Mashid Rahman, PMP, Divisional Director of RANCON Holdings Ltd. explicates the concept of real estate investment trust (REIT) and its potential benefits for the Bangladeshi real estate sector.
What is a real estate investment trust (REIT)? Could you please elaborate on its mechanism?
A real estate investment trust (REIT) is a company that owns, operates, and finances income-generating real estate projects. REIT essentially works like a mutual fund which can be invested in real estate. The rental from the property becomes the yield of the fund. Properties in a REIT portfolio may include commercial real estate including offices, apartment buildings, warehouses, shopping centres, and hotels. The portfolio can extend all the way up to apartment complexes, data centres, medical facilities, hotels, parks, educational facilities and even farmland.
REIT is a collective fund that essentially invests in assets. The investment has to be on a property that is income-generating. Most REITs have a straightforward business model. Mortgage REITs don’t own real estate, but instead, finance real estate. These REITS earn income from the interest on the investments.
How could REITs be beneficial for the Bangladeshi real estate market?
In Bangladesh, real estate growth is still very fragmented. It caters to the upper-middle class and upper class. With REIT, it will be possible to fund middle-income and low-income housing. The returns on low-income housing are much higher and there is little capacity for property owners to pay the money up-front. But, through REITs, it will be possible to utilise the collective fund to develop these projects, and once completed and put up for rent, the yield on them can be much higher than the high-end market.
Development projects can also benefit from REIT. Particularly for Bangladesh, agro-REIT can be a game changer. A study suggests that farmland separators, or aisles, across Bangladesh, can collectively add up to cover an area of an entire Upazila. That is a lot of wasted potentials, but with REITs, it will be possible to generate that 20% as an additional yield. There are other REIT mechanisms as well that will allow investors to monitor crop growth, claim insurance, and trade directly with distributors, essentially clearing out any middlemen in the process. Agro-REIT is a workable solution for utilising Bangladeshi farmlands. It is a potential new arena of income for the National Board of Revenue (NBR), Bangladesh, through agro REIT companies.
In a country like Bangladesh where infrastructure cost is high, REIT is a great solution for making medical facilities and educational institutes. Several schools are paying high rent, and therefore investing in schools through REIT can be a lifetime investment. Through REITs, it is therefore possible to become partial owners of educational institutions.
A study suggests that farmland separators, or aisles, across Bangladesh, can collectively add up to cover an area of an entire Upazila. That is a lot of wasted potential, but with REITs, it will be possible to generate that 20% as an additional yield.
What regulations and policies should be drafted to introduce REITs successfully to the Bangladeshi real estate market?
There are 3 perspectives here. The first is of those who are creating the REITs, the second is of the investors, and the third is of the regulators. The regulators are perhaps the most important here because the real estate sector has multiple regulators. Funds are essentially under the Ministry of Finance, and real estate is under RAJUK and the Ministry of Works. If REITs get into agro, healthcare, or education, then Ministries of Agriculture, Health, and Education are involved in the regulatory process.
So, first and foremost, a framework needs to be developed that can reduce the interdependency of the regulators. If we create a REIT today, then it will be managed by Security Exchange Commission, but a single regulatory change ordered by RAJUK can drastically alter the yield of REIT and vice versa. This is something we observed when MFS was introduced to Bangladesh. An important question then was whether MFS management would be a finance-led model or a telecom-led model. The government intervened to address this ambiguity and interdependency, and a bank-led model was settled. Likewise, for REITS, when policies will be created, it must be worked out how to remove interdependency and regulatory bottlenecks.
Regarding the REIT company, it is important they follow through with their due diligence. The performance of the first fund can be a game changer if addressed and handled properly. If done right, this may amass huge opportunities to attract foreign funds, create new investment tools and attract domestic innovation.
Since REIT is a fairly new concept in Bangladesh, what are some factors to take into consideration before investing in a REIT?
From a consumer perspective, it is important to weigh the risk. Every investment has a risk, but the risk has to be mitigated by the yield of the return. Questions to ask are, “What percentage am I getting? Who is issuing the asset? Which asset are they issuing in to?” Researching the background of the company and the extent of its goodwill practices should be considered in tandem with the cost-benefit analysis.
REIT investments can be massively beneficial. Money depreciates over time, but property appreciates. A lot of money in Bangladesh stays in banks. The returns from the bank can yield negative returns if the interest rate and inflation are adjusted. But because assets appreciate, today’s BDT 100 crore issued to a bond will not only yield returns of 6% to 10%, but at the end of its maturity period, the bond can double up because the asset value doubles up. These returns on investments must be carefully considered from a consumer perspective.
While REIT will be a new concept for Bangladesh, the model has been successfully used to fund infrastructure projects in several countries. The majority of real estate projects in Malaysia are built on REITs, and in India and Singapore, REITs are very mature. Truth be told, Padma Bridge can actually be transferred into a REIT. Bangladeshi people can invest in REITs today and pay off their debt. Government bank borrowing for infrastructure development can be generated out of REIT funds. The government can easily issue BDT 1000 crore worth of REIT funds out of Padma Bridge, which the public can invest in and the debt can be easily paid off. As such, all types of infrastructure projects can be covered by REIT.
There are also several considerations that make REIT a very lucrative concept for Bangladesh. It is conducive to the practices of Islamic banking as you are supporting businesses and getting returns through that instead of interest. Thus, REIT is very business-friendly and can collect a huge pool of money to build revenue-generating infrastructures.