Friday, September 29, 2023

State Bank extends financing limit for REITs

KARACHI: The central bank on Monday extended the financing limit for real estate asset management companies by banks and development finance institutions to boost housing and construction sector.

The State Bank of Pakistan (SBP) said the changes in regulations would enable banks/DFIs to make higher investments in real estate investment trusts (REITs) to the tune of 15 percent of their equity as against existing limit of 10 percent of equity.

“This move will not only bring more capital towards REITs but would also enable banks/DFIs to diversify their investments,” the SBP said in a statement. “In line with government of Pakistan’s initiative for the development of housing and construction sector, the State Bank of Pakistan has been taking various regulatory steps to enhance banks/DFIs participation through their financing in the development of these sectors.

In order to boost activities in these sectors further, the SBP has now made changes to certain provisions of existing prudential regulations for corporate and commercial banking to encourage enhanced participation and investment of banks/DFIs in the real estate investment trusts.”

REITs are asset management companies that own or finance income-producing real estate across a range of property sectors.

These asset management companies raise funding from public and institutions by floating various kinds of funds. REITs deploy funds by investing in real estate properties thereby enhancing the investment in housing and construction sector to contribute in economic growth and development.

The units of listed REITs are tradable on stock exchanges and offer a number of benefits to investors. SBP has also relaxed restriction, in existing regulations, on seeking financing against shares of listed group companies. It will enable investors in raising liquidity for further investment in new business opportunities and ventures leading to greater economic activity.

The change in regulation would also benefit the capital market by encouraging sponsors of companies to consider listing on the stock exchanges. “This will promote documentation of the economy, transparency, and good corporate governance practices as well,” said the SBP.

The SBP has already bound banks to enhance mortgage loans to at least 5 percent of their private sector credit by December this year to encourage construction sector considered as a catalyst to revive economic growth.

The SBP slashed the key interest rate by 625 basis points to 7 percent in couple of months last year to support the economy that contracted 0.4 percent during the last fiscal year due to coronavirus lockdown.

Pakistan has the lowest construction-to-GDP ratio of 2.5 percent compared to regional average of 7 to 8 percent due to multiple issues ranging from structural to financial issues.

The country’s construction sector has the region’s lowest financing-to-advances ratio of 2.3 percent compared to 14 percent in Sri Lanka, 7.4 percent in Bangladesh and 4 to 5 percent in India.

Source: The News

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