The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and the Colombo Stock Exchange (CSE) recently conducted a webinar titled “REITs: The way Forward and Opportunities”, focusing on the newly introduced Real Estate Investment Trusts (REITs) Framework. The discussion also highlighted key features of this opportunity that can be a catalyst for multiple benefits for property owners, investors and the economy at large.
The webinar featured capital market and financial services experts including the Chairman of CA Sri Lanka Manil Jayesinghe, CSE CEO Rajeeva Bandaranaike, Director Corporate Affairs at the Securities and Exchange Commission of Sri Lanka (SEC) Dr. Harshana Suriyapperuma, CSE Chief Regulatory Officer Renuke Wijayawardhane, Principal for Tax and Regulation at KPMG Sri Lanka Suresh R. I. Perera and Group Director Candor Holdings Ravi Abeysuriya.
Director Corporate Affairs at the SEC Dr. Harshana Suriyapperuma during his remarks noted the importance and significance of the introduction and provided the audience with a comprehensive understanding of the framework to issue and manage REITs in Sri Lanka.
“Upon the SEC issuing the gazette notification, the Sri Lankan capital market can now formally accept applications for creating REITs not only for commercial & residential properties meeting the criteria but also for infrastructure projects. It’s important to note that Sri Lankan REITs are allowed only as a listed security, mainly to promote transparency and to facilitate retail investor participation. In Sri Lanka the attractiveness of REITs is expected to be further enhanced owing to the Tax incentives included in the National Budget. Checks and Balances are included within the regulation framework to safeguard the interests of our investors whilst facilitating flexibility for the business case of REITs as an investment vehicle.”
It has been made mandatory within the Framework that a REIT be managed by a managing company licensed by the SEC and meet the basic criterions stipulated within the Listing Rules to qualify for a listing on the CSE. The real estate assets owned by the REIT would be required to meet the minimum threshold of Rs. 500 million at the point of listing, it is mandatory that all units issued pursuant to a REIT be listed, a 30% stake to be held by the sponsor or strategic investor which will be locked-in for a period of 06 months and 20% of the units issued be held by a minimum of 100 shareholders are some of the basic requirement that need to be met at the point of Listing a REIT.
Sharing remarks at the webinar, the CSE Chief Regulatory Officer Renuke Wijayawardhane highlighted the steps involved with Listing a REIT on the CSE and the overview of the process. To provide a perspective on the regulatory environment upon issuing and listing a REIT, Renuke also elaborated on the numerous compliance requirements that a REIT would be subject to at the point of listing as well as on a continuous basis.
“Similar to a listed company, REITs would be subject to compliance requirements in the best interest of all stakeholders involved and with focus on investor protection and maintaining a fair and orderly market.” Commenting on the timeline for issuing a REIT and the approval process, Renuke noted that initial approval for the REIT would have to be obtained through the SEC and the listing application should be forwarded to the CSE within a month of obtaining approval. Renuke also highlighted the process with listing a REIT on the CSE and noted that it would only take around 50 days from the point CSE grants approval for the listing application up to the point of Listing the units and be made available for trading on the CSE.
Principal for Tax and Regulation at KPMG Sri Lanka Suresh R. I. Perera shared his views in relation to tax issues that would affect a REIT. He pointed out that it is desirable that the intermediary, that is, the REIT vehicle should not be subject to tax or only for a very low tax situation and also said that most of the countries around the world in order to achieve this status has introduced specific REIT related tax provisions into their tax statutes.
Suresh went on to explain the many complications, grey areas, that arise in the context of the current tax provisions. He flagged the tax issues & implications that arise in the context of current tax provisions to three stakeholders namely, the sponsor, REIT Trust and the investor. He also commented on the reliefs provided for REITS in the budget proposals presented in the Parliament recently. The budget proposals have addressed Capital gains tax on investors, stamp duty and dividend to investors in REIT units. “As dividend from quoted company shares at present attract tax, the tax-free status provided for dividends from REITs to investors would provide a competitive advantage for attracting investment into REITS from investors.”
President of CA Sri Lanka Manil Jayesinghe, shared his views on governance implications for issuers and proactive governance with regards to safeguarding the rights of investors and noted the importance of the independence of the property valuation that needs to be produced and the appointment of a specialized panel of advisors which would safeguard the interest of the unit holders.
Speaking during the webinar, Group Director Candor Holdings Ravi Abeysuriya noted seven specific benefits for an investor through the introduction of REITs on the CSE. The seven benefits highlighted were that an investor could invest in real estate with a small sum, diversify their investment portfolio, gain access to a liquid investment vehicle, secure a stable and recurrent income stream, the reduced risk associated with a REIT investment due to the transparency demanded through the listing rules, the easy understandability of the investment and that it also serves as a hedge against inflation rates in the country.