SEC introduces unit trust-based REIT framework

SEC Chairman Viraj Dayaratne PC hands over REIT Framework to CSE Chairman Dumith Fernando (from left) CSE CEO Rajeeva Bandaranaike, SEC Director Corporate Affairs Dr. Harshana Suriyapperuma, SEC DG Chinthaka Mendis, SEC Chairman Viraj Dayaratne, CSE Chairman Dumith Fernando and SEC Director Legal and Enforcement Ayanthi Abeywickrema

• Will allow real estate developers to convert fully completed properties into REITs
• New rules relating to REIT framework published in SEC Gazette Notification dated July 31, 2020
• Distribution of approximately 90% income of a REIT to unit holders made mandated
• REITs are only allowed as listed REITs on CSE to promote transparency and distribute ownership

The Securities and Exchange Commission (SEC) has announced the introduction of a unit trust-based real estate investment trust (REIT) framework to the Colombo Stock Exchange (CSE).

The initiative provides the real estate developers and owners to convert fully completed properties into a REIT, which will provide an avenue for the public of Sri Lanka to make an investment and thereby benefit from any property value increases.

A REIT is a company that owns, operates or finances income-producing real estate. REITs provide investors the chance to own valuable real estate and present the opportunity to access dividend-based income.

REITs have been available for some time and are developing rapidly in Asia and are popular particularly in Thailand, Malaysia and India. 

The SEC, along with the other stakeholders, has been contemplating the introduction of a REIT framework in Sri Lanka for quite some time, although no finality had been reached. 
Corporate bonds were introduced to the capital market in Sri Lanka in 1997 and it is approximately after 23 years that a new product by way of REITs is being introduced. 

The Sri Lankan REIT structure has considered the local environment in which it is expected to operate and the SEC has brought in a regulatory framework that is best suited to the local market. 

The rules that have been introduced by the SEC will be an extension of the current Unit Trust Code and the new rules, which came into effect from July 31, 2020, are in the form of a Gazette Notification published by the SEC. 

These rules, which are comprehensive, will govern the setting up of and the conduct of a Sri Lankan REIT. Specific provisions have been included for the verification of title and valuation of property that will form part of the assets of the REIT. Among the requirements is the mandatory distribution of approximately 90 percent of income to the unit holders, which is currently not a requirement for any of the listed entities. 

Further, due to the availability of the tax pass through mechanism to unit trusts, REITs also could benefit to be a viable business concept to Sri Lanka that will open new horizons for entrepreneurs to take the real estate industry to greater heights.A SEC statement noted that this property-backed alternative platform offers unique benefits to the investing public, including high dividend, a relatively stable income stream, due to the long leases, investor protection since regulated by the SEC, swift entry and exit opportunities, portfolio diversification and an effective hedge against inflation, due to real estate asset backing.

The SEC also believes the introduction of REITs will be a catalyst for foreign investment as liquidity is added to the market through new listings.

“Many real estate owners/developers can immediately benefit from the unit trust-based REIT framework, which is now enabled under the capital market framework of the SEC. 
In order to promote transparency and to distribute ownership among people of Sri Lanka, REITs are only allowed as listed REITs on the Colombo Stock Exchange,” the SEC said.