Pakistan’s Pioneer REIT: The Story of Dolmen City REIT

Pakistani real estate consists of individual ownership, informal market and lack of access to large volume commercial properties by the common person. It was decades ago that, the real estate investment was pertaining to huge capital, skills and easiness to cope with the intricate property laws. This fact started to change in 2015 when Pakistan first Real Estate Investment Trust (REIT) was launched - Dolmen City REIT (DCR). As an innovative idea in all aspects, Dolmen City REIT had established a mechanism where joys of a high value commercial real estate venture can be enjoyed, and it is institutionalized and transparent and accessible to the investor.

Dolmen City REIT is not only a financial product; it is the history of realization of a present that transformed property investment in Pakistan. The REIT, pioneered by the Arif Habib Group in partnership with the Dolmen Group was to be a milestone that would open an avenue of investment to individual and institutional investors by putting a cash generating arguably world-class property portfolio located in the prime real estate of Clifton waterfront of Karachi at their disposal.

Although the journey of Dolmen City REIT is very inspiring and it has not yet been properly documented; in this blog, we look at the journey of Dolmen City REIT beginning with how it all started, and how it is performing in terms of finances, investor attraction, and its appreciation by the people of Pakistan. We shall also observe closely at how DCR has become a form of innovation in the capital markets in the country and what would await it in the future in a changing economic domain.

Rebirth of Dolmen City REIT

Dolmen City REIT was started on the ambitious idea to institutionalize the real estate investment environment in Pakistan. Already one of the key players in the real estate industry, the Dolmen Group had produced Dolmen City, a large mixed-use venue, located near the Clifton seashore of Karachi. The Dolmen Mall Clifton, which is one of the largest and highest-end shopping malls of Pakistan and a prime office tower The Harbour Front were comprised in this project, which invited multinational corporations and tenants of the highest level. These assets were profitable and successful, and this is why they were good targets to be securitized by means of REIT structure.

Understanding the huge potential of REITs in tapping and opening access to capital and democratizing property investment, the Arif Habib Group, a leader in financial services in Pakistan capital markets joined with Dolmen Group in forming Arif Habib Dolmen REIT Management Limited (AHDRML). AHDRML was appointed as the operator of Dolmen City REIT that was structured as a Close-end Shariah-compliant and perpetual REIT on Pakistan Stock Exchange (PSX).

Upon launching Dolmen City REIT in June, 2015, it became the first of its kind in the country that has brought about a paradigm shift in real estate and financial among other markets. The REITs IPO attracted so much attention among local and foreign investors and was well subscribed far beyond the expectations of the REITs. This IPO generated more than PKR 4 billion indicating great demand in exposed real estates. It was over 1.7 times subscribed that indicated confidence the investors had on the Dolmen brand and the Arif Habib brand given the historical performance of the underlying assets.

The importance of this launch was not limited by the figures. To them, this was the first time the smaller investors got an opportunity to invest in the lucrative commercial property without necessarily investing in the complete property and incurring the inconvenience of having to handle the physical care and maintenance that was usually the norm when the management of a property was taken over by the investor. This is the first time the industry has ever set out its transparency, regulatory compliance and corporate governance standards as Dolmen City REIT had done.

Dolmen City Assets and operations

Dolmen Mall Clifton and The Harbour Front Tower are the mainstays of success of Dolmen City REIT. These are features that symbolize a modern building, proper location and a great investment with respect to profits in the long-run. Lying along the Clifton waterfront of Karachi, Dolmen City is one of the centres of both commercial activities and primary shopping point, not to mention the entertainment and business destination.

Covering about 3 levels and comprising of above 550,000 square feet of leash area, Dolmen Mall Clifton is one of the largest of such malls. It has got a towering range of international and domestic retail brands, upscale-fashion stores, entertainment areas, and food courts, to mention but a few, thus making it one of the most trafficked centers in the country. A well-admixed portfolio of tenants, good footfall, and brand value make the property an ideal rental segment that guarantees high occupancy rates throughout the year, thereby securing a steady rental income to the REIT.

Harbour Front Tower is a 19 storey commercial tower that supports the mall as a front to the corporates. It has more than 250,000 square feet of high-end office space that consist of multinational corporations, financial institutions and firms dealing with professional services. The fact that the long term leasing agreements and the demand of good office spaces in Clifton makes Harbour Front a profitable venture to continue with it.

Dolmen City REIT management makes sure that the two properties are kept according to international standards. Dependable upkeep, sound marketing, and active handling of tenants have been some of the major deciding factors to maintain the occupancy rate above 95%. The REIT gets its money mostly through rental income which is incorporated by periodic increase in the leasing agreement to counter inflation and ensure profitability.

The REIT is Shariah-driven, implying that it has all activities and financial operations based within the Islamic spiritual financial practices. This is why DCR is a viable investment opportunity, especially to investors who need halal investment opportunities. Governance structure involves autonomous trustees, auditors and advisors to take care of this as per the regulations and make its working transparent.

Investor Earnings and Shareholder Returns

The financial performance Dolmen City REIT has spread since its launch is constantly increasing the results based upon sturdy rental revenue and appreciation in value of their properties. It earns variety due to its diversification of its sources of income with the retail and the corporate tenants which ensures that the company is not affected during economic volatility.

During the first years after its IPO, DCR has become a known stable dividend-paying-machine, yielding about 8-10% in dividends annually. These payouts were competitive to the conventional instruments of fixed income and money preserved in the bank. The returns to investors have increased over time as the properties have increased in prices and rental escalations have come to be.

Dolmen Mall Clifton and Harbour Front have a direct linkage to DCR financial performance in terms of the operations, due to their strategic position. The REIT has also been capable of preserving good occupancy levels and rent increase even in the most difficult times including economic downturn and political uncertainties. The factors that make it strong can be explained as excellent location of its assets, tenant quality and management strategies.

Unit price of DCR on the Pakistan Stock Exchange also has been appreciating over the years, which is displayed to illustrate the trust towards the REITs as well as gaining popularity. Although the market and macro-economic factors have caused the short-term volatility, the long-term movement was upward. DCR is a balanced investment instrument since investors enjoy both capital gains and ordinary dividends.

Further, REIT form of ownership provides tax benefits. The distributions of dividends paid by DCR are allowed to be tax-exempt at both corporate and shareholder level, though under a condition that its income is distributed to unit holders at least 90 percent. This tax benefit increases the total returns of the investor over various other investment plans.

Impact on Pakistan’s Real Estate and Capital Markets

Dolmen City REIT has made a revolutionary change to the Pakistan realty and capital market. Before it went into launch, the idea of REITs was rather unfamiliar in the country. The effectiveness of DCR showed that regulated real estate investment vehicles not only could but could flourish in the financial environment of Pakistan.

Among the greatest effects of DCR there has been the formalization of the real estate sector. The REIT has enhanced corporate governance, documentation and transparency in putting the premium commercial assets under a regulated structure. This has contributed to eliminating part of the risks involved in conventional property investment like unclear titles, illiquidity and market manipulation.

DCR has also given some motivation to other real estate developers and financial outfits to contemplate the introduction of REITs. Although the growth has been slow, future growth of REIT market in Pakistan is forthcoming due to the increase in awareness and the maturity of regulatory systems. Government and Securities and Exchange Commission of Pakistan (SECP) have noticed that REITs could bring foreign investment, create jobs and boost the economy.

Further, Dolmen City REIT has even brought in liquidity in the real estate investments. Contrary to the case with physical property whose sale may require months, or even several years, units of DCR can be traded on PSX, offering investors the ability to exit fast. This has enabled the affordable real estate to small and medium units to invest in the real estate which had no other option to invest in the high profile commercial venture.

The retail and the commercial sector has also benefited positively through the REIT. It has introduced a new infrastructure and consumer experience by providing a global class mall and office space. The very Dolmen Mall Clifton in particular has now become a retail centre in Karachi, and has helped in increasing the sales of both the local and international brands as well as economically to the city.

Dolmen City REIT Future outlook

Dolmen City REIT has a bright future since it has a solid asset base, experienced management, and an expanding investor base. In accordance with the current Pakistan which is in the process of eradicating its rural roots and transforming itself into a modernized version of itself, the requirement of quality commercial spaces will increase thus also increasing the value of the assets belonging to DCR.

DCR has possibilities to increase its portfolio either through new acquisitions or build more phases in Dolmen City. The expansions, not only would boost rental revenue, it would help diversify the asset mix on the part of the REIT, so that it did not depend upon a particular spot. The trend of formalizing and digitalizing the real estate business by the government is expected to help REITs. Property valuation reforms, more effective regulations, and taxations are some initiatives that could drive REITs to both local and foreign investors.

Moreover, green and sustainable buildings are becoming a concept to reckon with in the world. DCR can be a pioneer in that region when it switches to the development of environmental-friendly practices, energy-saving activities, and sustainable growth, which might draw investors interested in ESG in the future. There are challenges that continue to be experienced including economic unpredictability, changing interest rates and uncertainty of political environment that may influence the real estate demand and investor confidence. Nevertheless, the ability to survive hard economic times experienced in the past puts DCR in the best position to encounter the challenge.

With the further spread of information about REIT among the Pakistani investor base, Dolmen City REIT will most likely continue to be the industry standard holder of standards of production, transparency, and trustworthiness. Its success story may lead to the introduction of various REITs in areas such as hospitality industry, industrial properties and residential projects with an enhanced boost to the Pakistan capital markets.

Challenges and Lessons from Dolmen City REIT

Although Dolmen City REIT is a success story in the Pakistani real estate and capital markets, it has not been an easy ride as it happens. REIT structure presented great challenges to a country where real estate investments had always been informal. Training the investors on the idea of REIT and getting them on board to give up their direct ownership of real estates to the fractional model of investment was not an easy start at the very beginning. Most investors were hesitant on using a listed trust to earn returns as compared to owning physical property.

The other key problem was to maneuver through regulatory environment. When DCR was introduced, the REIT system in Pakistan was still being developed, and there was little precedence to exist in areas of operation and compliance. The Securities and Exchange Commission of Pakistan (SECP) was very instrumental in making the process smooth, however the Dolmen City REIT team had to go through the details in finer detail to make it a complete package instantly over-seeable by the SEC and Shariah-compliant.

The instability of economy in Pakistan was also a challenge as the exchange rate, inflation, and political instability affected the way investors felt about Pakistan and the way retailers acted. Retail business entities at Dolman Mall Clifton were experiencing a hard time during the economic slowdown which indirectly impacted the growth of the rental income.

Nevertheless, these problems gave important lessons. The excellence of DCR reinforced a quality asset, good governance, and strategic alliance. Its ability to raise tenancy and to engage in proactive tenant retention as well as to provide good marketing means has enabled Dolmen City REIT to maintain steady returns. It is also a precedence to other developers as it showed that properly organized REIT manage to survive in spite of the intricacies in the market. DCR experience has preconditioned the following development of REITs in Pakistan and provided the opportunities to learn how transparency, governmental support, and education of investors are important elements to be able to develop the trust and sustainability.

Conclusion

Dolmen City REIT is not only a symbol of Pakistan revolutionizing into the REIT structure but a product of innovation, transparency and empowerment to investors in the Pakistani real estate environment. This has democratized high-quality investments in real estate; by transforming prime commercial property such as Dolmen Mall Clifton and Harbour Front Tower to a publicly traded trust.

Since its inception, DCR has performed consistently in the distribution of dividends, a rise in capital appreciation, and investor confidence, a fact that has demonstrated that structured real estate investments can work within the Pakistani landscape. Its contribution to the formalization of the real estate industry, establishment of governance standards and introduction of liquidity into an otherwise illiquid asset vehicle has been titanic.

And Dolmen City REIT story is just beginning. DCR has a chance to grow, the regulatory framework is in its favour, and the number of investor inquiries is on the rise, so DCR is likely to continue leading the Pakistani market in the field of REITs. It is not only a triumphant financial product but also an example of how the real estate and capitals market can develop in a developing economy.

Dolmen City REIT is the reflection of what visionary leadership, great partnerships and new financial structures are capable of. Its experience is a good lesson to be learned both by the investor and policymaker on how to develop sustainable, transparent, and profitable investment platforms in the dynamic arena called real estate.

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