Arif Habib Group and Dolmen Group Forging a Partnership
Arif Habib Group had diversified businesses in the areas of financial services and solutions,
fertilizers, cement, steel, energy and real estate. The Group commenced brokerage services in
1970. Arif Habib Limited (AHL), a subsidiary of the group, was engaged in providing brokerage
and corporate finance services to a large number of institutional clients, high net-worth individuals
and retail clients.
AHL had a significant market share in the financial services business. The company provided
financing and investment solutions related to equity and debt capital markets, mergers and
acquisitions, financial advisory and structured finance. MCB Arif Habib Savings and Investments
Limited was a leading asset management company in Pakistan catering to institutional and retail
investors.
Dolmen Group was one of Pakistan’s leading real estate organizations, primarily engaged in the
development, construction and management of prime commercial real estate, including shopping
malls, office towers and residential apartment blocks. Since its inception in 1984, the group had
continued its expansion with several projects in the planning and construction phase as well as an
available land bank for future developments. The Group currently owns and/or manages the largest
portfolio of shopping malls in the country which include Dolmen City Mall, Dolmen Mall Hyderi
and Dolmen Mall Tariq Road, all in Karachi.
Arif Habib Dolmen REIT Management Limited (AHDRML), a joint venture of the Arif Habib
Group and the Dolmen Group, was incorporated as a public limited company in 2009 (unquoted)
under the Companies Ordinance 1984 and was registered under NBFC Rules with the Securities
and Exchange Commission of Pakistan (SECP). The objective of the company was to launch and
manage REITs on carefully selected and commercially viable real estate with the aim of bringing
real estate investment within the reach of common investors. The company combined the expertise
of Arif Habib Group and Dolmen Group, bringing together strength in financial markets, real estate
and property management. Pakistan’s first REIT, DCR, was launched by AHDRML. The IPO took
place on 12 June 2015 with the stock listed on all three stock exchanges of Pakistan. The successful
launch of a REIT in Pakistan was the outcome of a long period of regulatory adjustments by the
SECP and concerted efforts made by Arif Habib Group and Dolmen Group.
REIT Regulatory Evolution and Issues
Activities to establish a REIT regulatory regime in Pakistan started in 2005, when Prime Minister
Shaukat Aziz showed interest in bringing this global investment vehicle to Pakistan. While the real
estate market in Pakistan was growing, the sector remained capital starved. A need was felt to
provide finance to this sector through the capital markets and to provide investment opportunities
in real estate to small investors. REITs seemed to be a suitable vehicle for these objectives. In an
attempt to introduce this instrument in Pakistan, the REIT Regulations 2008 were issued by SECP.
However, no REIT could be launched under these regulations which were considered very
stringent for the sponsors and fund managers. Ejaz described the situation thus:
REIT Regulations 2008 were not very practical. The minimum fund size required was PKR 5
billion, which was quite large. The regulations also required that the real estate property must be
approved by SECP prior to bringing it into the REIT Scheme.
This was problematic since public knowledge of strong interest in the property before the
transaction was likely to impact the negotiation dynamics and property prices. This requirement
was seen by major investment bankers as over-regulation and detrimental to the development of
REITs in Pakistan. Due to some of these regulatory and technical issues, the regulatory framework
failed to generate sufficient interest of property owners, REIT management and property
management companies to establish REITs in Pakistan.
Based on the market response and feedback, SECP amended the REIT regulations in June 2010.
Under these amendments, some of the stringent requirements were relaxed for the REIT
Management Companies (RMCs). For example, the fund size and capital requirements were
reduced. However, many problems still remained. There was a restriction on REITs borrowing,
which could hinder their growth. In addition, Ejaz commented:
Under the REIT regulations 2010, 20 per cent of the real estate fund had to be owned by the RMC,
effectively making a fund manager a significant investor as well. If a real estate was to be brought
into a REIT scheme, payments for it could generally be made either through cash or issuance of
REIT units. However, the regulation restricted ownership by any single investor to a maximum of
10 per cent.
Hence, a REIT could not issue more than 10 per cent units for any property and payment had to
be made mostly in cash. This was another impediment in establishing REITs. It became obvious
that an outside property could be brought into a REIT scheme primarily through direct ownership
of property.
AHDRML submitted an application under the 2010 amended regulations in an attempt to provide
lead in this important catalyst of real estate development in Pakistan. However, a major challenge
for the RMC was to offer an attractive yield to excite investors’ interest in the REIT.
Recalling his professional experiences, Ejaz observed: Throughout the world rental REITs yield
150–200 basis points above the five-year government bonds. In the case of Pakistan, the yield on
five-year Pakistan Investment Bonds (PIBs) in 20102 was between 12 per cent– 14 per cent. This
was a tough benchmark for any rental REIT to meet.
For a Developmental REIT, risks were even greater since the project had to be developed first
before any income was generated, which under the interest rate scenario would be even less
attractive for investors. Hence, this attempt to launch a REIT by Arif Habib- Dolmen did not
materialize and in fact no other REIT could be launched in Pakistan even after the regulatory
amendments.
Based on the experience and fund managers’ reluctance to launch REITs under the 2010 regulatory
framework, SECP repealed the earlier regulations and replaced them with the REIT Regulations
2015.3 REIT Regulations 2015 brought down the minimum fund size requirement in line with the
listing requirement on the stock exchanges. Other regulatory changes provisioned an REIT scheme
to be registered before the transfer of property, enabling the REIT to carry out the purchase
transaction by issuing units to the seller of the real estate. The RMCs unit-holding requirement
was also reduced from
20 per cent to 5 per cent. According to REIT Regulations 2015, an ‘REIT Scheme’ had to be a
listed closed-end fund. Mortgage REITs were not allowed. Only equity REITs classified into the
following three categories were permitted to fund sponsors: Developmental REIT, Rental REIT
and Hybrid REIT.
Ejaz lauded the new regulations as a significant advancement over the previous, and a step in the
right direction. However, he noted that there were several areas in the regulatory framework that
still required improvement. Ejaz reflected:
For example, there is still a lacuna—minimum 25 per cent of the units must be issued through an
IPO. If someone transfers a real estate to the REIT, only 75 per cent of units could be issued to it,
remaining consideration (in cash) could be paid after the IPO and it takes about 2–3 months for
the process to complete. Another area that required to be revisited by the regulator was the SECP
approval requirement before a property could be brought into the REIT.
SECP as a regulator should provide the necessary guidelines related to property acquisition, but
leave the business decisions to the fund managers—removing the requirement of SECP approval
before it could be incorporated in the REIT. In addition, not allowing the use of leverage under the
new regulations significantly limited the financing opportunities for REITs. AHDRML filed the
application for the registration of DCR, comprising Dolmen Mall and Harbour Front properties,
two premier properties in Karachi’s Clifton area. However, many challenges had to be overcome
in launching the first listed REIT in Pakistan.