The first Rs 22.237 billion Islamic rental property fund of the subcontinent was launched at Karachi Stock Exchange (KSE) Monday. The two-day book building process for the country's first Rental Real Estate Investment Trust (REIT), Dolmen City REIT (DCR), was initiated by Sindh Finance Minister Murad Ali Shah here at KSE trading hall.
The initial public offering (IPO) envisages a total of 555.92 million units, 75 percent or 416.94 million shares would be offered to institutions and high net worth individuals (HNWIs) through book building on June 8-9. The balance 138.98 million or 25 percent units would go to retail subscribers on June 12.
The floor price for the book building has been set at Rs 10 per share while the strike rate for IPO segment would be determined by the end of book building Tuesday evening. If the floor price is applied, the 75 percent shares of DCR would fetch for the issuer, Arif Habib Dolmen REIT Management Limited (RMC), over Rs 4.169 billion. The bid offers, however, may be higher and, as a company official indicated, may rise beyond Rs 25 per unit. Beside big investors, the DCR shares would be available for small investors having Rs 5000. For institutional and HNWI bidders the minimum bidding amount was Rs 1 million.
"Not only Pakistan but this is the first REIT of the subcontinent," Arif Habib, chairman Arif Habib Group, told Business Recorder. The former KSE chairman was upbeat that the 'ideal' product would attract a good response from investors. Asked why he chose to go for Islamic financing for the country's maiden RIET instrument, the business tycoon cited higher investor appetite for Shariah-compliant products in the country as a reason. "We found it complying mostly with Shariah that makes it an ideal product," said Habib.
What makes DCR Shariah-compliant is its debt-free structure. Being wholly equity financed, the instrument, as per relevant regulations, can have no borrowing component. This very feature would give the instrument, he said, a wider market access. Estimated at 9.5 percent for first year, the average rate of return for the issue is expected to increase up to 13.5-14 percent in the fifth year. "This low-risk but high-yielding product is an attractive investment opportunity in the present low interest rate regime (seven percent)," commented Habib.
According to M Rafique Bhundi, a corporate finance officer at Arif Habib Limited, the average rate of return for DCR during next 10 years has been estimated at 15 percent which would swell by 22.5 percent in the 10th year. The minimum dividend payout ratio for DCR would be 90 percent. Otherwise, it would fall under the corporate tax regime. The underlying asset of DCR includes the rental income from building 'The Harbour Front' and 'Dolmen City Mall' which's occupancy level stands, respectively at 100 and 89 percent. This takes the two buildings effective occupancy ratio to 92 percent.
Majority of the existing tenancy agreements, the DCR managers claim, have a 10 percent annual rent escalation clause. The rate of the rental units in the two shopping malls was set to grow by 10 percent annually, Bhundi confirmed. "The REIT is an alternative asset class for investors seeking relative better dividend yield with low risks," viewed a market analyst. The DCR unit holders, he said, would have an access to the rental income and capital gain through sale in the equity market.
The Central Depository Company (CDC) being its trustee, the DCR is generally believed to have a low-risk compared to equity markets but higher than sovereign. "The... REIT is currently rated at RR1, with a highest investment quality. Hence, a 9.5 percent (bull case) offering is a decent return compared to risk-free securities," said the analyst. Finance Minister Shah said that the subcontinent's first product was modelled after mutual funds provided investors with regular income streams, diversification and long-term capital appreciation.
"I expect an enthusiastic participation from investors," the minister added. As BR observed at the bids-receiving stalls at the trading hall, by 11:30am at least 14 investors, mostly HNWIs, had submitted their bids to buy about 21 million units. Adeel Lakhani, an investor who visited the stalls to submit his bid, welcomed the IPO saying all the initial offerings launched during last 12 months had proved successful. "This is a rental property fund which would also give exposure to small investors."
In terms of shareholding, the Rs 22.237 billion REIT Fund is divided into 2.2237 billion units, of which 556 million would be floated in the market through IPO, while 25 percent or 1.667 billion would rest with RMC and its strategic investors from International Complex Projects Limited (ICPL). Under clause 11 of the newly-promulgated REIT Regulation 2015, the shareholdings of ICPL and RMC would be kept in blocked account throughout the life of the REIT scheme. Chairman Arif Habib Group Arif Habib, Chairman Dolmen Group Nadeem Riaz, Chairman KSE Muneer Kamal, Managing Director Nadeem Naqvi, Chairman RMC Nasim Beg, CEO Muhammad Ejaz and CEO Arif Habib Limited Shahid Habib were also present.