Dolmen City REIT (PSX: DCR) - the only Real Estate Investment Trust in the country announced its financial performance for 9MFY18 earlier this week, as it draws closer to ending its three years in operations. Apart from the typical benefits that REITs offer such as providing investment avenue, bringing real estate and construction sectors in the formal economy, providing structure and discipline to infrastructure and housing projects and allowing developers to raise finance, DCR stands out from the rest of the listed space in the country due to its relative protection against economic risks, limited competition and ability to pass on inflationary pressures.

Boasting occupancy rates of 100 percent for Harbor Front and 97 percent for Dolmen Mall Clifton, DCR reported a rise of around 13 percent in its total income in FY17, while the rental income that makes up for 95 percent of the revenues since it’s a rental REIT, saw an increase of around 12 percent year-on-year. Profit before change in fair value of investment property stood at Rs2.6 billion, up by 12 percent. REITs enjoy tax advantage, and hence Dolmen City REIT is not liable to income tax provided it meets certain conditions.

In 2018 so far, things are looking better for DCR. Total income was up by 8.6 percent year-on-year in 9MFY18, while the growth in rental income stood at 7.3 percent. Adjusting for management fee, trustee remuneration and levies, and change in fair value of investment property, profit before and after tax stood at Rs3,170 million, up by 6.6 percent, year-on-year.

While the exact occupancy rates for 9MFY18 are not available, the half yearly report for the firm shows that the occupancy levels of DCR remained stable on overall basis, standing at 97.5 percent by the end of December 2017. In view of the hefty capital expenditure incurred upfront, tenants for DCR are sticky. In fact, as at Dec 31, 2017, the Weighted Average Lease Expiry (WALE) on the leasable area of Dolmen City Mall stood at 3.12 years and that of Harbor Front stood at 3.46, which gives an average of 3.23 years for DCR on the whole.

According to the management of DCR, it is operating above its projected financial trajectory, remaining successful in maintaining occupancy levels and posting rental growth. As the mall nears 100 percent occupancy levels, rental revenues will be the prime revenue drivers for DCR.

However, looking at the REITs business environment in the country, one can see that the concept of Real Estate Investment Trust has not taken off in Pakistan, which has largely been due to the tax regime. As per the latest changes made in FY16 Federal Budget, the capital gains tax exemption was limited to developmental REITs for residential purpose only, while Dolmen City REIT and many others in the planning stage are rental REITs. Furthermore, advance tax for both the seller and the acquirer is a key inhibitor.

Not to forget that higher than normal dividend taxation on companies investing in REITs, which is 25 percent versus 12.5 percent on dividends to firms investing in stock funds is disadvantageous as well.
The recently announced tax amnesty scheme if applied in its true spirit is a good move in unlocking the real estate development potential where REITs could also get a boost. However, a favourable regulatory structure and rationalisation of taxes remain the main drivers of growth for REITs in the country.