Is physical retail collapsing during the pandemic, or is it already due for a comeback? That confusion has reigned among landlords all over the world as they grapple to understand just how long they have to go without foot traffic in the properties that they own and rent out to retail outlets and office tenants. Pakistan – with its varying approach to the lockdowns and shutdowns, and recent success in flattening the curve of the spread of the coronavirus – is certainly no exception.
In a notice sent to the Pakistan Stock Exchange (PSX) on August 6, Dolmen City REIT announced a slew of rental waivers for the occupants of the Dolmen Mall Clifton, and the Harbour Front office building in Karachi.
About 35% of the rents of tenants with retail outlets in Dolmen Mall Clifton would be waived for the month of August, while 25% of the rents of office tenants of the Harbour Front would be waived. In addition, minimum rent would not be charged to tenants of Dolmen Mall Clifton for those who have closed or limited operations on government directives such as entertainment, the play, and food outlets.
“Inshallah, by grace of Allah Almighty, the spread of the virus will be contained and businesses will return to the usual very soon,” the company optimistically stated in its notice.
It turns out, however, that business would return sooner than expected. Because that very notice was revoked, and in a new notice sent to the PSX on August 11, the company realized that people were actually returning to malls, and to work due to the surprising decline in Covid-19 cases in Pakistan.
“In view of the decline in the Covid-19 cases, though the disease is still prevalent and likely to increase if no adequate precautions are taken, the businesses have been allowed to open subject to strict following of precautions to lessen the economic burden on the population to the maximum extent possible,” the company noted.
Thus, the waived rental share was revised from 35% to 25% for retail outlets in Dolmen Mall. The other conditions stayed the same.
Why do we highlight this? Because it has been a rough few months for Dolmen City, one of the largest malls in Pakistan, and the only one that is publicly listed as a real estate investment trust (REIT). The complex also includes two Class A office buildings on the Karachi coastline, including the Harbour Front building, which houses the headquarters of several major companies, including Engro Corporation, Citibank, Procter & Gamble, Philip Morris, Chevron, and Mitsubishi.
A mall, as it turns out, does not do well in a pandemic, where people are encouraged to stay home, and at the very least, stay six feet apart from one another. The same holds true for an office space, where most workers are encouraged to leaninto remote-working.
Just a quick refresher: a REIT (pronounced “reet”) is a company that owns, operates, or finances income-generating real estate, and it does so by pooling the capital of many investors. REITs were created in the 1960s in the US, but only really began to catch on around the world in the 2000s. Pakistan was actually wildly early in introducing the REIT Regulations in 2008. However, this was considered a ‘failure’, and was not very attractive, leading to the SECP to revise and come up with the REIT Regulations 2015.
In Pakistan, there are three kinds of REIT schemes: developmental, rental, and hybrid. Developmental refers to the development of properties for sale, while rental refers to the acquisition and construction of properties for renting. Hybrid, as the name suggests, combines the two. The Dolmen City scheme is a Shariah compliant, rental scheme that offers investors a way to become unit holders of the mall itself – without of course, actually buying the mall.
Dolmen City actually began waiving rental fees in starting all the way in April 2020, when the effects of the pandemic and the subsequent Karachi-wide lockdown were at its zenith. In a letter sent to the PSX on April 28, the company said the rental waivers for tenants of Dolmen Mall Clifton would be 100%, while it would be 25% for tenants of Harbour Front. This was revised to 50% for tenants of Harbour Front in May, revised to 55% for tenants of Dolmen Mall in June, and revised to 45% and 40% for tenants of Dolmen Mall and Harbour Front respectively in July (see table for rate changes).
Why did the company have to start offering rental waivers? Well, the footfall sharply decreased in the months of the pandemic. One can see this even in the company’s most recent financial statements, for the nine month period ending in March 2020. The daily average footfall stood at 33,586 in January 2020 and 31,906 in February 2020, but fell to 15,771 in March 2020.
“Footfall showed a downward trend leading to March 2020 as the city was gripped in the fear of Covid-19 virus and lock-down was enacted,” the financial report noted.
So how much did these rental waivers affect Dolmen City? We can make some very rough assumptions.
First, let’s look at the total rental income earned in a year. According to an annual report for the period ending June 2019, the total rental value was Rs 3.759 billion. Of that, the total rental value of Dolmen Mall is Rs2.9 billion per annum, whereas it is Rs855 million per annum for Harbor Front. So Dolmen Mall is around 77%, while Harbour Front is 23%.
Then let us look at the most recent financials, for the quarter ending March 2020. The rental income in that quarter was Rs858 million, or Rs286 million a month. Let’s assume the split is the same: so that means Dolmen Mall contributed Rs220 million and Harbour Front contributed Rs66 million.
You can actually then apply the rental waivers for the months that came afterwards to that assumed amount, just to get a sense of the ballpark range of money that Dolmen City is losing out on. For the four month period May to August, that comes out to Rs587.4 million.
Of course, this is a rough estimate. We do not have the rental income numbers for the months after March. [Profit contacted the company’s chief financial officer, who declined to comment]. Additionally, as noted before, certain restrictions apply that would change these values. For instance, the rental waivers do not apply to essential services like banks or supermarkets. Plus, businesses that are closed, or have limited operations like the food court do not pay minimum rent in July and August (As of June 2019, according to the company’s annual statement, the mall occupancy showed that 14% occupants were related to food and 6% to entertainment).
But that is a fairly large loss to bear; and it is one that Dolmen City has to sustain. According to reports, the mall fully resumed operations in July, but had to continue to offer the waivers due to pressure from the apparel retailers. Will rental waivers be a continuing feature of the rest of 2020?