Unlike conventional financial institutions, Shariah-compliant institutions like Modarabas get a fee equal to 10% of the profit earned only if profit is earned. PHOTO: FILE
It is hard to miss the recently-built BRR Tower on the edge of Pakistan’s Wall Street in the business hub of Karachi.
The 19-storey structure with arches typically associated with Muslim architecture stands at the confluence of II Chundrigar Road, Dr Ziauddin Road and MR Kayani Road in the city’s financial district.
The building is constructed and rented by BRR Investments, an Islamic financial institution that manages the BRR Guardian Modaraba, Pakistan’s oldest Modaraba.
“We moved into this building after its completion in December last year,” BRR Guardian Modaraba CEO Ayaz Dawood told The Express Tribune in a recent interview. “I expect it to be rented by July, or maybe December. There has already been a respectable increase in its valuation, although the building has yet to be occupied.”
A Modaraba operates like a close-end mutual fund that can invest in a range of Shariah-compliant avenues, like leasing of assets, properties, and equity and debt securities.
However, unlike a mutual fund where the asset management company gets a percentage of total assets under management regardless of profit or loss, a Modaraba management company gets a fee equal to 10% of the profit earned. In other words, the management company does not make any profit if the Modaraba fails to post a profit in a given year.
Out of the 24 Modarabas operating in Pakistan by the end of last fiscal year, BRR Guardian Modaraba is the only one that has gone into real assets i.e. properties. By virtue of their memoranda, Modarabas cannot trade – which means buy and sell – in property. However, they are allowed to construct/buy a property for renting purposes only.
According to the company’s financial accounts for 2012-13, the value of BRR Tower has been ‘conservatively assessed’ at Rs960.3 million.
“We are a long-term player. We haven’t re-valued properties. In our books, investment properties are valued at Rs1.2 billion. But their fair value as on June 30 as per the independent valuation report is Rs1.7 billion,” Dawood said.
BRR Tower has 120,000 square feet of office space along with 80,000 square feet of parking space spread over six floors. According to Dawood, no other building in Pakistan offers such a large parking space.
If the per-square foot rent is around Rs100, he said the Modaraba will make Rs144 million a year. Given that its paid-up capital consists of a little over 78 million certificates with a face value of Rs10 each, Dawood said the building will generate an income of Rs2 per certificate per annum.
“Our Modaraba is still making money even though there is zero income from this building,” he said, adding that shareholders of the Modaraba will continue receiving a dividend generated through the rental stream of the tower.
“There is at least 7.5% increase in the rent every year. So it’s a hedge against inflation,” he noted.
BRR Guardian Modaraba announced its half yearly results last week, according to which its net profit for the period remained Rs15.1 million, down 33.1% from the corresponding six-month period in the preceding fiscal year.
Published in The Express Tribune, March 4th, 2014.
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