On the REIT track

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State-backed developers such as Emaar and Aldar, which have large rental portfolios, would be likely candidates for a REIT conversion.

According to EFG’s Kapadia, the Gulf has been slow to embrace this form of property investment largely because of the immaturity of its markets.

“It’s the understanding that they are alternative investment vehicles. There is appetite for alternative and direct property investment, but it’s also a function of maturity for companies looking to get into REITs. They want to develop their portfolios and then use these assets to set them up,” she adds.

Abdullah claims returns from IREIT will be around 8.5 percent and, while fundraising is targeted at a mixture of pension funds, financial institutions and high-net worth individuals, he aims to float the trust in Kuwait and perhaps Saudi Arabia at a later stage.

Inovest’s REIT is Sharia-compliant, meaning that income derived from interest is forbidden, together with revenue produced by prohibited activities or businesses.

These include gambling; the manufacture or sale of non-halal meat or related products; arms manufacturing; the adult entertainment business; nightclubs; hotels and resorts; tobacco and alcohol.

As Sanson points out, an Islamic REIT is only permissible if the income-producing property portfolio does not include a shopping mall, for example, which might house a supermarket selling pork, a tobacconist or an alcohol store.

Potential investors may ask themselves what the advantages are to be in investing in an Islamic REIT rather than one in the West. Kapadia at EFG puts it down to the rosier macroeconomic picture in the Gulf.

“Economic conditions in the West look likely to remain depressed for longer [than in the Gulf],”she notes.

However, the Gulf’s patchy regulatory framework could prove a deterrent. In 2006, the Dubai International Financial Centre (DIFC) took the lead on REIT laws by passing the Investment Trust Law and the Investment Trust and REITs Rules Instrument.

At the start of 2007, DIFC, Abu Dhabi Commercial Bank (ADCB), and the real estate division of Australia’s Macquarie Bank announced plans to create a REIT and acquire assets of $2bn. However, the framework remains untested as the REIT was never listed.

Experts believe that the regulations in place do not go far enough. Further financial legislation is needed to give greater security to companies launching REITs and those investing in them.

“They [laws] are not of a level of sophistication to provide sufficient levels of comfort to proposed investors,” says Sanson at DLA Piper. “Given how young and immature the real estate market is in this region in comparison to the UK and the US, if this is going to be a vehicle that is attractive to investors, there will need to be a review of existing REIT-specific legislation.”

At Inovest, Abdullah agrees. “The rest of the GCC can develop the right environment for REITS. It may take a bit of time, but they need to pass the right kind of laws.

“It’s just about creating the right regulatory environment and legal framework for such products.”

Despite Dubai’s early enthusiasm, Saud Masud, a real estate analyst at Swiss investment bank UBS, says the emirate is some time away from providing a platform from which REITS can operate.

“They will happen, but I don’t see them being a meaningful player in this market in the next five years,” he says. “REITs are a function of a steady market and the one thing you look for is recurring income and recurring revenues that can be passed to the end user.

“Dubai is not ready for it yet.”

State-owned developer Nakheel floated the idea of launching REITs with assets up to $2.72bn in February last year but the plan failed to materialise.

Emaar, the largest developer in the Middle East, and Abu Dhabi’s Aldar, both of which have large rental portfolios, would be the companies most likely to consider REITs, Masud notes.

For now, though, the litmus test remains Inovest’s $80m REIT fund and whether it proves a trigger for the investment class to take off in the Gulf.

“In the market there will be an awful lot of people who have had their fingers burned,” says DLA Piper’s Sanson, “and I think that, with the shake-up that is happening here now, once things stabilise, a vehicle such as a REIT could be an attractive proposition.”

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