Gulf investors are no strangers to real estate. It is among the most popular investment categories in the GCC, along with stocks and precious metals, and what regional conglomerate does not own a sizeable property portfolio?
However, the traditional approach to owning bricks and mortar is changing. Gulf real estate markets have stagnated in the past few years, disrupted by economic uncertainty, investor caution and low liquidity.
While markets are forecast to pick up this year on the back of rising oil prices, analysts are emphatic: direct property ownership no longer guarantees the lucrative returns it once did.
Enter an alternative form of asset ownership: real estate investment trusts (REITs). An established vehicle in the US, Europe and Asia, REITs are gaining popularity in the Gulf as investors seek tradeable assets rather than the illiquid ownership of a standalone building.
“REITs are nascent here but I am convinced they will at some point be favoured over direct real estate investment,” says Sylvain Vieujot, co-founder and chairman of Equitativa Real Estate, which launched the UAE’s first ever REIT, Emirates REIT, in 2010. “REITs give a stable, regular income and are an easy way to buy and sell property.”
REITs are a type of publicly listed fund that originated in the US in the 1960s but whose regulatory development has accelerated since the global financial crisis. They typically own income-producing commercial real estate and are legally obliged to distribute a proportion of their income, usually 80 or 90 percent, as dividends to shareholders.
Take up of REITs has been slow in the Gulf since regulations were first introduced in the UAE in 2006, but there has been a “surge” of interest in the last six to 12 months, claims Ali Shaikley, Dubai-based partner at law firm White & Case, which advised on the April listing of the UAE’s second REIT, ENBD REIT, owned by Emirates NBD Asset Management.
Since the beginning of 2017 alone, he says, eight new REITs have launched in the Gulf. They include ENBD REIT in Dubai and three in Abu Dhabi — the Residential REIT and Logistics REIT from Equitiva, and Etihad REIT from Abu Dhabi Financial Group, which is expected to launch an initial public offering (IPO) this year.
There have been three in Saudi Arabia - Riyadh REIT, Al Jazira Mawten REIT and Jadwa REIT Alharamain Fund - and one in Bahrain, Eskan Bank Realty Income Trust. Qatar has Regency REIT, a cross-border REIT listed on the Singapore Stock Exchange, while several other REITs are in planning and expected to come to market within months, advisors say.
“There are many reasons for this surge in interest,” Shaikley tells Arabian Business. “For real estate companies, the key driver is liquidity. At a time when regional banks have been tightening their exposure to real estate, REITs provide property companies with access, through private placements and IPOs, to an enlarged pool of private and institutional capital to fund their acquisition and investment activity.
“In other words, REITs are stepping into a funding gap created by lower levels of bank liquidity.
“From the investor’s perspective, buying units in a REIT gives him exposure to a portfolio at a significantly lower price point than if he had acquired the underlying assets directly.”
There are additional benefits. REITs offer investors returns without the usual downside risks and administrative burdens associated with direct property ownership, such as insurance, repair and maintenance. They also offer diversification across a range of real estate sub-sectors, spreading the risk, says Anthony Taylor, fund manager at ENBD REIT.
“If an investor holds a single property with a single tenant and the tenant vacates, the investor is exposed to no income until they replace the tenant,” he says.
“If the investor invests in a REIT, then should one property in the portfolio become vacant, there is continued revenue while the vacant one is re-leased.”
It is a compelling proposition and Taylor says investor appetite is “most definitely” growing. “We are seeing an increased interest in the establishment of REITs in the Gulf. Investors are taking into account the ease of investing into REITs compared to direct real estate, which requires ongoing local knowledge of the market and constant management of the asset.”
The rigorous nature of global REIT regulations is another reason for their appeal. Outside the Gulf, they offer significant tax benefits and, while this is not relevant in the GCC’s tax-free jurisdictions, other strands of their make-up are a big draw.
For example, REITs impose strict limits on leverage and the proportion of assets under development in the portfolio to reduce speculation, and are subject to stringent corporate governance, disclosure and transparency regimes, increasing investor confidence and minimising risk.
“Investors can take considerable comfort from the REIT brand and the standards to which they are subject,” explains Shaikley.
Shuaa Capital general manager Fawad Tariq Khan, who advised on the listing of ENBD REIT and is advising Etihad REIT, says REITs have further appeal for Gulf investors — they are a sharia-compliant investment product. “We know there is huge pent-up demand in the region for Islamic products but choice is very limited.
“Sharia law would place restrictions on some REITs, for example they could not own hotels that serve alcohol,” Khan says. “But REITs’ actual investment structure is sharia-compliant.”
Even professionals selling property through traditional channels believe REITs have a bright future. CBRE Middle East managing director Nick Maclean says: “We know from other markets around the world that indirect investment vehicles are a complimentary component of high transaction markets, such as the UAE.
“As global capital flows increase, instruments like REITs provide the UAE with alternative opportunities to grow its market share of international real estate investment.”
At present, there are really only two ways for Gulf investors to gain exposure to commercial real estate: direct ownership or equities in real estate developers — the latter of which is subject to changes in corporate dividend policies, notes Shuaa’s Khan.
Experts say the GCC has room for as many as 10-20 REITs as the region expands, with a combination of large, diversified REITs and specialised ones. “In the coming years, a number of REITs will consolidate with others and grow to achieve economies of scale,” says Taylor.
“Other REITs will look to specialise in sectors such as logistics or healthcare. This would allow fund managers and investors more scope to invest into specific regional real estate sectors.”
Saudi Arabia’s Mawten REIT launched in January and invests solely in income generating warehouses in Jeddah, while Emirates REIT invests in a mix of offices, schools and retail.
Vieujot says his new REITs will specialise in a single sub-sector, for example the Residential REIT. “We don’t want to mix asset classes. It’s better to keep them separate as some investors only want to invest in one segment, while different real estate types have different yields and market cycles and you do not want to lower the REIT’s overall performance.”
There are challenges to REITs’ growth. Once listed, they become vulnerable to the same stock market ups and downs as other traded entities, notes Vieujot, and they could also face issues concerning lack of available stock, says Maclean.
However, the main barrier to their growth is restrictive foreign ownership rules, says Craig Plumb, research director at JLL MENA (Middle East and North Africa). Saudi Arabia has the upper hand here, having amended its laws to allow up to 100 percent foreign ownership in most industry sectors.
Dubai, on the other hand, prevents even free zone-domiciled REITs from acquiring non-free zone assets, Plumb says. DIFC-registered Emirates REIT had to seek an exemption from Dubai Ruler’s Court enabling it to purchase properties anywhere in the emirate provided there was a minimum of 51 percent local ownership of its shares.
One UAE lawyer who wishes to remain anonymous is sceptical. “I wonder whether REITs are just a buzzword right now. When questioned, we find that many of the people who come to us saying they want to set up a REIT are in fact asking for a standard property fund.”
Still, judging by current interest levels, REITs are gaining momentum and if GCC governments wish to maintain their competitiveness in the international market, they would do well to introduce any remaining measures needed to facilitate their growth.
What are REITs?
REITs are listed trusts that own and/or manage income-producing commercial real estate, either the properties themselves or the mortgages on those properties. Investors can invest in the companies individually or through an exchange-traded fund or mutual fund.
Where did they originate?
They were born in the US in the 1960s, and have since gained popularity in other high-tax jurisdictions in Europe and Asia, as they are a highly tax-effective investment structure.
How much are REITs worth globally?
REITs are very big business — the global index of REITs covers more than 450 listed vehicles across 37 countries with assets in excess of $2 trillion. Gulf REITs are more nascent, although the UAE’s first REIT, Emirates REIT, reported 21 percent year-on-year growth in its rental income for the first quarter of 2017, to $12.6m.
How many REITs are there in the GCC?
Less than 10 at present, though there are several in incubation. The UAE has three, Saudi has two, Bahrain has one and Qatar has one. The next to launch is Etihad REIT in Abu Dhabi.
What type of real estate do they invest in?
There are many types of REITs available. Some, such as Emirates REIT, have a mixed portfolio of offices, retail and industrial; others like Saudi Arabia’s Mawten REIT and the new Residential REIT choose to invest solely in a one real estate sub-sector.
What are the pros and cons of REITs?
They can provide greater diversification, higher total returns and lower overall risk, particularly as a counterbalance to stocks, bonds and cash. They also offer investors exposure to large, income-generating assets they could not afford to buy in their entirety, and without the downside risks and added costs of property management.
The investor can step in and out of his investment as he wishes because he owns tradeable units rather than illiquid real estate whose sale is dependent on market conditions. And they offer real estate owners new avenues of raising income as the off-plan market and traditional sources of bank lending dry up, according to JLL head of research Craig Plumb.
However, unlike traditional real estate, many REITs are listed, which means they are subject to stock market volatility.
Further, many GCC jurisdictions place restrictions on foreign ownership, hampering REITs’ growth.
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