Knight Frank's last REIT update - in Q1 2018 - recorded 12 REITs with a $2.3 billion market capitalisation
The number of real estate investment trusts (REITs) listed on the Saudi stock exchange has risen to 17, with a total market capitalisation of $3.7 billion as of November 2019, according to a report from Knight Frank.
Knight Frank’s last REIT update – in Q1 2018 – recorded 12 REITs with a $2.3 billion market capitalisation.
However, in a statement the firm said it expects a slowdown in listings, with the vast majority of activity taking place in 2018 and not 2019. In 2018, nine new REITs were listed, compared to just one listing to date in 2019.
“The growing depth of the market is offering a more favourable platform for investors willing to adopt a long-term investment approach while taking advantage of the portfolio diversification benefits offered by REITs,” said Stefan Burch, general manager and partner at Knight Frank Middle East in Saudi Arabia.
Burch added that “moreover, the increased level of competition in the market is considered to be a trigger for the adoption of best-in-class practices by REIT management teams.”
Earlier this year, the inclusion of Saudi-based REITs in the FTSE EPRA Nareit Emerging Index was announced. The FTSE EPRA Nareit Global Real Estate Index Series is specialising in REITs and real esate companies and is designed as a performance-tracking tool for both developed and emerging markets.
Knight Frank said is expects the inclusion of Saudi REITs in this global real estate benchmark to have a favourable impact on the market by helping align regulatory guidelines governning their listing and operations with international best practices.
With regards to valuation, Saudi-based REITs have seen their price to net asset value narrow over the last two years, with REITs currently trading at an average of 9 percent discount to NAV, a figure in line with more established markets.
However – following a drop in 2018 – the index tracking performance of Saudi REITs rose by over 5 percent in the first ten months of 2019. Knight Frank expects spreads between higher and lower quality REITs to widen, given the availability of information for investors to increase their focus on fundamentals such as the quality of underlying portfolio and stability of cash flows.
According to the report, diversified REITs are consolidating their dominance on the market as opposed to thematic REITs due to a structural lack of institutional grade real estate stock.
“We have seen REITs starting to invest outside of Saudi Arabia, where Saudi REITs are able to invest up to 25 percent of their capital in international markets,” said Saud Sulaymani, partner at Knight Frank Middle East in Saudi Arabia, valuation and advisory. “Recent examples include Riyadh REIT’s partial acquisition of an office building in Washington D.C., USA and Bonyan and MEFIC REITs’ acquisition of residential assets in Dubai.”