Capital Markets

May 8, 2017

The GCC’s growing REIT market

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Written by George Allen, Senior Consultant, Instinctif Partners Middle East. This article originally appeared here.

GCC markets have, in recent months, seen a surge of activity in the region’s relatively youthful REIT market. A REIT is a real estate investment trust that invests directly in income-generating property and distributes a percentage of its net income to shareholders.

The objective of a REIT is to generate a regular dividend income for investors, with the opportunity of capital appreciation on its assets and an increase in the value of its equity. The region’s most recent REIT IPOs saw ENBD REIT (managed by Emirates NBD Asset Management) raise US$ 105 million in its offering of ordinary shares to investors on Nasdaq Dubai in March, followed by Jadwa Investment’s REIT Al Haramain Fund, which offered SAR 360 million of units on Saudi Arabia’s Tadawul stock exchange in April.

The GCC already has a number of REITs. Two in the UAE are listed on Nasdaq Dubai (Emirates REIT and ENBD REIT), with Abu Dhabi Financial Group (ADFG) recently announcing that it intends to IPO the newly launched Etihad REIT. Meanwhile, Saudi Arabia opened to REITs last year. Tadawul now hosts the AlJazira Mawten REIT Fund, the Riyad REIT Fund and the Jadwa REIT Al Haramain Fund. Bahrain announced regulations for REITs in November 2016, with the country’s first REIT launched in the form of the Eskan Bank Realty Income Trust in January 2017. Qatar and Kuwait have not yet established regulations for the trading of REITs on their stock exchanges.

As it stands: GCC listed REITs
Saudi Arabia
United Arab Emirates
Bahrain
1. AlJazira Mawten REIT Fund
2. Riyad REIT Fund
3. Jadwa REIT Al Haramain Fund
1. ENBD REIT
2. Emirates REIT
1. Eskan Bank Realty Income Trust

While the GCC’s two leading capital markets, Saudi Arabia and the UAE, have created clear opportunities for listing REITs, legal restrictions on foreign ownership of real estate and foreign ownership of shares on local exchanges create challenges for the development of REITs. Dubai markets, for example, restrict foreign ownership of REITs to 49%, while in many developed markets 100% foreign ownership is permitted. Saudi Arabia’s stringent criteria for Qualified Foreign Investors (QFIs) will mean that REIT investors will be mostly local.

So what opportunities do REITs offer?

In a large market such as Saudi Arabia, the establishment of REITs opens real estate to smaller investors, and will have a role in bolstering efforts by the government to resolve a shortage of housing, by bringing greater liquidity to the property and development sector. It has been well-publicized that Saudi Arabia’s ambitious National Transformation Program intends to double the contribution that real estate makes to the Kingdom’s GDP (to 10% by 2020), and REIT managers and shareholders alike will hope their companies will have a part in that process.

Existing and emerging GCC REITs will bring liquidity to the real estate sector. Financial institutions in the region have been reducing their exposure to a slower property market, so REITs will offer real estate companies access to a diverse range of investors via capital markets (for example through an IPO) to fund acquisitions and development projects. REITs also offer liquidity to investors. They allow investors to buy into a portfolio at a lower price than directly acquiring assets. Most REITs will look to diversify their portfolios as a strategy to mitigate risk, which also benefits investors. Since shares in the REIT can be traded on the open market, the investor can also shorten or exit their position as and when they choose.

From a governance perspective, REITs provide the benefit of a stricter regulatory framework than direct investment in a real estate asset or investment via a fund. In addition to minimum dividend payment requirements, REITs have a clearly defined governance structure, including an independent Board of Directors, that provide shareholders with the comfort that the REITs stated capital deployment strategy will be delivered diligently and scrupulously.

With what looks to be a fairly busy pipeline for upcoming REIT IPOs – mostly expected to take place in the UAE and Saudi Arabia – investors looking for consistent dividends and long-term capital appreciation are paying ever closer attention to the opportunities that REITs provide. As the region’s real estate sector begins to mature, there is considerable scope for more REITs to come to the market. Both New York and Singapore have hosted many such vehicles for some time, and it appears that now is the time for the GCC’s markets to follow suit.

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