The advent of a real estate investment market in the GCC with REITs

The property price correction in the UAE has triggered many investors to explore alternate investment avenues to preserve and grow their wealth. Ironically, the current downturn in the real estate sector is also an opportune time to invest in a Real Estate Investment Trust (REIT).

REITs allow investors exposure to the real estate sector without the risk and hassle of directly acquiring an asset. As they are listed on a stock exchange, investors can purchase or sell any number of shares depending on their risk appetite and capital commitments at the time. As a result, real estate comes within the reach of a much larger pool of potential investors.

REITs versus listed real estate securities

Compared to public real estate securities listed on a stock exchange, REITs are considered a much safer option. Whilst some real estate developers pay out dividends to shareholders, many of these dividend payments are funded through off-plan sales revenues and proceeds from land bank sales, which can be a threat to the future of the operations of the developers. On the other hand, REITs are governed by certain rules when it comes to dividend payouts and maintaining cash flows – REITs must distribute at least 80% of net income to investors as dividends, ensuring a steady income stream.

Upsides and downsides

One of the primary advantages of REITs is the tax benefit they offer due to their tax-exempt status or the reduced tax rates applicable. With the UAE and wider Gulf not having a practice of levying taxes on the rental income or capital gains received by the REIT, as well as no withholding tax on distributions, tax benefits are not essentially the biggest attraction. However, liquidity of the investment, stable income through dividend payouts and the heightened transparency as a listed asset continue to be universal advantages.

On the other hand, as REITs are relatively nascent investment vehicles, especially in the Middle East markets, the disadvantages are fundamentally the characteristics of a maturing market. Unclear regulations, fragile corporate development structures and a generalised focus as opposed to a sector-specific offering are all being tackled at a country-level to enhance the appeal of REITs. For example, whilst UAE, Saudi Arabia and Bahrain have already introduced regulations governing REITs, others including Oman and Bahrain are working to put in place their respective policies.

REITs also face some other challenges including limited scope for diversification given the nature of the investment and fluctuating trading volumes on the secondary market where shares might trade at a discount to NAVs – currently the case with ENBD REIT and Emirates REIT in the UAE. Then there is the possibility of getting delisted altogether – ENBD REIT is currently exploring the option to delist from the Nasdaq Dubai where its shares trade and become privately held to maximise shareholder value.

REITs in the region

Although REITs have been present in the UAE for a decade, with Emirates REIT being the first to be established in 2010, the true potential of the investment option is only being recognised and realised now. Several companies are in the process of attracting investor interest into their REITs but are waiting for the right time to enter the market, given the current property market downturn. The Palmon Group will wait until 2021 to list its Manrre Reit and Dubai Investments subsidiary Al Mal Capital is also expected to float a mixed-use fund soon.

Even in the wider Middle East, the uptake has been slow – over the last five years, only 9% of REIT Initial Public Offerings (IPOs) have been in the Middle East. Here too it was mainly countries such as Saudi Arabia that saw a flood of listings after the Capital Market Authority (CMA) gave a go-ahead to REITs in 2016, keeping with the National Transformation Program (NTP) and the Saudi Vision 2030 diversification strategy. The kingdom’s tryst with REITs got off to a rough start experiencing hiccups from insufficient due diligence and a generally tepid real estate climate. As a result, in early 2018, dividend yields on Saudi Arabia’s REITs were below the global average compared with UAE, where REITs were offering dividend yields that were 14% higher compared to the global average. Despite the initial challenges, the improved regulations and more defined corporate governance structures are expected to strengthen Saudi Arabia’s REITs market.

Global benchmarks

Overall, a low reading of 2.7% CAGR since 2009 for the Middle East and Africa REITs Index, according to S&P Capital IQ, compared to mature markets in the west reflect the tremendous upside potential the market possesses.

To draw a more similar comparison we can look to an emerging market like Singapore – the city-state has established itself as a sought-after destination for Asian REITs. Although REITs have prevailed in Singapore for a longer period, factors such as specialisation of assets classes and expansion of activities to include overseas assets are some of the factors which have worked well for the investment class.