Improved regulatory environment necessary for GCC REITs to flourish

Investor sentiment and lack of understanding, along with a weak regulatory environment, are the biggest challenges for the growth of REITs in the Middle East, according to the latest survey by CFA Society Emirates, which gauged the opinions of the society’s members and charterholders in the UAE.

The survey revealed that the majority of CFA Society Emirates’ members ranked expected returns from a REIT portfolio higher than cash equivalents and bonds, and said that they intend to invest in REITs. However, they believe that the returns from REITs would be lower than stocks, private equity and real estate. Most investment professionals surveyed expect that the UAE’s residential and commercial real estate market will either stay flat or deteriorate over the next 12 months.

Amer Abdul Aziz Khansaheb, CFA, President of CFA Society Emirates, commented on the findings, saying, “Over the past decade, the GCC has seen a surge of activity in the region’s relatively youthful REIT market. Recent developments, such as the oversubscription of ENBD REIT and Johor Corp’s Al-Salām REIT, suggest that there is a rising demand amongst investors for this particular asset class.

Investment professionals recognise that REITs are attractive to investors because they offer a more diversified portfolio compared to buying shares in a listed property company. Additionally, with declining oil revenues and the growing likelihood of fiscal restructuring measures, REITs would provide investors with a hedge against any inflationary trends.”

He added: “With the UAE’s real estate market having the highest demand in the GCC amongst regional and international investors, a less volatile asset class, such as REITs, is expected to become more attractive, as investors seek to reduce portfolio risk given the current macroeconomic environment. However, our survey shows that it is important for investment professionals to increase investor understanding about REITs and gain their trust through prudent and ethical investment strategies which put investor interests first. This, along with creating a more robust regulatory environment to gain investor confidence, is significantly important for the growth of REITs in the region.” 8 key survey findings: 1. Investor understanding of REITs was seen as the biggest challenge for its growth and development in the region.

2. 62 per cent are convinced returns from a REIT portfolio will be lower than stocks, 82 per cent feel that REITs will deliver lower returns than private equity and 46 per cent are of the opinion that real estate would deliver higher returns than REITs.

3. A large majority of respondents said that the expected returns from a REIT portfolio would be higher compared to cash equivalents (83 per cent) and bonds (73 per cent).

4. 76 per cent of members see institutional investors investing in REITs, compared to 23 per cent who felt that it would be retail investors.

5. 62 per cent of respondents said that they intend to invest in REITs.

6. 74 per cent of members expect the outlook for the UAE’s residential real estate market to either stay flat or deteriorate.

7. In terms of the commercial real estate outlook for the UAE, 70 per cent feel that the market will either stay flat or deteriorate.

8. 45 per cent of members believe that GCC’s real estate market is mature enough for REITs to flourish, while 43 per cent believe that it is not.