The rise of REITs
Despite the somewhat gloomy conditions in Gulf real estate markets in recent months, one area of optimism is real estate investment trusts or REITs.
Although having existed for decades in the US and other markets, where part of their appeal was the tax advantages, REITs have only emerged in the GCC over the last few years as regulation has adapted.
In terms of listed vehicles, it was not until Emirates REIT’s arrival on the Nasdaq Dubai in 2014 that the UAE’s first was introduced, although a number of private vehicles were formed in the years prior including the $200m Arabian Real Estate Investment Trust, set up in 2006 by HSBC and Daman, and the original Emirates REIT established by Dubai Islamic Bank and Dubai Properties in 2010.
“International funds aiming to geographically diversify across the globe are increasingly pressed to include Dubai in their portfolio, given the city's dominant rise as an economic hub. This has led many funds to enter the market on the back of REITs,” says David Godchaux, CEO of Core Savills.
In March, Emirates NBD listed the UAE’s second REIT on the Nasdaq Dubai. This was followed by Abu Dhabi Financial Group’s announcement that it would list its own Dhs3bn ($816.7m) Sharia compliant REIT this year, followed by a similar announcement from FIVE Holdings (formerly SKAI) that it would list a Dhs2.10bn ($570m) REIT for its hospitality assets, including the FIVE Palm Jumeirah Dubai, under Abu Dhabi Global Market.
Glyn Gibbs, regional head of business development for the Middle East and North Africa at ENBD REIT administrator Apex Fund Services, says REITs are growing in popularity because they are a means through which investors are able to gain exposure to larger property developments while also providing attractive and reliable returns in comparison to bank interest rates and more volatile regional equity markets.
Dividends for the UAE’s existing REITs range from 6-8 per cent, he says, generated from assets that are often properties with consistent yields over the medium-term, like schools.
“The thing that has surprised most commentators – myself included – is just how popular this phenomena has become,” he says.
“We have a situation where we have momentum and with momentum comes scale benefits, particularly as more REITs get launched, investors will have increasing choice in terms of the types of property exposure they can gain access to through the listed vehicle.
“REITs will also becomes a sector itself within an exchange and therefore will be attracting allocations from international funds investing in emerging markets that are benchmarked against index returns.”
Gibbs forecasts that the UAE market alone could support somewhere between seven and 10 REITs in the coming years, while there is deemed to be growing potential across the Gulf region.
He understands that initial discussions are taking place in Oman to put in place the appropriate regulation to facilitate a REIT, despite the smaller market size. Bahrain announced regulation for REITs in November and Kuwait is deemed to have sufficient potential for them although there is still some way to go on the regulatory side.
But the fastest moving market is also the region’s largest. Saudi Arabia opened its Tadawul stock exchange to REIT listings last year and currently has four listed funds – AlJazira Mawten REIT, Riyad REIT, Jadwa REIT Al Haramain and Taleem REIT – with many more expected to follow.
“In Saudi Arabia my understanding at the moment is there are probably in excess of 20 currently in the pipeline preparing submission to the Capital Market Authority and subsequent listing on Tadawul. So we will see how many of those transactions go through and how readily they can be absorbed by the market,” Gibbs says.