Yield-hungry investors gain from an alternate asset class as returns rise
here are more Real Estate Investment Trusts (Reit) flooding the market than the Initial Public Offerings (IPOs) by companies.
Five Reits worth $630 million (Dh2.3 billion) have been listed in the GCC, four in Saudi Arabia and one in the UAE within a span of 10 months, higher than the number of IPOs in the region, according to a report published by Marmore Mena Intelligence.
“This sudden emergence of an alternate asset class augurs well for the melancholic investment climate and makes available diversified products such as exchange traded funds, derivatives and Reits for its affluent and high net worth individuals who have till now searched beyond borders for alternative investment products,” Marmore said.
The returns have also been attractive so far. For example, Emirates Reit had a return of 10 per cent in 2016, compared to 13 per cent gains in Dow Jones Industrial Average.
Another investment option — gold, which is considered as an inflation hedge, was almost flat at $1,150 an ounce.
Not only does it serve investors as a diversification tool, it also provides the developers with alternate funding mechanism, de-stressing the banking system. “Introduction of Reits will further augment the nationalisation programme in GCC, as the contribution of nationals in the real estate sector is high,” Marmore said.
Hurdles
The development of Reit’s have been a problem due to several hurdles and one of them is regulations.
In most GCC countries, foreign ownership is restricted in real estate. Ownership limits are also limited in capital markets for international investors.
There are also leverage regulations placed on the real estate investment trusts. For instance, in Saudi Arabia, a Reit issuer’s leverage is restricted to 50 per cent while in countries such as USA and Canada there is no restriction on the debt levels.
“Liberalising the limits on foreign ownership will be one of the prime measures for developing secondary markets for such products. GCC nations also need to emphasise improving the market infrastructure such as adopting a common settlement cycle that is widely accepted, developing delivery versus payment systems apart from improving the transparency and disclosure mechanisms that are currently lagging behind,” Marmore said.
UAE and Saudi Arabia are among the first in the region to have introduced regulations that are accommodative for the listing of Reits. Currently both these countries together have collected a corpus of about $630 million. Bahrain too has followed suit and has recently enlisted elaborate procedures for listing Reits.
Limited options with IPOs
As far as IPO’s are concerned, investors have limited options as fewer in number have come to the market, but that is expected to change, according to analysts.
“Many expected 2017 to be promising for the UAE. However, the market has only witnessed one IPO during the first half of 2017. While the DFM and the ADX have put in place an increasingly efficient and flexible regime for public offerings, external factors are also important for determining investor appetite for new flotation,” said Shailesh Dash, Founder and CEO, Al Masah Capital.
In terms of IPO performance in the second quarter of 2017 compared to the same period in the previous year, the number of offerings has increased marginally, with three IPOs in the second quarter compared to two in the same period last year. The total proceeds raised in the second quarter of 2017 was 38 per cent lower compared to the second quarter of 2016.
“Further impetus for the UAE IPO market will only come from the government and regulator if the listing requirements are made much lighter and flexible, which will encourage local companies to list in the UAE rather than considering international markets,” Dash added.