REITs, or Real Estate Investment Trusts, are structured and regulated investment portfolios made up of various real-estate assets from a range of asset classes and may be private or publicly owned. Their main purpose is to give individual investors access to real-estate portfolio investments without personally owning assets, and to allow for asset owners to access a broader, and more liquid, investor base. In a broad sense, listed REITs are to real estate what the stock market is to industry.
REIT sponsors can achieve the same level of liquidity as shares listed at stock exchanges. They are typically considered a medium-risk investment, delivering 6-8 per cent returns, on average. Listed REITs offer equity-like returns with low correlation to other stocks, making them a strategic diversification tool.
A new class of investment
REITs offer transparency and confidence to the international market, making them attractive to international institutional investors as they can diversify their investment and risk. There are other vehicles available, but public REITs are traded on stock markets with the requisite transparent regulations, making them more trustworthy, and more liquid, than other forms of real-estate investment. Listed REITs and real estate-operating companies raised $37.5 billion (Dh137.7 billion) in 91 secondary equity offerings, nine IPOs (Initial Public Offering) and 37 unsecured debt offerings following the credit crisis.
Since they are used to fund physical assets, these investments are also considered Sharia-compliant and therefore fit the investment profile of GCC investors, who want their investments to be in accordance with Sharia. The unique characteristic of an Islamic REIT is that it invests primarily in income-producing, Sharia-compliant real estate and/or single-purpose companies whose principal assets comprise Sharia-compliant real estate. Despite its practical nature, the REIT market is very small compared to other investment vehicles in the region.
The first publicly listed, Sharia-compliant REIT reported was established in August 2008 in Singapore. There have been numerous attempts to introduce REITs across the GCC that have been met with a muted response. The Arabian Real Estate Investment Trust (AREIT), launched by HSBC and Daman in 2006, was one of the earliest established REITs in the Gulf. In June 2009, the Middle East and North Africa’s first Islamic REIT establishment was approved by the Central Bank of Bahrain. The National Bank of Abu Dhabi also launched a REIT with Gulf Investment Corp last year, with a seed capital of Dh100 million targeting high-quality, income-generating properties in the UAE. With only a handful of launches, the REIT market still remains untapped in the region.
However, the prospects for REITs remain bright due to the marked-down value of assets, as well as a recent pick up in investor sentiment. A completed property is an ideal investment target for REITs as compared to an off-plan property, since the former is ready to let. Investment vehicles such as REITs will provide the region’s real-estate markets with new products, new investors, new capabilities and a new class of investment, overall.
Regulations have permitted REITs in DIFC since 2006, but the onset of the financial crisis, and the subsequent property crisis, delayed any substantial progress in this area. Therefore, it was only in 2010 that the first REIT in the UAE was set up. The Emirates REIT, founded by Dubai Islamic Bank and Eiffel Management at the end of 2010, now has a portfolio of Dh769 million.
There has been no progress in listing these instruments across GCC markets. Nakheel shelved $760 million REIT plans in 2008, while Emirates REIT, Dubai’s most successful venture of its kind, also remains unlisted.
Investor attitudes are also a challenge — a lack of exposure to real-estate investment vehicles, combined with the lessons of previous crises, has made investors wary of complicated investments. Other challenges are the low returns and tax advantages, which are not applicable in the GCC.
Valuation also poses challenges in measuring NAVs (Net Asset Value) of non-traded REITs. Since the fund is not traded, it’s hard to know how much the shares are really worth until the company decides to list its assets. Some REITs employ outside consultants or investment bankers to provide interim valuations, but it ultimately depends on sponsor-provided information.
Well-drafted regulations addressing investor concerns with regards to recourse and valuations will provide a strong foundation for the development of a market in the region. Banks are expected to take a lead in the development of REITs, since it would be natural for them to club their real-estate assets and package them into an REIT, it being an acceptable instrument to collectivise market risks.
As many commercial properties in the GCC, particularly the UAE, have multiple owners, REITs will provide a platform to manage these properties collectively. Pending regulations with respect to owners’ associations will also provide an impetus to REITs by easing administrative hurdles. It will definitely give a boost to rental assets and additionally act as an alternate source of funds for developers.
Robin Teh is Chesterton International’s Country Manager in the UAE and Director of Valuations and Advisory for the Middle East and North Africa. He currently sits on the committee of Taqyeem (Valuations) of the Real Estate Regulatory Authority and also serves as a Senior Assessor for the Royal Institute of Chartered Surveyors, Dubai Chapter.