While Real Estate Investment Trusts (REITs) are common in many real estate markets around the world, they are relatively new in the Middle East, with the Emirates REIT being the first, launched in 2010. In November, Saudi Arabia created its local version of a REIT. The reason behind this move was to enable smaller investors to provide liquidity to the market and support government efforts to resolve a housing shortage and increase the percentage of housing generated by developers to 30 per cent from its current level of 10 per cent. More recently, ENBD REIT and Five REIT were also launched in the UAE.
While there are advantages for any industry to have financial structures such as REITs to support burgeoning property and construction industries, what are the advantages for the investors providing the capital?
Not exclusive to the rich
There was a time when the property game was for the wealthy investor and those with only small amounts had to look elsewhere to invest their hard-earned capital. This is no longer the case due to the rise of new investment platforms, which enable even the smallest of investors to enjoy the returns of investing in property.
One such platform that is relatively new to the local market is the REIT. A REIT is a trust company that accumulates a pool of money through an initial public offering (IPO), and buys, develops, manages and sells real estate assets. The IPO is identical to any other security offering with many of the same rules regarding disclosure and reporting requirements and regulations.
Investors, whether large or small, instead of purchasing stock in a single company, have the opportunity to buy a unit which is actually a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing, selling and financing of property and distributes it directly to the REIT holder on a regular basis. Units held in a REIT can be bought like a stock on a stock exchange. The REIT invests in real estate directly, either by buying, selling or leasing properties or by investing in mortgages.
Types of REITs
There are three types of REITs. Equity REITs invest in and own properties and therefore are focused on increasing the value of those properties, while also accumulating revenue from rents. Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities.
Their revenues are generated primarily by the interest that they earn on the mortgage loans, while Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
How to invest in REITs
Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specialises in REITs that are listed on the stock exchange. Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate — shopping malls, for example — or in a specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market.
REITs allow both small and large investors to invest in real estate without shelling out large amounts or devoting a lot of time in directly managing a property portfolio.
REITs also allow a greater amount of portfolio diversification because the large pooled funds available to the REIT management team enables the accumulation and operation of different types of property assets in different locales.
Investing in a REIT is no different to investing in any company. Some companies represent lucrative opportunities, while some companies may represent too much risk or poor value. Investors need to look at a REIT’s performance in terms of net asset value growth and dividend payment history, current portfolio composition and performance, the management team and future plans, and have an understanding of the likely performance of the property market and the economy. After completing a thorough and in-depth assessment of the REIT, investors can participate with what they can afford to invest in.
Another investment platform, which allows smaller investors to participate in the property market, is crowdfunding. A relatively new concept, crowdfunding entails the pooling of funds by a group of individuals to finance initiatives such as real estate investment projects. This is usually done via the internet.
The advantages are obvious. Investors get access to the real estate market with small amounts of money and can efficiently choose which real estate projects they wish to invest in, thereby spreading risk and enabling the possibility of building a portfolio made up of a variety of assets, in a variety of locations being developed by a variety of developers.
For developers, crowdfunding provides another source of funding for their projects. Using the internet is an efficient way of attracting interest to their projects and the reach that the internet provides magnifies the potential for raising funds more quickly.
However, as with any investment, crowdfunding is not without its risks. Obviously, investors will be exposed to gyrations in the market, along with all the other investors. In addition, the risk of default from developers can be higher when compared to peer-to-peer and direct real estate investment funding. In addition, unlike investing in a REIT, the absence of a secondary market restricts the ease with which investors can liquidate their position.
These risks need to be considered carefully when determining the type of return required and, as with any investment, extensive due diligence by all investors, regardless of whether they be big or small, is of paramount importance.
Mohanad Alwadiya is CEO of Harbor Real Estate and a senior advisor and instructor at the Dubai Real Estate Institute. The views expressed here are his own.
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