Real Estate Investment Trusts (REITs) offer an alternative to buying bricks and mortar. REITs originated in the US in the 1960s, but their development has accelerated during the past decade, with more than 20 countries adopting REIT laws in the past 15 years, according to Sylvain Vieujot, CEO of Emirates REIT.
“In the UAE, as in a lot of countries worldwide, real estate ownership is mainly restricted to nationals,” says Vieujot. “However, it is common practice for REITs to get an exemption to allow international investors to invest in local real estate through REITs.
“We have been working with government entities from all emirates to grant us such rights. Dubai has been the first emirate to grant us such an exemption, and since then we have become the largest publicly listed, Sharia-compliant REIT in the world both by total assets and by market capital.”
According to Ahmet Kayhan, Founder and CEO of real estate information provider, REIDIN, Emirates REIT has widened the options for real estate investors large and small. “Real estate classes, other than residential, were not within the reach of the retail investors. Emirates REIT has opened that door,” says Kayhan. “Unfortunately since the 2008 crisis until recently, these asset classes, except retail, were not performing well, due to many reasons such as oversupply, occupancy issues, maintenance cost, etc. Emirates REIT consolidated most of these and created an efficient model around them.”
Vieujot explains it was important to correctly time the creation of a REIT as well as the acquisition of new assets. “In the UAE, the REIT law was approved in 2006. At that time, there were already plenty of great assets in the UAE. However, real estate prices were excessive for long-term investors, and the yields were too low. That’s why we decided to wait for a better window to incorporate the REIT in 2010 and start buying properties,” says Vieujot.
Recently the government of Ras Al Khaimah also enacted a decree for REITs. “We are very interested in investing in RAK and are currently looking at school and residential properties there,” says Vieujot.
Why trade in REITS?
Kayhan says REITs will only become more popular among individual investors in the UAE. He says the lack of information and awareness has been the main hurdle for REITs.
“Unfortunately many are not aware that REITs are very safe and secure investment tools in mature markets,” says Kayhan. “On top of the efficiency, corporate governance and leverage advantage over direct investment, they offer tax advantages in those markets where investors of REITs are exempted of dividend payments. The UAE being a no-tax environment, urgency is not there.”
REITs offer individual investors and large institutions the advantage of investing in real estate in a fairly safe and simple way, according to Vieujot. “REITs solve a number of issues for investors, such as finding the best properties, raising the necessary funds and managing the properties after they are acquired,” he says. “REITs ultimately provide liquidity so investors do not have to buy the physical assets directly, but instead can buy only a few shares in a REIT.”
What do REITs do with your money?
“Usually, you invest in real estate to receive a regular rent. In the same way, you invest in a REIT to receive a regular dividend,” explains Vieujot. “As such, REITs primarily invest in income-producing assets to ensure attractive dividend yields to shareholders.”
Vieujot says Emirates REIT undertakes some of its own developments to enhance its returns. However, it caps these to 30 per cent of the portfolio. “As a rule of thumb, we develop projects for which we have already secured a long-term tenant, such as a school operator that wants a 30-year lease, and we buy existing buildings where our management can add value.”
REIT projects
Last year Emirates REIT agreed with Jebel Ali School to build new facilities, which would be leased for 30 years. After a year of construction, the new school opened for the start of the 2016 school year, providing a quality campus to the operator and a stable income to investors.
“Last October, we signed a similar project with the British Columbia Canadian School and we are now developing their campus in Dubai Investments Park,” says Vieujot.
Quick sell?
Although REITs can also be traded on the stock market, such as the Emirates REIT on Nasdaq Dubai, in general they are not a quick-sell option, but are more suited to long-term investors.
“It totally depends on your risk appetite. If you are aiming for a long-term, secure, income-generating investment, REITs can be good tools,” says Kayhan. “If you are aiming for short-term capital gains, REITs may not be the best, as they are mostly traded with a discount in the stock market.”
Vieujot says REITs are just as table and flexible as investments in actual properties such as villas and apartments. They can serve as a retirement plan and can also be passed on to the investor’s children.
“In fact, many of our investors are private individuals, pension funds and insurance companies,” says Vieujot.
Advantages and risks
When investing in REIT, one does not invest in a particular project, but a basket of properties. “The advantage of a REIT over other investments is the portfolio,” says Kayhan. “While one asset’s value is going down, the other goes up, hence the pool of assets saves your money.”
Understanding the management, type of asset and market opportunities are the main challenges of REITs.
“When investing in a REIT it’s important to understand the asset pool, how it’s managed and by whom,” says Kayhan. “This, of course, after making sure the real estate market overall offers a good investment option.
“In a bearish market, even if you have the best product you may still lose money. But overall I am a big believer in REITs and what they offer in terms of a sound investment vehicle in a market where there are not many structured products for investors to consider, other than direct investment.”
