Real Estate Investment Trusts (REITs) are vehicles that provide investors with exposure to a portfolio of real estate assets. There are different types of REITs, but the most common is the equity orientated whereby investors can own equity shares in a basket of income-generating real estate assets. Such assets are under professional management and the equity stakes can be freely traded on an established securities exchange. REITs vary in their geographical reach and may have a general or specific focus on the types of real estate sectors in which they invest.
Instead of taking on the cost, risk and management burden of directly acquiring real estate assets, such REITs provide the investor with wide access to the real estate market, but with smaller financial barriers to entry thus lowering overall risk; management of the properties carried out by the REIT or a third party; lower price volatility and providing a good hedge given their relatively low correlation with other asset classes; and a high degree of liquidity and the option of a quick and easy exit through selling the equity shares on an exchange.
Historically, REITs developed in the US as a means for a real estate company or trust to mitigate its tax liability. This was done through the majority of its annual income or capital gains, generated through the disposal of properties, being passed through and distributed annually to its shareholders. In the UAE, although tax considerations are less of a motivating factor, under the relevant regulations governing REITs, there must be an annual distribution of dividends to shareholders of not less than 80 per cent of a REIT’s annual net income.
In recent years, REITs have grown in the Middle East with the UAE, Saudi Arabia, Bahrain and Oman having introduced legal and regulatory frameworks. Islamic REITs, first developed in Malaysia in the mid 2000, have also proved popular in the region — appealing to Middle East investors by ensuring that the relevant underlying real estate assets are owned, used, financed and managed in a Sharia-compliant manner.
In the UAE, there are currently two listed REITs — Emirates REIT and ENBD REIT, both Sharia compliant, listed on Nasdaq Dubai and very active in the UAE market. The number of listed REITs in the UAE is undoubtedly set to grow. For example, the Dubai Financial Market (DFM) has very recently published rules on listing and trading REITs as a precursor to launching its REITs platform in the very near future.
— Inputs from Ian Arnott, senior associate, real estate, hotels and leisure, Al Tamimi & Company