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Is the GCC market sufficiently mature to handle REIT growth?

by Neha Bhatia on Aug 26, 2017

A matter of trust: Experts say Saudi Arabia is among the Middle East’s busiest REIT markets.
A matter of trust: Experts say Saudi Arabia is among the Middle East’s busiest REIT markets.

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Earlier this month, Dubai Land Department (DLD) announced that the total value of real estate transactions carried out in the emirate since January 2016 is worth more than $106bn (AED390bn).

The 18-month transaction report reveals that Dubai’s real estate market saw a considerable number of sales through 67,409 transactions for land, buildings, and units worth $45bn (AED165.7bn). Mortgages were registered at a value of $50bn (AED186bn), achieved through 22,353 transactions between January 2016 and July 2017.

Clearly, the growth prospects of Dubai’s real estate market are bright. For one, its residential segment is facing steady demand, especially for affordable housing options. Meanwhile, companies and government initiatives within the technology sphere are also supporting the growth of industrial real estate in the emirate, Cluttons’ head of research, Faisal Durrani, said this July.

“We expect to see growing demand from [the technology] sector as it develops, particularly around Al Maktoum International Airport and the Expo 2020 Dubai site, where the majority of demand is currently centred for industrial space,” he noted.

These long-term plans will also support the growth of real estate investment trusts (REITs) in Dubai, as well as other parts of the Middle East, according to Anthony Taylor, fund manager for real estate at Emirates NBD Asset Management.

“While they remain fairly new to this region, and there has been some misunderstanding surrounding them, REITs are already gaining momentum as a strong option for long-term and income-minded investors,” he tells Construction Week.

“We have recently seen several new REITs listed in Saudi Arabia, the region’s largest capital market, and our expectation is that several more will come to the market in the kingdom and the UAE in the near future. Our view is that the growth of the REIT landscape is more likely to accelerate in the short- to medium-term.”

While the outlook appears positive, analysts and fund managers agree the road to greater REIT uptake will be a long one. Through a survey of its members and charter-holders, CFA Society Emirates found that investor sentiment, coupled with lack of understanding, represent a key challenge for REIT growth in the Middle East.

The results of the survey, released in June 2017, stated that 43% of respondents believe the GCC has not reached the maturity level required to drive the uptake of REITs, even as 45% claimed the GCC’s real estate sector is ripe for REIT growth.

Commenting on the ideal scenario for REIT growth, Daniel Xu, a Singapore-qualified lawyer who formerly worked with DLA Piper in the UAE, says he “would favour incremental growth” in the region, where investors are “starting to warm to” the concept.

Sadique M, group general counsel at Five Global Holdings, also calls for gradual growth, “particularly because, as is common with any REIT, the classes of investors are wide and diverse with differing sophistication and net-worth”.

Xu and Sadique agree that incremental growth would pave the way for a regulatory framework, which could encourage the market to be more REIT-friendly and purposive to the [GCC’s] economic and financial conditions.

“In turn, a robust regulatory framework would encourage greater investor confidence,” Xu adds.

The advantages of REIT investments are, perhaps, best evidenced by the performance of ENBD REIT, which has a property portfolio worth $352m (AED1.22bn).

Taylor says the REIT’s “principal investment objective is to generate income returns, complimented by capital appreciation from real estate assets”.