Is the GCC market sufficiently mature to handle REIT growth?

Demand for steady returns and investor protection is driving the incremental growth of real estate investment trusts (REITs) in key Gulf markets, such as the UAE.

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.

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”.

At the time of its listing on Nasdaq Dubai this March, ENBD REIT “held seven properties in Dubai, covering both office and residential asset classes”, Taylor adds. ENBD REIT’s team is now “looking at investments into purpose-built facilities under-construction, where the operators have committed to a long-term lease on the asset on completion”.

In the long-term, REITs could even support regional construction finance plans.

Stephen Flanagan, partner and head of valuation for Knight Frank’s Middle East and North Africa operation, says a REIT was created to finance “the development of Jeddah Tower, to be the world’s tallest tower [upon] completion”, in Saudi Arabia.

He adds: “The vast majority of REITs in the Middle East to date have been income-producing, not development REITs. There is strong demand for income-producing assets, which carry less risk than development REITs, which have inherent risks.”

Flanagan commends the ongoing effort of the Gulf’s regulators to promote REIT uptake: “The regulatory framework is new, the regulators are still learning, and they are adopting best practice from more mature and established REIT markets.

“They are employing knowledgeable staff [...] to ensure that the regulations primarily protect investors, which is important to give confidence to the market. Regulators do not pretend to know everything, but are willing to discuss with capital houses and REIT managers the best ways to structure vehicles that protect investors and enable transparency.”

REITs in the Middle East are, at present, vehicles most relevant to developers due to their income-generation aims. However, as Sadique points out, REITs also have the scope for contractor involvement.

He explains: “One way in which a developer may incentivise contractors is to offer [them] an interest or some level of participation in the intended REIT. This encourages discipline in project completion date and avoid costs overruns to the developers.”

Xu says REITs offer the benefits of diversification, affordability, and liquidity – factors that investors will undoubtedly welcome.

Flanagan says he expects between five and 10 new REITs to be “launched before the end of 2017” in Saudi Arabia. Meanwhile, ENBD REIT, which recently acquired the $15m (AED55m) under-construction South View School in Dubai, will continue to explore “potential acquisition opportunities”, Taylor adds.

The fundamental benefits of REITs, it appears, have begun to gain traction in the Gulf, and regional fund managers show no signs of slowing down.

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