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UAE - As a vehicle for investment in property assets, real estate investment trusts (Reits) remains underpenetrated in the Middle East, but is expected to grow as the real estate market in the region matures in terms of quality of and access to assets, financing, governance and regulations, a study has found.
The study, The Emergence of Real Estate Investment Trusts in the Middle East, launched by PwC Middle East, finds that market capitalisation of Reits compared to listed real estate companies in the UAE is around 3 per cent.
In contrast, in more mature markets such as the US and the UK, Reit market capitalisation is at least 80 per cent of the listed market cap for real estate. This indicates Reits are currently underpenetrated in the region, says PwC.
A Reit is a company that owns, operates or finances income-producing real estate.
It is modelled after mutual funds, and historically has provided investors of all types regular income streams, diversification and long term capital appreciation.
The PwC study also foresees a shift in business models with Reit investors moving away from being 'generalist' aggregators of real estate assets to becoming 'specialists' within a particular real estate asset class. The study highlighted that to enable the sector for institutional investment the focus should shift to sector specialisation in line with global best practices.
In early-2018, Reits in the UAE were offering healthy dividend yields at 6.5 per cent compared to the global average of 5.7 per cent.
"As the Reit sector in the Middle East matures we anticipate there will be an emphasis on sector specialisation - with Reits focusing on a specific asset class within the real estate spectrum such as residential, retail, hospitality or office," said the report. The study also found that there would be a flight to quality whereby capital transitions to Reits with strong management teams and a good track record. Key factors that will determine the performance of a Reit include acquisition price of assets; focus on reinvestment/maintenance; strength of the underlying lease, and quality of assets, the study further said.
Combined market capitaliaation of Reits in the UAE was $800 million as of early-2018. In comparison, the small island nation of Singapore had greater than $60 billion in aggregate Reit capitalisation over the same time period. "On average, Reits tend to provide a healthy dividend yield; however sufficient diligence needs to be done before allocating capital to Reits to ensure that an investment yields the right returns," Dr Martin Berlin, Middle East partner and global deals real estate leader at PwC, said.
"Although still underpenetrated in the Middle East, Reits will benefit the region in terms of the transparency they will bring to sector. However, this will be a gradual process and will require a significant investment from these Reits to incorporate best practices relating to their underwriting, deal diligence, policies and procedures, systems as well as governance structures," added Dr Berlin.
PwC foresees other trends emerging in real estate investment regionally. These include sale and leasebacks, which it expects to rise given the current market conditions of limited liquidity and financing options; build-to-suit products (as developers increasingly customise their assets to cater to tenants' needs), and finally, co-working.
"While still underpenetrated here in the region, co-working spaces are becoming increasingly popular, with the UAE positioned to lead in this space," said the report.
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