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|29 November, 2018

Equitativa mulling hospitality, logistics REITs

Manager of Nasdaq Dubai-listed Emirates REIT "very actively looking at different asset classes", says chief development officer

Image used for illustrative purpose. A beautiful view of Dubai skyline.

Image used for illustrative purpose. A beautiful view of Dubai skyline.

Getty Images/Umar Shariff Photography

The company managing the Nasdaq-listed Emirates REIT is planning to create a series of sector-specific REITs targeting investments in healthcare and logistics, its chief development officer has said.

Speaking on a real estate panel at the Alternative Investment Summit in Dubai on Sunday, Equitativa's chief development officer, Racha Al Khawaja, said that the real estate investment trust (REIT) market was still "quite immature" in the region, with most of the vehicles that have been created to date containing a mix of property types.

"Segregation is needed on different asset classes," Al Khawaja said. "If you look at developed markets in the US and Europe, you will see that the REITs have become very sector-specific.

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Equitativa already manages one asset-specific REIT - an unlisted residential REIT containing more than 1,000 residential units in Abu Dhabi, Dubai and Ras Al Khaimah.

However, the UAE's two listed REITs on Nasdaq Dubai and many of the REITs listed on the Saudi stock exchange contain a mix of commercial property asset types.

Al Khawaja argued that this should eventually change.

"We're looking to set up a logistics REIT, a hospitality REIT, in the MENA region," she said.

She added that although the local property market is "reasonably slow", for a REIT this presents a chance to secure assets at attractive valuations.

"So we're very actively looking at different asset classes in the region to grow sector-specific REITs. We believe this is the trend going forward," Al Khawaja said.

Speaking on the same panel, Joseph Morris, a partner at Knight Frank, argued that "there's a lot of money looking at investment in real estate at the moment".

“If we look across the Gulf, in Saudi Arabia we're seeing a huge amount of investment there. We've seen 15 new REITs in the last 18 months or so, so there's a lot of depth to that market,” Morris said.

"Regionally, I think you're certainly seeing demand - and this is a global trend, really - moving into the alternative (real estate asset) space. There is demand for more alternatives - looking at healthcare, education, social infrastructure transactions. Logistics is a very popular asset class," he said.

Home and away

Morris also pointed out, however, that there is still a significant outflow of capital from the region into real estate assets overseas as regional investors diversify their wealth, and that the involvement of institutional investors into real estate assets in the region remains minimal.

"Internationally, we haven't seen the institutional capital that we perhaps wanted to see in this market as of yet. It will undoubtedly come as it loosens and the markets open up. That will follow, undoubtedly. I think the risk-adjusted returns are there," he said.

Al Khawaja added that another challenge faced by REIT market in the region is rising interest rates, which she said "is playing the biggest role in the real estate story and whether REITs can grow and flourish or not".

"Today, we're suffering from a very high interest rate environment, which is only due to the peg (between the UAE dirham and the US dollar),” Al Khawaja said.

She argued that higher interest rates were not conducive to growing REITs as the trusts often need to borrow to acquire assets and grow, adding that smaller REITS "don't really work very well".

"You can't financially engineer those products well enough in order for them to provide the maximum yield that you can to investors. In order to make the REIT grow, you need leverage."

On Wednesday, Emirates REIT announced that shareholders had voted at an extraordinary general meeting held on Monday to approve a 500 million UAE dirham ($136.1 million), seven-year funding facility from Dubai Islamic Bank, which is a shareholder in the REIT.

An investor presentation document filed on the company's website states that the facility will be used for "accretive acquisitions, value add capex programs (and) school expansion plans". Emirates REIT owns four education complexes, according to the document.

Weighed down

Investor sentiment has been negative towards UAE property markets this year. A Thomson Reuters index of UAE property stocks has declined by almost 31 percent since the start of the year, according to Eikon data, and both of the REITs listed on Nasdaq Dubai have been trading at significant discounts to their net asset value.

Emirates REIT had a net asset value of $529 million at the end of September, or $1.76 per share, but it closed at $0.95 per share on Wednesday.

Competitor ENBD REIT, which is managed by Emirates NBD Asset Management, has attempted to address its poor share price performance, which it blamed both on negative sentiment and a lack of liquidity in its shares.

ENBD REIT had a net asset value of $285 million, or $1.12 per share, at September 30, but its shares were trading at just below $0.59 per share on Monday prior to a shareholders meeting on Tuesday at which a set of measures aimed at boosting its share price were approved.

Shareholders agreed to extinguish over $84.5 million of share capital, and to allow the proceeds to be used as a distributable reserve, which can be used to support its share price either through dividend payments or share buybacks.

Following this approval, the shares have rallied and finished a fraction below $0.70 per share at close on Wednesday.

Equitativa is also looking to develop REITs outside of the United Arab Emirates, Al Khawaja told Zawya on the sidelines of the Fund Forum Middle East event in Dubai earlier this month. The company has already signed an agreement with a Hong Kong-based partner to develop a Belt & Road REIT, buying properties across Eurasia.

(Reporting by Michael Fahy; Editing by Imogen Lillywhite)

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