Dubai: PwC Middle East launched today its latest report “The Emergence of Real Estate Investment Trusts in the Middle East” which takes a look at the latest developments and trends in real estate investments across the region and the rise of Real Estate Investment Trust (REIT) as a vehicle for investment in property assets.
Market capitalization of REITs compared to listed real estate companies in the UAE is around 3% whereas in more mature markets such as US and UK at least 80% of the listed market cap for real estate is attributable to REITs indicating they are currently underpenetrated in the region, says PwC. 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 specialization in line with global best practices.
Flight to quality
The report also found that there will 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 are:
- Acquisition price of assets
- Focus on reinvestment / maintenance
- Strength of the underlying lease
- Quality of assets
Room for growth
Combined market capitalization of REITs in the UAE was c. $ 800 mn as of early 2018. In comparison the small island nation of Singapore had greater than $60 bn in aggregate REIT capitalization over the same time period. In Singapore the REITs have typically specialized in an asset class and then expanded geographically via organic and inorganic growth and that might be the way forward for REITs in the region as they have a small base of investable assets in their home markets.
Commenting on the findings, Dr. Martin Berlin, Middle East Partner and Global Deals Real Estate Leader at PwC said:
“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".
He added:
“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.”
In addition to the increasing attractiveness of REITs, PwC foresees other trends emerging in real estate investment regionally:
- Sale & Leasebacks - which it expects to rise given the current market conditions of limited liquidity and financing options
- Build-to-suit products - as developers increasingly customize their assets to cater to tenants’ needs
- And finally, co-working - a concept that has witnessed phenomenal global growth. While still underpenetrated here in the region, co-working spaces are becoming increasingly popular, with the UAE positioned to lead in this space.
The report also outlines the necessary requirements to qualify as a REIT in the UAE, and highlights key considerations for both investors and developers looking to consider REIT structures. It ends with an overview of the tax implications of REITS from both a legal and regulatory standpoint.
For the full report, visit: https://www.pwc.com/m1/en/publications/emergence-real-estate-investment-trust.html
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Established in the Middle East for 40 years, PwC has 22 offices across 12 countries in the region with around 4,500 people. (www.pwc.com/me).
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