REITs to soak up Gulf property glut

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LONDON - The number of real estate investment trusts (Reits) launched in the Gulf is expected to rise as investors look for a way of obtaining exposure to the region’s expanding property sector, analysts said.

A Reit allows investors to gain exposure to the real estate market through allowing collective ownership for fully-constructed real estate assets that generate regular income.

“(We are) most definitely likely to see an increase in the number of Reits launched in both Dubai and Abu Dhabi over the next 12 months,” said Craig Plumb, regional head of research at real estate consultancy JLL.

The financial instruments are seen as a way for smaller investors to access the real estate market without having to directly own property. They are also seen as lessening the investor’s exposure to ups and downs of the region’s property market.

Simon Townsend, head of valuation, advisory and consulting, at CBRE said: “There has been an increase recently in the number of Reits either launched or under-going structuring prior to launch. The investor market is continuing to diversify from direct real estate into a wider portfolio to hedge against fluctuations across market sectors.

“The access of investors to a secure and importantly regulated investment return across a wider basket of assets is continuing to prove to be a compelling investment argument,” he said.

David Abood, partner at real estate consultancy Core, said that Reits are becoming the preferred option for investors looking at Dubai.

“On the demand side, rather than purchase assets directly, we are witnessing SWFs, pension funds and other global institutional investors who wish to invest in Dubai real estate do so through investments in local PE firms and Reits,” he said.

“Through this strategy, they are able to take advantage of local investment expertise and avoid directly exposing themselves to any potential local operation risk (such as property management, asset management, tenant relations, etc.) that comes along with investing in real estate,” he added.

Against that backdrop, Dubai Investments said on Tuesday that its subsidiary Al Mal Capital is working with regulators and getting ready to launch its mixed-use Reit on the Dubai stock exchange (DFM) before the end of the year. The update was included in the investment company’s second-quarter results posted on the DFM.

Dubai was the home for the region’s first Reit, with the Emirates Reit listed in 2014 on Nasdaq Dubai. Since then, Abu Dhabi, Saudi Arabia and Bahrain have all brought in regulatory frameworks for the use and listing of funds. Oman finalized its regulation at the beginning of the year. Saudi Arabia’s Tadawul currently lists 14 Reits.

Abu Dhabi Global Markets launched its Etihad Reit last year, which remains scheduled for flotation this year.

The ENBD Reit, managed by Emirates NBD Asset Management, started trading on the Nasdaq Dubai exchange in March last year. Its current property portfolio stands at 1.7 billion dirhams ($463 million), with 11 properties across the office, residential and alternative real estate sectors.

Earlier this month it said that the gross yield on the portfolio had increased slightly to 8.4 percent in the second quarter of this year, compared to 8.3 percent the previous quarter due to the successful leasing of the Reit’s residential assets.

The full potential of the region’s Reit market has, however, been held back by the limited availability of high quality stock, according to analysts.

“The quality of assets varies greatly between funds, the poor quality of potential assets would be the biggest factor deterring investors from some proposed funds,” Plumb said.

While there are Grade A assets in the region, analysts say owners of these assets often do not see the need to dispose of them via a Reit due to the lack of alternative investment opportunities.

This could change in the coming years, said Abood. “In the mid to long term, we expect more investment-grade stock to become available while also foresee Reits to potentially invest in building purpose-built facilities to expand their portfolio,” he said.

According to a Q2 report from property consultancy JLL, 50,000 and 36,000 planned new residential units are expected to come on to the Dubai market in 2019 and 2020.

There is a strong pipeline for more high-investment-grade office space arriving on to the market, with the JLL report citing the pre-leasing of space at the new Foster + Partners-designed ICD Brookfield Place in the DIFC by a London-based members’ club — the Arts Club.

The new building offers around 85,000 square meters of grade A office space and will be on the market by 2019.

The Saudi Arabian market is also catching the eye of Reit investors, perhaps more so than its UAE neighbor, Plumb said.

“The strongest interest is ... in Saudi Arabia, where we are seeing a number of potential new funds being proposed,” he said.

Other analysts also noted the potential of Reits in the Kingdom.

“It is a new trend which could open additional potential opportunities for investors that are wishing to diversify their investments in the market,” said Alain Sfeir, partner at law firm Clyde & Co, based in the Kingdom, and who advised Riyadh-based MEFIC Capital on putting together its Reit earlier this year.

The MEFIC Reit completed its subscription period in May and is expected to be listed on the Saudi Stock Exchange (Tadawul) later this year. Reits in Saudi Arabia also offer non-Saudi nationals an opportunity to obtain exposure to the Kingdom’s real estate sector, said Abdulmajeed Alabdulwahab, senior associate at Clyde & Co.

Real estate consultancy Knight Frank said in its 1Q report that it expected more Reits to be listed in Saudi Arabia. Increased competition in the market for investors’ money should improve the quality of the real estate assets included in the Reit, the report said.

“As more Reits are listed, we expect the level of competition to increase in the market, which would translate into a greater focus on the adoption of best-in-class practices in terms of quality of the underlying portfolio, asset management and corporate governance,” the report read.

“To this end, the quality of the Reit, both in terms of real estate and asset manager will become paramount, which will provide more transparency to market participants and will enable investors to accurately deploy funds in line with a set strategy and risk profile.” Knight Frank research manager Taimur Khan said that there was “considerable capital ready to be deployed” in Reits, with yields of between 7 percent and 10 percent attractive to investors.

“Rents are falling in Dubai. However, this may not mean that yields will fall automatically as it is very much dependant on the individual asset as to how rents and yields are moving within each portfolio,” he said.

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