New trust law to facilitate REITs

Babu Das Augustine (Assistant Editor)
Filed on June 12, 2006

DUBAI — The Dubai Financial Services Authority (DFSA), the independent regulator of Dubai International Financial Centre (DIFC), is moving ahead with legislative enhancements to introduce Real Estate Investment Trusts within the DIFC jurisdiction.

DFSA has issued two Consultation Papers No 33 and 34 on its web sites. These consultation papers seek public comment on a number of significant enhancements to the Collective Investment Funds regime, which the DFSA introduced in April 2006.

"The proposed Investment Trust Law introduces a new investment vehicle for use by Funds to facilitate the establishment and operation of Real Estate Investment Trust (REITs) products. This is in line with DFSA's policy to adopt international standards and best practice wherever possible,” said David Knott, DFSA's CEO.

In January this year Khaleej Times had reported DIFC's plans to allow the registration and eventual listing REITs on Dubai International Financial Exchange (DIFX). Analysts view REITS as the the next big asset class in the offing that will make Dubai’s booming real estate sector more liquid and accessible to the international investors.

REITs are companies that invest its assets in real estate holdings. The investor gets a share of the earnings from the portfolio of real estate holdings that the REIT owns. Thus, it offers the same benefits of being a landlord without too many of the hassles while offering a liquid investment option than directly owning a property. The downsides are that the investor will have no control over when the company will sell its holdings or how it will manage them.

As an investment option REITs are a rather conservative with long-term returns lower than common stocks of other industries. This is because rental revenues do not usually vary as much as revenues at a manufacturing or service firm.

The new proposals in the consultation papers are primarily designed to facilitate the establishment of REITs and to remove unnecessary impediments to the marketing and selling of Foreign Funds in and from the DIFC.

Consultation paper No. 33 deals with proposals to introduce an Investment Trust Law, and specific requirements relating to how REITs can be established and operated in the DIFC. Currently Public Funds in the DIFC cannot use the trust vehicle. The proposed Investment Trust Law fills this gap by offering that vehicle, so that operators, particularly those coming from jurisdictions that use the trust structure for collective investments, will have that option open to them when the proposed legislation is enacted.

“The REITs specific proposals are designed to ensure that liquidity and other risks inherent in real estate investments are adequately addressed in a manner consistent with the international standards adopted for REITs,” said a statement from DFSA.

Consultation paper No. 34 deals with proposals to expand the categories of Foreign Funds that can be marketed in and from the DIFC. The DFSA's proposals to expand the categories of Foreign Funds arose due to industry concerns that the current categories are too restrictive. Following a risk based analysis, the DFSA now proposes to expand the categories of Foreign Funds that can be marketed and sold in and from the DIFC subject to certain due diligence and other obligation imposed on the firm distributing those Funds.

“In addition to creating a regulatory framework for managed Funds in the DIFC which meets internationally acceptable industry standards, the DFSA also strives to promote the marketing of Foreign Funds to meet certain governance and structural standards, providing greater investor confidence. As a risk based regulator, the DFSA works in consultation with the industry to maintain its core principles of integrity, transparency and efficiency,” said Knott.

The region’s fast growing interest in Islamic investment market makes REITs an investment option that has great potential in the Middle East. Muslim investors strongly prefer real estate as an asset class.

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