It's the beginning of the rise of Reits in the GCC
REITs provide real estate firms with access to a new pool of private and institutional capital
Throughout the GCC, everyone seems to be talking about real estate investment trusts (Reits).
Reits are not entirely new to the region. Indeed, a legal framework for Dubai Reits has been in place for over 10 years in the DIFC. Despite promising beginnings though, uptake has historically been slow, and it is only in recent times that Reits have really come to the fore. In the last year or so, there has been a vivid flurry of activity, which has seen new Reit laws enacted in Abu Dhabi (June 2015), Saudi Arabia (October 2016) and Bahrain (November 2016), and several new Reits established across the region.
In Dubai, we have just seen the IPO of ENBD Reit, which listed on Nasdaq Dubai on March 23, thus becoming the emirate's second listed Reit, alongside Emirates Reit. In Abu Dhabi, we have seen the emergence of the emirate's first two Reits, The Residential Reit and The Logistics Reit, which have been established in the Abu Dhabi Global Market as private (i.e. unlisted) Reits.
Since the introduction of the new Reit laws in Saudi Arabia last October, we have already seen two new Reits, Riyadh Reit and AlJazira Mawten (Reit), list on the Saudi Stock Exchange (Tadawul), and a third, Jadwa Reit Alharamain Fund, looks set to follow shortly, having recently gained regulatory approval.
In Bahrain, where new trust laws facilitating Reits were enacted last November, we have witnessed the arrival of the first Reit, Eskan Bank Realty Income Trust, which listed on the Bahrain Bourse on January 2. Needless to say, these are just the Reits that have actually come to market - there are many more at the planning stage.
A lot has clearly happened in a very short space of time. However, market commentators suspect that this may just be the beginning of the rise of the Reit in the region, with some sources suggesting there could be room for as many as 10 to 20 Reits in the UAE alone.
Offer of liquidity
So, why the rise of the Reit in the GCC? In a word - liquidity.
In taxable jurisdictions, the principal benefit of a Reit is its tax efficiency. Typically, Reits are exempted from payment of income and capital gains taxes, provided they dividend a minimum amount of their profits to unit holders.
However, in the GCC, tax efficiency is less relevant. Rather, the key factor behind the rise of the Reit in the region seems to be the liquidity they offer. At a time when regional banks have been shortening their exposure to the real estate sector, Reits provide real estate companies with access (through private placements and IPOs) to a new and enlarged pool of private and institutional capital to fund their real estate acquisition and investment activity.
Reits also provide liquidity to investors. From an investor's perspective, buying units in a Reit allows him/her to acquire an exposure to the real estate portfolio owned by that Reit at a significantly lower price point than if the investor had acquired the underlying assets directly. The Reit's portfolio is likely to be diversified, thus spreading the investor's risk. As the investor owns liquid tradeable units rather than illiquid real estate assets, it is easier for the investor to step in and out of its investment as need or opportunity requires.
The other key feature driving the rise of the Reit in the GCC is the Reit "brand" and the market confidence that this carries with it. Reits across the world are subject to rigorous regulatory requirements. As well as the minimum dividend requirements mentioned above, Reits are generally subject to strict limits on the amount of bank debt they can take out and on the proportion of development assets they can own (which for obvious reasons are considered riskier than completed assets already yielding rental proceeds).
Checks and balances
Furthermore, Reits are typically subject to stringent corporate governance, disclosure and transparency regimes that outstrip those applicable to private companies or mutual funds. These checks and balances on global Reits have been applied in a similar way to the local Reit regimes in the GCC.
For investors in GCC Reits, this means they can take considerable comfort from the Reit brand, which (all things being equal) will over time have the effect of driving up demand and price for Reit units as Reit markets mature in the GCC. For the Reits themselves, there is obviously a "cost" of compliance with the Reit regime, but the upside of this is the improved access to capital and liquidity that this entails.
So, what's next for Reits in the GCC? As mentioned above, there is a feeling among industry experts that there is still plenty of spare capacity in GCC Reit markets, and we are currently hearing speculation about new Reits on an almost daily basis.
One trend we expect to see as competition mounts is increased specialisation of Reits. In mature Reit markets, it is common to see Reits focused on specific asset classes. We have already seen a residential Reit and a logistics Reit form in Abu Dhabi, and we would expect this pattern to continue. In the GCC context, you would expect to see, before too long, Reits focused on the asset classes that are most prevalent here, such as malls, hotels, hospitals, warehousing and logistics.
It will be fascinating over the next few years to see how Reits contribute to the general investment mix in the GCC and how they stimulate the real estate sector in the jurisdictions where they take root. For example, there is a feeling that Reits can help to deliver more affordable housing in Saudi Arabia, by providing a new category of institutional purchaser for such assets and thus generating greater demand and stimulating increased supply.
This remains to be seen, but what we can be sure about is that Reits have now firmly arrived in the GCC. In a short space of time, they have gone from being an emerging to an established asset class, and the feeling is that there is plenty more to come from the sector.
Chris Beaumont-McQuillan is an associate in White & Case's real estate practice. Ali Shaikley is a local partner at White & Case. Views expressed are their own and do not reflect the newspaper's policy.
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