Real estate investment trusts lower entry barrier for investors
There are currently only a handful of active Reits in the UAE
Individual retail investors in the UAE are increasingly looking at real estate investment trusts (Reits) to access property portfolios without owning underlying assets. This reduces the risk associated with owning a property and also gives investors exposure to different asset classes.
Reits are funds that own income-producing real estate and are legally obliged to distribute a proportion of their income as dividends to shareholders.
"Reits are a relatively new and under-represented sector in the UAE. Although there have been Reits listed in the Dubai and Abu Dhabi markets for the past 10 years, there are currently only a handful of active Reits and these represent only a small fraction of all investors," said Craig Plumb, head of research - real estate/property for JLL in UAE (Dubai, Abu Dhabi) and wider Mena region.
Equitativa, a Reit manager, established the UAE's first Reit - Emirates Reit - in 2010. The Reit manager has now launched a new product targeted at investors who are keen to pick up assets along China's Belt and Road initiative. The initiative is fittingly named the Belt & Road Reit.
"The B&R Reit was launched along with a Chinese firm, Affluent Partners. It will be a diversified Reit which will include hospitality, industrial, warehouse and office assets. The Reit will invest in B&R countries ranging from Japan to the UAE. The Chinese partners will help raise between $200 million to $500 million in the first phase of the Reit," Sylvain Vieujot, group chairman of Equitativa, told Khaleej Times.
Equitativa will take out a road show along with its Chinese partners to market the B&R Reit. It will be promoted in the Middle East at a later stage. "The Chinese government has targeted B&R regions for significant economic investment which will result in growth and eventually offer attractive yields," Vieujot explained.
Equitativa has two existing Reits with a sole UAE focus. Emirates Reit has a portfolio of offices and schools in the UAE worth $1 billion. It has grown to be the largest in the region. All assets of Emirates Reit are currently in Dubai, but will be diversified at a later stage.
The firm launched a second private Residential Reit in Abu Dhabi. It has a portfolio of residential property in Dubai, Abu Dhabi and Ras Al Khaimah worth Dh1.2 billion.
"The prime attractions of Reits are the liquidity they offer and the relatively small entry or ticket price," added Plumb.
Opting for listed versus unlisted Reits depends on the investor's risk appetite.
"Reits are listed on the stock market and allow investors to buy and sell shares in any volume whenever they wish. Reits provide ordinary investors with an opportunity to enter a market they otherwise could not afford, for example larger commercial real estate assets, and the prospect of targeting sectors they see as holding strong future prospects under the guidance of expert fund managers. They could provide investors with a simple way to obtain income from property without the need to buy an actual property itself," said Haider Tuaima, head of real estate research, ValuStrat.
As per Nasdaq Dubai, Reits have produced a steady stream of income through a variety of market conditions with yields significantly higher on average than other equities.
Equitativa, which has expanded its fund manager role to India, Pakistan and Morocco, believes the current soft UAE property market offers very exciting opportunities.
"The right time to buy property is when the market is at its bottom. The Reit market in the UAE has a lot of potential for growth. However, it is challenging to launch a Reit at the moment. The market is still in a nascent stage," added Vieujot.
The fund manager said it has increased revenue from all assets in its portfolio, although not by a huge margin. "The secret of our success is compelling products, an active management strategy and selective approach to asset acquisitions," the chairman added.
Since 2006, regulations have permitted Reits in the DIFC. Recently, the Dubai Financial Market published rules on listing and trading of investment funds and Reits and also signed an MoU with the Dubai Land Department to encourage and facilitate opportunities for real estate companies in the financial market.
"The market is well regulated in both Dubai and Abu Dhabi. Although the regulatory framework is relatively recent, it provides an adequate framework rather than a constraint to new trusts," said Plumb.
Listing the disadvantages of Reits over traditional brick-and-mortar' investments, Tuaima said they cannot be directly leveraged by way of a mortgage and some of the funds have limited options for exit.
"For publicly traded Reits, an investor might have to face volatility as share prices are greatly influenced by market conditions which may not reflect the actual value of the properties. Reits may also require some management and transactional fees which could potentially lower investor pay-outs or dividends," Tuaima added.
Plumb warned investors to watch out for the quality of underlying assets in Reits. "A number of these funds have so far only purchased a small number of assets, so they do not offer the benefits of diversity offered by larger trusts overseas. Like all investments, the returns available from Reits will be dependent on market conditions. The currently depressed nature of market conditions in the UAE will act as a constraint on the performance of Reits," he concluded.
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