Why invest in Reits vs direct property ownership

dubai - A Reit is a company that owns, and in most cases, operates income-producing real estate

For many investors, owning property is a means of growing and diversifying their investment portfolio and strategy. In most recent years, developers started introducing residential projects into the Dubai market at a price point which has opened the opportunity to a wider buyer pool. The numerous options and the softening of prices have motivated first-time buyers to purchase property.

While some may view the current market conditions as a promising time to enter the real estate market, the cost of purchasing and owning a property remains out of reach for many. These barriers to enter the real estate market can discourage potential investors from giving real estate a second thought.

Owning a property and becoming a landlord offers more control and a better chance of recognising big returns, however it also comes with a long list of requirements, such as managing the property, collecting rent and responding to maintenance issues, to name a few. Also, if the owner does not live in the same country, hiring a management and leasing agency to handle these tasks will require an extra cost to the landlord. This is all in addition to the exposure the investor has, especially if the market conditions are not favourable and the rental income does not cover any mortgage payments, which may be associated with the property.

For many investors, this fact might close the opportunity door for property investment, but for those who see value in the real estate market and are looking for a viable alternative, an option does exist: real estate investment trusts, or Reits.

A Reit is a company that owns, and in most cases, operates income-producing real estate. Reits may own property ranging from office, apartments, hospitals, etc. Certain Reits may even specialise in a specific sector, such as healthcare and only purchase property related to that sector. Regulations require Reits to pay out the majority of their net annual income as dividends to investors. In the UAE, this requirement is 80 per cent.

Reits give individuals an opportunity to invest in diversified pools of income-producing real estate without having to own any property. The main advantage of buying Reit shares versus outright property ownership is this simplicity. Another advantage is that the investor has the flexibility of setting the amount to be invested in buying Reit shares based on their financial capabilities. It is important to note that a publicly traded Reit does not usually have a minimum requirement for the number of shares to be purchased, however typically they must be purchased in multiples of 10.

As in any investment, there are certain risks associated with purchasing Reit shares. Decreasing occupancy rates of assets within the portfolio will ultimately hurt the revenues and therefore the dividend payout. Additionally, the share prices can drop if the property values decrease and much like stock markets, the share prices can dip and fall based on supply and demand of shares.

Reits have started to emerge in the GCC region with six publicly listed Reits to date. There are currently three in Saudi Arabia, one in Bahrain and two in the UAE. The two Reits currently listed on Nasdaq Dubai are Emirates Reit and ENBD Reit which offer the opportunity to invest in a diversified portfolio of properties across several real estate assets.

With the potential for more Reit launches in the UAE market, Emirates Reit announced earlier this year, Equitativa Reit, the first residential-focused Reit as well as Abu Dhabi Financial Group announcing its intention to launch the IPO for Etihad Reit.

Reits are still in the early stage of development in the UAE and the region, therefore there are still some challenges to tackle ahead, namely the lack of investment-grade product to add to the portfolio.

CBRE is not in any way promoting investment in Reits or other investment products. Adequate due diligence must always be conducted before any investment with a full assessment of risk factors.
The writer is senior consultant - strategic advisory, CBRE Middle East. Views expressed are his own and do not reflect the newspaper's policy.