Real Estate Investment Trusts (“REITs”) have been widely used in the UK, the United States and Europe for over a decade, mainly as tax efficient real estate investment vehicles.
Their appeal in the Middle East has, not unsurprisingly, had less of an impact with tax efficiency being less relevant, however that is changing in recent years with an exponential rise in the number and use of REITs across the Middle East.
Middle East Activity
From a slow beginning, REIT activity in the Middle East is growing supported by a strong regulatory framework in each of the UAE, Saudi Arabia, Bahrain and Qatar, and pipeline plans for REIT regulation to be introduced to facilitate use in Oman. In Dubai, Emirates REIT and Emirates NBD REIT lead the way, both of which are listed entities on Nasdaq Dubai. In Abu Dhabi, the private (non-listed) The Residential REIT and The Logistics REIT are both registered in the financial free zone of Abu Dhabi Global Market. In Saudi Arabia, the rise of the REIT is well documented as increased diversification away from the Kingdom’s reliance on oil gathers pace.
A common misconception is that REITs only provide tax efficiency and in a region where tax efficiency is less of a commercial consideration, the immediate benefits of REIT usage are not as apparent. However, in addition to the tax efficiencies associated with REITs, REITs also offer two key benefits: liquidity and flexibility.
In a real estate market which, over the years, has been subject to steep rises and falls, institutional investors have been nervous to invest in direct ownership of bricks and mortar. Through the use of REITs, the investor invests in and owns tradeable units which can be bought and sold without the constraints of illiquidity that occurs through direct ownership of real estate.
In addition to liquidity, the REIT platform provides both the flexibility to invest across a diverse asset class and the flexibility to invest across a wide portfolio of assets. The increased regulatory requirements and governance that accompany REITs provides greater investor confidence in the underlying vehicle and by being combined with real estate investment structuring which produces an income generating product, REITs are becoming ever more popular in the region.
Diversification and asset classes
There are no restrictions as to asset class in which REITs can invest. Popular across the region are investments in student accommodation, staff accommodation and the warehousing/industrial sector. Generally, any asset class that is income producing can be used for investment within a REIT vehicle. Some REITs, for example The Residential REIT, prefer to concentrate investments on one asset class whereas others such as Emirates NBD REIT have diversified asset class across student accommodation, offices, schools and residential accommodation.
As the REIT market continues to grow across the Middle East, we expect to see continued diversification into the retail sector, the hotel sector (a growing sector in Saudi Arabia) and the staff accommodation sector. Ultimately, investors into REITs are looking for strong and stable returns and provided the REIT platform can produce sustainable returns, no asset class or sector is off the table.
REITs are particularly suited to being structured in a Shariah compliant manner especially given the popularity of real estate as an asset class in the world of Islamic Finance. Whilst the first Shariah compliant REIT was launched in Malaysia in 2006 and there has been a significant amount of traction with Shariah compliant REITs in both Malaysia and Singapore, this has not been translated into other geographies including the Middle East. It is however only a matter of time before Shariah compliant REITs in the Middle East emerge not least because there is an unfulfilled demand for instruments which are both liquid and Shariah compliant.