The US Securities and Exchange Commission describes a REIT as a company that owns and typically operates income-producing real estate or related assets such as office buildings, shopping malls, apartments, hotels, and resorts. A REIT does not develop real estate properties to resell them; instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.
In the UAE, there are currently two listed REITs - Emirates REIT and ENBD REIT – after the country became the first to establish REITs as a regulated investment structure, followed shortly after by Bahrain and Saudi Arabia. Saudi Arabia now has 17 REITs listed on the stock exchange with a total market capitalisation of $3.7 billion as at early November 2019. Meanwhile, Oman’s Capital Markets Authority enacted the first set of legislation for REITs in the Sultanate in 2018, while Kuwait’s Capital Markets Authority listed the country’s first real estate yield-generating fund on Boursa Kuwait in 2020.
While REITs are still relatively new investment vehicles in the Middle East markets, the true potential of the investment option is now being recognised as property price corrections continue, particularly in the UAE, and investors with lower risk appetites look for alternative real estate investment avenues as a clearer picture of the long-term impact of the COVID-19 pandemic emerges.
- THE BENEFITS OF A RELIABLE INVESTMENT
REITs’ historically offer high and reliable dividend payouts for income-seeking investors. In the GCC, the various country-specific laws require REITs to distribute 80% – 90% of their income from their real estate investments directly to investors has helped to dampen volatility during periods of equity market stress.
- DIVERSIFICATION BENEFITS
REITs provide significant diversification benefits by reducing portfolio volatility. Although REITs are technically stocks, real estate is a different asset class than equities, and real estate tends to hold its value better than stocks during tough economies.
- PROTECTION AGAINST INFLATION
In reality, the performance of REITs historically has demonstrated surprisingly minimal sensitivity to changes in interest rates. REITs are structurally possessive of a natural hedge against inflation. Commercial real estate rents and values, for example, have tended to increase when prices do; this has, in turn, supported REIT dividend growth, and provided retirement investors with reliable income even during inflationary periods.
- MAINTAINGING LIQUIDITY
It is relatively easy to free up cash from REITS as they are listed on major stock exchanges, unlike the complexities and time-consuming element of buying and selling properties that pose illiquid risks.
- TOTAL RETURN PERFORMANCE
When compared to the broader stock market, REITs reliable track record of growing dividends, combined with long-term capital appreciation through stock price increases provides investors with an attractive total return performance.
- THE RULE BOOK
REITs must adhere to the financial reporting and corporate governance standards related to capital and listing requirements, restrictions on investors, income tests, distribution requirements, etc. Recently the Dubai Financial Market (DFM) published rules on listing and trading REITs as a precursor to launching its REITs platform very soon.
- STABILITY THROUGH ACCESS TO FUNDRAISING
REITs can quickly access new capital through equity or debt offerings in the capital markets. REITs’ access to capital demonstrates investor confidence in their ability to operate despite challenging economic and financial market conditions.
- PROFESSIONAL MANAGEMENT
REITs are managed and run by highly skilled and experienced real estate managers and asset managers and other industry professionals.
- MINIMUM TIME AND EFFORT
Much like mutual funds, REITs allow for passive investing without the headaches of dealing with the issues involved with directly owning and managing a property such as maintaining or developing the property, providing landlord services, and collecting rent payments, to name a few.
- LOW MINIMUM INVESTMENT
The minimum investment for a publicly-traded REIT varies greatly; however, they typically have the lowest entry point for investors. Similarly, online REITs are more accessible with a relatively low minimum investment amount and are open to non-accredited investors.