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How resilient are REITs to a pandemic?

The challenges around COVID -19 continue to impact investment decisions with investors looking carefully at their portfolios and capital positions. Simon Townsend, Senior Director at CBRE tackles the big question: How resilient are REITs to a pandemic?

Globally, REITs have been operational since the 1960s, providing investors with tax-efficient investment vehicles. The first REIT law in the GCC was passed in 2006, in Dubai, and during this initial period, the market witnessed a slow growth in the number of REITs created. It was only after the initial listing on the NASDAQ exchange (Dubai) in 2014 that REITs started to gather momentum, followed in 2017 by Emirates NBD REIT.

One of the drivers for the establishment and growth of REITs across the region has been due to underlying legislation, and nowhere more so than in KSA. The law governing REITs within the Kingdom was finalised in 2016, and by the end of 2019, there were 17 REIT funds listed on the Tadawul (KSA Stock Exchange), with an approximate market cap above US$3.5bn.

The challenges around COVID -19 continue to impact investment decisions with investors looking carefully at their portfolios and capital positions. Determining their next steps as to whether they take advantage of market changes and increase their real estate exposures. Or as the changes to the underlying market conditions start to impact portfolios, they look at portfolio and value protection with an increased focus on risk mitigation.

The liquidity of REITs has seen some challenges. Globally, many property funds have temporarily ceased trading which has locked capital for investors. Regionally, we have seen units in the various REITs trading below NAV which has caused some imbalance in the markets, albeit this is not unlike many global markets.


How does a pandemic affect REIT fundamentals?

With people working from home due to lockdown restrictions, this results in a lack of utilisation of

space across commercial properties such as office, retail, and hospitality. This can influence REITs due to the engineering and structure of REITs in varying forms including:

Rent collection

With social distancing and lockdown, tenants are unable to pay rent.

Distribution requirements

REITs are considered attractive investments, specifically as an investment vehicle, if REITs pay out a significant amount of their earnings as distribution, then they would qualify for tax exemption; this varies across countries.


REITs are encouraged to distribute a sizeable amount of their net income to investors to qualify for tax exemptions which substantially reduces retained earnings; debt is therefore employed by REITs to raise capital.

What role does a pandemic paly on REIT performance?

REIT sectors are attractive investments due to rental and capital value growths as well as mandated dividend pay-outs; however, each sectoral REIT is expected to be affected differently by a crisis. Some REITs would perform much better while others would perform much worse.

The diversification of asset class and sector will continue to provide access to investment-grade assets that would not necessarily be possible for individual investors, in terms of scale and position of REITs, and is often considered a slight hedge against direct market changes. However, the selection of fund is important as sector-specific REITs could potentially bring a more consolidated risk rather than the diversification mentioned.

A REITs’ performance is hinged on the property dynamics and sector, for example:

Hospitality REITs

Globally COVID-19 has shut down travel, as most countries have a ban on international travel to flatten the curve, which will influence the hospitality industry adversely.

Retail REITs

Social distancing and movement restrictions have particularly affected the retail sectors with significantly reduced foot traffic in shopping malls and with this, there has been a surge in e-commerce – online sales gaining popularity.

Office REITs

The office property is currently under-utilized as employees work from home due to social distancing and movement restrictions. Organizations are now rethinking the use of office space, for example, Google and Facebook have extended working from home till the end of 2020. Whilst some firms are encouraging remote working – virtual meetings are encouraged. There is an expectation that there would be a realignment to the demand in office space in the future.

Flight to quality is expected during this COVID-19 pandemic as institutional investors reinvest funds to defensive REITs such as grocery, data centre, self-storage, and medical, which are less susceptible to the adverse effects of COVID19 on a REITs’ performance. What is certain is that the real estate landscape is no longer business as usual and REITs must be adaptable to the new growing demands of users of space in a post-COVID era to remain sustainable and a viable entity.

There is likely to be an increase in the growth of REITs across the GCC, as property owners, especially those of scale, consider the creation of a fund to provide additional liquidity to fund their operations. One of the benefits of a REIT to such entities is that they can retain shares in the fund of (on some exchanges) up to 75% of the equity and as such do not need to divest completely.

There is much activity ongoing in terms of the next vehicles to be listed across the GCC and it is anticipated that certainly within 2021 we could see the first meaningful engagement of foreign institutional capital into the regional REIT markets.

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