According to a PWC study, Real Estate Investment Trusts (REITs) have traditionally had a strong comeback from the financial crisis showing an impressive upswing in response to the ever-changing market environment. Similarly, analysts from EY have highlighted that at the depths of the financial crisis, a stronger, more resilient REIT industry also emerged, led by management teams that learned and put into practice many valuable lessons, not least around balance sheet strength and structure.
In today’s environment; however, the global and regional real estate sector is facing a new challenge in the form of the COVID-19 pandemic and the ensuing lockdowns. So, will the real estate market in the GCC show resilience against the pandemic? And if so, how can REITs play a bigger role in stabilising real estate investment returns in the GCC in 2021?
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. In the region, REITS started to gather momentum after the initial listing on the NASDAQ exchange (Dubai) in 2014, followed in 2017, by Emirates NBD REIT.
According to Simon Townsend, Senior Director, Head of Valuation & Consulting, from CBRE, 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 the Kingdom of Saudi Arabia (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$3.5 billion.
“The challenges around COVID-19 continue to impact investment decisions with investors looking carefully at their portfolios and capital positions, to determine 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,” Townsend explains.
“The potential asset diversification that REIT funds or other investment funds bring, both in terms of asset, sector and some instances geographic spread, may provide a further springboard for an increase in an investment into such vehicles.”
However, the liquidity of REIT’s has seen some challenges, Townsend says. “Globally, many property funds have temporarily ceased trading, which has locked capital for investors. Regionally we have seen units in the various REIT’s trading below NAV (net asset value) which has caused some imbalance in the markets, albeit this is not unlike many global markets.”
Meanwhile, a 2018 study from PWC found that REITs are underpenetrated in the Middle East but expected to grow gradually as the real estate market in the region matures in terms of quality of and access to assets, financing, governance, and regulations.
According to Townsend, the underlying attraction of a REIT in the GCC is driven by the revenue distribution. He believes that 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,” he adds.
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.
“One of the key catalysts for growth will be confidence in the regulatory framework and the role of the asset managers,” Townsend says. “With fund performance being widely scrutinised, this is enhancing a level of transparency for investors to ascertain the performance of the fund against the NAV as well as the performance and remuneration of the asset managers.”
The focus on the creation of institutional real estate product (long leases to AAA covenant), whether in sale and leaseback or build to suit, is increasing and these sought after assets are the key focus of the various REIT funds (as well as other institutional investors), Townsend explains. He says that it is potentially likely that we will, at some point, see large master-plan-centric REITs wherein completed (or partly completed in line with development risk restrictions) become a dedicated REIT providing another route to liquidity for the master-developer.
“Perhaps the next stage in the evolution of REIT’s will be an established development, or build-to-rent REIT wherein investors can invest in a regulated fund to take advantage of dedicated build-to-rent opportunities,” Townsend says. “Now, the focus remains on income, but with a continued shortage of long-term income flows, this evolution could be inevitable, which would align with the conclusions within the PWC report.”
There is much activity ongoing in terms of the next vehicles to be listed across the GCC and Townsend anticipates that certainly within 2021 we could see the first meaningful engagement of foreign institutional capital into the regional REIT markets.
“What is also certain is that the real estate landscape is no longer business as usual,” he adds. “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.”