Is now the right time for REITs?

In 2021, a rising number of investors are looking at their portfolios again and exploring where they can find that opportunity. So, with many saying that property in the UAE is undervalued does real estate represent a real opportunity for those looking to invest?

One man who believes so is Sylvain Vieujot, CEO of Equitativa, founder and manager of Emirates REIT, who describes this as one of the ‘most exciting times’.

In a wide-ranging interview, he looks at prospects for the market moving forward, his own company’s story amid Covid-19, and why it is the right time to invest in property.

Could you give us your opinion right now, in 2021, where do you think investor sentiment is at?

By the end of 2020, the market was at an all-time low, but now the sentiment is really changing. The real estate market has a long reaction time, so we don’t see it in the numbers yet, but we feel it in the day-to-day, firstly in terms of enquiries and business activities and also with a significant improvement in leasing activity.

And are you feeling that too in terms of institutional investor appetite? Are groups looking at their portfolios and thinking where can they find that opportunity? 

I think investors are slightly confused at the moment because there’s still a lot of risk in this market. Covid-19 is still present, impacting our lives and businesses, and we don’t know when the pandemic will be over. Many countries are still facing very significant challenges.

The UAE however, is one of the most advanced countries in the world, in terms of its vaccination campaign, and we see a lot of people starting to buy properties and move to Dubai again. This positive shift is starting to have a very significant impact on the residential market and is also starting to be felt in the commercial and education markets.

Incorporated in 2010, Emirates REIT is the UAE’s largest listed Sharia-compliant Real Estate Investment Trust (REIT)

Tell us about REITs, what are the fundamentals and why they are an opportunity? 

A REIT is a vehicle to invest in real estate. Usually, it’s challenging to invest in real estate, because if you [an institutional investor] buy a building, then you need to look at a large number of properties, then you need to market it, to lease it, to maintain it, and when you want to exit, it takes time and effort. It’s already a challenge if you want to invest in your home country, and when you want to invest abroad, it becomes very difficult.

That’s what a REIT is solving. It allows you to get in and out of real estate whenever you want, and there is no need for maintenance, or managing tenants. During times like now, if people want to start to invest in real estate, it will take them some time, if they want to invest in a REIT they just have to call their banks.

How much opportunity does the UAE have right now?

In real estate you have two key metrics. One is demographics and the other is the economy in general. The UAE demographics are very reactive due to the high density of expats.

Last year, the movements were quite large. Furthermore, many companies have shifted to full remote working to keep their employees safe, but also in an attempt to reduce the costs by not renewing their premises or moving to smaller places. This had a dramatic impact on office buildings and retail.

Now, we are seeing exactly the opposite. We are seeing companies expanding again, trying to find better premises and new companies coming to the UAE. I believe this pendulum shift represents a significant opportunity for the market and particularly for Emirates REIT.

Emirates REIT has a diversified portfolio and tenant mix

What’s the one element that most people don’t understand about REITs that you wish they would? 

REIT management is complex and expensive! We try to make real estate as simple as possible for the investors so they don’t see all the complexity of selecting, buying, leasing, maintaining, and selling the properties. I believe a lot of parties underestimate this work. Furthermore, a REIT is a long term vehicle.

So, you need to build a portfolio for the long term, that has the right leverage depending on the economic cycle, and that can weather the potential storms of the market like the one we just lived through and still add performance in normal times. That leads to a lot of complex choices. REIT management is not an easy business, believe me. 

It is only for those who are passionate about property and understand it, how best to manage it.

So, tell us about Equitativa and Emirates REIT, what assets do you have in the portfolio you manage? 

At Equitativa, we create and manage REITs composed of properties of the very highest calibre. In the UAE, for example, they are found in the most sought-after business and lifestyle districts. Our first REIT in the region, Emirates REIT, was created in 2010.

When we moved to the UAE in 2006, and were actually surprised that there were no REITs here. REITs are an important product for foreign institutional investors to invest in a country’s real estate, and therefore it is also an important way for a country to have access to foreign capital.

After four years of understanding the market and waiting for the right moment to invest in real estate, we founded Emirates REIT in 2010 in partnership with the Dubai Islamic Bank. The first three years were dedicated to growing the portfolio with professional investors, and in 2014, we listed the REIT on NASDAQ Dubai.

Resilience to economic cycles depends a lot on the mix of assets of the portfolio. Building up the right portfolio is quite challenging. It needs the right balance between long-term secured income properties and properties that carry more risk but can produce a higher upside. In Emirates REIT, we have mainly schools and offices.

Schools are the properties that usually bring long-term stable income, whereas offices provide more medium term leases with higher potential appreciation.

Altogether, it is about assembling and managing a balanced portfolio to provide both stable returns and capital appreciation. But even if you buy at the right price and the right time, you are not exempt from unforeseen events, such as a school operator that refuses to pay its rent or a building with a delayed connection to its community by a period of five years.

Office Park is located in the well established Knowledge Village

Tell us about Index Tower, one of your key assets? 

Index Tower is a very high-quality building. It was designed by Foster+ Partners, with energy efficiency and layout conservation in mind. The building is constructed in such a way that, even in the middle of a summer day, and without any A/C on, the temperature rarely exceeds 28 degrees Celsius.

In addition to that, the floor plan is really well thought out, with high-speed elevators at both ends of the building. Furthermore, floor plans are very large and without columns, which is ideal for any kind of companies. Finally, the location is really prime, at the entrance of DIFC, just across Dubai Mall.

Talk us through corporate governance and transparency. What are the fundamentals you’ve put in place?

The REIT and the REIT Manager are both highly-regulated. The vehicle by itself has a lot of systems and controls. For example, we have independent valuers. We have an independent fund administrator that does the accounting for the REIT.

Auditors that review and audit the REIT at least twice a year, and we are rated by Fitch that review all this at least once a year. And then we have a fairly large number of board members as well. We have a management board, an advisory board with our main and founding shareholders, an investment board, and a Sharia board. So, it’s a fairly extensive setup with a lot of supervision, but it works well because everybody is also contributing with their own expertise.

In addition, we have just completed a strategic review led by global investment bankers, Houlihan Lokey, and we were also recently advised by independent auditing giants, Grant Thornton. So, Equitativa has taken on expert advice at every turn to ensure its corporate governance is beyond reproach.

Where are your major shareholders at right now, are they happy? 

Our major shareholders are also founders of Emirates REIT, and they have been with us since the beginning. They are large Dubai institutions, like Dubai Islamic Bank, Dubai Properties, and TECOM. They’d be happier if we had more dividends and better returns and no Covid-19, but they are very supportive, and they understand the cycle we are in at the moment, like any other REIT in the world.

The share price is an issue as well, and they don’t see it as reflecting the real value of the REIT and the market illiquidity is not helping. That’s why we announced earlier that we might be looking at delisting. Our major shareholders understand the current market situation very well and are pleased that Equitativa is managing Emirates REIT.

The Equitativa Group manages the fund Emirates REIT

You talk about your best-in-class technology, why is that attractive to me as an institutional investor looking at your fund rather than somebody else? 

Our proprietary technology platform is entirely dedicated to the management of REITs. As my entrepreneurial background is IT, and the first company we created was an IT company that is listed on the French stock market, we decided to invest very early in developing a technology that allows us to manage all the KPIs of the REIT live.

Our team and our closest partners have to work on it. This was crucial during the first lockdown as we could work remotely without any impact or delay.

All the information is collected live, from every lease and every single invoice, to the maintenance reports and the budget management. All this information is directly accessed by all our stakeholders, including our external valuers, administrators and auditors. This brings a kind of transparency and efficiency that no other technology has yet achieved.

Without such tools, we would feel like we were operating in the 1980s when you had no mobile phone! We stay very systematic in creating processes and tools to manage the REIT, and our technology is a significant investment and continuously evolving.

Does that give you an edge, coming to the project with that IT background?

I think it’s quite fundamental that Equitativa is so vastly advanced in the technology space vis-à-vis any other REIT in the region. Most of the other asset managers have to buy off-the-shelf software packages that are not developed specifically for the management of the business.

It is important to understand that what is eventually crucial, is that people use the technology they have at hand. The difficulty in implementing processes into software, is to make everything simpler and easier. If the software is too complicated to use or not intuitive enough, anyone will prefer to work on excel, and their own documents, and the company will lose momentum in terms of information sharing, efficiency, and reliability.

Being at the same time an IT engineer and the CEO, my understanding of both the business and IT has been crucial in helping to develop a tool that is intuitive enough to be the preferred way of working, leading to data collection, team guidance, and the transparency we want to achieve.

Indigo 7 features 20,476 sq ft of prime retail and office space

When you look back over the last two years, what makes you proud?

The past two years haven’t been easy, and 2020 has been particularly challenging. Our team has put in a lot of effort to support our tenants as much as possible whilst keeping the interest of the REIT as its priority.

I am proud that Equitativa has assembled an Emirates REIT portfolio of property assets that is among the best in the region, and which continues to attract and retain tenants of exacting standards. But I am even more proud that our Equitativa service standards have retained tenant loyalty during a pandemic.