Over the past few years, and with the introduction of its regulatory framework, Real Estate Investment Trusts (REITs) structures have become widespread across the Gulf region.
However, Tariq Qaqish, CEO of Salt Fund Placement, believes that adopting international standards to local markets is not always the best approach due to “the uniqueness of market dynamics”.
“REITs regulations were not a perfect fit for the Gulf region and specifically the UAE. The dynamic of the real estate market in the Gulf is different in structure than other developed countries,” he said.
There are currently around 26 GCC funds, 17 of them in Saudi Arabia, four in the UAE, two in Oman, one in Qatar, one in Kuwait and one in Bahrain, with their total net asset value reaching $6 billion as of October this year.
A REIT is a vehicle to invest in real estate and is generally publicly traded like stocks, making it highly liquid, unlike physical real estate. Al Mal Capital REIT, Emirates REIT and ENBD REIT are some of the major products available in this segment.
For yield-starved income investors, REITs are a decent investment choice to park a part of their investment. Retail investors who cannot afford big-ticket real estate deals can participate with minimum investment.
Qaqish believes that while the existing REIT law is helping govern the process, it does not take into account the constant fluctuations witnessed in the region’s real estate market, leading to underperforming GCC REIT funds.
“The challenge is that the law forces at least 80 percent of the fund’s net profits to be distributed to unitholders each year. Although this percentage is lower than 90 percent in developed countries, it does not take into consideration the high volatility of the real estate market in the region.”
With the pandemic’s impacts on the real estate sector and investor appetite, challenges were created for REIT fund managers and their diversification strategies.
Tariq Qaqish, CEO of Salt Fund Placement.
“Saturation of the real estate market, economic deterioration, increase in job losses, have all pushed property prices down. As a result, asset prices were down, rental income declined, which caused higher volatility,” Qaqish noted.
“As a result, REITs were under cash flow pressures, increase in unitholders redemptions, and inability to shift strategy.”
With the region’s fund managers being unprepared for such a scenario, a few REITs attempted to delist, while others looked at the possibility of extending their sukuks.
“The UAE’s largest Shariah-compliant real estate investment trust Emirates REIT, which has reportedly suffered $243 million in face-value losses on rental assets, has offered to exchange the unsecured sukuk securities due in 2022 for new secured notes maturing in 2024,” added Qaqish.
The UAE’s largest Shariah-compliant real estate investment trust Emirates REIT.
Commenting on the reasons hindering the growth of GCC REITs, Qaqish said: “Having a more mature real estate market and lower volatility helps fund managers predict future cash flow. Real estate in developed countries is more stable because they require tenants to sign a minimum five-year lease contract for commercial spaces which provides stable cash flow for landlords, in this case REITs.”
“Another main reason why developed countries follow the rule of distributing 90 percent of REITs’ net profits is that the fund does not have to pay corporate tax, which is not applicable in the Gulf.”
While the outlook looks promising for REITs in the GCC, especially with the new class of investors looking for investment products to diversify their portfolios in local markets, Qaqish warns that “investors should remain aware of the sharp volatility of real estate in the region.”
Adjustments to the REIT law will be essential for increasing investor confidence, either through lowering the distribution percentage or giving fund managers more flexibility, shared Qaqish.
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