Sherif Selim*
THE formation of real estate investment trusts (REITs) in the Kingdom will institutionalize the real estate market, offer investors the opportunity to diversify their investment by participating in this asset class, attract foreign investors, provide developers an exit alternative thus encouraging more quality developments and create jobs for the economy.
For most people, real estate investing is limited to home ownership, with little thought of ever owning an office tower, a hotel, a retail shopping mall or an industrial warehouse. The creation of REITs offers the opportunity for individuals to participate in the ownership of commercial properties and procure the benefits of stability, diversification and growth that institutional investors have relished for decades.
It is understood that the Saudi Arabian Capital Markets Authority, the Saudi regulator, is considering the introduction of REITs in the Kingdom. It is not clear how much progress they have had, but the news is certainly exciting. If introduced, we do expect the legislation to be in line with other global REIT legislations and perhaps similar to the legislation of REITs in the United Arab Emirates, being the first GCC country to introduce REITs.
REITs involve direct investment in real estate, without the labor-intensive management attached to traditional commercial real estate investments.
Instead of investing in commercial real estate, which usually requires significant funds which increases the risk simply by being capital intensive, investing in REITs provides the same advantages without the any hands-on management and the associated risks.
Assets owned by REITs are traditional commercial real estate investments such as office buildings, hotels, shopping centers, logistics warehouses, retirement homes, resorts, apartment complexes, schools and hospitals.
Many foreign institutional investors are not allowed to invest in the Saudi real estate market due to the current restrictions imposed by the existing ownership laws in the Kingdom. The introduction of REITs to the Saudi market could also follow the recent opening of the local public market to foreigners and allow ownership of Saudi real estate through REITs with the exception of Makkah & Madinah to continue as the two holy cities. This is a move that will overnight help propel the market to a greater institutional level.
We see the introduction of REITS as a continuation of the reforms recently introduced by the government and is designed to elevate the financial markets in Saudi Arabia in order to institutionalize the market and attract investors locally, regionally and globally.
Traditionally global REITs have provided more attractive yields than other income investments. REITs have essentially changed the nature of property investment, giving individual investors easy access to high-value real estate assets, which was a domain previously reserved for large institutional investors. For institutional investors, REITs offer liquidity and greater geographical and sectorial diversification. REITs as an investment product offer a level of return stability, without foregoing growth potential. REITs are subject to more stringent regulations in areas such as leverage and financial reporting, providing investors with an added layer of security.
We believe that the introduction of REITs to Saudi will over time lead to an increased number of REITS entering the public markets, providing investors with increased choice and access to high quality product in an attractive, tax-efficient and liquid form.
REITs as investment products once introduced are expected to offer institutional and individual investors liquid exposure to income generating real estate. Real estate has investment characteristics that are distinct from that of the traditional asset classes such as equities and bonds and offer diversification benefits in a mixed portfolio.
Introduction of REITs attracts capital, including foreign capital, into the real estate sector by creating a new and attractive vehicle for institutional and individual investors to invest in commercial real estate. By selling stabilized assets to REITs, real estate developers can unlock capital that can be more effectively deployed in new development projects. Beyond the capital markets activity, this generates real economic output and creates new jobs in high-value areas such as asset management, investment appraisal, REIT management, legal and trustee services, investment banking, development management and consequently construction.
REITs also support the healthy development of the real estate industry by improving market transparency. As listed vehicles, they are required to provide detailed information to shareholders about rental and capital values as well as occupancy rates and tenant mix, thereby improving the capacity of all industry participants to plan responsibly and helping to smooth out real estate cycles.
We also noticed that real estate definitions and metrics are becoming more consistent among REITs across markets. The adoption of similar practices, particularly valuation methodologies, amongst global REITs is bringing markets closer, encouraging more cross-border investment and more efficient pricing of real estate. It is also supporting the broader efforts encouraging standardization of international real estate measurements.
The competitive pressures of the forward looking public markets encourage REITs to continually search for new growth opportunities and to explore diverse asset types with stable, attractive yields which will sequentially help the elevate the standard of the real estate market and encourage innovation.
Awqaf, endowments and insurance companies in the Kingdom will also benefit from the introduction of REITS as it will become a more transparent and liquid investment channel that will math their corporate governance and help achieve returns without putting pressure on their internal investment capabilities.
For the reasons outlined above, we believe the Saudi Arabian regulator approved the introduction of REITS and we look forward to review the new REIT legislation to start planning for participation in the creation of the first REIT.
We strongly believe that REITs in the Kingdom if introduced will become a valuable option for long-term institutional and individual investors, will positively contribute to the capital market diversity and development and will no doubt improve the development of the real estate market. It will also match the quality of the Saudi capital markets authority fund regulation which is already in line with other mature market global regulations.
* The writer is the Head of Real Estate MENA at SEDCO Capital
