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Real estate investment trusts (REITs) could see greater traction in the GCC due to lower interest rates in the short term and tax exemptions and government efforts to encourage investment diversification in the long term.
This type of trust has received attention in the UAE this week since Dubai Holding, the state-backed conglomerate, was reported as considering setting up a REIT.
Last month, Debtwire reported that Dubai developer BinGhatti was also considering a REIT, having issued a $200 million bond earlier this year.
REITs could also be an opportunity for Saudi Arabian developers to access alternative sources of finance, an analyst told Zawya.
Emirates REIT, the oldest in the region, made headlines with the sale of a $196 million office asset.
However, this Nasdaq-Dubai-listed REIT, which reported a property portfolio valued at $990 million in August, said a portion of the net sales proceeds will be used to partially redeem its sukuk certificates, which were issued on December 12, 2022, following a refinancing attempt rejected by bondholders in 2021.
The REIT held the Dubai Internet City office asset for 12 years, and while the price paid in 2012 was not revealed, data from real estate consultant JLL shows that grade A office space has increased on average in value by 53.6% during that time, showing 15.3% growth since Q3 2023.
Emirates REIT’s sukuk struggle aside, the Federal Reserve’s recent 50 basis points interest rate cut could spark momentum for REITs, existing and new, and the structure’s value as a tax-efficient structure may come to the fore as corporate tax takes effect in the UAE.
Samir Kazi, the head of real estate at ENBD Asset Management, said there was positive momentum from the interest rate cut and that the corporate tax in the UAE made the REIT landscape “more interesting”.
The UAE announced 9% corporate tax in late 2022 and Kazi said the advice received for ENBD REIT is that it will be able to apply for a tax exemption from the Federal Tax Authority.
In terms of REIT investment targets, the UAE office market, which has been recording high occupancy, has gained attention as it has bucked a global trend towards remote work since the COVID-19 outbreak, said Taimur Khan, Head of MEA Research, JLL.
Multi-family build-to-rent developments are going to be crucial for the residential sector.
Data centres, driven by the country’s investments in AI are of particular interest to REITs.
Challenges
For REITs to work and deliver dividends, they need non-recourse profit-only finance in the case of Shariah-compliant REITs, or, interest only conventional debt, said Mohamed Ali, managing director of Atheel Partners, which advises on real estate investments.
The instruments need to be five to ten years in duration, not three or four or five years as was the case with Emirates REIT’s recent sukuk, he said.
Ali also said that over the next two years, now that interest rates are coming down, trusts will need to focus on buying the right assets at the right price, not just because cheap financing enables them to. Further, they must not get complacent about CapEx spend to retain tenants and improve portfolio operating cash flow.
REITs are tied to the performance of the equity markets, which have seen volatility, particularly since 2020 due to the pandemic, followed by the resurgence since then, in addition to geopolitical issues and high interest rates, Ali said.
NAV per share
A marker of REIT success is net asset value (NAV) per share compared to share price, and many GCC REITs have been trading at a significant discount.
Emirates REIT, which invests in commercial and educational properties, recently reported NAV per share for the first half of 2024 of $1.76, while ENBD REIT, managed by Emirates NBD Asset Management, declared a NAV per share of $0.80 in Q2. With respective share prices this week of $0.23 and $0.34, both are trading at significant discounts.
The third Dubai REIT, Al Mal Capital REIT, focuses on education assets and reported its most recent NAV per share at AED 1.11, with its share trading higher this week at AED 1.20.
In Saudi Arabia, Tadawul-listed Riyad REIT’s most recent results show a NAV per share of SAR 11.01 ($2.94), with the share also trading at a significant discount, at SAR 6.75.
However, Jadwa REIT, another major Saudi fund, has a more marginal discount, with a NAV per share of SAR 11.22 and a share price this week of SAR 10.90.
Cause for optimism?
Atheel Partners’ Ali said there is a case that could be made for tax exemptions to REITs as necessary vehicles to get liquidity and foreign direct investment (FDI) into the commercial real estate sector.
There is cause for optimism, he said, on existing listings as well as in the private markets, where players are taking advantage of conditions to ramp up their portfolios, driven by long-term conviction about the strength of the economy.
(Reporting by Imogen Lillywhite; editing by Seban Scaria)
