Real Estate Investment Trust (REIT) in GCC

Apr 22, 2015

Real Estate Investment Trust (REIT) buys, develops and manages real estate ranging from offices, apartments and hotels to hospitals, shopping malls warehouses. It can be a privately owned or traded and shareholders of the company receive 90% of pre-tax income which is generated through rents and interests. However these company's legal aspects vary from country to country.

Real Estate Investment Trust (REIT) buys, develops and manages real estate ranging from offices, apartments and hotels to hospitals, shopping malls warehouses. It can be a privately owned or traded and shareholders of the company receive 90% of pre-tax income which is generated through rents and interests. However these companies’ legal aspects vary from country to country.
 

Benefits of REITs
Hedge against Inflation REITs main attraction is its ability to be used as a hedge against inflation. In general, real estate prices rises during periods of high inflation (inflation above expectations).
Diversification REITs also provide avenue for diversification of portfolio since REITs have low correlation with the other asset classes. REITs performance can be easily predicted by analyst as compared to equity stocks..
High Liquidity Smaller investment ticket size and an active market where REITs are traded ensure high liquidity for its investors in comparison with traditional Real Estate investments.
Property Management without Headaches
 
Investor can also enjoy the benefits of a property ownership without headaches of rent collection, facility management and drafting contracts with tenant as the REITs management takes care of these processes.
High Yields Another significant attraction for REITs has been the high dividend yield secured by stable return from long term leases.
 
Regulation of REITs (GCC)
The lack of regulations has limited the growth of REITs in the region. Only Bahrain and Dubai (UAE) have regulations governing REITs, with the introduction of Bahrain Financial Trusts Law in 2009 and Dubai International Financial Centre (DIFC) investment Law in 2006. The Dubai Financial Service Authority is the independent regulator of financial and ancillary services conducted in, or from, the DIFC and listed below are the DIFC’s regulations that differentiate the REITs with the property funds.
 
Property Funds REITs
  • All the Property Funds (i.e. Funds investing predominantly in real estate or real estate-related assets) must be closed-ended Funds
  • REITs are a sub-set of Property Funds, which are designed for income generation. A REIT must be a close-ended fund
  • Be an Investment Company or Investment Trust
  • Use only Investment Company or Investment Trust as the fund vehicle
  • Be listed, within six months of its establishment, either on an Authorised Market Institution or an Exchange in a Recognised Jurisdiction
  • Be a Public Fund that is listed and traded on an Authorised Market Institution
  • Invest only in Real Property or Property Related Assets, but may retain up to 40% of its investments in cash or certain specified Securities
  • Invest only up to 30% of its total assets in ‘property under development.
  • Have the Fund property valued annually and Value the Fund property on the basis of an independent valuation of the relevant property, before acquiring or disposing of any asset
  • Distribute 80% of its audited annual net income to Unitholders;
  • Limit its borrowings to 80% of its total net asset value.
  • Not borrow beyond 70% of net asset value
Source: Dubai Financial Services Authority
 
REITs in Gulf Cooperation Council 
Of late there has been a real estate boom in the Middle East. This has caused Real Estate Investment Trust (REITs) to attract attention in Gulf Cooperation Council (GCC). The Real Estate Investment Trust (REITs) adoption was enabled by the fact they can be easily structured to be sharia compliant. Kuwait Financial Centre’s (Markaz) real estate fund (Markaz Real Estate Fund or MREF) is one of the pioneers of a REIT-like investment fund in real estate. The fund invests in properties directly which generates both rental income and capital gains. However, it cannot be classified as a REIT since it is not a trust.

None of the Real Estate Investment Trusts (REITs) are listed on Gulf Cooperation Council (GCC) except for Emirates REIT which is the first REIT to be listed on stock exchange. Emirates REIT was able to raise USD 175 million in its Initial Public Offering and it is Dubai’s first IPO in five years. The proceeds of the IPO will be used to source their acquisitions and opportunities and for investing in existing assets. Emirates REIT wants to capitalize on the rebounded interest in real estate in Dubai where property prices have risen since 2009.

Existing REITs in the GCC
Name Domicile Manager Year
Arabian REIT Cayman HSBC Middle East 2006
Al Mahrab Towers REIT Kuwait Munshaat RE Co 2007
Inovest Bahrain Inovest 2009
Emirates REIT UAE Dubai Islamic Bank 2010
 
In the gulf, a substantial number of investor impose some form of moral, religious and ethical qualification on what kind of companies to invest in. Sharia Compliant REITs are being organized to attract money from those devout investors. Sabana REIT is the first REIT to be certified as sharia compliant is in Singapore. The types of business sharia compliant Real Estate Investment Trusts must avoid renting the properties to are tobacco, alcohol, gambling, pork and adult entertainment. The REITs shouldn’t rent the properties to conventional financial institutions due to their non-sharia compliant nature of business.  There are many conservative Muslims who understand the benefits of Real Estate but do not want to earn dividends through business that are against their religious beliefs.
 
Difference between Islamic and Conventional REITs
Category Conventional REITs Islamic REITs
Shariah committee/advisor Shariah committee/advisor is not required Need to appoint Shariah committee/advisor to ensurecompliance with Shariah law
Permissible activities by Tenants No restriction Only activities permissible under Shariah law
Insurance for properties Conventional insurance with insurance companies as approved by trustee The manager needs to consider the availability of Islamic insurance/ Takaful before opting for conventional insurance
Financing No restriction Financing should be as per Shariah law
 
The first real estate investment trust in the gulf is the formation of Arabian Real Estate Investment Trust (AREIT) on January 28th, 2006 by HSBC Bank Middle East Limited and Asset manager Daman. It is a private placement, not listed on any stock exchanges and invests primarily in commercial property through the GCC region of Bahrain, Qatar, Kuwait, Oman, United Arab Emirates (UAE) and Saudi Arabia. Their shareholders are Daman Asset Management, HSBC Middle East Limited and Jazira Investment Limited. The first sharia compliant real estate investment trust in United Arab Emirates is Emirates REIT which is a joint venture of between Dubai Islamic Bank and Eiffel Management a French real estate investment trust. United Arab Emirates has no federal laws governing foreign ownership of real estate property asset. Each emirate creates its own policy. The REIT in United Arab Emirates (UAE) started when in 2006 Dubai International Financial Center (DIFC) legislated Investment Trust Law and REITs rule instrument. Before the Economic recession in 2008 Dubai experienced the biggest and most attractive property boom in the world surpassing Las Vegas. But the recession has caused the property prices to plummet by 62%. Al Mahrab Tower REIT is the first sharia complaint REIT in Kuwait and was formed by Munshaat Real Estate Projects Co. K.S.C.C.

Potential of Islamic REITs in GCC
The potential for REITs is high in the GCC region, especially in Saudi Arabia, as the Kingdom’s real estate sector demand is driven by the shortage of residential units and growing population. REITs can benefit the high number of HNIs in UAE, Qatar and Kuwait by offering them an asset class to diversify their portfolio, provide protection against inflation and offer a liquid, affordable investment in real estate with regular stream of cash-flow. REITs as an investment have lower risk than the regular real estate funds due to the non-existence of risk associated with the development phase.

After being successful in Asian countries such as Japan, Singapore and Malaysia REIT are gaining popularity in GCC countries. The Islamic REIT is in early stages of development in most countries of GCC but holds significant potential. The potential is driven by the strong real estate sector fundamentals such as demographic profile, expected implementation of mortgage law and economic diversification. The increasing acceptance of sharia complaints products and reliability on stable returns also give great potential for REIT in GCC.

Steps to improve Islamic REITs Market in GCC
The Islamic REITs in GCC can be improved by
Establishing Standardized and Uniform REIT Guidelines Currently there is no standard regulatory framework for Islamic REITs in Saudi Arabia. The introduction of the same would help to differentiate the properties which are non-permissible as per sharia law.
Allowing Foreign Participation in Investments The capital market authority should permit the cross border trading of REITs as these could help to unlock additional avenues for investor’s participation and could also aid in boosting liquidity.
Development of Secondary Market The development of secondary market for REITs in GCC including the ease of listing procedures will help for easy trading of the instruments.