Investors are increasing looking for ways to gain exposure to the real estate and construction sectors without locking their portfolios into property. Mohammed Al Hashemi, Executive Director of Asset Management at Invest AD, discusses how Real Estate Investment Trusts (REITs) provide a transparent, liquid, and tax-efficient solution for real estate investors.
Saturday 10, November 2018 BY MULLALLY WILLIAM
Real Estate Investment Trusts (REITs) are a sub-set of traditional property funds that are viewed as a less risky, more liquid and diversified way to benefit from real estate growth potential.
The principal objective of a REIT is to provide investors with a stable source of income throughout the property cycle. Income is generated primarily from rent received from the REIT property portfolio, in addition to realised gains from the sale of properties.
The first REITs were launched in 1960 in the United States as a result of supportive legislation. Since then, REITs have gained recognition globally as an alternative investment class, seen as especially attractive against bonds, which are directly sensitive to interest-rate risks. Globally, the market capitalisation for REITs is now over $ 1 trillion.
Compared to property funds, REITs typically distribute 80 per cent of annual income to unit holders as dividends, with little or no tax requirements, and generally invest a minimal percentage of total assets in properties under development.
Like property funds, REITs can have their units listed and traded on recognised exchanges, creating more liquid exposure to property than traditional direct real estate assets.
Property development has always been a core driver of the UAE economy. Over the past 15 years, both the primary and secondary property market have grown substantially, with direct property ownership remaining the predominant route for investors.
Despite this, REITs did not gain traction in GCC capital markets for many years due to a lack of investor awareness of the asset class. GCC investors were generally less inclined towards the tax advantages of investing in REITs due to the region’s tax-free environment.
Meanwhile, the historic lack of local regulations, and limitations on foreign ownership of real estate have inhibited growth opportunities for the trusts. Regulators in the UAE, Kuwait, and Bahrain made advances in introducing the model, but the 2008 financial crisis, which caused property prices to fall by more than 50 per cent, caused regulators in other jurisdictions to roll back their plans.
More recently, ADGM in Abu Dhabi and the CMA in Saudi Arabia have developed and issued specific legislations governing REITs. While the majority of REITs in the GCC region are private, the public listing of a few vehicles over the past three years has begun to raise awareness among GCC investors.
REIT’s provide investors with less risky, more liquid and diversified exposure to residential and commercial real estate growth potential, in comparison to direct investment in income-generating property, which is the historically referred route for UAE investors.
Direct property ownership carries with it the burden of substantial oversight; owning and managing a building requires property maintenance, tenant and lease management, optimization of the leased space, and building usage enhancement.
Investors looking for income can traditionally choose from three asset classes; fixed income, dividend-paying equities, and real estate. The returns and risks associated with each of these vary widely. A REIT provides a steady and relatively predictable income stream, at a return almost twice that of an investment grade bond.
In relative terms, bonds are more liquid assets, but REITs provide optimal exposure for investors and corporates seeking to meet recurring payments or liabilities, such as insurance companies. Ultimately, both asset classes provide a diversified means of producing income and are complementary yet non-correlated asset classes.