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November 5, 2017 | 12:00 | Dubai
Knight Frank has released its latest report discussing the recent establishment of REITs in Saudi Arabia: ‘Real Estate Investment Trusts – Insights on Saudi Arabia – Q3 2017’. The report provides highlights on the global and GCC REIT markets alongside analysis on the development of the REIT market in Saudi Arabia by covering the regulatory framework, the implications that REITs may have for investors and the real estate sector and key challenges the sector may face.
GCC countries are moving forward with the establishment of a regulatory framework for the use and listing of REITs, with listings intensifying in recent months. In Saudi Arabia six REITs have been listed on the Tadawul in a short period of time following the approval of regulations in November 2016. The number of successful listings and the number of applications that are currently in the pipeline clearly show the pent up demand for REITs in the kingdom.
Raya Majdalani, Research Manager, comments on the recent development of a REIT market in Saudi Arabia.
Mainly driven by the amount of capital seeking exposure to the commercial real estate market, REITs that have been listed in the kingdom initially traded at a large premium to Net Asset Value (NAV), indicating investor appetite for income producing real estate as well as the potential depth of the market. This trend is in part a function of the relatively small number of listed vehicles available to investors; as the REIT market gains in maturity, pricing is expected to move more in line with NAV.
To date the investment strategy for REITs has on the whole been non-thematic, partly as a result of a chronic lack of good quality assets with long term, sustainable income. As the market matures, the emergence of thematic REITs is seen as a logical development whereby investors will be able to target specific real estate sectors rather than taking blended real estate exposure. This will be particularly important for investors seeking exposure to non-cyclical, defensive sectors such as healthcare and education.
REITs traditionally appeal to investors looking for more liquid exposure to the real estate sector, with the added benefits of diversification and long-term stability as well as regular dividend income and potential capital appreciation. The REIT market in Saudi Arabia will provide a wider range of investors exposure to the commercial real estate market, a sector that is typically illiquid and has large minimum entry requirements.
We welcome the establishment of the recent REIT regulations as another step toward a more transparent market, a key factor when it comes to institutionalizing the sector and attracting international capital. Over the longer term, REITs are expected to increase private sector participation in the financing of the real estate market. This appears to bode well with a real need for investing capital in the kingdom’s real estate market and falls in line with the broader goals of the Saudi Vision 2030 and the National Transformation Plan (NTP) which aim to stimulate the real estate sector and increase its contribution to overall GDP, while encouraging private sector participation in this process.
There are number of external factors that may challenge the growth of the REIT market in Saudi Arabia. A major factor will be the quality and supply of suitable assets that can be placed within potential REIT structures. As the success of the REIT market will, in part, rest on a sustainable pipeline of future assets, the softening of the current economic climate could hinder the development sector and with it future supply.
Stefan Burch – Partner, Saudi Arabia – commented: ‘The recent approval of the REIT regulations signal an important step in the government’s drive to increase transparency in the real estate markets where visibility around asset performance, ownership and legislation are key to attracting capital to the sector’