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REITs Continue to Gain Traction throughout the Middle East

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A relatively new vehicle in the Middle East, real estate investment trusts are performing well and continuing to expand.

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REITs Continue to Gain Traction throughout the Middle East

  1. 1. REITs Continue to Gain Traction throughout the Middle East Dr. Ehsan Bayat
  2. 2. REITs Continue to Gain Traction throughout the Middle East  While real estate investment trusts (REITs) have served as popular investment vehicles in the United States and Europe for more than a decade, they have taken longer to come to the Middle East. One of the reasons that REITs have not received the same interest in these countries is that the tax efficiency they provide means much less, because taxes throughout the Middle East have historically been fairly low. However, this state of affairs is changing quickly as countries face falling oil prices and seek to diversify their income. These changes have been accompanied by the creation of multiple REITs in the region.  Countries throughout the Middle East have the strong regulatory framework necessary for REITs, including Qatar, Bahrain, the United Arab Emirates, and Saudi Arabia. In addition, plans have already been made in Oman to create a framework that supports REITs. In Dubai, investors can choose between Emirates NBD REIT (ENBD REIT) and Emirates REIT, which are listed on NASDAQ Dubai. Abu Dhabi has two private entities, The Residential REIT and The Logistics REIT, which are both registered with the Abu Dhabi Global Market. Saudi Arabia has also recently become involved with the REIT market as a means of diversifying income for the country.
  3. 3. Why REITs Appeal to Middle Eastern Investors  The tax benefits of REITs are becoming more relevant for Middle Eastern investors as property taxes in several countries increase, but several other traits of REITs are also considered attractive. One of the major benefits is liquidity. Since REITs function much like investments in the stock market, they let investors take advantage of growing real estate markets while keeping their investments much more liquid than with direct purchases of property. The other major benefit that REITs provide Middle Eastern investors is flexibility and diversification. With an REIT, individuals can invest across several different asset classes at once instead of developing their own portfolio of assets.  So far in the Middle East, there are no restrictions on the assets classes in which REITs can invest, so there are REITs that target very specific markets, such as student housing, warehousing, and industrial space. Virtually any space that generates an income can be included in an REIT. Investors can choose to invest in an REIT that focuses on one asset class, such as The Residential REIT, or one that spreads investments across several different classes, such as ENBD REIT. As time goes on, new REITs with assets in the hotel sector, the retail sector, and other parts of the real estate market will likely be established.  Some REITs are taking a very creative approach to portfolio development. For example, ENBD REIT has been involved with a project to construct the South View School in the Remraam community of Dubai. The school will accommodate as many as 1,800 students, from the FS1 level through 12th grade. According to a recent announcement from project leaders, the school is on track to open its doors before the start of the 2018-2019 academic year.
  4. 4. Shariah Compliance for Middle Eastern REITs  Another feature of REITs that could attract investors from the Middle East is the fact that REITs can be adjusted to comply with Shariah law. Real estate is a very popular asset in Islamic finance, making this an important feature. The first Shariah-compliant REITs began operating in Malaysia in 2006. Since then, others have launched in Malaysia and Singapore, and now the Middle East.  Currently, both of the REITs listed on NASDAQ Dubai are Shariah-compliant, but the number of options will likely increase as demand for liquid, Shariah-compliant instruments grows. Notably, Emirates REIT recently announced that it will likely begin issuing sukuk certificates, or Islamic bonds, in the coming year due to a dramatic jump in the trust’s third-quarter net income. Profits in this quarter increased by more than 175 percent to USD $31.6 million, largely due to growth in rental income in Dubai.  Earlier this year, Abu Dhabi Financial Group announced plans for the flotation of a Dh 3 billion Shariah- compliant REIT, which the organization expected to execute before the end of the year. However, the organization recently announced that it would postpone the launch to the first half of 2018 due to regulatory issues. The so-called Etihad REIT was set up using a seed portfolio consisting of 10 properties across the UAE. The portfolio was developed in collaboration with Eshraq Properties, a major developer in Abu Dhabi.  The Etihad REIT delay stems from listing issues. The trust would become the first REIT based in the Abu Dhabi Global Market financial free zone to be listed in the UAE. The regulatory processes involved with this listing are taking longer than initially expected. Representatives from the Abu Dhabi Financial Group reported that the REIT already contains $700 million of income-producing assets and will see dividends by the end of the year, despite not being listed.