Guide to capitalise on UAE’s flourishing real estate market

The UAE’s lucrative property market is raising eyebrows worldwide. The rental yields of 5.5 per cent are very attractive compared to the 2-5 per cent you get in New York, London or Singapore.

What’s even more astounding is that the real estate market is set to get ‘hotter’ day by day. As per market reports, rental prices for apartments in the more affordable neighbourhoods of Dubai have increased up to 24 per cent in Q1 2023. Reasonably priced villas in well-known areas are fetching up to a 59 per cent increase, while the more distinguished luxury villa rentals have spiked by as much as 89 per cent.

Even in Abu Dhabi, the value of sales transactions tripled in the first three months of 2023, reaching Dhs11.6bn ($3.2bn), up from Dhs3.63bn last year.

The government’s outstanding handling of the Covid-19 pandemic and its progressive visa policies have done a phenomenal job of attracting more foreign buyers. The influx of Russian investors, high net-worth cash buyers, crypto millionaires, yield-hunting investors, and the China reopening – have all supported the demand and continue to buoy property prices.

This has led to the UAE residential real estate market anticipated to register a compound annual growth rate (CAGR) of more than 8 per cent during the forecasted period, 2022-2027.

Investors who want to leverage the boom in the market without committing to a large outlay can utilise real estate investment trusts (REITs) to earn high yields. They are derived from the stable contracted rental payments by the tenants residing on their holding properties.

Since REITs are required to distribute 80 per cent of the income to their shareholders annually, dividends can be substantial. The relatively low correlation of listed REIT returns with the returns of equities and fixed-income investments makes it a good portfolio addition to reap diversification benefits.

How do investments in REITs work?

These investment funds raise cash from private and institutional investors to invest in real estate projects in exchange for units of the fund. The process enables investors to profit from diversified real estate holdings and reduces the risks faced by any one individual during purchasing, maintaining, or financing a property.

Publicly listed REITs are professionally managed liquid property portfolios that provide dividend-based passive income and add value through price appreciation. The ownership proportions in REITs are calculated as per the number of owned units compared to the total number of units in the REITs.

In comparison to fractional property ownership, where multiple investors have direct claim to the specified property, REITs differ as they give diversified exposure to a pool of holdings via ownership of shares of the fund.

Understanding regulations governing REITs

According to UAE regulations, REITs need to be closed-ended funds, which means after the initial public offering (IPO), shares are not traded directly with the sponsoring fund. Instead, they can be traded on the exchange, with market participants acting as the corresponding buyer and sellers in the case of public funds.

REIT fund managers must also distribute at least 80 per cent of their audited annual net income to the unitholders as dividends each year under Securities and Commodities Authority (SCA) and Dubai Financial Services Authority (DFSA) regulations.

As per the SCA, the onshore or mainland funds are required to invest at least 75 per cent of their total assets in real estate and generate at least 90 per cent of their total revenue from real estate, interest, dividends, and capital earnings relating to such real estate.

They cannot borrow more than 50 per cent of their total asset value. Meanwhile, REITs listed in DIFC are considered offshore by SCA, thus, governed by DFSA, they are required to invest only in real property or related assets.

They cannot borrow beyond 80 per cent of their net asset value and invest more than 30 per cent of their total assets in properties under development. These requirements help safeguard the interest of the unitholders and achieve the income generation objective of the funds.

Which REITs to target?

The UAE is targetting a 7 per cent GDP growth rate year-on-year (YoY) to double the size of the economy by 2031. The population of Dubai is also on a trajectory to double within the next 20 years.

These factors support both the current and long-term growth of the real estate industry as the markets will witness higher occupancy rates in real estate assets across Dubai and the UAE, making REITs a very exciting proposition. Below are two REITs investors should keep an eye out for to capitalise on the booming real estate market:

Emirates REIT

Emirates REIT is the UAE’s first and largest listed Sharia-compliant REIT by assets under management. Its portfolio comprises 10 freehold buildings in Dubai split between commercial, retail and education assets with an estimated market value of $785m, an aggregate lettable area of roughly 202,950 sqm, and weighted average lease expiry of 7.1 years.

Its holdings of premium commercial and education real estate assets have a robust demand, increasing occupancy rates across the portfolio to 84.5 per cent and benefiting unit holders with an 11 per cent YoY rise in rental, fee and other income by the end of 2022.

As a result, net profit in 2022 increased to $82m, up 30 per cent year-on-year, reflecting the quality of the assets. This is the outcome of the REIT benefitting from Dubai’s largely stable retail sector with strong demand from the outperforming sectors like F&B and entertainment and time lag in construction completion supporting rental rates.

Emirates REIT’s exposure to the education sector is also advantageous, owing to solid demographic trends, with the population forecasted to reach 5.8 million by 2040, creating more school demand over the next decade.

ENBD REIT

ENBD REIT is a closed-ended DIFC investment company formed by Emirates NBD Asset Management to invest in a diversified Sharia-compliant real estate portfolio. Under its portfolio valued at $365m as of 2022-year end, there are 11 properties – offices (68 per cent), residential (15 per cent) and other properties (17 per cent) located across Dubai.

The REIT aims to regularly distribute a dividend to achieve a total return of approximately 5 per cent per annum. It actively manages the existing portfolio, focusing on freehold or long-term leasehold titles to lengthen tenant lease terms.

The REIT has an occupancy rate of 85 per cent and has earned Dhs7.5m in rental income as of December 2022. It is a diversified fund that benefits from the thriving Dubai real estate market via investment in a high-quality strategic location that reduces the impact of local real estate market fluctuations.

Emerging REIT themes in the UAE

The UAE has a unique kind of REIT known as the Masdar Green REIT, the first of its type in the GCC. This is a limited fund, i.e. not traded on the exchange and is dedicated to investing in sustainable income-generating real estate.

Investors increasingly seek socially responsible opportunities, and Masdar Green REIT meets the criteria based on specific environmental, social and governance practices.

The fund’s latest acquisitions include two fully occupied buildings within Masdar City with a platinum rating in Leadership in Energy and Environmental Design. The REIT exposes investors to a diversified portfolio with an occupancy rate of 98 per cent and an average unexpired lease term of more than six years.

To conclude, the UAE’s macroeconomic and demographic trends bode well for the prospering real estate market. REITs can play a significant role for investors to tap into these opportunities and optimise their portfolio allocation to meet their long-term object.

Vijay Valecha is the chief investment officer at Century Financial

Read: Here’s how much Dubai’s real estate sector recorded in Q1 2023