Insights: Is the UAE utilising property REITs to its long-term benefit?

A real estate investment trust or REIT is a company that owns, operates and finances income-generating real estate for its shareholders. Such companies look to pool the capital of several investors, making it possible for individuals and institutional investors to earn dividends from their real estate investments. They also remove the risk of needing to buy, manage or finance any property themselves.  

To date, however, REITs only represent a small part of real asset ownership in the region when compared to Europe, the US or developed Asia-Pacific.

There needs to be a stronger case made in favour of REITs already existing in the UAE because they support the underlying strength of the property market, as is witnessed in other real estate markets around the world. However, that potential for REITs operating in the UAE must be supported by small, yet significant changes on access to capital, particularly international, and a wider understanding of the benefits that REITs provide.

Current situation in the UAE
From a macro-economic and demographic standpoint, the forecasts for the UAE are positive: GDP growth should be in excess of 5 per cent for 2022 and 2023 and the population is increasing with a forecast in excess of 5.6 million people in Dubai and 12 million people residing in the UAE by 2040.  Those factors are conducive to both a short-term recovery and long-terms growth of the real estate sector.

Indeed, as the real estate market continues to recover this year, we are witnessing positive momentum on the occupancy in property assets across Dubai and the UAE. The UAE having successfully established itself as a safe sanctuary for business, due to both its efficient handling of the pandemic and its progressive legislation, is ensuring that more companies and entrepreneurs want to base their operations here or expand an already existing presence. 

In the office sector, the positive outlook, coupled with the obsolescence of certain office stock, the moderate pipeline of new deliveries and the occupiers’ wariness of strata developments, should bode well for fully owned quality assets.  

On the logistics and light industrial front, the comments made by Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister of the UAE and Minister of Presidential Affairs at the World Government Summit earlier in the year, as to a relative lack of growth in the UAE industrial sector, were very welcome. The government plans to significantly increase its focus on areas in the industrial sector, including pharmaceuticals and food supplies and that is an area where we see opportunities for REITs to grow.  The logistics and light industrial sectors have been favourites amongst real estate asset investors in most mature markets and we anticipate the UAE and Gulf region to follow suit on the back of the government’s emphasis for industrial development.  Social infrastructure, notably in the education and healthcare sectors, will also need to grow given the aforesaid demographic trends. Those assets typically lend themselves well to REIT ownership as the healthcare and education operators tend to be asset light and the REIT can provide both the capital inflow and the stability of institutional stability. ​

Looking at other markets in Asia Pacific like Singapore or in the US and Europe, established REITs play a key role in supporting and stabilising the real estate markets.  We have not yet reached a similar level of maturity in this region but the institutionalisation and internationalisation of the local real estate markets should foster this path. 

Supporting REITs in the UAE
To become significant real estate asset owners and support economic growth that guards against future economic downturns, REITs in this region need greater access to more international institutional investors, be they pension funds and insurance companies that typically like the inflation-hedging characteristics of real estate or global asset managers that will have both dedicated real estate strategies and exchange traded funds that will replicate indexes, or investment managers.  Whilst they have a clear interest in the region, which provide attractive yields, their involvement today remains subdued, notably owing to the perceived lack of liquidity of the stock exchanges and restrained access to non-GCC investors.  

Avenues to be explored to foster the growth and attractiveness of local REITs could include both a different approach to real estate lending by the local banks and an enhanced harmonised legal framework providing support for growth.

On the financing front, REITs in mature markets see their financing traditionally coming from non-amortising loans or bond issuances at moderate loan-to-value ratios, where the lenders draw comfort from the value of the asset pool provided as security and the underwritten cash-flows. This type of financing allows the REITs to distribute cash dividends – which is welcome by both retail and institutional investors. Amortising loans is more the norm at present locally but unfortunately eat away at the cash dividend distribution capability of the REITs, since the funds from operations need to be used to amortise part of the principal of the debt contracted instead of distributed.  This deters both retail and institutional investors from investing in REITs which are traditionally perceived as dividend stocks.

As to the legal framework, there were welcome modifications to the Federal Law on Commercial Companies in the UAE that became effective in early January this year. With respect to listed entities, the new Companies Law introduced the possibility for public joint stock companies under certain conditions to issue discounted shares, where the market price of the shares falls below the nominal value.  It could be an important step for Dubai International Financial Centre and Abu Dhabi Global Market to consider aligning their regulations onto the Federal laws. Indeed, discounted rights issue are a very common way across mature markets to support the growth of a business, REITs in the present example, through market volatility. 

It’s a unique balancing act but if we put the building blocks in place now and open the door to long term institutional capital, then I believe we can enhance the regional real estate market even further and in turn create more jobs and economic benefits for all. 

Thierry Leleuis is the CEO of the Equitativa Group