There are three key reasons why the real estate investment trust (REIT) sector within the GCC region isn’t taking off well among the investment community, despite the assets being Shariah compliant, a property expert managing holdings in the Middle East told IFN Investor.
Rasmala Investment Bank’s Real Estate Funds Head Ruggiero Lomonaco, who also heads the Saudi Arabia investment portfolio, explained that a main underlying reason for REITs to exist in most domiciles is to minimize tax dues on rental incomes.
This is done by having all rentals received – sans the management fee – going to REIT investors. As these investors are typically pension funds, which attract minimal or no income tax, their members get the bulk of rental earnings. “This logic doesn’t hold while Middle East nations remain income tax-free.”
Secondly, Ruggiero said REITs work well in areas where the property supply is limited – creating the basis for capital value appreciation and steady rental incomes with growth potential. This principle does not apply much to the Middle East – where major developments are ongoing amid open deserts.
Citing buildings in and around Makkah as examples viewed by many as having a high REIT potential, Ruggiero pointed out these premises are largely empty outside the Hajj and Ramadan periods. “Without steady rentals and also competition from newer developments nearby, investors would fare better by buying into firms undertaking these new projects.”
The final ingredient is for the REIT to be self-managed. “That is the secret for success. The management is fully aligned to the success of the REIT.” This also results in optimal management fees incurred, compared to external managers – who usually get contracted fixed rates.
With these three factors in play, Ruggiero pointed to several very successful global REITs operated by firms like industrial and warehousing-focused Prologis and Equinix, that handles digital infrastructure like data centers.
“Any REIT in the GCC can do well by applying these three rules strictly. I see the potential for the REITS industry to grow as the population in these countries mature and start seeking alternate fixed income tools to complement their pension schemes.”
A further complication is the restriction on foreign ownership, shared Qatar’s Al Rayan Investment Acting CEO Akber Khan – who raised a critical matter that applies across the GCC region.
“While locals can own properties easily, foreigners can own only certain places in Qatar. This complicates the process of what property can be transferred into a REIT. So which places can you buy to inject as assets?”
Akber said more questions arise on who can invest into the REIT if it’s a listed security. “How do you restrict this? Should you have limits on the foreign ownership? These are some of the questions being mulled over.”
Due to these issues, no REIT has yet been launched in Qatar. Akber said discussions to find solutions are taking place at the stock market regulator. Some reviews are being conducted at ministries which have to deal with regulations on real estate.
Ruggiero said some poorly-performing REITs within the Middle East need to also address some inherent problems, as several of these entities were created in the wake of the 2008 Dubai property-debt crisis to remove unsold inventory from the balance sheets of beleaguered property developers.
Explaining that the underlying intent was akin to a bailout then, Ruggiero said managers of these struggling REITs need to break out of current passivity – by enhancing property values and boosting rental yields – if they are to remain viable.
On how to identify REITs with strong potential, “my focus would not only be on what the yield is today, but whether the yield is growing or trending down. If it is growing, I am interested. I may invest even if the yield is now low at 2-3% per annum, if this is trending upward”.
