Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre “Markaz”, recently released a report titled ‘REITs in GCC: Regulatory hurdles persist’, analyzing the prevailing circumstances and future prospects for REITs in the region.
Five REITs have been listed in GCC, four in Saudi Arabia and one in the UAE within a span of 10 months, higher than the number of IPOs in the region. This sudden emergence of an alternate asset class augurs well for the melancholic investment climate and makes available diversified products such as exchange traded funds, derivatives and REITs for its affluent and high net worth individuals who have till now searched beyond borders for alternative investment products. Historical returns in the US indicate that REITs can be used as a hedge against inflation. Listing of REITs also improves the transparency in real estate market encouraging private players to invest in residential as well as commercial projects. The growth of the real estate sector will translate into more jobs and diversification of the economy. Hence, an organized real estate market with alternate funding mechanisms is of utmost importance and will de-stress the banking system. Introduction of REITs will further augment the nationalization program in GCC, as the contribution of nationals in the real estate sector is high.
GCC, is home to one of the most active real estate markets but development of REIT’s has been a problem due to several hurdles. A key impediment to the growth of REIT’s in the region is regulations. In most of the countries in GCC, foreign ownership is restricted (wholly or partially) in real estate. Ownership limits are also limited in capital markets for international investors. There are also leverage regulations placed on the real estate investment trusts. For instance, in KSA, a REIT issuer’s leverage is restricted to 50% while in countries such as USA and Canada there is no restriction on the debt levels. Liberalizing the limits on foreign ownership will be one of the prime measures for developing secondary markets for such products. GCC nations also need to emphasize on improving the market infrastructure such as adopting a common settlement cycle that is widely accepted, developing delivery versus payment systems apart from improving the transparency and disclosure mechanisms that are currently lagging behind.
UAE and KSA are among the forerunners in the region to have introduced regulations that are accommodative for the listing of REITs. Currently both these countries together have collected a corpus of about USD 630 million. Bahrain too has followed suit and has recently enlisted elaborate procedures for listing REITs. Sharia compliant Islamic REITs have also been developed and has been received favorably by investors. While the REITs market is still at a nascent stage, it is surely showing signs of moving in the right direction.