As investors open up to this alternative investment class, real estate investment trusts (REITs) are gradually gaining traction within the GCC. In 2016 we saw the listing – but not an initial public offering (IPO) – of Riyad REIT at Tadawul, as well as the IPO of Eskan Bank REIT, which completed its offering on December 6, 2016 and listed on the Bahrain Bourse on January 2, 2017.
NEW LAUNCHS: Eskan Bank Realty Income Trust (EBRIT) is sharia-compliant and the first listed REIT on the Bahrain Bourse. EBRIT, at the end of November 2016, offered for sale 144m units at IPO price of BD0.10 ($0.27) per unit; the issue was more than 95% subscribed raising BD13.8m ($36.6m).
The REIT consists of two mixed-use properties – Segaya Plaza and Danaat Al Madina (DAM). Segaya comprises residential and retail units, while DAM consists of office and retail units. The blended average occupancy of the REIT is 85%, and the REIT is targeting a sustainable annual dividend yield of 6.5%. One of the differentiating features of this issue is the performance supplement, whereby the investment manager (Eskan Bank will continue to own a 21.5% stake in EBRIT postIPO) will forego its share of dividend to meet a minimum yield of 6% (at IPO price) on an ongoing basis and until investors receive this minimum yield for at least two dividend distributions (on an annualised basis).
FUTURE POTENTIAL: 2016 was a landmark year for listed REITs in the region due to two new issues, Riyad REIT and EBRIT. Oman and Qatar are also in the process of finalising their REIT regulations.
Aspects of a REIT that make it a desirable investment class include liquidity, current income and diversification. At any given day REITs will always be more liquid than the underlying property, while REITs are also structured to pay a high proportion of cash earnings as dividends. With regards to diversification, REITs provide direct exposure to an alternative investment such as real estate. Furthermore, REITs generally provide exposure to a basket of properties, reducing risks involved with single property purchases. Properties may also be from different sectors.
REGULATION ACROSS GCC: REITs regulations are similar in the GCC when it comes to debt levels and dividend payout ratios. A differentiating factor is the investment in new construction as a percentage of net asset value (NAV). For Dubai, the ratio is the highest at 30%, followed by Saudi Arabia (25%). In Bahrain regulations do not allow for investment in new construction, making Bahrain’s REIT structure inherently more risk-averse. When evaluating a REIT, investors need to look into the cash earnings, i.e. earnings excluding the property revaluation gains. Some REITs might adopt an annual property revaluation policy, recording unrealised fair-value revaluation gains, which bloats paper earnings as well as the book value. Aggressive accounting policies depress relative valuation metrics like price-to-net-asset-value ratio or price to earnings, making the REIT cheap optically. In this regard, dividend yield is a key measure for comparing REITs, particularly from a minority shareholder’s perspective.
Company strategies might also differ. Both Riyad REIT and Emirates REIT have development properties in their portfolio, which could offer superior growth prospects assuming developments are value-accretive and delivered on time. EBRIT is more conservative in this regard. Leverage limits is another important factor. UAE-listed REITs can borrow up to 70% of gross asset value, and Bahrain REITs have a limit of 60%. Saudi REITs are the most conservative in this regard (50%).
Lastly, absolute measures like fund management fee, performance fee and the total expense ratio should also be considered. Fund management fee is typically a percentage of the assets under value. EBRIT is unique because performance fee is based on the company eclipsing a 7% dividend yield threshold – directly aligning cash on cash return of the investors to performance bonus of the fund manager. Emirates REIT performance fee is based on the increase in NAV.
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