The Saudi Stock Exchange-listed real estate investment trusts (REITs) will continue to acquire and increase their assets under management (AUMs) next year, as they continue to deploy significant capital in 2020 despite coronavirus pandemic and economic slowdown.
Since the listing of the first REIT on Tadawul in late 2016, the number of REITs reached 17, with a total market capitalization of SAR 15.5 billion as of Oct. 25, 2020. However, no REIT was listed year-to-date.
“Existing REITs will continue to acquire and grow their AUMs,” Ahmed Naaman Al Gore, Director - Capital Markets, JLL MENA, told Argaam.
“We are witnessing significant capital being deployed in 2020 despite COVID-19 and the economic slowdown. We don’t believe we’ll be witnessing any additional REITs being offered anytime soon.
“Fund managers who have successfully listed funds are unlikely to create new vehicles; the focus will be on growing the existing ones. Compressed yields (improved unit prices) can potentially pave the way for new funds to come to market and offer attractive terms.”
According to Al Gore, one of the key deterrents to new REIT offerings is coverage risk, i.e. will the authorized person be able to raise enough equity from retail and institutional investors to cover the offering amount.
-Positive outlook
On the other hand, Taimur Khan, Associate Partner at Knight Frank Middle East, felt that the increasing depth of the market is offering a more favorable platform for investors willing to adopt a long-term investment approach while taking advantage of the portfolio diversification benefits provided by REITs.
Additionally, the increased level of competition in the market is deemed to be a trigger for the adoption of best-in-class practices by REIT management teams.
“Given the culmination of these factors, particularly in these uncertain times where quality income and asset management will be sought out, we maintain a positive outlook for the REIT market going forward,” he stated.
Although JLL does not expect many new REIT launches in 2021, the consultancy foresees private real estate funds being established and managed until the market conditions improve over the medium term.
When asked if REITs are seeking to invest in the overseas markets, Khan said that the funds have started to invest outside the Kingdom, as they can invest up to 25% of their capital in international markets. He cited Riyadh REIT’s partial acquisition of an office building in Washington, DC, as well as Bonyan and MEFIC REITs’ acquisition of residential assets in Dubai.
But Al Gore stated that some funds have selectively acquired assets in the GCC and globally. However, the Kingdom remains the prime target, given the availability of quality assets, transactional ease, yields and knowledge of the process.
-Driving investor appetite
In 2019, selected Saudi-based REITs were included in the benchmark FTSE European Public Real-estate Association (EPRA) Nareit Emerging Market Index.
Khan said the inclusion of Saudi REITs in this global real estate benchmark would have a favorable impact on the market by further aligning the regulatory guidelines governing their listing and operations with international best practices. This, in turn, will continue to support investor appetite.
“Furthermore, the inclusion is seen as an important step towards increasing transparency, improving corporate governance and incentivizing accessibility of foreign investors to Saudi capital markets while broadening the investor base. These factors will take time to play out as the market is still relatively nascent,” he concluded.
Write to Parag Deulgaonkar at parag.d@argaam.com
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