Al Rajhi Capital's chief executive officer Gaurav Shah said Al Rajhi REIT seeks to ensure sustainable streams of income for investors over the medium to long terms, given its high-quality portfolio of constituent assets.
The fund is offering part of its assets in initial public offering (IPO) in Saudi Arabia till January 14. Out of a total asset worth of SAR 1.621 billion, Al Rajhi REIT is floating 42.67 million units at SAR 10 each.
Argaam interviewed Al Rajhi Capital's CEO Gaurav Shah for more information about the fund, its objectives and the opportunities it seeks to offer investors.
Q: Do you think the timing of your REIT's listing is appropriate, given market and economy conditions?
A: As we all know the Kingdom is going through significant economic changes and changes always come with challenges and opportunities, while throwing up some uncertainties as well. Regardless of the market timing, we believe that a well-structured REIT should be an essential component of a diversified portfolio holding of the investor.
Al Rajhi Capital was one of the first companies to offer income generating real estate fund within the Kingdom, however, we were not the first one to offer a REIT. The underlying reason is that we took time to build the portfolio that meets the risk and return objectives of the fund in line with best practices. Our REIT is a byproduct of our cumulative experience and expertise in real estate market in Saudi Arabia.
We would like investors to evaluate our REIT based on its features and merits. Our REIT offers a diversified portfolio of high quality assets that will generate steady regular income for investors. Majority of our leases are Triple net leases with reputed counterparties providing greater future income visibility which is further enhanced by the portfolio’s Weighted Average Lease Expiry Term of 7.2 years. Al Rajhi REIT offers a net yield of a targeted 6.16% in 2018 which is expected to steadily increase up to 6.5% by 2020 based on the existing portfolio. Given the broader market volatility, low rate environment and expected inflationary trends, we believe that Al Rajhi REIT offers a good opportunity for income seeking investors and to get exposure to the real estate market. Investors must always refer to the REIT Fund’s Terms & Conditions for full details prior to investment in the fund.
Q: It seems that half of Al Rajhi REIT's assets are concentrated in the retail sector. How do you justify that concentration?
A: We believe our REIT has one of the most diversified portfolios of real estate assets spread across retail, education, office building and logistics sectors. In our view, an investor has to look at multiple factors such as lease type, quality of tenant, and lease duration while evaluating asset quality apart from the sector. As you can see in our portfolio, our retail assets are major visiting points situated in prime areas, occupied by some of the most known retail names in the Kingdom with mostly long term leases. Given their track record, we believe that our tenants are better positioned in the market to face any challenges, which is further supported by the market share shift to more organized retail sector in certain segments. This shift will only accelerate going forward in our view. On a broader level, we believe that the retail sector will continue to benefit from the changes in the Saudi society, increasing Saudization apart from the growing young population and aspirational lifestyle which continue to be the core consumption drivers.
Q: Given the current market condition, we hear that some of the tenants in the market have renegotiated rental contracts and sought reductions, do you think the same will apply to your fund? How can that impact unit-holders and what are your plans in this regard?
A: This again highlights the need for having a diversified portfolio of assets in a REIT with creditworthy counterparties as lessees. As you are aware, REITs with fewer assets will always be more exposed to this risk you have highlighted, which is not our case. As I highlighted earlier, we have very strong counterparties as our lessees, and this relationship has been based on legal contracts and commercial understandings. They have been very professional and regular in servicing their payment obligations and we do not expect such pressures coming from our lessees. Even if such a rare situation arises in the future, our diversified portfolio will minimize such impact at the fund level.
Q: Some people believe that a REIT IPO now is a subtle exit strategy to dispose of ill-performing assets in a downturn. What is your view on that?
A: The team at Al Rajhi Capital follows a comprehensive investment process which includes extensive due-diligence both on the asset and seller before entering into any transaction. We have a long track record investing in good quality assets and in engaging with reputed counterparties. We will be using the IPO proceeds to acquire 2 new assets expanding the portfolio while all previous investors may continue to remain as unit holders in the REIT. We are not exiting from any assets and take our fiduciary responsibility towards our investors very seriously. Al Rajhi Capital has around 10% ownership in Al Rajhi REIT post the IPO, and we have voluntarily committed not to sell any units for the next two years post listing. This reflects the fund manager’s confidence in the current and future quality of the product.
Q: You estimate the fund will yield 6.16 percent in 2018. How does that compare to the market, and how attractive is a subscription to your fund given other viable options available to investors? And what are the main rewards to investors who would subscribe to your offer?
A: Returns has to be viewed in context of the associated risk parameters. There are REITs in the market with high returns accompanied with high risk attributes like shorter duration lease contracts leading to frequent rent revisions, high cost of property management, single asset or sector specific concentration, absence of anchor tenants etc. We believe that yield is important, but at the same time we would encourage investors to evaluate other important aspects like quality of assets, diversification, sustainability of income over long time periods, and professional expertise of the fund manager while taking their investment decision.
Our REIT scores high on all these parameters and by subscribing to our REIT investors can look forward to a professionally managed portfolio of quality assets that are capable of generating sustainable income over the medium to long-term investment horizon.
Q: What are your future plans regarding asset acquisition, geographical distribution of acquired assets, and sector concentrations?
A: Our core philosophy has always been to create a well-balanced diversified portfolio of income generating assets that will generate investors a steady income over the medium to long term investment horizon, while also providing potential for capital appreciation by active management of our portfolio. We will continue to explore opportunities for similar quality assets in various sectors such as education, healthcare, logistics, food and beverage etc. Our focus will remain on asset quality while ensuring creditworthy tenants to generate a regular income stream for our investors. We are very selective in our approach and acquisitions will happen only if risk-reward is favorable and is in line with our proven investment philosophy.
Q: Any plans to pursue growth opportunities in Mecca and Medina realty markets?
A: Al Rajhi REIT will have a mixed investor profile as it is open for both Saudi and non-Saudi investors. Given the ownership restrictions, this REIT will tap into growth opportunities in the rest of the Kingdom except Mecca and Medina. We have a goal of launching a dedicated REIT with assets in Mecca and Medina, however the timing and launch will depend on finding the right assets meeting our investment criteria.
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