REITs To Give Investors Easy Access to Local Real State

by shariff mohammed | Mar 02, 2017


Although REITs have only recently been introduced to the region, a large number of countries have permitted REITs for some time, especially so in emerging markets. As such, a vast amount of empirical data exists across different financial markets showing the positive contribution of REITs to the development of capital markets. Aside from widening the investment offering, recently observed empirical evidence shows that REITs also offer a different risk-return profile to conventional investment products such as stocks. Also, due to the nature of the real estate sector, with frequent rent reviews and asset appreciation, REITs can be an effective hedge against inflation. In the case of Saudi Arabia, returns are likely to be even more attractive due to the special tax conditions vis-à-vis other investment products in the Kingdom. Besides their impact on capital markets, REITs can also help realize the broader goals of the National Transformation Program (NTP) and Saudi Vision 2030. Specifically, the NTP lists several initiatives which aim to increase the real estate sector’s contribution to overall GDP.In the case of Saudi Arabia, REITs can facilitate the participation of the private sector in developing vacant land plots and raising the supply of real estate by bringing forward alternative sources of finance for the private sector.

Besides diversifying the investment offering available within the Kingdom, REITs will also give investors much easier access to local real estate. This should bring about increased participation from the private sector which, in turn, will help stimulate the development of vacant land and raise the real estate sector’s contribution in overall GDP, a key target of the NTP. Overall, we believe the introduction of REITs in the Kingdom will not only help confer benefits to capital markets, but also to the wider economy as well.

How can REITs benefit Saudi capital markets?

Although REITs have only recently been introduced to the region, UAE was the first to have listed REITs in the GCC back in 2014, a large number of countries have permitted REITs for some time, especially so in emerging markets. As such, a vast amount of empirical data exists showing their positive contribution to the development of capital markets. Aside from widening the investment offering, recently observed empirical evidence shows that REITs also offer a different risk-return profile to conventional investment products such as stocks. Furthermore, due to the nature of the real estate sector, with frequent rent reviews and asset appreciation, REITs can be an effective hedge against inflation. In the case of Saudi Arabia, returns are likely to be even more attractive due to the special tax conditions vis-à-vis other investment products. Below we outline some of the expected benefits of REITs for Saudi capital markets and investors alike.

Diversification:

REITs offer financial investors diversification benefits on three different levels. Firstly, due to the absence of an established bond market, the prevailing asset class in the Kingdom has been equities. Since real estate is driven by relatively distinct economic conditions compared to equities, it offers a potentially less correlated alternative to stocks (Figure 1). Secondly, diversification benefits can also be achieved through investing in different real estate sectors. As mentioned above, REITs in Saudi Arabia can invest in residential, commercial, industrial and agricultural properties. All of these sectors have distinct market dynamics which differentiate them from each other. For example, hotels are viewed as cyclical real estate since they are more prone to seasonal demand and sensitive to economic factors, such as disposable income. The healthcare sector, on the other hand, is often considered a more stable and defensive sector, due to demand being less tied to economic factors and influenced more by fundamentals such as demographics. Lastly, diversification is also possible since, according to CMA rules, 25 percent of a REITs total value can be invested outside the Kingdom. Local property market dynamics are likely to be less correlated to international property markets, therefore allowing risk to be spread across an even greater number of sectors and markets.

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