Saudi, UAE to lead REITs market growth in Middle East: PwC

Real Estate Investment Trusts (REITs) are currently underpenetrated in the Middle East with only a handful of REITs across the UAE and Saudi Arabia. However, they are expected to grow gradually as the real estate market in the region matures in terms of quality of assets, financing, governance and regulations, PwC said in a recent report.

The market capitalization of REITs as a percentage of listed real estate market cap is less than 3 percent in the UAE ($779 million) and around 30 percent in Saudi Arabia ($8.5 billion), whereas in more mature markets such as the UK, France and the US at least 80 percent of the listed market capitalization in real estate is attributable to REITs.

In early 2018, REITs in the UAE were offering healthy dividend yields (around 6.5 percent) compared to the global average of 5.7 percent. However, the story emerging in Saudi Arabia was a little different with REITs offering an average dividend yield of 2.7 percent, the PwC report added.

“Part of the issue in KSA was that there was a sudden rush in listings with insufficient diligence done on the quality of assets,” it noted.

PwC said early entrants to the market were able to obtain an initial premium on listing, however, the long term performance of a REIT is determined by the underlying quality of the real estate.

“Although there have been some challenges with REITs in KSA we do believe that there is a market opportunity for REITs across the Middle East,” it added.

Noting that REITs will benefit the region in terms of the transparency that they will bring to the real estate sector, PwC report noted this will be a gradual process and will require a significant investment from the REITs to incorporate best practices as they relate to their underwriting/ deal diligence, policies/ procedures, systems as well as governance structures.

One of the major drivers of REITs in the region will be large institutional investors, a majority of which are planning to increase their allocations to real estate, the report added.

REIT is a company that owns, operates or finances income-producing real estate. REITs allow anyone to invest in a portfolio of real estate assets through the purchase of company stock.