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Abu Dhabi, UAEMonday 18 June 2018

Reits – new investment strategies in real estate

Investors in this region, and the UAE in particular, are beginning to realise the benefits

The bell ringing of ENBD Reit’s listing on Nasdaq Dubai held at Dubai Financial Market in Dubai. Pawan Singh / The National
The bell ringing of ENBD Reit’s listing on Nasdaq Dubai held at Dubai Financial Market in Dubai. Pawan Singh / The National

As I continue to meet various stakeholders, especially regional investors, it is coming to my attention that they are increasingly seeking to better understand what to expect from Real Estate Investment Trusts (Reits).

“Will Reits continue to gain widespread acceptance in the region?”, “Will they soon be able to provide a steady income and yield higher revenue?” These are some of the questions I have recently heard and I will attempt to respond to these here based on my own views and market perception.

Undoubtedly, investors in this region, and the UAE in particular, are beginning to realise the benefits of making Reits an integral part of their portfolio. Of course, we are starting from a low base in comparison with more mature markets, but across the GCC it is clear that there is growing acceptance and understanding of Reits.

If we consider the number of publicly listed Reits currently available in the market as a barometer, we have seen strong appetite for an investment vehicle that can easily be described as a "real estate mutual fund". The growth is reflective of the broader shift in the attitudes of investors in a market that, until recently, had a limited number of structured real-estate products.

Despite being nascent, Reits’ adaptability has resulted in developing a number of genuinely impressive fund portfolios tailored specifically to the needs of local investors. This is evident in the new mix of assets that the funds have added to their portfolios.

Regional Reits, which traditionally relied heavily on office and residential projects, are now expanding to include alternative sectors, such as education and health care. Put simply, investors in the UAE and the wider region can now choose from a variety of products.

Of particular significance is the recent move by ENBD Reit to buy a new school that is currently being built in Dubai's Remraam community for Dh55 million. In a related deal, the fund has also acquired a student accommodation facility in Dubailand in May 2017 for Dh120m.

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In addition, the UAE’s first ever Reit, Emirates Reit, has also completed three school deals over the past few years. The most recent one was the sale and leaseback agreement with the British Columbia Canadian School in Dubai Investments Park.

The education sector has certainly been a source of positive news for Reits, predicated on the burgeoning demand of schools in the region. According to a recently published industry report, 1,000 new schools are expected to be built in Dubai, Abu Dhabi, Riyadh, Jeddah and Cairo in the next five years, with 350 of them expected to be supplied by the private sector.

Comparatively untapped, however, is health care, which involves high capital investments, whether it be for obtaining property to construct hospitals or procuring advanced medical equipment. With the UAE healthcare market predicted to grow by 60 per cent by 2021, and in line with the UAE Vision 2021 National Agenda to establish a world-class healthcare system, the sector is a lucrative prospect for Reits seeking high-impact returns and reliable growth.

A further catalyst for Reits expansion and diversification in alternative sectors is the fund managers’ ability to identify high-impact assets whose appeal remains unaffected by market cycles, while simultaneously allowing investors exposure without owning the underlying asset. This presents an unrivalled opportunity for funds to focus solely on alternate asset classes. A case in point is Five Holdings, which recently announced that it would launch an Dh2.1 billion hospitality-focused Reit, the first and biggest such in the region.

Looking ahead, there are some things we can now foresee with more certainty as the real estate sector in the UAE and the wider region continues to gain maturity. With Reits gaining wider acceptability and investors becoming increasingly sophisticated and seeking risk-free returns, the one thing that we can say at this stage is this: Reits in the region will continue to chart a new direction for the future, underpinned by local advantages, strategic location and upcoming events, including Dubai Expo 2020.

Sidharth Mehta is a partner and head of building construction and real estate at KPMG Lower Gulf.