THE REAL DEAL

REITS:
REAL WEALTH MACHINE
BY SARA MOHAMED

M ost dealers focusing their bets on real estate assets have always been craving for hassle-free exposure to the property sector. Over the years, Real
Estate Investment Trusts (REITs) have evolved to be one of the fine-tuned tactics to stimulate penetration into the market without the worry of
ongoing maintenance, management tasks, and ever-changing policies.

Having the convenience associated with trading stocks, meaning that So how to effortlessly get a slice of the real estate pie and build wealth
buying and selling are carried out with relative ease, REIT investors are in tandem, while also leveraging not putting all your eggs in one basket?
typically hooked to formulate a closed-end firm to be in charge of asset Invest-Gate reviews the most prevalent narrative threads as well as the
management and operation, ergo acquiring multiple shares against their stages of maturity of REIT regimes regionally and internationally. Besides,
investment. Contrarily, the funds are bankrolled into different real estate we flag up the elevator pitch on why everyday developers and investors
products, including residential, commercial, hospitality, medical, among should make room for REITs in their portfolios, with a special focus on
other types of revenue-producing equities. Shareowners duly generate the Egyptian scene.
income through general price appreciation or tenancies, thereby earning
rents pro rata to their shareholdings each month, sometimes quarterly.

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28 | november 2019 - issue 32

 invest-gate

GLOBAL PERFORMANCE
Globally, REITs are gathering pace as the number of countries, which pres- consultancy firm Knight Frank highlighted in its research, headlined “REIT
ently adopt the concept as an investment vehicle, almost doubled to 37 Insights on Saudi Arabia Q1 2018.” The number of listed REITs on the Saudi
nations in the last decade. With a 4% growth from H1 2016 to the first half stock exchange, Tadawul, doubled in two quarters only, bringing the total
of the subsequent year, the total market cap hit nearly USD 1.7 trn (EGP to 12 listed REITs by the end of the first quarter of 2018, the report added.
27.41 trn), London-based Ernst & Young (EY) unveiled in late August 2018.

REITs registered a total market cap of nearly REITs Global Average One-Year Dividend Yield (%)

USD 1.7 trn Germany

UAE
4.6%
5.9%
6.6%

Hong Kong
from H1 2016 to H1 2017
Malaysia 5.9%
Source: EY Singapore 5.9%
Japan 4.4%
Spain 6.1%
This remarkably productive capacity of capital can be attributed to the
impressive dividend returns. Still, this is highly dependent on the right tenant Canada 6.6%
mix, asset quality, management, and financial performance, according to South Africa 8.4%
the US-based National Association of Real Estate Investment Trusts (Nareit), 7.7%
the worldwide representative voice for REITs. France
UK 4.0%
Mexico 4.9%
Australia 6.0%
[Emirates] REITs normally give an average 4.5%
Belgium
return of 6.6%. Though this may not seem much Italy 4.2%
US 5.7%
compared to investment in shares and mutual 6.7%
Netherlands
Average dividend
funds, however, since it is backed by real assets, Ireland 4.0%
yield REITs: 5.7%
Source: PwC
REIT makes a good hedge against turbulent
market conditions,
Halfway across the world, EY’s 2017 “Global REIT Market” study, which
Youcef Betraoui takes into consideration productivity, demographic trends, and ongoing
CEO of UAE-based Land Sterling structural reforms, indicated, “In local currency terms, Spain, Singapore,
Property Consultants, confirms. and Hong Kong have led the way, with the most significant growth through
2017 to date.”

Studying mainly the business model in the Arab world, PwC, the global Speaking of Asia Pacific, “REITs have been around for longer in Singapore,
professional services firm, conforms with this positive estimate of return tending to specialize in an asset class and eventually expanding abroad so
in its “Emergence of REIT in the Middle East” report, underlining, “In early as to increase the base of high-quality assets and offer healthy returns to
2018, REITs in the UAE were offering healthy dividend yields (about 6.6%), investors,” PwC’s study uncovered.
compared to the global average of 5.7%.”
On the other end of the spectrum, EY’s report revealed, “The US REIT market
Likewise, the Saudi REIT market has continued to expand and now surpasses continued to dwarf all other global markets and is roughly twice the size
a total market capitalization of USD 2 bn (EGP 32.25 bn), UK-based property of all others combined.”

WHAT MAKES REITS DO WELL?

The multitude of successful listings and applications of REITs worldwide Simon Townsend, head of strategic advisory at CBRE MENAT, notes, “The
certainly betoken its rational track record of reliable and growing dividends, universal real estate market definitely sees an implied benefit [from REITs]
combined with long-term capital appreciation through stock price increases. as the pool of investable capital gains not only adds possible competition
Yet, there are specific battle maneuvers that need to be stationed to create for good assets propelling capital growth, but also stimulates market senti-
a righteously striving model. ment. However, regardless of whether you are a developer, fund sponsor,
or investor, the key factor for the underlying real estate to be secured for
the funds is the cash flow or cash-flow potential.”

the voice of real estate | 29

THE REAL DEAL

“Securing long-term income, along with the optimum tenant strength and Systematically, REIT is a double-edged sword; there is an array
institutional lease terms, provides a platform for stable investments. In some of other reasons to invest in this income-generating instrument,
instances, depending on the structure of the REIT asset, selection may be despite the challenges that may be in the cards. Invest-Gate
more toward value-add, wherein the ability to acquire it at a competitive abridges the virtues REITs offer to both investors and devel-
price is a given. But, the key will be the potential to raise the capital value, opers, while shedding light on some of the shortcomings that
whether through repositioning, tenant adjustment, more leases, or asset might turn up on the way.
management activities,” Townsend elaborates.

OFFERINGS
Speaking of the ideal structure, Nareit identified the typical REIT organi-
zational form:

Competitive Long-Term Performance: REITs can provide

long-term returns similar to those of other stocks.
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Substantial, Stable Dividend Yields: REITs’ dividend

yields produce a steady stream of income through various
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Liquidity: One can easily buy and sell REIT shares for being
listed on the stock exchange, and thus, effortlessly liquidated
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567896:;86"$7 +,-)./01. if need be.

Portfolio Diversification: REITs offer access to the varying

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Recession-Proof: When inflation rises, rents on apartments
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and prices of hotel rooms also increase, together with the
income obtained from your REIT, thereby offering a safe
haven for a risk-free investment.
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DRAWBACKS
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4==7 Interest Rates: The performance of REITs is inherently tied
Source: Nareit
to interest rate trends. When the latter surges, it eats into the
profit margins of the business model.

On another note, like any other financial product, REITs are also subject Taxation Looming Specter: Once distributed, investors will
to risks and tough market conditions, “with an added emphasis on inter- have to pay income tax on the annual dividend, as though
est rate risk,” Betraoui highlights, adding, “An imbalance in the market’s it is on the personal income, not the capital gain. So, those
supply/demand scenario can also affect the REIT’s business model posi- in the higher tax bracket may suffer from paying excessive
tively or negatively.” taxes.

Meanwhile, CBRE’s professional argues that although many factors influence Investment Risk: REITs are correlated with the real estate
the successfulness of REITs, the statutes guiding the overall system count market, hence factors such as property prices, interest rates,
as a crucial one. He enunciates, “The jurisdiction the fund is governed by debt, geography, and changing tax laws might influence
could potentially change the dynamics of how capital can be repaid and revenue production.
how the regulations are perceived.”
Debt Intervenes: Some REITs will incur high management
“One of the fundamental factors driving the deployment of capital into these and transaction fees, leading to lower payouts for sharehold-
vehicles is the robustness and transparency of regulations … The guide- ers.
lines around fund management, jurisdictions, as well as, investor protection
and rights are important to have been established and supported through Property Taxes: State and municipal authorities can raise
clear legislation,” Townsend argues. property taxes to boost budget revenue. Consequently, this
slashes REITs’ earnings.
“Whilst there is no doubt that investment returns and sustainability of such
returns are one of the tempting points to invest, coupled with the efficiency Slow Growth: REITs can grow at a slower pace than others if
of the taxation structure, but underpinning the investment decisions of capital funds are too low. US REITs, for instance, reinvest only
institutional investors, in particular, is the effectiveness of the legislation,” up to 10% of annual taxed profits back into the core business
he explains. lines each year, as investors get the remainder. As a result,
businesses can hang stagnant for long.

Source: Nareit and the US Securities and Exchange Commission (SEC)

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EGYPT: SLIGHTLY OUT OF SERVICE

At this juncture, especially after exhibiting the noble calibers excelling in “As long as rules on repatriation of capital are not relaxed, institutional
show rings across the globe, one might ask where does Egypt stand on investors will be apprehensive about deploying capital,” he further states.
the battlefield?
Other experts somehow support the latter’s perspective, as Townsend
For starters, the country had just ratified amendments to the executive points out, “If we consider a REIT looking to attract foreign investment,
regulations of the Capital Markets Law, which steers investment funds, in especially that of institutions, the liquidity of the fund, alongside the finan-
November 2017. Furthermore, it modified the ceiling and only permitted cial ramifications of repatriation of investment capital and dividends, will
REITs with a capital of EGP 500 mn to invest up to 50% of funds into a single be critical.”
real estate project, whereas those below are bound to a more diverse port-
folio, according to the Financial Regulatory Authority’s (FRA) official website. For now, it is safe to say that REITs are currently underpenetrated in Egypt,
with a few baby steps forward. The North African country is signing up for
During the same year, Naeem Holding had received approval from the another shot after the FRA confirmed the subscription of a single domestic
Egyptian Financial Supervisory Authority (EFSA) to establish Egypt’s first REIT in late 2018, dubbed the “Egyptians Real Estate Fund,” according to
REIT, at a total of EGP 1 bn, running for three years and financing local office the regulatory body’s official data.
and retail properties. However, the fund ceased its operations following
multiple interest rate hikes, the Egypt-based investment firm announced Since the Egyptian brand-new archetype is so far out of action, Betraoui
in a previous bourse filing. believes that it is best to be carefully monitored by the FRA, falling under
the same rules and regulations abided by any stock company nationwide.
Such retrogression is attributed to the series of economic downgrades and
reforms post the 2011 revolution, including gradually lifting interest rates by Better yet, the CEO sees a bright future for the country’s REIT market, empha-
700 basis points to 19.25% by July 2017, in a bid to mitigate inflation risks. sizing, “REITs will allow for quicker monetization of real estate assets, espe-
Land Sterling’s CEO affirms that several institutional investors decided to cially because Cairo has many international tenants (notably belonging to
flee the country in this light, backed by enduring some bottlenecks in inter- the information technology sector), who take up large amounts of office
national money transfers. and retail spaces.”

“Back in 2015, Citi Bank sold its retail business in Egypt, this is because it Nevertheless, in terms of structure, he justifies a key feature to delivering
had become almost impossible to move money out of the country about a alpha in any marketplace, particularly Egypt’s, saying, “Look for a fund
year before the EGP devaluation,” Betraoui tells Invest-Gate, stressing that manager who has a sound understanding of asset management life cycles.
the volume of institutional investors extremely varies in terms of how they The operator - or as we call it ‘counterparty risk’ - forms the foundation for
can repatriate their profits or yields, especially at the time of exit or when the success of any REIT, more so in value creation at the time of exit.”
selling shares in the secondary market.

CRUX OF THE LOCAL MATTER

REITs can indeed be an ideal wealth machine, yet it is one of the most In any case, if Egypt is keen on mastering this type of collective investment
sophisticated tools for this pursuit. Despite those seeking profitable long- scheme, it has to widen its knowledge of the REIT concept by better under-
term investment vehicles, the Egyptian government has also been pushing standing both market developments as well as the different financing and
to attract more local and foreign investments, which calls for rectification structuring alternatives utilized by more mature markets, in effect, offering
to the current REIT regime. Should international investors find it lucrative a shortcut to a fully-functional industry. Because even if shareholders are
enough, REITs can be a major source of foreign currency for the national always hungry for money-making assets, the country’s presently restricted
economy. and mediocre regulations merely touch off minor merits in this regard.

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