A Real Estate Investment Trust (REIT) is a trust that accumulates money from investors and purchases, develops or manages real estate properties. The income generated by the trust through these activities is then distributed to the REIT holders. The first REIT was launched in the US way back in the 1960s. Since then, they have evolved slowly but steadily spread across most countries today. REITs in UAE are still developing and form a much smaller market as compared to the REIT market in the US or Europe.
Let’s look at the types of Real Estate Investment Trusts available in Dubai:
Broadly, REITs can be classified into three types:
- Equity REITs
- Mortgage REITs
- Hybrid REITs
Let’s look at each of them separately.
Most REITs operate as Equity REITs. A Real Estate company that owns or manages income-generating properties like offices, apartments, shopping centers etc. and lease them to tenants is an Equity REIT.
Annually, these companies calculate their income by deducting all expenses associated with operating the properties and pay a major part of their income to shareholders as dividends. From time to time, these companies also generate revenues by selling properties.
Buying a share of an equity REIT is similar to buying stock of a company. The REIT acquires properties, commercial and/or residential and leases them to generate income. Some equity REITs focus on a particular segment like hotels or hospital buildings only, while others can be diversified. Before buying an Equity REIT it is important that you understand the specialization of the REIT. Here are some common types of Equity REITs available today:
- Residential – which acquires residential properties like apartment buildings, houses, etc.
- Retail – which acquires retail properties like shops, malls, etc. The tenants associated with such properties are usually long-term and these REITs are believed to generate steady returns.
- Office – which acquires office building, commercial centers, etc.
- Industrial – which acquires industrial premises, factories, etc.
- Healthcare – which invests in hospital, clinics, path labs, etc.
Mortgage REITs are fewer in number as compared to Equity REITs. Mortgage REITs invest in property mortgages. These REITs either lend funds to property owners or buy existing mortgages or mortgage-backed securities (MBS). Such REITs earn income from the interest on mortgage investments.
Like Equity REITs, Mortgage REITs can also invest in Commercial or Residential mortgage markets as a specialized focus. You can also have trusts focusing on both these segments in a pre-specified balance. The process of buying a Mortgage REIT is similar to purchasing a share.
As the name suggests, it is a mix of Equity and Mortgage REITs. It offers investors stability of owning property and the income potential of a mortgage loan interest.
Tradability of REITs
REITs are also classified based on their tradability as:
- Publicly traded REITs – are REITs listed on the stock exchange. You can invest in publicly traded REITs with a minimum investment of one share.
- Public Non-Listed REITs – are REITs which can be bought by you but are not listed on the stock exchange. Since these REITs are not traded on the exchange, redemption programs are often limited and can vary by company.
- Private REITs – are REITs which can be bought only by specific investors who fulfill the eligibility criteria set by the trust. Usually, the minimum amount of investment in a Private REIT is very high.
REITs in UAE
Currently, in Dubai there are two main REITs:
- Emirates REIT – This is the largest Shari’a Compliant REIT in the World. It was launched in 2010 and is managed by Equitativa. It is publicly traded on NASDAQ-Dubai. As of January 2018, their portfolio consists of:
- Trident Grand (Retail)
- Building 24 (Commercial)
- The Loft Offices (Commercial)
- Office Park (Commercial)
- Indigo 7 (Commercial)
- Index Tower (Commercial)
- European Business Center (Commercial)
- GWAD (Education)
- Jebel Ali School (Education)
- British Columbia Canadian School (Educational)
Further, as of March 31, 2018, the Net Asset Value per share was $1.73 and their portfolio size was AED 3,194,379,751.
- ENBD REIT – This was launched in March 2017 by Emirates NBD Asset Management. It is also a Shari’a compliant REIT publicly traded on NASDAQ-Dubai. As of March 2018, their portfolio consists of:
- Souq Extra Retail Center
- The Edge
- South View School
- Al Thuraya Tower
- Burj Daman
- Arabian Oryx House
- Binghatti Terraces
- DHCC 49
- DHCC 25
- Remraam Residential
Also, as of March 31, 2018, the net asset value per share was $1.18 and the property portfolio value was AED 463 million.
Benefits of REIT’s
- Higher Dividend – since most REITs pay a major portion of their income as dividends
- Diversification of Portfolio – you can add real estate to the list of assets in your portfolio without spending a huge amount
- Long-lease-secured income – many REITs secure long-term lease contracts thereby securing the income over a long period of time.
- Liquidity despite investing the real estate market – publicly traded REITs can be traded on the stock exchange
- Professional Management of the property – while an average investor might not have the required skills to manage a real estate property, REITs employ professionals to do the job.
The REIT market in Dubai is still in its nascent stages. The widespread property market in UAE is well-placed to benefit from REITs. It is only a matter of time before we see this market flourish in UAE.