22 Apr 2022
A real estate investment trusts (REIT) can be defined as a corporate entity that finances, operatesor possesses real estate properties that generate income across a range of sectors. A REIT allows any institutional investor to invest in an exhaustive liquid property portfolio that is professionally managed. In order to qualify as an REIT, these companies must meet certain requirements. Most REITs trade on major stock exchanges, and investors reap a number of benefits from them by diversifying their stock portfolio and receive dividend based passive income. The UAE is renowned for having an outstanding and a vibrant property sector in the GCC, and investors are able to benefit from the real estate industry that continues to expand and grow, and provide the advantage of having to obtain income from properties without having to purchase the property itself. Nasdaq Dubai is considered to be one of the first exchanges that was established in the UAE and GCC to contain REIT listings. These REIT listings are Emirates REIT and ENBD REIT located in the UAE. Investors are able to buy and sell shares in an REIT just like shares in any other company.
Key characteristics of REITs
In order for the REIT to be closed in the DIFC, it must come with a set of certain requirements: 1. It has to be a public fund that is listed and traded on a recognized exchange.
2. There has to be no more than 30% of total assets in property under development
3. It has to distribute at least 80% of annual net income
4. Borrowing must not exceed 70% of the net asset value of the fund.
Benefits of REITs –
Why invest in a REIT instead of a direct investment?
In regard with companies:
- Allows for companies to be able to raise capital without selling a stake in the company
- Initiating an REIT will allow companies to raise more capital for property expansion
- Allows the company to retain up to 75% of equity so raising capital can be done without selling the whole property.
- Companies are able to leverage their real estate assets with REITs by raising the capital through the partial sale of the REIT.
In regard with Investors:
- Long-term rates of return and income that are competitive and complements other stocks and bonds.
- Gives investors the chance to diversify their investments as real estate is considered a low-risk investment compared to other assets.
- The booming real estate industry has led to favorable market conditions with high dividend yields compared to other equities.
- Shares of REITs that are publicly traded are easily converted to cash in case of liquidity, due to them being traded on major stock exchanges.
- Due to inflation hedge, the rise of prices in real estate rents which provides a reliable stream of income during periods of inflation.
A Sharia'a compliant
An REIT that is Sharia’a compliant is required to adhere to the Sharia’a regulations which in effect, can limit the nature of investments such as companies linked to tobacco, alcoholic beverages, pork, some hotels, and non-Shariah compliant financial institutions. Sharia’a law limits the procedure in which an REIT can conduct business, as well as the financing arrangement to which it can enter. Funding the developments, contracts and principles used, utilization of the real estate, investment of cash, and the insurance schemes for the protection of real estate should all comply with Sharia’a law. Furthermore, a Sharia’a compliant REIT is required to appoint a Sharia’a supervisory board to ensure continuous compliance and supervision of the guidelines set therefore by Sharia’a law.
Nasdaq Dubai
Nasdaq Dubai is the largest exchange in the GCC, and the only exchange in the UAE that contains REIT listings. It has listed the first public REIT in the region in 2010 which is Emirates REIT, as well as connected investors in over 100 countries. It has a comprehensive regulatory framework that was set in place in 2006, and it houses the largest publicly listed Sharia’a compliant REIT in the world by total asset and by market capitalization.
REIT listing criteria
For an REIT to be eligible to be listed on Nasdaq Dubai, regardless of whether it is a domestic or foreign fund, it must comply with the DFSA’s rules and regulations. Domestic Fund Foreign Fund A Fund that is established in DIFC. Domestic Funds are required to comply with the DFSA’s collective Investment Rules, as well as market rules which govern listings. A fund that is established outside of DIFC Foreign Funds is required to be based on a recognized jurisdiction. If the jurisdiction does not appear on the list of recognized jurisdictions, a demonstration from the DFSA representative is required to prove that it is an acceptable jurisdiction and contains regulatory standards.
Conclusion
REITs in the UAE are currently limited as it is a fairly new approach to investment funds, however as the real estate market in UAE continues to thrive and mature, so will the popularity with REITs. The rules and regulations that govern REITs will continue to grow and develop as the UAE continues to strive to become the leading jurisdiction in the GCC to incorporate REITs.