Dubai property funds becoming popular real estate investment vehicles

Direct participation in Dubai’s large and very active commercial real estate market has long been a challenge for international investors operating in the emirate. Non-UAE nationals are allowed to own or hold property only within the confines of one of a growing number of free zones in the emirate, and then primarily only residential real estate. However, the introduction of real estate investment trusts (REITs) to Dubai’s investment landscape in recent years has the potential to change this situation.

In the first quarter of 2017 Emirates NBD (ENBD), Dubai’s largest lender, listed its newly established ENBD REIT on the NASDAQ Dubai Exchange. This is the second such vehicle to be publicly listed for trading in the emirate, following Equitativa Real Estate’s 2014 listing of Emirates REIT, which had a portfolio valued at approximately Dh3.1bn ($846.8m) as of November 30, 2017. In late 2016 Equitativa announced that it had established a new property-linked asset called the Residential REIT, which has steadily been acquiring residential real estate in Dubai and Ras Al Khaimah, the northernmost of the UAE’s seven emirates.

The entrance of ENBD to this arena, plus the launch of Equitativa’s new trust, is widely interpreted as an indication of the high potential of real estate-linked investment vehicles not only in Dubai, but across the Gulf region. “We have recently seen several new REITs listed in Saudi Arabia, the region’s largest capital market, and our expectation is that several more will come to the market in the kingdom and the UAE in the near future,” Anthony Taylor, fund manager for real estate at ENBD Asset Management, told media in August 2017. “Our view is that the growth of the REIT landscape is more likely to accelerate in the short to medium term.”

How It Works

REITs allow an investor to buy shares in a professionally managed portfolio of properties of various types, thereby ensuring diversified exposure over time. When REITs were pioneered in the US in the early 1960s, the investment structure of property trusts were modelled in part on the structure of mortgage funds. REITs also mimic direct investment in property, in that they generate regular dividends, which many investors equate to collecting rent. In most markets, REITs are mandated by law to distribute regular dividends. In the US, for instance, the trusts must distribute 90% of their taxable income to shareholders in the form of dividends, while in Dubai the figure is 80%. Emirates REIT distributed $0.08 per share for FY 2016, which worked out to a dividend yield of 7%.

While the liquidity inherent to regular dividend payments is understood to be a major benefit of REITs, many investors also buy shares in the trusts in order to gain exposure to a well-diversified, actively managed portfolio of property that they do not have to personally acquire, manage or market to renters or buyers. Emirates REIT, like other trusts around the world, has undertaken some property development of its own in recent years in an effort to further diversify its portfolio. Given their similarity to real estate itself, REITs are generally bought and held for long periods of time by most investors. Indeed, in addition to annual dividend payments, REITs may deliver medium- and long-term capital appreciation to shareholders as well, making them ideally suited to long-term strategies.

Driving Market Growth

Dubai’s real estate market is widely considered to have reached a turnaround point in 2016-17, with prices for most segments forecast to begin to recover in the near-term future. By acquiring a portfolio of property now, when the market is down, ENBD REIT and Equitativa’s new residential REIT expect to benefit from the coming upswing. Indeed, since early 2016 Dubai has seen a considerable amount of property change hands, as investors move to buy while prices are favourable. According to data from the Dubai Land Department (DLD) published in industry media, from January 2016 through June 2017 the total value of real estate transactions carried out in the emirate topped Dh390bn ($106.2bn). Some 67,400 transactions for land, buildings and individual units accounted for Dh165.7bn ($45.1bn), and approximately 22,400 mortgages were worth Dh186bn ($50.6bn). A separate local media article highlighted the DLD’s performance in the first half of 2017 alone, when it recorded 35,571 real estate transactions worth Dh132bn ($35.9bn), which represented a rise in value of nearly 17% over the same period of the previous year, and almost 26% growth in the number of transactions.

This expansion has been driven in large part by demand for residential units in select areas, with much of the activity centred in Dubai South, which is currently in the midst of long-term development that will see the area become a new population centre for the emirate by 2020 (see overview). Given the flurry of activity since the beginning of 2016, it is widely expected that a handful of additional new REITs will launch in Dubai – and perhaps other emirates – in the near future. “There is room in the UAE for 10 or 20 REITs. This is a very significant part of the investment horizon,” ENBD Asset Management’s Taylor told local media in March 2017. “We feel comfortable, being second, that many more will follow, and it’s important to have an established market.”

Current Landscape

REITs have been allowed to operate in the Dubai International Financial Centre (DIFC) since 2006, with the proviso that any trusts set up in the DIFC – a free zone with its own set of regulations, separate from those of Dubai – are allowed to acquire property only within designated free zone areas or outside of the UAE. In 2007 Equitativa Real Estate moved from Luxembourg to the DIFC with the intention to set up a trust in the emirate. “At that time there were already plenty of great assets in the UAE,” Sylvain Vieujot, chairman of Equitativa and CEO of Emirates REIT, told local media in December 2016. “However, real estate prices were excessive for long-term investors and the yields were too low.” Unfavourable conditions, followed by the 2008 global financial crisis, caused the company to hold off on launching a new trust until 2010, at which point Equitativa established Emirates REIT on a sharia-compliant basis, and began acquiring property. After that point, and particularly since Emirates REIT listed on the Dubai Financial Market in 2014, the firm’s portfolio has grown rapidly. Most recently, in August 2017 Emirates REIT acquired the European Business Centre in Dubai Investments Park at a price of Dh130m ($35.4m). The acquisition pushed the total value of Emirates REIT’s portfolio over the Dh3bn ($816.6m) threshold, and it now comprises 10 properties across Dubai.

Key to the firm’s success has been an exception granted to it in 2010 by the government of Dubai that exempts Emirates REIT from long-standing rules restricting real estate ownership to nationals. Since then, the trust has worked to make similar deals with other emirates and other Gulf nations. In 2016 Equitativa set up an asset management branch at the Abu Dhabi Global Market, the emirate’s new financial free zone, and promptly launched four new funds: the aforementioned Residential REIT, a Hospitality Property Fund, a Logistics Fund and Sportativa, the last of which will acquire sporting property assets. Given that the Emirates REIT has focused thus far on acquiring commercial office and education assets, it will not compete with these new funds. Equitativa is also reportedly looking at establishing a new REIT in Saudi Arabia, following the kingdom’s early-2016 decision to allow property trusts for the first time.

In January 2017 ENBD floated its REIT on Nasdaq Dubai. The trust, which had been operating on a closed basis since it was initially established in Jersey of the Channel Islands in 2005, had a portfolio value of $434m as of October 5, 2017. ENBD’s portfolio consists of 10 properties, concentrated in the residential and commercial office segments. In August 2017 ENBD REIT announced that it had acquired South View School, a Dh55m ($15m) education property located in Dubai’s Remraam Community. “This is our first education asset, and an important step in the ongoing diversification of our portfolio away from purely office and residential properties,” Tim Rose, head of the real estate department at ENBD Asset Management, told local media at the time of the acquisition announcement.

Future Listings

A number of other REITs are operated in Dubai and across the UAE on a private, closed basis. In 2006, for instance, HSBC and local developer Daman launched the $200m Arabian REIT, which continues to operate today. Similarly, the four new funds recently established by Equitativa in Abu Dhabi will likely be built up to a sizeable level in the coming years.

If the market rebounds as expected over the next few years, many of these REITs could decide to list on either the Nasdaq Dubai or other exchanges throughout the Gulf. Indeed, there is room for many more REITs to be launched in the UAE, which would be a major improvement on the two that are currently publicly listed in the country – Equitativa plans to eventually list the Residential REIT on an exchange in the UAE once the fund reaches a value of Dh1bn ($272.2m).