Real estate investment trusts

The Bahrain Bourse (BHB) will soon be listing its first real estate investment trust (REIT). This will be a welcome addition for investors seeking diversification and exposure to the Bahrain real estate sector, with this segment currently limited to Seef Properties, a malls operator. A REIT is a regulated legal structure that holds income-generating real estate assets, and issues units to investors. The unit holders effectively become the beneficial owners of the real estate assets in proportion to their unit holding. Income for a REIT comprises rental payments from the properties net of the associated expenses. REITs are a unique investment class offering multiple advantages including:

• Regular dividends: having a steady form of income (property rentals) REITs pay regular dividends, and are ideal for investors with a requirement of a recurring income stream;
• Diversification: the underlying properties are generally not correlated with equity markets;
• Liquidity: REITs are liquid instruments traded on exchanges unlike the underlying properties; and
• Divisibility: low-cost exposure to real estate assets such as REITs divides properties into smaller units, which otherwise would be less affordable.

Track Record

Listed REITs have an excellent track record as far as returns are concerned. In this regard, the returns of US-listed REITs as measured by the Dow Jones Equity All REIT Total Return Index have far outstripped returns of other listed asset classes over a 10-year period (FY05-FY14). REITs have returned an average of 8% per annum, which is higher than other popular asset classes such as corporate bonds (6%), equities (S&P 500 index at 6%), hedge funds (just 2%), and commodities (negative 4%), as measured by the Thomson Reuters/CoreCommodity CRB Index.

REIT Issuances Expected To Pick Up

The GCC has a paucity of publicly-traded REITs. There is only one REIT (Emirates REIT, Dubai-based) in the listed space across the region, which was listed in April 2014. However, other countries are also gearing up to launch REITs. Bahrain is expected to list its first REIT soon, following the issue of REIT listing regulations by the BHB in May 2015. The Capital Market Authority of Saudi Arabia is undergoing studies to introduce REITs, while the Qatar Exchange is also reportedly in a process of launching a REIT.

According to the Central Bank of Bahrain (CBB), Eskan Bank is in the process of launching Bahrain’s first REIT, which will be listed at the BHB. The REIT will consist of two income-generating and unleveraged properties currently owned by Bahrain Property Musharaka Trust, which was formed in May 2011 in collaboration with reputable institutional investors and high-net-worth individuals. The properties are Segaya Plaza and Danat Al Madina. Segaya is a mixed retail and residential property located in Segaya and is 100% occupied. Danat Al Madina, located in Isa Town, is also a mixed-use development inclusive of residential, retail and commercial office elements. The investment will be sharia-compliant, and is expected to have a total value of BD20m ($52.7m).

Key Regulations

REITs in Bahrain will operate under the Financial Trusts Law No. 23 of the year 2006 and be authorised or registered with the CBB.

Some of the more important listing requirements include: the REIT should hold a minimum of two real estate properties comprising at least 80% of the net asset value (NAV); up to 20% of the REIT’s NAV can be invested in the development of existing properties, meaning that properties under development cannot exceed 20% of the fund’s value; REITs are not allowed to invest in undeveloped land or mortgages; the minimum value of the REIT must be $20m; the REIT can leverage to a maximum of 60% of its NAV; and the REIT must distribute a minimum of 90% of its audited net realised income, which is higher than Dubai-based REITs (minimum of 80% of net income).