Real estate investment trusts hold promise for future bourse trading in Bahrain

Real estate investment trusts (REITs) are popular investment instruments in developed markets, but a relatively new phenomenon in GCC exchanges. Nasdaq Dubai became the first exchange in the region to list a REIT in 2014, and in January 2016 Saudi Arabia’s market regulator approved the listing rules that will govern the instruments in the kingdom. Bahrain, however, has moved more quickly than its giant neighbour to introduce REITs to the Bahrain Bourse (BHB). The topic of REITs has been on the agenda in Manama for some years, and is expected to be a popular option for both property developers and investors as accessible instruments which trade on the exchange like ordinary stock and provide investors with access to ownership in large real estate projects at low ticket sizes.

The BHB’s board of directors approved the listing guidelines for REITs in April 2015, and two months later gave its sanction to the trading guidelines of the new instrument. REIT structures are regulated by the Central Bank of Bahrain (CBB), which has regulated that the dividend payout ratio must be at least 90% of its net realised income, which is the requirement imposed on REITs in the UK. All REITs listed on the BHB must be approved by the CBB, and thereafter are subject to the relevant legislation in the CBB Rulebook as well as the REIT listing rules issued by the BHB.

This regulatory framework allows listed REITs to be based on property investment in Bahrain or overseas, but places a number of prudential conditions them. For example, at least 80% of a REIT’s net asset value (NAV) must be derived from a property rental business consisting of at least two properties (with separate title deeds) with a minimum valuation of $20m. Also, development property must not exceed 20% of the REIT’s NAV. The maximum leverage ratio, meanwhile, is restricted to 60% of the REIT’s NAV.

FIRST PRODUCT: In October 2016 Bahrain’s Eskan Bank announced that it had received authorisation from the CBB to establish and register the kingdom’s first REIT, which opened the way for an initial public offering for the instrument, arranged by the Manama-based Securities & Investment Company (SICO), and a listing on the BHB. Eskan’s REIT is a sharia-compliant product based on two income-generating and unleveraged properties: the commercial components of Danaat Al Madinea, a mixed-used property development in Isa Town; and Segaya Plaza, a mixed retail and residential property located in Segaya.

As Bahrain’s first REIT, considerable effort has been made to ensure it is a success. Eskan Bank, wholly owned by the government of Bahrain, is an institution mandated to provide mortgages for citizens of the kingdom on low-to-medium incomes, and also to engage in community- related property development activities. In structuring the REIT with SICO, it has embedded a number of protections, such as long-term capital expenditure reserves and unit-trading liquidity through a dedicated market maker.

ATTRACTIVE RATE: The new REIT has a minimum participation requirement of BD500 ($1330), a figure low enough to chime with the bank’s social mandate and give a broad range of Bahraini and GCC nationals and institutions access to Eskan Bank’s property development activities. The targeted yield for the REIT is 6.5%, an attractive rate at a time when the main indexes of regional bourses are tracking sideways. It also compares favourably with REITs in other markets: the FTSE NAREIT all REITs index, which tracks REITs listed on the New York Stock Exchange, the American Stock Exchange and the NASDAQ National Market List, gave a yield of 4.05% in 2015. In addition, the arrival of the kingdom’s first REIT at the BHB in January 2017 also offers benefits to the wider economy. “The introduction of this new alternative investment asset class will add greater depth to the kingdom’s real estate sector, while helping to improve liquidity on the BHB,” Najla M Al Shirawi, CEO of SICO, said in a press release to announce the instrument’s approval.