Saudi Arabia’s Islamic REITs: Boom or bust?

Following initial excitement, the performance of Islamic REITs in Saudi Arabia has been rather disappointing and most are now trading below their listing price. However, MARC ROUSSOT posits that as the market gains maturity and stronger regulations are put in place, REITs are expected to rebound buoyed by Saudi Vision 2030.

Falling short of expectations
A REIT tsunami hit Saudi Arabia’s shore in 2017 following the regulator’s decision to accommodate the asset class in October 2016. But 18 months later, out of the 12 Islamic REITs listed on Tadawul, only two of them, namely AlJazira Mawten REIT Fund and Taleem REIT Fund, have seen their value per unit staying above their SAR10 (US$2.67) listing price.

Pricing began moderating in October 2017, says Raya Majdalani, a research manager at Knight Frank. “We see the counter-performance of the REITs as a normalization trend with the pricing of the REITs moving closer in line with more mature markets. However, the main headwind facing the REIT market in Saudi Arabia is the constrained pipeline of suitable assets to be placed in REITs’ structures as the Saudi Arabian real estate market is dominated by a lack of institutional grade stock,” she explains.

“There is negative sentiment among investors about REITs due to a slowdown in the economy and unfavorable dynamics for the real estate sector. Furthermore, there is a need for promoting REITs as a diversified asset class among retail investors,” adds Sultan Al Nugali, the head of asset management at Albilad Capital, which launched Albilad Fund of REITs Fund, a vehicle aiming to capitalize on the price volatility of Shariah compliant REITs.

Optimistic outlook
However, despite the preset underwhelming performance, the future of Saudi Arabia’s Islamic REITs is brighter than its subdued start thanks to the Saudi Vision 2030. Mohammed bin Salman’s agenda to open the Kingdom to the world and further develop and diversify its economy will boost the hospitality, entertainment, commercial and housing industries. For instance, a total of 84 hotels are reportedly planned to be opened in 2018 alone.

To surf Saudi Arabia’s forthcoming real estate wave, more Islamic REITs are expected to be launched and listed throughout 2018. Greater competition will translate into a greater focus on the adoption of best-in-class practices in terms of quality of the underlying portfolio, asset management and corporate governance, believes Raya.

The multiplication of Islamic REITs will also offer investors more choice, which will lead to a deeper market where pricing becomes segmented and where poorer quality REITs will trade at a discount to those that follow best-in-class practices.

“A greater choice of available REITs is likely to drive pricing toward fundamental valuations. In parallel, we see investors increasing their focus on dividend yield generation as the market gains in maturity. Given the emerging nature of the market, yield discovery will improve as more performance information becomes available,” Raya analyzes.

Regulatory boost
The continuous enhancement of regulations by the Capital Market Authority will also be crucial for the REIT asset class to grow. The regulator issued a draft amendment in February including a proposed increase in the minimum capital requirement for new funds from SAR100 million (US$26.63 million) to SAR500 million (US$133.15 million). It is a positive measure according to Raya as it will strengthen the regulatory framework and enforce barriers to entry.

“The new regulation also introduces a lock up period for major shareholders as well as other requirements,” adds Sultan who believes that such new rules will help in lowering the volatility of REITs.

Riyad Capital declined to comment while Wasatah Capital and Samba Capital did not respond to requests for comment by IFN.

This article first appeared in IFN Volume 15 Issue 17 on the 25th of April 2018


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