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Real Estate Investment Trusts in Saudi Arabia

Wednesday, December 18, 2019/ Editor -  

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An insight on Saudi Arabia’s REIT market based on Q4 2019 data from Knight Frank Middle East
 
 
Dubai, UAE – October 18, 2019:   The number of REITs listed on the stock exchange reach 17, with a total market capitalisation of USD 3.7 billion as at early November 2019. 
 
This is a substantial increase compared to Q1 2018, where according to Knight Frank’s last REIT update, the market consisted of 12 REITs with a USD 2.3 billion market capitalisation. 
 
However, as expected we are seeing a slowdown in listings, with the vast majority of activity taking place in 2018 and not 2019. In 2018, nine new REITs were listed compared to just one listing to date in 2019. 
 
Stefan Burch, General Manager and Partner at Knight Frank Middle East in Saudi Arabia, said, “The growing depth of the market is offering a more favourable platform for investors willing to adopt a long-term investment approach while taking advantage of the portfolio diversification benefits offered by REITs. Moreover, the increased level of competition in the market is considered to be a trigger for the adoption of best-in-class practices by REIT management teams.”
Earlier this year, the inclusion of selected Saudi-based REITs in the FTSE EPRA Nareit Emerging Index was announced. The FTSE EPRA Nareit Global Real Estate Index Series is specialised in REITs and real estate companies and is designed as a performance-tracking tool for both developed and emerging markets. 
 
We expect the inclusion of Saudi REITs in this global real estate benchmark to have a favourable impact on the market by further aligning the regulatory guidelines governing their listing and operations with international best practices. 
 
Furthermore, the inclusion is seen as an important step towards increasing transparency, improving corporate governance and incentivising accessibility of foreign investors to Saudi capital markets while broadening the investor base. 
 
Generally, this falls in line with the recent inclusion of the Tadawul All Share Index in global benchmark indices including the MSCI Emerging Markets Index and the FTSE Russell Emerging Markets Index.
 
Valuation
 
From a valuation perspective, Saudi-based REITs have seen their price to net asset value (NAV) narrow over the past two years with REITs currently trading at an average of 9% discount to NAV, a figure that is in line with more mature markets. 
 
On a positive note, the index tracking the performance of Saudi REITs rose by over 5% in the first ten months of 2019, following a significant drop in 2018. Indicating that the market performance of Saudi REITs is likely turning the corner following a correction phase that has offset initial buoyancy. 
 
Going forward we should expect spreads between higher and lower quality REITs to widen given the greater availability of financial information enabling investors to increase their focus on fundamentals such as the quality of the underlying portfolio and stability of the cash flows.
 
Diversification
 
Diversified REITs are consolidating their dominance on the market as opposed to thematic REITs due to a structural lack of institutional grade real estate stock. 
This trend contrasts with more mature markets where there is a greater prevalence of thematic REITs, allowing investors to gain exposure to specific asset classes in line with individual risk/return profiles.
 
Saud Sulaymani, Partner at Knight Frank Middle East in Saudi Arabia, Valuation & Advisory, said, “We have seen REITs starting to invest outside of Saudi Arabia, where Saudi REITs are able to invest up to 25% of their capital in international markets. Recent examples include Riyadh REIT’s partial acquisition of an office building in Washington D.C., USA and Bonyan and MEFIC REITs’ acquisition of residential assets in Dubai.”
 
Six key findings of from the latest Knight Frank report:
 
1. Five new REITs have been listed on the Tadawul since our Q1 2018 review, taking the total number of REITs listed on the market to 17 with a market capitalisation of USD 3.7 billion.
 
2. Diversified REITs account for around 80% of listed REITs.
 
3. Saudi-based REITs have seen their price to net asset value (NAV) narrow over the past two years with REITs currently trading at an average of 9% discount to NAV, a figure that is in line with more mature markets.
 
4. The index tracking the performance of Saudi REITs showed healthy performance in the first ten months of 2019, with the index rising by over 5% during this period.
 
5. Saudi-based REITs offer investors an average 7.3% dividend yield, representing an attractive return well above the levels displayed by some key global benchmarks.
 
6. The recent inclusion of selected Saudi-based REITs in the FTSE EPRA Nareit Index signals an important step in the development of the REIT market in Saudi Arabia.

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