With the recent activity in the UAE capital markets such as the ENBD REIT and a number of others in the pipeline such as the Etihad REIT, in this article, I share my views on why Middle East groups must consider the REIT a credible option as an ongoing part of their capital strategy.

What is a REIT?

Whilst rules and regulations vary from country to country, a REIT (Real Estate Investment Trust) is generally a special purpose company (SPV) set up to acquire, manage and administer yielding commercial, retail and industrial real estate assets on behalf of a wide base of investors. A REIT manages the real estate aspects of the asset, leases them out for rental income to long term occupants or commercial operators.

Why invest in a REIT?

A REIT typically benefits from tax exemptions (in taxable jurisdictions), strong governance and regulations, and is required to pay the vast majority (80-90%) of its annual earnings in the form of dividends back to investors.

From the investors perspective, they benefit from a regular yield income and exposure to real estate assets without the capital and administrative requirements of acquiring, maintaining, leasing and managing real estate assets.

Why issue a REIT?

Well that’s all great for the REIT and its investors but what are the benefits for a group that owns commercial buildings, retail malls and logistics assets already? Why would they transfer or sell these to a REIT?

The answer is IT DEPENDS.  Some of the main reasons groups should consider “REITing” their real estate holdings include:

A – Value Creation

In our last post How to Release Value in Family Conglomerates, we touched on divesting non-core assets as a way of releasing value.

Shareholders typically value a group with reference to the return on capital of each division, for which typically, in a growing and profitable business, with a capital constrained environment, real estate holdings would be a key area where return on capital may fall short. So, “REITing” this division in return for cash to invest in the higher yielding core business would create overall value for the company.

B- Access to Buyers

Particularly in emerging markets like the UAE, there are a very limited pool of buyers who have the financial and management capability to acquire large real estate assets such as commercial buildings, retail malls, schools and hospitals.  So, creating your own “buyer” in the form of a REIT and placing equity with a wide variety of institutions and retail investors is an efficient way of ‘creating’ your own market. 

This also finds a market level pricing for the assets driven by market and investor preferences, whilst the group can retain long term occupancy of the asset at the same time. In some cases, the seller may also choose to retain say 20-30% of the asset themselves depending upon the amount of control and visibility they may require for key assets.

C- Access to long term funding

In some situations, companies may find the lending environment tight, inefficient or bank covenants imposed on the borrowing to be too restrictive to achieve the growth objectives of the company. In these cases, many companies consider a “sale and leaseback” structure to a REIT.  In short, it borrows (upfront cash from sale), and repays via installments (lease payments) over a course of a number of years. It is important to realize that this is isn’t always as simple as it seems, given the increasing accounting and legal tests for a “true sale” so any such structure must be thoroughly examined before implementation.


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About the Author:

George Traub

Managing Partner | Lumina Advisers

With 25 years of global advisory and asset management experience, in this article George shares his experience of structuring, managing and placing a number of REITs in the Asian capital markets.

George is a senior banker, finance professional and entrepreneur who has enjoyed a global career as a Managing Director, a CEO and a Partner at multinational investment banks, global advisory firms and regional financial institutions.

Having spent a substantial part of his career and personal life living and working in diverse geographies, he has a proven ability to lead culturally and geographically diverse teams across borders, markets and products to deliver exceptional performance. His professional career spans 10 years in London, 5 years in South Korea and 8 years in the Middle East.

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