By Declan King, Managing Director and Group Head of Real Estate at ValuStrat

Bio: King is a managing director and group head of real estate at ValuStrat – the Middle East’s leading consulting group providing advisory, valuations, research, due diligence, and industrial consulting services for the last four decades. It serves a wide variety of sectors, namely real estate, hospitality, education, healthcare, and retail

Real estate funds help create growth in the property market by driving the “institutional” type of activity on the buy-side, in addition to offering fund investors the opportunity to diversify their project portfolio and enter the commercial/retail market at a fraction of the whole asset ticket prices. This is essentially vital in the MENA region’s relatively new real estate markets, where the international activity is more recent and institutional presence is much less than in other mature zones.

Traditionally, property funds look for high-quality single-ownership buildings, with attractive occupational lease agreements already in place, on top of strong covenant tenants. This demand prompts the supply of such assets by developers, which helps raise the bar in providing sound long-term growth of the real estate market. Regionally speaking, we have seen the evolution of significant home-grown developers in both the private and public sectors in this space.

Therefore, as the availability of quality assets improves, so too do the expectations of sophisticated property owners and tenants about the broader real estate ecosystem, within which they are expected to participate. Invariably, matters concerning title ownership, planning, real estate finance, property management, legal recourse, landlords and tenants, transaction data, valuation, market transparency, as well as, the ability to liquidate assets and move funds out all need to be brought up to internationally accepted standards.

In general, such advances provide investors with comfort and help encourage their activity. Some examples of this in the MENA region are the introduction of freehold laws for non-nationals, the availability of property finance and well-organized government land departments, in addition to the provision of trustworthy titles and frameworks around strata ownership, as well as, the fine-tuned management of multi-occupied buildings.

There are different types of property funds in today’s dynamic market. Local funds and real estate investment trusts (REITs) initially started with quite broad multi-asset and geographical themes. However, these types of funds are now becoming more specialized and segmented in their focus by being solely allocated to finance individual asset classes such as the industrial, healthcare, educational, and hospitality sectors.

Simply put, investors in individual asset-specific REITs will surely secure the best upsideopportunity and downside protection. Conversely, some may feel that a broader multi-asset REIT affords better cross-market protection in a challenging environment. But, its success is predicated on buying assets at the right time in the property cycle, with uplifts in both capital value and rental income, with strong occupancy levels foreseen for the subject assets post-acquisition. Besides, an appetite from both institutional and retail customers for the shares traded on the stock market will need to be envisaged. In fact, investors will want to see gains on both fronts: The dividends received from REITs and their share price performance.

At the end of the day, successful REITs depend on the winning combination of boosting capital values and rental incomes from their component assets to bolster overall performance. Historically, the very first REITs in a country are generally broad and multi-asset in nature. As more entrants arrive, and the field becomes more crowded, a move to specialization with single-asset strategies is normally seen, yet still subject to the availability of suitable assets for the acquisition.

In this context, what is the difference between REITs and other real estate funds? Briefly, REITs are generally more liquid, with shares being traded on local exchanges, whilst entry or exit is possible at any time. Besides, REITs are normally open-ended in the timelines.

One anomaly of REITs can be the share price performance; even trusts with solidly performing assets under their umbrella can witness price declines when shares are traded on the stock market. On a positive note, some retail customers find the ability to buy small amounts of REIT shares an attractive route to investment diversification, allowing them to enter the commercial market at a small percentage of the total asset prices, while building or reducing their exposure instantly.

On the contrary, real estate funds may have set time parameters for investors to allocate or leave, and are often close-ended, with an exit date for the fund to wrap up clearly set out. Payment of dividends, fund management costs, and tax efficiencies (in various jurisdictions) are other possible differences between the two structures.

Generally speaking, almost all real estate sectors find such frameworks (i.e. the availability and governance of different real estate funds) beneficial to its internal market activity, especially if the local property market is in a maturing or recovery phase. In this case, the institutional activity and broader stimulus are to be encouraged. However, it is noteworthy to highlight that building a basket of appropriate properties may be a challenge in some geographies.


Venture into the real estate funds world and read Invest-Gate’s in-depth feature – REITs: Real Wealth Machine – Part I

When in Egypt, know all about REITs in the North African country by going over the second part – REITs: Real Wealth Machine – Part II