REITs: Real Wealth Machine – Part I

REITs: Real Wealth Machine – Part I

Most dealers focusing their bets on real estate assets have always been craving for hassle-free exposure to the property sector. Over the years, Real Estate Investment Trusts (REITs) have evolved to be one of the fine-tuned tactics to stimulate penetration into the market without the worry of ongoing maintenance, management tasks, and ever-changing policies.

So how to effortlessly get a slice of the real estate pie and build wealth in tandem, while also leveraging not putting all your eggs in one basket? Invest-Gate reviews the most prevalent narrative threads as well as the stages of maturity of REIT regimes regionally and internationally. Besides, we flag up the elevator pitch on why everyday developers and investors should make room for this concept in their portfolios, with a special focus on the Egyptian scene.

Having the convenience associated with trading stocks, meaning that buying and selling are carried out with relative ease, REIT investors are typically hooked to formulate a closed-end firm to be in charge of asset management and operation, ergo acquiring multiple shares against their investment. Contrarily, the funds are bankrolled into different real estate products, including residential, commercial, hospitality, medical, among other types of revenue-producing equities. Shareowners duly generate income through general price appreciation or tenancies, thereby earning rents pro-rata to their shareholdings each month, sometimes quarterly.


Global Performance

Globally, REITs are gathering pace as the number of countries, which presently adopt the concept as an investment vehicle, almost doubled to 37 nations in the last decade.

This remarkably productive capacity of capital can be attributed to the impressive dividend returns. Still, this is highly dependent on the right tenant mix, asset quality, management, and financial performance, according to the US-based National Association of Real Estate Investment Trusts (Nareit), the worldwide representative voice for REITs.


“[Emirates] REITs normally give an average return of 6.6%. Though this may not seem much compared to investment in shares and mutual funds, however, since it is backed by real assets, REIT makes a good hedge against turbulent market conditions,” Youcef Betraoui, CEO of UAE-based Land Sterling Property Consultants, confirms.



Likewise, the Saudi REIT market has continued to expand and now surpasses a total market capitalization of USD 2 bn (EGP 32.25 bn), UK-based property consultancy firm Knight Frank highlighted in its research, headlined “REIT Insights on Saudi Arabia Q1 2018.”

Halfway across the world, EY’s 2017 “Global REIT Market” study, indicated, “In local currency terms, Spain, Singapore, and Hong Kong have led the way, with the most significant growth through 2017 to date.” On the other end of the spectrum, the report revealed, “The US REIT market continued to dwarf all other global markets and is roughly twice the size of all others combined.”



What Makes REITs Do Well?

There are specific battle maneuvers that need to be stationed to create a righteously striving model:

“The universal real estate market definitely sees an implied benefit [from REITs] as the pool of investable capital gains not only adds possible competition for good assets propelling capital growth, but also stimulates market sentiment. However, regardless of whether you are a developer, fund sponsor, or investor, the key factor for the underlying real estate to be secured for the funds is the cash flow or cash-flow potential,” Simon Townsend, head of strategic advisory at CBRE MENAT, notes. 

“Securing long-term income, along with the optimum tenant strength and institutional lease terms, provides a platform for stable investments. In some instances, depending on the structure of the REIT asset, selection may be more toward value-add, wherein the ability to acquire it at a competitive price is a given. But, the key will be the potential to raise the capital value, whether through repositioning, tenant adjustment, more leases, or asset management activities,” he elaborates. 

On another note, like any other financial product, REITs are also subject to risks and tough market conditions:

“With an added emphasis on interest rate risk, an imbalance in the market’s supply/demand scenario can also affect the REIT’s business model positively or negatively,” Betraoui highlights. 

Meanwhile, CBRE’s professional argues that the statutes guiding the overall system also count as a crucial factor. He enunciates, “The jurisdiction the fund is governed by could potentially change the dynamics of how capital can be repaid and how the regulations are perceived.”

“Whilst there is no doubt that investment returns and sustainability of such returns are one of the tempting points to invest, coupled with the efficiency of the taxation structure, but underpinning the investment decisions of institutional investors, in particular, is the effectiveness of the legislation,” Townsend argues.  

As for the ideal structure of REITs, Nareit identifies the typical organizational form:

Want to know where does Egypt stands on the battlefield? Dig deeper into the REITs world by reading pages 28-31 at Invest-Gate’s November issue.


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