REITs: Real Wealth Machine – Part II

REITs: Real Wealth Machine – Part II

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. After the noble calibers excelling in show rings across the globe were earlier exhibited, one might ask where does Egypt stand on the battlefield? Invest-Gate flags 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.

Egypt: Slightly Out of Service

For starters, the country had just ratified amendments to the executive regulations of the Capital Markets Law, which steers investment funds, in November 2017. Furthermore, it modified the ceiling and only permitted REITs with a capital of EGP 500 mn to invest up to 50% of funds into a single real estate project, whereas those below are bound to a more diverse portfolio, according to the Financial Regulatory Authority’s (FRA) official website.

During the same year, Naeem Holding had received approval from the Egyptian Financial Supervisory Authority (EFSA) to establish Egypt’s first REIT, at a total of EGP 1 bn, running for three years and financing local office and retail properties. However, the fund ceased its operations following multiple interest rate hikes, the Egypt-based investment firm announced in a previous bourse filing.

Such retrogression is attributed to the series of economic downgrades and reforms post the 2011 revolution, including gradually lifting interest rates by 700 basis points to 19.25% by July 2017, in a bid to mitigate inflation risks.

Youcef Betraoui, CEO of UAE-based Land Sterling Property Consultants, affirms that several institutional investors decided to flee the country in this light, backed by enduring some bottlenecks in international money transfers.

“Back in 2015, Citi Bank sold its retail business in Egypt, this is because it had become almost impossible to move money out of the country about a year before the EGP devaluation,” Betraoui tells Invest-Gate, stressing that the volume of institutional investors extremely varies in terms of how they can repatriate their profits or yields, especially at the time of exit or when selling shares in the secondary market.

“As long as rules on repatriation of capital are not relaxed, institutional investors will be apprehensive about deploying capital,” he further states.

Other experts somehow support the latter’s perspective, as Simon Townsend, head of strategic advisory at CBRE MENAT, points out, “If we consider a REIT looking to attract foreign investment, especially that of institutions, the liquidity of the fund, alongside the financial ramifications of repatriation of investment capital and dividends, will be critical.”

For now, it is safe to say that REITs are currently underpenetrated in Egypt, with a few baby steps forward. The North African country is signing up for another shot after the FRA confirmed the subscription of a single domestic REIT in late 2018, dubbed the “Egyptians Real Estate Fund,” according to the regulatory body’s official data.

Since the Egyptian brand-new archetype is so far out of action, Betraoui believes that it is best to be carefully monitored by the FRA, falling under the same rules and regulations abided by any stock company nationwide.

Better yet, the CEO sees a bright future for the country’s REIT market, emphasizing, “REITs will allow for quicker monetization of real estate assets, especially because Cairo has many international tenants (notably belonging to the information technology sector), who take up large amounts of office and retail spaces.”

Nevertheless, in terms of structure, Betraoui justifies a key feature to delivering alpha in any marketplace, particularly Egypt’s, saying, “Look for a fund manager who has a sound understanding of asset management life cycles. The operator – or as we call it ‘counterparty risk’ – forms the foundation for the success of any REIT, more so in value creation at the time of exit.”

Crux of the Local Matter

REITs can indeed be an ideal wealth machine, yet it is one of the most sophisticated tools for this pursuit. Despite those seeking profitable long-term investment vehicles, the Egyptian government has also been pushing to attract more local and foreign investments, which calls for rectification to the current REIT regime. Should international investors find it lucrative enough, REITs can be a major source of foreign currency for the national economy.

In any case, if Egypt is keen on mastering this type of collective investment scheme, it has to widen its knowledge of the REIT concept by better understanding both market developments as well as the different financing and structuring alternatives utilized by more mature markets, in effect, offering a shortcut to a fully-functional industry. Because even if shareholders are always hungry for money-making assets, the country’s presently restricted and mediocre regulations merely touch off minor merits in this regard.

Eager 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? Dig deeper into the REITs world by reading pages 28-31 at Invest-Gate’s November issue.


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