The Abu Dhabi Securities Exchange’s (ADX) plan to launch real estate investment trusts (REITs) by the end of the year at first appears to be ill-timed.
Abu Dhabi’s property market is down by 30 per cent, while the bursting of Dubai’s real estate bubble has wiped 50 per cent off real estate valuations. Economists predict property prices will fall even further by the end of 2010, maybe as much as 20 per cent.
But it is exactly because of the current low valuation of UAE real estate assets, especially in Dubai, that it is an opportune time to pool funds under a REIT vehicle.
REITs are publicly traded real estate funds that own, manage and sometimes finance real estate and can be traded like stocks. In this way, they offer several key advantages in the current climate.
Unlike other forms of real estate investment, REITs are highly liquid because they are traded on stock exchanges like equities. They also offer transparent pricing and are considered more secure because they provide investors with diversity in a portfolio which helps to spread risk.
They are also well-suited to Islamic finance where there is a strong driver for investing in real estate. For example, sukuk (Islamic bonds) require an underlying asset as collateral, which typically involves the acquisition of a property asset.
The launch of these REITs would provide a much-needed source of new liquidity for the flagging ADX, which has declined by 5.1 per cent to date this year. It should also help boost foreign participation on the exchange in proving attractive to international investors, who look to diversify by investing in varied real estate and funds.
In many of the world’s major capital markets, REITs have become a favoured method for attracting public ownership in property investments. Indeed, these funds are not a new phenomenon – more than 20 markets worldwide now have REIT regulations, with the global market valued at more than $700bn.
The Dubai Financial Services Authority (DFSA) became the first regulatory body in the Mena region to introduce internationally benchmarked REITs in August 2006. Until now, no one else in the region has followed suit. But in addition to Abu Dhabi, Saudi Arabia is also now looking to list these funds later this year.
This would help position the region as a fertile ground for REITs trading where the scope remains huge. CBRE Financial Services Middle East estimates the potential value of the market stands at about $403bn.
With negative sentiment continuing to blight the region’s real estate market, REITs should help to reinvigorate the sector through opening it up as an avenue for investment, without the investor having to take specific property risk.