Real Estate Investment Trust (REIT)


By definition, Real Estate Investment Trust is a company investing in real estate projects. It can either be privately owned or listed publicly. Shareholders of this company receive about 90% of REIT rents in dividend form. However this is a company whose legal aspects normally vary from one country to the other. It has been launched in several countries though some have been utilizing its services fore quite a long time than the others. For example, the United States of America launched it in the 1960s with Europe s launching this securitization recently. Asian countries have not been left behind either. The Gulf Cooperation Council countries are the countries in the Arabian Peninsula with the exception of republic of Yemen. These countries include Saudi Arabia, United Arab Emirates, Oman, Kuwait, Qatar and Bahrain. Globally, it is estimated the volume of REIT is approximately $700 billion.

Lately, Middle East has experienced a boom in real estate. This is what has made REITs to attract so much attention in GCC countries. It is understood that easy adoption of REITs in GCC countries has been partly enabled by the fact that they can be structured in a way that they will be Shariah-compliant (BI-ME staff, 2009). It is because of this that they are in use in Islamic finance in the globe. In United Arab Emirates, REITs have been in use in the busy city of Dubai. The main reason why much focus has been on REITs in this country is after realizing that they serve the purpose of giving individual investors ample access in real estate investment portfolios. This is done without the need for individuals to personally own these assets. Owners of assets in UAE are able to access a more liquid and a broader investor base. Because of the challenging market climates sometimes where investors are distressed and the market is depressed, the needed liquidity in the UAE market is quickly gained by introduction of REITs. Confidence and transparency in the international market has been offered for those investors with a desire to invest in UAE property. For most of the investors, their risks and investments have been diversified. Though there are other avenues that are available in this kind of investment in UAE, public REITs in the stock market trading offer very transparent regulations. The market in Dubai has been enjoying REIT regulation since 2006. This is what has partly assisted the global growth of REIT capital totaling US$700 billion by the end of 2009.

Market analysis in UAE shows that using a transparent and an active REIT will automatically benefit the economy by providing fresh and a new source of capital and investors. It's clear that valuation of assets in real estate especially in Dubai is attractive. This makes the current time interesting in generating funds and consolidation of assets in one vehicle. Dubai International Finance Center (DIFC) allows foreign investors to enter their market through the use of DIFC- Real Estate Investment Trust. DIFC is a financial federal free zone and was established in accordance to Dubai law and UAE federal law. It is DIFC that has taken the first steps in promotion of REITs development. This was primarily done when it allowed the passing of Investment Trust Law. This was also followed by passage of Collective Investment Law No. 1 by 2006. Operation and formation of REITs in UAE are prescribed by the Dubai Financial Services Authority and DIFC. It's these same bodies that prescribe the criteria for qualification, rights, and obligations for trustees and operators of REITs. It's REITs which have made UAE public property ownership and investments to be so attractive. REITs are entities that have allowed many in UAE and foreign investors to engage in hotels, mortgage, shopping centers, and office buildings secured through real estate programs.

REITs operate, own, acquire, sell, manage and even develop all types of real estate assets. This provides the property investors with access to professionally managed portfolio in real property estate. REITs are advantageous as they allow investors to acquire interest and considerable rental income. This is because any DIFC formed REIT is expected to distribute about 80% of its income to the unit shareholders every year. For REITs, there is no stated minimum investment requirement and all investors always enjoy stable income. Unit holders have no control over the sale or purchase of property in REITs. However, any acquisition of REITs allows the investor to have a part ownership in attendant rental income and property where there are no hassles in physical management and ownership. A lot of liquidity and tradability has come in Dubai mainly because of introduction of REITs. Today, there are numerous financial institutions in UAE which have plans to operate and form one or several REITs which are to use Sharia financing principles.

In year 2006, Dubai International Financial Exchange (DIFX) listed REIT funds and a few REITs. These were introduced in order to hasten the recycling of the resources. It's because of the real estate boom in Dubai that has increased the attraction from the international, regional and local investment in the property market that has been burgeoning. One of these is Macquarie Bank Ltd, a leading security firm in Australia. In 2006, it reported that it was intending to establish a real estate investment trust in UAE worth US$2 billion (Luxuryasiahome, 2006). The main target was to acquire the assets which were by then owned by DIFC and other UAE properties. What was remarkable about the Dubai market was the rise in prices of residential property by an average of 20 percent in 2006 in comparison to the 50 percent recorded in 2005 (Sheen, 2008).

A REIT is in form of a corporate organization thus falling into two different property management structures. These are also externally and internally advised. Internally advised management structure REITs are superior to the externally advised ones as they are capable of solving emerging conflicts any time between shareholders and management (Peter & Brent, 2001). Since they are envisioned as passive investment vehicles as mutual funds, but with restrictions in trading, their structure must have 'advisors.' These advisors have the functions just like those of fund portfolio managers. They select properties and execute REIT investment strategies. However, assets in real estate programs have to be leased through an active management unlike bond and stock portfolios. Thus, in addition to 'advisors' they also have 'property managers.' These are responsible for property operation. Most of the internally advised REITs are organized as UPREITs (umbrella partnership REITs). Health care is the only exception in property sectors that is not under UPREITs. UPREITs structure dominates hotel/specialty, industrial/office and residential property sectors. The internally advised structure for REITs is advantageous and favored as it is capable of controlling administrative costs.

There is a growing tendency in Middle East in creation of REITs that are Sharia compliant. Even international investors are expected to adhere to these REIT structures as the community in UAE is purely Islamic. In the criteria for these structures, it is required that there should be total Islamicity of activities and assets. The structure of an Islamic REIT in UAE calls for classification, categorization and reconciliation of non-permissible and permissible commercial activities. Generally there is prohibition of resorts, financial services and hotels based on riba.' Conventional insurance has also been prohibited in all Sharia compliant REITs (Awan, 2008). Because of the Islamic faith, these REITs prohibit against any non-compliant stock broking and securities trading, alcohol, gaming, gambling activities, firearms and tobacco. Insuring of real estates now requires the authorities to deploy Takaful schemes.

Reports show that property boom in the GCC countries has been unprecedented in the last five years. Estimates show that construction projects already planned together with those under development are over the mark US$1 trillion. Out of this, 75% are in United Arab Emirates alone (Global Investment House �Global, 2009). Total assets invested in real estate projects in UAE have thus been growing in double digits. The double digit growth is yearly basis. This is a vital investment for UAE as it has been contributing approximately 15% to its GDP. However, after these five years of unrelenting real estate growth, global financial crisis has affected this investment. This has made the property market to perform poorly due to tightening credit. Global financial crisis has created job cuts, scaling down of projects and dramatic fall in prices. These effects have resulted in double digit growth of credit going towards the property sector in UAE. Latest figures reveal that loans in real estate mortgages for June 2008 reached AED87.5 billion. This was a growth of 49% when compared to 2007 figures that stood at AED58.8 billion. The construction sector has recorded a double digit growth in its credit. Credits in this sector have been AED31, 681(2004), AED 41,897 (2005), AED 54,344 (2006), AED 68,417 (2007) and AED 84,812 for 2008. Dubai residential segment has been attracting considerable expatriates. The last five years saw rental prices and sales grow in double digits. Despite the economic crunch in 2008, apartment prices have surged upwards by almost 6%.

It is clear that Dubai real estate investment projects have been performing so well since the introduction of REITs. Banks have come in to offer loans and attractive mortgages allowing locals and international investors to own prestigious property in this affluent market. It's notable that different nations will adopt different REIT structures to operate with. For UAE, they have gone an extra mile to introduce Sharia-compliant REITs. This prohibit against activities that deal with products that are not in accordance with Islam. The structure that is favored cuts administrative costs for REITs since they are just like corporate organizations with active management.


References

Awan, M. (2008). Structure of Sharia Compliant Islamic REITs. INCEIF

BI-ME staff. (2009). REITs can attract fresh capital to GCC. Retrieved from http://www.bi-me.com/main.php?id=40071&t=1

Global Investment House �Global." (2009). Global investment house report on UAE real estate Jan 2009. Retrieved from http://www.scribd.com/doc/11720534/global-investment-house-report-on-uae-real-estate-jan-2009

Luxuryasiahome. (2006). Macquarie Bank Plans US$2b UAE REIT. Retrieved from http://lushhomemedia.com/2006/12/20/macquarie-bank-plans-us2b-uae-reit/

Peter, L., & Brent, A. (2001). REIT organizational structure and operating characteristics. Retrieved from http://findarticles.com/p/articles/mi_qa3750/is_200105/ai_n8940689/pg_4/

Sheen, A. (2008). Overlooked way into real estate. Retrieved from http://www.globalpensions.com/global-pensions/news/1444871/overlooked-real-estate

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