Emergence of Real

Estate Investment
Trust (REIT) in the
Middle East
5th December 2018
REITs Modelled after Mutual Funds
Real Estate Investment Trust allow investors to participate in a capital intensive sector
such as real estate with limited liquidity and a clear exit path

REITs are currently underpenetrated in the Middle East, however we expect

them to grow gradually as the real estate market in the region matures in
terms of quality of assets, financing, governance and regulations.
We anticipate that there will be shift in business model with REITs in the
region shifting from being ‘generalist’ aggregators of real estate assets to
becoming a ‘specialist’ within a particular real estate asset class.
The focus should be on becoming specialists with growth
being driven by geographic expansion
organically or inorganically.

There will be a flight to quality whereby capital transitions to REITs

with strong management teams and a good track record. Key factors
that will determine the performance of a REIT are:

Acquisition price Strength of the

of assets underlying lease

Focus on
reinvestment / Quality of assets
maintenance

$
REITs will benefit the region in terms of the
transparency that they will bring to the real
estate sector. However this will be a gradual
process and will require a significant investment
from the REITs to incorporate best practices as
they relate to their underwriting/ deal diligence,
policies/ procedures, systems as well as
governance structures.

2 | PwC
 A majority of large institutional investors are
planning to increase their allocations to real estate

Sovereign Wealth Funds’ (SWF) Current and Target Allocations to Real Estate by
Proportion of Total Assets Under Management

100%
Current proportion

54%
of SWF Investors

Target proportion
of SWF Investors
80%
Proportion of SWF Investors in Real Estate

33%

33%

60%
31%

22%

40%

15%
11%

20%

<5% 5-9.9% 10-15% >15%

0%
Proportion of Assets Under Management

Attractiveness of real estate to Increasing allocations to

institutional investors real estate

• Ability to achieve steady cash flows through • SWF’s have approximately $6.6 trillion in
rental income assets under management as of 2017.
Historically only 33% of the SWF’s had
• Hedge against inflation (due to contractual an allocation of 10% or more towards real
escalations in long term contracts) estate, however that is expected to change
• Healthy yields and prospect of capital with ~70% of the SWF’s targeting a 10% or
appreciation more allocation towards real estate

Source: Preqin, PwC analysis

Note: Current proportion of allocations are as of 2017

The Emerging Middle East Real Estate Investment Landscape | 3

Historically investors from the Middle East have been
actively investing in real estate in the western markets.
However, there has been a slowdown in outbound
capital in the last couple of years.
Outbound capital by Middle East investors in real estate ($bn)

9.2 9.1 0.9

7.0

0.3
2.0 1.6 0.1
1.1

USA UK Germany

1.9 1.9

1.0

0.3 0.3
0.0

France Italy

2015 2016 2017

Potential reasons for reduced outbound capital:

• Low oil prices leading to lower budget surplus and
therefore potentially impacting allocations to SWF’s
• Potential uncertainty due to Brexit as well as timing
and quantum of interest rate movement in the US

Source: RCA

Note: Data is as of Q3 2017; Above chart includes outbound capital from UAE, Qatar, Kuwait, KSA, Oman, Lebanon & Bahrain. Outbound
capital comprises of properties/portfolios with transaction value of $2.5 Mn or greater

4 | PwC
As the real estate market in the Middle East evolves
we might see more capital being deployed locally.
There are various trends that are beginning to emerge in the real estate
investment landscape regionally:

Real Estate Investor REITs are currently underpenetrated in the Middle East
and we anticipate that number of REITs in the region
Trust (REITs) will grow

Alternate funding strategies such as “Sale &

Sale/Leasebacks Leasebacks” are expected to rise due to limited
liquidity and financing options currently in the market

Developers are increasingly building assets according

Build to Suit Products to needs of tenants who then rent or purchase the
entire building post completion

Concept that is witnessing phenomenal growth

internationally with members growing at ~2.8x Y-O-Y;
Co-working UAE is currently underpenetrated but there is
growth in this segment

The Emerging Middle East Real Estate Investment Landscape | 5

Real Estate Investment Trusts
REITs allow anyone to invest in a portfolio of real estate assets through the
purchase of company stock

So, what is a REIT?

• REIT is a company that owns, • Modeled after mutual funds, REITs historically have
operates or finances income-producing provided investors of all types regular income streams,
real estate diversification and long term capital appreciation

What is a REIT?

Key
Investors

Lenders Unit Institutional

Holders Funds

Loan/Bond Retail
Distributions Investors

Ownership
of Units

Acts on behalf Management

of unit owners Fees
REIT REIT REIT
Trustee Manager
Trustee Management
fees Services

Rental Income

Asset
Ownership

Property
Management
Services
Real
Estate Property
Assets Manager
Service
Fees
Source: NAREIT

6 | PwC
 From an investor’s perspective

Profit Leverage
Distribution Protection

Clear Exit Security of

Path Cash Flows

One of the risks with REITs are mandated Property under REITs are limited to
real estate is that it to distribute a development has to a gearing of 50% of
can at times be illiquid minimum of 80% be < 30% of NAV. Gross Asset Value
or hard to transact. of Net Income to therefore returns thereby preventing
A REIT allows investors thereby cannot be significantly excess leverage
investors to exit and assuring a constant skewed by project and forcing REIT
get their capital out dividend stream. development or managers to focus
of real estate almost by off- plan sales on the property
instantly by selling that are used by fundamentals in order
their shares in the private & public real to deliver returns
secondary market. estate companies in to investors.
the region.

Note: Above regulations are based on NASDAQ Dubai

In general REITs tend to be a safer avenue for investment as opposed to public real estate securities in the Middle East.
Although some real estate developers in the region are currently providing stable dividends, a large portion of these dividends
are actually being paid through off-plan sales as well as sale of their land bank. Off-plan sales can be quite volatile and selling
the strategic land bank can create challenges for the long-term sustainability for some of these developers. REITs on the other
hand are restricted in terms of the amount of risk they can take regarding opportunistic development and as a result tend to
have a larger focus on operating cash flows making their business model more sustainable.

The Emerging Middle East Real Estate Investment Landscape | 7

Developer Perspective
There are strong reasons for developers to potentially consider a REIT
structure as well:

1 2 3 4 5 6 7

To raise To To To acquire To attract To provide To enhance

money for deleverage increase other and retain liquidity the company’s
expansion of financing market companies high for existing reputation
operations on existing value or property performing owners/ and business
property portfolios employees shareholders/ profile in the
portfolio (stock investors market (which
options) could, for
example, assist
in completing
transactions
with tenants)

Source: PwC Analysis

Converting from a developer to a REIT is a common approach in

the more established real estate markets. Although REIT legislation
has been around in the US since the 1960’s the real impetus
for REIT conversion started in the 1990’s in the US when banks
were hesitant to lend for ground up development that was not
already pre-leased for the most part. Developers realized that they
needed better access to capital and that along with tax structuring
advantages was one of the primary drivers for developers to
convert to REITs. Most of the large REITs currently were private or
public real estate developers in the past and over a period of time
have converted to a REIT structure.
In the Middle East the trend is almost reversed wherein financial
institutions and private equity groups have launched REITs but
they have limited development or real estate asset management
experience. Considering that banks in the Middle East are
becoming cautious lending to the real estate sector, more
so in relation to off-plan sales, the need for alternate funding
mechanisms might convince some high quality developers,
with a focus on sustainable cash flows (build to lease model), to
consider a REIT structure. It should be noted though that once a
developer converts to a REIT then the amount it can develop at a
given point in time will get restricted. The focus would have to shift
towards acquisitions or in case there is a strong pool of cash flow
generating assets within the REIT then development can be done
in a more gradual way.

8 | PwC
For most markets, REITs tend to provide a healthy
dividend yield

REITs Global Average 1-Year Dividend Yield (%)1

UAE 6.6%

Germany 4.6%

Hong Kong 5.9%

Malaysia 5.9%

Singapore 5.9%

Japan 4.4%

Spain 6.1%

Canada 6.6%

South Africa 8.4%

France 7.7%

UK 4.0%

Mexico 4.9%

Australia 6.0%

Belgium 4.5%

Italy 4.2%

US 5.7%

Netherlands 6.7%

4.0% Average dividend

Ireland
yield for REITs: 5.7 %

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

In early 2018, REITs in the UAE were offering healthy dividend yields (~ 6.5%) compared to the global average of 5.7%.
However, the story emerging in KSA was a little different with REITs offering an average dividend yield of 2.7%. Part of
the issue in KSA was that there was a sudden rush in listings with insufficient diligence done on the quality of assets.
Early entrants to the market were able to obtain an initial premium on listing, however, the long term performance of a REIT
is determined by the underlying quality of the real estate. Although there have been some challenges with REITs in KSA we
do believe that there is a market opportunity for REITs across the Middle East. In our opinion, there will be a flight to quality
wherein REITs with a good asset base, strong management teams and robust governance structures will continue to grow
and attract capital whereas the non-performers will eventually be weeded out. As the REIT sector in the Middle East matures
we anticipate there will be an emphasis on sector specialisation - with REITs focusing on a specific asset class within the
real estate spectrum such as residential, retail, hospitality or office. Sector specialization allows the REITs to really
understand their customers, form lasting relationships and work with third party developers to create properties
that are in line with market demand and therefore, yield the right returns for investors.

Based on data extracted on 26th February 2018; Yield figures represent the annualized dividend
1

yield based on the market closing price as of the day.

Source: Bloomberg Finance L.P, PwC Analysis

The Emerging Middle East Real Estate Investment Landscape | 9

REITs are increasingly growing in prominence globally
Today more than 30 countries have listed REIT securities and several others are considering REIT legislation. REITs have seen
a tremendous growth over the past few years with market capitalization of REITs increasing from $389 billion in 2000 to over
$1.1 trillion in 2017 in the US alone. Emirates REIT was the first to be established in the region in 2010, however the real push for
REITs in the region has only happened over the last couple of years with their being headroom for growth.

Strong growth in market capitalization Increasing daily trading volumes

(US $bn) (US $bn)

2017 1,100 2018 7.2

+5%
+13%
2010 389 2013 4.8

2000 138 2008 4.5

Gaining credence globally

Australia Turkey Singapore UK KSA

1971 1997 2002 2007 2016

1960 1989 2001 2003 2010

USA Malaysia Japan Hong Kong UAE

Note: Data is for US REITs as of March 2018

Source: NAREIT, PwC Analysis

10 | PwC
Currently underpenetrated, but growth anticipated
for REITs in the Middle East
Currently REITs are underpenetrated in the Middle East with only a handful of REITs across the UAE and KSA. The market
capitalization of REITs compared to listed real estate is less than 3% in the UAE whereas in more mature markets such as
the UK, France and the US at least 80% of the listed market capitalization in real estate is attributable to REITs. The REIT
structure is a relatively new concept in emerging economies and therefore they have not necessarily had the time to adopt
best practices as compared to more mature markets such as the US where REITs have existed since the 1960s. There might
be lessons for REITs in the Middle East from the Singapore model wherein the tiny island of Singapore has approximately
40 listed REITs at the beginning of 2018 compared with only 2 in the UAE. Although REITs have been around for longer in
Singapore they have tended to specialize in an asset class and then eventually expanded abroad so as to increase their base
of high quality assets and offer healthy returns to their investors.

REIT market capitalisation as a % age of listed real estate market cap1

Market Capitalization of REITs in the region: UAE – $ 779 Mn & KSA – $ 8.5 bn REITs Non- REITs

UAE

Hong Kong

KSA

Malaysia

Singapore

Japan

Spain

Canada

South Africa

France

UK

Mexico

Australia

Belgium

Italy

US

Netherlands

Ireland

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Based on data extracted on 26th February 2018.

1

Source: Bloomberg, PwC Analysis

The Emerging Middle East Real Estate Investment Landscape | 11

What are the requirements to qualify
a REIT in the UAE?

REIT Requirements Description

A REIT must be constituted

Registration Requirements
1 either as an Investment
Company or as an
Investment Trust

Leverage Test Borrowing must not exceed

2 70% of the net asset value
of the fund

Minimum of 80% of REITs

Distribution Test audited annual net income
3 must be distributed to
shareholders

Invest no more than 30%

4 Development Test
of total assets in property
under development

Asset Test 60% or more of the

5 REIT’s assets comprise
Real Property

Note: The following information is valid for REITs listed on Nasdaq Dubai

12 | PwC
Tax overview of Middle East REITS

Globally REITs provide a tax efficient way to invest in property, as REITs are generally

1 exempt from tax or subject to tax at a reduced rate on rental income and capital gains.
Subsequent distributions by a REIT to its investors usually follows domestic tax law as to
whether tax (e.g. withholding tax) is payable. These tax outcomes are generally codified
within the domestic tax law of the jurisdiction where the REIT is domiciled.

Although the Middle East has had “REITs” since 2006, the legal framework for REITs
is uncertain in some jurisdictions and to date none of the jurisdictions have specifically
2 codified the tax treatment of REITs in their domestic tax law. This makes it difficult to
confirm the tax treatment of Middle East REITs with certainty, as the taxation of REITs
will depend on the application of general tax principles and practice (and how this can
evolve over time) in each territory.

Whilst Middle East REITs have far been used to invest within the region, there may be

3 scope for these vehicles to be used as a means of investing further afield. For example,
we’re aware of the UK tax authority allowing a UK REIT, wholly owned by a non-UK
REIT, to still receive normal UK REIT tax exemptions.

The Emerging
The Middle
Emerging East
Middle Real
East Estate
Real Investment
Estate Landscape
Investment | 13
Landscape | 13
The treatment of REITs from a legal perspective
Legal perspective will vary in each territory dependant on the assets held

Country KSA UAE Bahrain Oman Qatar

Regime under Capital Markets Dubai Central Bank of Capital Markets Qatar Financial
which REITS are Authority (CMA) International Bahrain (CBB) in Authority (CMA) Centre
established in November Financial Centre November 2016 in January 2018 Regulatory
2016 (DIFC) in 2006 Authority in 2016
Abu Dhabi Global
Market (ADGM) in
June 2015
Legal form Closed-ended Closed-ended Investment trust Investment fund Collective
of the REIT investment fund investment investment trust
company or or collective
investment trust investment
company
Distribution Minimum Minimum Minimum Minimum Minimum
Requirements distribution of distribution of distribution distribution of distribution of
90% annual 80% annual net of 90% of net 90% annual net 80% annual net
net profits income profits profits income
Foreign ownership Foreign No foreign No foreign No foreign Foreign
restrictions ownership ownership ownership ownership ownership is
(investors into restricted to 49% restrictions restrictions restrictions restricted to 49%
the REIT) when listed on when listed on
the Tadawul the Qatar Stock
Exchange
Foreign ownership REITs with No restrictions, Not permitted No restriction on Untested
restrictions foreign owners unless the assets to invest in assets
(REIT investing cannot hold are located undeveloped land
into assets) assets in Medina within the area(s) and mortgages
or Makkah designated
to UAE/GCC
nationals

14 | PwC
The treatment of REITs from a tax perspective
The tax profile of the REIT would depend on the domestic tax law
and current practice

Country KSA UAE Bahrain Oman Qatar

Targeted REIT A KSA fund N/A as there N/A as there An Omani A Qatar Financial
legal form from a regulated by the is currently no is currently no investment fund Center (“QFC”)
tax perspective CMA. Currently applicable CIT applicable CIT incorporated REIT that qualifies
as CMA regulated regime regime and separately as a special
funds cannot be licensed and investment fund.
registered for tax, registered with It is currently
in practice they CMA, which untested how
are not taxed can benefit from Qatari property
tax exemptions held by a QFC
for regulated REIT would be
investment funds taxed in Qatar
Tax for Gains subject to No CIT No CIT Gains subject Gains subject to
transferor on 2.5% Zakat or to CIT at 15% CIT at 10%
No exemption No exemption
seeding of CIT at 20% if seeded by a
from UAE from Bahrain No property /
assets into corporate. No tax
No property / property stamp duty transfer taxes
the REIT if seeded by an
transfer taxes transfer fees
individual
No exemption
from transfer
taxes
Tax on rental In practice, no No CIT No CIT No CIT Untested
income and Zakat or CIT
capital gains
received by
the REIT
Tax on disposals No Zakat or No tax No tax No tax if the REIT Untested
of REIT interests CIT for foreign is registered
unitholders, with the Muscat
as no practical Securities Market
basis to currently
register the fund
in order to tax
the disposal
by the foreign
unitholders
Withholding No WHT to KSA No WHT No WHT No WHT No WHT
tax (“WHT”) on residents
distributions
5% WHT to other
from the REIT to:
GCC and foreign
1 – GCC
resident unit
residents
holders
2 – Non-GCC
residents

Note: Based on data extracted on 26th February 2018

The Emerging Middle East Real Estate Investment Landscape | 15

Conversion to a public REIT is complex
We are well positioned to advise you through the key steps of the process

Share price

News
Post IPO

flow
Life as a REIT Transparency and
corporate governance

Ongoing
Continuing
obligations
Investor
relations

0-2 months Pricing

and
allocation
Completion

Project management, business as usual

Marketing

Active IPO
execution and Preparation of analyst
2-6 months prospectus presentation and
drafting roadshow presentation

Execution Communications
strategy
Due
diligence
Employee & Kick off meeting
management
compensation
and incentive
plans
Review of systems
Pre IPO

and control
environment
Assess corporate
governance,
6-12 months compliance, board
composition and
committees
Planning and
Preparation Tax and legal
Early look
structuring
marketing
Refine business
plan, strategy
and equity story
Appoint advisers Key management
Financial
information and
track record
requirements
Deal
1-2 years Review of structure
business plan, and
financing valuation
and growth
Strategy prospects
Define and
develop the
strategy and
equity story
Identify
roadmap
to IPO
Exit
strategy

16 | PwC
The Emerging Middle East Real Estate Investment Landscape | 17
Contact Us
Please feel free to reach out to us in case of any queries or if you want to discuss any
of these topics further

Real Estate & REIT Experts: Real Estate & REIT Experts:
Martin Berlin Chinmay Shukla
Email: [email protected] Email: [email protected]

Tax Experts: Tax Experts:

Jochem Rossel Mat Macauley
Email: [email protected] Email: [email protected]

Legal Team: Legal Team:

Darren Harris Nora AlMuhamad
Email: [email protected] Email: [email protected]

18 | PwC
The Emerging Middle East Real Estate Investment Landscape | 19
 pwc.com/middle-east

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