_How Real Estate Investment Trusts (REITS) are impacting KSA investment environment

While unlisted real estate vehicles and funds are not new to the GCC, listed REITs were only introduced to the region in 2014 with the listing of Emirates REIT on the Nasdaq Dubai. Following the initial listing, there has been limited new REIT formations. The approval of the REIT regulations in Saudi Arabia in late 2016 has dramatically altered the GCC landscape with six REITS being listed in Saudi Arabia since inception while a further listing in both Bahrain and the UAE has taken place.

In Saudi Arabia, non-listed real estate vehicles are not new to the market, with one of the most prominent being the vehicle which was created in 2015 for the development of Jeddah Economic City including Jeddah Tower.

"Since the legislation was passed clarifying the rules governing the listing of REITs in November 2016, the sector has seen significant growth, with six REITs already listed in the Kingdom and a number currently preparing for listing".

The number of successful listings and the number of applications that are currently in the pipeline clearly show the pent-up demand for REITs in Saudi Arabia.

Mainly driven by the amount of capital seeking exposure to the commercial real estate market, every REIT that has been listed in the Kingdom initially traded at a large premium to Net Asset Value (NAV) indicating investor appetite for the income-producing real estate as well as the potential depth of the market. This trend for trading at a premium to NAV is in part a function of the relatively small number of listed vehicles available to investors; as the REIT market gains in maturity, we expect pricing to move more in line with NAV.

REIT investment strategies in Saudi Arabia are split between the mixed-asset approach and the specific-asset class approach. Although the blended approach provides important benefits for the long-term with regards to the performance given the diversification of risk, we anticipate seeing a trend towards the specialization of REITs with a focus on asset classes that are prevalent to the region e.g. office, retail, education, healthcare and logistics.

The emergence of REITs is another step towards a more transparent market and is likely to assist in institutionalizing the real estate market in Saudi Arabia while providing a wider range of investors exposure to the commercial real estate market. In turn, investors will be able to take advantage of diversification benefits, long-term stability and potentially appealing returns from regular dividend income and potential capital appreciation.

Over the longer term, REITs are expected to increase private sector participation in the financing of real estate markets by accessing additional pools of capital. This is in line with government efforts to stimulate the real estate sector in Saudi Arabia by attracting private sector investments while serving the broader target of the strategic economic reforms aimed at diversifying the Kingdom away from its dependence on the hydrocarbon sector.

There are a number of headwinds that could challenge the development of the REIT market in Saudi Arabia. A major factor will be the quality and supply of suitable assets that can be placed within potential REIT structures. In general, the Saudi Arabian market is dominated by lack of instructional grade real estate when compared to the markets of both emerging and mature REIT jurisdictions. As the success of the REIT market will in part rest on a sustainable pipeline of future assets, the softening of the current economic climate could hinder the development sector and with it future supply.