_What's happening in the Saudi Arabian REITs market?

REITs initially traded at a significant premium to Net Asset Value (NAV). This was mainly attributable to large amounts of capital seeking exposure to these REITs compared to the size of the investable universe. Following initial buoyancy, most REITs have pared back early gains and are currently trading below listing price. As a result, price to NAV has dropped over the last two quarters, moving closer in line with more mature markets. 

As the market gains in maturity, a greater choice of available REITs is likely to drive prices towards fundamental valuations. In parallel, we see investors increasing their focus on income generation and dividend yields as more performance information becomes available.  

Given the number of approvals that are currently in the pipeline, we expect more REITs to list in 2018. As they do so, we expect the level of competition to increase, which would translate into a greater focus on the adoption of best-in-class practices in terms of; quality of the underlying portfolio, asset management and corporate governance. To this end, the quality of the REIT, both in terms of real estate and asset manager will become paramount, which will provide more transparency to market participants and will enable investors to deploy funds in line with a set strategy and risk profile.  

Key findings:

1. The market capitalisation of the global listed REIT market exceeded $1.7 trillion in the first half of 2017. The US market accounts for more than 65% of the global market size.
2. The GCC REIT market saw the introduction of a regulatory framework for the use and the listing of REITs in Oman in early 2018, joining the UAE, Saudi Arabia and Bahrain as GCC countries that have established public REIT regulations.
3. In Saudi Arabia, six new REITs have been listed on the Tadawul, taking the total number of listed REITs on the market to twelve with a total market capitalization now exceeding USD 2 billion. 
4. The CMA has recently proposed some amendments to refine existing legislation including a proposed increase in the minimum capital requirement for new funds from SAR 100 million to SAR 500 million.
5. While the vast majority of existing REITs are non-thematic, we see the emergence of more thematic REITs as an opportunity for investors going forward.
6. Pricing dropped over the last two quarters, moving closer in line with more mature markets. Going forward, a greater choice of available REITs is likely to drive prices towards fundamental valuations. 
7. We see investors increasing their focus on fundamentals including income generation and dividend yields as more performance information becomes available.

Source:  Knight Frank Research, Macrobond

Notes: (1) only REITs listed before 2018 were included in this graph

Notes: A higher number reflects a more important area of opportunity for the market

Notes: A higher number reflects a higher risk for the market