How REITs are unlocking the potential of UAE real estate

The year 2023 was marked by uncertainty from geopolitical tensions, recession concerns, high inflation and subsequent interest rates, and financial market volatility.

Conversely, the gloomy global picture is somewhat offset by stronger performance in the UAE, with economic growth projected to be 3.4 per cent in 2023 and 4 per cent in 2024, according to the International Monetary Fund.

Growth is supported by the non-oil sector as the UAE government is accelerating plans to diversify the economy and sources of income and boost foreign direct investment. Real estate projects and associated sectors such as hotels and industrial, logistics and manufacturing are playing a central role in this diversification drive.

“The country’s commitment to economic diversification away from oil-dependence is driving the growth of the real estate sector and may lead to new opportunities for REITs or real estate investment trusts,” says Adela Mues, partner, global corporate group at Reed Smith.

Earlier in 2023, real estate advisory firm CBRE projected a positive outlook for the UAE’s real estate sector, on the back of elevated oil prices and resolute economic growth, which supported strong levels of occupancy and investment activity.

The total number of transactions in Abu Dhabi rose by 94.1 per cent year-on-year (YoY) in H1 2023, underpinned by a 160.4 per cent increase in off-plan transactions while Dubai smashed records to post a 43.3 per cent YoY jump in transactions volumes, CBRE said in its UAE Real Estate Market Outlook Mid-Year Review in March.

Dubai and Abu Dhabi have witnessed an influx of wealthy global investors, who are drawn by a flurry of reforms that are being implemented to make the UAE appealing to global companies, investors and talent. Rating agency S&P Global projected that Dubai property developers will deliver 40,000 homes in 2023, with similar numbers in the next year and 2025. That’s high when compared with historic levels at between 15,000 to 30,000 homes.

“The UAE’s real estate sector benefits from strong government support and strategic initiatives aimed at diversification and development. This can create favourable conditions for REITs, particularly in certain growing sectors such as commercial, residential, and retail spaces,” remarks Mues.

The UAE’s real estate market conditions will likely remain healthy in the next 12-18 months. However, industry experts projected that demand will be slower than in the past two years due to high global inflation and higher for longer interest rates.

Real estate investors looking to leverage the UAE’s booming real estate market without committing to a large outlay are tapping into REITs to earn high yields.

“The country’s real estate market has its own dynamics, influenced by local demand, supply, and regulatory environment,” Mues observes while noting that REITs in the UAE are structured to adapt to these regional features.

Over the years, UAE REITs have demonstrated resilience amid a faltering global economy, and investor behaviour has also evolved, with a greater emphasis on sustainable and socially responsible real estate projects.

Catalyst for portfolio growth

The UAE’s real estate and construction sector has registered remarkable growth over the years, and REITs are playing a significant role in fueling the boom as they have increasingly become a popular investment option, given the ease they provide in managing properties without physically owning or buying them.

“REITs represent a distinct blend of investment attributes, amalgamating aspects from real estate, equity, and fixed-income markets,” says Arun Leslie John, chief market analyst at Century Financial.

“They grant exposure to real estate markets, potential property value appreciation, and consistent rental income, resembling equity investments with liquidity and dividend prospects, while also demonstrating income stability akin to fixed-income securities.”

REITs, which are a subset of property funds, have been a rapidly growing asset class worldwide and signs of this growth started to emerge in the UAE after the implementation of the legal and regulatory frameworks for their operations and establishment in 2016.

From a slow beginning, REIT activity in the Emirates has grown significantly, driven by strong structural reforms and ambitious economic growth strategies that are aimed at boosting competitiveness and attracting foreign direct investment.

The UAE’s status as a global tourism and business hub has attracted local and international investors to its real estate market. The growing demand in Dubai and Abu Dhabi’s luxury property market, a thriving tourism industry, and the continued expansion of the logistics industry are all contributing to the growth of the REIT sector.

Dubai Investment said in October that the increasing growth of REITs in the UAE has left a lasting impact on the country’s real estate industry as investors seek to diversify their investment portfolios to spread risk.

REITs also serve as a source of capital for property developers in the UAE. They help traditional commercial and residential real estate investors benefit from the growth in specialist areas such as education, healthcare and industrial sectors.

By investing in UAE REITs, investors gain exposure to different geographical markets where cities such as Abu Dhabi, Dubai and Ras Al Khaimah are experiencing significant real estate development and growth.

REITs in the country will continue to evolve in changing market conditions, but they are here to stay – offering portfolio diversification, inflation protection, and exposure to the real estate market without having to physically manage properties.

GCC REIT market

The GCC REIT market has grown exponentially since 2014 when Equitativa Group’s Emirates REIT was listed on the Nasdaq Dubai.

Emirates REIT, one of UAE’s Shari’ah-compliant REITs, reported a net profit of $93m (Dhs340m) in the nine months to September 30. Its net property income jumped by 11 per cent year-on-year to $45m (Dhs167m), driven by the combined effect of increased occupancy and continued improved rental rates.

Following Emirates REIT’s listing, there have been limited new REIT formations. However, the implementation of REIT regulations in Saudi Arabia in 2016 has dramatically altered the GCC landscape with six REITs being listed in the kingdom since inception while a further listings were reported in both Bahrain and the UAE.

Dubai Financial Market welcomed its first REIT listing in January 2021 after Al Mal Capital REIT raised $95.3m while OMAN REIT listed on the Muscat Stock Exchange in February of the same year to become the first diversified multi-asset REIT in the sultanate.

Al Mal Capital REIT’s total assets reached Dhs632.7m in the six months to June 30 from Dhs355.3m as of December 31, 2022, while its investment properties stood at Dhs578m.

The Gulf region has fully embraced the concept of REITs, with more than 18 of them listed across the region, including in Abu Dhabi, Dubai, Saudi Arabia, Bahrain, and Oman.

REIT investment strategies in the kingdom are split between the mixed-asset approach and the specific-asset class approach while in the UAE, both existing listed funds have their investments spread across a mixed portfolio of real estate holdings. John notes that the future outlook for REITs is mixed.

The weakening global labour market, declining inflation, and slowing consumer spending all support the anticipated Fed rate cuts in the US and are expected to support the REIT prices.

However, he warns that uncertainty lingers around the tightening of liquidity and credit in the US, which might again keep a check on the prices of REITs.

For the time being, though the blended approach provides important benefits for the long term with regards to performance given the diversification of risk, industry experts expect a trend towards the specialisation of REITs in the GCC with a focus on asset classes that are dominant to the region including office, retail, education, healthcare and logistics.

Read: Guide to capitalise on UAE’s flourishing real estate market