In the second half of his interview on the global real estate market, Stanley Kraska, Head of Global Securities at LaSalle discusses current trends in the REITs market with Giada Vercelli:
Giada Vercelli: Could you give an overview on the recent trends of REITS in the GCC region? What are the main drivers of these trends?
Stanley Kraska: REITs have gained momentum in 2016 after a period of uncertainty about their destiny in the GCC region. Regulators have made efforts to establish a more solid regulatory framework. The DFSA in Dubai has been the first mover by introducing a regulation in 2010 followed by the CMA of Saudi Arabia in August 2016 and the Central Bank of Bahrain in November 2016. The first REITs launched in the region was Emirate REIT, listed in 2014 at the Nasdaq Dubai Bourse, four years after the release of the regulation. The interest among regional investors and operators has been growing and took less time for new REITs to come to the market after the regulatory set up. The first REIT in Saudi Arabia (Riyad REIT) was listed at the Tadawul in November 2016 and the first REIT in Bahrain (Eskan REIT) was listed at the Bahrain Bourse in January 2017. The pipeline of REITs, especially in Saudi Arabia, can continue growing and the demand for income generating assets remain solid among GCC investors. However further boost has to take into consideration also some constraints such as restrictions on foreign ownership as well as tax benefit on dividend that have driven the development of the REITs market in western countries and would help diversifying the investors base in the GCC.
GV: What is the demand for Sharia compliant investment tools?
SK: The interest in REITs among Shariah compliant investors has grown in the past few years, driven by the need for income generating assets, better diversification and an alternative to sukuk, which yields declined dramatically in the past few years. The development of Shariah compliant multi-asset solutions is another important demand factor. Real estate has always been one of the preferred asset classes among Shariah compliant investors and the availability of REITs allows retails investors to easily access it under a solid regulatory framework.
GV: In order to be Sharia compliant these products may bring extra cost: what is the public response to these inbuilt costs?
SK: The Shariah compliant framework for REITs does not differ from guidelines set for other investments. Shariah compliant REITs must have underlying tenants which activities shall be permissible. Therefore are excluded financial services, gambling, manufacture and sale of non-halal products, conventional insurance and entertainment activities not in line with Shariah law. Yes there are ongoing expenses for Shariah compliant monitoring that however do not differ from what it is already requested for equity funds. It is worth mentioning that Shariah compliant investors can invest also in REITs that are not structured and marketed as Shariah compliant but satisfy criteria that ensure their admissibility. That enlarges the investible universe at investors benefit.
GV: Are the standards for Sharia compliant products harmonised? If not how should you evaluate the risk involved with an investment?
SK: Standardization in Islamic Finance has been always a challenge. Scholars have considered REITs as equity investments for a long period of time. Efforts have been made in recent years to ensure that REITs are a separate asset class and that has helped to improve understanding of their dynamics and requirements. Significant results have been achieved with the launch of Shariah compliant REITs benchmarks. Such initiatives help the dialogue and the setting of a common understanding of harmonised rules.
GV: How big is the public portion of the RE market?
SK: One way to view the size of the global real estate investment universe is via the market capitalisation of publicly traded real estate companies in a broadly used benchmark index. In this case, Im referencing the FTSE EPRA/NAREIT Developed Index, which we noted earlier. As of the end of 2016, the index was comprised of 334 companies, totaling a market cap of US$1.35 trillion. This market cap has grown more than 25% from the end of 2013. Going forward, we expect the existing opportunity set to continue to expand as existing companies grow, new companies come to market and additional countries develop real estate securities markets.
Looking at the bigger picture, public real estate is an important part of the institutional real estate investment universe. On a gross value basis, LaSalle estimates that public real estate accounts for approximately 44% of the institutional real estate investment universe, which totals over US$10 trillion. We think this translates into opportunities for continued long-term expansion.
GV: With the breadth of real estate, how do we get insights into so many different markets?
SK: At LaSalle, we benefit from having one of the largest and most experienced teams of portfolio managers and securities analysts, who are located in Baltimore, Amsterdam and Hong Kong. Further, our parent organizations, Jones Lang LaSalle (NYSE: JLL) and LaSalle Investment Management, are among the worlds leading real estate service and investment firms. These organisations are focused solely on real estate.
Our team of portfolio managers and security analysts can draw on JLLs and LaSalle Investment Managements resources a global organization with 70,000 employees in 80 countries. This direct real estate market platform provides us with great real-time information, proprietary market forecasts and provides a critical input to our investment decision-making process.
GV: Whats new in the REIT universe?
SK: As you may have heard, real estate now has its own separate sector classification in the public equity market. Real estate had historically been classified within the financials sector, but as of September 2016, it was added to the Global Industry Classification Standard (GICS) as an eleventh industry sector. GICS is the universal sector classification system developed by MSCI and S&P and real estate is the first sector addition to the system since its initiation in 1999.
For reference, the newly created real estate sector comprises approximately 3.2% of the MSCI World Equity Index and approximately 4% of the S&P Total Market Index, which is a U.S. index.
We see a favourable result from the creation of a separate real estate sector because it will draw more attention to the asset class from all types of investors and validates real estate as a distinct asset class. We believe the classification in its own sector provides further evidence that real estate has a place in a well-diversified investment portfolio.
Hear more on this topic at the upcoming Euromoney Executive Briefing: REITs in the KSA, which will take place in Riyadh on Monday 1st May. For more information, please visit the event webpage.
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