Source: Preqin, PwC analysis
Note: Current proportion of allocations are as of 2017
|So, what is a REIT?|
There are strong reasons for developers to potentially consider a REIT structure as well:
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.
1 Based on data extracted on 26th February 2018; Yield figures represent the annualized dividend yield based on the market closing price as of the day.
Source: Bloomberg Finance L.P, PwC Analysis
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.
Note: Data is for US REITs as of March 2018
Source: NAREIT, PwC Analysis
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.
Globally REITs provide a tax efficient way to invest in property, as REITs are generally 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 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 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.
Dr. Martin Berlin
Partner, Real Estate, Hospitality & Leisure Leader, PwC Middle East
Tel: 971 4 304 3182
Senior Manager, PwC Middle East
Tel: +971 (0) 4 304 3930
Middle East International Tax Leader, PwC Middle East
Tel: +971 4 304 3445
Tax Director, PwC Middle East
Tel: +971 (0) 2 694 7537
Legal Services Leader, PwC Legal Middle East
Tel: +971 (0)56 418 9768
Legal Manager, PwC Middle East