JEDDAH, 30 April 2007 — As Gulf-based investors wait for signs of stability in local equity markets, a rapidly growing asset class is quickly gaining attention in the region. “With historically less volatility than stocks and stable dividend yields, global real estate investment trusts, or Global REITs, have emerged as an increasingly attractive investment alternative,” Malek Al-Ajeel, head of business development, Gulf Investment Corporation, said in an online interview yesterday.
Global REITs are publicly traded companies or trusts that invest in a large number of properties, such as offices, hotels, apartments and shopping malls. Originating in the US more than 40 years ago, Global REITs pay little or no company tax so long as most of their taxable income is delivered to shareholders through dividends.
For investors, Global REITs provide a stable flow of income and are a highly liquid means of participating in the property sector. “The risk of an investment loss can be reduced by investing in a number of different Global REITs, either directly or through an investment fund,” he said.
Global REITs are now at the forefront of a world-wide trend toward the securitization of real estate. In the last 5 years, the total market capitalization of the global real estate securities universe has more than doubled and, at the end of 2006, total market capitalization of listed real estate equities amounted to $1,595 billion.
Much of this growth is being led out of countries that are introducing tax efficient REIT-like structures. REIT-like investments are now available in France, Japan, Hong Kong and Singapore and have made their debut in Britain at the beginning of this year. Germany and Italy are not too far behind. “Global REITs, and Global REIT-based funds, have become a significant force in the global property market, increasingly valued as a source of dividends and diversification,” he added.
“We estimate the average global real estate company owns between 100 and 300 commercial properties whereas an actively managed portfolio of 80-100 Global REITs provides exposure to between 10,000 and 15,000 properties worldwide,” Al-Ajeel said. In addition to providing diversification through investing in a wide range of properties and property types, a global portfolio offers an additional layer of diversification through investing in regions that overtime have shown a very low correlation. “This diversification is important: Real estate is inherently a local business, over the past 15 years the highest total returns for real estate stocks have come from a variety of regions. An active portfolio manager making skilled asset allocation decisions can add value over a single market investment strategy.”
In the US, REITs have recently been performing better than the general stock market, supported by strong fundamentals in the property sector. Commercial property including office and retail space remains buoyant despite a general slowdown in the housing market. The greatest potential source of growth in Global REITs is likely to be in the Asia-Pacific region, where markets such as Japan have large quantities of quality real estate. Outsized economic growth is fueling the expansion of the real estate markets in both China and India. “While both governments are still resolving issues relating to who can own property directly, an efficient way to access these emerging markets is to own Hong Kong and/or Singapore listed companies with real estate investments in these regions,” he said.
As the growth of global real estate securities continues to accelerate, investment firms are offering new real estate investment management structures.
In this region, Gulf Investment Corporation (GIC) claims to be leading the way with the GIC Global Real Estate Securities Fund, advised by ING Clarion Real Estate Securities — a global leader in real estate securities investment management. During its first year of operation — Jan. 31, 2006, through Jan. 31, 2007 — the fund share price rose 38 percent providing investors with an attractive alternative to other global and GCC-asset classes.
GIC is described as a leading regional financial institution established with the support of the Gulf Cooperation Council and is equally owned by its six member states — Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the UAE.
The globalization of REITs and other forms of real estate securities is still in its early stages.
