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The Case for REIT Investing in Dubai

Updated: Jul 28, 2022

Making More Money in Real Estate, in a Much Cheaper and Safer way

Real Estate has become the go-to method of investing for anyone looking to create a low risk, fixed income stream. We love real estate as an investment for its predictable costs and income as well as the simplicity in which we can enter or exit the investment.

Let's tackle the close cousin of this investment asset: the Real Estate Investment Trusts (REITs). We will get to know why RIETs are a much safer, cheaper and a more profitable way of investing in Real Estate in today's UAE real estate market.

What are REITs?

A REIT is a real estate investment trust, they are a category of “Property Funds” that invests primarily in income-generating real estate (Retail, Commercial, Schools, Residential,...) and distributes to its shareholders at least 80% of its audited annual net income.

The objective of a REIT is to generate a regular dividend income stream for investors typically derived from income from investment properties, usually in the form of rent, with the additional opportunity for capital appreciation of the underlying assets and increases in the value of the equity.

REITs are typically managed by an external executive management team which identifies the properties to acquire, sell or hold and manages the assets of the REIT. This management team then manages the properties, often through the use of third party property managers, with the aim of maximizing the potential returns in line with the REIT’s strategy. Some REITs may also develop and redevelop properties from time to time.

REITs in Dubai

In recent years, REITs have grown in the Middle East with the UAE, Saudi Arabia, Bahrain and Oman having introduced legal and regulatory frameworks for this asset class.

In the UAE, the largest listed REITs  are— Emirates REIT and ENBD REIT, listed on Nasdaq Dubai. The number of listed REITs in the UAE is undoubtedly set to grow. For example, the Dubai Financial Market (DFM) has published rules on listing and trading REITs as a precursor to launching its REITs platform in the very near future. Additionally, DFM has recently welcomed the listing of Al Mal Capital's REIT.

Real Estate vs. REITs Performance

Since the last real estate peak in 2014, property prices have been in decline ever since. Similarly, REIT performance has also been mirroring the same effect given the underlying asset’s similarities. This table summarizes the movement between 2014 and 2019 for REITs and the Dubai Residential Property Index:

As we can clearly notice, the REIT movement is much sharper in decline than the real estate market index. This can be attributed to its higher sensitivity to market movement due to its smaller entry prices, absence of large purchase costs, and relatively higher liquidity.

Given that the underlying assets are similar, we may be able to infer that REITs pricing is relatively much cheaper than the actual real estate market i.e. exposure to REITs will have a lower risk of price decline compared to the actual/real property real estate market.

Real Estate vs. REITs Returns

With declining sales prices and rents in Dubai in the past few years, rental yields (the rental income calculated as the percentage of the property’s value) have relatively maintained their high levels compared to other major cities in the world.

According to Global Property Guide, the average gross rental yield in Dubai is 7.1%, whereas the rental yields have decreased in London with 3%, Hong Kong with 2.82%, India with 2.22%, and Singapore with 2.83%.

Here is a look at the major communities in Dubai ranked by gross rental yield:

Additionally, we can take into account service charges costs of approximately 1.5–2.5% of the property value per year, arriving at an Average Net Rental Yield of Approximately 5.3%.

Comparing these figures to the net dividend returns that are offered by REITs in Dubai, we can quickly see the measurable difference:

We can stop the analysis at this point and hopefully the definitions and numbers makes it clear that investing in REITs has the following advantages when compared to investing in direct Real Estate:

  • Low or No costs for buying

  • Cheaper and More affordable prices

  • More diversified portfolio

  • Better Liquidity Higher net return paid consistently

For those interested in diving deeper into the details of the two REITs currently available in the market, the next section is for you.

A Deeper dive into REITs

This analysis will help us better understand the different metrics and prospects of the REITs in Dubai which in turn can help us make a more informed decision when investing.

Metrics for Evaluating the REITs

As a special asset class for investing, evaluating REITs demands a slightly different approach whet it comes to evaluation metrics. Here are the key metrics that we will be looking at:

  • Loan-to-Value Ratio (LTV): LTV measures the total debt as a percentage of the Net Asset Value.

  • Funds From Operations (FFO): Funds from operations (FFO) is a standardized industry term. It’s defined as net income + depreciation and amortization - gains from property sales.

  • Occupancy Rate: Is the ratio of rented or used units to the total amount of available units.

  • Dividend Yield: The dividend yield is the ratio of the REIT’s annual dividend compared to its share price. It is the best representation for net return in REITs.

Let’s examine the key metrics of ENBD REIT and Emirates REIT for the past three-four years:

From the above, we can notice relatively high occupancy rates, low Loan-to-value percentages and a significant Dividend Yield.

In Conclusion..

We have examined the similarities and differences in the investment of Direct Real Estate and REITs and it seems that given the superior attributes of REITs in the current market, investors should start taking notice of this asset class and may look into considering it in their portfolios.

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