Interview: SEDCO Capital REIT's portfolio value can reach SAR 1 bln

Shariah-complaint SEDCO Capital REIT is able to secure bank loans and raise its portfolio value to nearly SAR 1 billion in order to maximize returns, said Yasir Al-Sasi, Vice President Regional Real Estate Investments Asset Management MENA, at SEDCO Capital. The fund is aiming to offer a sustainable stream of income for its investors, he recently told Argaam in an exclusive interview. The fund targets geographical diversification, in line with Saudi Vision 2030, he added. So far, various investment opportunities have been explored in the Eastern Province, along with other promising cities across the Kingdom.

Below is the complete interview:

Q: What are the investment opportunities that SEDCO Capital REIT seeks to offer investors, compared to other Saudi-listed peers?

A: SEDCO Capital REIT is distinguished by its outstanding asset portfolio, which ensures sustainable streams of income for investors. These assets have been under management for over six years by SC Fund of Private Equity Funds 1. Seven out of eight properties were restructured for the new fund, given their strong performance in terms of potential lease opportunities and sustainability. While managing SC Fund of Private Equity Funds 1, we had a historical distribution of an average 7 percent annually over six years. SEDCO Capital REIT targets initial returns of 6.1 percent annually and links the fund manager’s bonuses to the distribution of cash dividends above 7 percent, which drives better performance.

The fund’s minimum subscription limit stands at SAR 500, an affordable level for all citizens, residents and GCC investors.

Q: Why are the fund’s investments restricted to Riyadh and Jeddah? Any plans for investment diversification in other cities?

A: The assets are currently restricted to Riyadh and Jeddah because they are the Kingdom’s biggest economic cities. We are looking for geographical diversification of assets in future acquisitions. We explored prime locations in Dammam and Khobar, and other secondary cities across the Kingdom. We believe these locations are promising, so we will invest there to achieve the best interest and sustainable income for investors.

We are also planning other investments outside the Kingdom and we may target some deals to reduce potential risks from economic volatility. On the other hand, we have a diversified portfolio, which consists of properties across the office, retail, residential, and hospitality sectors, in addition to Hyper Panda.

Q: The purchase value of the fund’s assets was based on average assessments, while assets of other funds were lower than average, how can you explain this?

A: The fund's assets were assessed by accredited assessors from Saudi Authority for Accredited Valuers (Taqeem). The initial valuation was conducted by Knight Frank and Jones Lang LaSalle. The average assessment was taken into account using the income approach, as the fund’s portfolio comprises income-generating assets.

We also used the replacement value method. The discrepancies between both assessments did not exceed 3.9 percent. In addition, the discrepancy between the acquisition value of those assets for the period from 2011 to 2014 compared to the current value stands at 4.24 percent. Some of those properties had no high occupancy rates upon purchase. Therefore, we bought such assets at fair values, keeping our investors’ interests in mind. The current value of these assets can be maximized for investor interest.

Q: You previously said the fund is expected to deliver a net yield of 6.10 percent in 2018. Do you think this yield is attractive, when compared to listed REITs?

A: The yield is attractive as it does not take into account the full deployment of capital. The current value of assets is SAR 565 million, while the fund size stands at SAR 650 million. The difference will be directly invested in additional real estate assets. We can also secure bank loans, which will bring the total portfolio to nearly SAR 1 billion – of which capital accounts for 50 percent. Therefore, returns will be highly aggrandized.

Q: The lease agreements of some assets will end in six months, and within one or two years. Are you sure about the renewal of these agreements?

A: Here you’re talking about a residential complex that comprises 52 units and several lease contracts. The six-month period remaining is the average of total existing lease terms. These contracts are concluded with individuals for one year. The same applies to office centers in Jeddah, though tenants are corporates with up to ten-year lease contracts.

We have single-tenant and multi-tenanted properties with multiple lease agreements, which account for 39 percent and 61 percent of total assets, respectively. Single contracts usually extend from ten to 25 years. Meanwhile, public-sector tenants lease properties for a maximum period from one to three years. The lease contracts of Hyper Panda and the hotel asset are still valid for 10.5 years and six years, respectively.

Our experience in the real estate market exceeds 50 years. We focus on analyzing investments, lease pricing and exit opportunities ahead of concluding acquisitions.

Our current lease values are close to the market average or slightly lower, so that we can overcome default risks or replace the existing properties with new assets. If our lease prices are much higher than the market, it will be difficult to attract tenants, when necessary.