Market cap of Saudi REITs crosses $2 bln in Q1

Saudi Arabia's Real Estate Investment Trusts (REITs) market capitalization has surpassed $2 billion in the first quarter 2018 and will continue to expand, Knight Frank said in a recent report.

The number of listed REITs doubled in the last two quarters, with 12 REITs listed on the Tadawul at the end of the first quarter.

"REITs initially traded at a significant premium to net asset value (NAV). This was mainly attributable to large amounts of capital seeking exposure to these REITs compared to the size of the investable universe," said Raya Majdalani, research manager, Knight Frank Saudi Arabia.

"Following initial buoyancy, most REITs have pared back early gains and are currently trading below listing price. As a result, price to NAV has dropped over the last two quarters, moving closer in line with more mature markets," she noted.

The investment strategy for REITs in the Kingdom has on the whole been non-thematic to date, partly as a result of a "chronic lack of good quality assets with long-term, sustainable income", the report said.

In common with more mature REIT markets, it is likely that thematic REITs will take the lead over diversified REITs in the longer term. Although the blended approach provides important long-term benefits, thematic REITs allow investors to gain exposure to specific real estate sectors in line with a specific risk/return profile.

"This will be particularly important for investors seeking exposure to non-cyclical, defensive sectors such as healthcare and education," said Majdalani. 

According to Knight Frank, the regulatory framework will remain a critical priority that generates challenges as well as opportunities for fund managers and investors in the REIT market.

"Strengthening and adapting regulations, which has proven to be favorable in more mature jurisdictions, will remain a requirement for the REIT market. In Saudi Arabia, this will be particularly important in light of the government’s drive to enhance the investment environment as part of the wider strategic reforms,” Majdalani added.

In February, Majdalani told Argaam that demand for REITs will remain solid in the Kingdom as it offers liquidity and easy access to real estate investments, exposure to institutional quality commercial real estate and stable dividend income.

Meanwhile, Stefan Burch, general manager, Knight Frank, said REIT regulations signal an important step in the government’s drive to enhance the investment environment as part of the wider strategic reform agenda.

"In 2018, we expect more real estate trusts to be listed given the number of approvals that are currently in the pipeline," he added.