MSCI, FTSE inclusion to drive foreign investment in Saudi REITs: Interview

Pictured: Raya Majdalani, Knight Frank

Foreign fund inflows into Saudi real estate investment trusts (REITs) are slated to pick up from its current levels following Saudi Stock Exchange's (Tadawul) inclusion in MSCI and FTSE Russell indices, Raya Majdalani, Research Manager, Knight Frank, told Argaam.

With competition heating up for existing assets within the Kingdom, REITs are likely to start investing in neighboring GCC countries, particularly the UAE could provide investors with “interesting entry points” to the market, she added.

Below is Argaam’s exclusive interview with Majdalani.

Q: How many REITs were launched in 2018 compared to 2017?

A: Sixteen REITs have been listed on the Tadawul to date and the total size of the market currently stands at around $3.2 billion. All this has happened in just two years following the approval of regulations. So clearly, the growth in the Saudi REIT market has been strong over a relatively short period of time, which can be explained by the appetite of capital houses and fund managers to set up REIT structures and by the amount of capital seeking exposure to the real estate market. Out of these 16 REITs, nine have been listed in 2018 versus six in 2017, which points to the fact that REITs listings have intensified this year.

Q: How has the REITs market performed in Saudi Arabia in the 11 months of 2018 compared to 2017?

A: While the Tadawul’s market cap has increased by four percent year-to-date (YTF) in 2018, the REIT index has lost c.23 percent of its value YTD.  The REIT index has been among the weakest performing index on the Tadawul this year, along with the real estate management and development index (-31 percent YTD) and the utilities index (-23 percent YTD).  The valuation of Saudi REITs has dropped below par value this year, converging towards international benchmarks. Going forward, we expect more REITs listings to lead to a deeper market, which will drive prices towards fundamental valuation.

Q: What is your REIT market outlook for 2019? How many REITs are expected to be launched in 2019?

A: In recent months, the Capital Market Authority approved the listings of two REITs on the local stock exchange, which we should expect to list over the coming few months. It seems like the pace of listings is going to moderate in 2019, following the listing of 16 REITs in just two years following the approval of regulations.

Q: Has demand for REITs remained high in the Kingdom?

A: The number of successful listings is a clear indicator of the pent-up demand for REITs in Saudi Arabia. Initially, the demand for REITs has been mainly driven by retail and family groups. Going forward, we should expect to see a higher participation from institutional investors as fund managers are now seeking more informed investors that have a longer-term investment approach based on fundamentals (such as asset quality) rather than a short-term approach.

 Q: How do MSCI and FTSE inclusions help the REIT market?

A: So far, the share of foreign ownership among REITs, which are listed on the Tadawul, is limited. The average rate of foreign ownership does not exceed 0.5 percent currently (excluding REITs which assets are located in Makkah and are, therefore, restricted to Saudis).

With the expected inclusion of Saudi Arabia in the MSCI and the FTSE emerging markets indices, the inflow of foreign funds in the Tadawul in general and in REITs more specifically has the potential to pick up from current levels.

Q: Do you think Saudi REITs will begin buying income-generating assets in other GCC countries as competition for existing assets heats up within the Kingdom? 

A: REITs in Saudi Arabia are allowed to invest up to 25 percent of their assets value abroad, it is likely that we will start seeing more  REITs investing in neighboring GCC countries as competition for existing assets heats up within the Kingdom. We have already seen some Saudi REITs investing in the UAE, an opportunity that could be seized by more REITs as current market conditions in the UAE and specifically in Dubai could provide investors with interesting entry points to the market.

Write to Parag Deulgaonkar at parag.d@argaamplus.com