Real estate investment trusts (REITs) have recently become a significant component of the real estate market, attracting billions of riyals in a short period and helping to stimulate the sector’s economy, for the purpose of investing through the acquisition of real estate and benefiting from the returns on those transactions. The Capital Market Authority has defined real estate investment trusts (REITs)

REITs (Real Estate Investment Trusts) as publicly available real estate investment funds, whose units are traded on the financial market and are known globally by the term «REIT.» They aim to facilitate investment in developed and ready-to-use real estate that generates periodic income and rental revenue.

Objectives of Real Estate Funds

The main objectives of publicly traded real estate investment funds are to invest in developed real estate properties capable of generating periodic and rental income, and allow all categories of investors to buy and sell fund units in the same manner as trading stocks in the financial market, in accordance with the regulations for publicly traded real estate investment funds announced by the Capital Market Authority at the end of October 2016.

Lower investment costs in real estate funds

Exchange-traded real estate investment funds are characterized by lower investment costs compared to other real estate investment funds and their commitment to distributing 90% of their net profits periodically (annually) as a minimum. These funds may also invest locally, regionally, and globally, provided that the total value of the fund’s real estate assets outside the Kingdom does not exceed 25% of its total assets, in accordance with clear and specific policies established by the Capital Market Authority.

Commitment to the principles of transparency and disclosure

Like other investment instruments in the financial market, they are subject to oversight and supervision by the Capital Market Authority and Tadawul, each within its respective jurisdiction. Furthermore, capital market regulations require listed real estate investment funds to maintain higher levels of transparency and disclosure than those imposed on investment options available in the traditional real estate market.

Compliance with Capital Market Regulations

Like other investment instruments in the capital market, REITs are subject to the oversight and supervision of the Capital Market Authority and Tadawul, each within its respective jurisdiction. Furthermore, financial market regulations require REITs to maintain high levels of transparency and disclosure that exceed those imposed on investment options available in the traditional real estate market.

Ownership rights in all types of real estate

REITs may own developed and ready-to-use properties, including residential, commercial, industrial, and agricultural properties, and may invest locally, regionally, and globally in accordance with the regulations of the Capital Market Authority, provided that the total value of the fund’s real estate assets outside the Kingdom does not exceed 25%.

Characteristics of Real Estate Investment Trusts

Conditional Return: Distributions to unit holders must not be less than 90% of the fund’s net profits annually.

Investment opportunity: Listed real estate investment funds offer the opportunity to invest at a low cost in real estate funds with a value of no less than 100 million riyals.

Ease of Investment: Real estate investment trusts (REITs) are characterized by clear regulations and the ease of trading their units—both buying and selling—similar to stocks listed on the stock market.

Existing Properties: Real estate investment trusts (REITs) hold real estate assets that are constructed, developed, ready for use, and generate income from rent or operations.

High transparency: The fund manager is required to submit periodic reports on the fund, which are published on the Tadawul website alongside other reports for companies listed on the stock market.

Other features of publicly traded real estate funds

Liquidity (flexibility): Fund units can be bought and sold on the financial market throughout trading days and periods.

Low initial cost for investing in real estate.

Periodic distribution of profits in accordance with clear policies governed by regulations.

High transparency.

Greater obligations and restrictions on the fund manager.

What is the difference between REITs and traditional funds?

Real estate investment trusts (REITs) are characterized by ease of investment and clarity in their terms and regulations, in addition to a secure exit for investors. REITs allow shareholders to enjoy periodic dividends, and the fund has a fixed lifespan, which can be renewed for another period. Additionally, traded real estate investment funds are characterized by high transparency compared to other (traditional) real estate funds.

The traded real estate investment fund is required to distribute 90% of its net income annually, while the traditional real estate investment fund is not required to distribute any percentage of its net income.

Annual Net Cash Yield Rate

One of the most important factors considered when making an investment decision is the annual net cash yield on the investment value; the currently accepted rate in the Kingdom is approximately 8% annually, which may increase or decrease depending on the type of property, the tenant’s classification, and the location. As for the net operating income NOI (Net Operating Income), it is the net cash return realized after accounting for all expenses.

The value of the real estate asset upon exit

The expected value of the real estate asset at exit is important for determining the feasibility of an investment decision and how much capital gain the investor will realize after the sale. Property improvements also play a role in increasing cash returns.

Tadawul’s approval is not an endorsement of feasibility

The Authority urged investors to obtain the terms and conditions of the "Musharaka REIT Fund" on the fund manager’s website and the Capital Market Authority’s website, which contain the information and data that investors need to review before deciding whether or not to invest, warning of the high risks involved in ignoring the terms and conditions and failing to review their content, and noting the necessity of understanding the general provisions and consulting a licensed financial advisor, These clarifications from the Capital Market Authority are intended to ensure that investors do not believe that the approval of an application to establish a real estate investment fund constitutes an endorsement of a feasibility study or an invitation to invest, as the Authority’s approval decision means that regulatory requirements under the Capital Market Law andits implementing regulations.