A year has passed since the Capital Market Authority (CMA) issued its regulations on listed real estate investment funds, which were announced in October 2016, in line with the National Transformation Program, which aims to increase GDP through safe investment in structurally developed real estate. This is considered an important step toward restructuring and developing the real estate sector, as well as a smart and practical approach to increasing working capital in the sector.
Exit at market price and fair returns
Investment funds outperform traditional funds in several ways, even though they were established before REITs (REITs) and have similar investment objectives. However, publicly traded real estate funds offer many attractive advantages that motivate investors and encourage them to participate, such as ease of exit; which is currently unavailable in traditional real estate funds. An investor wishing to sell their units can do so on the market and receive a fair price (market price) that includes the invested capital, plus any undistributed expected profits.
In the current situation, however, an investor may have to wait several months to find another investor to purchase their investment units, and for good distributions, REITs also outperform traditional funds in dividend distribution, as regulations stipulate that the dividend payout ratio to unit holders must not be less than 90% annually of the fund’s net income, In traditional funds, however, dividend distributions are subject to the fund manager’s discretion and the approval of the fund’s board of directors.
A radical change in the real estate sector
Over time, the market for publicly traded real estate funds has matured, leading to the development of a comprehensive system of real estate activities designed to support this transparent investment, which adheres to the highest standards of governance.
This ecosystem includes real estate appraisal and its related activities, the assessment of tenants" suitability and their classification based on financial solvency and adherence to obligations, and the construction development of income-generating properties, where contractors and developers will be classified based on the types of properties they specialize in developing, as well as property management and marketing activities.
At the real estate sector level, we are on the verge of a radical change. In the short term, the demand from these funds for income-generating properties may lead to an increase in their prices, however, in the medium and long term, it is expected that many properties will be built for rental purposes rather than solely for ownership, as is currently the case, and consequently, both rental and housing costs are expected to decrease.
Attracting and Mobilizing Capital
In addition to the specific advantages and benefits for investors and companies, there are broader benefits that affect the macroeconomic level and will have a positive impact on the real estate sector in particular and the Saudi economy in general, as these funds will encourage foreign capital to enter and invest, provided they ensure ease of exit, and stimulate the localization of investment by attracting much of the wealth that has fled abroad.
They will also provide local banks with an opportunity to securitize their real estate assets and convert them into tradable and saleable financial products, which will necessarily lead to increased lending and lower borrowing costs. and a significant portion of the Kingdom’s real estate inventory, which is currently valued at cost, will be revalued to reflect its fair value.
Making investment accessible to all... and reducing risks
Investing in publicly traded real estate funds will be accessible to everyone by virtue of their being offered for trading, which will create a new investment vehicle for small investors alongside the stock market. This will enable them to diversify their investment portfolios and reduce the level of risk to which be exposed to, whereas traditional real estate funds may be available only to a specific category of investors; some also rely on them as a savings portfolio that preserves and grows the investment principal.
These funds will be the best channel to help citizens save in a motivating way, as the value of their investment increases over time due to the rise in the value of the fund’s assets; at the very least, the principal is protected from inflation, as inflation will be offset by the appreciation of the assets.
