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Real Estate Investment Trust

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Mariam Abdulnabi

on 9 June 2014

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Transcript of Real Estate Investment Trust

Real Estate Investment Trusts
Naseej Properties
Presented by:
Mona Ali
Rawan Khunji
Maryam Sadeq

Definition of REITs
Advantages of REITs
High dividend yields
Carries greater returns on average comparing to other investments.
It is very easy to buy and sell publicly traded REITs’ shares, which are traded on major stock exchanges.
Lower Volatility
Comparing to the performance of other asset classes, REITs have low correlation. This is useful for diversification of portfolio, which results in upsurge returns and lower risk.
It is convenient for those who do not wish to go through the process of looking for a house, buying and renting it and selling it later.
Tax benefits
dissimilar to normal corporate incomes or dividends, there is one level of taxation only for the distributions that are paid to REIT investors.
Ownership of commercial real estate
It gives the average investor the benefit of skilled property management without the usually associated great capital and labor necessities.
A security which sells similar to a stock on the main exchanges, and invests and participates in real estate in a direct way, either throughout mortgages or properties. REITs collect particular tax considerations and usually offer investors great returns, also a greatly liquid technique of investing and participating in real estate. Individuals either invest in real estate investment funds by buying their shares straight on an open exchange, or they could invest in a mutual or a joint fund that concentrates on public real estate.
Types of REITs
Equity REITs: This type of REITs invest in and own possessions and properties, which are income producing, and generate income by renting them out.

Mortgage REITs:
allows investors to own property mortgages, purchase mortgages from lenders and loan money for mortgages.
Profits and income from this type of REITs come from interest earned on mortgage loans.
This type of REITs tends to have more leverage than equity REITs. Because of these trusts’ exposure to interest rates, this type has a greater risk. As the value of REITs can fall significantly, if interest rates increases.

Hybrid REITs: This type combines both types of REITs, which can be either close or open ended
History of REITs
Congress created the REITs in 1960 in the United States in order to give all Americans not only the wealthy, the chance to invest in income creating real estate in a way that is comparable to how numerous Americans invest in bonds and stocks throughout shared funds. September 2010 was marked the start of the 50th anniversary year of the United States REIT industry.
Naseej can invest in many types of real estate for the REIT, however they should be
income-generating assets
Naseej cannot invest in a land that has nothing built in it yet, nor can it invest in a new building or a new project, as it is required for the property to be in progress and generate income.
office buildings
shopping malls
self-storage facilities
health care facilities
industrial facilities
shopping centers etc.
Examples of REITs
Disadvantages of REITs
REITS are non-traded they are considered to be illiquid investments
They cannot be sold on an open market, therefore, it is challenging to sell a share if it must be sold immediately to raise money.
Problematic to regulate the worth of a share of the REIT that is non-traded
It is difficult to measure the value of the REIT, as This type of REITs normally do not specify an approximation of its worth per share till 18 months after their offering ends.
Slower Growth
only reinvest 10% of the income back to the core business lines.
Even though businesses manage to be rather stable, this does not mean that the REITs are without risk. For instance, the real estate market is disposed to cyclical slumps.
Conflict between Naseej and the outsource company
For instance, the REIT might pay the outside manager major fees grounded on the total of assets under management and property acquisitions. These fee inducements might not necessarily associate with the shareholders’ interests.
No tax benefits in the GCC
investors will not gain the tax benefit that comes from investing in a REIT.
Difference between REITs and other investment Structures
REITs vs. Bonds
Interest rate

REITs vs. Direct commercial real estate investment
Existing REITs in Bahrain
23rd of June 2009
first Shariah compliant REIT of its kind to be established in the MENA area
IREIT has been intended to be listed on the Bahrain Stock Exchange
Inovest has asked to postpone the launch of listing the IREIT
Al salam bank
first Asian REIT fund in the world that is Shariah complaint
It will invest in a portfolio of Asian properties
The REIT is going to invest in 15 to 35 properties
deliver the best investment answer for accessing the developing of Asian real estate market in an approach that is diversified and Shariah compliant.
Dubai vs. UK
Dubai: Emirates REIT
launched in 2010
listed in April,2014
80% dividend

January 2007
90% dividend

Western Vs. Regional REITs
Shariah Compliance
Islamic REITs started in Malaysia in 2005 by introducing the guidelines

The first publically listed was in Singapore in 2008

Should follow AAOIFI Board regulations and standards

REITs are not required to be Shariah Compliant (If you are dealing with Islamic banks in Bahrain you have to do Shariah compliant REITs)

We recommend Naseej to establish an islamic REIT
Open/Close ended REITs
Open ended
Issue and exchange holdings at anytime

Close ended
It has limited accounts of holdings

REITs structure in Expert is open ended and it should be listed

There is no regulation for the Exempt; it can be either open or close ended REIT

We recommend Naseej to establish an open ended structure REIT

The investors in the GCC are not educated because of that there are no RETAIL REITs

Lack of incentives and legislation (Restriction on investors in the GCC as there is restrictions on foreign ownership)

There is an opportunity to establish REITs in the GCC
Management Structure
Management Strategies
Marketing Strategies

Management Structure
Outsource staff from 4 different entities:

Entity 1; Trustee, Custodian, Fund administrator, Registrar/ Transfer Agent. E.g. Two Seas Trust

Entity 2; Fund manager, Placement agent. E.g. SICO

Entity 3; External Auditor e.g. BDO

Entity4; Investment Advisor (optional) e.g. CGM
Management Structure
Management Strategies
To focus on managing the real estate portfolio

To refine the company’s balance sheet

To control cost-operating margin, grow the NAV and manage the interest rate risks.

To promote the REITs
Marketing Strategies
Core Product, Actual Product, Augmented Product

Public / Private: Existing Clients

Issue IPO

Marketing campaign, newspapers (87%), exhibitions, billboards, telecommunication companies, social media

Private PPM
Lack of knowledge and expertise in the GCC
The fact that REITs are fairly new in the Middle East; therefore, there is a limited amount of knowledge and expertise. And this may eventually lead to a limited number of interested investors.
Most stable company/Investment
REITs own hard, tangible assets such as land and buildings, and often sign their tenants to long-term lease contracts. Because of this, REITs tend to be some of the most stable companies on the market.
A REIT is a separate legal entity
if the company goes bankrupted, the REIT won’t get affected and this will raise the investors’ confidence in the REIT.
Who can invest?
Accredited Investors only

Accredited investors and expert investors

All investors

Accredited investors: minimum net worth $ 1,000,000, minimum investment $100,000
Expert Investors: minimum net worth $100,000, minimum investment $10,000

REIT category
Type of investors
Public/Private REITs
Private REIT: PIU, PPM/ not listed

Public REIT: CIU BD exempt/ expert / retail; listed within 6 months

Recommended: Public REIT

Regulatory Framework
Min/Max Values
Minimum value of the project: $20 million US Dollars i.e. BD 7.5 million

BD Expert: min 2 properties; 80% of total NAV, max 20% for property development, max 20% on other REITs

BD Exempt: min 1 property

Max leverage 60%

Min CA 12%, Basel II requirements

Financial distributions: 90% of total net realized income within 6 months
Financial Requirements
CBB: Volume 7, CIU Bahrain Domiciled REIT

Trustee and relevant persons will ensure compliance and submit required reports and annual valuation reports to the CBB

BD Exempt: high level disclosure
Optimal Size
Min 2 properties, max up to 70

Budget: BD 20 m (Debt/Equity)

Optimal size: 6 properties or more "don't put all your eggs in one basket"

Stable property: Expected to generate income for the life of the project
Financial Requirements
Transaction and management costs

Application fees BD 100

Subscription fees 2%

Annual CBB fees BD 2000

Management fees 1-2%

This report will explain whether it is feasible for Naseej to establish & manage a REIT in accordance to the regulatory environment in Bahrain
Thank you
Please feel free to ask any questions
No minimum investment
Gives all citizens the opportunity to invest, however this is not yet applied in Bahrain and this will be explained in more details.
Regulatory Metrics
Find attractive properties
Seek an investment advisor
Buy properties if decided to establish a REIT
Find relevant persons
Enter into an agreement with them
Choose a specific structure
Assign the trustee to set up the prospectus and apply for the REIT
Full transcript