As the real estate sector grows and investors look for more opportunities, real estate income funds and trusts are beginning to emerge. The investment environment is starting to develop as people look beyond shares as a way of growing capital. Equities are still the main vehicle for investment, with the stock market posting returns of 11% in the three years to the beginning of 2013. The debt market is also taking off thanks to the rising popularity of sukuks (Islamic bonds), issuance of which increased by 470% between 2008 and 2013, to reach a total of SR40.01bn ($10.7bn) in the latter year. Funds are also growing, and there were 227 worth a total of $23.5bn at the beginning of 2013.
While money market funds and equity funds account for the vast majority of managed assets, at 62.7% and 31.2%, respectively, property and real estate funds are a growing element of the market.
HIGH NET WORTH: For such funds, Saudi Arabia has the potential to be an attractive market. The country has the biggest high-net-worth community in the MENA region. As of 2012, the Kingdom was home to 1265 ultra-high-net-worth individuals with assets of $230bn. The country’s real estate sector has the potential to be a strong performing asset class. Indeed, its fundamental dynamics – a young and growing population, strong economy and high government spending, particularly in infrastructure – bode well for the performance of real estate funds. These trends will be supported by a regulatory infrastructure for mortgages and a government-backed house-building programme.
The first Saudi-focused real estate fund was launched in May 2011 by local investment firm NCB Capital. The fund concentrated on the Makkah and Jeddah region. This was followed in 2012 by a fund focused on residential villas in north Riyadh, which raised SR280m ($74.6m). At the time, Tariq Linjawi, head of wealth management at NCB Capital, told the local press, “We managed to close subscription in the fund in record time due to investors’ confidence in the solid Saudi economy and supported by the fast growth of the local real estate sector along with huge demand for residential units in the Kingdom.” In 2012, AlKhabeer Capital announced plans for two funds, a $39.9m residential development fund and a $66.6m industrial property development fund. This trend has continued, with fund managers expressing their confidence in Saudi real estate as an asset moving forward. As such, property-related investment vehicles continue to launch in the Kingdom. In February 2014 Itqan Capital, a Saudi-based investment company launched its third property-related fund, the Real Estate Income Fund (REIF III). It is a four-year, closed-end fund that will invest in various real estate segments in major Saudi cities and follows on from the success of REIF I, launched in 2011, and REIF II. Adil Saud Dahlawi, CEO of Itqan Capital, told the Arab News, “The REIF model… has proven to be a very successful one by capitalising on the lucrative real estate sector in Saudi Arabia, offering investors an annual cash yield of 7-8% distributed every six months while promising capital gains on the medium term.”
ATTRACTIVE RETURNS: In an interest rate environment where one-year Saudi Treasury bills are offered at 0.7% and government bonds are offered at less than 200 basis points above the interbank rate, the returns on property funds could prove attractive. For example, the International Investment Real Estate (IIRE), a Dammam-based fund manager, launched one-year real estate trusts in 2012 and 2013 that achieved returns of 35% and 30%, respectively. On its latest real estate investment trust, the fund requires a minimum investment of $100,000 for the one-year tenure.
“We are confident enough to guarantee a minimum of 20% net return to our investors; we believe this guarantee is extremely prudent and backed up with extensive research,” Raed Al Khars, the CEO of IIRE, told Al Bawaba news website. In the longer term, the fund’s focus on land investment could prove risky, given government plans to curb land price escalation. For the time being, however, the fund and others concentrating on various property classes continue to perform well.
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