The way forward: First domestic real estate investment trust blazes a new trail

The firm building the world’s tallest skyscraper, the Jeddah Tower, overlooking the Red Sea port of Jeddah has developed a funding vehicle for the construction that is a first for Saudi Arabia. The tower will be higher than Dubai’s Burj Khalifa and will form the iconic centrepiece of Jeddah Economic City. Thanks to new regulations from Saudi Arabia’s Capital Market Authority (CMA), the construction work will be funded by the country’s first real estate investment trust (REIT), a finance model that can now be used by other developers and investors in Saudi Arabia.

Jeddah Tower

The Alinma Jeddah Economic City Fund holds SR8.4bn ($2.2bn) and is the result of a deal between Kingdom Holdings’ Jeddah Economic Company and Alinma Investment, a SR1bn ($266.6m) Saudi limited liability company that offers investment products and services. The fund is sharia-compliant and will operate under CMA regulations, which were published in 2015. The agreement was signed on October 29 of that year, when construction work on the iconic tower had reached the 26th floor. The purpose of the fund will be to develop the first phase of the Jeddah Economic City project, including the construction of Jeddah Tower. Under the arrangement Alinma Bank will finance the fund, to be managed by Alinma Investment, while Jeddah Economic Company will act as the master developer and draw on the fund’s credit lines. The fund’s board will be chaired by Prince Alwaleed bin Talal, chairman of Kingdom Holding Company, while Abdulmohsen Al Fares, CEO of Alinma Bank, will be deputy chairman. Jeddah Economic Company bought out 100% of the fund’s units.

At the signing ceremony Prince Alwaleed spelt out the significance of the funding arrangement. “This agreement with Alinma is part of Jeddah Economic Company’s drive to diversify its sources of funding for Jeddah Tower and Jeddah Economic City,” said Prince Alwaleed, in a statement reported on Kingdom Holding’s website. Talal Al Maiman, the executive-director of the Kingdom Holding Company, said that financial planning for the project took over two years. “When we formulated and prepared the financial model, which included all aspects of cost and revenue, we made sure that we studied every single one of the project’s needs,” he said in a statement on the holding company’s website. “Alinma Investment has been an active partner in the process of devising a detailed, sophisticated financial model that complies with sharia law so we can build the world’s highest skyscraper on our homeland. Such a financial model will set the trend for future real estate projects.”

When the REIT was created, 85,000 sq metres of the Jeddah Tower had been completed and with the funding in place, Mounib Hammoud, the CEO of Jeddah Economic Company, said he expected the project to be completed on schedule. The tower will be over 1000 metres high and is expected to have 50 more floors than Burj Khalifa in Dubai. It will have more than 435,000 sq metres of floor space and include a 200-key Four Seasons hotel, 102 branded Four Seasons residences, office space, residential units and the world’s highest observatory, the Sky Terrace.

Economic City

Jeddah Economic City is being built over 5.3 sq km at an estimated cost of SR75bn ($20bn), according to Colliers International. The first phase will cover an area of 1.5 sq km and include 3.3m sq metres of buildings including the Jeddah Tower that will form the downtown area of northern Jeddah, with hotels, offices, malls and offices. It is expected to be completed in 2020. Development of Jeddah Economic City is expected to carry on in two further phases, with this work beginning in 2021. The completion of the project will see the relatively remote Obhur resort become a new focal point for the ancient Red Sea port, and it will be connected by the modern regional rail, metro and tram services to Jeddah itself, and to King Abdulaziz International Airport, which is being expanded to cater for 80m passengers annually.

REIT Regulations

News that the CMA was considering regulations to govern the listing of REITs was first revealed in May 2015. At that time the authority was taking soundings on how REITs work in international markets, according to Reuters, and it would appear to have drafted regulations quite swiftly in order to facilitate the agreement over the Jeddah Tower some six months later.

The REIT regulations are published on the CMA website and explain how the securities, which trade on stock markets but make direct investments in properties and distribute profits as dividends, must be established and administered in the Kingdom.

Foreign Investors

The initial consideration of these regulations came a month before the Saudi Stock Exchange, also known as the Tadawul, was opened to direct foreign investment. REITs have a specific appeal for international investors in Saudi Arabia. Among the SAMA regulations on REITs a clause states: “Without prejudice to the rule of real estate ownership for non-Saudis in the Kingdom, subscription in the fund is open to any Saudi, GCC citizens or non-Saudi residents in the Kingdom.” Reuters reported that this type of investment would also offer tax benefits to foreign investors, who pay a 20% tax on all profits generated in the Kingdom as well as a 5% withholding tax when repatriating dividends.


The Jeddah Economic City REIT is not the first in the GCC. Emirates REIT was listed in 2014, and Bahrain’s stock market announced it was drawing up regulations governing them in December 2015. Emirates REIT was originally created in November 2010 but only listed in April 2014. The fund manager was created as a joint venture between Dubai Islamic Bank (DIB), which owned 25% of the fund manager’s issued share capital, and Eiffel Management, which owned the remaining 75%. Eiffel Management is based in the British Virgin Islands and is wholly owned by a Liechtenstein-based foundation, Galaxis 239 Stiftung. DIB is a publicly listed corporation, with the Investment Corporation of Dubai its biggest shareholder.

According to its launch prospectus, Emirates REIT was initially a sharia-compliant fund that owned 10 properties in Dubai with a net leasable area of 1.2m sq metres, of which 46.9% was commercial, 12.7% retail and 39.8% educational, with the remaining land taken up by storage between the properties. By January 2016 its portfolio was valued at $670m, consisting of eight properties with a net asset value of $466m, which included office buildings in Media City, Internet City and Dubai International Financial Centre, two schools (GEMS World Academy and Jebel Ali School in Dubai Sports City) and a community mall in Dubai Marina. Emirates REIT’s financial performance for 2015 showed net profits up 26.7%, from $48.6m to $61.5m, and its net asset value at $469.6m, up 8.7% year-on-year. The net asset value per share rose from $1.44 to $1.57, which with the total dividend payout of $0.08 per share, represented a total return of 14.2%. Over the same period the Dubai Financial Market General Index fell by 16.5%. This performance suggests the REIT model may become popular in GCC states in the future. At the end of 2015 Emirates REIT was actively pursuing acquisitions, with 300 properties under consideration, including schools, car parks, office spaces, retail outlets and hospitality buildings such as hotels and serviced apartments.

Global REITs

Ratings agency Standard and Poor’s (S&P), which operates the S&P Global REIT Index, dates the development of the investment idea back to mid-19th-century Massachusetts, but the first REIT was not set up until 1961, and it took several decades for them to catch on.

Between 1991 and 1993 the US REIT Index generated an average annualised return of 20%. By 1994 the estimated market capitalisation of REITs in the US alone had reached $44bn, almost six times its value in 1990. According to a 2014 report by S&P’s, REITs have evolved into a mature asset class with more than $670bn in market capitalisation in the US.

Vast Potential

Although Saudi Arabia’s first REIT has been developed as a vehicle for two domestic business entities, Kingdom Holding Company and Alinma Investment, the establishment of the model and the provision of the necessary regulatory structure by the CMA could pave the way for an increased number of these investment strategies.

Overseas institutional investors could see subsequent REIT launches as an opportunity to take a stake in real estate ventures in Saudi Arabia. This in turn could help channel additional sources of funding into the development of private-sector schemes across the Kingdom. As Emirates REIT has shown, a mixed-portfolio approach could see these funds used to develop private schools, luxury office accommodation, hotels or new retail developments. The size of the market in Saudi Arabia, when compared to Dubai, could see REIT funds in the Kingdom surpass the performance of those in the emirate, just as the Jeddah Tower will, once complete, overshadow Burj Khalifa.