The introduction of real estate investment trusts (REITs) in Saudi Arabia in 2016 has led to substantial growth in the country's real estate market. Currently, 15 REIT funds with a total market capitalization of $3 billion are listed on the Saudi stock exchange. Initially, REIT offerings were oversubscribed and prices skyrocketed, with some doubling in value. However, prices have since fallen in line with international averages as investors realized REITs are better suited for long-term capital preservation than trading profits due to high dividend payouts. Going forward, choosing successful REITs will be challenging in the developing Saudi market.

1. Interesting Notes on the REIT
Market in Saudi Arabia
Dr. Ehsan Bayat

2. Interesting Notes on the REIT Market in Saudi Arabia
While the Saudi Arabian Real estate market remains unstable, the recent introduction of real estate
investment trusts (REITs) has driven substantial market growth. The Capital Markets Authority
established regulations for REITs in 2016, and the first one became commercially available that
November. Currently, 15 different investment funds—with a market cap of $3 billion—have been listed
on the Saudi Arabia stock exchange, Tadawul, with several more planned.

3. The Attraction to REITs among Saudi Investors
The REIT industry’s popularity in Saudi Arabia may not come as a surprise given real estate’s popularity
as an asset class in the country. REITs provide a unique opportunity for investors to develop interests in a
variety of market segments and physical locations without spending an exorbitant amount of capital.
Moreover, these funds maintain a good deal of liquidity, making them particularly attractive. Thus, the
popularity of REITs makes sense, especially considering their lower risk and stronger yields in
comparison to real estate equities. REITs also must pay out 90 percent of their earnings as dividends to
their holders according to Saudi Arabian law, making them similar to fixed income investments.

4. The Dramatic Rise in Saudi REIT Trading Values
On the other side of the coin, investor security remains unstable due to constant shifts in prices. Around the world, the
majority of REITs trade slightly below their net asset value, with an average discount of about 17 percent. However, in Saudi
Arabia, initial offerings quickly became oversubscribed and prices skyrocketed during post-launch trading as a result. Some
of the funds more than doubled in value. In September 2017 Saudi Arabian REITs were actually trading at a premium of 50
percent.
Some analysts say that Saudi investors misunderstood the role of REITs, which is what drove the prices so high. This
misunderstanding caused a kind of frenzy driven by speculation. Regardless of its cause, this rush to purchase hastened
efforts to bring new REITs to market. With prices rising so quickly, more people wanted to cash in on the phenomenon.
Partners at one law firm working to set these entities up noted that they suddenly became swamped with clients wanting to
sell assets to newly formed REITs or form an REIT themselves. At one point, newly listed vehicles would increase in price by
30 percent to 40 percent in just a matter of days.

5. Saudi REITs Fall in Line with International Standards
Much of the enthusiasm behind REITs makes sense given the fact that many companies experience a significant rise in value
immediately after an IPO. Furthermore, these new vehicles attracted a number of investors and came at a time when few
other equities were available in Saudi Arabia. However, many people did not consider the fact that REITs pay out 90 percent
of their earnings to shareholders, leaving very little room for capital appreciation. Thus, REITs are less than ideal for making
money through trading and better for growing wealth through inflation and overall capital preservation.
Investors soon realized that the effective yields of these entities were about 3 percent, barely enough to cover the
operational cost of the fund, so they began to sell. By August of 2018, REITs in Saudi Arabia were trading at the worldwide
average of a 13-percent discount. Unfortunately, this means that investors who bought at the peak of the market have
experienced major losses. However, with the market mostly equalized, investors have the opportunity to choose REITs with
the most potential for long-term returns. Prices are now fairly bunched together but will likely separate a bit in the coming
years as investors realize that some have better assets than others.

6. The Difficult Road ahead for Saudi Real Estate Investors
The task of choosing the right REIT will prove a difficult one given the infancy of the market. A number of
these vehicles have not yet even posted a full year of returns, which puts investors used to looking at
years of results at a disadvantage. On the bright side, these vehicles do provide transparency and
information, especially when compared to other investment options in Saudi Arabia. Twice annually, a
third-party evaluator establishes asset value and publishes this information publicly. This level of
transparency may be what has continued to attract attention from investors.
At the same time, REITs do come with risks, especially given the sluggish economy in Saudi Arabia.
Hundreds of new units have become available at a time when many foreign workers are leaving the
country because of an expatriate tax. However, rental income from prime properties are actually
increasing, so it is up to investors to find the REITs that have amassed the most impressive portfolio.