Real estate trusts struggle despite strong Dubai market

ENBD REIT

• Two trusts down on IPO prices
• Focus on rental income
• ‘No appetite from investors’

Dubai’s resurgent property market has delivered riches to property owners and shareholders of leading developers like Emaar Properties, but investors in two listed Dubai real estate investment trusts – Emirates REIT and ENBD REIT – are nursing sustained losses.

Both trusts are listed on Nasdaq Dubai. The emirate’s international bourse launched in 2005 with the aim of emulating stock exchanges in Hong Kong and Singapore but has struggled to attract listings – and investors.

REITs are designed to allow smaller investors to access big-ticket property propositions, including commercial real estate but Emirates REIT and ENBD REIT are struggling to generate real profits despite an industry boom.

There seems little prospect for them to rebound, say analysts, who instead highlight alternative investments that could outperform.

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Founded in 2010, Emirates REIT raised $175 million when an initial public offering in April 2014 was priced at $1.36 a share.

ENBD REIT, which is managed by Dubai’s top bank Emirates NBD, priced its March 2017 IPO at at $1.11, raising $105 million.

Shares in Emirates and ENBD ended Wednesday at $0.19 and $0.37 respectively, down 86 percent and 67 percent on their IPO prices.

Neither responded to requests for comment.

“There’s a big divergence between the performance of Dubai REITs and the real estate sector,” said Vijay Valecha, chief investment officer at Century Financial.

“Anyone who invested in REITS would have thought they would get similar returns to those that real estate owners are getting, but that hasn’t happened.”

Trading at a discount

Emirates REIT owns seven office and retail properties and three education facilities. Its net asset value (NAV) – the value of its properties minus its debt – was almost $419 million as of June 30, up nearly 19 percent year on year. Yet Emirates REIT’s market capitalisation is just $62.4 million, according to S&P Global data.

Such a discrepancy may normally attract the interest of investors in distressed companies. However, the price that Emirates REIT would get for its real estate assets would likely be significantly lower than its NAV if it were to sell them, said Joice Mathew, United Securities head of research in Muscat.

“The NAV is created out of the unrealised profit in the value of assets,” he explained. “I don’t see those values being attainable currently.”

ENBD REIT owns 11 Dubai properties spanning offices, retail and education.

The fund’s NAV was $183 million as of June 30, while its market capitalisation is almost $93 million, according to S&P.

“Liquidity in Emirates REIT and ENBD REIT has totally dried up and they’re trading at huge discounts to their NAVs, so achieving a proper valuation for any new publicly listed REITs would be challenging,” said Mathew.

REITs generally focus on rental income and not property price appreciation, said Valecha.

“The REITs are structured in a bad way, so they continuously lose money and hence their share prices keep declining,” Valecha added. “The structure of REITs was functionable when interest rates were low but now that we’re in a higher-for-longer rate environment the numbers just don’t add up.”

Anthony Taylor, ENBD REIT’s then head of real estate, told a June 7 analysts call that high interest rates had put potential dividends “under pressure”.

Yet premium office rents in Dubai rose 11 percent year on year in the third quarter, according to consultants JLL, which estimates central business district occupancy levels were 90 percent. Dubai retail rents rose 5 percent over the same period.

Trusts struggling worldwide

ENBD REIT’s second-quarter net rental income excluding changes in property valuations fell 46 percent year on year to AED 1.70 million as its finance costs more than doubled over the same period.

Similarly, Emirates REIT’s made a third-quarter loss of $5.4 million excluding revaluation gains on its portfolio.

In December 2022, Emirates REIT refinanced a $400 million sukuk, issuing a new $380 million sukuk upon which it will pay 9.5 percent interest versus 5.1 percent previously.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest, and also may finance businesses involved in activities not allowed under Sharia law.

Clauses prevent Emirates REIT paying cash dividends. For 2020-2022, it paid dividends in bonus shares, which dilute existing shareholding and so are a purely cosmetic gesture, said Mathew.

“The real estate bull run of the past few years has been astronomical and yet still there’s no appetite from investors to buy REIT shares,” said Century Financial’s Valecha.

“Management fees are extremely high. The associated costs of real estate are very expensive and it’s difficult to manage these assets – it’s far more complicated than an equities ETF (exchange-traded fund), for example.

“REITs worldwide are struggling. They’re being superseded by a new concept of fractional ownership, which seems a much better way to invest in real estate in small monetary denominations.”

Business park owner Tecom – which joined the Dubai Financial Market stock exchange following a $463 million IPO in June 2022 – is proving a more attractive alternative to Dubai’s listed REITs, said Mathew.

Tecom provides a dividend yield of around 4.6 percent, while as a liquid stock on the buoyant Dubai Financial Market, investors can easily enter and exit – unlike REIT shareholders.

“Right now, Tecom has high occupancy levels and a very strong tenant base – if its rental yield continues to rise, there’s a lot of upside in the stock,” added Mathew.