Investor interest wanes as Saudi real estate trusts underperform

May 16, 2024, 5:57 AM

Saudi REITs need more exposure to 'sheds and beds' – warehousing and hospitals – says one expert

Saudi REIT share price falling
Generally diverse portfolios
Stronger than Dubai counterparts

Saudi Arabia’s publicly listed real estate investment trusts lag the kingdom’s main stock index as investor enthusiasm for the REIT asset class wanes. This is despite steady returns and an upbeat outlook in the property sector.

REITs are often listed on bourses and invest in various property types such as offices, residential, education facilities and commercial buildings. REIT shareholders get dividends, while management companies receive fees.

In 2016, Saudi Arabia’s Capital Market Authority permitted REITs to join the kingdom’s stock exchange. Subsequently, many Saudi conglomerates with extensive property portfolios brought these assets together into a REIT and listed this on the stock market, generating cash from otherwise largely illiquid assets.

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Today, Saudi Arabia has 18 listed REITs. On May 13 their combined market capitalisation was SAR16.5 billion ($4.4 billion).

“In the long term we expect further listings, but I doubt the number of listed REITs will increase by much any time soon,” said Taimur Khan, head of Middle East research at consultants CBRE. “This is largely due to the availability of assets.”

Al Rajhi Reit is the largest by market value (SAR2.3 billion), followed by Jadwa REIT Saudi (SAR2.2 billion), Sedco Capital REIT and Bonyan REIT (both SAR1.6 billion), and Riyad REIT (SAR1.3 billion), bourse data shows.

Saudi REITs held their value well following an initial flurry of listings, said Khan, defying a broader downturn in valuations worldwide.

“That was indicative of where Saudi’s real estate story was at, as well having this liquid real estate asset class coming into play for investors,” said Khan.

Yet the share price of four of the five biggest Saudi REITs slid over the 12 months to May 13.

Al Rajhi was down 16 percent and Jadwa dropped 11 percent, while Sedco and Alahli both fell 16 percent. Bonyan was flat. Saudi Arabia’s main stock index gained about 8 percent over the same period.

“Saudi Arabia’s built environment is changing quickly with new stock coming into the market, so REITs with a portfolio of older assets might be less attractive in some market segments, for example older malls, and therefore less valuable,” said Khan.

Al Rajhi Reit owns around 20 properties spanning commercial, education, healthcare and residential buildings. As of March 31 its net asset value had fallen 16 percent since inception.

“Generally speaking, most REITs in Saudi don’t have enough exposure to ‘sheds and beds’ ie warehousing and healthcare,” said Andrew Love, a regional partner at consultants Knight Frank.

Sedco Capital REIT’s portfolio of 21 properties spans retail, education, leisure and commercial facilities, while residential comprises 28 percent of Jadwa Reit Saudi’s holdings. Office and commercial (both 18 percent) and retail (14 percent) are other sizable components.

“Globally, REITs tend to be quite specialised in terms of their portfolio, focusing on a particular real estate asset class such as commercial or education for example,” said Khan.

“Saudi REITs’ portfolios are typically much more diversified and that makes it harder to identify what’s driving the performance of their stock prices.”

Nevertheless, Saudi REITs attract more investor activity and typically trade at a smaller discount to their net asset value compared with their listed Dubai counterparts, he explained.

Most Saudi listed REITs provide “fairly strong” dividend returns, said Khan.

Broadly, the Saudi real estate sector is bullish. Office rents in Riyadh made double-digit percentage increases in 2023, while premium office rents in Jeddah climbed 20 percent over the same period according to CBRE.

Residential prices also rose in Saudi Arabia’s key cities, aside from Jeddah apartments, CBRE estimates.

“There's a huge amount of demand, particularly in Riyadh, where there’s population growth, both organic and from inbound migration, which will be a big driver and underpin real estate values”, added Khan.

Knight Frank’s Love was bullish on Saudi REITs’ long-term future.

“As the market grows and laws around foreign ownership evolve, we expect there to be increased demand, particularly from overseas investors looking for exposure and diversification,” he added.