Franklin Templeton Investments, a global investment management organisation, is optimistic about real estate investment trusts, or Reits, becoming a significant regional industry in the next couple of years, with the company having substantial investment in the sector.
“If you look at the popularity of Reits in Australia, more than 70 per cent of all commercial real estate is listed in the public market, while in the US it is estimated to be 10 to 15 per cent. So it is a trend we are seeing globally and we expect it to roll over to this region,” said Jack Foster (pictured above), Managing Director and Head of Global Real Estate, Franklin Templeton Real Estate Advisors.
He spoke to Emirates Business about investment trusts, their benefits and the very likelihood of their investments in the region.
The UAE is a tax-free country, so does it makes sense to have Reits here?
Investors like the idea of being able to access returns from real estate. They have been able to access developments that go through volatile cycles, whereas Reits offer much more stability in returns. They must distribute a large proportion of their income and, therefore, investors get high dividend as well as stability in property valuations.
So what is the advantage for the government?
The tax-free issue is less of a perspective, but again investors will be attracted to the capital structure. And that will be a big driver for expansion of Reits.
Do you believe Middle Eastern investors will invest in these instruments?
They will invest in the same way as they invest in bonds. Investors here are looking to diversify their portfolios and real estate is arguably the largest asset class in the world. Real estate is a very personal asset and everyone feels very strongly about it, as majority of people who own homes have their net worth tied up in that. So, for them, access to real estate will be important.
How large will this sector be in the country?
Our focus is on existing firms and so we haven’t done any projections for Reits. If you look at the popularity of Reits in Australia, more than 70 per cent of all commercial real estate is listed in the public market, while in the US it is estimated to be 10 to 15 per cent. So it is a trend we are seeing globally and we expect it to roll over to this region.
Are you working with any real estate company for listing of their Reits?
Our focus is in Reits and we generally do not invest in developers. However, we are watching the developments very closely as and when these developments occur.
What returns can you expect vis-à-vis bonds and stocks?
Yields could be in a broad range of three to seven per cent depending upon the company, but you begin with a high-income component. We can easily see appreciation for property companies and yields achieving 10 per cent a year. The market is pretty strong, demographics are very healthy and the economic boom here will continue to bring good returns.
Are Reits open to small investors, or is it a game for institutional investors only?
Reits have a history of attracting small investors. However, it will generally be a combination of institutional and small investors. Global investors will invest in this region.
When do you expect the first Reits from the UAE to list?
There are few private Reits, which are not publicly traded, although legislation has been approved in Kuwait and Dubai. In the next couple of years, we will see them emerge as it is all about access to capital and the attractiveness of the capital structure. It will certainly be a pretty significant industry.
How much are you planning to invest in this region?
We will have exposure to this region as opportunities arise. As the industry grows, we can have more specific opportunities to invest, but for now investors can access Reits through our mutual fund that is based in Luxembourg. Middle Eastern investors are some of the biggest investors in the world and we believe they have large exposure in the US.
Many investors, who look around the world for real estate, also look for discounts. Reits offer them an easy way to access property markets, not just in the US and Europe, but even in Asia.
So we believe there would be a large proportion of exposure of Middle Eastern investors in the globe. They are looking for Reits and we are certainly advising our clients to consider that option.
We see strong value in this region and we can have substantial exposure to Reits in the future because we are very value oriented. When we see the stocks emerge here, we will definitely have significant exposure. We see the region as a very attractive for investing in property over the long term and are definitely exploring that option.
Do you expect the UAE property market to cool down anytime soon?
We don’t see anything on the horizon that would suggest the market is likely to cool down soon. You have a growing population and strong economic activity will continue in the near future. I don’t see the market cooling down at this point, as demand will be there. But one big factor that may have an impact is overbuilding. At this point, we don’t see it happening. But, it is frustrating for us, as we would like to see some Reits, so that we can get some exposure here.
Are any realty funds planned for this region?
We are very conscious of the needs of UAE investors. So we are exploring a Shariah-compliant opportunity. We will be looking for a vehicle to allow Middle Eastern investors to access Shariah-compliant vehicles overseas.
Did you suffer from the slowdown/recession in the US real estate market?
We look for value around the world and we actually were underweight in the US for quite sometime as we felt valuations were too high. With the correction of property stocks, we have increased our presence in the US. So we were not hit dramatically.