What is a Real estate investment trust?
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.
- What are the parties involved in a REIT?
some of the best-known REITs in Saudi Arabia:
- Deraya REIT
- Al-Jazeera REIT
- Taaleem REIT
- AL Riyadh REIT
- Mosharaka REIT
- REITs Manager
the REIT manager sets and executes the strategic direction of the trust according to its stated investment strategy. For example, it is responsible for the acquisition and divestment of the REIT’s properties.
they typically appoint a property manager to manage the real estate properties of the REIT.
manager responsibilities Include:
- renting out properties to achieve the best rental income
- Unit Holders
A unitholder is an investor who owns one or more units in an investment trust or master limited partnership (MLP). A unit is equivalent to a share, or piece of interest. Unitholders are afforded specific rights that are outlined in the trust declaration, which governs the trust’s actions.
- Asset Valuation Companies
A company must meet some requirements to be considered as a REIT, which is why such companies need services of valuation companies to ensure they meet those requirements issued by the Saudi authority for accredited valuers & ministry of commerce
These requirements include:
- Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
- Earn at least 75% of gross income from rents, interest on mortgages that finance a real property, or real estate sales
- Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
- Be an entity that’s taxable as a corporation
- Be managed by a board of directors or trustees
- Have at least 100 shareholders after its first year of existence
- Have no more than 50% of its shares held by five or fewer individuals
What are some benefits of investing in Real estate investment trusts?
The risk arising from investing in one property is diluted when you invest in a pool of properties through a REIT.
As an individual investor, you may not be able to afford a direct investment into a large asset such as office buildings or shopping malls. By investing in a REIT, you get to invest in these large assets in bite-size chunks.
It is easier to buy and sell units in a REIT than to buy and sell properties. REITs are listed on the stock exchange and you can trade units in a REIT throughout the trading day.
- Tax benefits
REITs that distribute at least 90% of taxable income each year enjoy tax transparency treatment by IRAS (subject to certain conditions). Individual investors who receive these distributions also enjoy the tax-exemption treatment.
- Transparency and flexibility
You can access information on REIT prices and trade REITs throughout the trading day.
What are some factors affecting REITs’ Valuation regarding the Saudi market?
- Geographical diversification, “local, regional, and international.”
- Diversifying the fund’s assets, “residential, commercial, administrative, hotel, sports, educational ….”.
- Diversification is based on the quality of the tenants.
- Diversification related to the contract period.