REITs Arrive in Saudi Arabia: What Investors Need to Know - Latham & Watkins LLP
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Latham & Watkins REITs Practice 3 August 2017 | Number 2179
REITs Arrive in Saudi Arabia: What Investors Need to Know
The introduction of Real Estate Investment Traded Funds (REITs) will facilitate increased
investment in Saudi Arabia’s real estate sector.
Key Points:
• REITs intend to provide retail investors with access to high-grade, low-risk, income-generating
real estate assets in Saudi Arabia.
• REITs also aim to help develop a mature and sophisticated real estate sector in Saudi Arabia.
• The introduction of REITs raises new investment opportunities for investors.
Objectives
The Board of the Capital Market Authority (CMA) formally introduced (REITs) to Saudi Arabia when it
issued the Instructions for REITs (REITs Instructions). The first REIT was listed on the Saudi Stock
Exchange (Tadawul) on 13 November 2016. Currently, four REITs are listed on Tadawul with a number of
others to follow.
REITs were introduced as a new financing tool that taps into Saudi Arabia’s large portfolio of real estate
assets. This financing tool aims to provide retail investors with a new investment channel through which
they can access the Saudi real estate market. In addition, REITs provide tangible evidence of Saudi
Arabia’s efforts to achieve the National Transformation Program 2020.1
Global REIT Market 2
REITs are an internationally recognized instrument. The United States is the world’s largest listed REIT
market with 464 listed REITs amounting to a market capitalization of more than US$2.4 trillion to date.
Emerging markets, such as Malaysia and Turkey, have comparatively smaller numbers of listed REITs
with 24 and 25 listed REITs, respectively, and with market capitalizations amounting to US$6 billion each.
France and the United Kingdom lead the European market with 189 and 246 listed REITs, respectively,
amounting to market capitalization values of US$986 million and US$985 million, respectively.
Closer to Saudi Arabia, the United Arab Emirates (UAE) offers the ENBD REIT and the Emirates REIT,
which are listed on NASDAQ Dubai with market capitalizations of US$261 million and US$289 million
respectively. Other Gulf Cooperation Council (GCC) countries, such as Bahrain and Kuwait, have private
REITs with total sizes of US$80 million and US$100 million, respectively.
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Reserved.Legal Environment for REITs in Saudi Arabia
The Investment Fund Regulations, which the Board of the CMA issued on 24 December 2006 and
amended on 23 May 2016, regulates, among other capital market activities, private and public mutual
funds and private real estate funds in Saudi Arabia. Public real estate funds are in turn regulated by the
Real Estate Investment Funds Regulations, which the CMA issued on 15 July 2006 (the Real Estate
Investment Regulations).
Fund managers issue private funds, including private real estate investment funds, only to sophisticated
investors or investors with a minimum subscription amount of SAR1 million.3 Whereas public funds are
funds that are offered to the public either through the fund managers of such funds or on Tadawul.
Notably, a mutual fund that primarily focuses on investing in securities offered by public real estate
companies is considered a mutual fund and not a real estate investment fund in Saudi Arabia. However,
REITs — which invest directly in real estate properties — comply with both the Real Estate Investment
Funds Regulations and the REITs Instructions.
Requirements of the REITs Instructions
The REITs Instructions define REITs as real estate investment funds offered to the public and listed on
Tadawul, with the main objective of investing in “developed and constructed real estate properties
capable of generating periodic and rental income.”
REITs must distribute a specified percentage of their profits to their unitholders at least once a year.4
Developed and constructed real estate properties are ready-to-use real estate properties, including
commercial, residential, agricultural, and industrial properties. The interests of unitholders in REITs
consist of units, each of which represents ownership in the REIT’s underlying real estate.
The main features of a REIT include:
• The fund manager should appoint a licensed, independent custodian that is entitled to retain the
REIT’s assets. However, the appointed custodian is not permitted to be the fund manager.
• The custodian should separate all of the REIT’s assets from any personal assets or other clients’
assets. All records required to support performances of contractual responsibilities should be
maintained and separately allocated by registering all units and other assets of the REIT under the
name of the custodian.
• The unitholders should collectively own the REIT’s assets.
• The fund manager must appoint a specialized real estate management company that is licensed by
the Saudi Authority for Accredited Valuers to manage the REIT’s real assets. Such company should
have the necessary expertise in managing real estate and be responsible for executing property
management activities including, but not limited to, property management, property maintenance, and
leasing services and collection. This is intended to facilitate a continuous growth in the real estate
assets during the term of the REIT.
Law Office of Salman M. Al-Sudairi in association with Latham & Watkins 3 August 2017 | Number 2179 | Page 2How REITs Work 5 Key Considerations The REITs Instructions raise a number of key considerations, including: Form A REIT must be a closed-ended fund with a capital of at least SAR100 million with a nominal value of SAR10 for each unit.6 This nominal value is intended to provide retail investors with the opportunity to invest in the real estate sector in Saudi Arabia through the medium of a REIT. Such investors may consist of both local and non-local investors (with a view to facilitating foreign capital into Saudi Arabia). Ownership Structure The public should own at least 30% percent of the units in a REIT.7 The REITs Instructions define public to exclude any unitholder holding units that represent 5% or more of the aggregate units of the REIT, the fund manager or the fund manager’s affiliates, or any member of the REIT’s board of directors. The number of unitholders from the public should be at least 50.8 Unitholders may exercise all rights attached thereto, including the right to vote and the right to subscribe in in-kind units and/or tradable rights issued as a result of a capital increase.9 Portfolio of Real Estate Assets A REIT’s underlying portfolio of real estate assets needs to be registered under the name of a custodian, provided that such custodian is not the fund manager of the underlying REIT, a subcontracted fund manager of such REIT, or a subsidiary of any of them.10 Similar to other real estate investment funds, a REIT can be a private income-generating real estate fund. The REIT must acquire and develop its underlying portfolio of real estate assets with a view to operating such real estate assets as part of its own investment portfolio, as opposed to reselling such real estate assets after they have been developed. Such real estate assets can be industrial, residential, office, retail, specialized (healthcare, hotels/resorts, and storage properties), or a hybrid of any of these. Law Office of Salman M. Al-Sudairi in association with Latham & Watkins 3 August 2017 | Number 2179 | Page 3
The CMA requires REITs to invest at least 75% of their total assets in developed and constructed real
estate assets that are capable of generating periodic and rental income and prohibits investments in
“white lands”.11 The REITs Instructions do not provide a definition for white lands; however, the White
Lands Fees Regulations that the Royal Decree number M/4 dated 12/02/1437H promulgated. (24
November 2015G) (the White Lands Regulation) does.
The White Lands Regulation defines white lands as “vacant lands in urban areas classified as commercial
residential lands or residential lands.”12 As of the publication of this Client Alert, how this is to be
definitively interpreted in practice particularly regarding the real estate assets to which the REITs
Instructions will apply remains unclear.
Moreover, a REIT may invest a maximum of 25% of its total assets in developing, redeveloping, or
renovating its underlying real estate assets.13 No more than 25% percent of the REIT’s total assets may
be located outside Saudi Arabia.14
Disclosure Requirements
REITs are subject to extensive disclosure requirements compared to other types of real estate investment
funds. In order to facilitate a transparent disclosure regime for prospective investors, a REIT’s fund
manager must make certain disclosures to unitholders and to the CMA without delay, including:
• Any material developments that are not publicly available and which a prudent investor may consider
when making an investment decision. Material developments include developments that would affect
the REIT’s activities, assets and liabilities, financial position, and unit price.
• Any purchase, sale, mortgage, or lease of real estate assets with a total value that equals or exceeds
10% of the value of the REIT’s total assets
• Any change in the composition of the REIT’s board of directors or any of its committees
• Any increase or decrease of the REIT’s net assets or its total profits by 10% or more
• The annual audited financial statements of the REIT15
Dividends
Unlike other real estate investment funds, a REIT typically pays out a large share of its taxable income as
dividends to unitholders. Dividends distributed annually to a REIT’s unitholders must not be less than
90% of the net profits of the underlying REIT.16 The net result being that only 10% of a REIT’s annual
profits may be used in reinvesting in order to provide reliable yields in the form of an annual income
distribution to unitholders whilst ensuring that profits are not wholly allocated to debt repayments.
Tradability
Trading in the units of real estate investment funds, other than REITs, is subject to a relatively
complicated procedure that the fund managers of such funds conduct. Units in REITs can, as is the case
for securities, however, be traded through Tadawul’s main market.
Law Office of Salman M. Al-Sudairi in association with Latham & Watkins 3 August 2017 | Number 2179 | Page 4Debt
A REIT’s total debt cannot exceed 50% of the total value of its assets.17
A REIT’s capital may only be increased through either an in-kind contribution or through the issuance of
tradable rights issues in accordance with the guidelines CMA provided for the purposes of implementing
the new Companies Law.18
Conclusion
The introduction of the REITs Instructions highlights the emergence of REITs in Saudi Arabia, as
investors are looking to diversify their existing risk portfolio or tap an asset class through an alternative
investment medium. Most notably, REITs provide a platform for low-entry costs with a liquid instrument
allowing a broader spectrum of retail investors to participate in the real estate market in Saudi Arabia
(which many investors were previously unable to do). However, as with any new financing tool, the
practical application and extension of the REITs Instructions to a defined real estate pool remains subject
to refinement, coupled with the establishment of a mature primary market that allows for a liquid and
transferable instrument for unitholders.
If you have questions about this Client Alert, please contact one of the authors listed below or the Latham
lawyer with whom you normally consult:
Salman Al-Sudairi
salman.al-sudairi@lw.com
+966.11.207.2515
Riyadh
Amar N. Meher
amar.meher@lw.com
+966.11.207.2516
Riyadh
The authors would like to thank Afrah Al-Shuaiby for her contributions to this Client Alert.
Client Alert is published by the Law Office of Salman M. Al-Sudairi and Latham & Watkins as a news
reporting service to clients and other friends. The information contained in this publication should not be
construed as legal advice. Should further analysis or explanation of the subject matter be required, please
contact the lawyer with whom you normally consult. The invitation to contact is not a solicitation for legal
work under the laws of any jurisdiction in which the firm’s lawyers are not authorized to practice. A
complete list of the firm’s Client Alerts can be found at www.lw.com. If you wish to update your contact
details or customize the information you receive from the Law Office of Salman Al-Sudairi and Latham &
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Endnotes
1
The National Transformation Program aims to diversify the Saudi economy, improve legislative environment, improve the
performance of the real estate sector and increase its contribution to the GDP from 5% to 10% by 2020.
2
Bloomberg.
Law Office of Salman M. Al-Sudairi in association with Latham & Watkins 3 August 2017 | Number 2179 | Page 53
Article 74 of the Investment Funds Regulations.
4
Part 4: REITs Conditions: (3) of the REITs Instructions.
5
Tadawul Knowledge Center.
6
Part 4: REITs Conditions: (a) of the REITs Instructions.
7
Part 4: REITs Conditions: (b)(2)(b) of the REITs Instructions.
8
Part 4: REITs Conditions: (b)(2)(a) of the REITs Instructions.
9
Part 3: General Provisions (K) of the REITs Instructions.
10
Part 3: General Provisions: (B) and (C) of the REITs Instructions.
11
Part 4: REITs Conditions: (b)(4) of the REITs Instructions.
12
Article 1 of the White Lands Fees Regulations.
13
Part 4: REITs Conditions: (b)(4) of the REITs Instructions.
14
Part 3: General Provisions: (O) of the REITs Instructions.
15
Part 8: Disclosure Requirements of the REITs Instructions.
16
Part 4: REITs Conditions: (b)(3) of the REITs Instructions.
17
Part 4: REITs Conditions: (b)(5) of the REITs Instructions.
18
Part 3: General Provisions: (L) of the REITs Instructions.
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