• Saudi REIT funds are outperforming their emerging market and US counterparts combined despite the repercussions of the pandemic


    The Real Estate Investment Traded Funds "REIT", listed on the Saudi market, during the month of September last achieved distinguished performance at the international level.
    The components of the special sub-index in Saudi Arabia contributed to achieving major gains in the global FTSE-NARIT real estate index, surpassing their counterparts in emerging markets and the US market combined.
    The international supremacy of Saudi REIT funds (among the components of the FTSE Index) comes despite the fact that the business of traded real estate funds has been affected by the pandemic, whether at the local or global level, which has caused pressure on leasing contracts and a decrease in their prices on the exchanges that trade in them.
    The monitoring unit of the reports in the newspaper Al-Eqtisadiah revealed the contribution of nine local entities to pushing the Saudi FTSE Abra Nariate Real Estate Sub-Index, which specializes in traded real estate investment funds and real estate companies, the index to achieve gains of 8.24 percent during last September, and two-digit gains By 23.1 percent within three months.
    While the REIT funds in the emerging markets index lost 2.85 percent, and the US by 3.19 percent over the past month.​
    The FTSE Ibra-Narit Emerging Markets Real Estate Index contains more than 140 real estate investment traded funds and real estate companies spread over 16 emerging countries. Whereas, the MSCI Index of US REIT funds contains 141 REIT funds listed on US stock markets.

    Comparison of performance between two markets

    Indicators for measuring the performance of entities listed on local and international stock exchanges are the preferred choice for global asset management companies in order to measure the performance of a specific class of ETF funds or stocks (for example, small capital companies) with their counterparts in the same class in other regions' ​​geographies.​
    This is instead of the traditional method of measuring the performance of the stock market as a whole, whose movement varies according to the small or large size of the market or the number of companies listed in it (and their market value), which varies from one market to another.
    Therefore, stock performance indicators such as "FTSE", for example, created a new market by creating the appropriate environment, or platform, that enabled asset management companies to launch investment funds specifically tailored to measure the performance of a specific group of stocks, which are related to several common factors, being It specializes in the real estate sector and is highly liquid in terms of trading, and foreign investors are allowed to invest in it.
    Thus, the investor can measure the performance of large-cap Saudi companies with their counterparts from other global markets, with which they share the same features, which makes the comparison of measuring the performance of these companies between two geographical regions more logical and realistic, compared to the traditional methods that some traders use. , Which is missing the benchmarks between two different exchanges.​
    An index is defined as a statistical measure, usually of a price or a quantity, and is calculated from a representative set of underlying data. The most common role of the index is as a benchmark, and it can be described as the standard by which the performance of a financial instrument can be measured, and through this role, the index provides a way to measure the performance of a specific segment of the financial market, such as comparisons within the geographical area, the industry sector or others. From the assets.

    The highest weight​

    REIT funds contributed to making Saudi Arabia the ninth highest weight in the FTSE-Iber Naret real estate index for emerging markets, with a ratio of 1.72 percent of the index weight across eight funds and a real estate company.
    The interest of local and foreign investors in the local REIT funds, as part of the index, raised its market value to $ 2.84 billion. This contributed to making Saudi Arabia the second highest weight in the FTSE-Iber Naret real estate index for the Middle East and Africa countries, constituting 22.98 percent of the overall weight of the index.
    And the monitoring of the economic reports unit in the newspaper was based on data issued by the authorities that manage global performance indicators such as "FTSE" and "MSCI" and other sources such as "Bloomberg", where all performance indicators provide multiple options for each indicator.
    The "economic" monitoring, for example, relied on the "total return index, which includes the accrued profits (TR)" which takes into account the reinvestment of periodic distributions at the index price, that is, in other words, the level of the total return index (returns due are added to stock prices or funds).

    Global real estate depression

    The repercussions of the Corona pandemic affected most housing sales and commercial real estate in developed and emerging markets, especially in capital capitals, whose rents depend on the wealthy and bankers, as well as real estate linked to retail.
    While some cities are witnessing the migration of some of their residents to the countryside after the outbreak of the Corona pandemic, especially during the first half of this year, for fear of infection or after losing their jobs. The emergence of the second wave of the pandemic in some international markets contributed to a recession in the real estate sector, which affected the performance of REIT funds, as some corporate and individual tenants were unable to pay those rents.​

    Outstanding performance in September​

    The outstanding performance of the local REIT funds last month in the FTSE-NARIT real estate index coincides with the recording of real estate traded funds in late September, one of the largest weekly gains since the funds were listed in November 2016, and these gains were accompanied by trading volumes. The highest ever, according to previous monitoring by Al-Eqtisadiah newspaper.
    It is known that real estate traded funds do not witness high volatility or active trading, by virtue of their investment nature through periodic cash distributions to their shareholders. Therefore, the weekly volatility of the sector is within the range of 2 percent up or down, but there are rare cases that you find an overheated activity, It happened last September.​

    Join 2019

    It is known that the Saudi Stock Exchange Company, Tadawul, announced in June 2019 that it had joined the FTSE-NARIT Global Real Estate Index, which specializes in real estate investment traded funds and real estate companies.
    Similar to other global indices, a group of listed securities was selected to join the index and be reviewed periodically, and the index components were announced on the FTSE Ibrahit Real Estate Index website.
    The accession of the Saudi financial market to the global real estate indicators of emerging markets comes as a step to raise the level of real estate investment funds in Saudi Arabia and keep them in line with international practices, in addition to enhancing the level of transparency, and enabling REIT funds to attract more foreign investors and broaden the investor base.​

    Diverse assets and distributions
    Each "REIT" contains a diversified portfolio of real estate assets, such as apartments, apartment buildings, office space, malls, shops, and hotels. Whereas, some funds tend to develop new buildings or buy existing ones with the aim of improving them and then raising their market value.
    Regardless of the strategy followed by the fund manager, this investment pool brings with it cash flows (ie income) by renting or selling those properties after their value rises. After that, the cash return is distributed to unit owners on a regular basis, in the absence of compelling economic circumstances, as these funds are obligated to distribute at least 90 percent of the net profits to unit owners.
    Nevertheless, the pandemic has made it important for fund managers to retain a proportion of the income to hedge against economic downturns, low occupancy rates, and tenants' default. Details of operating income and the amount of cash available for distribution to the REIT are also attached by some seasoned investors. These two measures contribute to measuring the performance of the fund over a certain period of time and determine the potential for what real estate unit owners may acquire.

    What are Real Estate Investment Traded Funds?

    They are real estate investment funds available to the public, whose units are traded in the financial market and known internationally as "REITs". They aim to facilitate investment in the real estate sector developed and ready for use, which generates periodic and rental income, according to the "Tadawul" website.
    Real estate investment ETFs are characterized by the low cost of investing in them, compared to other real estate investment funds, and their commitment to distribute 90 percent of their net profits periodically (annually) as a minimum. These funds can also invest locally, regionally, and internationally, provided that the total value of the fund's assets from real estate outside Saudi Arabia does not exceed 25 percent, in accordance with clear and defined policies by the Capital Market Authority.
    The Real estate investment traded funds - like other investment tools in the financial market - are subject to supervision and supervision by the Capital Market Authority and Tadawul, each according to its competence. Financial market regulations also require real estate investment funds traded to have high levels of transparency and disclosure that exceed those imposed on investment options available in the traditional real estate market.
    Real estate investment ETFs are characterized by several characteristics such as ease of investing in them, especially the clarity of their systems and the ease of dealing with their units - buying and selling - similar to shares listed on the financial market, in addition to that, these funds contain real estate assets established, developed, ready for use, and generating income resulting from rentals or operations.
    It is also characterized by high transparency through the commitment of the fund manager to submit periodic reports on the fund, which are displayed on the Tadawul website, like other reports of companies listed on the financial market.

    Economic Reports Unit​

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