Five months after the first real estate investment trust (REIT) was introduced in Dubai, local investors are showing little enthusiasm for the product.
There are no new property REITs scheduled to launch, Simon Gray, the director of supervision at the Dubai Financial Services Authority (DFSA), said this week. There is interest from financial institutions, but "it may take some time" for REITs to gain traction in the UAE, Mr Gray said.
The potential for REITs created a stir last year when the DFSA implemented a framework for creating the trusts. REITs were expected to add much-needed liquidity to the market, giving investors a low-cost vehicle to invest in property.
REITs in the US control US$353 billion (Dh1.29 trillion) in property, according to the ratings agency Standard & Poor's.
But the tax advantages found in REITs were not applicable in the UAE, where there are no corporate taxes, said Jonathan Herps, an Abu Dhabi investment adviser, during this week's Cityscape property conference in the capital. Many property investors are not interested in the relatively low yields offered by REITs, he said.
"I think you have a real problem trying to attract investors with a 5, 6, 7 per cent payout," said Mr Herps.
Dubai's first REIT, Emirates REIT, was established last November by a partnership of the Dubai Islamic Bank and Eiffel Management, a French company.
The Emirates REIT is Sharia-compliant and focuses on commercial and residential property. Eighty per cent of the fund's net income is returned to investors. It may list on the Nasdaq Dubai by the end of the year, Marwan Ahmad Lutfi, the deputy chief executive of the Dubai International Financial Centre said this month.
The National Bank of Abu Dhabi is also planning a REIT, its general manager of corporate and institutional coverage Sameh al Qubaisi confirmed yesterday, without providing details.
Banks are expected to lead the development of REITs, in some cases pooling their own assets for investors, analysts say.
"It is effectively another means of selling interest" in property, said David Quinn, the head of agency services in the Middle East and North Africa for Cushman & Wakefield, the property firm. "But it is a costly and bureaucratic process that takes time."
It is also difficult to find properties in the UAE suitable for funds, industry executives say.
In Dubai the majority of office buildings are classified as strata buildings, with multiple owners, bringing an unwanted layer of complexity to any transaction.
"It's hard to get quality assets in Dubai," Mr Herps said. "You don't want to negotiate with 40 owners."
Investors in the region are also wary of funds focused on UAE property, industry analysts say.
"Pooled funds are not so much flavour of the month," said Mohamad el Hage, the director of investment banking for Unifund Capital. "Investors want to see and feel the assets they are investing in."
With share prices for property companies low, investors already have avenues to participate in the property market, analysts say.
"There is nothing compelling about a REIT in this environment," said Chet Riley, an analyst with Nomura Securities.
However, REITs will eventually grow in the region, Mr Gray said. The downturn in the market has investors looking for less risky ways to invest in property, he said.
"There is a huge amount of interest," Mr Gray said. "REITs effectively collectivise the risks."
Several Sharia-compliant REITs have launched in Asia in the past two years.