Real estate funds regulations to boost housing shortage

As part of the Saudi Arabia 2030 Vision Plan to develop its capital market to introduce new financial instruments and investment opportunities, the Capital Market Authority (CMA), Saudi Arabia’s market regulator, has issued new regulations for real estate investment traded funds (REITFs) in October 2016. The REITF Regulations enable revenue generating structural developed real estate investment opportunities to be publicly offered and traded on the Tadawul (the Saudi stock exchange) as securities.

In addition to developing the Saudi capital market, the issuance of the REITF Regulations is also socially relevant. The 2030 Vision Plan economic reform programme announced in June 2016 provides that Saudi Arabia aims to build 1.5m homes over the next seven years to ease a shortage of affordable housing, as well as to draw more private investors into its housing sector. With state revenues affected by low oil prices, the Kingdom is looking at alternative solutions to procure capital whilst creating investment opportunities for investors.

General provisions

The REITF Regulations stipulate the following general requirement applicable to all REITFS:

• A REITF fund manager must appoint one or more custodians who are authorised by the CMA to conduct custody activity in the Kingdom.
• The custodian must segregate each REITF’s assets from its own assets and from the assets of its other clients, and must maintain all necessary documentation by registering the securities and other assets of the relevant investment fund.
• The assets of the REITF shall be owned collectively by the unit holders in that fund.
• REITF fund managers shall appoint a property management company specialised in managing properties.
• Road shows for the initial subscription in a REITF must not exceed 14 days.
• The units of REITF must be registered with the CMA’s Depositary Centre.
• The REITF fund will be able to increase its capital through tradable rights issuances as in the case of limited companies.

REITF conditions

In addition to the general requirements outlined above, the draft REITF regulations require each REITF to meet the following conditions:

• the fund must be closed-ended
• the minimum amount of the fund must be SAR 100m
• the nominal value per unit in the fund must be SAR 10
• at least 75% of the fund’s total assets value must be invested in developed real estate that generates periodic rental income
• at least 200 REITF unit holders from the public
• at least 50% of the total REITF units must be owned by unit holders from public
• at least 90% of the fund’s net income must be distributed annually to the REITF unit holders
• the fund manager is prohibited from investing in vacant/undeveloped land, and
• the borrowing of the fund must not exceed 50% of the total assets value of the fund.

Offering requirements

All REITF offerings must comply with the following requirements:

• The fund manager seeking to offer and list REITF units on the Tadawul must submit an application to the CMA.
• The fund manager must produce a REITF information memorandum in a way that makes it easy for existing and prospective unit holders to understand the investment opportunity.
• The REITF information memorandum must include information necessary for all potential REITF unit holders to make an informed judgement regarding the investment being offered to them, including:
  • key dates and initial subscription procedures showing:
    • a timetable showing the expected dates of the initial offer
    • a description of the initial subscription procedures, and
    • unit allocation method
  • a clarification of the REITF policy on the distribution of dividends to unit holders
  • the expected duration to hold the targeted real estate, and
  • a statement that the CMAs Committee for the Resolution of Securities Disputes’ has the jurisdiction to adjudicate disputes arising from investing in the REITF.
• When submitting an application, the fund manager shall provide the CMA with a binding agreement to sell the property subject to investment or to transfer its interest at the completion of fund units offering.

Disclosure requirements

The fund manager shall disclose any material events that might affect the fund’s business, and a description of the fund’s dividends distributed to unit holders, every six months as follows:

• The fund manager must prepare and provide annual reports to the unit holders containing:
  • assets in which the fund currently invests and is aiming to invest, and
  • a benchmark of the fund’s performance over the last three financial years which includes:
    • the fund’s net assets value at the end of each financial year
    • the fund’s net assets value per unit at the end of each financial year
    • highest and lowest net assets value per unit for each financial year
    • the number of units in issue at the end of each financial year
    • income distribution per unit (net and gross), and
    • the expense ratio
  • a performance record which covers the following:
    • the total return for one year, three years, and five years
    • the annual total return for each of the last ten financial years, and
    • a table showing actual fees and fund expenses paid by the investment fund during the year, and the total expense ratio
  • the annual report of the fund’s board, and
  • a statement on any special commission received by the fund manager during the period.

Trading halt and cancellation of Listings

The CMA may, at any time, suspend the trading of REITF units or cancel its listings as it deems fit in the following circumstances:

• the CMA considers it necessary for the protection of investors or the maintenance of the orderly market
• the fund manager fails
• the liquidity requirements are no longer met
• the fund does not have a sufficient level of operations to warrant the continued trading of securities on the Tadawul
• the fund manager or its business is no longer suitable to warrant the continued listing of its units on the Tadawul, or
• the fund manager may request in writing to the CMA a temporary halt or cancellation of the REITF’s units itself.

Whilst the REITF Regulations represent one of many steps in the 2030 Vision Plan to develop the Saudi capital market, these will also be welcomed by the Saudi Ministry of Housing which has been tasked with building more affordable homes to ease the housing shortage. However, the REITF Regulations afford broad powers to the CMA to halt or cancel trading of REITFs upon the occurrence of certain events which qualified foreign investors should be fully aware of before entering into such arrangements.