BizBahrain April 2016

ASAR | Finance Law Analysis
the participants. This defines perhaps
the most fundamental difference
between Reits and other forms of
collective investment undertakings
or stock investments in that Reits are
obliged to deliver most (though not all)
of the income realized by paying it out
annually to the investors in the form
of dividends; therefore, the possibility
of reinvesting into the business is
limited. Yield, as opposed to net asset
value, becomes thus the key parameter
to determine financial performance
of a Reit. Central Bank of Bahrain
regulations also define the scope of
the investments that may be carried
by a Reit, which varies depending
on whether the Reit is limited to
investment by accredited investors. In
that case, the rules concerning, inter
alia, a minimum level of diversification
(the Reit must hold a minimum of 2 real
estate properties), a maximum level of
development expenditures on existing
properties and a limit to assets other
than real estate that may be owned by
a Reit (only cash and cash equivalents)
are relaxed. The regulations also limit
the amount of financial leverage that
may be incurred by a Reit offered
to investors other than accredited
investors.
Liquidity is another key factor of
a successful Reit structure, and the
recently issued listing and trading
rules have filled a gap that previously
hindered expansion of Reit instruments
in the Kingdom. The availability of a
liquid, public market supports investors
exiting from the investment through a
trade in the bourse, though it should be
noted, unlike a redemption of units in
other types of investment schemes, a
trade on the Bahrain Bourse is effected
at a market price that is determined by
matching bid and ask orders and which
may be different than net asset value.
Central Bank of Bahrain regulations
and Bahrain Bourse rules have created
the condition for the expansion of
Reits in the Kingdom as an investment
vehicle for real estate; however, to
thrive Reits must prove efficient
and competitive versus other forms
of investments in addition there
remaining a robust market appetite
for real estate investments. With
the absence of tax implications, the
primary drivers in terms of preferred
investment structures rest with costs
(both upfront and ongoing), security
and flexibility of such structures.
The costs of compliance of a Reit as
compared to, for example, a commercial
company holding structure, are
generally higher, though this associates
in part with greater protections for
investors. Whereas higher costs might
ordinarily constitute a disadvantage,
the flexibility inherent to Reits may
prove, if properly used, a critical
advantage over corporate structures.
For example, the absence of legal
capital rules on Reits (other than
the requirement that a Reit must be
constituted with property having at
least USD 20 million (or equivalent in
another currency) appraised value)
consents devising a structure to
maximize distributions and avoiding
cash traps—where cash sits in the
structure yielding lower returns than
the other assets without the possibility
of distribution to investors.
Lastly, from an investor perspective
the palatability of a Reit would depend
on the quality of both the income
generating property held and the
persons in charge of management.
That said, the existence of a regulatory
framework and supervision by the
regulator should ensure that the
management of the Reit is focused on
generating income from the properties
and distributing such income to
the investors while controlling
unsystematic risk. This includes
limitation on risks connected with
extensive capital expenditures or
reinvestment of profits to expand the
Reit, which would be consented only
to a limited extent under regulations
applicable to listed Reits.
All in all, the real estate sector
has proven to be resilient through
difficult economic cycles, and the Reit
regulations permit a new avenue for
investments allowing smaller investors
to achieve the benefit of a diversified
portfolio of properties while retaining
the income-generation profile of a
typical real estate investment. It is
now for industry leaders to structure
listed real estate investment products
by making best use of the flexibility
inherent to Reits, which, if successful,
should attract further investments in
the real estate sector with a positive
domino effect.
Simone Del Nevo
Senior Associate at
ASAR-Al Ruwayeh &
Partners
May 2016
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