Expectations differ about expected real estate fund investments

Saudi Arabia launches three real estate funds in six months, while Egypt launches its third fund in Q3

During the first experiment of launching real estate funds in Egypt, there were different points of view on expected returns from investing in these funds and the distribution ratios.
The Saudi market is new to these types of funds as well, as it saw the launch of three funds in the past six months. The latest fund is Jadwa REIT Al-Haramain Fund, traded last week after the successful coverage of the initial public offering (IPO) of the fund with 1257%.
This raises questions about how Saudi Arabia succeeded in collecting these huge investments and a rush of investors. Will the Egyptian market succeed in covering the IPO of its real estate funds and attracting investors to it as well?
The Egyptian real estate funds faced many obstacles since the issuance of the executive regulation and the launch of the first two real estate funds. The biggest obstacle for real estate funds now is depriving them of tax exemptions, which will reduce their profitability and may deprive them of attracting Arab and foreign investments, especially that the majority of countries exempt this kind of funds from taxes, so the Egyptian funds will be a weak competitor with their counterparts abroad.
Real estate funds experts agreed that all the challenges for these funds in Egypt will not prevent them from attracting investments and they expect that these funds will generate a satisfying return for investors compared to other financial tools.
However, the duration of the Jadwa fund was 99 years from the date of listing. The duration of the two Egyptian funds, Naeem and Al Masreen, was only 3 and 10 years respectively.
Hany Tawfik, director of Acumen BPE, said that the optimal duration of real estate funds in Egypt ranges between 10 and 20 years to attract small investors and that a three-year period cannot be understood or justified, considering the history of real estate funds around the world. The optimal period for the Saudi investor is 99 years, according to studies conducted by the Saudi company Jadwa.
Tawfik said that his company is in the final stages of signing the contract of managing the real estate fund of the HDB, which is expected to be launched during the third quarter of this year. The fund targets investing in leased assets through development processes which ensure that the fund will achieve costs far less than the purchase of units or buildings and ready-made projects.
Alsherif Wahdan, managing director of Naeem, said that the nature of the investment in Egypt is different from the investment in Saudi Arabia. The Egyptian investor prefers short-term investment; therefore, three years is considered an appropriate period for investment in the real estate fund to recycle the money afterwards, whether in a new fund or through another investment.
Hashim Al-Sayyed, vice chairperson and CEO of the Al Masreen real estate fund, said that Saudi investors are keen on investing in real estate funds to save money for their heirs, so their IPOs see a wide turnover, unlike the Egyptian investors who prefer to get a quick return on a short-term. They also hedge against future fluctuations of the economy, which in turn affect all sectors and investments.
Al-Sherif Wahdan said that the holders of the documents obtain 10% annual distributions, which is attractive to investors, especially since this percentage does not include the capital gains resulting from the annual increase in the value of real estate owned by the document holders through their subscription in the fund, which could increase the return on their investments to almost 26%.
Therefore, Wahdan expected that the IPO on the fund's documents will see a good turnover of individual investors, as it ensures a sustainable and risk-free return, unlike most of the other investment channels that include risk ratios such as the stock exchange.
As for the property, its value is not decreasing, but it is constantly increasing. Therefore, the majority of investors consider investment in real estate to be the best, especially if it generates annual returns besides the value of the assets themselves.
He pointed out that his company succeeded in covering the private offering segment easily, which witnessed investments from various institutions, funds, strategic investors, and companies subscribing to the fund.
He agreed with Tawfik, believing that the suitable average return on investment in real estate funds is 10%, represented in cash dividends generated by capital gains from an increase in the value of real estate.
He added that it guarantees the distribution of cash dividends annually on investors, through the strategy of real estate funds, which focuses on the profits of assets leased in administrative and commercial projects.
Al Sayyed said that the real estate fund managers can achieve returns on investment in these funds that exceed 10%. The majority of real estate investment companies are able to achieve returns exceeding 200%. Similarly, real estate funds, which are treated like real estate investment companies, are able to achieve returns even if those are not annual, which will depend on the efficiency of management.
In a related context, the manager of the Saudi fund targets to distribute cash dividends twice a year, amounting to at least 90% of the annual net profit of the fund, excluding profits from the sale of basic real estate and other investments that may be reinvested in additional assets or maintenance and renewal of existing fund assets.
The distribution mode contributed to the increase in the coverage of the fund of 1257%. The number of subscribers in the IPO was 5,800 with total proceeds in the IPO of SAR 4.5bn.
He explained that the laws in the United States and the European countries exempt real estate funds from taxes if they are distributing more than 80% of profits, and the rest of the countries followed them.
He told Daily News Egypt that the Naeem fund intends to distribute 90% of its annual profits.
While Tawfik believes that the Tax Law on real estate funds stopped the rapid launch of real estate funds after the amendments to the executive regulations of the Capital Market Law and the inclusion of the provision of the establishment of these funds since 2014.
He added that taxes and fees of the fund manager and the management services company as well as other salaries and expenses are deducted from the dividend returns from profits, which reaches 90%, ending with small distribution rates.
In general, he thinks that a comparison of Egyptian real estate funds with their Saudi counterparts will always end in favour of the Saudi funds.
The Saudi law exempts all funds from taxes. He called for amendments to the Egyptian Tax Law to apply the US system and to allow for tax exemptions when distributing 90%, which will achieve a quantum leap in investment in real estate funds.
He pointed out that the distributable revenues after expenses will be compared to investment in the certificates of deposits or in the Egyptian stock exchange, especially since real estate investment generates a high return, sometimes up to 400%, while also considering the preference of Egyptian investors to inject their money in real estate to maintain their assets in light of price hikes and the continuing inflation in Egypt.