Post by congregatio on May 25, 2018 5:39:12 GMT 4
Real Estate Investment Trusts (REITs) are vehicles that permit investment in income-generating real estate through the purchase of publicly traded securities. REITs typically own, operate and trade in several types of commercial real estate assets ranging from office buildings, apartment complexes, hospitals, warehouses, hotels and shopping malls. They allow for individual investors to acquire ownership of these types of property portfolios by purchasing shares or units in the REIT. The investors receive revenue from the real estate property rent. A REIT will operate by leasing space and passing on collected rent payments to its investors through dividends.
REITs offer a number of advantages for individuals or corporates looking to invest in property. For example, individual investors are not required to invest large sums directly in real estate, but instead can invest small amounts into a REIT. This presents a lower risk option particularly given that the management of properties is conducted by the REIT. Additionally, REITs also offer an easy exit for investors who can simply trade their equity stakes on an exchange.
In recent years, REITs have become more popular in the Middle East with various GCC jurisdictions, including Saudi Arabia and the UAE enacting legislation for the existence of REITs. Oman has now followed suit.
On 4 January 2018, the Capital Market Authority issued Decision No. 2 of 2018 – the issuing regulations for Real Estate Investment Trusts (the REIT Regulations). The introduction of the REIT Regulations means that it is now possible for investors to establish and invest in REITs in Oman. The REIT Regulations follow Ministerial Decision 95 of 2017 issued by the Ministry of Housing on 15 November 2017 which also specifically focuses on REITs. Together, these laws demonstrate the government's intention to provide a clear regulatory framework for the operation of REITs in the Sultanate.
In this article we set out the key aspects of the new REIT Regulations which, amongst other things, set out the rules necessary to establish, manage and invest in REITs in Oman.
Establishing a REIT in Oman
Prior to the issuance of the REIT Regulations, the only way that investors in Oman could invest in a fund with a portfolio of real estate assets was through a fund established pursuant to the Executive Regulations of the Capital Market Law (Decision 1/2009) (CML Regulations) which only permitted up to 30 per cent of the fund's equity to be invested in real estate assets.
Under the REIT Regulations the principal objective of a fund can now be to invest in real estate. A REIT established in Oman must:
have a paid-up capital of no less than OMR 10 million;
distribute 90 per cent of its net annual profits to its unit holders (which is analogous to other jurisdictions where REIT legislation has been enacted);
offer at least 40 per cent of its equity for public subscription;
be established as a closed ended fund with its investment units listed on the Muscat Securities Market.
Similar to other funds established pursuant to the CML Regulations, investors who wish to establish a REIT must appoint an investment manager licensed by the CMA. Such investment manager shall make an application to the CMA for approval to establish the fund and for approval of the REIT's articles and prospectors. The investment manager is also responsible for managing all aspects of issuing and listing the REIT's units.
Management of the REIT
In addition to the investment manager, REITs are also under an obligation to appoint a number of service providers, including a custodian and a fund manager to oversee management of the fund's real estate portfolio. The manager must have experience in real estate investment and is responsible for executing the investment strategy of the fund.
The investment manager is also required to ensure that the REIT has a dedicated management body to undertake the function of supervising and controlling the activities of the fund and the service providers. The management body must consist of three to seven members, one third of whom must be independent. Members are to be elected by secret ballot at the ordinary general meeting of the unit holders for a maximum term of five years, after which the members may be re-elected.
The primary responsibility of the REIT management body is to ensure the fund is managed in accordance with its objectives, its articles and the law. It also has the responsibility of evaluating the performance of the investment manager and appointing, removing and determining the remuneration of the service providers with the exception of the investment manager, whose appointment and remuneration is to be determined by the investors at the general meeting.
Whilst the CML Regulations set out rules for the management of other types of funds, the REIT Regulations (presumably to create better transparency for investors) include considerably greater detail than the CML Regulations on the roles of each service provider and the management body. Further aspects addressed by the REIT Regulations include setting out guidelines for the management of the REIT if certain of its assets are based overseas or if the REIT is established to be compliant with Shari'a law. In this case, a Shari'a committee for the fund (in addition to the management committee) is to be established to provide Shari'a law guidance.
Rules for investment in REITs
The REIT Regulations set out the classes of assets that REITs can invest in – which are to be limited only to the following:
real estate properties and related assets;
special purpose vehicles (SPVs) licensed by the CMA that have been established for the purpose of retaining properties;
assets unrelated to real estate properties;
cash, deposits and money market instruments.
However, assets falling under (c) and (d) above are not permitted to exceed 25 per cent of the total value of the REIT's assets and at least 50 per cent of the total value of the REIT's assets shall be at all times invested in income-generating real estate properties or SPVs.
Subject to a limited number of exceptions, properties purchased by the REIT should be wholly rented out, have a record or prospect of yielding healthy income, be under the management control of the REIT when purchased, and be free from (except for obligations related to credit facilities) encumbrances and third party rights.
A REIT is also prohibited from performing the following activities:
providing loans or financial facilities;
developing real estate properties unless the purpose of the development is renovating, restoring or expanding existing properties within its investment portfolio;
purchasing undeveloped land;
investing more than 25 per cent of its equity outside the Sultanate of Oman (except with the CMA's approval).
Whilst REITs are generally prohibited from investing in undeveloped lands, REITs can invest in real estate under construction. However, the purchase contract should be conditional on the completion of the property construction. Furthermore, there should be sufficient income from other fund properties to ensure no considerable decline in the fund's returns to unit holders, and investment in properties under construction should not exceed 10 per cent of the REIT's total asset value (unless approved by the unit holders at a general meeting).
The REIT Regulations also set out parameters for investment in usufruct properties, investment in SPVs, investment abroad, insurance requirements, evaluating properties, pricing and trading of its units, and financing property purchases.
In respect of financing, a REIT may obtain loans to purchase properties and to meet capital requirements by borrowing from banks and other financial institutions as well as by issuing bonds or sukuk. However, a REIT's debt shall not exceed 60 per cent of the its total asset value unless approved by the unit holders at a general meeting.
A particularly interesting aspect of the REIT Regulations is that, although comprehensive in the classes of assets that REITs can invest in and the conditions on how investment can take place, the legislators appear to have drafted the law with some flexibility in mind as to how a REIT can invest in assets. The unit holders and the CMA are able to exercise powers, if required, to exceed the limits set out in the REIT Regulations should a particular type of investment be to the overall advantage of the unit holders.
Conclusion
The introduction of a REIT regime in the Sultanate is part of the government's recent attempts under the Tanfeedh initiative to diversify the economy and investment (both foreign and domestic) in Oman and to allow for less reliance on the oil and gas sector. With a decline in oil prices, attempts to bolster the economy have become even more important. The REITs legislation marks a shift in Oman's policy towards its real estate market, perhaps due to a realisation that the development of laws in the property sector may not only attract foreign direct investment, but also allow for foreigners resident in Oman to invest in assets locally rather than send their money abroad. With the recent discussions on potential relaxation of restrictions on foreigners buying properties outside ITCs and the introduction of management rights schemes, the new REITs legislation is perhaps the most exciting development in the law relating to real estate, with more to follow over the coming years.
REITs offer a number of advantages for individuals or corporates looking to invest in property. For example, individual investors are not required to invest large sums directly in real estate, but instead can invest small amounts into a REIT. This presents a lower risk option particularly given that the management of properties is conducted by the REIT. Additionally, REITs also offer an easy exit for investors who can simply trade their equity stakes on an exchange.
In recent years, REITs have become more popular in the Middle East with various GCC jurisdictions, including Saudi Arabia and the UAE enacting legislation for the existence of REITs. Oman has now followed suit.
On 4 January 2018, the Capital Market Authority issued Decision No. 2 of 2018 – the issuing regulations for Real Estate Investment Trusts (the REIT Regulations). The introduction of the REIT Regulations means that it is now possible for investors to establish and invest in REITs in Oman. The REIT Regulations follow Ministerial Decision 95 of 2017 issued by the Ministry of Housing on 15 November 2017 which also specifically focuses on REITs. Together, these laws demonstrate the government's intention to provide a clear regulatory framework for the operation of REITs in the Sultanate.
In this article we set out the key aspects of the new REIT Regulations which, amongst other things, set out the rules necessary to establish, manage and invest in REITs in Oman.
Establishing a REIT in Oman
Prior to the issuance of the REIT Regulations, the only way that investors in Oman could invest in a fund with a portfolio of real estate assets was through a fund established pursuant to the Executive Regulations of the Capital Market Law (Decision 1/2009) (CML Regulations) which only permitted up to 30 per cent of the fund's equity to be invested in real estate assets.
Under the REIT Regulations the principal objective of a fund can now be to invest in real estate. A REIT established in Oman must:
have a paid-up capital of no less than OMR 10 million;
distribute 90 per cent of its net annual profits to its unit holders (which is analogous to other jurisdictions where REIT legislation has been enacted);
offer at least 40 per cent of its equity for public subscription;
be established as a closed ended fund with its investment units listed on the Muscat Securities Market.
Similar to other funds established pursuant to the CML Regulations, investors who wish to establish a REIT must appoint an investment manager licensed by the CMA. Such investment manager shall make an application to the CMA for approval to establish the fund and for approval of the REIT's articles and prospectors. The investment manager is also responsible for managing all aspects of issuing and listing the REIT's units.
Management of the REIT
In addition to the investment manager, REITs are also under an obligation to appoint a number of service providers, including a custodian and a fund manager to oversee management of the fund's real estate portfolio. The manager must have experience in real estate investment and is responsible for executing the investment strategy of the fund.
The investment manager is also required to ensure that the REIT has a dedicated management body to undertake the function of supervising and controlling the activities of the fund and the service providers. The management body must consist of three to seven members, one third of whom must be independent. Members are to be elected by secret ballot at the ordinary general meeting of the unit holders for a maximum term of five years, after which the members may be re-elected.
The primary responsibility of the REIT management body is to ensure the fund is managed in accordance with its objectives, its articles and the law. It also has the responsibility of evaluating the performance of the investment manager and appointing, removing and determining the remuneration of the service providers with the exception of the investment manager, whose appointment and remuneration is to be determined by the investors at the general meeting.
Whilst the CML Regulations set out rules for the management of other types of funds, the REIT Regulations (presumably to create better transparency for investors) include considerably greater detail than the CML Regulations on the roles of each service provider and the management body. Further aspects addressed by the REIT Regulations include setting out guidelines for the management of the REIT if certain of its assets are based overseas or if the REIT is established to be compliant with Shari'a law. In this case, a Shari'a committee for the fund (in addition to the management committee) is to be established to provide Shari'a law guidance.
Rules for investment in REITs
The REIT Regulations set out the classes of assets that REITs can invest in – which are to be limited only to the following:
real estate properties and related assets;
special purpose vehicles (SPVs) licensed by the CMA that have been established for the purpose of retaining properties;
assets unrelated to real estate properties;
cash, deposits and money market instruments.
However, assets falling under (c) and (d) above are not permitted to exceed 25 per cent of the total value of the REIT's assets and at least 50 per cent of the total value of the REIT's assets shall be at all times invested in income-generating real estate properties or SPVs.
Subject to a limited number of exceptions, properties purchased by the REIT should be wholly rented out, have a record or prospect of yielding healthy income, be under the management control of the REIT when purchased, and be free from (except for obligations related to credit facilities) encumbrances and third party rights.
A REIT is also prohibited from performing the following activities:
providing loans or financial facilities;
developing real estate properties unless the purpose of the development is renovating, restoring or expanding existing properties within its investment portfolio;
purchasing undeveloped land;
investing more than 25 per cent of its equity outside the Sultanate of Oman (except with the CMA's approval).
Whilst REITs are generally prohibited from investing in undeveloped lands, REITs can invest in real estate under construction. However, the purchase contract should be conditional on the completion of the property construction. Furthermore, there should be sufficient income from other fund properties to ensure no considerable decline in the fund's returns to unit holders, and investment in properties under construction should not exceed 10 per cent of the REIT's total asset value (unless approved by the unit holders at a general meeting).
The REIT Regulations also set out parameters for investment in usufruct properties, investment in SPVs, investment abroad, insurance requirements, evaluating properties, pricing and trading of its units, and financing property purchases.
In respect of financing, a REIT may obtain loans to purchase properties and to meet capital requirements by borrowing from banks and other financial institutions as well as by issuing bonds or sukuk. However, a REIT's debt shall not exceed 60 per cent of the its total asset value unless approved by the unit holders at a general meeting.
A particularly interesting aspect of the REIT Regulations is that, although comprehensive in the classes of assets that REITs can invest in and the conditions on how investment can take place, the legislators appear to have drafted the law with some flexibility in mind as to how a REIT can invest in assets. The unit holders and the CMA are able to exercise powers, if required, to exceed the limits set out in the REIT Regulations should a particular type of investment be to the overall advantage of the unit holders.
Conclusion
The introduction of a REIT regime in the Sultanate is part of the government's recent attempts under the Tanfeedh initiative to diversify the economy and investment (both foreign and domestic) in Oman and to allow for less reliance on the oil and gas sector. With a decline in oil prices, attempts to bolster the economy have become even more important. The REITs legislation marks a shift in Oman's policy towards its real estate market, perhaps due to a realisation that the development of laws in the property sector may not only attract foreign direct investment, but also allow for foreigners resident in Oman to invest in assets locally rather than send their money abroad. With the recent discussions on potential relaxation of restrictions on foreigners buying properties outside ITCs and the introduction of management rights schemes, the new REITs legislation is perhaps the most exciting development in the law relating to real estate, with more to follow over the coming years.