Saudi REITs poised for growth: S&P Global sees long-term growth potential for Saudi Arabia's emerging real estate investment trust (REIT) sector, the agency said in a recent report. The real estate sector has large financing needs that need to be met, as it undergoes a massive expansion across all subsectors — from residential to retail and office space, S&P said.

The REIT market cap stood at about USD 4 bn as of the end of August, with a total of 19 listed entities on Tadawul’s main and parallel markets. Al Rajhi REIT led with over USD 600 mn in market cap by the end of the month, followed by Jadwa (over USD 500 mn), Bonyan (USD 400 mn), and Sedco Capital (USD 300 mn).

REITs are considered attractive financing tools, as they help diversify funding sources for real estate operators by attracting long-term capital from local and international investors and foreign capital, while providing investors with a consistent income yield.

BUT- Growth stalled in the past five years: Only three new REITs were listed in the period between 2020-2024, compared to 10 listings during 2018-2019. Operators and investors looking to adopt REITs face a few hurdles, including a lack of income-generating assets, in which REITs must invest at least 75% of their portfolio.

That’s about to change. Expansion of the REIT sector is expected to accelerate as more construction projects reach mature stages, which will increase the supply of investable assets.

Reforms are also expected to spur growth. The Capital Markets Authority approved changes in July allowing REITs listed on the Nomu market to invest in real estate development projects, a move that could help ease the asset supply constraint.

Regulations are already somewhat REIT-friendly, as the Kingdom exempts all investment funds — including REITs — from corporate tax and requires profitable REITs to distribute at least 90% of their annual net income to unitholders. Saudi REITs also allow foreign investors to put money into projects in Makkah and Madinah, which are otherwise off-limits.

BUT- Transactions are still subject to a real estate tax of 5% of the sold property’s value, which is higher than the rival Dubai market’s 4%.

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