Al-Assaf: REIT funds are an essential channel in regulated real estate investment

Investment Funds: The Best Way for Individuals and Institutions to Achieve Their Investment Goals

Investment funds are one of the best ways for individuals and institutions to achieve their investment objectives. These funds typically align with investors’ aspirations by understanding their current appetite, preferences, and market opportunities, allowing for the design of tailored investment products. Investment funds are managed professionally by licensed companies under the supervision of highly precise regulatory authorities, such as the Capital Market Authority.

One of the key attractions of investment funds is their transparency in providing clients with continuous performance reports. Investors can also compare fund performance with other funds and benchmark indices, offering a more professional and objective evaluation of the fund’s performance. This was highlighted by Ibrahim Al-Assaf, CEO of “Musharaka” Financial Company, in the following discussion:

What Distinguishes Investment Funds?

Investment funds offer low costs in exchange for specialized management and a transparent, professional approach to investment. They provide an opportunity for all individuals, regardless of their financial or knowledge level, to participate in investments managed by experienced entities that treat all investors with the same professionalism. Additionally, investment funds allow companies seeking expansion or real estate project development to finance their projects through these funds. All these factors make investment funds the ideal investment choice.

The investment opportunities presented by funds are not arbitrary; they are based on thorough studies and analysis. Independent entities assess the feasibility of opportunities and the expected benefits for investors. Fund managers must possess the necessary expertise to manage investments, even if market conditions change. They conduct regular risk assessments in compliance with regulations before launching any fund.

The Future of Real Estate Investment

How do you view the real estate market given recent changes?

The current changes in the real estate market are corrective and regulatory, aiming to improve professionalism and organization. The era of chaotic individual speculation is over. The real estate market is shaping its future, and we see that future in Real Estate Investment Trusts (REITs).

Is there a difference between real estate contributions and real estate funds?

Yes, the difference is significant. Real estate funds surpass real estate contributions in all aspects, including governance, compliance, regulation, professionalism, transparency, risk assessment, and the separation of ownership from management to avoid conflicts of interest.

For 23 years, real estate contributions played a role in property development, but over time, many of them deviated from their original goals and faced challenges due to a lack of professionalism, regulatory oversight, and internal and external audits. According to the Real Estate Contributions Committee’s website, there are currently 252 contributions under review, 102 contributions have been liquidated, and 7 have been transferred to liquidators. The total funds invested in these contributions exceed 2 trillion SAR, with over 60% of them failing within the past 23 years.

Nine years ago, the Ministry of Commerce halted the issuance of real estate contribution licenses and restructured the regulations. The Capital Market Authority took over the oversight of real estate investment funds to better serve investors and licensed investment firms.

What Are REITs?

REITs are the primary channel for organized real estate investment, which we hope to see soon in the Saudi market due to their significant impact on the economy. These funds bring balance and structure to the real estate sector.

REITs invest in income-generating properties, aiming for capital growth and providing annual or semi-annual returns to unit holders. They are publicly traded in secondary markets, allowing investors to buy and sell freely. Their unit prices fluctuate based on supply and demand, dividend distributions, and overall market conditions. REITs are considered one of the safest investment methods due to their ownership of valuable real estate assets that appreciate over time and provide stable returns. This investment model is suitable for both individuals and institutions, serving as both a savings and investment tool.

REITs first appeared in the United States in 1960, with legislative support from Congress due to their importance to the economy.

Why Do Many Real Estate Contributions Fail?

Several factors contribute to the failure of real estate contributions:

1. Lack of advanced regulations and effective oversight.
2. Financial fraud and the emergence of 64 fake contributions.
3. No separation between ownership and management.
4. Changes in real estate laws.
5. Misallocation of funds into unregulated and failed investments.
6. Some contributions were used for money laundering with insufficient oversight.
7. Lack of professional expertise in managing contributions.

Regulatory bodies have recognized these risks and addressed them in the Real Estate Investment Fund regulations under the Financial Market Law, approved by the Council of Ministers in 2004.

What Is the Musharaka Income-Generating Real Estate Fund?

It is a distinctive real estate investment product designed to meet the needs of investors seeking consistent annual returns and safe capital growth, avoiding the risks of volatile financial markets.

What Investment Products Does the Fund Offer?

In addition to investing in globally Sharia-compliant REITs, the Musharaka Income Fund focuses on income-generating properties such as towers, residential and office complexes, hospitality facilities, and industrial and logistics real estate. The fund collects rental income from these properties and distributes a significant portion of it to unit holders annually while also benefiting from property value appreciation over time.

Why Is Musharaka’s Real Estate Fund a Strong Investment Opportunity?

1. It protects investors’ capital from inflation, as rental prices rise with inflation.
2. It is a relatively safe investment, accessible to individuals with low unit prices.
3. Investors can participate in periodic cash distributions, helping them manage financial obligations without affecting their principal investment.

In the U.S., fixed-income real estate funds are among the most effective savings and investment tools for individuals and businesses.

How Does the Fund Generate Profits?

The fund generates revenue from two sources:

1. Regular cash distributions, averaging 8.5% annually.
2. Property value appreciation, which is realized at the end of the investment period.

What Is Musharaka’s Fund Management Strategy?

The fund targets five diverse real estate sectors: residential complexes, hospitality, industrial properties, office buildings, and commercial centers. It maintains geographic diversification, investing across Riyadh, the Eastern Province, and Jeddah, ensuring that no more than 40% of the fund is allocated to a single property type. This strategy reduces risks and aligns with the investment guidelines outlined in the fund’s terms and conditions.

To minimize risk, the fund does not invest in properties requiring major redevelopment, limiting renovations to 15% of the purchase cost.

Who Can Invest in the Fund?

The fund is open to all investors, including Saudi citizens, foreign residents, GCC nationals, and both Saudi and Gulf-based companies and institutions.

What Are the Risks of This Type of Investment?

Investment risks in this type of real estate fund are relatively low due to the presence of valuable real estate assets and long-term lease contracts (minimum three years).

The Capital Market Authority oversees all investment products, and an independent auditor reviews the fund’s financials. Musharaka Financial Company is licensed by the Capital Market Authority under license number 27-13169, ensuring internal compliance and external audits.

Investment funds have agreed-upon performance indicators with regulatory authorities, allowing investors to compare performance with the overall market. Additionally, the fund’s real estate assets undergo biannual valuations by accredited real estate appraisers licensed by the Ministry of Commerce and the Capital Market Authority.