The most stable income and the least effort undoubtedly comes from income-generating properties, and we often hear the phrases “I wish I had a building”, “there is no investment like a building that gets you rent every year”. This is a beautiful saying, but achieving it is not easy, as it isn't always possible to obtain a good income-generating property for a small amount, and it usually takes many years to collect an appropriate amount to buy or build an income-generating property. This is in addition to the management and operation requirements of leasing, collection, judicial pleadings to collect arrears, maintenance services for some real estate, and improvements and developments after a period of time has passed since the property's build up.
However, it is no longer impossible since the establishment of an investment product for this category – real estate traded funds (REIT). It can be defined simply as funds that own a number of income-generating properties and carry out all the responsibilities of management and operation, in addition to the possibility of future expansion by offering additional units for subscription or through bank funding, and these funds distribute 90% of the net income annually based on the regulations of the Saudi Capital Market Authority (CMA), on an annual, semi-annual or quarterly basis.
These funds are characterized by easy trading through the stock market and owning a number of properties, which reduces the risks in the event that some rental units are vacant, unlike owning one property. There are several characteristics that are important to have in the fund before deciding to invest in it, the most important of which is the diversity of property between commercial, residential, office, hotel and warehouses, in addition to the geographical diversity between several cities, which reduces the risks in the event of major events that cause reluctance from these real estate such as What happened to hotel properties in the holy sites when Umrah was stopped at the time of the Corona pandemic.
Also, there are a number of financial and basic indicators that must be paid attention to in order to make a decision to buy or sell the fund's units, the most important of which are:
- Unit profit from operational operations – which is the actual income of the fund, in the event that the cash distributions in the year exceed the profit of the unit, this means that the fund management uses the surplus cash, which is often sourced from bank funding for distribution, and this is a dangerous indicator that threatens the sustainability of distributions.
- Total liabilities for assets – which is the debt ratio and it is preferable, of course, for it not to be a large number, and it's always better to keep it below 40%
- Percentage of leased units – it can be obtained from the reports issued by the fund departments periodically
- Duration of Lease Contracts – the approaching end of lease contracts is one of the important events that must be taken into consideration, as there may be a significant negative impact on the Fund when not renewing or renewing at a lower amount.
In conclusion, this type of investment is feasible for those who want to obtain cash dividends continuously without devoting themselves to speculation in stock markets and with very small amounts.
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Past performance is no guarantee of future results. Your investment can fluctuate, so you may get back less than you invested. Consider each product’s risk(s) before investing. Baraka is not a financial adviser and therefore does not provide financial advice. Our content is informational only.
