Emirates REIT has issued the first sukuk by a real estate investment trust (Reit) in the MENA region.
It’s also the first Reit from the region to have a credit rating (BB+).
Reits have not traditionally issued sharia-compliant bonds, and have instead preferred to tap conventional debt markets for their financing needs. The only previous issuance of this type was in Malaysia in 2014, when KLCC Reit sold $930 million of Islamic bonds.
The Irish Stock Exchange (ISE) hosted the $400 million issuance, which relied on underlying wakala and murabaha contracts. The entire timeline of the deal was less than two months. This was to ensure Emirates Reit didn’t miss the favourable issuance window, at the end of Q4, according to Ahmed Taha, director of debt capital markets at Standard Chartered Bank, which acted as sole global coordinator, ratings advisor and joint lead manager.
The hybrid structure included a number of novel features.
The wakala sukuk
The wakala part of the issuance relied on a special purpose vehicle (SPV) issuing the five-year 5.125% sukuk certificates, the proceeds of which were invested on its behalf into a pool of sharia-compliant assets. In this transaction, leased real estate assets in onshore Dubai and some located in the Dubai International Financial Centre (DIFC) were used at the centre of the structure.
The revenue resulting from the investment in these assets (the rentals paid by the tenants of the leased properties) will be used to pay investors in the sukuk specified amounts at pre-determined times, in a similar way to classic bond repayments. Any profits originating from the investment will be split between the originator and the issuing SPV.
A legal issue Emirates Reit was faced with was with Irish authorities, when listing on ISE.
“They saw that it was a Reit involved so thought that it was issuing the sukuk itself and as such wanted to apply the relevant disclosure rules applicable to trusts,” said Dentons partner Alex Roussos, who advised the lead arrangers, Dubai Islamic Bank, Emirates NBD Capital, Standard Chartered Bank and Warba Bank. “But the SPV was issuing the sukuk certificates which meant the application of a different regime.”
The deal also included some bespoke provisions when it came to the investment portfolio’s composition.
“We had slightly different thresholds for tangibility, which was agreed with sharia scholars beforehand,” said Roussos.
According to sharia law, the capital underpinning the wakala contract must be provided either via tangible assets (including real estate) or via receivables. Assets such as real estate may be brought in to the value of at least 33% of the capital invested. The ratio gives the issuer flexibility in putting forwards assets supporting the sukuk.
In the Emirates Reit deal, the split occurred at 55%, dropping to 51% during the life of the sukuk. Roussos noted that as this was an asset-light structure, not all assets were put forward. Fatwa authorising the transaction were issued including by Emirates Reit as a sharia-compliant entity with its own sharia board.
The murabaha part
Emirates Reit’s issuance also included a murabaha contract. Under this type of agreement, the sukuk-issuing SPV sells assets or commodities at a price that includes a pre-agreed profit to the purchasing entity, which then on-sells them on the market and agrees to repay the SPV in instalments. This form of issuance is not used as a single sukuk structure but rather in association
The wakala structure has become one of the most popular forms of Islamic finance compliant issuances, forming the basis of over two-thirds of deals globally. But the murabaha structure is also gaining traction, having traditionally been the most used in Malaysia (80% of all issuances) up until a few years ago, when the government amended the tax regime to encourage wakala and ijara issuances.
Other considerations
Reits have traditionally not resorted to Islamic finance-compliant funding, in part because of lack of familiarity with this type of finance and because trusts of this type are still relatively new in the Gulf region. Some smaller private placements have happened but nothing compared to the size of the Emirates Reit issuance.
“It’s is the largest listed Reit in the region and had all the traits of an ideal sukuk issuer,” said Taha. “Its asset size enables it to access the sukuk market with a benchmark-sized public sukuk - other Reits are much smaller and would need to do domestically sold sukuk private placements or domestic loans to fund themselves.”
Sukuk have a pricing advantage at the moment: they are slightly cheaper for issuers compared to normal bonds because they provide access to a wider pool of investors, which can lead to more competitive terms.
“Sukuk has the major of advantage of attracting both conventional and Islamic investors,” said Taha. “The larger investor base increases demand and results in lower pricing (profit rate) for the issuer.”
According to Emirates Reit, it will primarily use the proceeds to refinance existing debt, including to allow it to fix debt for a set term (five years).
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Tear sheet
The sukuk was priced on December 5 and settled a week later. 1. It was rated BB+ by Fitch. The prospectus can be found here.
Half of investors were located outside of the UAE - major investors included banks (48%) and fund managers (35%). The orderbook closed at $850 million.
Clifford Chance acted as counsel to Emirates Reit and Dentons acted as counsel to joint lead managers: Dubai Islamic Bank, Emirates NBD Capital, Standard Chartered Bank and Warba Bank. Standard Chartered Bank acted as global coordinator and ratings advisor.
See also
Iran central bank: building a global sukuk market
Dana sukuk: why the market is overreacting