Real estate investment funds (hereinafter referred to as a “REIF”) are one of the primary ways to invest in real estate. A REIF owns income-producing real estate in a range of property sectors and is generally seen to have a number of benefits to investors. Investment in a REIF is now possible in Oman by virtue of the Capital Markets Authority (the “CMA”) Organisational Regulation of Real Estate Investment Funds No. 2 of 2018 (the “REIF Regulations”) and Ministerial Decision No. 95/2017 issued by the Ministry of Housing (“MD 95/2017”).
Prior to the enactment of the REIF Regulations and MD 95/2017, a fund wishing to invest in real estate was reliant solely on the CMA’s Executive Regulations of the Capital Markets Law promulgated by Decision No. 1 of 2009 (the “CML Executive Regulations”), which permitted funds to invest up to 30 per cent of their capital in real estate. The CML Executive Regulations however, proved unsatisfactory (as far as REIFs were concerned), and owing to the lack of regulatory framework for the governance of REIFs, the Ministry of Housing showed reluctance to approve funds investing in real estate.
In an effort to diversify the Sultanate’s economy, the REIF Regulations are seen to support the Sultanate’s National Program for Enhancing Economic Diversification or Tanfeedh, as it is better known. Such REIF Regulations are aimed to encourage both foreign and domestic investment in real estate in Oman. This aim is evidenced by the fact the REIF Regulations state that a REIF is required to offer at least 40 per cent of its capital to the public, upon issuing its investment units for public offering. In other words, at least 40 per cent of the investment units of a REIF must be available for public subscription and be traded on the Muscat Securities Market (“MSM”).
This article sets out: (a) the key points to establishing a REIF in Oman; (b) the key investment rules applicable to a REIF; and (c) the management responsibilities of a REIF.
Establishing a REIF
Among other organisational requirements to set up a REIF, such as duly completing an application to CMA for initial approval and appointing a company licensed by CMA to be the REIF’s investment manager, the paid-up capital of the REIF must be no less than 10 million Omani rials (“OMR”). This requirement is a departure from the requirements set out in Part VI of the CML Executive Regulations, wherein it was stated that the capital of a fund at the time of establishment shall not be less than 2 million OMR.
Investment Rules
The REIF Regulations set out parameters by which a REIF may operate in the Sultanate and have determined that a REIF is not permitted to: (a) provide loans of financial facilities; (b) develop properties, unless the development is to renovate, supply or expand existing properties within its investment portfolio; (c) buy a piece of land; or (d) invest more than 25 per cent of the total value of its assets outside of the Sultanate (unless otherwise approved by the CMA as explained further below).
A REIF is also prohibited from purchasing properties at an amount exceeding 110 per cent of amount stated in any property’s valuation report. A REIF is further prevented from selling any property for less than 90 per cent of the property’s valuation. All properties in the REIF’s investment portfolio are subject to an independent re-valuation at least once in every 3 years.
Conditions for Purchasing Properties
It is specified by the REIF Regulations that 50 per cent of the total value of a REIF’s assets must be invested in income generating properties and/or special purpose vehicles (“SPV”). Any investments of the REIF in assets not related to real estate and/or cash, deposits and cash market instruments are not to exceed 25 per cent of the total value of the REIF’s assets.
Leased and non-leased properties
When purchasing properties, a REIF is required to meet certain conditions, including that, subject to certain exceptions, a property be fully leased, have good historical records and/or promising prospects such that it will obtain a good level income; economical according to the MSM reports and be free from any obligations or rights of third parties at the time of purchase.
It is also usually a requirement that a REIF have a majority ownership and control over the purchased property. However, in certain instances, a REIF may purchase properties without having a controlling majority on the basis that:
- the total value of the REIF’s non majority owned properties shall not exceed 25 per cent of the total value of the REIF’s assets after the acquisition;
- the acquisition is in the best interest of the holders of a REIF’s investment units; and
- there is a clear disclosure in the REIF’s prospectus regarding the risks associated with its ownership of properties without having a controlling majority.
- there is a strong probability of obtaining a tenant;
- any disbursements of capital to enhance the condition of the property will not materially affect the proceeds of the holders of the REIF’s investment units; and
- within a reasonable period of time, the holders of the REIF’s investment units will attain reasonable proceeds.
A REIF is only permitted to purchase properties under construction if the criteria under Article 125 of the REIF Regulations are satisfied. By way of overview, some of these Article 125 conditions include that:
- the REIF’s portfolio must be sufficient to ensure there is no significant decrease in the fund’s revenues during the construction period of the property in question;
- the purchase agreement is conditional upon the completion of the property construction;
- the total value of the properties under construction that are purchased by the REIF will not exceed 10 per cent of the total value of the REIF’s assets after purchase; and
- the REIF is prevented from selling the property under construction for at least 2 years from its completion.
As far as usufruct contracts are concerned, a REIF may purchase the rights from a usufruct contract. However, this is only permissible if the REIF has obtained the requisite consent of the competent authorities to transfer the usufruct contract to the REIF prior making the units available on the MSM.
Special Purpose Vehicles
In order to acquire a SPV with interest in property, an investment manager is required to consider, among other things, the following:
- whether the acquisition is in the interest of the holders of an REIF’s investment units;
- whether there a valid commercial reason for the acquisition of the SPV rather than the properties; and
- whether the property owned by the SPV will be compliant with the conditions for purchasing properties, some of which are outlined under the relevant heading above.
Properties Outside the Sultanate
As referred above, a REIF is permitted to purchase property outside the Sultanate, however investment abroad must not exceed 25 per cent of the total value of the REIF’s assets. Investment in property outside the Sultanate is further only permitted on the basis that it is considered in the best interest of holders of the REIF’s investment units. In assessing whether investment abroad is/is not in the best interest of holders of investment units some of the factors that must be considered include whether there are any:
- contradictions imposed on foreign ownership, restrictions on foreign exchange, transfers and provisions relating to competition and monopoly;
- economic, political, legal, judicial and accounting factors including the real estate market;
- operational restrictions including the level of transparency with respect to accounting and financial reporting; or
- restrictions or barriers to tax, in those countries where the REIF is looking to purchase property.
It should be noted that a REIF is permitted to take a loan(s) for the purchase of properties and SPVs. Under the CML Executive Regulations, a REIF was not permitted to borrow more than 30 per cent of its net asset value, whereas the REIF Regulations state that the total debt of a REIF is not to exceed 6o per cent of the total value of the REIF’s assets at the time of borrowing. However that percentage may be exceeded if approved at an extraordinary general meeting of the holders of a REIF’s investment units.
Other Controls
MD 95/2017 has further specified controls, including that a REIF is permitted to own property only if it is used in connection to commercial, residential, industrial and tourism purposes. Further, a residential complex may only be purchased by a REIF if the complex is 10,000 square meters or more in size. A REIF is prevented however from owning empty spaces and properties used for agricultural use.
Management of a REIF
A REIF’s investment manager is required to ensure there is suitable and duly appointed fund management to supervise and control the work of the REIF and its service providers. Subject to certain restrictions as to who may serve as a member of fund management, management is to comprise of at least 3 but no more than 7 members, including 2 independent members. As part of the responsibilities of the REIF’s management, fund managers are required to ensure that a fair and accurate assessment of all REIF assets and liabilities are made.
A Shari’ah committee must also be formed of at least 3 members all of whom must be independent from the investment manager and whose functions include, but are not limited to:
- providing real estate investment and fund management advice in accordance with the principles of Islamic Shari’ah and ensuring the REIF is in compliance with principles of Islamic Shar’iah and the CMA Regulations;
- providing expertise and legal advice on all matters, in particular on the REIF’s articles of association, prospectus, investment decisions and other operational matters of the REIF;
- reviewing the report of the investment manager regarding the REIF's compliance with its investment transactions in accordance with the principles of Islamic Shari’ah; and
- preparing a report to be included in the annual or interim report of the REIF that includes its opinion as to whether the operation of the REIF is conducted in accordance with the principles of the Islamic Shari’ah for the relevant financial period.
Conclusion
Although the concept of funds investing in real estate is not entirely new in Oman, it is understood that the comprehensive REIF Regulations will encourage the establishment of REIFs and be beneficial for the overall development of the real estate sector in the Sultanate. Investors of REIFs will see high returns of 90 per cent of any annual net profit on their investment and have access to a diverse portfolio of real estate which, prior to the REIF Regulations, had previously been largely unavailable to both foreign and domestic investors.
