Ever wondered how REITs raise money through debt—and why some choose public markets while others go private?
The method a REIT uses to issue debt has a direct impact on cost, flexibility, speed, and investor relationships. Understanding the difference between public debt offerings and private placements helps investors evaluate a REIT’s strategy and risk profile.
Introduction: The Capital Behind the Properties
Real Estate Investment Trusts (REITs) must constantly raise capital to acquire new properties, refinance existing debt, and maintain steady dividend distributions. While equity offerings (issuing new REIT shares) are common, debt financing is often more efficient and less dilutive to existing shareholders. But debt comes in different forms—and choosing between a public debt offering and a private placement isn’t just a matter of preference. Each approach comes with clear trade-offs.
In Arab markets like the UAE, Saudi Arabia, and Egypt, the REIT sector is maturing rapidly. As these REITs begin to tap into debt markets, investors need to understand how the method of fundraising affects credit risk, liquidity, and transparency.
This article breaks down the differences between public and private REIT debt issuance, focusing on their relative costs, flexibility, legal requirements, and practical impact on REIT performance and investor perception.
What Is a Public Debt Offering?
A public debt offering occurs when a REIT issues bonds or other debt instruments to the general public through capital markets. These debt securities are listed on a public exchange and sold to a broad base of institutional and retail investors.
Public offerings are subject to regulatory approval, typically require credit ratings, and involve detailed disclosures through a prospectus. Once issued, these bonds trade on secondary markets, offering liquidity to bondholders.
For example, a Saudi-listed REIT might issue a sukuk (Islamic bond) on the Tadawul or a conventional bond in international markets to raise SAR 500 million for expansion.
What Is a Private Placement?
In contrast, a private placement is a direct offering of debt to a limited number of institutional investors—such as pension funds, insurance companies, or sovereign wealth funds. These transactions are negotiated privately and are not listed on public exchanges.
Private placements typically involve fewer regulatory filings, less disclosure, and more flexibility in structuring terms like interest rates, covenants, and maturity dates. However, they are less liquid, meaning investors usually hold the notes until maturity.
An example would be a UAE REIT arranging a $100 million five-year term loan with a regional pension fund, with terms customized to both parties’ needs.
Cost Comparison: Which Is Cheaper?
Cost is one of the most important considerations for REITs when choosing between public and private debt.
Public debt offerings often involve higher upfront costs. Legal fees, underwriting fees, regulatory filing costs, marketing expenses (“roadshows”), and listing fees all contribute to the total issuance expense. However, these offerings may provide lower interest rates, especially if the REIT has a strong credit rating and the bond is investment-grade.
On the other hand, private placements have lower upfront costs. They don’t require extensive marketing or public disclosures, and legal expenses are usually lower. However, the trade-off is that investors in private placements typically demand higher interest rates as compensation for reduced liquidity and higher perceived risk.
So, while a public issue might cost more to arrange, the long-term cost of capital (through lower interest payments) may be lower—if market conditions and creditworthiness are favorable.
Flexibility: Who Has More Control?
When it comes to customization and control, private placements win.
In a private placement, the REIT can negotiate nearly every detail with the investor: the repayment schedule, interest calculation, covenants, collateral requirements, and even early repayment options. This is particularly useful for REITs with unique cash flow needs or non-standard asset types.
Public debt, by contrast, is much more standardized. Bonds are usually issued in fixed denominations, with fixed interest rates and terms designed to appeal to a broad investor base. Regulatory constraints limit how much customization is possible.
However, public markets offer greater flexibility in re-accessing capital. Once a REIT establishes itself with a strong bond issuance record, it can issue more bonds faster, with lower costs, and without renegotiating every term. This scalability can be attractive for REITs with ambitious growth plans.
Speed and Timing: How Quickly Can Funds Be Raised?
Private placements are generally faster. Since there’s no need for regulatory review, credit rating issuance, or public marketing, a REIT can negotiate a deal and close in a matter of weeks.
Public offerings take longer. Preparing a prospectus, going through approvals, and conducting a roadshow can take months. Market timing is critical, and any negative macroeconomic developments during the preparation phase can affect investor appetite or pricing.
For REITs operating in fast-moving real estate markets, where acquisition opportunities arise quickly, the speed of private placements can be a significant advantage.
Disclosure and Regulatory Requirements
Public offerings are governed by strict regulatory frameworks. REITs must disclose detailed information about their operations, financials, risks, asset base, and use of proceeds. They must also obtain a credit rating and file ongoing reports for the life of the bond.
This level of transparency benefits investors but increases the administrative burden on the REIT.
Private placements, in contrast, are largely exempt from these obligations. Investors typically perform their due diligence, and the REIT is not subject to public disclosure beyond what is privately agreed upon.
For REITs that prefer to limit public exposure—especially in early growth stages or volatile markets—private placements offer a more discreet solution.
Liquidity and Market Perception
One major advantage of public debt is liquidity. Since bonds are listed and traded on secondary markets, investors can buy and sell them more easily, which makes them more attractive—especially to institutional investors with strict liquidity mandates.
Public debt also enhances a REIT’s market presence and reputation. A successful issuance signals financial strength, governance discipline, and long-term vision. It opens doors to broader investor bases and can improve a REIT’s share price.
Private placements, while flexible, are illiquid. The notes are usually held to maturity and rarely traded. As a result, these instruments appeal to a narrower group of investors, and the REIT gains less visibility in public markets.
Credit Ratings and Their Role
Public debt issuance almost always requires a credit rating from a recognized agency like S&P, Moody’s, or Fitch. A favorable rating (such as investment grade) can significantly lower interest costs and attract larger pools of capital. However, achieving such a rating requires financial strength, operational stability, and consistent performance.
Private placements, while not always requiring a formal rating, may still involve internal evaluations by institutional investors. In some cases, private investors will request a shadow rating or conduct in-depth risk assessments using proprietary models.
For REITs in the GCC and Egypt, pursuing a rating can also signal readiness for international expansion and adherence to global standards, improving investor confidence beyond the region.
Which Is Right for REITs in Arab Markets?
In developing markets like those in the MENA region, the choice between public and private debt is shaped by the maturity of capital markets, regulatory environment, and investor appetite.
For example, in Saudi Arabia, the sukuk market is well-developed and allows REITs to issue Islamic bonds that comply with Shariah law while accessing broad pools of institutional investors. This makes public issuance an attractive option—especially as regulators encourage capital market expansion.
In Egypt, where debt capital markets are still emerging, REITs may find private placements more suitable. These can be structured through direct arrangements with local banks, development funds, or international investors without going through the costly process of public listing.
In the UAE, REITs have access to both options. Larger REITs with international ambitions may prefer public debt to establish a stronger market presence, while smaller or newly launched REITs may find private placements more accessible and efficient.
Case Example: Public vs. Private in Action
Let’s compare two hypothetical REITs in the Gulf.
REIT A, listed in Saudi Arabia, plans to expand into industrial logistics and needs SAR 600 million. It chooses a public sukuk issuance, obtains a credit rating, and goes through the Capital Market Authority’s approval process. The process takes three months, but the Sukuk is oversubscribed, and the REIT secures financing at an attractive rate with a ten-year term.
REIT B, operating in the UAE, needs AED 150 million to acquire a portfolio of school buildings. It negotiates directly with a private regional investment firm for a five-year loan. The deal is finalized in six weeks, with customized terms and no disclosure requirements. The interest rate is slightly higher, but the REIT values speed and confidentiality.
Both REITs meet their goals—but through very different strategies.
Conclusion: Choosing the Right Tool
Debt is an essential part of a REIT’s capital stack, and how it is raised has lasting consequences. Public offerings offer scale, liquidity, transparency, and potentially lower costs over time. But they come with complexity, higher upfront costs, and slower execution.
Private placements provide speed, flexibility, and discretion, but tend to be more expensive and illiquid.
For REIT managers, the choice depends on strategy, market timing, investor relationships, and long-term goals. For investors, understanding how a REIT raises debt helps assess its financial strength, risk profile, and operational priorities.
As REITs in the Arab world continue to grow, expand into new asset classes, and enter global markets, mastering the trade-offs between public and private debt will be key to sustainable growth—and investor success.
