Transcript ISLAMIC REAL ESTATE INVESTMENT TRUSTS (REITs): PROSPECTS

ISLAMIC REAL ESTATE
INVESTMENT TRUSTS (REITs):
PROSPECTS & OPPORTUNITIES
Assoc Prof Dr Engku Rabiah Adawiah bt Engku Ali
Ahmad Ibrahim Kulliyyah of Laws
International Islamic University Malaysia
[email protected]
[email protected]
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Agenda
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What is a REIT?
Track-record of REITs in the Asian Region
Islamic REIT vis-à-vis Conventional REIT
Islamic REITs in Malaysia: Regulation & Experience
Global Islamic REITs: Issues & Challenges?
Prospects & Opportunities for Islamic REITs
The Way Forward
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What is REIT?
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REIT is an investment vehicle
structured as a unit trust that
invests in stable income producing
real properties & real property
related assets
REIT is driven entirely by
recurrent income from its
investment properties
REIT is a low risk, passive
investment vehicle with high
certainty of cash flow from rentals
derived from lease agreements
with tenants
REIT distributes all or at least a
high proportion of its income to its
unit holders, which are generally
passed on without deduction of
any REIT entity level tax
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REIT is established through a Deed
of Trust executed by the parties.
The Trustee acts for the unit holders
The Deed of Trust governs the REIT
and the roles and responsibilities of
the trustee and the management
company
REIT can be listed on a stock
exchange. Stock exchange listing
allows wide investor base and
creates liquidity in REIT units
REIT offers investors good yields as
well as a highly liquid method of
investing in real estate
REITS are governed by multiple
levels of stakeholders, including unit
holders, manager, trustee and
regulating authorities ensuring
investors’ protection
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REIT: A Definition
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“An investment vehicle that invests or proposes to
invest at least 50% of its total assets in real estate.
An investment in real estate may be by way of direct
ownership or a shareholding in a single-purpose
company whose principal assets comprise real estate”
Note: Real estate means physical land and those
human-made items which are attached to the land
Source: SC Guidelines on REITs 2005
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Track-record of REITs in the Asian Region
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Japan – first REITs after revision of the Investment
Trust Law in May 2000
Korea – launched REITs after introduction of REIT Trust
Act in July 2001
Singapore – first REITs launched in July 2002
Malaysia – first REIT listed in August 2005. At end of
2006, 12 REITs had been approved (total value of
RM5.5b), of which 9 were listed
Generally – countries need revision or introduction of
Trust Law to facilitate the creation of REITs
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Islamic REIT Vis-à-vis Conventional REIT?
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Fundamentally – not much
difference
Objective, administration
and structure of an Islamic
REIT – very similar to
Conventional REIT
Key difference – how the
incomes of the Islamic REIT
are derived and how the
fund is being managed, e.g:
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type of tenants; and
proportion of rental income
derived from the tenants
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Islamic REIT – tenants
in a property acquired
must operate in
businesses that comply
with Syariah principles
Conventional REIT – no
such requirement
Islamic REIT – fund
must be managed in
Shari`ah compliant
manner
Conventional REIT – no
such requirement
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Islamic REIT: A Definition
“In general, an Islamic REIT is a collective investment scheme
in real estate, in which the tenant(s) operates permissible
activities according to the Syariah”
SC Guidelines for Islamic REITs
For real estate investment to be Shari`ah compliant, regards
should be given to the following:
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Utilization of the real estate must be Shari`ah compliant, including
tenancies & sub-tenancies
Financing of the acquisition / development of the real estate should
be Shari`ah Compliant
Investment of cash / liquidity must be made in Shari`ah compliant
instruments
Insurance scheme for protecting the real estate should also be
Shari`ah compliant
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General Regulatory Framework for
REITs & Islamic REITs (Malaysian)
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Malaysian REITs fall within the regulatory purview of
the Securities Commission; and if listed, Bursa
Malaysia Securities Berhad also
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SC Guidelines – oversee the listing & sale of REITs &
Islamic REITs on Bursa Malaysia
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An Islamic REIT must comply with both Guidelines –
the Guidelines for Islamic REITs (November 2005) &
the general SC Guidelines on REITs (January 2005)
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There must be Shari`ah committee / adviser for the
Islamic REIT to oversee Shari`ah compliance
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Malaysian SC’s Guidelines for Islamic
REITs (November 2005)
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Generally, tenants of a property acquired by an Islamic
REIT must operate permissible activities in accordance
with Shari`ah principles
If there are “mixed” tenants – the proportion of rentals
from the operation of non-permissible activities to total
turnover of the Islamic REIT in any current financial
year must not exceed 20%
A building where all the tenants operates only nonpermissible activities cannot be included in an Islamic
REIT even if the total rental complies with the 20%
ruling
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Malaysian SC’s Guidelines for Islamic
REITs (November 2005)
Rental activities that are classified as non-permissible:
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Financial services based on riba (interest);
Gambling/gaming;
Manufacture or sale of non-halal products or related products
Conventional insurance;
Entertainment activities that are non-permissible according
to the Syariah;
Manufacture or sale of tobacco-based products or related
products;
Stockbroking or share trading in Syariah non-compliant
securities; and
Hotels and resorts
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Malaysian SC’s Guidelines for Islamic
REITs (November 2005)
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For new tenant(s) – the Syariah committee / adviser
must advise the Islamic REIT manager against
accepting new tenant(s) who operate activities that are
fully non-permissible
The Islamic REIT manager must ensure that all forms
of investments, deposits and financing instruments
comply with Shari`ah principles
Takaful schemes must be used to insure the real estate
Note: Unless otherwise approved by the trustee and
the SC, the total borrowings of the fund to acquire
properties shall not exceed 50% of the total asset
value of the fund at the time the borrowings are
incurred – (SC Guidelines on REITs)
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Taxation Issues…
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Malaysia relaxed its stamp duty on properties being
sold under REITs to avoid double-taxation
Effective 1/1/2007 (for 5 years), dividends from REITs
listed on Bursa Malaysia will be subjected to a final
withholding tax of 15% for non-corporate investors
Foreign institutional investors will be subjected to a
final withholding tax of 20%
Local & foreign corporate investors will be subjected
to existing tax treatment & tax rate (27% in 2007)
From 2007, all income from REITs – exempted from
tax, provided 90% of total income of REITs is
distributed to investors
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How would a Malaysian Islamic REIT be
administered ?
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All REITs are governed by multiple levels of stakeholders to
ensure maximum investors’ protection:
 Unit holders;
 Manager;
 Shari`ah committee/adviser;
 Trustee; and
 Regulatory authorities
Islamic REITs – must comply with both SC Guidelines on
REITs and SC Guidelines for Islamic REITs
All REITs are established through a Deed of Trust executed
by the trustee who acts on behalf of the unit holders.
The Deed of Trust governs the REITs and the roles of the
trustee and the management company
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Structure of an Islamic REIT
Shariah
Committee/
Adviser
Oversee
Shari`ah
Compliance
Unit Holders
Units subscribed in
IPO and/or acquired
in the open market
Management
Company
Property
Management
Fees
Property
Manager
Management
fees
Management
services
Income
ISLAMIC
REIT
Direct
Ownership of
Properties
Unit holders
Appoint
Trustee
Acts on behalf
of Unit Holder
Trustee
Net
Property
Income
Properties
Property
Management
Services
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Adapted from Farris Aziz Faizal, Senior Manager CIMB Islamic
Examples of Islamic REITs in Malaysia
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First Islamic REIT – Al `Aqar KPJ REIT:
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launched on 24th July 2006 with an issue of 340m units
listed on Bursa Malaysia on 10th August 2006
backed by health-care assets (specialist hospitals)– valued
at RM481m
Al Hadharah Boustead REIT:
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launched on 15th January 2007 with an issue of 220m units
listed on Bursa Malaysia in February 2007
backed by plantation assets
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STRUCTURE OF AL-`AQAR KPJ REIT
Shariah Committee
Members
Unit Holders
Advise the Al
`Aqar KPJ REIT
on Shariah
related matters
Manager
(Damansara REIT
Managers S/B)
Property
Management
Fees
Maintenance
Manager (Healthcare
Technical Services)
Holding of
Units
Management
Services
Acts on behalf
of Unit Holders
Al `Aqar KPJ
REIT
Management
Fees
Ownership of
Properties /
Building
Maintenance &
management
services
Maintenance &
management
Fees
Distributions
Trustee Fees
Trustee
(Amanah Raya
Berhad)
Net
Property
Income
REIT Properties
Comprising of 6
Specialist
Hospitals
Rent
Rental
payments
6 Hospital Tenants
(which are
subsidiaries of KPJ)
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Global Islamic REITs?
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No clear-cut regulatory framework
No clear-cut Shari`ah standards
Would AAOIFI or other Islamic standard-setting
bodies take up the responsibility?
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Issues…
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Prohibited sectors? Would the same sectors listed
under DJIM / FTSE stock selection criteria be equally
applicable to Islamic REITs?
Possible categorization of sectors based on modes of
usage:
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Accommodation;
Hospitality (hotels & resorts);
Offices;
Storages & warehouse
Medical treatment
Education & research
Shopping complex / mall
Entertainment, etc.
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Issues…
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What about the benchmarking? Would different hostcountry / jurisdiction have different benchmarks?
What about the various financial ratios – e.g. 33%
leverage? Are they still applicable to Islamic REITs?
Ideally – Islamic REITs should adhere to the ratio, and
financing needs should use Islamic based transactions
As of now – these issues are left to the ijtihad (juristic
deliberations) of the Shari`ah committee / advisors to
the Islamic REITs
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Prospects & Opportunities for Islamic
REITs?
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Keen interest by investors in real estate projects and
property funds due to its perceived stability and potential
value appreciation
Why Islamic REIT? Tax savings & liquidity (compared to
normal real estate funds)
Prospect? Definitely!
With the infrastructure in place – Islamic REITs can grow
multi-fold
 What are Investors looking for in Islamic REITs?
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Shariah compliance
Income stability
Capital stability & growth
Quality real estate
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Liquidity
Diversification
Expert management
Transparency
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Potential Investor Base?
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Pension and provident funds – likely to be a major player
because of tax treatment of REITS and the mandates to
invest more in real estate
Retail and private banking investors – focus on yields
versus alternative local investment products, thus, REITs
product should be priced competitively
Fixed return funds – typically takaful / insurance
companies who look for safe predictable returns, low
volatility and strength of management
International real estate & equity funds – focus on key
fundamentals, e.g. global diversification, high net of tax
returns compared to other markets, stability of underlying
capital and experience and reliability of manager
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Criteria for successful Islamic REITs
Quality Islamic REITs:
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Quality underlying real
estates with sustainable
growth prospects
Asset diversification
Long-term investment
planning – growth by asset
value enhancement &
further asset acquisition
Quality Management:
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Result-oriented manager
Transparency to investors
Independence of
management (outset &
ongoing)
Strong management team
Effective Shari`ah
governance
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The Way Forward…
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The Malaysian Islamic REITs regulatory infrastructure –
lay a fresh foundation for the growth of an Islamic
REITs market in Malaysia
This in turn will hopefully contribute & spur the growth
& expansion of Islamic REITs infrastructure & market –
regionally & globally
The success of Islamic REITs depends on its ability to
create value & deliver its full potentials – lessons can
be learnt from other successful REIT markets
What matters most:
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The quality of the Islamic REITs
The quality of the management of the Islamic REITs
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Thank You
Wassalamualaykum wrt wbt
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