ISLAMIC REAL ESTATE INVESTMENT TRUSTS (REITs): PROSPECTS

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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
• rabiah_at_iiu.edu.my
• eradawiah_at_yahoo.com

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Agenda

• 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?

• 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

• 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

• 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

• 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?

• 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
• type of tenants and
• proportion of rental income derived from the
  tenants

• 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 Shariah
  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 Shariah
  compliant, regards
• should be given to the following
• Utilization of the real estate must be Shariah
  compliant, including tenancies sub-tenancies
• Financing of the acquisition / development of the
  real estate should be Shariah Compliant
• Investment of cash / liquidity must be made in
  Shariah compliant instruments
• Insurance scheme for protecting the real estate
  should also be Shariah compliant

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General Regulatory Framework for REITs Islamic
REITs (Malaysian)

• Malaysian REITs fall within the regulatory
  purview of the Securities Commission and if
  listed, Bursa Malaysia Securities Berhad also
• SC Guidelines oversee the listing sale of
  REITs Islamic REITs on Bursa Malaysia
• An Islamic REIT must comply with both Guidelines
  the Guidelines for Islamic REITs (November
  2005) the general SC Guidelines on REITs
  (January 2005)
• There must be Shariah committee / adviser for
  the Islamic REIT to oversee Shariah compliance

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Malaysian SCs Guidelines for Islamic REITs
(November 2005)

• Generally, tenants of a property acquired by an
  Islamic REIT must operate permissible activities
  in accordance with Shariah 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
  non-permissible activities cannot be included in
  an Islamic REIT even if the total rental complies
  with the 20 ruling

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Malaysian SCs Guidelines for Islamic REITs
(November 2005)

• Rental activities that are classified as
  non-permissible

• 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 SCs Guidelines for Islamic REITs
(November 2005)

• 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 Shariah 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

• 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 ?

• All REITs are governed by multiple levels of
  stakeholders to ensure maximum investors
  protection
• Unit holders
• Manager
• Shariah 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
Unit Holders
Unit holders Appoint Trustee
Units subscribed in IPO and/or acquired in the
open market
Oversee Shariah Compliance
Income
Management fees
Management Company
ISLAMICREIT
Acts on behalf of Unit Holder
Trustee
Management services
Direct Ownership of Properties
Net Property Income
Property Management Fees
Properties
Property Manager
Property Management Services
Adapted from Farris Aziz Faizal, Senior Manager
CIMB Islamic
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Examples of Islamic REITs in Malaysia

• First Islamic REIT Al Aqar KPJ REIT
• 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
• 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
Holding of Units
Distributions
Acts on behalf of Unit Holders
Management Services
Al Aqar KPJ REIT
Manager (Damansara REIT Managers S/B)
Trustee (Amanah Raya Berhad)
Management Fees
Trustee Fees
Ownership of Properties / Building
Net Property Income
Property Management Fees
Maintenance management services
REIT Properties Comprising of 6 Specialist
Hospitals
6 Hospital Tenants (which are subsidiaries of
KPJ)
Maintenance Manager (Healthcare Technical
Services)
Rent
Maintenance management Fees
Rental payments
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Global Islamic REITs?

• No clear-cut regulatory framework
• No clear-cut Shariah standards
• Would AAOIFI or other Islamic standard-setting
  bodies take up the responsibility?

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Issues

• 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
• Accommodation
• Hospitality (hotels resorts)
• Offices
• Storages warehouse
• Medical treatment
• Education research
• Shopping complex / mall
• Entertainment, etc.

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Issues

• What about the benchmarking? Would different
  host-country / 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 Shariah
  committee / advisors to the Islamic REITs

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Prospects Opportunities for Islamic REITs?

• 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?

• Shariah compliance
• Income stability
• Capital stability growth
• Quality real estate

• Liquidity
• Diversification
• Expert management
• Transparency

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Potential Investor Base?

• 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

• Quality Management

• Quality underlying real estates with sustainable
  growth prospects
• Asset diversification
• Long-term investment planning growth by asset
  value enhancement further asset acquisition

• Result-oriented manager
• Transparency to investors
• Independence of management (outset ongoing)
• Strong management team
• Effective Shariah governance

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The Way Forward

• 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
• The quality of the Islamic REITs
• The quality of the management of the Islamic REITs

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Thank You

• Wassalamualaykum wrt wbt