Islamic REITs (iREITs)

Background
In November 2005, The Malaysian Government through the Securities Commission of Malaysia issued guidelines for Islamic REIT , setting new global benchmark for the development of Islamic REIT and making Malaysia the first jurisdiction to introduce such guideline in the industry. This guideline provides a guide on to market players in on shariah compliant in developing and managing an Islamic REIT. This guideline also serve to complement the existing guidelines on REIT. Presently, Malaysia is the only government to establish such guidelines for Islamic REIT. The guideline facilitates the creation of new asset class for investors and provide new opportunities for market players including fund managers to further diversify their investments portfolios. REIT and Islamic REIT are shares similar broad characteristics in terms of main structure requirements i.e. to have valuation, trustees, property managers, management companies, property manager, etc. In terms of tax treatment in Malaysia both REIT receive similar tax treatment on stamp duty, real property gains tax as well as corporate tax. They are also similar in terms of returns and distribution form the properties, i.e. both are generated frp, rental income and capital appreciation. Another similarity is the return to shareholder in tems of capital gain and dividend. The regulatory framework is also similar for both with exception that Islamic REIT must comply with the Shariah requirement, where Islamic REIT is required to appoint a Shariah Advisor or Committee who will act as advisor to the REIT and be the point of reference and consultations on permitted investments as provided under the Securities Commission Guideline. The distribution of income, although similar with REIT where it should only be made from realised gains or realised income, for Islamic REIT these income must be from Shariah compliant activities or from the activities within the 20% benchmark This benchmark is used to asses the level of contribution from mixed rental payment from Shariah-non compliant activities such as the rental payment from the premise that involved in gambling, sale of liquor, etc. Narrowing down to the Malaysian market, to date, there are 13 REIT being offered in Malaysia inclusive of two Islamic REIT. Al-Aqar KPJ REIT being the first Islamic REIT in the world and Al-Hadharah Boustead REIT being the first Islamic plantation REIT in the world. Both the Al-Aqar KPJ REIT and Al-Hadharah Boustead REIT rank amongst the top 3 REIT in Malaysia in terms of dividend yield. REITs and iREITs are similarly regulated however, iREITs add additional terms stating that investments and returns should be Shariah approved or within the 20% benchmark set by SC

How to invest in REITs

1. For listed REITs, you can buy and sell them like listed stocks as they are listed under the Exchange where investors need to go through a stockbroker to invest in them. 2. For unlisted REITs, like any other unit trust products, you can buy from or sell to the management company or through other authorized agents

islamic REITs (iREITs)

Rental Restriction for iREITs
REITs No restrictions on the tenants nature of business as long as it is legitimate by Malaysian Law iREITs Must be from Shariah compliant investments or is within the 20% benchmark

Financing Instruments for iREITs

REITs iREITs The total borrowings of the fund must not exceed 50% of the Must be from a Shariah total asset value of the fund. Conventional or Islamic approved financing financing instruments are allowed instrument

Insurance of REIT for iREITs

REITs The REITs must have insurance to protect its assets. Takaful or conventional insurance is allowed iREITs Takaful must be employed to insure. However, if Takaful is not able to serve the insuring service, conventional insurance schemes can be used

Size of iREITs
Initial size of a REIT must be at least RM100mil. REIT must offer units to the general public as part of the listing scheme at Least: i. ii. 5% of approved fund size for a fund with total asset value of up to RM200mil. 2% of the approved fund size, or an aggregate of 10mil nits, whichever is higher, for a fund with total asset value of above rm200mil.

Pricing of iREITs
Listed Units The issue price must be at least RM0.50 each unit and the price will be quoted on the exchange Unlisted Units Price will be decided by the management company. After initial offer period, the price of the fund will be the NAV per unit of the fund for the purpose of any transaction.

Dealing in Units for iREITs

Listed Units To create or cancel units Management Company should instruct trustee to write on the creation or cancellation of the units. The trustee will then create or cancel units in accordance to the instruction give to it by the management company. Any dealing in units must adhere to the relevant securities laws, guidelines and rules. Unlisted Units Management Company must agree to issue and redeem, and effect the same and repurchase of units upon proper request of an investor.

Authorised Investment for iREITs

REITs Real estates Single-purpose companies Real estate related assets Non-real estate-related assets iREITs Same but must be Shariah compliant or within the 20% benchmark

Cash, deposits, and money market instruments At least 50% of a funds asset value must be Same but Investments must be made only invested in real estate and/or single-purpose on Shariah approved and will not include companies at all times non-permissible items or within 20% benchmark Investment in non-real estate-related assets Same but must ensure that it is Shariah and/or cash, deposits and money market compliant or within 20% benchmark instrument not exceed 25% of funds total asset value

iREIT: Restrictions are set on investments for the fund such as the banning of 1. owning a building, in which all the tenants operate non-permissible activities even if the percentage of income received is below the 20% benchmark; and 2. the acceptance of a new tenant whose activities are fully non-permissible. The non-permissible activities banned from iREIT: 1. 2. 3. 4. 5. 6. 7. 8. Financial services based on riba (interest); Gambling/gaming; Manufacture or sale of non-halal products or related products; Conventional insurance (if Takaful is available) Entertainment activities that are non-permissible accordance to Shariah; Manufacturing or sale of tobacco-based products or related products; Stockbroking or share trading in Shariah non-compliant securities; and Hotels and resorts.

Returns and Distribution of Income for REITs

Return from properties

REIT Rental income Capital appreciation

iREIT Shariah compliant:

Rental income Capital appreciation

Return for the investor

Dividend Capital gain

Shariah compliant:

Dividend Capital gain

Distribution Distribution of income should Distribution of income should only be made of income only be made from realised from realised gains or realised income but gains pr realised income. must be from Shariah compliant activities or from the activities within the ( 20% benchmark ) * (20% benchmark): This benchmark is used to asses the level of contribution from mixed rental payment from Shariah-non compliant activities such as the rental payment from the premise that involved in gambling, sale of liquor, etc.

Parties Involved
Who Management Company Trustee Role To establish, to issue and offer subscription and invite for purchase as well as operate and administer the trust To take custody and control of funds property and hold it in trust for unit holders as well as to monitor operations of the fund for unit holders interest Take on tasks delegated by Management Company or trustee To value the properties within the fund

Third Party Independent Qualified Valuer Property Manager To manage the properties piled under the fund Investment To provide oversight over the operation and management of the fund Committee Shariah Advisor *only applied for iREIT To monitor and assess the operations of iREITs Unit Holders Holding shares of the trust

Benefits of iREITs

Mixed portfolio of assets Diversify risk profile by participating in a range of real estate and real estaterelated assets High dividend distribution to unitholders Income that is distributed by a REIT to its unitholders will not be subject to tax at the REIT level Stable returns A REIT is physically able to generate stable, sustainable income through rental income and capital appreciation, which can be used to continually pay regular dividends

Affordability REITs allow investors to participate in the real estate market with a smaller capital outlay as compared to the outright purchase of real estate Inflation hedge The value of real estate (underlying) is expected to generally increase in tandem with inflation rate

Risks

Returns are not guaranteed The total return of REITs is subject to the performance of the property market. Hence, the unit price of a REIT may go down if its underlying properties drop in value. Loss of control over investment Investors will not have direct control over the management companys investment decisions like when to buy or sell certain real estates, or how they will be managed. Market factors REITs are also subject to the vagaries of market demand and supply. As such, market fluctuations, confidence in the economy and changes in the interest rates may affect REITs price.