islamic real estate investment trusts (reits): prospects & opportunities
DESCRIPTION
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]. Agenda. What is a REIT? - PowerPoint PPT PresentationTRANSCRIPT
1
ISLAMIC REAL ESTATE ISLAMIC REAL ESTATE INVESTMENT TRUSTS (REITs): INVESTMENT TRUSTS (REITs):
PROSPECTS & OPPORTUNITIESPROSPECTS & OPPORTUNITIES
Assoc Prof Dr Engku Rabiah Adawiah bt Engku AliAssoc Prof Dr Engku Rabiah Adawiah bt Engku AliAhmad Ibrahim Kulliyyah of Laws
International Islamic University [email protected]
2
AgendaAgenda
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
3
What is REIT?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
4
REIT: A DefinitionREIT: 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
5
Track-record of REITs in the Asian RegionTrack-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
6
Islamic REIT Vis-à-vis Conventional REIT?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 Shari`ah compliant manner
Conventional REIT – no such requirement
7
Islamic REIT: A DefinitionIslamic 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
“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: 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
For real estate investment to be Shari`ah compliant, regards should be given to the following: 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
8
General Regulatory Framework for General Regulatory Framework for REITs & Islamic REITs (Malaysian) 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 Shari`ah committee / adviser for the Islamic REIT to oversee Shari`ah compliance
9
Malaysian SC’s Guidelines for Islamic Malaysian SC’s Guidelines for Islamic REITs (November 2005)REITs (November 2005)
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 non-permissible activities cannot be included in an Islamic REIT even if the total rental complies with the 20% ruling
10
Malaysian SC’s Guidelines for Islamic Malaysian SC’s Guidelines for Islamic REITs (November 2005)REITs (November 2005)
Rental activities that are classified as non-permissible: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
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
11
Malaysian SC’s Guidelines for Islamic Malaysian SC’s Guidelines for Islamic REITs (November 2005)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 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)
12
Taxation Issues… 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
13
How would a Malaysian Islamic REIT How would a Malaysian Islamic REIT be administered ?be administered ?
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
14
Structure of an Islamic REITStructure of an Islamic REIT
Shariah Shariah
Committee/Committee/
AdviserAdviser
Shariah Shariah
Committee/Committee/
AdviserAdviser
ManagementManagement
CompanyCompany
ManagementManagement
CompanyCompany
Property Property
ManagerManager
Property Property
ManagerManager
ISLAMICISLAMICREITREIT
ISLAMICISLAMICREITREIT
PropertiesPropertiesPropertiesProperties
TrusteeTrusteeTrusteeTrustee
Units subscribed in IPO and/or acquired
in the open market
Management fees
Management services
Property Management
Services
Direct Ownership of
Properties
Net PropertyIncome
Property Management
Fees
Unit holders Appoint TrusteeIncome
Acts on behalf of Unit Holder
Adapted from Farris Aziz Faizal, Senior Manager CIMB Islamic
OverseeShari`ah
Compliance
Unit HoldersUnit HoldersUnit HoldersUnit Holders
15
Examples of Islamic REITs in MalaysiaExamples 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
16
STRUCTURE OF AL-`AQAR KPJ REITSTRUCTURE OF AL-`AQAR KPJ REIT
Holding of Units
ManagementServices
Management Fees
Maintenance & management
Fees
Ownership of Properties /
Building
Net PropertyIncome
Property Management
Fees
Distributions
Acts on behalf of Unit Holders
Advise the Al `Aqar KPJ REIT on Shariah related matters
Al `Aqar KPJ Al `Aqar KPJ REITREIT
Al `Aqar KPJ Al `Aqar KPJ REITREIT
Shariah Committee Shariah Committee MembersMembers
Shariah Committee Shariah Committee MembersMembers Unit HoldersUnit HoldersUnit HoldersUnit Holders
Manager (Damansara REIT
Managers S/B)
Manager (Damansara REIT
Managers S/B)
REIT Properties REIT Properties Comprising of 6 Comprising of 6
Specialist Specialist HospitalsHospitals
REIT Properties REIT Properties Comprising of 6 Comprising of 6
Specialist Specialist HospitalsHospitals
Trustee (Amanah Raya
Berhad)
Trustee (Amanah Raya
Berhad)Trustee Fees
6 Hospital Tenants6 Hospital Tenants (which are (which are
subsidiaries of KPJ)subsidiaries of KPJ)
6 Hospital Tenants6 Hospital Tenants (which are (which are
subsidiaries of KPJ)subsidiaries of KPJ)
Maintenance Manager (Healthcare Technical Services)
Maintenance Manager (Healthcare Technical Services)
Maintenance & management
services
Rental payments
Rent
17
Global Islamic REITs?Global Islamic REITs?
No clear-cut regulatory framework No clear-cut Shari`ah standards Would AAOIFI or other Islamic standard-setting bodies
take up the responsibility?
18
Issues…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.
19
Issues… 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 Shari`ah committee / advisors to the Islamic REITs
20
Prospects & Opportunities for Islamic Prospects & Opportunities for Islamic REITs?REITs?
Shariah compliance Income stability Capital stability & growth Quality real estate
Shariah compliance Income stability Capital stability & growth Quality real estate
Liquidity Diversification Expert management Transparency
Liquidity Diversification Expert management Transparency
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
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?
21
Potential Investor Base?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
22
Criteria for successful Islamic REITsCriteria 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
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 Shari`ah
governance
Result-oriented manager Transparency to investors Independence of
management (outset & ongoing)
Strong management team Effective Shari`ah
governance
23
The Way Forward…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
24
Thank YouThank You
Wassalamualaykum wrt wbtWassalamualaykum wrt wbt