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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 – PowerPoint PPT presentation

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Title: ISLAMIC REAL ESTATE INVESTMENT TRUSTS (REITs): PROSPECTS


1
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

2
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

3
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 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 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?
  • 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

7
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

8
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

9
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

10
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

11
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)

12
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 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

14
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
15
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

16
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
17
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?

18
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
  • 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

20
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

21
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 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

23
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 You
  • Wassalamualaykum wrt wbt
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