Islamic Real Estate Trust Investment

ISLAMIC REAL ESTATE INVESTMENT TRUST

PREPARED BY:

Nawalin Nazah

Hamida Mohamed

Rininta nurrachmi www.rininta-nurrachmi.blogspot.com

Background on IREITs

Difference between REITs and IREITs

Analysis of IREITs from Shariah point of view

Practical cases of IREITs

Issues of IREITs and the way forward

Conclusion

Discussion Flow

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Backround on REITs

REITs is an investment vehicle that proposes to invest at least 50 % of its total assets in real estate

It can be through direct ownership or through a single purpose company whose principle asset comprises of real asset.

Reits first stated in US in 1960

Reits now operates in 29 countries


Cont..

More than US $700,000 Million Market globally

72% of Investment in the REITS are located in U.S.

REITs are trusts which provide investors with an investment vehicle in real estates.

REIT is a vehicle that owns and operates income producing real estates.


Islamic Reits

Islamic REIT is a collective investment scheme in real estate whose tenants operate permissible activities that are in line with Sharia principles.


Permissible activities

The activities which are Shariah compliant and not relate with those :

Financial services based on interest.

Gambling

Manufacture/sale on non-halal products

Conventional insurance

Entertainment activities not in line with Sharia

Stock broking and trading in conventional securities

Hotels and resorts


feature Conventional REITs Islamic REITs

Shariah commite / advisor There is no necessity for

any shariah committee /

advisor

IREITs should assign a

shariah committee to

certify conformity with

shariah conditions

Permissibility of activities

perform by tenants

No constraint Only allowable activities

approved

Insurance for properties Conventional insurance

with insurance

companies as permitted

by trustee

The manager has to be

concern abaout the

availability of Islamic

insurance before going to

conventional insurance

financing No limitations Financing should be

shariah compliant

Comparison between REITs and IREITs


Analysis of I-REITS from Shari’ah Point of View

Shari’ah committee (SC) or advisory (SCA) is responsible for overlooking the functions of Islamic REITs so that it complies with all of Shariah principles including investment, deposit and financing decision for Islamic REITs, acquisition and disposal of real estate and rental earnings and activities.

SC is also required with the supervising and ensuring of all funds to be managed and administered in accordance to Shariah principles decreed and outlined by the Securities Commission.



Main features of Shariah-compliant REIT I. Rental activities that are classified as non-permissible Financial services based on interest.

Gambling

Manufacture/sale on non-halal products

Conventional insurance

Entertainment activities not in line with Shariah

Stock broking and trading in conventional securities

Hotels and resorts

Nature of all non-permissible businesses is that it is highly profitable.

casino & lottery outlets – game of chance always favor the operator liquor stores interest-bearing banks



Rental from a Tenant who carries out Mixed Activities:

- Activities are permitted by Shariah but there is a small extent of

non-permissible or prohibited elements.

SCA requires that the renewal from non-permissible activities should not exceed 20% of the total turnover of I-REIT


How do we calculate the ratio of non-permissible activities?

The techniques used by SCA comprise the utilization of space, hours of service, and other methods that are considered appropriate by the shariah advisors by their own ijtihad.


Islamic Benchmark

Calculated by space and sales:

Permissible 80%

Non-permissible 20%

Permissible Sales = RM 8,000

Total sales: RM 10,000 Non-permissible sales = up to RM 2,000



SCA is not allowed to acquire real estate wherein all tenants run non-permissible business actions. This holds even where the percentage of rental from the said property is beneath the agreeable level of 20% of the total turnover of IREITS.

In the case of rental out a new tenant, the benchmark that is used to make specific in case of the mixed rental income cannot be applied because the exact rental from it is not known yet.



If the new tenant engages in the business activities are consider non permissible, fund manger is not allowed to involve in such activates.

Obviously manager of I-REIT must make sure that all activities of deposit, investment, and financing are in accordance with the shariah.

The guideline also requires that an I-REIT must use Takaful schemes to insure its real estate. However, I-REIT may use the conventional schemes is they are unable to be covered by takaful schemes.



I-REIT is permitted to participate in forwards sale or purchase of currency for risk management.

I-REIT is convinced to deal with Islamic Financial Institution then it will be appreciative by the concept of wa’d .

If the I-REIT deal with conventional financial institution, it allowed to take part in conventional forwards sale or purchase of currency.


Practical cases of Islamic REITs in Singapore

Sabana Shariah Compliant REITs

• No Shariah framework

• Only legal framework applicable for conventional and Islamic REITs

• Shariah framework is to be determined by respective Shariah Board of Islamic REITs

• Continuous rental : Non permissible activities <5% per annum of Gross Revenue

• Investment : Must be Islamic, if non available / viable can do conventional but with permission from Shariah Adviser


Practical cases of Islamic REITs in UAE

Emirate REITs (Dubai Islamic Bank & Eiffel Management-France)

• At least 80% of company’s net income will be distributed to shareholder annually in the form of dividends

• Not engage in stock lending and derivative transaction for speculative purposes

• Shariah framework on Islamic REITs is to be determined by Shariah Supervisory board of the Islamic REITs

• There is no specific DFSA (Dubai Financial Service Authority) module for Shariah compliant REITs, thus the REIT structures is offered by DIFC (Dubai International Financial Center)


Issue

Lack of Standardization in

Shariah

Limitation of investment universe

Lack of Appropriate index for pricing

Source : Shariah Compliant real estate development financing and investment in GCC by Ibrahim, et al www.rininta-nurrachmi.blogspot.com

Way Forward

Clear & Transparent Shariah Framework

Quality Management

Diversification of the product


conclusion

Islamic REIT has a potential to develop into a

possible investment alternative, however, following major issues needs to be resolved:

Universally acceptable regulatory framework

Shari’a consensus on assets types

Cross border trading

Tax benefits and double tax treaties


Islamic Real Estate Trust Investment

Education

Transcript of Islamic Real Estate Trust Investment