I-REITs in Malaysia by sweetchild2009

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									ISSUES IN REAL ESTATE INVESTMENT TRUST (REIT)

GHAZANA SAID ATAN  NIDA PHETTONGKAM


‫ِ هلل ّر م ِ َح م‬ ِ ‫بسۡمِ ٱ ِ ٱل َحۡ َـٰن ٱلّر ِي‬
(In the name of Allah, the Beneficent, the Merciful)

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PRESENTATION OUTLINE
INTRODUCTION REIT I-REIT ISSUES DISCUSSION

CONCLUSION

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INTRODUCTION
Property has a dual nature :  as fixed or immovable asset in Balance Sheet, which means that it can be securitized  as a predictable income stream, similar to bonds and equity, which means that it can be monetized Note
For the purpose of this presentation, we will narrow our discussion to REIT and I-REIT markets and issues strictly applicable to Malaysia only

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PRESENTATION OUTLINE
INTRODUCTION REIT I-REIT ISSUES DISCUSSION

CONCLUSION

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WHAT IS A REIT ?
REIT is in the form of :
a collective investment vehicle (typically in a trust fund)  which pools money from investors and uses the pooled capital  to buy, manage and sell real estate assets (e.g., residential or commercial buildings, retail or industrial lots) or other real estate-related assets (e.g., shares in public listed property companies, listed or unlisted debt securities of real estate companies etc)

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CONT’D
Securities Commission, Malaysia REIT is an investment vehicle that proposes to invest at least 50% of its total assets in real estate, whether through direct ownership or through a single purpose company whose principal asset comprise real asset

  

REITs in Malaysia is governed by : Securities Commission Act 1993 Guidelines on Real Estate Investment Trusts (was first issued by the SC in 1995) Guidelines for Islamic Real Estate Investment Trusts (for I-REITs)

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TYPES OF REITs
 Equity REITs
Invest in and own real estate (thus responsible for the equity or value of their real estate assets). Revenues come principally from the real estates’ rents Mortgage REITs Lend money to real estate owners and operators or purchase existing mortgages and mortgage-backed securities. Revenues generated primarily from the interest that they can earn on the mortgage loans


Hybrid REITs Own properties and give loans (combine the investment strategies of equity REITs and mortgage REITs)


TYPICAL REIT STRUCTURE

(Source : Security Industry Development Centre, Securities Commission)

WHY ARE REITs ATTRACTIVE TO INVESTORS

INCOME STABILITY

• Income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods of time or interest from the financing of those properties

CAPITAL STABILITY & GROWTH

• Long term unit price capital growth potential is driven by increase in rental earnings and by capital appreciation of underlying properties

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CONT’D
LIQUIDITY & VALUATION
• Many REITs perform regular (annual/quarterly) valuations of their company property holdings

DIVERSIFICATION

• Diversification by types of properties, tenants and locations

EXPERT MANAGEMENT

• Benefit from experienced and professional real estate team that knows the industry, understands the business and can take advantage of opportunities thanks to its ability to raise funds from the capital markets
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CONT’D

TRANSPARENCY

• Subject to stringent corporate governance

TAX BENEFITS

•Where a REIT distributes at least 90% of its total income, the REIT will be exempt from tax. Where a REIT does not meet this distribution test, then the REIT will be taxed at normal corporate income tax rates, which are currently 27% in 2007, 26% in 2008 and 25% in 2009 onwards.

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PRESENTATION OUTLINE
INTRODUCTION REIT I-REIT ISSUES DISCUSSION

CONCLUSION

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ISLAMIC REIT (I-REIT)
In November 2005, Malaysia became the first jurisdiction to introduce a guideline in the global Islamic finance sector and in the process, set a global benchmark for the development of I-REIT

I-REIT is an investment vehicle that invests primarily in:  income-producing Shariah-compliant real estate, and/or;  single purpose companies which are Shariah compliant whose principal assets comprise Shariah compliant real estate
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CONT’D
To date, Malaysia has two I-REITs under their helm :


Al-Hadharah Boustead REIT (investment in Shariah compliant plantation assets). It is also the largest Islamic REIT in Malaysia with a market capitalisation of approximately RM551 million as at 31 December 2008. Al-Aqar KPJ REIT (first healthcare REIT in the world).
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

STRUCTURE OF I-REIT

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PRESENTATION OUTLINE
INTRODUCTION REIT I-REIT ISSUES DISCUSSION

CONCLUSION

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ISSUES ON SHARIAH PERMISSIBILITY
In the I-REITs Guidelines, I-REIT is defined as : “A collective investment scheme in real estate, in which the tenants operate permissible activities according to Shariah.” Accordingly, the Shariah Advisory Council of Securities Commission delineates the rental activities that are classified as nonpermissible.
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CONT’D
The following rental activities classified as non-permissible:
    

are




Financial services based on interest (riba); Gambling/gaming (maysir); Manufacture of sale of non-halal products or related products; Entertainment activities that are non-permissible according to the Shariah; Manufacture or sale of tobacco-based products or related products; Stockbroking or share trading in Shariah noncompliant securities; Hotels and resorts; .
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CONT’D
I-REIT must also ensure that all forms of investment, deposit and financing instruments comply with the Shariah principles. For example, in financing the acquisition of real estate, I-REIT fund manager must not engage in riba-based instrument which would have an effect on the Islamicity of the I-REIT operation and transaction.

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ISSUES ON RENTAL
Rental from the tenant who operate mixed activities  The rental from non-permissible activities must not exceed 20% of total turnover of the I-REIT
2. Method used for calculating the ratio of rental from non-permissible activities  Methods include the usage of space, hours of service and other methods deemed appropriate by the Shariah advisors using their own ijtihad
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1.

CONT’D
3. Acquisition of real estate with existing tenant The fund manager must obtain the rental information from each non-permissible activity operating at the property to be acquired then compare to the total turnover of the I-REIT  The percentage amount will be referred to the 20% benchmark as determined by the SAC for the criteria on rental from nonpermissible activities.

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CONT’D
4. Renting out to a new tenant :  A tenant whose activities are fully impermissible The fund manager is also advised not to accept a new tenant whose activities are wholly non-permissible


A tenant whose activities are partially impermissible The fund manager can calculate the rental of non-permissible activities and compare it to total rental paid by the tenant and the percentage of 20% will be used as a basis for determining the ratio between the two.
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ISSUE ON RISK MANAGEMENT
I-REITs are allowed to deal in forward sales and purchases of currency as a risk management tool. In doing so, they are encouraged to deal with Islamic financial institutions, in which case the principle of wa’ad (unilateral promise) will apply. However, if the I-REITs deal with conventional financial institutions, they are permitted to participate in the conventional forward sales or purchase of currency.

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ISSUES IN POTENTIAL RETURNS
When investors make an investment decision, they look primarily at the potential returns. In Malaysia, the government has given issuers of I-REITs a number of incentives but little has been allocated for the demand side. More perks for investors may persuade them to consider I-REITs as an asset class in their investment portfolio.

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PRESENTATION OUTLINE
INTRODUCTION REIT I-REIT ISSUES DISCUSSION

CONCLUSION

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JUSTIFICATION FOR BENCHMARK SET BY SAC
1. Fiqh maxim “Al-Ashbah wal Nasa'ir”, which means, “"To rule as prohibited something that is a mix of the permissible and the prohibited is ihtiyat (precautionary) and it is not necessarily prohibited. 2. Analogy to some fiqh rulings, where some fuqaha have ruled that a garment made of threads mixed of silk and cotton or wool can be worn by Men if the ratio of the silk thread mixed with the cotton or the wool does not exceed 50%. The nature of the new thread has departed from both silk and cotton and, consequently, ruled as halal for men by some jurists
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CONT’D
3. Partnering non-Muslims is permissible

4. Benchmark set by Prophet Muhammad s.a.w
5. Benchmark in ghubn cases These benchmarks set by the Hanafis are meant only to draw the line between the excessive gharar and the minor gharar

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CONT’D
6. If the haram elements involve matters such as umum al-balwa (common plight), fasad alzaman (prevalence of haram) and urf (custom), then we may tolerate this haram as long as the core activity of the company or the tenant is halal. 7. It is legitimate to accept a beneficial thing (maslaha) if found to be in conflict with Shariah, and overlook committing the haram that might be associated with it, because the ultimate objective of the Shariah is the realization of maslaha.
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PRESENTATION OUTLINE
INTRODUCTION REIT I-REIT ISSUES DISCUSSION

CONCLUSION

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CONCLUSION


In Malaysia, there are 12 REITs listed on the local stock exchange with a combined market capitalization of over RM5 billion (US$1.42 billion). Of the 12, two are I-REITs, i.e., Al-Hadharah Boustead REIT and the Al-Aqar KPJ REIT. Malaysian REITs have been reported by analysts to have returned 90% of their distributable income as dividends to unit holders, which translated into an average forecast yield of 5.3% in 2007. This is expected to rise to 6.9% in 2008 and 7% in 2009

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CONT’D


Malaysian REITs have been reported by analysts to have returned 90% of their distributable income as dividends to unit holders, which translated into an average forecast yield of 5.3% in 2007. This is expected to rise to 6.9% in 2008 and 7% in 2009 and at this rate, the REITs offer better returns than the average annual income from investing in 10-year government fixedincome instruments

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CONT’D


Besides the distinctive nature of Shariah compliant investment which may appeal to Muslim investors, the I-REITs has the potential to attract investors due to their unique characteristics such as high dividend yields, low correlation with common stocks and a potential hedge against inflation. However, while the take up rate for the I-REITs shows that investors are keen to invest in this asset class, the supply is limited for the time being.

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CONT’D


The increasing demand for Shariah compliant real estate investment is reflected by the global rise in the number of I-REITs, mainly in the Middle East, and other parts of Asia.



For continuous development of Malaysian IREITs, there should be more attractive schemes to appeal the international investing community, including the regulatory framework, continuous education process on I-REITs and various tax incentives

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CONCLUSION


For continuous development of Malaysian I-REITs, there should be more attractive schemes to appeal the international investing community. In this regard, education process in creating awareness of the benefits of IREITs, the various tax incentives and regulatory framework introduced by Malaysian authorities will be one of the best supports to make Malaysian I- REITs to success globally.

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THANK YOU

‫واهلل أعلم بالصواب‬
(Allah Knows Best)

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