1. Assoc Prof Dr Engku Rabiah Adawiah bt Engku Ali
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

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 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 Shari`ah compliant manner

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 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 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 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 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 SC’s 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 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…
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;
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 REIT
Shariah
Committee/
Adviser
Unit Holders
Oversee
Shari`ah
Compliance
Units subscribed in
IPO and/or acquired
in the open market
Unit holders
Appoint
Trustee
Income
Management
fees
Management
Company
ISLAMIC REIT
Acts on behalf
of Unit Holder
Trustee
Management
services
Direct
Ownership of Properties
Net
Property
Income
Property Management Fees
Property
Manager
Properties
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
Manager (Damansara REIT Managers S/B)
Management
Services
Al `Aqar KPJ REIT
Trustee (Amanah Raya Berhad)
Management
Fees
Trustee Fees
Ownership of Properties / Building
Property Management Fees
Net
Property
Income
Maintenance & management services
Maintenance Manager (Healthcare Technical Services)
REIT Properties Comprising of 6 Specialist Hospitals
6 Hospital Tenants (which are subsidiaries of KPJ)
Rent
Maintenance & management Fees
Rental payments

17. 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…
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 Shari`ah 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 Shari`ah 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. Wassalamualaykum wrt wbt
Thank You
Wassalamualaykum wrt wbt