IB 1006 Islamic REITS

Prof. Dr. Saiful Azhar Rosly

International Center for Education in Islamic Finance (INCEIF)

Islamic Financial System

Definition: Quranic rules and
Regulations (Divine values) that
govern the flow of funds from the
surplus spending unit (SSU) to the
deficit spending unit (DSU).

Islamic
Financial
System
Islamic
Financial
Market

Surplus
Sector

Direct
Financial
Market

Islamic
Money
Market

CAPITAL MARKET

Islamic
Bond
Market

Deficit
Sector

Islamic
Equity
Market

Indirect
Financial
Market

Commercial
Banks

Takaful

Unit
Trusts

Finance
Companies

Merchant banks

Islamic REITS

ISLAMIC
ECONOMICS
LIMITED RESOURCES

Scarcity requires
man to be efficient
in utilizing resources
We cannot afford to
waste resources
under scarcity
Inefficiency due to
misallocation of resources
can create
1. Poverty
2. Inflation
3. Unemployment
4. Negative growth

REVELATION
Quran
Hadiths

UNLIMITED
DESIRES

SCARCITY
BASIC ECONOMIC
PROBLEMS
P1: What to produce?
How much?

PROBLEM OF CHOICE

P2: How to produce?

P3: How to reward
factor inputs?

KNOWLEDGE

P4: How to control

inflation and
unemployment?
P5: How to attain
positive growth?

REASON/DEDUCTION(Istiqra)
SENSES/INDUCTION (Istinbat)

Human Behaviour
Choice &
Action

Fard Ayn
(Obligatory knowledge)

Reason

Facts

Based on
Observable
Foundations
(SCIENCE)

Based on
Non-Observable
Foundations
(DIVINE)

Rukun
Iman

Rukun
Islam

Concept
of

IslamicWorldview

God
Din
Man
Society
Universe
Prophethood

Primordial
Stage (Alam Ruh)

Mothers Womb
(Alam Rahim)
The Muslim Mindset
Stages
of Existence
from Islamic
perspective

Dunya (World)
Scarcity

Alam Barzakh
(Life in the Grave)

Hereafter
(Akhirah)

ISLAMIC REITS: OBJECTIVES

Shariah aspects Equity Objective
- Observing the Purpose of Shariah (Maqasid Al-Shariah)
- Application of Islamic Contracts
- 20% cap on non-Shariah permissible trades

Operational (Tabi) aspects Efficiency Objective

-Yield
- Management Fees
-Tax
-Business strategies such as investment, operating, acquisition
and capital management strategies - to improve yield
-Marketing
-Risk

Principles of
Islamic Finance
1. Shari Principles Equity objective
e.g. Halal & Haram
DOING THE RIGHT THING
2.

Tabi Principles Efficiency objective

DOING IT RIGHT

Islamic Financial System is

based on Divine Values

These Divine values are put together

under 5 basic principles

SHARIAH PRINCIPLES IN
FINANCIAL TRANSACTIONS
Principle #1 : Prohibition of riba
Principle #2: Application of al-bay (trade
and commerce)
Principle #3: Avoidance of gharar
(ambiguities) in contractual
agreements
Principle #4: Prohibition of maisir (gambling)
Principle #5: Disengagement from production of
impure commodities.

SHARIAH Divine Values

SHARIAH OF ISLAM

AQIDAH (FAITH)
Rukn Iman
Belief in God, the Angels,
the Prophets, the Holy Books,
and Predestination

AKHLAK
(ETHICS AND MORALITY
Knowledge of Conducts
Virtues and Vices

GOD AND MAN

Rukn Islam

MUAMALAT
(INTERACTIONS)

MAN AMONG MAN

Criminal Law, family Law
Laws of Contract, etc.

SHARIAH
Purpose of Shariah: PROTECTION OF
PUBLIC INTEREST
1. Preservation of benefits The
Permissible (Halal)
2. Prevention of harm The
Prohibited (Haram)

SHARIAH PRINCIPLE #1
Prohibition of interest as riba
No contractual guarantee(s) on investments

SHARIAH PRINCIPLE #2
Application of
Al-Bay

Principle Components of iwad

1. Risk-taking
(Al-Ghorm bil Ghonm)
2. Value-addition

SHARIAH PRINCIPLE #3
Elimination of
uncertainties/ambiguities (gharar) in
contractual agreements

SHARIAH PRINCIPLE #4
Prohibition of Gambling (Maisir)
i.e earning via game of chance

Gambling

Lotteries
Casinos
Insurance
Commodity Trading
Futures
Options

MAISIR: Game of Chance

Excessive risk
Earnings arising from mere chance (aleotary) and not
by way of knowledge, skills and value-addition
The probability of winning is very remote
Zero-sum game
One party wins and the other losses
Aleotary outcome arising from pure chance alone
Making bets with an expectation to win
Bets and winnings are hugely disproportionate

SHARIAH PRINCIPLE #5
Avoiding impure commodities.

Islamic Finance Principles

No profit can be created without risk-taking.
Islamic financial transactions are based on valid
contracts
The Purpose of the Shariah (Maqasid al-Shariah) is
strictly observed:
Purpose of Shariah: PROTECTION OF PUBLIC
INTEREST
1. Preservation of benefits The Permissible
(Halal)
2. Prevention of harm The Prohibited (Haram)

Islamic Finance
Corporate Finance
Sukuks, Islamic Private Debt Securities, Islamic REITS,
Islamic Unit Trusts
Consumer Finance
Murabahah, Ijara
Enterprise Finance Small & Medium Sized Enterprises
Mudaraba, Musyarakah
Microfinance
Public Finance

Allah has allowed trading and

commerce (al-bay) but
prohibits riba (Quran: Al-Baqarah 275)
Islamic Banking = Trading &
Commerce

Allah has allowed AL-BAY but prohibits RIBA

AL-BAY
(TRADE & COMMERCE)

Al-Bay

Contract of Exchange
Uqud al-buyu

Contract Sale
Exchange Goods for Money

Spot Sale with mark-up

(Al-Murabahah)
Bayal-musawaammah
Bay Wadhiah, Mutlak

Al-Murabahah
Credit sale

Contract of Profit-Sharing
Uqud al-Istiraq

Contract of Sale
Exchange Services for Money

Deferred Sale
Bay Muajjal

Bai-Bithaman Ajil

Forward
Sale

Istisna

Al-Mudharabah
(Trustee Partnership)

Ijarah
Wakalah
Kafalah

Salam

Al-Shirka
(General Partnership)

Principle of Contract (Aqd) in AlBay

Pillars of Contract (AQD)

Agents of Contract - rational
Objective of Contract transfer of
ownership
Price stated on the spot
Subject matter - halal
Offer & Acceptance

Productive Elements in Al-Bay

Multi-dimentional view of Al-Bay

IWAD
RISK
(al-ghorm bil ghonm)

EFFORT

RESPONSIBILITY
Al-kharaj bil daman

AQAD

Al-Bay and Its Derivatives

Al-Bay and Its Derivatives

Ijarah

Murabahah

Partnership

Wakalah, kafala

Industry Updates
Islamic REIT

Al-Hadharah Boustead REIT

AL-AQAR KPJ REIT - MALAYSIA

AXIS REIT - MALAYSIA

Islamic REITS: Basic Issues

Objective
Structure
Regulatory Regime
General Benefits
Investors
Comparison with Alternative Investment
Fees and Charges
Performance Indicators

Objective of an Islamic REITS

To provide unit holders with a stable distributions per
unit with the potential for sustainable long-term
growth of such distributions.
How?
By optimizing the performance and enhancing the
overall quality of a large and geographically diversified
portfolio of Shariah-Compliant real estate assets
through various permissible investments and business
strategies.

ISLAMIC REAL ESTATE FUNDS

Fund
Manager /
Distributor

Guidance
Financial
Group

Name of
Fund

Guidance
Fixed
Income Fund

Country

USA

Size
(USDm)

200

Type

Residential

Investor Advisor

Description

Freddie Mac
real estate finance assets. The securities will
be issued and guaranteed by the Federal
Home Loan Mortgage Corporation (Freddie
Mac). The fund will hold securities that are
backed by Shariah-compliant

Shamil Bank

China Realty
Fund

China

150

Commercial

CITIC International
Assets
Management Co.
Ltd. (CITICIAM)

Shamil Bank Bahrain entered into

an MoU with prominent Chinese
financial institutions, CITICIAM to
set up and launch USD150m
closed-end China Realty Fund.

ISLAMIC REAL ESTATE FUNDS

Fund Manager
/ Distributor

Name of
Fund

Country

Size
(USDm)

Type

Investor Advisor

Description

Kuwait Finance
House

Baitak Asia
Real Estate
Fund

South Asia

600

Commercial,
Residential

Pacific Star Group

A USD600m Islamic real estate

fund. The Baitak Asia Real Estate
Fund will invest in residential and
commercial sites in Asian
countries. This will be the first
real estate deal in Asia for Kuwait
Finance House.

Kuwait Finance
House

Islamic
European
Real Estate
Fund

Europe

486

Commercial,
Residential

Equity Estates BV

The fund intends to invest Euro

400m in European property
concentrating on high yielding
office, logistics and light industrial
properties in the Benelux, France
and Germany.

Dubai Islamic
Bank (DIB);
Cheung Kong
Group

Al Islamic Far
Eastern Real
Estate Fund

Far East

450

Commercial,
Retail,
Residential

ARA Asset
Management

The new fund will be managed by

ARA Asset Management and
jointly promoted by DIB and
Cheung Kong Group. The
Islamic-compliant investment
vehicle has set aside USD450m
to invest in commercial, retail and
residential projects in major Asian
cities.

REITs Market around the WorldTop 15 World Real

Estate market

Sources: World Bank Organization, FTSE, EPRA

United States has the largest real estate market in the world. The estimated size of the
US market is approximately US$5 trillion.
Japan ranks second with around US$2 trillion, followed by the four major European
economies. The German market is approximately US$1.1 trillion, with the UK just behind
at approximately US$1 trillion.
France is close to US$800 billion. Italy is approximately US$660 billion. Canada comes in
at just under the US$400 billion mark.
The top 15 countries comprise around 88% of the total global real estate market.
Interestingly, the top five countries hold 68% of the total. The next ten countries add 20%
and
the remaining
34 countries
make
upstructured
the final under
12%.Conventional legislation in non-Muslim countries.
No OIC
member
countries. But
Islamic REITS
can be

Structure and Organization

Islamic REITS

TYPICAL REITS RELATIONS

Unitholders

Management
Company

REIT

Invest in authorised
investment

Distribution and
Possible capital gains

Trustee

Islamic REITS
Tripartite agreement between three
parties:
1. The Manager
2. The Trustee
3. Unitholders
Tripartite relationship is governed by a
Deed registered with the Regulator (e.g
Securities Commission Malaysia)

DEED
A Deed is a legal instrument used to grant a right.
The trust deed is a legally binding agreement between
the manager, trustee and unit holders. The agreement
usually spells out clearly how the unit trust scheme is
to be administered. The contents usually include:

Valuing and the pricing of units;

Keeping of proper accounts and records;
Collection and distribution of income;
Rights of unit holders;
Duties and responsibilities of the manager;
Duties and responsibilities of the trustees; and
Protection of unit holders interest.

Shariah Aspects
Islamic REITS

SHARIAH ASPECTS: LEGALITY

The SC I-REITS Guidelines discussed four
matters for I-REITS, viz.:
rental of real estate by I-REITS for
business purposes with a permissibility
benchmark of 20%;
investment, deposit and financing for IREITS;
takaful schemes to insure real estate; and
forward sales or purchases of currency for
risk management.

ISLAMIC REITS: Legality

20% Permissibility Benchmark

Benchmarking is based on rental space rather than
volumes of sales the non-permissible business can
generate.
Nature of all non-permissible businesses is that it is
highly profitable.
1. casino & lottery outlets game of chance always
favour the operator
2. liqour stores addiction i.e captured market
4. interest-bearing banks- small cap but
able to raise high volumes of deposits to make loans.

Islamic Benchmark : [Space/Sales]

ratio and [Space/Sales].

$200m

sales

sales

$100m

Islamic Contracts in REITS:

WAKALAH Model
Unitholders and Management Company(MC)
Wakalah Fee-based
Unitholders appoint MC to invest funds in properties.
MC earns fees.
Unitholders and Trustee
Wakalah Fee-Based
Unitholders appoint Trustee to serve as a custodian
for all the assets of the Islamic REIT.
Trustee earns fees.
The Wakalah principles are incorporated in the Deed
of Islamic Reits.

Nature of work undertaken by

Management Company (Wakil)
Managing the Properties effectively
Maintaining net property income
Maximizing the return and performance of each
Properties and their growth via enhancement of
properties
Raising the profile of Properties
Acquiring property assets with good yield and
growth potential for both locally and abroad
that meet the Managers investment criteria
Employing optimum capital structure.

Wakalah Fees
Annual Management Fee
Annual Maintenance and Management Fee
Annual Trustee Fee
Shariah Committee Members Fee
Fund Expenses

Management Expense Ratio (MER)

Management Expense (ME) = Annual management
fee + Annual management and maintenance fee +
Annual Trustee fee + Shariah fee + Fund expenses
MER = [(ME + Non-Recoverable Expenses) / (Average
Value of a REIT calculated on a daily basis)] x 100
Shariah-compliant MER? up to?
To protect investors from high loading charges by
Islamic Reits management companies.

Wakalah Model.
Management Company (ie Wakil) does not bear
potential of loss (ie. risk) of investment.
Management Company is entrusted to invest the REIT
Fund in return for a Fee (ujrah).
Potential loss of investment is borned by Unitholders.
Management Company receives fee payment (ie fees)
eventhough Unitholders are suffering capital losses.
Nominal fees (ie absolute amount) may fall when net
asset value of REIT declined.
Percentage fee remained unchanged.

Risk-Return Principle
Juristic Principle (Al-Qawaid Fiqiah) Al-Ghorm Bil Ghonm
No Pain No Gain

Al-AQAR KPJ REIT RENTAL AMOUNT

The rental amount for the financial period ending 31
December 2006 and three (3) full financial years ending 31
December 2007, 31 December 2008 and 31 December 2009
are as follows:
Financial period/years
ending 31 December

Total rental amount per

annum (RM mil)

Total rental amount per

month (RM mil)

2006*

35.48 (US$10.13m)

Approx. 2.96 (US$0.84m)

2007

35.70

Approx. 2.98

2008

36.43

Approx. 3.04

2009

36.96

Approx. 3.08

Note * The rental rate is approximately 7.38% of the gross

market value of the Properties.

RETURN

RISKS faced by Unitholders

Investment by Unitholders is based on RiskReturn Principle al-Ghornm bil Ghonm
where:
1. Original investment not guaranteed
2. Income may rise or fall
3. May not receive any income at all.

Types of Risk in Islamic REIT

Organizational and Operational Risk
Risk relating to investment in real
estate
Risk relating to Properties
Shariah non-compliance risk
Risk relating to an investments in the
units

Alternative to REIT Wakalah Model

Unitholders and Management Company
(MC)
Al-Mudarabah
Profit-Sharing
MC fees = portion of rental income.
Unitholders and Trustee
Wakalah
To ensure MC adheres strictly to the
provisions of the Deed.

Typical REIT structure

Unitholders

Investment in REIT

Acts on behalf
of unitholders

Management
fee

REIT
manager

Distributions

REIT

Management
services

Trustees fees

Purchase assets

Net property income

Property assets

Trustee
(holds properties
for the Benefit of
unitholders)

Al-Aqar KPJ Islamic Reits

Oversubscribed by 4.13 times
Islamic Reits drew 5,115 non-Muslim
and non-Bumiputra investors.
Open up at RM0.99, a premium of
4.2%, or 4 sen, over its retail offer
price of RM0.95
30,810 units done at the opening bell
Closed at 3.5 sen up at RM0.985
Al-Aqar REIT raised RM177.25 million

Al-Aqar KPJ REIT Structure - MALAYSIA

Shariah Committee
Members
Advise the
Al-Aqar KPJ
REIT on
Shariahrelated
matters

Unitholders*

Distributions

Management
fees

Manager
(Damansara REIT Management
services
Managers
Sdn. Bhd.)

Al-Aqar
KPJ REIT

Ownership
of properties
Maintenance and
management
fees

Holding
of units
Acts on behalf
of unitholders
Trustees fees

Trustee
(Amanah Raya
Berhad)

Net property income

Rental payments

Maintenance manager
for the properties Maintenance and REIT properties,
management
(Healthcare Technical
comprising 6 hospitals
services
Services Sdn. Bhd.)

Rent

Hospital tenants

Note * where KPJ will indirectly own 47.06% of the units

Al-Aqar KPJ REIT

First Islamic Real Estate Investment Trust
(I-REIT)
Comprises of six hospitals building worth
RM461.24m or USD$131.9m
Manager: Damansara REIT Managers Pte.
Lead adviser: AmMerchant Bank Pte.
Trustee: Amanah Raya Pte.
Units holdings:
KPJ : 160 million units
Institutional investors: 165 million units
Retail investors: 15 million units

Al-Aqar KPJ REIT: Fees and

Expenses

Annual management Fee

Maintenance and management fees
Annual trustee fee
Shariah Committee Members fee
Others
Auditors fees
Valuation fees
Relevant professional fees
Profit payments and expenses in respect of Islamic
financing facility
Printing, posting, general and operating expenses for
the administration of the fund.

Al-Aqar KPJ Islamic REIT

Worlds first Islamic REIT IPO
The worlds first Islamic real estate investment trust
(I-REIT) Al Aqar KPJ REIT IPO was launched with
AmMerchant Bank appointed as the advisor, managing
underwriter and sole placement agent.
Under the IPO, a total of 340 million units were issued
and of these, KPJ Healthcare would hold 160 million
units (47%), while 165 million units would be issued
to institutional investors at US$0.27 (RM1) per unit
and 15 million units to the public at US$0.26
(RM0.95) each. About US$49 million (RM180 million)
was expected to be raised from the IPO.

Al-Hadharah Boustead REIT

Al-HADHARAH BOUSTED REITS

Boustead Properties
And Other Vendors

Sale of Assets

Letting of
Asset for rental
Unitholders*
To be paid by
tenants
Distribution in the form of
Dividends and other distributions

Investment in REITS
Management
fees

Boustead
REIT Manager
Advise the
Al-Hadharah
REIT on
Shariahrelated
matters

IBFIM
Shariah Advisor

Al-Hadharah
Management
Boustead
services

Acts on behalf
of unitholders
Trustees fees

CIMB
Trustee

Rental Income
Ownership
of properties
(Vested in
Trustees)

Plantation Asets

Monitoring the
Plantation Assets

Plantation Adviser

Bousted Al-Hadharah Islamic REITS

Vendor sells assets to SPV (AlHadarah REITS).
SPV leases back the assets to the
Vendor.
Vendor pays fixed rentals for 30 years
Rentals passed to Unitholders as
income.
Unitholders no fixed income and
capital protection.

CONTRACTS: SPA & Ijarah

Sale and Purchase Agreement:
The sale and purchase agreements
between the Vendors and the Trustee,
on behalf of Al-Hadharah Bousted
REIT, in relation to the sale and
purchase of the Plantation Assets

CONTRACTS
Ijarah Arrangements: The arrangements
by al-Hadharah Bousted REITS
(AHBR)where the Trustee on behalf of AHBR
as lanlord agrees to let the Plantation Assets
to the Vendors as tenants for a period of
three years which are renewable four times
up to twelve years and thereafter renewable
for up to an additional fifteen years
comprising five additional terms of not more
than threee years each, save and except for
the tenancy of the Malay Reserved Land
which are not automatically renewable.

Islamic REITS Structure

The FUND Islamic REITS

The Unit Holder
Manager
The Trustee
Shariah Committee/Shariah Adviser
The Property Assets
Authorized Investments

Regulatory Framework
Islamic REITS

REITS DEFINED
Securities Commission REITs
Guidelines:

a trust 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 principle assets comprise real estate.

REITS DEFINED
Invests at least 50% of its total
assets in real estates
Trusts passive income vehicle
Distributes dividends to unit-holders
Governed by a constitution
Cannot reinvest income as retained
earnings
Dividends are tax deductible

REITS DEFINED
Has a management company
Has a trustee company
Employs a property manager

REITs in Asia - Qualification and

Legislations
Singapore

Australia

Japan

Malaysia

Hong Kong

Thailand

South
Korea

Taiwan

Dividend
yield

At least
90% of
taxable
earnings

100% of
taxable
earnings

At least
90%

No
requireme
nt

At least
90% aftertaxincome

At least
90% of net
profit

At least
90% of
taxable
earnings

Income
must be
distributed
within 6
months
ofFYE

Tax pass
through

Yes

Yes

Yes

Yes for
local
residents
only

No

Yes

No

yes

Property
transfer
taxes

Stamp
duty
waived for
5 years to
2010

None

Reduced
tax rates

Stamp
duty
waived

None

Reduced
property
transfer
rate

property
transfer
rate

None

Tax
incentives
for investors

Yes

Nil

Nil

Nil 25%
withholdin
g tax on
dividend

Nil

Nil

Nil

Yes 6%
withholdin
g tax on
dividend

Gearing cap

Max 35%
of total
assets
unless
REIT or all
borrowing
s rated
min A

No
restriction
, market
average
38%

No
restriction,
market
average
25-45%

35% of
asset,
unless
approved
by SC

Max 35%
of gross
asset
value

Borrowing
not
permitted

Borrowing
not
permitted

No stated,
but
regulations
prefers
less than
35% of
gross asset
value

Investment
restrictions

At least
70% in
real
estate

None

At least
75% in real
estate

At least
75% in real
estate

<10% of
asset in
nonincome
producing
properties

At least
75% in real
estate

At least
70-90% in
real estate

At least
75% in real
estate

Developmen
t

Max 20%

Yes

Yes, if
>50% of
assets are
income
producing

No

No

Properties
at least
80%
constructe
d

K REIT- yes
CR REIT-No

No

Source: DIFC, Khalid Yousef,2006

REITs in the US..Qualification and legislations

REITs were formed in 1960 Congress passed legislation providing small investors access to
income producing properties (The Real Estate Investment Trust Act of 1960).

Benefit of REIT structure entity does not pay corporate taxes as at least 90% of income
distributed to shareholders annually.

To qualify as REIT status, a company must meet and maintain certain provisions.

Publicly traded REITs are SEC-registrants and subjected various regulatory requirements.
Have a minimum of 100 shareholders

No more than 50% of shares can be held by 5 or fewer

Provisions to
Qualify as
REITs

Minimum 75% of total asset invested in properties investment*

Minimum 75% of income derived from properties/mortgages

Not more than 20% of assets can consist of shares in TRS**

* Investment includes mortgage loans and shares in other
REITs

** TRS = Taxable REITs Subsidiary was formed by REITs to involve in

taxable ancillary businesses such as advising clients

Conventional REITS

Islamic REITS

1. Permissibility

Not established

Permissible (Halal)

2.Rental purpose

No restrictions

Business purposes only

3.Insurance

No restrictions

Takaful only

4. Activities on

No restrictions

Permissible activities only.

property

Must not include:

- financial activities based on
riba (interest)
- gambling & gaming
- conventional insurance
- entertainment activities that
are not permissible according
to shariah laws
- manufacturing &/ sale of
tobacco-based products or
related products
- stock-broking or share trading
in shariah non-compliant
Securities
- hotels and resorts
- In incidences of mixture, for
example supermarkets, a
benchmark of 20% is allowed
for non-permissible goods of
trade

5. Financing

No restrictions

Funds must be shariahcompliant

OPERATIONAL ASPECTS
Islamic REITS

Performance Indicators

Management Expense Ratio (MER)

Total Returns
Average Annual Returns
Distribution Yield
Net Asset Value (NAV)

Authorized Investments
At least 75% of al-aqar KPJ REIT total
assets shall be investment in Shariahcompliant real estate, single purpose
companies which are Shariah compliant,
real-estate related assets or liquid assets
which are Shariah compliant;
The remaining 25% of al-aqar KPJ may be
invested in other Shariah-compliant assets
(ie Shariah compliant real estate related
assets, Shariah compliant non-real estate
related assets such as Islamic asset-backed
securities)

Performance Indicators

Management Expense Ratio (MER)

Total Returns
Average Annual Returns
Distribution Yield
Net Asset Value

Valuation of REITshow are REIT Unit

REITS in Japan, US and Singapore are trading at a premium of 70 - 230 bps
priced
compared to the government bonds
1.51.3
3

Japan 10 yr Gov bond

Premium
of 230
bps
200bps

3.6

Japan REITs

4.54.2
4

US 10 yr Gov bond
US REIT

Premium
of 7036bps
bps

4.9
3.23.2
7

Singapore 10 yr Gov bond

Premium
ofof 140
bps
133bps

4.6

Singapore REITs

5.25.4
0

Australian 10 yr Gov bond

Australian LPT

7.1
4.13.9
1

Malaysian 10 yr Gov bond

7.3

Average Malaysian REIT Yield

0

4 Yield (%) 5

Premium
of
of 170
bps
200bps
Premium
of 340
of
bps
320bps

Source: Bloomberg, CIMB

Notes:
1.
Average 12 month gross dividend yield of Berjaya Sports, Hap Seng Consolidated, Hong Leong bank, Shell Refining, Nestle,
Tanjong PLC, United Plantation and YTL Power
2.
Kuala Lumpur Stock Exchange Composite Index dividend yield
3.
Kuala Lumpur Property Index dividend yield

Investing in REITswhy are REITs attractive to investors?

Income
stability

Capital stability
& growth

Quality real
estate

Liquidity
& valuation

REITs is typically distribute >90% of net cash flow

Income is underpinned by legally enforceable lease
agreements
Low leverage
Little or no development risk
REIT unit price is much lower than those of general equities
Long-term unit price capital growth potential is driven by
increase in rental earnings and also by capital appreciation of
the underlying properties
Provide institutional investors with an alternative to direct
real estate investment with increased flexibility
Provide retail investors with an opportunity to invest in highvalue institutional quality real estates assets that would
otherwise not be possible
Packaging illiquid real estate into liquid listed securities that
offer diversification, transparency, expert management and
regular research coverage
Institutions receive daily mark to market value of their
investment
Low transaction costs in buying/selling REIT units vs trading
underlying assets
Individuals can redeem small investment quickly by
selling the units in the open market and with little cot
REITs allow institutional funds to make incremental
investments in lumpy real estate as and when new
investment funds are received

Investing in REITs. (contd)

Diversification

Diversification by types of properties, tenants and locations

Expert
Management

Benefit from experienced, professional real estate managers

Additional scrutiny by the trustee

Defensive

Consistent yield-based investment has defensive asset class

characteristics
Income-generating investment grade property is a safe
haven during uncertain times

Transparency

Source: JPMorgan, 2005

Subject to stringent corporate governance and disclosure

requirements
Government regulates on payout ratios, gearing, allowable
investment, etc.

Types of investment

Risk level

Expected return
level

Low

Low

High

High

Cash
Fixed deposit
Bonds
REITs
Direct investment in
real estate
Investment in shares
Financial derivative
products
Al-Ghorm bil Ghonm
No Reward Without Risk

REIT developments in other Asian markets

India
India

Philippines
Philippines

REITs are yet to be established in India, however the

Securities and Exchange Board of India (SEBI) has
been finalizing a framework for Real Estate Mutual
Funds (REMFs)
The Association of Mutual Funds of India (AMFI) issued
a report to SEBI regarding the launch of real estate
investment schemes in 2002
Regulators have been cautious on approving REMFs
due to fears or them causing excess speculation in the
real estate market

No specific REIT regulation exists. However, the

Special Purpose Vehicles (SPV) Act of 2002 has
provided for the creation of Asset Management
Companies (AMCs). SPCVs could include the function of
REITs
Indonesia
Indonesia

Thailand
Thailand

China
China

Formal REIT guidelines are still yet to be legislated.

However, framework exists and guidelines are in place
for Property funds by the Office of the Securities and
Exchange Commission (SEC)
Under the current regime, only a licensed mutual fund
management company is eligible for the
establishment and management of all types of mutual
funds including property funds
Lack of available assets remains a limitation.
Underlying residential market has been strong and has
been pushing property development stocks higher

PRC Trust Laws, introduced in October 2001, provide

guidance on recognition of trusts in China
However detailed implementation rules are yet to be
released. Land laws and ownership structures in place
are capable of providing a sufficient legal framework
for REITs, however, the current unit trust structure
prohibits investment in real estate
Some private syndicated deals have occurred in China
and there is an expectation of the market developing
further
As Chinese property companies are launched, modern
REIT structures are likely develop in tandem on an
accelerated basis

While REITs have not been established in Indonesia,

the Indonesian Bank Restructuring Agency (IRBA) has
been considering setting REITs up
Property companies currently provide investors with
exposure to listed real estate

41

Wassalam
Thank You