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Islamic REIT

The Islamic capital market which was introduced alongside Malaysian capital market in 1996 is now an integral part and parcel of the overall Malaysian capital market and offers wide range of Islamic investment products which are free form unsury (riba’), gabling (maisir) and ambiguity (gharar). By setting up guidelines for Islamic REITs, Malaysia has in actual fact pave the way for another Islamic financial product to be enlisted in its Islamic capital market. To date, Malaysia Islamic capital market has already made its impact on the global scene as market for Syariah approved securities, Islamic bonds, Islamic unit trusts, Syariah indices, warrants, crude oalm oil futures, Islamic asset securitization (sukuk) and of course, REITs.

Selangor Medical Centre

Ampang Puteri Specialist

Ampang Puteri Specialist

Damansara Specialist Centre

The Syariah Advisory Council (SAC) which was set-up in1996 to advise on the matter pertaining to Islamic capital market and issues related to it, relies on Qur'an and Sunnah as the primary sources and Ijmak (consensus of opinion), Qiyas (analogical deduction) and Maslahah (public interest) as well as sources in line with Syariah as the secondary sources. The Islamic Guidelines which was reviewed in January 2005 provide answers to some of the pertinent questions about Islamic REIT such as strict rule on leasing exercise which must be of Syariah compliant. On a softer note, the guidelines also provide mix tenants operating permissible and non permissible activities (which cannot exceed 20% of the total turnover, determined by SAC).

Apart from the REIT guidelines, Islamic REIT is also subjected to SC Act 1993, SC Regulations 196, Guidelines on Real Estate Investment trust issued by SC, Guidelines on Islamic REITs issued by SC, Guidelines on Assets Valuation, listing requirements by Bursa Securities Malaysia Bhd, Valuers and Estate Agents Act, National Land Code, Strata Title Act and FIC guidelines. In general, the Islamic REIT is designed particularly for Muslim investors who are concern and sensitive with the underlying Syariah rules on finance and investment.

For real estate investment, the widely known Islamic financial instrument is Ijarah. In Ijarah Fund, the subscription amounts from investors are used to purchase assets like real estates for the purpose of leasing them out to their ultimate users or tenants with strict rules that the premise must not be leased or rented to tenants operating non-permissible activities or trade such as financial services based on riba, gambling/gaming, manufacture or sale of non-halal products or related product conventional insurance, entertainment activities that are non-permissible to Syariah, manufacture or sale of tobacco based products or related products, stock broking or share trading in Syariah non-compliant securities and hotels and resorts.

For Malaysia, the setting up of Islamic REIT guidelines is an efforts to attract foreign investors to Malaysia from other Islamic countries particularly from Middle East which are flush with liquidity, especially after the rising oil price in 2004 and 2005. Following the 2008-2009 global economic slowdown, the year 2010 witnesses promising signs of global economic recovery with Gulf Cooperation Council (GCC) countries and the key markets for Islamic finance outperforming the rest of the world. The market for Islamic wealth management is predicted to grow by 15% to 20%. The substantial funds repratriated by Gulf investors from western markets during the financial crisis estimated between US$400 and US$800 billion is still waiting re-investment. Given the Islamic banking asset worldwide has already grown to about US$1 trillion, this figure is expected to increase to US$1.6 million as forecasted by the Islamic Finance Services Board. Malaysia, being an Islamic counterpart with the Middle East, the opportunity is wide open to tap the surplus liquidity to the country by attracting investments in Syariah compliant for example equities, bonds, sukuk and real estate.

Although the Islamic REITs in Malaysia is said to be the most advance securitization market, it also encounter some of the following challenges:-

  • The number of real estate assets belonging to companies and institutions which are interested in Islamic REITs is either small or not investment grade and unsuitable to be converted for Islamic REIT.

  • Stiff competition from other market player who are planning to expand the non-Islamic REIT. The Islamic REIT which may not be that attractive in term of market qualities, may seen as disadvantage.

  • Due to the strict Syariah compliant guidelines, the non-Muslim owners of investment grade real estate wont be interested in the Islamic REIT particularly when the existing tenants with non-permissible activities contributes significant rental income to the owners,

  • As Islamic REIT is to cater for Muslim market player with different underlying investment principles, is could be viewed as a smaller and constricting market as compared to conventional REIT that attract wide spectrum of investors

  • Questions of whether Islamic REIT would still offer tax benefits since rental income from REIT would still subject to zakat

  • For mix tenancies (permissible and non-permissible activities), reduction in net rental income (after setting aside the rental income from non-Syariah compliant ) would reflect a lower yield, giving a lower net asset value (NAV) to the Islamic REIT,

  • Two separate accounts (permissible and non permissible activities) need to be set up. Income from the non permissible account must undergo process of ‘purification’ by passing it to charity (sadaqah) such as qualified Islamic charities,

  • Islamic REIT would be exposed to extra risk factor due to their market limitations,

  • Above all, the support and acceptance from the Muslim investors both local and foreign in the Islamic REIT which is very significant to be able to take off successfully in the capital market.

As conclusion, Islamic REIT would fit well with investing institutions like EPF, PNB, Khazanah Nasional, Takaful companies, Tabung Haji, large corporation as well as Islamic banks and financial institutions. Instead of being investors, some of these institutions could even set up Islamic REIT in view of large real estate portfolio that they own. Despite the underlying constraints, there would certainly be abundance of potential local and foreign market players for Islamic REIT ready for the move.

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