Date post: | 24-Jun-2015 |
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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
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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.
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Islamic Reits
Islamic REIT is a collective investment scheme in real estate whose tenants operate permissible activities that are in line with Sharia principles.
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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
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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
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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.
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Analysis of I-REITS from Shari’ah Point of View
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
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Analysis of I-REITS from Shari’ah Point of View
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
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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.
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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
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Analysis of I-REITS from Shari’ah Point of View
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.
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Analysis of I-REITS from Shari’ah Point of View
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.
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Analysis of I-REITS from Shari’ah Point of View
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.
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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
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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)
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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
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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
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