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Islamic REITS

By Dr. Saiful Azhar Rosly
8 years ago

Amanah, Aqar, Aqd, Ard, Halal, Iman, Islam, Mal, Maqasid , Murabahah, Riba, Rukn , Salam , Shariah , Shariah compliant, Takaful , Wakalah, Al-kharaj, Al-kharaj bil daman, Provision, Sales

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  1. Islamic REITS Prof . Dr. Saiful Azhar Rosly International Center for Education in Islamic Finance (INCEIF)
  2. 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
  3. 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)
  4. 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
  5. Primordial Stage (Alam Ruh) Mother’s Womb (Alam Rahim) The Muslim Mindset Stages of Existence from Islamic perspective Dunya (World) Scarcity Alam Barzakh (Life in the Grave) Hereafter (Akhirah)
  6. ISLAMIC REITS : OBJECTIVES o  Shariah aspects – Equity Objective - Observing the Purpose of Shariah (Maqasid Al-Shariah) - Application of Islamic Contracts - 20% cap on non-Shariah permissible trades o  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
  7. 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
  8. Islamic Financial System is based on Divine Values These Divine values are put together under 5 basic principles
  9. SHARIAH PRINCIPLES IN FINANCIAL TRANSACTIONS o  Principle #1 : Prohibition of riba o Principle #2: Application of al-bay’ (trade and commerce) o Principle #3: Avoidance of gharar (ambiguities) in contractual agreements o Principle #4: Prohibition of maisir (gambling) o Principle #5: Disengagement from production of impure commodities.
  10. 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.
  11. SHARIAH Purpose of Shariah : PROTECTION OF PUBLIC INTEREST 1. Preservation of benefits – The Permissible (Halal) 2. Prevention of harm – The Prohibited (Haram)
  12. SHARIAH PRINCIPLE #1 Prohibition of interest as riba No contractual guarantee(s) on investments “They say: Trade is like riba” (Qalu Innamal bay’u mith lurriba) “ The Quran says: Allah has allowed al-bay’ but prohibits riba” (waahalallah ul bay’ wa haramu riba) (Al-Baqarah : 275-278)
  13. SHARIAH PRINCIPLE #2 Application of Al-Bay’ Profit creation with equivalent countervalue (‘iwad) eg. no risk no gain risk = ‘iwad gain = profit
  14. Principle Components of ‘iwad 1. Risk-taking (Al-Ghorm bil Ghonm) 2. Value-addition 3. Liability (Al-Kharaj Bil Daman)
  15. SHARIAH PRINCIPLE #3 Elimination of uncertainties/ ambiguities (gharar) in contractual agreements
  16. SHARIAH PRINCIPLE #4 Prohibition of Gambling (Maisir) i.e earning via game of chance
  17. Gambling o   Lotteries o  Casinos o  Insurance o  Commodity Trading o  Futures o  Options
  18. MAISIR : Game of Chance o  Excessive risk o  Earnings arising from mere chance (aleotary) and not by way of knowledge, skills and value-addition o  The probability of winning is very remote o  Zero-sum game One party wins and the other losses o  Aleotary – outcome arising from pure chance alone o  Making bets with an expectation to win o  Bets and winnings are hugely disproportionate
  19. SHARIAH PRINCIPLE #5 Avoiding impure commodities.
  20. Islamic Finance Principles o   No profit can be created without risk-taking. o  Islamic financial transactions are based on valid contracts o  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)
  21. Islamic Finance o   Corporate Finance Sukuks, Islamic Private Debt Securities, Islamic REITS, Islamic Unit Trusts o  Consumer Finance Murabahah, Ijara o  Enterprise Finance – Small & Medium Sized Enterprises Mudaraba, Musyarakah o  Microfinance o  Public Finance
  22. ‘Allah has allowed trading and commerce (al-bay’) but prohibits riba” (Quran: Al-Baqarah 275) Islamic Banking = Trading & Commerce
  23. “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) Bay’al-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)
  24. Principle of Contract (‘Aqd) in Al-Bay
  25. Pillars of Contract (AQD) o  Agents of Contract - rational o  Objective of Contract – transfer of ownership o  Price – stated on the spot o  Subject matter - halal o  Offer & Acceptance
  26. Productive Elements in Al-Bay
  27. Multi-dimentional view of Al-Bay IWAD RISK (al-ghorm bil ghonm) EFFORT RESPONSIBILITY Al-kharaj bil daman AQAD
  28. Al-Bay and Its Derivatives
  29. Al-Bay and Its Derivatives Ijarah Murabahah Partnership Wakalah , kafala
  30. Industry Updates Islamic REIT
  31. Al-Hadharah Boustead REIT
  34. Islamic REITS : Basic Issues o  o  o  o  o  o  o  o  Objective Structure Regulatory Regime General Benefits Investors Comparison with Alternative Investment Fees and Charges Performance Indicators
  35. Objective of an Islamic REITS o   To provide unit holders with a stable distributions per unit with the potential for sustainable long-term growth of such distributions. o  How? o  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.
  36. ISLAMIC REAL ESTATE FUNDS Fund Manager / Distributor Name of Fund Country Guidance Financial Group Guidance Fixed Income Fund USA Shamil Bank China Realty Fund China 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 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.
  37. 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.
  38. REITs Market around the World ……Top 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 up the final 12%. No OIC member countries. But Islamic REITS can be structured under Conventional legislation in non-Muslim countries.
  39. Structure and Organization Islamic REITS
  40. TYPICAL REITS RELATIONS Unitholders Management Company REIT Invest in authorised investment Distribution and Possible capital gains Trustee
  41. Islamic REITS o   Tripartite agreement between three parties: 1.  The Manager 2.  The Trustee 3.  Unitholders o  Tripartite relationship is governed by a Deed registered with the Regulator (e.g Securities Commission –Malaysia)
  42. DEED o   A Deed is a legal instrument used to grant a right. o  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:o  o  o  o  o  o  o  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.
  43. Shariah Aspects Islamic REITS
  44. SHARIAH ASPECTS : LEGALITY o  The SC I-REITS Guidelines discussed four matters for I-REITS, viz.: o  rental of real estate by I-REITS for business purposes with a permissibility benchmark of 20%; o  investment, deposit and financing for IREITS; o  takaful schemes to insure real estate; and o  forward sales or purchases of currency for risk management.
  45. ISLAMIC REITS : Legality
  46. 20 % Permissibility Benchmark o  Benchmarking is based on rental space rather than volumes of sales the non-permissible business can generate. o  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.
  47. Islamic Benchmark : [Space/Sales] ratio and [Space/Sales]. $200m sales sales $100m
  48. Islamic Contracts in REITS : WAKALAH Model o  Unitholders and Management Company(MC) Wakalah – Fee-based Unitholders appoint MC to invest funds in properties. MC earns fees. o  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. o  The Wakalah principles are incorporated in the Deed of Islamic Reits.
  49. Nature of work undertaken by Management Company (Wakil) o  Managing the Properties effectively o  Maintaining net property income o  Maximizing the return and performance of each Properties and their growth via enhancement of properties o  Raising the profile of Properties o  Acquiring property assets with good yield and growth potential for both locally and abroad that meet the Manager’s investment criteria o  Employing optimum capital structure.
  50. Wakalah Fees o   Annual Management Fee o  Annual Maintenance and Management Fee o  Annual Trustee Fee o  Shariah Committee Members Fee o  Fund Expenses
  51. Management Expense Ratio (MER) o  Management Expense (ME) = Annual management fee + Annual management and maintenance fee + Annual Trustee fee + Shariah fee + Fund expenses o  MER = [(ME + Non-Recoverable Expenses) / (Average Value of a REIT calculated on a daily basis)] x 100 o  Shariah-compliant MER? up to? o  To protect investors from high loading charges by Islamic Reits management companies.
  52. Wakalah Model . o  Management Company (ie Wakil) does not bear potential of loss (ie. risk) of investment. o  Management Company is entrusted to invest the REIT Fund in return for a Fee (ujrah). o  Potential loss of investment is borned by Unitholders. o  Management Company receives fee payment (ie fees) eventhough Unitholders are suffering capital losses. o  Nominal fees (ie absolute amount) may fall when net asset value of REIT declined. o  Percentage fee remained unchanged.
  53. Risk-Return Principle Juristic Principle (Al-Qawaid Fiqiah) “Al-Ghorm Bil Ghonm” No Pain No Gain
  54. 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
  55. RISKS faced by Unitholders o   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.
  56. Types of Risk in Islamic REIT o   Organizational and Operational Risk o  Risk relating to investment in real estate o  Risk relating to Properties o  Shariah non-compliance risk o  Risk relating to an investments in the units
  57. Alternative to REIT Wakalah Model o   Unitholders and Management Company (MC) Al-Mudarabah Profit-Sharing o  MC “fees” = portion of rental income. o  Unitholders and Trustee Wakalah To ensure MC adheres strictly to the provisions of the Deed.
  58. Typical REIT structure Unitholders Investment in REIT Acts on behalf of unitholders Management fee REIT manager Distributions REIT Management services Trustee ’s fees Purchase assets Net property income Property assets Trustee (holds properties for the Benefit of unitholders)
  59. Al- ’Aqar KPJ Islamic Reits o  Oversubscribed by 4.13 times o  Islamic Reits drew 5,115 non-Muslim and non-Bumiputra investors. o  Open up at RM0.99, a premium of 4.2%, or 4 sen, over its retail offer price of RM0.95 o  30,810 units done at the opening bell o  Closed at 3.5 sen up at RM0.985 o  Al-’Aqar REIT raised RM177.25 million
  60. Al- ’Aqar KPJ REIT Structure - MALAYSIA Shariah Committee Members Advise the Al-’Aqar KPJ REIT on Shariah-related matters Unitholders* Distributions Management fees Al-’Aqar KPJ REIT Manager (Damansara REIT Management services Managers Sdn. Bhd.) Ownership of properties Maintenance manager for the properties (Healthcare Technical Services Sdn. Bhd.) Holding of units Acts on behalf of unitholders Trustee’s fees Net property income Maintenance and management fees Maintenance and management services Trustee (Amanah Raya Berhad) Rental payments REIT properties, comprising 6 hospitals Rent Hospital tenants Note * where KPJ will indirectly own 47.06% of the units
  61. Al- ’Aqar KPJ REIT o  First Islamic Real Estate Investment Trust (I-REIT) o  Comprises of six hospitals building worth RM461.24m or USD$131.9m o  Manager: Damansara REIT Managers Pte. o  Lead adviser: AmMerchant Bank Pte. o  Trustee: Amanah Raya Pte. o  Units holdings: KPJ : 160 million units Institutional investors: 165 million units Retail investors: 15 million units
  62. Al- ’Aqar KPJ REIT: Fees and Expenses o  o  o  o  o  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.
  63. Al-Aqar KPJ Islamic REIT o   World’s first Islamic REIT IPO The world’s 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. o  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.
  64. Al-Hadharah Boustead REIT
  65. 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 Shariah-related matters IBFIM Shariah Advisor Management services Al-Hadharah Boustead Acts on behalf of unitholders Trustee’s fees CIMB Trustee Rental Income Ownership of properties (Vested in Trustees) Monitoring the Plantation Assets Plantation Asets Plantation Adviser
  66. Bousted Al-Hadharah Islamic REITS o   Vendor sells assets to SPV (AlHadarah REITS). o  SPV leases back the assets to the Vendor. o  Vendor pays fixed rentals for 30 years o  Rentals passed to Unitholders as income. o  Unitholders – no fixed income and capital protection.
  67. CONTRACTS : SPA & Ijarah o  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
  68. CONTRACTS o   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.
  69. Islamic REITS Structure o   The FUND – Islamic REITS o  The Unit Holder o  Manager o  The Trustee o  Shariah Committee/Shariah Adviser o  The Property Assets o  Authorized Investments
  70. Regulatory Framework Islamic REITS
  71. REITS DEFINED o   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.”
  72. REITS DEFINED o   Invests at least 50% of its total assets in real estates o  Trusts – passive income vehicle o  Distributes dividends to unit-holders o  Governed by a constitution o  Cannot reinvest income as retained earnings o  Dividends are tax deductible
  73. REITS DEFINED o   Has a management company o  Has a trustee company o  Employs a property manager
  74. 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 requirement At least 90% aftertax-income 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% withholding tax on dividend Nil Nil Nil Yes – 6% withholding tax on dividend Gearing cap Max 35% of total assets unless REIT or all borrowings 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 non-income producing properties At least 75% in real estate At least 70-90% in real estate At least 75% in real estate Development Max 20% Yes Yes, if >50% of assets are income producing No No Properties at least 80% constructed K REIT- yes CR REIT-No No Geographical restrictions No No No No Local only Local only No Local only, approval needed for foreign Source: DIFC, Khalid Yousef,2006
  75. 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
  76. 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
  78. Performance Indicators o   Management Expense Ratio (MER) o  Total Returns o  Average Annual Returns o  Distribution Yield o  Net Asset Value (NAV)
  79. Authorized Investments o   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; o  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)
  80. Performance Indicators o   Management Expense Ratio (MER) o  Total Returns o  Average Annual Returns o  Distribution Yield o  Net Asset Value
  81. Valuation of REITs …………how are REIT Unit priced REITS in Japan, US and Singapore are trading at a premium of 70 - 230 bps compared to the government bonds 1.531.3 Japan 10 yr Gov bond Premium of 230 bps 200bps 3.6 Japan REITs 4.2 4.54 US 10 yr Gov bond US REIT Premium of 7036bps bps 4.9 3.27 3.2 Singapore 10 yr Gov bond Premium 140 ofof133bps bps 4.6 Singapore REITs 5.205.4 Australian 10 yr Gov bond Australian LPT 7.1 4.11 3.9 Malaysian 10 yr Gov bond 7.3 Average Malaysian REIT Yield 0 1 2 3 4 Yield (%) 5 6 Premium of of 170 200bps bps Premium of 320bps 340 of bps 7 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 8
  82. Investing in REITs …why are REITs attractive to investors? Income stability Capital stability & growth •  •  •  •  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 •  •  Quality real estate •  Liquidity & valuation •  •  Provide institutional investors with an alternative to direct real estate investment with increased flexibility Provide retail investors with an opportunity to invest in high-value 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
  83. Investing in REITs …. (cont’d) Diversification •  Diversification by types of properties, tenants and locations Expert Management •  •  Benefit from experienced, professional real estate managers Additional scrutiny by the trustee •  Consistent yield-based investment has defensive asset class characteristics Income-generating investment grade property is a ‘safe haven’ during uncertain times Defensive •  •  Transparency Source: JPMorgan, 2005 •  Subject to stringent corporate governance and disclosure requirements Government regulates on payout ratios, gearing, allowable investment, etc.
  84. 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
  85. REIT developments in other Asian markets India Philippines n   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) n  The Association of Mutual Funds of India (AMFI) issued a report to SEBI regarding the launch of real estate investment schemes in 2002 n  Regulators have been cautious on approving REMFs due to fears or them causing excess speculation in the real estate market n  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 n  While REITs have not been established in Indonesia, the Indonesian Bank Restructuring Agency (IRBA) has been considering setting REITs up n  Property companies currently provide investors with exposure to listed real estate Thailand China n  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) n  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 n  Lack of available assets remains a limitation. Underlying residential market has been strong and has been pushing property development stocks higher n  PRC Trust Laws, introduced in October 2001, provide guidance on recognition of trusts in China n  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 n  Some private syndicated deals have occurred in China and there is an expectation of the market developing further n  As Chinese property companies are launched, modern REIT structures are likely develop in tandem on an accelerated basis 41
  86. Wassalam Thank You