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Islamic Real Estate Investment Trusts (I-REITs): Less Effort, Steady Rewards

Industry Insights | May 24, 2018

Islamic Real Estate Investment Trusts (I-REITs): Less Effort, Steady Rewards

Dr.Norhafiza Nordin

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Purchasing a property can be more than just getting a decent house to live in. One may buy a house, an apartment or a condominium for investment property. Direct property investment or real estate is one of the investment alternatives which is available for investors to include in their portfolio.It has become one of the popular investment alternatives for diversification purposes. Nevertheless, not many people can afford to participate in direct real estate investment. Direct real estate investment refers to the act of buying a stake in a specific property. For that reason, it requires a significant amount of money to get into. In addition to high cost, the process involved is also more complicated than the process of investing in other investment alternatives such as stocks and bonds. On top of that, this asset class is illiquid. It is not easy to buy and sell them in a short period of time without a substantial loss in value.

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For those who are interested to invest in property or real estate but cannot afford to do so, real estate investment trusts (REITs) offer a great option to diversify their portfolio. REITs give the opportunity to investors who have limited capital to participate in large-scale commercial real estate without having to enter the market directly. REITs permit ownership of high quality but illiquid commercial properties. In general, REITs are similar to a mutual fund or a unit trust, in which they use the pooled capital of investors to invest in real estate. They may purchase income-producing properties such as shopping malls, office buildings, hotels and hospitals. These properties are usually rented out and the income earned would then be distributed to the investors. REITs are traded like stocks on the exchange.

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The advantages of investing in REITs are:

  • Affordability: investment in REITs does not require large capital like direct property investment. Furthermore, they are managed by professionals who will ensure optimal performance.
  • Liquidity: compared to direct investment properties, REITs are more liquid. Units of REITs can be conveniently bought and sold like shares because they are listed on stock exchanges.
  • Stable income stream: REITs pay steady income in the form of dividends commonly known as income distribution to their unit holders. Usually 90% of the realized income is allocated for this purpose. As a result, REITs have been known for providing a steady stream of passive income to their unit holders. Requiring little monitoring effort, they suit the needs of young people who just enter the workforce. With not so high income levels, they are able to earn regular income at a low risk.

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For Muslims who want to invest in REITs but at the same time want Shariah compliant products, they may choose Islamic real estate invetsment trusts (I-REITs). Like conventional REITs, Islamic REITs are collective investment vehicles that pool money from many investors to buy, manage and sell commercial properties. The main difference between I-REITs and conventional REITs lies in the fact that I-REITs must only include Shariah compliant activities. In brief, I-REIT is a Shariah compliant investment tool which focuses on the real estate sector.

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Developed to fulfill the demand for Shariah compliant products, this asset class offers an investment solution for Muslim investors.It does not only offer Muslim investors the opportunity to invest with peace of mind but also the opportunity to obtain good return on their investment. In general, an Islamic REIT is a collective investment scheme in real estate in which the tenants only run permissible activities based on Shariah principles. Specifically, Shariah compliance for an Islamic REIT applies to the utilization of the real estate, including sub-tenancies, financing of the acquisition and development of the property, as well as cash and liquidity management and property insurance schemes. In case where a portion of the rental comes from non-permissible activities, then these rentals shall not exceed 20% of its total turnover. Table 1 summarizes the differences between Islamic REITs and conventional REITs.

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Table 1: Comparison between I-REITs and conventional REITs

Source: Securities Commission Malaysia

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I-REITs offer an attractive investment option because they allow investors to get into the market with cheaper cost and lower risk. I-REITs are gaining popularity. In Malaysia for example, the market for I-REITs has shown a steady growth over the past decade with a market capitalization of RM 18.53 billion. This figure equals more than 40% of the total value for market capitalization of the Malaysian REIT segment. Since its launch in 2006, this investment alternative has shown encouraging acceptance and growth. This might be due to the fact that there is no significant difference between Islamic and conventional REITs, except that an Islamic REIT must comply with Shariah principles. Nevertheless, it is also a collective investment scheme that focuses on investing in real estate activities. The first Islamic REIT, Al-‘Aqar KPJ REIT, was launched in Malaysia in 2006. At its inaugural launching it invested in hospital properties with a market value of USD138 million. It was then followed by the introduction of Al-Hadharah Boustead REIT in 2007, Axis REIT in 2008, and KLCC REIT in 2013.Al-Hadharah Boustead REIT’s portfolio involves plantation properties, Axis REIT focuses on office and industrial properties and KLCC REIT centres around retail and office properties.

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In conclusion, Islamic real estate investment trust (I-REIT) is increasingly becoming popular as an investment vehicle. It provides greater flexibility and more diversification benefits than direct exposure to real estate with similar return. For those who have limited capital to invest in direct property or real estate, this investment vehicle offers a great option. Without much effort and capital, investors are able to enjoy steady income with minimal risk.

Disclaimer

This material is for informational purposes only. The information is not intended to be used as the only basis for investment decisions, nor should it be construed as advice designed to meet your particular needs. You are advised to seek the advice of your financial adviser, legal or tax professional, prior to making any decision based on any specific information contained herein.

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