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8/8/2019 Structuring Islamic REIT Part 2 - NOV 2008
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Understanding and Structuring aShariah Compliant Real Estate
Financial Product (Part II)
Prof Dr. Mohd Azmi [email protected]
Pre-conference workshop A, Sunday 9 Nov 2008,Dubai
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Meaning of REITs Real Estate Investment Trusts (REITs) An investment trust in which fund is collectively
pooled from investors (individuals andcompanies) and is used to invest in real estate.The investment is normally in the form of buying,managing, selling and leasing real estates or
purchasing shares in public listed real propertycompanies or investing in debt securities in realproperty companies (adapted fromwww.azmilaw.com)
Real estate investment trust or property trustfund means unit trust scheme that invests orproposes to invest primarily in income-generating
real estate (Securities Commission Malaysia,Guidelines on REITs, updated Aug 2008)Pre-conference workshop A, Sunday 9 Nov 2008, Dubai
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REITs as property investment
vehicle REITs are typically listed and quoted in
many stock exchanges. For example inMalaysia there are 2 Shariah compliantREITs and 11 conventional REITs listed in
Kuala Lumpur Stock Exchange (BursaMalaysia) with market capitalization of
US$1.53bil. In Singapore there are 21 conventional
REITs listed in Stock Exchange of
Singapore with market capitalization ofUS$20bil A rea, 2008
Pre-conference workshop A, Sunday 9 Nov 2008, Dubai4
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Types of REITs
Equity REITs
Own and operate income producing realestate Office
Hospital Apartment
Retail (shopping centres)
Hotels May perform development, construction and
leasing activities
Most common type of REITsPre-conference workshop A, Sunday 9 Nov 2008, Dubai
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Mortgage REITs
Lend money to real estate owners andoperators of existing property
May also buy mortgages
Hybrid REITs
Both own properties and give loans to real
estate owners
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Investing in REITswhy are REITs attractive to investors?
Incomestability
Quality real
estate
Capital stability
& growth
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 underlyingproperties
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 bepossible
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 cost
REITs allow institutional funds to make incremental investments inlumpy real estate as and when new investment funds are received
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Investing in REITs. (contd)
Expert
Management
Diversification
Defensive
Diversification by types of properties, tenants and locations
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
Transparency
Subject to stringent corporate governance and disclosure
requirements
Government regulates on payout ratios, gearing, allowable investment,
etc.
Source: JPMorgan, 2005
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Meaning of Shariah compliant
REITs There is no universal definition although all
definitions have to comply with therequirements of the Shariah
Definition used by Securities Commission
Malaysia (Guidelines for Shariah compliantREITs, November 2005)
A Shariah compliant REIT is a collective
investment scheme in real estate, in whichtenants operate permissible activitiesaccording to the Shariah
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Shariah compliant REITs can be listed or
unlisted Examples of listed Shariah compliant
REITs are Al-Aqar KPJ REIT and Al-Hadharah Boustead REIT (both inMalaysia) whilst unlisted Shariah
compliant REITs , also known as Shariahcompliant real estate funds, are shown in
the following two slidesPre-conference workshop A, Sunday 9 Nov 2008, Dubai
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FundManager /Distributor
Name ofFund
Country Size(USDm)
Type Investor Advisor Description
GuidanceFinancial
Group
GuidanceFixed
Income Fund
USA 200 Residential Freddie Mac
real estate finance assets. The securities
will be issued and guaranteed by theFederal Home Loan MortgageCorporation (Freddie Mac). The fund willhold securities that are backed byShariah-compliant
Shamil Bank China RealtyFund
China 150 Commercial CITIC InternationalAssetsManagement Co.Ltd. (CITICIAM)
Shamil Bank Bahrain entered intoan MoU with prominent Chinesefinancial institutions, CITICIAM toset up and launch USD150m
closed-end China Realty Fund.
Shariah Compliant Real Estate Funds
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Fund Manager
/ Distributor
Name of
Fund
Country Size
(USDm)
Type Investor Advisor Description
Kuwait FinanceHouse
Baitak AsiaReal EstateFund
South Asia 600 Commercial,Residential
Pacific Star Group A USD600m Shariah compliantreal estate fund. The Baitak AsiaReal Estate Fund will invest in
residential and commercial sitesin Asian countries. This will bethe first real estate deal in Asiafor Kuwait Finance House.
Kuwait FinanceHouse
ShariahcompliantEuropean
Real EstateFund
Europe 486 Commercial,Residential
Equity Estates BV The fund intends to invest Euro400m in European propertyconcentrating on high yielding
office, logistics and light industrialproperties in the Benelux, Franceand Germany.
Dubai Shariahcompliant Bank
(DIB); CheungKong Group
Al Shariahcompliant Far
Eastern RealEstate Fund
Far East 450 Commercial,Retail,
Residential
ARA AssetManagement
The new fund will be managed byARA Asset Management and
jointly promoted by DIB andCheung Kong Group. TheShariah compliant-compliantinvestment vehicle has set asideUSD450m to invest incommercial, retail and residentialprojects in major Asian cities.
Shariah Compliant Real Estate Funds
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Shariah compliant REITS: Basic
Issues Objective
Structure Regulatory Regime
Sources of income
Permissible investment
Purification of income
Investors Comparison with Alternative Investment
Fees and Charges
Performance Indicators15
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Objective of Shariah Compliant
REITS To provide unit holders with a stable
distributions per unit with the potential forsustainable long-term growth of suchdistributions.
How? By optimizing the performance and enhancingthe overall quality of a large and geographically
diversified portfolio of Shariah-Compliant realestate assets through various permissibleinvestments and business strategies.
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Shariah Compliant REITs and
Real Estate Funds Model 1:
Management of fund: Wakalah Acquisition of property: Murabaha or Ijarah or
Musharakah Mutanaqisah
Relationship with tenants: Ijarah
Model 2:
Management of fund: Mudarabah Acquisition of property: Murabaha or Ijarah or
Musharakah Mutanaqisah
Relationship with tenants: Ijarah17
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Mudarabah structure
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Propertymanager
FundManage
r
Lessee
MUDARIB
RABB-UL MALor his contracted representative
Assetmanagement
Fundmanagement
Partnership
RABB-UL MAL
Investors
EquityDividends
Fund
Seller
Assets
Financier/SPV
Ijarah orMurabahah
Ijarah$
Source: adapted from Thomas, 2005
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Murabahah structure
20
Vendor
RealEstate
Bank
IslamicInvestors
Fund/InvestmentCompany
InvestmentSubsidiary
Source: adapted from Thomas, 2005
Occupyingtenants
Investmentsubsidiary
sale
Purchaseprice
Legaltitle
sale
Purchase price+ mark up
Legal title: onor off shore sub
$Ijarah
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Ijarah Structure
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Vendor/bank
RealEstate
Finco
IslamicInvestors
Fund/InvestmentCompany
InvestmentSubsidiary
Source: adapted from Thomas, 2005
Occupyingtenants
Sale of Ijarah
assets
Purchaseprice
Legaltitle
RedeemableIjarah/Ijarah MuntahiaBittamllek
Rent
$Ijarah
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Shariah compliant REITS
Tripartite agreement between three parties:
The Manager
The Trustee
Unitholders
Tripartite relationship is governed by a Deed
registered with the Regulator (e.g SecuritiesCommission Malaysia)
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DEED A Deed is a legal instrument used to grant a
right.
The trust deed is a legally binding agreementbetween the manager, trustee and unit holders.The agreement usually spells out clearly howthe 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.
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http://en.wikipedia.org/wiki/Righthttp://en.wikipedia.org/wiki/Righthttp://en.wikipedia.org/wiki/Legal_instrumenthttp://en.wikipedia.org/wiki/Granthttp://en.wikipedia.org/wiki/Righthttp://en.wikipedia.org/wiki/Righthttp://en.wikipedia.org/wiki/Granthttp://en.wikipedia.org/wiki/Legal_instrument8/8/2019 Structuring Islamic REIT Part 2 - NOV 2008
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Shariah Aspects
Shariah compliant REITS (I-
REITs)
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ShariahGuidelines on
I-REITs
Rental from tenantWho operates mixed
activites
Rental is free fromNon-permissible
activities
How incomes fromI-REIT are earned?
How the funds aremanaged?
Methods of calculatingthe ratio of rental of
Non-permissible activities
Instruments used inInvesting, deposit andFinancing for I-REITs
Takaful Coverage
Risk Management Issues
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Establish Shariah guidelines for fund manager
Monitor fund operations so as to ensure Shariah
compliance (usually done in quarterly reviews)
Make updates to Shariah guidelines as and
when necessary Devise capital gain and dividend cleansing
procedures if mandated by the fund
Provide comfort to investors that theirinvestments are managed in compliance toShariah
Roles of the Shariah Advisor:
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Requirements Of Shariah-compliant Real
Estate Investment1. PERMISSIBLE ACTIVITIES must ensure that the property is used for halal or permissible
activities.
Non-permissible activities include: financial services based on interest (riba); gambling/gaming; manufacture or sale of non-halal products or related
products; conventional insurance; entertainment activities that are non-permissible according
to the Shariah; manufacture or sale of tobacco-based products;
stockbroking or share trading in Shariah non-compliantsecurities;
and hotels and resorts. Shariah committee or advisors are allowed to use their own
discretion based on ijtihad to determine other activities that aredeemed non-permissible
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Characteristics Of Shariah-compliant Real
Estate Investment2. ACQUIRING REAL ESTATE WITH EXISTING TENANTWHO OPERATES MIXED ACTIVITIES one whose core activities are permitted by Shariah, & other
activities that may contain a small extent of prohibited elements, Shariah advisors must perform compliance assessment with
additional consideration.
Rental from non-permissible activities must not exceed 20% of
total turnover of the Islamic REIT Shariah advisors shall advise the Islamic REIT fund manager:
not to invest in the real estate involving non-permissibleactivities that clearly exceed the benchmark.
not permitted to own real estate, in which all tenants operatenon-permissible activities, even if the percentage of rental isstill below the benchmark (20%). This is to protect the imageof the Islamic REIT
hariah compliant Benchmark : [Area used
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hariah compliant Benchmark : [Area usedfor Non Shariah Compliance/Total Area] ratio
and [Sales from Non Shariah compliant/TotalSales].
sales $10m
sales$2m
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Characteristics Of Shariah-compliant Real
Estate Investment3. RENTING OUT REAL ESTATE TO A NEW TENANTS
The Shariah advisor must advise the Islamic REIT fundmanager not to accept a new tenant(s) whose activities are fullynon-permissible.
Shariah advisor must make sure that the Islaimic REIT fundmanager consistently supervise the activities of the tenant
If tenants activities is not obviously impermissible, the 20%
benchmark in determining the status of mixed rental incomeneed not be applied in case of renting out to a new tenant.This is because the exact rental receipt from non-permissible activities is still unknown.
In an obvious case whereby the new tenant involves in
activities which are deemed impermissible then it is notallowed for Islamic REIT fund manager to accept suchtenant.
For example, a well-known casino operator who plans torent the real estate of the Islamic REIT must not be
accepted as a new tenant
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Characteristics Of Shariah-compliant Real
Estate Investment4. METHOD OF CALCULATING THE RATIO OF
RENTAL OF NON-PERMISSIBLE ACTIVITIES
usage of space, hours of service and other methods deemedappropriate by the Shariah advisors using their own ijtihad.
E.g. supermarket - the rental of non-permissible activities -selling of alcohol can be based on the ratio of area occupied for
non-permissible activities to the total area occupied. E.g. if the total area rented out is 10,000 square feet and the
area allocated for the sale of alcoholic beverages is 1000square feet, then the ratio of area used for non-halal activities is10%.
Thus, the rental from non-permissible activities is 10% of thetotal rental paid by the supermarket. Rental income is deemedto be permissible as it is still within the acceptable benchmark of20% of total turnover of the Islamic REITs.
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Characteristics Of Shariah-compliant Real
Estate Investment5. INVESTMENT, DEPOSIT AND FINANCING FOR
ISLAMIC REIT
An Islamic REIT must also ensure that all forms of investment,deposit and financing instruments comply with the Shariahprinciples.
For example, in financing the acquisition of real estate, IslamicREIT fund manager must not engage in riba-based instrumentwhich would have an effect on the Islamicity of the IslamicREIT operation and transaction.
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Malaysian Shariah Permissible
Investments for I-REITs: Real estate physical land and all things thatare a natural part of the land as well as things
attached to the land both below and abovethe ground (50% of total assets)
Real estate-related assets - includes units of
other I-REITs , Shariah compliant securities ofproperty companies, and sukuks issued byproperty companies
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Single purpose companies private
companies whose principal assets comprisereal estate
Liquid assets Shariah compliant securities
of non property companies Asset-backed sukuks Sukuks based on
securitization transaction
Non-real estate-related assets cash, shariahcompliant deposits or other instruments
convertible into cash within 7 daysPre-conference workshop A, Sunday 9 Nov 2008, Dubai
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http://shariah%20compliant%20reits%20part%202.ppt/#64.%20Screening%20Methodology%20for%20Shari'ah-Compliant%20Stockshttp://shariah%20compliant%20reits%20part%202.ppt/#79.%20Types%20of%20Sukukhttp://shariah%20compliant%20reits%20part%202.ppt/#79.%20Types%20of%20Sukukhttp://shariah%20compliant%20reits%20part%202.ppt/#64.%20Screening%20Methodology%20for%20Shari'ah-Compliant%20Stocks8/8/2019 Structuring Islamic REIT Part 2 - NOV 2008
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Characteristics Of Shariah-compliant Real
Estate Investment6. TAKAFUL COVERAGE
The Guideline issued by the SecuritiesCommission also stipulates that an IslamicREIT must use Takaful schemes to protect
its real estate. However in case that Takaful schemes are
unable to provide the insurance coverage,then the Islamic REIT is permitted to useconventional schemes
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Characteristics Of Shariah-compliant Real
Estate Investment7. RISK MANAGEMENT ISSUES
Islamic REIT is permitted to participate in forward
sales or purchases of currency, and is encouragedto deal with Islamic financial institutions.
If the Islamic REIT deals with Islamic financial
institutions, then it will be bound by the concept ofwa'd(a unilateral promise where only one party isobligated to fulfil his promise or responsibility). The
party that is bound is the party that initiates thepromise.
However, if the Islamic REIT deals with conventional
financial institutions, it is permitted to participate inthe conventional forward sales or purchase of
http://shariah%20compliant%20reits%20part%202.ppt/#81.%20Islamic%20Forward%20Rate%20Agreementhttp://shariah%20compliant%20reits%20part%202.ppt/#81.%20Islamic%20Forward%20Rate%20Agreement8/8/2019 Structuring Islamic REIT Part 2 - NOV 2008
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Nature of work undertaken by
Management Company (Wakil) Managing the Properties effectively Maintaining net property income
Maximizing the return and performance of eachProperties and their growth via enhancement ofproperties
Raising the profile of Properties Acquiring property assets with good yield and growth
potential for both locally and abroad that meet theManagers investment criteria
Employing optimum capital structure.
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WakalahFees
Annual Management Fee
Annual Maintenance and Management Fee
Annual Trustee Fee
Shariah Committee Members Fee
Fund Expenses
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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 byShariah compliant Reits management companies.
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WakalahModel.
Management Company (ie Wakil) does not bearpotential of loss (ie. risk) of investment.
Management Company is entrusted to invest the REITFund 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.
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Risk-ReturnPrinciple
Juristic Principle (Al-Qawaid Fiqiah) -
Al-Ghurmu Bil Ghunmi
No Risk No Gain
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RISKS faced by Unitholders
Investment by Unitholders is based on Risk-ReturnPrinciple al-Ghornm bil Ghonm where:
1. Original investment not guaranteed
2. Income may rise or fall3. May not receive any income at all.
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S C
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Types of Risk in Shariah Compliant
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
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Alternative to REIT WakalahModel
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 ofthe Deed.
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Investor/Unit trust fund receives income frominvested companies in the form of dividend and
capital gain. Not all income are consideredclean. Some are derived from non halalsources such as interest income
Purification of income requires identifying theprohibited income received from investedcompanies and deducting it from the total
income prior to distribution The income net of purification is then distributed
to the investors
Purification of Income
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The prohibited income cannot be distributed toinvestors but instead donated to charities
It is also possible for the fund manager to allowdiscretion to investors in deciding the recipientcharitable organization
No consensus among Shariah scholars inimplementing purification
No standard available from AAOFFI but provides
a method to compute the prohibited income
Purification of Income
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AAOIFI: First step: Determine the proportion of
prohibited income: (Total Prohibited
Income/No. of Shares) Second step: Determine the quantum ofprohibited income: (No. of shares owned x
Proportion of prohibited income) FTSE GII recommends 5% of the dividend
received is taken out and given to charities
S&P SI provides the following formula toestimate tainted dividend
Div*(Non-permissible Revenue/Revenue)
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Case Studies of ShariahCompliant REITs in Malaysia
KPJ Al-`AQARREIT
AL-HADHARAHBOUSTED REIT
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AlAl--Aqar KPJ REITAqar KPJ REIT
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Al-Aqar KPJ REIT
First Shariah compliant REIT Established on 28 June 2006
Comprises of six hospitals building worthRM461.24m or USD$131.9m
Manager: Damansara REIT Managers Pte.
Lead adviser: AmMerchant Bank Pte. Trustee: Amanah Raya Pte. Units holdings:
KPJ : 160 million unitsInstitutional investors: 165 million unitsRetail investors: 15 million units
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Al-Aqar KPJ Islamic Reits
Oversubscribed by 4.13 times
Islamic Reits drew 5,115 non-Muslim andnon-Bumiputra investors.
Open up at RM0.99, a premium of 4.2%,or 4 sen, over its retail offer price ofRM0.95
30,810 units done at the opening bell Closed at 3.5 sen up at RM0.985
Al-Aqar REIT raised RM177.25 million
52
KPJ Al-
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REIT Properties:1. Ampang Puteri Specialist
Hospital Building
2. Damansara SpecialistHospital Building
3. Johor Specialist Hospital
Building
4. Ipoh Specialist Hospital
Building
5. Puteri Specialist HospitalBuilding
6. Selangor Medical Centre
Building
Tenants
(Subsidiariesof KPJ)
Maintenance
Manager for
the properties(HealthcareTechnical
Services Sdn.
Bhd.)
Al-'AqarKPJ REIT
Trustee(Amanah RayaBerhad)
Unit Holders
Manager
(DamansaraREIT Mgmt.
Sdn. Bhd.
Investment
Dividend
Ownership ofProperty
Net PropertyIncome
Custodianship service
Trustee fees
Management services
Management fees
Rent
Rental Payment
Maintenance andManagement
Services
Maintenance andmanagement fees
Advise onShariahrelated matters
`AQARREIT
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Al-AqarKPJ 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 Islamicfinancing facility
Printing, posting, general and operating expenses for the
administration of the fund.54
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Al-Aqar KPJ Islamic REIT
Worlds first Islamic REIT IPOThe worlds first Islamic real estate investment trust (I-
REIT) Al Aqar KPJ REIT IPO was launched withAmMerchant Bank appointed as the advisor, managingunderwriter and sole placement agent.
Under the IPO, a total of 340 million units were issuedand of these, KPJ Healthcare would hold 160 millionunits (47%), while 165 million units would be issued toinstitutional 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 beraised from the IPO.
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Al-Hadharah Bousted REIT
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Al-Hadharah Bousted REIT
Lauched on 15Lauched on 15thth Jan 2006Jan 2006
11stst II--REIT made up of plantation assets i.e. oil palmREIT made up of plantation assets i.e. oil palmestatesestates
Involves saleInvolves sale--lease back mechanismlease back mechanism
Acquires 8 plantation assets from Bousted GroupAcquires 8 plantation assets from Bousted Groupinvolving 8 palm oil estates and 2 palm oil mills, allinvolving 8 palm oil estates and 2 palm oil mills, alllocated in Peninsular Malaysia.located in Peninsular Malaysia.
Total purchase consideration RM472 million ( USD136Total purchase consideration RM472 million ( USD136million)million)
Tenants pay a cumulative fixed rental of RM41.3 millionTenants pay a cumulative fixed rental of RM41.3 millionper annum on a bimonthly bases for the 1per annum on a bimonthly bases for the 1stst tenancy termtenancy term
of 3 years.of 3 years.57
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REIT Properties:Oil Palm Estate and Estate
with Palm Oil Mill in 8different locations:
1. Batu Pekaka, Kedah2. Bukit Mertajam, Penang3. Malaya, Perak4. Bekoh, Johor5. Kulai Young, Johor6. Telok Sengat, Johor7. Chamek, Johor8. Lepan Kabu, Kelantan
Tenants(Subsidiaries ofBousted Group)
Plantation
Adviser(Appointed byBousted REIT
Manager).
Al-HadharahBousted REIT Trustee(CIMB TrusteeBerhad)
Unit Holders
Manager
(Bousted REITManager Sdn.
Bhd.
Investment
Dividend
Ownership ofProperty
RentalIncome
Custodianship service
Trustee fees
Management services
Management fees
Rent
Rental Payment
Monitoring ofPlantation assets
Maintenance andmanagement fees
Advise onShariahrelated matters
AL-HADHARAHBOUSTED REIT
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Bousted Al-Hadharah Islamic REITS
Vendor sells assets to SPV (Al-Hadarah
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.
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CONTRACTS: SPA & Ijarah
Sale and Purchase Agreement: The sale
and purchase agreements between theVendors and the Trustee, on behalf of Al-Hadharah Bousted REIT, in relation to the
sale and purchase of the Plantation Assets
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CONTRACTS
Ijarah Arrangements: The arrangements by al-Hadharah Bousted REITS
(AHBR)where the Trustee on behalf of AHBR aslandlord agrees to let the Plantation Assets to theVendors as tenants for a period of three years whichare renewable four times up to twelve years andthereafter renewable for up to an additional fifteenyears comprising five additional terms of not morethan three years each, save and except for the
tenancy of the Malay Reserved Land which are notautomatically renewable.
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Sources of Income for Al Hadharah
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Sources of Income for Al-Hadharah
Bousted REIT Investors Rental
Performance-based profit sharing Annual profit sharing of net incremental
income based on a formula pegged to crudepalm oil prices and fresh fruit bunch prices.
The profit shared (50:50) and payable in the
form of dividend to unit holders. Capital gain
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Prospects
of ShariahCompliant
REITs
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1. Enhancement of tax transparencysystem & reduction of Investors tax
2. Operates in a more transparent and wellregulated and transparent esp. with the issuance
of 2 Guidelines by Securities Commission
3. High-Quality Assets which generate a stableStream of cash flow backed by a steady portfolioof tenants.
4. Offers investors and subscribers with high yieldReturns and certainty of income.
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Enhancement of Tax Policy by
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Enhancement of Tax Policy by
Malaysian Authorities Tax Transparency (Effective from YA 2007)
REITs will be exempted from tax on all income if itdistributes at least 90% of income to investors
If distributes less than 90% of income, REIT will besubject to income tax on chargeable income at normalcorporate income tax (eg. 28%)
Implications:
Encourages REITs Manager to distribute at least 90%of income to investors.
Certainty of income to investors
Ensuring higher yields from investment65
Tax Reduction for REITs investors
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Tax Reduction for REITs investors
(Malaysia)REIT
DistributionsCurrent taxtreatment
Amended taxtreatment
Individuals &non-corporateinvestors
Resident Taxed at ownmarginal rate of tax
Withholding tax of15%
Non-Resident Withholding tax at28%
Withholding tax of15%
CorporateInvestors
Resident Taxed at normalcorporate tax rate(28% currently)
Existing taxtreatment (27%effective YA2007)
Non-Resident Withholding tax at
28%
Existing tax
treatment (27%withholding taxfrom 1.1.2007)
Institutional
Investors
Foreign Withholding tax at
28%
Withholding tax of
20%
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Conclusion
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Conclusion
Shariah compliant REITs have the potential toappeal to investors because:
Shariah-compliant investment
Higher Certainty of income in the form of dividend Funds will typically have multiple properties in its
portfolio as well as diversified tenant pool which reduces
reliance on a single property and tenant in the case ofdirectly held real estate
Allows investors access to investment grade assetswithin the property market for the small initial capital
outlay Investors have the opportunity to invest in properties
which are managed by professional management
companies.67
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THANK YOU
68Pre-conference workshop A, Sunday 9 Nov 2008, Dubai
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Screening Methodology for Shari'ah-Compliant Stocks
Currently there is no international Shari'ah standard forstock screening
Different funds or fund managers utilise differentstandards based on their respective Shari'ah councils
In Malaysia we have the list issued by Syariah AdvisoryCouncil of Securities Commission, Dow Jones-RHBIslamic Malaysia Index and FTSE Bursa Malaysianamely FBM Hijrah Shariah Index and FBM EMASShariah Index
At the global level we have the Dow Jones IslamicMarket Indexes, FTSE Global Islamic Index Series andS&P Islamic Index Series and MSCI Islamic Index
Series69
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Screening Methodology for Shari'ah-Compliant Stocks
Rules to ensure that ordinary shares are Shari'ahcompliant
The stock screening process is divided into two stages: Evaluation in terms of company activities, products and industry
Negative screen
Computation of a set of financial ratios & compare them against
specified benchmarks
The screening process begins by screening thecompany in terms of its activity, products and industry
alcohol, tobacco, pork-related products, conventional
financial services, weapon and defense, entertainment(hotels, casinos/gambling, cinema, pornography, music,etc.) are excluded
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Screening Methodology for Shari'ah Compliant Stocks
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Screening Methodology for Shari ah-Compliant Stocks
Next, a set of measures called financial filters is also usedto refine the selection.
The filters use a number of financial ratios and comparethem against their respective benchmarks to weed outnon-Shariah compliant stocks
The data for ratios are obtained from Balance Sheet andIncome Statement. Dow Jones and S&P Indexes usestock market data as well
In general these ratios can be grouped into 3; liquidassets, interest income and leverage
The ratio benchmark ranges from:
Liquid asset: 17% to 70% Interest income and/or Income from Shariah Non-compliant
activities : 5% to 15% Leverage: 30% to 33%
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Screening Methodology for Shari'ah-Compliant Stocks :
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Securities Commission of Malaysia
Securities Commission of Malaysia applied additionalcriteria to companies which are involved in multiplebusiness, i.e., companies whose business activitiescomprise both Shari'ah permissible and non-permissible
elements. The analysis is done at the holding company,subsidiary company and associate company levels. Theadditional criteria include: Core activities of the company are activities not against the
Shari'ah principles as mentioned earlier Haram element is small compared to core activities, i.e.,
compared against benchmark Public image/perception of company is good
Core activities of the company are important and of publicinterest (maslahah) to the muslim ummah and the country Proportion of haram element is small and in matters such as
umum balwa (common plight), uruf (customs) and the rights ofthe non-Muslim community which are accepted by Islam
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Screening Process of SAC, Securities Commission,Malaysia
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Malaysia
Com
pany
Activity, Industry
& Product
Financial servicesbased on riba (interest) Gambling/gaming Manufacture and / orsale of non-halal
products Manufacture or sale oftobacco-based productsor related products Conventionalinsurance (gharar) Entertainment Stockbroking or sharetrading in Shariah non-compliant securitiesOther activitiesdeemed non-permissible
Quantitative Analysis
TO and PBT of non-approved activities
SOP of non-approved
securities
Interest Income
Dividend receivedfrom investment in
non-approved
securities
All of the above must
be below certain
threshold
Image publicpublicperception or image ofperception or image ofthe company,the company,importance of theimportance of thecompanies tocompanies to ummah,ummah,
urufuruf (custom),(custom), umumumumbalwabalwa(common(common
plight), rights of nonplight), rights of non--muslims etc.muslims etc.
Perm
issible
Stage 1 Stage2 Stage 3
No Yes Yes
Drop
DropDrop
Yes
NoNo
Qualitative Analysis
List is updated every end of May and end of Nov. Previously it was
end of April and October 74
Screening Process of Dow Jones Islamic Index (2003)
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Company
Activity, Industry
and Product
Non-Permissible
Activities:
Pork Production
Non-Halal Food
Products
Alcohol Beverages
Gaming
Interest based
Financial Institution
Entertainment
Arms, Defense
Tobacco
Activities Contrary
to Islam
Stage 1 Stage 2
Financial Ratio Filters
Total Debt to Trailing 12-Month
Moving Average Market
Capitalization
33%
Account Receivables to Trailing
12-Month Moving Average
Market Capitalization
33%
Cash + Interest Bearing Securities
to Trailing 12-Month Moving
Average Market Capitalization
33%
Drop
Drop
No
NoPermissible
Yes
Yes
* List is updated every quarter75
Sharia Non-compliant Business (Industry
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p ( yClassification Benchmark, ICB)
2717 Defense 3535 Distillers & Vintners
3577 Food Products
3745 Recreational Products
3785 Tobacco
5337 Food Retailers &Wholesalers
5553 Broadcasting &Entertainment
5555 Media Agencies
5752 Gambling
5753 Hotels 5755 Recreational Services
5757 Restaurants & Bars
8355 Banks 8532 Full Line Insurance
8534 Insurance Brokers
8536 Property & CasualtyInsurance
8538 Reinsurance
8575 Life Insurance
8733 Real Estate Holding &Development
8773 Consumer Finance
8775 Specialty Finance
8777 Investment Services 8779 Mortgage Finance
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Screening Process of FTSE Global Islamic Index Series
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(In collobration with Yasaar, 2006 onwards )
Company
Activity, Industry
and Product
Non-Permissible
Activities:
Pork ProductionNon-Halal Food
Products
Alcohol Beverages
Gaming
Interest basedFinancial Institution
Entertainment
Arms, Defense
Tobacco
Activities Contrary
to Islam
Stage 1 Stage 2Financial Ratio Filters
5 ratios are
computed
Drop
Drop
No
Yes
No YesPermissible
Cleansetainted
dividend
* List is updated every quarter
5%
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FTSE FINANCIAL FILTERS
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FTSE FINANCIAL FILTERS
FTSE GlI**
I LIQUIDITY
3 Acc Rec + Cash/Total Asset < 50%
6 Cash + Int Bearing Sec/Total Assets < 33%
II PROHIBITED INCOME
1 Interest Income/Group Turnover < 5%
7 Non Permissible Income other than Interest Income/Revenue < 5%III DEBT
2 Total Debt/Total Asset < 33%
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Screening Process of S&P Shariah Indices
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Company
Activity, Industry
and Product
Excludes:
Pork Production
Non-Halal FoodProducts
Alcohol Beverages
Gaming
Interest based
Financial InstitutionEntertainment
Arms, Defense
Tobacco
Gold & silver
trading as cash on
deferred basis
Activities Contrary
to Islam
Stage 1 Stage 2Financial Ratio Filters
4 ratios
Drop
Drop
No
Yes
No YesPermissible
Cleansetainted
dividend
* List is updated every quarter79
S&P FINANCIAL FILTERS
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S&P FINANCIAL FILTERS
S&P SI
I LIQUIDITY
2 Acc Rec/12 Mth MA Market Cap < 49%
5 Cash + Int Bearing Sec/12 Mth MA Market Cap. < 33%
II PROHIBITED INCOME
7 Non Permissible Income other than Interest Income/Revenue < 5%
III DEBT
1 Total Debt/12 Mth MA Market Cap < 33%
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MSCI Sh i h I d
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MSCI Shariah Index Established in May 2007
Stage 1: Core Business Negative Screen: Alcohol
Tobacco
Pork-related products
Financial services
Defense/weapons
Gambling
Music
Hotels Cinema
Adult Entertainment
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Stage 2: Financial Filters
Stage 3: Dividend Purification
Argues that part of companys total income is
derived from interest income. Hence a portionof dividend paid out to shareholders must bededucted and given out to charity
Ratio Benchmark
Total Debt/Total Assets < 33.33%Cash + Interest-bearing securities / TotalAssets
< 33.33%
Account Receivables / Total Assets < 70%
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Dividend adjustment factor is used todetermine clean dividends
Calculated as follows: (Total Earnings Interest Income) / Total Earnings
Note that Total earnings are defined as grossincome, and interest income as operating andnon-operating interest
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T f S k k
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Types of Sukuk
84
Leased-based Sukuk Sukuk Ijarah Sukuk of Freehold Existing Assets
Sukuk of Existing Assets Subject to Head Lease Sukuk of Future Tangible Assets (Mausufah FiDhimma (advance lease)
Sukuk of Existing Specified Services Sukuk of Described Future Services
Partnership-based Sukuk
Sukuk Mudaraba Sukuk Musharaka
Sukuk Wakala
T f S k k
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Types of Sukuks
85
Sale-based Sukuk
Murabaha Istisna'a
Salam
Hybrid Sukuk
Sukuk Al Istithmar
Other Types of Sukuk:
Sukuk Wakalah
I l i F d R A
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Islamic Forward Rate Agreement
An agreement between 2 parties to
exchange one payment of profit(interest) denominated in a singlecurrency for another payment of profit
(interest) denominated in the samecurrency, based on a notional principal
amount, at a single specified period. The principle used is Wa'd (unilateralpromise)
Forward Currency Contract
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87
y
A contractually binding agreement between twoparties to sell and buy two different currenciesnow, at certain price, but the delivery will be at an
agreed future time. Elements:
- Binding agreement to sell or buy
- The rate of exchange is fixed when thecontract is made. Normally, it differs fromthe rate of a spot transaction
- Delivery of the currencies will be made atan agreed future time, either a specific dateor any time between two specific dates,depending on the contract terms
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C td
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89
Contd
FCC is not allowed because it violates therule of exchange of currencies, i.e. spot
delivery during the contractual session(qabd al-badalayn fi halat al-aqd)
Alternatively, the mechanism of al-wad isused.
Comparison
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FORWARD EXCHANGECONTRACT PROMISSORY FORWARD EXCHANGE
The contract is made on thedealing date (1/4/2005)
On the dealing date (1/4/2005), a unilateralpromise is given by one party to do a contract on
3/7/2005, but the real contract will only takeplace on the value date (3/7/2005)
This agreement is binding andenforceable to both parties
Promise given (dealing date) is only binding onthe party who makes the promise
Exchange rate is fixed on thedealing date (1/4//2005)
Exchange rate is fixed on the dealing date(1/4//2005)
Delivery is made on the valuedate(3/7/2005)
The real contract and spot delivery will be madeon the value date (3/7/2005)
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