IB 1006 Islamic REITS

1
IB 1006 Islamic REITS

• Prof. Dr. Saiful Azhar Rosly
• International Center for Education in Islamic
  Finance (INCEIF)

2
Islamic Financial System
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 Market
Deficit Sector
Surplus Sector
Takaful
Direct Financial Market
Islamic Money Market
Indirect Financial Market
Commercial Banks
Unit Trusts
CAPITAL MARKET
Islamic Bond Market
Finance Companies
Islamic Equity Market
Merchant banks
Islamic REITS
3
LIMITED RESOURCES
UNLIMITED DESIRES
ISLAMIC ECONOMICS
SCARCITY
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
BASIC ECONOMIC PROBLEMS P1 What to
produce? How much? P2 How to
produce? P3 How to reward factor
inputs? P4 How to control inflation and
unemployment? P5 How to attain
positive growth?
PROBLEM OF CHOICE
KNOWLEDGE

• REVELATION
• Quran
• Hadiths

REASON/DEDUCTION(Istiqra) SENSES/INDUCTION
(Istinbat)
4
Human Behaviour Choice Action
Based on Non-Observable Foundations (DIVINE)
Based on Observable Foundations (SCIENCE)
Fard Ayn (Obligatory knowledge)
Reason
Rukun Iman
Rukun Islam
Facts
Concept of God Din Man Society Universe Propheth
ood
IslamicWorldview
5
Primordial Stage (Alam Ruh)
The Muslim Mindset Stages of Existence from
Islamic perspective
Mothers Womb (Alam Rahim)
Dunya (World) Scarcity
Alam Barzakh (Life in the Grave)
Hereafter (Akhirah)
6
ISLAMIC REITS OBJECTIVES

• Shariah aspects Equity Objective
• - Observing the Purpose of Shariah (Maqasid
  Al-Shariah)
• - Application of Islamic Contracts
• - 20 cap on non-Shariah permissible trades
• 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

• 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

• Principle 1 Prohibition of riba
• Principle 2 Application of al-bay (trade
  and commerce)
• Principle 3 Avoidance of gharar
  (ambiguities) in contractual agreements
• Principle 4 Prohibition of maisir (gambling)
• 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
MUAMALAT (INTERACTIONS)
MAN AMONG MAN Criminal Law, family Law Laws of
Contract, etc.
GOD AND MAN Rukn Islam
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 1Prohibition of interest as
ribaNo contractual guarantee(s) on
investmentsThey say Trade is like riba
(Qalu Innamal bayu 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 2Application
ofAl-BayProfit creation with equivalent
counter-value (iwad) eg. no risk no gainrisk
iwadgain profit
14
Principle Components of iwad1.
Risk-taking(Al-Ghorm bil Ghonm)2.
Value-addition3. Liability(Al-Kharaj Bil Daman)
15
SHARIAH PRINCIPLE 3Elimination of
uncertainties/ambiguities (gharar) in contractual
agreements
16
SHARIAH PRINCIPLE 4Prohibition of Gambling
(Maisir)i.e earning via game of chance
17
Gambling

• Lotteries
• Casinos
• Insurance
• Commodity Trading
• Futures
• Options

18
MAISIR Game of Chance

• Excessive risk
• Earnings arising from mere chance (aleotary) and
  not by way of knowledge, skills and
  value-addition
• The probability of winning is very remote
• Zero-sum game
• One party wins and the other losses
• Aleotary outcome arising from pure chance alone
  
• Making bets with an expectation to win
• Bets and winnings are hugely disproportionate

19
SHARIAH PRINCIPLE 5Avoiding impure
commodities.
20
Islamic Finance Principles

• No profit can be created without risk-taking.
• Islamic financial transactions are based on valid
  contracts
• 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

• Corporate Finance
• Sukuks, Islamic Private Debt Securities, Islamic
  REITS, Islamic Unit Trusts
• Consumer Finance
• Murabahah, Ijara
• Enterprise Finance Small Medium Sized
  Enterprises
• Mudaraba, Musyarakah
• Microfinance
• 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
RIBAAL-BAY(TRADE COMMERCE)
Al-Bay
Contract of Exchange Uqud al-buyu
Contract of Profit-Sharing Uqud al-Istiraq
Al-Mudharabah (Trustee Partnership)
Contract Sale Exchange Goods for Money
Al-Shirka (General Partnership)
Contract of Sale Exchange Services for Money
Ijarah Wakalah Kafalah
Forward Sale
Spot Sale with mark-up (Al-Murabahah) Bayal-musaw
aammah Bay Wadhiah, Mutlak
Deferred Sale Bay Muajjal
Salam
Istisna
Al-Murabahah Credit sale
Bai-Bithaman Ajil

• Al-Bai-bithaman Ajil

24
Principle of Contract (Aqd) in Al-Bay
Aqad Approach
Buyer Seller
AL-BAY Trade Commerce
Object
Price
25
Pillars of Contract (AQD)

• Agents of Contract - rational
• Objective of Contract transfer of ownership
• Price stated on the spot
• Subject matter - halal
• Offer Acceptance

26
Productive Elements in Al-Bay
ghorm
Risk-Taking
AL-BAY Trade Commerce
kasb
Work Effort
Responsibility
daman
IWAD APPROACH
27
Multi-dimentional view of Al-Bay
AQAD
IWAD
Buyer Seller
RISK (al-ghorm bil ghonm)
AL-BAY
Object
EFFORT
Price
RESPONSIBILITY Al-kharaj bil daman
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Al-Bay and Its Derivatives
Buy Sell
Leasing
AL-BAY
RISK WORK RESPONSIBILITY
Partnership
Fee-Based
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Al-Bay and Its Derivatives
SUKUKS
Ijarah
Asset Financing
Murabahah
Islamic Banking
RISK WORK RESPONSIBILITY
Partnership
Enterprise Financing SMEs
Fee-Based
Wakalah, kafala
30
Industry Updates

• Islamic REIT

31
Al-Hadharah Boustead REIT
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AL-AQAR KPJ REIT - MALAYSIA
33
AXIS REIT - MALAYSIA
34
Islamic REITS Basic Issues

• Objective
• Structure
• Regulatory Regime
• General Benefits
• Investors
• Comparison with Alternative Investment
• Fees and Charges
• Performance Indicators

35
Objective of an Islamic REITS

• To provide unit holders with a stable
  distributions per unit with the potential for
  sustainable long-term growth of such
  distributions.
• How?
• 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.

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(No Transcript)
37
ISLAMIC REAL ESTATE FUNDS
Fund Manager / Distributor Name of Fund Country Size (USDm) Type Investor Advisor Description
Guidance Financial Group Guidance Fixed Income Fund USA 200 Residential 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
Shamil Bank China Realty Fund China 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.
38
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.
39
REITs Market around the WorldTop 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 US5 trillion.
• Japan ranks second with around US2 trillion,
  followed by the four major European economies.
  The German market is approximately US1.1
  trillion, with the UK just behind at
  approximately US1 trillion.
• France is close to US800 billion. Italy is
  approximately US660 billion. Canada comes in at
  just under the US400 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.
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Structure and Organization

• Islamic REITS

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TYPICAL REITS RELATIONS
Unitholders
REIT
Trustee
Management Company
Invest in authorised investment
Distribution and Possible capital gains
42
Islamic REITS

• Tripartite agreement between three parties
• The Manager
• The Trustee
• Unitholders
• Tripartite relationship is governed by a Deed
  registered with the Regulator (e.g Securities
  Commission Malaysia)

43
DEED

• A Deed is a legal instrument used to grant a
  right.
• 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-
• 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.

44
Shariah Aspects

• Islamic REITS

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SHARIAH ASPECTS LEGALITY

• The SC I-REITS Guidelines discussed four matters
  for I-REITS, viz.
• rental of real estate by I-REITS for business
  purposes with a permissibility benchmark of 20
• investment, deposit and financing for I-REITS
• takaful schemes to insure real estate and
• forward sales or purchases of currency for risk
  management.

46
ISLAMIC REITS Legality
47
20 Permissibility Benchmark

• Benchmarking is based on rental space rather than
  volumes of sales the non-permissible business can
  generate.
• 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.

48
Islamic Benchmark Space/Sales ratio and
Space/Sales.
20
sales
200m
non-halal
80
sales
halal
100m
49
Islamic Contracts in REITS WAKALAH Model

• Unitholders and Management Company(MC)
• Wakalah Fee-based
• Unitholders appoint MC to invest funds in
  properties.
• MC earns fees.
• 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.
• The Wakalah principles are incorporated in the
  Deed of Islamic Reits.

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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 each
  Properties and their growth via enhancement of
  properties
• Raising the profile of Properties
• Acquiring property assets with good yield and
  growth potential for both locally and abroad that
  meet the Managers investment criteria
• Employing optimum capital structure.

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Wakalah Fees

• Annual Management Fee
• Annual Maintenance and Management Fee
• Annual Trustee Fee
• Shariah Committee Members Fee
• Fund Expenses

52
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 by
  Islamic Reits management companies.

53
Wakalah Model.

• Management Company (ie Wakil) does not bear
  potential of loss (ie. risk) of investment.
• Management Company is entrusted to invest the
  REIT Fund 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.

54
Risk-Return Principle

• Juristic Principle (Al-Qawaid Fiqiah) -
• Al-Ghorm Bil Ghonm
• No Pain No Gain

55
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 (US10.13m) Approx. 2.96 (US0.84m)
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
56
RISKS faced by Unitholders

• Investment by Unitholders is based on Risk-Return
  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.

57
Types of Risk in Islamic 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

58
Alternative to REIT Wakalah Model

• 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
  of the Deed.

59
Typical REIT structure
Unitholders
Distributions
Investment in REIT
REIT
Trustee (holds properties for the Benefit of
unitholders)
Acts on behalf of unitholders
Management fee
REIT manager
Management services
Trustees fees
Net property income
Purchase assets
Property assets
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Al-Aqar KPJ Islamic Reits

• Oversubscribed by 4.13 times
• Islamic Reits drew 5,115 non-Muslim and
  non-Bumiputra investors.
• Open up at RM0.99, a premium of 4.2, or 4 sen,
  over its retail offer price of RM0.95
• 30,810 units done at the opening bell
• Closed at 3.5 sen up at RM0.985
• Al-Aqar REIT raised RM177.25 million

61
Al-Aqar KPJ REIT Structure - MALAYSIA
Unitholders
Shariah Committee Members
Holding of units
Advise the Al-Aqar KPJ REIT on Shariah-related
matters
Distributions
Al-Aqar KPJ REIT
Acts on behalf of unitholders
Management fees
Trustee (Amanah Raya Berhad)
Manager (Damansara REIT Managers Sdn. Bhd.)
Trustees fees
Management services
Ownership of properties
Net property income
Maintenance and management fees
Maintenance manager for the properties (Healthcar
e Technical Services Sdn. Bhd.)
Rental payments
Hospital tenants
REIT properties, comprising 6 hospitals
Maintenance and management services
Rent
Note where KPJ will indirectly own 47.06 of
the units
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Al-Aqar KPJ REIT

• First Islamic Real Estate Investment Trust
  (I-REIT)
• Comprises of six hospitals building worth
  RM461.24m or USD131.9m
• Manager Damansara REIT Managers Pte.
• Lead adviser AmMerchant Bank Pte.
• Trustee Amanah Raya Pte.
• Units holdings
• KPJ 160 million units
• Institutional investors 165 million units
• Retail investors 15 million units

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Al-Aqar KPJ 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
  Islamic financing facility
• Printing, posting, general and operating
  expenses for the administration of the fund.

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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 with
  AmMerchant Bank appointed as the advisor,
  managing underwriter and sole placement agent.
• 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
  US0.27 (RM1) per unit and 15 million units to
  the public at US0.26 (RM0.95) each. About US49
  million (RM180 million) was expected to be raised
  from the IPO.

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Al-Hadharah Boustead REIT
66
Al-HADHARAH BOUSTED REITS
Unitholders
Letting of Asset for rental To be paid by tenants
Boustead Properties And Other Vendors
Sale of Assets
Distribution in the form of Dividends and other
distributions
Investment in REITS
Al-Hadharah Boustead
Acts on behalf of unitholders
Management fees
CIMB Trustee
Boustead REIT Manager
Trustees fees
Management services
Advise the Al-Hadharah REIT on Shariah-related
matters
Rental Income
Ownership of properties (Vested in Trustees)
IBFIM Shariah Advisor
Monitoring the Plantation Assets
Plantation Adviser
Plantation Asets
67
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.

68
CONTRACTS SPA Ijarah

• 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

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CONTRACTS

• 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.

70
Islamic REITS Structure

• The FUND Islamic REITS
• The Unit Holder
• Manager
• The Trustee
• Shariah Committee/Shariah Adviser
• The Property Assets
• Authorized Investments

71
Regulatory Framework

• Islamic REITS

72
REITS DEFINED

• 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.

73
REITS DEFINED

• Invests at least 50 of its total assets in real
  estates
• Trusts passive income vehicle
• Distributes dividends to unit-holders
• Governed by a constitution
• Cannot reinvest income as retained earnings
• Dividends are tax deductible

74
REITS DEFINED

• Has a management company
• Has a trustee company
• Employs a property manager

75
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 after-tax-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 lt10 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 gt50 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
76
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
Provisions to Qualify as REITs
No more than 50 of shares can be held by 5 or
fewer
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
77
  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 shariah-
    compliant
78
OPERATIONAL ASPECTS

• Islamic REITS

79
Performance Indicators

• Management Expense Ratio (MER)
• Total Returns
• Average Annual Returns
• Distribution Yield
• Net Asset Value (NAV)

80
Authorized Investments

• At least 75 of al-aqar KPJ REIT total assets
  shall be investment in Shariah-compliant real
  estate, single purpose companies which are
  Shariah compliant, real-estate related assets or
  liquid assets which are Shariah compliant
• 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)

81
Performance Indicators

• Management Expense Ratio (MER)
• Total Returns
• Average Annual Returns
• Distribution Yield
• Net Asset Value

82
Valuation of REITshow are REIT Unit priced
REITS in Japan, US and Singapore are trading at a
premium of 70 - 230 bps compared to the
government bonds
1.53
1.3
Japan 10 yr Gov bond
Premium
200bps
of 230 bps
3.6
Japan REITs
4.54
4.2
US 10 yr Gov bond
Premium
36bps
of 70 bps
US REIT
4.9
3.27
3.2
Singapore 10 yr Gov bond
Premium
of 133bps
of 140
bps
4.6
Singapore REITs
5.20
5.4
Australian 10 yr Gov bond
Premium
of 170
of 200bps
Australian LPT
bps
7.1
4.11
3.9
Malaysian 10 yr Gov bond
Premium
of 320bps
of 340
bps
7.3
Average Malaysian REIT Yield
Yield ()
0
1
2
3
4
5
6
7
8
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
83
Investing in REITswhy are REITs attractive to
investors?
Income stability

• REITs is typically distribute gt90 of net cash
  flow
• Income is underpinned by legally enforceable
  lease agreements
• Low leverage
• Little or no development risk

Capital stability growth

• 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

• 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

Quality real estate

• 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

Liquidity valuation
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Investing in REITs. (contd)
Diversification

• Diversification by types of properties, tenants
  and locations

Expert Management

• Benefit from experienced, professional real
  estate managers
• Additional scrutiny by the trustee

Defensive

• 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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Types of investment Risk level Expected return level
Cash Low High Low High
Fixed deposit Low High Low High
Bonds Low High Low High
REITs Low High Low High
Direct investment in real estate Low High Low High
Investment in shares Low High Low High
Financial derivative products Low High Low High
Al-Ghorm bil Ghonm
No Reward Without Risk
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REIT developments in other Asian markets
India
Philippines

• 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)
• The Association of Mutual Funds of India (AMFI)
  issued a report to SEBI regarding the launch of
  real estate investment schemes in 2002
• Regulators have been cautious on approving REMFs
  due to fears or them causing excess speculation
  in the real estate market

• 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

• While REITs have not been established in
  Indonesia, the Indonesian Bank Restructuring
  Agency (IRBA) has been considering setting REITs
  up
• Property companies currently provide investors
  with exposure to listed real estate

China
Thailand

• PRC Trust Laws, introduced in October 2001,
  provide guidance on recognition of trusts in
  China
• 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
• Some private syndicated deals have occurred in
  China and there is an expectation of the market
  developing further
• As Chinese property companies are launched,
  modern REIT structures are likely develop in
  tandem on an accelerated basis

• 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)
• 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
• Lack of available assets remains a limitation.
  Underlying residential market has been strong and
  has been pushing property development stocks
  higher

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Wassalam

• Thank You