Islamic Real Estate Investment Trust

Discussion Flow

Presented By

Saif Ahmed lari

ISLAMIC REAL ESTATE INVESTMENT TRUST Discussion Flow Backround on REITs REITs is an investment vehicle that proposes to invest at least 50 % of its total assets in real estate

It can be through direct ownership or through a single purpose company whose principle asset comprises of real asset.

Reits first stated in US in 1960

Reits now operates in 29 countries

Cont.. More than US $700,000 Million Market globally 72% of Investment in the REITS are located in U.S. REITs are trusts which provide investors with an investment vehicle in real estates. REIT is a vehicle that owns and operates income producing real estates.

Islamic Reits

Islamic REIT is a collective investment scheme in real estate whose tenants operate permissible activities that are in line with Sharia principles. Non-permissible activities The activities which are not Shariah compliant:Financial services based on interest. Gambling Manufacture/sale on non-halal products (intoxicants, pork, etc)Conventional insurance (due to interest)Entertainment activities not in line with Sharia Stock broking and trading in conventional securities Hotels and resorts (with bars and pubs)

Comparison between REITs and IREITs Feature

Conventional REITs

Islamic REITs

Shariah commite / advisor

There is no necessity for any shariah committee / advisor

IREITs should assign a shariah committee to certify conformity with shariah conditions

Permissibility of activities perform by tenants

No constraint

Only allowable activities approved

Insurance for properties

Conventional insurance with insurance companies as permitted by trustee

The manager has to be concern abaout the availability of Islamic insurance before going to conventional insurance

financing

No limitations

Financing should be shariah compliant

Analysis of I-REITS from Shariah Point of View Shariah committee (SC) or advisory (SCA) is responsible for overlooking the functions of Islamic REITs so that it complies with all of Shariah principles including investment, deposit and financing decision for Islamic REITs, acquisition and disposal of real estate and rental earnings and activities. SC is also required with the supervising and ensuring of all funds to be managed and administered in accordance to Shariah principles decreed and outlined by the Securities Commission.

Analysis of I-REITS from Shariah Point of View Main features of Shariah-compliant REIT I.Rental activities that are classified as non-permissible Financial services based on interest. Gambling Manufacture/sale on non-halal products Conventional insurance Entertainment activities not in line with Shariah Stock broking and trading in conventional securities Hotels and resorts

Nature of all non-permissible businesses is that it is highly profitable. casino & lottery outlets game of chance always favor the operator liquor stores interest-bearing banks

Analysis of I-REITS from Shariah Point of View Rental from a Tenant who carries out Mixed Activities: - Activities are permitted by Shariah but there is a small extent of non-permissible or prohibited elements. SCA requires that the renewal from non-permissible activities should not exceed 20% of the total turnover of I-REIT

How do we calculate the ratio of non-permissible activities? The techniques used by SCA comprise the utilization of space, hours of service, and other methods that are considered appropriate by the shariah advisors by their own ijtihad.

Islamic Benchmark Calculated by space and sales: Analysis of I-REITS from Shariah Point of View SCA is not allowed to acquire real estate wherein all tenants run non-permissible business actions. This holds even where the percentage of rental from the said property is beneath the agreeable level of 20% of the total turnover of IREITS. In the case of rental out a new tenant, the benchmark that is used to make specific in case of the mixed rental income cannot be applied because the exact rental from it is not known yet.

Analysis of I-REITS from Shariah Point of View If the new tenant engages in the business activities are consider non permissible, fund manger is not allowed to involve in such activates. Obviously manager of I-REIT must make sure that all activities of deposit, investment, and financing are in accordance with the shariah. The guideline also requires that an I-REIT must use Takaful schemes to insure its real estate. However, I-REIT may use the conventional schemes is they are unable to be covered by takaful schemes.

Analysis of I-REITS from Shariah Point of View I-REIT is permitted to participate in forwards sale or purchase of currency for risk management. I-REIT is convinced to deal with Islamic Financial Institution then it will be appreciative by the concept of wad . If the I-REIT deal with conventional financial institution, it allowed to take part in conventional forwards sale or purchase of currency

Practical cases of Islamic REITs in Singapore Sabana Shariah Compliant REITs

Only legal framework applicable for conventional and Islamic REITs Shariah framework is to be determined by respective Shariah Board of Islamic REITs Continuous rental : Non permissible activities