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Islamic Real Estate Investment Trusts (i-REITs)

Islamic Capital Market

Islamic Real Estate Investment Trusts (i-REITs)

Real estate investment trust (REIT) is a collective investment scheme in real estate that combines the best features of real estate and trust fund. i-REIT is the Shariah version of the conventional REIT.

In November 2005, The Malaysian Government, through Securities Commission Malaysia (SC) issued Guidelines for Islamic Real Estate Investment Trusts , setting a new global benchmark for the development of this instrument and making Malaysia the first jurisdiction to introduce such guidelines in the industry. These guidelines provide guidance to market players on Shariah compliancy in developing and managing an i-REIT. These guidelines also serve to complement the existing Guidelines on Real Estate Investment Trusts.

What is i-REIT?

Compared to the conventional one, the income of i-REIT:

  1. Must be from Shariah permissible activities;or
  2. In case of mixed activities, must adhere to the 20% benchmark as determined by the Shariah Advisory Council (SAC) of SC.

The activities below are deemed Shariah non-permissible

  1. Financial services based on riba (interest);
  2. Gambling/gaming;
  3. Manufacture or sale of non-halal products or related products;
  4. Conventional insurance;
  5. Entertainment activities that are non-permissible according to the Shariah;
  6. Manufacture or sale of tobacco-based products or related products;
  7. Stockbroking or share trading in Shariah non-compliant securities; and
  8. Hotels and resorts.

Apart from that, a Shariah committee or Shariah advisor must also be appointed to advise the fund manager on Shariah compliancy matters.

In terms of tax treatment in Malaysia, both REIT and i-REIT receive similar tax treatment on stamp duty, real property gains tax as well as corporate tax. The regulatory framework is also similar for both with the exception that i-REIT must comply with the Shariah requirements

The general structure of an i-REIT is as follows:

<i>i</i>-REIT
  1. Investors invest in i-REIT through holding of units
  2. i-REIT acquires real estates as its pool of assets
  3. Manager manages and administers i-REIT
  4. Trustee acts as the custodian of the fund
  5. Shariah committee advises on matters pertaining to Shariah
  6. Property manager provides maintenance and management services of the real estates
  7. Tenants rent the real estates

Returns and risks on i-REIT

Generating returns and distribution from rental income as well as capital appreciation, i-REIT is a rewarding investment as it offers:

  1. Mixed portfolio of assets

    Investors are able to diversify their risk profile by participating in a range of real estate and real estate-related assets.

  2. High dividend distribution to unitholders

    To qualify for tax transparency status, an i-REIT is required to distribute 90% or more of its total income to unit holders.

  3. Stable returns

    An i-REIT is physically able to generate stable, sustainable income through rental income and capital appreciation, which can be used to continually pay regular dividends.

  4. Affordability

    i-REIT allows investors to participate in the real estate market with a smaller capital outlay as compared to the outright purchase of real estate.

  5. Inflation hedge

    The value of real estate is expected to generally increase in tandem with inflation rate.

Having said that, investors should also be aware of these risks associated with i-REIT:

  1. Returns are not guaranteed

    The total return of an i-REIT is subject to the performance of the property market. Hence, the unit price of an i-REIT may go down if its underlying properties drop in value.

  2. Loss of control over investment

    Investors will not have direct control over the management company's investment decisions like when to buy or sell certain real estates, or how they will be managed.

  3. Market factors

    i-REIT is also subject to the vagaries of market demand and supply. As such, market fluctuations, confidence in the economy and changes in the interest rates may affect i-REIT’s price.

How to invest in i-REIT?

Investors can buy and sell i-REITs that are listed on the Exchange through their stockbrokers. The four (4) i-REITs listed on Bursa Malaysia are:

*Stapled securities comprising of the units in the KLCC REIT and the shares of KLCC Property Holdings Berhad