Islamic Markets
Shariah-compliant 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 March 2018, The Securities Commission Malaysia (SC) issued new Guidelines on Listed Real Estate Investment Trusts (REITs) pursuant to section 377 of the Capital Markets and Services Act 2007 (CMSA), which set out the requirements for a proposal in relation to the listing and quotation of units of a conventional or Islamic real estate investment trust (REIT) on the Main Market of Bursa Securities, which may include the establishment of a conventional or Islamic REIT in Malaysia and Issue and offering of units of such REIT.
In addition to complying with above guidelines, any proposal in relation to the listing and quotation of units of an Islamic REIT on the Main Market of Bursa Securities and conversion to an Islamic REIT must also comply with the Guidelines on Islamic Capital Market Products and Services (ICMPS Guidelines) issued by the SC in November 2022, which is the central source of reference on all the various offerings of Islamic Capital Market (ICM) products and services for sophisticated and retail investors.
What is i-REIT?
Compared to the conventional one, the income of i-REIT:
- Must be from Shariah-Compliant Rental; or
- In case of mixed activities, must adhere to the 20% benchmark as determined by the Shariah Advisory Council (SAC) of the SC.
In addition to above, by and after the end of the 10th financial year post listing or establishment, i-REIT must ensure:
- The income from Shariah Non-compliant Rental must reduce from 20% percentage threshold to less than 5%;
- May acquire new real estate provided that the percentage of the Shariah Non-Compliant Rental after such acquisition is less than the 5% threshold; and
- Must not acquire new real estate where all tenants carry out fully Shariah non-compliant activities, even if the percentage of the Shariah Non-Compliant Rental after such acquisition is less than the 20% threshold or less than the 5% threshold, whichever applicable.
In the event that an i-REIT fails to comply with above guidelines, the excess amount of the Shariah Non-Complian Rental must be channelled to baitulmal or charitable bodies as advised by the Shariah adviser.
The activities below are deemed Shariah non-permissible
- Conventional banking and lending;
- Conventional insurance;
- Gambling;
- Liquor and liquor-related activities;
- Pork and pork-related activities;
- Non-halal food and beverages;
- Tobacco and tobacco-related activities;
- Stockbroking or share trading in Shariah non-compliant securities;
- Shariah non-compliant entertainment; and
- Other activities deemed non-compliant according to Shariah principles as determined by the SAC of the SC.
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:
- Investors invest in i-REIT through holding of units
- i-REIT acquires real estates as its pool of assets
- Manager manages and administers i-REIT
- Trustee acts as the custodian of the fund
- Shariah committee advises on matters pertaining to Shariah
- Property manager provides maintenance and management services of the real estates
- 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:
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.
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.
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.
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.
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:
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.
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.
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 five (5) 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