A Complete Guide on Islamic REIT: A Liquid Investments Accessible to Retail Investors

Islamic Real Estate Investment Trust (REIT) is a real estate collective investment scheme in which the tenant engages in shariah-compliant operations.

Property investing is generally one of the most profitable types of investment since capital grows faster than inflation in many major countries. On the other hand, direct property investments require a substantial initial investment, are risky, and are not liquid. As a result, while direct property investments offer significant returns in many areas, they are out of reach for most retail investors.


Development of Islamic REITs

Initially, REIT was established in the United States in 1960. The goal was to alleviate the concentration of real estate in the hands of a few rich individuals by establishing a tax-favored investment trust that allowed retail investors to participate in real estate.

Malaysia is the pioneer of the Islamic REITs, with four out of five listed Islamic REITs globally in early 2014. Al-Aqar KPJ REIT, based in Malaysia, was the world’s first Islamic REIT (Real Estate Investment Trust), launching in June 2006. The initial investment of Al-Aqar KPJ REIT was six hospitals for USD 138 million. Second, Al-Hadaharah Boustead REIT, created in February 2007, with an initial investment of USD 136 million in palm oil plantation estates. Third, AXIS REIT, which became the first conventional REIT that converted to Islamic REIT in 2008. Lastly, the fourth REIT and the largest REIT in Malaysia is KLCC REIT, with a market capitalization of USD 3.53 billion.

Overall, Islamic REITs in Malaysia represent 23.5% of the market share in the number of REIT funds. Furthermore, Singapore also launched its first Islamic REIT- the Sabana REIT in 2010 and was listed on Singapore Stock Exchange Securities Trading Limited. The Islamic REIT is growing with the following numbers of Islamic REITs from the GCC region: Kuwait, Bahrain, and Dubai.

Differences between Conventional and Islamic REITs

Conventional REITsIslamic REITs
Income from real estateNo restriction; anything legalRestricted to Shariah-compliant
usage of real estate assets
Income from other assetsNo restriction; anything legalRestricted to Shariah-compliant
investments in other assets such
as Sukuk
Business activitiesNo restriction; anything legalRestricted to Shariah-compliant
usage of real estate assets
InsuranceNo restriction; anything legalShariah-compliant insurance
FinancingNo restriction; anything legalShariah-compliant financing
Appointment of Shariah advisorsNone requiredMust appoint Shariah advisors

In above table, you can see the differences between conventional and Islamic REITs.

Why Should You Invest in REITs?

There are several reasons why REIT investment is good for you.  Here are the reasons:

  • Passive income. Click a button on the platform, purchase the share and go back to your daily life. You can receive dividend payments either every month or every three months, it depends on the REIT you invest in.
  • Liquidity. They are much more liquid than rental properties. It is because publicly traded REITs can be bought and sold just like stocks.
  • Diversification. When you invest in REITs, you can invest hundreds or even thousands of different properties across the country, which means that poor performance among one or two properties won’t affect the portfolio that much.
  • No expertise is needed. Investing in REIT, you do not have to be an expert at several different real estate markets. Instead, you can rely on the expert individuals in the company you invest in. They are real estate professionals and spend their days analyzing markets.
  • Predictable cash flow. By law, a REIT must distribute at least 90% of its taxable income to the shareholders every year in the form of dividends. Most REITs pay quarterly or monthly dividends, which means you regularly count on fairly predictable cash flow when you own REITs.

Shariah guidelines for Islamic REITs

The Malaysian Securities Commission’s guideline on Islamic REITs was the first of its kind globally, published in 2005. In particular, it emphasized the importance of evaluating the following key areas while performing Shariah-compliant REIT assessments:

  • The rental activities must consist of halal sources.
  • The rental from non-permissible activities should not exceed the benchmark of 20% of the total turnover of Islamic REITs.
  • The tenant of the acquired real estate property must not run impermissible business activities.
  • The Rental activities only allowed for the new tenants that comply with shariah business activities.
  • Instruments used in investment, deposit, financing for Islamic REITs must conform to Shariah principles.
  • A conventional insurance scheme is only permissible if the takaful scheme cannot provide the desired insurance coverage.
  • The Islamic REIT is allowed to involve in forward sales or purchase of currency for risk management purposes and is encouraged to deal with Islamic financial institutions.

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