Islamic REITs picking up momentum amid shaky market environment

By Arno MaierbruggerGulf Times Correspondent BangkokAnother upcoming placement of a Shariah-compliant Real Estate Investment Trust, or Islamic REIT, in Southeast Asia amid a shaky financial market environment shows that the demand for this kind of investment vehicle remains high and the formation of similar REITs in and outside their main playing ground Malaysia will likely pick up momentum.Johor Corp Bhd, the investment arm of Johor state, the southernmost state on the Malaysian peninsula bordering Singapore, will list its second REIT, named Al-Salam REIT, on the stock exchange in Kuala Lumpur on September 29, the company announced last week. The initial public offering is expected to bring in close to $60mn, with 98% of the units to be sold to institutional investors. Al-Salam REIT’s portfolio will comprise Shariah-compliant investments in commercial, retail, office and industrial assets located mainly in Johor Bahru, Malaysia’s third largest city. This IPO will bring the current number of Islamic REITS in Malaysia to four, the highest number per nation globally. REITs are securities that invest in real estate and often trade on major exchanges like a stock. Unit holders are entitled to regular income distributions with yields typically ranging from 3% to 9% per annum. There are conventional REITs and Islamic REITs, whereby the latter’s steady rental income has become popular with Islamic pension funds amid a general shortage of Shariah-compliant assets.“Al-Salam REIT is targeted at investors or fund managers with long-term investment objectives who seek regular stable income distribution and long-term capital appreciation,” said Johor Corp’s president Kamaruzzaman Abu Kassim, adding that “therefore we expect lots of interest from local Islamic state and pension funds.”Malaysia was the first country to promote Islamic investment instruments focused on property, with the Malaysian security commission issuing the world’s first guideline for Islamic REITs as early as in 2005. Since then, three Islamic REITs hit the market, Axis REIT, Al-Aqar Healthcare REIT and KLCC REIT.Axis REIT was Malaysia’s first and largest Islamic REIT, launched in June 2005. Today, its portfolio of properties comprises commercial offices, office industrial buildings, warehouse and logistics centres, light industrial buildings and warehouse retail facilities located in Klang Valley, an industrial suburban area west of Kuala Lumpur.Al-Aqar Healthcare REIT, formerly Al-Aqar KPJ REIT, was launched in 2006 as the world’s first-ever Islamic REIT focused on healthcare and is today majority-owned by Johor Corp. Its portfolio comprises a number of hospitals tenanted by one of Malaysia’s largest healthcare providers, KPJ Group, which runs specialist hospitals conducting permissible activities according to Shariah.The latest addition was KLCC REIT, listed in May 2013. This REIT is notable because its property holdings include the Petronas Twin Towers in Kuala Lumpur, Malaysia’s tallest and most iconic building. It also owns two other commercial buildings in Kuala Lumpur City Centre, popularly known as KLCC, the central business district of Malaysia’s capital.The first publicly traded non-Malaysian Islamic REIT became Sabana Shariah Compliant Industrial REIT when it was listed on the Singapore stock exchange in 2010. Since then, it grew to the world’s largest listed Shariah-compliant REIT by assets, holding a current portfolio of 23 industrial buildings in Singapore focusing on high-tech, chemical and general warehousing and logistics. In principle, Shariah-compliant REITs are required to limit their exposure to activities that are non-permissible under Islamic law. Rental income from non-permissible activities such as gaming, entertainment venues, financial services that pay interest, hotels and resorts that serve alcohol, as well as properties where tobacco is sold, cannot exceed 20% of a Shariah-compliant REIT’s total income, at least per Malaysian guidelines.Sabana REIT emphasises that it allocates 100% of its non-Shariah income, if any, to charitable causes on a quarterly basis. “This makes the dividend to unit holders of Sabana REIT 100% Shariah-compliant,” says Bobby Tay, the REIT’s Chief Strategy Officer.The largest Islamic REIT in the Gulf region became Emirates REIT – launched also in 2010 by Dubai Islamic Bank but listed only in 2014 – which mainly invests in office buildings, schools and retail properties.