What Is i-REIT?
Real estate investment trusts (REITs) are investment schemes that work as a vehicle that raises money from many investors that combine the best features of real estate and trust funds.
While, i-REIT or formerly known as Islamic real investment trust is the Shari’ah version of the conventional REIT. In fact, Malaysia was the pioneer in the world to introduce i-REIT in 21 November 2005.
Securities Commission of Malaysia (SC) as main regulator, has set up various guidelines to the market which consistently increase year to year. The i-REIT are required to establish a Shari’ah committee, which will then clarify Shari’ah guidelines on the investment activities allowed to be undertaken. The Shari’ah principles related to Islamic REITs are following below:
i. prohibition of ‘riba’
ii. avoidance of uncertainty (gharar)
iii. prohibition of gambling
iv. disengagement from the production of an impure commodity
Kind Of Criteria Eligible in i-REIT?
Unethical business activities and practices are screened based on a set of the sector and financial guidelines permissible of not more than 20% of the total firm income. This includes some business activities in conventional financial services and investments in low income firms, conventional fixed income instruments such as bonds, interest based instruments, accounts and derivatives, as well as short selling. Several liquidity thresholds account receivables, cash, and short-term investments, interest income are commonly used in financial ratio screens.
Tax Advantage
In terms of tax treatment in Malaysia, both REITs and i-REIT receive similar tax treatment as stamp duty, property gains tax and also corporate tax. The regulatory framework is also similar for both with the exception that the i-REIT must comply with Shari’ah compliance.
Four i-REIT And Their Market Capital In Malaysia
1. Al-’Aqar Healthcare REIT
Malaysia's first Islamic REIT (Al-'Aqar Healthcare REIT) was established by Johor Corporation on June 2006. This REIT was initially invested in six hospitals and was also listed on Bursa Malaysia in August 2006. Thus has become a milestone as the first Islamic REIT in the world and also the first healthcare REIT in Asia. As of December 2019, the asset size of Al-'Aqar REIT amounted to RM1.66 million with a market capitalization of RM971.5 mn. According to Al-’Aqar REIT (2020), market capitalization decreased to RM964.1mn. However, its asset size also experienced a slightly decrease to RM1.64mn.
2. Al-Hadharah Boustead REIT
Al-Hadharah Boustead REIT became the second Islamic REIT was introduced the following year on February 2007. This REIT invests in plantation estates and mills and its valued at RM611.1mn. In February 2014, Al-Hadharah Boustead REIT was privately made by its parent company and removed from the Bursa Malaysia stock exchange, making it the first REIT in the Malaysia to be privatized.
3. Axis REIT
In December 2008, Axis REIT, which was initially established as a conventional REIT in 2005, however restructured their business model according to Islamic REIT guidelines and recategorized as an Islamic REIT, making the first Islamic industrial REIT in the world. As of December 2019, Axis REIT’s asset size was valued at RM3.085bn with a market capitalization of RM2.54bn. In 2020, the asset size and market capitalization of Axis REIT both increased to RM3.364bn and RM2.92bn, respectively.
4. Al-Salam REIT
On September 2015, Johor Corporation launched their second REIT, Al-Salam REIT. The REIT is medium in size and has a diverse portfolio including commercial, retail, office and industrial assets. As of 31 December 2019, the REIT’s asset size stood at RM1.246m with a market capitalization of RM4.69m. In 2020, its total asset value increased to RM1.249m. However, the market capitalization dropped slightly to RM3.19m.
With the listing of Al-Salam REIT in Bursa Stock Exchange, Malaysia now has four Islamic REITs. This will provide more investment opportunities for other investors interested in real estate investment to invest in prime places and increase their ability to participate in the wealth -generating real estate industry.
I-REIT Return and Risks
I-REIT investors will receive an expected return from rental income (dividends) and capital increases as well as capital gains due to the holding of real estate assets over the investment period. Through i-REIT, investors can tap into a larger type of Shari’ah-compliant commercial properties such as residential, commercial, and retail properties. I-REIT helps increase regional and international investment flows by attracting global Islamic as it offers:
i. Mixed portfolio of assets
- Investors are able to diversify their investment portfolios in Shari’ah-compliant in a range of real estate and real estate-related assets.
i. Diversification
- Price does not move along with the stock market price and other subsector markets. I-REIT are able to generate incredible profits for its investors through dividend
distribution.
ii. Inflation hedge
- I-REIT have potential as an alternative investment that can be used as a hedge
inflation and during GFCs.
Although there are many returns that investors will receive but there are also risks that investors should be aware when associated in i-REIT:
i. Guarantee of returns
- Even though an investment in i-REITs promises a dividend that is consistent, but the actual return received by the investor is dependent on the performance of the property market.
ii. Management aspects
- Investment is fully managed by the management company, therefore investors have no say and are not involved in any decision-making regarding the property in
question.
iii. Market factors
- I-REITs are also subject to variations in market demand and supply. Therefore, market flunctuation, confidence in the economy and interest rate changes can affect the price of the market.
Do visit our resources section to get i-REIT infographic