Perhaps you have been admiring the performance of Shari’ah Compliant REITs and been wondering why they have attracted so much attention from institutional investors. Or perhaps you have at one time considered investing in a Shari’ah Compliant REIT but a lack of understanding of the product has put you off from getting vested.
|Shari'ah Compliant REITs may include properties such as technology parks such as the above, a property under the Sabana Shari'ah Compliant REIT portfolio.|
Either way, this short article aims to address the most common vexations that investors have with regards to this very niche class of securitized real estate investment known as the Shari’ah Compliant REIT.
What Are Shari’ah Compliant REITs and Islamic REITs?
Don’t let the names confuse you. Depending on your locality, Shari’ah Complaint REITs may also be known as Islamic REITs but they basically mean the same thing. Shari’ah Compliant REITs are Real Estate Investment Trusts that have taken a certain level of commitment towards partaking in activities that are deemed to be acceptable according to principles of Islamic jurisprudence. This generally includes refraining from tenancy activities with businesses that handle alcoholic beverages, gambling activities and other activities considered to be not aligned with the values of Islam such as brothels and clubs.
Besides adhering to regulatory requirements imposed by the bourse in which they list, Shari’ah Compliant REITs will also need to adhere to audits that will be conducted on them by certifying bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) or independent Shari’ah surveyors to certify that they are indeed Shari’ah compliant.
For the sake of brevity, we will refer to them in this article by its more commonly used term – Shari’ah Complaint REIT. Examples of prominent Shari’ah Complaint REITs in this region today include Sabana Shari’ah Compliant REIT (Singapore), Al-Aqar Healthcare REIT (Malaysia) and Al-Hadharah Boustead REIT (Malaysia).
Myth 1: Shari’ah Compliant REITs Have Limited Earning Potential Due to Islamic Restrictions.
On the contrary, Shari’ah Compliant REITs have ample track record of giving reliable dividends even during times of economic slowdown. For example during the first five months of 2013, Sabana Shari’ah Compliant REIT topped the table by beating 21 other REITs listed on the Singapore Exchange when ranked according to 12-month historical dividend distribution yields. Institutional investors such as the Malaysian-government backed Pilgrims Board Fund have also increasingly taken on more units in Shari’ah Compliant REITs such as the Al-Aqar REIT.
But why is this so?
Shari’ah Compliant REITs have mostly resorted to industrial properties and healthcare properties as the bread and butter of their respective portfolios. This is due to the fact that tenancy activities within these two clusters are at the least likely to come afoul of Islamic jurisprudence principles as compared to a retail or hotel premises where alcoholic beverages are aplenty. It so happens that properties within these the industrial and healthcare sectors have also historically provided the most reliable yield vis-a-vis properties in sectors such as retail or hospitality. Hence it can be deduced that the stable nature of Shari’ah Compliant REITs is largely derived from the intrinsic nature of the properties that it invests in.
Myth 2: Shari’ah Compliant REITs absolutely will NOT take in tenants that handle alcoholic beverages.
This will mostly depend on the standard or model of Shari’ah compliance that the REIT has decided to take on. Most Shari’ah Compliant standards will have a certain level of tolerance towards non-permissible activities. For example Sabana REIT subscribes to the Gulf Coorperation Council (GCC) compliant standard which has a 5 percent tolerant level towards activities that are deemed to be not acceptable to Islam. This means that REITs that subscribe to this Shari’ah Compliant model may have a certain number of tenants who engage in non-permissible activities, such as wine storage, as long as it does not exceed 5 percent of the total gross revenue derived.
Other certifying bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) may have a different model or tolerance level than the GCC before conferring a REIT the status of Shari’ah Compliant.
Myth 3: Only Muslims can partake in Shari’ah Compliant REITs.
Investors of all religious inclinations can partake in this investment vehicle. Shari’ah Compliant REITs have been established to ride on the growing demand, especially from investors in the Middle East, for investments that are aligned to their belief systems. But it has not been designed to exclude investors of any other faith.
In substance, Shari’ah Compliant REITs are no different from ethically-coded investment classes, such as environmentally friendly or fair-trade investments, in that the assets follow a certain moral code. But other than that it is not steeped in any peripheral dogma or exclusivity clauses.
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