Shari'ah compliant REITs are real estate investment trusts that have committed towards partaking in activities that are deemed to be acceptable according to principles of Islamic jurisprudence.
These include refraining from taking in tenants that are not seen to be aligned with these values such as alcoholic beverages dealers, karaoke lounges, wine cellars and gambling premises.
An example of a Shari'ah compliant REIT was Sabana REIT, which is listed on the Singapore Exchange (SGX). (Updated on 22 July 2021: Sabana REIT has decided to drop its adherence to Shari'ah principles).
Popular property types within Shari'ah compliant REITs include industrial properties such as factories and warehouses, and healthcare properties such as hospitals and nursing homes.
Properties like these generally will not have issues qualifying for Shari'ah compliance.
Shari'ah compliant REITs typically refrain hospitality, retail, and entertainment-oriented properties such as hotels and serviced residences as the probability of it qualifying for Shari'ah compliance may be lower.
Shari'ah compliant REITs have largely been established to satiate the demand for investment products, particularly by investors from the Middle East, for securitised real estate investments products that comply with the tenets of their faith.
Besides individual investors, there is also an increasing number of institutional investors, such as boards of Islamic Finance products, who will be looking towards Shari'ah compliant REITs as a means of diversifying their portfolio into properties while still complying with the requirements of an Islamic fund.
There are several Shari'ah compliance standards that a REIT intending to be Shari'ah Compliant may adhere to. The more popular standards include those set by the Gulf Coorpration Council (GCC) or that of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
Most of these standards provide a certain level of allowance towards tenancy activities that are not seen to be aligned to Islamic principles. For example the GCC standard provides a 5% allowance threshold.
This means that a REIT will still be certified as a Shari'ah compliant REIT as long as the non-permissible activities do not contribute more that 5 percent of the portfolio's gross revenue.