Demand for shariah compliant properties
The Islamic Capital Market (ICM) has come a long way since its beginning in the 1960s, stemming from the response to tremendous oil wealth, and is today one of the fastest growing segments of the global financial industry with assets estimated to be more than USD2 trillion.
The ICM is where market transactions are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam. ICM is a component of the overall capital market and it plays an important role in generating economic growth for the country. In Malaysia, the ICM functions as a parallel market to the conventional capital market, and play a significant complementary role to Islamic banking and Takaful in broadening and deepening the Islamic financial markets.
During the 2008 global financial crisis, we witnessed Islamic Banks outperforming their conventional counterparts. Due to their ethical banking practices, they were not exposed to sub-prime and toxic assets.
Malaysia leads the world in the development of Islamic Finance and a vibrant ICM. It has the government’s commitment to make Malaysia a global Islamic financial hub by establishing a comprehensive regulatory, legal, corporate governance & Shariah framework. Islamic Finance is seen
now as more than just an alternative to conventional finance,
and its appeal to all Malaysians is becoming apparent. Today, Malaysia’s Islamic capital market represents 58% of the total Malaysian capital market.Source: KFH Research database
Why is there a big demand for Shariah-compliant properties?
The demand for Shariah-compliant properties stems from the success of Islamic finance and the establishment of Shariah Mutual and Wealth Management Funds, and Sovereign Wealth Funds in Malaysia like PNB and Lembaga Tabung Haji (The Pilgrims Fund). In addition there are many Private Fund Managers that have established Shariah Funds to cater to the growing demand for ethical investments.
The property sector still remains a very popular asset for these funds to invest in and hence, has given rise to the growing demand for Shariah compliant properties to be made available to the Islamic Funds Management and Takaful Insurance industries to invest in.
What are Shariah compliant properties?
Properties are a secular asset as they comprise largely of bricks and mortar. So one may ask what makes one property Shariah-compliant and the other not.
The answer lies on the usage of the space within the property. The activities conducted within the property need to be permissible under the Shariah law and that activity is largely determined by the business activity of the tenant.
The list of activities that are classified as non-permissible are:
- financial services based on riba (interest);
- manufacture or sale of non-halal products or related products;
- conventional insurance;
- entertainment activities that are non-permissible according to the Shariah;
- manufacture or sale of tobacco-based products or related products;
- stockbroking or share trading in Shariah non-compliant securities; and
- hotels and resorts.
Unfortunately, most of the iconic towers in Kuala Lumpur are occupied by conventional banks or conventional insurance companies which have disqualified them as Shariah compliant properties.
However, there are several types of properties that do fit very well into the Shariah-compliant space. Good examples include hospitals, industrial, and logistic warehouses that does not produce or handle non-halal products. Other examples include Oil & Gas Companies’ Headquarters, Hypermarkets, Islamic Banking Headquarters, Takaful Companies, Automotive service centres and showrooms, IT Products and Data Centres.
Certain level of non-permissible activities within the Shariah compliant property may be allowable. The Securities Commission of Malaysia’s Guidelines for Islamic Real Estate Investment Trust allows a 20% benchmark of non-tolerance level within the portfolio or property (if it is a single property). This provides certain level of flexibility to the property owner when working towards ensuring the property is Shariah compliant.
Islamic REITs offer the best exposure to Shariah-compliant properties
Islamic Real Estate Investment Trust (Islamic REIT) is a collective investment scheme that invests and owns income producing Shariah compliant properties. Listed Islamic REITs are traded on our local Bourse and provide Unitholders with consistent returns in the form of income distributions similar to owning physical properties.
Comparing against direct investment in Shariah-compliant property, an Islamic REIT offers the following key advantages:
It is professionally run and managed
An Islamic REIT is run by an Islamic Fund Management Company (The REIT Manager) which is licensed by the Securities Commission under the Capital Market Services Act. Strict compliance to the Securities Commission and Bursa Securities’s regulations is mandatory. In the case of an Islamic REIT, the Manager has to engage a Shariah advisor to ensure compliance.
Investing in an Islamic REIT will be your answer to owning Shariah-complaint property without the hassle of attending to tenants’ demands or managing the property. Just let the professional REIT Manager manage tenant expectations.
A small start-up investment is all that is required
Any physical real estate investment requires a big initial investment outlay. However with an Islamic REIT, investors can purchase a partial ownership of a big real estate portfolio and enjoy the income produced from it as well as its appreciation in value. A minimum investment of 100 units is allowed.
It’s easy to buy and sell Islamic REIT units
All listed Islamic REIT units are listed on Bursa Securities and traded like normal equity stocks. It is priced daily and the prices are transparent. Unlike buying a property which may take more than six months to complete and involves agency commission, the buying and selling of these units can be done almost instantly and is cheaper to transact.
Frequency of Islamic REIT dividend payment
Most of the Islamic REITs pay a quarterly dividend which is as good as collecting monthly rents from tenants from a directly owned property investment.
There is a distinct tax advantage
The tax advantage is the one of the key attractions of investing in Islamic REITs. For a REIT that distributes at least 90 percent of its total yearly income to unit holders, the REIT itself is eligible for exemption from the corporate tax rate of 25% under Section 61A of the Income Tax Act 1967 for that year of assessment. However, the withholding tax would be applicable on the REIT’s dividends that have been exempted at the REIT level, the schedule of which is appended below:
Islamic REITs sometimes trade assets like that of a normal investor
Some Islamic REITs behave like the individual property investor and disposes of an asset when the time and price is right. Axis-REIT is one such example. In the last ten years, it has completed three asset disposals, the gains of which were fully distributed back to investors as special tax free dividends much to the delight of the unitholders.
The Market is shifting towards more to Shariah Compliant investments
Prime Minister Najib Razak announced on the 23rd April 2015 that the Employees Provident Fund (EPF), Malaysia’s RM600 billion state pension fund, will offer an Islamic investment option to its members by 2017, which would create the world’s largest Shariah-compliant fund of its kind. The EPF already invests about a third of its portfolio in stocks and bonds that complies with Islamic principles.
EPF, that has consistently outperformed its guaranteed minimum dividend of 2.5 percent annually, hired consultants last year to study the feasibility of a state-backed pension fund focusing entirely on Shariah-compliant investments.
The move could funnel billions of dollars into Shariah-compliant asset managers in Malaysia, which will be a boon for the country’s Islamic finance sector. The government envisions the industry accounting for 40 percent of the country’s total banking assets by 2020, compared with latest figures of around 23 percent released last year.
This will create the largest Shariah fund of its kind in the world, and will further strengthen Malaysia’s position as a leading Islamic financial centre.
In 2012, the government launched a private retirement scheme (PRS), which included Islamic options. As of December, they represented 29 percent of total PRS assets under management.
Khazanah Nasional, Malaysia’s sovereign wealth fund, recently announced that they will add to the government efforts to develop the ICM further by issuing a 1 billion ringgit socially responsible Islamic bond.
All these moves will all go to further cement the growing appeal for Shariah-Compliant properties in the markets, as these funds look for yield within the Islamic space.
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