Concept of REITs and ISLAMIC REITs April 25

Concept of REITs and ISLAMIC REITs April 25, 2012 Avari Towers, Karachi Al – Huda Trainings Ch. Hamad Rasool Bhullar

REITs – the Concept REITs are unique Real Estate Investment Trusts as the name suggests, these are trusts which provide investors with an investment vehicle in landed properties A REIT has been defined as “a vehicle which mobilizes funds from the unit holders comprising individuals and companies for investment in real estate”. These REITs acquire, develop, manage, lease and sell the real estate properties to earn and distribute their earnings ( over 90%) to their Trust holders

Historical Background of REITs Over the last 50 years (since 1960) REITs gained tremendous growth in: USA, Canada, Australia, South Africa, Japan, Hong Kong, Singapore, South Korea, Malaysia, France, Netherlands, Belgium Before the Mortgage Crisis and by the year 2006 the Total Market Capitalization had gone above 600 Billion in these countries. UD$

Variety in Names Globally REITS are named differently in different countries : REIT (US, Hong Kong, Korea, Singapore), Listed Property Trust (LPT) (Australia), Japanese REIT (J-REIT), Real Estate Property Trust (REPT) Malaysia), Property Unit Trust (PUT) (South Africa), Real Estate Investment Fund (REIF) (Italy, Spain), Real Estate Mutual Fund (REMF) (Greece), Mutual Fund Trusts (MFT) (Canada), UK-REIT in UK

Islamic REITs “An Islamic REIT is a collective investment scheme in real estate, in which the tenants operate permissible activities according to the Shariah” Collective Investment Vehicles – Trust funds where capital is pooled from investors for buying, managing and selling real estate property being used in Shariah Compliant ventures

Islamic REITs Returns from rental income, plus; capital appreciation, resulting from the holding of real estate assets over the investment period – dividends and capital gains Investments in residential or commercial building, retail or industrial sites; shares in publicly listed property companies, unlisted Islamic securities of property companies

SHARIAH PERMISSIBLE INVESTMENTS FOR I-REITs �Real Estate - Physical land manmade items attached to the land �Non real estate-related assets - Cash, deposits or other instrument convertible into cash within 7 days �Single purpose companies - Private companies whose principal assets comprise real estate

SHARIAH PERMISSIBLE INVESTMENTS FOR I-REITs �Real estate-related assets - Units of other I-REITs, Shariah-compliant securities of property companies and Islamic bonds securities issued by property companies �Liquid Assets - Shariah-compliant securities of non property companies �Asset-backed securities - Islamic bonds issued �from securitisation transaction

Islamic REITs – Further Shariah Guidlines �If any financings are to be raised for the acquisition of Properties, such financings shall be raised through Shariah Compliant modes �All liquid cash shall be held in Shariah compliant investment accounts �Prohibition of using any derivatives and instruments involving interest receipts & payments including: � Future contracts �Option contracts �Swaps �Short sales

Islamic REITs – usage of properties Here arise two Questions: a. what activities are permissible? b. what is the position where mixed activities are permissible and/or Nonpermissible carried on in the premises? In other words, what is the criteria to be used in deciding whether an Islamic REIT may purchase a property where mixed activities are operated?

Islamic REITs – Non permissible activities �Financial services based on riba (interest); �Gambling/gaming; �Manufacture or sale of non-halal products or related products; �Conventional insurance; �Such Entertainment activities (being indecent) that are non-permissible according to the Shariah; �Manufacture or sale of tobacco-based products and related products; �Stock broking or share trading in Shariah noncompliant securities; and �Hotels and resorts.

Islamic REITs – Non permissible activities As regards the second issue, the Guidelines says that where mixed activities are carried on the Islamic REIT manager must conduct additional compliance assessments. This involves: – Aggregating the rental from all nonpermissible activities in the property in question; and next - Ascertaining the proportion the aggregate rental so determined bears to the total turnover of the Islamic REIT.

Islamic REITs – Non permissible activities If the percentage of the non-permissible rental exceeds 20% of the total turnover the fund manager cannot invest in that real estate. An Islamic REIT is not allowed to own real estate in which all the tenants operate non-permissible activities even if the percentage of the rental from that property to the total turnover of the Islamic REIT is less than 20%, i. e. below the benchmark. The fund manager is also advised not to accept a new tenant whose activities are wholly nonpermissible.

MANY THANKS FOR Listening with PATIENCE Can be contacted @ 0300 8481603 Hamad_rb@yahoo. com