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Saturday, June 11, 2011

Potential in Islamic REIT

DH Flinders Ltd, a specialist Asia-Pacific corporate advisory practice that focuses on real estate, financial services and small capital sectors, sees good investment opportunities in Islamic real estate investment trust (REIT) in Malaysia.

Executive director Stephen Hawkins says Malaysia already has a good start in terms of Islamic REIT awareness, having established the guidelines for this type of investment.

Hawkins: ‘Malaysia has syariah guidelines and syariah REIT guidelines, so there’s already a formal structure that provides fund managers and operators a structured environment to work within.’

“Malaysia has syariah guidelines and syariah REIT guidelines, so there's already a formal structure that provides fund managers and operators a structured environment to work within.

“It also provides the regulators with an environment to regulate and investors will be able to see clearly how things will be structured and run in this market,” he tells StarBizWeek.

DH Flinders has offices in Australia and Singapore.

In November 2005, the Government, through the Securities Commission (SC), issued guidelines for Islamic REIT, setting a new global benchmark for the development of Islamic REIT and making Malaysia the first jurisdiction to introduce such guidelines in the industry.

According to Bursa Malaysia website, presently, Malaysia is the only government to establish such guidelines for Islamic REIT.

The guidelines facilitate the creation of a new asset class for investors and provide new opportunities for market players, including fund managers, to further diversify their investment portfolios.

“Malaysia has an advantage over the rest of the region because it has taken the time to put those guidelines in place,” says Hawkins.

On a global level, Hawkins believes that there is a large, untapped market for Islamic REITs. Malaysia, he says, is in a good position to benefit with its established guidelines in place.

“From a Malaysian context, Malaysian people and Malaysian funds are already comfortable with syariah-compliant REITs.

“From an international perspective, there are lots of syariah investors in the Middle East that look to countries like Malaysia that have established guidelines. There's an opportunity to provide more investment products to those investors to give them choice.”

Hawkins notes that by having an established conventional REIT market in Malaysia, both local and foreign investors would be confident in diversifying their investment portfolio into Islamic REIT.

“From a REIT perspective, I see some good opportunities in Malaysia. Investors are already aware of REITs in this country. They've become comfortable with this vehicle in the last five to 10 years.”

According to Bursa, there are 13 REITs being offered in Malaysia now, including two Islamic REITs.

Al-Aqar KPJ REIT is the first Islamic REIT in the world while Al-Hadharah Boustead REIT is the first Islamic plantation REIT.

Both Al-Aqar KPJ REIT and Al-Hadharah Boustead REIT rank among the top-three REITs in Malaysia in terms of dividend yield, according to information on the local bourse's website.

“There are already (Islamic REIT) vehicles out there, but I believe there's a lot more market appetite for this type of products,” Hawkins says.

According to SC guidelines on Islamic REITs, rental incomes are derived from permissible business activities conducted according to syariah principles.

In the case where a portion of the rental is from non-permissible activities, then these rentals shall not exceed 20% of the total turnover of the Islamic REIT.

An Islamic REIT is not permitted to own properties where all the tenants operate non-permissible activities.

With more stringent guidelines (as opposed to) conventional REITs, Islamic REITs usually comprise investments in industrial properties.

This is because industrial properties are the easiest of the property sub-sectors to assess and to ensure that they are syariah-compliant, says Hawkins.

“Most industrial facilities, even if they're multi-tenanted, you kind of know what they're doing and it's easy to asses or judge. But a lot of industrial properties are single tenanted anyway.

“It's harder for a hotel or shopping centre as there's going to be alcohol or gambling activities in this type of property. It's difficult to eliminate this from your tenancy mix. Even from an office point of view, it will be multi-tenanted and it won't be easy to determine what the tenants are doing inside.”

Essentially, properties that are syariah-compliant would need to operate under circumstances where it is not contrary to syariah law. These include gambling activities or the selling of alcohol, tobacco-related products and manufacture or sale of non-halal or related products.

“Fundamentally, industrial properties (tend to be more) compliant with the syariah guidelines,” says Hawkins, adding that industrial properties are capable of generating good and stable yields.

“From my perspective, for the industrial sub-sector, the buildings may not be the trophy assets. They're not going to be the largest office tower or the newest shopping centre in a city.

“But I believe that industrial properties can provide good yields because they have all of (right investment) fundamentals, such as strategic locations and long leases.”

Hawkins also says that the industrial property sector is not subject to huge upswings and downturns experienced by other property sectors.

“In good times, the rents (for industrial properties) may not increase as sharply as other sectors but in a downturn, they are more defensive from a returns and value perspective, and essentially, more resilient.”

Hawkins also believes that industrial property sector is a “proxy for the overall economy.”

“Demand for industrial space is essentially linked to economic activity. Asia is in the middle of a big growth cycle and the world is starting to recognise that Asia is where that growth is, and industrial property is a proxy for that growth.

“As the population grows or economic activity starts to increase, people need more industrial space. It's a good time to be in Asia and Malaysia and a good time for the industrial sector to provide strong returns to investors in a REIT product that is safe and provides solid yield, plus growth.”

By The Star

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