ISLAMIC REAL ESTATE

INVESTMENT TRUST

PRESENTED BY
SAIF AHMED LARI

Discussion Flow
Backgro
und on
IREITs
Conclusi
on

Differenc
e
between
REITs
and
IREITs

Issues of
IREITs
and the
way
forward

Analysis
of
IREITs
from
Shariah
point of
view

Practical
cases of
IREITs

Backround on REITs
REITs is an investment vehicle that proposes to invest

at least 50 % of its total assets in real estate

It can be through direct ownership or through a single

purpose company whose principle asset comprises of

real asset.
Reits first stated in US in 1960
Reits now operates in 29 countries

Cont..
More than US $700,000 Million Market globally
72% of Investment in the REITS are located in U.S.
REITs are trusts which provide investors with an

investment vehicle in real estates.

REIT is a vehicle that owns and operates income
producing real estates.

Islamic Reits

Islamic REIT is a collective investment scheme in

real estate whose tenants operate permissible

activities that are in line with Sharia principles.

Non-permissible activities
The activities which are not Shariah compliant:
Financial services based on interest.
Gambling
Manufacture/sale on non-halal products

(intoxicants, pork, etc)

Conventional insurance (due to interest)
Entertainment activities not in line with Sharia
Stock broking and trading in conventional securities
Hotels and resorts (with bars and pubs)

Comparison between REITs and IREITs

Feature

Conventional REITs

Islamic REITs

Shariah commite /
advisor

There is no necessity for

any shariah committee /
advisor

IREITs should assign

a shariah committee
to certify conformity
with shariah
conditions

Permissibility of
No constraint
activities perform by
tenants
Insurance for
properties

Conventional insurance
with insurance
companies as permitted
by trustee

Only allowable
activities approved

The manager has to

be concern abaout
the availability of
Islamic insurance
before going to
conventional
insurance

Analysis of I-REITS from Shariah Point of View

Shariah committee (SC) or advisory (SCA) is

responsible for overlooking the functions of Islamic

REITs so that it complies with all of Shariah
principles including investment, deposit and
financing decision for Islamic REITs, acquisition and
disposal of real estate and rental earnings and
activities.
SC is also required with the supervising and
ensuring of all funds to be managed and
administered in accordance to Shariah principles
decreed and outlined by the Securities Commission.

Analysis of I-REITS from Shariah Point of View

Main features of Shariah-compliant REIT
I.Rental activities that are classified as non-permissible
Financial services based on interest.
Gambling
Manufacture/sale on non-halal products
Conventional insurance
Entertainment activities not in line with Shariah
Stock broking and trading in conventional securities
Hotels and resorts

Nature of all non-permissible businesses is that it is highly

profitable.
casino & lottery outlets game of chance always favor the operator
liquor stores
interest-bearing banks

Analysis of I-REITS from Shariah Point of View

Rental

from a Tenant who carries out

Mixed Activities:

- Activities are permitted by Shariah but there is a

small extent of non-permissible or prohibited
elements.
SCA requires that the renewal from nonpermissible activities should not exceed
20% of the total turnover of I-REIT

How do we calculate the ratio of non-permissible activities?

The techniques used by SCA comprise the

utilization of space, hours of service, and

other methods that are considered
appropriate by the shariah advisors by their
own ijtihad.

Islamic Benchmark
Calculated by space and sales:

Total Sales 100%

1st [Permissible]
2nd [Non-Permissible]

Analysis of I-REITS from Shariah Point of View

SCA is not allowed to acquire real estate wherein all

tenants run non-permissible business actions. This

holds even where the percentage of rental from the
said property is beneath the agreeable level of 20% of
the total turnover of IREITS.
In the case of rental out a new tenant, the
benchmark that is used to make specific in case of
the mixed rental income cannot be applied because
the exact rental from it is not known yet.

Analysis of I-REITS from Shariah Point of View

If the new tenant engages in the business activities

are consider non permissible, fund manger is not

allowed to involve in such activates.
Obviously manager of I-REIT must make sure that
all activities of deposit, investment, and financing
are in accordance with the shariah.
The guideline also requires that an I-REIT must use
Takaful schemes to insure its real estate. However, IREIT may use the conventional schemes is they are
unable to be covered by takaful schemes.

Analysis of I-REITS from Shariah Point of View

I-REIT is permitted to participate in forwards sale or

purchase of currency for risk management.

I-REIT is convinced to deal with Islamic Financial
Institution then it will be appreciative by the concept
of wad .
If the I-REIT deal with conventional financial
institution, it allowed to take part in conventional
forwards sale or purchase of currency

Practical cases of Islamic REITs in Singapore

Sabana Shariah Compliant REITs
Only legal framework applicable for conventional and

Islamic REITs
Shariah framework is to be determined by respective
Shariah Board of Islamic REITs
Continuous rental : Non permissible activities <5% per
annum of Gross Revenue
Investment : Must be Islamic, if non available / viable can
do conventional but with permission from Shariah
Adviser

Practical cases of Islamic REITs in UAE

Emirate REITs (Dubai Islamic Bank & Eiffel

Management-France)
At least 80% of companys net income will be distributed to

shareholder annually in the form of dividends

Not engage in stock lending and derivative transaction for
speculative purposes
Shariah framework on Islamic REITs is to be determined by
Shariah Supervisory board of the Islamic REITs
There is no specific DFSA (Dubai Financial Service Authority)
module for Shariah compliant REITs, thus the REIT structures
is offered by DIFC (Dubai International Financial Center)

Issues
Lack of
Standardization
in Shariah

ISSUE
S

Limitation of
investment
universe

Lack of
Appropriate
index for
pricing

Way Forward

Quality
Management
Diversification
of the product

Clear &
Transparent
Shariah
Framework

Conclusion
Islamic REIT has a potential to develop into a
possible investment alternative, however, following

major issues needs to be resolved:

Universally acceptable regulatory framework
Sharia consensus on assets types
Cross border trading
Tax benefits and double tax treaties.

THANK YOU

Saif Ahmed Lari