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Islamic Real Estate Investment Trust

Introduction

A REIT is a form of security that is traded in the same way as a direct investment and stocks in the stock market—undertaken through properties or mortgages. On the other hand, a trust is an organization that pools together a number of investments relating to REIT. Similar to stocks, REITs trade on grand exchanges.

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REITs form part of Investment Trusts in Real Estate. These are trusts that give investors an investment guide in all landed properties. A REIT is the vehicle that mobilizes funds emanating from unit holders consisting of companies as well as individuals and for real estate investment (Khan, 2007).

Islamic REITS

This refers to a collection of schemes of investment in the real estate industry. In this case, tenant(s) are allowed to operate activities that are ethical and permissible in the Syariah.

There comes the question of non-permissible activities which make Islamic REIT so distinct. Some of the prohibited activities highlighted in the schedule include; interest-based financial activities or services (Riba); gambling or gaming that involves manufacture of commodities that are non-halal; Conventional insurance that comprises entertainment activities, which complies with the set rules of Shariah law; manufacture and sale of tobacco-based products; stock broking and share trading involving non-compliant securities of Shariah; and hotels and resorts. Guidelines also provide that compliance assessments must be conducted in circumstances involving mixed activities (El-Gamal, 2006).

Real estate authorities have a way in which to aggregate rentals derived from all the non-permissible activities involving the property in question.Where the non-permissible part of rental is more than 20% aggregate turnover, it is a restriction for the fund manager to invest in the particular real estate. Shariah Advisory Commission has set 20% as the benchmark. The managers, entitled to fund these programs; are advised to observe non-permissible trends, and reject any new tenant where it deems possible. The Guidelines, as well, provides the formula to calculate percentage of rentals from only non-permissible events over total tenant operating rental (Rosly, 2010).

The schemes associated with Takaful requires that the real estate should be insured before any activity is undertaken thereon; a regulation by Islamic REITs. However, there has speculation that Takaful Scheme cannot provide authorized or expected coverage. In the case of such limitation, Islamic REITs can intertwine or waiver conventional insurance schemes (Oliver, 2006).

Principles of Shariah Law

Right to life or Respect for life: This is called haqq al haya and requires both respect to the unborn (right after their spirit ruh is breathed through to the foetus), and social duties like respecting non-belligerents during war as well as using dispute -settling techniques where possible so as to prevent any violence which may risk lives of others or of oneself. Respecting life requires fundamentally understanding the fact that everlasting peace result from only justice; therefore stability must be sought.

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Respect for the community: This focuses on the unit of the family, and on a much wider view, looks at the community’s expanding circles—humankind and all the sentient beings of the universe. Haqq al nasl is unique to the Islamic law as it holds that sovereignty, which is found in a country’s or a state’s power; for instance, Euro-American law of internationalism. Recognition of individual rights to life ensures that the society conforms to the legally stipulated regulations, and enhances sovereignty on various levels; all focusing on Supreme being; God. This contrasts with exclusive sovereignty concept, which is common with “nation-state,” found in mid-twentieth century.

Respecting free and private enterprise: it implies an individual freedom to own production industries and enterprises, which was felt at the beginning of twentieth century. Denying access to ownership of capital in an economy, which is capital-intensive, could amount to denying life itself.

Political self-determination (haqq al hurriyah): This term, islamically, stresses both the ruled and the rulers’ responsibility to permanently establish institutions that are designed in a way to enhance broad-based political involvement by each policy member in its governing role (Rosly, 2010).

Dignity (haqq al karama) is the obligation to have respect for human dignity, the helm of Islamic laws. The main aim of Shariah is to enhance relationship that exists between individuals and Allah. It expresses a deep understanding among individuals and Allah.

Knowledge (haqq al ‘ilm): The duty of pursuing knowledge is the principle to success, irrespective of whether the context is public or private life. Islamic system of finance is based on five divine values, also known as the principles of Shariah law. These are prohibition of riba, application of ‘al-bay’ (trade and commerce); avoidance of gharar (ambiguities) in contractual agreements- Prohibition of maisir (gambling); disengagement from production of impure commodities.

Differences between Islamic REITS and Conventional REITS

First is in terms of objectives where structuring and administering Islamic REIT is almost done in the same way as Conventional REIT. However, the difference comes where the Islamic REIT incomes are arrived at and how management of the fund in question is undertaken.

Secondly, the concern is on the tenant type and percentage of the rental income coming from tenants. In Islamic REIT, the tenants, in any property that has been acquired, have to carry out a business, which is in line with the principles of Shariah. In Conventional REIT, there is no such regulation to be met. Islamic REIT also holds that management of funds must be undertaken in a manner compliant with the Shariah while conventional REIT has no such rules (El-Gamal, 2006).

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The main objectives of Islamic REITs include enhancing creation of modern assets and facilities for investors; finances an organizations’ plan and portfolio; provide adequate information to individuals who want to invest in Malaysia’s real property. The Islamic REITs will ensure that the corporation or an individual investor will not necessarily have to own such assets

In addition to these, Islamic REITs have the following objectives: Shariah aspects that refer to equity objective, and observing the purpose of Shariah, Maqasid Al-Shariah. Other objectives are the Islamic Contracts application; 20% capital for non-Shariah compliant trades; and Operational or Tabi’ aspects which refer to the efficiency objective of this reits. These objectives can be broken down into achieving success in management fees, yield tax, business strategies like operating investment, acquisition, as well as strategies of capital management yield improvement (risk and marketing); providing unit holders per unit with stable distributions and the potential to achieve sustainable long-term or lasting growth of these distributions (Khan, 2007, p. 56).

Islamic REITs have several merits, which is a development of conventional REITs, amongst them being professional management, portfolio diversification, participation in property market and income distribution: Some of the pitfalls of Islamic REITs, most of which are advantages of conventional reits, includes; In some jurisdictions, the taxation and regulatory framework is non-facilitative; they are risky, for example they are viable to property-related risks. In addition, there is lack of effective providers of re-Takaful and Takaful products at the regional level.

References

El-Gamal, M. (2006). Islamic Finance: Law, Economics, and Practice, London: Routledge.

Khan, N. (2007). Challenges and Opportunities Facing Islamic Capital Markets and the Islamic Banking Industry Today. Islamic Finance News Vol. 4 , p. 21.

Oliver, K. (2006). Islamic Financial Markets Conference and Specialized Works. New York: Wiley & Sons.

Rosly, S. A. (2010). International Center for Education in Islamic Finance (INCEIF) IB 1006 Islamic REITS. London: Cengage.

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