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As developments in Islamic finance grow, we’re seeing an increased adoption of financial instruments such as Islamic Real Estate Investment Trusts (i-REITs).
Since their launched in the GCC in 2010, REITs have grown to a market of USD 10.3 billion as of 2024 and are expected to see an annual compound growth rate of 8.24% reaching USD 15.4 billion by 2029, according to market research firm Mordor Intelligence.
But what are REITs? What’s the difference between them and Islamic REITs? And why should one invest in them?
REITs are companies that own or finance income-producing real estate that must payout dividends of around 90% of the real estate portfolio’s taxable profits annually to investors. An investor receives an annual return based on their level of ownership in the REIT.
A typical structure of a REIT will see the trust own a series of properties (that may or may not individually have a property manager) with tenants paying rent to the trust. These real estate properties can be residential, commercial, industrial or agricultural. The trust will we have a trustee to bear legal responsibility and a manager who will manage its investments.
REITs are typically listed in a stock exchange and investors buy into them the same way they would a stock or an ETF.
Read more about: Halal ETFs Invetsment
REITs were invented to give the average person an avenue to invest in real estate that they typically would not be able to afford. As such, it is a much more accessible way for people to take part in the real estate market and capture its returns. As such, REITs offer certain benefits, including:
· - Allows for passive income, where an investor isn’t required to take an active role or have any experience in monitoring and reacting to the market.
· - They provide predictable cashflows, as REITs are required to provide investors with annual dividends, which company stocks do not.
· - REITs are a great way to see compound returns, making them amenable to long-term investors. Investors must reinvest or prolong their investment in order to lock in the benefits of compounding investments over time.
· Unlike typical real estate investing, REITs are liquid, allowing investors to buy in and buyout easily.
· Because REITs manage a group of properties they are diversified, giving an investor a hedge against any single property going bust.
Islamic REITs are conceptually no different from typical REITs, except they place limitations on the type of investments, activities by the properties and the type of tenant. As with any Islamic investment, certain activities are prohibited, including alcohol, gambling, drugs (including tobacco), and interest-bearing finance.
Islamic REITs are prohibited from investing in properties that generate income from such activities and are not allowed to rent property to tenants that engage in them. The regulatory threshold for un-Islamic activities in countries such as Malaysia and the UAE, which introduced Islamic REITs, is 20%.
Furthermore, shariah-compliant REITs are not allowed to transact, seek or provide funding through non-shariah-compliant means, such as interest-bearing bonds or loans. Investing and financing through shariah-compliant means such as sukuk are an acceptable alternative. Insurance for properties must also abide by shariah regulations.
Islamic REITs typically use the same structure except they must include a shariah-compliance advisor to ensure activities abide by shariah principles.
Some examples of well-known GCC-listed Islamic REITs include:
· - Al Rajhi REIT (Saudi Exchange)
· - Emirates REIT (Nasdaq Dubai)
· - Riyad REIT (Saudi Exchange)
· - ENBD REIT (Nasdaq Dubai)
· - Jadwa Saudi REIT (Saudi Exchange)
All the advantages of investing in a typical REIT noted above can be found in Islamic REITs, in addition to having some unique advantages particular to the Islamic-minded investor.
For one, Islamic REITs are unlikely to be as leveraged as typical REITs due to prohibitions against interest-bearing debt and thus are less likely to fall into default and bankruptcy. One of the major risks of REITs is that they can be highly leveraged – whether that be the REIT itself or the properties it invests in – which can be exacerbated in high interest rate environments.
Furthermore, Islamic REITs may prove to be a useful contemporary method to develop and achieve sustainable returns for Waqf assets, which are assets that provide charitable socio-economic and religious services for the community. Waqf assets generally suffer from a lack of liquidity and a self-sustainable means of generating income that can be re-invested in its operations, making them heavily reliant on donations.
REITs can provide a useful method to counter these disadvantages, according to a 2016 research paper by Dr Aznan Hassan, associate professor in Islamic law at the International Islamic University of Malaysia and Dr. Ayahnaz Sulaiman, associate professor at the Universiti Sains Islam Malaysia.
Its worth noting that yields from shariah-compliant REITS have outpaced global REITs historically. As of 2022, Shariah Global REITs saw an annualized total return of 9.37%, while global REITs saw an annualized total return of 8.98% during the same period, according to Manulife Investment Management. This trend looks set to continue – at least in certain Muslim countries, such as the UAE – which has exceeded global levels as of 2024, according to Mordor Intelligence.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
