INTRODUCTION ON REIT & I-REIT

My colleague and I are in the midst of doing our project on Islamic Real Estate Investment Trust (I-REIT) and feel that we could share the basic of REIT and I-REIT to all – for better understanding and reading pleasure ….

REIT

REIT is an investment trust which is collectively pooled from investors and is used to invest in real estate only. The investment is normally in the form of buying, managing, selling and leasing real estate or purchasing shares in public listed real estate companies or investing in debt securities or real estate companies. The Securities Commission of Malaysia defines REIT as “an investment vehicle that proposes to invest at least 50% of its total assets in real estate, whether through direct ownership or through a single purpose company whose principal asset comprise real asset”. However, different countries adopt a different approach in determining the requirement for a REIT especially with regards to ratio of investing in real estate, e.g., the main requirement for a REIT in the US is that it must invest at least 75% of company's total assets in real estate.

The objective of REITs is to obtain reasonable returns on investment. Returns are generated from rental income plus any capital appreciation that comes from holding the real estate assets over an investment period. Unit holders receive their returns in the form of dividends or distribution and capital gains for the holding period.

As an investment, REIT combines the best features or real estate and stocks. It gives investors and practical and effective means to include professionally managed real estate in a diversified investment portfolio. By buying a unit of REIT, the holder actually owns a fraction of a pool of real estate that generates income via renting, leasing and selling the said property. As an added bonus, REITs provide a platform for international investors to invest in a particular country’s real property without the hassle and responsibilities associated with direct ownership of such assets.

I-REIT

Generally, an I-REIT is an investment vehicle that invests primarily in:

(a) income-producing Shariah-compliant real estate, and/or;

(b) single purpose companies which are Shariah compliant whose principal assets comprise Shariah compliant real estate

I-REITs provide a new investment opportunity for investors who wish to invest in real estate through Shariah compliant capital market instruments. An I-REIT is an effective means of gaining investment exposure to large Shariah-compliant commercial properties. Investments in I-REITs provide opportunities to hold stakes in high-grade Shariah-compliant real estate which may otherwise have been difficult or impossible for a retail investor to hold

In line with Malaysia’s Capital Market Master plan to promote the country as an international Islamic financial centre, guidelines for I-REITs were released by the Shariah Advisory Council (SAC) of the Securities Commission of Malaysia. In November 2005, Malaysia became the first jurisdiction to introduce such guidelines in the global Islamic finance sector and in the process, set a global benchmark for the development of such REIT. The thrust of the I-REITs Guidelines is to provide a new investment opportunity for those who wish to invest in real estate through Shariah compliant capital market instruments and to facilitate the creation of a new asset class for investors and allow fund managers to further diversify their investment sources and portfolios.