The guideline on Islamic REITS (real estate investment trusts) recently issued by the Securities Commission is a step in the right direction.
It should be viewed in the context of the regulatory body’s continuing efforts to develop Islamic capital markets in line with the government vision to make Malaysia a leading player in Islamic finance.
The guideline seeks to address Islamic issues on asset classification with regard to real estate investments to ensure syariah compliance.
It outlines criteria according to which a certain real estate or property is considered permissible for an investor to acquire with other investors as co-owners who are also holders of the investment trust fund.
These criteria deal with the way the estates are used rather than their physical aspects.
If they are utilised for purposes not repugnant to the syariah, then they are considered permissible.
The permissibility of an asset is also decided on the basis of whether it is halal.
The halalness of an asset is an issue entirely different from the issue of the way it is used.
Halal assets may or may not be used in compliance with the syariah.
However, the guideline states that if the non-halal usage exceeds a certain benchmark, the investors need to be advised by their syariah advisers to sell off their holding in that unit trust.
Currently, the Islamic REIT is also governed by the other guidelines issued by the Securities Commission for normal REIT.
In a sense, the new guideline on Islamic REIT can be considered a supplement to the existing guidelines which are general rules on all aspects of investments in REIT in Malaysia.
From the perspective of Islamic law, the purchase of a unit in a unit trust fund/REIT may be said to constitute a financial investment in a mudarabah scheme whereby it is given to a management company so that it can buy assets to generate income.
If these assets are rented out based on an ijarah contract, the income stream is expected to flow throughout the investment duration.
This process is governed by both mudarabah and ijarah principles.
In short, this is an investment scheme based on mudarabah whereby tangible assets are bought and rented out to generate profits for the investor.
There are many similarities between Islamic REITS and sukuk al-ijarah.
Both involve the acquisition of tangible assets to be leased to third parties to generate income for the investor for the duration of his investment.
In the case of Islamic REIT, apart from the investor, three other parties are involved � the unit trust management company, the trustee and the third party tenant of the asset.
As for sukuk al-ijarah, it’s structure indicates that instead of having a unit trust management and a trustee company in between, there is a special purpose vehicle (SPV) company specially set up to issue sukuk and a trustee company which functions like in a unit trust scheme.
The SPV invites potential investors to purchase sukuk.
A certificate is issued for a purchase.
In reality, the investors merely provide capital to the SPV in the context of mudarabah, to acquire tangible assets for income generation in order to pay the investor periodically as agreed upon in the sukuk document or contract.
In both instances, returns to sukuk investors and holders of unit trusts will come from the projected income stream generated through the use of the assets and any capital gain.
If the sukuk is sold back to or redeemed by the issuer, or in the case of unit trusts, if the holders dispose of their units in the market or have them repurchased by the unit trust management company, they will be disposed of at the current market price, which is calculated on the basis of the net asset value of the unit minus management fees or charges.
In classical mudarabah, returns to the mudarib (the entrepreneur or manager) are payable from a share of profits from the scheme, if it turns out to be profitable.
The amount is based on an agreed ratio, say 40:60.
But in the case of unit trusts, the managers receive their income from the fees charged to the fund irrespective of whether the scheme is profitable or not.
Thus, this scheme is not a straightforward mudarabah and may be classified as al-wakalah bi�l ujur, meaning paying or hiring someone to act as an agent.
In many cases, sukuk al-ijarah is issued by companies or governments to fund infrastructure projects whereby certain assets are sold by the issuers to the SPVs which will buy them with funds collected through sukuk subscription.
The issuers will rent the assets from the SPVs for a certain period commensurate with the lifespan of the sukuk, by making periodic rental payments to the investors through the SPVs.
Normally SPVs are formed by the issuers specifically to facilitate the whole securitisation.
The SPVs are meant to ensure that the pool of investments is used to buy assets which are to be rented out.
These assets will then generate income in the form of a rental stream.
In conclusion, whether potential investors prefer to buy sukuk al-ijarah, Islamic REITS or to take part in the more traditional mudarabah scheme, the underlying rule is that investors in fact acquire ownership of the relevant assets or real estate.
This ownership justifies their entitlement to the returns.
As owners they should never forget the fact that according to the syariah, they also bear ownership risk (daman al-milk) with regard to the underlying assets or real estate that they own.
That having being said, investment in real tangible assets and the use of ijarah principles in using these assets to create income streams are held to be valid by almost all Muslim jurists.