MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Islamic Real Estate Investment Trusts (i-REITs)

The total market capitalization of the Real Estate Investment Trusts (REITs) market in general in Malaysia has reached about US$653.13 million (RM2.4 billion). Althought it started in the USA, Asia-Pacific REITs have begun to make their mark. In Malaysia, the REITs market started almost 17 years ago as property trust funds, and now the market has moved into commercial REITs and healthcare REITs, with the next being plantation and retail REITs.

Moderator Pushpa Rajadurai opened the discussion with a question on the similarity of REITs issued in Malaysia to those issued elsewhere, from the Shariah perspective.

Responding to this question, Salman Younis said that the only issue faced in Islamic REITs was multiple tenancies, where there might be some tenants who were involved in non-halal activities. However, he said KFH Malaysia did not encounter this problem as it had separate titles on a strata basis that exclude properties that were involved in non-permissible activities.

Looking at the regulatory aspect of Islamic REITs, Mohammed Ridza Mohamed Abdullah pointed out that as far as the law was concerned, the Islamic REITs guidelines issued by the Securities Commission identified non-permissible activities that tenants could not undertake.

He also noted that the debt leverage of trust itself had to be looked at, especially when Islamic REITs allowed different funding, not merely funding of an equity nature.

Interestingly, Mohamed Ridza said, there were many different products in Malaysia, backed by a strong regulatory framework. He noted that Malaysian REITs concentrated very much on trust, as against the Special Purpose Vehicle (SPV) approach adopted by most of the Middle Eastern players.

Sharing the lessons she learnt from the first listed Islamic REIT launched by KPJ Healthcare Group, Paduka Siti Sa’adiah Sh Bakir said that the group, having to source financing for its expansion plan, decided to opt for Islamic REITs due to their simplicity, the fact that they can be further added to and, more importantly, because they were off-balance sheet items.

Taxation is an important part of REITs, whether Islamic or otherwise. Dr Veerinderjeet Singh explained that at the moment, various exemptions had been granted, including exemption for all real property gains tax (RPGT) on the sale of property into the REITs or the purchase of property for the REITs, in addition to exemption from stamp duty.

Existing REITs were very similar to trusts, and regulators were very much fixated with the concept of unit trusts, whereby income tax would be exempted if the profits were distributed to its unit-holders, with undistributed profits being taxed at 28%. Veerinderjeet further explained that this would encourage REITs companies to distribute profits to unit-holders.

As far as unit-holders were concerned, corporate residents would be charged at the normal corporate rate, while individual residents would be charged progressively from 0% to 28%, similar to other income earners. For non-residents, they would be subjected to a withholding tax of 28%.

Having outlined the tax structures in relation to REITs and compared them to neighboring Singapore, Veerinderjeet said players in the REITs market would like to see a reduction of the withholding tax of 28% to a much lower rate, comparable to Singapore’s 10%. In addition, income of individuals receiving dividend was tax exempted in Singapore, whereas a Malaysian would be charged the normal marginal tax rate.

Veerinderjeet also said that the market wanted total tax transparency, where REITs would be seen as an intermediary vehicle, free from tax and imposing minimal tax on income of the dividend recipient. He also suggested looking into offshore REITs, where the properties were located outside of Malaysia and listed on the local bourse.

Finishing up the session, Pushpa concluded that REITs in Malaysia were still in their infancy and in terms of size, as Salman mentioned, size really did matter in REITs, especially when tapping the GCC market. She also said that Malaysian Shariah principles on REITs were internationally comparable, backed with strong tax and regulatory frameworks and it was very much hoped that the suggestion of having full tax transparency and offshore REITs would be seriously considered by the relevant authorities.