REAL ESTATE INVESTMENT TRUSTS
OPPORTUNITY TO EXPAND THE UNIVERSE OF ASSET BACKED
INSTRUMENTS
SAYD FAROOK PHD
GLOBAL HEAD - ISLAMIC CAPITAL MARKETS
ISLAMIC FINANCE (RAPIDLY DEVELOPING ECONOMIES)
24 OCTOBER 2011
CONCLUSION
DEMAND
• Islamic Commercials Banks
• Short Term Funds
• Fixed Yield and Protection of
Capital
• Rating
SUPPLY
• Conventional universe of
Property Rental REITS
• Screened for Shari’a Compliant
tenants and financials
DEMAND DRIVERS
UNDERSTANDING WHAT ISLAMIC MARKETS
NEED
DEMAND DRIVERS
FLOW OF FUNDS IN ISLAMIC FINANCE
Suppliers of Capital
Financial Intermediary
INSTITUTIONAL
RETAIL
Mass Affluent
Awqaf/
Endowments
100
Sovereign
Wealth Funds
70
80
60
40
30
Commercial
Banks
(74%)
20
UNHWI/HNWI
10
0
01/01/1900
Takaful
Source: E&Y, The Banker
Takaful (1%)
Funds (5%)
Sukuk (10%)
Investment
Banks (10%)
90
50
Pension Funds
$951B
Commercial Banks hold
the majority of Islamic
finance assets
DEMAND DRIVERS
LIQUIDITY POSITION OF ISLAMIC BANKS
Consistent liquidity surplus: Islamic banks have continued to demonstrate their
excess liquidity before, during and after the global financial crisis, as investors
seek a safe haven, while complying with Shari’a principles.
INTERBANK RATIO
Source: Bankscope
NET FINANCING/DEPOSITOR & SHORT TERM FUNDING
Source: Bankscope
Liquidity excess flows directly into treasury funds pool, particularly after GFC.
DEMAND DRIVERS
FLOW OF FUNDS TO CAPITAL MARKETS
Islamic Finance Assets – 822 bln
822b
’09 Top
500
Islamic
Fin.
Institution
Assets
290b
’08 GCC
Islamic
Fin.
Institutions
Assets
Fixed Income Assets – 131 bln
200/
131bln
July’ 10
total/outstand
Sukuk issued
62/31
July’ 10 total/
outstand int.
Sukuk issued
Money Market Transactions
– 7 bln/day
2bln
Saudi
Arabia
0.5bln
Bahrain
4.5 bln
Rest of
World
FLOW OF CAPITAL IN ISLAMIC FINANCE
SHORT TERM YIELD IS THE ORDER OF THE DAY
Supplier of Capital
Retail + Institutional
DEPOSITS/
INVESTMENTS
$2.5T assets of HNWI Muslims
$2T in SWF’s of 4 GCC powers
Financial
Intermediary
IF
BANKING
ASSETS
$1B Today > $2.2T by
2015
Treasuries
LOW RISK
INTERBANK
MONEY MARKETS
Murabaha ~$710B/day
MAJORITY OF ISLAMIC LIQUIDITY SITS WITH
ISLAMIC COMMERCIAL BANK TREASURIES
7
DEMAND DRIVERS
WHAT DO ISLAMIC BANK TREASURIES
NEED?
CREDIT
QUALITY /
RATING
CAPITAL
PRESERVATI
ON
LIABILITY
MATCHING
YIELD
SIMPLICITY
TREASURY
DEMANDS
SUPPLY OPPORTUNITIES
HOW REITS CAN BE UTILISED TO
FACILITATE SUPPLY
REAL ESTATE INVESTMENT TRUSTS
(REITs)
WHAT ARE REITS?
Real Estate Focus
•
Investment vehicle that invests or proposes to invest 50% of its
total assets into real estate assets.
Ownership
• May be by direct ownership of the assets or by way of equity in
company that invests in such assets
Business Model
• REIT business model driven almost entirely from investment
property recurrent income.
• Low risk passive investment with high certainty of cash flows.
• To be tax free at REIT level, must distribute most of its income
(some authorities require 90%) to its shareholders.
REIT STRUCTURE AND
STAKEHOLDERS
Unit
Holders
Investment
Manager
Returns
Management
Services
Trust Services
Trustee
REIT
Management Fees
Ownership of
Properties
Property
Manager
Maintenance &
Management
Services
Maintenance &
Management Fees
Trust Fees
Net Property
Income
Tenant
Rent
Rental Payment
TYPES OF REITS
Equity
• Primary Asset:
Direct ownership
of real estate
• Leasing
• Development
• Asset
Management
• Rental Income
Mortgage
Hybrid
• Primary Asset:
Mortgage Assets
• Real Estate loans
• Construction
financing
• Interest Income
• Primary Asset:
Mix of assets
• Own and operate
real estate assets
and provide
mortgage
financing
SHARIA COMPLIANCE FOR EQUITY
REITS
• Non-permissible rental activities
– Interest / Gambling / Gaming / Non-Halal Products and
services or related services
• Rental from tenant who operates mixed activities
• Leverage (Percentage of Debt)
• Cash and Accounts Recievable
• Interest Income
POTENTIAL REIT UNIVERSE
Europe
15%
America
45%
AsiaPacific
40%
Global REIT
Market
US Equity REITs
$795 bln
$389 bln
Turkish REIT
$7.5 bln
Malaysian REIT
$795 mln
Source: Datamonitor, E&Y
Other
REITs
18%
Diversifi
ed REITs
8%
Retail
REITs
26%
Industry/
Office
REITs
20%
Healthca
re REITs
12%
Resident
ial REITs
16%
REITS
WHAT RETURNS HAVE THEY OFFERED?
DEMAND MEETS SUPPLY
WHY ARE REITS
GOOD FOR ISLAMIC
BANKS?
• Diversification of credit
• Low risk
• Steady income
generation
• Liquid (particularly
those in developed
markets)
• Asset backed
CHALLENGES
• Real Estate
concentration
• No guaranteed capital
protection, but then
nothing is RISK FREE
POTENTIAL
SOLUTIONS
• Require a third party
market maker to sit in
between and arbitrage
the two sides with
some risk absorption
• Create a rated SPV
compiling the
underlying assets and
providing a diversified
pool of risk in different
buckets and
geography
• Key is to find
traditional PASSIVE
rental REITs (not
construction or
development based)
CASE STUDY
ATAKULE REIT JSC, TURKEY
Shopping centers (32.83%)
Business centers (16.70 %)
Hotels (9.52%)
Office buildings (0.73%)
Capital market and monetary instruments
(39.25%).
OPPORTUNITY FOR FINANCIAL INSTITUTIONS
REIT WAKALA INVESTMENT FUND
High Risk 1: 25% (Europe)
Investor 1
High Risk REIT 2: 25% (Asia)
Wakala Certificate
Issuing SPV (Wakeel)
High Risk Assets
High Risk REIT 3: 25% (Amer)
IRR
30%
High Risk REIT 4: 25% (BRIC)
Purchase of units in each REIT
Med Risk 1: 25% (Europe)
Investor 2
Wakala Certificate
Issuing SPV (Wakeel)
Medium Risk Assets
Med Risk REIT 2: 25% (Asia)
Med Risk REIT 3: 25% (Amer)
IRR
20%
Med Risk REIT 4: 25% (BRIC)
Return of capital and profit in form of rental revenues
Med Risk 1: 25% (Europe)
Investor 3
Wakala Certificate
Issuing SPV (Wakeel)
Low Risk Assets
Undertaking to purchase REIT unit at x
price at given dates
Sponsor Investment
Grade Rated Bank
Med Risk REIT 2: 25% (Asia)
Med Risk REIT 3: 25% (Amer)
Med Risk REIT 4: 25% (BRIC)
IRR
5%
WHAT’S NEEDED TO INVEST IN THIS
MARKET?
• Uniform standards of what is Shari’a compliant for
REITS, identifying:
– Types of permissible tenants (can be similar to activities
screener)
– Permissible percentage of tenants involved in noncompliant activities
– Percentage of leverage, cash and interest income
CONCLUSION
DEMAND
• Islamic Commercials Banks
• Short Term Funds
• Fixed Yield and Protection of
Capital
• Rating
SUPPLY
• Conventional universe of
Property Rental REITS
• Screened for Shari’a Compliant
tenants and financials