Islamic REITs & Capital Market Development - Meezan Bank

Increasingly become an important asset classin the global capital marketGlobal REITs Value (USD)Year Value Growth(Million)2000 $181,100 Region % Value @2001 $206,800 14.2%2002 $223,500 8.0%2003 $308,700 38.1%2004 $424,600 37.5%United States 72.5%Asia Pacific 14.9%Europe 9.8%Canada 2.8%Source : “Trends and Development in REITs”, GrahamSugden,REITs: Broadening Investment Opportunities In Malaysia,Securities Commission, Malaysia, 2June 2005Securities Commission 3

Increasingly become an important asset classin the global capital market• Global REIT Report 2006 estimated that listed REITs worldwidewith a total market capitalisation, of USD608 billion. Aftertaking into account the effect of gearing, this represents inexcess of USD890.9 billion in property assets within the GlobalREIT sectorTotal REITs by regionEMEA59Pacific64Asia75NorthAmerica2860 100 200 300 400Source : Global REIT Report 2006, Ernst & YoungSecurities Commission 4

What are Real Estate Investment Trusts (REITs)• Malaysian REITs are in the form of:collective investment vehicles (typically trustfunds)which pools money from investors and uses thepooled capitalto buy, manage and sell real estate assets, suchas residential or commercial buildings, retail orindustrial lots, or other real estate-relatedassets(e.g. shares in public-listed propertycompanies, listed or unlisted debt securities ofproperty companies etc.)Securities Commission 5

In the case of Malaysia, regulatory framework isintroduced to accelerate the growth of REITs• REITs in Malaysia are governed by: Securities Commission Act 1993 Guidelines on Real Estate InvestmentTrusts Guidelines for Islamic Real EstateInvestment Trusts (For Islamic REITs)• Property trusts have existed in Malaysiasince 1988• The Guidelines on Real Estate InvestmentTrusts (formerly known as the Guidelineson Property Trust Funds) was first issuedby the SC in 1995• The latest edition (3 rd ) the Guidelines onREITs was issued on 3 January 2005 toaccelerate the growth, and establish avibrant and competitive real estateinvestment trust industry in MalaysiaSecurities Commission 7

Objectives of REITs Guidelines• To enhance protection ofinterest of unit holders• To ensure fit and properness ofoperations• To enhance level of disclosureand transparency of offeringdocuments and reports• Part of SC’s on-going oversightof operatorsSecurities Commission 8

REITs add significant new dimension to thecapital market development• Add depth and breadth to capital market REITs provide an alternative fund-raisingopportunities to businesses as REITs offer away property owners to unlock capital in realestate that they can redeploy to other highyielding business activities• Enhance growth of fund managementbusiness REITs offer a viable and alternative investmentopportunities for investors, particularly topension/provident funds and insurancecompanies due to their stable distributionspay-out, low volatility vis-à-vis the stockmarket and low correlation to equity marketSecurities Commission 9

REITs and capital market development• Enhance standards of corporate governance REITs offer higher standards of corporategovernance due to the involvement of REITmanagers and trustees in the scheme• Enhance liquidity or property market andimprove price transparency Revitalise the property sector as REITsmanagers are given the incentives to acquireand grow Market participants could also infer capitalvalues of physical commercial space byreferring to current yields offered by listedREITsSecurities Commission 10

Islamic REITs advances Malaysia’s Islamiccapital market developmental plan• Further entrench Malaysia’s vision to become aglobal Islamic capital market hub in the region• Malaysia International Islamic Financial Centre (MIFC)• Facilitate development of a wider range ofIslamic collective investment products• Cater investors who need to effectivelymobilise their Islamic funds• Facilitate creation of new asset class for fundmanagers to diversify their sources andinvestment portfolios• Attract investors’ appetites for Shariahcompliant real estate investmentSecurities Commission 11

SC introduced Islamic REITs Guidelines to facilitateproduct developmentGuidelines for Islamic Real EstateInvestment Trusts issued on 21November 2005Shariah guidelines and criteriaoutlined by the Shariah AdvisoryCouncil (SAC) of the SCThe first Guidelines in the worldto facilitate Islamic REITsdevelopmentComplement the Guidelines onReal Estate Investment Trusts(REITs Guidelines)Securities Commission 12

Islamic REITs structureUnit holdersInvestmentDistributionsManagerManagementservicesManagement feesIslamic saREITsActs on behalf ofUnit holdersTrustee feesTrusteeShariahAdviserOwnership ofProperties/Other assetsNetInvestmentIncomePropertyManagerMaintenance andmanagementservicesMaintenance andmanagement feesPropertiesOther assetsRentRental paymentTenantSecurities Commission 13

Role of Shariah scholars / advisers is crucial inascertaining Shariah complianceIslamic REITs investment must be reviewed,monitored and approved by the appointed Shariahcommittee / Shariah adviserRental of real estate by Islamic REITsInvestment, deposit and financing for IslamicREITsInsuranceForward sales or purchases of currency forrisk managementSecurities Commission 14

Rental activities classified as Shariahpermissible except :Financial services based on riba (interest)Gambling / gamingManufacture or sale of non halal products orrelated productsConventional insuranceEntertainment activities (non Shariah-compliant)Manufacture or sale of tobacco-based based productsStockbroking or share trading in Shariahnon-compliant securitiesHotels and resortsOther activities deemed non-permissible according to Shariah(ijtihad of Shariah committee / Shariah adviser )Securities Commission 15

Islamic REITs Guidelines paved the way for Malaysia’sfirst Islamic REITs …• KPJ Healthcare Bhd (KPJ) launchedworld’s first listed Islamic REITs• Al-`Aqar KPJ REITs launched on 24July 06 with an issue of 340 millionunits• Assets : six specialist hospitalsvalue at RM481 million Johor Specialist Hospital Puteri Specialist Hospital Ampang Puteri SpecialistHospital Damansara SpecialistHospital Selangor Medical centre Ipoh Specialist HospitalSecurities Commission 16

…followed with second Islamic REITs offered topublic recently• The world’s second listed IslamicREITs• Al-Hadharah REITs offered topublic on 15 January 2007 with anissue of 220 million units• Assets : 8 palm oil estates withinPeninsular Malaysia and 2 palm oilfactories.Securities Commission 17

REITs and capital market in Malaysia – facts & figuresMalaysian REITs SectorREITsLaunchdatefund size(mln units)Initialoffer price(RM)Market capUS$(mln)AmFirst Prop Trust 28 Sep 89 138.5 1.00 37.3AHT PNB 2 25 Mar 97 104.9 1.28 14.0AHT PNB 28 Dec 00 100.0 1.00 21.4Axis REIT 3 Aug 05 205.9 1.25 40.4Starhill REIT 16 Dec 05 1,040.0 0.98 236.9UOA REIT 30 Dec 05 228.0 1.15 66.5Tower REIT 12 Apr 06 237.5 1.07 60.0Hektar REIT 4 Dec 06 320.0 1.05 88.0AmFirst REIT 21 Dec 06 429.0 1.00 106.7Quill Capita Trust 8 Jan 07 238.7 0.84 65.3Islamic REITs:Al-Aqar KPJ REIT 10 Aug 06 340.0 0.95 91.4Al-Hadharah REIT 15 Jan 07 220.0 0.99 -# Rounded figure Exchange Rate: RM1= US$0.27Source : ProspectusSecurities Commission 18

REITs received strong support from the governmentthrough facilitative policies• Exemption on realproperty gains tax(RPGT) for the disposalof real estate byindividuals andcompanies to REITs• Tax transparency,REITs were exemptedfrom income tax onchargeable income ifincome is distributed• Budget 2007 Lower withholding tax ondividend from REITs listedon Bursa Malaysia For individuals and mutualfunds : 15% tax ondividend For foreign institutionalinvestors : 20%withholding tax ondividend REITS be exempted fromtax on all income providedthat at least 90% of thetotal income is distributedto investorsSecurities Commission 19

REITs further contribute to the growth of Malaysiancapital marketIn 2006Capital marketMarket capitalisation : RM 848.7 bln(US$ 234 bln)Outstanding debt : RM 452 blnsecurities ii (US$ 125 bln)Capital market : RM 1.3 trln(US$ 361 bln)Banking sector assets: RM 1.1 trln *(US$ 305 bln)Funds raised * : RM 69.5 bln(US$ 19 bln)* As at November 2006RM billionRM billion140012001000800600400200012010080604020Size of Malaysia's capital marketMarket capitalisationOustanding debt securities452.40379.00 415.70351.90297.74 301.47848.7640.3722.0 695.3465.2 481.62001 2002 2003 2004 2005 2006Source: Bursa Malaysia, BNMFunds raised in the Malaysian capital market7.77Bonds Equity6.486.326.1213.291.6597.3164.4685.8372.8855.6767.8502001 2002 2003 2004 2005 Nov-06Source:BNMSecurities Commission 20

..and broaden Malaysian Islamic capital market productsand services• Many first innovations have taken placeIslamic Equities•886 Shariah stocks•64% of market capitalisation• New Shariah index: FTSE_BursaMalaysia of FBM EMAS ShariahIndex launched in Jan 07.Sukuk47% of total outstandingbondsIslamic Unit TrustsNAV RM8.9 bn(8.2% of total industry)• First global sovereign sukuk of US$600million• First Islamic exchangeable sukuk ofUS$750 million• First listed Islamic REITs• Comprehensive with a wide range of products• Shariah compliant stocks• Islamic unit trusts• Islamic REITs• Sukuk• Shariah compliant futures contracts• Islamic intermediation services• Islamic stockbroking• Islamic fund managementSecurities Commission 21

Islamic REITs has tremendous potential butnumerous issues need to be addressed• Create a conducive tax, legal and Shariah framework• Broaden the range and size of assets such as plantations,warehouses, residential, hospitals, logistics etc• Product innovation – competitive and compatible withinternational standards and best practices• Harmonisation of Shariah views• Sustainable awareness and educational programmes• Enhance OIC / IDB countries Islamic capital market to createa vibrant global Islamic financial system- mutual recognition, regional & global productdevelopment, cross-listing ,strategic alliance & capacitybuildingSecurities Commission 22

Thank youSecurities Commission3 Persiaran Bukit Kiara50490 Kuala LumpurMALAYSIAwww.sc.com.mySecurities Commission 23