Real Estate and Infrastructure Investments in Islamic Equities
Real estate and infrastructure investments in Islamic equities offer investors the opportunity to align their investment portfolios with Shariah principles while capitalising on the potential for attractive returns. By understanding the principles of Islamic finance, the criteria for Shariah-compliant investments, and the market opportunities and challenges, investors can make informed decisions and harness the potential of these sectors. This article aims to explore the world of real estate and infrastructure investments in Islamic equities, specifically focusing on the Malaysian financial landscape.
Principles of Islamic Finance
Islamic finance operates under the principles of Shariah, which guide ethical and responsible financial practices. These principles are derived from the Quran and the teachings of Prophet Muhammad (peace be upon him).
Key principles include the prohibition of interest (riba) and uncertainty (gharar), avoiding prohibited activities (haram), as well as the achievement of ultimate objective of the Islamic Law that is to preserve the social order of the community and ensure the equality, justice, and harmony (Maqasid al-Shariah).
These principles ensure that investments are aligned with Islamic values and meet the general objective of Islam.
For example, in the Quran, Allah says: " O believers! Fear Allah and give up outstanding interest if you are ˹true˺ believers. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal — neither inflicting nor suffering harm." (Al-Baqarah 2:278-279). This verse underscores the prohibition of interest and emphasizes the importance of adhering to Shariah-compliant financial practices.
Real Estate Investments in Islamic Equities
Real estate investments in Islamic equities are typically facilitated through Real Estate Investment Trusts (REITs) or direct property ownership. REITs are investment vehicles that allow investors to pool their funds to invest in a portfolio of income-generating properties. Malaysian listed REITs undergo rigorous screening based on specific criteria set by the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) to its Shariah compliance.
In Shariah-compliant investing, adhering to Islamic principles involves avoiding sectors and activities that are considered Shariah non-compliant. These include financial services based on interest (riba), gambling/ gaming, the manufacture or sale of non-halal products, conventional insurance, entertainment activities that contradict Shariah, tobacco-based products, stockbroking in Shariah non-compliant securities, and hotels and resorts with non-permissible practices. Shariah-compliant investors consciously exclude these sectors from their investment portfolios to ensure that their investments are in line with ethical and responsible investment practices guided by Shariah principles. By adhering to these guidelines, investors can ensure that their investment activities are aligned with their religious beliefs and promote values such as fairness, social responsibility, and avoidance of prohibited activities.
Bursa Malaysia is indeed a key resource for information on Shariah-compliant Real Estate Investment Trusts (i-REITs). According to their website, i-REITs are a Shariah version of conventional REITs, offering investors the opportunity to invest in real estate while adhering to Islamic principles. These REITs must ensure that their income is from Shariah-compliant rental or adhere to a 20% benchmark for mixed activities as determined by the SAC of the SC.
Regarding the performance of Malaysian REITs, including i-REITs, a 2024 industry analysis from Simply Wall St indicates that the Malaysian REITs industry has shown a steady performance with a growth forecast of 3.1% annually.
As of January 5, 2024, the market capitalisation of the Malaysian REITs industry stood at RM 17.8 billion with revenues of RM 2.2 billion and earnings of RM 1.1 billion. The Price-to-Earnings (PE) ratio for the industry was 18.3x, indicating a solid valuation in the market.
In terms of specific i-REITs, data from mreit.fifthperson.com as of January 5, 2024, shows various performance metrics such as distribution yield, price to book ratio, dividend per unit, net asset value, and gearing ratio. For example, Al-‘Aqar Healthcare REIT had a distribution yield of 6.48% and a gearing ratio of 45.8%, while Al-Salam REIT had a yield of 5.49% and a gearing ratio of 48.8%.
This information illustrates the active and dynamic nature of the Malaysian i-REITs market and provides insights into their performance and stability as investment options in the Islamic finance sector.
For more detailed information, you can visit Bursa Malaysia and mreit.fifthperson.com
On the other hand, SC, the regulatory authority overseeing the capital market, maintains a list of approved Shariah-compliant securities, including REITs. Investors can visit the SC's website or contact their Investor Affairs and Complaints Department for information on i-REITs. It is important for investors to conduct thorough due diligence and review the fund's prospectus, financial statements, and investment strategy before making investment decisions.
For investors looking to delve into i-REITs in Malaysia, Bursa Malaysia offers a comprehensive directory of registered Participating Organisations or brokers. These institutions are not only adept at offering Shariah-compliant securities, including REITs, but majority of them also provide a wide array of Shariah-compliant services, ensuring an investment process that fully adheres to Shariah principles.
Engaging with these registered entities is a key strategic decision for anyone interested in the Islamic capital market. They are skilled in guiding both institutional and retail investors, offering expertise in executing trades and investments while maintaining strict adherence to Shariah compliance.
Infrastructure Investments in Islamic Equities
Infrastructure development plays a crucial role in the growth and economic progress of Malaysia. Islamic equities provide avenues for investors to participate in infrastructure projects while adhering to Shariah principles. Infrastructure investments in Islamic equities can be made through infrastructure funds or Islamic project finance.
Islamic infrastructure funds pool investors' funds to finance infrastructure projects that comply with Shariah principles. These projects can include transportation systems, utilities, telecommunications, and renewable energy initiatives.
Islamic project finance involves providing financing for specific infrastructure projects while adhering to the Shariah principles in Islamic finance.
For instance, the Mass Rapid Transit (MRT) system in Kuala Lumpur, specifically the Klang Valley MRT Project, presents an opportunity for Shariah-compliant infrastructure investment. DanaInfra Nasional Berhad supports this initiative through Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) Programmes, structured based on Shariah principles, specifically Commodity Murabahah (via a Tawarruq arrangement), and backed by the Government of Malaysia. Highlighting its commitment to engaging a broader range of investors, DanaInfra announced the initial public offering of the 15-year exchange-traded sukuk in 2013, featuring a RM100 million scheme issued under the same ICP and IMTN programme of up to RM8 billion. This innovative move saw three tranches of the MRT Sukuk Programme listed on Bursa Malaysia as Exchange-traded Sukuk or Retail Sukuk on November 28, 2013, opening up participation to retail investors. This arrangement not only allows investors to contribute to Malaysia's infrastructure development but also enables them to adhere to Shariah principles in Islamic finance, further diversifying investment opportunities within the country's growing Islamic financial market.
DanaInfra, mandated to undertake funding for government projects, has expanded its portfolio to include significant undertakings such as the MRT Putrajaya Line, the Sarawak Pan Borneo Highway, and the Light Rail Transit 3 (LRT3).
With Phase 1 of the MRT Putrajaya Line operational since June 16 and Phase 2 expected to commence in January 2023, alongside the Sarawak Pan Borneo Highway project construction progress standing at 83.04% as of May 25, and the LRT3 project 72.25% completed as of April 30, DanaInfra's initiatives underscore the pivotal role of sukuk in financing Malaysia's infrastructure ambitions.
Role of Islamic Financial Institutions and Islamic Fund Management Companies
Islamic financial institutions and Islamic fund management companies play a critical role in facilitating real estate and infrastructure investments in Shariah equities. They are responsible for conducting thorough due diligence, ensuring compliance with Shariah principles, and providing investors with access to diversified portfolios.
1. Islamic Financial Institutions:
Structuring Shariah-compliant Financial Products: Islamic financial institutions develop and structure Shariah-compliant investment products like Sukuk, and ensuring the products are align with Islamic principles.
Due Diligence: The institutions rigorously assess investments for Shariah compliance, evaluating the nature and financial structure of potential investments.
Transaction Facilitation: These institutions facilitate investment transactions, connecting investors with opportunities and managing processes like the issuance of Sukuk.
2. Islamic Fund Management Companies:
Portfolio Management: Specialising in managing Islamic assets, the fund managers build and manage portfolios, including Shariah equities and Sukuk.
Market Research and Analysis: The fund managers conduct comprehensive research to identify viable Shariah-compliant investments, as well as analysing market trends and financial data.
Investor Relations: Fund managers maintain communication and relationship with investors, providing updates on investment performance and market insights.
Balancing Ethics and Performance: These fund managers ensure investments adhere to Shariah principles while striving for competitive financial returns.
3. Islamic Stockbrokers:
Facilitating Trades: Islamic stockbrokers play a crucial role in executing trades for both institutional and retail investors. They facilitate the buying and selling of Shariah-compliant securities.
Access to Markets: These Islamic stockbrokers provide investors with access to Islamic capital markets, offering a range of Shariah-compliant investment products and services.
Advisory Services: Islamic stockbrokers facilitated by their dealers’ representatives also offer advisory services, guiding investors on suitable Shariah-compliant investment products and services based on their financial goals.
The Malaysian Perspective
Malaysia stands out as a global centre for Islamic finance, boasting a robust ecosystem that supports Shariah-compliant investments. The country offers a diverse array of investment products and services, spanning real estate and infrastructure projects.
Within Malaysia's Islamic finance landscape, one finds Islamic banks, takaful providers (Islamic insurance), and Islamic fund management companies. The regulatory framework, overseen by entities such as the SC and Bank Negara Malaysia, ensures strict adherence to Shariah principles in financial transactions and products. This commitment, coupled with government initiatives, solidifies Malaysia's standing as a premier Islamic finance destination. The nation's vibrant ecosystem provides numerous opportunities for Shariah-compliant investments in real estate and infrastructure.
For investors seeking Shariah-compliant portfolios with enticing returns, real estate, and infrastructure investments in Islamic equities present attractive prospects. Participating in real estate can be facilitated through (i-REITs), offering diversified portfolios of income-generating properties. Infrastructure investments, on the other hand, can be pursued through infrastructure funds or Islamic project finance (Sukuk), simultaneously contributing to the development and growth of vital sectors.
* Some financial products and services may not be classified as Shariah-compliant. Please research carefully before making any financial decisions
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