History or background of REIT
Real Estate Investment Trusts (REITs) a companies that invest their shares in real estate provide the profits and distribute dividends to the shareholders. This is a system where the return on investment comes from the purchase of shares and the investment of buying the real estate for rent to obtain the finance. Real estate surrounded us which is residential, commercial, and industrial. Real Estate Investment Trusts (REITs) have provided individual investors all over the country with buildings like shopping malls, offices, hospitals, warehouses, and other types of commercial properties. The investors that invest in REITs have been given the predictable cash flow and the benefits of the common stock’s liquidity. Therefore, the importance of REITs is always access to capital and acquire to build additional properties as part of their ongoing real estate business.
In addition, REITs are also managed by professional bodies that a skilled in selecting and developing commercial property and having a positive impact on the income of the investors. Before Real Estate Investment Trusts (REITs) were known in Malaysia, REITs were created in the United States in 1960 allowing investors to invest in huge real estate. REITs in the United States are the choice for the investors who are taxation double on their business. It is because even a minor problem in large scale of business can affect their tradition that not everything is controlled by rich people and big companies.
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Apart from that, REITs have been around for more than forty years, but it’s only been in the past dozen years that most people have started buying into these higher investments. From the end of 1992 through the end of 2004, the size of the REITs industry has increased by almost twenty times from 16 billion dollars to 308 billion dollars.
As the saying goes, Stan Ross, a former managing partner of Ernst & Young‘s Real Estate Group said, “They are real operating companies that lease, renovate, manage, tear down, rebuild, and develop from scratch.” This means that we should know about what is a REITs and what it can give us benefits from that investment. Real Estate Investment Trusts (REITs) mean when we buy real estate, we are also buying a business, and the REITs are our real estate.
Furthermore, Real Estate Investment Trusts (REITs) in Malaysia such as equities, unit trust funds, derivatives, and brokerage services a new class of asset investment option that has emerged with the potential fair return on investment. It is also being traded in Bursa Kuala Lumpur with ease of buying and selling like a normal equity.
At last, the Real Estate Investment Trust (REIT) management team will accept the risk when the odds of success are very strong. This is because they are investing their money in the properties and didn’t want to risk the loss of capital any more than the investment center which is REITs. REITs will run the properties in such a way that they generate income, but they also have the future in the growth of the property portfolio and its cash flow as well as taking advantage of new opportunities.
Development of REIT in Malaysia
Malaysia was the first country in Asia were introduce Real Estate Investment Trusts (REITs) previously known as Property Trust Funds (PTFs) in 1988. Then, there were four real estate trusts listed on the Kuala Lumpur Stock Exchange (KLSE) which is Arab – the Malaysian First Property Trust in August 1989, the First Malaysian Property Trust in November 1989, the PNB Real Estate Trust in December 1990, and the Mayban Property Trust Fund One in Mac 1997.
After that, Malaysia also used the Australian Listed Property Trusts (LPTs) model to establish a constitutional framework even there has some different aspects in terms of structure. This is related to Bumiputra rules that restrict foreign ownership by the indigenous Malay. The first constitutional framework also was approved by Bank Malaysia in 1986. However, the framework is limited and does not provide tax transparency. The other issues are this sector are lack of focus on asset management, trading was small and the First Malaysia Property Trusts became private. Subsequently, a real estate trust guideline in 1995 also failed to stimulate any benefits.
Besides that, the real estate trusts guidelines aim to attract new entries and raise awareness among the public participants and the property owners or developers who have the advantage of REITs to increase the liquidity of the real estate market. The characteristics of this REIT’s guidelines were shown like prioritizing regarding the liberalization of loans has a limit for REITs, flexibility on property acquisition on lease holdings as well as flexibility in the acquisition of secured properties to the final institutions. So with this continuous effort to create the products and services will develop the financial system in Malaysia.
After that, according to Islamic Finance Asia in 2009, a proper REITs market was started in Malaysia at the beginning of 2005 after REITs in general hit the stock markets in Japan, Hong Kong, and Singapore. Only three out of 18 REITs trading on the main board of Bursa Malaysia are Sharia-compliant. They are Al–Aqar KPJ, Al – Al-Al-Al-Hadharah Boustead, and Axis REITs. Malaysia was also listed as the first Islamic REIT in the world with the Al–Aqar KPJ REITs as the first introduced. While, the second Islamic REIT was Al – Hadharah Boustead REITs, which had eight oil palm estates in its portfolio. Next, the third was Axis REITs which was converted from conventional into Islamic REITs in 2008. An example of an early REIT launched in 2006 was Starhill Real Estate Investment Trust (STARREIT). These three REITs in Malaysia specialize in different types of real estate assets. The types of real estate aassessorAl–Aqarrarr specialize in healthcare buildings, Al –Al-Al-Al-Hadharahh in oil palm plantations, and Axis in office buildings and industrial properties.
Then, the difference between REITs and conventional REITs is the source of the income. REITs derive their income from business activities that are Sharia-compliant. As for conventional REITs, their income was from investors investing their money in real estate and getting dividends from running the business on commercial properties.
After that, REITs have a high market liquidity and efficiency in real estate and corporate governance organizations of real estate companies in the country. A REIT can diversify the product based on Sharia to meet the needs and preferences of investors. The creation of REITs is also able to increase the country’s Islamic capital market attracting foreign investors investing in Malaysia. Foreign investors can invest in REITs without direct ownership of the property.
Furthermore, real estate developers are shareholders and owners of REITs in Malaysia because they are experts in property development. This means, they also have the advantage of creating and providing improvements to the property which can make their business strategy better by renting out the property. Besides, they also know how to operate and maintain their business until it leads to profitability.
REIT features
As we all know a Real Estate Investment Trust (REITs) is a company that owns, operates, and finances the income from producing the properties. Mostly, properties under Real Estate Investment Trusts (REIT) like shopping malls, offices, warehouses, hospitals, and other more commercial properties.
Next, Real Estate Investment Trusts (REITs) generate a steady income stream for the investors but in a different way of capital appreciation. REITs are publicly traded like stocks, which makes them highly liquid and different from other real estate investments. In Malaysia, REITs were managed by Bursa Malaysia.
There are features of REITs. A REIT pays a minimum of 90 percent of its taxable income in the form of shareholder dividends each year. Firstly, the characteristic of REITs is a minimum of funds. Companies will offer the REITs’s fund at least RM100 million. However, the REITs are allowed to borrow up to 50 percent of the total asset value which increased from the previous limit of 35 percent. While fans over 50 percent must be approved by the unit holders.
Secondly, the management of REITs. REITs must ensure that the assets have proof of title or ownership of interests to allow proper custodial arrangement. A management company should inform the trustee in writing and keep them updated on any proposal relating to acquisitions or disposal of real estate. Besides that, the foreign ownership in the management of the fund is liberalized to 70 percent an increase to 49 percent in 2005.
Thirdly, real estate development. Real estate development is the total value in the construction of properties obtained by the fund not exceeding 10 percent of the total assets of the funds after the acquisition. In addition, REITs can only be used to invest in completed properties and not under-construction projects. Apart from this, it gives a good prospect market value because the sale and purchase agreement is based on the construction completion.
One of the REIT's characteristics is distribution. This means that there is no limit but there is tax exemption if distributed around 90 percent of total income. For the distributions, less than 90 percent are charged the tax according to the year of the assessment.
Lastly, the properties under the REITs have given an exception of Stamp Duty and Property Gains Tax on the instrument of transfer of property for an individual or company and from disposal of real estate. This means the owner of the properties doesn’t have to pay the tax at LHDN. It can give the benefit for the owner of the properties.
Additionally, Real Estate Investment Trust (REIT) managers were given more flexibility to manage the diversification of the portfolio of REITs. An example is having the freedom to invest in foreign property and permitted part of the portfolio in which the properties are not wholly owned or have majority ownership. So, REIT managers can generate the funds more quickly for acquisition purposes or capital expenditure.
Hence, according to iREITs should related to the return on the investment, usury, gambling, and investment transactions. This element can determine whether the investment is Sharia or otherwise. For all that, REITs are not allowed the mix activities such as usury in financing, gambling, and insurance conventional. This is to make sure that real estate investment to ensure it is parallel with Islamic principles.
Types of REITs in Malaysia
Most REITs are traded on major stocks exchanged but there are also public nonlisted and private REITs. In Malaysia, according to the National Association of Real Estate Investment Trusts (NAREIT, 2009). REITs are divided into three types which are Equity REITs, Mortgage REITs, and Hybrid REITs.
First is the equity REITs, which mostly own and operate the income-producing real estate. They have increasingly become a real estate operating company engaged in a wide range of real estate activities including leasing, maintenance, development of real property, and tenant services. Equity REITs also have assets such as buildings, residential, and offices that can generate income. This is because equity REITs concentrate on the properties in a particular area. Equity REITs are known to have the potential to be good in long-term investment by offering a stable dividend income as well as a capital increase when it is sold. Therefore, investors who invest in equity REITs are investing in a portfolio of real estate that can generate income. In Malaysia, these equity REITs are only used in conducting real estate investments, an example is Al–Aqar KPJ REITs.
Second on the list is the mortgage REITs are emphasized in long-term mortgage holders, but they are also involved in short-term construction and financing. These mortgage REITs offer loans based on the interest to the property owners, operators, or developers in the sector commercial and residential areas. For this point, it can have a major risk because mortgage REITs are more sensitive to the market interest rates. The most important is that income comes through interest rates. Next, mortgage REITs are known to lend money directly to the real estate owners and operators or extend the credit indirectly through the acquisition of loans or mortgage-backed securities. Now, mortgage REITs generally extend the mortgage credit only on existing properties. Besides, mortgage REITs also managed their interest rate and credit risks using securitized mortgage investments, dynamics hedging techniques, and the other accepted derivative strategies.
The third REIT is a Hybrid REIT. A hybrid REIT is a combination of equity REITs and mortgage REITs. This type of REIT owns a property and makes a loan to the real estate at the same time. The income for hybrid REITs comes from both rent and interest.
At last, one of the three types of REITs above, Malaysia only uses equity REITs. It is because these REITs can be aligned with Sharia law as long as it is not mixed with anything that is prohibited such as interest (riba), fraud (gharar), and so on. Besides that, this is also because their business is managing the income-producing properties and distributing of their profits as dividends. REITs are also highly liquidity and in market valuation.
REIT investment mechanism
A Real Estate Investment Trust (REIT) is a company dedicated to owning and in most cases, operating income-producing reestatesate such as apartments, shopping malls, offices, hospitals, warehouses, and both other commercialets. Some of the REITs are also engaged in financing real estate.
For all intents and purposes and to make the easier REITs are shared. When you buy or invest in REITs exactly like you purchase the shares and the business. Before you want to invest in real estate which is in REITs, you must know where the money should be invested also managed properly. We must be careful about what we invest. The most important is, that we shouldn’t think about the money but the risk of it.
As we all know, REITs are one form of unit trust or unit trust. There is a difference between unit trusts and REITs. REITs are only invested in the real estate sector while the unit trusts invest in the other investment.
Next, the investors will invest in REITs through a fund management company. The investor’s money will be used in the fund management company. All the money is used to buy properties such as hotels, hospitals, offices, shopping malls, warehouses, and so on.
Apart from this, these properties will be leased to the tenant for a certain period based on the agreement between the tenant and the management team. Then, the income is generated through renting or selling the properties and it is distributed directly to the REIT holder. When a REIT pays out dividends, the management team will distribute them among shareholders within 90 percent of paid-out taxable income.
Lastly, this can make it more than just a company's shares or equity. REITs are very suitable to be used as a defensive instrument in an investor’s portfolio. Investing in this instrument also can make you the owner of several properties at a time.
Advantages and disadvantages of REIT investment
Investing in Real Estate Investment Trusts (REITs) have an advantage. One of the advantages is a type of stocstockis is because of their taxation, REITs have a greater profit for paying the shareholders dividends than similar other corporations. REITs will maintain the tax-qualified status by paying out 90 percent of their income to common shareholders, it doesn’t have to pay the federal income taxes. Without, a tax it can reduce profits so the shareholders can get more of the REIT’s earnings.
Another benefit are potential for a non–taxable return of capital. This is because depending on the REIT distribution policy and annual earnings, a portion of dividends may be deemed a non–taxable return of capital. Hence, this is not the only investor that does not have to pay taxes on part of the dividend in the year and it is distributed because those amounts are also not taxable until the stocks are sold. This shows that return of capital defers taxes as well as lowers an investor’s taxable income during the time REIT stock is held, it will increase after-tax dividend yield.
REITs are also easy conversion to cash. This shows that REITs in Malaysia that are listed on Bursa Malaysia have high liquidity. This means the investors do not have to endure many processes and a long wait to convert their assets to cash immediately. There is a difference when having a transaction in real estate such as houses because we have to long wait until it is successful. REIT shares can be converted to cash in less than a day.
Meanwhile, REITs have some disadvantages. The returns are also not guaranteed. This is because the total return of REIT is subject to the performance of the property market. Therefore, the price of one unit of REIT depends on the market value of the property and if the market falls it will have an impact on the price of REITs. For this point, it can give a risk if not have the tenants and the tenant’s ability to pay the rent will also affect the return from the property.
Besides that, the market risks. Real Estate Investment Trusts (REITs) are subject to changes in the market demand and supply. Market fluctuations, stability in the economy, and changes in interest rates may affect the price of REITs. As a result, when the economics change or other factors may affect the market performance, the value of investments can change over time. Among the other factors that can influence market performance are interest rates, inflation movements, economic conditions, financial market conditions, political changes, and so on.
The other disadvantages of REITs are fund management risks. Management risks can happen when the company’s manager does not perform the task according to theinstructionsnhavee beenhas given in investing in REITs. Furthermore, the poor management of REITs can affect the shareholders with a loss of invested capital. In addition, the selection of real estate to be the assets for REITs is a subjective process. So, the selected properties can give the result in a lower or higher return than the property market.
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