SaydFarook.pdf

8/14/2019 SaydFarook.pdf

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REAL ESTATE INVESTMENT TRUSTSOPPORTUNITY TO EXPAND THE UNIVERSE OF ASSET BACKEDINSTRUMENTSSAYD FAROOK PHD

GLOBAL HEAD - ISLAMIC CAPITAL MARKETSISLAMIC FINANCE (RAPIDLY DEVELOPING ECONOMIES)

24 OCTOBER 2011


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CONCLUSIONDEMAND Islamic Commercials Banks Short Term Funds Fixed Yield and Protection of

Capital Rating

SUPPLY Conventional universe ofProperty Rental REITS

Screened for Sharia Complianttenants and financials


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DEMAND DRIVERSUNDERSTANDING WHAT ISLAMIC MARKETSNEED


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Source: E&Y, The Banker

Suppliers of Capital

RETAIL INSTITUTIONALFinancial Intermediary

Awqaf/Endowments

Pension Funds

SovereignWealth Funds

UNHWI/HNWI

Takaful

Mass Affluent

0

10

20

30

40

50

60

70

80

90

100

Sukuk (10%)Funds (5%)

Takaful (1%)$951B

Commercial Banks(74%)

InvestmentBanks (10%)

DEMAND DRIVERSFLOW OF FUNDS IN ISLAMIC FINANCE

Commercial Banks holdthe majority of Islamic

finance assets


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DEMAND DRIVERS LIQUIDITY POSITION OF ISLAMIC BANKS

NET FINANCING/DEPOSITOR & SHORT TERM FUNDINGSource: Bankscope

INTERBANK RATIO Source: Bankscope

Consistent liquidity surplus: Islamic banks have continued to demonstrate theirexcess liquidity before, during and after the global financial crisis, as investorsseek a safe haven, while complying with Sharia principles.

Liquidity excess flows directly into treasury funds pool, particularly after GFC.


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DEMAND DRIVERS FLOW OF FUNDS TO CAPITAL MARKETS

Islamic Finance Assets 822 bln

822b 09 Top

500Islamic

Fin.Institution Assets

290b 08 GCCIslamic

Fin.Institutions

Assets

Fixed Income Assets 131 bln200/

131bln July 10

total/outstandSukuk issued

62/31July 10 total/outstand int.Sukuk issued

Money Market Transactions 7 bln/day

2bln Saudi

Arabia0.5blnBahrain

4.5 blnRest ofWorld


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FLOW OF CAPITAL IN ISLAMIC FINANCESHORT TERM YIELD IS THE ORDER OF THE DAY

DEPOSITS/INVESTMENTS

IFBANKING ASSETS

LOW RISKINTERBANK

MONEY MARKETS

7

Supplier of CapitalRetail + Institutional

FinancialIntermediary Treasuries

$2.5T assets of HNWI Muslims$2T in SWFs of 4 GCC powers

$1B Today > $2.2T by2015

Murabaha ~$7-10B/day

MAJORITY OF ISLAMIC LIQUIDITY SITS WITHISLAMIC COMMERCIAL BANK TREASURIES


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DEMAND DRIVERSWHAT DO ISLAMIC BANK TREASURIESNEED?

TREASURYDEMANDS

SIMPLICITY

CREDITQUALITY /

RATING

CAPITALPRESERVATI

ON

LIABILITYMATCHING

YIELD


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SUPPLY OPPORTUNITIESHOW REITS CAN BE UTILISED TOFACILITATE SUPPLY


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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 investmentproperty 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.


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REIT STRUCTURE ANDSTAKEHOLDERS

REIT

Investment Returns

UnitHolders

TrusteeManager ManagementServices

Management Fees

Trust Services

Trust Fees

Ownership ofProperties

Net PropertyIncome

TenantRent

Rental Payment

Maintenance &ManagementServices

Maintenance &Management Fees

PropertyManager


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TYPES OF REITS

Equity

Primary Asset:Direct ownershipof real estate

Leasing Development Asset

Management Rental Income

Mortgage

Primary Asset:Mortgage Assets

Real Estate loans Construction

financing Interest Income

Hybrid

Primary Asset:Mix of assets

Own and operatereal estate assetsand providemortgagefinancing


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SHARIA COMPLIANCE FOR EQUITYREITS Non-permissible rental activities

Interest / Gambling / Gaming / Non-Halal Products andservices or related services

Rental from tenant who operates mixed activities

Leverage (Percentage of Debt)

Cash and Accounts Recievable

Interest Income


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POTENTIAL REIT UNIVERSE

Industry/OfficeREITs20%

Healthcare REITs

12%

Residential REITs

16%

RetailREITs26%

Diversified REITs

8%

OtherREITs18%

America45%

Asia-

Pacific40%

Europe15%

Global REITMarket

$795 bln

US Equity REITs $389 blnTurkish REIT $7.5 blnMalaysian REIT $795 mln

Source: Datamonitor, E&Y


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REITS WHAT RETURNS HAVE THEY OFFERED?


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DEMAND MEETS SUPPLY

WHY ARE REITSGOOD FOR ISLAMIC

BANKS?

Diversification of credit Low risk Steady income

generation Liquid (particularly

those in developedmarkets)

Asset backed

CHALLENGES

Real Estateconcentration

No guaranteed capitalprotection, but thennothing is RISK FREE

POTENTIALSOLUTIONS

Require a third partymarket maker to sit inbetween and arbitragethe two sides withsome risk absorption

Create a rated SPVcompiling theunderlying assets andproviding a diversifiedpool of risk in differentbuckets andgeography

Key is to findtraditional PASSIVErental REITs (notconstruction ordevelopment based)


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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%).


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WHATS NEEDED TO INVEST IN THISMARKET?

Uniform standards of what is Sharia compliant forREITS, identifying: Types of permissible tenants (can be similar to activities

screener)

Permissible percentage of tenants involved in non-compliant activities Percentage of leverage, cash and interest income


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CONCLUSIONDEMAND Islamic Commercials Banks Short Term Funds Fixed Yield and Protection of

Capital Rating

SUPPLY Conventional universe of

Property Rental REITS Screened for Sharia Compliant

tenants and financials

Documents

SaydFarook.pdf