SG Shariah-compliant REITs: A quick guide for Muslim investors today

Shariah-compliant REITs
Marina Bay Sands in Singapore – Credit to Adrian Agawin (www.pexels.com)

REITs are a popular investment tool among Singaporeans and unsurprisingly, for Shariah-compliant REITs too especially among Muslim retail investors.

Earlier this year, I was asked by a reader to share my thoughts around it.

In this article, I’ll cover some of the common topics below:

  • What are REITs and how do Shariah-compliant REITs differ?
  • Why are REITs popular among investors?
  • What are the different types of REITs?
  • How do I choose and identify a Shariah-compliant REIT?
  • Examples of Shariah-Compliant REITs in Singapore today

So without further ado, let’s dive right in.

What are REITs and how do Shariah-compliant REITs differ?

REIT, or also stands for Real Estate Investment Trust.

When you invest in REITs, you are basically a part owner to a property.

For a Shariah-compliant REITs, they are basically compliant and align to the business and finance screening of the Shariah guideline.

Why are REITs popular?

Here’s the thing – REITs are a popular dividend generator tool for many Singaporeans.

Think about it, properties in Singapore continue to fetch high prices and it is not slowing down yet.

via GIPHY

So long as Singapore remains competitive in the global market and stable in the political landscape, its property prices will continue to appreciate over time.

What are the different types of REITs?

Broadly, we can categorize them into 4 different types:

  • Retail & Commercial
  • Industrial & Logistics
  • Hospitality
  • Healthcare

Let’s elaborate it a little further:

Retail & Commercial

Retail REIT basically owns properties like malls and shopping centres that feature big box retailers.

Similarly, Commercial REIT own properties and rent them out to businesses, primarily for offices and retail stores.

Some retail & commercial REITs listed on SGX are Capitaland Mall Trust, Capitaland Commercial Trust and Mapletree Commercial Trust.

Industrial & Logistics

Industrial and/or logistics REIT essentially owns and manages properties that are mainly used for production, manufacturing, storage, logistics facilities and distribution of goods.

Examples of industrial REITs listed on SGX are Ascendas REIT, Mapletree Logistics Trust and Mapletree Industrial Trust.

Hospitality

Hospitality REIT is basically a trust that owns, acquires and manages the likes of hotels, budget hotels, luxury resorts and business-class hotels and leases out space to guests.

Some hospitality REITs listed on SGX are Ascott Residence Trust, CDL Hospitality Trust and Frasers Hospitality Trust.

Healthcare

Healthcare REITs invest in the real estate of hospitals, medical centres, nursing facilities, and retirement homes.

The success of this real estate is directly tied to the healthcare system.

Some healthcare REITs listed on SGX are First REIT and Parkway Life REIT.

The Big Question – How do I choose and identify Shariah-compliant REITs?

The approach to identifying a REIT which is Shariah-compliant is pretty similar to how you would do for an individual stock. 

We will take reference from the Yasaar Research Inc’s Shariah Screening Process, which is the current FTSE partner and also accredited by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions).

  1. Business Screen – Source of Revenue
  2. Financial Screen – Interest-bearing Debt
  3. Financial Screen – Interest-bearing Securities

For the sake of explanation, let’s take an example of Mapletree Commercial REIT.

To start, you can simply visit their website and take a look under the latest quarter’s financial statements.

Let’s begin.

[Step 1] Check for its Source of Revenue

For REITs, they should normally pass this criteria.

Reason being REITs’ source of revenue primarily comes from their properties, be it in the form of rental income from their tenants or profits arising from selling their properties.

Take a look at their latest Q3 Financial statement:

To find the total revenue, we can simply add the gross revenue and any other revenue, in this case is their finance income.

More on their gross revenue, here is the breakdown:

Shariah-compliant REITs

You can see that it is mainly rental income coming from these 6 properties.

Shariah-compliant REITs

On the other hand, they did not specifically mention what is this finance income about (all we know it was an income deriving from their ‘investing activities’)

Hence, we can conservatively assume it could be interest income (i.e. interest earned through investments in financial instruments)

Compliant Revenue

218,671 / (218,671 + 539) = 99.8%

99.8% of revenue is compliant. These are rental income from their properties, which are highly likely to be safe.

Non-compliant Revenue

539 / (218,671 + 539) = 0.2%

0.2% of revenue is non-compliant due to interest income.

Business Screen: PASS
Non-compliant revenue does not exceed 5% of total revenue.

[Step 2] Check for its total debt, not more than 33%

Companies may take on debt to finance their activities. However, their total liabilities should not exceed 33% of its total assets.

Let’s check it out.

Financial Screen

Total Debt / Total Assets = S$,216,418 mil / 8,880.8 mil = 36.2%

Finance Screen (Part 1 of 2): FAIL
Total debt exceeds 33% of its total assets.

At this point, you may stop and conclude that Mapletree Commercial Trust REIT is non-Shariah compliant.

But for the sake of this article, let’s proceed to the next and last step.

[Step 3] Check for its interest-bearing securities, not more than 33%

In order to do this, you have to add cash and interest-bearing items, and divide them by total assets.

Let’s try:

Financial Screen

Finance Screen (Part 2 of 2): PASS
Its cash and interest-bearing items are less than 33% of total assets.

In conclusion, we can safely assume that Mapletree Commercial Trust is not shariah-compliant as it failed one of the 3 criteria above.

What are Shariah-compliant REITs in Singapore today?

Based on the latest FTSE quarterly report as of 30 Oct 2020 (at the time of writing), we can see that there are at least 5 of them which are REITs.

Shariah-compliant REITs

They are:

  1. Capitaland
  2. Hongkong Land Holdings
  3. Mapletree Industrial Trust
  4. Keppel DC Reits
  5. Frasers Logistics & Commercial Trust 

My thoughts

REITs could play an integral part of our portfolio, especially when it comes to dividends.

As REITs normally have high dividend payout (more than 5%), investors love them for the passive income and without the need to manage the hassle and headache of owning a property.

For Muslim investors like myself, you will notice that REITs tend to have a bordeline pass or fail when it comes to their gearing ratio (or total debt over total assets)

Reason being, the nature of owning properties tend to leverage on debt to buy more properties and in turn, increasing their exposure to interests or riba.

Hence we need to do our due diligence to ensure we stay clear of that.

In Summary…

I’ve summarised the various Shariah-compliant REITs on SGX that you can invest in today, as well as breaking down the steps on how to do it yourself.

Now I want to turn it over to you. Which one would you go for today, considering the prices of REITs have been depressed lately?

Or would you rather wait it out and let the dusts settle?

Let me know in the comment section below.

4 Comments

  1. Zam November 16, 2020
    • Khairul Ruzaini November 19, 2020
  2. Anees November 16, 2020
    • Khairul Ruzaini November 19, 2020

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