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.
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
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 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 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).
- Business Screen – Source of Revenue
- Financial Screen – Interest-bearing Debt
- 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.
[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:
You can see that it is mainly rental income coming from these 6 properties.
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)
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.
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.
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.
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.
- Hongkong Land Holdings
- Mapletree Industrial Trust
- Keppel DC Reits
- Frasers Logistics & Commercial Trust
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.
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.
Salam, it may pass today but can fail the financial screenings next time. Thus, difficulty to keep long term and potential loss if sold off. Thoughts?
Wsalam Zam, I would normally go for stocks/REITs which have been consistently passing the financial screening and have good enough buffer so it doesn’t easily crosses over. My personal preference 🙂
Salam Bro, i think there is a mistake. Regarding: “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. They are” — Should it be : “Mapletree Industrial Trust” instead of “Mapletree Logistics Trust”? The below are the Top 10 Constituents. Correct me if i am wrong. Thanks
Hongkong Land Holdings
Venture Corp Singapore
Mapletree Industrial Trust
Keppel DC REIT
Frasers Logistics & Commercial Trust
NetLink NBN Trust
Wsalam Anees, thanks for pointing that out. Rectified!
Assalamu’alaikum Khairul, such a nice, simple article on Shariah compliant REITs in Singapore. By the way, are you able to write up on Sukuk that are available in Singapore and global? I’m interested to know more about them and how to go about investing in them. Thank you.
Waalaikumsalam Muhammad, as far as I’m aware, there isn’t Sukuk available in Singapore today. Globally, yes we do. For a start, you may want to invest in Wahed and get exposure in to the likes of Franklin Global Sukuk Fund, Arqaam Islamic Income Fund and Emirates Global Sukuk Fund. I’ve explain it a little more here. Hope this helps.
I understand your personal preference on going for stocks/REITS that regularly pass the financial screening, do you check on previous quarters financial statements or previous year window as well to justify your choice?
Apologies i am new to personal finance and hope you can answer my queries 🙂
I would normally do the screening on the stocks/REITS which I’m personally vested in or high on my watchlist. It can be time-consuming, so this personal exercise normally done on a quarterly basis. To your question – I will prioritize the current period 🙂
Hope that explains!
How do i access that the stocks/REITS have regularly pass the financial screening, do you check on previous quarters financial statements or previous year window as well to justify your choice?
Apologies i am new to personal finance and hope you can answer my queries 🙂
Hi there, may i know what do one do if the reit they hold on to goes into the Fail category? Do one have to immediately sell off the Reit?
Are Capitaland and Hong Kong Land reits? I believe they are Real Estate stocks that give out dividend as any other dividend-yielding stocks do, but they are not Reits per se. Owning a Reit stock is, as you said correctly, owning a part of the property under its portfolio and therefore gaining direct access to the distributable income generated by the properties. This is different from owning a property stock which essentially is you invest in the company itself. Wassalam
Hi Azmi, you’re right – thanks for pointing that out.
Capitaland and Hong Kong Land Holdings in this example are considered real estate companies, and not REITs per se.
Please post your review regarding crypto and halal investing. Is crypto shariah compliant etc would love to know your analysis behind it.
Hi Hafiz, thanks for the suggestion. I’m already looking into it and will share more when the time comes iA.
Hi Salam Khairul,
Please pardon if I may sound silly or ask a very silly question. I’ve long been searching for something i can invest but I am not very tech savvy and definitely have no clue on stocks or investment, I’ve definitely fone slot of reading but I do not know how to go about and start.
There’s so many good insights and suggestions as well as good question from the comments sections itself and ive learn alot. I was just wondering if you could be kind enough to guide me through on where should I start and I’ll pick up from there.
It’s been tough for me for a while now and i just thought it would be great to start investing on myself for once.
Wsalam Nad, do drop an email at [email protected] and insya’Allah we can take it from there.
Salam Bro. I’ve been investing in shariah compliant stocks. But, the ones I am confident enough to invest in are those that are listed in the ftse index as above -since they are researched and backed by a reliable institution(Insyallah). Your step by step calculations are easy to understand(i am very grateful). My question is : Are there many counters in your own portfolio where you do your own DIY shariah compliance screening.
Wsalam Rahim, these days I approached it on 2 fronts. I’m a subscriber to Zoya app for awhile now (a Shariah stock screening app which I recommend) for a quick 30-second check. At the same time, I will do my own due diligence and confirm it on my end when I have more time to sit down, have some coffee and run through the financials.
Salam brothers….just sharing….from the Islamicly app which I subscribed to for Singapore….USA….Malaysia…Indonesia Islamic markets. The only fully shariah compliant REIT in Singapore is Sabana Shariah Compliant Reit. The rest all failed accounting ratio…..mainly in debt (33%) compliant.
Not sure where 33% come from.
It should go all the way back for 3yrs.
You have 90 days to sell it at a loss or profit.
Salam thank you for the useful article. There’s a latest FTSE ST Singapore Shariah Index as of 30 June 2021 where Capitaland has been replaced by Ascendas REIT. I have a few questions:
1) Does this mean that Capitaland is no longer shariah-compliant? If so then what do we do with the shares we already have?
2) Does the shariah-compliant Capitaland refer to “Capitaland Ltd (C31)” or “Capitaland Int Comm Trust (C38U)”? The latter is a REIT so I presume this is the one.