What are Shari’ah-compliant REITs and how are they different?

FTSE ST Singapore Shariah Index

Amongst the REITs traded in Singapore, a number of them are deemed to be Shari’ah-compliant (SC). The decisions to include publicly-traded securities into the index are made and dynamically adjusted by scholars from Yasaar Limited, a UK special purpose vehicle (SPV) engaged by FTSE. Locally, three S-REITs are identified within the top constituents of the FTSE ST Singapore Shariah Index as of May To start off, it is important to point out that the stocks listed in the FTSE SGX Shariah Index Series are not certified by Shari’ah committees at the company level.

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Being endorsed as Shari’ah-compliant (SC) REITs enables the REITs to reach out to a larger group of prospective investors, which includes all existing REIT investors plus Islamic investors. Here are the main difference between Shari’ah-compliant REITs to their plain-vanilla counterparts.

FTSE Screening Criteria for Shari’ah Compliance

As seen from the summarised chart above, aside from the ban in alcohol, an important differentiator between Islamic and its non-Islamic financing is the strict restrictions on interest-bearing financings.

In short, being SC restricts the potential investment universe and the extensive use of leverage, both of which could impact the attractiveness of the REIT.

Company-level Shari’ah Compliance Certification – Sabana SC REIT

As aforementioned, being included in the FTSE Islamic Index series does not stand for official Shari’ah accreditation and does not serve as an assurance that the REIT will continue adhering to the prescribed criteria. Hence, Islamic investors might be at risk of being non-compliant with their religious beliefs if they do not keep track of the financials of the non-Shari’ah-certified REITs they invest in. As such, Shari’ah compliance at the company level is crucial to attracting buy-and-hold Islamic investors.

Looking at local REITs, it is with great pity that Singapore lost its only Shari’ah-compliant REIT at the end of 2021. Sabana Industrial Trust, previously known as Sabana Shari’ah-compliant REIT (Sabana SC REIT), had removed its SC compliance requirements in October 2021. The scene is slightly more vibrant across the causeway with four certified SC REITs, known as i-REITs, traded on Bursa Malaysia.

Prior to the removal of SC compliance, Sabana SC REIT was certified as an SC REIT at the company level through the purview of an Independent Shari’ah Committee. The committee provided advisory services and ensured that the operation and financing of the REITs complied with Shari’ah Law and issued a certification of Shari’ah compliance. Akin to FTSE and Yassar Limited, the Independent Shari’ah Committee took the form of a special purpose vehicle (SPV) and was chaired by Shari’ah scholars and experts. i-REITs in Malaysia adopt a largely similar structure.

Concluding Remarks

Despite a larger prospective investor base to reach out to, SC REITs are inherently limited by the scope of operations and the financing options that are being imposed. In addition, an extra layer of fees will be incurred by engaging the independent Shari’ah committees. Hence, SC can be a double-edged sword to the REIT managers but a welcoming addition which makes the capital market more inclusive to Islamic investors.

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