Islamic REIT shortage seen boosting demand for Johor's new trust

[KUALA LUMPUR] Demand for Malaysian Islamic real-estate investment trusts may withstand a sluggish property market as their steady rental income is popular with pension funds amid a shortage of Shariah-compliant assets.

Johor Corp, the investment company of the country's southern Johor state, plans to list the RM900 million (S$333 million) Al-Salam REIT, Kamaruzzaman Abu Kassim, the company's president, said in an e-mail interview Tuesday. The prospectus will be registered by July and the trust expects to deliver returns of around 6.3 per cent in 2016, he said.

Islamic lenders in Malaysia are facing a shortage of investing options with worldwide sukuk issuance down 28 per cent so far this year. The Southeast Asian nation's US$1.5 billion global Islamic bond sale last month drew more than US$9 billion of bids and was priced below the initial target, reflecting demand for Shariah-compliant instruments.

"There is still a shortfall in institutional quality Islamic investments, as the quantum of Islamic sovereign and institutional funds continues to grow within the region," Suhaimi Zainul-Abidin, a founding member of the Gulf Asia Shari'ah Compliant Investments Association in Singapore, said in an interview Tuesday. "Johor Corp can therefore expect lots of interest from local Islamic state and pension funds."

RELATIVE RETURNS

Shariah-compliant REITs forbid investment in property associated with activities deemed unethical under Islamic law such as gambling, financial services that pay interest, hotels that serve alcohol and bars. There are only three listed Islamic property trusts in Asia, compared with 128 non-Islamic vehicles, according to data compiled by Bloomberg.

"We believe that Al-Salam REIT will attract cornerstone investors," Johor Corp's Kamaruzzaman said. "Al-Salam REIT is targeted at investors or fund managers with long-term investment objectives who seek regular stable income distribution and long- term capital appreciation." Malaysia's two Shariah REITs outperformed sukuk last year.

Al-'Aqar Healthcare REIT, majority owned by Johor Corp, returned 11.7 sen a unit to shareholders, stock exchange figures show. That worked out to a dividend yield of 8.4 per cent based on its year-end closing price, according to data compiled by Bloomberg. Axis Real Estate Investment Trust paid out a quarterly average dividend of 4.94 sen a unit last year, or an annual yield of 5.5 per cent.

The Bloomberg AIBIM Bursa Malaysia Corporate Sukuk Index, which tracks the most-traded local-currency notes, returned 3.2 per cent in 2014.

'OVERWHELMING RESPONSE'

"For Johor Corp's Islamic REIT listing plan, we should expect an overwhelming response and oversubscription of units by institutional investors," said Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd in Kuala Lumpur. "This is based on the fact that Islamic REITs are giving much higher yields than other Shariah-compliant investment instruments."

While the trusts generated relatively high returns in 2014, the unit prices of the Al-'Aqar and AXIS trusts have dropped around 3 per cent this year, compared with a 2.7 per cent gain in Malaysia's benchmark share index, amid a softening real-estate market after the government imposed a series of measures to curb speculation.

The value of commercial and industrial transactions fell 3.3 per cent to RM46.3 billion in 2014 from the previous year, according to the government's latest annual property market report.

REITS FAVOURED

The unit price of Singapore's Sabana Shari'ah Compliant Industrial Real Estate Investment Trust, the third Islamic REIT in Asia, has dropped 10 per cent this year, while the city- state's benchmark stock index rose 2.2 per cent.

The falling prices are unlikely to dent the popularity of Islamic REITs due to the amount of funds that need to be invested in a Shariah-compliant manner. Malaysian Islamic banking assets climbed 12 per cent to RM625.2 billion last year, central bank data show. That's more than half of the US$300 billion of outstanding sukuk worldwide, according to figures from the Malaysia International Islamic Financial Centre.

"REITs are one of the asset classes that is Shariah investor friendly and even preferred by many because of its compulsory quarterly payout feature," said Raj Mohamad, managing director at Five Pillars Pte, a consulting firm in Singapore. "Property-related investments are favored by Shariah investors because of the underlying real assets."

BLOOMBERG