DPD30063:

INVESTMENT FROM ISLAMIC

PERSPECTIVE
CHAPTER 3:
TYPES OF INVESTMENT
 SUBTOPICS
3.1 Types of securities traded on the Bursa Malaysia
3.1.1 Types of securities
a. Equity
b. Debt
c. Derivatives
3.1.2 Types of Investor
a. Growth-seeking
b. Balanced-income and growth
c. Conservative-stable income

3.2 The types of financial instruments in investment activities

3.2.1 Types of investment Islamic equity
a. Concept
b. Distinguish common stock and preferred stock
c. Differences between equity investment, musyarakah and mudharabah
d. Advantages of fund management for Islamic equity investments
3.2.2 The Islamic unit trust
a. Concept
b. Dollar-cost averaging method
c. Differentiate between closed-end fund and open-end fund
d. Advantages and drawbacks of unit trust
e. Distinguish unit trust and exchange-traded fund
 Cont. SUBTOPICS
3.2.3 Real Estate Investment Trust (REITs)
a. Concept and objectives of REITs
b. REITs player
c. Compare conventional REITs and Islamic REITs
d. Advantages and risks of investing in REITs
3.2.4 Exchange Traded Bond and Sukuk (ETBS)
a. Concept
b. Advantages and risks of Exchange Traded Bond and Sukuk (ETBS)
c. Differences between ETBS and shares
 TYPES OF SECURITIES
What is a security?
◦ A security is a financial instrument, typically any financial asset that can be traded.
◦ The nature of what can and can’t be called a security generally depends on the jurisdiction in
which the assets are being traded.
◦ In the United States, the term broadly covers all traded financial assets and breaks such assets
down into three primary categories:
1. Equity securities – which include stocks
2. Debt securities – which includes bonds and banknotes
3. Derivatives – which includes options and futures
 TYPES OF SECURITIES
1. Equity Securities
Equity almost always refers to stocks and a share of ownership in a company (which is possessed by the
shareholder).
Equity securities usually generate regular earnings for shareholders in the form of dividends.
An equity security does, however, rise and fall in value in accord with the financial markets and the
company’s fortunes.

2. Debt securities
Debt securities differ from equity securities in an important way; they involve borrowed money and the
selling of a security.
They are issued by an individual, company, or government and sold to another party for a certain amount,
with a promise of repayment plus interest.
They include a fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the
date when the total amount of the security must be paid by).
Bonds, bank notes (or promissory notes), and treasury notes are all examples of debt securities. They are
all agreements made between two parties for an amount to be borrowed and paid back – with interest – at a
previously-established time.
 TYPES OF SECURITIES
3. Derivatives
Derivatives are slightly different type of security because their value is based on an underlying asset
that is then purchased and repaid, with the price, interest, and maturity date all specified at the time of the
initial transaction.
The individual selling the derivative doesn’t need to own the underlying asset outright. The seller can
simply pay the buyer back with enough cash to purchase the underlying asset or by offering another
derivative that satisfies the debt owed on the first.
A derivative often derives its value from commodities such as gas or precious metals such as gold and
silver. Currencies are another underlying asset a derivative can be structured on, as well as interest rates,
Treasury notes, bonds, and stocks.
Derivatives are most often traded by hedge funds to offset risk from other investments. As mentioned
above, they don’t require the seller to own the underlying asset and may only require a relatively small down
payment, which makes them favorable because they are easier to trade.
 TYPES OF INVESTORS
1. Growth-seeking
This asset mix may be appropriate for investors with a significant tolerance for fluctuations in market value,
and who seeks to emphasize dividend and interest income (in addition to capital appreciation) as a component of
total return.
Asset Mix: 65% Equity. 35% Bonds, 0% Short term

2. Balanced-income and growth

This asset mix may be appropriate for investors with a moderate tolerance for fluctuations in market value,
and who seek to emphasize dividend and interest income (versus capital appreciation) as a component of total
return.
Asset Mix: 45% Equity, 55% Bonds, 0% Short term

3. Conservative-stable income
This asset mix may be appropriate for investors who wish to minimize fluctuations in market value,
compared to an equity-only portfolio, and who seek to emphasize dividend and interest income (versus capital
appreciation) as a component of total return.
Asset Mix: 15% Equity, 85% Bonds, 0% Short term
 TYPES OF FINANCIAL INSTRUMENTS
◦ Definitions of Financial Instruments: The written legal obligation of one party to transfer something of value,
usually money, to another party at some future date, under certain conditions. The enforceability of the
obligation is important.
◦ Financial instruments obligate one party (person, company, or government) to transfer something to another
party.
◦ Financial instruments specify payment will be made at some future date.
◦ Financial instruments specify certain conditions under which a payment will be made.
◦ Types of financial instruments
Islamic equity fund Real Estate Islamic Unit Trust Islamic hedge fund Islamic interbank
Investment Trust money market
(REITs)
Warrant Preferred stocks / Forward contract Future contract Option
priority shares
 THE CONCEPT OF ISLAMIC EQUITY FUND
Concept • Similar to traditional equity funds in that investors pool their funds to invest in
shares.
• Profit is also achieved from the dividends distributed by the relevant companies.
These funds are not allowed to invest in certain areas such as companies involved
in areas that are not lawful in terms of Shariah, such as alcohol, gambling, or
pornography.
Objective The objective of the fund is to provide investors with opportunity to earn high
capital return over the medium to long term through active investments in Shariah
approved securities listed on the Bursa Malaysia.
Principles The fund shall invest primarily in a diversified portfolio among any of the top 300
Shariah-compliant companies in terms of market capitalization listed on Bursa
Malaysia. The fund has an aggressive investment approach where active trading
strategy is adopted.
 THE CONCEPT OF ISLAMIC EQUITY FUND
Performance Benchmark FTSE Bursa Malaysia EMAS Shariah Index; (FBMSHA)
The index comprises the constituents of the FBMSHA that are
Shariah-compliant according to the SAC screening methodology. You may
obtain the information pertaining to the index from Bursa Malaysia website and
major daily newspapers.
*FTSE = Financial Times Stock Exchange
Investment Time Horizon Recommended 5 years or more.
 THE CONCEPT OF ISLAMIC EQUITY FUND
Principle Risk
i. Shariah status reclassification risk
This risk refers to the risk that the currently held Shariah-compliant equities in the fund may be reclassified as
Shariah non-compliant in the periodic review of the equities by the SAC, the Shariah adviser or the Shariah boards of
the relevant Islamic indices. If this occurs, the manager will take the necessary steps to dispose such equities. There
may be opportunity loss to the fund due to the fund not being allowed to retain the excess capital gains derived from
the disposal of the Shariah non-compliant equities.
In such an event, the fund should:
a) dispose of the securities if the value of the securities exceeds or is equal to the investment cost on the
date of announcement of the list of Shariah-compliant securities by the SAC. The fund is allowed to keep
dividend received and capital gain from the disposal of the securities up to the date of announcement of the
list of Shariah-compliant securities by the SAC. However, any dividends received and excess capital gain from the
disposal of Shariah non-compliant securities after the date of announcement of the List Shariah-compliant
securities by the SAC should be channeled to baitulmal and/or charitable bodies;
b) hold the respective securities if the market price of the said securities is below the investment cost until
the market price or value of the securities is equal to the cost of investment; or
c) dispose of the securities at the price lower than the investment cost which will result the decrease in the
fund’s value.
 THE CONCEPT OF ISLAMIC EQUITY FUND
ii. Stock specific risk
Prices of particular stock may fluctuate in response to the circumstances affecting individual companies, such as
adverse financial performance, news of a possible merger or loss of key personnel of a company. Any adverse price
movements of such stock will adversely affect the fund’s NAV (Net Asset Value).

iii. Equity market risk

The performance of the fund is subject to the volatility of the stock market which is influenced by the changes in
the economic and political climate, interest rate, international stock market performance and regulatory policies. The
movement of the value in the underlying investment portfolio will affect the NAV of the fund. Any downward
movement of the value will negatively impact the NAV of the fund.

iv. Dividend Policy Risk

This is a risk particular to the fund which has heavy emphasis on high yield dividend stocks. Such a risk may
occur when fundamentals of the company’s business deteriorate or if there is a change in the dividend payout policy
resulting in a reduction of the dividend to be paid by the company.
This risk may be mitigated by investing mainly in companies with a consistent historical record of paying
dividends, strong cash flow, or operating in fairly stable industries.
 THE CONCEPT OF ISLAMIC EQUITY FUND
Advantages
i. Transparency
Investors in Islamic equity funds expect a high level of transparency. After all, if one of a fund’s key
objectives is to comply with Shariah, the fund managers must be quite open about which industries and
companies they invest in.

ii. Financial screening

Part of the screening process for determining whether an equity asset is Shariah-compliant involves
considering a company’s financials, including how much debt the company carries. Islamic equity funds avoid
investing in firms that carry very high levels of debt. Therefore, Islamic funds may be considered more
conservative and slightly less risky than some conventional equity funds.
 THE CONCEPT OF ISLAMIC EQUITY FUND
iii. Diversification
Investing in any fund (Islamic or conventional) that purchases assets from multiple companies reduces
the risk of losing capital when disaster strikes and a company declares bankruptcy or closes it doors.

iv. Liquidity
For the Islamic investor, a benefit of investing in a fund versus putting money into a fixed-term
investment is liquidity. When situations change and the investor wants or needs to cash out, doing so is much
easier when the investment is in a fund. Keep in mind, however, that overall, Islamic investments, including
Islamic funds, tend to be less liquid than their conventional counterparts.
 DISTINGUISH FEATURES BETWEEN
COMMON STOCK AND PREFERRED STOCK
ASPECTS COMMON STOCKS PREFERRED STOCKS
DIVIDENDS After the preferred stockholders are paid Paid first
Variable and may become higher Pre-determined rates; unchanged
GROWTH High potential but one that is connected to Don’t grow as the company grows
the company’s growth
LIQUIDATION Paid last after all the creditors and Given preference in terms of payment, just as
preferred shareholders are paid with dividends
VOTING RIGHTS Have them and can use them for deciding Don’t have any voting rights
important issues
ARREARS Missed dividends don’t accrue, so they can Accruement of the arrears added to the next
be paid the next year year’s payment
CERTAINTY No profits mean no dividends Paid even if the company incurs losses
 DIFFERENCES BETWEEN EQUITY INVESTMENT
AND MUSHARAKAH AND MUDHARABAH
DIFFERENCES EQUITY INVETSMENT MUSHARAKAH / MUDHARABAH
Liquidity The potential liquidity is of course one of the Inherently illiquid
most attractive features of equities.
Shareholding The equity investor can sell a part of shareholding Indivisible
in a particular company.
Disposed Equities can be disposed of at any time without For a fixed period agreed between the
the permission of the company being financed. financier
Profit Most investors in equities hope for capital gains. The investor in a musharakah and
mudharabah contract enjoys the possibility of
a share in the profits of the business, but not
the gains.
 ADVANTAGES OF FUND MANAGEMENT FOR
ISLAMIC EQUITY INVESTMENTS
◦ These funds have obvious advantages to Muslims, who can invest their money safe in the
knowledge that the fund will not compromise any of their religious beliefs.
◦ Many funds have been around for a long time and have a good track record of generating healthy
returns for their investors.
◦ It can be argued that, over the long term, IEFs will tend to perform better than conventional
funds, since the former avoid investing in heavily leveraged companies.
 THE ISLAMIC UNIT TRUST
THE CONCEPT OF ISLAMIC UNIT TRUST

◦ Unit trust are based on the concept that risk and reward are shared by the investors, employing the
expertise of professional managers.
◦ The Islamic unit trust schemes are required to additionally appoint a Shariah committee or a
Shariah advisor to ensure that their operations are in accordance with Shariah.
◦ This is in conformity with Islamic partnership principles of musharakah and mudharabah and is
already applied within the Islamic financial system.
 THE ISLAMIC UNIT TRUST
DOLLAR-COST AVERAGING METHOD
◦ Dollar cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across
periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur
regardless of the asset’s price and at regular intervals.
◦ In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of
equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.
◦ Key features of DCA:
i. DCA refers to the practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price.
ii. The goal of DCA is to reduce the overall impact of volatility on the price of the target asset; as the price will likely vary
each time one of the periodic investments is made, the investment is not as highly subject to volatility.
iii. DCA aims to avoid making the mistake of making one lump-sum investment that is poorly timed with regard to asset
pricing.
iv. DCA is a long-term investment technique that helps to reduce the risk associated with investing a single large sum
 THE ISLAMIC UNIT TRUST
DIFFERENCES BETWEEN CLOSED-END FUND AND OPEN-END FUND

• Unit trusts are also referred to as open-ended funds, because they will always accept more case from investors – they
just become bigger to accommodate the demand.
• Investment trusts are also known as closed-ended funds, because they tend to raise a set amount of cash, then invest
it. They do not create new shares whenever someone wants to buy them. Instead, they are listed on the stock market,
so if you want to invest in them, you can buy their shares just as you would with any other listed company.

Open-End Funds Closed-End Fund

Form of Entity • Statutory Trust or Corporation
Key Governing Documents • Declaration of Trust / Articles
Incorporation
• By-laws
• Investment Management Agreement
Parties to Key Documents • Board of Directors / Trustees
• Investment Adviser
• Statutory Trust or Corporation
of • Declaration of Trust / Articles of
Incorporation
• By-laws
• Investment Management Agreement
• Board of Directors / Trustees
• Investment Adviser
 THE ISLAMIC UNIT TRUST
Open-End Funds Closed-End Fund
Governance • Board of Directors / Trustees Board of Directors / Trustees
Offering of Shares / Units • Principal Underwriter • Principal Underwriter
• Broker-Dealer/RIAs • Underwriting Syndicate
• Direct Investor Investments • Broker-Dealer/RIAs
Issuance of Shares/Units Ongoing IPO
Liquidity End of Day (NAV-based) Generally Continuous during Market Hours
(Market Price)
Management Primarily Active Primarily Active
Management Fee Yes Yes
Diversification Requirements Yes Yes
 THE ISLAMIC UNIT TRUST
ADVANTAGES OF INVESTING IN UNIT TRUST

a. Affordability
As unit trusts are collective investment scheme, the investors can start with an investment amount as
low as RM100.
b. Diversification
In addition, since the investors is investing into a diversified portfolio of investments, rather than an
investment portfolio of one or two investments or shares, his risk is better spread out in line with the saying
that “put all your eggs in one basket”
c. Liquidity
An excellent return that cannot be “cashed-in” or converted back to cash (i.e. sold) does not necessarily
mean a good investment as poor liquidity constitutes an additional risk factor for the investor. Hence, most
investors prefer that their investment to be liquid. That is, that the investment can easily be converted back
to cash. Unit trusts provide this feature as units can easily be bought or sold. Some funds can even return your
investment to cash within the same day.
 THE ISLAMIC UNIT TRUST
ADVANTAGES OF INVESTING IN UNIT TRUST

d. Professional Fund management

Unit trusts fund managers are approved professionals in a highly regulated industry. Their license,
background and expertise ensure that decision making is structured and according to sound investment
principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager
can bring. In the long term, it is this expertise that should generate above average investment returns for unit
trust investors.
e. Investment Exposure
For an individual investor, it may be difficult to have exposure to particular asset classes. For
example, if an investor with RM20,000 wants to be invested into property, global equity an bond market, it
would be impossible to simultaneously hold a direct investment portfolio in all of these markets. However,
with unit trust investments, it is possible to spread the RM20,000 around to all of these asset classes
concurrently so that the investor can gain the investment exposure he seeks.
 THE ISLAMIC UNIT TRUST
ADVANTAGES OF INVESTING IN UNIT TRUST

f. Reduced Costs and Access to Asset Classes

If one investor were to buy a large number of direct investments, the amount they would be able to
invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each
transaction; therefore the overall dealing costs would take a large chunk out of the capital (affecting future
profits). Pooling money with that of other investors gives the advantage of buying in bulk, making dealing costs
an insignificant part of the investment. In addition, since the fund managers invest in larger amounts, they are
able to get access to wholesale yields and products, which are impossible for the individual investor to
obtain. For example, unlike unit trust funds, most individual investors cannot have direct access to the
Malaysian Government Security market because, amongst other reasons, the amount of each transaction
could run into millions of Ringgit.
g. Regulated industry
With the introduction of unit trusts in Malaysia came regulation from various regulators, especially the
Securities Commission. The entire range of variables relating to the unit trust industry is governed by
various legislations. The sole purpose of such regulations is to protect the interest of the investing public.
Regulations provide investors with a level of comfort that they are investing in a safe investment mechanism.
 THE ISLAMIC UNIT TRUST
DRAWBACKS OF INVESTING IN UNIT TRUSTS

a. Load fund, annual management fees and trustee fees

Investing in unit trusts involves fees such as load funds, annual management fees and trustee fees.
For example, the cost of investing in CIMB Islamic Money Market Fund is 0.5% of the NAV of annual
management fees and 0.08% of the NAV of Trustee Fee

b. Performance over the long run

In the long run, the performance of unit trusts have not done all that well; indeed, only a handful have
been able to outperform the market with some degree of regularity. Their performance, in general, has
corresponded to the performance of the market as a whole. Of course, index-based unit trust funds should
provide the return of that market covered less unit trust fund-related costs.

c. Speculation
Has mistakenly been equated with gambling. It involves a great deal of computation which in the highly
developed computation techniques of today can hardly be a game of chance. The issue arises with regards
to accounts period, buying securities in margin, taxation, commission and service charge.
 THE ISLAMIC UNIT TRUST
Cont. DRAWBACKS OF INVESTING IN UNIT TRUSTS

d. The diversity provided by an Islamic unit trust is perhaps its most attractive feature, which on the flip side
can also provide room for uncertainty.
Is the fact that an investor buys into a basket of underlying equities. In some cases, there are stocks
which do not comply with the binding Islamic requirements.

e. Global investment
Ability to gather information to analyse global companies or issues to determine whether it is
Shariah-compliant.

f. Selling unit trust products outside Malaysia

legal and regulatory issues. Acceptance by Middle-east investors of Malaysian unit trust products. The
issues in terms of differing Shariah opinions and ruling, and differing accounting standards.
 ISLAMIC EXCHANGE TRADED FUND
◦ Exchange Traded Funds (ETFs) is an investment in undivided interest in a pool of securities or other assets
such as commodities and exchange rates.
◦ It is similar to the investment in unit trusts or mutual funds, except that ETF can be bought and sold
throughout the day like stocks on a securities exchange through a broker or dealer.
◦ Another difference of ETFs and unit trust investment is ETFs do not sell or redeem their individual shares at
NAV, instead they do it based on market price of the unit traded on the stock exchange.
◦ If there is a strong investor demand for ETF, its respective share price will increase above its NAV per share,
giving arbitrageurs an incentive to purchase additional creation units from the ETF and sell the component
ETF shares in the open market. This will create additional supply of ETF, which in turn the ETF’s market
capitalization and reduces the market price per share. Investors make money along the process of price
correction.
◦ With the increased demand of Shariah compliant products, Islamic ETF began to flourish in the market.
◦ An i-ETF tracks benchmark index comprising securities that are Shariah compliant. It is necessary for the
management company to appoint Shariah adviser to monitor on the adherence of the management company
to the Shariah guidelines.
 DISTINGUISH FEATURES BETWEEN UNIT TRUST
AND EXCHANGE-TRADED FUND
ETF UNIT TRUST

Investment • Passively managed. • Actively managed.

Objective • Designed to follow performance of an index.
• No active selection of underlying securities and
returns made by ETF fund manager.
Buy and Sell • Listed and quoted on a stock exchange.
Transactions • ETFs are bought and sold like stocks
throughout the trading day.
• Investors pay fund managers to select stocks
(or other securities) in order to outperform a
selected index.
• Performance of unit trust funds depends on
the fund manager’s skills and the supporting
structure provided by the fund management
company.
• Buy and sell via agents working for a fund
management company or through institutional
unit trust agents such as banks
• Purchases or redemptions are done at a single
price at the end of a trading day as the price of
units in a fund depends on the closing price of
its components.
 DISTINGUISH FEATURES BETWEEN UNIT TRUST
AND EXCHANGE-TRADED FUND
ETF UNIT TRUST
Cost to • There is a brokerage fee, clearing fee and stamp • Usually impose an upfront sales fee between 3%
invest duty, similar to trading shares. to 5%.
• The annual management fee usually is less than • Both funds typically levy a back-end charge or exit
1% of the fund’s NAV. fee which investors pay when they redeem the
fund.
• Fund’s annual management fee can be between
0.75% to 5% per annum of the fund’s NAV.
Minimum No • Require an initial minimum investment of
Investment RM1,000.
Amount • Subsequent investments are lower, typically
RM100.
 DISTINGUISH FEATURES BETWEEN UNIT TRUST
AND EXCHANGE-TRADED FUND
ETF UNIT TRUST
Continuous trading and pricing Yes No
throughout the trading day?
Prospectus available? Yes Yes
Can be purchased online? Yes Yes
Redemption charges for No Yes
withdrawals
Possible to view the underlying Yes No
securities?
Possible to receive dividends? Yes Yes
 REAL ESTATE INVESTMENT TRUST (REIT)
Definition
◦ An investment vehicle that invests or proposes to invest at least 50% of its total assets in real estate. An
investment in real estate may be by way of direct ownership or a shareholding in a single-purpose company
whose principal assets comprise real estate.
Note: Real estate means physical land and those human-made items which are attached to the land.
Source: SC Guidelines on REITs 2005
◦ REIT is a collective investment vehicle (typically a trust fund) which pools money from investors and uses
the pooled capital to buy, manage and sell real estate assets. The real estate assets can be residential or
commercial buildings, retail or industrial lots, or other real estate-related assets (e.g. shares in public-listed
property companies, listed or unlisted debt securities of property companies, etc.)
 REAL ESTATE INVESTMENT TRUST (REIT)
Concept of REIT
◦ REIT is an investment vehicle structured as a unit trust that invest in stable income producing real properties
and real property related assets.
◦ REIT is driven entirely by recurrent income from its investment properties.
◦ REIT is a low risk, passive investment vehicle with high certainty of cash flow from rentals derived from
lease agreements with tenants.
◦ REIT distributes all or at least a high proportion of its income to its unit holders, which are generally passed
on without deduction of any REIT entity level tax.
◦ REIT is established through a Deed of Trust executed by the parties. The Trustee acts for the unit holders.
◦ The Deed of Trust governs the REIT and the roles and responsibilities of the trustee and the management
company.
◦ REIT can be listed on a stock exchange. Stock exchange listing allows wide investor base and creates liquidity
in REIT units.
◦ REIT offers investors good yields as well as a highly liquid method of investing in real estate.
◦ REIT are governed by multiple levels of stakeholders, including unit holders, manager, trustee and regulating
authorities ensuring investors’ protection.
 REAL ESTATE INVESTMENT TRUST (REIT)
Size
◦ The initial size of a real estate investment trust should be at least RM100 million.

Objective
◦ To provide unit holders with a stable distributions per unit with the potential for sustainable
long-term growth of such distributions.
◦ By optimizing the performance and enhancing the overall quality of a large and geographically
diversified portfolio of Shariah compliant real estate assets through various permissible
investments and business strategies.
 REAL ESTATE INVESTMENT TRUST (REIT)
REIT players
◦ All REITs are governed by multiple levels of stakeholders to ensure maximum investors’ protection:
i. Unit holders
ii. Manager
iii. Shariah committee / adviser
iv. Regulatory authorities
◦ Islamic REIT must comply with both SC guidelines on REIT and SC Guidelines for Islamic REIT. REIT is
established through a Deed of Trust executed by the trustee who acts on behalf of the unit holders.
◦ The Deed of Trust governs the REITs and the roles of the trustee and the management company.
A deed is a legal instrument used to grant a right.
The trust deed is a legally binding agreement between the manager, trustee and unit holders.
 REAL ESTATE INVESTMENT TRUST (REIT)

Example
• First Islamic REIT – Al ‘Aqar KPJ REIT: launched on 24th July 2006 with an issue of 340m units listed on
Bursa Malaysia on 10th August 2006 backed by healthcare assets (specialist hospitals) – valued at RM481m.
• Al Hadharah Boustead REIT: launched on 15th January 2007 with an issue of 220m units listed on Bursa
Malaysia in February 2007 backed by plantation assets.
REAL ESTATE INVESTMENT TRUST (REIT)
 REAL ESTATE INVESTMENT TRUST (REIT)
Conventional versus Islamic REIT

CRITERIA CONVENTIONAL REIT ISLAMIC REIT

Shariah Advisor No Shariah Adviser
Investment instrument Minimum of 50% of listed fund’s total
assets must be invested in other instrument,
such as bonds, stock, money market and
ABS
Appoint Shariah Adviser is compulsory
The 50% of listed fund’s total asset must
follow Shariah requirements. The rest 20%
must be invested in investment comply with
Shariah principles.

Rental restriction No restriction on the tenant’s nature of The percentage of rental from
business as long as it is legitimate by non-permissible activities should not exceed
Malaysian Law. 20% benchmark set by SC.
 REAL ESTATE INVESTMENT TRUST (REIT)
Advantages of REIT
◦ Higher dividend
The requirement to pay at least 90% of their income as a dividend is a primary reason why investors buy
REIT like Simon Property Group (SPG).
◦ Portfolio diversification
Generally, real estate prices aren’t correlated to stock prices. They can move together or in completely opposite
directions. Adding REIT to a diversified investment portfolio may provide much-needed diversification.
◦ Income is secured by long leases
REIT is like Equity Residential (EQR) own physical assets and often have long-term lease contracts with
their tenants. This leads to a secure and stable income stream over a longer period.
◦ Liquidity
REIT shares are traded on the major stock exchanges. This makes buying and selling property requires a lot
of effort, expense, and expertise.
◦ Professional management
REIT like Ventas (VTR) are managed by highly skilled and experienced real estate professional managers.
Average investors may not have the skills to manage high-income bearing properties.
 REAL ESTATE INVESTMENT TRUST (REIT)
Cont. Advantages of REIT
◦ Transparency
The Securities Commission registered REIT are required to make regular disclosures. This makes REIT
operations more transparent to investors.

Risk of Investing in REIT

◦ Grow at a slower pace
REIT can only reinvest a maximum of 10% of their annual profits back into their core business lines each
year. This may cause some of the REITs to grow at a slower pace than a normal company on Wall Street.
◦ May rely on debt
A higher dividend payout by many REITs like Ventas (VTR) may force management to go for higher leverage
to expand real estate holdings. This would result in higher interest going out. This would reduce their earnings. In
contrast, expansion in real estate holdings may create additional source of income for leveraged REIT.
◦ Real estate is a cyclical business
Although REIT like Simon Property Group (SPG) have to pay at least 90% of their income as a dividend,
their income stream isn’t guaranteed. Cyclical downturns in the real estate market could make REIT business
unstable.
 REAL ESTATE INVESTMENT TRUST (REIT)
Cont. Risk of Investing in REIT
◦ Tax treatment
REIT likes Equity Residential (EQR) is required to pay at least 90% of their disposable income to the
unitholders. They don’t have to pay taxes on profits. However, investors will have to pay income tax on the
annual dividend as though it’s personal income, not a capital gain, once it’s distributed. So, investors in the
higher tax bracket may be at a disadvantage because they have to pay higher taxes.
◦ Property taxes may rise
State and municipal authorities have the right to increase property taxes to increase their budget
revenue. This reduces REITs’ earnings.
 EXCHANGE TRADED BOND AND SUKUK (ETBS)
Concept
◦ Exchange Traded Bonds and Sukuk (ETBS) are fixed income securities, also known as bonds or sukuk, that are listed
and traded on the stock exchange. ETBS are issued either by companies or governments (the issuer) to raise funds
for their needs. ETBS have varying structures such as fixed rate, floating rate and hybrids.
◦ ETBS will still utilize the same mechanisms as that of buying and selling shares in which a trading account (with the
broker) and Central Depository System (CDS) account will be needed by the investors.
◦ What is the difference between ETBS and OTC?
ETBS Over the Counter (OTC)
Subscription of ETBS through issuing houses, or Subscription through banks for the primary market.
banks/brokers for the primary market.
ETBS are traded over the Exchange after listing via Traded over the counter via the banks after initial
investors/traders trading account in the secondary market. issuance.
ETBS process are quoted on the exchange. Investors need to contact relevant banks for prices of
bonds and sukuk.
Minimum trading size is 10 units, typically with an IPO To buys and sell bonds or sukuk through OTC will
price of RM100 and thus minimum price of RM1000.00 dependent on the terms set by the banks.
(dependent on the minimum set by the issuer).
EXCHANGE TRADED BOND AND SUKUK (ETBS)
Benefit to Issuers:

Double Tax Market Making Diversified Brand

Deduction Framework Investors Enhancement

• On expenses • Investment • Access to new • Able to profile

incurred vis-à-vis banks to market segments of more effectively
ETBS issuance make with certain investors to the retail
obligations • Larger base of market and
• Able to facilitate investors will improve
liquidity for every provide more marketability
issuance competitive • Issuer will be
pricing part of ETBS
story
 EXCHANGE TRADED BOND AND SUKUK (ETBS)
Benefits to Investors:

Stamp Duty New Investment Low Cost Balanced Risk/

Waived Instrument Structure Reward

• Applicable to • Investment • Minimum • Low risk

individual retail through EPF investment equity-type
investors for Account 1 amount RM1000 instruments
ETBS trading • Non-taxable • Invest and trade • Certainty of
• Valid until 31 coupon payment in regulated, income and
Dec 2015 received from open and capital repaid at
non-taxable transparent par on maturity
issuers market
 EXCHANGE TRADED BOND AND SUKUK (ETBS)
Risks of ETBS

◦ Credit risk
This risk arises if the ETBS issuer is unable to pay the coupon payment on the coupon rate or the
principal amount to the lender at maturity. Government bonds and sukuk are backed by the central
government, thus deemed to have a low credit risk.

◦ Market risk
This is the risk of price fluctuations and is impacted by the demand and supply in the market.

◦ Interest rate risk

Valuation of the ETBS may be affected by the changes in interest rates, e.g. if the interest rate rises,
ETBS prices will fall as investors may relocate their investment to capture a rise in interest rates available in
other instruments, for example, in a bank deposit.
 EXCHANGE TRADED BOND AND SUKUK (ETBS)
Differences between ETBS and shares
Bonds / Sukuk
Bonds / Sukuk are debt securities
Bond / sukuk holder – they are the owner
of a bond asset and do not have rights to
the ownership of the company
Steady flow of payments known as
coupon/dividends
Generally less volatile
Time limit or maturity period
Trade size is 10 units
Shares
Stocks are equity securities
Shareholder – an owner of the company
Dividend payments based on the policy and
performance of the company
Impacted by market volatility and forces
Do not have a maturity period, unless delisted
Trade size is 100 units
THE END