The Use of Islamic Real Estate Investment Trust (I-REITs) as a Contemporary Instrument in Developing Waqf Assets: Potential Structure, Issues and Challenges

Abstract

The primary objective of this paper is to explore the potential of Islamic Real Estate Investment Trusts (I-REITs) as an effective instrument for financing waqf development activities. This study employs legal research methodology, (the data used were largely library-based and documentary in nature), in which opinions of jurists, classical and contemporary are analysed in discussing the potential of I-REITs as a mechanism to develop waqf assets. Besides, several resolutions issued by relevant market authorities are referred to in this study. The study concludes that despite several challenges, with proper implementation, I-REITs may be adopted by a waqf institution as a mechanism to finance the development of their waqf assets. The novelty of this paper lies in the proposed structure of I-REITs, which can be a useful reference for the policy-makers and REITs issuers in establishing an enabling environment within which waqf I-REITs can potentially operate. Therefore, this study hopes to shed some light on the potential of waqf I-REIT to become an asset class to provide diversity for the public to give waqf.

Headnote

Abstract: The primary objective of this paper is to explore the potential of Islamic Real Estate Investment Trusts (I-REITs) as an effective instrument for financing waqf development activities. This study employs legal research methodology, (the data used were largely library-based and documentary in nature), in which opinions of jurists, classical and contemporary are analysed in discussing the potential of I-REITs as a mechanism to develop waqf assets. Besides, several resolutions issued by relevant market authorities are referred to in this study. The study concludes that despite several challenges, with proper implementation, I-REITs may be adopted by a waqf institution as a mechanism to finance the development of their waqf assets. The novelty of this paper lies in the proposed structure of I-REITs, which can be a useful reference for the policy-makers and REITs issuers in establishing an enabling environment within which waqf I-REITs can potentially operate. Therefore, this study hopes to shed some light on the potential of waqf I-REIT to become an asset class to provide diversity for the public to give waqf.

Keywords: Waqf, Islamic Real Estate Investment Trust (I-REITs), Social finance, Islamic finance, Malaysia

Abstrak: Objektif utama kertas ini adalah untuk meneroka potensi amanah pelaburan hartanah Islam (I-REIT) sebagai instrumen yang efektif untuk membiayai aktiviti pembangunan wakaf. Metodologi yang digunakan adalah berasaskan kajian perundangan (sebahagian besar data yang digunakan adalah bersifat kajian kepustakaan dan dokumen), melibatkan pandangan fuqaha klasik dan kontemporari yang dianalisis bagi membincangkan potensi I-REIT sebagai mekanisme pembangunan aset wakaf. Di samping itu, beberapa resolusi yang dibuat oleh badan kawal selia yang berwibawa turut dirujuk dalam kajian ini. Kajian ini merumuskan bahawa meskipun berdepan dengan pelbagai cabaran, menerusi implementasi yang baik dan terurus, struktur I-REIT berupaya diaplikasikan sebagai satu kaedah untuk membiayai pembangunan aset wakaf. Kertas ini mengetengahkan hasil dapatan kajian yang baharu bahawa struktur I-REIT yang dicadangkan boleh dijadikan rujukan dan panduan kepada pihak pembuat dasar dan penerbit I-REIT dalam mewujudkan persekitaran yang membolehkan I-REIT wakaf beroperasi. Sehubungan itu, diharapkan kajian ini berupaya memberikan pencerahan mengenai potensi I-REIT wakaf sebagai satu kelas aset bagi memberikan kepelbagaian pilihan kepada orang awam untuk berwakaf.

Kata kunci: Wakaf, Amanah Pelaburan Hartanah Islam (I-REIT), Pembiayaan sosial, Kewangan Islam, Malaysia

1.0 Introduction

According to Hodgson (1974), waqf has been regarded as a primary vehicle for a Muslim society to finance its business activities. As the role of waqf is becoming more significant, it has become one of the key underlying components of social sector (ijtima'i) in the entire Islamic economic system (Surtahman and Sanep, 2010). In addition, waqf may serve as a safety net for socio-economic security through wealth distribution and sharing of benefits with the poor and needy, which to a certain extent is parallel to the role of zakah (Kahf, 1998). History has shown many evidences of the tremendous impact of waqf development on socio-economic development of the Muslim society (Cizakca, 1998) without putting inward pressure on government expenditure (Mohsin, 2010). A great example is the building of Masjid al-Haram, Masjid al-Nabawiy and University al-Azhar (Ahmad Zaki, 2006). These are among the inventions due to waqf development which have significant contribution to the well-being and civilization of Muslims around the world. It is indisputable that there are various models for developing waqf assets that have been proposed and implemented throughout the Islamic era. Aminah and Sabit (2011) analysed the effectiveness of these models for developing waqf assets and concluded that most of them suffer from two major problems, namely insufficiency of liquid funds and illiquidity of waqf assets. Indeed, it is a difficult task to find a sustainable model that could solve these liquidity issues in the effort of generating stable and continuous returns for waqf institutions as well as the beneficiaries. Thus, as pointed out by Kahf (1998), ongoing research pertaining to contemporary methods of developing waqf assets is urgently needed.

The above discussion provides a dire and valid justification for considering the implementation of various innovative structures, including using Islamic capital market instruments such as Islamic Real Estate Investment Trusts (I-REITs) in developing waqf assets. I-REITs is a collective investment scheme similar to mutual funds or unit trusts, which raises funds from investors for the purpose of buying and hiring property such as houses, commercial buildings, farms and car parks or other financial assets related to property such as construction company stock and sukuk issued by real estate companies (Securities Commission Malaysia, 2006; 2007). A holder of REITs unit is deemed as a buyer of a fraction of a managed pool of real estate which entitles the unit holders the beneficial ownership or beneficial interest to the real estate in terms of rights to the receivables. I-REIT itself can be seen as a company that owns and usually manages commercial and residential properties like apartments, offices and factory spaces, on behalf of the shareholders.

From an industrial point of view, I-REITs are seen to have a great deal of potential to attract a wider pool of institutional and individual investors in providing abundant support for the expansion of the property sector through acquisition of properties via the scheme hence stimulating the industry's growth. The proven ability of I-REITs to raise capital can also benefit activities of upgrading and maintaining public infrastructure and facilities such as airports and healthcare institutions (Messer, 2011). This whole idea is in line with the fundamental role of a financial market as a platform that mobilizes capital from a surplus sector to those that have a shortage of funds. Consequently, this may result in a more enhanced level of economic efficiency in a country due to better resource allocation (Mishkin, 2010).

This study aims to explore the prospect of I-REITs as an alternative mechanism to unlock the value of waqf assets, hence developing waqf assets for the betterment of the ummah, with Malaysia taken as a sample for discussion. This is done by deploying a legal research methodology in which opinions of jurists, classical and contemporary, are analysed in discussing the potential of I-REITs as a mechanism to develop waqf assets. Several resolutions issued by relevant institutions are also referred in this study. This paper advocates, inter alia, that the integration of I-REITs and waqf will be able to provide an enhancement to waqf properties which will, in turn benefit the beneficiaries via the income that will be generated by the I-REITs. In doing so, a viable structure of waqf I-REITs is proposed, which is a novelty of this paper.

2.0 The Landscape of I-REITs in Malaysia

In the conventional practice, REITs are recognized as a group of financial assets which are defensive and low risk (Newell and Atasya, 2009) especially when it faces uncertain market situations (Yeap, 2011). This is due to the characteristic of REITs that consists of diversified portfolios across different types of assets. REITs features prominently on the investors' radars as it can possibly generate attractive returns without having to take colossal risks. The returns to the investors may come in forms of dividend payment which is generated from rental income of the properties and any capital appreciation resulting from holding REITs units (Securities Commission Malaysia, 2007). According to statistics provided by Bursa Malaysia (2012), on average, REITs return is around 6 to 7 per cent, which is higher than the returns from bonds and fixed deposit savings. In addition, the findings of Anuar and Soi (2011) on the performance of several REITs in Malaysia, including both conventional and Islamic REITs, show that the dividend yields of Malaysian REITs was recorded above the return of fixed deposit, at an average of 2 to 3 per cent. Meanwhile, in comparison to equity investment, although the dividend yield may not be as high as the returns gained from investing in stock markets, REITs involve lesser risk due to regular rental income flows from their rental properties (Afiq and Harul Izwan, 2011). When it comes to I-REITs, Newell and Atasya (2009) concluded that I-REITs have demonstrated a high degree of robustness during the global financial crisis compared to conventional REITs.

Malaysia became the first jurisdiction in the global financial sector to issue the Guidelines on I-REITs (Securities Commission Malaysia, 2006) which sets as a global benchmark for the development of I-REITs. The 2008 Securities Commission Malaysia's (SC) Guidelines on REITs stipulates that REITs must invest at least 50% of its total assets in real estate, whether via direct ownership or through a single purpose company whose principal assets comprise real asset1. This allows shareholders to invest in property without actually having to own directly the property (Wajdi, 2011). The major advantage of I-REITs is that it is much easier to buy or sell, shares in I-REITs which is traded on major exchanges than to buy or sell property in the traditional way. Therefore, I-REITs may be viewed as the best combination of investment in real property and stocks (Anuar and Soi, 2011).

Malaysia has been hailed as the pioneer of I-REITs development with the launch of the first instrument of its kind in the world namely Al-'Aqar KPJ REITs in the year 2006 (Newell and Atasya, 2009). This was followed by Al-Hadharah Bousted REITs and AXIS REITs both in 2007 and 2008 respectively. In May 2013, the KLCCP-i, a stapledsecurity which consists of equity and I-REITs was established. The recent establishment of this stapled REITs has contributed towards significant growth of market capitalization of I-REITs in Malaysia from RM3.64 billion to RM15.4 (Securities Commission Malaysia, 2013). The launch of I-REITs has embarked on another dimension of ethical investment which provides the opportunity for Muslim investors around the world to diversify their investment portfolios to generate returns and improve profitability based on the principles of Shariah.

On a global level, there is a large, untapped market for I-REITs and Malaysia has an advantage over the rest of the region to provide new opportunities for market players, including fund managers to further diversify their investment portfolios. With established regulatory framework that facilitates the creation of a new asset class, it provides huge opportunity for the Malaysian market to attract foreign investors, especially from the Middle East to invest in this country (Alias and Soi, 2011). This was evidenced in the case of Al-Aqar Healthcare REITs (formerly known as Al-Aqar KPJ REITs) which successfully attracted the Middle Eastern investors to invest approximately $100 million in its syndicated ijarah facility after its launch in 2006 (Newell and Atasya, 2010).

3.0 Literature Review

3.1 The Concept of Waqf

The word waqf is derived from the Arabic verb waqafa which means withholding (al-habs) and preventing (al-man ') (Al-Sarakhsi, 2005). According to Ibn Qudamah (1995), waqfmeans "withholding the corpus of an asset (without disposing it) and distributing the return (outcome) of the asset". The perpetuity element of waqf which preserves the corpus of waqf and distributes the benefits to beneficiaries distinguishes waqf from other concepts of infaq (charity) such as hibah (grant), sadaqah (donation) and hadiyyah (gift) (Mohd Zamro, 2008). Likewise, Kahf (1999) asserted that the repeatability of benefits generated from waqf assets has theoretically differentiated waqf from ordinary sadaqah since the concept of sadaqah jariyyah (perpetual charity) only applies to the former and not the latter.

The perpetual or continuous feature of waqf is further manifested through a progressive approach in developing waqf property, in which no waqf asset should be left idle and unattended in order to ensure sustainable return to beneficiaries. Essentially, the sadaqah jariyah concept signifies the Muslims' willingness to sacrifice their wealth for the sake of others, so that they will be rewarded eternally in this world and hereafter (Imam Muslim, 1997). A waqf also reflects the concept of qurbah as a mean of drawing oneself closer to Allah (Al-Zuhayli, 1997). It should be highlighted at this particular juncture that the practice of waqf works not only within the boundaries of self-devotion to Allah, but also as a central role in bonding and bridging the social gap among humanity based on the principles of mahabbah (love), ta'awun (cooperation) and ukhuwwah (brotherhood) (Syahnaz, 2008).

3.2 Features of Shariah-Compliant REITs

The distinguishing feature of I-REITs is its classification as an ethical investment that prohibits non-halal or non-permissible rental activities such as financial services based on interests (riba), gambling/gaming, manufacture or sale of non-halal products or related products, conventional insurance, leisure activities that are non-permissible according to Shariah, manufacture or sale of tobacco-based products or related products, stockbroking or share trading in non-Shariah compliant securities, as well as hotels and resorts. Among the main requirements of I-REITs are: (i) in acquiring new property, the rental from non-permissible activities of the property should not surpass 20 per cent of the total turnover of the I-REITs in the current financial year. If it does exceed 20 per cent the benchmark, the Shariah advisors shall advise the property manager against acquiring and investing in such property; (ii) for renting out to a new tenant, I-REITs manager shall ensure that the new tenant does not engage in activities that are considered impermissible in Shariah, and (iii) he or she should also ensure that all types of investments, deposit and financing instruments conform to Shariah principles.

In 2005, the SC introduced Guidelines on Islamic REITs which is the first of its kind in the world. Among the most important features of the Guidelines include various requirements regarding its tenancy, managing of its liquidity, investment, takaful and hedging mechanism according to Shariah principles. Apart from this, the Guidelines also require for an appointment of the Shariah committee or advisory panel who will be responsible to watch over the entire process of I-REITs so that it conforms to the Shariah principles throughout the investment tenure. In addition, the Guidelines on I-REITs specifies that an I-REIT is obliged to employ takaful schemes to insure its real estate. Nevertheless, in case that takaful schemes are not available or not economically viable, the I-REIT is permitted to take conventional insurance, provided that prior approval from the Shariah Advisors have been obtained. Besides, I-REITs are allowed to take part in forward sales or purchases of currency for the purpose of hedging its position only. In this respect, I-REITs shall involve only in Shariah compliant hedging instruments. Only if the Islamic instruments are not commercially viable will I-REIT be allowed to obtain Shariah non-compliant instruments, provided prior approval is obtained from Shariah Advisors.

3.3 The Implementation of I-REITs in the Areas of Waqf

3.3.1 The "InternalREITs" in Singapore

The Islamic Religious Council of Singapore (MUIS) has creatively invented an "internal REITs" for its waqf assets. This was done through the purchase of a six-level office building at 11, Beach Road where an asset migration exercise was undertaken. Waqf assets with low value and yield were transferred to a high yielding asset through the istibdal process. The net returns from the rental of the building was then distributed to the waqf beneficiaries based on their shareholdings in the asset (Shamsiah, 2010). The beneficiaries of waqfassets with low returns prior to the migration process have now become the shareholders to high quality assets with better yield. The net assets value of the property increased from $S25 million in year 2007 to $S100 million in year 2012 (Shamsiah, 2012). As a result, MUIS was able to contribute many benefits for the trustees or administrators as well as the beneficiaries in terms of good location, proficient management, and high sustainable income. The beneficiaries of the waqf also include provisions for education and the needy.

3.3.2 Waqf of Shares by Johor Corporation Berhad

Malaysia is the global pioneer in establishing I-REITs with the launch of Al-Aqar KPJ Healthcare REITs (formerly known as Al-'Aqar KPJ REITs) in August 2006 whose portfolio comprises six hospitals. The number of property in the portfolio has increased from 6 to 252 with the primary focus on the healthcare-related property such as hospitals, nursing colleges and retirement living facilities. Value of these properties increased approximately three times from RM486 million in 2006 to RM1.4 billion in the year 2012 (Damansara REITs Managers, 2012). By implementing the I-REITs mechanism, Johor Corporation Berhad (JCorp) as the sponsor managed to raise fund from the investors to expand the healthcare business in terms of financing new medical equipment and facilities, upgrading the existing buildings as well as acquiring more hospitals in order to enhance the size of the investment portfolio (Md. Nurdin, 2011).

In 2000, JCorp established Waqaf An-Nur Corporation (WANCorp) to spearhead the management of shares or stocks and assets that were given for waqfdevelopment. WANCorp is also responsible to implement corporate social responsibility (CSR) initiatives by managing hospitals, clinics, mosques, entrepreneurship and educational programs which all are based on waqf concept. The contributions were also extended to an international level through the Somalia Humanitarian Aid and GAZA Humanitarian Fund in 2011 (Johor Corporation, 2011).

JCorp has once again carved its own history to be the pioneer and the only company in Malaysia that has been actively involved in waqf on shares and I-REITs. By donating some of the shares and I-REITs, dividend received each year from the waqfassets will be disbursed to the waqf beneficiaries. Based on the waqf deed regarding the distribution of the waqf benefits, 70 per cent out of the dividend will be distributed for reinvestment in Islamic fixed deposit and human resource development and 25 per cent will go for general welfare of the society, which is under thefisabilillah (charitable) theme, covering healthcare, education, entrepreneurship aid and other charity programs and the rest, 5 per cent, will be disbursed to the Islamic Religious Council of Johor (Waqaf Annur Annual Report, 2012). As at 31 Disember 2012, the net asset value (NAV) of JCORP subsidiary (listed companies) consist of Kulim (Malaysia) Berhad, KPJ Healthcare Berhad and Al-Aqar Healthcare REITs that have been allocated to waqf worth up to RM444.67 million (Waqaf Annur Annual Report, 2012). For the year 2012, the WANCorp spent RM3.5 million from the contribution and allocation of pledged aids under the fisabilillah benefits or charity purpose (Johor Corporation Annual Report, 2012). It is very interesting to learn that about 2 percent of Al-Aqar Healthcare REITs units (Johor Corporation Annual Report, 2012) have also been put under the waqf initiative and contributed towards the well-being of the society in the religious, social and economic areas.

From these two examples, it is observed that combining the elements of innovation and creativity by highly talented and motivated people, coupled with progressive fatwa and easy access to finance, together with a robust legal framework and strong governance, has contributed towards the successful management of waqf assets by MUIS and WANcorp. Corresponding to this advancement of waqf management in Singapore and the dynamic role of stock waqf in socioeconomic development in the state of Johor, further research to analyse the potential of I-REITs structure in waqf development in Malaysia is crucial, particularly in bringing more innovation and expertise towards pursuing waqf growth to the next level.

4.0 Discussion

4.1 Is the Waqf Concept andI-REITviable?

The waqfconcept emphasizes generating sustainable income of the waqf property for the beneficiaries. Thus, the effort of developing abandoned waqf property by means of efficient dynamic structures should be given high priority by the mutawalli. In fact, there are many waqf properties that have yet to be exploited in generating more income and benefits for the maslahah of the ummah. It is expected that if I-REITs, an investment instrument that have the potential to enable larger group of investors to own property, with a small amount of money, were to be implemented in waqf, the number of waqf contributors will increase in the future. Therefore, it is vital to explore the REITs structure in the development of waqf assets. The REIT structure is argued to be appropriate, and essential for individual investors who would like to participate in this investment by contributing their property for waqf as it requires a low investment outlay (Shamsiah, 2011). As a vehicle managed by real estate professionals and subject to rigorous regulation on good governance and transparency, I-REITs create portfolio of income-generating properties and distribute net returns on a regular basis, hence providing stable yields for unit holders.

4.2 Issues of Waqf Development Based on I-REITs Structure as A Social Financing Mechanism

The establishment of I-REITs waqf based on the structure mentioned above may face few issues and challenges that will be addressed in the following discussion.

i. Viable size and quality of waqf assets to establish I-REITs

The first feature that is crucial in order to establish an I-REIT is that the initial size of the assets in the investment portfolio should be big enough to allow for relatively potential high return for the waqf assets. The SC's Guidelines on Real Estate Investment Trusts stipulate that the minimum size required to issue REITs in Malaysia is RM100 million. The question arises as to whether there are enough number of waqf assets to be injected into the I-REITs to meet the minimum requirement of the REITs' Guidelines.

To explain this further, according to Sing and Ling (2003), REITs income extremely depends on the type of commercial property that are injected into the REITs portfolio. Office, industrial (warehouse and logistic) and retail (shopping malls) are among the type of assets which yield high rent to REITs. In Malaysia, office building is one category of assets that yield higher return to the REITs company, followed by industrial REITs and retail and health care services, as shown in Table 1.

Currently in Malaysia, most of the waqf buildings managed by SIRCs in Malaysia have a value of less than RM100 million and only a few property are income producing assets. This situation reflects the reality that most waqf assets in Malaysia are less suitable to be injected into I-REITs portfolios because they do not fulfill the requirement set by the 2008 REITs' Guidelines by the Securities Commission of Malaysia. However, since there are lots of scattered uneconomicallysized waqf lands in various states in Malaysia, there is potential that this pool of abandoned lands be replaced (istibdal) with high quality and income producing high rise buildings in strategic location cities like Kuala Lumpur, Penang or Johor Bahru. Istibdal is one of the pragmatic mechanisms or an "exit policy" that is allowed by Shariah to be considered in order to develop abandoned waqf lands all over the nation for the benefit of the ummah.

ii. The nature and background of I-REITs Industry

The modus operandi of any I-REITs is to acquire high quality assets to create a larger and sustainable size investment portfolio to attract wider investors to participate. Given the fact that real estate business is a high profile and expensive industry which requires strong financial company background in acquiring new assets, almost all of I-REIT companies will obtain financing facilities from financial institutions or will issue sukuk to enable them to buy new property or to serve the existing debt. A study over the annual financial statements of three I-REITs companies in Malaysia, namely Axis REITs, Al-Aqar Healthcare REITs and KLCC REITs show that these companies have been actively involved in sukuk issuance. Annual Report of Axis REITs, for example, clearly stated that the purpose of the issuance of sukuk is to refinance the existing debt of the fund (refinance the fund's financing facilities). This is to assist the company to strengthen their financial position in line with the provisions of the REIT Guidelines. This reflects that debt financing seems to be one of the most favoured approach taken by the majority of REIT/I-REITs companies to strengthen their financial management. It seems that the modus operandi of waqf I-REIT should also emulate this practice in creating value for the waqf I-REITs.

Besides, waqf I-REITs can also employ cash waqf mechanism to generate more funds to create waqf properties. For instance, SIRCs may design waqf prospectus to invite cash from the public to be donated in waqf I-REITs. The waqf I-REITs itself may determine assets to be acquired under it. Next, the public will donate their money which shall be used to acquire properties and shall be declared as waqf.

iii. Transfer of ownership of waqf assets to third party

As a basic rule, waqf assets cannot be disposed since the ownership of the waqf assets has been transferred to Allah permanently and remains unchanged. Hence, the asset has to remain in the waqf domain perpetually (Al-Zuhayli, 1997). Also, the waqf assets shall not decrease in size or quantity, as it is prohibited for mutawalli to dispose the assets. Nevertheless, the assets should not be left idle by any act of neglect. Thus, the mutawalli as the sole trustee is responsible to venture into strategic and viable plans to develop waqf assets in order to enhance the value, quality and size.

Based on the REITs Guidelines by the SC, the creation of I-REITs will involve the process of selling assets (in this respect, waqfassets) to a special purpose vehicle (SPV) which later establishes an I-REITs. Such structure raises the concern from a waqf point of view because selling of waqf properties would not be allowed as it infringes the inalienability element of the waqf property. Considering this, the application of an ijarah contract for a long term or al-hukr (long-lease) may be regarded as a viable option to the current practice provided that the current law is amended to allow the establishment of waqf I-REITs for a certain definite period. Apart from that, the "selling" of a waqf property for a certain period of time with the condition to buy back in the future would be another alternative which is worth considering. For instance, a waqf I-REITs is established for up to 30 years, upon which the mutawalli shall have the right to purchase back the assets.

According to Mohd Daud Bakar (2014), I-REIT is a viable model to finance the development of waqf through the offering of units to the investors where the capital raised can be used to refurbish the existing buildings or to establish new waqf assets. This can be realized through a specific clause in the agreement between the SIRCs as a trustee and the I-REIT that the SIRCs will buy back the waqf asset that have been "sold" to I-REIT after a certain period of time for example 20 years. He added that in this situation, there is no issue that the ownership of the waqf property would be transferred to any third party as it is secured by a clause where the assets would be bought back by SIRCs after the maturity period. This mechanism is to allow waqf assets that have no liquidity to be "sold for a while" for the purpose of obtaining capital to finance the construction or upgrading the infrastructure on the basis of preserving maslahah of the waqf itself.

iv. Subscription by non-muslims

The notion of waqf reflects religious and charitable act of expressing one's submission and piety to Allah. The concern then is whether waqf I-REITs can be subscribed by non-Muslims as the proceeds will be channeled to institutions that serve the needs of the Muslims such as mosques and Islamic religious schools. These institutions are closely related to the sanctity of Islamic rituals and divine devotion to Allah. In this regard, Muslim jurists ruled that non-Muslims are allowed to perform waqf as long as the objective is towards the virtue of righteousness and against immorality (Al-Saritiy, 1997). On that note, waqf I-REITs is open to the public largely, regardless of being Muslims or non-Muslims, for the purpose of realizing social benefits.

v. Legal issues

From a legal perspective, a thorough research is required to analyze the implementation of waqf I-REITs which involves waqf assets that are in the category of religious property. This gives rise to the question of whether these properties are recognized as at par with other commercial assets (Sabit, 2008), mainly during the migration exercise of waqf assets into the I-REITs structure that have to strictly comply with, among others, the National Land Code, and provisions and regulations related to the Islamic capital market sector. Moreover, it is important to study the operations of waqf in different countries and the implementation of cross-border issues of waqf I-REITs that raises challenges in term of legal, Shariah and tax requirements.

vi. Risk management

Since it is a must to keep a waqf corpus intact, waqf capital preservation has become the major concern in any developing or investing strategy. Thus, the I-REITs manager must take due diligent effort in mitigating risks to avoid losses or reduction to the principal assets while at the same time actualizing the benefits to the beneficiaries. Corresponding to this, the OIC International Council of Fiqh Academy in Resolution No. 140 has recognized the diversification and risk management in the form of taking guarantees and securities in investment strategies.

4.3 Paradigm Shift Among the Waqf Authorities

After all, the greatest challenge that need to be addressed is the readiness and willingness of all waqf authorities in Malaysia, especially the SIRSc to make a paradigm shift of accepting contemporary instruments such as I-REITs as a tool in expanding the benefits of the waqf property. This will ensure an effective transformation and development in achieving substantial and broad-based improvements for the well-being of the ummah.

It should be noted that the establishment of waf-REITs will embark on a new asset class of waqf. This initiative is in line with the resolution by Majma' Fiqh in 2009 on the permissibility of waqf of financial rights (huquq al-maliyah) that are Shariah-compliant such as company shares, sukukand intangible rights (huquq ma'nawi) that comprises intellectual property such as copyrights, trademarks and patents along with waqf of unit trusts (Al-Majma' al-Fiqh al-Duwali, 2009. Looking at the massive size and fast development of Islamic equity market throughout the world, further research need to be carried out to harness the potential of unit trust, including I-REITs as a contemporary waqf instrument to develop waqf assets.

5.0 The Proposed Waqf I-REITs Structure

Having discussed the issues of developing waqf properties via I-REITs, it is clear that the main obstacle of developing waqf through I-REITs lies in the current legal framework in Malaysia. For example, REITs Guidelines which stipulates that the establishment of I-REIT can only be realized by true selling of the assets to the REITs company. The approach, however, contradicts the underlying principles of waqf which dictate that the asset should not be transferred out of waqf ownership through buying and selling or be given as a hibah. Thus, the initial idea of developing abandoned waqf assets thought the I-REITs structure is inherently difficult to implement as it violates the Malaysian laws pertaining to I-REITs, unless the law is amended to facilitate the practice of waqf REITs.

Having said that, the idea of incorporating waqf into the I-REIT structure is still a viable mechanism where it can be realized at the investors level. Based on the structure, the investors are given the option to channel all or part of their holding units of REITs to waqf, and this can be done at the beginning of the issuance of I-REITs or at any time during the lifetime of the I-REITs. If the opinion that allows for temporary waqf is to be adopted, they can even transfer their holdings of I-REITs units for a certain period of time only. Figure 1 illustrates the proposed structure of waqf I-REITs.

In this structure, a REIT will be established by the SRICs as the sponsor. Suitable assets which are non-waqf assets (to avoid the notion of selling waqf properties) will be identified and be injected into waqf REIT. The REITs manager will offer the REITs units to various entities, ranging from Waqf Property Fund, Baitulmal, GLC and also the public. These investors will purchase units of waqf REIT, whose proceeds will be used to purchase Shariah-compliant assets that are previously identified by SIRCs. The assets will be leased backed to the SIRCs. SIRCs will then sublease the assets to the Shariah-compliant tenants. The returns from the tenancy will be distributed to the investors. The dividend from this waqf REITs will be used by the SRICs to refurbish the existing waqf assets which are not in waqf REITs.

This structure can also facilitate for temporary waqf as recommended by the Maliki school of law. The time is specified for instance for a short period of two or three years or for a long period up to 99 years. This can be done by allowing the investors to temporarily give up their I-REITs units to waqf. During this period, any dividend from the I-REITs units will be given to waqf. The unit holders can even change their purpose of buying the I-REITs unit from investment into charity by declaring waqf on their I-REITs unit later. This flexibility in application will definitely entice investors to participate in this proposal. The idea is also in line with the recent law development pertaining to waqf in Malaysia particularly in the state of Selangor. Section 23 of the Wakaf (State of Selangor) Enactment 2015 on "wakaf of shares" outlines that "shares, bonds, sukuk or other instruments for valuable guarantee; and benefits from the units of share, bonds, sukuk or other instruments for the said valuable guarantee" can be a mawquf (waqf object). The illustration in section 23 of the Enactment clearly specifies the permissible practice of "wakaf of shares" which can also be analogized to the waqf I-REITs as follows: "A owns one thousand units of share in company B. A may give wakafthe dividend from the said units of share for the purpose of wakaf am or wakaf khas to the Majlis."

6.0 Conclusion

In the current competitive global economy, the search for a new mechanism that integrates Islamic finance and the waqf sectors has brought a new array of development in the Muslim world. The convergence of these two Shariah-compliant sectors is very promising to be a new engine of growth and quantum leap that engages more Muslims to an efficient and systematic way of managing the waqf asset. This paper submitted that the Islamic REITs structure for waqf development has the potential to be a source of social finance, particularly in financing the development of abandoned and scattered waqf assets by unlocking the values of the waqf assets with I-REITs mechanism. This structure may be regarded as a viable option to the current practice provided that the current law is amended to allow the establishment of waqf REITs for a certain definite period. The I-REITs structure is deemed feasible to be implemented and incorporated as a mean to develop waqf with the arrangement made at the investors level where they are given options to give all or part of their holding units to the waqf. The proposed structure involves the engagement of SRICs in providing underlying non-waqf assets for the waqf I-REITs. It also helps to attract other investors, including corporate entities and the public. The dividend which has become mawquf can be channeled for further development of other waqf assets which have not been developed well. The proposed structure can also be used to create a new waqf asset by inviting prospective investors to donate their money via I-REITs units (which is equivalent to cash waqf ) that will be used to create new waqf assets.

Apart from that, this study also proposed the practice of temporary waqf which is permissible under the Maliki School and also in line with the current law in the Federal Territories of Malaysia. The development of waqf assets via I-REITs structure has far-reaching objectives and its implementation is expected to significantly increase its portfolio. It can possibly attract a larger pool of the growing Muslim base investors as the value that can be injected into waqf asset can be in small denomination. In conceptualizing the waqf I-REITs, it is evident that more research needs to be done, especially in analyzing the best mechanism to introduce the new asset class of waqf, namely waqf unit trust and waqf I-REITs to the public at large, the issues related to the legal framework as well as risk management. Thus, this paper is believed to be a catalyst to the relevant authorities to restore the core function of waqf in serving the community and public.

Footnote

Endnotes

1. Other countries take up different approaches in establishing REITs particularly concerning the ratio of investing in real estate. In the US for example, REITs is obliged to invest at least 75% of the company's total total assets in real estate while for Korea and Singapore, the minimum ratio is 70%.

2. This include two hospitals in Indonesia, one in Thailand and a retirement and aged care resort called Jeta Gardens in Brisbane, Australia.

References

Reference

Affin Investment Bank. (2014). "M-REITs", Sector Update, 2 April 2014, 7.

Afiq Sharifuddin & HarulIzwan. (2011, April) Liquid returns from property, Malaysian REIT market enjoys stable yields. Property Quotient, 11, 2.

Ahmad Zaki Abd.Latiff et al. (2006, September). The Management of Waqf and Its Potential Towards Educational Development in Malaysia. Paper presented at National Waqf Convention, Kuala Lumpur.

Al-Sarakhsi, Syams al-Din. (1986). Al-Mabsut (Vol. 2). Beirut: Dar al-Ma'rifah.

Al-Saritiy, Abdul Wadud Muhammad. (1997). al-Wasayawa al-Awqafwa al-Mawarith fi al-Shari'ah al-Islamimyyah. Beirut: Dar al-Nahdah a-Arabiyyah.

Al-Zuhayli, Wahbah. (1987). al-Wasaya wa al-waqf fi al-fiqh al-Islami. Damsyik: Dar al-Fikr

Aminah Mohsin dan Mohammad Tahir Sabit Mohammad. (2011). Weaknesses of Current Capital Raising, Financing, and Investment Methods of Awqaf (Islamic Trusts). International Conference on Social Science and Humanity, International Proceedings of Economics Development Research (IPEDR) (Vol. 5) (pp. 401-405). Singapore: IACSIT Press.

Anuar Alias dan Soi Tho, C. Y. (2011, Special Issue). Performance analysis of REITs: comparison between M-REITS and UK-REITs. Journal of Surveying, Construction and Property 2, 38-61.

Bursa Malaysia. (2011). "Why Invest in REITs?". Retrieved from http://www. bursamalaysia.com/website/bm/media_centre/Events/download/Inv_ Know_Sunway130811.pdf, 28 Mei 2012.

Cizakca, Murat. (1998, November). Awqaf in History and its Implications for Modern Islamic Economies. Islamic Economic Studies, 6(1), 43-70.

Damansara REIT Managers. (2012). 2012 Al-'Aqar Heathcare REIT Annual Report. Kuala Lumpur: Author.

Guidelines on Islamic Real Estate Investment Trust 2005.

Guidelines on Real Estate Investment Trust 2008 (updated 28 December 2012).

Hodgson, Marshall G.S. (1974). The Venture of Islam: Conscience and History in a World Civilization (Vol. 2). Chicago: The Universsity of Chicago Press, 1974.

Hwa, T. K. (2009). How many REITs are there in Malaysia? The Malaysia Surveyor 44(3).

Ibn Qudamah, Muwafiquddin Abdullah bin Ahmad. (1985). Al-Mughni (Vol. 5). Beirut: Dar Ihya' al-Turath al-'Arabiy.

Johor Corporation. (2012). 2012 Annual Report. Johor Bahru: Author.

Johor Corporation. (2011). 2011 Annual Report. Johor Bahru: Author.

Kahf, Monzer. (1998, March). Financing the Development of Awqaf Property. Paper presented at Awqaf Development Conference. Kuala Lumpur.

Kahf, Monzer. (1999, October). Towards the Revival of Awqaf: A Few Fiqhi Issues to Reconsider. Paper presented at the Harvard Forum on Islamic Finance and Economics. Harvard University, United States of America.

Majma' al-Fiqh al-Islami al-Duwali. 2009. "Al-Qararatwa al-Tawsiyyat al-Daurah al-Tasi 'ah 'Ashar". Retrieved from http://www.fiqhacademy.org. sa/.

Maybank Investment Bank Research. 2013. "M-REITs", Sector Update, 22 April 2013.

Md. Nurdin Ngadimon, Deputy General Manager and Head Shariah, Islamic Capital Market & Market Development, Securities Commission of Malaysia. Personel communication, November, 21, 2011.

Messer, Ron. (2011, Jan-Mar). New Financing Opportunities for Airports: Exploring the Possibility of A Speciality REIT. Journal of Airport Management, 5(2), 123.

Mohd Zamro Muda. (2008). Grants and Wills Instrument: Legal Analysis and Applications in Malaysia. Muamalat Journal, 1, 1-19.

Mohd. Daud Bakar, Chairman of Shariah Advisory Council of Bank Negara Malaysia and Securities Commission of Malaysia. Personel communication, December, 5, 2014.

Mohsin, Magda Ismail Abdel. (2010, June). Revitalization of Waqf Administration and Family Waqf Law. US-China Law Review, 7(6), 1-8.

Muslim, Abi al-Husayn bin al-Hujjaj al-Qushayri. Sahih Muslim. Kaherah: Dar al-Hadith, 1997.

Mustafa Al-Khin et. al. (2005). Al-Fiqh al-Manhaji. Damsyik: Dar al-Qalam.

Newell, G. dan Atasya Osmadi. (2009, Disember). The development and preliminary performance analysis of Islamic REIT in Malaysia. Journal of Property Research 26(4), 329-347.

Newell, G. dan Atasya Osmadi. (2010). Assessing the importance of factors influencing the future development of REITS in Malaysia. Pacific Rim Property Research Journal 16(3), 358-374.

S. Mishkin, Frederic. (2010). The Economics of Money Banking And Financial Markets, Business School Edition. United Kingdom: Pearson.

Sabit, Mohammad Tahir Mohammad. (2008). "Sustaining the Means of Sustainability: The Need for Accepting Wakaf (Waqf) Assets in Malaysian Property Market". In Proceedings of The 14th Annual Conference of the Pacific Rim Real Estate Society. Kuala Lumpur, 2008.

Securities Commission of Malaysia, "Islamic REITs: The latest Shariah-Compliant investment", Quarterly Bulletin of Malaysian Islamic Capital Market 1, 1, (May 2006).

Securities Commission of Malaysia. (2013, September, 30). Malaysia's Islamic Capital Market Statistical Update.

Shamsiah Abdul Karim (2010). Contemporary Shari'ah Structuring for the Development and Management of Waqf Assets in Singapore. (Unpublished Ph.D's thesis). Durham University.

Shamsiah Abdul Karim. (2010). Contemporary Shari'ah Structuring for the Development and Management of Waqf Assets in Singapore. Ph.D Thesis, Durham University.

Shamsiah Abdul Karim, Assistant Director of Waqf Unit, Singapore Islamic Religious Council (MUIS). Personel communication April, 30, 2012.

Shamsiah Abdul Karim. (2011). Contemporary waqf administration and development in Singapore: Challenges and Prospects. In Monzer Kahf dan Siti Mashitoh Mahamood (Eds.), Essential Readings in Contemporary Waqf Issues (pp. 109-128). Kuala Lumpur: CERT Publications Sdn Bhd, 109-128.

Sing, T & Ling, T (2003). "The Role of Singapore REITs in a Downside Risk Asset Allocation Framework". Journal of Real Estate Portfolio Management 9 (3), 219-235.

Surtahman Kastin & Sanep Ahmad. 2010. Islamic Economy, Policy and Practice. Kuala Lumpur: Dewan Bahasa dan Pustaka.

Syahnaz Sulaiman. (2008). The Status of Developing Waqf Khas Property from Shariah Perspective. Muamalat Journal, 1, 45-64

Waqaf Annur. (2012). 2012 Annual Report. Johor Bahru: Author.

Yeap, C. (2011, Disember). Questions over REIT as a defensive asset class. The Edge Malaysia 5.