Fundamentals of Islamic Money and Capital Markets

Chapter 8

Islamic Real Estate Investment Trusts (I-REITs)

Learning outcomes

At the end of this chapter, you should be able to:

1 Distinguish the differences between conventional and Shariah-compliant REITs.

2 Explain the Islamic REITs structure.

Introduction

A real estate investment trust (REIT) is a special type of mutual fund. Like other mutual funds, REITs allow small investors to participate with a low minimum investment. However, whereas other mutual funds invest only in financial instruments, REITs also invest in real estate and/or mortgages. Therefore, it is a vehicle that mobilises funds from the unit holders comprising individuals and companies for investment in real estate. Income generated by REITs come from rents on real property and/or interest payments on mortgages and will be passed through to shareholders.

REITs are eligible to be sold on stock exchanges so investors can easily buy and sell them at any time. Other than supply and demand law, the share value of REITs is also influenced by their composition, which is determined by the portfolio manager. Investors will monitor whether or not the portfolio manager has the expertise required for real estate investment and industry. Therefore, although the REIT’s performance was good, the share value can be low due to the small number of investors who want to invest in it.

REITs normally are classified as equity REITs, mortgage REITs, and hybrid REITs. Equity REITs are REITs that invest directly in properties, whereas ...