The thirst for Islamic financial investment structures continues unabated, particularly in connection to the property sector.
In a global first, Singapore listed Cambridge Industrial Trust is being transformed into an Islamic property trust. Australia's largest bank, National Australia Bank, will invest $35 million (Dh128.5m) for a stake in what will probably become the world's first listed industrial property trust which adheres to Shariah law.
It will be the first publicly listed Shariah-compliant Real Estate Investment Trust (Reit) in Singapore.
The bank's direct investment management arm has formed a joint venture with Oxley Corporate that will own 80 per cent of the company that manages the $750m Cambridge Industrial Trust (CIT). The current asset portfolio has 43 properties valued at S$967m.
Under the terms of the Reit management deal, NabInvest owns a 70 per cent interest in a joint venture company with Oxley Corporate. The joint venture company in turn owns the 80 per cent in CITM, the company that manages the trust. Japanese conglomerate Mitsui will continue to own the remaining 20 per cent. CIT is in the business of investing directly or indirectly in income-producing real estate and real estate related assets used mainly for industrial, including warehousing, purposes. This involves sourcing and acquiring value-enhancing assets in Singapore as well as other parts of Asia.
Growing wealth in the Middle East is increasing demand for Shariah-compliant products in Asia. CIT will capitalise on the scarce availability of Shariah-compliant products generally, and more specifically, publicly listed Shariah-compliant Reits by gaining a foothold in the globalised Islamic financial market place.
The proposed conversion is expected to generate greater demand from the Islamic financial community and cultivate a new investor pool for CIT when raising capital or issuing debt.
Three GCC countries, the UAE, Qatar and Kuwait, were ranked first, third and fourth respectively in the world with the highest percentages of millionaire households. Saudi Arabia is also a huge market. Investors from the GCC and Asia Pacific regions currently hold $267 billion in Shariah-compliant assets.
The trust is currently seeking unit holder approval to convert. Before conversion to a Shariah-compliant REIT, the trust will have to finalise a Shariah-compliant financing solution for $S369m of interest-bearing loans, because to be Shariah-compliant, a REIT must not pay or receive interest.
The Islamic Bank of Asia, Singapore's first Islamic bank, has been appointed adviser for the conversion, and HSBC is advising on the refinancing solution.
Shariah law will prevent the trust from stockbroking or share trading in non-compliant securities and conventional insurance.
Outlawed investments will include some entertainment activities such as gambling gaming, involvement in the manufacture or sale of non-halal goods and the sale of tobacco-based products. As the principal source of revenue for investors is the rental derived from properties owned by the Reit, it is necessary to ensure that the rental is derived from permissible sources.
Cash and liquid assets of CIT will also have to be invested in Shariah-compliant products. Demand for Shariah-compliant financial products has increased sharply is Asia in recent years, due partly to strong economic growth in the region which has led to an unprecedented accumulation of wealth.
The rising demand for Shariah-compliant products in Asia can also be attributed to the rising wealth in the GCC and wider Middle East. High energy prices should sustain this demand.
Accordingly, the number of Shariah-compliant funds worldwide is forecast to double to 1,000 by 2010. The growing pool of liquidity in the Middle East augurs well for Asia as much of it is reportedly looking for suitable investments in the Asian area. Asia is taking notice of these flows. Islamic banks are growing in a number of markets such as Malaysia. The Indonesian Parliament recently passed a new Islamic banking law that will allow commercial banks to be converted into Shariah-compliant ones and for foreign entities to set up Islamic banks in cooperation with Indonesian partners.
Other than meeting demand from its domestic Muslim population, the new law is intended to draw investments from the Middle East into the country's infrastructural development.
In Japan, the Financial Services Authority has proposed an amendment to the banking law that will allow Japanese banks to offer Islamic finance products through a subsidiary. In addition to legislative initiatives, governments and other entities in Asia plan or have announced Sukuk issuances. The Indonesian government said that it would issue US dollar and rupiah sukuks later this year. Separately, it has been reported that the Hong Kong Airport Authority is considering a sukuk issuance.
Monetary Authority of Singapore announced in May that it is developing a facility to make available Singapore dollar sovereign-rated sukuk to financial institutions in Singapore conducting Islamic finance. Malaysia already originates 67 per cent of outstanding Sukuks worldwide.
More Middle Eastern investors are looking towards opportunities in Asia as they seek to diversify their portfolios and search for new opportunities. Asset managers are increasingly structuring Shariah-compliant funds and other investment products to meet the needs of clients.