al-hadharah boustead reit update
TRANSCRIPT
REITs and Islamic REITs
1. Introduction
Real Estate Investment Trust’s Definition and Classification
There are a few definition associated to Real estate investment trusts or REITs.
Based on Husni, Badri (2010) REITs are collective investment schemes where
funds are pooled and primarily invested in real estate assets and other real estate
related assets. Real estate assets may consist of residential or commercial
buildings, retail or industrial lots, lodgings/resorts, hospitals/health care facilities,
self-storage facilities and specialty-built buildings. In another definition, Corgel,
Mcintosh and Ott (1995) define REITs as investment tools to create flow of
funds from investors to the real estate and property sector of the country.
According to Wong (2004), REITs is a company or a trust that pools
fund from individual investors, acquires and operates income-generating real
estate, and distributes the income derived from their own properties as
dividends. REITs has attributes of both stock and bond so it is regarded as a
hybrid of stocks and bonds. In addition, according to Wong (2004), REITs
increase strength from the pool of resources gathered from investors and
invests into high profile and high value property for greater return as lots of
investors may not be able to invest in huge real estate portfolio.
The Securities Commission of Malaysia defines REIT as “an investment vehicle
that proposes to invest at least 50% of its total assets in real estate, whether
through direct ownership or through a single purpose company whose principal
asset comprise real asset” (Securities Commission, 2005). Different countries
adopt different approach in determining the requirement for a REIT especially
with regards to ratio of investing in real estate. In United States for instance, the
main requirement for a REIT is that it must invest at least 75% of company's total
assets in real estate. As for Korea and Singapore, 70% is used as the minimum
ratio of investing in real estate (Vincent, 1999). Thus, REIT is an entity that
accumulates a pool of fund from investors, which is then used to buy, manage
and sell assets in real estate industry.
Examples of real estate related assets are shares in public-listed property
companies and listed or unlisted debt securities of property companies. Subject
to the investment limits prescribed by a regulatory body, REITs are also
permitted to invest in non-real estate related assets, asset-backed securities and
liquid assets. REITs, which may be listed or unlisted, generate investment
returns from the rental income collected from tenants plus any capital
appreciation arising from holding the real estate over the period. Investors in
REITs, called unit holders, receive their returns in the form of dividends and/or
capital gains for the holding period. Real estate investment trusts (REITs) are
commonly known as listed property trusts in Malaysia.
REIT offers investors the opportunity to diversify and invest their portfolios in
listed real estate securities that own and operate income generating from real
estate such as residential, commercial, retail properties, plantation land, storage
facilities, warehouses, car parks and others, which otherwise expensive if they
were to invest direct. The owner of one REIT unit is actually buying a portion of a
managed pool of real estate. This pool of real estate then generates income
through renting, leasing and selling of property and distributes it directly to the
REIT on a regular basis. Hence, an investor may receive returns either in the
form of dividend or capital gain for the asset holding duration.
In essence, REIT operates like any other trust funds involving stakeholders like
management company, trustee and unit holders. The relationship of these
parties is outlined and governed by a trust deed. The trust deed is essentially a
formal document outlining the objectives and principles of REIT, and rights and
responsibilities of a management company and a trustee respectively. The REIT
must be managed and administered by a management company approved by
the Securities Commission. Under the Guidelines on REIT, the management
company must be "a subsidiary of either a company involved in the financial
services industry in Malaysia; or a property development company; or a property-
investment holding company; or any other institution which the Securities
Commission may permit" (Securities Commission, 2005b). Among the main
functions of REIT manager include setting up the strategic direction of the REIT,
recommending to its trustee on the possible acquisitions, divestments or
enforcements of assets and ensuring compliance with applicable regulations.
The REIT is also required to have a trustee who acts as the custodian of the
assets of the fund and to safeguard the interests of the unit holders. This
requires continuous supervision and monitoring of the funds managed by the
management company so that it complies with the objectives and the deed of the
fund and all related regulatory requirements and guidelines set by laws and the
Securities Commission. In Malaysia functions of a trustee can only be assumed
by a trust company which registered under the Trust Companies Act, 1989. The
trustee earns trustee's fees for its functions in holding the assets for the benefits
of the unit holders.
Another important stakeholder of REIT is property manager who provides
property management services and in return, earns property management fees.
The main functions of property manager include managing and controlling the
assets of the REIT, preparing budgets and maintaining financial records for the
properties and advising on sale and purchase decisions. Figure 1 summarises
and illustrates the roles and functions of various parties involve in REIT
operation.
Literature has generally categorised REITs into three types, namely Equity
REITs, Mortgage REITs and Hybrid REITs (Allen, Madura, & Springer, 2000;
Obaidullah, 2005; Park, Mullineaux, & Chew, 1990) . A brief description of each
type is discussed below:
Figure 1: Stakeholder in REIT Operation
Unit Holder
Investment Returns
Manager Trustee
Management services Safeguard unit holder’s
interest
REIT
Management fees Trustee fees
Ownership of Net Property properties Income
Maintenance andManagement
RentServices
Maintenance and Rental PaymentProperty Manager
management fees Tenant
I. Equity REITs
Equity REITs owns and operates income-generating real estate which
involves a wide range of activities including leasing, development of real
properties and tenant services. A distinctive feature of equity REITs is that it
acquires and develops the real estate properties with the intention to
manage them as part of its portfolio rather than resell them once they are
developed.
II. Mortgage REITs
Mortgage REITs primarily hold long-term mortgages, but many also engage
in short-term construction financing (Park et al., 1990).This type of REITs
offers interest-based loans to real estate owners, operators or developers. It
involves greater risk since mortgage REITs tend to be more sensitive to
volatility in market interest rates. This is due to the fact that mortgage REITs
hold mortgages whose prices move in the opposite direction of interest
rates.
III. Hybrid REITs
As the name implies, hybrid REITs are a combination of equity and
mortgage REITs. In other words they own and operate real estate at the
same time extend loans to real estate owners and operators.
History of REITs
According to Taylor and Bailey (1936), REIT was begun in Boston in the
middle of 1880’s. The significant events of REIT history can be revealed on
Table 1.
Table 1
Years Event
1960 President Eisenhower (US President 1953-1961) signs REIT Act into law
1961 The first REIT are created
1965 First REIT listed on NYSE
1974 First significant change to REIT tax rules
1976 REIT allowed to incorporate
1980s REIT find it difficult to compete for capital due to tax laws
1989 Worst real estate recession since 1930s
1991 First publicly traded REIT to achieve a $1 billion equity market capital
1992 First IPO of an UPREIT
1997 REIT Simplification Act of 1997
1999 REIT Modernization Act of 1999
Sources: Liang, 2000
Since 2001, REIT have been included in the Standard& Poor’s (S&P) 500
Index, mainly due to recognition and acceptance of the importance of REIT
and the real estate and property sector in the public capital markets. Besides
that, REIT has also gained popularity across the continents of Europe and
Asia, offering a new opportunity for international funds to diversify into foreign
real estate without worrying about liquidity. European countries which have
adopted the REIT concept include Belgium, Germany, France, and
Netherlands. REIT markets have been successfully established in Asia
country like Japan, Singapore, Taiwan, Malaysia, Thailand, South Korea and
Hong Kong.
In Asia, Malaysia was the first to have listed property trusts in 1989. The Asian
economic crisis during the 1997-1998 period, had significantly contributed to the
development of REITs in other Asian countries. The REIT market took off later in
Japan and Singapore in 2001 and 2002 respectively. South Korea established its
REIT legislation in 2001 while Taiwan launched its first REIT in 2004. Hong Kong
was the latest to introduce a listed REIT in 2005. While Japan has the most
developed REIT market, Singapore is widely considered to be the most dynamic
REIT market among other Asian countries. Table 2 shown the latest Total
Global Market Capitalization of REIT in 2010
Table 2: Total Global Market Capitalization of REIT in 2010
Country Market Capitalization (US million)
US 271,850
Australia 70,747
France 64,526
UK 37,176
Japan 29,432
Singapore 23,134
Canada 20,610
Netherlands 12,234
Hong Kong 9,519
Belgium 6,761
South Africa 3,401
New Zealand 2,540
Turkey 1,890
Malaysia 1,543
Germany 713
South Korea 133
Source: Global Real Estate Investment Trust Report 2010
2. Development of REITs In Malaysia
2.1 Regulatory Framework
Malaysia was the first country in Asia to introduce legislation to permit the
formation of listed property trusts. In 1986, Bank Negara Malaysia (the Central
Bank of Malaysia) approved the regulatory framework for listed property trusts
where the principal governing their establishment and operation was the
Companies Act 1965 and the Securities Industry Act 1983. Specific guidelines on
property trust funds were introduced by the Securities Commission in 1991 and
later revised in 1995.
In 1999, the Securities Commission embarked upon a consultation process in
relation to property trust funds vis-à-vis the likes of similar products in other
jurisdictions, such as REITs in the United States and property funds in
Singapore. It issued a Consultation Paper on Property Trust Fund and
Consultation Paper on Property Trust Funds and Real Estate Investment Trusts
in 1999 and 2002 respectively.
Pursuant to the Finance Act 2004, which was gazetted in December 2004, REITs
will enjoy a tax treatment as follows:
(a) REITs to be exempted from tax on income distributed to its unit holders
whereas the undistributed income will be taxed at 28%;
(b) Income distributed to unit holders will be taxed at their respective taxes.
However, for non-residents, the tax payable at 28% will be withheld by REITs;
and
(c) The accumulated income that has been taxed and subsequently distributed is
eligible for tax credit in the hand of unit holders.
Furthermore, REITs under the Finance Act 2004 enjoy stamp duty exemptions
on all instruments of transfer of real property. Property owners who sell their
properties to REITs are also exempted from real property gains tax.
However, the filing obligations imposed under the Stamp Act 1949 and the Real
Property Gains Tax 1976, are still required to be adhered to. On January 3, 2005,
the Securities Commission issued the new Guidelines on Real Estate Investment
Trusts to govern the operation and administration of REITs in Malaysia. The
amended guidelines have generated a lot of excitement and discussion among
industry players, with a number of them, especially those with sizeable
investment properties, seriously considering injecting their assets into such
trusts.
The key features of the new guidelines, which are a major improvement from the
old guidelines, include the following:
i. Liberalization of the borrowing limit for a REIT;
ii. Relaxation of rules on acquisitions of leasehold properties;
iii. Flexibility in the acquisition of real estate that is encumbered by
financial charges;
iv. Eligibility requirements for management companies that manage
REITs have been streamlined;
v. Introduction of a declaratory approach in the establishment of REITs;
and
vi. Enhancement in the amount of exposure and reporting required which
is consistent with international standards.
On November 22, 2005, the Securities Commission issued the Guidelines
on Islamic Real Estate Investment Trusts (Islamic REITs) to facilitate further
development of new Islamic capital market products. Malaysia was the first
jurisdiction in the global Islamic financial sector to issue such guidelines and had
set a global benchmark for the development of Islamic REITs. The Islamic REITs
guidelines complemented the existing guidelines on conventional REITs. Syariah
(Islamic jurisprudence) compliance criteria are provided in the guidelines to guide
management companies in their activities relating to REITs, including the types
of Syariah permissible and non-permissible rental and investment activities.
REIT and Islamic REIT are shares similar broad characteristics in terms of main
structure requirements i.e. to have valuation, trustees, property managers,
management companies, property manager, etc. In terms of tax treatment in
Malaysia both REIT receive similar tax treatment on stamp duty, real property
gains tax as well as corporate tax. They are also similar in terms of returns and
distribution form the properties, i.e. both are generated frp, rental income and
capital appreciation. Another similarity is the return to shareholder in terms of
capital gain and dividend.
The regulatory framework is also similar for both with exception that Islamic REIT
must comply with the Shariah requirement, where Islamic REIT is required to
appoint a Shariah Advisor or Committee who will act as advisor to the REIT and
be the point of reference and consultations on permitted investments as provided
under the Securities Commission Guideline. The distribution of income, although
similar with REIT where it should only be made from realised gains or realised
income, for Islamic REIT these income must be from Shariah compliant activities
or from the activities within the 20% benchmark This benchmark is used to
assess the level of contribution from mixed rental payment from Shariah-non
compliant activities such as the rental payment from the premise that involved in
riba, gambling, sale of liquor and other activities prohibited in Islam.
2.2 Industry Growth
The first Malaysian listed property trust, Arab Malaysian First Property Trust, was
launched in September 1989. The second listed property trust was First
Malaysian Property Trust, established in November 1989, and followed by the
third listed property trust, Amanah Harta Tanah PNB, which commenced in
December 1990.
The fourth property trust was the unlisted Mayban Property Trust Fund One
launched in 1990. There was no listed property trusts issued until Mayban
Property Trust Fund One was listed on the KLSE in June 1997 and known as
Amanah Harta Tanah PNB 2. The First Malaysian Property Trust, however,
ceased its listing in July 2002. As at the end of April 2005, only three property
trusts were listed on the Bursa Malaysia comprising AmFirst Property Trust
(formerly Arab Malaysian First Property Trust), Amanah Harta Tanah PNB and
Amanah Harta Tanah PNB 2.
Following the introduction of the new Guidelines on Real Estate Investment
Trusts, Axis Real Estate Investment Trust was the first to be listed on Bursa
Malaysia on July 29, 2005. Next, Starhill Real Estate Investment Trust, the
country’s largest REITS was listed on December 16, 2005, followed by UOA Real
Estate Investment Trust on December 30, 2005. Narrowing down to the
Malaysian market, to date, there are 14 REIT being offered in Malaysia inclusive
of three Islamic REIT. Al-Aqar KPJ REIT being the first Islamic REIT in the world
and Al-Hadharah Boustead REIT being the first Islamic plantation REIT in the
world. Both the Al-Aqar KPJ REIT and Al-Hadharah Boustead REIT rank
amongst the top 3 REIT in Malaysia in terms of dividend yield. Axis-REIT which
was listed on Bursa Malaysia on 3 August 2005 was successfully reclassified as
a Shariah Compliant REIT on December 2008 with principal investment primarily
in commercial, office and office/industrial real estate. Table 3 and 4 present a
snapshot of listed REITs to date.
The National Budget 2007 also provides tax incentives to entice specific
investors to the Malaysia REIT market through the reduction of tax on the
investors. According to the tax proposal, dividends received by local and foreign
individual investors and local unit trusts from listed REITs subject to a withholding
tax of 15%, while foreign institutional investors (include a pension fund, collective
investment scheme or such a person approved by the Minister of Finance) be
reduced to 20% from the previous 28% for five years (Badawi, 2006; Treasury
Malaysia, 2006).
Table 3: Malaysian REITS Specialization And Example
Table 4: Malaysian REIT Portfolio Composition
3. REITS In Malaysia
REIT returns averagely in develop market is around 3-5% depending on its
individual performance. However, REIT in Malaysia is very attractive because as
we are in a so-called last phase of developing nation before developed. Our
nation’s property’s values are still a gap behind many developed countries in
Asia. This emerge as an opportunity with an average attractive yield between 6-
8% which is higher than other major developed countries. Especially when REITs
are in the infant stage in Malaysia, most REIT managers are with option and plan
to growth their property portfolio to trade or manage rental in order to achieve
even a better yield for investor.
REIT is not just having the existing property to rent out, manage and collect
rental. A high performance REIT is like your property fund manager. They will
develop new opportunities, acquire more properties into their portfolio and to
some countries, jointly develop property projects. This will provide even a higher
potential return compare to those low to moderate risk investment instruments.
To date, market capitalization of 14 REITS (including 3 Islamic REITs or iREITS)
as at 7 May 2011stood at RM11.254billions with RM2.460billions generates
through iREITs. The biggest market capitalization for iREITs is Al-Hadharah
Boustead REITs at RM896.5million, followed by Axis-REIT at RM890.9Million
and Al-Aqar KPJ REIT at RM673.0million. The biggest REITs in Bursa Malaysia
is Sunway REITs at RM2.980billion. Pie Chart 1 and 2 shown the comparison of
Malaysian REITs.
Pie Chart 1: Comparison Between REITS and iREITS in Market
Capitalization
82%
18%
Market Capitalization
REITs iREITS
Pie Chart 2: iREITs Market Capitalization Comparison
AlAqar27%
Axreit36%
BSDreit36%
iREITs Market Capitalization
CHARACTERISTICS OF SHARIAH-COMPLIANT REITS
The introduction of Islamic REITs is viewed as one of the most significant
initiatives to broaden and deepen the product base of Islamic capital market in
Malaysia. It can also help to enhance competitiveness of Malaysian Islamic
capital market by attracting global Islamic investors who wish to diversify their
investment portfolio which are Shariah compliant. This section provides an
overview of Shariah rules and principles used in determining the Islamicity of
REITs as outlined in the Guidelines for Islamic REITs issued on 21st November
2005 by Securities Commission (Securities Commission, 2005).
Compliance Assessment Process
The Shariah-compliant assessment is undertaken by Shariah committee or
advisor. This Shariah committee is responsible to oversee the operation of
Islamic REITs so that it complies with every aspect of Shariah principles
including investment, deposit and financing decision for Islamic REITs,
acquisition and disposal of real estate and rental earnings and activities. The
Shariah committee is also required to supervise and ensure that all funds are
managed and administered according to the Shariah principles decreed and
outlined by the Securities Commission.
There are several specific aspects of Shariah-compliant assessment process that
Securities Commission has outlined in the Guidelines for Islamic REITs. The
following highlights the salient aspects that need to be scrutinised when
conducting Shariah-compliant assessment.
1. Non-Permissible Rental Activities
Since rental constitutes the main income stream for investors, it is pertinent to
ensure that this rental derived from halal or permissible sources. Accordingly, the
Shariah Advisory Council of Securities Commission delineates the following
rental activities that are classified as non-permissible. The list includes financial
services based on interest (riba); gambling/gaming; manufacture of sale of non-
halal products or related products; conventional insurance; entertainment
activities that are non-permissible according to the Shariah; manufacture or sale
of tobacco-based products or related products; stockbroking or share trading in
Shariah non-compliant securities; and hotels and resorts. Apart from these
activities, the Shariah committee or advisors are allowed to use their own
discretion based on ijtihad1 to determine other activities that are deemed non-
permissible to be included as a criterion in assessing the rental income for the
Islamic REIT.
2. Rental from Tenant who Operates Mixed Activities
When there is a case of tenant who operates mixed activities i.e. one where its
core activities are permitted by Shariah, although there are some other activities
that may contain a small extent of prohibited elements, the Shariah advisors
must perform compliance assessment with additional consideration. One of the
most important considerations is that the rental from non-permissible activities
must not exceed 20% of total turnover of the Islamic REIT (based on the latest
financial year). To that effect, Shariah advisors need to advise the Islamic REIT
fund manager not to invest in the real estate involving non-permissible activities
that clearly exceed the benchmark.
3. Method of Calculating the Ratio of Rental of Non-Permissible Activities
There are several approved methods that can be used for calculating the ratio of
rental of non-permissible activities from a tenant operating mixed activities. The
methods include the usage of space, hours of service and other methods
deemed appropriate by the Shariah advisors using their own ijtihad. In the case
of a supermarket for instance, the rental of non-permissible activities such as
selling of alcohol can be based on the ratio of area occupied for non-permissible
activities to the total area occupied. For example, if the total area rented out is
10,000 square feet and the area allocated for the sale of alcoholic beverages is
1000 square feet, then the ratio of area used for non-halal activities is 10%.
Thus, the rental from non-permissible activities is 10% of the total rental paid by
the supermarket. In this case the 10% rental income is deemed to be permissible
as it is still within the acceptable benchmark of 20% of total turnover of the
Islamic REITs.
4. Acquisition of Real Estate
Shariah-compliant assessments must be carried out by the appointed Shariah
advisor. It is not permitted to acquire real estates in which all tenants operate
non-permissible activities, even if the percentage of rental from the said real
estate is within the accepted benchmark i.e. below 20% of the total turnover of
the Islamic REITs.
5. Renting Out to New Tenant
The 20% benchmark in determining the status of mixed rental income need not
be applied in case of renting out to a new tenant. This is because the exact rental
receipt from non-permissible activities is still unknown. However in an obvious
case whereby the new tenant involves in activities which are deemed
impermissible then it is not allowed for Islamic REIT fund manager to accept
such tenant. For example, a well-known casino operator who plans to rent the
real estate of the Islamic REIT must not be accepted as a new tenant.
6. Instruments used in investment, deposit and financing for Islamic REITs
An Islamic REIT must also ensure that all forms of investment, deposit and
financing instruments comply with the Shariah principles. For example, in
financing the acquisition of real estate, Islamic REIT fund manager must not
engage in riba-based instrument which would have an effect on the Islamicity of
the Islamic REIT operation and transaction.
7. Takaful Coverage
The Guideline issued by the Securities Commission also stipulates that an
Islamic REIT must use Takaful schemes to insure its real estate. However in
case that Takaful schemes are unable to provide the insurance coverage, then
the Islamic REIT is permitted to use conventional schemes (Securities
Commission, 2005).
8. Risk Management Issues
Islamic REIT is permitted to participate in forward sales or purchases of currency,
and is encouraged to deal with Islamic financial institutions. If the Islamic REIT
deals with Islamic financial institutions, then it will be bound by the concept of
wa'd (a unilateral promise where only one party is obligated to fulfil his promise or
responsibility). The party that is bound is the party that initiates the promise.
However, if the Islamic REIT deals with conventional financial institutions, it is
permitted to participate in the conventional forward sales or purchase of
currency.
3. Al-Hadharah Boustead REIT
Introduction
The Al-Hadharah Boustead REIT is the first Islamic oil palm plantation real estate
investment trust (REIT), marking a milestone for the REITs market in Malaysia.
Listed on 8 February 2007 on the Main Board of Bursa Malaysia Securities
Berhad, Al-Hadharah Boustead REIT's principal investment strategy is to own
and invest primarily in plantation assets comprising plantation estates and mills.
The primary objectives of the Fund are to provide Unit holders with stable
distribution of income/yield and to achieve long term growth in the NAV per Unit
of the Fund.
It is the largest Islamic REIT in Malaysia, based on asset value at listing date. As
at 6 May 2011, Al-Hadharah Boustead REIT Malaysia market capitalisation was
at RM896.5 million. Al-Hadharah Boustead REIT Established in Malaysia under
the Deed dated 11 December 2006 entered into between Boustead REIT
Managers Sdn Bhd (formerly known as Emas Jeep Sdn Bhd) and CIMB Trustee
Berhad (formerly known as Bumiputra-Commerce Trustee Berhad) as an Islamic
real estate investment trust.
Al-Hadharah which means “civilisation” is a Shariah-compliant REIT that involves
the sale of plantation assets to a fund established by the Boustead Group. These
assets will
subsequently be leased back to certain subsidiaries of the Boustead Group, who
will then become tenants. Al-Hadharah Boustead REIT will be managed by
Boustead REIT
Managers Sdn Bhd, a subsidiary of Lembaga Tabung Angkatan Tentera (LTAT),
one of the premier and leading funds in the region.
Key Milestones
Date Event
29 July 2009
Al-Hadharah Boustead REIT held its second Extraordinary General
Meeting to seek unitholders' approval for the amendments and
restatement of the Trust Deed.
11 December 2008 Injection of Malakoff Estate and Bebar Estate into the Plantation Assets
09 December 2008
Al-Hadharah Boustead REIT held its first Extraordinary General Meeting
to seek unitholders' approval for the acquisition and leaseback of Malakoff
and Bebar Estates.
26 June 2007Injection of Lepan Kabu Estate and Lepan Kabu Mill into the Plantation
Assets
08 February 2007Listing of Al-Hadharah Boustead REIT on the Main Board of Bursa
Malaysia
02 February 2007 Allotment of Issue Units to successful applicants
15 January 2007Launch of the Prospectus and Opening of the Retail Offering and
Institutional Offering
11 December 2006 Establishment of Al-Hadharah Boustead REIT
NST dated 16 January 2007 on the launching of Al-Hadharah Boustead REITs
Prospectus
Revisited The Initial Public Offering
Initial Public Offering by Boustead REIT Managers Sdn Bhd as the manager of
Al-Hadharah Boustead REIT was 220,000,000 new units comprising:
(i) 20,000,000 for Malaysian public at the retail price of RM0.99 per Issue
Unit;
(ii) 2,000,000 Issue Units for eligible Directors and employees of Boustead
REIT Managers Sdn Bhd, Investment Committee members of Al-
Hadharah Boustead REIT, Directors and employees of Boustead
Estates Agency Sdn Bhd and the Directors of Boustead Holdings
Berhad and Boustead Properties Berhad (collectively the promoters of
the Al-Hadharah Boustead REIT), at the retail price of RM0.99; and
(iii) 198,000,000 Issue Units for institutional and selected investors at the
institutional price of RM1.05 per Issue Unit.
Together with the new Issue units, total units issued were 472 million units as
ratio shown below:
53%42%
5%
Unitholdings of Al-Hadharah Boustead REIT Upon Listing
Vendor Institution Retail & Employees
4.1 The Structure of Al-Hadharah Boustead REIT
The following diagram illustrates the structure of Al-Hadharah Boustead
REIT and indicates the relationship between Al-Hadharah Boustead REIT,
the Manager, the Plantation Adviser, the Trustee, the Shariah Adviser and
the Unit holders:
Pursuant to the above transaction structure:
1. Al-Hadharah Boustead REIT acquires from the Vendors all
the rights, interests and benefits relating to the beneficial
ownership of the Plantation Assets;
2. To fund the purchase consideration of the Plantation Assets,
Al-Hadharah Boustead REIT issues Units to the Vendors
pursuant to the acquisition of the Plantation Assets as part of
the purchase consideration. The balance of the purchase
consideration will be satisfied in cash based on proceeds
raised from the Public Offering, which is offered to the public
and institutions/investors;
3. Pursuant to the SPAs, each of the Vendors will issue a
declaration of trust (“Declaration of Trust”) wherein each of
the Vendors will declare that it holds all the rights, interests
and benefits relating to the beneficial ownership of the
Plantation Assets in trust for Al-Hadharah Boustead REIT
(save and except for the Malay Reserved Land);
4. Upon completion of the acquisition of the Plantation Assets,
Al-Hadharah Boustead REIT lets the Plantation Assets to the
respective Vendors for agreed rental payments and for
agreed tenancy periods of three (3) years each,
automatically renewable four (4) times up to twelve (12)
years and thereafter renewable for up to an additional fifteen
(15) years comprising five (5) additional terms of not more
than three (3) years each (save and except for the tenancy
of the Malay Reserved Land which are not automatically
renewable), upon the terms and subject to the conditions as
set out in the Ijarah Arrangements/SPAs;
5. The Manager appointed Plantation Adviser to monitor the
overall state and condition of all Plantation Assets.
MARKET VALUATION
Al-Hadharah Boustead REIT assets involve eight oil palm estates
and two palm oil mills, all located within Peninsula Malaysia. For
the listings, the total purchase consideration for these plantation
assets, which forms the basis of this fund, was RM472 million, a
discount of 3.42% from the market valuation of RM489 million.
The Deed
The Deed is executed between Boustead REIT Managers as the
Manager of Al-Hadharah Boustead REIT and CIMB Trustee as the
Trustee of Al-Hadharah Boustead REIT to act in their respective
capacities.
Rights and Liabilities of Unit holders
(a) Each Unit in Al-Hadharah Boustead REIT is of equal value
and represents an undivided interest in the Fund.
(b) The prior approval of Unit holders (by ordinary or special
resolution in a meeting as the case may be) is required for
the following transactions:
(i) Sale or disposal of any Plantation Assets (by ordinary
resolution) for assets not exceeding 50% of the total
asset value or by special resolution for assets
exceeding 50% of the total asset value; and
(ii) Acquisition and Disposal of Plantation Asset to
corporation related to the Manager.
(d) A Unit holder may not:
(i) interfere or seek to interfere with the rights,
powers, authority or discretion of the Manager or
the Trustee under the Deed;
(ii) exercise any rights in respect of the assets of the; and
(iii) require any assets of the Fund to be transferred for a
benefit of a Unit holder.
(e) The liability of a Unit holder is limited to the amount
payable for any Unit.
INCOME STREAMS
Under the Al-Hadharah Boustead REIT, plantation assets will be
leased back to the vendors for a three-year renewable tenancy with
a cumulative period of up to thirty years. At the end of every three
years, the fixed rental will be reviewed and a new rental will be
agreed between the parties. The new rental will be determined
based on historical crude palm oil (CPO) prices, prevailing and
expected future CPO prices, cost of production, extraction rates
and yield per hectare.
Hence, income sources for Al-Hadharah Boustead REIT include:
i. Fixed Rental
Tenants will pay a cumulative fixed rental of RM41.3 million per
annum for the first tenancy term of three years. This will be payable
on a bi-monthly basis.
ii. Performance-Based Profit Sharing
In addition to a fixed rental, the Al-Hadharah Boustead REIT may
enjoy an annual profit sharing of net incremental income based on
a formula pegged to CPO and fresh fruit bunch (FFB) prices. This
net incremental income is determined based on the actual CPO
price realised for the year, above the reference price of RM1,500
per MT for the first three years. It will be shared on a 50:50 basis
between the tenants and the fund. This profit sharing payment is
the first of its kind in the REIT market and may translate into more
handsome dividend yields for investors.
iii. Capital Gains
Given the development potential of some of the plantation assets,
especially those located in prime locations; there is a potential
upside for capital gains. The gains realised may be distributed as
bonus dividends.
DIVIDENDS
i. Projected Dividends
At least 98% of the distributable earnings of the REIT will be paid to
unitholders for the first three financial years. It is projected that the
REIT will be well positioned to declare a dividend distribution of
7.38 sen for the next three years.
ii. Variable Dividends
In addition to income from fixed rentals, the REIT will also see
earnings derived from profit sharing between the REIT and its
tenants based on a formula. This may also contribute to additional
dividend distribution to the
unitholders.
iii. Bonus Dividends
Unitholders may also enjoy enhanced dividend yield from the sale
proceeds of selected plantation assets with developments potential
located in prime areas.
4.4 INVESTMENT OBJECTIVES
Al-Hadharah Boustead REIT is a REIT formed to own and invest
primarily in plantation estates and mills. The primary objectives of
the Fund are:
(a) to provide Unit holders with a stable distribution of income/yield;
and
(b) to achieve long-term growth in the NAV per Unit of the Fund.
4.5 STRATEGY
The strategy is to invest in a portfolio of plantation estates and mills
in Malaysia and will not invest in non-real estate assets upon
listing of Al-Hadharah Boustead REIT. In achieving the strategy, the
plans are to adopt a combination of the following strategies:
4.5.1 Organic Growth Strategy
Adopt organic growth strategy to maximise returns, sustain
and improve cash flows and net income generated through
following key areas:
(a) Proactive asset management
(b) Maintain Replanting Programme
(c) Asset Enhancements
(d) Cost Effectiveness, Cost Efficiency and
Excellence in Application
(e) Sustainable Agriculture
4.5.2 Financing strategy
The Manager will operate in accordance with the Deed and
REIT Guidelines whereby the maximum level of financing of
the Fund will not exceed 50% of the total asset value at the
time the financing is obtained.
5. The Investment of Al-Hadharah Boustead REIT
The investments of Al-Hadharah Boustead REIT are limited to at
least 75% of the total asset value of the Al-Hadharah Boustead
REIT and must be invested in Shariah-compliant plantation assets,
single-purpose companies, plantation-related assets or liquid
assets.
Analysis on Islamic Model of Al-Hadharah Boustead REIT
Wakalah
Al-Hadharah Boustead REIT uses the concept of wakalah in governing the
relationship of unitholders with the Manager and Trustee. In Islamic financing,
wakalah is a contract in which one person appoints another person to act as an
agent on their behalf in a transaction. For the service performed, the Manager
and Trustee, in return enjoyed ujr or fees. The Wakalah principles are
incorporated in the Deed of Islamic REITs. List of fees as follows:
Type of Fees Service
Management Fee The manager receives this fee for managing the REIT
Plantation Adviser Fee The plantation adviser receives this fee for monitoring the
REIT’s plantation assets.
Trustee Fee The trustee receives this fee for acting as trustee and
custodian of the assets and for safeguarding the interests of
the unitholders.
Shariah Advisory Fee The Shariah adviser receives this fee for acting as the Islamic
REIT’s adviser for shariah compliance matters
Other fund expenses The REIT will bear all operating expenses, including auditors’
fees and expenses, fees for the valuation of any investments,
taxation, advisers’ fees and expenses as well as
administration expenses. Administration expenses include
costs incurred for the convening of any unitholders’ meeting,
as well as the preparation of the Deed and any report
pertaining to the REIT to the Unitholders. REIT also bears all
expenses relating to the listing exercise, which includes the
underwriting commissions, placement fees, brokerage, stamp
duty (if any) and registration fees in respect of units issued
pursuant to the Public Offering.
Tenant’s Mudharabah Profits Sharing
In addition to the fixed rental, the Tenants shall also pay a yearly amount not
later than two (2) months after the last business day of the financial period/year,
based on an agreed formula which is correlated to the performance of Crude
Palm Oil (CPO) and Fresh Fruit Bunches (FFB) prices realised and the actual
FFB and CPO productions of the Plantation Assets as provided for in the Ijarah
Agreements. The amount will represent a 50:50 sharing between the Tenant and
the Landlord of the net incremental income, based on CPO prices realised in the
year when compared to the Reference CPO price of RM1,500 per MT or such
other CPO price agreed for the subsequent additional tenancy terms.
Juristic Principle (Al-Qawaid Fiqiah) - “Al-Ghorm Bil Ghonm” (No Pain No
Gain)
Investment by Unitholders is based on Risk-Return Principle “ al-Ghornm bil
Ghonm” where:
1. Original investment not guaranteed
2. Income may rise or fall
3. May not receive any income at all
Unitholders liabilities on losses are limited to the amount invested while the
Manager has no liability.
Ijarah Agreement & Arrangement
i) Under the Ijarah Arrangements (Appendix 1), the Plantation Assets are let
back to the Vendors as Tenants for a cumulative tenure of up to thirty (30)
years.
ii) The Ijarah Arrangements for each of the estates and mills shall take the
form of a three (3)-year tenancy which are automatically renewable four (4)
times up to twelve (12) years andthereafter renewable for up to an
additional fifteen (15) years comprising five (5) additional terms of not more
than three (3) years each (save and except for the tenancy of the Malay
Reserved Land which are not automatically renewable)
iii) The Ijarah Arrangements for the first two (2) tenancy periods of three (3)
years each totaling (6) years cannot be terminated by the Tenants (save for
any breaches by the Trustee), save and except for Malay Reserved Land
iv) The tenancies of the Malay Reserved Land shall be for a period of not
exceeding three (3) years. Upon expiry of the tenancies, the Tenants and
the Trustee (on recommendation of the Manager) may enter into.
Performance of Al-Hadarah Boustead REIT
Distribution Per Unit, Net Profit and Rental Revenue
Based on prospectus dated 15 January 2007 and Annual Report for the year
2007, 2008, 2009 and 2010, the comparison is as Table 6 below:
Table 6: Comparison of Distribution Per Unit, Net Profit and Rental
Revenue
YEAR RENTAL REVENUE
(RM’000)
NET PROFIT
(RM’000)
DISTRIBUTION PER UNIT
(SEN PERUNIT)
ACTUAL PROSPECTUS ACTUAL PROSPECTUS ACTUAL PROSPECTUS AMT
(RM’000)
2007 55,185 30,308 49,804 32,852 10.91 7.38 48,848
2008 67,503 41,598 190,148 34,517 11.03 7.38 58,301
2009 71,031 41,593 83,170 34,821 9.30 7.38 51,801
2010 75,022 NA 82,075 NA 10.0 NA 55,700
Clearly, the actual Distribution Yield and Net Profit have outperformed the
financial projection in the prospectus. The average Distribution Yield for the last
three years (2008-2010) was at 10.11 sen, which was 37% higher than the
prospectus projection. In addition to dividend, the retail investors with IPO price
of RM0.99 have seen the share price appreciates (as at 6 May 2006) to RM1.43
or 44% (average of 11% a year).
KEY BENEFITS OF INVESTING IN REITs
The REITs like Al-Hadharah Boustead REIT, as an investment instrument
provides investors the benefit of participating in the steady rental yields of real
estates and other properties and the potential for capital upside in the long run.
Key benefits include:
(a) Higher dividend yield
REITs are required to pay out a minimum amount to qualify for tax transparency,
which in most cases is at least 90% of their income as distributions. This
provides investors with a regular income as compared to the dividend payout of a
listed company which is at the discretion of the company. Such a stable flow of
income coupled with the REITs’ low risk, appeal to certain types of investors,
such as pension funds and retirees.
(b) Transparent investment policy
REITs have transparent and defined investment policies and objectives in terms
of the types and location of properties/real estate that REITs can invest in,
whereas a property/real estate company is not restricted to doing business in
property/real estate investment and property development. The transparent and
defined investment policy allows REITs to trade at near NAV as they are
effectively capitalising income streams of the properties/real estate. i.e. the
valuation of an REIT is effectively similar to that adopted for valuing the
underlying properties/real estate.
(c) Liquidity
The REIT is a liquid investment when the REIT is listed as units of a listed REIT
and traded like any other stock on the stock exchange. This provides liquidity to
ownership of physical real estate assets.
(d) Diversification
REITs also offer the benefit of diversification arising from their holding of a
portfolio of high quality real estates with different tenancy lengths and
geographical locations, rather than a single real estate or building, as well as
management by experienced real estate professionals.
(e) Affordability
REITs provide investors an entry into the real estate market via participation and
investment in units of the REITs, which requires a smaller capital outlay relative
to purchasing similar real estates on their own.
(f) Long run inflation hedge
REITs may provide a hedge against inflation as when inflation rises, the value of
real estate and real estate securities can be expected to similarly increase.
(g) Stable returns
REITs typically have relatively stable cash flows since almost all of its revenue is
generated by rentals/rental payments under the terms of rental/tenancy
agreements, which are typically for specific durations.
(h) Professional management
REITs provide investors an opportunity to buy into real estates that are managed
by experienced and professional persons and can positively ecpect:
(i) Potential capital appreciation
In addition to distributing income at regular intervals, REITs also provide an
opportunity for capital appreciation via any increase in the values of the real
estate held in its portfolio.
(j) Ownership of investment grade real estates
REITs allow retail investors to participate in the real estate market. Subject to the
quality of the real estates, investors in an REIT are essentially akin to holding
stakes in large real estates, which would otherwise not be possible for a retail
investor.
REITs Benefits To Boustead Holdings Berhad
By selling assets to Al-Hadharah Boustead REIT, Boustead Holdings Berhad will
benefits as follows:
(i) Generates Available Cash
Through IPO, Boustead manage to generates up to RM230miliion with the
total cost involves around RM9million. This is cheap and reasonable source
of financing.
(ii) Maintain The Ownership
Only a partial of assets sold and Boustead Holdings Berhad still maintaining
majority shareholder as evidence in Annual Report 2010 where it holds
335,914,500 Unitholdings or 60.31%.
(iii) Tax Exemption
The corporate tax is exempted if Al-Hadharah Boustead REIT distributes at
least 90% of the net income.
RISKS OF INVESTING IN REITS
Although investment in REITs has low risk there were cases of delisted REITs as
a result of poor performance such as Amanah Harta Tanah PNB 2 (AHP2). It
was delisted from Bursa Malaysia on 11 May 2009 due to bad performance since
1997. Indeed, REITs are exposed to a variety of risks associated with
investments of, management of, and returns from the REITs.
(a) General risk
Economic, political and regulatory risks
The performance of the real estate industry is closely linked to the economic
environment. Any adverse developments in the political and economic
environment and uncertainties in Malaysia can materially and adversely affect
the real estate industry and hence the financial performance of REIT. These
include oversupply of commodities, the
risks of war, global economic downturn and unfavourable changes in the
Government’s policy such as changes in the rate of tax, methods of taxation or
introduction of new regulations.
Fund management risk
There is a risk that the manager may not adhere to the investment mandate of
REIT. Poor management of REIT may jeopardize the investment of unitholders
through loss of their capital invested. In addition, the selection of real estates,
which makes up the assets of REIT is a subjective process. Real estate selected
by the investment manager may yield a higher or lower return than the overall
real estate market.
Loan financing risk
Investors who take loans to finance the purchase of units in REITs must be
prepared to accept gearing risks, including but not limited to being forced to
provide additional funds to top up their loan margins account when the price of
units goes down, or suffer the higher cost of financing when interest rates trend
upwards. In addition, the returns on REITs are not guaranteed and may not be
earned evenly over time.
Risk of non-compliance
There is the risk that the manager and others associated with the fund will not
comply with the deed of the fund, the law that governs the fund, the Shariah or
the internal policies, procedures and controls, all of which may affect the
investment of unitholders.
(b) Investment risk
Dividend distribution not guaranteed
The net operating earnings earned by REIT depends on, amongst others, the
amounts of rental income received, and the level of real estate assets, operating
and other expenses incurred. If the real estates owned by an REIT do not
generate sufficient net operating earnings and cash flow, the REIT’s ability to
make dividend distributions will be adversely affected.
Capital market risk
The price of a REIT is subject to the volatility as well as the liquidity of the equity
market. The equity market is influenced by many factors, including but not limited
to economic growth, interest rates, capital flows and monetary and fiscal policies.
Risks associated with financing
Significant fluctuations in interest rates may have an adverse impact on the
financial performance of REITs and may lower income distribution to unitholders.
There is an inverse correlation between the interest rate and the distributable
earnings to unitholders.
Takaful risk
Real estate held by REITs could suffer physical damage caused by fire, flood,
earthquake or other causes, resulting in losses (including loss of rental) which
may not be fully compensated by Takaful. In addition, certain types of risks (such
as war and terrorist acts) may be uninsurable or the cost of Takaful may be
prohibitive when compared to the risk. No assurance can be given that material
losses in excess of Takaful proceeds will not occur in the future.
Risk relating to investments in the plantation estate
The yields of the plantation estates may be adversely affected by a number of
factors, including but not limited to:
(a) decrease in CPO prices that leads to reduced income generated from the
plantation estates, hence reduction in the income of the REIT;
(b) increase in replanting expenditure including but not limited to fertilizer cost
and cost of labour;
(c) the manager’s ability to provide adequate management and maintenance;
(d) inadequacy of Takaful cover for the plantation estates;
(e) changes in tax regulations;
(f) the Tenants’s ability to pay rental on a timely basis or at all;
(g) the terms on which tenancy renewals and new tenancies are agreed being
less favourable than existing tenancies;
(h) poor cost control resulting in higher operating and other expenses without a
corresponding increase in revenue;
(i) unexpected expenses incurred due to changes in statutory laws, regulations
or government policies which increase the cost of compliance with such laws,
regulations or policies and defects affecting the plantation assets which need
to be rectified, leading to unforeseen capital expenditure;
(j) amendment or revocation of the present tax incentives for REITs.
(k) Competition from other edible oils such as soya bean oil and rapeseed oil
which may affect global demand for palm oil.
Risk relating to investment in other authorised investments
Subject to the investment limits prescribed by the SC for the time being, apart
from real estate assets which fall under category of real estate, REITs are
permitted to invest in any of the following:
(a) single-purpose companies;
(b) real estate-related assets;
(c) liquid assets;
(d) non-real estate related assets; and
(e) asset backed securities.
Where REITs invest in stock market related investments, the following risks
become key considerations:
Market risks
Stock prices may fluctuate in response to activities of the individual companies,
general market sentiment, economic conditions and political and social
environment. Such fluctuations in the investment portfolio will cause the NAV of
the REIT or prices of units to fall as well as rise.
COMPARISON WITH OTHER FORMS OF INVESTMENTS
All investments carry some form of risk-return trade-off. Some of the investment
alternatives are as follows:
Cash and fixed deposits
Fixed deposits generally provide a fixed rate of return and can provide a stable
stream of income. The range of deposit products available is quite extensive,
ranging from simple overnight deposits at a cash rate, to more long term,
structured deposits, like a two-year fixed deposit. Whilst deposits with a licensed
financial institution can be considered almost risk free, there still exists a risk of
default. Cash and fixed deposits do not present any opportunity for capital gain,
and depending on the inflation rate, may not provide a positive real return.
Investment in bonds
Investments in bonds generally provide a fixed rate of return and can provide a
stable stream of interest income. Bond prices move inversely to its yield to
maturity. Bond investors are subject to a number of risks, including credit risk and
interest rate risk. Bonds are generally less risky than shares but riskier than cash
or fixed deposits.
Direct investment in real estates
Investments in real estate can provide a regular and stable stream of income and
capital gains. However, such investment typically requires a large capital outlay,
and is therefore generally available only to high net worth individuals,
corporations or institutions. Movement in real estate prices can be cyclical and
depending on the timing of the investment, can result in capital losses. Large
capital outlays also limit the ability to diversify risk. Further, investments in real
estates are generally less liquid than investments in marketable shares or bonds
and may be difficult to exit in a timely manner.
Investment in shares
Investment in shares is subject to market risk and specific risks associated with
company or business and may result in either capital gains or losses. Share
prices can be volatile, and may not always reflect the fundamental value of a
company. Investment in shares may or may not provide a regular stream of
dividends. Shares are generally more risky than bonds or fixed deposits.
Financial derivative products
Financial derivative products are used to manage investors’ exposure to
unexpected price fluctuations in, amongst others, the commodity, equity and
bond markets and derives its value from an underlying instrument such as
interest rates, indices and share
prices. As these underlying instruments can be volatile at times, this form of
investment
has very high investment risks. Financial derivative products can also provide an
avenue to earn very high returns or losses without large capital outlays. In
summary, risk and return comparison for the various investments may be
summarized as follows:
Types of investment
Risk level Expected return
level
Cash Low Low
Fixed deposit
Bonds
REITs
Direct investment in real estates
Investment in shares
Financial derivative products High High
8. CONCLUSION
The introduction of Islamic REITs provides an investment opportunity for
investors wishing to invest in real estate through Syariah-compliant capital
market instruments. International investors seeking Syariah-compliant
instruments can buy into Islamic REITs without the need for direct ownership of
such properties. Islamic REITs also enhances the competitiveness of the
Malaysian Islamic capital market by attracting Islamic investors globally. It also
broadens and depends the Islamic product base and encourages savings to be
channeled into investments in Syariah-compliant assets.
Undoubtedly, Islamic REITs, with their relatively stable returns, provide investors
with a new Shariah-compliant investment options. Islamic REITs is an investment
instrument not only potential in providing investors with a 'piece of mind' in terms
of complying with God's law but equally important the benefits of participating in
the steady rental yields of real estates and other properties. Islamic REITs
typically have relatively stable cash flow since almost all of its revenue is
generated by rental payments. Islamic REITs also offer the benefit of
diversification arising from their holding of a portfolio of high quality real estates
with different tenancy lengths and geographical locations, rather than a single
real estate or building.
More importantly it promotes financial inclusion by providing investors an entry
into the real estate market via participation and investment in units of the Islamic
REITs, which requires a smaller capital outlay relative to purchasing similar real
estate on their own. Indeed, the emergence of Islamic REITs should help to
propel the expansion of Islamic capital market in Malaysia. For Malaysian Islamic
REITs to be truly successful, they also have to appeal to the vast international
investing community. In this regard, the various tax incentives and regulatory
framework introduced by the Malaysian authorities are perceived as a move in a
right direction towards realising the noble vision of becoming the world’s Islamic
financial and capital hub.
Appe
ndix 1
SALIENT TERMS OF THE SPA(s) AND IJARAH AGREEMENTS
6.1. SPA(s)
The salient terms of the SPA(s) between the Vendors and the
Trustee, on behalf of Al- Hadharah Boustead REIT are as follows:-
The following sets out some of the salient terms of the SPAs:-
(a) the Vendors have agreed to sell and the Trustee (acting as a
trustee for the Fund) has agreed to purchase the Plantation
Assets free from all encumbrances subject to the lease and
to all conditions, express or implied, and restrictions in the
documents of title to the Plantation Assets;
(b) the purchase consideration of the Plantation Assets will be
settled partly by way of Units to be issued by the Fund and
partly by cash (other than Lepan Kabu Estate and Lepan
Kabu Palm Oil Mill which will be fully settled by Units). The
cash consideration will be settled by way of the proceeds
arising from the Public Offering. The cash portion of the
purchase consideration will be settled by the Fund within
fourteen (14) days from the date of listing and quotation of
the Units on the Main Board of Bursa Securities (which
fourteen (14) days shall not be later than two (2) months
from the completion date of the SPAs) and the balance of
the purchase consideration (not settled in cash) will be
settled by the Fund after the completion date of the SPAs
but prior to the listing of the Units. In the case of the Lepan
Kabu Estate, the purchase consideration will be fully settled
by the Fund by way of procuring the crediting of such
number of Units to the relevant Vendor on the completion
date of the SPA in respect of the sale and purchase of the
Lepan Kabu Estate;
(c) the SPAs are subject to various conditions precedent as
stipulated in the SPAs as follows:-
(i) the approval of the SC (Equity Compliance Unit) to
the sale and purchase contemplated under the SPAs
having been obtained on terms acceptable to the
Vendors and the Trustee, each acting reasonably,
which approval was obtained on 22 November 2006;
(i) the approval of SC for:-
(aa) the proposed establishment of the Al-Hadharah
Boustead REIT pursuant to the Deed on terms
acceptable to the Manager comprising the
issuance of the Units, the appointment of the
Manager and the Purchaser as trustee of the
Al-Hadharah Boustead REIT;
(bb) the proposed appointment of the Directors and
Chief Executive Officer, the members of the
Investment Committee of Al- Hadharah
Boustead REIT and the Shariah Adviser;
(cc) the Public Offering;
(dd) the proposed admission, listing and quotation
of the Units to be issued by Al-Hadharah
Boustead REIT on the Main Board of Bursa
Securities;
(ee) the proposed exemptions / variations from the
Guidelines of Real investment Trusts issued by
the SC on 3 January 2005;
this was obtained on 22 November 2006;
(iii) the approval to the sale of the Plantation Assets to the
Trustee at the purchase consideration as set out
above and on the terms contained in the SPAs from
the shareholders of the Vendors and where
applicable, the shareholders of the holding company
of the Vendors which is listed on the Bursa Securities
having been obtained, which was obtained on 23
November 2006;
(iv) the endorsement by the Shariah adviser on the
structure of the transaction as contemplated under the
SPAs, the Ijarah Agreements and the Declaration of
Trust;
(v) the Purchaser being satisfied that the Vendors have
made applications to the Estate Land Board for its
approval to the sale and transfer of the Plantation
Assets to the Trustee; and
(vi) the Purchaser being satisfied that the Vendors have
make all necessary applications to the relevant land
authority to change the category of land use and/or
express conditions imposed on the Plantations Assets
as referred to in the SPAs.
(d) the SPAs are further subject to various conditions
subsequent, including the obtaining of the consent of the
Estate Land Board pursuant to the National Land Code for
the sale and transfer of the Plantation Assets by the Tenants
to the Fund. The Tenants shall forthwith upon the execution
of the SPAs, submit, amongst others, all necessary
applications to the Estate Land Board and obtain the said
approval of the Estate Land Board for the transfer of the
Plantation Assets to the Fund and present the transfer in
respect of the Plantation Assets for registration within three
(3) years from the completion date of the SPAs;
(e) if for any reason the sale and purchase of any of the
Plantation Assets shall not take place in accordance with the
SPAs, the parties may (but shall not be obliged to do so)
subject always to the approval of the SC, consider a partial
sale of the Plantation Assets to the Trustee on such terms
and conditions acceptable to the SC and the parties;
(f) the Vendors have made specific representations and
warranties in respect of its ownership of the Plantation
Assets, which survive the completion of the SPAs;
(g) in the event that the conditions subsequent referred to above
are not obtained within the stipulated period, the Vendors,
Boustead Holdings or any subsidiary of Boustead Holdings
may substitute or procure the substitution of the affected
Plantation Assets (“Affected Plantation Assets”) with a new
plantation asset(s) or pay a cash sum equivalent to the
purchase consideration of the Affected Plantation Assets or
a combination of new assets and cash to the Trustee, failing
which the agreement on the sale of the Affected Plantation
Assets (but not all the Plantation Assets) shall be terminated;
(h) in the event that the transfer of the Plantation Assets cannot
for any reason whatsoever not attributable to the Vendors or
the Trustee, be registered in favour of the Trustee and in
such event if a substitution of the said Affected Plantation
Assets is not possible, the parties shall do all things as are
within their reasonable control to procure the registration of
the transfer within a stipulated period from the date of the
parties being notified of such non-registration of the transfer,
failing which the Trustee shall forthwith be entitled to
terminate the agreements in respect of the sale and
purchase of the relevant Plantation Assets which cannot be
transferred (but not the other unaffected Plantation Assets);
(i) upon termination of the SPAs or the agreements in respect
of the sale of the Affected Plantation Assets, the relevant
Tenants shall refund a sum equivalent to the purchase
consideration (in the event that the same shall have been
paid to the relevant Tenants of the Affected Plantation
Assets) to the Fund and subject to the receipt of the said
purchase consideration by the Trustee, the declaration of
trust, the power of attorney and the
memorandum/memoranda of deposit in respect of the
Affected Plantation Assets shall forthwith be terminated
whereupon the titles shall be returned to the relevant
Tenants and the possession of the Affected Plantation
Assets shall be re-delivered to the said Tenants; and
(j) upon the execution of the SPAs, the Trustee shall be entitled
to lodge private caveats on the titles to the Plantation Assets
(save and except in the case of Lepan Kabu Estate and
Lepan Kabu Palm Oil Mill which comprise certain parcels of
Malay Reserved Land where no private caveats will be
lodged).
6.2 Ijarah Agreement(s)
The Ijarah Arrangement as envisaged under the Ijarah Agreements
will take effect on the completion date of the SPAs.
The following sets out some of the salient terms of the Ijarah
Agreements:-
(a) the Trustee as Landlord lets the Plantation Assets to the
Vendors as Tenants for a term of three (3) years
commencing from 1 January 2007 (“Term”) subject to the
terms and conditions of the Ijarah Agreements. In the case
of Lepan Kabu Estate and Lepan Kabu Palm Oil Mill, the
term of three (3) years will commence from the completion
date of the SPA relating to Lepan Kabu Estate and Lepan
Kabu Palm Oil Mill;
(b) in consideration of the letting of the Plantation Assets by the
Landlord to the Tenants for the Term and subject to the
provisions of the Ijarah Agreements, the Tenants shall pay to
the Landlord the following payments in arrears:-
(i) Fixed Rent as set out in the Ijarah Agreements which
shall be payable in arrears on a two-monthly basis
and on the last business day of every two (2) calendar
months. The first payment of the Fixed Rent shall be
due and payable immediately on the last market day
of the second calendar month immediately after the
commencement date of the Term and thereafter on
the last market day of every two (2) months.
(ii) a yearly amount calculated in accordance with the
formula set out in the Ijarah Agreements on the last
business day of each financial period/year of the Fund
and payable not later than the expiry of two (2)
months thereof. The first payment of the
Performance-Based Profit Sharing shall be due and
payable not later than the expiry of two (2) months
after the last business day of the financial year during
which the purchase consideration payment date
occurs.
(c) On the date of receipt of the purchase consideration by the
Tenant as vendor under the SPA in relation to the Plantation
Assets, the Tenant shall pay one (1) month’s rental deposit
as security for the due performance and observances by the
Tenant of all the several covenants, conditions, stipulations
and agreements on the part of the Tenant under the Ijarah
Agreements;
(d) in the event that the Landlord shall, at any time during the
continuance of the Term, desire to sell in whole or in part of
the Plantation Assets (“Offer Property”), the Landlord
hereby covenants with the Tenants that the Landlord shall
give the Tenants or Boustead Holdings any/or any of the
subsidiaries of Boustead Holdings (“BHB Group Companies)
as may be notified by the Tenants to the Landlord in writing,
the first right of refusal to purchase the Offer Property by
giving notice to the Tenants or any of the BHB Group
Companies of such desire to sell at the prevailing market
price and upon such other terms and conditions as may be
mutually agreed between the parties. The Tenants or as the
case may be any of the BHB Group Companies, shall within
fourteen (14) days of receipt of such notice make an offer to
purchase the Offer Property failing which the Landlord shall
be free to sell the said Offer Property to any third party at
any price subject to the applicable REIT Guidelines or where
the first right of refusal is not exercised due to the Tenants
not accepting the price offered, at the price not lower than
the price offered to the Tenants or any of the BHB Group
Companies.
(e) in the event that any Plantation Assets is substituted by
another plantation asset or any Plantation Assets is
disposed off by the Landlord, the tenancy of the affected
Plantation Assets envisaged under the Ijarah Agreements
shall be deemed varied accordingly to the extent of the
substitution or disposals of the affected Plantation Assets;
(f) if:-
(i) the event referred to in paragraph (e) above, the rent
shall be adjusted accordingly in accordance with a
formula set out in the Ijarah Agreements to reflect a
sum equivalent to the value of the rent proportionate
to the ratio of the value of the substituted property or
as the case may be, the portion of the rent that is
attributable to the Offer Property; or
(ii) the Landlord carry out or cause to be carried out the
development or construction of any major
infrastructure, major mill upgrades, new mills and/or
buildings on the Plantation Assets involving a sum in
excess of RM1.0 million per transaction, the rent shall
be adjusted accordingly to reflect a sum equivalent to
the cost of financing incurred in relation thereto based
on the base financing rate of Malayan Banking
Berhad plus one (1) per cent;
(g) in the case of the tenancy of the Plantation Assets (other
than the Malay Reserved Land), either party may serve a
notice on the other at least three (3) months before
expiration of the term of the tenancy to renew the tenancy of
the Plantation Assets (save and except for the Malay
Reserved Land) and in any of this case, if the Landlord is
satisfied that there is no existing breach or nonobservance of
any of the covenants on the part of the Tenants under the
Ijarah Agreements or if there is such a breach or non-
observance, the breach or nonobservance of which is not, in
the opinion of the Landlord, material, the Ijarah Agreements
shall upon the expiry of the term be automatically renewed
for up to twelve (12) years comprising four (4) additional
tenancy term of not exceeding three (3) years each and
thereafter, for an additional fifteen (15) years comprising five
(5) tenancy terms of not exceeding three (3) years each, at
such rent as may be mutually agreed between the Landlord
(at the recommendation of the Manager) calculated based
on the following formula:
[A – B] X [C X D X E]
Where:
A: The amount that must be agreed between the
Landlord and the Tenants based on the average
historical, prevailing and expected future crude palm
oil price per MT
B: The average projected production cost per MT for the
next three (3) years
C: The average projected yield per hectare for the next
three (3) years
D: The average projected mature hectares for the next
three (3) years
E: The average projected extraction rate for the next
three (3) years
(h) the Landlord covenants, amongst others, with the Tenants
that during the term of the tenancy, the Landlord shall, at the
costs and expenses of the Fund:-
(i) pay all existing and future quit rent, assessment, tax,
rates and any other outgoings payable to local and
municipal councils, and other authorities in respect of
the Plantation Assets;
(ii) insure or pending the transfer of the Plantation Assets
in favour of the Landlord, cause the Tenants to take
up workman’s compensation Takaful coverage and
Takaful coverage in respect of the Plantation Assets
and all buildings erected on the Plantation Assets
against fire or any damage or death or injury to any
person using or entering or occupying the premises of
the Plantation Assets; and
(iii) replant or cause to replant, the crops in the Plantation
Assets in accordance with such replanting
programmes acceptable to the Landlord and the
Tenants (at the recommendation of the Manager).
(i) if the SPAs are terminated in accordance with the terms of
the SPAs or if the Tenants are in breach of the terms of the
Ijarah Agreements, the Landlord shall be entitled to
terminate the Ijarah Agreements. In this respect, where the
Ijarah Agreements are terminated due to any breach by the
Tenants of the terms therein contained, the Landlord shall be
entitled to re-enter upon the Plantation Assets and forfeit the
security deposit; and
(j) in the case of the tenancy of the Plantation Assets (other
than the Malay Reserved Land), the Tenants shall not be
entitled to terminate the Ijarah Agreements during the first
two (2) tenancy terms unless the Landlord shall be in
material breach of the terms of the Ijarah Agreements.
7. FUTURE PROSPECT AL-HADHARAH BOUSTEAD REIT
The Directors of the Manager believe that the liberalization introduced
under the revised REIT Guidelines (which were issued on 3 January 2005)
coupled with the tax exemption of REITs gazetted in December 2004 and
the new tax incentives relating to REITs as announced in the 2007
Budget, will encourage the growth of listed REITs in the country.
The prospects of Al-Hadharah Boustead REIT are mainly dependent on
the growth of the Malaysian economy, the plantation sector, global
commodity market, as well as the development of REITs in Malaysia. The
Plantation Assets to be acquired by the Fund have encouraging long-term
prospects for the following reasons:
(i) Demand from China is expected to augment further, underpinned
by its growing population and the lifting of import quotas for palm oil
according to the World Trade Organisation’s guidelines;
(ii) There is greater health awareness on the negative effects of trans-
fatty acids. Transfat labeling requirements in the US which took
effect on 1 January 2006, coupled with the European Union’s
aversion to genetically modified organisms, weigh in favorably for
CPO as more food companies switch over from soybean oil.
(iii) Escalating petroleum prices have spurred the usage of biofuels. For
instance, the European Commission in May 2003 issued a directive
on the promotion of the use of bio-diesel and proposed a plan to
eventually achieve 20% replacement of fossil fuels with non-fossil
fuels by 2020.
The Plantation Assets which are mainly located in Peninsular Malaysia
have good development potential that can be realised as future capital
gain.
With the experienced management team of the Manager in the palm oil
industry, cost effective plantation management and encouraging long-term
prospects in the palm oil industry, the Manager believes that the current
environment augers well for Al-Hadharah Boustead REIT and this in turn
will enhance its ability to improve its future earnings.
With the establishment of the Plantation Assets, the Al-Hadharah
Boustead REIT is confident of the future prospects for the palm oil
industry. In order to ensure a sustainable and stable distribution
income/yield and long term growth of NAV per Unit to the Unit holders, the
Manager intends to undertake the following plans:
(a) working closely with the Tenants and the Plantation Adviser to
implement an
effective and prudent replanting programme and capital expansion
programme to improve the production yield of the estates and
efficiencies of the mills; and
(b) continuously seeking for higher yield plantation assets to complement
the Fund's existing portfolio of Plantation Assets.