Islamic Finance Interview – Thomson Reuters
Islamic Finance is a fast growing segment in Southeast Asia’s banking sector. Inside Investor sat down with Rafiza Ghazali, Head of Islamic Finance (Asia) at Thomson Reuters, to learn more about the structure of Islamic finance vehicles in the region and opportunities for investors in that segment.
Q: What is your opinion on Real Estate Investment Trusts, or REITs, as alternative medium or long-term investments and their importance in the region?
A: REITs are quite an easy story for investors who understand the real estate sector. For example, Singapore has enjoyed a strong real estate growth in the past, providing a conducive environment for REITs. REITs, like any other investment product, require wide distribution channels, strong marketing ability and regulation efficiency allowing short time-to-market cycles. Sabana, the world’s largest listed Shariah compliant REIT from Singapore, is a good example of how big the demand for alternative asset class investment is, and it has done very well in the past. Shariah compliant REITs have a huge potential as they provide an alternative to existing offerings and provide an avenue to diversify investment portfolios. More importantly, they provide the opportunity for more retail participation in the commercial property segment.
Q: How does the approval process work?
A: From the regulatory point of view, it works like any other investment product. However, to ensure that the investment adheres to Shariah principles, Shariah compliant REITs need to fulfil additional compliance requirements. There is the Shariah board which looks into the structure of the REIT to ensure Shariah principle adherence. That also includes that income which derives from the structure is permissible and ‘halal’.
Q: What are the differences in REITs issued in the region?
A: There are challenges that differ from country to country, including taxation and legal aspects of structuring REITs and to ensure that they are commercially viable. REITs have to have the right diversification of properties, providing a certain yield and high occupancy rates.
Q: What would you see as the prime advantage of REITs?
A: REITs have always been perceived as being able to provide consistent income flows. It’s not as exciting as equity where people can make quick money out of capital gains. The unit prices of REITs have always been very stable, but they are providing a very good monthly income which attracts the more risk-adverse investors.
Q: Where is the target market for Singaporean REITs?
A: It is mostly marketed locally, but there is also a need to have a geographical diversification of investors. Just look at the situation in Europe and the debt crisis there: if all of the investors of a REIT are from the same region, and this region experiences volatility, then all investors would be dumping their exposure. This can be avoided by greater regional distribution. The target group for any REIT would be medium to long-term investors wanting stable income flows.
Q: How can REITs or Islamic investments in general from the region be made more attractive for GCC investors?
A: The question is: how can Asian investment companies tap the surplus liquidity from the GCC? There haven’t been major success stories so far, apart from the sukuk market. In order to gain meaningful acceptance, in addition to performance, the size of the issues has to be significant. If the asset value is only $100 or $150 million, for example, no one from the GCC will look at it. And there has to be a greater scalability of assets. The GCC has always been focused on property investment as they understand the industry very well. It’s just a matter of combining different assets which they are comfortable with, and to align it with Shariah principles. This is a good basis for marketing Asian REITs in the GCC, but the business still needs to gain some traction.
Q: What could be Islamic finance products for retail investors?
A: Malaysia is working on offering more exchange-traded funds, or ETFs. In 2008, i-VCAP, a Malaysian management firm launched the first Shariah compliant ETF in Asia with probably more in the pipeline. It provides an alternative investment product to the retail market. Like other investment products targeted at retail investors, it is important that the investors are made aware of the risks associated with it, and that the marketing materials are as transparent as possible. Currently, Islamic finance is heavy towards the sukuk market. We need to balance the equation and increase our attention more towards the equity capital market that targets both wholesale and retail markets to reduce the risks associated to ‘over-leveraging’. To further diversify, other products include investment in commodity or participating in businesses similar to ‘cooperative’ or micro financing, whereby investors pool funds and provide direct financing to businesses and the real economy.
Q: Where do you see potential to attract sovereign wealth funds?
A: Sovereign wealth funds, like any other investor, look for performance and track record. The products also need to adhere to their stringent investment criteria.
Q: Are you, personally, only focusing on Islamic finance instruments?
A: Well, it is not possible to work in an isolated manner on Shariah compliant products only. There is a need to understand and analyse conventional products as well, given the fact that Islamic finance products are relatively new compared to their conventional equivalent, and are actually a small subset of the total investment universe. Shariah compliant products are made available to investors at large, and performance needs to be benchmarked against the conventional equivalent, otherwise there would a cost associated to adhering to Shariah principles.
[caption id="attachment_3381" align="alignleft" width="161"] Rafiza Ghazali, Head of Islamic Finance (Asia) at Thomson Reuters[/caption] Islamic Finance is a fast growing segment in Southeast Asia’s banking sector. Inside Investor sat down with Rafiza Ghazali, Head of Islamic Finance (Asia) at Thomson Reuters, to learn more about the structure of Islamic finance vehicles in the region and opportunities for investors in that segment. Q: What is your opinion on Real Estate Investment Trusts, or REITs, as alternative medium or long-term investments and their importance in the region? A: REITs are quite an easy story for investors who understand the real estate sector....
Islamic Finance is a fast growing segment in Southeast Asia’s banking sector. Inside Investor sat down with Rafiza Ghazali, Head of Islamic Finance (Asia) at Thomson Reuters, to learn more about the structure of Islamic finance vehicles in the region and opportunities for investors in that segment.
Q: What is your opinion on Real Estate Investment Trusts, or REITs, as alternative medium or long-term investments and their importance in the region?
A: REITs are quite an easy story for investors who understand the real estate sector. For example, Singapore has enjoyed a strong real estate growth in the past, providing a conducive environment for REITs. REITs, like any other investment product, require wide distribution channels, strong marketing ability and regulation efficiency allowing short time-to-market cycles. Sabana, the world’s largest listed Shariah compliant REIT from Singapore, is a good example of how big the demand for alternative asset class investment is, and it has done very well in the past. Shariah compliant REITs have a huge potential as they provide an alternative to existing offerings and provide an avenue to diversify investment portfolios. More importantly, they provide the opportunity for more retail participation in the commercial property segment.
Q: How does the approval process work?
A: From the regulatory point of view, it works like any other investment product. However, to ensure that the investment adheres to Shariah principles, Shariah compliant REITs need to fulfil additional compliance requirements. There is the Shariah board which looks into the structure of the REIT to ensure Shariah principle adherence. That also includes that income which derives from the structure is permissible and ‘halal’.
Q: What are the differences in REITs issued in the region?
A: There are challenges that differ from country to country, including taxation and legal aspects of structuring REITs and to ensure that they are commercially viable. REITs have to have the right diversification of properties, providing a certain yield and high occupancy rates.
Q: What would you see as the prime advantage of REITs?
A: REITs have always been perceived as being able to provide consistent income flows. It’s not as exciting as equity where people can make quick money out of capital gains. The unit prices of REITs have always been very stable, but they are providing a very good monthly income which attracts the more risk-adverse investors.
Q: Where is the target market for Singaporean REITs?
A: It is mostly marketed locally, but there is also a need to have a geographical diversification of investors. Just look at the situation in Europe and the debt crisis there: if all of the investors of a REIT are from the same region, and this region experiences volatility, then all investors would be dumping their exposure. This can be avoided by greater regional distribution. The target group for any REIT would be medium to long-term investors wanting stable income flows.
Q: How can REITs or Islamic investments in general from the region be made more attractive for GCC investors?
A: The question is: how can Asian investment companies tap the surplus liquidity from the GCC? There haven’t been major success stories so far, apart from the sukuk market. In order to gain meaningful acceptance, in addition to performance, the size of the issues has to be significant. If the asset value is only $100 or $150 million, for example, no one from the GCC will look at it. And there has to be a greater scalability of assets. The GCC has always been focused on property investment as they understand the industry very well. It’s just a matter of combining different assets which they are comfortable with, and to align it with Shariah principles. This is a good basis for marketing Asian REITs in the GCC, but the business still needs to gain some traction.
Q: What could be Islamic finance products for retail investors?
A: Malaysia is working on offering more exchange-traded funds, or ETFs. In 2008, i-VCAP, a Malaysian management firm launched the first Shariah compliant ETF in Asia with probably more in the pipeline. It provides an alternative investment product to the retail market. Like other investment products targeted at retail investors, it is important that the investors are made aware of the risks associated with it, and that the marketing materials are as transparent as possible. Currently, Islamic finance is heavy towards the sukuk market. We need to balance the equation and increase our attention more towards the equity capital market that targets both wholesale and retail markets to reduce the risks associated to ‘over-leveraging’. To further diversify, other products include investment in commodity or participating in businesses similar to ‘cooperative’ or micro financing, whereby investors pool funds and provide direct financing to businesses and the real economy.
Q: Where do you see potential to attract sovereign wealth funds?
A: Sovereign wealth funds, like any other investor, look for performance and track record. The products also need to adhere to their stringent investment criteria.
Q: Are you, personally, only focusing on Islamic finance instruments?
A: Well, it is not possible to work in an isolated manner on Shariah compliant products only. There is a need to understand and analyse conventional products as well, given the fact that Islamic finance products are relatively new compared to their conventional equivalent, and are actually a small subset of the total investment universe. Shariah compliant products are made available to investors at large, and performance needs to be benchmarked against the conventional equivalent, otherwise there would a cost associated to adhering to Shariah principles.
