Islamic Real Estate Investment Trust as an Investment Asset for Waqf Management in Indonesia: Regulatory Framework and Shariah-Compliancy

Islamic Real Estate Investment Trust as an Investment Asset for Waqf Management in Indonesia: Regulatory Framework and Shariah-Compliancy Yoga Prakasa Abstract In an attempt to deepen the financial sector, the Government of Indonesia had issued fiscal policy on 22 October 2015 (dubbed the fifth economic policy package) which targets real estate and property sector, among others. The move is expected to spur domestic REIT issuance and transfer of Indonesian foreign-issued REITs’ assets back to Indonesia. Despite the lack of public awareness to REIT, this paper tries to introduce the potential issuance of domestic Islamic REIT, and further stretch its potential as waqf investment asset and also list its challenges and solutions for adoption by nazirs. The paper draws upon Indonesian regulations in waqf and capital market particularly in the area of REIT, Shariah capital market and Collective Investment Scheme. Further references are also made to published papers, presentations and the Internet to provide scholarly background and Shariah framework to the notion of Indonesian-domiciled Islamic REIT. The paper postulates that although specific regulations and fatwas regarding Islamic REIT do not exist yet, the existing regulatory framework for REIT and waqf is sufficient for Islamic REIT creation and its inclusion as waqf investment asset. Keyword Real Estate Investment Trust, REIT, waqf, cash waqf, Otoritas Jasa Keuangan, OJK, Badan Wakaf Indonesia, BWI, Trust Law, Bapepam, Shariah Capital Market, DIRE Contact Information Yoga Prakasa, CFP® Assistant Vice President, Investment Analysis and Product Development PT BNI Asset Management Chase Plaza Building, 6th Floor, Jl. Jend. Sudirman Kav. 21, Jakarta 12920, Indonesia Phone : +62 (21) 2996-9646 Mobile : +62 817-670-6622 Email 1 : [email protected]; Email 2 : [email protected]

I. TABLE OF CONTENTS I.

Table of contents

1

Introduction

2

III.

Cash waqf

4

IV.

Real Estate Investment Trust (REIT)

7

II.

A. Indonesian regulatory framework

V.

7

B. Investment benefits

11

C. Shariah-compliancy

14

Islamic REIT as waqf investment

20

VI.

Conclusion

28

VII.

References

30

Appendix I: Abbreviations

34

Appendix II: Terms used in Indonesian capital market regulations

37

Appendix III: Selected regulations governing cash waqf in Indonesia

40

Appendix IV: Selected regulations governing REIT and Shariah capital market in Indonesia

 

41

1  

II. INTRODUCTION Waqif (the party who part with its asset) has created awqaf (plural of waqf) since the time of the Prophet. They are considered as avenues for waqif to obtain continuing religious rewards as the awqaf assets are to be maintained in perpetuity to fulfill the needs of the beneficiaries as intended by the waqif.1 Traditionally in the past, waqif is associated with the rich as only rich people can donate hard assets such as land and building. Although cash waqf had been approved in the 8th century, it was not until the 16th century that cash waqf gained its popularity.2 In Indonesia, the Government has issued formal waqf regulation in 2004. Under Law 41/2004, waqf is no longer limited to hard assets. The Waqf Law allows money or cash to be donated as waqf assets.3 As such, waqf is no longer limited to the rich since cash donation for waqf can be done by everyone, as such opening up the space for common people to be waqif. Consequently, the power of crowd donation is made possible as a source of endowment funding. Nevertheless, it was not until 2009 that more definitive regulations on the administration and management of cash waqf were issued. Even then, the pace of development for cash waqf asset management leave a lot to be desired, especially in the area of capital market investment. Capital market authority had issued regulations on REIT in 2007, and Indonesia’s first REIT has been listed on the Stock Exchange since August 2013. There has been no REIT issuance again to this day. As a part of the attempt to reinvigorate Indonesia’s investment climate, against the backdrop of slowing global economy, the Government of Indonesia under President Joko Widodo has issued series of fiscal policy starting on 9 September 2015. The fifth policy (announced on 22 October 2015) targets real estate and property sector, among others, with one in particular seeking to eliminate double taxation on REIT.4 The                                                                                                                         1

Mohsin (2014) Chowdury, et al. (2011: 12156) 3 Waqf Law article 16 number 3 (a) and article 28 4 The implementing regulation, MOF Regulation 200/2015 allows for tax exemption on dividend received by REIT from SPC, effectively eliminate double taxation on REIT’s operation. Stamp duty for property transaction by REIT is not eliminated. The Ministry’s newly instituted 25% capital gain tax in lieu of existing 5% final 2

 

2  

Government intends to spur domestic REIT issuance and transfer of foreign-issued REIT’s assets back to Indonesia. On the other hand, development of Shariah capital market has been relatively slow. Until the end of 2014, market share (based on the amount size) of Sukuk and Shariah-compliant mutual funds each were under 5% relative to total (conventional and Shariah) instruments outstanding.5 While lack of awareness of Shariah capital market has been a major hindrance, part of the slow growth was due to limited supply of Shariah-compliant instruments themselves. OJK responded by issuing regulations in 2015 with incentives given to Shariah instruments issuance. Islamic REIT is not among those set in the new regulations. Since its first issuance in 2012, REIT is still largely unknown in Indonesia despite the popularity of real property assets as society’s favorite form of investment.6 Despite the lack of public awareness to REIT, this paper tries to introduce the potential issuance of domestic Islamic REIT, and further stretch its potential as waqf investment asset and also list its challenges and solutions for adoption by nazirs. The paper draws upon Indonesian regulations in waqf and capital market particularly in the area of REIT, Shariah capital market and Collective Investment Scheme. Further references are also made to published papers, presentations and the Internet to provide scholarly background and Shariah framework to the notion of Indonesian-domiciled Islamic REIT. The paper postulates that although specific regulations and fatwas regarding Islamic REIT do not exist yet, the existing regulatory framework for REIT and waqf is sufficient for Islamic REIT creation and its inclusion as waqf investment assets. References to related Laws and regulations are available in the Appendices.

                                                                                                                                                                                                                                                                                                                                                                                income tax for property owner has received widespread objection as being contradictory to the spirit of stimulating REIT issuance. The Government is reviewing this Regulation, and plans to issue revision on it. 5 Roadmap Pasar Modal Syariah 2015-2019 6 Bank Indonesia’s 4Q2015 survey on residential property reported housing mortgage amount of IDR 337 trillion. On the assumption of 57% banking product utilization rate based on 2013 financial literacy survey conducted by OJK, it is assumed that higher number of people surveyed utilized (invested in) mortgage relative to 0.1% capital market product utilization rate. Single Investor Identification (SID) recorded on KSEI numbered only 434,107 as of October 2015, showing some 0.1% capital market investor out of total Indonesian population of more than 237 million and further confirming the assumption.

 

3  

III. CASH WAQF Shamsiah Abdul Karim’s quote on Yediyildiz opens up our mind of what waqf potential could be, “thanks to the prodigious development of the waqf institution, a person could be born in a house belonging to a waqf, sleep in a cradle of that waqf and fill up on its food, receive instruction through waqf-owned books, become a teacher in a waqf school, draw a waqf-financed salary and at his death, be placed in a waqf provided coffin for burial in a waqf cemetery,” (Karim, 2012). Under Law 41/2004, waqf is defined as a legal action by the waqif to donate its asset to be used without certain time frame (depending on the asset type) for religious purpose and/or to the benefit of general public in accordance with Shariah.7 Waqif and nazir (the party who administer and manage waqf asset) can be individual, organization, and other legal entities.8 It is up to the nazir to fully maximize the potential and economic benefit of waqf assets for the good of the general public. Figure 1. Categories of waqf in Islamic Jurisprudence (with Object being further delineated based on Government Regulation 42/2006)

Source: (Chowdhury et al., 2016), Government Regulation 42/2006 Government Regulation 42/2006 classifies waqf assets into: 1) immovable objects (such as land), 2) movable objects other than cash (such as vehicle, gold, and capital market instruments), and 3) cash.9 BWI Regulation 1/2009 further defines cash waqf (the third category of waqf asset under Government Regulation 42/2006) to be waqf done in the form of                                                                                                                         7

Waqf Law article 1 number 1 Waqf Law article 7 and article 9 9 Government Regulation 42/2006 article 15 8

 

4  

cash which can be productively managed by the nazir for the benefit of mauquf alaih (the beneficiary as set in the waqf deed by the waqif).10 There is a difference between cash waqf and waqf through cash, according to BWI.11 Cash waqf is waqf given directly in cash, with the intention that the cash can be managed (and invested) in productive manner. The return from the management/investment shall then be used for the benefit of mauquf alaih. Waqf through cash, on the other hand, is asset waqf given indirectly through cash, hence the intention is to use the cash to purchase or build the intended waqf asset. The waqf asset would then be used for the benefit of mauquf alaih. For the sake of simplicity, cash waqf meant in this paper is cash waqf given directly in cash and waqf through cash with the intention to be invested in Islamic REIT. Furthermore, BWI Regulation 1/2009 stipulates that cash waqf must be done through LKSPWU (generally, Shariah banks), while waqf through cash can be done through any registered nazir.

Figure 2. Cash waqf management and investment scheme

Since cash waqf now has a legal basis under Waqf Law and coupled with increasing adoption rate of cash waqf by the general public, the need shall emerge for safekeeping and investment of cash waqf. Magda Ismail Mohsin defines cash waqf as “the confinement of an amount of money by a founder(s) and the dedication of its usufruct in perpetuity to the welfare of society” (Mohsin, 2014). The need for investment in one hand is simply due to impossibility                                                                                                                         10 11

 

Article 1 number 3 As described in Handbook Tanya Jawab Wakaf Uang (2011: 2)

5  

for direct use of cash for the benefit (consumption) of mauquf alaih on the ground of perpetuity enforcement, while on the other hand leaving the cash idle shall expose it to inflation which subsequently may decrease its purchasing power. As such, safekeeping and investment are among the skill set required for cash waqf management, which may differ to hard asset management (i.e., building, vehicle, cattle, etc.). BWI Regulation 4/2010 allows nazir to cooperate with other parties in the management and investment of cash waqf assets.12 For the service given, nazir is allowed to receive service fee up to 10% of the net revenue (after cost) generated by cash waqf investment.13 As for the investment itself, should nazir decide to go for capital market instruments, nazir can refer to OJK Regulation 15/2015, among others. Article 2 of the Regulation stipulates extensive prohibited transactions such as speculative transaction and interest-based margin transaction, as well as prohibited underlying businesses of issuers which include riba-based financial institution (i.e., conventional banks), gharar-based risk sale and purchase (i.e., conventional insurance), producer of haram goods (i.e., brewery, pork manufacturer), etc. Capacity building for nazir is in the best interest of all stakeholders. BWI, as the authority on waqf, should spearhead the movement for nazir enablement, in collaboration with Ministry of Religious Affairs, OJK, and DSN. Further and more creative development should arise from this sector. For the record, as of 2003 land awqaf properties in Indonesia are spread through 362,471 locations with total area of 1,538,198,586 square meter and valued at IDR 590 trillion.14 Additionally, the Government itself may need to build the capacity of BWI in relation with its potential increase in scope of work and complexity if further and exponential waqf development is to be its mission objective.

                                                                                                                        12

Article 2 number 2 BWI Regulation 4/2010 article 2 number 3; BWI Regulation 1/2009 article 9 number 7 14 Data is based on awqaf asset registered with the Ministry of Religious Affairs as of 2003 and supported with Center for Study of Religion and Research (CSRC) study, as quoted by Suparman and Subhan in Al-Awqaf Jurnal Wakaf dan Ekonomi Islam (2009: 27-29). Also note that the data only cover some 50% of land awqaf during the early 2000 period and the value has not been adjusted to land price escalation since 2003. 13

 

6  

IV. REAL ESTATE INVESTMENT TRUST (REIT) The United States Congress created REITs as an investment instruments enabling institutional and retail investors to invest in portfolios of income-producing real property assets. US President Dwight David Eisenhower signed into law the REIT Act in 1960. Within one year of the Act signing, six REITs were debuted. Four years afterward, the first REIT listing on the New York Stock Exchange. In 1969, The Netherlands passed the first European REIT legislation. Asia catched up in 2001 with the launch of Japanese REIT. By the turn of the 21st century, some 40 countries had REIT legislation. January 1985 marked the time of the first dedicated real estate fund establishment in the US, a mutual fund type which invest exclusively on REITs and other real property asset securities. In Indonesia, issuance of REIT legislation was marked by series of Bapepam & LK Regulation (IX.M.1, IX.M.2, IX.C.15, and IX.C.16) in 2007, of which five years later the Indonesia Stock Exchange followed by its regulation on REIT issuance and trading on the bourse, while fund investment in REITs has not been regulated yet. A. INDONESIAN REGULATORY FRAMEWORK Real Estate Investment Trust is known in Indonesian regulation terminology as “Dana Investasi Real Estat” or abbreviated nicely as DIRE (read: dee-ray or dē-rā). DIRE is not an exact translation of REIT. This is because Trust Law, heavily utilized in common law countries, is not recognized in civil law-based jurisdiction of Indonesia. Capital Market Law of 1995 managed to circumvent the non-existent of Trust Law by introducing a legal form known as Collective Investment Contract (CIC). CIC provides the legal basis for public pooling of investment funds to be managed by investment managers on behalf and for the benefit of the pooled investors. As such, the dominant form for collective investment scheme (CIS) in Indonesia is CIC. Even though PT (Corporation) is also allowed as a CIS form, many deem it impractical and cumbersome to use PT as a CIS form, albeit certain future circumstances may present it as the better form for certain instruments such as closed-end fund. Under CIC, pooled investment fund is held by a custody bank, freeing investment manager to concentrate on the directive strategic and tactical execution of the investment itself. Furthermore, fund held under CIC is bankruptcy remote, meaning that should the investment  

7  

manager or the custody bank went bankrupt, creditors cannot confiscate the fund. Holding of fund by custody bank also limit fraud attempt by investment manager although it is not shielded against manager’s poor investment judgment. Figure 3. Indonesia REIT structure

Source: Bapepam-LK and OJK Regulations, BNI Asset Management OJK Regulation 19/2016 allows for REIT to be structured with or without the use of SPC. SPC is formed as a limited liability corporation (Perseroan Terbatas - PT) where REIT ownership of SPC’s equity is at minimum 99.9% of SPC’s paid capital. The function of SPC is to hold ownership of real estate assets in REIT since Law 5/1960 stipulates that only individuals and legal entities can hold ownership over land (REIT is a contract, thus it cannot directly hold land ownership). SPC may also serve on behalf of REIT as the party for conducting agreement with property manager. A third-party property manager is likely to be appointed by the investment manager due to the first’s expertise in commercial property management including operational management, human resources, tenant management, budgeting, financial recordkeeping, and acquisition/disposal advice. The investment manager may source property management activities internally, but usually this is not the common route taken as its expertise lies in fundraising and capital project engagement.

 

8  

Figure 4. REIT structure using Special Purpose Company (SPC) Investment Manager (BNI Asset Mgmt)

Investor (Unit Holder)

Existence of SPC is intended to bridge land ownership (Land Law only permits ownership by individual or legal enLty, not a contract like REIT), and may serve on behalf of REIT as the party for conducLng agreement with property manager

OJK-registered Appraiser

Custodian

REIT (DIRE)

Special Purpose Company

Property Asset(s)

3rd Party Operator

Property Owner / Property Manager

Source: Bapepam-LK and OJK Regulations, BNI Asset Management OJK Regulation 19/2016 defines three types of allowable assets for REIT investment. They are: 1) Real Estate asset (Aset Real Estat) at minimum 50% of REIT’s NAV Land and building above the land, specifically commercial building as it is the type of real property which can generate recurring income. For example: mall, hotel, hospital, serviced apartment, office, and service utility (i.e., water treatment, waste management, telecommunication tower). Investment in land bank and green-field project are not allowed to be classified as Real Estate asset. 2) Real Estate-related asset (Aset yang berkaitan dengan Real Estat) This category is wider as it includes publicly listed Real Estate securities (i.e., publicly listed shares and bonds, and potentially other listed REITs) and private instruments issued by Real Estate companies. Investment in land bank and green-field project may be categorized as Real Estate-related asset by means of securities issuance conducted by Real Estate companies. At minimum 80% of the REIT’s NAV has to be placed in Real Estate asset and Real Estate-related asset. 3) Cash and equivalent at most 20% of REIT’s NAV.

 

9  

The use of cash as REIT’s underlying investment is allowed, to certain threshold, by the regulators to give investment manager flexibility given that Real Estate asset is characteristically illiquid. Figure 5. Salient points of Indonesia REIT issuance

Legal Platform

• Indonesia does not recognize “Trust”, a common law concept, since Indonesia is based under civil law • As such, Collective Investment Contract (CIC) is set by regulator as a Trust-like contract, a contract formation between investment manager and custody bank that binds unit holder (investor) • Note that CIC is not a legal entity, hence it is not a legal subject, unlike PT (corporation)

Bankruptcy Remote

Yes, since REIT asset is neither part of investment manager’s asset nor custody bank’s

Investment Policy

• At minimum 50% placement in Real Estate asset • At minimum 80% placement in Real Estate and Real Estate-related asset • At maximum 20% placement in Cash

Asset Size

Minimum of IDR 50 billion

Type of Offering

May be public or private

Exchange Tradability

May be listed (exchange tradable) or unlisted (subscription and redemption through investment manager)

Existence of SPC

Used primarily to hold ownership of Real Estate asset

Mandatory Appraisal

Once per year, by OJK-registered appraiser

Leverage

REIT may get leveraged through bank loan for the purpose of new asset acquisition, at most 45% of target asset value

Dividend Distribution

At least 90% of REIT’s after tax net profit has to be distributed once per year

 

10  

NAV Calculation

At least once per month

Initial NAV per Unit

Analogous to Mutual Fund, commonly set at IDR 1,000 per unit, while exchange-listed REIT may set it lower for liquidity purposes

Unit Holding Requirement

• Minimum of 100 unit holders

(for Listed REIT)

• Maximum stake held by a single unit holder is 75%

Real Estate Asset Acquisition

True sale; along with its inherent rights, interests and benefits

Real Estate Asset Disposal

May only be done by approval of investment manager and custody bank, and may not be done at less than 90% of previous 6-month appraised value

Taxation

Profits on dividend and capital gain are not taxable (applicable to domestic and foreign Participation Unit holders)15

Source: Government and OJK Regulations, (Tanuwijaya, 2015) B. INVESTMENT BENEFITS Investment benefits of REIT are many, among others: •

REIT investment made it possible for ordinary investors with low capital to invest in commercial real property assets, previously open only to high net worth individual and large corporation.

•

Exposure to commercial property would not only grant investor the right to the underlying operational profit of the property, but also the potential appreciation of land price where the property resides.

•

Exposure to commercial property asset class further diversifies portfolio of stocks and bonds. Historical correlations with stocks and bonds have been very low as shown by Bloomberg data:

                                                                                                                        15

Government Regulation 94/2010 regarding Calculation of Taxable Income and Income Tax Payment on Current Tax Year, article 5 states that profits on CIC Participation Unit are not taxable, be they from dividend or capital gain. The term also applies for foreign Unit holders (investors).

 

11  

Figure 6. REIT correlation to stocks and bonds over two-year period (2014-2015) Security

XCID

XIJI

SAM Sukuk

XCID 16

1.000

-0.283

-0.061

XIJI 17

-0.283

1.000

0.332

SAM Sukuk 18

-0.061

0.332

1.000

As shown by Bloomberg, XCID has very low (near zero) and even negative correlation with both XIJI and SAM Sukuk. As such, REIT price movements differ and somewhat slightly to be on opposite direction with stocks and bonds. Diversification between the three asset classes may provide effective risk mitigation against volatility in any one of them. •

Due to its nature, REIT is required to distribute dividend from its Real Estate asset utilization, up to 90% of after tax profit. The resulting cash flows cater to income-seeking investor.

•

REIT financial is transparent as all REITs are required to submit registration to regulator while announcement to the public is mandatory (for public REIT).

•

For publicly listed REIT, it is exchange-tradable thus enabling flexibility in investment entrance and exit.

•

Provides easier record of asset value since appraisal is conducted on annual basis, of which investment manager is required to report it in their Net Asset Value calculation.

•

For property owner, REIT allows for monetization of real property asset.

•

For investor, profits from REIT are not taxable, regardless whether they are in the form of dividend or capital gain.19

•

The recent Government Regulation, which is the implementing policy of Jokowi administration’s fifth economic policy package, eliminates double taxation on REIT. Previously SPC was taxed at corporate rate prior to dividend distribution to REIT, which was then taxed again at the REIT level after cost. Recent regulation eliminates this double

                                                                                                                        16

DIRE Ciptadana Properti Ritel Indonesia (IDX ticker: XCID). Since the only Indonesian REIT available is XCID, it is used for the proxy to REIT. XCID was listed on Indonesian Stock Exchange on 1 August 2013. 17 Premier Syariah ETF JII (IDX ticker: XIJI). XIJI tracks Jakarta Islamic Index, consisting of 30 Shariahcompliant Indonesian stocks. It is used as a proxy to investable Shariah stocks in Indonesian market. XIJI was listed on Indonesian Stock Exchange on 30 April 2013. 18 SAM Sukuk Syariah Sejahtera is a Shariah-compliant mutual fund managed by Samuel Aset Manajemen. It invests in Indonesian sukuk and has a track record length covering both XCID and XIJI, hence it is chosen to be the proxy for investable Indonesian sukuk. SAM Sukuk Syariah Sejahtera inception date was 10 February 2010. 19 Government Regulation 94/2010 article 5.

 

12  

taxation by ruling that SPC is considered to be one entity with REIT thus dividend from SPC to REIT is not considered to be taxable income.20 •

REIT enables investor to participate and take advantage of the growth of Indonesian property sector.

•

REIT is managed professionally by investment manager, property manager, and custody bank. As such, REIT enables investor to outsource the management of real property asset investment to competent institutions, with supervision by OJK, at low cost and low capital.

As with any investment with positive return yield, the corresponding risks also accompany REIT, such as: •

Value of investment may decline, due to market forces or fundamentally due to property and/or operational deterioration.

•

As an investment instrument, global and domestic events may affect REIT positively or negatively, which is commonly known as market risk. For example, disease epidemic may disrupt the traffic of a hotel REIT or that new regulation on national health insurance drive up the traffic of a hospital REIT.

•

Being a commercial property, REIT’s real estate asset is exposed to commercial competition in its respective area and industry.

•

Due to its dividend stream, the development of interest rate may affect REIT positively or negatively (interest rate risk), even though the REIT is not leveraged. This is because interest rate hike (or reduction) by the central bank may decrease or increase the attractiveness of substitute investment instruments based on their yield and cash flows.

•

The professionals who managed REIT may be incapable of realizing the REIT’s full potential (execution risk) and/or implementing the REIT’s investment objective (strategic risk) and/or mishandle the property operation (operational risk).

•

Concentration risk may present when the REIT has only a single asset or a group of assets in one industry and/or in one geographic area. Its exclusive exposure in real estate asset may also be seen as concentration risk on a wider portfolio management perspective. Hence, diversification is essential for investing in REIT.

                                                                                                                        20

Ministry of Finance Regulation 200/2015 (regarding Taxation Treatment for Taxpayer and Taxable Employers Who are Using Certain Collective Investment Contract Scheme on the Attempt for Financial Sector Deepening) article 2 states on the exemption for REIT scheme, with regard to income from SPC to be considered non-taxable.

 

13  

•

Force majeure and any type of extreme disaster may befall upon the underlying property of REIT. Sufficient insurance (or takaful for Islamic REIT) coverage is important as a tool for investment risk management. C. SHARIAH-COMPLIANCY

The first Islamic REIT in the world was Malaysia-based Al-Aqar KPJ REIT, launched on June 2006.21 Al-Aqar KPJ REIT initial investment were six hospitals valued at USD 138 million. The second Islamic REIT was also Malaysia-based, Al-Hadaharah Boustead REIT, with initial investment in palm oil plantation estates valued at USD 136 million and was launched on February 2007. The third Islamic REIT and world’s first Islamic industrial/office REIT was the Malaysia-based AXIS REIT. AXIS REIT was initially launched as conventional REIT in August 2005 but subsequently restructured to be Shariah-compliant on December 2008.22 On May 2013, Malaysia issued world’s first stapled REIT, KLCC REIT. A stapled REIT is an investment vehicle which ‘stapled’ two or more entities/instruments into a new financial instrument.23 Even Singapore had issued its first Islamic REIT, Sabana REIT, and subsequently listed it on the Singapore Exchange Securities Trading Limited in 2010.24 As of third quarter 2013, Sabana REIT portfolio consisted of 22 properties valued at SGD 1.22 billion, making it the world’s largest Islamic REIT.25 Yet, as of this writing, Indonesia being the largest Muslim populated country in the ASEAN region has not issued any Islamic REIT. Currently there are no specific regulations concerning Islamic REIT in Indonesia, although OJK has indicated in their Shariah Capital Market Roadmap that such regulation is in the planning and may be released in the near future.26 Globally there are four types of REIT: equity REIT, mortgage REIT, hybrid (equity and mortgage) REIT, and stapled REIT. Indonesian regulations do not allow for mortgage REIT yet, and stapled REIT does not exist yet despite its possibility under current regulations. For the sake of relevancy, the REIT meant by this paper is of equity type.                                                                                                                         21

Insights (2013) Insights (2013) 23 Insights (2013) 24 Insights (2013) 25 ISRA (2015) 26 Roadmap Pasar Modal Syariah 2015-2019 22

 

14  

It may also be useful to note the argument between Shariah-compliant and Shariah-based (driven) approach in the creation of a financial instrument. Although this paper would not delve into the philosophical underpinning of both approaches, it shall attempt to explain the differences and related aspects. Aznan bin Hasan described that Shariah-based perspective is “where the asset used in Islamic products are really transacted on, not only used as ‘conduit’ to obtain the same results of the conventional products”, while Shariah-compliant perspective is where “asset used may be utilized to reach the same effect like the conventional products” (Hasan, 2016). While Hasan illustration applies to financing instruments, similar understanding can analogously be applied to REIT as well. In Shariah-compliant REIT, the REIT is considered to fulfill Shariah Principle in Capital Market as long as there is no breach to the Principle even when the REIT is designed as a conventional investment instrument. For example, a conventional industrial estate REIT may be deemed Shariah-compliant if there are no Shariah prohibited goods manufactured in the vicinity, no conventional borrowing is undertaken by the REIT, and that the REIT does not undergo Shariah prohibited transactions. It can be analogous to Shariah-compliant shares. In this case, the REIT would be listed under Shariah-compliant Securities List (DES) similar to ordinary shares. However, should the REIT undertake conventional interest-based loan to acquire new property, for example, then it would be delisted from DES until the loan is paid. In Shariah-based REIT, the REIT is designed to be Shariah instrument from the initial construction, so that it shall fulfill Shariah Principle in Capital Market and be listed in DES at all time. For example, a Shariah hotel REIT is made with Shariah Supervisory Board (DPS) at the hotel level and REIT level to ensure Shariah-compliancy of the operating hotel and the REIT structure at all time. Hence, the hotel management has to ensure that no alcohol is served on the premise and ensure that non-mahram guests of opposite gender to be husband and wife, for example. This REIT can be analogous to Sukuk. Hence, it is unlikely that Shariah-based REIT would be jettisoned from DES due to its design and Shariah supervision. For simplicity sake, this paper refers to Islamic REIT being Shariah-based REIT and Shariahcompliant REIT. The term Islamic REIT is also interchangeable with Shariah-compliant REIT.

 

15  

The following lists are considered to be prohibited criteria of Islamic REIT27 : •

General prohibition of hotels and resorts (except explicitly operated as Shariah establishment).

•

General prohibition of riba-based financial services. This can mean riba-based financial services as tenants of a mal, for example, or riba-based financial transaction used by REIT such as conventional loan undertaken for new property acquisition as illustrated in prior example above.28

•

General prohibition of conventional insurance. This can also mean conventional insurance as tenants of an office building, for example, or conventional insurance used by REIT to insure the building.

•

General prohibition against alcohol, tobacco (based on international fatwa), gaming, gambling, and other haram goods and services. This can mean no building tenants having the aforementioned business activities. This prohibition can go wider as other goods and services, which have mudarat (harmful) effect to the general public, are also off-limit.29

Since REIT is allowed to invest in Real Estate related assets, they have to fulfill Shariah Principle in Capital Market as well, and be listed in DES if applicable (such as Sukuks and Shariah-compliant stocks). The above list may be seen as theoretical simplification as in many real cases there are less clear cut instances where a multi-lease commercial property may include a small branch of conventional bank or a conventional insurance agency office or a supermarket selling tobacco or a fine dining restaurant serving alcoholic beverages or in any combination. Shariah scholars have generally allow for multi-lease properties to have non-permissible activities as long as they are below a certain threshold.30                                                                                                                         27

The list is derived from the activities and underlying business in contrary to Shariah Principle in Capital Market. For a more extensive description, please refer to OJK Regulation 15/2015 on Implementation of Shariah Principle in Capital Market, Bapepam-LK Regulation II.K.1 on Criteria and Issuance of Shariahcompliant Securities List, and Fatwa DSN-MUI 40/2003 on Capital Market and General Guideline for the Implementation of Shariah Principle in Capital Market 28 Bapepam-LK Regulation II.K.1 stipulates total interest-bearing debt over total asset at maximum to be 45%. While this regulation applies to issuers for inclusion in DES, an analogy to REIT may be made. 29 OJK Regulation 15/2015 article 2 section 1 sub-section d.3 30 While non-permissible activities are prohibited, as long as they do not comprise the primary usage and revenue of the property, they are still allowed by regulators and scholars. Bapepam-LK Regulation II.K.1 stipulates total non-halal income (including conventional interest income) to be at maximum 10%. While this regulation applies to issuers for inclusion in DES, an analogy may be made for REIT. For comparison, Securities Commission Malaysia (Insights: 2013) sets the threshold at 20% in any current financial year.

 

16  

The income received from non-permissible activities, such as in the example above, shall be taken out from REIT’s operation and may be donated to charity. The ‘cleansed’ income would then be distributed to investors. Ijtihad of Shariah scholars may be needed in determining acceptable technique to calculate threshold ratio. Several approaches are available such as utilization of occupied space, length of service hours, portion of revenues, and number of traffic. Different asset may require different threshold calculation approach. Although REIT is not classified as a mutual fund under OJK regulations, and since there are no specific fatwa opines on Islamic REIT, an analogy to Fatwa DSN-MUI 20/2001 on Investing Guideline for Shariah-compliant Mutual Fund may be made. Fatwa DSN-MUI 20/2001 is chosen because it stipulates for the usage of wakalah aqad for operational (investing) mechanism between the fund and its investor, while operational (investing) mechanism between the fund and its investee (in REIT case, it would be its commercial property along with its property manager) is using mudharabah aqad. Investment manager and custody bank will be remunerated for their services, each for collective fund management and collective safekeeping, in a scheme known as wakalah bil-ujrah. Analogous to the definition of Reksa Dana Syari’ah (Shariah-compliant Mutual Fund) in Fatwa DSN-MUI 20/2001, Islamic REIT has to abide by the principle and regulation of Shariah law. The form of aqad are: 1) between REIT Participation Unit Holder as the capital provider (Shahib al-mal/Rabb al-mal) with investment manager, and 2) between investment manager as the agent (wakil) of Shahib al-mal and the investee (commercial property manager).31 Mudharabah aqad is chosen as the contract between the investment manager as a wakil of Shahib al-mal with the property manager because of its characteristics: •

Sharing of profits between the investor (Shahib al-mal), through agency of the investment manager, and the investee (property manager) is according to the agreed proportion by both parties and that there will be no guarantee of fixed return to the investor.

                                                                                                                        31

 

Article 2 of the Fatwa describes the operational mechanism of Shariah-compliant mutual fund, consisting of: • Between investor and Investment Manager, it is conducted through waqala aqad. • Between Investment Manager and investee, it is conducted through mudharabah aqad.

17  

•

Investor only shares the risk proportionate to the capital contributed.

•

Property manager does not bear risk of loss to the investment as long as no gross negligence (tafrith) is conducted on its part.

Alternatively, ijarah aqad can be used where investor (Shahib al-mal), through investment manager, receives rental payment from property manager for the use of the property. The property manager may sub-lease the property to other tenants and may use cost plus margin as the tenants’ rental rate. Advantage of ijarah aqad is the relatively constant (less fluctuative) return for the investor as the spread risk is borne by the property manager. If the property manager was the previous owner of the commercial property prior to its purchase by Islamic REIT, then the aqad is ijara sale and lease back, as the property owner sold the property to the REIT and then lease it back from the REIT. The aqad between investor and its agent (investment manager and custody bank) is conducted through wakala bil-ujrah (agency for fees). Fatwa DSN-MUI 20/2001 article 3 stipulates this for Shariah-compliant mutual fund, which may be analogous to Islamic REIT. The investor gives a mandate to investment manager to invest on behalf of the investor (and to custody bank to safe keep on his/her behalf) in accordance with the terms and condition stipulated in the prospectus (for public REIT) or the information memorandum (for private REIT). In its Shariah Capital Market Roadmap, OJK has indicated that legal framework for Islamic REIT may be released in the near future as part of its effort to strengthen regulatory framework for Shariah Capital Market in general. As an attempt to widen investor base and participation, more effort may be offered, namely incentive for Islamic REIT. OJK has showed such support for mainstream Shariah-compliant investment instruments, such as mutual fund, with the release of OJK Regulation 19/2015 on Issuance and Requirement for Shariah Mutual Fund, where incentives given include lower minimum asset under management (IDR 10 billion vs IDR 25 billion for conventional mutual fund), higher cap on single security allocation (20% vs 10% for conventional mutual fund), and foreign securities allowance (up to 100% vs 15% for conventional mutual fund). Similar incentives may be given to Islamic REIT, for example: lower income tax, allowance for foreign Real Estate

 

18  

related asset (including units of foreign Islamic REITs), and exemption for property owner from MoF Regulation 191/2015.32 Such incentives may require coordination by OJK with other Government bodies, but it is expected to enable supply increase with the rise of REIT, and specifically Islamic REIT, issuance.

                                                                                                                        32

Ministry of Finance Regulation 191/2015 is an implementing regulation to the Government’s fifth fiscal policy announced on 22 October 2015 regarding temporary tax relaxation for revaluation of fixed asset. The Government allows for lower tax rate (3% up to 31 December 2015, 4% up to 31 June 2016, and 6% up to 31 December 2016 in lieu of 10% existing rate) on unrealized (book value) gain resulting from fixed asset revaluation. The Regulation disallow subsequent revaluation within a 5-year period afterward, while sale of the revalued property within a 10-year period afterward shall render the tax relaxation invalid, as such requiring property owner/seller to pay the remaining tax owed under the 10% rate.

 

19  

V. ISLAMIC REIT AS WAQF INVESTMENT In the context of waqf, the data for usage of or investment in capital market instruments are difficult to come by. The published report of BWI shows that until 2011, total cumulative cash waqf received since 2007 was IDR 3 billion, of which one-third was used for hospital financing and the rest was put in Shariah banks current account.33 Total cumulative earning was IDR 26 million. It is safe to assume that there is minimum usage of capital market instruments as a medium for investment of cash awqaf. Consideration for using Islamic REIT (or any Shariah capital market instruments, for that matter) as waqf investment stem from the need to maintain cash purchasing power to ensure perpetual life of the waqf asset while at the same time generate return to fulfill the needs of the beneficiaries (mauquf alaih). Advantages for using Islamic REIT as waqf investment asset include the followings:

•

Islamic REIT can be used to monetize existing awqaf properties of which the sales proceeds shall be used for developing new ones. In the course of time during its management of awqaf properties, nazir may find that aging properties losing their values causing uncompetitive sub-lease rates or that area development where properties are located requires capital deployment from the nazir (i.e., commercial area which is to be developed into health care complex) or other scenarios which affect long-term viability of continued operation of the awqaf properties. In such scenarios, it may be determined that monetization of a waqf property is needed for capital redeployment in area improvement project or in other more potential area or in unrelated social project after taking into account commercial and social consideration. Sale of the property to REIT enables nazir to obtain capital needed for such projects. The nazir may exit from its property asset outright if the commercial offer is high enough (perhaps the waqf property is situated in high-demand commercial area), or the surrounding area is no longer feasible to conduct halal business, or when change in zonation necessitate exit from the premise such as when there is a government

                                                                                                                        33

As reported by BWI in its website. Available: http://bwi.or.id/index.php/in/unduhan.html?task=view.download&cid=39

 

20  

infrastructure project. Alternatively, the nazir can purchase some portion of Islamic REIT’s Participation Unit, in effect retaining their partial ownership of the property. Note that change in awqaf assets (istibdal), be it in the form or purpose, shall require BWI and Ministry of Religious Affairs approval.34 It is possible for the nazir to be hired by the REIT as its property manager due to the nazir’s familiarity with the property object. Nazir (or subsidiary entity of it) may be compensated for its work by mean of management fee, which is an income source outside nazir’s allowable portion from the asset’s return.35

•

By design, REIT investment in tangible real property aligns with the preference of many Muslim investors and institutions, given the encouragement to link financial sector (and instruments) to the real economy. Furthermore, a group of nazirs can participate in real economy through collective investment scheme such as REIT, regardless of their individual capital base. By pooling capital together, each individual nazir can proportionately own an Islamic REIT. The structure of REIT participation in unit allows for further flexibility of ownership by nazir. A particular nazir may have different need than the others, which necessitate its exit from the investment, such as to disburse benefit to mauquf alaih. Unit participation offers flexibility in full or partial disposal and liquidation of asset, in comparison with direct ownership of real property.

•

Alternative arrangements can be accommodated in Islamic REIT transaction as waqf for philanthropic estate management. Aznan bin Hassan describes one form where coownership between waqif and nazir is made with declining ownership and eventual transfer from waqif to nazir (Hasan, 2016). The structure is somewhat analogous to diminishing musharaka transaction in Sharia mortgage.

                                                                                                                        34

Waqf Law article 36, which further elaborated in Government Regulation 42/2006 article 49-51. BWI Regulation 4/2010 allows nazir to receive income up to 10% of net return generated by waqf investment (in this case, REIT’s dividend). On top of it, nazir may be hired by the REIT as property manager for additional management fee compensation. 35

 

21  

This type of arrangement can be made as a structure of family waqf (a purpose waqf, please refer to figure 1). A family estate takes ownership of the REIT in an agreed proportion together with the nazir. Over time, as stipulated in waqf deed and waqif will (wasiat), the ownership of the family estate is being transferred gradually to the nazir. Such arrangement may be impossible or costly without REIT structure, such as through strata-title and corporate shares. Should the nazir decide to take permanent ownership after full transfer has been completed, or should it decide to change the property usage, the nazir may need to register the property as waqf asset (not just an investment) to BWI along with istibdal approval if necessary. Subsequently, the REIT can then be unregistered from the OJK.

•

Due to its longevity, as property investment is characterized by its long live asset, liquidity issues that undermine REIT investment by other types of investor may not apply to nazir. Note that due to lack of public knowledge and limited investor penetration, REIT in Indonesia is somewhat illiquid by common institutional investor’s standard. Figure 7. XCID daily transaction volume has been consistently on the low side (below 1 million units), allegedly causing (on average) 26% discount to NAV 36 160  

Volume  (RHS)  

Price  (LHS)  

 1,200,000    

NAV  (LHS)  

140  

 1,000,000      800,000    

100   80  

 600,000    

60  

 400,000    

40    200,000    

Jun/16  

Apr/16  

Feb/16  

Dec/15  

Oct/15  

Aug/15  

Jun/15  

Apr/15  

Feb/15  

Dec/14  

Oct/14  

Aug/14  

Jun/14  

Apr/14  

Feb/14  

Dec/13  

Oct/13  

20   0  

Unit  Transacted  

IDR  per  Unit  

120  

 -­‐        

Source: Bloomberg                                                                                                                         36

DIRE Ciptadana Properti Ritel Indonesia (IDX ticker: XCID) is the only Indonesian REIT with available data, as such it is used for the proxy to REIT exchange transaction. The data is generated from 1 October 2013 until 15 June 2016.

 

22  

Ideally, investment should be placed in liquid instruments, as this is the best practice for institutional entities such as insurance and investment management companies as well as pension funds. However, it may be argued that liquidity is of less importance to cash awqaf. Historically, traditional awqaf involve long live assets with almost no need for exit, such as Rumah well in Madinah (waqf made by Uthman ibn Affan (RA) in 1st century of Hijrah) and Singapore’s Omar Kampung Melaka mosque made in 1826, among others. Shamsiah Abdul Karim, citing Nuffield, argues that “where time horizon is perpetual, the importance of market value is reduced and hence income is the utmost importance” (Karim, 2012). This aligns with the need for awqaf benefit to be distributed to beneficiaries (mauquf alaih) continuously in periodic interval. Therefore, while illiquidity may not necessarily be a concern for nazir, its position as a holder of (nearly) perpetual asset may benefit in deepening the national financial sector. With proper ijtihad, it is possible for nazir to become a market maker for Islamic REIT trading. A daily quotation by the nazir can be done providing that the need for investment waqf is adhered to (limited to no loss in asset value). This mechanism may also solve another issue in REIT market, namely a persistent discount to NAV (again, because of limited investor penetration). By providing daily quotation, analogous to an authorized participant dealer in exchange traded fund (ETF) market, the persistent discount to NAV may no longer be an issue. The nazir may be compensated through the spread between bid and offer of the Islamic REIT. As the spread is considered to be an investment return of the waqf asset, then the compensation allowance for nazir imposed by BWI applies.37 Knowing the benefits of REIT investment, consideration of Islamic REIT as waqf investment is not without its set of challenges: 1. Lack of public awareness Public knowledge of capital market, much less Shariah capital market, is extremely low. Based on OJK Financial Literacy Blueprint issued in 2013, the survey showed that only 6% of Indonesian population were capital-market literate in comparison with 97% who were banking-literate. As such, literacy on Shariah capital market is likely to be lower.                                                                                                                         37

 

BWI Regulation 4/2010

23  

Figure 8. General national capital market literacy is the lowest among financial services sub-sector Banking

Insurance

Multifinance

Sector Wellliterate Adequate literacy Lessliterate No literacy

Pension

Capital

National

Fund

Market

Pawn Co.

21.80%

17.84%

9.80%

7.13%

3.79%

14.85%

75.44%

41.69%

17.89%

11.74%

2.40%

38.89%

2.04%

0.68%

0.21%

0.11%

0.03%

0.83%

0.73%

39.80%

72.10%

81.03%

93.79%

45.44%

Source: OJK (National Strategy for Financial Literacy) 2. Likely discourse on legal framework It took 16 years for Shariah Banking Law to be enacted since Indonesia’s first Shariah bank was established. Legal framework for Islamic REIT may be realized in 10 years since the first regulation on REIT was established.38 Legal framework for Islamic REIT to be used as cash waqf asset may take longer. While current regulatory framework does not provide concrete answer, it is sufficient provided that supportive fatwas from the nazir’s DPS can be provided. Conservatives may prefer current account and time deposit in the meantime, unaware of the inflation impact to asset value. 3. Proper investment risk management Al-ghunmu bi al-ghurmi, the Shariah principle of return commensurate with risk, is the fundamental base for investment risk management. Like other investment instruments, property has a cycle of its own. There may be periods where it provides good and sizable return, but there may be other periods where market forces swing the other side. Islamic REIT dividends, and even NAV, may decline during unfortunate periods. Looking at                                                                                                                         38

OJK’s Shariah Capital Market Roadmap indicates Islamic REIT regulation is in the planning and may be released by 2019.

 

24  

investment instrument individually may discourage nazir, which is understandable given the risk-averse nature of most persons, since each instrument’s returns contain equitable risks. This is where perspective of portfolio management comes into play. While it is beyond the scope of this paper, a glimpse of risk management in the form of simple diversification (please refer back to figure 6) may have shown briefly how risk management works in a portfolio setting. Al-ghunmu bi al-ghurmi, in an effort to thwart the impact of inflation, seeking a higher return may necessitate further understanding to the corresponding risk along with the investment. Figure 9. Different asset class exhibits different annual performance; with inflation being the hurdle rate to be outpaced

Source: Bloomberg, (Septanto, 2016) Figure 10. Graphical representation of Figure 9

Source: Bloomberg, (Septanto, 2016) 4. Higher volatility than cash placement in banking products In relation with the discussion above on risk management, higher return offered by capital market products also come with its corresponding volatility (as measured by standard

 

25  

deviation). Although REIT has somewhat narrower standard deviation than shares, hence lower volatility, probability for NAV decline relative to initial investment still exist. Nazir may bring the practice commonly used in Shariah banking industry, namely profit equalization reserve (PER) and investment risk reserve (IRR). By instituting PER, nazir allocates a reserve amount prior to disbursement to mauquf alaih, in order to maintain a certain level of cash flow for mauquf alaih. IRR, on the other hand, is a longer term and a broader tactical effort to mitigate waqf investment against possibility for future investment losses. IRR provides a buffer or protection against loss of capital, which is essentially part of investment risk management, executed through cash flow and capital management. Instituting PER and IRR on REIT level would be difficult since REIT is required by regulation to disburse at least 90% of its profit to investors on yearly basis. However, nazir may institute PER and IRR themselves prior to disbursement to mauquf alaih. 5. Lack of readily available and suitable assets for structuring Islamic REITs There are plenty of suitable assets to be structured into Islamic REITs for investment by cash awqaf.39 What is lacking are current land and property awqaf ready to be structured into Islamic REITs since the majority are in the form empty plots and religious property assets such as mosques, cemeteries, schools, and madrasa. Istibdal by BWI approval may be needed to convert those assets, especially empty plots, into commercial properties suitable for Islamic REIT structure. Conversion may be done directly on the site or plot sale with the proceeds used for different site development, though conversion may need to be financed through other means due to REIT limitation for greenfield project participation. 6. Need for more active participation from BWI Management and investment of cash waqf can only be done through LKS products and/or Shariah-compliant financial instruments.40 Although LKS products are mainly banking products, its counterpart the Shariah-compliant financial instruments are wider in variety                                                                                                                         39

Tanuwijaya et al (2016) estimates that total book value of assets of Indonesia developers to be IDR 72 trillion (USD 5.2 billion), which represents long term potential of USD 7 billion REIT in Indonesia considering a cap rate of 8.5% 40 BWI Regulation 4/2010 article 7 number 1

 

26  

which include capital market instruments. For capital market instruments, both the OJK and DSN have issued regulations and fatwas for Shariah-compliancy on wide range of instruments. Investment outside LKS products, however, may only be done by BWI approval after due diligence by BWI, and the investment subsequently has to be insured.41 Only up to 40% of cash waqf portfolio may be invested outside LKS products. It is understandable that BWI concerns about the value preservation of cash waqf assets, but BWI may also need to concern itself with the real value and not just the nominal value of assets. Further, the use of insurance as a risk management mechanism is valid but such effort may bring in additional cost and may impede return. In accordance with the principle of al-ghunmu bi al-ghurmi, the effort to limit risk may subsequently limit return. Until further active participation by BWI to include Shariah capital market instruments in its cash waqf regulations, waqif are left with the only option to give asset waqf (general asset in Shariah capital market instruments or specifically in Islamic REITs) indirectly through cash. The waqf deed shall be made with the explicit intention to use the cash to purchase Shariah capital market financial instruments. The waqf can be made through registered nazir, not necessarily LKS-PWU and may even have to be other than LKS-PWU due to restrictions put by the regulations.

                                                                                                                        41

 

BWI Regulation 4/2010 article 7 number 4-6

27  

VI. CONCLUSION

In accordance with its basis of ijtihadi law, the development of waqf shall continue going forward. Musthafa Muhammad Az-Zarqa’ states that “details on waqf laws contained in fiqh references almost entirely based on ijtihadi and qiyasiyah propositions and argumentations, as such the voice of reasoning may still play a major part in this matter,” (Hasan et al, 2009).42 Cash awqaf has the ultimate benefit to reach wider beneficiaries across wider geographic range. Its wide range of investment options shall require continuous exercise of creativity by scholars since waqf itself is based on ijtihadi law. On the other hand, cash awqaf management requires not only steadfast nazirs, but also those conversant in modern investment portfolio theory and management. The formalization of cash waqf under the Waqf Law of 2004 and its implementing regulations provides positive legal basis for waqf in general and cash waqf in particular. Its formalization also solidifies waqf position in the state positive law. In the absence of Trust Law, the legislative body has managed to circumvent the trust form, very much akin to waqf. In the same manner, the Capital Market Law of 1995 also sidesteps the trust form by instituting CIC. CIC would later be used as trust replacement in 2007 by Bapepam & LK in its regulation on REIT. The Government intends to incite REIT issuance in Indonesia, and possibly transfer Indonesian foreign-issued REIT’s assets back to Indonesia, by issuing the fifth economic stimulus on 22 October 2015. The stimulus seeks to eliminate double taxation on REIT, with implementing regulation issued by Ministry of Finance in 10 November 2015.43 The Government’s impetus, along with OJK’s Shariah Capital Market Roadmap, should be capitalized on further to deepen the financial sector. One attempt would be the issuance of Islamic REITs, supported by its investment through cash waqf.

                                                                                                                        42

Az-Zarqaa (Ahkam al-Awqaaf, 1418) as quoted by Tholhah Hasan in Al-Awqaf Jurnal Wakaf dan Ekonomi Islam (2009: 7) 43 MoF Regulation 200/2015

 

28  

Regardless whether Islamic REIT is Shariah-based or Shariah-compliant, the investment instrument has a sound proposition as a waqf investment asset. This paper attempts to explain that despite the non-existence of specific regulations and fatwas regarding Islamic REIT, its concept is plausible under current regulatory framework of REIT. Investment by cash waqf in REIT is also plausible, although at this stage the waqif may have to initiate the paradigm shift through explicit Shariah capital market investment stated in the waqf deed. This paper has also outline the benefits of Islamic REIT investment along with its risks and challenges for Islamic REIT adoption by nazirs. Risk mitigations and solutions to challenges require active participation from related stakeholders, with the main identified objective to be capacity building for nazirs. In its attempt to introduce the notion of Islamic REIT in Indonesia, the paper also tries to move forward the ijtihadi discussions for awqaf investments in capital market instruments, particularly REITs due to the public’s familiarity with real estate awqaf. It is expected that future studies shall be able to explore and delve with awqaf investment in capital market, as realization of inflationary impact to awqaf assets is germinating for creative asset management by nazirs. Islamic REIT is not a new concept, although its implementation in Indonesia investing landscape is in its infancy. OJK has the responsibility to set up the foundational framework and proper catalyst for industry players to create the supply, while at the same time educate the public to create the demand.44 Capacity building is the name of the game, both in the area of Shariah capital market development and awqaf management, otherwise future studies would only be limited in theory without implementation. Hopefully by Government support, through OJK and BWI, there shall be meaningful growth of capable nazirs, in shaa Allah.

                                                                                                                        44

Government Regulation 11/2014 regarding Fee Collection by Financial Services Authority stipulates in its article 17 section 3 that OJK may charge as low as 25% from normal rate as an incentive tool to spur growth in an emerging area development. The Shariah Capital Market Roadmap also state in its second program of the first directive to encourage instruments issuance by means of incentives. As such, since Shariah Capital Market is considered to be emerging area in financial market development, OJK may look into incentivize investment managers to issue Islamic REIT by charging lower fee collection from its AUM (normal rate is 0.045% per annum).

 

29  

VII. REFERENCES Abdullah, M., “An Analysis of Waqf Investment Strategy”, available at https://www.academia.edu/1754712/An_Analysis_of_Waqf_Investment_Strategy (accessed 23 February 2016). Awan, M.M.M., “Structuring of Sharia Compliant Islamic REITs”, available at http://www.alhudacibe.com/images/Presentations%20on%20Islamic%20Banking%20and%20Finance /REITs/Structure%20of%20Islamic%20REITs%20by%20Muhammad%20Mahmud%20Awan.pdf (accessed 20 March 2016). Bank Indonesia (2016), “Survei Harga Properti Residensial Triwulan IV 2015,” [Residential Property Price Survey 4th Quarter 2015] available at http://www.bi.go.id/id/publikasi/survei/harga-propertiprimer/Documents/Laporan%20SHPR%20TW%20IV-2015.pdf (accessed 28 February 2016). Badan Wakaf Indonesia (2011), “Laporan Pengelolaan Wakaf Uang,” [Cash Waqf Management Report] available at http://bwi.or.id/index.php/in/unduhan.html?task=view.download&cid=39 (accessed 18 March 2016). Chartered Institute of Management Accountants (2011), Islamic Banking and Takaful, Study Guide Two, Global Trade Media, London, United Kingdom. Chowdhury, M.S.R., et al. (2011), “Economics of Cash Waqf Management in Malaysia: A proposed cash waqf model for practitioners and future researchers”, African Journal of Business Management, Vol. 5 No. 30, pp. 12155-12163. Direktorat Pasar Modal Syariah Otoritas Jasa Keuangan (2015), Roadmap Pasar Modal Syariah 2015-2019 [Shariah Capital Market Roadmap], Otoritas Jasa Keuangan, Jakarta, Indonesia. Forum Lembaga Keuangan Syariah Penerima Wakaf Uang (2011), Handbook Tanya Jawab Wakaf Uang [Cash Waqf Question and Answer Handbook]. Badan Wakaf Indonesia, Jakarta, Indonesia. Haq, F. and Natalie B. (2012), “Why Shariah Finance and Real Estate are a Perfect Match”, available at http://www.lexology.com/library/detail.aspx?g=9f815515-78bf-4c41-ae6f-550a226a8808 (accessed 24 February 2016).

 

30  

Hasan, A.B. (2016), “Extending the Role of Islamic Capital Market in Development of Waqf”, presented at the Global Islamic Finance Forum 5.0, 10-12 May, Kuala Lumpur, Malaysia. Hasan, A.B., "Shariah Compliant or Shariah Driven Approach? Towards Full Appreciations of The Philosophical Roots of Islamic Finance,” available at http://www.academia.edu/1379702/IIFS__Shariah_Compliant_or_Shariah_Driven_Approach (accessed 20 March 2016). Hasan, T., et al. (2009), Al-Awqaf Jurnal Wakaf dan Ekonomi Islam, Vol. II No. 03. Hasanah, U. (2006), “Satu Tahun UU Wakaf” [One Year post-Waqf Law], Sharia Business, No. 34, p. 37. Hasanah, U. (2010), “Nazhir Wakaf Uang Harus Profesional” [Cash Waqf Nazir Must Be Professional], Sharing, Vol. IV No. 41, p. 31. Hasanah, U. (2006), “Wakaf Produktif dan Kemiskinan” [Productive Waqf and Poverty], Sharia Business, No. 41, p. 22. Hwa, T.K. and Noor, A.R.M. (2007), “Islamic REITs: A Syariah-compliant investment option”, presented at the 12th Asian Real Estate Society Annual Conference, 9-12 July, Macau, People’s Republic of China. IdealRatings (2015), Asia Pacific Islamic REITs Index Factsheet, San Francisco, California, United States. Insights (2013). Islamic Real Estate and Investment Trusts (Islamic REITs): A promising asset class for wealth management, Bank Negara Malaysia, Kuala Lumpur, Malaysia. International Shari’ah Research Academy for Islamic Finance (ISRA) (2015), Islamic Capital Markets: Principles & Practices, Pearson, Kuala Lumpur, Malaysia. Islamic Research and Training Institute (IRTI) (2016), Indonesia Islamic Finance Report: Prospects for Exponential Growth, Thomson Reuters, Jakarta, Indonesia. Kahf, M. (1999), “Toward the Revival of Awqaf: A few fiqh issue to reconsider”, paper presented at the Third Harvard University Forum on Islamic Finance, 1 October, Cambridge, Massachusetts, United States.  

31  

Karim, S.A. (2012), “Contemporary Investment and Development of Waqf Assets in Singapore”, presented at the International Islamic Capital Market Forum, 20 September, Kuala Lumpur, Malaysia. Karim, S.A., “Contemporary Waqf Administration and Development in Singapore: Challenges and Prospects”, available at http://www.academia.edu/5511338/Contemporary_Waqf_In_singapore_by_Shamsiah_Abdul_Karim (accessed 7 March 2016). Mannan, M.A. (1999), “Cash Waqf Certificate: Global opportunities for developing the social capital market in 21st century voluntary-sector banking”, paper presented at the Third Harvard University Forum on Islamic Finance, 1 October, Cambridge, Massachusetts, United States. Mohsin, M.I.A. (2014), “What We Can Do With Waqf Properties?”, presented at the Roundtable Discussion on Development of Waqf Properties in Malaysia, 2 May, Kuala Lumpur, Malaysia. Otoritas Jasa Keuangan. “Strategi Nasional Literasi Keuangan Indonesia” [National Strategy for Financial Literacy], available at https://www.academia.edu/9341004/Strategi_Nasional_Literasi_Keuangan_Indonesia (accessed 23 February 2016). Prakasa, Y. (2012), “The Potential for Islamic Exchange Traded Fund (ETF) in Indonesia: A comparative study of development in US, UK, and Malaysia”, paper presented at the International Conference on Islamic Capital Markets, 19-20 June, Jakarta, Indonesia. REIT.com, “REIT Industry Timeline”, available at https://www.reit.com/investing/reit-basics/reitindustry-timeline#1 (accessed 25 February 2016). Rosly, S.A., “IB 1006 Islamic REITS”, available at http://slideplayer.com/slide/5982593 (accessed 20 March 2016). Septanto, H. (2016), “The Big Long: Building a portfolio for any weather”, Majalah LPS, No. Feb 2016, pp. 11-13. Tanuwijaya, E. and Arif, M. (2015), “Indonesia Macroeconomics and Property Outlook”, presented at the Real Estate Investment Trust (REIT) / Dana Investasi Real Estat (DIRE) Forum, 24 February, Jakarta, Indonesia.

 

32  

Unit Komunikasi Perusahaan KSEI (2015) “Statistik” [Statistics], Fokuss, No. 3, p. 11 Yasni, M.G. (2006), “Waqf dan Philanthropist Ekonomi” [Waqf and Economic Philanthropist], Azzikra, Vol. 2 No. 24, pp. 90-91

 

33  

APPENDIX I: ABBREVIATION ASPM : Ahli Syariah Pasar Modal (Capital Market Shariah Expert) Newly defined and regulated by OJK starting in 2015, ASPM are individuals and business entities with the authority to provide Shariah advice and supervisory duty on the implementation of Shariah aspects in commercial business of their employers and clients. With regard to Shariah capital market investment products (which include Islamic REIT), ASPM is required to issue Shariah-compliancy statement along with regular update reports (as stated in OJK Regulation 16/2015). Bapepam-LK : Badan Pengawas Pasar Modal & Lembaga Keuangan (Capital Market and Financial Institution Supervisory Agency) Established in 1976, Bapepam is led by a Chairman assigned by the President of Republic of Indonesia and is responsible to the Ministry of Finance. Bapepam’s main function is to create an orderly, fair, and efficient capital market and to protect the interest of the general public and investors. In 2005, Bapepam is merged with non-bank financial institution supervisory agency Direktorat Jenderal Lembaga Keuangan (Directorate General of Financial Institution) under the Ministry of Finance, and became Bapepam-LK.45 Starting 31 December 2012, the function, duties and authorities of Bapepam-LK was transferred to OJK and subsequently Bapepam-LK ceased to function.46 BEI : PT Bursa Efek Indonesia (Securities Exchange Indonesia) A limited liability company formed in 2007, a merging between an equity bourse PT Bursa Efek Jakarta and a debt & derivative bourse PT Bursa Efek Surabaya. Its main task is to administer orderly, fair, and efficient Securities trading in Indonesia. BEI is one of the three Indonesian Capital Market SROs. It is owned by Members of the Securities Exchange.47 BWI : Badan Wakaf Indonesia (Indonesia Waqf Board) An independent body set by the Government of Indonesia with the function and duties to oversee waqf development, supervise nazir, manage and administer waqf assets which are national and international in scale, and provide advice to Government regarding waqf policy. BWI also has the authority to regulate nazir, maintain the register of waqf assets, and change the status of waqf assets. It reports to the President and the Ministry of Religious Affairs.48 CIC : Collective Investment Contract (Kontrak Investasi Kolektif - KIK)                                                                                                                         45

Bapepam-LK website, available: http://www.bapepam.go.id Article 55 of Law 21/2011 on Financial Services Authority 47 IDX website, available: http://www.idx.co.id 48 Article 47-61 Law 41/2004 on Waqf. BWI website, available: http://www.bwi.or.id 46

 

34  

CIC is a legal form stipulated in Capital Market Law of 1995, giving legal basis for collective investment scheme in Indonesia despite the non-existence of Trust Law. CIS : Collective Investment Scheme CIS is a legal concept providing the basis for public pooling of investment funds to be managed by third-party investment managers on behalf and for the benefit of pooled investors. In Indonesia, CIC is the dominant form of CIS. DES : Daftar Efek Syariah (Shariah-compliant Securities List) List of securities in compliance with the Shariah Principle in Capital Market. The list may be issued by Bapepam-LK or other third party institutions approved by Bapepam-LK. Islamic REITs have to be included in this list to be considered for Shariah-compliant investment universe. DIRE : Dana Investasi Real Estat (Real Estate Investment Trust - REIT) In this paper, abbreviation of REIT is used instead of DIRE, but the meaning is interchangeable. Discussion of REIT can be read on chapter VIII of this paper. DPS : Dewan Pengawas Syariah (Shariah Supervisory Board) A supervisory board responsible for the implementation of Shariah principle in each of its respective supervised financial institutions and non-financial corporations. A separate and new DPS is formed each time a new institution is requesting for Shariah-compliant supervision, and it shall be tasked for supervision on the requesting institution. Members of DPS are comprised from members of DSN. It reports to DSN.49 In November 2015, OJK issued Regulation 16/2015 on ASPM which formally defines and regulates DPS. DSN : Dewan Syariah Nasional (National Shariah Board) A subset of MUI. It is formed for specific tasks to organize, coordinate, and determine on economic and financial matter conformity and compliancy with the Shariah principle. It reports to MUI.50 KSEI : PT Kustodian Sentral Efek Indonesia (Securities Central Custody Indonesia) A limited liability company established in 1997, with main tasks to provide orderly, fair, and efficient Securities Central Depository and Settlement services for account holders comprising of Securities Companies and Custodian Banks. KSEI is one of the three Indonesian Capital Market SROs.51

                                                                                                                        49

MUI website, available: http://www.mui.or.id MUI website 51 KSEI website, available: http://www.ksei.co.id 50

 

35  

LKS : Lembaga Keuangan Syariah (Shariah-compliant Financial Institution) Indonesian legal entities with line of business in the field of Shariah finance, which include banks, takafuls, and cooperatives, among others. LKS-PWU : Lembaga Keuangan Syariah – Penerima Wakaf Uang (Shariah-compliant Financial Institution as the Receiver of Cash Waqf) Under Law 41/2004, waqif may only donate cash for waqf through LKS-PWU which are financial institutions, mostly banks, registered with the Ministry of Religious Affairs. MUI : Majelis Ulama Indonesia (Indonesian Council of Ulama) The council was formed in 1975 with the intention to accommodate the aspiration of wide-range Muslim constituents, which include two largest Muslim organizations in Indonesia, Nahdlatul Ulama and Muhammadiyah. Representatives from religious organizations, provinces, and the military also sit in the council. The council shall organize, coordinate, and determine on matters of religious interest of its collective constituents.52 OJK : Otoritas Jasa Keuangan (Financial Services Authority) An independent body set by the Government of Indonesia with the function, duties and authorities to regulate, supervise, audit, and investigate activities in the financial sector. Established through Law 21/2011, OJK assumes the function of Bapepam-LK starting 31 December 2012. As such, any reference to Bapepam-LK in any governing regulation is meant for OJK afterward. SPC : Special Purpose Company Bapepam-LK Regulation IX.M.1 allows for REIT to be structured with or without the use of SPC. SPC is formed as a limited liability corporation (Perseroan Terbatas - PT) where REIT ownership of SPC’s equity is at minimum 99.9% of SPC’s paid capital. The function of an SPC is to hold ownership of real estate assets in REIT since Law 5/1960 stipulates that only individuals and legal entities can hold ownership over the land. Note that REIT is a contract, thus it cannot directly hold land ownership under Land Law.

PT : Perseroan Terbatas (Limited Company or Corporation) PT is a legal entity regulated under Corporate Law of 2007. As a distinct legal person, PT is treated as a person under law with the ability, among others, to form agreement, execute contract, and appear before the court. PT is represented by its board of directors and owned by its shareholders. Indonesia uses two-tier board system for corporate management.                                                                                                                         52

 

MUI website

36  

APPENDIX II: TERMS USED IN INDONESIAN CAPITAL MARKET REGULATIONS

Aset Real Estat (Real Estate asset) : Real Estate asset is defined as the physical land and construction above the land.53 It is the main asset holding of a REIT. Aset yang berkaitan dengan Real Estat (Real Estate-related asset) : Real Estate-related asset is defined as Real Estate company’s securities listed on the Securities Exchange and/or Real Estate company’s issued securities (unlisted).54 It is supplementary asset holding, along with cash, of a REIT. Bursa Efek (Securities Exchange) : the party who provides and administers infrastructure and/or systems to facilitate the bid and offer between Securities’ buyers and sellers for trading purposes. Publicly-traded REITs are traded on the Securities Exchange. Efek (Securities) : those which include debt instruments, commercial papers, equity (stocks/shares), bonds, certificate of debts, Participation Units of collective investment contract, futures contracts on securities, and other derivatives on securities. As such, REIT is considered as a security under Indonesian capital market since it is formed as collective investment contract. Emiten (Issuer) : the party who issues public or private offering of a Security. In REIT issuance, the issuer is the investment manager of the issued REIT. Kustodian (Custody) : the party who offers custody services on Securities and other related assets, and other services which include: - receipt of dividends, interests, and other rights, - settlement of Securities transactions, and - representation of account holders In REIT, the custody bank is the investment manager’s counterparty, with the responsibility of providing custody services of the REIT’s assets. Manajer Investasi (Investment Manager) : the party who conducts its business activity by managing portfolio of Securities and/or collective investments on behalf of its investors; other than insurance companies, pension funds, and banks which are governed under separate regulations.

                                                                                                                        53 54

 

Bapepam-LK Regulation IX.M.1 Bapepam-LK Regulation IX.M.1

37  

Memorandum Informasi (Information Memorandum or Info Memo) : written information which disclose material information and facts related to private offering, for the purpose of selling Securities to other parties. Pasar Modal (Capital Market) : the market for conducting activities related to public offering and securities trading; public companies and their issued Securities; and other institutions and professionals related to securities trading and issuance. Penatalaksana (Arranger) : the party who sign a contract with the issuer to conduct issuance arrangement and/or public/private offering of the securities on behalf of the issuer. Commonly, the arranger is an investment bank. Penawaran Terbatas (Limited or Private Offering) : the activity of offering to sell Securities to limited parties, done by the issuer, in accordance with governing Law and regulations. An offering must not breach terms of public offering as stipulated under Law 8/1995. Penawaran Umum (Public Offering) : the activity of offering to sell Securities to the general public, done by the issuer, in accordance with governing Law and regulations. Under Law 8/1995, public offering is defined as Securities offering in Indonesia’s jurisdiction or to Indonesia’s citizens by mean of mass media or offered to more than 100 parties or had been sold to more than 50 parties for a defined amount and at a defined time.55 Perantara Pedagang Efek (Securities Broker) : the Party who trade securities for its own behalf or other parties’. Publicly listed REIT is traded on Securities Exchange through Securities Broker. Perusahaan Efek (Securities Company) : a company whose business activities include securities underwriting, securities brokerage, and/or investment management. Portofolio Efek (Securities Portfolio) : a collection of securities owned by a party(s). Pihak (Party) : individual, corporation, joint venture, association, or any other organized group. Prospektus (Prospectus) : written information related to public offering for the purpose of selling securities to other parties.

                                                                                                                        55

 

Explanation of Article 1 number 15 of the Law 8/1995.

38  

Reksa Dana (Mutual Fund) : a vehicle used to raise funds from public investors to be subsequently invested in securities portfolio by the investment manager. Unit Penyertaan (Participation Unit) : the unit of measure that shows proportionate interest of each party in a collective investment portfolio. Participation Unit is used as mutual fund and REIT’s proof of ownership.

 

39  

APPENDIX III: SELECTED REGULATIONS GOVERNING CASH WAQF IN INDONESIA Law 41/2004 on Waqf (Undang-Undang Republik Indonesia Nomor 41 Tahun 2004 tentang Wakaf) This is the most authoritative regulation governing all aspect of waqf in Indonesian positive law. It is also known as the Waqf Law. Government Regulation 42/2006 on Enforcement of Law 41/2004 (Peraturan Pemerintah Nomor 42 Tahun 2006 tentang Pelaksanaan Undang-Undang Nomor 41 Tahun 2004 tentang Wakaf) This is an implementing regulation on the administration and enforcement of Law 41/2004, and acts as its executive order. Minister of Religious Affairs Regulation 4/2009 on Administration of Cash Waqf Registration (Peraturan Menteri Agama Nomor 4 Tahun 2009 tentang Administrasi Pendaftaran Wakaf Uang) This is the Ministry regulation on the administrative and reporting aspect of cash waqf, mostly by LKS-PWU to the Ministry and BWI. BWI Regulation 1/2009 on Guideline for Management and Investment of Cash Waqf Assets (Peraturan Badan Wakaf Indonesia Nomor 1 Tahun 2009 tentang Pedoman Pengelolaan dan Pengembangan Harta Benda Wakaf Bergerak Berupa Uang) A more detailed regulation by BWI on cash waqf which includes parties involved, cash receivership, certificate of proof, administration and management of cash waqf, its investment and return/dividend distribution. BWI Regulation 4/2010 on Guideline for Management and Investment of Waqf Assets (Peraturan Badan Wakaf Indonesia Nomor 4 Tahun 2010 tentang Pedoman Pengelolaan dan Pengembangan Harta Benda Wakaf) Another detailed regulation by BWI on management and investment of waqf assets, which also include distribution of benefit/usufruct of cash waqf. Fatwa MUI on Cash Waqf dated 11 May 2002 (Keputusan Fatwa Majelis Ulama Indonesia tentang Wakaf Uang tanggal 11 Mei 2002) This fatwa issued by MUI is the earliest reference to the permissibility of cash waqf in Indonesia.

 

40  

APPENDIX IV. SELECTED REGULATIONS GOVERNING REIT AND SHARIAH CAPITAL MARKET IN INDONESIA Law 8/1995 on Capital Market (Undang-Undang Republik Indonesia Nomor 8 Tahun 1995 tentang Pasar Modal) This is the most authoritative regulation governing all aspects of Indonesian capital market including administration, legalities, and instruments such as mutual funds. It is also known as the Capital Market Law. Law 40/2007 on Corporation (Undang-Undang Republik Indonesia Nomor 40 Tahun 2007 tentang Perseroan Terbatas) This is the most recent authoritative regulation governing all aspects of Indonesian corporation including its organ, duties of the board, and shareholders meeting. It is also known as the Corporate or Company Law. Law 5/1960 on Land (Undang-Undang Republik Indonesia Nomor 5 Tahun 1960 tentang Peraturan Dasar Pokok-Pokok Agraria) This is the most authoritative regulation governing all aspects of land rights, use and ownership in Indonesia. It is also known as the Land Law. Government Regulation 45/1995 on Administration of the Activities in the Capital Market as later changed by Government Regulation Number 12/2004 (Peraturan Pemerintah Nomor 45 Tahun 1995 tentang Penyelenggaraan Kegiatan di Bidang Pasar Modal sebagaimana telah diubah dengan Peraturan Pemerintah Nomor 12 Tahun 2004) This is more detailed regulations on the administration of Indonesian Capital Market and acts as the executive order of Law 8/1995. Ministry of Finance (MOF) Regulation 200/2015 on Tax Treatment for Tax Payer and Taxable Business Utilizing Certain Collective Investment Contract Scheme as an Attempt for Financial Sector Deepening (Peraturan Menteri Keuangan Nomor 200/PMK.03/2015 tentang Perlakuan Perpajakan Bagi Wajib Pajak dan Pengusaha Kena Pajak yang Menggunakan Skema Kontrak Investasi Kolektif Tertentu dalam Rangka Pendalaman Sektor Keuangan) This is an implementing regulation to the Government’s fifth fiscal policy announced on 22 October 2015, regarding the elimination of double taxation on REIT. The part on newly instituted capital gain tax is under subsequent review and shall be revised by the Government due to public objection.

 

41  

Bapepam-LK Regulation IX.M.1 on Guideline for Investment Manager and Custody Bank in the Management of Real Estate Investment Trust Formed as Collective Investment Contract (Peraturan Bapepam-LK Nomor IX.M.1 tentang Pedoman Bagi Manajer Investasi dan Bank Kustodian yang Melakukan Pengelolaan Dana Investasi Real Estat Berbentuk Kontrak Investasi Kolektif) This regulation provides guideline for investment management companies and their custody banks on managing CIC-based REIT. It refers to the Decree of the Chairperson of Bapepam-LK Number KEP425/BL/2007 (Keputusan Ketua Bapepam-LK Nomor KEP-425/BL/2007). OJK Regulation 19/2016 is issued in 4 April 2016 to replace Bapepam-LK Regulation IX.M.1. Bapepam-LK Regulation IX.M.2 on Guideline on the Collective Investment Contract for Real Estate Investment Trust Formed as Collective Investment Contract (Peraturan Bapepam-LK Nomor IX.M.2 tentang Pedoman Kontrak Investasi Kolektif Dana Investasi Real Estat Berbentuk Kontrak Investasi Kolektif) This regulation provides guideline for investment management companies on drafting CIC-based REIT contract. It refers to the Decree of the Chairperson of Bapepam-LK Number KEP-426/BL/2007 (Keputusan Ketua Bapepam-LK Nomor KEP-426/BL/2007). Bapepam-LK Regulation IX.C.15 on Statement of Registration for Public Offering on Real Estate Investment Trust Formed as Collective Investment Contract (Peraturan Bapepam-LK Nomor IX.C.15 tentang Pernyataan Pendaftaran Dalam Rangka Penawaran Umum oleh Dana Investasi Real Estat Berbentuk Kontrak Investasi Kolektif) This regulation provides guideline for investment management companies on filing for public offering registration on CIC-based REIT. It refers to the Decree of the Chairperson of Bapepam-LK Number KEP-423/BL/2007 (Keputusan Ketua Bapepam-LK Nomor KEP-423/BL/2007). Bapepam-LK Regulation IX.C.16 on Guideline on the Format and Content of the Prospectus for Public Offering on Real Estate Investment Trust Formed as Collective Investment Contract (Peraturan Bapepam-LK Nomor IX.C.16 tentang Pedoman Mengenai Bentuk dan Isi Prospektus Dalam Rangka Penawaran Umum oleh Dana Investasi Real Estat Berbentuk Kontrak Investasi Kolektif) This regulation provides guideline for investment management companies on drafting the prospectus for public offering registration on CIC-based REIT. It refers to the Decree of the Chairperson of Bapepam-LK

Number

KEP-424/BL/2007

(Keputusan

424/BL/2007).

 

42  

Ketua

Bapepam-LK

Nomor

KEP-

Bapepam-LK Regulation IX.A.14 on Definitions of Aqad (Contract) Used in the Issuance of Shariahbased Securities in Capital Market (Peraturan Bapepam-LK Nomor IX.A.14 tentang Akad-akad yang Digunakan dalam Penerbitan Efek Syariah di Pasar Modal) This regulation acts as the legal basis for the formation of contracts to be used in the issuance of Shariah-compliant securities. Creation of Islamic REIT has to use the aqad as defined in this regulation. It currently refers to the Decree of the Chairperson of Bapepam-LK Number KEP131/BL/2006 (Keputusan Ketua Bapepam-LK Nomor KEP-131/BL/2006). OJK Regulation 53/2015 is issued in 29 December 2015 to replace Bapepam-LK Regulation IX.A.14. Bapepam-LK Regulation II.K.1 on Criteria and Issuance of Shariah-compliant Securities List (Peraturan Bapepam-LK Nomor II.K.1 tentang Kriteria dan Penerbitan Daftar Efek Syariah) This regulation explains the criteria for Shariah-compliant securities to be included in OJK issued Shariah-compliant Securities List (DES). Islamic REIT needs to conform with Shariah Principle in Capital Market along with the requirements in this regulation to be included in the DES. It currently refers to the Decree of the Chairperson of Bapepam-LK Number KEP-208/BL/2012 (Keputusan Ketua Bapepam-LK Nomor KEP-208/BL/2012). OJK Regulation 15/2015 on Implementation of Shariah Principle in Capital Market (Peraturan OJK Nomor 15/POJK.04/2015 tentang Penerapan Prinsip Syariah di Pasar Modal) This regulation acts as the legal basis for Shariah Capital Market administration and activities, which also regulate parties involved, their requirements and business conducts. It is mandatory for investment management companies who manage Shariah-compliant funds to have Shariah Advisory Board, in accordance with this regulation. OJK

Regulation

16/2015

on

Capital

Market

Shariah

Expert

(Peraturan

OJK

Nomor

16/POJK.04/2015 tentang Ahli Syariah Pasar Modal) This regulation defines ASPM and includes their requirements, permits, authorities and duties. Shariah Advisory Board of the investment companies who manage Islamic REIT shall comply with ASPM regulation. OJK Regulation 53/2015 on Definitions of Aqad (Contract) Used in the Issuance of Shariah-based Securities in Capital Market (Peraturan OJK Nomor 53/POJK.04/2015 tentang Akad yang Digunakan dalam Penerbitan Efek Syariah di Pasar Modal) This regulation acts as the legal basis for the formation of contracts to be used in the issuance of Shariah-compliant securities. Creation of Islamic REIT has to use the aqad as defined in this regulation. Since its issuance in 29 December 2015, this regulation replaces Bapepam-LK Regulation

 

43  

IX.A.14, which refers to the Decree of the Chairperson of Bapepam-LK Number KEP-131/BL/2006 (Keputusan Ketua Bapepam-LK Nomor KEP-131/BL/2006), previously issued in 1 August 2012. OJK Regulation 19/2016 on Guideline for Investment Manager and Custody Bank in the Management of Real Estate Investment Trust Formed as Collective Investment Contract (Peraturan OJK Nomor 19/POJK.04/2016 tentang Pedoman Bagi Manajer Investasi dan Bank Kustodian yang Melakukan Pengelolaan Dana Investasi Real Estat Berbentuk Kontrak Investasi Kolektif) This regulation provides guideline for investment management companies and their custody banks on managing CIC-based REIT. Since its issuance in 4 April 2016, this regulation replaces Bapepam-LK Regulation IX.M.1 on Guideline for Investment Manager and Custody Bank in the Management of Real Estate Investment Trust Formed as Collective Investment Contract, which refers to the Decree of the Chairperson of Bapepam-LK Number KEP-425/BL/2007 (Keputusan Ketua Bapepam-LK Nomor KEP-425/BL/2007), previously issued in 18 December 2007. Fatwa DSN-MUI 20/2001 on Investing Guideline for Shariah-compliant Mutual Fund (Fatwa DSNMUI Nomor 20/DSN-MUI/IV/2001 tentang Pedoman Pelaksanaan Investasi untuk Reksa Dana Syariah) This fatwa acts as the fiqh basis on investment and administration guideline for Shariah-compliant mutual fund. In this fatwa, it is determined for usage of wakalah aqad for the creation of mutual fund and mudharabah aqad for its securities investment. Since REIT is formed as CIC-based fund in Indonesian, this fatwa should be analogously applicable to Islamic REIT. Fatwa DSN-MUI 40/2003 on Capital Market and General Guideline for the Implementation of Shariah Principle in Capital Market (Fatwa DSN-MUI Nomor 40/DSN-MUI/X/2003 tentang Pasar Modal dan Pedoman Umum Penerapan Prinsip Syariah di Bidang Pasar Modal) This fatwa reaffirms the Shariah Principle in Capital Market, including prohibited trading practices in the securities exchange. Since Islamic REIT may be traded in the exchange and/or invest in publicly traded securities, this fatwa should be analogously applicable to Islamic REIT. Fatwa DSN-MUI 80/2011 on the Implementation of Shariah Principle in Trading Mechanism of Equity-based Securities at Securities Exchange’s Regular Market (Fatwa DSN-MUI Nomor 80/DSNMUI/VI/2011 tentang Penerapan Prinsip Syariah dalam Mekanisme Perdagangan Efek Bersifat Ekuitas di Pasar Reguler Bursa Efek) This fatwa determines on the permissibility for equities trading in the secondary market (Securities Exchange). Since Islamic REIT may be traded in the secondary market on the Exchange, this fatwa should analogously applicable to Islamic REIT.

 

44