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Islamic REITs as an Investment Asset for Waqf Management in Indonesia – Part 2

[This article is a continuation of Part 1. Part 2 was posted on 2 November 2016 on the Islamic Banker website. Note: IslamicBanker.com changed to IslamicMarkets.com in April 2018.]

Real Estate Investment Trust is known in Indonesian regulation terminology as “Dana Investasi Real Estate” 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 the civil law-based jurisdiction of Indonesia. Capital Market Law of 1995 managed to circumvent the non-existent 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 of and for the benefit of the pooled investors. As such, the dominant form of collective investment scheme (CIS) in Indonesia is CIC. Even though PT (Corporation) is also an allowable vehicle for CIS, many deem it impractical and cumbersome to use PT as for CIS. PT, however, may present as the better form for specific instruments such as closed-end funds.

Under CIC, a pooled investment fund is held by a custody bank, freeing the investment manager to concentrate on the investment’s directive strategic and tactical execution. Furthermore, the fund held under CIC is bankruptcy remote, meaning had the investment manager or the custody bank went bankrupt, creditors cannot confiscate the fund. Holding the fund by a custody bank also limits fraud attempts by the investment manager, although it is not shielded against the manager’s poor investment judgment.

Indonesia REIT structure

Indonesian REIT structure diagram
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 have right over land (REIT is a contract; thus, it cannot directly retain land ownership). SPC may also serve on behalf of REIT as the party for conducting an agreement with the property manager. The investment manager likely appoints a third-party property manager due to the latter’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 typical route taken as its expertise lies in fundraising and capital project engagement.

REIT structure using Special Purpose Company (SPC)

REIT structure using Special Purpose Company
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. It is the type of real property that 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 a land bank and a green-field project cannot be classified as Real Estate assets.

2) Real Estate-related asset (Aset yang berkaitan dengan Real Estat); this category is broader 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 a land bank and a green-field project may be categorized as Real Estate-related assets employing securities issuance by Real Estate companies. At a minimum, 80% of the REIT’s NAV has to be placed in Real Estate assets and Real Estate-related assets.

3) Cash and equivalent at most 20% of the REIT’s NAV. The use of cash as REIT’s underlying investment is allowed, to a certain threshold, by the regulators to provide investment manager flexibility given that Real Estate asset is characteristically illiquid.

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, the regulator set Collective Investment Contract (CIC) as a Trust-like contract, a contract formation between the investment manager and custody bank that binds the unit holder (investor).
• Note that CIC is not a legal entity; hence it is not a legal subject, unlike PT (corporation).
Bankruptcy RemoteYes, since REIT asset is neither part of investment manager’s asset nor custody bank’s
Investment Policy• At minimum 50% placement in Real Estate assets.
• At minimum 80% placement in Real Estate and Real Estate-related assets.
• At maximum 20% placement in cash.
Asset SizeMinimum of IDR 50 billion.
Type of OfferingPublic or private
Exchange TradabilityListed (exchange tradable) or unlisted (subscription and redemption through investment manager).
Existence of SPCUsed primarily to hold ownership of Real Estate assets.
Mandatory AppraisalOnce per year, by an OJK-registered appraiser.
LeverageREIT may get leveraged through a bank loan for new asset acquisition, at most 45% of target asset value.
Dividend DistributionAt least 90% of REIT’s after-tax net profit must be distributed once per year.
NAV CalculationAt least once per month.
Initial NAV per UnitAnalogous 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 (for Listed REIT)• Minimum of 100 unitholders.
• Maximum stake by a single unitholder is 75%.
Real Estate Asset AcquisitionTrue sale, along with its inherent rights, interests, and benefits.
Real Estate Asset DisposalIt may only be done by approval of the investment manager and custody bank and may not be done at less than 90% of the previous 6-month appraised value.
TaxationProfits on dividend and capital gain are not taxable (applicable to domestic and foreign Participation Unitholders) [1]
Source: Government and OJK Regulations, (Tanuwijaya, 2015)

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:

REIT correlation to stocks and bonds over two-year period (2014-2015)

XCID [2]1.000-0.283-0.061
XIJI [3]-0.2831.0000.332
SAM Sukuk [4]-0.0610.3321.000
Bloomberg shows that XCID has a very low (near zero) and even negative correlation with both XIJI and SAM Sukuk. As such, REIT price movements differ somewhat slightly to be in the 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, at least 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. [5]
  • 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 taxation by ruling that SPC is considered to be one entity with REIT. Therefore, dividend from SPC to REIT is not considered to be taxable income. [6]
  • 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 a 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, interest rate development may affect REIT positively or negatively (interest rate risk), even though the REIT itself 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.
  • 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.


[1] 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 to foreign Unitholders (investors).

[2] DIRE Ciptadana Properti Ritel Indonesia (IDX ticker: XCID). Since the only Indonesian REIT available is XCID, it is used as the proxy to REIT. XCID was listed on the Indonesian Stock Exchange on 1 August 2013.

[3] Premier Syariah ETF JII (IDX ticker: XIJI). XIJI tracks the Jakarta Islamic Index, consisting of 30 Shariah-compliant Indonesian stocks. It is used as a proxy to investable Shariah stocks in the Indonesian market. XIJI was listed on the Indonesian Stock Exchange on 30 April 2013.

[4] 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 the proxy for investable Indonesian Sukuk. SAM Sukuk Syariah Sejahtera inception date was 10 February 2010.

[5] Government Regulation 94/2010 article 5.

[6] 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 the exemption for REIT scheme, concerning income from SPC to be considered non-taxable.

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