Kenya had its first REIT offer the Stanlib Fahari I-Reit on 25th October 2015. This is the first REIT offering after The Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013 vide legal notice no. 116 came into effect on18th June, 2013. The same regulations also provide for the rules to govern Islamic REIT’s. This is an important and promising asset class for sharia complaint investment, both for an individual’s personal financial plan and for institutional investor’s like fund managers who operate Islamic Sharia Compliant retirement benefit schemes and Islamic Mutual Fund managers.
Historically, Islamic REIT’s came into existence in July 2006 after Malaysia’s innovative launch of the world’s first Islamic REIT the Al-Aqar KPJ REIT. This asset class has since registered encouraging growth and presents strong prospects to augment the Islamic wealth management practices globally, as REITs have a natural alignment with Shariah principles.
What are Islamic REITs?
 The key feature of Islamic REIT is that the incomes and fund management of the Islamic REIT must observe the principles of Shariah. According to the Capital Markets (Real Estate Investment Trusts) (Collective Investment Scheme) Regulations, 2013. Which provides guidelines on Islamic REITs and the appointment of a Shariah Advisor, “In general, an Islamic REIT is a collective investment scheme in real estate, in which the tenant(s) operates permissible activities according to the Shariah”. This would involve acquisition and leasing of real estate (including tenancies and sub-tenancies), where the activities and operations are Shariah-compliant. Examples of impermissible activities/operations include conventional banking services, gambling and casino operations, sale of liquor and non-halal food items among others. In case of mixed tenants operating mixed activities (Shariah compliant and non-compliant activities), the proportion of rentals from the operation of non-permissible activities to total turnover of the Islamic REIT in any current financial year must not exceed 20%. 
International Perspective
Kuwait launched the first Islamic REIT in 2007 known as the Al Mahrab Tower REIT which has the Al Mahrab Hotel tower of Makkah, Saudi Arabia as the primary income generating asset. The Islamic REIT is estimated to have a market capitalisation of approximately USD100 m in 2013 while the initial prospectus indicated the REIT is expected to generate an internal rate of return of 24% for the investors. The REIT however is not listed and remains as a private REIT in Kuwait.
The Financial Institutions Supervision Directorate of the Central Bank of Bahrain (CBB) authorised the first Islamic REIT in Bahrain in June 2009. Within the same year, the Bahraini asset management company Inovest launched the Inovest REIT with a fund of BHD30mln (USD79.8mln) with the objective of acquiring income‑generating properties in the Gulf Cooperation Countries (GCC). The Islamic REIT was originally estimated to earn an annual 8.5% return from a ‘buy and leaseback’ approach. Although the REIT manager had indicated its intention to list on the Bahrain Bourse, as of now it remains a private REIT.
Singapore launched an Islamic trust called Sabana REIT on 26th November 2010 listed on the Singapore Exchange Securities Trading Limited. The REIT aims to invest in income producing industrial real estate used for industrial purposes in Asia. As at 3rd Quarter of 2013, the REIT had a portfolio of SGD1.22 billion making it the largest Islamic REIT in the world, consisting of 22 properties distributed across four main industrial property segments – high-tech industrial, chemical warehouse and logistics, warehouse and logistics, and general-industrial.
United Arab Emirates
UAE joined the Islamic REIT business much later in November 2010 when Dubai Islamic Bank partnered with Eiffel Management, a pioneer of REITs in France to establish the Emirates REIT incorporated in the Dubai International Financial Centre (DIFC). The initial portfolio of the Emirates REIT were management of 7 owner occupied properties secured on about 15 year leases, and worth approximately USD46 m.  Currently, the market capitalisation of Emirates REIT is estimated to be approximately USD200 m, generating average returns between 6% to 8% for the investors.
The Al-Aqar KPJ REIT invested in 6 hospitals with the market value of the properties estimated at USD138mln. Malaysia introduced a second Islamic REIT in the subsequent year when on 8th February 2007, Al-Hadaharah Boustead REIT, listed on the main board of Bursa Malaysia. The Al-Hadarahah Boustead REIT underlying assets were plantation estates and the initial investments were valued at SD136mln. In December 2008, Malaysia introduced a third Islamic REIT called the AXIS REIT, which was the world’s first Islamic industrial/office REIT. In May 2013, Malaysia introduced the KLCC Real Estate Investment Trust (KLCC REIT), which is the world’s first Shariah-compliant stapled REIT. KLCC REIT is currently Malaysia’s largest REIT. Stapled REITs are investment vehicles which include two or more separate entities ‘stapled together’ to trade using a single new financial instrument. KLCC REIT staples together the existing shares of KLCC Property Holdings Bhd (KLCCP) and units of KLCC REIT which consist of Kuala Lumpur City Centre’s three prime assets: Petronas Twin Towers, Menara 3 Petronas and Menara ExxonMobil. The stapled REIT trades on Malaysia’s main bourse, Bursa Malaysia.
Prospects and Opportunities for Islamic REITs
Islamic REITs have tremendous potential to be developed as a thriving global wealth management product since it is structured on tangible real assets which provide stability as the investments are channelled to the real economy. Real asset and tangible assets investments are also the preferred asset class among Muslim investors and institutions given its natural fit with the Islamic finance principles which advocate link between the real economy and the financial sector. The success of Islamic REITs in Malaysia and Singapore give weight to the assertion that Islamic REITs have strong prospects to be launched in global markets as a lucrative alternative real estate investment product. Islamic REITs also come with the added advantage of tax savings in most countries including Kenya, where the REIT is exempted from tax payments provided it distributes most of its income (80% in Kenya) to investors.
Income Tax Act Extract
“20.(1) Subject to conditions specified by the Cabinet Secretary under section 130-
(a) a unit trust; or
(b) a collective investment scheme set up by an employer for purposes of receiving monthly contributions from taxed emoluments of his employees and investing them primarily in shares traded on any securities exchange operating in Kenya,
(c) a real estate investment trust
registered by the commissioner, shall be exempt from income tax except for the payment of withholding tax on interest income and dividends as a resident person as specified in the Third Schedule to the extent that its unit holders or shareholders are not exempt persons under the First Schedule.
(2) All distributions of income, and all payments for redemption of units or sale of shares received by unit holders or shareholders shall be deemed to have been already tax paid.”
Islamic REITs provide institutional investors such as pension funds and other retirement benefit schemes an alternative investment avenue to diversify their investments. Other institutional investors such as takaful (Islamic sharia compliant insurance) companies that look for sharia compliant asset classes to meet their long term business investment need  are also likely to be attracted towards Islamic REITs investments. It is our belief before long an Islamic REIT shall be launched in Kenya.