Editor's letter

The assembled throng in Kuala Lumpur last month for the Malaysia: Investment Destination conference had high hopes for Malaysian real estate investment trusts (REITs). Danny Palmer, global head of equity and equity-linked capital markets and global investment banking for HSBC, predicted the growth rate would be even higher than that seen in Singapore. "We've had investor's calling us," he said. "Investors are excited - they've read about them [in Singapore], and they're ready to go."

There's nothing particularly novel about Malaysian REITS at first glance - the rules changed earlier in the year to snap them in line with other Asian REITS, after the lacklustre performance of Malaysia's first REIT attempt, the Property Transfer Funds. With the rule changes, REITs will no longer pay stamp duty on property for their portfolios, nor will vendors pay capital-gains tax when selling to a REIT. Individual investors will pay no income tax on REIT income. This is some incentive for the government to be offering - property developers can drastically reduce their tax bills.

Why would the government offer such attractive terms to get a REIT market up and running? One reason might be to attract foreign investment in the property sector - historically, all of Kuala Lumpur's fantastic growth has been paid for internally, while the new REITS can be 49% foreign owned, which opens the potential for easy outside investment in building Malaysia further.

But another reason might be Malaysia's ambition in Islamic finance. What does a REIT have to do with Islamic finance?

Speaking to Asia Risk last month, the central bank's governor Zeti Aziz claimed a new benchmark was needed for Islamic derivatives in Malaysia. Klibor - the Kuala Lumpur benchmark interest rate - is commonly used, but what Zeti proposes, for certain instruments, is a benchmark based around rental incomes. And for a benchmark based around rental incomes, look no further than a REIT or REIT index. Once the REIT market gets going, perhaps they could be somehow be used for a whole suite of sharia-compliant derivative products which are correlated to commercial real estate demand and economic activity, not interest rates.

James Ockenden, Editor