REITs and Islamic REITs

1. Introduction

Real Estate Investment Trust’s Definition and Classification

There are a few definition associated to Real estate investment trusts or REITs.

Based on Husni, Badri (2010) REITs are collective investment schemes where

funds are pooled and primarily invested in real estate assets and other real estate

related assets. Real estate assets may consist of residential or commercial

buildings, retail or industrial lots, lodgings/resorts, hospitals/health care facilities,

self-storage facilities and specialty-built buildings. In another definition, Corgel,

Mcintosh and Ott (1995) define REITs as investment tools to create flow of

funds from investors to the real estate and property sector of the country.

According to Wong (2004), REITs is a company or a trust that pools

fund from individual investors, acquires and operates income-generating real

estate, and distributes the income derived from their own properties as

dividends. REITs has attributes of both stock and bond so it is regarded as a

hybrid of stocks and bonds. In addition, according to Wong (2004), REITs

increase strength from the pool of resources gathered from investors and

invests into high profile and high value property for greater return as lots of

investors may not be able to invest in huge real estate portfolio.

The Securities Commission of Malaysia defines REIT as “an investment vehicle

that proposes to invest at least 50% of its total assets in real estate, whether

through direct ownership or through a single purpose company whose principal

asset comprise real asset” (Securities Commission, 2005). Different countries

adopt different approach in determining the requirement for a REIT especially

with regards to ratio of investing in real estate. In United States for instance, the

main requirement for a REIT is that it must invest at least 75% of company's total

assets in real estate. As for Korea and Singapore, 70% is used as the minimum

ratio of investing in real estate (Vincent, 1999). Thus, REIT is an entity that

accumulates a pool of fund from investors, which is then used to buy, manage

and sell assets in real estate industry.

Examples of real estate related assets are shares in public-listed property

companies and listed or unlisted debt securities of property companies. Subject

to the investment limits prescribed by a regulatory body, REITs are also

permitted to invest in non-real estate related assets, asset-backed securities and

liquid assets. REITs, which may be listed or unlisted, generate investment

returns from the rental income collected from tenants plus any capital

appreciation arising from holding the real estate over the period. Investors in

REITs, called unit holders, receive their returns in the form of dividends and/or

capital gains for the holding period. Real estate investment trusts (REITs) are

commonly known as listed property trusts in Malaysia.

REIT offers investors the opportunity to diversify and invest their portfolios in

listed real estate securities that own and operate income generating from real

estate such as residential, commercial, retail properties, plantation land, storage

facilities, warehouses, car parks and others, which otherwise expensive if they

were to invest direct. The owner of one REIT unit is actually buying a portion of a

managed pool of real estate. This pool of real estate then generates income

through renting, leasing and selling of property and distributes it directly to the

REIT on a regular basis. Hence, an investor may receive returns either in the

form of dividend or capital gain for the asset holding duration.

In essence, REIT operates like any other trust funds involving stakeholders like

management company, trustee and unit holders. The relationship of these

parties is outlined and governed by a trust deed. The trust deed is essentially a

formal document outlining the objectives and principles of REIT, and rights and

responsibilities of a management company and a trustee respectively. The REIT

must be managed and administered by a management company approved by

the Securities Commission. Under the Guidelines on REIT, the management

company must be "a subsidiary of either a company involved in the financial

services industry in Malaysia; or a property development company; or a property-

investment holding company; or any other institution which the Securities

Commission may permit" (Securities Commission, 2005b). Among the main

functions of REIT manager include setting up the strategic direction of the REIT,

recommending to its trustee on the possible acquisitions, divestments or

enforcements of assets and ensuring compliance with applicable regulations.

The REIT is also required to have a trustee who acts as the custodian of the

assets of the fund and to safeguard the interests of the unit holders. This

requires continuous supervision and monitoring of the funds managed by the

management company so that it complies with the objectives and the deed of the

fund and all related regulatory requirements and guidelines set by laws and the

Securities Commission. In Malaysia functions of a trustee can only be assumed

by a trust company which registered under the Trust Companies Act, 1989. The

trustee earns trustee's fees for its functions in holding the assets for the benefits

of the unit holders.

Another important stakeholder of REIT is property manager who provides

property management services and in return, earns property management fees.

The main functions of property manager include managing and controlling the

assets of the REIT, preparing budgets and maintaining financial records for the

properties and advising on sale and purchase decisions. Figure 1 summarises

and illustrates the roles and functions of various parties involve in REIT

operation.

Literature has generally categorised REITs into three types, namely Equity

REITs, Mortgage REITs and Hybrid REITs (Allen, Madura, & Springer, 2000;

Obaidullah, 2005; Park, Mullineaux, & Chew, 1990) . A brief description of each

type is discussed below:

Figure 1: Stakeholder in REIT Operation

Unit Holder

Investment Returns

Manager Trustee

Management services Safeguard unit holder’s

interest

REIT

Management fees Trustee fees

Ownership of Net Property properties Income

Maintenance andManagement

RentServices

Maintenance and Rental PaymentProperty Manager

management fees Tenant

I. Equity REITs

Equity REITs owns and operates income-generating real estate which

involves a wide range of activities including leasing, development of real

properties and tenant services. A distinctive feature of equity REITs is that it

acquires and develops the real estate properties with the intention to

manage them as part of its portfolio rather than resell them once they are

developed.

II. Mortgage REITs

Mortgage REITs primarily hold long-term mortgages, but many also engage

in short-term construction financing (Park et al., 1990).This type of REITs

offers interest-based loans to real estate owners, operators or developers. It

involves greater risk since mortgage REITs tend to be more sensitive to

volatility in market interest rates. This is due to the fact that mortgage REITs

hold mortgages whose prices move in the opposite direction of interest

rates.

III. Hybrid REITs

As the name implies, hybrid REITs are a combination of equity and

mortgage REITs. In other words they own and operate real estate at the

same time extend loans to real estate owners and operators.

History of REITs

According to Taylor and Bailey (1936), REIT was begun in Boston in the

middle of 1880’s. The significant events of REIT history can be revealed on

Table 1.

Table 1

Years Event

1960 President Eisenhower (US President 1953-1961) signs REIT Act into law

1961 The first REIT are created

1965 First REIT listed on NYSE

1974 First significant change to REIT tax rules

1976 REIT allowed to incorporate

1980s REIT find it difficult to compete for capital due to tax laws

1989 Worst real estate recession since 1930s

1991 First publicly traded REIT to achieve a $1 billion equity market capital

1992 First IPO of an UPREIT

1997 REIT Simplification Act of 1997

1999 REIT Modernization Act of 1999

Sources: Liang, 2000

Since 2001, REIT have been included in the Standard& Poor’s (S&P) 500

Index, mainly due to recognition and acceptance of the importance of REIT

and the real estate and property sector in the public capital markets. Besides

that, REIT has also gained popularity across the continents of Europe and

Asia, offering a new opportunity for international funds to diversify into foreign

real estate without worrying about liquidity. European countries which have

adopted the REIT concept include Belgium, Germany, France, and

Netherlands. REIT markets have been successfully established in Asia

country like Japan, Singapore, Taiwan, Malaysia, Thailand, South Korea and

Hong Kong.

In Asia, Malaysia was the first to have listed property trusts in 1989. The Asian

economic crisis during the 1997-1998 period, had significantly contributed to the

development of REITs in other Asian countries. The REIT market took off later in

Japan and Singapore in 2001 and 2002 respectively. South Korea established its

REIT legislation in 2001 while Taiwan launched its first REIT in 2004. Hong Kong

was the latest to introduce a listed REIT in 2005. While Japan has the most

developed REIT market, Singapore is widely considered to be the most dynamic

REIT market among other Asian countries. Table 2 shown the latest Total

Global Market Capitalization of REIT in 2010

Table 2: Total Global Market Capitalization of REIT in 2010

Country Market Capitalization (US million)

US 271,850

Australia 70,747

France 64,526

UK 37,176

Japan 29,432

Singapore 23,134

Canada 20,610

Netherlands 12,234

Hong Kong 9,519

Belgium 6,761

South Africa 3,401

New Zealand 2,540

Turkey 1,890

Malaysia 1,543

Germany 713

South Korea 133

Source: Global Real Estate Investment Trust Report 2010

2. Development of REITs In Malaysia

2.1 Regulatory Framework

Malaysia was the first country in Asia to introduce legislation to permit the

formation of listed property trusts. In 1986, Bank Negara Malaysia (the Central

Bank of Malaysia) approved the regulatory framework for listed property trusts

where the principal governing their establishment and operation was the

Companies Act 1965 and the Securities Industry Act 1983. Specific guidelines on

property trust funds were introduced by the Securities Commission in 1991 and

later revised in 1995.

In 1999, the Securities Commission embarked upon a consultation process in

relation to property trust funds vis-à-vis the likes of similar products in other

jurisdictions, such as REITs in the United States and property funds in

Singapore. It issued a Consultation Paper on Property Trust Fund and

Consultation Paper on Property Trust Funds and Real Estate Investment Trusts

in 1999 and 2002 respectively.

Pursuant to the Finance Act 2004, which was gazetted in December 2004, REITs

will enjoy a tax treatment as follows:

(a) REITs to be exempted from tax on income distributed to its unit holders

whereas the undistributed income will be taxed at 28%;

(b) Income distributed to unit holders will be taxed at their respective taxes.

However, for non-residents, the tax payable at 28% will be withheld by REITs;

and

(c) The accumulated income that has been taxed and subsequently distributed is

eligible for tax credit in the hand of unit holders.

Furthermore, REITs under the Finance Act 2004 enjoy stamp duty exemptions

on all instruments of transfer of real property. Property owners who sell their

properties to REITs are also exempted from real property gains tax.

However, the filing obligations imposed under the Stamp Act 1949 and the Real

Property Gains Tax 1976, are still required to be adhered to. On January 3, 2005,

the Securities Commission issued the new Guidelines on Real Estate Investment

Trusts to govern the operation and administration of REITs in Malaysia. The

amended guidelines have generated a lot of excitement and discussion among

industry players, with a number of them, especially those with sizeable

investment properties, seriously considering injecting their assets into such

trusts.

The key features of the new guidelines, which are a major improvement from the

old guidelines, include the following:

i. Liberalization of the borrowing limit for a REIT;

ii. Relaxation of rules on acquisitions of leasehold properties;

iii. Flexibility in the acquisition of real estate that is encumbered by

financial charges;

iv. Eligibility requirements for management companies that manage

REITs have been streamlined;

v. Introduction of a declaratory approach in the establishment of REITs;

and

vi. Enhancement in the amount of exposure and reporting required which

is consistent with international standards.

On November 22, 2005, the Securities Commission issued the Guidelines

on Islamic Real Estate Investment Trusts (Islamic REITs) to facilitate further

development of new Islamic capital market products. Malaysia was the first

jurisdiction in the global Islamic financial sector to issue such guidelines and had

set a global benchmark for the development of Islamic REITs. The Islamic REITs

guidelines complemented the existing guidelines on conventional REITs. Syariah

(Islamic jurisprudence) compliance criteria are provided in the guidelines to guide

management companies in their activities relating to REITs, including the types

of Syariah permissible and non-permissible rental and investment activities.

REIT and Islamic REIT are shares similar broad characteristics in terms of main

structure requirements i.e. to have valuation, trustees, property managers,

management companies, property manager, etc.  In terms of tax treatment in

Malaysia both REIT receive similar tax treatment on stamp duty, real property

gains tax as well as corporate tax. They are also similar in terms of returns and

distribution form the properties, i.e. both are generated frp, rental income and

capital appreciation.  Another similarity is the return to shareholder in terms of

capital gain and dividend.

The regulatory framework is also similar for both with exception that Islamic REIT

must comply with the Shariah requirement, where Islamic REIT is required to

appoint a Shariah Advisor or Committee who will act as advisor to the REIT and

be the point of reference and consultations on permitted investments as provided

under the Securities Commission Guideline. The distribution of income, although

similar with REIT where it  should only be made from realised gains or realised

income, for Islamic REIT these income must be from Shariah compliant activities

or from the activities within the  20% benchmark  This benchmark is used to

assess the level of contribution from mixed rental payment from Shariah-non

compliant activities such as the rental payment from the premise that involved in

riba, gambling, sale of liquor and other activities prohibited in Islam.

2.2 Industry Growth

The first Malaysian listed property trust, Arab Malaysian First Property Trust, was

launched in September 1989. The second listed property trust was First

Malaysian Property Trust, established in November 1989, and followed by the

third listed property trust, Amanah Harta Tanah PNB, which commenced in

December 1990.

The fourth property trust was the unlisted Mayban Property Trust Fund One

launched in 1990. There was no listed property trusts issued until Mayban

Property Trust Fund One was listed on the KLSE in June 1997 and known as

Amanah Harta Tanah PNB 2. The First Malaysian Property Trust, however,

ceased its listing in July 2002. As at the end of April 2005, only three property

trusts were listed on the Bursa Malaysia comprising AmFirst Property Trust

(formerly Arab Malaysian First Property Trust), Amanah Harta Tanah PNB and

Amanah Harta Tanah PNB 2.

Following the introduction of the new Guidelines on Real Estate Investment

Trusts, Axis Real Estate Investment Trust was the first to be listed on Bursa

Malaysia on July 29, 2005. Next, Starhill Real Estate Investment Trust, the

country’s largest REITS was listed on December 16, 2005, followed by UOA Real

Estate Investment Trust on December 30, 2005. Narrowing down to the

Malaysian market, to date, there are 14 REIT being offered in Malaysia inclusive

of three Islamic REIT. Al-Aqar KPJ REIT being the first Islamic REIT in the world

and Al-Hadharah Boustead REIT being the first Islamic plantation REIT in the

world.  Both the Al-Aqar KPJ REIT and  Al-Hadharah Boustead REIT rank

amongst the top 3 REIT in Malaysia in terms of dividend yield. Axis-REIT which

was listed on Bursa Malaysia on 3 August 2005 was successfully reclassified as

a Shariah Compliant REIT on December 2008 with principal investment primarily

in commercial, office and office/industrial real estate. Table 3 and 4 present a

snapshot of listed REITs to date.

The National Budget 2007 also provides tax incentives to entice specific

investors to the Malaysia REIT market through the reduction of tax on the

investors. According to the tax proposal, dividends received by local and foreign

individual investors and local unit trusts from listed REITs subject to a withholding

tax of 15%, while foreign institutional investors (include a pension fund, collective

investment scheme or such a person approved by the Minister of Finance) be

reduced to 20% from the previous 28% for five years (Badawi, 2006; Treasury

Malaysia, 2006).

Table 3: Malaysian REITS Specialization And Example

Table 4: Malaysian REIT Portfolio Composition

3. REITS In Malaysia

REIT returns averagely in develop market is around 3-5% depending on its

individual performance.  However, REIT in Malaysia is very attractive because as

we are in a so-called last phase of developing nation before developed.  Our

nation’s property’s values are still a gap behind many developed countries in

Asia.  This emerge as an opportunity with an average attractive yield between 6-

8% which is higher than other major developed countries. Especially when REITs

are in the infant stage in Malaysia, most REIT managers are with option and plan

to growth their property portfolio to trade or manage rental in order to achieve

even a better yield for investor.

REIT is not just having the existing property to rent out, manage and collect

rental.  A high performance REIT is like your property fund manager.  They will

develop new opportunities, acquire more properties into their portfolio and to

some countries, jointly develop property projects.  This will provide even a higher

potential return compare to those low to moderate risk investment instruments.

To date, market capitalization of 14 REITS (including 3 Islamic REITs or iREITS)

as at 7 May 2011stood at RM11.254billions with RM2.460billions generates

through iREITs. The biggest market capitalization for iREITs is Al-Hadharah

Boustead REITs at RM896.5million, followed by Axis-REIT at RM890.9Million

and Al-Aqar KPJ REIT at RM673.0million. The biggest REITs in Bursa Malaysia

is Sunway REITs at RM2.980billion. Pie Chart 1 and 2 shown the comparison of

Malaysian REITs.

Pie Chart 1: Comparison Between REITS and iREITS in Market

Capitalization

82%

18%

Market Capitalization

REITs iREITS

Pie Chart 2: iREITs Market Capitalization Comparison

AlAqar27%

Axreit36%

BSDreit36%

iREITs Market Capitalization

CHARACTERISTICS OF SHARIAH-COMPLIANT REITS

The introduction of Islamic REITs is viewed as one of the most significant

initiatives to broaden and deepen the product base of Islamic capital market in

Malaysia. It can also help to enhance competitiveness of Malaysian Islamic

capital market by attracting global Islamic investors who wish to diversify their

investment portfolio which are Shariah compliant. This section provides an

overview of Shariah rules and principles used in determining the Islamicity of

REITs as outlined in the Guidelines for Islamic REITs issued on 21st November

2005 by Securities Commission (Securities Commission, 2005).

Compliance Assessment Process

The Shariah-compliant assessment is undertaken by Shariah committee or

advisor. This Shariah committee is responsible to oversee the operation of

Islamic REITs so that it complies with every aspect of Shariah principles

including investment, deposit and financing decision for Islamic REITs,

acquisition and disposal of real estate and rental earnings and activities. The

Shariah committee is also required to supervise and ensure that all funds are

managed and administered according to the Shariah principles decreed and

outlined by the Securities Commission.

There are several specific aspects of Shariah-compliant assessment process that

Securities Commission has outlined in the Guidelines for Islamic REITs. The

following highlights the salient aspects that need to be scrutinised when

conducting Shariah-compliant assessment.

1. Non-Permissible Rental Activities

Since rental constitutes the main income stream for investors, it is pertinent to

ensure that this rental derived from halal or permissible sources. Accordingly, the

Shariah Advisory Council of Securities Commission delineates the following

rental activities that are classified as non-permissible. The list includes financial

services based on interest (riba); gambling/gaming; manufacture of sale of non-

halal products or related products; conventional insurance; entertainment

activities that are non-permissible according to the Shariah; manufacture or sale

of tobacco-based products or related products; stockbroking or share trading in

Shariah non-compliant securities; and hotels and resorts. Apart from these

activities, the Shariah committee or advisors are allowed to use their own

discretion based on ijtihad1 to determine other activities that are deemed non-

permissible to be included as a criterion in assessing the rental income for the

Islamic REIT.

2. Rental from Tenant who Operates Mixed Activities

When there is a case of tenant who operates mixed activities i.e. one where its

core activities are permitted by Shariah, although there are some other activities

that may contain a small extent of prohibited elements, the Shariah advisors

must perform compliance assessment with additional consideration. One of the

most important considerations is that the rental from non-permissible activities

must not exceed 20% of total turnover of the Islamic REIT (based on the latest

financial year). To that effect, Shariah advisors need to advise the Islamic REIT

fund manager not to invest in the real estate involving non-permissible activities

that clearly exceed the benchmark.

3. Method of Calculating the Ratio of Rental of Non-Permissible Activities

There are several approved methods that can be used for calculating the ratio of

rental of non-permissible activities from a tenant operating mixed activities. The

methods include the usage of space, hours of service and other methods

deemed appropriate by the Shariah advisors using their own ijtihad. In the case

of a supermarket for instance, the rental of non-permissible activities such as

selling of alcohol can be based on the ratio of area occupied for non-permissible

activities to the total area occupied. For example, if the total area rented out is

10,000 square feet and the area allocated for the sale of alcoholic beverages is

1000 square feet, then the ratio of area used for non-halal activities is 10%.

Thus, the rental from non-permissible activities is 10% of the total rental paid by

the supermarket. In this case the 10% rental income is deemed to be permissible

as it is still within the acceptable benchmark of 20% of total turnover of the

Islamic REITs.

4. Acquisition of Real Estate

Shariah-compliant assessments must be carried out by the appointed Shariah

advisor. It is not permitted to acquire real estates in which all tenants operate

non-permissible activities, even if the percentage of rental from the said real

estate is within the accepted benchmark i.e. below 20% of the total turnover of

the Islamic REITs.

5. Renting Out to New Tenant

The 20% benchmark in determining the status of mixed rental income need not

be applied in case of renting out to a new tenant. This is because the exact rental

receipt from non-permissible activities is still unknown. However in an obvious

case whereby the new tenant involves in activities which are deemed

impermissible then it is not allowed for Islamic REIT fund manager to accept

such tenant. For example, a well-known casino operator who plans to rent the

real estate of the Islamic REIT must not be accepted as a new tenant.

6. Instruments used in investment, deposit and financing for Islamic REITs

An Islamic REIT must also ensure that all forms of investment, deposit and

financing instruments comply with the Shariah principles. For example, in

financing the acquisition of real estate, Islamic REIT fund manager must not

engage in riba-based instrument which would have an effect on the Islamicity of

the Islamic REIT operation and transaction.

7. Takaful Coverage

The Guideline issued by the Securities Commission also stipulates that an

Islamic REIT must use Takaful schemes to insure its real estate. However in

case that Takaful schemes are unable to provide the insurance coverage, then

the Islamic REIT is permitted to use conventional schemes (Securities

Commission, 2005).

8. Risk Management Issues

Islamic REIT is permitted to participate in forward sales or purchases of currency,

and is encouraged to deal with Islamic financial institutions. If the Islamic REIT

deals with Islamic financial institutions, then it will be bound by the concept of

wa'd (a unilateral promise where only one party is obligated to fulfil his promise or

responsibility). The party that is bound is the party that initiates the promise.

However, if the Islamic REIT deals with conventional financial institutions, it is

permitted to participate in the conventional forward sales or purchase of

currency.

3. Al-Hadharah Boustead REIT

Introduction

The Al-Hadharah Boustead REIT is the first Islamic oil palm plantation real estate

investment trust (REIT), marking a milestone for the REITs market in Malaysia.

Listed on 8 February 2007 on the Main Board of Bursa Malaysia Securities

Berhad, Al-Hadharah Boustead REIT's principal investment strategy is to own

and invest primarily in plantation assets comprising plantation estates and mills.

The primary objectives of the Fund are to provide Unit holders with stable

distribution of income/yield and to achieve long term growth in the NAV per Unit

of the Fund.

It is the largest Islamic REIT in Malaysia, based on asset value at listing date. As

at 6 May 2011, Al-Hadharah Boustead REIT Malaysia market capitalisation was

at RM896.5 million. Al-Hadharah Boustead REIT Established in Malaysia under

the Deed dated 11 December 2006 entered into between Boustead REIT

Managers Sdn Bhd (formerly known as Emas Jeep Sdn Bhd) and CIMB Trustee

Berhad (formerly known as Bumiputra-Commerce Trustee Berhad) as an Islamic

real estate investment trust.

Al-Hadharah which means “civilisation” is a Shariah-compliant REIT that involves

the sale of plantation assets to a fund established by the Boustead Group. These

assets will

subsequently be leased back to certain subsidiaries of the Boustead Group, who

will then become tenants. Al-Hadharah Boustead REIT will be managed by

Boustead REIT

Managers Sdn Bhd, a subsidiary of Lembaga Tabung Angkatan Tentera (LTAT),

one of the premier and leading funds in the region.

Key Milestones

Date Event

29 July 2009

Al-Hadharah Boustead REIT held its second Extraordinary General

Meeting to seek unitholders' approval for the amendments and

restatement of the Trust Deed.

11 December 2008 Injection of Malakoff Estate and Bebar Estate into the Plantation Assets

09 December 2008

Al-Hadharah Boustead REIT held its first Extraordinary General Meeting

to seek unitholders' approval for the acquisition and leaseback of Malakoff

and Bebar Estates.

26 June 2007Injection of Lepan Kabu Estate and Lepan Kabu Mill into the Plantation

Assets

08 February 2007Listing of Al-Hadharah Boustead REIT on the Main Board of Bursa

Malaysia

02 February 2007 Allotment of Issue Units to successful applicants

15 January 2007Launch of the Prospectus and Opening of the Retail Offering and

Institutional Offering

11 December 2006 Establishment of Al-Hadharah Boustead REIT

NST dated 16 January 2007 on the launching of Al-Hadharah Boustead REITs

Prospectus

Revisited The Initial Public Offering

Initial Public Offering by Boustead REIT Managers Sdn Bhd as the manager of

Al-Hadharah Boustead REIT was 220,000,000 new units comprising:

(i) 20,000,000 for Malaysian public at the retail price of RM0.99 per Issue

Unit;

(ii) 2,000,000 Issue Units for eligible Directors and employees of Boustead

REIT Managers Sdn Bhd, Investment Committee members of Al-

Hadharah Boustead REIT, Directors and employees of Boustead

Estates Agency Sdn Bhd and the Directors of Boustead Holdings

Berhad and Boustead Properties Berhad (collectively the promoters of

the Al-Hadharah Boustead REIT), at the retail price of RM0.99; and

(iii) 198,000,000 Issue Units for institutional and selected investors at the

institutional price of RM1.05 per Issue Unit.

Together with the new Issue units, total units issued were 472 million units as

ratio shown below:

53%42%

5%

Unitholdings of Al-Hadharah Boustead REIT Upon Listing

Vendor Institution Retail & Employees

4.1 The Structure of Al-Hadharah Boustead REIT

The following diagram illustrates the structure of Al-Hadharah Boustead

REIT and indicates the relationship between Al-Hadharah Boustead REIT,

the Manager, the Plantation Adviser, the Trustee, the Shariah Adviser and

the Unit holders:

Pursuant to the above transaction structure:

1. Al-Hadharah Boustead REIT acquires from the Vendors all

the rights, interests and benefits relating to the beneficial

ownership of the Plantation Assets;

2. To fund the purchase consideration of the Plantation Assets,

Al-Hadharah Boustead REIT issues Units to the Vendors

pursuant to the acquisition of the Plantation Assets as part of

the purchase consideration. The balance of the purchase

consideration will be satisfied in cash based on proceeds

raised from the Public Offering, which is offered to the public

and institutions/investors;

3. Pursuant to the SPAs, each of the Vendors will issue a

declaration of trust (“Declaration of Trust”) wherein each of

the Vendors will declare that it holds all the rights, interests

and benefits relating to the beneficial ownership of the

Plantation Assets in trust for Al-Hadharah Boustead REIT

(save and except for the Malay Reserved Land);

4. Upon completion of the acquisition of the Plantation Assets,

Al-Hadharah Boustead REIT lets the Plantation Assets to the

respective Vendors for agreed rental payments and for

agreed tenancy periods of three (3) years each,

automatically renewable four (4) times up to twelve (12)

years and thereafter renewable for up to an additional fifteen

(15) years comprising five (5) additional terms of not more

than three (3) years each (save and except for the tenancy

of the Malay Reserved Land which are not automatically

renewable), upon the terms and subject to the conditions as

set out in the Ijarah Arrangements/SPAs;

5. The Manager appointed Plantation Adviser to monitor the

overall state and condition of all Plantation Assets.

MARKET VALUATION

Al-Hadharah Boustead REIT assets involve eight oil palm estates

and two palm oil mills, all located within Peninsula Malaysia. For

the listings, the total purchase consideration for these plantation

assets, which forms the basis of this fund, was RM472 million, a

discount of 3.42% from the market valuation of RM489 million.

The Deed

The Deed is executed between Boustead REIT Managers as the

Manager of Al-Hadharah Boustead REIT and CIMB Trustee as the

Trustee of Al-Hadharah Boustead REIT to act in their respective

capacities.

Rights and Liabilities of Unit holders

(a) Each Unit in Al-Hadharah Boustead REIT is of equal value

and represents an undivided interest in the Fund.

(b) The prior approval of Unit holders (by ordinary or special

resolution in a meeting as the case may be) is required for

the following transactions:

(i) Sale or disposal of any Plantation Assets (by ordinary

resolution) for assets not exceeding 50% of the total

asset value or by special resolution for assets

exceeding 50% of the total asset value; and

(ii) Acquisition and Disposal of Plantation Asset to

corporation related to the Manager.

(d) A Unit holder may not:

(i) interfere or seek to interfere with the rights,

powers, authority or discretion of the Manager or

the Trustee under the Deed;

(ii) exercise any rights in respect of the assets of the; and

(iii) require any assets of the Fund to be transferred for a

benefit of a Unit holder.

(e) The liability of a Unit holder is limited to the amount

payable for any Unit.

INCOME STREAMS

Under the Al-Hadharah Boustead REIT, plantation assets will be

leased back to the vendors for a three-year renewable tenancy with

a cumulative period of up to thirty years. At the end of every three

years, the fixed rental will be reviewed and a new rental will be

agreed between the parties. The new rental will be determined

based on historical crude palm oil (CPO) prices, prevailing and

expected future CPO prices, cost of production, extraction rates

and yield per hectare.

Hence, income sources for Al-Hadharah Boustead REIT include:

i. Fixed Rental

Tenants will pay a cumulative fixed rental of RM41.3 million per

annum for the first tenancy term of three years. This will be payable

on a bi-monthly basis.

ii. Performance-Based Profit Sharing

In addition to a fixed rental, the Al-Hadharah Boustead REIT may

enjoy an annual profit sharing of net incremental income based on

a formula pegged to CPO and fresh fruit bunch (FFB) prices. This

net incremental income is determined based on the actual CPO

price realised for the year, above the reference price of RM1,500

per MT for the first three years. It will be shared on a 50:50 basis

between the tenants and the fund. This profit sharing payment is

the first of its kind in the REIT market and may translate into more

handsome dividend yields for investors.

iii. Capital Gains

Given the development potential of some of the plantation assets,

especially those located in prime locations; there is a potential

upside for capital gains. The gains realised may be distributed as

bonus dividends.

DIVIDENDS

i. Projected Dividends

At least 98% of the distributable earnings of the REIT will be paid to

unitholders for the first three financial years. It is projected that the

REIT will be well positioned to declare a dividend distribution of

7.38 sen for the next three years.

ii. Variable Dividends

In addition to income from fixed rentals, the REIT will also see

earnings derived from profit sharing between the REIT and its

tenants based on a formula. This may also contribute to additional

dividend distribution to the

unitholders.

iii. Bonus Dividends

Unitholders may also enjoy enhanced dividend yield from the sale

proceeds of selected plantation assets with developments potential

located in prime areas.

4.4 INVESTMENT OBJECTIVES

Al-Hadharah Boustead REIT is a REIT formed to own and invest

primarily in plantation estates and mills. The primary objectives of

the Fund are:

(a) to provide Unit holders with a stable distribution of income/yield;

and

(b) to achieve long-term growth in the NAV per Unit of the Fund.

4.5 STRATEGY

The strategy is to invest in a portfolio of plantation estates and mills

in Malaysia and will not invest in non-real estate assets upon

listing of Al-Hadharah Boustead REIT. In achieving the strategy, the

plans are to adopt a combination of the following strategies:

4.5.1 Organic Growth Strategy

Adopt organic growth strategy to maximise returns, sustain

and improve cash flows and net income generated through

following key areas:

(a) Proactive asset management

(b) Maintain Replanting Programme

(c) Asset Enhancements

(d) Cost Effectiveness, Cost Efficiency and

Excellence in Application

(e) Sustainable Agriculture

4.5.2 Financing strategy

The Manager will operate in accordance with the Deed and

REIT Guidelines whereby the maximum level of financing of

the Fund will not exceed 50% of the total asset value at the

time the financing is obtained.

5. The Investment of Al-Hadharah Boustead REIT

The investments of Al-Hadharah Boustead REIT are limited to at

least 75% of the total asset value of the Al-Hadharah Boustead

REIT and must be invested in Shariah-compliant plantation assets,

single-purpose companies, plantation-related assets or liquid

assets.

Analysis on Islamic Model of Al-Hadharah Boustead REIT

Wakalah

Al-Hadharah Boustead REIT uses the concept of wakalah in governing the

relationship of unitholders with the Manager and Trustee. In Islamic financing,

wakalah is a contract in which one person appoints another person to act as an

agent on their behalf in a transaction. For the service performed, the Manager

and Trustee, in return enjoyed ujr or fees. The Wakalah principles are

incorporated in the Deed of Islamic REITs. List of fees as follows:

Type of Fees Service

Management Fee The manager receives this fee for managing the REIT

Plantation Adviser Fee The plantation adviser receives this fee for monitoring the

REIT’s plantation assets.

Trustee Fee The trustee receives this fee for acting as trustee and

custodian of the assets and for safeguarding the interests of

the unitholders.

Shariah Advisory Fee The Shariah adviser receives this fee for acting as the Islamic

REIT’s adviser for shariah compliance matters

Other fund expenses The REIT will bear all operating expenses, including auditors’

fees and expenses, fees for the valuation of any investments,

taxation, advisers’ fees and expenses as well as

administration expenses. Administration expenses include

costs incurred for the convening of any unitholders’ meeting,

as well as the preparation of the Deed and any report

pertaining to the REIT to the Unitholders. REIT also bears all

expenses relating to the listing exercise, which includes the

underwriting commissions, placement fees, brokerage, stamp

duty (if any) and registration fees in respect of units issued

pursuant to the Public Offering.

Tenant’s Mudharabah Profits Sharing

In addition to the fixed rental, the Tenants shall also pay a yearly amount not

later than two (2) months after the last business day of the financial period/year,

based on an agreed formula which is correlated to the performance of Crude

Palm Oil (CPO) and Fresh Fruit Bunches (FFB) prices realised and the actual

FFB and CPO productions of the Plantation Assets as provided for in the Ijarah

Agreements. The amount will represent a 50:50 sharing between the Tenant and

the Landlord of the net incremental income, based on CPO prices realised in the

year when compared to the Reference CPO price of RM1,500 per MT or such

other CPO price agreed for the subsequent additional tenancy terms.

Juristic Principle (Al-Qawaid Fiqiah) - “Al-Ghorm Bil Ghonm” (No Pain No

Gain)

Investment by Unitholders is based on Risk-Return Principle “ al-Ghornm bil

Ghonm” where:

1. Original investment not guaranteed

2. Income may rise or fall

3. May not receive any income at all

Unitholders liabilities on losses are limited to the amount invested while the

Manager has no liability.

Ijarah Agreement & Arrangement

i) Under the Ijarah Arrangements (Appendix 1), the Plantation Assets are let

back to the Vendors as Tenants for a cumulative tenure of up to thirty (30)

years.

ii) The Ijarah Arrangements for each of the estates and mills shall take the

form of a three (3)-year tenancy which are automatically renewable four (4)

times up to twelve (12) years andthereafter renewable for up to an

additional fifteen (15) years comprising five (5) additional terms of not more

than three (3) years each (save and except for the tenancy of the Malay

Reserved Land which are not automatically renewable)

iii) The Ijarah Arrangements for the first two (2) tenancy periods of three (3)

years each totaling (6) years cannot be terminated by the Tenants (save for

any breaches by the Trustee), save and except for Malay Reserved Land

iv) The tenancies of the Malay Reserved Land shall be for a period of not

exceeding three (3) years. Upon expiry of the tenancies, the Tenants and

the Trustee (on recommendation of the Manager) may enter into.

Performance of Al-Hadarah Boustead REIT

Distribution Per Unit, Net Profit and Rental Revenue

Based on prospectus dated 15 January 2007 and Annual Report for the year

2007, 2008, 2009 and 2010, the comparison is as Table 6 below:

Table 6: Comparison of Distribution Per Unit, Net Profit and Rental

Revenue

YEAR RENTAL REVENUE

(RM’000)

NET PROFIT

(RM’000)

DISTRIBUTION PER UNIT

(SEN PERUNIT)

ACTUAL PROSPECTUS ACTUAL PROSPECTUS ACTUAL PROSPECTUS AMT

(RM’000)

2007 55,185 30,308 49,804 32,852 10.91 7.38 48,848

2008 67,503 41,598 190,148 34,517 11.03 7.38 58,301

2009 71,031 41,593 83,170 34,821 9.30 7.38 51,801

2010 75,022 NA 82,075 NA 10.0 NA 55,700

Clearly, the actual Distribution Yield and Net Profit have outperformed the

financial projection in the prospectus. The average Distribution Yield for the last

three years (2008-2010) was at 10.11 sen, which was 37% higher than the

prospectus projection. In addition to dividend, the retail investors with IPO price

of RM0.99 have seen the share price appreciates (as at 6 May 2006) to RM1.43

or 44% (average of 11% a year).

KEY BENEFITS OF INVESTING IN REITs

The REITs like Al-Hadharah Boustead REIT, as an investment instrument

provides investors the benefit of participating in the steady rental yields of real

estates and other properties and the potential for capital upside in the long run.

Key benefits include:

(a) Higher dividend yield

REITs are required to pay out a minimum amount to qualify for tax transparency,

which in most cases is at least 90% of their income as distributions. This

provides investors with a regular income as compared to the dividend payout of a

listed company which is at the discretion of the company. Such a stable flow of

income coupled with the REITs’ low risk, appeal to certain types of investors,

such as pension funds and retirees.

(b) Transparent investment policy

REITs have transparent and defined investment policies and objectives in terms

of the types and location of properties/real estate that REITs can invest in,

whereas a property/real estate company is not restricted to doing business in

property/real estate investment and property development. The transparent and

defined investment policy allows REITs to trade at near NAV as they are

effectively capitalising income streams of the properties/real estate. i.e. the

valuation of an REIT is effectively similar to that adopted for valuing the

underlying properties/real estate.

(c) Liquidity

The REIT is a liquid investment when the REIT is listed as units of a listed REIT

and traded like any other stock on the stock exchange. This provides liquidity to

ownership of physical real estate assets.

(d) Diversification

REITs also offer the benefit of diversification arising from their holding of a

portfolio of high quality real estates with different tenancy lengths and

geographical locations, rather than a single real estate or building, as well as

management by experienced real estate professionals.

(e) Affordability

REITs provide investors an entry into the real estate market via participation and

investment in units of the REITs, which requires a smaller capital outlay relative

to purchasing similar real estates on their own.

(f) Long run inflation hedge

REITs may provide a hedge against inflation as when inflation rises, the value of

real estate and real estate securities can be expected to similarly increase.

(g) Stable returns

REITs typically have relatively stable cash flows since almost all of its revenue is

generated by rentals/rental payments under the terms of rental/tenancy

agreements, which are typically for specific durations.

(h) Professional management

REITs provide investors an opportunity to buy into real estates that are managed

by experienced and professional persons and can positively ecpect:

(i) Potential capital appreciation

In addition to distributing income at regular intervals, REITs also provide an

opportunity for capital appreciation via any increase in the values of the real

estate held in its portfolio.

(j) Ownership of investment grade real estates

REITs allow retail investors to participate in the real estate market. Subject to the

quality of the real estates, investors in an REIT are essentially akin to holding

stakes in large real estates, which would otherwise not be possible for a retail

investor.

REITs Benefits To Boustead Holdings Berhad

By selling assets to Al-Hadharah Boustead REIT, Boustead Holdings Berhad will

benefits as follows:

(i) Generates Available Cash

Through IPO, Boustead manage to generates up to RM230miliion with the

total cost involves around RM9million. This is cheap and reasonable source

of financing.

(ii) Maintain The Ownership

Only a partial of assets sold and Boustead Holdings Berhad still maintaining

majority shareholder as evidence in Annual Report 2010 where it holds

335,914,500 Unitholdings or 60.31%.

(iii) Tax Exemption

The corporate tax is exempted if Al-Hadharah Boustead REIT distributes at

least 90% of the net income.

RISKS OF INVESTING IN REITS

Although investment in REITs has low risk there were cases of delisted REITs as

a result of poor performance such as Amanah Harta Tanah PNB 2 (AHP2). It

was delisted from Bursa Malaysia on 11 May 2009 due to bad performance since

1997. Indeed, REITs are exposed to a variety of risks associated with

investments of, management of, and returns from the REITs.

(a) General risk

Economic, political and regulatory risks

The performance of the real estate industry is closely linked to the economic

environment. Any adverse developments in the political and economic

environment and uncertainties in Malaysia can materially and adversely affect

the real estate industry and hence the financial performance of REIT. These

include oversupply of commodities, the

risks of war, global economic downturn and unfavourable changes in the

Government’s policy such as changes in the rate of tax, methods of taxation or

introduction of new regulations.

Fund management risk

There is a risk that the manager may not adhere to the investment mandate of

REIT. Poor management of REIT may jeopardize the investment of unitholders

through loss of their capital invested. In addition, the selection of real estates,

which makes up the assets of REIT is a subjective process. Real estate selected

by the investment manager may yield a higher or lower return than the overall

real estate market.

Loan financing risk

Investors who take loans to finance the purchase of units in REITs must be

prepared to accept gearing risks, including but not limited to being forced to

provide additional funds to top up their loan margins account when the price of

units goes down, or suffer the higher cost of financing when interest rates trend

upwards. In addition, the returns on REITs are not guaranteed and may not be

earned evenly over time.

Risk of non-compliance

There is the risk that the manager and others associated with the fund will not

comply with the deed of the fund, the law that governs the fund, the Shariah or

the internal policies, procedures and controls, all of which may affect the

investment of unitholders.

(b) Investment risk

Dividend distribution not guaranteed

The net operating earnings earned by REIT depends on, amongst others, the

amounts of rental income received, and the level of real estate assets, operating

and other expenses incurred. If the real estates owned by an REIT do not

generate sufficient net operating earnings and cash flow, the REIT’s ability to

make dividend distributions will be adversely affected.

Capital market risk

The price of a REIT is subject to the volatility as well as the liquidity of the equity

market. The equity market is influenced by many factors, including but not limited

to economic growth, interest rates, capital flows and monetary and fiscal policies.

Risks associated with financing

Significant fluctuations in interest rates may have an adverse impact on the

financial performance of REITs and may lower income distribution to unitholders.

There is an inverse correlation between the interest rate and the distributable

earnings to unitholders.

Takaful risk

Real estate held by REITs could suffer physical damage caused by fire, flood,

earthquake or other causes, resulting in losses (including loss of rental) which

may not be fully compensated by Takaful. In addition, certain types of risks (such

as war and terrorist acts) may be uninsurable or the cost of Takaful may be

prohibitive when compared to the risk. No assurance can be given that material

losses in excess of Takaful proceeds will not occur in the future.

Risk relating to investments in the plantation estate

The yields of the plantation estates may be adversely affected by a number of

factors, including but not limited to:

(a) decrease in CPO prices that leads to reduced income generated from the

plantation estates, hence reduction in the income of the REIT;

(b) increase in replanting expenditure including but not limited to fertilizer cost

and cost of labour;

(c) the manager’s ability to provide adequate management and maintenance;

(d) inadequacy of Takaful cover for the plantation estates;

(e) changes in tax regulations;

(f) the Tenants’s ability to pay rental on a timely basis or at all;

(g) the terms on which tenancy renewals and new tenancies are agreed being

less favourable than existing tenancies;

(h) poor cost control resulting in higher operating and other expenses without a

corresponding increase in revenue;

(i) unexpected expenses incurred due to changes in statutory laws, regulations

or government policies which increase the cost of compliance with such laws,

regulations or policies and defects affecting the plantation assets which need

to be rectified, leading to unforeseen capital expenditure;

(j) amendment or revocation of the present tax incentives for REITs.

(k) Competition from other edible oils such as soya bean oil and rapeseed oil

which may affect global demand for palm oil.

Risk relating to investment in other authorised investments

Subject to the investment limits prescribed by the SC for the time being, apart

from real estate assets which fall under category of real estate, REITs are

permitted to invest in any of the following:

(a) single-purpose companies;

(b) real estate-related assets;

(c) liquid assets;

(d) non-real estate related assets; and

(e) asset backed securities.

Where REITs invest in stock market related investments, the following risks

become key considerations:

Market risks

Stock prices may fluctuate in response to activities of the individual companies,

general market sentiment, economic conditions and political and social

environment. Such fluctuations in the investment portfolio will cause the NAV of

the REIT or prices of units to fall as well as rise.

COMPARISON WITH OTHER FORMS OF INVESTMENTS

All investments carry some form of risk-return trade-off. Some of the investment

alternatives are as follows:

Cash and fixed deposits

Fixed deposits generally provide a fixed rate of return and can provide a stable

stream of income. The range of deposit products available is quite extensive,

ranging from simple overnight deposits at a cash rate, to more long term,

structured deposits, like a two-year fixed deposit. Whilst deposits with a licensed

financial institution can be considered almost risk free, there still exists a risk of

default. Cash and fixed deposits do not present any opportunity for capital gain,

and depending on the inflation rate, may not provide a positive real return.

Investment in bonds

Investments in bonds generally provide a fixed rate of return and can provide a

stable stream of interest income. Bond prices move inversely to its yield to

maturity. Bond investors are subject to a number of risks, including credit risk and

interest rate risk. Bonds are generally less risky than shares but riskier than cash

or fixed deposits.

Direct investment in real estates

Investments in real estate can provide a regular and stable stream of income and

capital gains. However, such investment typically requires a large capital outlay,

and is therefore generally available only to high net worth individuals,

corporations or institutions. Movement in real estate prices can be cyclical and

depending on the timing of the investment, can result in capital losses. Large

capital outlays also limit the ability to diversify risk. Further, investments in real

estates are generally less liquid than investments in marketable shares or bonds

and may be difficult to exit in a timely manner.

Investment in shares

Investment in shares is subject to market risk and specific risks associated with

company or business and may result in either capital gains or losses. Share

prices can be volatile, and may not always reflect the fundamental value of a

company. Investment in shares may or may not provide a regular stream of

dividends. Shares are generally more risky than bonds or fixed deposits.

Financial derivative products

Financial derivative products are used to manage investors’ exposure to

unexpected price fluctuations in, amongst others, the commodity, equity and

bond markets and derives its value from an underlying instrument such as

interest rates, indices and share

prices. As these underlying instruments can be volatile at times, this form of

investment

has very high investment risks. Financial derivative products can also provide an

avenue to earn very high returns or losses without large capital outlays. In

summary, risk and return comparison for the various investments may be

summarized as follows:

Types of investment

Risk level Expected return

level

Cash Low Low

Fixed deposit

Bonds

REITs

Direct investment in real estates

Investment in shares

Financial derivative products High High

8. CONCLUSION

The introduction of Islamic REITs provides an investment opportunity for

investors wishing to invest in real estate through Syariah-compliant capital

market instruments. International investors seeking Syariah-compliant

instruments can buy into Islamic REITs without the need for direct ownership of

such properties. Islamic REITs also enhances the competitiveness of the

Malaysian Islamic capital market by attracting Islamic investors globally. It also

broadens and depends the Islamic product base and encourages savings to be

channeled into investments in Syariah-compliant assets.

Undoubtedly, Islamic REITs, with their relatively stable returns, provide investors

with a new Shariah-compliant investment options. Islamic REITs is an investment

instrument not only potential in providing investors with a 'piece of mind' in terms

of complying with God's law but equally important the benefits of participating in

the steady rental yields of real estates and other properties. Islamic REITs

typically have relatively stable cash flow since almost all of its revenue is

generated by rental payments. Islamic REITs also offer the benefit of

diversification arising from their holding of a portfolio of high quality real estates

with different tenancy lengths and geographical locations, rather than a single

real estate or building.

More importantly it promotes financial inclusion by providing investors an entry

into the real estate market via participation and investment in units of the Islamic

REITs, which requires a smaller capital outlay relative to purchasing similar real

estate on their own. Indeed, the emergence of Islamic REITs should help to

propel the expansion of Islamic capital market in Malaysia. For Malaysian Islamic

REITs to be truly successful, they also have to appeal to the vast international

investing community. In this regard, the various tax incentives and regulatory

framework introduced by the Malaysian authorities are perceived as a move in a

right direction towards realising the noble vision of becoming the world’s Islamic

financial and capital hub.

Appe

ndix 1

SALIENT TERMS OF THE SPA(s) AND IJARAH AGREEMENTS

6.1. SPA(s)

The salient terms of the SPA(s) between the Vendors and the

Trustee, on behalf of Al- Hadharah Boustead REIT are as follows:-

The following sets out some of the salient terms of the SPAs:-

(a) the Vendors have agreed to sell and the Trustee (acting as a

trustee for the Fund) has agreed to purchase the Plantation

Assets free from all encumbrances subject to the lease and

to all conditions, express or implied, and restrictions in the

documents of title to the Plantation Assets;

(b) the purchase consideration of the Plantation Assets will be

settled partly by way of Units to be issued by the Fund and

partly by cash (other than Lepan Kabu Estate and Lepan

Kabu Palm Oil Mill which will be fully settled by Units). The

cash consideration will be settled by way of the proceeds

arising from the Public Offering. The cash portion of the

purchase consideration will be settled by the Fund within

fourteen (14) days from the date of listing and quotation of

the Units on the Main Board of Bursa Securities (which

fourteen (14) days shall not be later than two (2) months

from the completion date of the SPAs) and the balance of

the purchase consideration (not settled in cash) will be

settled by the Fund after the completion date of the SPAs

but prior to the listing of the Units. In the case of the Lepan

Kabu Estate, the purchase consideration will be fully settled

by the Fund by way of procuring the crediting of such

number of Units to the relevant Vendor on the completion

date of the SPA in respect of the sale and purchase of the

Lepan Kabu Estate;

(c) the SPAs are subject to various conditions precedent as

stipulated in the SPAs as follows:-

(i) the approval of the SC (Equity Compliance Unit) to

the sale and purchase contemplated under the SPAs

having been obtained on terms acceptable to the

Vendors and the Trustee, each acting reasonably,

which approval was obtained on 22 November 2006;

(i) the approval of SC for:-

(aa) the proposed establishment of the Al-Hadharah

Boustead REIT pursuant to the Deed on terms

acceptable to the Manager comprising the

issuance of the Units, the appointment of the

Manager and the Purchaser as trustee of the

Al-Hadharah Boustead REIT;

(bb) the proposed appointment of the Directors and

Chief Executive Officer, the members of the

Investment Committee of Al- Hadharah

Boustead REIT and the Shariah Adviser;

(cc) the Public Offering;

(dd) the proposed admission, listing and quotation

of the Units to be issued by Al-Hadharah

Boustead REIT on the Main Board of Bursa

Securities;

(ee) the proposed exemptions / variations from the

Guidelines of Real investment Trusts issued by

the SC on 3 January 2005;

this was obtained on 22 November 2006;

(iii) the approval to the sale of the Plantation Assets to the

Trustee at the purchase consideration as set out

above and on the terms contained in the SPAs from

the shareholders of the Vendors and where

applicable, the shareholders of the holding company

of the Vendors which is listed on the Bursa Securities

having been obtained, which was obtained on 23

November 2006;

(iv) the endorsement by the Shariah adviser on the

structure of the transaction as contemplated under the

SPAs, the Ijarah Agreements and the Declaration of

Trust;

(v) the Purchaser being satisfied that the Vendors have

made applications to the Estate Land Board for its

approval to the sale and transfer of the Plantation

Assets to the Trustee; and

(vi) the Purchaser being satisfied that the Vendors have

make all necessary applications to the relevant land

authority to change the category of land use and/or

express conditions imposed on the Plantations Assets

as referred to in the SPAs.

(d) the SPAs are further subject to various conditions

subsequent, including the obtaining of the consent of the

Estate Land Board pursuant to the National Land Code for

the sale and transfer of the Plantation Assets by the Tenants

to the Fund. The Tenants shall forthwith upon the execution

of the SPAs, submit, amongst others, all necessary

applications to the Estate Land Board and obtain the said

approval of the Estate Land Board for the transfer of the

Plantation Assets to the Fund and present the transfer in

respect of the Plantation Assets for registration within three

(3) years from the completion date of the SPAs;

(e) if for any reason the sale and purchase of any of the

Plantation Assets shall not take place in accordance with the

SPAs, the parties may (but shall not be obliged to do so)

subject always to the approval of the SC, consider a partial

sale of the Plantation Assets to the Trustee on such terms

and conditions acceptable to the SC and the parties;

(f) the Vendors have made specific representations and

warranties in respect of its ownership of the Plantation

Assets, which survive the completion of the SPAs;

(g) in the event that the conditions subsequent referred to above

are not obtained within the stipulated period, the Vendors,

Boustead Holdings or any subsidiary of Boustead Holdings

may substitute or procure the substitution of the affected

Plantation Assets (“Affected Plantation Assets”) with a new

plantation asset(s) or pay a cash sum equivalent to the

purchase consideration of the Affected Plantation Assets or

a combination of new assets and cash to the Trustee, failing

which the agreement on the sale of the Affected Plantation

Assets (but not all the Plantation Assets) shall be terminated;

(h) in the event that the transfer of the Plantation Assets cannot

for any reason whatsoever not attributable to the Vendors or

the Trustee, be registered in favour of the Trustee and in

such event if a substitution of the said Affected Plantation

Assets is not possible, the parties shall do all things as are

within their reasonable control to procure the registration of

the transfer within a stipulated period from the date of the

parties being notified of such non-registration of the transfer,

failing which the Trustee shall forthwith be entitled to

terminate the agreements in respect of the sale and

purchase of the relevant Plantation Assets which cannot be

transferred (but not the other unaffected Plantation Assets);

(i) upon termination of the SPAs or the agreements in respect

of the sale of the Affected Plantation Assets, the relevant

Tenants shall refund a sum equivalent to the purchase

consideration (in the event that the same shall have been

paid to the relevant Tenants of the Affected Plantation

Assets) to the Fund and subject to the receipt of the said

purchase consideration by the Trustee, the declaration of

trust, the power of attorney and the

memorandum/memoranda of deposit in respect of the

Affected Plantation Assets shall forthwith be terminated

whereupon the titles shall be returned to the relevant

Tenants and the possession of the Affected Plantation

Assets shall be re-delivered to the said Tenants; and

(j) upon the execution of the SPAs, the Trustee shall be entitled

to lodge private caveats on the titles to the Plantation Assets

(save and except in the case of Lepan Kabu Estate and

Lepan Kabu Palm Oil Mill which comprise certain parcels of

Malay Reserved Land where no private caveats will be

lodged).

6.2 Ijarah Agreement(s)

The Ijarah Arrangement as envisaged under the Ijarah Agreements

will take effect on the completion date of the SPAs.

The following sets out some of the salient terms of the Ijarah

Agreements:-

(a) the Trustee as Landlord lets the Plantation Assets to the

Vendors as Tenants for a term of three (3) years

commencing from 1 January 2007 (“Term”) subject to the

terms and conditions of the Ijarah Agreements. In the case

of Lepan Kabu Estate and Lepan Kabu Palm Oil Mill, the

term of three (3) years will commence from the completion

date of the SPA relating to Lepan Kabu Estate and Lepan

Kabu Palm Oil Mill;

(b) in consideration of the letting of the Plantation Assets by the

Landlord to the Tenants for the Term and subject to the

provisions of the Ijarah Agreements, the Tenants shall pay to

the Landlord the following payments in arrears:-

(i) Fixed Rent as set out in the Ijarah Agreements which

shall be payable in arrears on a two-monthly basis

and on the last business day of every two (2) calendar

months. The first payment of the Fixed Rent shall be

due and payable immediately on the last market day

of the second calendar month immediately after the

commencement date of the Term and thereafter on

the last market day of every two (2) months.

(ii) a yearly amount calculated in accordance with the

formula set out in the Ijarah Agreements on the last

business day of each financial period/year of the Fund

and payable not later than the expiry of two (2)

months thereof. The first payment of the

Performance-Based Profit Sharing shall be due and

payable not later than the expiry of two (2) months

after the last business day of the financial year during

which the purchase consideration payment date

occurs.

(c) On the date of receipt of the purchase consideration by the

Tenant as vendor under the SPA in relation to the Plantation

Assets, the Tenant shall pay one (1) month’s rental deposit

as security for the due performance and observances by the

Tenant of all the several covenants, conditions, stipulations

and agreements on the part of the Tenant under the Ijarah

Agreements;

(d) in the event that the Landlord shall, at any time during the

continuance of the Term, desire to sell in whole or in part of

the Plantation Assets (“Offer Property”), the Landlord

hereby covenants with the Tenants that the Landlord shall

give the Tenants or Boustead Holdings any/or any of the

subsidiaries of Boustead Holdings (“BHB Group Companies)

as may be notified by the Tenants to the Landlord in writing,

the first right of refusal to purchase the Offer Property by

giving notice to the Tenants or any of the BHB Group

Companies of such desire to sell at the prevailing market

price and upon such other terms and conditions as may be

mutually agreed between the parties. The Tenants or as the

case may be any of the BHB Group Companies, shall within

fourteen (14) days of receipt of such notice make an offer to

purchase the Offer Property failing which the Landlord shall

be free to sell the said Offer Property to any third party at

any price subject to the applicable REIT Guidelines or where

the first right of refusal is not exercised due to the Tenants

not accepting the price offered, at the price not lower than

the price offered to the Tenants or any of the BHB Group

Companies.

(e) in the event that any Plantation Assets is substituted by

another plantation asset or any Plantation Assets is

disposed off by the Landlord, the tenancy of the affected

Plantation Assets envisaged under the Ijarah Agreements

shall be deemed varied accordingly to the extent of the

substitution or disposals of the affected Plantation Assets;

(f) if:-

(i) the event referred to in paragraph (e) above, the rent

shall be adjusted accordingly in accordance with a

formula set out in the Ijarah Agreements to reflect a

sum equivalent to the value of the rent proportionate

to the ratio of the value of the substituted property or

as the case may be, the portion of the rent that is

attributable to the Offer Property; or

(ii) the Landlord carry out or cause to be carried out the

development or construction of any major

infrastructure, major mill upgrades, new mills and/or

buildings on the Plantation Assets involving a sum in

excess of RM1.0 million per transaction, the rent shall

be adjusted accordingly to reflect a sum equivalent to

the cost of financing incurred in relation thereto based

on the base financing rate of Malayan Banking

Berhad plus one (1) per cent;

(g) in the case of the tenancy of the Plantation Assets (other

than the Malay Reserved Land), either party may serve a

notice on the other at least three (3) months before

expiration of the term of the tenancy to renew the tenancy of

the Plantation Assets (save and except for the Malay

Reserved Land) and in any of this case, if the Landlord is

satisfied that there is no existing breach or nonobservance of

any of the covenants on the part of the Tenants under the

Ijarah Agreements or if there is such a breach or non-

observance, the breach or nonobservance of which is not, in

the opinion of the Landlord, material, the Ijarah Agreements

shall upon the expiry of the term be automatically renewed

for up to twelve (12) years comprising four (4) additional

tenancy term of not exceeding three (3) years each and

thereafter, for an additional fifteen (15) years comprising five

(5) tenancy terms of not exceeding three (3) years each, at

such rent as may be mutually agreed between the Landlord

(at the recommendation of the Manager) calculated based

on the following formula:

[A – B] X [C X D X E]

Where:

A: The amount that must be agreed between the

Landlord and the Tenants based on the average

historical, prevailing and expected future crude palm

oil price per MT

B: The average projected production cost per MT for the

next three (3) years

C: The average projected yield per hectare for the next

three (3) years

D: The average projected mature hectares for the next

three (3) years

E: The average projected extraction rate for the next

three (3) years

(h) the Landlord covenants, amongst others, with the Tenants

that during the term of the tenancy, the Landlord shall, at the

costs and expenses of the Fund:-

(i) pay all existing and future quit rent, assessment, tax,

rates and any other outgoings payable to local and

municipal councils, and other authorities in respect of

the Plantation Assets;

(ii) insure or pending the transfer of the Plantation Assets

in favour of the Landlord, cause the Tenants to take

up workman’s compensation Takaful coverage and

Takaful coverage in respect of the Plantation Assets

and all buildings erected on the Plantation Assets

against fire or any damage or death or injury to any

person using or entering or occupying the premises of

the Plantation Assets; and

(iii) replant or cause to replant, the crops in the Plantation

Assets in accordance with such replanting

programmes acceptable to the Landlord and the

Tenants (at the recommendation of the Manager).

(i) if the SPAs are terminated in accordance with the terms of

the SPAs or if the Tenants are in breach of the terms of the

Ijarah Agreements, the Landlord shall be entitled to

terminate the Ijarah Agreements. In this respect, where the

Ijarah Agreements are terminated due to any breach by the

Tenants of the terms therein contained, the Landlord shall be

entitled to re-enter upon the Plantation Assets and forfeit the

security deposit; and

(j) in the case of the tenancy of the Plantation Assets (other

than the Malay Reserved Land), the Tenants shall not be

entitled to terminate the Ijarah Agreements during the first

two (2) tenancy terms unless the Landlord shall be in

material breach of the terms of the Ijarah Agreements.

7. FUTURE PROSPECT AL-HADHARAH BOUSTEAD REIT

The Directors of the Manager believe that the liberalization introduced

under the revised REIT Guidelines (which were issued on 3 January 2005)

coupled with the tax exemption of REITs gazetted in December 2004 and

the new tax incentives relating to REITs as announced in the 2007

Budget, will encourage the growth of listed REITs in the country.

The prospects of Al-Hadharah Boustead REIT are mainly dependent on

the growth of the Malaysian economy, the plantation sector, global

commodity market, as well as the development of REITs in Malaysia. The

Plantation Assets to be acquired by the Fund have encouraging long-term

prospects for the following reasons:

(i) Demand from China is expected to augment further, underpinned

by its growing population and the lifting of import quotas for palm oil

according to the World Trade Organisation’s guidelines;

(ii) There is greater health awareness on the negative effects of trans-

fatty acids. Transfat labeling requirements in the US which took

effect on 1 January 2006, coupled with the European Union’s

aversion to genetically modified organisms, weigh in favorably for

CPO as more food companies switch over from soybean oil.

(iii) Escalating petroleum prices have spurred the usage of biofuels. For

instance, the European Commission in May 2003 issued a directive

on the promotion of the use of bio-diesel and proposed a plan to

eventually achieve 20% replacement of fossil fuels with non-fossil

fuels by 2020.

The Plantation Assets which are mainly located in Peninsular Malaysia

have good development potential that can be realised as future capital

gain.

With the experienced management team of the Manager in the palm oil

industry, cost effective plantation management and encouraging long-term

prospects in the palm oil industry, the Manager believes that the current

environment augers well for Al-Hadharah Boustead REIT and this in turn

will enhance its ability to improve its future earnings.

With the establishment of the Plantation Assets, the Al-Hadharah

Boustead REIT is confident of the future prospects for the palm oil

industry. In order to ensure a sustainable and stable distribution

income/yield and long term growth of NAV per Unit to the Unit holders, the

Manager intends to undertake the following plans:

(a) working closely with the Tenants and the Plantation Adviser to

implement an

effective and prudent replanting programme and capital expansion

programme to improve the production yield of the estates and

efficiencies of the mills; and

(b) continuously seeking for higher yield plantation assets to complement

the Fund's existing portfolio of Plantation Assets.