Sabana Reits sukuk is the first
sukuk ever to be convertible into units in a reit
(real estate investment trust). It could signal
Singapores push to become an Islamic financial
Although Singapore boasts arguably the most complex reit
markets in Asia, Sabana was the first to issue a
shariah-compliant reit listed on the Singapore
Exchange (SGX). It has now issued the first convertible
sukuk on the SGX.
The issuance of the convertible sukuk could herald
the issue of more sophisticated shariah-compliant
instruments in Singapore, perhaps putting it in competition
with Malaysia as a centre for Islamic finance.
This transaction highlights how reits can have access
to a wide variety of Islamic financing structures, including
complex and tailored sukuk structures, to meet their
financing needs, said Allen & Gledhill partner
Suhaimi Zainul-Abidin, who advised Sabana Reit.
Deal counsel explained that the sukuks
structure was specifically tailored for property acquisitions.
Zainul-Abidin said that it is unlike the typical
ijarah or wakala-based sukuk
structures where the assets generating the profits would
usually start off as assets owned by the obligor or group
Instead it combined the concepts of murabaha,
ijarah and wakala so that the sukuk
was issued to acquire real estate assets. These formed some of
the trust assets that generate profit for sukuk
Gregory Man, senior associate at Clifford Chance who
represented Morgan Stanley as sole lead manager and
book-runner, explained that a wakala was at the heart
of the transaction.
We then needed to execute the transaction in two
stages because Sabana reit required the funding from this issue
to acquire the real estate asset that would ultimately underlie
the sukuk, Man added. We entered into a
murabaha transaction to provide Sabana with its
acquisition funding, and then the asset was injected into the
structure so that the transaction going forward was
part-murabahah and ijarah.
Man commented that the most complicated aspect of the deal
was to allow flexibility in the structure to account for
convertibility features that convertible bond issues expect to
see in a conventional convertible deal. To meet expectations,
counsel had to work on the deals underlying
More convertible sukuk ahead?
More convertible sukuk issues may be forthcoming.
The last convertible sukuk issue was in 2009, and the
lull in issuances is due to both economic conditions and
questions arising from the instruments compliance with
However structures have developed as
shariah-compliant instruments become more complex, and
this transaction could be the beginning of a trend.
Zainul-Abidin said that this deal is in line with recent
trends in various jurisdictions to
encourage the establishment of shariah-compliant Reits and
Now that other these entities have seen convertible
sukuk being done again, they may consider following
suit. Man said, Those issuers for whom it would make
sense to issue a convertible instrument could look to either
convertible bonds or convertible sukuk.
Singapore as an Islamic finance hub
Singapore is looking towards becoming an Islamic finance
hub, but is competing with Malaysia, which boasts the largest
and most well-developed Islamic finance market in the world.
This year Malaysia introduced the innovative
collateralised murabahah instrument and saw the
first sukuk issuance from the CIS region listed on Bursa
Man added that it will be difficult to displace Malaysia as
the main centre in Asia for Islamic finance. The history
and maturity of Malaysia have contributed to it being the
largest Islamic finance market in the world.
But Zainul-Abidin said that Singapore is catching up, and
has introduced significant changes in terms of tax equalisation
and other permissive regulations which should effectively
remove any barriers to Islamic financing in or through
However, for the time being, Malaysia is at the forefront of
Islamic finance. Given the amount of liquidity in the Malaysian
ringgit market at present, Man said that it wouldnt
surprise him if he saw more foreign issuers looking to tap some
of the liquidity in Malaysia through ringgit issues. Equally,
there appears to be less incentive for domestic issuers to
issue abroad at the moment.