I slamic real estate investments are equally, but not more attractive than their conventional equivalents. Most are in commercial property, but this cannot include property used for non-halal purposes, the major exclusion being the premises that conventional commercial banks occupy. However, it could be argued that the exclusions have focused the minds of investors. There have been some highly profitable, but also socially deserving investments in student residences and care homes. This is very encouraging. Commercial property is a sound asset class that should be included in Shariah compliant portfolios, not least because the property cycle differs in timing from traded equity cycles, providing useful diversification.
PROFESSOR RODNEY WILSON
I n order to answer this question we have to examine what “conventional” real estate investments are and the nature of the returns to which they give rise. There are essentially two types of conventional investment in real estate: The former – Mortgage-Backed Securities – are growing rapidly in popularity as credit institutions bundle mortgage portfolios and sell them off to investors interested in a certain return with limited exposure to capital loss. However, this class may be absolutely excluded as halal, leaving the latter, which are again divided between investment in property companies and other new types of vehicle – such as Real Estate Investment Trusts (REITS) – which becoming increasingly popular. Both allow participation in the capital gain which we have come to expect from real estate investment over time, but the latter are more advantageous in terms of the inherent cost structures and particularly tax transparency. The almost totally unappreciated truth of the matter is that the greater part of the gain in real estate values derives from the fact that land prices are driven up by the availability of “deficit-based” credit created by the current “fractional reserve” banking system. This leads to unearned capital gains to those lucky enough to “own” land. In a more equitable system a “Commons” such as land would be held in trust on behalf of the community, with those having exclusive private use of this Commons compensating the community through a “land rental” payment. This is, of course, the basis of the Islamic belief that land and other “commons” (such as “fire” = energy and water) can be absolutely “owned” only by God; that we are merely stewards, and it is arguable that “zakat” in respect of such ownership may be characterized as compensation to the community. It is an interesting question for debate what the Prophet (s.a.w.) would have made of the “privatization” of water and the relatively modern concept of exclusive “ownership” of knowledge, i.e. the concept of “intellectual property.” The value of land in fact derives from its rental value, and this is a function of the capital investment made in the land by the “owner,” as well as investment made by the community in infrastructure such as transport access and utilities, which give rise to a “location value.” “Asset-based” investment vehicles simply package both “ownership” and the streams of property rentals which combine both the value of the land and the capital invested in the land. It is my thesis that the closer such vehicles approach the revenue-sharing principles of Islamic investment, then the more efficient and effective they become. If my thesis is correct and it is the case that an Islamic enterprise model is optimal, then it follows that the answer to the question posed will be that Islamic investment in real estate is more attractive than conventional investment using defective and conflicted legal forms such as companies and “trusts.” CHRIS COOK Principal Partnerships Consulting LLP, London
W orldwide, few markets have proved as dynamic as the Islamic finance sector. The amount of Shariah compliant capital investments is estimated at US$500 billion – US$800 billion in over 70 countries, with annual double digit (15%) growth expected over the next years and decades. According to official figures released by the Arab Monetary Fund (AMF) in May last year, capital outflows from the GCC during the past 10 years amount to approximately US$240 billion. More than 60% of these outflows emanated from Saudi Arabia, and property markets in the US and Europe were the prime beneficiaries of Arab capital seeking overseas opportunities. Direct investment through real estate funds can be an ideal building block for enhancing and safeguarding the assets of an investor’s portfolio. They are particularly beneficial to investors who are heavily concentrated in highly market sensitive asset classes with low interest rates and subject to volatility in equity markets, and are therefore a good way of diversifying a portfolio where property constitutes a credible instrument. Property finance has attracted particular interest from Muslim investors, since it is a tangible (real) asset which provides them with a fixed coupon in the form of rental income. It is the asset class which can be structured to yield cash flows closest to a fixed income instrument without vitiating the principles of riba. The guiding principle for such investments is that the investment must be halal, with ethical principles being upheld and compliance with the Shariah laws as an overriding concern. From a 3% share in 1997, Islamic investments now constitute over 25% of total cross-border investments into European property. Most of this capital has been invested into property in the UK, France and the Benelux. But strictly speaking, comparing Shariah compliant real estate investing and conventional real estate investing is not an apples to apples comparison and there may be tracking error in comparing the two, as the investment criteria applied are not the same. Islamic investing applies the materiality test to exclude activities which are not Shariah complaint such as gambling, liquor selling outlets and hotels. It is often argued that Shariah structures and double tax incidence on, such structuring often reduces returns. But today, the industry has evolved with screening mechanisms and legal frameworks to structure transactions in a Shariah complaint, cost-effective manner without compromising returns. As explained earlier, there is a pent-up demand for Shariah compliant real estate investing and the industry has been evolving to cater to such needs. Shariah compliant real estate investing can be compared to ethical or socially responsible investing in conventional real estate where investors are willing to accept lower returns if certain investment criteria are satisfied. So, when compared to conventional real estate, the yardstick used for such comparison is not only limited to returns available from such investment, but whether it also meets certain screening/investment criteria which determine the investment selection process. Mr.Ziyad Arekat General Manager/ Solidarity Asset Management
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