Shariah Real Estate Finance Goes Global, published in Global Property News

Published in Global Property News

Demand for Shariah-compliant real estate finance - permissible under Islamic law - has reached such a peak that new funds and vehicles are being established at an unprecedented rate in a wide range of locations.

Islamic finance as a whole is thought to be worth upwards of $800bn, while Shariah-compliant assets held by investors from the Gulf states and Asia Pacific total $267bn, according to Emirates Business publication. The number of Shariah-compliant funds is expected to reach 1,000 by 2010.

In Japan, the finance ministry has tabled a proposed amendment to the country's banking law to allow Japanese banks to offer Islamic finance products. It is already possible to invest in 'sukuks' (Shariah-compliant bonds) in Malaysia, with Hong Kong, Indonesia and Singapore soon to follow.

Kuwait's Boubyan Bank became the first Islamic bank to offer a Shariah compliant real estate financing structure in Japan earlier this year, known as the Boubyan Global Real Estate Fund, in conjunction with two Japanese real estate partners. The fund took two years to structure, since no Shariah compliant financing previously existed in Japan. But the lure of billions of dollars of potential investment from the Gulf was enough for any qualms to be put aside.

In a nutshell, Shariah compliance depends on no interest being earned or paid, that there should be low risk to investments, and they should not involve gambling, alcohol, tobacco, cinema, weapons, pork or pornography. Instead of interest, agreements involve earning profits by charging rentals on leased assets ('ijarah'), on purchase and resale at a higher value ('murabahah'), asset-backed bonds with proportional ownership ('sukuk') and profit and loss sharing according to proportional investment ('musharakah').

The potential disadvantages of Shariah-compliant finance are that each investment theoretically needs to be approved by a panel of scholars, which can be time consuming, and that the purchase and resale model of murabahah can lead to double taxation through stamp duty.

The UK has already taken steps to remove this pitfall, helping to make London a hub of Islamic finance. Several new funds have been established in the past couple of years, and many UK banks now offer Shariah-compliant finance for real estate purchase and investment.

Some established real estate funds are now converting themselves into Shariah-compliant vehicles in order to capitalise on the surging demand. Singapore-listed Cambridge Industrial Trust is one example. National Australia Bank - the country's largest - is to invest $35m in the fund, which will be among the first Shariah-compliant Real Estate Investment Trusts (Reits) in the world and certainly the first in Singapore. Its current portfolio has 43 properties valued at $677m.

Besides the attractions of finding a home for oil-rich investors to place their money, Shariah-compliance is viewed by some as an ethically worthwhile act in itself. "It represents an opportunity for the real estate profession to contribute positively to a more ethical approach to investment and development," says Stephen Brown, head of research at the Royal Institution of Chartered Surveyors in London.