In many ways, commercial real estate is an ideal asset class for investors who not only want to diversify their investment holdings, but also who wish to remain compliant with Muslim religious beliefs. Like a number of “ethical” investment vehicles, such as green and sustainable funds Shariah law includes strict criteria for investment. It prohibits riba (or interest) and gharar (uncertainty, as in short selling, speculation and derivatives) – both problems that property investing avoids.
What's more, all transactions and practices have to be certified and passed by the Shariah board, a panel of respected Shariah scholars with expertise in Islamic law. Muslims are forbidden from making investments connected with arms or munitions, alcohol, gambling, tobacco, pork products, pornography or conventional financial services. Discovering whether a commercial property has any connection with these forbidden products is generally a lot more straightforward, for example, than finding out the same thing about shares in publicly listed companies.
In July, international property consultants King Sturge released research carried out by the Royal Institution of Chartered Surveyors (RICS) to look into the dynamics of Shariah compliant investment in real estate.
It found that Middle Eastern investment in European real estate has seen massive acceleration over the last decade, with the Dubai International Financial Centre estimating that £827 million ($1.5 billion; €1.2 million) was invested in European property in 2001. The UK has seen the lion's share of that capital, with 91 percent invested in the region, a 225 percent increase over the previous year.
In terms of sectors, approximately three quarters of Shariah funds invest in offices and industrial property, while two thirds invest in logistics and distribution, with half investing in retail and residential property. In terms of future investment trends, industrial is expected to remain the most popular choice.
The results of the survey were good news for Europe, which 85 percent of respondents found favourable for Shariah investment, while the UK was an almost universally popular destination at 94 percent. France and Germany were also favored regions in Northern Europe, as was Spain in Southern Europe and the Czech Republic in Central Europe, while only 47 percent favored the US.
The UK found favor due to its ‘Shariah friendly environment’, in terms of human capital and expertise, institutional and legal framework and political environment. London, in particular, was identified to have the most relevant expertise by over 90 percent of respondents.
Less welcoming was the news that a similar proportion (85 percent) believe that there is a lack of understanding about Shariah funds, both in the general public and the real estate market. However, that is expected to improve over time as Shariah funds attain more exposure.
However, educating the market will be essential before opportunities are missed. Angus McIntosh, partner and head of research at King Sturge was not available for a comment but said in a statement: “UK business is now familiar with ethical funds but there is a real need to find out more about the growing opportunities for Shariah compliant real estate investment and the nature of the market as this area represents a crucial opportunity for many businesses.”
A key consideration is transparency. Due to the strict nature of the funds, 41 percent considered transaction transparency important to clarify Shariah compliance. For instance, 39 percent wanted to know the activity of tenants, to ensure that the assets are ‘halal’.
Costs and fees also have to be similar to conventional, or non-Shariah compliant investments, otherwise price differences can lead to an inability to market Shariah funds. However, these potential obstacles can ultimately work in a Shariah fund's favour – a fund set up according to Shariah principles is automatically implied to be transparent, the board's backing working as a badge of authenticity.
The biggest stumbling block concerns balancing reliable and fast decision-making with the constant scrutiny of all property transactions, portfolio and tenant selections required by Shariah law. While 47 percent believed that Shariah funds do understand the need for clear and efficient decision-making arrangements, many agree that delays are due to Shariah board debates.
Nevertheless, Shariah compliant funds are flourishing, both in Europe and beyond. Last September, Kuwait Finance House (KFH) launched a €400 million Shariah compliant fund to invest in property in Germany, France, the Netherlands and Belgium – it had previously raised a £250 million fund focused on the UK. In June of this year, KFH partnered with Singapore-based Pacific Star Group to set up a $600 million Islamic real estate fund targeted at customers in Asia, and the same month saw HSBC Amanah launch a $200 million real estate fund concentrating primarily on North America.
Double hire at Lehman
Lehman Brothers has appointed two new executives to its European private equity real estate arm. John McCarthy, a former partner with O'Connor Capital Partners, has joined the firm as managing director and head of European asset management. He will also be responsible for Lehman's mezzanine funds. Jonas Grander, who formerly headed the Stockholm-based Scandinavian operation of Doughty Hanson Real Estate Fund, has joined the firm as executive director and senior investment officer. Both will be based in London and will report to Gerald Parkes, the head of Lehman's European real estate private equity group.
Aznar joins Warburg
Pedro Aznar has joined the real estate team in the London office of private equity giant Warburg Pincus. He will work on the firm's real estate investment activities across Europe. Aznar previously spent six years with the Morgan Stanley Real Estate Funds, where he had responsibility for German acquisitions. He was also active in other European markets, including Spain and Scandinavia. Prior to Morgan Stanley, Aznar worked as a management consultant with Bain & Company and a project manager with Daimler Benz. Warburg's European real estate investments have included a $200 million (€161 million) commitment to Resolution II, a fund created to buy, develop and manage commercial investment properties in the United Kingdom and Europe. The firm has invested $1 billion of equity in real estate globally and has recently been increasing its focus on the asset class.
TKP appoints RE head
TKP Pensioen, the Dutch pension fund manager, has appointed Robert-Jan W. Tel as its head of real estate investments. He replaces Koos Gerlofs, who retired at the beginning of July. Tel has been with TKP since 1999, when he joined as a senior portfolio manager responsible for indirect unlisted real estate investment. He has also been involved in managing the group's real estate fund-of-funds, TREF. In his new role he will be responsible for a team of three, including newly hired portfolio manager Harm-Zwier Medendorp. The third member of Tel's team has yet to be appointed.
Otis Spencer, the former ABP real estate executive who recently joined US property firm Heitman, has been promoted to director of portfolio management. In his new role, Spencer, who is based in Warsaw, will head Heitman's pan-European asset management team, as well as continuing to act as portfolio manager for the new €350 million ($429 million) Heitman Europe Property Partners III fund. Spencer was previously a senior portfolio manager on the Dutch civil service pension fund's real estate team. Heitman has also named Edward Kisala as director of acquisitions, responsible for its Western and Central European acquisitions teams.
Citigroup poaches from Deutsche
Nick Jacobson, the former head of European and Asian real estate investment banking at Deutsche Bank, has defected to Citigroup. Following a three month leave he will join the bank's real estate and lodging investment banking team in October as head of Europe, Middle East and Africa. Before joining Deutsche in January 2001, Jacobson worked as a managing director in the real estate investment-banking group at JP Morgan and as European head at ABN AMRO. In his new role he will report to the Global Head of Real Estate and Lodging, James Brent. The appointment is part of the restructuring of Citigroup's real estate team initiated in April, following the loss of several of the bank's senior real estate bankers to Merrill Lynch.