The Islamic financial services industry has seen strong growth in recent years, in particular a rise in prominence of sukuks (Islamic bonds), takafuls (Islamic insurance) and Sharia-compliant funds. According to Islamic Financial Services Board, an international standard-setting organization, there were 1,029 Islamic funds managing $64bn in assets in 2012; 45% of the AUM originated from GCC investors, while Asia contributed 35%. The majority of Sharia-compliant funds invest in equities, with real estate vehicles making up just 2.1% of the AUM of such funds.
The reasons why Sharia-compliant real estate funds are in short supply may be due in part to their strict structures and a lack of supporting services. As Islamic law forbids the payment of interests, conventional financing is not permitted, resulting in difficulties in the leveraging of investments. Also, certain assets such as casinos and retail outlets related to the sale of alcohol are out of bounds to Sharia-compliant funds. Differing opinions among Islamic scholars, who certify Sharia funds, can also lead to obstacles in structuring an investment vehicle.
However, Sharia-compliant property funds can potentially help conventional managers on the fundraising trail. In addition to unlocking a source of capital which is otherwise off-limits, Sharia compliancy can be attractive to investors which place a premium on responsible investing. The prohibition of leverage and approval of only ethical investments means that Sharia-compliant vehicles fit in well with the mandates of socially responsible institutions. In a challenging fundraising environment, Sharia compliancy can serve as a novel way for fund managers to differentiate themselves.
In the past five years, 13 Sharia compliant private real estate funds raised more than $989mn, which is approximately 1% of the total number of unlisted property vehicles which held a final close in the same period worldwide. Fifty percent of these 13 funds target residential properties, while 40% are interested in industrial assets. The majority of the fund pool is single-strategy vehicles (77%), with the opportunistic strategy being the most preferred approach (62%). At present, there are four Sharia-compliant private real estate funds in market, targeting an aggregate commitment of $936mn. One significant vehicle is TFI-Hines Brazil Income Real Estate Fund; managed by Qatar-based The First Investor, it has a target size of $500mn and aims to invest in diversified properties in Brazil.