The world hit a notable milestone last month in April, as the global population of Muslims surpassed 2 billion. In the United States, Pew research predicted years ago that Muslims would become the second-largest religious group in the country by 2040. As the Muslim population goes on the rise around the world, so too does Islamic investment activity, but Muslims are restricted from certain types of investment that don’t comply with their doctrine of Shariah law.
Muslim investors have a great deal of dry powder to invest after the global COVID-19 health crisis. But even before the pandemic emerged, the Islamic finance industry had been on a meteoric rise and today this Shariah-compliant financing system accounts for more than $2 trillion in financial assets, predominantly in the Middle East and Malaysia. And with the Islamic finance industry on track to grow by 10 to 12 percent annually, the timing is right for the U.S. real estate industry to put its Shariah-compliant offerings on full display.
On the face of it, it may appear that Shariah-compliant investment poses a major conflict with certain types of commercial real estate. After all, Shariah law prohibits participation in investments with connections to such activities as alcohol consumption and tobacco use, which, at first glance, would appear to take property types like retail restaurants and hotels out of contention, and even prevent involvement in properties that offer alcohol-serving eateries, tobacco sales, or even smoking areas. Contrary to popular belief, Shariah law does allow for investment in almost all property types as long as there is no connection between the financing of the project and the operation of the completed development. Therein lies a major key to adhering to the ethical regulations of Shariah law.
“Shariah principles favor the development and trading of risk in physical assets so it’s a natural match between Islamic finance models and the acquisition and development of real estate assets,” Ahmed Haggag, newly installed senior vice president of Walton Global’s Shariah Investments division, told Propmodo. Walton tapped Haggag, who has a long history of working with the Islamic Finance Advisory Board, to lead the firm’s expansion of faith-aligned investment opportunities for the growing Muslim population. For Shariah-compliant projects, Walton secures the land, develops it and divests, and that’s where the investors’ involvement ends. Compliance remains intact as the investors have no connection to the operation of the newly developed property, be it a multifamily community, an office building, or a hotel.
In fact, Walton’s first Shariah-compliant project with Haggag is a hotel. A hotel in Arizona that, like most lodging destinations in the U.S., will provide alcohol to guests in some capacity. Walton has acquired the land and will develop the hotel, but will protect its faith-based investors with a barrier between their investment and the hotel by securing a third-party to oversee operations of the lodging facility before the disposition of the asset. “We incorporated the interest-free financing concept, the ethical investment concept, and the risk sharing across all the investments, and all these are guidelines that Shariah boards look to have in a project for the label of Shariah-compliant product,” Haggag said. The Shariah-compliant Islamic financial system forbids the charging of interest on loans and relies on a profit-and-loss sharing model between borrower and lender on investments. Having ticked all the aforementioned boxes, Walton has already secured the requisite endorsement for the hotel development from the Islamic Finance Advisory Board, which takes on the responsibility of conducting due diligence for a project on behalf of the faith-based investors.
Walton is just one of a growing number of firms that are taking steps to accommodate the rising demand for Shariah-compliant real estate investment opportunities in the U.S. In April of this year, Mamluk Halal Investment made its debut as a Shariah-compliant passive real estate investment fund. The fund offers fully passive investment offerings for accredited investors under a unique Islamic financing structure that absorbs a Wakala model (a financing structure in which a principal supplies capital and an agent provides labor). And earlier in 2023, global investment firm Pentavirate announced the issuance of a 5-year, $100 million Sukuk (a Shariah-compliant bond) collateralized by U.S. commercial real estate. The offering is the first in a $2 billion multi-series program designed to give global investors access to stable, Shariah-compliant assets across the U.S.
The fast-growing Muslim population makes for a large pool of investors seeking Shariah-compliant real estate opportunities in the U.S. These opportunities are not limited to faith-based groups, giving U.S.-based companies like Walton and Pentavirate an even larger cluster of potential clients. “If you look at the demographic and the populations of countries in the Gulf area, you find ex-patriates and people of non-Muslim faiths that are the majority of the population compared to the locals, and many of them are investing and contributing to the Shariah-compliant products,” Walton’s Haggag added.
With the ongoing worldwide expansion of the Muslim population, and the vast wealth in Middle Eastern countries awaiting investment opportunities, an increasing number of Shariah-compliant real estate investment opportunities are on the horizon. This is adding to the group of already existing investment options including multifamily REITs, which are popular among faith-based investors due to the property type’s convenient fit with Shariah regulations. Given that multifamily properties’ primary use does not involve activities deemed non-permissible under Shariah law such as the consumption or manufacturing of alcohol (unless the property’s amenity offerings feature, say, an alcohol-serving restaurant), apartment buildings and condominiums are typically inherently Shariah compliant. The U.S. real estate market remains a popular destination for cross-border investors to plant their money, so why not make it available for around one quarter of the world’s population as well?
