Fund managers have been observing this trend for years, however, the London-based South Bank University, commissioned by the real estate consultancy King Sturge and The Royal Institution of Chartered Surveyors RICS, was the first to get this on paper: Islamic funds that are strictly aligned to the rules of the Shariah are quickly spreading.

Up to 500 billion US Dollars have been invested by Shariahcompatible funds under the strict eyes of Islamic scholars already in North American, European and Asian real estate projects. That is clearly more than the 200 billion US Dollars that the Dubai International Finance Centre DIFC was assuming, since they predicted a yearly growth of twelve to 15 percent in this fastest growing niche in the international market for real estate finances. The most popular segments in Islamic funds include office real estate, retail properties and residential housing.

Interesting from a German perspective: “For the quick growing funds, Europe is currently known as the ‘Flavour of the Month’,” said Paul Devonshire, Director of TMW Pramerica Immobilien GmbH in Munich, at a discussion on “Real Estate Financing and Investment Based on Islamic Law” in the EXPO REAL FORUM. Paul Devonshire must know. He was in the Near East in the 1990’s for an American asset management consulting company and now manages the activities of TMW Pramerica in this region. The RICS study showed a 225 percent increase in Europe for 2001 alone, according to the most current figures available.

The lawyer Liane Muschter, Senior Associate at Norton Rose in Frankfurt am Main and a member of the Islamic Finance Group there sees Germany making fast progress in this niche. According to Liane Muschter, “In Europe, next to Great Britain, primarily France and Germany have inflow from these funds, and Germany has the largest potential with its 3.5 billion Muslims.”

Eighty to 90 percent of Islamic capital that made its way to Europe went to Great Britain according to the RICS study. Islam fund managers consider London the location with the most expert knowledge, the best legal conditions and the best political climate for investments based on Islamic law.

All three participants in the podium discussion at EXPO REAL confirmed this. Among the internationally preferred destinations, Great Britain got a clearly better evaluation with 94 percent of those surveyed than the USA with 47 percent, or even South East Asia with 38 percent.

Traditionally, Islamic capital is bound by tight restrictions for markets like the real estate sector. Starting at verse 276, the second sura of the Koran says that Allah allows selling, but forbids interest. Whoever takes interest will risk the “war of Allah and his envoys.“ “A tight body of rules and regulations for finance products that are adapted to Islamic belief does not exist. There are only the principles of the Shariah, that are derived from five different sources, one of them being the Koran,” explains Jawad Ali. He is a finance attorney at the international law firm King & Spalding in London and responsible for financing business based on Islamic law.

Jawad Ali noted the many restrictions that still exist today. For example, Islamic funds are not permitted to invest in real estate properties where their renters process pork, offer conventional financial services (interest), operate movies or casinos, or sell alcohol.

The Financing Method “Murabahah”
The most common financing method used to get around the interest prohibition, says Jawad Ali, is the so-called Murabahah: instead of giving a mortgage, the bank buys the property from the client and sells it to him for an agreed upon premium. The premium equals the interest for the traditional – but in Islam forbidden – mortgage.

The indirect approach of the Murabahah has thus prevented the fast growing financing niche in Germany from growing more. “The taxes are the largest hurdle,” explains Liane Muschter. Murabahah financing leads to two consecutive sales contracts, and, thus, is subject to property acquisition tax twice. But in total, positive growth rates are predicted for the market. Eighty-nine percent of those surveyed in the RICS study predict major increases in the coming twelve months.