Shariah Compliance in Real Estate Investment

Shariah Compliance in Real Estate Investment - Shariah...

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Unformatted text preview: Shariah Compliance in Real Estate Investment Muhammad Faishal bin IBRAHIM ONG Seow Eng* Department of Real Estate National University of Singapore November 9, 2006 *Corresponding author. Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566. Email: seong@nus.edu.sg We thank Chee Yun Xuan, Lee Sze Teck and Victor Indarto for excellent research assistance. We also thank Patrick Tan (Pacific Star), Kumar Tharmalingam (Hall Chadwick Asia), Sayed Mohamad Mustar (AmMerchant Bank), Elie Habib and Rakesh Patnaik (Global Investment House), Angelo Vernardos (Heritage Fiduciary Services), Arfat Selvam (Arfat Selvam Alliance) and participants at the Islamic Real Estate Asia conference, September 2006 for their comments. Funding from the National University of Singapore is gratefully acknowledged. 2 Shariah Compliance in Real Estate Investment Abstract This paper examines the cost of Shariah compliance in real estate investments by comparing synthetic Shariah compliant (SC) REIT portfolios with unconstrained US REIT portfolios, indexes and real estate mutual funds (REMF). The performance of the synthetic portfolios are compared with various benchmarks in both univariate and multi factor framework. Shariah compliance seems to create a return trade-off and less restrictive compliance requirements appear to provide better historical returns when SC portfolios are compared to broader indexes or REMFs in general. However, Shariah compliance does not mean that SC REIT portfolios necessarily under-perform relevant indexes when relevant risk factors are considered and when we allow for differing sensitivities to benchmark returns. Our simulation shows that the market weighted SC simulated REMFs dominate the conventional REMF and the average simulated annualized mean portfolio return for SC and SC-LR REMFs are higher than the historical REMF annualized mean return. Introduction The past decade has witnessed a rapid growth in Islamic banking and finance market making it one of the faster growing financial niche markets globally (Aggrawal and Yousef, 2000). Growing at a rate of 15% in mid-1990s (Abdul Hamid and Norizaton, 2001), Islamic banking is expected to be a dominant growth engine in finance and banking in this millennium. The United Kingdom Financial Services Authority estimated Islamic banking and finance market to be worth between US$200 billion to US$500 billion worldwide. Other sources estimate the Islamic finance market to be between USD250 billion and USD 1 trillion (Chow, 2006). Current account surpluses in oil-producing countries are expected to exceed USD500 billion in 2006, and the Citigroup Global Wealth Management group estimates the current wealth of USD1.2 trillion in Middle Eastern countries to grow to USD1.8 billion by 2010. Islamic assets accounted for only 3% of total banking assets in Dubai in 2003, 3 and have grown to 14.7% in 2006. The growth escalated after 9/11 where there has been significant flight of capital originating from the Middle East and other Islamic nations to...
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This note was uploaded on 10/09/2011 for the course 323 3232 taught by Professor 3232 during the Spring '11 term at Apex College.

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Shariah Compliance in Real Estate Investment - Shariah...

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