When religious edict and investment converge

Middle Eastern investors buying hotels, particularly in the U.S., is ongoing and will only increase as we move into the fourth quarter and beyond. In fact, Middle Eastern investors, fueled by lower oil prices, are projected to spend an average of $15 billion annually on the international property market over the next few years, according to a recent report from CBRE.

But investment for Middle Eastern investors, in some instances, isn't only about the dollars. GlobeSt.com has an interesting take on Middle Eastern investment into the U.S. Undeniably, many Middle Eastern investors are Muslim and guided by the principles of Sharia law. That confluence sometimes causes agitation and difficulty, like when this happened last year.

For some, Sharia law is considered extreme; for others, it guides all things that touch their lives—even investment.

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How Sharia law impacts investment
Hotels, as we know, are not just places for sleep; they serve food, they serve liquor, both of which have conditions within Sharia.

Then there is this: The notion of interest payments in conventional banking is impermissible in Sharia law, because it is considered usury and is therefore unjust. In place of interest, Islamic finance is based on ownership of assets and the sharing of risk.

Banks in the Western world receive interest in exchange for the risk they take by loaning money; in Islamic finance, a bank that provides funding to a business will have an agreed share in the profit/loss generated from the money it provides. It negates the need for interest payments and the investment risk is shared between the bank and the business.

In addition to financing, Muslims are not permitted to invest in anything that is considered unlawful or impermissible under conventional Islamic law, for instance any business that has links to such things as pork, alcohol, tobacco, pornography, prostitution and gambling—all things, for better or for worse, many hotels have exposure to.

Adhereing to these concepts can make investing globally difficult for practitioners of Sharia. However, according to GlobeSt.com, it has become more common.

The ability to structure investments in accordance with the Sharia "has opened up the global market to a new group of investors," John Opar, a partner at Shearman & Sterling, and a specialist in Sharia-compliant transactions, told GlobeSt.com. "These are investors who have the wherewithal to invest across the globe and want to be able to do so in accordance with their religious principles.

"Being able to facilitate the structuring of these investments has opened up the market for individuals and compliant companies (such as takaful companies, providing compliant insurance products) as well. It has also created a new source of capital in the global market that people are able to access."

In the early days, Middle Eastern investment in the U.S. was in parking garages, a business that on its face didn't conflict with Sharia, like hotels might.

Opar told GlobeSt.com that the turning point for such investments was the 1998 issuance of a fatwa for Dow Jones Islamic Market Indexes, which spelled out how equity securities could or could not be considered Sharia-compliant. "That fatwa, which was really focused on creating an index for the stock market for compliant investment, opened up Islamic investment generally by essentially recognizing principles that were probably implicit before but not explicit," he said.

"You probably can’t think of a company that has no interest rate receivables, or interest-bearing bank accounts, or some other non-compliant activity. So the Dow Jones fatwa recognized that a degree of impurity was permissible, and established ranges for what was permissible. It also established the concept of cleansing or purifying, such that by appropriate treatment of tainted income—through charitable donations, for instance—one could cleanse an investment."

While this fatwa addressed the stock market, it also, as Opar explained, opened up investment in U.S. real estate. "Since then, there has just been steady growth," he said.

As Islamic investors became more comfortable, they moved from parking garages to multifamily housing, for example. Still, according to Opar, "hospitality probably is the furthest point along that spectrum of comfortable investment, and one where investors tend to shy away if they’re compliant." 

Opar calls the U.S. real estate community generally receptive to this type of investment activity. "We’ve gone up the learning curve significantly from where we were 15 years ago," he said.

"As the big sovereigns continue to seek safe havens and long-term stable growth potential, the flow of capital from the Middle East will become even stronger," Spencer Levy, Americas head of research at CBRE, told The Real Deal. "We expect a greater amount of this capital to start looking beyond the gateway markets to achieve its objectives."

Middle Eastern investors spent $5 billion in the first quarter of 2015, with the money split nearly evenly between Europe and the Americas. New York, Washington, D.C., Los Angeles, and Atlanta were the top U.S. destinations.

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