Dubai government owned property developer, Nakheel might tried to deep in into an unknowable part of Islamic finance after having challenged nature to make palm shaped islands off the country’s shore.
Nakheel needs to raise 1.36 billion dirhams ($1bn) for housing and infrastructure projects via an initial public offering of two real estate investment trusts (Reits).
These instruments have yet to take off in the Gulf Islamic finance sector but are tipped as the next big thing as more institutions examine ways of managing and capitalising on the recent real estate boom while abiding by Islamic restrictions.Analysts say Reits are perfectly suited to Islamic finance because they are based on underlying, tangible assets, such as rent on real estate, not on speculation.
"Reits have not yet taken off but it's a question of when," says Qudeer Latif, head of Islamic finance at corporate law firm Clifford Chance in Dubai. "Real estate growth in the last three years has been phenomenal and there are lots of banks who have very high exposure to real estate assets."
Hedging such exposure can be difficult because sharia scholars differ on whether derivatives are permissible.A Reit is a listed property company that usually does not pay tax on its earnings as long as these are mostly distributed to investors in the form of dividends.
"There's a lot of demand in the market for Islamic solutions," says Jamal Dar, an executive at PwC in London. "It's dependent on the legislative environment in the region."Malaysia, a long-established Islamic financial centre, several years ago listed the first Islamic Reits, which included hospitals and palm oil estates as assets.
The Dubai International Financial Centre, the free zone opened in 2004 to attract institutions from around the world, is also hoping to create a Reit sector following a revamped regulatory framework."We've seen a number of Reits in jurisdictions with a fairly mature real estate market [such as Malaysia]. They aren't just limited to buildings and they can be anything tangible with an income stream - estates, plantations, even a power plant with an off-take by a government entity," says Nik Thani, executive director of Islamic finance at the DIFC.
"As long as there's steady cashflow, and the cashflow is not derived from interest-based income, anything can be monetised. And while sukuk [Islamic bonds] are for institutional investors, Reits can be retailed to everyone thereby providing wider access towards investing in Islamic investment products."
Institutions operating in the DIFC are regulated by the Dubai Financial Services Authority, whose rules contain "hidden gems, particularly for Islamic finance", that have yet to be utilised, says Mr Thani.But Reits still need another important foundation stone - clear and concise property laws and, in particular, land registration rules. In Dubai, for example, companies operating outside the DIFC's free zone are subject to the regular civil legal framework, which is in the process of being adapted to keep up with the fast-paced economy.
"This makes sense for Dubai because there are a lot of massive projects here that are not currently monetised but are income-producing," says Mr Thani.
An updated legal and regulatory framework is needed to boost securitisation in general, not just Reits. Legal issues relating to bankruptcy, insolvency and ownership need to be clarified before investors gain confidence.
The growth of Islamic securitisation also has been hampered by investor caution following the credit crunch in the US. But many analysts believe the crisis serves to highlight the benefits of Islamic finance and its requirement to be linked to tangible assets.
