The impact and imminence of Sukuk in real estate

The discordance between conventional bonds and Islamic beliefs was the basis for the launch of Sukuk – a sharia compliant financial bond or certificate. In view of the fact that earning interest—or ‘riba‘ in Arabic—is prohibited under sharia, Sukuk offers a way around the regulations, generating profit instead of interest, and thereby conforming to Islamic values. As opposed to conventional interest-paying debt instruments in the West, a Sukuk investor does not hold a debt obligation owed by the issuer, but owns a tangible asset linked to the investment. The investor then rakes in profits generated by the asset, which is considered ’halal’, or permissible. This circumvention of prohibition, and creation of a financial vehicle in accordance with religious injunction, is the key innovation of Sukuk bonds.

Sukuk is chief among the alternative, sharia-compliant financing practices, in the fixed income space. Its first recorded issuance traces back to Malaysia in the year 1990(1). Sukuk then made a delayed but much anticipated debut in the GCC, in the year 2001. Two decades later, Sukuk’s ubiquity within – but not limited to – the Muslim world is noteworthy. Much like its precedent in the Malaysian market, Sukuk has invigorated investment activities and solidified financial infrastructure to a palpable degree. Since these bonds are predominantly asset-backed, their impact on commercial real estate is grounds for further exploration as well.

Sukuk vs. conventional bonds

Based on structural differences of Islamic contracts, various types of Sukuk can be issued, namely Istisna, Wakala and Murabaha, among others. In broad terms however, Sukuk can be classified as asset-based transactions or asset-backed securitizations, although the latter is so far less popular, with limited issuance recorded globally. In the context of real estate, comparisons between asset-based Sukuk and conventional bonds are more applicable.

For starters, Sukuk envisages asset-ownership while conventional bonds are debt obligations. According to Sudhakar Rao, Chairman of Gemini Property Developers, Sukuk enables investors adhering to Islamic traditions to channel their returns from real estate investments as rental profits instead of riba, and simultaneously hold ownership rights of the underlying real estate asset. Sudhakar Rao is of the opinion that given the sizable sharia-conforming investor base in the MENA region, Sukuk can be conducive to revitalization of real estate investments and help alleviate the soaring inventory-problem.

The face value of Sukuk is drawn based on that of the corresponding asset, which is compatible with real estate, as properties are prone to market fluctuations. On the contrary, conventional bonds are priced based on credit ratings—a disadvantageous proposition for many investors. Another difference is that Sukuk holders are disposed to accept losses, if the asset value diminishes over time, while conventional bonds guarantee a fixed principal after maturity. Financial parameters aside, Sukuk caters to a fourth of world population by circumventing the riba restriction and exempting the individual from sharia restrictions.

Influence on real estate

A comprehensive Reuters report reveals that although a significant number of Sukuk transactions, linked to real estate assets, defaulted during the global financial crisis, it did not hamper Sukuk issuance within the Islamic real estate ecosystem(2). In fact, the issuance soared in the aftermath, during 2011-12. As it stands, a large number of Sukuk tokens issued can be attributed to profit-generating practices within corporations, but some were also the result of raising capital for real estate projects.

In a Sukuk al Istisna bond proposed in Turkey, a Deloitte report recognizes positive signs for the region’s real estate market(3). Owing to government support and favourable foreign relations, Turkish real estate firms have scaled aggressively, both locally and on a global scale, adding significantly to Turkey’s economy and creating in excess of 1.8 million jobs. Despite consequent challenges, Turkey is contemplating Sukuk reforms to become impervious to political uncertainty and cut-throat competition.

Acknowledging the prospects, ASA Ventures in Dubai are entering a strategic partnership with blockchain investment company IBC Group Limited, in a bid to introduce Sukuk tokens for real estate assets in the UAE(4). The first tokens issued by the company will represent a 200-apartment project in Dubai Marina, valued at $100 million. The traction for Sukuk in Dubai is in part due to a 69% increase in the short-term rentals earned through properties listed on popular hospitality service Airbnb. According to Sudhakar Rao, the synergy of Sukuk and real estate can add a resurgent energy to Dubai real estate, further accelerating the growth of the industry, which is already on the road to recovery. Dubai is currently emerging as a leader in the deployment of cutting-edge technology to create smart real estate infrastructure, and the timely infusion of Sukuk can allay any traditional hindrance to further advancement, Sudhakar Rao believes.

Imminence and momentum

Dino Kronfol, Chief Investment Officer at Franklin Templeton Investments, with an industry experience spanning a decade, believes that Sukuk is on a positive growth trajectory, in terms of further issuance(5). Apart from becoming increasingly mainstream, the Sukuk market is well on its way to hit $2.7 trillion valuation by 2030, as per Kronfol’s estimation. It is vital, however, to preserve the ongoing momentum by promoting Sukuk market and quelling any prevailing misconceptions, he further opines.

Sukuk recently made its initial foray into J.P. Morgan’s Asia Credit Index Core and Emerging Market Bond Indices. Concurrently, the Finance Minister of the UK, Philip Hammond, announced the issuance of second sovereign Sukuk, which is a notable initiative in context of the country’s ambition to emerge as the world’s best financial services market(6). The announcement also has particular significance in view of the fact that Britain was the first non-Islamic country to issue a Sukuk, dating back to 2014.

Sudhakar Rao welcomes the emergence of Sukuk in real estate, particularly in Dubai, as an alternative financing option whose far-reaching impact has transcended the frontiers of Islamic nations. At the same time, Rao believes that Sukuk should preserve the momentum, complement real estate growth and safeguard investor interests, without compromising the original objective of adhering to Islamic traditions.


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