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German residential real estate attracts international investors


Germany’s real estate market is Europe’s top investment location of 2008, according to Ernst & Young’s latest trend barometer. More than 80% of polled investors are convinced that the German real estate market will continue to offer an attractive investment environment this year. In fact, 34% expect 2008 to bring a higher return on equity.
      Another 64% believe that the return on equity will at least match last year’s level. The investment barometer of Estavis AG, based on a survey among German and international investors on the German real estate market, shows similar findings. Nearly 70% of the institutional investors interviewed are planning to step up their investments in German real estate. The reasons underlying the attractiveness of the German market are the comparatively low real estate prices and the prospects of rent-rate increases.
     While inflation-adjusted real estate prices more than doubled in Spain, Denmark and the UK between 1996 and 2006, they dropped by almost a quarter in Germany. In most locations, the prices for residential property have actually dropped below the construction costs (replacement value). A comparison of average rent rates today and the costs of real estate-portfolio financing suggests that German residential real estate is undervalued. The fundamentals for the years to come indicate a sustained demand in Germany’s residential real estate markets that is matched in many places by a limited supply.
      True, Germany will be subject to a demographic decline in the medium term, as will other European countries. Yet the number of households—a benchmark for appraising the evolving demand on the housing market—will continue to show a visible growth curve for another 10–15 years.

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Development of secondary markets

The overall size of the sukuk market worldwide is estimated at nearly US$70bn. However, the bulk of sukuk are over-the-counter instruments. Listed sukuk account for only 20–25% of outstanding sukuk issued—US$10–$15bn. There are more sukuk listed in Dubai than anywhere else, but the secondary market is virtually non-existent. Second is London, where the secondary market for sukuk totalled less than US$5bn at 21 March 2007. Among listed sukuk, Standard & Poor’s rates close to US$6bn, or roughly 50% of sukuk outstanding, that is listed globally.
      New sukuk issuance is expected to accelerate, and could reach US$20-$25bn in the next five years, according to the most reasonable forecasts. While sukuk are listed on exchanges in the Middle East, South East Asia and Europe, they remain relatively illiquid because of the absence of a diverse investor pool and a tailored regulatory framework. Most current sukuk investors are concentrated in Muslim majority countries, although non-Muslim investors have begun to express an interest in sukuk.
     The investor pool will not expand significantly beyond the traditional Muslim base and the sukuk market will not be able to sustain its growth unless a regulatory framework sufficiently tailored to monitor Islamic financial products develops and fosters investor confidence. The Dow Jones Citi­group Sukuk Index (DJCSI), the world’s first sukuk index, and the Dubai International Financial Exchange (DIFX) marked a strong commitment to promote continued growth and to cultivate secondary trading.
      The second significant event was the establishment of the DIFX, the first international financial exchange in the Gulf region. The DIFX’s regulatory framework follows international standards and the exchange seeks to be the leading trading venue for both conventional and Islamic financial products.

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Institutional infrastructure

To determine whether financial products comply with the Shariah, the opinions of scholars trained in Islamic jurisprudence, fiqh, are sought. Their rulings, or fatwa, are regarded as definitive, but as Islam is not a centralised or hierarchical religion, there are many competing, and sometimes contradictory fatwa. It was to resolve these conflicts that the Islamic Fiqh Academy was established in Jeddah in January 1981. Its mandate was agreed by the Organisation of the Islamic Conference, which now serves 57 Muslim majority countries. The academy’s rulings on finance are respected by the Shariah board members of leading Islamic banks and takaful operators.
     Notable rulings include those on the permissibility of deposit or down-payment subscriptions and foreign exchange transactions (1993), bank deposits and investment in equities (1995) and leasing contracts (2000). Whether credit cards are permissible has been addressed at several meetings. As the issues are often complex, it is not merely ruling whether a financial product or activity is permissible, but the terms under which it is permissible.Sometimes the fatwa have been taken forward by other bodies, as with the ruling on the permissible equity investments that resulted in the Dow Jones Islamic Indexes developing their methodology to determine which business sectors are permissible for investors who want to be Shariah-compliant. The question of financial screening to avoid excessive exposure to riba was also further refined by the Dow Jones Islamic Indexes.

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Divergence of views, divergence of allocations

We are witnessing a divergence in global versus Islamic asset management trends, a divergence both troubling and problematic for professional asset managers. Yet at the same time it provides important opportunities for development of the Islamic asset management industry. Islamic asset management seems to be moving not only against world trends but also encouraging them. The initial conclusion of some observers is not positive. The world asset management industry had about US$62 trillion in assets under management at the end of 2006. This most certainly increased in 2007 and the first four months of 2008, perhaps by 2–3%, following trends that began in the early 1990s.
     Global asset allocation reflects the principal conclusions of modern portfolio theory (MPT)—that is, the allocations of professional asset managers generally average along the lines of a contemporary balanced strategy portfolio in whichever currency you wish to name. MPT underpins the professional asset management industry. With MPT, managers have a tool to evaluate all asset classes objectively, as well as their respective, expected future performance, and match a combination of these asset classes to the long-term investment needs of clients, whether they be individual or institutional. MPT centres on diversification of risk while attempting to achieve the highest possible risk-adjusted return. Six decades and many Nobel prizes highlight the near universal acceptance of MPT. While some, such as Taleb and Mandelbrot, have shown that MPT has its inherent weaknesses by depending on historic data, neither critic has developed any realistic alternative as the core tool for making professional investment decisions.

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Why are derivatives haram under Shariah law?

The controversies surrounding derivatives revolve around gambling: the Arabic term is maisir, a game involving hazardous events—particularly a game of chance by means of divining arrows. This was popular at the time of the Prophet. Maisir comes in various categories, some of which seek omens or fortune-telling by divining arrows, backgammon, chess, and lotteries. The word maisir (game of chance) is derived from the root: (i) yasara—to become gentle, to draw lots by arrows; (ii) yasar—affluence because maisir brings about profit; (iii) yusr—convenience, ease. Maisir is so termed because it is a means of making money without toil and exertion; (iv) yasr—dividing a thing into a number of shares and distributing them among themselves. Gambling is called maisir because those who partake in the games of chance divide the meat of sacrificial animals among themselves.
     All the above connotations are vividly found in the word maisir. Imam Malik, founder of the Maliki school of jurisprudence, said that gambling was of two categories: a game of chance that is partaken with a view to sport (fun), and the game of chance that involves gambling. Gambling, in this sense, means all dealings in which people are required to make a bet and every dealing which involves some aspect of gambling is maisir. So where does gambling fit within the Quran?

They ask thee (O’ Prophet) about khamr (intoxicants) and games of chance (gambling). Say: In both of them there is great harm, although there is some advantage as well in them for men, but their harm is much greater than their advantages.
Surah 2: 219

O’ ye who believe, verily wine and games of chance, (ungodly) shrines, and divining devices are abomination of Satan’s work. Avoid them, that ye may prosper. Only would Satan sow hatred and strife among you, by wine, and games of chance, and turn you aside from the remembrance of Allah, and from prayer: Will you not, therefore, abstain from them?
Surah 5: 90, 91

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Configuring an IT system for takaful

Receiving a license to operate a takaful business is only the first step towards trading. In the increasingly complex world of finance, information and comunications technology plays an important role in supporting product creation, quick time to market and responsive customer service. Any mistakes can be costly. When Malaysian financial group MAA Holdings Berhad decided in 2007 to launch Islamic insurance under a new company, MAA Takaful, to complement its existing insurance business (MAA Assurance), it knew it had to come up with an IT strategy to support the fledging business unit. One of the main questions MAA Takaful had to answer was whether to procure purpose-built takaful solutions or retrofit existing conventional insurance applications. MAA Takaful offers a wide range of products, including motor, general takaful, investment linked and ordinary family and group takaful such as mortgage-reducing term takaful.
     Jimmy Yeoh, CEO of MAAGNET, MAA Holding’s IT shared services company, says, as its conventional insurance systems at MAA Assurance had proven to be stable and scalable, the path of extending existing applications was chosen. By modifying MAA Assurance’s Life, Group Life and General Insurance to form the core of MAA Takaful’s applications, Mr Yeoh says that the latter has already found itself with a massive leg up in terms of ICT. “Our existing conventional insurance systems are rich in functionality and a lot of processes are fully automated, with straight-through processing capability,” says Mr Yeoh. To support the takaful product range, three core applications were implemented: family, general and group family. The main challenge, says Mr Yeoh, was not so much technical but a matter of how to implement the incorporation of takaful business principles into the system.