Navigating Real Estate In Kenya With Shariah Principles

Ali and Amina are savvy investors, and one area they are both excited about is real estate. But as practicing Muslims, one question they always ask before investing in an opportunity is whether the opportunity is halal, in other words, is it permissible under Islamic law or Shariah?

For Muslims, and even some non-Muslims, who adhere to Shariah law when making investment decisions, certain sectors are strictly off-limits. Alcohol, tobacco, gambling, ammunition, and pornography are some sectors that Muslims (and even non-Muslims) who abide by Shariah laws on investing would never touch.

But what about real estate? This is where it can become tricky because of a myriad of factors, including interest rates, property use, type of tenants, etc, but fortunately, some financial experts analyse investment opportunities and advise investors like Ali and Amina on whether the said opportunities are Shariah-compliant.

One such firm is London-based Araf Consultants, a premier advisory firm specializing in Islamic finance, investment banking, fintech, and strategic business solutions. They gave their verdict on two REITs.

Araf Consultants issued two distinct reports concerning the Acorn Student Accommodation (ASA) REITs. The ASA Income (I) REIT, which collects rents from students, and the ASA Income (D) REIT, which develops hostels.

Let’s look at Araf Consultants’ Shariah Compliance Report on the ASA I and D REITs.

First, it is important to note that under Shariah law, rental properties must follow certain principles without any violations or breaches. For one, rent derived from a property must be from lawful or halal sources. In other words, rent derived from gambling, alcohol, pork sales, or other nefarious activities is not legit or Shariah compliant.

Second, there must be fairness in lease agreements between the landlord and the tenants. Additionally, in the case of the D REIT, the contractors must also be screened to ensure that they abide by Sharia practices.

Finally, Islamic finance prohibits the use of interest-based financing arrangements. Therefore, Shariah-compliant REITs must ensure that financing for property acquisitions or development projects adheres to Shariah principles, such as through structures like Murabaha (cost-plus financing) or Ijara (leasing). Avoiding interest-based loans or conventional debt instruments is crucial to maintaining Shariah compliance.

On both REITs, Araf Consultants found that the REIT derives rents from tenants, students, and businesses such as groceries, which are Shariah-compliant. The ASA I and D REITs followed Shariah rules by avoiding interest-based financing. Although the Capital Markets Authority allows up to 35% financing, the ASA I REIT stayed within 30%, demonstrating a careful and Shariah-compliant approach to debt.

Araf Consultants, as the Acorn Investment Management Ltd (AIML) shariah advisors confirmed that both the ASA I and D REITs maintained the approval of permissible to invest for the Muslim community.

For Amina and Ali, it is now clear that they can invest in two golden real estate opportunities that are Shariah-compliant, enabling them to meet their investment ambitions without compromising their faith.