SHARIAH COMPLIANCE REAL ESTATE INVESTMENT : AN EMPIRICAL PERSPECTIVE

Abstract

The dissertation aims to investigate the costs of Shariah compliance(SC) structure on the investments. The study was divided into two parts. In the first part of the study, the multi factor latent variable model was used to test the predictability of the four assets classes. The significance of common risk premia in the SC stocks, SC real estate, real estate stocks and REITs was tested using the generalized method of moments(GMM). In the second part of the study, 2-stage regression models were used to test whether the Shariah Compliance structure increases the cost of the real estate investment. The first stage regression removes the market effect and obtains the residual. The residual serves as the “pure factor” and was used in the second stage regression. Weekly excess returns of SC stocks, SC real estate stocks, real estate stocks and REITs were computed for the period from September 2007 to December 2010. The main findings of the study are that first, Shariah Compliance real estate and conventional real estate capture the same risk premia. This implies that Shariah Compliance real estate investments are indifferent from its counterpart in terms of risk premia. Put it in another way, there could be dilution of diversification benefit, if both SC real estate and conventional real estate investment were included in the same portfolio. Second, the structural factor is not the main factor that determines the return of the SC real estate. It reiterates that the risk-return characteristic of SC investment are indifferent from its conventional counterpart. There are no Shariah compliance costs on the SC investment. These findings are consistent with the prior findings by Ibrahim and Ong (2008) that the Shariah Compliance Real estate investments do not necessary underperform its counterparts, if adjusted for the risk.