Shariah compliance in real estate investment

Abstract

This paper examines the cost of Shariah compliance in real estate investments by comparing synthetic Shariah compliant (SC) real estate investment (REIT) portfolios with unconstrained U.S. REIT portfolios, indexes, and real estate mutual funds (REMF). The performance of the synthetic portfolios are compared with various benchmarks in both univariate and multi factor framework. Shariah compliance seems to create a return trade-off and less restrictive compliance requirements appear to provide better historical returns when SC portfolios are compared to broader indexes or REMFs in general. However, Shariah compliance does not mean that SC REIT portfolios necessarily under-perform relevant indexes when relevant risk factors are considered and when differing sensitivities are applied to benchmark returns. The simulation shows that the market-weighted SC simulated REMFs dominate the conventional REMF and the average simulated annualized mean portfolio return for SC and SC-LR REMFs are higher than the historical REMF annualized mean return.