MUMBAI: For the first time ever, with eyes firmly planted on lucrative investments from the Middle East, many real estate developers are planning to launch Shariah-compliant REITs, or real estate investment trusts.
After the Securities & Exchange Board of India ( Sebi) recently announced guidelines for REITs, many developers believe a Shariah-enabled REIT would attract investments from the Middle East.
ET has independently learnt that at least four real estate developers, not all of them Muslims, are in advanced talks with lawyers and real estate experts for launching Shariahenabled REITs in India. "We are seeing serious interest from a few developers who want to further explore the possibility of doing REITs in India, which is also a Shariahcompliant financial product," said Zulfiqar Shivji, International Liaison Partner & Head of Transaction Advisory Services at BDO India. "Interestingly, even non-Muslims today are appreciating a Shariahcompliant product which fundamentally provides security and dissuades one from taking excessive risks with complex products with committed returns."
Shivji himself is currently working with a few such developers in Mumbai, but admitted that there's a dilemma surrounding the developers' plans.
Many developers are in a quandary as they fear a backlash due to the sensitive nature of Sharia. However, at least three developers can go in for necessary permissions for the new product in the coming months even as they keep their eyes focused on any new announcements in the Budget.
Compliance with indian laws Industry trackers say that the new product would comply with Indian laws, just that there would be stricter norms around borrowings and interests.
The REITs will have to adhere to the Islamic law around doing business as it forbids lending money and receiving interest. Also, REITs would follow the rules on transactions — Fiqh-al-Muamalat — while formulating new investment vehicles.
"Sharia compliance is just an Islamic banking way of attracting investments. The way Indian companies abide by the corruption laws in the UK or US regarding FCPA, the Indian companies will have to scrupulously abide by Sharia requirements," says Parimal Shroff, founder of Mumbai-based law firm Parimal K. Shroff & Co.
"The realty sector is in financial stringency and requires resources and the companies will make sure that they will use all the legitimate avenues to raise the money."
Under REIT, retail investors would be able to invest in smaller units of commercial real estate. But there are a whole lot of problems that need to be sorted out here. Take the case of a Mumbai-based real estate player who has his operations around central Mumbai. "The developer has a mall along with aresidential and office space in just one land parcel. He wants to go for Shariah-enabled REIT, but the problem is all three properties have to be separated, their revenues distinguished and three different companies need to be floated," said a source.
Real estate developers, who are willing to venture into the Shariah-compliant REITs, are also looking at retail Muslim investors who want to invest anywhere between Rs 5 lakh and Rs 10 lakh in the new product.
"The biggest challenge is the Shariah-compliant REIT may not be too attractive for other investors as the yields would be lower than other products due to stringent laws around accepting interest and others," added a senior lawyer.
Yet, there are many investors who would accept little less returns as it complies with their religious beliefs," added a senior lawyer.