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For Islamic landlords, rich banks make bad tenants

Written by: Staff

SINGAPORE, Feb 22 (Reuters) Most landlords would love to own a bit of Wall Street, with a blue-chip bank paying the rent.

But not Islamic property investors.

For them, a conventional bank cannot be their tenant because it sins against Islam by charging interest on loans, which was banned as usury by the Prophet Mohammad about 1,400 years ago.

They would not dream of owning a brewery or a brothel, but what about a hotel that serves alcohol? Or a large shopping centre whose tenants include a few liquor or tobacco outlets? And what happens if a Muslim landlord finds some apartments in a residential tower are being used for prostitution? The grey areas of Islamic property investing are looming larger as international banks and fund managers look to meet a growing appetite for real estate from Muslim investors, many of them from Middle Eastern countries bulging with oil money.

''It does matter where the rent comes from,'' said Abdulkader Thomas, an expert on Shariah-compliance in Islamic finance, told a conference in Singapore on Wednesday.

But there were practical limits to how far Muslim landlords would, and could, go in vetting their tenants, he added.

As a rule of thumb, Shariah scholars hired to advise Islamic property investors will consider how much of a building's rental income is derived from ''bad income'' such as liquor sales.

If it's less than five per cent, then it is deemed ''incidental'' income and qualifies as an Islamic investment. But that portion of the overall rent cannot go to the landlord.

In the jargon of Islamic finance, it is cleansed.

''You give it to an acceptable charity,'' explained Thomas, head of investments for Kuwait-based Alshaya Group International.

Such theological debates have gone beyond the level of individual Muslim investors weighing up a purchase. They are now heard in major international banks -- many of whom, incidentally, would not qualify to be an Islamic investor's tenant.

GOOD RENT, BAD RENT There are few reliable figures on the size of the market for Islamic property, but it is growing quickly and can already account for a large part of an institutional Islamic investor's balance sheet, said Rakesh Patnaik, head of property investment funds for Kuwait-based investment bank Global Investment House.

''It's in its infancy,'' Patnaik said, adding that Global Investment House had a total of .5 billion under management.

Shariah scholars have drawn some fine lines on what is considered un-Islamic property, he added, explaining that even a conventional bank could be deemed an acceptable tenant as long as the bank didn't use the premises for making loans.

''We look at the tenant profile very, very carefully,'' he told the conference. ''It's not the name of the tenant, but it's the specific activity carried out in the property,'' Patnaik said, adding that a bank's back-office operations might qualify.

Privacy laws, particularly in the United States, mean Islamic investors in residential property cannot check up on what their tenants do in their own homes.

''There are tens of thousands of apartments in the U.S. that are owned by Islamic investors and it's become an issue because you can't lawfully know what your tenant is doing,'' said Alshaya Group's Thomas.

''You can't say these people shouldn't put pork in the fridge,'' he joked, then added seriously: ''But if you can't look behind, then how do you address it? ''The reality is that the permissibility of leasing shelter (to someone) trumps what you don't know about them.'' REUTERS SD PM1657

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