The growth of the petro-dollar economies over the last two decades have partly contributed to increased investment by Islamic investors in real estate assets based in the West. Typically, an investor’s objective is to diversify their income and preserve wealth by investing in assets in developed economies, using financial models which adhere to their religious and cultural beliefs.

Islamic and Middle Eastern investors have significant investment in the hospitality industry, acquiring a number of high profile hotels, such as the Kingdom Holding Company’s acquisition of the Four Seasons Hotel George V in Paris and The Savoy in London, and Tejara Capital’s investment in The Grosvenor House Apartments in London. Similarly, London’s Bermondsey Square Hotel was purchased using an Islamic Finance structure.

Shariah compliant investment in hotels is an uncomfortable marriage, but one which we are seeing on a more regular basis.

Fundamental principles

The Shariah means the ‘path’ or Divine Law derived from the religious precepts of Islam from two main sources:

• Quran – the book of divine guidance revealed to Prophet Muhammad (peace be upon him); and
• Hadith – the reports describing the words, teachings, actions and behaviours of Prophet Muhammad (peace be upon him).

Islamic investments must comply with Shariah principles, the key relevant ones in this case being:

• Riba – Islam prohibits any dealing that establishes effortless enrichment, this is known as ‘riba’. This is best known by the prohibition of payment and receipt of interest. Therefore, the investment documentation should stipulate that the investment is Shariah compliant and there should be no reference to interest. Equally, any debt used to finance the purchase of an asset must not involve the giving and taking of interest.
• Gharar and Maysir – refers to the interrelated concepts of chance, risk, uncertainty and speculation. Parties to a contract must have knowledge of the contract, its objects, and its implications. The absence of any of these elements would produce an element akin to gambling, which is prohibited under Islamic finance.
• Asset class – Islamic finance places an emphasis on ethical trade and there is a prohibition on dealing in non-Shariah compliant products. Ultimately, businesses whose core activities comprise of alcoholic beverages, tobacco, gambling and casinos, adult entertainment, non-Islamic financial products, insurance and pork products are considered prohibited business operations.

The provisions listed above directly impact the way Shariah compliant hotel investment can be undertaken, structured and implemented. A Shariah investor buying a hotel will usually appoint a Shariah board; engaged to ensure compliance on an on-going basis and issue a fatwa to confirm adherence to Islamic principles.

Asset class

Investments and assets acquired by an Islamic investor must be Shariah compliant. The hospitality industry may appear to be a Shariah compliant investment on initial consideration; however, this asset class may prove problematic once a business screening process is undertaken and close scrutiny is paid to the business operations. Activities such as the sale and consumption of alcohol, the operation of casinos, the consumption of nonhalal meat and pork, the availability of adult entertainment, and mixed-gender recreation facilities, would prove to be fatal hurdles for potential Islamic investors who want to invest in hotels in Western jurisdictions.

Recently, a new market has developed with the emergence and spread of ‘halal hotels’, where there are none of the prohibited activities described above. The most obvious market is Saudi Arabia, being one the largest religious tourism industries. However, there are also growing markets in states outside the Arab world such as Turkey and Malaysia, which are developing Muslim travel markets. The Dubai Islamic Economy Development Centre outlined their commitment to Islamic tourism in their ‘refreshed strategy’. Several factors have contributed to the growth of this sector including increased efforts to develop this tourism industry by the Organisation of Islamic Conference, increased bureaucracy in obtaining a visa approval in the West which has shifted Middle Eastern travellers to the East, and the spending potential of Middle Eastern travellers prompting hotels to pay closer attention to Muslim needs.

The purest form of halal-hotels focus on meeting the needs of Muslim tourists while travelling in accordance with the pillars of Islam. In consideration of this, these hotels would provide the services and facilitate the routine of the Muslim way of life. Examples of this would be prayer facilities, halal food, signs directing travellers towards the direction of Mecca in their hotel room, separate recreation facilities for men and women, private beaches for women and the absence of alcohol. The concept of Shariah compliant hotels has evolved from fulfilling religious needs and basic Islamic services to lifestyle option, with more extensive Islamic services. Whilst the target market can be extended to non-Muslim travellers who want a family or health focused holiday, such hotels are unlikely to be popular within the general context of Western culture.

Shariah compliance may be considered too restrictive and would render the business unattractive to customers in Western jurisdictions and potentially unviable to investors. The conflict of investing in hotels on a Shariah compliant basis in the Western world can be overcome in the following ways:

• Consider the core source of income – Guidance from the Accounting and Auditing Organisation for Islamic Financial Institutions and Islamic Scholars suggests that assets may still be considered Shariah compliant, provided only 5 per cent. or less of the income is from non-halal sales or activities. This de minimis rule has expanded the scale of Islamic investment.
• Separate company holding the non-halal assets – a separate company or special purpose vehicle may hold the parts of an investment that can be attributed to non-halal operations, such as the bars, minibars, and other entertainment, separating the non-halal operations from the investment.
• Purification of investment earnings – any earning that can be attributed to non-Shariah complaint sources or operations are deducted from income and distributed as ‘zakat’ which is a form of charitable giving seen to ‘cleanse’ the investment. However, estimating these earnings can be an arduous and complex task.
• Use Islamic Finance – Islamic finance structures such as Sukuk, Commodity Murabaha, and others should be considered to finance the investment in the hotel to avoid the giving and taking of interest.

The decline in the oil based economies in the Middle East and the search for new sources of revenue could mark the beginning of increased investment in the Islamic tourism industry. However, currently there is no clear agreed standard for Shariah compliant hotels, which has the potential to create uncertainty amongst investors. It is timely for guidance on a universal standard to be issued by the Islamic finance regulatory bodies in order to encourage investment and growth in the hospitality sector.

Islamic investors compete with each other and commercial investors in the West. Conventional investors have the advantage of a highly developed and sophisticated investment and debt market, whereas Islamic investors cannot leverage real estate acquisitions using conventional debt as this will require the giving of interest. However, the growth of Islamic banks and Islamic wealth chasing, trophy assets in the United Kingdom will no doubt mean an increased level of Islamic interest in this asset class. 

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