3 Shariah-Compliant Ways to Invest in Real Estate

Real estate is perhaps the most well-understood investment that we know, as people will always need a place to live, work and play.

Investing in real estate takes two main forms - owning your home and leaving a legacy for future generations, and investing in property to generate potential rental income.

The lure of real estate investment is in the potential for the following:

1. Capital appreciation
2. Rental income.

Capital appreciation occurs when the value of a property increases over time.  

For example, a property bought for £200,000 that appreciates to £300,000 over several years means the investor gained £100,000 in capital appreciation. Selling at the new increased price will book the investor a £100,000 profit or capital gain.

Rental income is simply the income received by landlords from tenants. This is also sometimes referred to as rental yield. 

Rental income may provide investors with a relatively regular and stable income stream that can either supplement other income streams or be the main source of income for full-time property investors. For example, a property bought for £200,000 that rents out at £800 per month would generate for an investor an annual gross rental income of £9,600 (before any expenses).

In practice, property investors may benefit from both capital appreciation and rental income. This combination of potential capital appreciation and rental income makes real estate investing an attractive investment option for many.

The problem for Muslim investors, however, is the common use of debt to invest in real estate. Historically, the only way to access the real estate would be through large amounts of cash or by borrowing from a lender. This is strictly forbidden in Islam, where Riba (interest) is a major sin. 

The good news is that there are genuine Halal ways for Muslim investors to invest in real estate. In this article, we look at three Shariah-compliant and debt-free options available for Muslim investors to invest in property without compromising their faith.

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1. Cash is King

The simplest (and perhaps the most difficult) way to invest in real estate is to buy in full, with cash. The only dependency here (which is a big one) is affordability. It can be pretty expensive to purchase real estate in full, particularly in high-demand locations.

However, for those blessed with adequate wealth, either from their income, their inheritance or through any other means, real estate can be well afforded. This method can also work if you can compromise on location and buy in a cheaper area. Alternatively, you could join forces with family members or close friends to jointly purchase real estate.

While this approach generally ensures full compliance with Islamic finance principles, it’s important to consider the risks of investing heavily in a single asset. There could be void periods and/or damages to the property which affects the income generated. 

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2. Via the Stock Market

Instead of directly purchasing real estate, you could gain exposure to the real estate market via the stock market. This can be an accessible way to benefit from real estate when you don’t have the large sums required to do it alone or if you want to avoid the hassle that comes with direct ownership.

A. REITs

Real Estate Investment Trusts (REITs) own and manage income-generating real estate assets. They operate commercial properties such as apartments, offices, malls, warehouses and hotels, and collect rental income, which is passed on to investors through dividends. 

REITs provide a way for investors to gain exposure to professionally managed portfolios of real estate across different sectors. Many REITs are publicly traded, allowing investors to benefit from real estate cash flows by purchasing REIT stocks and ETFs.

Unfortunately, most REITs are leveraged so it is important to do your due diligence to ensure you look for Shariah-compliant REITS only. You can find this out by checking to see if the REITs have a Shariah certification that has been signed off by scholars.

B. Homebuilders

Investing in stocks of major real estate construction companies can provide exposure to the housing market.

These large constructors design, construct and sell new residential and commercial properties across the world. Their revenues and profits are tied to housing demand, prices and construction costs.

Purchasing homebuilder stocks allows investors to potentially capitalise on a strong housing market. However, these stocks can carry more risks than you would have by simply directly investing in real estate. The stocks are linked to the performance of the individual companies themselves and how well they run their operations.

To make sure these are Halal investments, you would need to screen the individual stocks to see if they are Shariah-compliant. The primary business activity is construction, which is Halal, but you will also need to check that the finances of the company are Shariah-compliant and watch out for any interest-bearing debt.

You can find out this information by looking at the company's balance sheets, or you can use Shariah-compliant screeners that can do this for you.

C. Real estate servicers

Companies that provide services related to real estate are another way to invest in the sector. This could include real estate brokers, property and asset managers, and platforms that list properties for sale and earn a commission or a fixed fee for each sale. 

While not direct owners of property, their business fundamentals and stock performance have a high correlation to real estate markets. Investing in a basket of leading real estate service stocks can therefore give you diversified exposure to the real estate market. The key to success here is to be creative and find companies that can ride the real estate wave successfully.

Again, as with homebuilders, you would need to screen any individual stocks for their Shariah compliance.

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3. Real Estate Crowdfunding or Fractional Ownership

The last option in this article is one that has become increasingly popular in recent years.

Real estate crowdfunding allows you to purchase a share of a real estate asset alongside other investors. This lowers the barrier to entry for real estate investing and is often a hassle-free method. You are not responsible for any of the maintenance or administration that comes with owning real estate. Just make sure you invest via reputable and regulated crowdfunding platforms and do your due diligence into the actual advertised real estate project.

From a Shariah-compliance perspective, investing in real estate via an equity basis is Halal. When investing via investment platforms, you will typically buy shares in a Special Purpose Vehicle (SPV, basically a company set up to buy a property) which owns the underlying real estate asset.

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Wahed Real Estate

Wahed has innovated in this space by offering access to Shariah-compliant property investing through fractional Real Estate Equity investment or crowdfunding. Through the Wahed App, investors can invest in individual properties (via an SPV) from a minimum of £500. This provides investors with access to properties with a target net yield of 5% and above, along with exposure to the potential capital appreciation. 

What sets Wahed apart is the meticulous approach to ensuring Shariah compliance and investment quality. Investors benefit from Wahed’s thorough due diligence process, which includes property sourcing and post-investment support. Additionally, Wahed’s real estate offering is reviewed for Shariah-compliance by both an internal Shariah team and externally by the Shariyah Review Bureau (SRB).

By combining tech and Islamic principles, Wahed is making real estate investing more accessible to Muslim investors. The platform streamlines the investment process while also providing a level of professional management and ethical oversight that individual investors may struggle to achieve on their own.

To find out more reasons on why investing with Wahed could be a good choice, check out our previous blog on “8 Reasons Why You Should Invest in Real Estate with Wahed.”

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Summary

Investing in Shariah-compliant real estate can be an excellent investment when done correctly. Despite the prevalence of Riba (interest) in modern economies, there are still a few Shariah-compliant ways for Muslim investors to participate in the real estate market without compromising on their principles. Whether through cash purchases, carefully selected stock market investments or via platforms like Wahed's real estate, there are options that best suit your personal circumstances.

If you’re investing for the first time, you could think about starting with lower amounts and gain experience on what works and what doesn’t. Above all, make Dua for guidance and ask Allah SWT for Barakah (blessings) in your wealth.

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