Islamic investors eye us: despite political differences, Islamic investors are being drawn to the US, attracted by more Islam-friendly investment vehicles. (Finance).

At first glance, Castle Pines appears to be a typical 356-unit housing development being built in suburban Denver, Colorado. But its project financing is different from most US real estate ventures. Castle Pines is being built with capital from the Islamic Investment Company of the Gulf (IICG).

The Kuwait-based IICG is putting $8 million into Castle Pines and is the project's majority equity investor, according to Key Global Capital, which placed the funds on behalf of the investors. It is only one of a growing number of Islamic-friendly investment vehicles attracting Arab investors to the US. What is unique here isn't Arab funding of US real estate (banker's estimate almost $400 billion in Middle East funds are now poured into US office and residential properties). Rather, the Castle Pines financing reflects the growing importance of global Islamic finance as a source of investment capital, even in US markets.

This is occurring, despite a series of legal and political threats to such investments in the US. Two, which stand out, are a $1 trillion law suit filed earlier this year by survivors of the New York World Trade Centre attack, and the recently enacted USA Patriot Act. The Act is directed at stopping money-laundering activities by imposing more stringent diligence requirements on financial institutions.

Earlier, the US pressed banks around the world to freeze the assets of more than 150 persons or institutions it suspected were connected to terrorism.

It may have done more harm than good: $24 million in US financial institutions was frozen as a result of this action (other countries froze $75 million in assets). But this prompted Saudi institutions and individuals to withdraw a significant portion of their capital invested in the US--estimates now run as high as $200 billion.

Nevertheless, recent volatility in global stock markets--and lack of attractive opportunities in home countries--is causing a net inflow of investment funds to the US. Islamic investors, like many others, are hard pressed to resist the great stability provided by US real property investments. The Saudi-based Al Rajhi Bank estimates that there are over 150 Arab-based Islamic financial institutions looking to place managed funds into overseas investment vehicles. Similar to socially conscious American investors, these Islamic investors do not want their money to go to alcohol, tobacco or firearm interests. Multifamily developments like Castle Pines are ideal investments, seen as providing a social benefit and a good financial return.

Isam Salah, partner in the New York-based law firm of King and Spalding, and head of its Islamic Finance and Investment Practice Group, believes there are now about 30 Islamic real estate funds in the US, up from only three in 1999. "It was just circumstance that these Islamic funds emerged when they did," he says. "There was no legal impediment. It reflects the evolution of Islamic finance as it grows in size and sophistication."

Shari'ah-compliant Islamic investment vehicles are proliferating within the US itself. There are now Islamic banks, real estate trusts, leasing operations, mutual funds and finance companies. They service a US Muslim community now estimated at 12 million, which enjoys a median income of $40,000 (well above the national average). It is a market with a future: Islam is the fastest growing religious sector in the US, with an estimated 2.5% annual growth rate.

Bankers and brokers have moved quickly to cater to this new, well-defined investment group. Dow Jones, which operates the benchmark Dow Jones Industrial Average stock index, has developed a whole family of country and sector indexes, tracking Islamic-compliant equities, under the Dow Jones Islamic Market Index (DJIM) it launched in 1999.

These indexes are designed to screen equities for individuals as well as institutional investors. Companies that comprise the DJIM are Shari'aah compliant (with allowances made for western financial practices): they cannot engage in sale of alcohol, firearms, gambling or tobacco as their primary business. There are now 1,457 companies included in the DJIM global index, of which 625 are based in the US.

According to F Scott Valpey, Executive Vice President, Azzad Asset Management, Inc., a US-based Islamic mutual fund manager, there are 102 known Islamic equity funds in the world, including three Islamic equity mutual funds and one private equity fund available to investors in the US. Although mutual funds have existed for over 80 years, the North American Islamic Trust (NAIT) is credited with inventing the first mutual fund directed at Muslim investors in the US in 1986. US-based Islamic funds have performed above average: for example, over a 10-year period, the Amana Income Fund has generated average annual returns of 12.45%. The Amana Growth Fund, over the last five years, has averaged annual returns of 22.45%, although its performance so far this year represents a loss of a little more than 10%. Islamic funds are still considered boutique operations by the US investment community at large. There are 7,791 mutual funds in the US, of which 3,952 are equity funds.

Similarly, Islamic investment still represents only a small fraction of total Arab overseas investments. Funds invested in a Shari'ah-compliant manner total $150 billion. Estimates of Arab money invested abroad range from as high as $2,400 billion to as low as $500 billion. Some western sources estimate that the volume of Arab investments in the West alone, last year stood at $1,300 billion, of which $750 billion came from Saudi Arabia. Almost 40% of the Saudi funds ($300 billion) are in the US, with another 30% in Europe.

Funds invested in a Shari'ah-compliant manner are increasing by 15% annually. However, there are limits to how far such investment can grow in the US. Although there is now approximately $7 billion in Islamic-structured real estate finance, this represents less than 2% of total Arab real estate investments in North America. Often, the issue is convenience: conventional (interest charging) banking facilities are readily available to finance most Arab real estate investments in the United States. Typically, this means the overseas investor has to pay only 20% of the total, and assume a loan for the balance of the investment. However, Arab institutional investors are feeling greater pressure to make their overseas portfolios more Islamic. With more funds being governed in a Shari'ah manner, US companies seeking finance are expected to develop Islamic financing packages to attract those funds.

"Islamic funds have proved they can operate successfully in the United States," stated one New York-based Arab investment advisor. "The key issue is structuring the financing package."

Islamic Investment

The Dow Jones view of halal equities

Index                        Stocks      Market        "Cap      (%)
                                        Capita-       Gap" **
                                        lization     $ billion
                                       $ billion      Traded
                                      Full Value *   Shares *

(Dow Jones Islamic Market)

(DJIM)                        1,457     $7,397.5      $6,461.1   87.3
DJIM US                         625      4,212.9       3,994.4   94.8
DJIM UK                         112        706.4         464.7   65.7
DJIM Japan                      178        596.3         441.4   74.0
DJIM Europe                     293      1,986.5       1,646.2   82.8
DJIM Asia/Pacific               439      1,029.6         694.6   67.4
DJIM Technology                 338      1,347.1       1,193.7   88.6
DJIM Extra Liquid               100      4,637.4       4,232.5   91.2

* Full value is total market value of equities of index companies.
Traded shares is the value of shares in those companies
which are actually available to trade.

** The difference in capitalization, measuring the value of traded
shares as a percent of total market value.