How can I invest with small budgets in real estate ethically and in accordance with Islam?

As a private investor with a limited budget, how can I invest in real estate in addition to buying a conventional house? How do I do this in accordance with my ethical and religious values, which make interest and speculation taboo? Is it even possible, or do I have to make compromises in order to use my savings sensibly?

We deal with these questions in the following article, giving you insight into the investment opportunities offered by the real estate market and its financial instruments.

To demonstrate that even those with small budgets can invest in real estate, we focus on investments of up to €5,000.

Overview

We will take a closer look at the following financial instruments:

Open real estate funds
Closed real estate funds
Real estate stock companies
Real estate investment trusts (REITs)
Crowd investing
SUKUUK (rent-based, interest-free, and without speculation)

The highlights at a glance

In the following table, the various real estate investment forms are subjected to direct comparison.

*Secondary market: In finance, a secondary market is a sub-market through which market participants buy or resell financial instruments that are already in circulation. Real estate funds usually have a secondary market. A few crowd platforms also offer trading places for investors.

Explanation

1. Open real estate funds

There are two alternative investment funds where the investors’ money is mainly invested in real estate: open-ended and closed-ended real estate funds.

Open-ended real estate funds invest in many different properties, often in different locations around the world, to spread risk and investors’ capital widely. Since investors can get in at any time, it is called an open fund. Due to regulatory requirements, commercial properties—such as office complexes, retail properties, and shopping centers—are preferably included in the portfolio. It should be noted that, for you as an investor, there is often a minimum holding period of 24 months and a notice period of 12 months.

Income is generated through rental income and the increase in value of the real estate portfolio and distributed proportionately to you as a shareholder in the form of dividends.

Key facts at a glance

Entry is possible from as little as €10.
These funds contain an issue surcharge that can be as high as several percent, causing additional costs.
Holding periods and periods of notice for the sale of shares are common.
The redemption of units can be stopped by the fund if there is a strong urge to sell. Correspondingly, high losses can arise if purchases are resumed.
The interest-based financing does not conform to the rules of Islam.
Shares can be purchased through the bank.

Target group

Investors who want to invest in real estate in a diversified manner

2. Closed real estate funds

Closed real estate funds are the second type of investment fund we present here.

Unlike an open real estate fund, you usually have to pay a minimum sum of several thousand euros for the purchase. As the name implies, after the required capital has been raised, the fund will be closed. No other investors can participate afterwards (unless other investors sell their fund shares). Often, only a specific property is financed, or sometimes a few properties. Typical properties financed in this way include office buildings, hotels, hospitals, shopping centers, and residential and commercial properties, the construction of which is then commissioned. The term extends over 10 to 30 years, during which time your invested capital is tied up.

Since you, as an investor, are making a direct investment here (depending on the type of fund), an obligation to make additional payments can be demanded if the project is in trouble. If the company becomes insolvent, you are liable for all your private assets.

Closed real estate funds offer investors the opportunity to invest in projects with a higher risk profile. The income comes mainly from rents and an increase in the property’s value.

Key facts at a glance

Entry is possible from €5,000.
These funds give investors the opportunity to invest in specific real estate projects, such as commercial real estate or hotel real estate.
With successful settlement and sale, high profits can be achieved.
Investors can only get involved until the set target amount is reached.
In the event of poor development, there may be a total loss, with a possible obligation to make additional payments.
Shares are unlisted and can only be sold through the secondary market in the case of early sales (no or low fungibility).
Risks such as delays, legal risks, and other construction-related risks may arise in new construction projects.
It involves interest-based financing.

Target group

Investors who want to invest in capital investments for the long term
Experienced investors or investors accompanied by a financial advisor
Investors looking for access to exclusive projects

3. Real estate stock companies

Real estate stock companies offer you another opportunity to invest indirectly in real estate. A real estate company mainly buys residential complexes and rents them out. As a rule, it has a broadly diversified real estate portfolio consisting of various properties in different regions. Well-known German real estate companies include Vonovia SE, Deutsche Wohnen SE, and LEG Immobilien AG.

Negative headlines can give the real estate stock company a bad image, which can also have a negative impact on the value of shares. The resentment of tenants and other stakeholders can lead politicians to introduce regulations that entail disadvantages for real estate stock companies.

As an investor, you have voting rights that you can use at general meetings. Dividends are usually paid to give investors a share of the profits.

Key facts at a glance

Entry is possible from €1.
As a shareholder, you are given the right to codetermination at general meetings.
They grant you access to large real estate portfolios.
They provide very liquid and fungible shares that can be bought and sold cheaply and quickly on the stock exchange.
Real estate corporations are not exempt from corporate taxation.
Distributions are not mandatory and may be suspended or canceled.
The value of the joint-stock company is based not only on the value of the real estate portfolio but also on other factors, such as its management’s work, public appearance, and stakeholder relationships.
Interest-based financing and the issuance of interest-bearing bonds.
The share price can be traded every trading day.

Target group

Investors who want to invest broadly and diversely in a large real estate portfolio in different locations without being tied to a specific term

4. Real estate investment trusts (REITs)

A special form of real estate company is the so-called “real estate investment trust” (REIT). REITs are exchange-traded real estate shares that invest in real estate and land for their investors. This special status comes with a high level of regulation and, thus, high administrative costs.

REITs are special real estate stocks with certain advantages and extra regulations anchored in the REIT Act. In order to obtain the status of an REIT, certain requirements must be met, and these requirements differ from country to country. In Germany, for example, an REIT must have more than 75% of its capital invested in real estate.

Mainly commercial properties are included in the portfolio. Further requirements for share capital, debt, free float, and many other points are regulated in the law regarding German real estate stock corporations with listed shares (REIT-Gesetz [REITG]).

These requirements make investing in real estate easier and more attractive for investors. Almost all of the profits of an REIT are distributed (at least 90%). The REIT also receives tax advantages; corporate income tax and trade tax do not apply. Taxation comes into play only when dividends are paid out. This results in higher dividend payments than other real estate companies.

In addition, an investment in REITs offers you the advantage of being able to position yourself broadly in real estate with little effort and benefit from a stable income. There is also the option of buying/selling REIT shares flexibly on the stock exchange without paying front-end loads or having to adhere to notice periods and minimum holding periods, as with open-ended real estate funds.

Properties that can be included in an REIT portfolio are as follows:

Hotels
Office buildings
Hospitals
Shopping
Centers Resorts

Key facts at a glance

Entry is possible from €1.
Strict regulations provide the REIT company with a fixed framework.
Their high profit distribution is required by law.
They allow investors to invest diversely in the commercial real estate sector (office, retail, hotels, etc.).
Currently, there are only five REITs in Germany.
According to the REIT Act, German REITs are not allowed to invest in residential real estate.
Dividends from foreign REITs are additionally subject to a withholding tax. The amount of the withholding tax depends on the country.
They involve interest-based financing and the issuance of interest-bearing bonds.

Target group

Investors who want to receive dividends with a high payout ratio (something that is required by law for REIT companies!)

5. Crowd investing

Crowd investing, or equity crowdfunding, is an alternative way to finance projects, start-ups, and many other ideas. The crowd (a large number of investors) plays a key role in financing.

Real estate projects have a high capital requirement, which is usually covered by banks or large investors. In crowd investing, the crowd takes on the role of the bank and becomes a lender with an interest requirement.

In the special case of real estate crowd investing, the German market mainly offers new construction projects or refurbishments in the commercial sector. Both variants involve additional risks, such as possible construction defects, construction delays, rising raw material prices, and other factors that must be taken into account. Accordingly, higher costs arise, which are reflected directly in investors’ profit levels.

Conventional crowd investing projects do not carry 100% of the financing amount. The crowd and the real estate developer take on the equity share, while the debt portion is covered by an interest-bearing loan from a bank. The crowd and the bank receive interest and amortization from the real estate developer. In the event of insolvency, the bank, as the senior creditor, is served first. This is unlike the SUKUUK model, which we will discuss in more detail later.

Key facts at a glance

Entry is possible from €50 EUR.
There is no blind pool, and a specific selection of properties is possible.
It offers high transparency in the selection of real estate projects.
There is no dependence on management in the selection of real estate.
Shares are not listed on the stock exchange and can only be sold on a secondary market when one is available (low fungibility).
There is no provision for a say in crowd financing.
There is entrepreneurial risk, as the return can suffer in the event of rent losses or other breaches of contract.
Interest is also incurred here, as borrowed capital is obtained via a bank loan.

Target group

Investors looking for a range of short-, medium-, and long-term investment opportunities in predominantly commercial real estate
Investors looking for access to exclusive real estate development projects
Investors who want to decide for themselves which properties fit into their own investment portfolios

6. SUKUUK (rent-based, interest-free, and without speculation)

SUKUUK is a new form of crowd investing that is ethical, sustainable, and safety-oriented. It is an online platform that brings value-oriented investors and customers together—from the crowd for the crowd. As an investor, you participate in the financing of private homes and help others buy a house. For this, you acquire shares in the property. For the purchased shares, you will receive monthly rental income from the buyer.

Investments in selected residential properties in Germany are possible from a one-time fee of €250, without interest, speculation, or the obligation to make additional payments.

Key facts at a glance

Entry is possible from €250.
Only residential real estate and existing properties in Germany are financed.
On the SUKUUK platform, you decide which real estate project you want to support.
There is no obligation to make additional payments.
Diversification is possible by investing in several properties.
Your profits are rent-based and completely independent of the interest rate market.
It is the only way to participate in the real estate market without interest or speculation.

Target group

Value-oriented investors who appreciate ethical and sustainable financial products
Investors who want to decide for themselves which properties fit into their own investment portfolios

This article has given you an overview of investment opportunities in the real estate market. Decide for yourself what suits you and your values best.

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