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Comparing Islamic REITs: Insights from Global Financial Crises
Introduction
Real Estate Investment Trust (REIT) refers to financial security that can be traded and principally invested in the real estate ventures. The investment can be direct or indirect in regard to properties and mortgages. REITs differ, for example, there are equity REITs and Mortgage REITs. Additionally, there are conventional REITs and Islamic REITs. Islamic REITs are mostly in use in countries that operate under Islamic Laws. The conventional and Islamic REITs are similar in many aspects. Nevertheless, Islamic laws govern Islamic REITs. The general structure of conventional and Islamic REITs are the same. The observation of Sharia principles in all aspects of Islamic REITs brings about the only difference. The government monitors the operations of Islamic REITs too. In many countries, the Islamic REIT (as a way of investment) has increased significantly. However, the performance of Islamic REITs during economic downturns has not been determined. It has not been determined whether they perform better than the conventional REITs.
This paper identifies and discusses the effectiveness of Islamic REITs during economic downturns. This occurs by comparing two conventional and two Islamic REIT. The two conventional REITs are British Land and Vornado. On the other hand, the Islamic REITs are Ezdan and Deyaar. The period under consideration is 2007-2012. During the global financial crisis, both conventional and Islamic REITs registered negative performance. Many REITs underperformed even before the global financial crisis began. However, there are indications that REITs performed better after the global financial crisis ended. This study provides an insight into how Islamic REITs performed compared to the conventional REITs during the pre, during, and post-global financial crisis.
Pre Global Financial Crisis
Under this examination, the period before the start of the global financial crisis is between the years 2007 and 2008. The yearly averages of all the four REITs during this period were volatile. Three of the REITs recorded a positive return on assets. However, Deyaar did not record a positive return on assets. However, the table has not indicated the figures of Deyaar during this period. British Land recorded the highest returns on assets (16.4124%) followed by Ezdan (11.4377%). Vornado recorded 2.8141%. In 2008, Ezdan recorded the highest returns on assets (22.4061%). British land and Vornado recorded -10.7689% and 1.7999% returns on assets.
By these results, the conclusion may be that Islamic REITs offered better returns on assets compared to conventional REITs before the global financial crisis. The possible reason for the better performance of Ezdan during the year 2008 may be due to increased investment. It is not known whether it is the features of Islamic REITs that made it perform better. In case investment in Ezdan increased during the period, then it had the ability to improve performance and hence offer superior returns to investors. British Land and Vornado underperformed in the year 2008. Again, it is not known whether it is the features of conventional REITs that led to the underperformance of the REITs.
The net profits after tax indicate that the conventional REITs performed better than Islamic REITs in 2007. British Land and Vornado registered 465.188 million and 568.906 million in 2007. Ezdan recorded a net profit of 154.1515 millions in 2007 after tax. However, in 2008, Ezdan and Deyaar recorded the highest net profits compared to British Land and Vornado. British Land and Vornado recorded -3137.57 millions and 395.043 millions net profits in 2008. On the other hand, Ezdan and Deyaar recorded 372.8322 millions and 298.1763 millions net profits in 2008. The reason for the poor performance of the Islamic REITs in 2007 could be that they had just been formed two years back. This also indicates that the Islamic REITs performed better compared to the conventional REITs before the global financial crisis. However, the performances of the Islamic REITs are not with high margins. This could be due to Sharia principles that do not expect REITs to take part in risky ventures. In terms of share price, the conventional REITs offered higher returns to investors in the two years. In 2007, British Land was valued at $7.4139 per share while Vornado was valued at $3.2435 per share. In 2008, Vornado was the highest valued REIT with a share price of $2.1174.
During The Global Financial Crisis
This refers to the period between the years 2008 and 2010. During this period, all the REITs reported the worst returns on assets except Ezdan. British Land recorded -38.3763% returns on assets while Vornado recorded 0.5104% return on assets in 2009. However, Ezdan recorded a 46.9219% return on assets in 2009. In 2010, when the crisis was ending, British land recorded 16.31% returns on assets while Vornado recorded 3.1835% returns n assets. This indicates that during the start of global financial crisis, the Islamic REITs performed better than conventional REITs.
In 2009, the profit after tax for British Land and Vornado were -6668.39 millions and 106.169 millions respectively. The profits after tax for Ezdan was 2383.339 millions while Deyaar recorded 8.2095 millions after tax profits. These also indicate better performance of Islamic REITs at the start of the crisis. On the other hand, as the crisis neared an end in 2010, British Land and Vornado recorded 1820.038 millions and 647.883 millions. However, Ezdan and Deyaar recorded 33.3286 millions and -627.542 millions after tax profits respectively. The share prices of all the four REITs were low in 2009. However, the share prices of the conventional REITs were higher than those of Islamic REITs.
Post Global Financial Crisis
After the global financial crisis (the period after the year 2010), the return on assets of conventional REITs were higher than those of Islamic REITs. British Land and Vornado recorded 12.3005% and 3.2336% respectively. However, Ezdan and Deyaar recorded 1.066% and 0.5256% respectively. These show that the Islamic REITs performed poorly after the global financial crisis compared to the performance of the conventional REITs. Additionally, the after tax profits of the conventional REITs are higher than that of the Islamic REITs. British Land and Vornado recorded after tax profits of 1307.221 millions and 662.302 millions in 2012. These are higher than the after tax profits that the Islamic REITs recorded. Ezdan and Deyaar recorded only 94.8642 millions and 10.2565 millions as after-tax profit in 2011. This may be due to increased confidence of conventional REITs. In addition, the share prices of the conventional REITs in 2011 and 2012 are higher than are those of the Islamic REITs. Thus, the conventional REITs are a better investment option after the global financial crisis.
Data
The data used in this analysis was obtained from Bloomberg website.
Returns on Assets.
Profits after Tax.
Share Price.
Conclusions
The effectiveness of Islamic REITs as a viable investment option during economic downturns has not been determined. The paper aimed at determining the effectiveness of the Islamic REITs during economic downturns by comparing their performance with the conventional REITs during the global financial crisis. The comparison involved division of the crisis period in to pre, during and post global financial crisis. Before the beginning of the crisis (2007), the conventional REITs performed better than the Islamic REITs by comparison of the returns on assets. However, in 2008, Ezdan had higher returns on assets compared to the conventional REITs. The after tax profits of the Islamic REITs were higher than that of the conventional REITs in 2008. In conclusion, the Islamic REITs performed better compared to conventional REITs before the global financial crisis. However, during the global financial crisis (2009- 2010), both REITs performed poorly. Nonetheless, in 2010, the Islamic REITs performed poorly compared to the conventional REITs. After the global financial crisis, the conventional REITs performed better compared to Islamic REITs. These results indicate that the Islamic REITs are not sound investment options during economic downturns.
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