By Daliah Merzaban
MANAMA (Reuters) - Islamic banks and insurers, starved of long-term bonds, are being forced to invest in Gulf Arab real estate in an increasingly risky bet on stable returns after a five-year rally in property prices.
With about $700 billion in assets, according to consultancy Mckinsey, Islamic financial institutions are struggling to park their cash without violating religious rules that exclude interest bearing bonds and speculative investments.
Islamic bonds, which pay profits rather than interest, suit their needs best. There was about $82 billion worth of Islamic bonds, or sukuk, outstanding in July before a global credit crisis virtually dried up sales. Most mature in five years.
At longer maturities the choice narrows further. Not one sukuk has a maturity of 30 years, the typical term of an investment that matches potential liabilities such as a life insurance policy.
"Where is Islamic money?," said Sameer al-Wazzan, chief executive officer of Solidarity, the world's largest Islamic insurance firm by capital. "It's all in buildings and housing," Wazzan told the Reuters Islamic Finance Summit.
Actually most Islamic banks invest in deposits with conventional banks, which have units complying with sharia, or Islamic law. Some of their cash is also invested in equities and other asset classes.
"The problem we face is the availability of long-term Islamic investments," Wazzan said.
REAL ESTATE FUNDS
Without more sukuk, Gulf banks and Islamic insurers, known as takaful companies, are turning to real estate investments hoping to replicate the kind of returns that bonds offer.
Real estate funds that offer capital guarantees and maturities of about five years are increasingly popular, said Ashraf Bseisu, chairman of the Bahrain Insurance Association, a grouping of 39 insurers, brokers and reinsurers.
Because such funds guaranteed investors would not lose their capital, insurers were investing in them to get round prudential regulations that limit exposure to volatile and risky assets, he said.
"The asset allocation of most takaful companies is not what it should be," said Bseisu. Islamic insurers hold as much as 40 percent of their assets in real estate investments compared with an industry guideline of no more than 10 percent, he said.
In the past five years, property investments have paid off handsomely. Prices have surged as governments in the world's top oil-exporting region invested a windfall from a near five-fold rise in oil prices since 2002 in infrastructure and real estate, and relaxed rules on foreign ownership.
Office rents in Dubai have tripled since 2005, United Arab Emirates property services firm Asteco said in October. In Qatar, which has the world's third-largest gas reserves, office rents surged 20 percent in the year to June, according to consultancy CB Richard Ellis.
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