How This Investment Fund Is Using Sharia Law To Reach Big Investors
The success of Ethika Investments’ initial Ethika Diversified Opportunity Fund I, which is expected to deliver a net ROI of 22.3% and a 2.1x net equity multiple to investors, has led to another offering, Ethika Diversified Opportunity Fund II. Bisnow caught up with Ethika Investments/Laurus Corp chief investment officer Austin Khan to learn more about the fund investors and types of properties it will target.
Austin tells us the new fund is designed to attract high-net-worth and family office clientele, as well as public pension funds, foundations, endowments and other institutions. Nearly 45% of Fund I investors are from the Middle East and South America; they were attracted by Ethika’s efficient tax structuring, availability of a Sharia-compliant way to invest, presence in key international financial gateways, and a vertically integrated platform that often results in lower fees and higher returns.
He expects the second fund to close approximately 18 months following the first fund close, with a similar mix of investors, many of whom invested in Fund I. Austin notes that to attract investors from the Middle East, his firm has set up an intermediary to channel capital to investments, then manage profits according to sharia law. He explains that sharia law does not allow for the receipt of interest or a profit on money invested, so this third-party manager separates non-permitted income from ROI and channels it into something as directed by the investor, such as a charity.
Like the previous fund, Fund II will acquire office, hotel and retail assets. But unlike Fund I, which was launched as the market was emerging from the recession in 2010, Fund II will focus on value-add opportunities. (Pictured is a rendering of LA's Howard Hughes Promenade, which was purchased by Ethika Fund and is undergoing a $30M renovation by Laurus Corp, Ethika's development affiliate.)
The decision to focus on a value-add investment strategy was based on changed market conditions. “Class-A and trophy assets in gateway markets are fully stabilized, so core-to-core opportunities are more difficult to come,” Austin says. “Investors are buying at a 4% cap and financing at 2%, but if the interest rate moves 1%, one-half of that spread is eroded.”
Beginning immediately, the fund's leadership team will identify and evaluate potential investment opportunities in the $25M to $150M range, located in top US markets with steady growth in key industries—financial services, energy, technology, healthcare and education. “These underperforming assets are still very well-priced with a great deal of upside potential, versus core real estate assets that have been overbought and overpaid for over the last several years," Austin says.
Specific characters include a walkable neighborhood; with unique features or striking architecture; infrastructure and space to add technologies, services and amenities; and priced below replacement cost.The 393-key Hunt Valley Inn in Baltimore, for example, was purchased by Ethika Fund I and received a $15M top-to-bottom renovation that included complimentary WiFi, a lounge/bar, a café, a fitness center and a heated pool (pictured is the new lobby).
Austin says hotels should have space for amenities, like a restaurant, conference facility and fitness center. The $12M renovation of the 384-room Hilton in San Antonio, which was also purchased by Ethika Fund I, covered all aspects of the property, including guest rooms, meeting spaces, recreational amenities, and food and beverage outlets. “On the office side, he adds, "we’re looking at opportunities in markets with certain tenant types, like healthcare or tech, and space to do public gathering areas and other amenities.”