What Does the U.S. REIT Market Have in Store for Nonconventional Investors? The Case of Shariah Compliance

Abstract

The authors model the behavior of a hypothetical investor who is interested in U.S. securities but is also interested in compliance with Islamic investment guidelines. They apply financial restrictions to a 1990–2010 sample of Shariah-recommended REITs. In cumulative performance tests, they find evidence of outperformance associated with compliance during the entire study period and during the early 2000s recession and the late 2000s financial crisis. In risk-adjusted tests with a univariate model, the authors also find consistent evidence of outperformance during the entire study period and in times of economic turbulence. Using multivariate models, they find that compliant portfolios do just as well as noncompliant portfolios. They conclude that financial compliance might be rewarding for Shariah-abiding investors who are interested in the U.S. REIT sector. In separate tests, the authors show that leverage and REIT performance are independent. Yet, they show anecdotal evidence that outperformance of compliant portfolios may imply efficiency of an underlying conservative, but not necessarily religious, strategy that avoids the excessive use of debt, interest, and cash.