The underlying idea is sound. A REIT pools money to own income-producing property and distributes the rent, which is ownership of a real asset generating a real return - exactly the shape Islamic finance favours. Three things decide whether a particular REIT works. Tenants: a mall REIT whose income includes conventional banks, bars, cinemas and betting shops is earning partly from impermissible activity, and most screening bodies apply a tolerance of around 5% of revenue before the holding fails. Leverage: conventional REITs typically borrow heavily at interest, and standard screens require interest-bearing debt below roughly a third of total assets, which many exceed. Cash and interest income: money held in interest-bearing deposits produces income that must be purified. Shariah-compliant REITs exist and apply these screens continuously, which is the simpler route than assessing a conventional REIT yourself.
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Because a REIT's income is rent, and rent comes from whoever occupies the buildings. A portfolio anchored by conventional banks, bars, cinemas or betting shops is generating income from those activities, and you receive a share of it. Screening bodies generally allow around 5% of revenue from impermissible sources before the holding fails, with the corresponding proportion of your income purified below that threshold.
An equity REIT owns buildings and earns rent. A mortgage REIT owns loans secured on property and earns the interest spread between its borrowing cost and what borrowers pay. The second is a lending business and fails at the first question rather than on any ratio - interest income is the entire model, not an incidental component. Establish which type you are looking at before anything else.
Industrial and warehouse, data centre and healthcare REITs typically have straightforward tenant bases. Retail and mixed-use are hardest, because a large mall will almost always contain a bank branch, a bar or a cinema. Office REITs sit in between and depend heavily on which firms occupy the buildings.
Continuous screening rather than annual self-assessment
Islamic REITs restrict tenants to permissible activities, cap non-compliant rental income, use Islamic financing instead of conventional debt, and have a supervisory board reviewing holdings continuously. Where available this is far simpler than assessing a conventional REIT yourself.
Verify the supervisory board is named and independent, and check whether purification figures are published.
Evidence used to explain the general principle. These references do not replace personal scholar review.
4 Sources & 1 Scholarly Opinions
Compare the general position and the details scholars usually check.
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