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Mid-West to Middle East - Property Week
08 August 2008
Embracing Islamic law will attract wealthy Middle Eastern investors in a climate of tightening credit, says HDG's Harold Garrison.
Jonathan Brasse at Property Week reports.
The US is quite an introverted country. It is unusual for a small US company like ours to step out internationally. I'm proud of that.'
So says self-proclaimed workaholic Harold Garrison, founder of Indianapolis-based fund manager and developer, HDG Mansur.
Garrison's roots are as introverted as they come. He grew up in a small countryside community in northern Indiana where bailing hay was a common livelihood. But a stint in the US Army in his twenties enabled him to travel and opened his eyes to the world outside his rural confines.
One month from his 60th birthday, Garrison concedes that he now spends half his waking life travelling, visiting his company's offices in Indianapolis, New York, London and Dubai, marketing funds to potential investors and finding suitable investments for them.
Garrison's workload is not about to ease up. In the past month HDG has started capital raising on two new funds: HDG International Property Fund, a core fund that aims to attract more than $200m (£100m) of equity to buy investment properties and debt in Europe and the US; and HDGM Opportunity Fund I, an opportunistic fund targeting £350m (£175m) of equity to spend on the troubled residential and mixed-use markets in the US.
These new funds represent polar ends of the investment spectrum, enabling Garrison to blend risk with security – a must, he believes, in the current market conditions. They also bring the number of funds it manages to three.
The third is his most coveted project: the open-ended HDG Mansur Amanah Global Properties Income Fund. The Fund is the largest of its kind in the world, having amassed more than $500m (£250m) of equity since its inception in September 2002 to December 2007. Crucially, it is also sharia compliant.
SPENDING POWER
Sensing that it needed remarketing, Garrison took the fund, which also invests globally, back on the road. Since starting in May, he has captured an additional $150m (£75m) of what he terms 'loose commitments', and aims to grow this equity base to $1bn (£500m) within 18 months. With debt, he expects the fund to have spending power of $3.5bn (£1.75bn).
These three funds will dominate HDG Mansur's horizons. Garrison plans to expand the business across the globe to continue its growth of 25%-35% a year.
'I would be pleased to keep it at that rate. It's one thing to manage a business from one office and an entirely different thing to do it from several internationally.'
New offices are planned in the short term, including one in Florida and one in the Far East where he had previously bought a property between 1996 and 2000.
Garrison first became involved in property in 1978 when he started an architectural firm, HDG Architects, having graduated from Ball State University with science and architecture degrees. In 1982, he launched his first develop business, Mansur Developments, with co-founder Lee Alig and three years later he sold the architecture firm.
'I realised I couldn't do both things,' he says. While the business grew in the US, Garrison's ambitions to take the company overseas did not match those of Alig and in 2000 the partners went their separate ways: Alig formed Mansur Real Estate, a Midwest US property services business, and Garrison formed HDG Mansur.
The business was formed to develop property investment vehicles for wealthy individuals and international institutions. Garrison declines to name funders, but says they are Middle Eastern, American and European. In addition to its central Amanah fund, the company managed five international property funds established by an undisclosed Middle Eastern bank until 2002. These held €400m (£315m) of investments in North America and south-east Asia as well as shares in European property companies.
In the past 12 months, the company has completed 18 investments worth €567m (£446m) encompassing more than 3m sq ft of property. These were completed on behalf of both sharia and non-sharia-compliant investors. Garrison sees the former growing in importance in future, although he says: 'Even in completely sharia-compliant funds there are investors who are not Islamic. Their perspective is purely property.'
Sharia-compliant investment vehicles are riddled with restrictions, particularly if used to invest internationally. In addition to the investment laws of a given country, sharia compliancy entails incorporating Islamic law. Paying or collecting interest and investment in companies involved in gambling, munitions, alcohol, prostitution and in industries that use speculation as a means of making money, are but a few of the forbidden areas.
Garrison remains undeterred by these restrictions and says demand from his longstanding pool of investors, many of whom are Middle Eastern, encouraged the expansion. Given that much of the world's equity comes from the Middle East, it has been prudent to create vehicles that cater for its exportation.
He adds that sharia investment, like Islamic law, is open to interpretation. 'Its structure is changeable,' he says. 'A lot of respected scholars have taken on the challenge of working out how Islamic financing works today. This has been going on for more than 10 years.'
Paul Horning, head of Innovest Capital, the US investment arm of Gulf Investment House, which also runs sharia-compliant funds, says that while they come with additional hurdles, the lack of available debt worldwide is forcing businesses to re-educate themselves.
'I no longer find myself having to explain sharia-compliant vehicles as often,' says Horning. 'At least in the US, equity is replacing debt and, through sharia instruments, there is a constant source of equity. If debt was as abundant as it used to be, sharia [compliancy] wouldn't be as much of a solution.'
ISLAMIC SCHOLARS
Nonetheless, Garrison is still using debt. Through a complex device called an Ijara lease, a form of debt can be raised.
'The solicitors still need to explain how it works to me,' admits Garrison. But he says knowing the reason behind why one financial instrument is sharia compliant and another is not is not important – HDG's vehicles are vetted by panels of Islamic scholars before they are taken to the market.
Property, as any investment, can be subject to the highs and lows of market forces, so a fund that invests in property would appear to contradict one of sharia law's core principles, that of Gharar, or uncertainty. Under sharia law contracts where the subject matter, price and time of delivery are uncertain are prohibited. But Garrison says he does not need to explain this. He says: 'It is not our job to interpret Islamic or sharia compliance. That is why we have experts. We go to sharia boards and present different concepts. From those the board would direct us to what is appropriate.'
Mark Tolner, chief financial officer of Dubai-based fund manager, First Group, believes raising funds from the sharia-insistent investors for investment into non-sharia markets is trickier than investing them in Muslim states. He says: 'Sharia compliance is best in countries where the model matches the law of the land.'
But HDG has managed to attract companies that insist on sharia compliance, such as Dubai's Nakheel Developments, into places such as Europe. Nakheel is a significant shareholder of the £255m, mixed-use Finzels Reach scheme in Bristol, for example. The property is no longer in the Amanah fund, but its money was used to finance early parts of the development.
Innovest's Horning says Garrison is a pacesetter in bringing sharia-compliant vehicles into property investment and that others will follow his lead. 'He is definitely ahead of the pack in terms of organising both sides of a [sharia investment] and now the flow of funds in the market is matching his platform,' says Horning.
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