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Middle EastMay 1 2005

Time share project uses sukuk financing concept

Farhan Bokhari reports on an innovative new real estate development in Saudi Arabia, which will run on the time-share principle and is being funded via Islamic financing.
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It’s not surprising that the sponsors of the first time-sharing apartment complex in the centre of Makkah, the location of Islam’s holiest site known as the Kaaba, or House of Allah, in Saudi Arabia, have borrowed financing concepts from Islamic banking and married them with the name Zam Zam to develop what they hope and claim is set to be a highly successful venture.

Makkah draws up to two million Muslims to the annual Haj pilgrimage, when they spend weeks in the holy city. This prompts increased demand for a variety of accommodation, from shared rooms in flats to luxury rooms in the city’s upcoming five star hotels.

The $400m time-sharing complex known as Zam Zam Tower, which has more than 1200 apartments, is unique. It is the first time that a practice common across some of the world’s most sought-after tourist destinations is being used to cater for pious Muslims.

The name Zam Zam is taken from the centuries-old Zam Zam fountain in Makkah. For the pilgrims, the fountain is far more than a source of water. Many believe it has medicinal and spiritual qualities. The name is also a reminder of a miracle. Its history describes how the prophet Ismail – son of the prophet Abraham – braving scorching heat, dragged his feet on the sandy stretch of Makkah and up sprung a fountain, which still runs to this day and is used for a host of purposes. Often Muslims returning from the annual pilgrimage carry plastic canisters filled with water from Zam Zam, despite protests from flight attendants about the shortage of space on flights leaving Saudi Arabia.

Sukuk financing

The sponsor of the project – Kuwait’s Munshaat real estate company – has added to the appeal of the name of its real estate by using the sukuk financing concept, which is permissible under Islam. Regular mortgages and other modes of financing with fixed interest rates are forbidden because they are considered usury.

“This project marks a breakthrough in the Islamic finance industry,” Fouad Al Hamood, chairman of Munshaat, told The Banker.

Details of the project, which is still under construction, are available to prospective buyers on the internet at www.zamzamtower.com. The website’s welcome message is: “Imagine that you are here every year, in the best spot on earth near the Holy Mosque.”

Foreign purchasers

Mr Al Hamood is eager to emphasise that non-Saudi nationals who purchase time at Zam Zam Tower, would only occupy their properties for the duration of their contract lasting up to 24 years. This, he says, is essential to keep purchases within the strict Saudi laws, which do not allow foreign ownership of real estate in the country.

“This project provides an answer to what was a very difficult issue in Makkah. When there are pilgrims during the peak season, accommodation is very much needed,” says Mr Al Hamood.

Under the terms of the agreement, prospective occupants would have to reserve an apartment for a particular part of the year. Prices would be highest during the Haj. Occupants would be allowed to sell their lease to other Muslims, leave it to their dependants in their will or rent out their time to other tenants.

The sponsor is so confident of the venture’s success that it has begun negotiating a second site for a similar project in Medina, the second holiest city in Saudi Arabia where the prophet Muhammad was buried.

The agreement by the Saudi authorities to allow such a venture may be a response to fast-mounting anxieties among officials in many Islamic countries responsible for organising groups of pilgrims over the future development of real estate in Makkah. Some analysts say property prices there – driven by the demand from the millions of pilgrims visiting for Haj each year have shot up to levels comparable to New York or similar expensive urban locations around the world.

During Haj, pilgrims begin a four-day journey from Makkah, heading first towards the spacious grounds of Arafat before going to Muzdalifa and then to Mina, the three destinations along the route of the pilgrimage. But before the journey and for months afterwards, pilgrims stay in the city, making it the main focal point of their visit.

The Haj also marks the single largest annual gathering anywhere in the world, which presents anyone offering accommodation with considerable commercial opportunities. The asking price for Zam Zam Tower ranges from $284,000 for the most spacious apartments for 44 days during the Haj season (the average length of time that pilgrims stay) to about $6000 for the smallest studio flat for a week during the lowest season of the Islamic year.

Mr Al Hamood says that the complex would not have been possible without the support of the Saudi government, which donated the land for the site within close walking distance of the Kaaba.

No residence rights

Despite the bold statements from sponsors, the Zam Zam Tower complex continues to throw up questions on unresolved issues. Unlike many other countries, where buying or leasing property can work as a ticket to a residence permit that ensures the right to repeated entry for overseas nationals, there are no such guarantees in Saudi Arabia. Mr Al Hamood says his company is working with the Saudi government to issue visas for occupants of Zam Zam Tower “for a certain period”, though further details are not yet available.

There is also the issue of repeat visits. In view of the increasing number of pilgrims, many Islamic countries actively discourage their nationals from heading to Makkah year after year. Their intention is to allow as many Muslims as possible to perform the pilgrimage, which is a once-in-a-lifetime obligation on financially solvent and able-bodied Muslims.

The facility for time sharing of Zam Zam Tower to be sold onwards is Munshaat’s way of responding to criticism that from the world’s population of more than one billion Muslims, only 2% perform the Haj every year. “Our hope is that the kind of facility we are providing through apartments would ease life for pilgrims,” says Mr Al Hamood.

Possible critics

The remaining issue is that of possible criticism from strict Muslims. Many believe that the pilgrimage ought to be performed in the simplest way possible, with modest lifestyles going hand in hand with the spirit of the pilgrimage and the obligation to embrace standards of simplicity. The dress code for Haj – men drape themselves with two large pieces of white cloth and women wear a white dress covering them from head to toe – underlines the spirit of the pilgrimage for many Muslims. In Mina, where Muslims spend more than two days of their three-day venture for Haj outside Makkah, pilgrims sleep on the ground, use communal washrooms and sit on the floor for meals, with the rich and the not-so-rich often sitting side by side.

“Allah would like his worshippers to enjoy the benefits he has given them, he would like you to use what he has given you. There’s no conflict between pilgrimage and living in reasonable comfort,” says a Muslim businessmen involved in proposing a time share complex venture in Makkah, who asked not to be named.

But Mr Al Hamood is convinced of the venture’s success. “The market trend tells us that accommodation in Makkah is becoming increasingly expensive each year. There are risks in what we’re doing, just like there are risks in any business proposition. But Zam Zam Tower is proving to us that we’re filling an important gap,” he concludes.

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