How a Focus on Real Estate is Killing Startup Culture

The Search for Startups

The Search for Startups will be a new series on what helps and discourages startup culture. This week we’re focusing on how a focus on real estate investment pulls us back

Within much of the Ummah today it is evident that from Morocco to Makassar startup culture is lacking behind the rest of the world. There are many startups and many bright and innovative people without a doubt. However the lack of infrastructure is preventing the bright and innovative of the Ummah from accessing their full potential. The first aspect of this lack of infrastructure is lack of investment. Specifically a desire in much of the Muslim world to invest in real estate instead of innovation.

A focus on Real Estate has been detrimental to innovation

So what’s the problem?

Now why is real estate investment such a big issue? To put it simply, owning and renting out property does not add innovation and productive value to the society. Real estate investment does sometimes provide new housing but often times it is just making profit off buying existing housing.

Renovations and design may encourage some innovation but real estate does not push an economy forward. It does not provide many jobs after construction is complete. Even the money gained is just to buy or build more houses or stores.

Furthermore real estate is not a competitive field. There is skill and ability required to run a real estate corporation but in the end it is nowhere near as competitive as the manufacturing or tech sectors and so produces far less innovation.

Real Estate investment makes money but doesn’t promote innovation or technological growth, instead relying on others to do that and then pay rent.

The unfortunate road ahead

There is generally only one main way this can end up which is clearly not in line with Islamic principle. As people start to see the big investors make millions on real estate they start to take out mortgages so they can also catch on the real estate train. Banks then profit lending out mortgages earning them 30-40% profit off a house loan once everything has been paid.

The rush in people buying houses on loans makes housing more expensive gaining the real estate investors even more money. All this extra money without any real innovation or progress. Not only is this haram by the consensus of Islamic scholars, it leads to an increase in speculation, essentially financial gambling.

Banks giving out mortgages to anyone who wants and then selling mortgages by the hundreds to other banks or investors. This seemingly grows the economy as more people buy houses and the banks gain more money. This comes at a cost. In America we have seen skyrocketing house prices and sudden collapses destroying people’s lives. But because the bankers and big real estate investors profit after it seemingly “grows the economy”.

This does not increase productivity, nor advance the country technologically. It is however extremely profitable for the bankers and property owners involved so they knowingly or not end up falling into this path.

So why do countries venture into this trap? Stability, real estate is seen as the most stable investment and it is almost guaranteed to go up in the long run. People will always need homes and they will want better and newer homes as well. It is then understandable that people turn to this as they try to grow their wealth but it will ultimately not work. Let’s look at the Gulf States:

Megaprojects and mega failures

The Gulf states have come to see large scale growth in the economy attracting people from all over the globe with a seemingly endless supply of oil wealth. They build cities in the desert dedicated to science, technology and manufacturing yet their dreams constantly fall short, why?

It is largely due to these cities themselves. Large megaprojects where they build property in hopes others come and pay them rent. They mainly want others to take the risk of investing in tech and science and they simply profit from taxing and charging rent in these cities. This garners short term wealth but it falls short of the actual goals of increasing innovation almost every time.

The Gulf states don’t invest in tech, they invest in real estate in hopes to charge rent on someone else investing in tech

Even with their vast wealth they are still hesitant on spending money on ventures and startups themselves. This idea of being very safe in your investment that you become blind to almost any degree of risk is completely opposite of the investment required for innovation. One should always analyze and minimize risk before investing but not this far!

What about you and me?

Now this applies to the wealthy and rich, but what about the average person? It is here where we can make a slight change. Instead of sitting on your savings watching them disappear due to inflation as the currency drops in value, we should invest. New companies are showing up often and we don’t even need to take big risks.

Invest in stock market indexes which contain parts of tons of stocks which will generally always go up unless all the companies fall apart. ETFs which are specialized groups of stocks allow you to use your money towards something somewhat useful. You have smaller risk, but are still investing in growing companies rather than sitting on your savings. Sometimes your investment can have further effects like with mobile data.

These measures are largely becoming easier and easier as new stock trading apps appear all over the world. We can invest in the newly growing companies in our countries and play a small part in their growth. Our small investment can help build a bigger culture of investment into productive things like tech or manufacturing. In the end putting us towards a more innovative and forward thinking future.

To learn from a success story of startup culture in the Muslim world check out our article about Malaysia startups.

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