Philip Churchill, co-founder of 90 North Real Estate Partners, and Theo Andrew discuss the advantages and complexities of Islamic finance, as well as the firm’s plans in Australia and how its year has gone so far.
What exactly is Islamic finance and how did 90 North come to specialise in it?
Succinctly put, Islamic finance is the process of selecting suitable real estate investments with tenants who comply with the shariah principles of Islam, and then structuring the legal documentation with respect to both finance and equity to also comply with these overarching values.
While the legal principles have been largely established for most global real estate markets now, applying them remains very much an art which can only come with experience. For an acquisition to be officially shariah-compliant, it must be signed-off by a shariah board. However,
the ultimate determinant are the investors and whether they are satisfied with the level of compliance.
My co-founder partner, Nick Judd, and I specialised in Islamic real estate investment for many years before establishing 90 North in 2011. We believed investors would have an appetite for a real estate investment manager, which was both a specialist in Islamic finance and completely
independent. Our judgement was vindicated and 90 North has grown from strength to strength over the last six years.
On a personal level, while not a Muslim myself, I have studied and applied the shariah principles over many years, beyond simply the technical matters of tenant compliance and not paying or receiving interest. I find the rules that are applied very similar to traditional good business ethics, which we at 90 North hold very highly.
Middle Eastern investment now stands at £1.93 billion, up 25 percent on last year. Are you noticing any patterns in investment from this region into London and the UK?
London continues to be a major draw for Middle Eastern investment. Its natural strengths as a global financial and cultural hub, combined with its first-class infrastructure, means the city is continuing to land some significant investments from the region. However, the capital is by no means the end of the story for the UK.
There is a tremendous amount of Middle East and North Africa region investment activity across the country. Indeed, the vast majority of 90 North’s investments have been conducted outside of London. Our investment partners in the Gulf and elsewhere in the Middle East are attracted by the higher yields available, alongside the fact they do not need to compromise on an asset’s covenant strength, age or lease length.
In addition, many have studied at university across the UK, and this helps build familiarity and recognition that there is a whole country of opportunities outside of London.
What effect will Brexit have on investor appetite?
For London, and more specifically the City of London, there is a little nervousness about the potentially negative impact on the financially driven economy there, but beyond that the issue is more one of currency than Brexit itself.
Almost none of our investors are on the fence about this issue. Half are nervous about the prospects, or, perhaps more accurately, the potential volatility, of sterling and are looking towards US dollar- or eurodenominated real estate. Meanwhile, the other half currently see sterling as great value and are very keen to get more exposure.
What did the start of the year look like for 90 North?
Highlights of the year so far have included two significant acquisitions in the US, the refinancing of two UK properties where our investment partners were keen to hold them for longer, and exiting one of our Norwegian properties, which realised a healthy profit.
The summer hasn’t slowed our activity. We have assets under exclusivity or contract to purchase in almost all our markets and one or two sales are being progressed as well.
90 North and its investment partners recently acquired the Mercy Health headquarters in Ohio for $84.5 million. In this volatile global climate, are there any assets that you see generating particularly strong yields, or are there more pressing concerns at play?
In the current volatile global climate, our investment partners are looking for safety and are willing to accept lower yields to achieve this. While Mercy Health is a great example of a new office building, with a long lease in a strong market, investors are also willing to consider a wide range of asset classes and locations.
Of course, this is as long as they are comfortable that their equity is safe, they will achieve a net cash yield materially above just leaving their money in the bank, and, ideally, there are opportunities to add value.
90 North recently opened an office in Australia. What attracted you to the market and are there any deals in the pipeline?
Our investors, predominantly in Asia but also the Middle East, had been asking for Australian real estate, so the partners and I thought we should take a look and form our own opinion.
I had a perception that the market was dominated by the local pension funds and that perhaps the economy was suffering from commodity prices coming down from their highs. The reality was very different, with an economy still going strong after 25 years without a technical recession and plenty of opportunities to invest.
After digging deeper, we also found a rich vein of Islamic finance knowledge among the lawyers, tax advisers and banks, which is what we need to make our product work at 90 North.
Our head of Australia, Michael Dowling, has made a terrific start and we are already working on our first investments, with a strong pipeline as well. I’m sure we will be announcing our first acquisitions soon and be building our Sydney office further.