2022 can safely be described as a year of two halves with respect to Islamic real estate investment.
Scanning the IFN news database may be relatively unscientific, but it does support what we have seen on the ground that international real estate investment dropped substantially from the end of June, as investors paused to monitor the markets.
Triggered by Russia’s invasion of Ukraine, record-high inflation and rapidly increasing benchmark interest rates, purchasers stopped and prices started to adjust, led by the US, along with the EU and the UK.
Market expectations for projected benchmark interest rates shot up in reaction to this uncertainty, but have since been drifting down, with the three-year swap now ranging from 4% in the UK, through 3.8% in the US and 2.9% in the EU. Interestingly, while this anticipates further increases from the current 3.5% in the UK and 2.5% in the EU, at least as an average rate for the next three years the market is expecting a reduction from the US Fed’s current 4.25–4.5% range.
So, with the likely peak in interest rates starting to become more visible and importantly, at least at the time of writing, no significant worldwide political or financial market shocks for the last quarter of 2022, investors are starting to anticipate an inflection point.
Financial markets love an acronym, and so while TANA (‘There Are No Alternatives’) supports continued equity and Sukuk investing, it is time for TARA (‘There Are Real Alternatives’).
With inflation far from beat, and both real estate and infrastructure investments historically providing a good hedge for price rises, attention is building and opportunities will present themselves, with the start of a new year providing an opportune moment to get back on the horse.
While it may be best for those holding real estate to wait for prices to recover, with prices down say 10–20% across the board, purchase yields look rather more favorable compared with the heady days pre-summer.
We at 90 North continue to favor the residential sectors, with one of the Islamic investors’ favored asset classes of multifamily now offering better returns in the US, while student accommodation in the UK offers a premium return over the private rented sector and is locking in inflation-beating rental increases of 10–12% for the forthcoming 2023/24 academic year.
Meanwhile, European commercial leases typically have annual inflation-linked rental increases. As we have been saying for a while “Make inflation your friend”, and with unsold stock building up, we can safely conclude that ‘There Are Real Alternatives’.
Wishing everyone a successful 2023.
Written by Philip Churchill, first published in Islamic Finance news Volume 20, Issue 2 dated 11th January 2023.