Breaking the inflation interest investing chain


I have sung the praises of UBS’s real estate research in the past, but while all the great graphs and detailed data were there in its latest publication, it was two simple statements that got me thinking. “Real estate today does not have the tailwind of low interest rates and debt to fuel returns.” “Generating good performance will rely more on asset management initiatives such as reducing vacancies, reducing lease-up times and improving assets to drive rental growth.”

Whether an Islamic investor or not, many have become rather obsessed with what I have named the ‘Inflation Interest Investing Chain’. And inconveniently for Shariah compliant investors, it all hinges on interest rates. With the path to lower central bank interest rates being lower inflation, we are all glued to the price index announcements, looking for clues as to whether interest rates will be ‘higher for longer’ or adjust to ‘a new normal’. Investment decisions sit paralysed, waiting for either interest rate cuts to commence or fall below a given threshold where the levered deal we loved so much becomes viable again.

I am not sure when inflation became the enemy. I appreciate that, as we have seen, it rising leads to higher interest rates and so, everything else being equal, a fall in property values, but it used to be our friend. Multiple research reports over the years have shown that real assets are a great hedge for inflation, ie high inflation tends to equal higher rents.

Attention needs to shift to the ‘asset management initiatives’ that UBS identifies as being the key to future good performance. I cannot remember a time when there is more going on in a sector that at its heart is very simple: a building to either live, work or play in. Hybrid working, shorter leases, energy standards, fire safety, property tech, new building techniques, tax changes, legislation changes and soon (most likely) government changes in the US and the UK.

Rather than hiding under a stone remembering the ‘good old days’ of 20 year leases and low interest rates, it is time to embrace the changes and the opportunities that are being created. It is both exciting but admittedly challenging at the moment, but the new winning strategies are already out there.

I am reminded of my Islamic Finance Qualification all those years ago, with a Mudarabah being a partnership between one party providing the capital, the Rab Al Maal, and the other providing the labor, the Mudarib, known as the working partner. Rather than relying on the ‘Inflation Interest Investing Chain’, it is time to put your Mudaribs to work.

Written by Philip Churchill, first published in Islamic Finance news Volume 21, Issue 06 dated 7th February 2024.