Recently, that shift has become more rapid as the UK, and especially London, positions itself as the best place for Middle Eastern investment. In 2013 London mayor Boris Johnson proclaimed that he was mayor of the eighth emirate of the UAE. And last year the British government became the first non-Muslim state to issue a sharia’ compliant bond, or sukuk. In the UK, the preferred home for that investment is real estate, with Battersea Power Station, Chelsea Barracks, The Shard and the Olympic Village all financed in a manner that is compliant with Islamic law. And recently it has become a lot easier, and less morally questionable, for the world’s Muslims to invest here. “Most sophisticated lenders are now willing to at least consider using Islamic finance products to structure real estate finance,” says Habib Ullah, head of Taylor Wessing’s banking and finance group in Dubai. “They also have confidence that it can provide them with the same security protections as using conventional structures.” As a result of this there has been a convergence. The gap between the pricing of sharia-compliant debt when compared with conventional debt has been narrowed, “if not completely eliminated”, says Ullah. “Sharia compliance is not difficult to achieve if the financier or lawyer is experienced,” says Ashley Freeman, head of Islamic finance at international law firm Charles Russell Speechlys. “Previously, a compliant structure could be expected to add 15-20% in legal and structuring fees because of the inclusion of what were then considered to be ‘novel’ features. Nowadays, however, because everyone is much more familiar with the structures, there is hardly any difference in pricing.” There is also an increase in the quantity of Islamic finance products available, such as Islamic capital market products, like sukuk, and, more recently, Islamic derivative products.
One firm that has benefited from the rising desire for sharia-compliant property investment is 90 North. The investment advisory firm was founded in 2011 by Philip Churchill and Nick Judd, and is chaired by TV Dragon James Caan (see box, overleaf). “The returns are now so similar,” says Judd, “so if we can structure it that way, then we will.” The reason for that is that sharia compliance has begun to move from being something exotic and costly to being a familiar part of the investment toolkit. “Islamic finance has changed enormously in the past 20 years,” says Freeman. “There has been a definite increase in the number of investment platforms, which are as varied as the conventional platforms,” he says. “There are large international banking groups offering Islamic finance, often through dedicated ‘windows’, through to smaller boutique firms managing private wealth – and everything in between.
The UK now has a handful of pure Islamic banks, albeit only one operating in the retail sector.” Previously, only a very tight group of people could do this, says Judd. “That skills set is now deployed among a much broader pool of people. The banks have got their heads around what it is and are now prepared to loan.” In the early days nearly everything was based on a resale with a mark-up, or murabaha. “Although there is still a heavy dependence on this technique,” says Freeman, “we have seen successive waves of focus on ijara, mushrakha, wakala and sukuk”. The latter was barely mentioned 20 years ago, Freeman points out. “Now it seems everyone is talking about it.” The £200m sukuk issued by the British government last year, for instance, could have been sold at least 10 times over, as it attracted more than £2.3bn in orders on the day of issue. “The market is more sophisticated,” says Freeman. “The level of education on the subject has improved greatly, both for those in the industry, and customers and the general public.” Unlocking the wealth of Muslims who desire or require sharia compliance could result in a flood of previously untapped cash. “They are desperate for real returns,” says Judd. “They want income. They have money sitting in the bank doing nothing, and if they can invest it Islamically in property, they will.” Approximately 23% of the world’s population – 1.8bn people – are Muslim. Worldwide, Islamic assets held under management are estimated to total $1.6tn (£1.1tn). The conservative estimate for Islamic wealth is $100tn. In the UK, it is thought that Islamic finance taken as a whole accounts for less than 5% of all financing transactions. In the Arab Gulf region it is between a third and 40%, and growing rapidly.
One hope of Judd’s, shared by the government and Johnson, is that London could become a global connecting point for Islamic finance. Of course, there are many challenges to overcome before this can become a new norm. The execution capability is limited. And putting together a good sharia-compliant deal is as much an art as a science. “London and Luxembourg are vying to be the European capital of Islamic finance,” says Freeman. The potential is huge. And this is not simply because of the 1.8bn Muslims who may find this investment model attractive. “Once the western world starts to realise that the words ‘Islamic’ and ‘sharia-compliant’ are not threatening,” says Freeman, “we will start to appreciate the merits of this finance.” Indeed, a non-Muslim appetite for sharia compliance is already beginning to emerge. “Islamic finance is popular because it rejects usury and instead seeks to find ‘real economy’ transactions,” says Freeman. “That is something that everyone can subscribe to.” Judd agrees. “The opportunity for growth in the sharia sector is not just in the Middle East,” he says. “It is not just Muslims. For those who wish to invest ethically, it is massive.”
When 90 North first pitched its plan to source and structure sharia-compliant deals, there were a few nerves. “When you are sitting in front of James Caan,” founder Nick Judd recalls, “he will rip you to shreds if you don’t have a good business proposition.”
Since 2011 it has closed on £565m of property transactions across Europe and the US, and it has opened offices in Chicago and Kuala Lumpur. But, even though both Judd and co-founder Philip Churchill had worked extensively in the Middle East, and occasionally for sharia-compliant institutions – Churchill was formerly a vice-president and head of real estate at Gatehouse Bank – the focus on sharia compliance developed almost by accident. “We set up 90 North to offer responsible investments,” says Judd. “Ethical” was to be the watchword, not “Islamic”. “It was the second deal we did that took us down the Islamic route,” Judd recalls. In 2012, 90 North had sourced the deal for the Siemens HQ in Lincoln for £18m. “We said to our equity partner that we would like to structure it Islamically.” At that time, a growing level of expertise in the market had meant that returns for sharia-compliant investments were beginning to converge with returns for non sharia-compliant investments. “Also, we believed there was the demand,” says Judd.
EY had the previous year published a report into investment preferences in the Middle East which found that a third of Middle Eastern investors were not concerned whether their investments complied with Islamic laws, while a third would rather have sharia’ compliant investments, if they were cost efficient. The remainder was adamant that if an investment was not compliant, they were not interested. James Caan: the former Dragons’ Den star is the chairman of sharia investment specialist 90 North Judd and Churchill saw this as an opportunity. But the institution 90 North was running with was not convinced. Three months later 90 North sourced the deal to buy the L’Oreal building in Nottingham for £10m. “This time they asked us if we could do it Islamically,” says Judd. He had been proven correct. The demand was there, and the returns had converged enough to make everyone happy. “To date, the 15 transactions that we have done have all been done, more or less, Islamically,” he says.
Judd adds that this is not necessarily because the Middle Eastern institutions that 90 North deals with are sharia’ compliant. In fact, just two are. “It tends to be the end investors that are sensitive about sharia compliance,” he says. This raises the key issue. Previously some Middle Eastern institutions had been put off certain investments in the UK because of a concern that their investors might have issues with the morality of those investments. It goes back to the EY report – if certain ways of doing business run the risk of alienating a third of your potential customers, and doing it a different way would please them and not displease the other two-thirds, which way are you going to pick?
So far, 90 North has raised about £500m. But, like the government’s sukuk, Judd thinks he could have done that three times over.