Islamic real estate industry continues to have much to contribute to investors


Shariah compliant real estate investment has long been an established product offering for Islamic investment managers. The allure of bricks and mortar remains, frequently with an attractive income component compared to equities or Sukuk.

While tenant use of course needs to be monitored, the basics of real estate investment suit Shariah principles well, with a genuine business being undertaken, either to build to rent or sell new property or hold existing properties for their rental income.

Broadly speaking, where Islamic investors want to buy real estate, there is now the necessary critical mass of professionals able to assist. What remains lacking is a scale to Islamic banks outside of the Middle East and Southeast Asia able to provide Shariah compliant finance for larger transactions, with conventional finance and a structure to insulate investors from the non compliant payment of interest required in a pragmatic approach to allowing transactions to occur.

Review of 2019
Accurate data on the volume of Shariah compliant real estate investment is very hard to source, but Real Capital Analytics (RCA) comes close by monitoring cross-border acquisitions undertaken by Middle Eastern investors. Its findings for the first half of 2019 reveal that transaction volume was materially up. RCA recorded US$8.6 billion of acquisitions for these six months, nearly 60% up on the volume for the first halves of both 2017 and 2018, and at the time of writing given the activity we are witnessing, there seems little reason to believe that the data for the second half of 2019 will be any less encouraging.

Digging into the detail of the RCA analysis reveals some interesting findings. Investors from the UAE and Bahrain were particularly active, investing more than they had done for the whole of 2018. Half of the investment went into the US, representing the second highest proportion since RCA started recording.

While UK volume was down, at 21% of the total, RCA observed that it was not as bad as the political uncertainties of Brexit suggested it might have been. And last but not the least, China attracted Middle Eastern investors for the first time since 2012.

With respect to asset classes, the office sector remained very attractive for investors, along with a broad range of residential related properties, including multifamily in the US and student accommodation in the UK.

While logistics has the fundamentals of disruptive e-commerce behind it, investors often found it hard to get the yield they wanted in this sector. On the other side of the coin, retail, with the odd exception, was out of favour.

While most of the real estate exposure is achieved by direct acquisition through an investment manager, there was genuine innovation during the year, with Manulife Asset Management Services launching its Manulife Shariah Global REIT Fund, reportedly the first such fund available to retail investors.

Incorporated in Malaysia the fund anticipates making investments into office, retail, industrial and residential markets, as well as the new economy and healthcare, and across a wide geographic spectrum covering the US, the UK, Ireland, Spain, Japan, Australia, Singapore, Hong Kong, China and South Korea.

Preview of 2020
So long as the global economy keeps on picking its way through political turmoil, I see no reason to believe that the growth in real estate investment activity seen in 2019 will not continue.

I was worried last year that the quality of the underlying real estate was being compromised in pursuit of higher returns, but latterly I believe that investors have returned to wanting quality, albeit being open to looking at new markets geographically to achieve the blend of property fundamentals and yield they are looking for.

Despite Manulife’s very encouraging innovation of a REIT fund in 2019, the focus during 2020 will no doubt remain on direct real estate investment for most.

As in previous years, I see little change in the size of Islamic bank balance sheets, which would otherwise allow direct Shariah compliant finance to be sourced on larger, mainly commercial real estate investments. This remains a shame, but thankfully the conventional banks are largely supportive of providing finance through Shariah compliant structures and I anticipate this continuing in 2020.

As tax rules become more internationally comparable, we should hopefully see a slowing in tax changes, but of course there is the risk of political influence in such matters, so no guarantees.

Again, I’m encouraged that Shariah compliant investors are largely refocused on the quality of the underlying investment rather than being solely driven by the level of annual distributions.

The Islamic real estate industry continues to have a great deal to contribute to such investors seeking the best advice not only with regards to the real estate itself, but the other components such as legal, tax, banking and reporting that make up vital elements of the transaction as a whole.

This article was first published in Islamic Finance news 2020 annual guide