12/4/2019

Lower for longer

Viewpoint

It is the time of the year when many in the Islamic finance world are determining their strategic goals and investment plans for the next 12 months. However, we all recognise that as Shariah compliant investors, we are not alone and are competing for the tastiest investment opportunities with the wider investor community. And so, I thought I’d share a topic that’s been receiving a great deal of commentary recently: the low level of interest rates and bond yields in the conventional finance world.

The phrase “Lower for longer” is being used with increasing frequency to describe interest rates and bond yields across the US, the UK and Continental Europe, all significant investment destinations for cross-border Islamic equity. The US Federal Reserve has cut rates three times since the summer to its current 1.75% level, the Bank of England’s base rate remains at just 0.75% and the European Central Bank’s deposit rate is negative at an unprecedented -0.5%. The “Lower for longer” phrase can be seen in the five-year interest rate swaps, which at the time of writing were 1.46% in the US, 0.8% in the UK and -0.6% in Europe. But what have conventional interest rates got to do with Islamic investors? Well, back to the competition point, as low interest rates are also keeping bond yields low, so from pension funds and insurance companies to sovereign wealth funds and family offices, allocations to real estate are increasing.

The natural place for investors looking to increase their real estate activity is with offices, which remains the largest real estate sector and can often be bought with long leases, just as our own 90
North did earlier this year with the Dutch headquarters of Mercedes-Benz. Add in the aforementioned inflation rental growth in most markets and you can see why competition is continuing to build and inevitably yields are continuing to fall. Great if you already own the property, but troublesome if you want to increase your portfolio and have a fixed target return in mind.

Helpfully, the real estate market provides a wide range of options and while it will take a little more homework to fully get to grips with, the so-called alternative real estate sectors, ie outside of offices, industrial and retail, can provide some higher yielding opportunities. For example, Islamic activity in the student accommodation sector continues on both sides of the Atlantic, with Vie Management recently acquiring a US$135 million portfolio across six states with an Islamic finance facility, and our own 90 North currently working with Middle Eastern investors on a number of UK acquisitions. So, while the Islamic finance industry of course finds conventional interest rates unpalatable, we
cannot ignore them, as the behaviour of competing investors and therefore the real estate market itself is being heavily influenced by them at the moment.

Wishing everyone a peaceful end to 2019 and a healthy and prosperous 2020. Hope you can find the yield you are looking for!

This article was first published in Islamic Finance news dated 4th December 2019.