The session on direct investment, whether that be real estate, private equity or alternative assets, was the most informative, with the panel quickly establishing that investors needed a high level of cash yield to encourage them out of bank deposits.
Noting that commercial investments had not performed well for many Shariah compliant investors as the post-COVID-19 world made its impact on the office sector in particular, the somewhat safe haven of residential was raised.
I say ‘somewhat safe haven’ as while conflicting research can be found, the general view is that mainstream UK house prices have fallen, with Nationwide recently reporting a 5.3% fall in the year to August, the largest decline since 2009.
However, compared to office, retail and even logistics which was the darling sector of the investor world until the music stopped in summer 2022, this fall is rather modest and remains underpinned by a continued chronic lack of housing in the UK, with a troublesome planning system, vehement objections from local residents against any new substantial housing development and now the increased build costs and finance expense all slowing new supply.
High residential mortgage rates are cited as the principal reason for such a cooling of the market, but with the forward curve suggesting that rates will peak within the next three to six months, perhaps now could be the moment for Islamic investors to start working up an investment strategy.
While capital appreciation is likely as interest rates fall, we have to come back to the panel’s observation with respect to the high level of cash yield that investors are seeking. While Islamic banks are keen to support this sector, with rates where they are, the levered model that we have been spoilt with over recent years is no longer accretive. So, where to find some yield?
A persistent frustration for us at 90 North is that the vast majority of the residential investment world still quotes yields on a gross basis, which is frankly almost useless.
While a double-digit gross yield sounds rather appealing, it makes no allowance for operational costs and prudent maintenance cost reserves that should be made.
While the forum mentioned purpose built student accommodation as an alternative to find higher income, while we are huge fans of the sector, including inflation matching 10%-plus rent increases for this academic year, the strength of the occupational market has meant that investment values have not fallen significantly and net cash yield returns will be closer to 4–5% until leverage becomes cost effective.
Seeking returns at up to double that level, we are leaving no stone unturned. Initial research into the co-living market has been encouraging with respect to yields, but more difficult to scale up.
Otherwise, care homes were also mentioned by the panel, and this is an area we continue to monitor.
Occupancy has not bounced back in the same way that it has with student accommodation post-COVID-19, but we feel that the day is getting closer when this is worth another proper look.
That residential should be a focus for investors is of little surprise as demographics are frequently the basis on which new investment strategies in times of change are based, but for those seeking deposit-busting current returns we advise treading carefully.
Written by Philip Churchill, first published in Islamic Finance news Volume 20, Issue 37 dated 13th September 2023.