Real estate – crossing more borders

While of course in its simplest form, Shariah compliant real estate investment has existed for an eternity, with individuals buying properties themselves – most likely on an all-cash basis – and choosing to manage them appropriately, it is the involvement of international investment managers that is our focus here.

As Islamic Finance News launched towards the end of 2004, the global Islamic real estate industry had had, from my perspective, a relatively short five years of accelerated growth behind it. I had been with Citigroup over this period, working with Middle East investors to bring a US fund model into the UK, HSBC Amanah had established their global real estate fund and Credit Suisse and others were also getting active.

Until the music stopped

The years 2005 to 2007 was a period of substantial geographic expansion. Working closely with Shariah scholars and taking structuring lessons learned from acquiring properties in the US and the UK, the industry expanded across continental Europe and beyond.

Optimism was running high, with annual investment volumes swelling, fund allocations increasing and the wider Islamic industry rapidly expanding. Largely delivered previously through so-called Islamic windows of banks or fund managers, this period also including the establishment of several dedicated Islamic banks in London, pushing the industry on again. Governments and tax authorities were frequently keen to accommodate and, in many cases, encourage this momentum, with tax changes to ensure a level playing field for the Shariah structures required.

The Great Recession

From 2008 to 2010, it was a time of pause and rebuilding. Such was the fall in asset values across the globe and across sectors that Islamic real estate could not be immune. Investors came out of the Great Recession substantially more cautious and wanting significantly more control of individual acquisitions, no longer keen to support blind funds. And so, deal by deal, confidence was rebuilt, and activity started to grow.

While investors wanted to get back on the horse, a great number of the finance banks were more cautious. The industry relied – and still does – on the conventional banks to provide the leverage on such transactions. Post-recession risk teams were in control and many decided that they didn’t want to support the necessary Shariah legal structures, as the additional level of complexity was either a real concern to them or not something they could prioritise while they were licking their wounds elsewhere.

Optimism again

Since 2011, the Islamic cross-border real estate industry has grown from strength to strength. With increased levels of scrutiny, investors valued the contribution of independent investment managers able to support and deliver their investment wishes.

While there is no consistent source for the volume of Shariah compliant real estate investment, Real Capital Analytics comes close, with its analysis of Middle East cross-border property investment being a helpful proxy, but also possibly misleading.

As you would imagine, the headlines are often grabbed by the sovereign wealth funds of the Middle East making US$500+ million investments, which were as much about strategic deployment of wealth as they were about producing a steady income. This activity peaked in 2015, with Real Capital Analytics recording over US$35 billion of cross-border investment, fuelled by an oil price which had remained above US$100 for a few years.

With a new US$40-80 price range for oil establishing itself from 2015, the sovereign wealth fund activity fell and indeed reversed in many cases with capital being repatriated. However, the activity of other investors was at least maintained and indeed has seen more substantial growth over the last 12 months.

Alongside this has been the growth in the volume of Islamic REITs over the last few years, with Saudi Arabia, Bahrain and others actively encouraging their establishment.

Meanwhile, innovation has been seen with crowdfunding fintech managers again tapping into investors’ desire to select their own investments, often at a very granular level.

Conclusion

So, where are we now compared to 15 years ago? In short, the Islamic real estate industry has substantially matured and geographically diversified, with a critical mass of professionals able to assist in most global markets.

The industry rode the market exuberance like so many into the Great Recession, but came out stronger, listening to investors more and quickly adapting to deliver what was demanded.

No longer the niche sector of 2004, the industry finds itself being compared to conventional property investment managers and realising that its environmental, social and governance credentials, born out of Shariah compliance, have a wider audience beyond Islamic investors.

This article was first published in Islamic Finance News 15th Anniversary Edition.