Rising residential

Investment into the rented residential sector has long been one of the preferred real estate sectors for Islamic investors, with recent research from UBS providing a global perspective, an explanation for the sector’s robustness and some interesting projections for the future.

Firstly, rented residential volumes have grown significantly in recent years, most notably in the US where numerous Shariah investors have undertaken multifamily investments in the past, and Germany, with the volume in both countries now representing more than a third of all transactions.

These were already significant residential markets, with others down the pecking order showing accelerated growth in transaction volume, with Spain and the UK identified as having noticeably increased their share of activity in recent years.

Regrettably for those looking to get on the housing ladder, decreasing affordability of homebuying is a major factor, with the price to rent ratio (comparing the relative cost of buying to renting) having increased more than 50% in France, Germany and the UK over the last 20 years, with recent interest rate increases doing nothing to help.

Looking forward, driven largely by immigration, UBS is projecting 10%-plus increases in population for Australia, Canada and Switzerland by 2035, as well as 5%-plus decreases in average household sizes in France, Italy and Japan as these nations’ populations age.

But it is not all about country level demand, with the report highlighting migration within Germany itself, largely to the west and south, but also toward the larger cities in the east. This reminds me of 90 North’s own analysis in California, a significant population of around 40 million, with movement out of the dense central business districts toward the beaches and mountains as hybrid office working allowed greater location flexibility.

With supply having been limited by tighter financing terms post-global financial crisis, increasing scarcity and cost of building plots in dense urban areas and more recent elevated construction costs, the demand versus supply imbalance stage is set.

UBS’s analysis supports this, with rental growth exceeding inflation in the majority of the countries analysed, with outperformance in the US (>2% per annum above inflation), Netherlands (>1.5%) and Canada (>1%) — increasingly important with inflation where it is now.

From this, I see no reason for Islamic investors’ appreciation of residential to end.

Written by Philip Churchill, first published in Islamic Finance news Volume 19, Issue 41 dated 12th October 2022.