UK Islamic Finance – 90 North: A year in review

In the media

The allure of real estate for Islamic investors goes back a long way. Whilst equities and Sukuk will always be a significant part of a Shariah compliant investment portfolio, there is something about the bricks and mortar of real estate that eternally appeals. PHILIP CHURCHILL of 90 NORTH takes us through the past 12 months in the UK market, and looks ahead to the coming year.

Whilst 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 and let or sell new property or hold existing properties for their rental income.

So, whilst the requirements of demand and potential supply were there, what was needed were the professionals to put the two sides together. Thankfully the UK took a lead on that, with lawyers, accountants, tax advisers and of course real estate specialists working with Shariah scholars to establish the basic principals that built into a significant business.

Much of this work was done around 15 years ago, with the UK establishing itself as the European capital for Islamic finance and by default Islamic real estate investment.

The clutch of dedicated Shariah compliant banks in London also helped that position, with most of them supporting real investment in one way or another.

2017: A review
2017 saw the first impact from Brexit, or rather, there wasn’t. Whilst this could have reasonably have been assumed to at least delay investment decisions amongst Islamic investors, this didn’t turn out to the case. CBRE recently identified London as being the most favoured city for Middle East outward investment, overtaking New York. The weakening of sterling helped to seal the deal.

However, Islamic investment into the UK isn’t all about London, with a larger number of transactions (if not value) conducted across the UK and across a very wide range of sectors from offices and retail to care homes and student accommodation.

These were almost exclusively undertaken as individual transactions rather than true multi-asset fund structures, but as the year draws to a close there is a growing voice towards such funds that hasn’t been heard for more than ten years. Risk aversion remains key, with income producing assets vastly preferred, although investors have had to learn to live with a slightly lower net cash yield than previous years as asset prices and finance costs rose, and the ability to make tax deductions continued to diminish.

Speaking of which, the UK Government’s decision to start implementation of tax upon the sale of UK real estate held offshore came as a shock to some, but it’s amazing that this tax break has remained available for so long. All part of levelling the playing field.

The UK has also led the field with Islamic fintech, with a number of crowd-funding initiatives being launched or growing to more substantial levels, as well as more innovative ways to finance acquisition of homes. Such innovation is to be applauded and I’m sure will go from strength to strength.

2018: A Preview
I suspect that funds may be grabbing the headlines in 2018. Investor sentiment seems to be warming towards them, with the benefits of diversification and even some appetite for blind-funds where assets have not been identified in advance, at least where the investment manager can show previous competence in a specific sector.

With respect to the UK real estate markets themselves, pauses or even falls in value for certain sectors were blamed on Brexit in 2017, when in truth these sectors were due to at least slow down anyway. Focus on demand versus supply fundamentals and relative value should remain paramount during 2018.

Risk aversion will not subside, but investors will continue to need to get used to lower net cash yields, unless they are willing to move up the risk spectrum.

Dare I say, it should now be stable on the tax rules front, with the anticipated changes now in place, bringing the UK in line with the international norm in most regards.