The UK is undoubtedly the European and Western world’s leading centre for Islamic finance and nowhere is that more visible than in the UK real estate market.
Islamic finance at its core involves the application of the shariah (the religious law of Islam) to modern banking and finance. In the context of real estate in the UK that means parties to a shariah-compliant transaction need to view the entire lifecycle of an asset from development (to the extent that it is relevant), initial acquisition, ongoing management and finally disposal through a shariah lens. That lifecycle, however, often doesn’t look or feel very different from a conventional life cycle.
The UK market
The UK has been at the forefront of key developments in Islamic finance, and has benefited from government policies, which have supported the progression of the domestic Islamic finance market. Legislation and regulations have been adapted and developed for the tax treatment of financial products to allow for shariah-compliant structures and transactions to be treated on a par with conventional products.
This approach, which is intended to create a level playing field between conventional and Islamic finance, has not only been adopted by many Muslim-majority countries looking to regulate their own Islamic finance industries but has also cemented the UK’s position among shariah-compliant investors as a jurisdiction where it is safe to invest. Such a position has resulted in shariah-compliant investors investing in the UK in ever-increasing numbers and almost all of that investment has been in real estate.
The appetite of shariah-compliant investors has – much like the conventional market – moved increasingly from London (both the City and greater London) to the regions. Interestingly, however, this investment in the regions is not limited solely to major cities, but in the case of England in particular, also includes larger provincial towns and cities including, for example, Watford, Slough, Swindon and Coventry – all of which have had investment or funding advanced in a shariah-compliant manner in the very recent past.
Regional activity
There are a whole host of reasons why there has been an increasing move to invest and fund in the regions by Shariah-compliant investors and funders but the main ones are set out below.
■ Shariah-compliant investment, much like conventional investment, is driven in very large part by the desire for higher yields. The fact that higher yields can more often than not be found outside greater London has meant that shariah-compliant investors have focused their attention there. 90North, an active participant in the Islamic finance industry, for example, at the tail-end of last year advised on the sale of a 12-property care home portfolio in the East Midlands comprising a dual property and share sale, which generated a net IRR of around 13.5%.
■ The UK benefits from there being 20 institutions offering shariah-compliant financial services (double the number of institutions in the US), including five fully shariah-compliant banks. Almost all of these institutions will fund UK real estate and while there are some who are more limited in their geographic parameters, none (so far as we are aware) is restricted to only funding in central London. This has meant that shariah-compliant debt has been available to fund acquisitions across the UK. For example, ADIB UK, a wholly shariah-compliant bank, has, since the start of the year, funded commercial properties in Bristol and Leeds acquired by Middle Eastern investors (corporate as well as high net worth) in addition to a Travelodge in Heathrow acquired by a Saudi investor. On a related point, shariah-compliant debt can be sourced for a wide variety of asset classes. Paul Stockwell, chief operating officer at Gatehouse Bank, another wholly shariah-compliant bank, has said for example that his bank has “been particularly busy in the institutional financing markets, for both residential and commercial properties, as well as in the retail financing market for residential buy-to-lets”.
■ There has been a general growth in non-domestic investors investing in UK real estate. This growth is reflected equally in the shariah-compliant space and much of that investment has been outside greater London. Stockwell adds that in Q2 2018, “spending by overseas investors [around £6bn] rose by 17% quarter on quarter and accounted for around 50% of total spending – the second-highest share in the last 10 years. This demonstrates the current demand for UK real estate by non-domestic investors in the current environment.”
■ At a time when demand for revenue-generating properties outstrips supply and stable yields have led to tight competition for the highest-quality assets, shariah-compliant investors who do have geographic restrictions are having to either relax those restrictions or look at alternative asset classes to be able to invest monies and generate their expected levels of returns.
■ Some investors consider the regions to be less exposed to Brexit relocation and associated risks, but again this is not a view that is limited to shariah-compliant investors.
Further examples of recent regional investment that has involved shariah-compliant investors, funders or structuring include:
■ Rosette Merchant Bank’s acquisition of the Tesco Extra store in Oldham, Greater Manchester, for in excess of £50m;
■ Greenridge Investment Management offering to the market a mixed-use property in Sheffield let, among others, to NCP and the secretary of state in May 2018 for £41m, having acquired it less than 18 months earlier; and
■ 90North’s acquisition of a student accommodation property in Leamington Spa for £17.185m.
A positive outlook
Looking ahead, market forecasting for Islamic investment and finance post-Brexit is positive, with several commentators suggesting that the UK will be even more attractive as a destination for Islamic wealth globally. By contrast to other international investors, Islamic institutions and Muslim investors consider the UK a base for their investment, rather than a gateway or connection to the European Union. This all bodes well for the continued growth of the Islamic finance market in the UK for real estate.
Shakeel Adli is head of Islamic finance at CMS Cameron McKenna Nabarro Olswang LLP
