While for many real estate is considered among alternative assets, within the Islamic investment world real estate is certainly mainstream. Evolving from individuals buying properties directly, the industry today has considerable depth and sophistication. PHILIP CHURCHILL writes.
While the Islamic structuring is less of a challenge than it was 15 or so years ago when the structures as we now know them were being developed, the challenge nowadays is securing the real estate opportunity in the first place, with local real estate investment managers fulfilling this role.
For Islamic investors, such real estate investment is not restricted by borders or time zones with a global flow of capital and sellers familiar with seeing purchase offers from Islamic investors, with the association of such offers with underlying wealth still strong.
Review of 2016
As Islamic investors considered their international real estate allocations for 2016, they had the rather unusual considerations of political instability on the world stage to contemplate, with the UK voting to leave the EU and the prospect, latterly confirmed, of Donald Trump becoming president of the US.
However, none of these events reduced Islamic investor appetite, which increased during the year. The global hunt for yield continued with Muslim investors comparing what they can earn at the bank or with other assets and deciding that real estate should form a material part of their investment strategy.
What limited 2016 activity was a lack of suitable investment opportunities, with supply constrained by sellers either deciding to hold in the short-term while political events stabilize or to refinance, fueled by a historically low cost of senior finance.
As investors sought opportunities, they considered a far wider range of property asset classes beyond the usual office investment. Logistics has been a favorite for a while, but there was increasing allocation to retail and residential properties, particularly multi-family in the US and UK student accommodation saw increasing interest again.
Geographically, Islamic investors continued their voyage of discovery, seen most noticeably in Europe, for while the UK and Germany remain favorites, transactions were undertaken across the continent, with the Netherlands, the Nordics and Southern Europe all witnessing activity.
Preview of 2017
With political instability at home and abroad, no change is expected in investors being risk averse, with an often binary approach to investment opportunities. If the quality of location, property, tenant and lease length ticks all the boxes, then Islamic investors are willing to pay a full price to achieve certainty of investment income; without it, Islamic investors would often prefer to wait where such capital is concerned.
What will continue to limit activity is the availability of products, as Shariah compliant investors are not alone on the world stage of hunting for opportunities. Making themselves more attractive to sellers by having committed equity and the ability to move quickly and reduce transaction risk will be important to secure more of the pie for the Islamic investment world.
Changes to tax laws will most likely continue in the same vein on restricting tax deductions and establishing more of a level playing field for domestic and international investors. None of this should come as a shock to Islamic investors who have never sought an advantage and so any changes should be fairly easily accommodated.
2017 could see a bigger return to fund structures. Since the last downturn in 2007-09, investors have typically wanted transactions not fund platforms, but a paucity of opportunities may drive investors to allocate at least a portion of planned investment into fund initiatives if only to get some exposure to the asset class.
The impact of Trump on Islamic investment into the US will be interesting to observe. At the time of writing, thankfully, the previous rhetoric of Trump and bold statements on limiting travel into the US have subsided. With the volume of investment that he plans to undertake across the US, it would seem unlikely that he would seek to dissuade international capital from coming in, not least being a real estate man himself.
Within Europe, as the UK continues to decide how best to leave Europe, investors will likely use such uncertainty and a depressed pound sterling to invest, taking a longer-term view that their investment will look wise once the dust has settled.
Germany has an election itself later in the year and while Angela Merkel looks to have a comfortable lead at the moment, recent history has taught us to take nothing for granted. All this could encourage Islamic investors to increasingly look outside of their traditional comfort zones. Alternative countries may be more stable than the established western favourites of the US, the UK and Germany.
Real estate returns remain highly attractive to Islamic investors, but no increase is expected in the volume of opportunities and the new world order of change needs to be taken into consideration.
Should be interesting.