One of the most commonly used asset classes in Islamic finance, real estate continue to be a popular choice for Islamic investors, with interest in new markets and a return to traditional markets setting the stage for an active market in 2014. The size of the market is difficult to define given the nature of the asset but the increase in the number of Islamic real estate investment trusts illustrate the continued interest in the asset class. REBECCA SIMMONDS assesses the Islamic finance real estate opportunities for the year ahead.
Shariah compliant real estate funds
The last six months has seen an increase in the number of Islamic real estate investment trusts on the market, with last year witnessing the establishment of Shariah compliant global real estate fund, the Basil Property Trust, managed by Malaysia-based Pelaburan MARA and Singapore-based AEP Investment Management. The managers of the fund, which is domiciled in Singapore, but looking to markets such as Australia, Malaysia and Europe, aim to raise US$200 million in equity by the end of 2014 and plan to eventually list the fund as a real estate investment trust (REIT).
In February this year, Al Hadarah Boustead REIT, the first plantation-based Islamic REIT in Malaysia confirmed its privatization exercise, delisting from Bursa Malaysia, the Kuala Lumpur stock exchange following a drop in interest from investors. At the start of March, Al Salam Bank — Bahrain launched the Al-Salam Asia REIT fund, as the first Shariah compliant Asian real estate investment trust. The bank will be the sponsor and seed investor of the fund, which will be managed by Zurich-based B&I Capital. March is also expected to see the listing of Libya’s first Islamic real estate investment fund on the Libyan stock exchange, according to industry reports.
Challenges and opportunities
Traditional markets for Islamic investment in property, like the UK, are seeing renewed interest from investors from the Middle East. Experienced investors are looking to UK cities such as Manchester or Edinburgh and showing an interest in investing in development opportunities. There has been an increase in interest in real estate in Europe among Islamic investors keen to gain euro exposure, with Germany becoming a more popular destination for investment and the Spanish property market also generating a certain amount of interest. Logistics and warehousing is an area that offers a lot of opportunity in Germany according to industry players, whilst the opportunities in the UK are still to be found in office space, residential care homes and university accommodation. Some elements of the UK retail sector are also still ripe for investment. The US as a destination market is also seeing a resurgence in popularity despite the difficulties posed by the distance and the time difference for Middle Eastern investors, with the office sector and development of multi-family residential accommodation providing opportunities for investment.
Investors are also showing interest in the opportunities available in the Middle East and Asia, with the UAE and Qatar attracting a lot of attention due to their infrastructure plans ahead of Expo 2020 and the FIFA World Cup 2022 respectively. The residential property market in Dubai has seen a hike in prices, almost approaching the levels seen prior to the crash of 2008, with the IMF cautioning UAE authorities to be wary of a property bubble. UAE authorities have introduced restrictions regarding the purchase of property with a limit on mortgages for individuals and 100% land payment and 20% construction guarantee as collateral for developers. In Abu Dhabi and Oman, the real estate sector is experiencing double digit growth with potential for investment for Islamic investors interested in the rental market. Following the introduction of Saudi Arabia’s real estate laws last year, the sector is predicted to grow, with Islamic investors showing interest in residential opportunities in the kingdom, as well as development projects across the breadth of the Arab Spring countries, with standout cities such as Cairo and Tunis, and the Iraqi real estate market, all being tapped as targets for Islamic real estate investment. Regional stability and regulatory implementation remain challenges that will need to be met.
Outlook
The outlook for real estate as an Islamic finance asset class continues to be positive, as investors show an increased appetite for risk in investment and become more confident in the opportunities available in the form of new markets and types of real estate. The willingness of investors to extend their scope beyond traditional and highly competitive markets such as the UK and look towards investment in alternative real estate asset classes, in order to be able to deploy their capital and make astute investments, bodes well for the continued success of the real estate market within Islamic finance.