After the persistent bear market in equities, investors — especially those in the Gulf states — have been seeking refuge in either cash management instruments, short-term liquidity management instruments and latterly in real estate funds.
LONDON, 24 February 2003 — First it was equities, with global markets plunging to record lows since 2000 and fund managers warning of more volatility for the foreseeable future because of uncertain political factors such as the Iraq crisis and the slowdown in consumer spending due to a sluggish global economy.
Pension funds and portfolios in particular took a beating, with both high net worth investors and those with much smaller investment portfolios and pension contributions equally affected. Corporate failures such as Enron and WorldCom merely exacerbated matters, especially for investors and employees.
More recently, the split capital trusts scandal in the UK precipitated a report by the House of Commons Finance Committee in which the MPs talked about a possible “Magic Circle” of financial companies offering this product, which was tantamount to a pyramid scheme. They allegedly mis-sold the product and failed to articulate to the investors the true risks associated with the product.
Only last week the Financial Services Authority (FSA), the UK regulator, called for better information on precipice bonds, especially in direct offer mailings. The FSA has previously issued a series of warnings advising consumers to be careful when investing in these bonds, also called “High Income Bonds”, “Stock Market Income Bonds”, “Premier Bonds”, or “Extra Income or Growth Plans”. In December, the FSA expressed concern that many retirees were buying such products from a fixed amount of savings, as a way of generating income. These products are designed to deliver a high income without protection against loss of initial capital invested. Return of the original capital is linked to the performance of an index/indices or a basket of stocks.
More recently, the FSA turned its attention to property funds and the risks associated with these funds. In February 2003, FSA Chairman Sir Howard Davies launched an initiative aimed at examining the nature of property funds currently being marketed, the information available about these funds, the risks in each category, and the extent to which financial advisors understand and properly advise on this type of investment. In other words, the primary aim is ensure that consumers are properly informed of the risks associated with property funds.
After the persistent bear market in equities, investors — especially those in the Gulf states — have been seeking refuge in either cash management instruments, short-term liquidity management instruments, capital guaranteed or protected funds, and latterly in real estate funds. Real estate funds and investments, for instance, are flavor of the moment for Islamic (Shariah-compliant) investment funds, especially in US, UK, European, and Gulf real estate assets.
Investors have been attracted by the outperformance of real estate investments, especially commercial property, which in the UK for instance has outperformed equities, gilts, and cash investments. The total return forecast for UK commercial property investments in 2002 is put at 9 percent plus; and the forecast for 2003 is even higher at 10 percent.
In the Islamic finance sector several Gulf banks have launched real estate funds and have closed a motley of club deals. Bahrain-based Gulf Finance House (GFH) in 2002 successfully (and some would say too easily) raised 50 million UK pounds from Saudi and other Gulf investors for its Cayman Islands-registered Gulf Atlantic Real Estate Company (GAREC), which plans to invest in a 300 million UK pounds commercial property portfolio in the UK. In November 2002, the company made its first acquisition in the UK — it bought an office block in a business park adjacent to Gatwick Airport for 41.7 million pounds sterling from BAA Lynton. The property is currently leased to British Telecom on a long lease. More recently, GAREC completed the second investment in the portfolio when it acquired the Arlington Securities Plc portfolio for 67 million pounds. The portfolio comprises two office blocks and two distribution warehouse centers. GAREC is looking to acquire further portfolios.
Gulf Finance House is also mandated to raise the financing and managing for the ambitious, and some would say superfluous, $1.2 billion Bahrain Financial Harbor Project.
Last year Kuwait Finance House, through its affiliate Terminal Real Estate AB, acquired Malon Group in Sweden in a 330 million Euro deal. The Malon Group is a real estate vehicle which owns a property portfolio predominantly occupied by the Swedish Post Office. This is considered to be the single largest Islamic real estate acquisition. According to Trowers & Hamlins, the legal firm which acted for the Kuwaitis, “this is an enviable portfolio of properties, and with the Swedish Post Office in state hands, the occupier comes with the very strongest of covenants. It is very rare for a portfolio of this kind to come onto the market, but the reputation of Kuwait Finance House helped them to secure the deal”.
Needless to say property advisors to the various banks sing the predictable mantra of strong property market fundamentals, strong historical performances, and ways the risks can be mitigated. The Kuwait Finance House deal, however, is more of an exception than the rule. Other players, such as London-based Islamic Asset Management (IAM), a subsidiary of ABC International Bank in London, and Dawnay Day Group, have closed several individual and club commercial property deals for Islamic investors from the Gulf amounting to millions of UK pounds.
In the Gulf, Shamil Bank of Bahrain, a subsidiary of the Geneva-based Dar Al-Maal Al-Islami (DMI) Group, headed by Prince Muhammad Al-Faisal, is developing the Al-Marsa Real Estate Project through the launch of a Shariah-compliant real estate fund.
By far the biggest player in the Islamic real estate investment sector is Bahrain-based First Islamic Investment Bank (FIIB), which closed its first real estate deal in Europe in December 2002 through a joint venture called Crescent Euro Industrial I, set up by FIIB and Lend Lease Real Estate Investments GmbH, a subsidiary of Lend Lease Corporation.