LONDON, 12 September 2005 — The United Kingdom and Europe have emerged as the most favored investment locations for Islamic and Middle Eastern real estate funds, according to a ground-breaking new report titled “Shariah Property Investment: Developing an International Strategy”, which was commissioned by London-based international property consultants King Sturge, and endorsed by The Royal Institution of Chartered Surveyors (RICS) in London.
According to Stephen Brown, head of research at The Royal Institution of Chartered Surveyors (RICS), “The Islamic banking and finance market is one of the fastest-growing global niche markets, estimated to be worth some $500 billion and real estate investment is now forming a major part of their activities. Real estate is a particular popular investment vehicle for Shariah property investment as it can easily comply with Shariah law requirements.” The report which included surveys with leading industry players and experts carried out in conjunction with London South Bank University, stressed that 94 percent of respondents chose the UK as their most favored investment location for Islamic real estate and property funds; followed by Europe with 85 percent.
The Middle East, however, came third with 62 percent. Despite the fact that capital has been returning to the region and real estate investments have been booming, there remains an underlying concern about the legal and regulatory governance of the real estate markets especially in the six Gulf Cooperation Council (GCC) states, and the long-anticipated market correction in the sector, which has been boosted to a large extent by artificial demand dynamics sustained by a market flush with private liquidity running into the billions of dollars. Various surveys by investment banks such as Merrill Lynch and Boston Capital in the last year or so, have put private capital in the Middle East from an estimated $700 billion to over $1 trillion.
Not surprisingly the United States emerged fairly low as a favored location with 47 percent. This is partly do to the continuing fall-out of 9/11 and the subsequent financial war on terrorism. Investors from the Middle East and Southeast Asia remain wary of a perceivedly discriminatory US immigration culture against Arabs and Muslims; and the perceivedly unfair and catchall provisions and excesses of the Patriot Act. Bahrain-based Islamic investment bank, Arcapita Bank, with a US real estate portfolio in excess of $1.2 billion, is by far the major real estate investor in the US. Other Islamic banks to have entered the US markets include Noriba Bank, the dedicated Islamic bank of the UBS Group, HSBC, Kuwait Finance House; and Qatar Islamic Bank.
Southeast Asia was well down with only 38 percent of respondents favoring the region as a favored location, underlying the fact that Middle East investors, including Islamic ones, are still not totally familiar with credit and country risk dynamics of the region. The licensing of three Islamic banks owned by GCC investors or operators in Malaysia by Bank Negara, the central bank, may go some way in improving and mitigating this risk perception. But it will take Al-Rajhi Banking and Investment Corporation; Kuwait Finance House; and the consortium led by Rusd Investment Bank, Qatar Islamic Bank and Global Investment House — the three licensees in Malaysia, some time to get going and establishing themselves in the market.
The report stresses that while compliance with Shariah investment principles is the over-riding basis for the investments, investors also consider other factors crucial to their decisions. These include tax status (65 percent); availability of specialist expertise (61 percent); regulation of investment (47 percent); risk assessment regulation (47 percent); and transaction transparency (41 percent).
Tax status is an important consideration. Unless special tax arrangements are available, an investor may incur double stamp duty; and risk weighting in such transactions. Transparency of transactions especially of structures, Shariah compliance and asset allocation were deemed equally important. However, investors remain short-term in their outlook with the maximum average life-time of an Islamic real estate fund preferred at five years. London emerged as by far the best location in human capital and expertise in Shariah compliant real estate investment provided by such banks as ABC International Bank; Dawnay Day Global Investments; HSBC; Citigroup; Arcapita Investments; and property consultants such as King Sturge; DTZ; and law firms such as Norton Rose, Taylor Wessing, Clyde & Co., Denton Wilde Sapte, Stephenson Harwood and others.
According to the report, the commercial and industrial sectors are the most popular ones for Shariah-compliant property funds. The industrial sector, is seen as most suited for stock selection and approval by the Shariah board, and “it is likely that more money will be allocated to this sector in future.” New property investment classes that are emerging include leisure and theme parks, elderly care, and self-storage developments.
