Middle East Islamic real estate investment on cusp of high-growth trajectory - analysts

Shariah-compliant real estate investment and financing are on a growth trajectory on the back of consumer demand and increased liquidity seeking Islamic assets. But they face competition from conventional sectors.

The launch on April 12 of Shariah-compliant Etihad real estate investment trust (REIT), reported to be worth 3 billion Emirati dirhams ($817 million), by Abu Dhabi Financial Group underlined the accelerating growth in Islamic real estate investment and financing on the back of demand from consumers and commercial entities alike. Islamic real estate investment and financing is on the cusp of a high-growth period in the United Arab Emirates (UAE) and the larger Middle East, analysts say, providing more avenues for investors to make Shariah-compliant property investments.

Underlining this growth trend, Emirates REIT, launched in November 2010, became in September 2016 the largest publicly listed Shariah-compliant REIT in the world both by total assets and by market capitalisation.

Days after the announcement of Etihad REIT, on April 19, Yousef bin Abdullah Al Shelash, Chairman of Riyadh-based Dar Al-Arkan Real Estate Development Company, rang the market opening bell to celebrate the listing of a $500 million sukuk on Nasdaq Dubai, to support the company’s capital-raising strategy as it prepares for further property development activities across Saudi Arabia, including commercial real estate and integrated residential communities. The sukuk was two times oversubscribed and received significant interest from international as well as regional market participants.

A combination of factors – including strong consumer demand for housing, based on population growth; growing awareness of Islamic finance; increased investible wealth seeking Shariah-compliant assets; and the continued attractiveness of the UAE and the region’s high-yield real estate markets – is propelling organisations towards creating avenues for Islamic real estate investing.

Nicholas Maclean, Managing Director of CBRE Middle East, told Salaam Gateway: “Some of our clients are seeking to create funnels or instruments to collect domestic Islamic funding. From an Islamic perspective, I think one of the interesting opportunities that the Arab world has at the moment is to capture a larger proportion of spending. This is money which is with private citizens at the moment, who want notionally to give it to Islamic investment but can’t find the right vehicle in which to invest. Put together with the prospects in real estate, it makes it an interesting opportunity here for Islamic investment companies to capture a greater proportion of disposable income of people who live here.”

AN UNDERSERVED DEMAND

Real estate has been a primary focus of the global Islamic finance industry since the 1990s, beginning with investments in the residential housing sector, before moving to commercial real estate. However, in the Middle East, some of these are still underserved sectors, creating vast opportunity.

Khalid Howladar, Managing Director and Founder of Acreditus, told Salaam Gateway: “The tangibility of real estate makes it much better suited for Islamic finance. Current structures seek to replicate non asset-backed structures causing excess complexity. When you have real income-generating assets, all the typical Islamic structures work much better.”

According to the 2016/2017 State of the Global Islamic Economy Report by Thomson Reuters, strong balance sheets have helped Islamic financial institutions weather the shock of lower oil prices and as a grouping the Gulf Cooperation Council (GCC) remains Islamic finance’s leader with assets amounting to $922 billion. In the UAE, the property market continues to provide high yields in comparison with other markets, thus making it an attractive investment.

Howladar said that, anecdotally speaking, there is an increase in the number of avenues of investment in Shariah-compliant real estate.

“The avenues are growing as the pool of Islamic liquidity continues to grow. If you look at Islamic banking as an example, those in the GCC have very healthy deposit bases and growth that typically exceed those of conventional banks. This growing pool of money ultimately needs more Islamic investment opportunities,” he said. 

While the global issuance of sukuk, a traditional favourite of Shariah-conscious investors, has remained subdued in 2015 and 2016, the liquidity chasing Islamic assets has increased.

“The demand for Shariah-compliant property investments is linked to the growth of Islamic finance, which has been growing at a rapid pace,” Phillip Caraiscos, CEO of Zawaya Realty, a joint venture by Dubai-based Noor Investment Group and Awqaf and Minors Affairs Foundation (AMAF), told Salaam Gateway. Set up a couple of years ago, Zawaya offers Shariah-compliant property management, valuations, investment appraisals, and brokerage and property maintenance.

THE REIT ROUTE

Islamic REITs allow investors to collectively invest in real estate, in which the tenant(s) operates activities permissible by Shariah. This involves acquisition and leasing of real estate.

“Shariah-compliant real estate investment has become reasonably mainstream to the extent that if there is a need/request – lawyers, advisors, accountants, etc. can accommodate this. In addition, some of the REITs are already compliant – giving Islamic investors a liquid way to invest in property,” Howladar said.

The 10 UAE-based properties contributed by Etihad REIT’s founding shareholders, which include Abu Dhabi-listed Eshraq Properties, make up the mixed-use portfolio, and are situated in established locations across the UAE. According to a statement, the assets have a blended occupancy level of over 90 percent, and will be managed by an Abu Dhabi Financial Group company.

Similarly, Emirates REIT reported a portfolio value of more than $700 million across eight properties in February, with a net asset value of $484 million.

Commenting on the launch of Etihad REIT, Fawad Tariq-Khan, Director of Investments at ADFG, said: “With the UAE real estate sector maturing while maintaining strong investor appetite, we believe that now is the perfect time to enter the market with Etihad REIT.”

AFFORDABLE HOUSING

In parallel, a burgeoning demand for affordable housing has given a boost to Islamic home finance in the UAE. Imran Ahmed, Product Manager at Sharjah Islamic Bank (SIB), told Salaam Gateway: “Islamic banks are constantly looking to increase their consumer home finance portfolio as the overall real estate market in UAE has stabilised and has matured over a period of time.”

Caraiscos added: “Zawaya Realty [manages] a range of property assets … including affordable housing, an area that is seeing increased demand in the market currently.”

In the commercial real estate space, however, segments of the market are still underserved. SIB’s Ahmed told Salaam Gateway that demand from small and medium-sized enterprises (SMEs) was encouraging banks to create products relevant to this sector.

“For SIB, diversifying into the commercial property segment is seen as a window of opportunity since this segment was underserved. Our initiative to launch commercial property finance comes at a time when the market indicates demand among self-employed businessmen and SMEs for commercial financing towards the purchase of office space and retail outlets for end-use, expansion as well as investment,” he said.

HURDLES

Despite the attractiveness of real estate, there are hurdles to cross, in terms of structuring of assets and ease of doing business. One of the difficulties lies in the intrinsic nature of Shariah-compliant property.

“The difficulty that some of the funds have at the moment is that their relative returns compared to some of the non-Islamic structures have been lower and the environment in which they can invest also excludes some of the best yielding real estate assets – hotels, food and beverage and offices that are occupied by institutions, etc. There needs to be some new thinking about creating vehicles and the way that Islamic finance scholars tend to be engaged to look at what is acceptable or what’s not acceptable,” said CBRE’s Maclean.

For investors, Shariah-compliant investments tend to seem more convoluted. “Despite the improvements it is still more complex to invest in a Shariah-compliant form – one of the fund managers told me that it can cost up to 1 percent of the yield versus a similar conventional investment,” Acreditus’ Howladar added.

A combination of government policy, regulation and innovative products are needed to contribute to strengthen the Islamic real estate sector.

“Market participants are working to try and simplify and harmonise the legal and financing structures given the complexity, but it still remains fragmented across multiple markets. Greater inter-market cooperation to help standardise and streamline the financing structures (like the sukuk market) will improve market liquidity,” said Howladar.

Awqaf or endowments have also traditionally invested in real estate. In Dubai, Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, has launched a new Dubai Awqaf and Endowment District, although its specificities are still scarce. Zawaya’s Caraiscos said: “I believe this has helped spur growth in the sector and helped more assets come into the mainstream.”

© SalaamGateway.com 2017