Islamic Real Estate Finance in the UK

It has been just over 10 years since the UK Treasury and the Financial Services Authority bought the home purchase plan scheme of Shariah compliance mortgages in the UK within their regulatory remit. The growth of Islamic real estate finance in the UK in the past 10 years has been tremendous. There are now around 20 financial institutions that offer Islamic finance services with five fully Shariah compliant banks. The UK has grown to become the western hub for Islamic finance globally. 

The UK, London in particular, has historically been an attractive location for real estate investment. Despite some volatility in recent years due to the global economic downturn between 2007 and 2011, yields from UK real estate have stabilized and there remains significant competition for the highest quality assets. One of the reasons behind the strong growth of Shariah compliant real estate finance in the past decade is the UK authorities’ leading role in adapting and developing pre-existing legislation and regulations governing the tax treatment of financial products in order to cater to Shariah compliant structures. In doing so, this has enabled a level-playing field for Islamic finance products and conventional finance.

For example in 2003, the UK government introduced special exemptions for stamp duty land tax to relieve the unintended consequences of double taxation that arose as a result of the structures used by some Islamic mortgages.

As a result, Islamic finance has been used in a number of high-profile projects in London such as the Shard, the Olympic Village and the redevelopment of the Chelsea Barracks and Battersea Power Station sites.

Home finance and residential property investment have traditionally dominated the Islamic finance real estate market. Banks such as Al Rayan and Gatehouse Bank provide Shariah compliant mortgage products to retail customers that offer an excellent alternative to conventional mortgages. Investment in residential property has been mainly restricted to London and the southeast of England. However, this trend is now changing. Abu Dhabi Islamic Bank has begun to pick up the pace in its targeting of growth opportunities in high-net worth banking and real estate financing. One of the growth opportunities ADIB CEO Bruno Martorano has identified is a shift toward commercial financing and the bank recently completed the Islamic structural financing of commercial acquisitions in Bristol and Leeds. There has also been an increasing shift in commercial investment outside of London as investors seek higher yields in established locations in a wide range of sectors such as distribution centers, offices, retail and student accommodation.

The Centre for Cities, an economic think tank that researches economic growth in UK cities and helps cities to improve their performance, recently described an urban renaissance in the UK. In its March 2018 report, it noted that major urban centers in the north and the Midlands, such as Manchester, Leeds, Birmingham and Liverpool, experienced the fastest city center growth in recent decades, as measured in employment rates and residential growth. The city center population of these cities grew more than 6.5 times faster than that of London between 2002 and 2015. Real estate advisors providing investors with Shariah compliant investments have taken advantage of these opportunities, as demonstrated by Greenridge Investment Management’s acquisition of the National Air Traffic Services Campus in Solent and Rosette Merchant Bank’s acquisition of a Tesco supermarket and accompanying retail parade in Oldham, Greater Manchester.

Despite the overall uncertainties surrounding the Brexit process and the outcome of negotiations with the EU, in my experience the appetite for investment in UK real estate remains strong. In fact, as a firm we have experienced an upturn in transactions following the Brexit vote as a result of investors taking advantage of the favourable exchange rate in order to acquire prime real estate assets.

The demand for Shariah compliant real estate investment in the UK remains strong. The Bank of London and the Middle East recently established a physical presence at the Dubai International Financial Centre to service its clients across the Gulf region, while Gatehouse Bank opened a new customer service center in Milton Keynes in order to support its new strategy and expansion plans.

The UK government also recently looked into the capital gain tax implications of borrowers refinancing properties with Islamic finance products. All of these developments point to continued sustained growth in Islamic finance real estate investment in the UK.

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This article was first published in Islamic Finance news Volume 15 Issue 31 dated the 1st August 2018.