This item was first published in the Islamic Finance News, 15 February 2017.
The UK’s decision in June to leave the EU and more recently Donald Trump’s shock US election win surprised markets throughout the world, causing many to think twice about their expectations from the French and German elections in 2017.
However, despite all this uncertainty, real estate remains an attractive, and relatively safe, investment. The initial uncertainty following the Brexit vote has largely subsided and London in particular continues to be viewed as a safe haven for investors. So it is not all doom and gloom. In fact, in many areas, it seems like it is just business as usual.
A major reason for the exponential growth which Islamic finance has experienced globally in recent years has been the application of Shariah compliant structures to the world of property finance.
Real estate finance transactions are well suited to Shariah compliant structures, particularly Ijarah (lease), because they satisfy the Shariah requirement that the subject matt er is a valuable, identifiable and quantifiable asset with utility. The taking of security (to guard against a breach of contract) is also approved and encouraged in Islam. As such, financiers are protected in the same way as those in a conventional transaction.
In the UK, commencing from 2003, a number of changes have been made to the legislative framework such that the UK is viewed both domestically and internationally to be a favourable jurisdiction for Shariah compliant transactions. Whether that is the removal of double taxation on a Shariah compliant lease or profit payments under a commodity Murabahah being treated as equivalent to interest from a tax perspective, the cumulative effect of these changes has been overwhelmingly positive.
More recently, Brexit’s effect on the pound has been good news for international real estate investors, particularly those from the Middle East whose currencies are pegged against the dollar. However, it remains to be seen what impact Brexit (as early as March 2019) and the run-up to Brexit will have on the UK’s dominant position on Islamic finance.
Meanwhile, in Germany, the Islamic commercial property sector is gaining traction. However, the yields on German property are not as high as in the UK, and the properties generating the higher yields tend to be in German cities that may not be familiar to Islamic investors.
In France, which has Western Europe’s largest Muslim population, while the penetration of Islamic finance has not been as great as in the UK, 2016 did see some notable growth and innovation. Paris, in particular, remains a very attractive market for Shariah compliant real estate investment and the expectation is that the growth that France has seen in recent times will continue into 2017. However, both France and Germany have a long way to go if they are to compete with the UK’s hold on the Islamic property finance market.