Alternatives: The growing demand for Sharia-compliant UK property funds

Investment based on Sharia principles has existed in the UK for over 30 years, but only in the past decade has the sector rapidly developed. Although a fraction of the global investment market at around 1 per cent, Islamic finance is now estimated to be worth £1.3trn, a 150 per cent increase since 2006.

The London Stock Exchange already accounts for 53 Sukuk issues (Islamic bonds), raising over $38bn. It has a growing presence in Sharia-compliant exchange traded funds, with seven available, and Takaful (Islamic insurance) has reached a new high in the UK.

The first World Islamic Economic Forum outside the Middle East was held in London in 2013. David Cameron, then Prime Minister, declared then: “I don’t just want London to be a great capital of Islamic finance in the Western world, I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world.”

At the forum, the Government announced the launch of a £200m sovereign Sukuk, investing in UK commercial property.

This was oversubscribed 10 times, attracting £2.3bn of subscriptions from banks and sovereign wealth funds worldwide, with a third from UK-based Islamic banks and 37 per cent from Middle Eastern institutions.

With no plans from the Government to launch another, there is growing global demand for more Sharia-compliant options in the UK property market. Demand is becoming more urgent, as the pound remains weak post-Brexit, particularly for dollar-denominated investors.

London Central Portfolio has launched the UK’s first Sharia-compliant residential property funds. Muslims make up 25 per cent of the world’s population and the Islamic finance industry is growing 50 per cent faster than the commercial banking sector. Muslim institutional and retail wealth is increasingly mobile. Economic and political instability, heightened by the US presidential election, is encouraging Middle Eastern investors to diversify into global markets, with London property being a firm favourite.

Qatari-backed Al Rayan Bank, which provided the Islamic finance for LCP’s last fund, London Central Apartments III, recognises this growing demand. Keith Leach, chief commercial officer, says: “Two key objectives for Al Rayan Bank have been to provide bespoke Sharia-compliant investment opportunities and to expand our presence in the real estate sector – particularly in Prime Central London, a favourite of both our Middle Eastern and British clients. We are keen to strengthen our product range.”

As with the Government’s Sukuk, the investor base for LCP’s Sharia-compliant funds has been diverse, drawn from the UK and internationally, as well as from both conventional and Islamic investors. The majority of Islamic int-erest came from the MENA region, accounting for 48 per cent of investors. A further 10 per cent came from Malaysia, another well-developed Islamic financial centre and 38 per cent from domestic UK Muslims.

In 2017, LCP is to launch London Central Apartments IV (LCA IV), with a Sharia-compliant option. Investing in the rental sector in Prime Central London, LCA IV will target a total return on investment of around 100
per cent over seven years with annual interim distributions of 5 per cent after the second year.

LCA IV will not be subject to forthcoming reductions in mortgage interest relief, or additional rate Stamp Duty.

Onshore investors benefit from an 8 per cent reduction in CGT and the use of tax-efficient wrappers like Sipps and Isas. For offshore investors, it is exempted from non-resident CGT and non-dom inheritance tax.

The landscape of the UK’s real estate investment market is changing as the Government offers attractive tax breaks for vehicles with ownership diver-sity in preference to private landlords.

Naomi Heaton is CEO of London Central Portfolio