How Islamic finance is shaping Europe’s property markets

Article by JLL Staff Reporter
Middle eastern cities and investors
Image credit: Shutterstock

As Middle Eastern money continues to make its way into global property markets the number of investors seeking specialist, Sharia-compliant advice and financing is on the up, especially in the UK and, increasingly, in Germany. 

While many wealthy Muslim investors own expansive property portfolios in the UK capital, for example Qatari investors now own £1 billion worth of luxury property in London’s exclusive Mayfair district, others are snapping up stakes in new developments and regeneration projects.

The Shard, Battersea Power Station and Chelsea Barracks – three iconic construction projects – were all three built using Sharia-compliant finance.

Indeed, Sharia-compliant funds are providing an important source of cash for the London real estate market, with investors from Saudi Arabia, Kuwait and Qatar along with growing interest among investors in the United Arab Emirates and Bahrain, according to Claudio Sgobba, director in JLL’s debt advisory team in London.

He says about 60 percent of JLL’s Gulf client base who invest in Germany and the UK requires Sharia-compliant investments and finance. “The UK is the number one Islamic finance centre in the western hemisphere,” he explains. “London has a critical mass of qualified professionals in this area and English law is often used to govern Islamic financial transactions.”

A focus on social investments

Central to Sharia-compliant finance is a prohibition on “making money out of money”. There can be no charging of interest and neither can there be any mixing of funds raised or invested in a Sharia-compliant manner with non-compliant monies.

Commercial and residential real estate therefore fits well with Sharia-compliant finance, which is governed by three rules: the structure of the investment, the types of real estate finance vehicles and the type of asset that is allowed.

Though many notions of what is sharia compliant exist, each deal is passed through a board of scholars to see whether the established criteria for any investment are met.

Muslim investors, for example, generally avoid bars, gambling premises, breweries and distilleries although some investors would allow hotel investments provided revenues from alcohol sales are less than five per cent of what the asset generates. However, the hospitality sector is generally shunned by Saudi and Kuwaiti investors because of links to the sale and consumption of alcohol and other forms of entertainment.

“There are many different opinions as to what is Sharia-compliant,” Sgobba says. “There may be hundreds of qualified scholars across the world, but only a few who have gained recognition from the financial industry and Islamic investors alike.”

Business meets charity

Aside from the steady returns on offer, real estate investment can count towards the annual charitable giving required of wealthy Muslims.

Sgobba explains: “Charity is a core practice of Islam and investments in socially beneficial transactions can be seen as a form of sadaqah, a discretionary and discreet act of charity.”

In recent years, Islamic investment activity has moved away from trophy assets such as large income generating office buildings and towards social investments. Healthcare and senior housing, for example, are proving popular.

“To invest in a luxury development may be compliant with Sharia, but it is not a beneficial act in itself,” Sgobba adds. “Investing in senior housing is a good deed as well as good business.”

“On average, property accounts for 65 percent of the investment portfolio of a Gulf Ultra-High Net Worth Individual. As such the asset class will always be a favourite spot among investment products as it has the benefits of both fixed income through yearly rental streams and equity through capital appreciation,” he concludes.

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