Islamic investors accelerate investment in UK property to record levels

According to DTZ, the international property consultants, Islamic investors spent £190m on UK property in the first half of this year compared with £36m in the first half of 2003, a jump of 428%. Islamic investment as a percentage of all overseas investment in UK property has grown from 5.3% in 2003 to 6.8% in the first half of 2004. Trowers & Hamlins expects total Islamic investment in UK property in 2004 to comfortably exceed the £363m invested in 2003. Property investors are traditionally more active in the second half of the year.

According to Trowers & Hamlins, the Islamic Finance market as a whole, which has been growing at around 15% per year, still has tremendous scope for growth amongst the world's 1.2 billion Muslims. At present most Islamic investment in UK property is from Gulf based investors.

Trowers & Hamlins says the principal reason for the influx of Middle Eastern capital into UK property is that Gulf based investors have lost much of their historical confidence in US equities and they are expecting the UK property market to outperform its US counterpart.

Sarah Gooden, Partner of Trowers & Hamlins, comments: "With oil prices at their highest level in two decades Gulf states are generating huge amounts of wealth. Middle Eastern economies can't re-absorb all this capital so UK property is seen as a natural home."

"The liquidity and transparency of the UK property market, along with the ease with which deals can be structured on a tax-efficient basis, are ensuring its growing popularity with Islamic investors."

Trowers & Hamlins says that the advantage the UK has over other EU states in attracting Gulf investment is the flexibility of its legal system and the ease with which it is possible to develop structures compliant with Islamic law.

Sarah Gooden explains; "The expertise which has been developed in this country over the last few years has increased confidence that investment can be successfully structured on an Islamic basis which means that pent up demand can be tapped."

"If the UK can continue to refine its Islamic Finance skills it will give us a tremendous advantage over other investment markets."

In the UK there is also increasing confidence that there is a real demand for Islamic financial products from British Muslims. The last few days have seen the authorisation by the FSA of Islamic House of Britain, the first purely Islamic bank to be authorised to operate in the UK.. Trowers & Hamlins see this as major breakthrough and as further evidence of a trend which is likely to gather momentum over the next few years.

"I expect we will start to see a range of Islamic investment products becoming available in the retail market including funds investing in property. It is also likely we will see Islamic insurance products being launched before too long. However, there won't necessarily be a rush of new Islamic banks in the immediate future. Competitiors may well wait and see how the new bank fares before they follow, " says Sarah Gooden.

According to Trowers & Hamlins, there is also a growing acceptance that Islamic financial instruments can compete with conventional financial tools. For example, 70% of the users of Islamic financial products in Malaysia are non-Muslims.

48% of the recent State of Qatar's Global Islamic bond issue was taken up by non-Muslims and such was the popularity of the issue that the size of the issue was increased from $500m to $700m - making it the largest Islamic bond issue so far.

Trowers & Hamlins admits that other factors are also playing a part in the rapid growth of Islamic investment in UK property.

"Since September 11 the US has become a less welcoming investment environment - there have been problems over visa applications and there is always the concern that investment accounts could be wrongly frozen. The UK is seen as more culturally tolerant."

Trowers & Hamlins recently advised on setting up the Islamic finance for structure for Kuwait Finance House's (KFH) £250m UK property fund and €400m European property fund