IFN Saudi Arabia Forum 2016: Saudi Islamic investment opportunities arise from low oil price environment bolstered by regulatory enhancements

Jeddah, Saudi Arabia – The opening of the Saudi capital market and the Kingdom’s strong infrastructure pipeline are creating compelling Islamic finance opportunities for investors, both local and foreign; and market players are positively embracing imminent regulatory enhancements while simultaneously positioning themselves to capitalize on emerging opportunities.

At the IFN Saudi Arabia Forum 2016, which gathered a selective audience of over 150 senior industry participants, regulators and key decision-makers from across the Middle East, Europe, Asia and Africa, delegates and speakers alike shared optimism for the Saudi Islamic finance market.

The high-level event kicked off with an engaging onstage dialogue with Mohammed Elkuwaiz, the vice-chairman of the Capital Market Authority (CMA), during which he discussed, among other things, the impact of the Qualified Foreign Financial Institution Investment in Listed Shares Rules on the Islamic investment landscape.

“Attracting foreign investors is not an end or destination but a journey. We are midway this journey and the feedback has been positive,” Mohammed said.

He is also revealed that the CMA is currently working on four new regulations to facilitate the Saudi capital markets including listing rules for the secondary market, guidelines on corporate governance, regulation on special purpose entities and a revised set of rules on mergers and acquisition.

“Beyond that, the CMA has also enacted a process to review and revamp all of its regulations. The purpose for this exercise is to incorporate feedback received throughout the years from various market participants, to simplify interface with the capital markets, to give the [stock] exchange more responsibility with respect to capital market activities and to increase efficiency.”

The forum continued on with a welcome message by the chairman of the Jeddah Chamber of Commerce and Industry, Sheikh Saleh Kamel, and a series of insightful and lively panel sessions led by the industry’s most recognized leaders in their fields. A recurrent theme throughout the day was the disruptive forces of technology, not only in the field of Islamic asset management but also in area of human capital development.

Real estate was another hot topic, with the US and European markets taking center stage. Isam Salah, a partner at King & Spalding, confirmed that Gulf investors are demonstrating stronger appetite for real estate equities in the US post the financial crisis with particular interest in multifamily projects, single tenant industrial office, warehouse, student accommodation and also serviced hotels. Sharif El Gamal, the chaiman and CEO of Soho Properties, echoed Isam’s sentiments, characterizing the US market as going through a ‘London effect’ attracting strong interest from global investors. Sharif also confirmed that Soho Properties is working on another Shariah compliant real estate financing deal next year. Naim Azad Din, the deputy CEO and head of asset management at Sidra Capital, believes that opening investment funds, particularly real estate investment trusts (REITs), to the retail market would be a gamechanger for the industry. Interestingly, the CMA earlier also revealed that there are a several REITs under formation with more in the pipeline.

Real estate aside, project and infrastructure financing steps into the limelight as a massive potential Islamic investment avenue, especially in the current low oil price environment.

“The irony is that the low oil price has given way for the bond and Sukuk market to develop, essentially putting Saudi Arabia on the map,” said Stuart Anderson, the managing director and regional head of Middle East for S&P Global Ratings. Tightening liquidity as a result of weaker oil revenue is indeed good news for the project financing market as the government, under liquidity pressure, has been seeking for alternative funding sources including from the fixed income market and banking sector. It is estimated that Saudi Arabia would require over US$800 billion until 2020 to meet its infrastructure needs.

Two other trends which dominated discussions were the rise of private placement Islamic deals and the increasing integration of ESG/SRI proposition in the Shariah finance space.

According to Nabil Issa, a partner at King & Spalding, the tax efficiency and time-saving elements as well as flexibility when it comes to tenors afforded by privately placed Sukuk/funds have contributed to the appeal and growth of private placement deals: over the last 18 months, 33 out of the 40 funds King & Spalding (Saudi office) facilitated in structuring were privately placed. Such deals also allow foreign investors exposures into sectors which traditionally may not be available due to certain regulatory requirements such as healthcare, logistics and education. On the ESG/SRI front, Stuart Hutton, the chief investment officer of Simply Ethical, observed that investors are increasingly looking at social returns in addition to financial returns in their investments and this is especially true for Islamic investors. Abdul Rahman Hammad, the regional director for IdealRatings, added that the case is even stronger for the convergence of ESG/SRI and Islamic finance as ethical/religious-screened entities are outperforming their conventional counterparts.

Please find an overview of the above event here.

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