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New Government Strategy on Islamic Finance Spurs Spate of Transactions in Prime UK Real Estate Market

The UK Government initiatives on Islamic finance, announced at the World Islamic Economic Forum (WIEF) in London at the end of October 2013, seem to have given an added momentum to Islamic finance transactions, especially in the real estate sector. In the last few weeks several transactions in the UK real estate sector have been closed, involving Abu Dhabi Islamic bank (ADIB), 90 North Real Estate Partners LLP, Gatehouse Bank and Islamic Bank of Britain (IBB).

ADIB, for instance, arranged a £20 million structured Islamic financing facility – its debut deal in the UK real estate sector – to fund the development of Westbourne House, an office-cum-retail property in Central London. The financing was arranged for a consortium of GCC investors who purchased the property in 2012 with the aim of converting it into luxury residential apartments.

According to Arif Usmani, Global Head of Wholesale Banking at ADIB, the Bank “welcomes the increasingly high profile role being played by the UK’s financial services sector to encourage the global acceptance and growth of Islamic finance products and services. Resilient demand from international buyers for prime residential real estate has underpinned the performance of London’s property market which has outpaced most other markets in recent years.”

In another transaction, 90 North Real Estate Partners LLP, an independent Mayfair-based investment advisory firm, specialising in Shariah compliant real estate investment, advised a Middle Eastern investor represented by Dubai-based Arzan Wealth, on the purchase of Crossley Retail Park, Worcestershire in a £41.5 million deal, which is projected to give a net initial yield of 7.3 per cent per annum to the investor. The transaction was financed through a Shariah-compliant debt facility provided by Bank and financing for the acquisition was provided by Aareal Bank.

In a statement, Nicholas Judd, Founder Partner of 90 North stressed that “the investment platform we manage in partnership with Arzan Wealth has now acquired approximately £110,000,000 of property and we are seeking further substantial acquisitions across a range of real estate sectors for 2014”. 90 North has over the last 18 months transacted on 7 assets with a value of about £200 million including central London developments, and income producing stabilised warehousing assets and approximately 1,800 student housing beds at campuses in Canterbury and Bradford. According to James Caan, Chairman of 90 North and a former BBC TV’s Dragons’ Den member, “once again we have demonstrated our ability to originate and transact across the UK property spectrum, with transactions all structured in accordance with Islamic principles and ethics, key aspects which are at the core of 90 North’s business”

Kuwait-owned Gatehouse Bank on the other hand has set up a £700 million joint venture with Sigma Capital, the Edinburgh-based residential and urban regeneration specialist, which will support the roll-out of an initial 2,000 new privately rented residential properties in the UK, with the potential to grow the portfolio to around 6,600 new rental homes once fully developed.

The initial phase has a total development cost of £200 million and the development cost of the entire proposed portfolio is estimated at £700 million. Under the terms of the joint venture, Gatehouse will deliver the equity element of the venture and both parties are in negotiations with a number of leading banks for financing to complete the initial £200 million development phase. Once bank finance is in place, construction is expected to take place over 24 months, with the new homes being delivered in phases.

The initial 2,000 units are being supported in particular by Sigma’s local authority partnerships with Liverpool and Salford City Councils, and 22 sites, totalling over 90 acres, have already been identified across the North West. The joint venture will deliver significant high quality housing stock and assist with the regeneration objectives of local authority partners in a cost efficient and timely way. Sigma stressed that the 2,000 new rental homes would comprise one of the largest single new build residential housing portfolios in the UK. The Group will generate revenues from asset management fees during both the construction and investment phases and will also participate in the capital upside of the joint venture vehicle.

Gatehouse Bank, which is a dedicated Shariah-compliant investment bank regulated by the UK’s Prudential Regulatory Authority, currently has a real estate portfolio worth in excess of UK£1 billion across the UK and US.

The joint venture with Sibma has the support of the UK Coalition Government. Prime Minister David Cameron in a statement reiterated that “as part of our plan to help Britain succeed, we are determined to build a rebalanced economy across the country. As we compete in a tough global race, Sigma’s joint venture with Gatehouse is brilliant news for the North West and for Britain, showing that we are open for business. The rental market is a vital asset to this country and this new investment will help to boost local economies, create jobs and deliver more homes for hardworking people. And it’s on top of the wide range of measures we’ve already introduced to get Britain building, including our new Build to Rent fund, and the billions we’re investing towards delivering the fastest rate of affordable house building for two decades.”

Gatehouse Bank also issued two Sukuk in December 2013, comprising £8.2m each, with a total of £16.4 million. The Sukuk are secured by existing real estate assets-under-management, the regional British Telecom (BT) headquarters in Leeds, UK, and paying a distribution of 4.25 percent and 6.25 percent per annum over a 7 year term. “Investors,” said Gatehouse in a statement, “will earn a return by virtue of the profit earned through the rent agreement of the building. Both sukuk were arranged following a refinancing of a major headquarters building let to British Telecommunications Plc until September 2020.”

Rental payments from the tenant will be applied to fund payments to the Sukuk holders on each periodic distribution date. One Sukuk benefits from a repurchase undertaking from Gatehouse Bank on the third anniversary of issuance and also benefits from security over the underlying real estate asset, while the second remains subordinated. As Mr Abdulaziz AlDuweesh, Chief Investment Officer at Gatehouse Bank explained: “Gatehouse Bank is positioned to expand the Sukuk offering of the business in line with an increase in demand. The UK remains a great opportunity for developing this product offering.”

The Islamic Bank of Britain plc (IBB) in the meantime has widened its range of Shariah-compliant Buy to Let Purchase Plans (BTLPP) by launching two new fixed rental rate deals, with deposits of 25 percent and 35 percent. According to Imran Pasha, Head of Sales and Service, IBB, the Bank’s “fixed rental rate BTLPPs are ideal for landlords looking to fix their outgoings over the next two years. The deals have been launched in response to growing demand for Shariah-compliant finance as the Buy to Let market continues to enjoy a resurgence.”

IBB also completed its first finance deal in Scotland in December for Al-Meezan, a non-profit, non-political organisation based in Glasgow. The deal for commercial property finance, valued at UK£0.4 million, has enabled Al-Meezan to complete renovation and extension work at its premises. It also includes refinancing of the credit for the initial building works, making Al Meezan’s finances fully Sharia-compliant.

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