legal guide09.indd - Islamic Finance News

Opportunities in Islamic Real Estate
By Nichola West and Alex Thomas
Real estate bears a low correlation to other asset
classes and in the interests of spreading investment
risk is an important diversifier. When to invest is the
ultimate open-ended question. Since the peak of the
market in mid-2007, property values have fallen significantly
on a global basis.
Some perceive the summer of 2009, for example, as
a good time to invest, resulting in sealed bids for UK
investment opportunities, with buyers keen to take
advantage of the 30% to 40% reduction in values
since the market high.
The fluctuations in currency exchange rates and oil
prices also have an impact. However, it is really a tale
of two halves in that other investors are still cautious,
believing capital values will be further adjusted to
take into account falls in rent and tenant defaults.
There is also a feeling that the market has yet to see
truly distressed, as opposed to stressed, sellers.
Advantages and disadvantages
A real estate investment, if well selected, has the
potential to realize good income and capital growth.
The use of leverage and sound tax planning can also
enhance the returns for the benefit of investors.
Increasingly, lot size is a factor. For example, some
investors would like to invest in a large trophy asset
but cannot take the risk alone.
Equally, other investors like the ability to invest in
smaller lot sizes but it would not be cost efficient to
do so unless a portfolio of similar assets is created.
An advantage of real estate investments is that they
can be structured so as to be flexible enough to
allow for different investors’ preferences, including
their own geographical/sector focus.
On the other hand, real estate assets are perceived
to be illiquid. However with good planning and
structuring this perceived difficulty can be overcome
if units/shares in the fund vehicle, as opposed to the
asset level, can be traded.
Investing in real estate
To invest in real estate, good strategic and legal
advice is required. This is at the global level in terms
of choosing the relevant investment jurisdiction and
the specific sector to invest in. Likewise, such advice
will also be required at a local level, to ensure a
sound investment and that transaction/tax charges
do not erode investment returns.
There are four key ingredients to a successful real
estate investment: market knowledge, structuring
and tax planning to maximize benefits, and the use
of gearing.
Sound market knowledge is essential to ensure the
suitability of each asset acquired. For example, the
UK investment market is popular with overseas
investors as it is well developed, resulting in quality
investment research and analysis, leading to a high
degree of transparency. This, combined with the UK
lease model, providing for an upwards only income
yield for lease terms of between 10 and 15 years, is
particularly attractive to overseas investors.
The parties will also need to consider carefully
the fund structure. Will it be more in the nature
of a joint venture or a larger fund? Decisions on
key issues must be taken and set out clearly in the
documentation to provide clear rules for the fund
managers and investors. For example, how should
the investment vehicle be structured? What is the
investment term and restrictions on sale of property
and the investors’ direct interests? How should
major decisions be taken?
Once the characteristics of the fund have been
determined, tax planning will play an important
part as it is essential tax leakage is minimized. For
example, the UK property market is a particularly
attractive investment for overseas investors. This is
because with proper tax planning capital taxes will
not be payable on a sale of an investment property
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