Islamic Finance is based on ethical and socially responsible principles, ensuring fair distribution between all parties, making it an attractive option for investors in the aftermath of the global financial crisis. Islamic Finance assets were estimated to be worth $2 trillion in 2015 and now in 2018 are estimated at US$3.4 trillion suggesting an annual growth of 17.6% over the last four years. This figure is projected to grow to $5 trillion by 2021 as the volume of compliant products and capital flows increase.
At its core, Islamic financing principles favour the development and sharing of risk in physical assets, which contribute to the economic growth of society. There is therefore a natural match between the Islamic finance model and the acquisition and development of real estate assets. Moreover, Islamic finance offers flexible tools which can be used for a wide range of real estate financing. This ranges from residential mortgages, to large scale investment such as Qatari Diar’s acquisition of the Chelsea Barracks and the construction of the Shard of Glass in London. More recently, Islamic finance techniques were used by Emaar Properties in Dubai to refinance existing facilities for the development of the Dubai Mall.
Islamic investors, including certain Middle East sovereign wealth funds, have traditionally preferred investing in prime real estate in the UK and Europe. In view of the economic uncertainty in Europe, there are increasing capital flows into commercial real estate in Asia and Australia, particularly in the industrial and commercial sectors. This trend is obviously something that the burgeoning Sri Lankan Real Estate sector could benefit from.
There is no doubt that the global appetite for Islamic finance and investment funds is growing – especially in the existing economic environment – as a viable alternative to conventional debt-funding. For entities seeking to raise funding, it gives them access to a larger investor pools.
Islamic financing concepts and commercial real-estate investments are complimentary as they both adopt a risk sharing model. Islamic financing has been used for real-estate transactions for decades in the Middle East and Malaysia, and non-Muslim countries such as the UK and Singapore have enacted legislative changes to pave the way for these types of financing arrangements.
Throughout Asia and Australasia, there now seems to be increasing focus from a number of other countries looking to tap this alternative source of capital. Once this increased focus gains momentum and any necessary legislative changes are implemented, we will most likely see exponential growth in this area.
- More than 300 Islamic banks & windows that are present in at least 60 countries worth $3 trillion
- More than 750 Islamic funds worldwide with assets under management of more than US$60 billion
- A growing Muslim population standing at around 1.7 billion, out of which 50 million in Europe are looking at investment products catered to their needs
- The search for ethical investments by Muslim and non-Muslim investors
- The need of investment products where to invest oil revenue surpluses
- The need for Islamic project financing for the infrastructure projects in the region
- A growing number of Islamic and conventional financial institutions entering the space
- A rise in sophistication through greater fundamentals in the contracts and their appropriate utilisation in the development of modern financial instruments