The annual IFN UK Forum 2023 was held in London in September 2023 and, once again, was a well-attended event, giving attendees a chance to connect and reconnect with colleagues, clients and friends alike from all over the world, including Saudi Arabia, the UAE and the UK. The forum, supported by His Majesty’s Government, TheCityUK and The City of London, is a fixture in the calendars of Islamic finance professionals in the region, attracting an international profile of financial institutions, bankers, investors, intermediaries and service providers.

The wide-sweeping itinerary covered issues such as developing financial architecture to ensure continued competitiveness, developing innovative Islamic structured finance solutions and the strategic development of Islamic social and sustainable finance. Following our inaugural Real Estate of Mind round ups (see here) of trends in the sector earlier over the years, below are some of the key insights and takeaways from the event:

THE UK AND ISLAMIC FINANCE

It was apparent that the UK is the original pioneer of Islamic finance in the Western world and the event underscored how, today, the country remains the leading centre for Islamic finance in the West. The event heard from government representatives in attendance that the UK government continues to be committed to remaining at the forefront of Islamic finance. Not only is this commitment vital for the UK Muslim population, but also for the UK economy at large, both from a foreign direct investment perspective and from the export of financial and trade services perspective.

Even so, we must also acknowledge that the demand for Islamic finance products in the UK has not been as high as originally expected. The general sentiment is that the UK government needs to pick up its pace and respond quicker than it has done so in the recent past to the needs of the Islamic finance industry. More needs to be done by the UK government to create a level playing field for the Islamic finance industry participants, including the Islamic banks, in order for the industry to grow and for the UK to retain its current position.

COMMERCIAL REAL ESTATE

Overall UK commercial real estate transaction volumes are down. This is not a surprise and it is in line with the global subdued performance trends. We continue to see interest from the GCC investors in UK commercial real estate, in particular in alternative assets such as logistics and student housing.

Following the aftermath of the Brexit vote, the Covid-19 pandemic and the high cost of debt finance, we saw the GCC Islamic investors with dry powder taking a wait and see approach. Such investors were laser focused on acquiring assets from distressed sellers (not distressed assets). We have not however seen the originally anticipated influx of distressed commercial real estate sellers. This is testament to the strength of the UK economy. Bank lenders have once again proved themselves as reliable partners - looking to stabilise loans rather, than pulling the plug in difficult times. However there was query as to what extent refinancing options available to owners/borrowers when their loans come to maturity and whether in 2024 the market is likely to see more distressed sellers.

Overall, the UK financial institutions are not in trouble and any fire sales have been far and few between.

Yes - times have been difficult in terms of transaction volumes however the general discussion no longer seems to be around a UK recession, but more focused on reaching the peak of interest rate rises and future opportunities in an environment where the UK economy has proved itself to be resilient time and time again, thus restoring the investors’ faith in the longevity of the UK market as an investment hub.

SUSTAINABILITY

Sustainability took centre stage in the discussions this year. Sustainability is no longer a nice-to-have aspirational focal point, but a must-have component of the Islamic finance ecosystem. Synergies between sustainability and Islamic finance were highlighted by various participants. Doing less harm and striving to do better is not a new concept to the Islamic finance industry. The challenges around standardisation, regulation and dealing with skepticism are all well-trodden paths for the Islamic finance participants. There are certainly lessons that sustainability can learn from Islamic finance and vice-versa.

There was a sense of general excitement around COP 28 and the role that Islamic finance will play, noting that COP 28 is being held in the UAE (a Muslim country with an excellent reputation for innovation and development for the long term).

It was also acknowledged the industry needed to do a lot more to implement Shari’ah-compliant green purpose facilities, a UK green Sukuk and sustainability linked Murabahas. It must keep at par with its conventional counterparts which is not currently the case.

RETAIL MARKET

Some of the discussions touched on the growth of the retail market and especially Islamic mortgages provided by bank and non-bank lenders. Challenges around making such products competitive with their conventional counterparts were highlighted. Once again, the need for the UK government to provide liquidity to the Islamic banks and thus create a level playing field was highlighted.

NON-BANK LENDING

Whilst some GCC investors are riding out the storm waiting for interest rates to drop and financings to become viable (thus allowing them to reach their expected levels of yield), others are being proactive and looking to innovative structures to deploy their funds. And this is where we as a firm have seen a surge in demand and supply of non-bank financings. This is where instead of direct investments, the GCC investors are seeking to finance the acquisition of UK real estate by borrowers, rather than to directly acquire UK real estate.

The increase in non-bank commercial real estate lending is in line with the global banking lending landscape, where the market is witnessing a liquidity void in particular with respect to certain borrowers (such as SMEs) and sectors (such a commercial real estate and development).

Who better to fill this gap than non-bank lenders with plenty of dry powder and long-standing experience in the real estate sector.