Key highlights:
- Global real estate market exhibited resilience in 2023 but uneven macroeconomic conditions in 2024 will weigh on market.
- The Middle East accounts for the largest market share of Shariah compliant real estate funds.
- Saudi Arabia hosts the highest number of Islamic REITs globally.
Overview
The global real estate market has exhibited robust growth, with an anticipated increase from US$4.02 trillion in 2023 to US$4.31 trillion in 2024, representing a compound annual growth rate of 7.4%, according to Research and Markets. This expansion can be attributed to several factors, including robust economic growth in emerging markets, heightened demand for affordable housing, government initiatives and rising disposable income.
In the aftermath of the COVID-19 pandemic, there has been an improvement in office utilization worldwide, particularly stabilizing in Asia and parts of Europe. This stability can be attributed to the increasing prevalence of return-to-office mandates which are expected to rise further in 2024.
Real estate continues to be an Islamic investor favorite due to its defensive nature especially during times of uncertainties, as the asset class has long been considered a safe haven for income and capital appreciation.
A significant portion of Islamic investments into real estate takes place outside of the banking market through specialist asset managers using a wide range of instruments covering private credit, mezzanine financing and real estate funds including REITs.
Islamic REITs
REITs play an increasingly important role in Islamic investment, drawing investors seeking steady profits through tangible assets while allowing property companies to access a larger pool of investors to fund acquisitions and development projects through the capital markets.
REITs did face a decline in performance during Q1 2024. The FTSE EPRA Nareit IdealRatings Global REITs Islamic Index saw performance diminishing from Q4 2023 to Q1 2024 by 2.4%. Similarly, both the S&P Global REIT Shariah Index and S&P Global All REIT Shariah Capped Index experienced sluggish beginnings in Q1 2024, with declines of 7.3% and 3.97% respectively.
While there might have been a decline in Q1 2024, the FTSE EPRA Nareit IdealRatings Global REITs Islamic Index recorded a substantial performance increase of 8.9% in 2023 and 14.2% over the last five years. Additionally, the S&P Global REIT Shariah Index reported a total return of 15.4% in 2023 and 5.05% over the past five years.
In the GCC region, REITs have gained popularity bolstered by regulatory support, and the region has established itself as a global leader in manufacturing Islamic REITs.
Chart 1: Islamic real estate funds (including REITs) breakdown by region
There are 41 Islamic real estate investment funds globally as at Q1 2024, according to the IFN Investor Fund Database. The majority, comprising 31 funds, approximately 80%, are in the Middle East, with total assets under management (AuM) of US$7.03 billion. Following closely is Asia Pacific with seven funds having a combined value of US$1.24 billion, Americas with two funds totaling US$126.11 million while Europe houses one fund valued at US$10.35 million which was launched in September 2023.
Out of the 32 funds hailing from the Middle East, Saudi Arabia leads with the highest number of Islamic real estate funds, boasting 24 funds with a combined value of US$6.15 billion. Following behind are Malaysia and the UAE, each with four funds. Malaysia’s total AuM amount to US$1.06 billion, while the UAE’s AuM stand at US$370.9 million.
AuM growth
In the four regions with Islamic real estate funds and REITs, the Middle East saw the most significant quarterly rise in total AuM, increasing by 22.15%, equating to a boost of US$1.28 billion. Subsequently, the Americas recorded the second-highest increase at 17.5%, reaching a total of US$18.8 million, followed by the Asia Pacific region with a 5.09% increase, totalling US$6 million.
- Middle East: Up by 22.15% to US$7.04 billion from US$5.76 billion.
- Americas: Up by 17.5% to US$126.2 million from US$107.4 million.
- Asia Pacific: Up by 5.09% to US$1.24 billion from US$1.18 billion.
- Europe: Down by 3.74% to US$10.3 million from US$10.7 million.
Chart 2: Islamic real estate funds (including REITs) breakdown by country
Table 1: Top performing Islamic real estate funds (including REITs) by region in Q1 2024
| Region | Fund | Fund manager | Three-month returns (%) |
|---|---|---|---|
| Asia Pacific | Hejaz Property Fund | Hejaz Financial Services | 8.37 |
| Middle East | Global Sharia REITs Portfolio | Invesense Asset Management | 17.1 |
| Americas | SP Funds S&P Global REIT Sharia ETF | ShariaPortfolio | 1.86 |
Note: Data on Islamic real estate funds in Africa not available
New players and products In 2023, four Islamic real estate funds were introduced, three of which originated in Saudi Arabia and one from the UK. These funds amassed a total of US$517.88 million in AuM as at the end of Q1 2024, according to IFN Investor Fund Database.
Table 2: 2023 Islamic real estate funds (including REITs) AuM as at the end of Q1 2024
| Fund | Fund manager | AuM (US$ million) |
|---|---|---|
| Real Estate Distribution Fund | Al Rajhi Capital | 95.02 |
| Hospitality REIT Fund | Alinma Investment | 271.9 |
| Global Real Estate Passive Fund | Sedco Capital | 140.5 |
| FTSE EPRA NAREIT Developed Islamic UCITS ETF Fund | HSBC Global Asset Management | 10.35 |
Outlook
In a market where credit remains active, interest rate stability is crucial for driving investment activity. Real estate credit strategies will stay in focus despite the elevated interest rate, with increase in new debt sources.
In 2024, the primary hurdle for real estate investors resolves around effectively handling financial and asset-related obstacles within their portfolio, alongside actively pursuing investments in high-demand assets and capitalizing on upcoming opportunities. Hence, investors must possess qualities enabling them to seamlessly employ both offensive and defensive strategies and efficiently manage resources.
The relative steadiness in the macroeconomics landscape will present opportunities for both investors and occupants to enact real estate plans in 2024 which were unfeasible to carry out in 2022 and 2023 due to post-pandemic highs and lows, despite persisting challenges of higher borrowing costs, geopolitical uncertainties and inflation.
This report was produced by Elliot Yip and Aravinth Rajendran, financial data analysts at IFN Investor.
