LONDON -- Saudis and Gulf nationals who wish to buy a holiday home or a buy-to-let investment property in the UK but who wish to use Shariah-compliant property finance, can now do so following the launch of a bespoke home financing scheme aimed at high networth Arab expatriates and non-UK residents.
According to various estimates, the UK attracts about 500,000 Muslim visitors annually mainly from the GCC states and southeast Asian countries such as Malaysia and Brunei. The UK's own Muslim population is about 2 million and the EU-wide Muslim population is an estimated 14 million, mainly concentrated in France and Germany. According to the Financial Services Authority, the spending power of the half a million Muslim visitors to the UK in 2002 totaled 600 million Sterling pounds.
Over the next few weeks, London-based ABC International Bank, a subsidiary of the consortium bank, Arab Banking Corporation (ABC) in Bahrain, one of the largest banks in the Arab world, will be marketing its pioneering Alburaq Shariah-compliant Expatriate Property Finance Scheme, which is based on the Islamic concept of diminishing Musharaka (co-ownership or equity participation), in the Middle East. ABC is also in negotiations with a few local Arab banks with the aim of distributing its Alburaq suite of Islamic retail banking products to their respective customer base.
The Alburaq brand, according to ABC, is emerging as one of the leading Islamic consumer finance suite of products in the world, comprising home finance, property finance for non-UK residents, buy-to-let, community projects, savings and investments, education finance, and consumer finance.
"We are targeting non-UK residents from the Gulf and Arab countries wishing to buy property -- a holiday home or buy-to-let investment property -- anywhere in the UK," stresses Keith Leach, senior manager at ABC International Bank.
"Many financial institutions see this as a niche part of their business. A bank like ABC needs to service the needs of its Arab customer base. The property finance facility can also be used in other ways. A sizeable number of Arab students also come to study in the UK. Some parents can buy a property for the use of their children while they are studying in the UK; and hold it as a buy-to-let investment afterward. Another benefit of owning a property is that it removes the need of paying expensive hotel bills in London.
There are also good tax reasons to own property in UK. Usually also the rental income accrued will be more than the monthly premiums paid to the bank under the property financing scheme."
The Alburaq Shariah-compliant property financing scheme brings together the best of British financial engineering and expertise and Islamic financial principles, which prohibits the charging and giving of interest. Potential customers can get further comfort in the knowledge that ABC has a representative and independent Shariah (Islamic legal) advisory board, whose principal is Sheikh Nizam Yaquby, a noted Bahraini Fiqh scholar who also sits on the Shariah Advisory Boards of several major financial institutions globally.
The UK has traditionally been a good property investment market for Gulf investors. Over the last two years, the number of Islamic real estate funds and stand-alone property acquisitions have grown substantially in the UK market. ABC, Gulf Finance House, Kuwait Finance House, Qatar Islamic Bank, First Islamic Investment Bank are just a few Islamic banks active in the UK real estate market.
In the last year, thanks in part to last year's UK budget which exempted co-ownership alternative property financing schemes from the need to pay double stamp duty in the Finance Act 2003, which became effective in December 2003, a spate of Islamic home mortgage products have been introduced in the UK market including the Alburaq Shariah-compliant Home Financing Scheme in conjunction with Bristol & West, one of the leading high street mortgage providers in the UK; and others by HSBC Amanah; United National Bank, and Ahli United Bank.
Property as an investment asset class has over the years outperformed gilts (government bonds) and equities. Owning a property in the UK in particular, according to Leach, has proven to be one of the very best longer-term investments. However, property investment like any other asset class, can be subject to cyclical market conditions which carry various risks. As such investors need to have a longer-term view of the market.
Tax planning, for instance, is an important consideration due to UK domicile law. "We cannot give specific tax advice but can guide on the basic structures and put clients in touch with the right lawyers that will set up a trust or off-the-shelf vehicle in say Jersey, Guernsey, Isle of Man or British Virgin Islands (BVI), to meet the tax situation most efficiently. The aim is to mitigate inheritance tax; capital gains tax; and income tax -- but done legitimately using offshore structures provided customers don't breach the residency laws of the UK," explains Leach.
On the downside, there is some confusion whether the double stamp duty exemption for the Shariah-compliant mortgage applies only to individuals buying a house directly. Banks are in talks with the UK's Inland Revenue to seek clarification whether the exemption equally applies to houses acquired through offshore family trusts.
Generally, banks will finance up to 75 percent of the value of the property for non-residents, people who do not have the normal salary confirmations like those working in the UK. This means that banks such as ABC have to use different ways of assessing the credit risk of a potential client. This is where ABC's pre-eminence in the Arab banking market comes in, to help the due diligence process using its local knowledge and data base.
"Once we get comfortable with the credit risk, the rest of the processes are the same. Normally we would do a mortgage for 15 years rather than 25 years, which is a long time," adds Leach.
ABC is confident that because of above processes, its expatriate Shariah-compliant home financing scheme is more competitive in pricing than say an equivalent UK conventional mortgage, which would regard such a mortgage as much more risky because the mortgagee is not a UK national salaried person. Such a mortgage, says Leach, would be classified separately almost like a non-status mortgage, which would drive up the pricing because of the perceived extra risk.
Mushtak Parker
© Arab News 2004
