Funding for affordable homes

Lower returns may attract Islamic finance if the investment is sound, as Dan Alderson discovers

The growing need for lower-cost housing poses a conundrum for the UK, but Islamic finance could provide a solution.

Successive governments have struggled to attract finance for such schemes. Islamic finance institutional investors may forego higher returns for a safe investment in which there is perceived social benefit, however.

“They are prepared to accept returns of between 4 to 5 per cent,” says Saadat Khan, founder and chief executive of UK-based Ethical Asset Management. “They also seem to like the idea of government or quasi-government income streams.”

Sharia-compliant inward investment is already coming from the Middle East. In January, Bahrain’s Tadhamon Capital joined the UK’s Landspeed and Apache Capital in a deal to fund 1,500 affordable shared-equity homes.

But Sharia compliance alone will not guarantee investment for projects.

“Infrastructure is a natural fit for Islamic finance and it’s possible that Middle-East governments and banks might want to diversify their investments geographically, but they need attractive projects,” says Debashis Dey, a partner at Clifford Chance.

Every transaction that includes affordable housing is different and therefore each has to be looked at on its individual merits, says Nigel Denison, head of markets at Bank of London and the Middle East which is already lending £465 million to the mid-market sector.

“Some of the different issues include where the development is located, which housing association or local authority is involved, and what is the mix of affordable housing and accommodation for the open market,” he says.

Key issues from a banker’s point of view include the loan-to-value ratio being sought by the borrower, the valuations being ascribed to the development and how the repayment schedule will be met.