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September 19, 2016

Malaysia’s interest in overseas real estate, notably in Australia and the UK, has increased, supported by a weaker pound and a softer AUD (Australian dollar), as the domestic market in the Southeast Asian country continues to underperform.

“Malaysian capital continues to target Australian real estate mainly due to some key drivers, firstly both currencies devalued at similar rates over the past 18 months,” says Nick Charlton, from JLL’s Capital Markets team in Malaysia.

“Following Brexit, local investors have also started to look at the UK as well.”

“Before the referendum, the RM (Malaysian Ringgit) was too weak against the British pound to be attractive for Malaysian investors.”

The RM has gained about 1.94 percent against the Australian dollar and about 17 percent against the pound year-to-date.

“Most investors in Malaysia cite the security of tenure and long lease terms that are available in Australia at similar or slightly better yields than what can be found on prime commercial property in Kuala Lumpur,” says Charlton. Growth in the local Malaysian real estate market has slowed due to government measures to cool the sector as well as an economy that has been negatively impacted by falling commodity prices, he adds.

“Some prime office properties in Kuala Lumpur are transacting at circa 4 percent net yield and below compared to Sydney,” he adds. In Australia, effective rental growth for commercial properties in Sydney and Melbourne is forecast at around 12 percent and 10 percent over next two years respectively. Yield spreads as at the second-quarter of this year are trading at a 288 basis point, which is more than double long-term averages.

Malaysian investment interest in overseas real estate markets has been largely led by those previously educated overseas or families who have sent their children overseas for education. “As such they are are comfortable investing in a country with which they are familiar,” explains Charlton.

“The potent mix of education and property is playing a bigger role in dictating the flow of global private capital into real estate investments, especially in the residential sector” says Ali Meadows, JLL’s Head of Global Capital Markets, Asia Pacific. “Top destinations have so far included London, New York and Sydney.”

Shariah-compliant funds

With increased Malaysian interest in Australian and UK properties, the number of Shariah-compliant funds being set up overseas to tap investment appetite from Muslim investors has also risen. Last month, Australia’s Islamic investment company, Crescent Wealth, and KAF Investment Funds, a Malaysian investment manager, launched the KAF Australia Islamic Property Fund. The KAF Australia Islamic Property Fund (KAIPF) is Malaysia’s first fund to give non-institutional investors direct access to Australian commercial property. This feeder fund invests into Australia’s leading Islamic property fund, the Crescent Diversified Property Fund.

While Shariah-compliant investment has had a presence in the UK for more than 30years, drawing investors mainly from the Middle East, but only in the last decade has the sector developed rapidly. Among the notable players in the real estate sector included London Central Portfolio and Gatehouse Bank.

With Muslims representing a quarter of the world’s population, and an increasing number of conventional finance investors seeking ethical and uncomplicated instruments following the 2008 financial crisis, the potential for growth in Islamic finance is widely regarded to be an immense source for investment opportunities.

Among Malaysia’s government-linked funds, the Employees Provident Fund (EPF), Kumpulan Wang Persarran (Diperbadankan), known as KWAP, Permodalan Nasional Bhd (PNB), who looks after bumiputra investment, and pilgrims fund Tabung Haji have been among the most active buyers of overseas properties in recent years.

EPF’s real estate assets include 65 Fleet Street in London and the Battersea Power Station in the U.K.

Among prominent Malaysian investors who are active in Australian real estate are CIMB Trust Capital and Starhill’s Global Reit, whose biggest shareholder is Malaysia’s YTL Corporation.

For a product to be Shariah-compliant, it has to be approved by notable religious scholars well-versed in the Quran.

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Nick Charlton

JLL Capital Markets, Malaysia

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