The first onshore Shariah-compliant real estate fund in the Australian market, The LM Australian Alif Fund, was officially launched at end of May in Bahrain. The fund is managed by LM Investment Management Ltd., a specialist Australian income funds manager operating internationally and which is aimed at Islamic investors who are looking for opportunities in alternative investments and in new markets. Here Mushtak Parker discusses with Ken Scott-Hamilton, general manager (Middle East), LM Investment Management Ltd., the rationale behind launching the fund and the opportunities and challenges for Islamic finance in Australia.

Excerpts:

Can you expand on the structure and the rationale behind the launch of the fund?

The LM Australian Alif Fund LM Investment was soft launched in March this year. But we officially launched it in Bahrain last week at the World Islamic Funds Conference. The fund is an income fund but all the assets are real estate-backed. Our profit rate forecast for the fund is 7 percent per year distributed annually. The fund is a 3-year fixed term unit trust and the primary asset is real estate. The investment will be in a portfolio of real estate assets in different parts of Australia across a variety of sectors such as construction, industrial, retail or residential retirement villages. We know this market very well because we have been active in it for 11 years. There is definitely an opportunity to take advantage of Islamic investors who are looking for alternative investments and in new markets. Since coming to Dubai, I have been determined to offer Islamic investors new opportunities especially in the Australian market.

What is the size of the fund?

All of our funds have minimum of A$1 billion under management. We are specifically targeting Islamic investors in the Middle East and Southeast Asia and we have just started with the road shows to attract investment into the fund. We have had an overwhelming interest from financial institutions in the GCC countries, which we will be exploring over the next few weeks.

Since there are no Islamic financial institutions in Australia, how did you do the Islamic structuring for the fund?

There are no Islamic banks incorporated in Australia. Kuwait Finance House has a representative office in Australia. We approached a Malaysia’s CIMB Group to help us with the Islamic hedging for the fund. Amanie Solutions of Dubai is our Shariah adviser and we are using its Shariah Supervisory Board to ensure that the fund satisfy the Shariah-compliance requirements.

Where is the value added in terms of your real estate asset allocation?

There are a lot of great opportunities in the Australian market. Yes it had a knock. But the market has been quite resilient. Australia is such a vast country. We have so many different markets-on average 11. Maybe Sydney is having a bad year one year but then Perth and Brisbane are doing well. Australia has a residential shortfall of about 180,000 homes year-on-year and on the back of that shortfall as new suburbs are built you get your light industrial and your retail developments. Australia has significant opportunities and we see that going on over the next 5 to 10 years. We also have an aggressive immigration policy — we allow on average 160,000 people to come in every year. They directly get involved in the economy through work or investment and this drives the real estate market as well.

Why has Australia hitherto not leverage Islamic finance. Is it because of government policy or simply the market being too slow to react?

I think the market has been slow to react. We established an office in Dubai two years ago. Ever since, I have seen the opportunity for us to be able to offer a fund for Islamic investors. This is the first onshore Australian Shariah-compliant fund. We hope it is the first of many. We are monitoring the reaction to this first offering and see how the market and investors respond.

For real estate transactions are the tax neutrality laws relating to say double stamp duty and capital gains in place in Australia to facilitate Islamic transactions?

Yes they are in place. This fund specifically enables us to pass the profit back to the investors without attracting any capital gains tax. The only tax the fund is charged is withholding tax for non-resident investors. This is very similar to the European Union Savings Directive Withholding Tax. As the government charges 10 percent, we cannot do anything about it. Our net profit forecast on the US dollar, euro and sterling is 7 percent for the first year, which we believe is quite attractive in this region.

Double stamp duty may not impact on your fund now, but it may on stand-alone real estate transactions in the future. Is the government doing anything in this respect?

There are definitely discussions going on in the Australian Parliament in Canberra in this respect. Tax neutrality for Islamic products will certainly open up the market in Australia like it has in the UK. We have been hamstrung by the way we do any leveraging for this fund that is why we don’t offer that at all. Primarily that would be a Murabaha facility based on commodity contracts traded on the London Metal Exchange. Trying to convey that concept to developers and borrowers in Australia is quite difficult.

Does the Islamic financial model fit in with the Australian economic value proposition?

Are the Islamic investors going to be suitably interested in Australia as a market? I am confident that they would be. My understanding is that only $600 million of assets are Shariah-compliant in Australia currently and most of these funds are equity-based. People are looking for alternatives. Real estate-backed investment opportunities are going to be of significant interest. The region may see Australia as an emerging market but it is the 4th largest funds under management industry globally and we are quite sophisticated. I also see opportunities for Sukuk over the next year. I think there will be significant interest and appetite from Australian companies wanting to do that.