News
West more interested to invest in Gulf sukuk
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Strong oil prices have triggered a boom in the issuance of Islamic bonds (sukuk) in the UAE and other Gulf producers and Westerners have emerged as the main investors in such instruments, according to British data.
Despite an increase in return from US bonds, Western investors have become even more interested in investing in Gulf sukuk because of their strong real value and low risk, showed the figures by the London-based Trowers and Hamlins, a leading British law firm with offices in the Middle East and other areas.
Peaking at nearly $17 billion (Dh62bn) in the year ending last June, the value of corporate sukuk issued in the GCC has far surpassed that of conventional bonds issued in the region, the company said in a report.
It said the issuance of corporate sukuk in the region, which controls more than 45 per cent of the world's recoverable oil resources, has jumped by nearly 20-fold over the past five years because of strong appetites for such tools.
The report also noted that the value of Islamic bonds issued in the GCC over the past year was more than 30 per cent higher than the amount of conventional paper debt, which rose marginally to $11.2bn in 2007/08 from $11.1bn.
Western institutions have emerged as the majority purchasers of Islamic debt, now accounting for around 60 per cent of take up, the report said.
"Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in Gulf corporates is now seen by Western institutions," said Neale Downes, Partner, Trowers & Hamlins,
"Fears that Islamic bonds would be under-subscribed as yields from US corporate bonds increased have proved premature. Islamic bonds are linked to the underlying value of assets, so the demand for these instruments, often in preference to US securities, is a good sign of how much growth is still expected to come from the Middle East." Hesaid: "A few banks in the region have taken sub-prime write downs, but there is so much liquidity in the Gulf with the high price of oil that recapitalising these institutions has not been a major challenge. Inevitably, a lot of oil money is being used to buy Islamic debt."
According to the report, doubts voiced over the compatibility of some Islamic bonds with Sharia law and the impact that would have on Gulf investors readiness to invest have "largely been put to rest."
"Pragmatism guides the vast majority of Gulf investors. Their primary motivation for buying Islamic bonds is the attractive return, the same as Western investors." The research showed the average tenor (time to maturity) of sukuk issued between July 1, 2007 and the end of last June was 7.4 years, up from six years during 2006-2007 and 4.8 years during 2005-2006.
"Gulf corporates are all too aware of how the sub-prime crisis left a lot of short-term borrowers in the West with burnt fingers. Longer term debt is more expensive but it is an essential part of a sensible corporate financing strategy," he said.
The figures showed sukuk issuance by industry sector is increasingly diverse and is much less dominated by real estate as in previous years.
Just 37.5 per cent of Islamic bonds issued recently are by corporate entities in the real estate sector, compared to 60 per cent last year. The number of sukuk issued by the oil and gas sector has doubled to 12.5 per cent while 25 per cent of all sukuk are now issued by financial services companies.
"It is a useful barometer for how Gulf economies are diversifying. Real estate is still an important wealth generator in the Gulf, but over the last few years areas such as financial services have become significant contributors to economic growth," Downes said.
A breakdown showed the real estate sector accounted for around 42 per cent of the sukuk value between July last year and last June. Financial services accounted for 29 per cent, while 14 per cent was in the oil and gas sector, 10 per cent in industry and five per cent in transport.
From around $1bn between July 2007-June 2008, the value of sukuk issued in the GCC (excluding sovereign debt) rose to nearly $2.1bn in the following year and peaked at $17bn last year.
Despite an increase in return from US bonds, Western investors have become even more interested in investing in Gulf sukuk because of their strong real value and low risk, showed the figures by the London-based Trowers and Hamlins, a leading British law firm with offices in the Middle East and other areas.
Peaking at nearly $17 billion (Dh62bn) in the year ending last June, the value of corporate sukuk issued in the GCC has far surpassed that of conventional bonds issued in the region, the company said in a report.
It said the issuance of corporate sukuk in the region, which controls more than 45 per cent of the world's recoverable oil resources, has jumped by nearly 20-fold over the past five years because of strong appetites for such tools.
The report also noted that the value of Islamic bonds issued in the GCC over the past year was more than 30 per cent higher than the amount of conventional paper debt, which rose marginally to $11.2bn in 2007/08 from $11.1bn.
Western institutions have emerged as the majority purchasers of Islamic debt, now accounting for around 60 per cent of take up, the report said.
"Appetite for Islamic debt has been remarkably resilient to the credit crunch and shows just how low-risk investing in Gulf corporates is now seen by Western institutions," said Neale Downes, Partner, Trowers & Hamlins,
"Fears that Islamic bonds would be under-subscribed as yields from US corporate bonds increased have proved premature. Islamic bonds are linked to the underlying value of assets, so the demand for these instruments, often in preference to US securities, is a good sign of how much growth is still expected to come from the Middle East." Hesaid: "A few banks in the region have taken sub-prime write downs, but there is so much liquidity in the Gulf with the high price of oil that recapitalising these institutions has not been a major challenge. Inevitably, a lot of oil money is being used to buy Islamic debt."
According to the report, doubts voiced over the compatibility of some Islamic bonds with Sharia law and the impact that would have on Gulf investors readiness to invest have "largely been put to rest."
"Pragmatism guides the vast majority of Gulf investors. Their primary motivation for buying Islamic bonds is the attractive return, the same as Western investors." The research showed the average tenor (time to maturity) of sukuk issued between July 1, 2007 and the end of last June was 7.4 years, up from six years during 2006-2007 and 4.8 years during 2005-2006.
"Gulf corporates are all too aware of how the sub-prime crisis left a lot of short-term borrowers in the West with burnt fingers. Longer term debt is more expensive but it is an essential part of a sensible corporate financing strategy," he said.
The figures showed sukuk issuance by industry sector is increasingly diverse and is much less dominated by real estate as in previous years.
Just 37.5 per cent of Islamic bonds issued recently are by corporate entities in the real estate sector, compared to 60 per cent last year. The number of sukuk issued by the oil and gas sector has doubled to 12.5 per cent while 25 per cent of all sukuk are now issued by financial services companies.
"It is a useful barometer for how Gulf economies are diversifying. Real estate is still an important wealth generator in the Gulf, but over the last few years areas such as financial services have become significant contributors to economic growth," Downes said.
A breakdown showed the real estate sector accounted for around 42 per cent of the sukuk value between July last year and last June. Financial services accounted for 29 per cent, while 14 per cent was in the oil and gas sector, 10 per cent in industry and five per cent in transport.
From around $1bn between July 2007-June 2008, the value of sukuk issued in the GCC (excluding sovereign debt) rose to nearly $2.1bn in the following year and peaked at $17bn last year.