As with a number of other developed economies which are ‘developing nations’ in the world of Islamic finance, Australia is all about opportunities and what could be. The difficulty is determining whether these opportunities will be seized and what will be.
There are signs that the recent growth in the residential real estate sector in the major cities of Sydney and Melbourne is slowing. These two markets have stolen a huge march on the rest of the nation with property pundits now talking about two markets with two different sets of fundamentals: Sydney and Melbourne versus the rest.
The major Australian banks have already retreated from development and construction financing, in large part due to pressure from the regulator, the Australian Prudential Regulation Authority (APRA). Similarly, investor loans are now priced at a premium to owner-occupied, and there is a raft of other recently introduced measures aimed at tempering foreign investment in residential real estate.
This retreat does provide an opportunity for off shore financiers, including Shariah compliant financiers, and we would expect this trend to continue in 2018.
In order to seize some of the opportunities, it may require looking further afield from the traditional powerhouses of Sydney and Melbourne, and perhaps even beyond residential development projects. Agricultural assets, industrial assets and infrastructure are all possible targets and with some innovative deal structuring, the usual impediments of Australia’s tax system can be navigated.
The last year saw a small number of acquisitions of Australian commercial assets (office towers) by offshore Shariah compliant entities, on at least one occasion financed by an Australian bank. Given the enquiries in this area that our firm has been fielding in recent months, our expectation is that this trend will continue into 2018.
Moderate growth can be expected in the areas of Islamic funds and superannuation as these products roll out to faith-based retail investors. We are yet to see explosive growth in this market due to a lack of institutional investors and off shore investors — who are behind the massive Australian conventional funds market.
The APRA’s foreshadowed changes to the bank licensing framework intended to ease access to bank licenses during 2018 are unlikely to result in the licensing of an Islamic bank in the next year. This is due in part to the lack of a market for such an entity as well as application lead times. However, these licensing changes may result in other forms of financial institutions and fi ntech-based platforms which could easily straddle both the conventional and Shariah compliant markets.
Finally, what of the likelihood of changes to our tax system to provide the dreamt of tax neutrality for Islamic finance products? In Australian slang: ‘Buckleys or none’ (little or no chance). The political will remains sadly absent.
Christopher Aylward is a partner of Madison Marcus Law Firm based in Sydney and the head of the banking and finance division.
This article first appeared in Islamic Finance News (31 January 2018, Volume 15, Issue 5, Page 15). For more information, please visit www.islamicfinancenews.com.