Surge in sukuk brings market back to 2006 levels
The Islamic bond market has surged in the first half of this year as issuers tap demand for long-term paper at record low levels. Issuance of sukuk, or Islamic bond-like instruments, this year is expected to reach record levels of anything up to $126bn, more than three times the 2007 level of $38bn.
Nigel Denison, head of markets and wealth management, Bank of London and The Middle East (BLME), said: “A lot of GCC investors are bringing money back to the domestic market. In part this is driven by the Eurozone crisis, but it is also due to the attractions of the region as an investment destination – its huge wealth, its young population and lack of sovereign debt.”
Denison said: “The sukuk market started improving last year, and issuance has returned to 2006 levels.” The current global sukuk market stands at $214bn, or 1-2% of the mainstream market. One half of the sukuk market is US dollar-denominated, with the other half in Malaysian ringgit.
“The sukuk market compares very well against the mainstream bond market,” says Denison. In the Middle East, investors have used real estate as a proxy for fixed income investments, in part to be Sharia’a compliant. However, real estate is illiquid, making sukuk more attractive for investors looking for liquid investments.
In May last year, BLME launched its High Yield Fund, a pure sukuk fund, which is currently hitting its target of a net return of US$ 3 month LIBOR + 5%. The fund is part of the Luxembourg-domiciled BLME Sharia’a umbrella fund, a Sicav SIF, and is available only through financial advisers.
The umbrella fund also has the BLME $ Income Fund, launched in 2009, which targets a net return of 3-month US$ Libor +1% by investing in short-term Islamic money market instruments and longer term Sukuk and Ijara instruments. BLME is also due to launch a Light Industrial Building Fund, investing in UK real estate, with a target return of 8-10% cash on cash.
Paul Bateman, senior risk manager at BLME, points to other contributory factors. He said: “The current low yield environment has pushed down borrowing costs to very attractive levels, which borrowers want to lock-in by issuing long-dated fixed-rate obligations.”