The opportunity to access large pools of capital from the Middle East and Asia is leading more institutional investors to explore Islamic finance in the UK.

Financial growth: Qatari Diar’s Chelsea Barracks redevelopment in London is one of the most prominent schemes backed by sharia finance

The fact that investors from these regions often prefer or require investments that comply with sharia law (see box) is also making it a more prominent part of the property finance sector.

Demand for Islamic real estate finance comes mainly from Muslims. British Muslims find their finance options limited, as their faith stipulates they should only use asset-backed finance without interest charges and providers that do not invest in industries considered harmful, such as the arms trade, animal testing, gambling, pornography, alcohol and tobacco.

Sagheer Malik, group chief commercial officer and managing director of home finance at UK-based Islamic property finance firm Offa, says: “Property is often the asset class of choice for [Muslims] to build generational wealth and provide a pension. This community has been underserved by slow, outdated and opaque finance providers.”

Arab Banking Corporation (Bank ABC) reports that global managers are increasingly opening their doors to sharia investors and structuring bespoke Islamic real estate funds.

Keith Leach, head of UK real estate, Islamic financial services, at Bank ABC, says: “In the UK, the Islamic finance market is measured in the high single-digit billions across all sectors, but the real estate portion is really where the activity is visible. Islamic home finance books are in the low billions before you add Gulf capital coming in via private club deals and bespoke structures, which are far harder to quantify.”

London ‘a global hub’

Farooq Zar, a partner in commercial law firm Schofield Sweeney’s real estate team, says: “London is a global hub for Islamic finance – it’s ahead of any other European city. The UK government even issued a sukuk [Islamic bond], which was hugely oversubscribed.”

Leach adds that while there is clear appetite from Muslim investors, growth has been boosted by institutions’ increasing willingness to build and standardise the product. He says banks, fund managers and lawyers have worked hard to create workable structures that pass the legal and sharia tests. These include sukuk, diminishing musharaka as an alternative to conventional interest mortgages, ijara (Islamic leasing) and commodity murabaha, a form of cost-plus financing with at least three parties.

Sovereign wealth funds and major Gulf investors – already big property investors – are using Islamic structures, such as sukuk, sharia-compliant funds and special-purpose equity/special-purpose vehicles (SPVs) that align with balance sheet and regulatory needs.

In the UK, sukuk bonds have been used to finance property acquisitions and developments, typically led by Gulf institutional investors and sovereign wealth funds. Qatari Diar’s Chelsea Barracks redevelopment in London is one of the most prominent Islamic-finance-backed property deals in Europe.

London is a global hub for Islamic finance, ahead of any other European city
Farooq Zar, Schofield Sweeney

Malik says: “Sukuk can be a powerful real estate finance tool, effectively turning property income streams into sharia-compliant bond-like instruments.”

Instead of paying interest, the sukuk is structured around ownership or usufruct (the right to use and benefit from a property owned by another person) of tangible assets, which Malik says makes it a “natural fit with property, an inherently asset-backed sector”.

Offa’s team has experience in this area after working on AlRayan Bank (UK)’s landmark £250m Tolkien Funding Sukuk No. 1. Launched in 2018, it was the largest sterling-denominated sukuk issued by a UK entity and the UK’s first Islamic residential mortgage-backed securitisation. Backed by a portfolio of home purchase plans, the deal showed the sukuk could be structured as an asset-backed instrument in the residential property sector.

Meanwhile, Zar identifies an “increasing interest in ethical, responsible finance, particularly from the younger generation”. He adds: “With the right products and awareness, non-Muslims are also increasingly interested, especially those seeking ethical or ESG-aligned investment options. Islamic finance has real potential to appeal beyond the Muslim community, particularly when framed as an ethical, values-driven form of finance.”

Residential is one of the main sectors that Islamic finance has focused on, both at the retail level through Islamic mortgages and the institutional level in build-to-rent and student housing. Malik says: “These asset classes offer stable, long-term income and allow close alignment with sharia principles, making them particularly attractive to Gulf investors and UK Islamic finance institutions.”

Logistics and warehousing is another clear favourite for investors using sharia finance, Malik adds, driven by resilient occupier demand, tight supply and strong rental growth.

Prime central London offices, hotels and healthcare are also attracting selective Islamic investment, typically where income security and asset quality are assured. While retail parks and mixed-use regeneration schemes also attract sharia financing, they are secondary to the dominant living and logistics markets.

Affordable housing role

Offa believes Islamic finance could also play a growing role in funding affordable housing, while Malik says: “It delivers stable, socially impactful returns and aligns closely with sharia principles of asset backing and community benefit.” Leach adds that “there is a strong ethical alignment, which makes Islamic capital attractive” for funding affordable housing.

But he says that while low financing costs and subsidies are required to make homes affordable, Islamic structures do not automatically reduce cash costs compared with conventional finance and can sometimes add structuring expenses. “It will require a joint effort with government and housing associations to bring Islamic finance into their funding mix and create a standardised framework for cost efficiency,” he concludes.

On an industry-wide scale, growth in Islamic finance may be limited by legal and regulatory fragmentation, which is one of the biggest operational barriers real estate firms face when trying to structure sharia-compliant deals.

Islamic finance providers must meet the same standards as other regulated firms, including meeting the Financial Conduct Authority’s (FCA’s) Consumer Duty requirements. The FCA regulates Islamic finance in the UK, including sharia-compliant lending products enabling consumers to purchase a property. An FCA spokesperson says: “We continue to support the development of Islamic finance, ensuring our regulatory framework supports its unique characteristics.”

Leach says another barrier to the growth of Islamic real estate finance is that “every jurisdiction has its own tax quirks and sharia interpretation, which means higher structuring costs and slower execution compared with conventional debt”. He adds: “Liquidity can also be thin – sukuk and Islamic funds don’t always trade as freely in secondary markets.”

Limited availability

Zar highlights the limited availability of sharia-compliant products, with Islamic finance still seen as niche in the UK. “Many SMEs and even banks lack awareness or understanding of Islamic finance,” he notes. “There’s also a perception that it’s more expensive or bureaucratic – and sometimes it is. As a result, larger businesses with in-house finance teams tend to use it more than SMEs.”

Islamic finance costs can be increased by tax and stamp duty complications from the multiple transfers and SPVs these structures require; legal and contractual complexity; and regulatory challenges in aligning sharia governance with conventional financial rules.

Malik says it would benefit all parties to address these issues, particularly when it comes to tackling the UK housing crisis. To that end, Offa is a member of the All-Party Parliamentary Group for Islamic and Ethical Finance and continues to push for simplification of Islamic finance in the UK.

“I hope the government continues streamlining tax and regulations so that Islamic finance can become a more mainstream source of funding for affordable housing delivery in the UK and Europe,” he concludes.

The principles of Islamic finance

Islamic finance is rooted in principles derived from sharia, or Islamic law, which promotes transparency, fairness and social justice in financial dealings. One of the key principles is that riba, the charging or paying of interest, is strictly forbidden. Instead, Islamic finance uses models like profit-sharing, leasing or mark-up-based structures. The return is linked to real economic activity, not interest accumulation. The key principles include:

• Risk sharing: In conventional finance, the borrower carries all the risk and the lender gets their interest no matter what, but Islamic finance encourages mutual risk and reward.
• Asset backing: Every transaction must be backed by tangible assets or services. In Islam, money has no intrinsic value; it is a means, not an end. This avoids speculation and ensures money is tied to the real economy.
• Ethical investing: Investments in industries considered unethical are prohibited. This ensures capital flows into sectors with positive social impact.
• Charitable giving: Islamic financial institutions are required to give 2.5% of profits annually to charity, known as zakat. This helps with poverty alleviation and aligns finance with broader social welfare.
• Fair contracts: All parties should have equal access to information and give informed consent.
• Long-term focus: Speculative short-term trading, such as short-selling, is discouraged.