Financing UK offices, shops and warehouses under Sharia rules

Structures used for investment property

The most common structure is ijara: the bank, often through a special purpose vehicle, buys the building and leases it to the investor, who sublets to tenants. Profit-only ijara mirrors an interest-only loan, with the bank’s ownership bought back at the end of the term.

• Ijara: lease-based, typical for income-producing assets held for five years.
• Commodity murabaha: a metals trade creating a deferred debt, used for refinancing and portfolios.
• Diminishing musharakah: joint ownership with gradual buy-out, suited to amortising deals.

Sector screening by the lender

Islamic banks examine the tenants, not just the building. Properties whose main income comes from licensed alcohol premises, gambling or other prohibited activities are excluded. AlRayan Bank, for example, considers supermarket-let assets case by case because of alcohol sales within the store.

How tax and stamp duty apply

HMRC’s alternative finance rules treat the bank’s return as a loan relationship for corporation tax, so a company investor can normally deduct it as a finance cost. Purchase and resale and diminishing shared ownership arrangements are specifically listed in HMRC’s Corporate Finance Manual.

Non-residential Stamp Duty Land Tax is charged at 0% up to £150,000, 2% to £250,000 and 5% above. Alternative property finance relief under the Finance Act 2003 can prevent a second charge when the bank acquires the property, provided the statutory conditions are met.

Is this lending regulated by the FCA?

No. Commercial property finance to companies and professional investors is unregulated lending. Banks providing it are still authorised by the PRA and FCA as deposit-takers, but borrowers do not receive consumer protections such as MCOB rules or automatic Financial Ombudsman access for larger businesses.

Which banks lend on UK commercial property?

AlRayan Bank offers Structured Real Estate finance above £2.5 million for property investors, typically five-year profit-only facilities across England, Wales and Scotland. It does not finance owner-occupied premises or trading businesses, and its new lending now focuses largely on Gulf-based clients.

QIB (UK) finances offices, retail, industrial and logistics, hotels and student accommodation for high-net-worth individuals and corporates. BLME, owned by Boubyan Bank, provides real estate facilities from £5 million to £30 million, mainly for investors from the Gulf.

Honest limits for local SMEs

Most Islamic commercial lenders set high minimums and target international investors. A local business wanting £300,000 to buy its own premises will struggle to find a dedicated Islamic lender, and may need a conventional bank or a specialist broker.

What makes a deal bankable

Lenders look at the strength and length of leases, tenant covenant, location, building condition and the sponsor’s track record. Single-let assets with long leases to strong tenants attract better pricing than multi-let secondary buildings with short leases and vacancies.

Pricing benchmarks and rate types

QIB (UK) offers floating pricing set as a fixed margin above the Bank of England base rate, or fixed pricing. The benchmark is used only to calculate rent or profit, which scholars accept because the payment remains rent for an asset or profit on a sale.

Financing a commercial property step by step

1. Prepare an investment summary with rent roll, leases, tenant details and purchase price.
2. Approach Islamic banks directly or through a broker experienced in Sharia-compliant deals.
3. Receive indicative terms covering finance-to-value, profit rate, term and fees.
4. Instruct a RICS valuation and building survey through the bank’s panel.
5. Set up the purchasing vehicle, often a UK or offshore company, with legal and tax advice.
6. Negotiate the lease, purchase undertaking and security documents with the bank’s solicitors.
7. Complete, pay SDLT within 14 days and start the agreed rent or profit payments.

Large deals can take three months or more because both the Sharia structure and the property due diligence need sign-off. Buyers in competitive sales should agree an exclusivity period long enough to cover the bank’s credit and Sharia approvals.

Costs and documents for investors

Common reasons deals are declined

• Tenants whose main business involves alcohol, gambling or other prohibited activities.
• Facility size below the bank’s minimum, such as £2.5 million at AlRayan or £5 million at BLME.
• Owner-occupied premises where the bank finances only investment property.
• Short leases or weak tenant covenant creating income risk.
• Complex offshore structures without clear beneficial ownership information.

Can a trading business buy its own premises?

Few Islamic banks currently offer owner-occupier commercial finance in the UK. Businesses can ask the banks directly, use a broker, or consider a sale-and-leaseback with an investor using Islamic finance, but this market remains limited.

Does an existing tenant with a bar block finance?

Not always. Banks often apply a tolerance threshold, for example accepting a mixed building where a small share of rent comes from non-compliant tenants, with that income purified. The thresholds are set by each bank’s Sharia board.

Is refinancing from a conventional loan possible?

Yes. QIB (UK) and AlRayan both refinance existing property, and BLME offers short-term bridging to longer investment facilities. The conventional loan is repaid at completion, and the investor then pays rent or profit to the Islamic bank.

Are Scottish and Welsh properties eligible?

AlRayan and BLME both lend in England, Wales and Scotland. Scottish purchases pay Land and Buildings Transaction Tax and Welsh purchases pay Land Transaction Tax, each with its own rates, thresholds and alternative finance provisions that investors should check before exchange.