1. Shariah Property Investment: current trends by Ali Parsa* and Angus McIntosh** & * London South Bank University ** King Sturge LLP UK & EUROPEAN REAL ESTATE INVESTMENT & FINANCE 22 November 2006 The Hyatt Regency Churchill, London

2. Shariah Compliant Real Estate Investment Research at London South Bank University PROJECT ONE: launched in 2005 Current Trends in Shariah Compliant Real Estate Investment in Europe Sponsored by K ing Sturge and supported by the RICS PROJECT TWO launched in 2006 Global flows of Shariah Compliant Real Estate Investment in conjunction with National University of Singapore

3. Globalisation and Real Estate Markets Property, as an investment asset is increasingly shaped by global market forces The traditional reasons for including property in an investment portfolio is being enhanced by the forces of globalisation: – the perception that property carries lower risk, – that property is less volatile than other investment media, – that property facilitates diversification and – helps to achieve balance in a portfolio

4. Globalisation and Real Estate Markets Real estate markets are continuing their strong evolution into a global asset class, with cross- border investment now representing 44% of total volumes, compared with 34% for the first half of last year. (Tony Horrell 2006 CEO of Jones Lang LaSalle’s International Capital Group) International investment in real estate has become a persistent feature of real estate markets in the developed economies in the last fifteen years (Worzala 2006) Adair et al (1999) the removal of barriers to capital movement and increasing information flow has promoted real estate as an international investment asset.

5. Global Direct Real Estate Investment Activities Inter-regional investment – purchases and sales Global direct real estate investment in the first half of 2006 $290bn 30% increase over first half of 2005 44% of total investment in cross border investment 34% increase for first half of 2005 31% ($89bn) of total volumes involves investors not from the region where asset is located 2006 is forecast to be a record year for commercial direct real estate investment to reach total transactions of $600bn Source JLL 2006

6. Inter-regional investment – purchases and sales, 2006 AMERICAS Direct real estate investment in Americas $129bn in FH 2006 Cross border investment 27% of total investment Inter-regional investment reached 26% of total investment EUROPE Direct real estate investment in Europe $117bn in FH 2006 Cross border investment 68% of total investment Inter-regional investment reached 39% of total investment ASIA Direct real estate investment in Europe $117bn in FH 2006 Cross border investment 68% of total investment Inter-regional investment reached 39% of total investment Source: JLL 2006

7. Source: Jones Lang LaSalle, Global Real Estate Capital, More Markets, More Competition, March 2006 Inter-regional investment – purchases and sales, 2005

8. Foreign Investment into Central London Offices Transaction Volumes: £ millions Source: King Sturge

9. Shariah Finance Research: King Sturge & London South Bank University with RICS Face to face interviews with 25 individuals International Funds, Property Investment cos., Trading Cos., Banks - Equity & Debt lenders, International Consultants, Fund and Asset Managers, Legal advisors, Accountants, Brokers Most based in London – but ALL international

10. Research objective to: understand the growing international importance of Shariah funds to property investment clarify the different types of investment structures find out what funds think about different property markets understand Shariah funds’ future investment strategies

11. Knowledge of Shariah Investment Shariah financial products worth over $300-400 billion globally Equals 60% + of total 1.2 billion Muslim’s world savings Growing at more than 15% per annum King Sturge & London South Bank Univ. interviewees in 2006 survey – have invested over euro3.86billion Currently over euro1.650billion to invest

12. Definition of Shariah Investment Ethical investment organised in compliance with Islamic Law Prohibited investments include: 1.options trading, 2.interest-based trading and 3.conventional financial services

13. Ethical Funds: Shariah Funds Will not invest in companies which: Trade in pork products Pornography Financial services (conventional) Arms or munitions Cinema Tobacco Gambling Alcoholic liquor

14. Ethical Funds: Church of England Commissioners UK Will not invest in companies which: Promote pornography Supply armaments Invest in gambling Supply tobacco Media/publishing/TV

15. Prohibited Shariah Investments Gharar – uncertainty, short selling, derivatives and speculation Maysir – gambling, speculation, conventional insurance, derivatives Riba – return of money on money, interest – fixed or floating, simple or compound

16. Choice of Finance Structure – 2006 (2005) Ijarah – 89% (74%) - asset leased to investor Murabahah – 55% (65%) - purchase & resale Sukuk – 73% (57%) - asset backed bond Musharakah –76% (54%) - profit sharing ratio Mudarabah – 68% (51%) - investment partnership

17. Choice of Finance Structure – 2006 (2005) Ijarah – 90% (74%) - asset leased to investor Islamic lease agreement, profits from rental on leased asset

18. Choice of Finance Structure – 2006 (2005) Murabahah – 65% (55%) - purchase & resale Purchase and resale, capital provider purchases the commodity from third party, resells at predetermined higher price to capital user

19. Choice of Finance Structure – 2006 (2005) Sukuk – 75% (57%) - asset backed bond Similar to bond, asset backed – leased to client to yield return

20. SUKUKS "Gulf region bond issuance has more than quadrupled to US $4,067m** in the first eight months of 2006 compared to the total of $876m for all of 2005 Sukuks now make up 32% of the total (US $1,292m) up from 14% (US $122m) last year". Source MEED 2006

21. Choice of Finance Structure – 2006 (2005) Musharakah –76% (54%) - profit sharing ratio Profit & loss sharing, in proportion to the capital investment by each party. Equity arrangement regarded as purest form of Islamic financing

22. Choice of Finance Structure – 2006 (2005) Mudarabah – 53% (51%) - investment partnership Investment partnership: Rabul-Mal, investor, provides capital to Mudarib, entrepreneur, to undertake business/investment

23. Compliant requisites – very important - 2005 Tax status – 65% Availability of Specialist Expertise – 61% Regulation of Investment – 47% Risk Assessment Regulation – 47% Transaction Transparency – 41%

24. Shariah Real Estate Funds - different from conventional funds - % yes 2006 Monitoring of Compliance67.5% Costs65% Payment of Dividends50% Portfolio Selection55% Regulation 42% Portfolio Management28%

25. Shariah: Non-compliant Sources of Finance 5% or more may be non-compliant Donation to charity – “portfolio purification” Target say 8% income yield and total return 15%

26. Do Funds understand the importance of decision making? Yes – 60% (47%) Not sure – 10% (35%) No – 30% (12%)

27. Funds prefer to invest indirectly through established fund - 2006 Yes – 45% Not sure – 10% No – 45%

28. Favoured registered location – 2006 (2005) Off-shore – 58% (50%) Depends on Fund/Not sure – 22% (38%) On-shore - 10% (12%) No Answer – 10% (6%)

29. Favoured locations for Investment

30. Locations favoured for Shariah investment – next 3 years UK 50% France 35% Germany35% Spain 10% Sweden 15% Netherlands 10% Italy10% Poland 10% Locations favoured for Shariah investment in 2006 – last 3 years

31. Locations favoured for Shariah investment – next 3 years UK 55% Germany40% France 40% Spain 40% Belgium 30% Netherlands 25% Italy25% Portugal, Hungary, Poland & Slovakia10-15% Locations favoured for Shariah investment in 2006 – next 3 years

32. Focus for Non-European Markets – next 3 years USA Japan Indonesia Korea Hong Kong Malaysia

34. REITs – why successful Greater financial governance & transparency Improves investor confidence Weighted cost of capital falls = greater economic efficiency Grows the property investment market – to include public sector and infrastructure investments

35. King Sturge-London South Bank Univ. Shariah Funds: Special Issues- % saying yes - 2006 Invest in REITs (tax transparent Real Estate Investment Trusts) 95% Should contribute to Urban Renewal75% Do you know about IPD (Investment Property Databank) 60% Is IPD useful tool to measure investment performance 65%

36. CONCLUSIONS from this report Shariah compliant funds set to increase & London playing a pivotal role and is the prominent global centre Geographical spread of Shariah real estate investment REITS will offer opportunity to increase Shariah investment The need for product innovation in order to create a mass market in Shariah investment The true extent of Shariah complaint real estate investment much higher by high net-worth individuals than the current institutional investment

37. THANK YOU FOR YOUR ATTENTION parsaaa@lsbu.ac.uk