A. Rushdi Siddiqui, Global Director+1-212-597-5740

rushdi.siddiqui@dowjones.com

Quest for Islamic REIT Index

Islamic Real Estate ForumJune 28-30

London

Defining REIT [Mahmoud El Gamal]

• Publicly traded companies that buy, develop, manage, maintain, and (rarely) sell real estate properties: –Must pay out at least 90% of net income as dividends –

• •Low correlation with other asset classes offers diversification benefits: –REIT stocks’ correlation with S&P 500 (1/93—10/01) = 0.24 –

• •Very few failures, mostly due to excessive debt-leveraging –Islamic debt-screening should reduce that risk

• •Consistently high dividend yield (6-7%) + capital gains

Defining REIT [Mahmoud El Gamal]

• REITs are capital market vehicles for owning real estate, and deriving income thereof. They give investment (diversification, management) and tax advantages over direct investment in real estate.

• •Investors own REITs for their dividends: share prices rise relatively slowly due to distribution of dividends. They form a less speculative part of investment portfolios.

• •Almost all the assets of equity REITs are in the form of

real estate, held to generate rental income dividends

US51.0%

HK10.2%

AU9.4%

GB8.7%

NZ0.1%

Other12.7%

JP7.9% CA

2.3%

NL2.3%

FR2.3%

SG1.4%

IT0.4%

SE1.1%

ES0.7%

AT0.6%

DE0.4%

BE0.6%

CH0.5%

Other7.0%

Industrial7.5%

Health Care1.1%

Outlets0.3%

Leisure0.4%

Other2.6%

Diversif ied19.2%

Hotels1.6%

Residential10.1%

Office29.5%

Parking0.5%

Self Storage0.5%

Retail26.7%

Weightings

0

50

100

150

200

250

1989 1990 1991 1992 1993 1994 1995 19961997 1998 1999 2000 2001 2002 2003

0

50

100

150

200

250Avail. Eq. Mkt. Cap

Total. Eq. Mkt. Cap

# of Co

Market capitalization

27.4%

36.8%

10.8%

13.5%12.3%12.8%

28.4%

7.6%

3.1%2.4%

9.8%

13.0%

10.0%

14.7%

18.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

9yrs 7yrs 5yrs 3yrs 1yr

S&P/CG Europe

S&P/CG Asia Pacif ic

S&P/CG North America

Returns

Real Estate Investment Trust (REIT)• Equity

– Equity REITs purchase properties and then pay their shareholders income received from rents, or from capital gains on the sale of properties whose values have appreciated

• Mortgage– Mortgage REITs loan money to real estate developers and pay

their shareholders money from interest income.

• Hybrid– Hybrid REITs mix equity and debt investments and pay their

shareholders money from interest and income from rents in differing percentages, depending on the composition of their portfolios

Types of Equity REITs

• Office Buildings

• Shopping centers & Malls

• Medical Buildings/Nursing Homes

• Industrial Warehouses

• Hotels

• Apartments

Interest in Realty (YTD)

• Modern Islamic financial institutions, including Islamic banks and funds, invest in the real estate sector for two reasons. They purchase properties with the goal of long term capital appreciation, and they purchase properties for the purpose of earning income through ijarah leases. The rulings of the Shari`ah Supervisory Boards of these institutions in respect to ijarah shed light on a principle which may be of importance to the

screening of REITs.

Leasing Fatawa (YTD)• (In answer to a question as to whether or not the KFH

may lease property to a foreign embassy.) The Board is of the opinion that it will be lawful to lease property to such an embassy. This is because the contract is for the use of the property as space for carrying out the embassy's business, and that is lawful. With regard to what certain of its occupants may be involved in on the property, whatever prohibited activities, the sin will be theirs alone and has nothing to do with the contract. This is something that occurs incidentally, and may as well be occasioned by any lessee, Muslim or non-Muslim. It is not a condition of ijarah that the lessee be a pious Muslim.

• Kuwait Finance House, Fatawa Shar`iyah, Question 235, p. 224

Leasing Fatawa (YTD)• (In answer to a question as to whether or not the KFH may lease

aircraft to airlines that serve alcohol to its passengers.) The Board considered the fatwa of the Ministry of Awqaf, no. 28A/89 and agreed with it.

• It is lawful for a company in possession of aircraft to lease its airplanes to other airlines if the purpose of the lease is a lawful one, like the transport of passengers or freight that is not haram. This will hold even if the lessor company learns that the lessee engages in the sale of liquor, or that its passengers carry it with them. The reason for this is that the legal presumption in regard to leasing is that it is lawful. The occurrence of [things like] the sale of liquor [is incidental] and not a part of the subject of the lease; and the sin will be the doer's.

• Kuwait Finance House, Fatawa Shar`iyah, Question 243, p. 230

Leasing Fatawa (YTD)• What is the Shari`ah ruling in regard to leasing real

estate to supermarkets, restaurants, hotels, or tourist shops whose products andservices may include Islamically prohibited items?

• It is not lawful to lease property to a business concern whose primary business is in prohibited goods or services. It is lawful, however, to lease property to a business concern whose primary business is in lawful goods or services even if these are supplemented by income from unlawful goods or services.

• Dallah Albaraka, Fatawa of the 2nd Seminar on Problems of Modern Banking, Question no. 1

Leasing Fatawa (YTD)• Please explain the Shari`ah position in regard to the

Jordan Islamic Bank's leasing certain of its properties to companies or institutions whose primary business is transacting by means of interest

• Since it is unlawful for a Muslim to aid or assist in the commission of sin, and since transacting by means of interest is sinful, and since the primary business of these companies and institutions is transacting by means of interest, then the best that can be said of the proposal in the question is that it involves assisting in the commission of sin and is therefore unlawful. Hence, I will advise that no lease be offered for the purpose mentioned.

• Jordan Islamic Bank, Fatawa Shar`iyah, vol. 2, p. 12

DJIM Screens

• Debt/market Capitalization* <33%

• Cash + Interest Bearing securities/Market Capitalization* <33%

• Accounts Receivable/Assets <45%

– *Rolling 12 month average

REITs & Leverage (June ‘04)• OFFICE REIT D/MC D/A• EQUITY OFFICE 101% 47%• BOSTON PROPERTIES 109 58• TRIZEC PROPERTIES 134 55• MACK CALI REALTY 70 43• ARDEN REALTY 72 49• SL GREEN REALTY 85 50• HRPT PROPERTIES 139 46• CARRAMERICA REALTY 110 60• PRENTISS PROPERTIES 78 47• BRANDYWINE REALTY 85 47

REITs & Leverage

• Industrial REITs D/MC D/A

• Prologis 54% 46%• Amb Property 99% 47• Catellus Development 60 53• Centerpoint Properties 50 58• First Industrial Realty 109 54

REITs & Leverage

• Shopping Centers D/MC D/A

• Kimco Realty 45% 46%• Developers Diversified 82 52• Weingarten Realty 78 63• Regency Centers 62 46• Chelsea Property 55 61

REITs & Leverage

• Regional Malls D/MC D/A

• Simon Property 106% 65%

• General Growth 120 69

• Rouse Co 112 68

• Macerich Co 114 64

• Mills Corp 106 65

REITs & Leverage• Apartments D/MC D/A

• Equity Residential 67% 46%• Archstone-Smith 76 43• Avalonbay Comm 69 47• Apartment Invt & Mgmt 190 61• United Dominion 98 60• Camden Property 92 57• Bre Properties RE 74 53• Essex Property 60 48• Home properties 120 54

• Post Properties 112 53

REITs & Leverage

• Self Storage D/MC D/A

• Public Storage 3% 3%• Shurgard Storage 68 49

• Sovran Self Storage 53 37

REITs & Leverage

• Equity Healthcare D/MC D/A

• Health Care Ppty 46% 46%• Ventas Inc 38 78• Health Care 65 46• Healhcare Realty 39 38• Nationwide Health 72 53

• Senior Housing 56 40

NO DJIM REIT Index

• Leverage Issue

• Office Tenant Revenue Breakdown

• But …….

Proposed Islamic Realty Fund• Product Lend Lease SICAV Global Liquid Real Estate Fund• SponsorLend Lease Corporation• Manager Houlihan Rovers• Administrator Brown Brothers Harriman (Luxembourg)• Custodian Brown Brothers Harriman (Luxembourg)• Domiciled Luxembourg• Launch date 3Q-4Q-2004• Shariah Board Sh N. Yaquby & Sh. Y. Talal DeLorenzo• Fees Sales Charge up to 5%

» Institutional Adm Fee .05%

• Liquidity Weekly• NAV Calculation Weekly

Proposed Islamic Realty Fund

• Shari'ah Investment Criteria

• Houlihan Rovers commits to managing the first Shari’ah compliant Global ‘Liquid’ Real Estate Fund along the following Islamic Investment guidelines:

• Universe• Equity REITs or real estate operating companies only• Only companies where we possess a complete

description of all the business divisions

Proposed Islamic Realty Fund• Prohibited Industries

• The investment manager will examine all aspects companies’ business description, stock by stock, and eliminate the companies whose business activities are greater than 5% in the following areas:

• Meat

• Pork

• Beef

• Supermarkets/Grocery

• Convenience Stores

• Wine/Alcohol/Liquor

• Food (non-vegetarian)

• Restaurants

Proposed Islamic Realty Fund

• The following are also prohibited industries:• Operating gambling casinos, manufacturing of gambling

machines• Creating, publishing or distributing pornography• Operating hotels• Financial services, including banks, brokerage firms and

insurance companies

Proposed Islamic Realty Fund

• Financial Screens – Three financial screens have been used for Shari'ah

compliance testsNo investments shall be made by the Fund in companies with capital structures, financial ratios or investment structures that do not comply with respect to principles and precepts to Islamic Shari'ah.

• Business Activities– No investments shall be made by the Fund in companies that

are involved in prohibited activities or industries not compatible with Shari'ah as interpreted by the Shari’ah Supervisory Board.

Proposed Islamic Realty Fund

• Characteristics

• Total Equity Market Cap> US$100B• Number of Companies +/- 100• Dividend Yield +/- 5.0 %

Sector Comparison Weightings

•Conventional Universe– Office 29%

– Retail 27

– Residential 10

– Diversified 19

– Industrial 8

– Storage.5

– Healthcare 1

•Islamic Universe– Office 12%

– Retail 25

– Residential 37

– Diversified 3

– Industrial 7

– Storage5

– Healthcare 5

Country Comparison Weightings

•Conventional Universe– US 51%

– HK 10

– AU 9

– JAP 8

– UK 9

•Islamic Universe– US 61%

– HK 15

– AU 4

– JAP .3

– UK 7

Performance (April 30, 2004)

-10

-5

0

5

10

15

1 Month YTD 2 Years 3 Years

Shari'ah

MSCI (W)

DJIM (W)

Conclusion

• Equity REIT Index Constraints:– Leverage

– Revenue breakdown

• Suggestions:– Sought after asset class

– Transparency --> Accountability --> Confidence

– Performance

– Fees

– Marketing/PR & Distribution Channels