1 PRESENTATION AT THE ISLAMIC REAL ESTATE CONFERENCE, LONDON 30TH JUNE 2004 ESTATE CONFERENCE, LONDON 30TH JUNE 2004 INVESTING IN REAL ESTATE PROJECTS.

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PRESENTATION AT THE ISLAMIC REALPRESENTATION AT THE ISLAMIC REAL

ESTATE CONFERENCE, LONDON 30TH JUNE 2004ESTATE CONFERENCE, LONDON 30TH JUNE 2004

INVESTING IN REAL ESTATE PROJECTS IN INVESTING IN REAL ESTATE PROJECTS IN THE ARAB WORLD : POSSIBILITIES OF RISK THE ARAB WORLD : POSSIBILITIES OF RISK

MITIGATION THROUGH RENTAL MITIGATION THROUGH RENTAL SECURITIZATION (SUKUK)SECURITIZATION (SUKUK)

BY: BY:

NATHIF J. ADAMNATHIF J. ADAM

HEAD OF INVESTMENTS & FINANCIAL INSTITUTIONSHEAD OF INVESTMENTS & FINANCIAL INSTITUTIONS

NATIONAL BANK OF SHARJAH, UAENATIONAL BANK OF SHARJAH, UAE

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1. In most Arab oil producing countries, the construction sector has been a primary beneficiary of the boom in the non-oil development.

2. In many countries construction sector has shown phenomenal growth every year.

3. A series of new and on-going large scale projects suggests that the sector will show further robust growth over the coming years.

A NOTE ON THE CONSTRUCTION SECTOR

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As an example, the Dubai Internet city is largely occupied by some of the biggest foreign business names in the world – Microsoft, IBM, Oracle, Siemens, Sun Microsystems, Cisco etc.

Such specialist residential and office compounds are becoming more and more common in the Gulf.

Ultimate rentals for such kind of properties can be pooled and collected outside the country of the property’s domicile.

Hence, these kind of properties can ideally be constructed on the basis of rental securitization (Sukuk) as illustrated in the following chart.

FOREIGN CURRENCY RENTALS

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Selected foreign property Tenants

Selected foreign property Tenants

Sukuk Issuer(SPV - MUDARIB)

Sukuk Issuer(SPV - MUDARIB)

Primary Sukuk subscribers

Primary Sukuk subscribers

Foreign escrow account for rental pooling

Foreign escrow account for rental pooling

INVESTMENT STRUCTUREINVESTMENT STRUCTURE

Property investment in Gulf

(Proprietor)

Property investment in Gulf

(Proprietor)

Secondary Market

Secondary Market

Rental Revenues

Offshore

Onshore

Sukuk

Sukuk Proceeds

Right to future rental revenue

Sukuk proceeds

Right to property investment

Periodic rentals and final principal amounts

Excess rental amounts

Sukuk tradability

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The appropriate investment is first identified and advance agreements reached with the potential foreign tenants regarding payment of the future rentals in currency to an escrow account outside the domicile of the project.

An offshore SPV will be formed by the party acting as transaction Mudarib and the SPV will issue Sukuk to foreign persons and institutions interested in investing in the Gulf construction project.

The SPV will utilize the Sukuk proceeds to fund the construction of the project against assignment by the project proprietors of future rentals sufficient enough to repay the Sukuk investors their original amounts invested together with acceptable returns.

Any excess rentals after satisfying the Sukuk holders shall be passed on to the project proprietors.

STRUCTURE DETAILS

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STRUCTURE WITH EXCELLENT VALUE PROPOSITIONSSTRUCTURE WITH EXCELLENT VALUE PROPOSITIONS

The structure enables foreign investors to invest in the lucrative property ventures taking place in the Gulf at minimum risk.

Through the structure, a major risk is mitigated i.e. sovereign currency transfer and convertibility risks.

Other risks will be covered ordinarily through insurance, covenants etc.

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STRUCTURE ADVANTAGES------- cont.

The Sukukholders in addition to the comfort of the foreign rentals also remain the “owners” of the underlying project i.e. the property underconstruction.

Through the structure, tradable securities are created. It should be realized that the trading of the securities relates to the underlying assets and not the rentals, which only represent additional collateral.