Essays on shariah compliant real estate investments

Essays on Shariah-compliant Real Estate Investments A THESIS By Akinsomi Omokolade Ayodeji (BSc (Hons) OBU; MSc, NUS) to The Department of Real Estate in partial fulfilment of the requirements for the degree of Doctor of Philosophy In the subject of Real Estate National University of Singapore January 2013 ACKNOWLEDGEMENTS   First and foremost I am grateful to Olodumare1 for his constant watch over me; throughout my sojourn on earth he continues to astound me with his blessings, love and protection. I am grateful to my supervisor and mentor, Professor Ong Seow Eng who gave me an opportunity in research and encouraged me to undertake my PhD at the National University of Singapore, changing my life for the better. He has mentored and trained me on how to conduct good research and taught me lifelong lessons which helped me in completing my PhD thesis and would help and put me in good stead all throughout my life. I would also like to thank my thesis committee members, Associate Professor Muhammad Faishal bin Ibrahim and Professor Graeme Newell for their timely and cherished advice as well as their suggestions on my PhD thesis and its direction. I am thankful to the academic staff and administrative team at the Department of Real Estate who encouraged and helped me in one way or another during my time at NUS. I am grateful and indebted to the National University of Singapore for awarding me a research scholarship to complete my PhD thesis. My colleagues at NUS: I thank them for their warmth and support through the challenges of of my PhD journey including Dr. Woei Chyuan, Zhao Daxuan, Wei Yuan, Radheshyam Chamarajanagara Gopinath, Emmanuel Ibo Inkoom and Babatunde Oluwayomi. I thank Ms. Nancy Kiley of the Dow Jones Islamic Index for being helpful in providing me data for my thesis. I am also thankful to Professor Adekunle Adeyeye and family who took me in as their own and gave me timely advice and help throughout my stay in Singapore; they have been a true blessing to me. I                                                               Olodumare means Supreme Being (God) in Omokolade’s native language of Yoruba spoken by the Yoruba people of  South‐Western Nigeria.  am grateful to the Nigerian High Commission in Singapore for their diplomatic and humane help when I needed it the most to carry on with my PhD programme after an untimely hiccup. I would like to offer my gratitude to the visiting professors at the National University of Singapore including Professor Tsur Somerville who gave me profound PhD advice (“hit the ball hard, you don’t have to hit a home run”) and Professor David Downs. I am especially thankful and indebted to my finance teacher in high school, Mr. Oluyimika Adebowale, who taught so fabulously well and gave me a solid foundation in accounting and finance. I am grateful to my father; Honourable Ayobami Akinsomi who helped me financially throughout my education and encouraged me to undertake my graduate studies at the National University of Singapore and many thanks to my mom, Mrs. Ibironke Akinsomi for all her love, support and prayers and her phone calls to encourage and sooth me in times of despair. To my sisters Olaide, Oluwatosin and Mosunmola and to my dear brother Omofolarin; I thank you for your encouragements and all the banter to cheer me up along the way. My eternal gratitude I owe to my fiancée and diamond in the rough, Ms.Erika Furubayashi who has been my angel and stood by me throughout my toughest moments; she comforted and urged me on throughout my unwinding PhD journey. Arigato babe! Finally and with utmost importance, I thank my family for being there for me and I remember my late Grandma. I truly miss your heart of gold, your infectious laughter and sincere love. I dedicate this thesis to my dad and hero, Honourable Ayobami Akinsomi, who went far beyond the call of duty to give all his children the best of education. ii Table of Contents   ACKNOWLEDGEMENTS i  ABSTRACT vii LIST OF ABBREVIATIONS…………………………………………………………………………. xi CHAPTER ONE 1  INTRODUCTION . 1  1.1  Shariah- compliant Investments . 1  1.2  Shariah Compliance in Real-estate Investments 4  1.3  Problem Statement . 6  1.4  Scope of the Study 7  1.5  Research Objectives . 8  1.6  Research Contributions 10  1.7  Organisation of the Thesis 13  CHAPTER TWO . 15  SHARIAH-COMPLIANT REAL-ESTATE DEVELOPMENT FINANCING AND INVESTMENT IN THE GCC . 15  2.1  2.1.1  2.2  Introduction and Motivation……………………………………………………………15  Motivation of study 17  Literature Review . 19  2.2.1  Basic principles of Islamic financial system 20  2.2.2  Shariah law and real-estate investments . 21  2.2.3  Shariah compliance and real-estate investment trusts 23  2.2.4  Real Estate Development and Investment in the GCC 25  2.3  Research Methodology . 27  2.4  Survey Results 28  2.4.1  Differences between Shariah and conventional development financing and investment 29  2.4.2  Main criteria for Shariah financing of real-estate financing and development 30  2.4.3  Instruments used in financing of real-estate developments or investments . 32  2.4.4  Involvement of financier on real-estate development projects 33  2.4.5  Impact of Islamic finance on performance of organisations 35  2.4.6  Motivations for financing property developments using Shariah financing or conventional financing. 36  2.4.7  Shariah-friendly environment in the GCC. 37  2.4.8  Country to invest in the GCC . 39  iii 2.4.9  Real-estate sectors to invest in. 39  2.4.10  Level of development of Islamic financial markets in the GCC 40  2.4.11 Lack of understanding in Shariah compliance of real-estate development . 41  financing and investment. 41  2.4.12  Method of financing . 42  2.5                 Current Issues in Shariah Financing of Real Estate Developments and Investments. . 43  2.5.12  Implicit interest in Islamic finance instruments . 43  2.5.13  Shariah board/Shariah committees . 44  2.5.14  Lack of appropriate index for pricing 45  2.5.15  Lack of standardisation in Shariah compliance 45  2.5.16  Limitation of investment universe 46  2.5.17  High risk and agency problems associated with partnership financing . 46  2.6  Conclusions 47  CHAPTER THREE . 50  DOES BEING SHARIAH-COMPLIANT AFFECT CAPITAL STRUCTURE? EVIDENCE FROM PROPERTY FIRMS IN THE GULF STATES. 50  3.1 Introduction . 50  3.2 Literature Review 53  3.2.1 3.3 3.3.1 Theory on capital structure . 53  Research Focus and Methodology . 58  Determinants of capital structure . 59  3.4 Data and Descriptive Analysis . 65  3.5 Empirical Results . 68  3.5.1 Debt market restriction and leverage . 68  3.5.2 Difference in firm characteristics . 71  3.5.4 Determinants of leverage: Fixed effects 75  3.5.5 Over-leverage in Shariah compliant firms and under-leverage in Islamic firms . 80  3.6 Conclusion 85  CHAPTER FOUR 87  THE IDIOSYNCRATIC RISKS OF A SHARIAH-COMPLIANT REIT INVESTOR . 87  4.1 Introduction . 87  4.1.1 The importance of idiosyncratic risks . 91  4.1.2 Shariah compliance and idiosyncratic risks 92  4.2  Literature Review . 95  4.3  Methodology and Data Descriptions 99  iv 4.4  Data and Descriptive Analysis . 102  4.4.1  Estimating idiosyncratic risks 103  4.4.2  Idiosyncratic risks and the cross-section of expected returns 108  4.4.3  The cross-section of Shariah-compliant REIT portfolios 111  4.4.4  Correlations of variables 115  4.5  Results and Findings 117  4.6 Robustness Tests 124  4.6.1 Sub-period analysis 124  4.6.2 Alternative estimation of idiosyncratic risks . 126  4.6.3 Why are Shariah-compliant portfolios significant? . 128  4.6.4 Islamic REITs in Malaysia 130  4.7                  Conclusion . 132  CHAPTER FIVE . 136  CORPORATE REAL-ESTATE HOLDINGS AND FIRM RETURNS OF SHARIAH-COMPLIANT FIRMS 136  5.1 Introduction . 136  5.2 Literature Review 142  5.3 Data and Methodology 143  5.3.1 Data . 143  5.3.2 Methodology . 145  5.4 Summary Statistics 147  5.5 Empirical Findings and Analysis 152  5.5.1 Stock performance of Shariah-compliant firms 152  5.5.2 Correlations between corporate real-estate ownership, alpha (out-performance) beta (risk) and Shariah quantitative variables. . 157  5.5.3 Regression analysis and results . 161  5.6 Robustness tests 166  5.7 Conclusion 169  CHAPTER SIX 171  CONCLUSIONS AND RECOMMENDATIONS 171  5.1 Background . 171  5.2 Summary of Main Findings 172  5.3 Practical Implications 174  5.4 Limitations and Future Research 176  BIBILIOGRAPHY 179  v APPENDICES . 192  Questionnaire for Survey for Chapter Two . 192  Islamic Instruments 200  Sample of GCC Firms Interviewed in Chapter Two . 202  Sample of GCC Property Firms in Chapter Three . 203  Sample of US Real Estate Investment Trusts in Chapter Four 204    vi Thesis Advisor: Professor Ong Seow Eng Omokolade Ayodeji Akinsomi Essays on Shariah-compliant Real-estate Investments ABSTRACT Shariah–compliant real estate investments in the past decade have received attention not only in the Middle East but globally. Research in Shariah-compliant real-estate investments are sparse and in some cases non-existent. In this study, the role that Shariah principles and compliance play in firm value and firm performance is investigated. One survey and three empirical studies that examine Shariah compliance in real-estate investments are conducted; these comprise (a) Shariah compliance in real-estate investments in the Gulf Cooperation Council (GCC) (b) leverage choice of Islamic and Shariah-compliant real-estate firms (c) the idiosyncratic risks of Shariah-compliant real-estate investment trusts, and (d) the corporate real-estate ownership of Shariah-compliant firms. The findings of this thesis are as follows: The first essay is a survey in which 18 senior executives in the Islamic finance and real-estate industry from the Gulf Cooperation Council are interviewed. This survey provides the template for the subsequent research questions in the empirical studies. There exist comparative differences between general finance and Islamic finance and its application in real-estate development financing and investment. Equity Shariah instruments are in high demand from real estate investors; however they are rarely offered by Islamic banks. In addition, survey results confirm that Islamic financiers tend to partner real-estate companies through land acquisition to postconstruction, contrary to how conventional financiers operate. The survey also points to the importance of political environments, legal and institutional frameworks and human capital expertise as factors in which Shariah-compliant real estate firms consider when taking real estate investment vii decisions. Finally, results show that Shariah-compliant investments have systematic differences based on how developed the Islamic financial system of that region is. The second essay examines the leverage choice of Shariah-compliant and Islamic public-listed realestate firms. Past literature assumes that capital availability depends on a firm’s characteristics this chapter explores how compliance to Shariah principles or law may also be associated with a firm’s choice of capital structure Shariah principles or law may also be associated with a firm’s capital structure choice is explored. The study finds that Islamic real-estate firms (with an internal Shariah board) are significantly less leveraged than general real-estate firms; however, the results of Shariahcompliant firms (inclusion in the Dow Jones Islamic Index) are inconclusive. After controlling for firm characteristics and fixed effect on each firm, the results of lower leverage remain significant and persistent in Islamic firms. On further examination, the earlier differences in lower leverage by Islamic real-estate firms can be explained by their poor access to the debt market and the unwillingness of Islamic growth firms to explore leverage as a source of capital. The third essay investigates the impact of Shariah-compliant investment principles on the idiosyncratic risks of a Shariah-compliant and Islamic Real Estate Investment Trust (REIT) investor using US REITs. The importance of idiosyncratic risks in explaining cross-sectional returns of a synthetic Shariah-compliant REIT investor’s portfolio is examined in this chapter. Results show a positive and significant relationship between expected idiosyncratic volatility and expected REIT returns of the synthetic Shariah-compliant portfolio (GCC Shariah compliance standards). The relationship between expected REIT returns and idiosyncratic volatility on Islamic REITS in Malaysia is tested and the results lend robust support to earlier findings on the synthetic Shariah-compliant portfolio of a positive and significant relationship; in other words, idiosyncratic risks are an important factor to consider in the pricing of Shariah-compliant and Islamic REIT stock returns. On further examination, the viii significant relationship as seen in the synthetic Shariah-compliant portfolios can be explained from the firm-specific risks of the residential REIT sector which is the most dominant sector during the period of investigation. More importantly the implications of these results also point to the importance of Shariah compliance standards and screening methods, which are significant features associated with the understanding of the relationship of idiosyncratic risks on expected REIT returns of Shariah portfolios. The fourth essay focuses on corporate real-estate ownership of Shariah-compliant firms in the United States. A novel dataset which forms the constituents of the Dow Jones Islamic Market Index (DJIM) which conform to Shariah principles, particularly non-real-estate firms and their corporate real-estate ownership, characteristics is examined. Results show a significant correlation between Shariahrestricted variables and corporate real-estate ownership of Shariah-compliant firms. Leverage is significantly positively correlated with corporate real-estate ownership (CREO) while Cash + interesting-bearing securities are negatively correlated with CREO. There is an insignificant correlation between accounts receivables and CREO. Furthermore, the role of CREO in firm performance, particularly systematic risk and idiosyncratic component of return, is investigated. Results find that, in line with previous studies, a negative relationship between systematic risk and CREO in Shariah-compliant firms exists; however, this result is inconsistent when results are examined based on industry classification. In addition, the CREO of Shariah-compliant firms does not explain the idiosyncratic return of Shariah-compliant firms as there exists a flat relationship between the idiosyncratic component of return (alpha) and corporate real-estate ownership. Results that CREO not play any role in explaining the firm returns in Shariah-compliant firms are robust even when Shariah-restrictive variables are controlled for. ix Bibliography Seiler, S. J., A. Chantrath, and J. R. Webb. "Real Estate Ownership and the Risk and Return to Stockholders." Journal of Real Estate Research. Vol. 22, No.1 (2001), 199-212. Sharpe, W.F. "Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk." Journal of Finance, Vol.19, No. (1964): 425-42. Shleifer, A, and R. W. Vishny. "Liquidation Values and Debt Capacity: A Market Equilibruim Approach." Journal of Finance. Volume 47: 1343-1366. Smith, C.W., and R.L. Watts. "The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies." Journal of Financial Economics, Vol. 32, No. (1992): 263-92. Spiegel, M., Wang, X., 2006. "Cross Sectional Variation in Stock Returns Liquidity and Idiosyncratic Risk. Unpublished Working Paper. Yale University (2006). Titman, S., & Wessels, R. "The Determinants of Capital Structure Choice." The Journal of Finance, Vol. 43 No.1 (1988): 1-19. The Royal institution of Chartered Surveyors (RICS). King Sturge and London South Bank University. "Current Trends in Shariah Property Investment". RICS Research, London, United Kingdom. (2006) Treasury, H.M. "The Development of Islamic Finance in the Uk: The Government's Perspective." Bank of England, London (2008). Tuzel, S. "Corporate Real Estate Holdings and the Cross-Section of Stock Returns." Review of Financial Studies, Vol. 23, No. (2010): 2268-2302. Warner, J.B. "Bankruptcy Costs: Some Evidence." Journal of Finance, Vol. 32, No. (1977): 337-47. Yusof, R., and Majid, M. Stock market volatility transmission in Malaysia: Islamic versus 190 Bibliography Conventional Stock Market. Journal of Islamic Economics, Vol. 20, No. (2007), 17-35. 191 Appendix APPENDIX 1   Questionnaire for Survey for Chapter Two   Real Estate Development Financing and Investment in Gulf Cooperation Council (GCC) Countries.  Department of Real Estate   School of Design and Environment   National University of Singapore   4 Architecture Drive   Singapore 117566  Telephone: (65) 6516 6901/ (65) 6516 3552  Facsimile: (65) 6516 3552    Email: rstoaa@nus.edu.sg    AIM    This research project examines how compliance to Islamic Principles affects Real‐ estate Development  Financing (focusing on the Gulf Cooperation Council which includes Bahrain, Kuwait, Oman, Qatar, Saudi  Arabia  and  United  Arab  Emirates)  and  also  looks  into  how  Shariah  Compliance  affects  risk‐adjusted  investment returns as a consequence of a more limited investment universe. The project considers the  role of Shariah‐compliant Real‐estate Developers and Investment Companies in comparison with other  Non‐Shariah Real‐estate Developers and Investment Companies in the GCC.    This  questionnaire  is  targeted  at  senior  representatives  of  major  international  firms  in  the  Gulf  Cooperation Council involved in Real‐ estate Development, Investment, and Real‐ estate Development  Financing.    I  am  interested  in  your  views  as  a  Senior  Expert  and  your  comments  are  of  particular  value  to  the  successful outcome of this thesis. It is estimated that the survey would take 30‐45 minutes to complete.     INSTRUCTIONS   In  the  attached  questionnaire  you  are  asked  to  answer  questions  by  ticking  the  appropriate  boxes. Where you are given a scaled choice, you need only to tick one box per questions   All information you provide will be treated in strict confidence. Results will only be published in  aggregate form.   Where  you  are  invited  to  comment  please  use  a  separate  sheet  of  paper  if  this  is  more  convenient.  Thank you for participating in this survey.    Section One: GENERAL     Q1. Respondent Details     Surname                                   ………………………………………………………….  192 Appendix   First Name (s)                           ………………………………………………………     Your Position (job title)             ……………………………………………………… .    Organisation Name:                                                                           .       Address                                       ………………………………………………………                                                        ………………………………………………………     City                                               ……………………………………………………….    Postcode                                        ……………………………………………………     Tel:                                                ……………………………………………………     Fax:                                               ……………………………………………………     E‐Mail:                                           …………………………………………………… .    From  the  following  list  please  indicate  which  classification  best describe  your organisation (Please  Circle)    2.1 Property Development Company  2.2 Property Investment Company   2.3 Fund/Asset Management  2.4 Independent Real Estate Consultant   2.5Property Development and Investment Company  2.6 Other Please Specify         …………………………………………………………………………………………………………………………………………………………… ………………………    Q.3  To  what  extent  is  Shariah‐compliant  Development  Financing  and  Investment  different  to  other  conventional development Financing and Investment?                                                    Not Different               Different       Very Different   Finance and Investment                   1             2                 3              4                 5  Portfolio Selection                             1             2                 3              4                 5          Portfolio Management                      1             2                 3              4                 5    Payment of Dividends                        1              2                3              4                 5  Monitoring of Compliance                1              2                3              4                 5  Regulation                                            1              2                 3             4                 5  Costs                                                       1              2                3              4                 5    193 Appendix Other Please Specify   …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………    Q.4 Is your organisation involved in Shariah‐compliant real‐estate development or investment?   □Yes   □No  Q.5 What are the main criteria for Shariah Financing of real‐estate developments?  …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… ……………………………………………… .    Q.6 In what form and shape is your company involved with Shariah‐compliant services?                                                                             At present                         In the future  □                         □  Investment                                                               □                         □  Asset Management                                                 □                         □  Consultancy                                                              □                         □  Provision of mortgages                                              Other please specify   …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… ……………………………………………….    Q.7  Please  specify  the  percentage  of  development  projects  undertaken  and  financed  through  Shariah  financing.               .              Q.8    What  method  of  financing  (please  list  instrument  if  applicable)  do  you  use  in    property  developments and why?         Please explain percentages                                                                              At Present                        In the future  □                       □ Debt                                                                                …………………………………………………………………………………………………………………………………………………………… ……………………… .     194 Appendix   □                       □ Equity                                                                           …………………………………………………………………………………………………………………………………………………………… ……………………… . .    □                       □   Other                                                                                 (Please specify)                …………………………………………………………………………………………………………………………………………………………… ……………………… . .  Q.9 Below is a brief outline of the main methods of Islamic Finance. Would you ever consider utilising  such methods of finance in real‐estate development financing?                                                 Never    Not likely   Likely      Most Likely     Definitely   9.1 Ijara/ Ijara‐wa‐Iqtina               1              2              3                  4                   5  9.2 Sukuk                                         1              2              3                  4                   5   9.3 Mudaraba                                 1              2              3                  4                   5  9.4 Musharaka                                1              2              3                  4                   5  9.5 Murabaha                                  1              2              3                  4                   5  9.6 Istisna                                        1               2              3                  4                   5  9.7 Qard Hasan                               1               2              3                  4                   5    For their definitions, please see below.    9.8 Other (please state)  ………………………………………………………………………………………………………………………………………………………………… ……………………………    The Islamic financial model works on the basis of risk sharing.  The  customer  and  the  bank  share  the  risk  of  any  investment  on  agreed  terms,  and  divide  any  profits  between them.    The  main  categories  within  Islamic  Finance  are:  Ijara,  Ijara‐wa‐iqtina,  Mudaraba,  Murabaha  and  Musharaka.   Ijara is leasing agreement whereby the Bank buys an item for a consumer and then leases it back  over a specific period   Ijara‐wa‐Iqtina is a similar arrangement, except that the customer is able to buy the item at the  end of the contract    Sukuk means participation securities, coupons, investment certificates   Mudaraba offers specialist investment by a financial expert in which the bank and the customers  shares any profits. Customers risk losing their money if the investment is unsuccessful, although  the bank will not charge a handling fee unless it turns into profit   Musharaka  is  an  investment  partnership  in  which  profit‐sharing  terms  are  agreed  in  advance  and losses are pegged to the amount invested  195 Appendix  Murabaha is a form of credit which enables customers to make a purchase without have to take  out an interest‐bearing loan. The bank buys an item and then sells it on to the customer on a  deferred basis   Istisna  is  contract  of  sale  of  specified  goods  to  be  manufactured,  with  an  obligation  on  the  manufacturer to deliver them upon completion (i.e. commissioned manufacture)    Q.10  How  many  Property  Developments  in  your  organisation’s  current  portfolio  have  been  financed  using Shariah Financing? Please tick  □ 1‐5       □ 5‐10       □ 11‐20  □ 21‐30  Other Please state      Q.11 In your professional opinion, how does adherence to Islamic Principles affect the Financing of real‐ estate developments?       Q.12 Please rate the involvement of your financier on a recently completed or ongoing project.                                                                                                     Not Involved             Involved        Very Involved          12.1 Land Acquisition                    1              2              3                  4                   5         12.2 Construction Stage                1             2              3                  4                   5          12.3 Post Construction                  1             2              3                  4                   5    Q.13 Islamic Finance involves profit‐ and loss‐sharing compared to conventional financing where interest  is charged on loans. Do the differences in approach have a positive or negative impact in relation to the  performance of your organisation?  Please  Comment       ………………………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………………………………………………………… …………………………………………………… .  ………………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………     Q.14 What are the challenges and issues your organisation faces from the type of financing you use?  196 Appendix .  Q.15  Please  state  your  motivations  for  financing  property  developments  using  Shariah  financing  or  conventional financing.  .    Q.16 what Index do you use as a benchmark to measure the performance of your organisation’s Stock  Returns? Please List:    .    Q.17 Please rate the appropriateness of the following index as an appropriate benchmark in measuring  your Company’s stock performance                                                 Not Appropriate          Appropriate        Very Appropriate     Standard & Poor                                1              2              3                  4                   5  Dow Jones                                          1              2              3                  4                   5  MSCI                                                    1              2              3                  4                   5    Q18 In your view which GCC Country has the most Shariah‐friendly environment?  Please list in order of importance. The GCC consists of Kuwait, Oman, Saudi Arabia, Qatar, Bahrain and  the United Arab Emirates.  Political    Environment  Legal Framework    Institutional    Framework  Human  Capital    and Expertise     Q.19  If  your  company  were  to  be  involved  with  Shariah‐compliant  Real‐estate  Projects,  which  GCC  Country would you wish to invest in?  Rank  Country  Cities 197 Appendix   Bahrain      Kuwait      Oman      Qatar      Saudi Arabia      United Arab Emirates         Q.20 Which sectors of the real‐estate market would you invest in and why?                                                                                       At Present               In the Future  □                □  Retail                                                                                 □                 □  Residential                                                                       □                 □        Industrial                                                                           □                 □        Logistics and Distribution                                               □                 □  Commercial Office                                                                     Further Comments   …………………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………………………… .    Q.21 Please rate the development of Islamic financial markets in each country in the GCC.                                                                                                    Not Developed          Developed        Very Developed          21.1 Bahrain                                   1              2               3                  4                   5         21.2 Kuwait                                    1              2               3                  4                   5          21.3 Oman                                      1              2               3                  4                   5         21.4 Qatar                                       1              2               3                  4                   5         21.5 Saudi Arabia                           1              2               3                  4                   5         21.6 United Arab Emirates             1              2               3                  4                   5     Q.22 In  your  opinion, do you think there is a lack  of  understanding in Shariah Compliance of Real  Estate Development Financing in the GCC Countries?  …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… ……  Q.23 Given your experience in real estate development financing, which method of financing would  you opt for?   □Shariah‐compliant Financing   □Conventional Financing      198 Appendix Why? Please Comment   …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………………………    I would like to thank you for your contribution to this research!  199 Appendix APPENDIX 2 Islamic Instruments Ijara/Ijara-wa-Iqtina: an Ijara is a leasing contract whereby the finance house leases an asset for a fee and for a specified period of time to its client. The bank (the owner of the asset) bears all the risk associated with ownership. The ijara can be structured as a lease-purchase contract in which case the lease payment may include part payment for the asset until the lease period ends; ownership then reverts from the bank to the customer. Sukuk: The Sukuk in recent years is a very popular Islamic instrument for the financing of realestate development and investment. Sukuk are Islamic bonds which are traded on capital markets. Sukuk are asset-backed and the bonds are backed by a profit-sharing arrangement, a loan or sale-leaseback arrangement. Investors own a part of the underlying asset and the asset serves as collateral for debt repayments (Jobst 2007). Murabaha: Is a contract in which the bank purchases a tangible asset on behalf of its customer from the supplier, the bank and its customer agree a pre-determined resale price based on cost plus mark-up price. The contract specifies if the bank collects payment by instalments or a lump sum upon maturity. Istisna: The Istisna is often used to finance long-term projects, and it is a popular form of financing in real-estate construction and development. The instrument is a pre-delivery financing and leasing instrument. In an Istisna contract, a contractor is willing to manufacture an asset for the client at a pre-determined amount, within a specified time. The Istisna often involves two contracts; the first Istisna contract involves an agreement by the customer to purchase the asset 200 Appendix from the bank or financier upon completion. The second contract is between the bank and the contractor, and this agreement involves the bank paying the contractor for building the asset. Mudaraba: Is an equity Islamic contract in which one party finances the project, in most cases, the bank and the other party (mudarib) provides the expertise in executing the project. Profits are shared based on agreements as specified in the contract whilst losses are borne by the financier except in cases where the mudarib has been deemed to be negligent. The mudaraba is based on profit and loss sharing, a key characteristic of Islamic finance principles. Islamic principles encourage investor to be partners in a business rather than function as a passive lender. The profit- and loss-sharing system is in contrast with the conventional system where the borrower pays the bank interests as well as the principal amount borrowed regardless of the success or failure of the venture. Musharaka: Is an equity Islamic contract in which the bank and a business partner contribute to finance a project in the form of a partnership. Ownership is based on the share contributed towards financing. In a musharaka contract, the profit or losses is distributed to the financing partner and the business partner according to a pre-determined ratio. Qard Hassan: An interest-free loan also referred to a benevolent loan. The borrower pays back the same amount which was initially borrowed from the financier without any interest payments. Islamic principles encourage the loan to be written-off if the borrower is having difficulties in repaying back the loan.   201 Appendix APPENDIX 3 Sample of GCC Firms Interviewed in Chapter Two   AEP Investment Management, Saudi-Arabia Ameen Talib & Associates, Singapore Arab Banking Corporation, Bahrain Arcapita Bank, Bahrain CapitaLand Amanah, Singapore CapitaLand GCC Holdings, GCC CB Richard Ellis, Bahrain Coast Investment and Development Company, Bahrain Elaf Bank, Bahrain 10 Emaar Properties, United Arab Emirates 11 Emirates Tarian Capital Ltd, United Arab Emirates 12 Eskan Bank, Bahrain 13 Jones LangLasalle, MENA, United Arab Emirates 14 Keppel Al Numu Development, Saudi Arabia 15 Ratings Intelligence, Kuwait 16 REEM Investments, United Arab Emirates 17 Sakana Housing Solutions, Bahrain 18 Salam Bounian Development Company, Qatar           202 Appendix APPENDIX 4   Sample of GCC Property Firms in Chapter Three   10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Aayan Real Estate Co. Abyaar Real Estate Development Co. Ajial Real Estate Entertainment Co. Ajwan Gulf Real Estate Co. Al-Arabiya Real Estate Co Al Enmaa Real Estate Co. Al Safat Global Holding Co. Dar-Alarkan Real Estate Development Co. Aldar Al-Dar Properties Co. Al-Mazaya Holding Co. AlMudon International Real Estate Co. Alqaria (Kuwait Real Estate Holding Co.) Al-Tamdeen Real Estate Development Co. Altijaria (The Commercial Real Estate Co) Aqar Real Estate Investments Co. Arkan Al Kuwait Real Estate Co. Arriyadh Development Co. Barwa Real Estate Co. Coast Investment and Development Co. Deyaar Development Co. Dubai Development Co. Emaar Development Co. EMAAR AB Ezdan Real Estate Co. First Dubai Development Co. Grand Real Estate Projects Injazzat Real Estate Development Co Inovest Co. 30 Investor Holding 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 Investor Holding Group Co. Jabal Omar Development Co. Jeezan Holding Co Kuwait Business Town Real Estate Co. Kuwait Real Estate Co. Al Mabanee Holding Co. Manazel Holding Co. Al- Massaleh Real Estate Co. Mena Real Estate Co. Munshaat Real Estate Projects Co. National Real Estate Co. Pearl Development Co. Qatar Real Estate Investment Co. Safat Global Holding Co. Salhiah Real Estate Co. Sanam Real Estate Co. Saudi Real Estate Co. Seef Real Estate Co. Sorouh Real Estate Co. Taiba Holding Co. Tameer Real Estate Investments Co. Al-Themar International Holding Co. Tijara Real Estate Investment Co. Union Properties Co. Union Real Estate Co. United Real Estate Co.                               203 Appendix APPENDIX 5   Sample of US Real Estate Investment Trusts in Chapter Four   10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 BOSTON  S L GREEN REALTY CORP  ALEXANDRIA REAL EST EQUITIES INC  MACK CALI REALTY CORP  HIGHWOODS PROPERTIES INC  CORPORATE OFFICE PROPERTIES TR  BIOMED REALTY TRUST INC  DOUGLAS EMMETT INC  KILROY REALTY CORP  BRANDYWINE REALTY TRUST  FRANKLIN STREET PROPERTIES CORP  PARKWAY PROPERTIES INC  PROLOGIS TRUST  A M B PROPERTY CORP  D C T INDUSTRIAL TRUST INC  EASTGROUP PROPERTIES INC  FIRST POTOMAC REALTY TRUST  FIRST INDUSTRIAL REALTY TR INC  LIBERTY PROPERTY TRUST  DUKE REALTY INVESTMENTS INC  P S BUSINESS PARKS INC CA  CAPITAL LEASE FUNDING INC  MISSION WEST PPTYS INC MD  GLADSTONE COMMERCIAL CORP  KIMCO REALTY CORP  FEDERAL REALTY INVESTMENT TRUST  REGENCY REALTY CORP  DEVELOPERS DIVERSIFIED RLTY CORP  WEINGARTEN REALTY INVESTORS  TANGER FACTORY OUTLET CENTERS IN  ALEXANDERS INC  EQUITY ONE INC  SAUL CENTERS INC  ACADIA REALTY TRUST  INLAND REAL ESTATE CORP  RAMCO GERSHENSON PROPERTIES TR  37  38  39  40  41  42  43  44  45  46  47  48  49  50  51  52  53  54  55  56  57  58  59  60  61  62  63  64  65  66  67  68  69  70  71  72  CEDAR SHOPPING CENTERS INC URSTADT BIDDLE PROPERTIES INC  KITE REALTY GROUP TRUST  ROBERTS REALTY INVESTORS INC  SIMON PROPERTY GROUP INC  MACERICH CO  TAUBMAN CENTERS INC  C B L & ASSOCIATES PPTYS INC  PENNSYLVANIA REAL ESTATE INVT TR  GLIMCHER REALTY TRUST  REALTY INCOME CORP  NATIONAL RETAIL PROPERTIES INC  AGREE REALTY CORP  Getty  EQUITY RESIDENTIAL PROPERTIES TR  AVALONBAY COMMUNITIES INC  UNITED DOMINION REALTY TR INC  ESSEX PROPERTY TRUST INC  CAMDEN PROPERTY TRUST  B R E PROPERTIES INC  APARTMENT INVESTMENT & MGMT CO  HOME PROPERTIES N Y INC  MID AMERICA APT COMMUNITIES INC  AMERICAN CAMPUS COMMUNITIES INC  POST PROPERTIES INC  COLONIAL PROPERTIES TRUST  ASSOCIATED ESTATES REALTY CORP  EDUCATION REALTY TRUST INC  EQUITY LIFESTYLE PROPERTIES INC  SUN COMMUNITIES INC  UNITED MOBILE HOMES INC  VORNADO REALTY TRUST  WASHINGTON REAL ESTATE INVS TR  LEXINGTON CORPORATE PROP INC I  COUSINS PROPERTIES INC  INVESTORS REAL ESTATE TRUST  WINTHROP REALTY TRUST ONE LIBERTY PROPERTIES INC  PRESIDENTIAL REALTY CORP   HOSPITALITY PROPERTIES TRUST  LASALLE HOTEL PROPERTIES  103 104 105 106 107 PITTSBURGH & WEST VIRGINIA RR  ISTAR FINANCIAL INC  NORTHSTAR REALTY FINANCE CORP P M C COMMERCIAL TRUST  B R T REALTY TRUST    73 74 75 76 77 204 Appendix 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 DIAMONDROCK HOSPITALITY CO  HERSHA HOSPITALITY TRUST  FELCOR LODGING TRUST INC  ASHFORD HOSPITALITY TRUST INC  M H I HOSPITALITY CORP  PUBLIC STORAGE EXTRA SPACE STORAGE INC  SOVRAN SELF STORAGE INC  U STORE IT TRUST HEALTH CARE PPTY INVS INC  VENTAS INC  HEALTH CARE REIT INC  NATIONWIDE HEALTH PROPERTIES INC SENIOR HOUSING PROPERTIES TR  OMEGA HEALTHCARE INVESTORS INC HEALTHCARE REALTY TRUST INC  MEDICAL PROPERTIES TRUST INC  NATIONAL HEALTH INVESTORS INC L T C PROPERTIES INC  UNIVERSAL HEALTH RLTY INCM TR  COGDELL SPENCER INC  DIGITAL REALTY TRUST INC  RAYONIER INC  ENTERTAINMENT PROPERTIES TRUST POTLATCH CORP 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 ANWORTH MORTGAGE ASSET CORP CAPSTEAD MORTGAGE CORP  DYNEX CAPITAL INC  RESOURCE CAPITAL CORP  NEWCASTLE INVESTMENT CORP  RAIT INVESTMENT TRUST  ARBOR REALTY TRUST INC  CAPITAL TRUST AMERICAN REALTY INVESTORS INC  EASTERN LIGHT CAPITAL INC  AMERICAN SPECTRUM REALTY INC  GRAMERCY CAPITAL CORP  ARES CAPITAL CORP  MAGUIRE PROPERTIES INC  INNSUITES HOSPITALITY TRUST  ANNALY MORTGAGE MANAGEMENT INC Hatteras  Redwood 205 [...]... between Shariah compliance and conventional realestate investments specifically in the GCC, the centre of Islamic finance, which informs the research question: 8 Chapter One Introduction What are the key differences between Shariah compliance and conventional real estate investments in the GCC? The second essay examines the leverage choice of public listed Islamic and Shariah- compliant realestate firms... discussed earlier 1.2 Shariah Compliance in Real estate Investments   Shariah- compliant real- estate investments incorporate the application of Shariah law The qualitative (halal activities8) and quantitative (restriction in financial ratios9) aspects of Shariah compliance laws are applied to real- estate investments before they are considered as permissible for Shariah investors Shariah property funds... effects of Shariah compliance to firm value and firm performance from a real- estate investment perspective The first and second essays focus on the role of Shariah compliance in the Gulf Cooperation Council including an understanding of Shariah- compliant real estate investments and the leverage choice of Shariah- compliant real- estate firms; while the third and fourth essays investigate the effect of Shariah. .. limitations of the research and provides recommendations for future work on Shariah- compliant real- estate investments 14 Chapter Two Shariah- compliant Real- estate Development Financing and Investment in the GCC CHAPTER TWO SHARIAH COMPLIANT REAL ESTATE DEVELOPMENT FINANCING AND INVESTMENT IN THE GCC   2.1 Introduction and Motivation   In recent times, Islamic banking and finance has witnessed exponential... the restrictions contribute to the findings The research question for the fourth essay is; Do the limitations in Shariah financial ratios have linkages to the relationship between CREO and firm performance of Shariah- compliant firms? 1.6 Research Contributions   The first essay extends the literature on the understanding of Shariah- compliant real- estate investments The essay examines these investments. .. in the Gulf Cooperation Council through a survey of Senior Executives The study presents first-hand knowledge from the Shariah- compliant real- estate industry and sheds light on comparative differences between conventional and Shariah real- estate investments Significant differences such as the role of Islamic banks as partners rather than financiers in Shariah- compliant real- estate investments and the... X  Table 1.1 above shows Shariah investments in comparison with other forms of investments: while conventional investments have an unconstrained universe and there are no rules when financing investments, ethical investment have a constrained universe and can finance investments based on 3 Chapter One Introduction choice Shariah investments in equities operate within a constrained universe and are... popularity of Shariah- compliant real- estate grows across the Gulf States and worldwide, the essay investigates the role that Islamic finance plays in the real- estate industry in the Gulf Cooperation Council, and investigates whether the processes of financing Shariah- compliant real- estate investments by financiers, real- estate practitioners and professionals are in line with the tenets of Shariah Law... investors to consider Shariah- compliant investments based on the Shariah- compliance screening methods which are peculiar to regions Investors are also made aware through this research study that there exist systematic differences in Shariah- compliant real- estate investments across regions From a regulator’s perspective, results show that different Shariah- compliance regulations have differing reactions to... decision making of Shariah- compliant investors, Shariah- compliant fund managers and financial regulatory bodies 1.7 Organisation of the Thesis   The rest of the thesis is organised as follows: Chapter two examines the real- estate development financing and investments in the Gulf Cooperation Council including the comparative differences 13 Chapter One Introduction between conventional and Shariah- compliant . Thesis Advisor: Professor Ong Seow Eng Omokolade Ayodeji Akinsomi Essays on Shariah- compliant Real- estate Investments ABSTRACT Shariah compliant real estate investments in the past decade. of Shariah- compliant real estate investments and the leverage choice of Shariah- compliant real- estate firms; while the third and fourth essays investigate the effect of Shariah compliance on. Honourable Ayobami Akinsomi Chapter One Introduction CHAPTERONE INTRODUCTION  1.1 Shariah compliant Investments  In recent years, Shariah investments have gained popularity and are considered