Understanding Shariah Investment June 2008

RREEF Real Estate Research

Introduction This paper introduces Shariah-compliant investment by reviewing its key terms and concepts, assessing its market size and potential, and outlining its opportunities and challenges for investors and financiers. Shariah-compliant investment represents a series of ethical financial transactions that are organised in accordance with Islamic law. The range of investment opportunities complying with Muslim religious beliefs has historically been fairly limited. Islamic banking is distinguished by a ban of interest-based transactions, an emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit sharing, and the prohibition of speculation and uncertainty in business contracts. Saving and investing, however, are in line with Islamic religious principles so an increasing range of financial products are now emerging to meet Shariah rules. At the same time, the capital available for deployment into Shariah-compliant investments is vast and growing. At the heart of the Middle East, the countries of the Gulf Cooperation Council – Saudi Arabia, Kuwait, the UAE, Bahrain, Qatar, and Oman – form a market of 38 million residents (about the same population as California) with a combined annual GDP that grew 6.4% in 2007 to reach US$840 billion. Add to this another 430 million Muslims living outside the Middle East – many of whom reside in prosperous or growing economies such as India, Malaysia, or Turkey – and the market opportunities become quite clear. We conclude that strong economic growth, rising oil revenues, and healthy current account surpluses in many Muslim countries are among the factors supporting the growing potential of Shariah-compliant investment. But as with all good opportunities, we also caution that there are associated challenges, too. These include, among other things, a shortage of appropriately qualified Shariah scholars to serve on required review boards, the lack of a global consensus on Shariah interpretation with regard to financial products, and a lack of standardisation for transaction structuring and processing.

Table of contents

Understanding Shariah Investment........................2 Scale and Sources of Middle Eastern Capital ...10 Capital Mobility and Allocation........................19 The Outlook for Shariah-Compliant Alternative Investment......................24 Authors: Henry Chin +44 207 545 6611 +852 2203 7908 [email protected]

Peter Hobbs +44 207 547 4855 [email protected] Cameron Dowe +61 2 8258 2683 [email protected]

Richard Hedley +61 2 8258 1477 [email protected]

Tae Kim +82 2724 4330 [email protected]

Marcus Wignell +44 207 545 9833 [email protected]

June 2008

IMPORTANT: PLEASE SEE CONFLICT DISCLOSURES IMMEDIATELY AT THE END OF THE TEXT OF THIS REPORT

Understanding Shariah Investment

RREEF Research 1

RREEF Research 2

1. Understanding Shariah Investment

Background and Market Opportunities The emergence of Islamic banking in recent years is one of the most important trends in the financial world. There has always been a demand among Muslims for financial products and services that conform to the Shariah (Islamic law). With the development of viable Islamic alternatives to conventional finance, Muslims are increasingly able to participate in the financial world without bearing an economic penalty. The Islamic banking industry today is valued at several hundred billion dollars (estimates vary)1, and consists of more than 300 financial institutions in and outside the Muslim world. This emerging industry is the product of the collective efforts of bankers, economists, and Islamic legal scholars over the past several decades to develop financial solutions that meet the religious requirements of Muslims. It is a young and fast-growing industry that continues to evolve and expand both financially and geographically. This industry’s vast market includes devout Muslims in indigenous Muslim societies as well as in Muslim minorities of non-Muslim countries. Furthermore, it offers a broad appeal beyond its traditional Muslim base: non-Muslim individuals and communities that seek ethical financial solutions have also been attracted to Islamic banking. The first modern Islamic financial institutions emerged in the 1960s and 1970s. Since then, Islamic banking has spread to a large number of Muslim countries, including the Gulf Cooperation Council (GCC)2, the Arab world at large, South and Southeast Asia, and even Muslim communities in the West and Africa. Bahrain is considered a hub for Islamic banking, with significant activity also taking place in Kuala Lumpur and London. Islamic financial institutions have taken the form of commercial banks, investment banks, investment and finance companies, insurance companies, and financial service companies. They follow different banking models: private institutions in a conventional economy (as in the GCC and the West), attempts at national Islamic banking systems (as in Sudan, Iran, and Pakistan), and dual banking models (as in Malaysia). They also take different forms: wholly Islamic institutions, Islamic subsidiaries of conventional banking groups, and Islamic banking ventures within conventional banks. This is an industry that is still evolving, developing, and growing. It has gone from commercial banking to syndicated transactions and equities, and more recently, into debt issuance and structured products. Its sophistication and product offerings have developed along with this change. At an earlier stage, industry growth was in part a reflection of economic growth in the Islamic world, fuelled primarily by oil wealth. This created a growing middle-wealth segment and hence made banking a necessary service to the larger segment of the population. In the past several years, increased awareness about Islamic banking has led to increased market share (from conventional banking) and continued high growth (15-20% in key markets). The Middle East – especially the GCC – is an increasingly important source of capital for the global financial system3. Middle Eastern investors hold US$2.4-2.8 trillion in traditional investment assets worldwide, including treasuries, corporate bonds, equities, and funds.

1 According to the estimates from the UK Financial Services Authority in 2006, the Islamic banking and finance market is estimated to be worth between US$200 billion and US$500 billion. According to McKinsey’s (2006), “The world of Islamic Banking Competitiveness Report, the Islamic banking sector is worth between US$180 billion and US$250 billion. According to the estimates from Dubai International Financial Centre (DIFC), the global market for Islamic financial products is worth more than US$200 billion. 2 The GCC bloc includes Saudi Arabia, Kuwait, UAE, Bahrain, Qatar, and Oman. 3 The UAE’s Abu Dhabi Investment Authority (ADIA) spent US$7.5 billion to buy a stake in Citigroup.

The Islamic banking industry today is valued at several hundred billion dollars with more than 300 financial institutions already participating.

Middle Eastern investors hold US$2.4-2.8 trillion in traditional investment assets worldwide.

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More specifically, Shariah-compliant products (which include banking assets and asset management) were valued at around US$450 billion (ex-Iran) in 20064. With growth of 23.5% p.a. over the past five years, Shariah compliant products are expected to grow at 17% p.a. to exceed US$1 trillion in value by 2010 (ex-Iran). The growth of international property investment has accelerated during this decade, due to (1) the maturity of real estate as an asset class, (2) increasing allocation to real estate by institutional investors, and (3) better returns in both absolute and relative terms, compared to other asset classes5. There are a growing number of infrastructure projects requiring Islamic-compliant finance, and this has created a considerable demand for professional services and products within the Middle East region. However, Shariah-compliant real estate and infrastructure investment are still relatively under-developed and fragmented. Given the growth of Middle East capital, it is essential to understand the requirement of Shariah-compliant investment, the scale of the investment markets, and the investors’ appetite for alternative investment.

Chart 1 : Scale of Islamic Banking and Asset Management

Source: McKinsey (2007)

Note: *including offshore assets **Estimate of Islamic share of Saudi market based on Islamic loans share out of total loans ***excluding

Iran.

Defining Shariah-Compliant Investment Shariah-compliant investment represents a series of ethical financial transactions that are organised in accordance with Islamic law. The range of investment opportunities complying with Muslim religious beliefs has historically been fairly limited. In order to offer new investment vehicles for those investors who are looking to develop a self-invested personal pension, or a small self-administered scheme, a new system of Shariah-compliant investment funds has emerged. These funds do not permit transactions that are eschewed by Islam, including option trading or interest-based transactions, such as margin trading and short selling. Islamic banking is an ethical and equitable mode of financial services that derives its principles from the Shariah (Islamic law). The Shariah is based on the Quran and the

4 McKinsey (2006), “The World Islamic Banking Competitiveness Report”. The sector outside Iran has reached $US400-500 billion and is on track to exceed US$1 trillion by 2010. 5 RREEF Research (2007), “Global Real Estate Insights”.

The growth of international property investment has accelerated during this decade.

Shariah-compliant investment follows ethical principles that are in accordance with Islamic law.

10

UK

9

Turkey

320

Iran

38

Malaysia3

Indonesia

3

Brunei

33

UAE3

Omar

4

Sudan

90 100

KSA

24

Kuwait 2

Pakistan

12

Bahrain

150-180

250-270

400-450

Based on projected growth trends. Islamic assets are expected to exceed USD 1 trillion by 2010(excluding Iran)

Total Islamic Assets (excluding Iran

Islamic assetsunder managment

Islamic banking Asset***

2006 USD billions

10

UK

10

UK

9

Turkey

9

Turkey

320

Iran

320

Iran

38

Malaysia

38

Malaysia3

Indonesia

3

Indonesia

3

Brunei

33

UAE

33

UAE3

Omar

3

Omar

4

Sudan

4

Sudan

90 100

KSA

90 100

KSA

24

Kuwait

24

Kuwait 2

Pakistan

2

Pakistan

12

Bahrain

12

Bahrain

150-180

250-270

400-450

Based on projected growth trends. Islamic assets are expected to exceed USD 1 trillion by 2010(excluding Iran)







2006 USD billions

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Sunnah of the Prophet Muhammad, and it governs all aspects of personal and collective life. Overall, Shariah investment must be carried out in accordance with the fundamental principles of Islamic law. A Shariah board of Islamic scholars advises the financial institution in the development of Shariah-compliant products. The most distinctive element of Islamic banking is the prohibition of interest, whether "nominal" or "excessive," simple or compound, fixed or floating. Other elements include the emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit sharing, and the prohibition of gambling and certain types of uncertainty. These parameters define the nature and scope of Islamic banking, as interpreted by the Shariah scholars that work with financial institutions. Saving and investing in line with religious principles is important for many Muslims, and an increasing range of financial products are now available to meet Shariah rules. Islam is very clear on a number of financial topics. While trade and investment are encouraged, Shariah rules prohibit involvement in alcohol, gambling, pornography, abortion, human cloning, defence, conventional banks or insurers, and most forms of entertainment. Industries associated with pork are prohibited. The most fundamental aspect of Shariah compliance is the prohibition of any form of usury, or riba6. Any amount in a contract of loan or debt – regardless of size – that exceeds the principal is riba. Such contracts are prohibited by the Quran, regardless of whether the loan is taken for the purpose of consumption or for some production activity. This indicates that any forms of receiving or paying interest are not allowed, because Islam defines all forms of interest as usury. The rationale behind the prohibition of interest in Islam suggests an economic system where all forms of exploitation are eliminated. In particular, Islam wishes to establish justice between the financier and the entrepreneur. The financier should not be assured of a positive return without doing any work or sharing in the risk, while the entrepreneur, in spite of his management and hard work, is not assured of such a positive return. In general, there are two forms of forbidden riba:

1. Riba al-fadl, where a particular good is exchanged for another hand-to-hand, but in different quantities; and

2. Riba al-nasiah, where money is exchanged for money with deferment.

Key Principles of Shariah Finance

The key principles of Shariah relevant to finance transactions include:

1. Interest (riba): Shariah regards money as simply a means of exchange, without intrinsic value and holds that money cannot be used to make money. Interest is the classic example of riba. Payment or receipt of interest is strictly prohibited, and any obligation to pay interest is considered void under Shariah.

2. Speculation (maisir): Shariah prohibits and treats as void transactions that rely on

chance or speculation, rather than effort, to produce a return. This can create problems in relation to contracts that are seen as tantamount to gambling, which includes some conventional derivative transactions such as swaps, futures, and options.

6 Riba comes in the form of interest, unjustified rewards, and unlawful gains.

Islamic beliefs prohibit interest-based transactions…

…but encourage savings and investment.

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3. Uncertainty (gharar): Shariah prohibits and treats as void contracts that are uncertain. All the fundamental terms of a contract (such as subject matter, price, and time of delivery) must be absolutely certain at the outset.

4. Unjust enrichment/unfair exploitation: Shariah prohibits and treats as void

contracts under which one party unfairly exploits the other or gains unjustly at their expense.

5. Unethical purpose: Shariah-compliant finance can be raised only for purposes

that are permitted by Shariah and for the benefit of society. In order to be deemed Shariah-compliant, an Islamic product must be overseen by a Shariah advisory board or Shariah supervisory committee of renowned Islamic scholars. Once this board satisfies itself that a proposed product and structure is compliant with Shariah principles, it issues a fatwa (decree) on the proposal. The product can be marketed only when the fatwa of Shariah compliance is issued. Upon the launch of the product, the Shariah advisory board continues to monitor the product on a regular basis to ensure compliance, and in effect, to act as “Shariah auditors” for the product. It is common market practice for Islamic financial service providers to engage their own Shariah boards or employ Shariah advisors who can provide access to such a board. There are global bodies of Shariah scholars that work towards promoting consistency and standardisation. The 15-scholar Shariah board of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is one example. The OIC (Organisation of The Islamic Conference) Islamic Fiqh Academy is another. The Shariah board of the AAOIFI has issued Shariah standards that are widely followed within the Islamic banking industry. However, the scholars are not regulated by any central authority7 and it is expected that the general acceptance of Shariah standards will create a market precedent of consistency.

7 There still can be some differences in views on the same product, which means that a financial instrument may be compliant in one country but not in another country.

An advisory board of Islamic scholars is a crucial component of Shariah-compliant investment.

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Overview of Different Financial Instruments and Structures There are several different methods of investment in real estate based on the principles of Shariah law: Ijara, Mudarabah, Musharakah and Murabahah. However, all such finance structures have to be certified by a panel of experts, a Shariah board. In addition, each transaction will have to be scrutinised by a Shariah board to ensure full compliance with Islamic principles. Ijara means lease or rent and in Islamic finance is a lease arrangement. Ijara entered into by the financier provides the financier profit through receipt of rental on the assets rather than earning interest on money lent to a purchaser.

Chart 2 : An Illustration of Ijara Finance Structure

Source: Sara Catley (2007), "Islamic Finance – the core concepts" December.

In the simplest Ijara agreements, the financier acquires an asset and leases it to the purchaser. The purchaser makes lease payments representing the agreed profit, which may be determined using a benchmark, such as EURIBOR, plus the financier’s margin. One element that differentiates an Ijara from a conventional lease is the ongoing risk the financier must take in relation to the asset. In a typical Ijara structure, the financier remains responsible for insurance and non-day-to-day maintenance of the asset. Murabahah is a transaction under which the asset is purchased by the financier and resold to the purchaser for a fixed amount including a margin. Murabahah agreements like loans can be syndicated. In the simplest Murabahah, the financier acquires an asset and then under the Murabahah agreement sells it to the purchaser at a premium. The payments under the Murabahah agreement may be payable in instalments. The premium is is often based on a benchmark figure, such as EURIBOR, plus the financier’s margin. The Murabahah is therefore analogous to a conventional asset finance facility. A reverse Murabahah transaction can be used to provide a purchaser with a cash lump sum. Under a reverse Murabahah the purchaser acquires the asset from the financier and then sells it either back to the original owner or another party. The original purchaser therefore receives a cash lump sum but remains obliged under the original transaction to make repayment on the asset purchase plus the agreed margin (and as in a Murabahah transaction the payments are due in instalments). For all types of Murabahah transactions it is a key element that the financier acquires legal title to the assets and takes some commercial risk even if briefly. Sukuk are financial certificates, often referred to as Islamic Bonds that can be traded on the capital markets. Sukuk are similar to conventional bonds except that they are always

Shariah-compliant financial techniques include…

…Ijara (an asset lease)…

…Murabahah (a purchase and resale agreement)…

…Sukuk (tradable asset-based certificates)…

SUPPLIER FINANCIER CUSTOMER

Payment of purchase price

Rent (= purchase priceplus premium

Sale of asset Lease of asset

SUPPLIER FINANCIER CUSTOMER

Payment of purchase price

Rent (= purchase priceplus premium

Sale of asset Lease of asset

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asset-based or asset-backed and represent an interest in the underlying asset proportionate to the purchaser’s investment. There are many ways to structure the assets for the issuance of sukuk perhaps the simplest being for the issuing entity to enter into an Ijara with the assets holding company. The basic principle is that an ownership share in the underlying asset entitles the Sakk holder to a proportionate share of the returns generated by the asset. The overall economic effect is similar to a conventional bond. Sukuk represent the fastest-growing segment of the Islamic finance market.

Chart 3 : An Illustration of Sukuk Finance Structure

Source: Clifford Chance (2006), "Introduction to Sukuk" September.

Musharakah means sharing and denotes an arrangement for an Islamic compliant joint venture. Musharakah is often used in long-term investment projects as it is similar to a conventional partnership or joint venture. Typically the financier contributes cash and the purchaser or fund contributes assets into a holding entity (venture in the below diagram). The financier and purchaser share in the profits of the venture in pre-agreed proportions however are required to share the losses pro-rata to their initial contribution value. In general the profit-sharing arrangement is generally set-up so that the financier receives their initial investment plus a return based on a benchmark, such as EURIBOR, plus the financier’s margin. The diminishing Musharakah is structured so that the financier's contribution reduces over time as the purchaser repays or buys out the financier's share of the venture.

…Musharakah (profit and loss sharing agreements)…

Shariah Investors

Target Assets(Shariah complaint

Real Estate

Originator(asset holder)

Islamic SPV Issuer

Servicing/ManagementAgreement Declaration of Trust over Sukuk Assets

Sukuk certificates

Payment for investment

Purchase Undertaking

Sale of Sukuk assets

Payment for Sukuk assets

Leases Sukuk assets

Payment of rental for Sukuk assets

Sukuk-al-Ijara

Shariah Investors

Target Assets(Shariah complaint

Real Estate

Originator(asset holder)

Islamic SPV Issuer

Servicing/ManagementAgreement Declaration of Trust over Sukuk Assets

Sukuk certificates

Payment for investment

Purchase Undertaking

Sale of Sukuk assets

Payment for Sukuk assets

Leases Sukuk assets

Payment of rental for Sukuk assets

Sukuk-al-Ijara

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Chart 4 : An Illustration of Musharakah Finance Structure

Source: Mayer Brown (2008), "At a glance - Islamic Finance" March.

Mudarabah means profit sharing and is an arrangement under which investors (Rab al Maal) contribute funds to a fund manager (Mudareb), which provides investment management services through investment in Shariah-compliant assets in return for remuneration generally including a share of the profits.

Chart 5 : An Illustration of Mudarabah Finance Structure

Source: Mayer Brown (2008), "At a glance - Islamic Finance" March.

Mudarabah can be used to syndicate other financing arrangements that are Shariah compliant but more usually the structure is used for typical investment funds.

…Mudarabah (investment management)…

FINANCIER CUSTOMER

VENTURE

Cashcontribution

Share in profitsand losses


Contribution in kind (at least 30%)

FINANCIER CUSTOMER

VENTURE

Cashcontribution



Contribution in kind (at least 30%)

INVESTOR(S)(Rab al Maal)

MANAGER(Mudareb)

FUND

Invests funds



Provides expertiseand manages funds

PROJECT/ENTERPISE

INVESTOR(S)(Rab al Maal)

MANAGER(Mudareb)

FUND

Invests funds



Provides expertiseand manages funds

PROJECT/ENTERPISE

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The Challenges of Islamic Finance The emerging Shariah-compliant finance industry faces a number of challenges. First among these challenges is a skills shortage. There are very few appropriately qualified Shariah scholars for the required boards, and training can take time. It can take up to 30 years before a person is considered qualified, and there is no universal agreement on what makes a person "qualified" in this context. A second challenge is that there is no global consensus on Shariah interpretation, especially in relation to innovative products. There are, however, some signs that the market may be settling. Third, there is a lack of standardisation. A high level of innovation and low transaction volumes mean that documents for the Islamic finance market (and the Sukuk market in particular) tend to be tailor-made for individual transactions, leading to much higher transaction costs than conventional alternatives. These costs should diminish as transaction volumes increase, and various industry bodies take steps to speed up the standardisation process. Fourth, there is a limited secondary market: Until very recently, there had been only a shallow and limited secondary market for Islamic finance products (again, Sukuk in particular) as most traditional investors have tended to hold their investments until maturity. A further challenge is the requirement for physical assets. Much Shariah-compliant finance is asset-based, relying in some way on an income stream generated from assets. In practice, this can limit fund-raising to the availability of cash-generating assets. Another issue involves restrictions on hedging. Traditional hedging techniques using derivatives are not always Shariah-compliant. For example, some derivatives fall foul of the prohibition of gambling. This means that hedging risks relating to currency, fair value or profit volatility is not easily achieved in Shariah-compliant finance. This is set to change as Shariah-compliant alternatives are developed. In fact, work on an ISDA master agreement for Shariah-compliant derivatives is currently underway. A final issue involves tax disadvantages. The tax treatment of Shariah-compliant structures may not follow the treatment of their conventional finance alternatives. For example, where the financier's return is structured as a profit share rather than interest, a tax deduction may not be available for the Islamic funding cost. In practice, this can necessitate careful structuring to ensure that Shariah-compliant finance does not become a more expensive fund-raising method than conventional finance.

The key challenges of Shariah-compliant investment are skill shortages…

…lack of uniform consensus on Shariah interpretation…

…and the lack of standardised processes and transactions.

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2. Scale and Sources of Middle Eastern Capital

Demand for Islamic products has spread across the world, and well beyond the Middle East. There are more than 430 million Muslims outside the traditional Middle East (a region that stretches from the Mediterranean to Pakistan), including 190 million in Indonesia, 73 million in Turkey, 150 million in India, 20 million in Europe, 7 million in the US, and 17 million in North Africa, It is reasonable to assume that many of these 430 non-Middle Eastern Muslims could be interested in Shariah-compliant products. In India, for instance, the government has recommended the establishment of a framework for Shariah-compliant mutual funds in order to provide investment options for the Muslim community8. Despite the increasing interest across the world, the GCC countries still represent the most apparent and immediate opportunities for Shariah-compliant products. Although the GDP of Pakistan and India is far higher than the GCC, the wealth of the GCC is greater, as is the demand for Islamic savings products (Table 1). The GCC countries account for 45% of the global Islamic high net worth individuals (HNWIs), or about US$700 billion. Given the wealth of the region and the demand for Islamic products the following section focuses on the sources and scale of capital for the GCC region only.

Table 1: Islamic Countries GDP and HNW Wealth

Source: McKinsey (2007), Global Insights, RREEF Research

The number of Islamic financial institutions worldwide has grown rapidly to over 300 with capitalisation in excess of US$13 billion, including banks, mutual funds, mortgage companies, and Takaful (mutual insurance). According to Kuwait Finance House’s 2008 estimates9, more than 50% of financial services in the GCC bloc will be Shariah-compliant by 2020. Given the fast-growing wealth and population of the Islamic world there is a clear need to provide products that are suitable for their needs10. Over recent years, there has been a surge in demand for Shariah investment products. Given the growing wealth of the region, this global flow to Islamic ethical funds is set to continue in the next few years, with McKinsey estimating that it will grow at 25% p.a. until

8 Deutsche Bank (2007), “Shariah Real Estate Funds: Sizing the Opportunities.” 9 Kuwait Finance House (2008), “Identifying the Driving Forces of Global Islamic Finance”. 10 By 2020 the worldwide Muslim population will rise to 2.5 billion from the current 1.5 billion. Islamic banks are expected to manage 40-50% of total savings of the Muslim population within the next 10 years according to the forecast from Global Insight (2008 Q1).

Shariah-compliant products have broad market potential outside the Middle East…

…but for now, the heaviest demand lies in the core countries of the Gulf Cooperation Council.

Region CountryGDP (US$ Billion)

HNW Wealth (US$ billion)

Islamic Orientation

GCC Saudi Arabia 377Kuwait 113Bahrain 17Qatar 63UAE 199Oman 41

South East Asia Malaysia 183Indonesia 435

Sub-Continent Pakistan 145India 1137

Levant and Turkey Turkey 499Syria 38Egypy 130Lebanon 23

North Africa Morocco 64Algeria 135Tunisia 35Libya 65

140

75%

50%

25%

25%

50%

700

220

400

130

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at least 2011, a rate of growth that is 50% higher than non-Islamic products11. Although fast-growing Shariah-compliant asset management products (a subset of Islamic finance) remains relatively small, with McKinsey estimating it to represent 6% or $US150-180 billion of GCC investable assets. Before exploring the scale of the market, it is worth of identifying the drivers of the Islamic financial market. Factors Driving the Growth of Islamic Finance 1. Strong Economic Growth The GCC region is a small but important part of the global economy. Its 2007 real GDP was around US$810 billion, accounting for just 2.1% of the global total12. Despite the relatively small size of their economies and populations13, the rate of GDP growth in GCC countries reached 6.4% in 2007, which is similar to the Asia Pacific average (5% to 6%). Its growth rate exceeded the averages for Latin America, Europe, the OECD and the Middle East. In terms of GDP per capita, Qatar, the UAE, and Kuwait rank among the highest in the world, and well above the Euro Zone’s average. In the past few years, macroeconomic growth in the region has been robust on the back of higher oil prices. High growth in the GCC region is set to continue over the next few years driven by high oil prices and growth in other sectors. Export and GDP growth are still heavily dependent on the hydrocarbon sector. However, throughout the GCC there are serious efforts to diversify the economy. A 2008 Deutsche Bank report recently found that non-hydrocarbon real GDP growth is outpacing growth in the hydrocarbon sector in every country, except Qatar14. Higher rates of inflation and unemployment rank as the biggest concerns for the GCC countries in the years ahead. Excess liquidity (from large current account surpluses) and expansionary fiscal policies of governments amplify inflationary pressures. The increase in national population (from both locals and expatriate workers), and a constrained housing supply add further pressure to inflation. Government responses to unemployment rates include expansion of public sector jobs, promotion of economic diversification, and enhancement of vocational and academic education to better align national skills with private sector demand15.

11 McKinsey (2006), “The World Islamic Banking Competitiveness Report”. 12 Global Insights (Q4 2007) 13 With a total population of around 38 million, the GCC as a whole is roughly equivalent in size to California, Poland, or Argentina. 14 Deutsche Bank Research (2008), “GCC Chartbook – A Visual Essay”, February. 15 Deutsche Bank Research (2008), “GCC Chartbook – A Visual Essay”, February.

Robust economic growth in the GCC compares well with the Asia Pacific region…

…but unemployment and inflation remain major concerns.

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Chart 6 : Real GDP Growth (%), 2003 - 2037

Source: Global Insights, 2008Q1 forecast

Note: Aggregate GCC GDP growth is an unweighted average of Kuwait, Bahrain, Qatar, UAE, Oman and Saudi Arabia

Chart 7 : GDP Per Capita (US$), 2007


0

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30,000

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-37

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%

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Chart 8 : GDP Per Capita (US$), GCC Countries, 2003 – 2037


Chart 9 illustrates the long-term diversification efforts within the GCC’s economies by using their excess petrodollar. In the 1970s and 1980s, most of the basic infrastructure projects and government services were funded by oil wealth in order to provide a solid platform for future economic growth. The GCC countries started focusing on economic diversification in the 1990s. During this period, the non-oil industries started to emerge, particularly the expansion of the industrial sector, including petrochemicals, fertilisers, and steel. Since the beginning of the current decade, diversification into non-oil industries and generation of income-yielding projects for an expanding population are key trends. Property development and construction drive the non-oil sector in the GCC countries. There are currently around US$1 trillion in infrastructure investments in the pipeline, and these investments are expected to increase to US$3 trillion by the end of decade16. The emergence of Dubai as a hub for international financial services is another example of the region’s economic diversification.

16 Deutsche Bank Research (2008), “GCC Chartbook – A Visual Essay”, February

-

20,000

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2003 2004 2005 2006 2007 e 2008 f 2009 f 2010 f 2011 f 2012 f 2013-37 f

US$

Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates

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Chart 9 : The Path of Diversification in GCC Economies


2. Rising Oil Revenue The GCC region holds around half of the world’s known oil reserves. Oil earnings account for 70% of the GCC’s exports and revenues. According to Global Insights, the GCC economies are estimated to post a record budget surplus of US$188 billion for 2008, from less than US$10 billion in the beginning of the decade. The revenue from exports has also increased from US$280 billion in 2004 to US$510 billion in 2007, a 77% increase over the three-year period17.

Chart 10: Total GCC Export Revenue Trend (US$ Billions)


17 Global Insights (2008), Q1 Forecasting Data

Extensive oil reserves and rising oil prices translate to…

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2004 2005 2006 2007 e 2008 f 2009 f 2010 f 2011 f 2012 f 2013-37f

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ion

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With oil prices currently at record highs, the value of assets held by the GCC’s sovereign wealth funds (SWFs) has increased tremendously over the past few years. Petrodollars are among the fastest growing investment source (Deutsche Bank 2008)18. The largest SWF in the GCC countries is the Abu Dhabi Investment Authority (ADIA) with estimated total assets of up to US$875 billion, followed by various funds in Saudi Arabia, and the Kuwait Investment Authority (KIA)19. 3. Healthy Current Account Surplus Increasing oil prices have driven up returns on hydrocarbon exports to create a current account surplus. Free trade agreements are currently being discussed with the EU, Japan, and India. Potentially, these agreements could diversify export destinations. At this moment, the Asia Pacific region is the main export destinations for the GCC countries. With the continuing inflow of FDI into the energy and construction sectors, the GCC has become more open to foreign capital. The current account surplus is expected to remain relatively high by world standards. The introduction of a Common Market (CM) in January 2008 will also provide new opportunities and deepen economic ties20.

Chart 11: Current Account Balance as a Share of GDP (%), GCC Countries, 2004 - 2037


Note: Aggregate GCC figure is an unweighted average of Kuwait, Bahrain, Qatar, UAE, Oman and Saudi Arabia

18 Deutsche Bank Research (2008), “GCC Chartbook – A Visual Essay”, February 19 ADIA spent US$7.5 billion investment for a stake in Citigroup in November 2007, and KIA also invested in both Merrill Lynch and Citigroup in early 2008, following the recent US sub-prime banking crisis. 20 The Common Market is intended to provide GCC countries with greater bargaining power when conducting trade agreements, freer movement of goods and services, and greater mobility of labour and capital flows. Freer movement of capital will allow funds to seek out the highest rates of return and increase investment efficiency. The CM will also give GCC nationals the right to real estate ownership across the region and the same treatment in all economic activities.

…record budget surpluses in the GCC.

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RREEF Research 16

Sources of Capital Strong growth in the Middle East (as explained in the previous section) has increased the wealth of individuals and institutional investors across the region. This wealth has increasingly become concentrated in three different types of capital sources, including retail and high net-worth individuals (HNWIs), institutions, and sovereign wealth funds (SWFs) (Table 2).

Table 2: Investor Segments in the GCC Region

Source: McKinsey (2007), Deutsche Bank

Although retail capital and HNWIs represent the smallest segment of the investor base, this segment continues to grow rapidly. Given the rising GDP per capita in the region, the number of individuals with liquid assets in excess of US$50,000 has grown significantly, at 6% a year between 2003 and 200721. The growth for HNWIs is even stronger. The CAGR among HNWIs (those with liquid assets in excess of US$300,000) was 7.9% over the same period22. This group of investors is increasingly demanding a wider range of asset classes and alternatives that reflect the benefits of diversification; they also demonstrate an increasing awareness of the range of emerging asset classes. The second group of major investors are financial institutions. Around 300 Islamic financial institutions hold at least US$1.9 trillion. This segment’s rate of growth is expected to reach more than 10% per annum23. The third and largest group of investors is comprised of the sovereign wealth funds. Although it is difficult to estimate the scale of capital controlled by these funds, it is likely that the three largest investment authorities (based in Kuwait, Saudi Arabia, and the UAE) hold combined assets of US$1.4 trillion (Table 6 shows the size of the SWFs in the GCC countries).

Table 3: Sovereign Wealth Funds in GCC Countries

Organisation AUM (USD Bn) Inception YearUAE Abu Dhabi Investment Authority (ADIA) 875 1976Saudi Arabia Various Funds 300 NAKuwait Kuwait Investment Authority (KIA) 250 1953Qatar Qatar Investment Authority (QIA) 40 2000Oman State General Stabilisation Fund (SGSF) 8.2 1980

Source: Deutsche Bank Research

Market Potential for Shariah-Compliant Investment SWFs account for majority of total GCC assets (US$1.5 trillion, or 54% of the total), followed by public pension funds (US$200 billion, or 10% of the total), and high net worth individuals and family offices (8%). Insurance companies are expected to have the

21 Ernst and Young (2007), “The Islamic Funds and Investment Report”. 22 Ernst and Young (2007), “The Islamic Funds and Investment Report”. 23 Deutsche Bank (2007), “Shariah Real Estate Funds: Sizing the Opportunities”.

Investors can be classified into three distinct groups.

The smallest group of investors includes retail capital and high net worth individuals…

…next in size are financial institutions…

…and the largest group of all includes sovereign wealth funds, especially those from the UAE, Saudi Arabia, and Kuwait.

Investor SegmentsTotal AUM (US$ billions)

SWFs 1500Insitutions (ex SWF) 400High Net Worth Individuals 700Mass Affluent Investors, Including Retail 200Total 2800

RREEF Research 17

strongest growth due to the emergence of Takaful24 and the shift of the portfolio allocation from traditional asset classes to more alternative asset classes (i.e., real estate, infrastructure, private equity, and structural products). Due to government regulations, Islamic banks and many family offices prefer to have clear Shariah-compliant products for their portfolios. According to McKinsey’s 2007 analysis25, the growth of Islamic products is expected to increase by 25% p.a. for the next five years that is 50% higher compared to non-Islamic products. This strong growth is mainly driven by the increasing number of Islamic-oriented investors and the overall increase in wealth.

Table 4 : Sources of Institutional Capital by Type

Source: McKinsey (2007), RREEF Research

According to Ernst and Young citing its own analysis, Shariah factors are important in 60% of Islamic wealth markets.26 Provided performance and service standards match those of conventional products, Ernst and Young estimates that the potential client base for Shariah-compliant products could equate to 90% of the total Islamic market.

Table 5: Shariah Factors for Investor Consideration Low High

Market Segment Only conventional Value seeker Perfer Shariah products, given the same return Only Islamic

CharacteristicsPrefer conventional products - little knowledge of Islamic industry

Always select the best performance or service

Shariah is second to performance service, but still considered a bonus feature

Prepared to sacrifice performance for Shariah compliance

Estimated Share of Market Wealth 10% 30% 40% 20%

Islamic Orientation

Source: Deutsche Bank, Ernst and Young

Chart 12: Degree of Islamic Orientation by Investor Type

Source: Ernst and Young (2007), RREEF Research

24 Islamic insurance 25 McKinsey (2007), “2007 European Asset Management Survey – October 2007”. 26 Ernst and Young (2007), “The Islamic Funds and Investment Report”.

Category AUM (US$ billions) Expected Growth CommentSWFs 1500 Moderate Established global InvestorsPublic Pension Social Insurance Funds 200 Weak Increased pressure from insurred for Islamic ManagementInsurance Companies 5 Strong Emergence of Takeful and further growth from portfolio shiftCharities 10 Weak Frequence Islamic Objectives and often fully ousourced investment managementBanks (Proprietary) 30 Moderate Islamic banks require Shariah-complaint treasuryFamily Offices 155 Moderate Some require clear Islamic orientationTotal 1900

INSTITUTIONAL HNWI RETAIL

VALUE SEEKERS (30%)

ISLAMIC PREFERENCE(40%)

PURE ISLAMIC ONLY 20%

CONVENTIONALPRODUCT (10%)

$200 bn

VALUE SEEKERS (30%)

ISLAMIC PREFERENCE

(40%)



SOVEREIGNWEALTH FUNDS

(80%)

FAMILY OFFICES(10%)

$1,900 bn

PENSION FUNDS(10%)

$700 bn

Conventional Product

No Islamic Preference

Islamic Preference

Pure Islamic


VALUE SEEKERS (30%)




$200 bn

VALUE SEEKERS (30%)

ISLAMIC PREFERENCE

(40%)




(80%)

FAMILY OFFICES(10%)

$1,900 bn

PENSION FUNDS(10%)

$700 bn


VALUE SEEKERS (30%)




$200 bn

VALUE SEEKERS (30%)

ISLAMIC PREFERENCE

(40%)




(80%)

FAMILY OFFICES(10%)

$1,900 bn

PENSION FUNDS(10%)

$700 bn



Islamic Preference

Pure Islamic



Islamic Preference

Pure Islamic

RREEF Research 18

Various investors have different allocations and appetites for Shariah-compliant products. HNWIs in the GCC region tend to have the highest allocation (75% of their portfolio) to the Shariah-compliant products, followed by HNWIs outside the GCC region (25% to 50%), and institutions (25%). Potentially, there could be more than US$1 trillion of capital allocated to Shariah-compliant products.

Table 6: Potential Allocation to Shariah Products, 2007

Source: RREEF Research, McKinsey (2007), Deutsche Bank Research

Note: Institutions in GCC countries

Given the maturity and strong performance of the alternative asset class (real estate and infrastructure), investors are seeking to diversify their portfolio allocations. According to Ernst and Young, there is an increasing need for investors for diversified portfolio allocations.27 Traditionally, the allocations for regional investors are focused on bonds and money markets. As investors move away from conservative portfolios, they actively look for products that are new and innovative, such as alternative investments (i.e., high-yielding products in real estate, infrastructure, private equity, hedge funds, or structural products). HNWIs also intend to have higher allocations to alternative investments28. Institutions still prefer to invest in the conventional asset classes like fixed income and equities. Despite lower allocations to real estate and infrastructure, there could be around US$ 300billion of capital seeking Shariah-compliant alternative products. Given the growth of HNWIs and assets under management (AUM) in institutions over the next five years, there could be an additional US$150 billion of capital looking for Shariah-compliant alternative products by 2011. Table 7: Potential Allocation to Alternative Shariah-compliant Investment, 2007 and

2011

Source: RREEF Research, McKinsey (2007), Deutsche Bank Research

Note: Alternative means real estate and infrastructure; Institutions in GCC countries

27 Ernst and Young (2007), “The Islamic Funds and Investment Report”. 28 According to McKinsey’s survey, HMWI would like to have 20% allocation to real estate and 13% to alternative investment by the end of 2008.

The appetite for Shariah-compliant products ranges from 25% to 75% of the portfolio, depending on the type of investor.

Total AUM (US$ Trillion)

Potential Allocation to Shariah Investment (%)

Potential Allocation to Shariah Investment (US$ bn)

Institutions 1.90 25% 475.00HNWI in GCC 0.70 75% 525.00HNWI outside GCC 0.89 25% to 50% 222.50

Intended Allocation to Alternative (%) - 2007

Intended Allocation to Alternative (US$ Bn) - Shariah Products - 2007

Future Allocation to Alternative (Shariah-Compliant) US$ Billion - 2011

Institutions 6% 28.50 28.50HNWI in GCC 35% 183.75 105.00HNWI outside GCC 35% 77.88 28.04

RREEF Research 19

3. Capital Mobility and Allocation

The Middle East and other Muslim countries in Asia (especially Indonesia and Malaysia) are the primary locations for the Islamic capital. Middle Eastern capital has tended to feel more comfortable investing in neighbouring countries as well as other Muslim countries29. Western Europe and the US are the next preferred locations, due to the maturity and size of the existing markets, as well as the complexity and availability of products.

Chart 13 : Global Deployment of Islamic Product

Source: Kuwait Finance House (2008)

Traditional assets, such as equities and fixed income, remain the main asset classes for investors in the region. Mutual funds in the GCC countries have grown rapidly from US$23 billion in 2002 to more than US$60 billion in 2005 and are expected to increase to US$153 billion by 2011, which is a 23% CAGR in nine years. More notably, more than 75% of the products are Shariah-compliant in Saudi Arabia, indicating the scale and importance of Shariah-compliant capital.

29 Kuwait Finance House (2008), “Identifying the Driving Forces of Global Islamic Finance”.

Mutual fund investments are growing at 23% annually in the GCC, with up to 75% Shariah-compliance

Secondary AreaPrimary Area

Territory Area

Secondary AreaPrimary Area

Territory Area

Primary Area

Territory Area

Primary Area

Territory Area

RREEF Research 20

Chart 14 : GCC Mutual Fund Assets Under Management (US$ Billions)


Note: Dip in 2006 was due to stock market correction.

The weight of capital into the alternative asset class (especially real estate) from a range of investors including pension funds, REITs, leveraged buyers, SWFs, institutions, and retail investors has increased over the past five years. Despite the current global financial turmoil, the trend of strong demand for real estate exposure continues, as shown by recent surveys of current and target allocations to real estate30 (Chart 15). RREEF Research believes that Middle Eastern pension funds would also follow the global trend by increasing their exposures to alternative classes.

30 Turbulence in the credit markets seems not to have dampened institutional investors’ enthusiasm for real estate. For instance, the latest INREV survey found that 82% of European investors expect to increase their allocation to the non-listed sector in 2008, and the latest IREI/Kingsley survey expects a further US$76 billion to be allocated to the asset class. An even sharper increase is expected in Japan where ARES’ recent survey suggests that investors are seeking to increase allocations from the current 2.4% to as high as 8%. More recently, the China Insurance Regulatory Commission (CIRC) is also planning to allow Chinese insurance companies to invest in real estate and infrastructure in order to diversify their investments and reduce exposure to the equities markets.

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RREEF Research 21

Chart 15 : Pension Real Estate Allocations

Source: RREEF Research based on ARES; IREI/Kingsley Associates; JPMAM, INREV, Ernst and Young

According to Ernst and Young, US$8.6billion was raised in the region for real estate investment, demonstrating the strong appetite for real estate investment. For example, Saudi Arabia’s GOSI31 pension fund allocation has planned to increase its real estate allocation to 1% to 5% over the next five years. Moreover, of the US$3.7 billion invested by MENA32 private equity firms in 2006, the largest share went to real estate (40%), followed by financial services (17%), and travel and services (15%)33. Although there are no specific research reports which show the actual/intended allocations to real estate from the Middle Eastern institutional investors, the weight of capital from Middle Eastern countries to global real estate has increased significantly. Middle Eastern capital has become one of the major cross-regional sources of capital. The amount of investment increased from US$2.4 billion in 2001 to US$14 billion in 200734. According to Jones Lang LaSalle, the GCC’s direct commercial investments in cross-regional real estate are set to grow by nearly 50 per cent in 2008, to reach US$20 billion. This growth is driven by:

• sustained high oil prices in 2008; • awareness of portfolio diversification; • rising levels of private and sovereign wealth; • demand for liquidity in mature markets following the recent sub-prime crisis; • expectation of record exports; and • creation of new family offices and sovereign wealth funds.

31 General Organization for Social Insurance (GOSI) 32 Middle East and North Africa (MENA) 33 Ernst and Young (2007), “The Islamic Funds and Investment Report” and Deutsche Bank Research (2008), “GCC Chartbook – A Visual Essay”, February 34 RREEF Research (2008), “Global Real Estate Investment and Performance 2007 and 2008”, April; Jones Lang LaSalle; RCA; DTZ; and CBRE.

Middle Eastern investors show a strong appetite for real estate.

0%

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15%

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Italy

Switzlerla

nd

Benelux UK US

Germany

Nordics

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RREEF Research 22

Chart 16 : Middle Eastern Capital Invested in Global Real Estate (US$ Billions)

Source: RREEF Research, RCA, JLL, CBRE, DTZ

Apart from the institutional capital, HNWI is also one of the major sources of capital in the region. There is more than US$1.6 trillion AUM from global Islamic HNWIs. Chart 17 demonstrates the asset class allocation from the high net worth individuals in the region in the past 3 years. It is clear to see that the allocation to equities was expected to increase from around 25% of the total portfolio in 2004 to 30% of the total by the end of 2008. Real estate investment is expected to increase significantly from 16% of the total investment in 2004 to 24% of the total towards to the end of 2008. The share of fixed income has decreased to 20% of the total in the past 3 years. Alternative investments also account a considerable amount of share of the total portfolio allocation.

Chart 17 : HNWI Asset Allocation, 2004 - 2008


The UK, Western Europe, and the US are the preferred locations for Shariah-compliant real estate investment funds. Muslim countries in the Middle East and Muslim-friendly countries in Asia (i.e., Singapore and Thailand) are also preferred locations for real estate investment.

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RREEF Research 23

There have been a number of Shariah-compliant real estate transactions reported in various publications across the world, demonstrating the appetite and the growth of Shariah-compliant real estate products. In Europe, a pan-European real estate fund launched by the European Islamic Investment Bank (EIIB) located in London, with an initial target size of €200 million to €500 million. National Bank of Kuwait also plans to launch a Islamic Shariah-compliant real estate securities fund in 2008. Kuwait’s Adeem Investment Company purchased a couple of properties in the UK based on Shariah-compliant transactions. In the US, Islamic banks also have increased their activity in real estate investment trusts (REITs)35. In the Asia Pacific region, Malaysia is in the lead position for Islamic finance. Since 2005, two I-REITs (Islamic REITs) have been formed in Malaysia: AI-Aqar KPJHealthcare IREIT and AI-Hadharah Boustead IREIT. Given the successful cases for I-REITs in Malaysia, more Asian I-REITs will be brought into the market in the medium term, especially in the markets which have developed a friendly environment for I-REITs and Islamic finance. Given the current favourable investment and regulatory environment to support the growing appetite for real estate asset class investment among regional institutions and HNWI investors, the need for Shariah-compliant real estate products is set to increase over the next few years.

35 DTZ Research (2008), “Islamic Finance and Real Estate”, January.

The market for Shariah-compliant real estate transactions is growing.

RREEF Research 24

4. The Outlook for Shariah-Compliant Alternative Investment

The capital available for deployment into Shariah-compliant investments is vast and growing. At the heart of the Middle East, the countries of the Gulf Cooperation Council – Saudi Arabia, Kuwait, the UAE, Bahrain, Qatar, and Oman – form a market of 38 million residents with a combined annual GDP growth rate that currently exceeds the booming Asia Pacific region. Add to this another 430 million Muslims living outside the Middle East, and the market suddenly appears quite large. Strong economic growth, rising oil revenues, and healthy current account surpluses in many Muslim countries are among the factors supporting the growing potential of Shariah-compliant investment. Muslim investors have different allocations and appetites for Shariah-compliant products. Institutional investors from the Middle East may allocate up to 25% of their portfolios to Shariah-compliant options, while high net worth individuals in GCC countries allocate as much as 75%. Other investor allocations may fall somewhere in between. With these allocations, the market potential for Shariah-compliant products could feasibly exceed US$1 trillion. Traditional assets, such as equities and fixed income, remain the main asset classes for investors in the GCC region, while mutual fund investing in these countries is growing at an average annual rate of 23%. Cross-border investment into Europe and the US has often tended toward alternatives, especially real estate. Real estate and infrastructure investments provide a series of attractive characteristics including stable and regular income, and good diversification. Given these intrinsic characteristics, many Islamic investors have found real estate investment an attractive option when investing overseas. Significant opportunities currently arise for Shariah-complaint products, but the challenge will be packaging real estate and other investment opportunities into acceptable Shariah-compliant transactions and financial instruments. Several reasons support this case:

• Strong economic growth in the Middle East supports greater affluence and increasing demand for Shariah-compliant products.

• Low penetration levels by Islamic funds and lack of depth across asset classes and products signifies untapped potential.

• Movement away from conservative portfolios parallels an emerging interest in alternative investment options.

• Recent and forthcoming regulatory reforms may prove beneficial for growth in the market.

• GCC government surpluses are oriented toward investments in infrastructure projects to stimulate long-term economic growth.

Among these opportunities, however, specific challenges must be recognized:

• A lack of common standards of Shariah principles; • limited expertise in Shariah law to support required boards; and • limited options for structuring financial instruments.

Given the strong underlying demand for Shariah-compliant products, further development on standard certification will be a high priority. While the range of investment opportunities complying with Muslim religious beliefs has historically been fairly limited, the emergence of Shariah-compliant investment offers a major market opportunity that has yet to be fully developed.

RREEF Research 25

Appendix 1: List of Selected Acronyms & Terms

AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions

ADIA Abu Dhabi Investment Authority

AUM assets under management

Bai al Salam funding for an asset with deferred delivery

CM Common Market (of the Gulf Cooperation Council)

EIIB European Islamic Investment Bank

Fatwa decree

Ghanar uncertain terms of contract

GOSI General Organization for Social Insurance (Saudi Arabia)

GCC Gulf Cooperation Council (includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates)

HNWI high net worth individuals

Ijara lease agreement

ISDA International Swaps and Derivatives Association

Istisna’a advance funding (as for construction or development)

KIA Kuwait Investment Authority

Maisir speculation

MENA Middle East and North Africa

Mudarabah investment management in compliance with Shariah

Mudarib investment manager

Murabahah purchase and resale

Musharakah profit and loss sharing

OIC Organisation of The Islamic Conference

Quard Hassam interest-free loan

Riba interest

Shariah Islamic law

Sukuk tradable financial certificates

SWF sovereign wealth funds

Takaful an Islamic concept of insurance

RREEF Research 26

Important disclosure

© 2008. All rights reserved. No further distribution is allowed without prior written consent of the Issuer. RREEF is the brand name of the real estate, infrastructure and private equity division for the asset management activities of Deutsche Bank AG. In the US this relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management Australia Limited (ABN 63 116 232 154) Australian financial services license holder; in Hong Kong: Deutsche Asset Management (Hong Kong) Limited (“DeAMHK”); in Japan: Deutsche Securities Inc.; in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N) and in the United Kingdom, RREEF Limited, RREEF Global Advisers Limited, Deutsche Asset Management (UK) Limited and Deutsche Private Asset Management Limited; in addition to other regional entities in the Deutsche Bank Group. Key RREEF research personnel, including Asieh Mansour, Chief Economist and Strategist and Peter Hobbs, Head of Real Estate Research are voting members of the investment committee of certain of the RREEF Alternative Investment Funds. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF and its affiliates. This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. 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RREEF Research 27

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RREEF Research 28

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Understanding Shariah Investment June 2008

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