Legal Trends in Islamic & Conventional Real Estate Finance : 12 months on…Wasim KhanNorton Rose Fulbright LLPPartner11 June 2015

Real estate finance in the UK…Post 2008• Move away from speculative development• Move towards financing of income producing ‘core’ assets• Focus on legal due diligence• Focus on commercial due diligence• Work out of existing portfolios• Islamic banks winning new business

…resulting in fewer new deals but banks with the upper hand in negotiations…

2

The position in 2015• We have come full circle• UK market is very competitive• Previously stagnant real estate is now freely traded (eg, industrial) • Aggressive lending has returned• Focus on due diligence is still there• Development finance very much available

…but are we heading for another car crash?

3

Current legal framework• Robust financial covenants• High levels of monitoring and reporting• Regular review of security• But deals still driven by tax efficiency• Rush to deliver to beat market correction

…more stringent legal controls

4

Islamic finance – still going strong The legal structures being used• Commodity Murabaha direct to the PropCo remains the favoured

solution• Some Ijara based lending (mainly residential) • Sukuk still rare• Some hybrid structures (mixture of Islamic and conventional)

e.g. development financing of Battersea Power Station• Security over property

5

The regulatory landscape…

6

Islamic finance in the UK• Did you know:

– The UK has five banks dedicated to Islamic finance, over 20 banks offering Islamic products

– There is $38 billion of sukuk listed in London, primarily issued by corporates and banks based in the Middle East

• UK Government committed to encouraging the growth of Islamic finance in the UK:– The issue of £200 million worth of sovereign sukuk in June 2014, the first

sovereign sukuk issue outside the Islamic world– Bank of England announced that it will assess the feasibility of a Shariah-

compliant liquidity facility, which aims to help Islamic banks to manage their operations more effectively

– UK Export Finance, the UK’s Export Credit Agency, is expecting to provide its first Shariah-compliant guarantee for sukuk issued by a customer of Airbus

– UK Minister of State chairs second meeting of the Global Islamic Finance and Investment Group

• UK centre for Islamic finance

Improving market standards

7

FEMR• There is a clear push by the UK Government to improve market

standards• Fair and Effective Markets Review (FEMR) established by the

Chancellor in June 2014 to conduct a comprehensive and forward-looking assessment of the way wholesale financial markets operate and to help restore trust in those markets

• October 2014 FEMR issues consultation document examining what needs to be done to reinforce confidence in the fairness and effectiveness of the fixed income, currency and commodities markets

• Further seven benchmarks used in the fixed income, commodity and currency markets brought within UK legislative framework for benchmarks on 1 April 2015

• Final recommendations of FEMR published 5pm 10 June 2015

A continuing hot topic for the UK

8

Banking reform• New senior managers’ regime, certification regime and new

conduct rules for banks to enter into force on 7 March 2016• PRA and FCA plans to publish final rules summer 2015• June 2014 Chancellor stated “I am also extending the senior

managers’ regime to cover all banks that operate in this country, including the branches of foreign banks”

• In March 2015 FCA and PRA issued Joint Consultation Paper on the application of the new regimes to UK branches of overseas banks: Consultation closed 25 May 2015

• One important point to note about the new regime for senior managers is that the Banking Reform Act 2013 introduces a new criminal offence relating to a decision by a senior manager which causes a bank to fail: however, this offence will not apply to UK branches

Spotlight on overseas banks

9

PRA papers• The UK’s regulation of foreign banks continues to be on the radar• In February 2014, the PRA, issued a consultation paper on its

proposed approach to the supervision of UK branches of international banks

• In September 2014 the PRA issued a Policy Statement and Supervisory Statement

• Note the comment in the Supervisory Statement which provides guidance on the PRA’s supervisory approach to international banks: – “the PRA will be content for non-EEA branches undertaking retail banking

activities beyond de minimis levels only if there is a very high level of assurance from the Home State Supervisor over resolution. The PRA also expects new non-EEA branches to focus on wholesale banking and to do so at a level that is not critical to the UK economy, i.e. an interruption to the provision of service would not cause financial instability in the UK”

European Union rules

10

CRD IV and CRR continues• Paperwork on the Capital Requirements Directive IV and the

Capital Requirements Regulation continues to flow from Europe and the UK

• Significant number of Regulatory Technical Standards and Implementing Technical Standards (binding standards that supplement EU legislation) still need to be adopted by the European Commission on both the CRD IV and CRR

• How to stay on top of the paperwork:– European Commission – Delegated and implementing acts under the CRD IV /

CRR– Bank of England – PRA CRD IV updates

The tax landscape in 2015What did Mr Osborne do when he saw this?

11

Did he:

a) Introduce a new tax, potentially in breach of the UK’s double tax treaty network?

b) Buy his coffee from a different coffee empire?c) Continue to work with the OECD in a joined up effort with other

OECD countries to ensure profits are taxed where they are generated?

12

Diverted Profits Tax• Diverted profits tax is widely cast; it will not just apply to internet

retailers and coffee vendors• It is payable at 25% with accelerated collection mechanics; it is

designed to be penal

BUT• It does not apply to loans

13

HOWEVER• Real estate is within HMRC’s sights• DPT should only be relevant for offshore companies which have a

property development trade, or a trade of dealing in properties• DPT is in force: loan documentation should seek comfort on

borrower’s position

14

Whose house is this?

15

16

Mr Osbourne, Mr Osbourne, Mr Osbourne….

17

UK residential property continues to be an area for tax raising measures:• December 2014: Change in the way SDLT on residential property

sales is calculated increases the amount of SDLT on properties worth over £937,500. The average price of a London family home is £510,000 (source: HM Treasury)

• Autumn Statement 2014, the government announced that the rates of ATED will be increased by an amount 50% above the rate of inflation. The originally stated aim was for the charges to increase only in line with the Consumer Prices Index

• From April 2015: CGT for non-resident persons and closely held companies selling UK residential property. Does not apply to commercial property or residential property held by investment vehicles

18

DisclaimerNorton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.References to ‘Norton Rose Fulbright’, ‘the law firm’ and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.The purpose of this communication is to provide general information of a legal nature. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

20