UAE_Real_Estate_-_12_Sep_08_1443[1]

UAE Real Estate

SECTORResearch

12 September 2008

KFH Research LtdKDN PP15024/3/2009 (021451)

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KFH Research LtdKDN PP15024/3/2009

“Reaching New Heights”

We maintain a positive outlook for the overall UAE real estate sector in 2008-09, fundamentally driven by Abu Dhabi and its huge demand-supply imbalance

Dubai real estate would experience a correction in the prices of residential developments in 2010 whereas the commercial segment will continue to boom, offsetting the fall in residential prices to some extent

The UAE’s real estate sector will continue to flourish amidst stubbornly high inflation rates as property is used as a hedge against inflation

Contents

UAE Real Estate Outlook 3

Demand Drivers for Real Estate 4

Challenges facing the Real Estate Sector 13

UAE Real Estate vs.GCC Real Estate 14

Emirate-Specific Outlook

Dubai 15

Abu Dhabi 27

Ras Al Khaimah 33

Fujairah 35

Ajman 36

Sharjah 38

Umm Al Qaiwain 39

Research TeamBaljeet GrewalManaging Director & Group Chief EconomistTel: 603 – [email protected]

Tursina [email protected]

Waina [email protected]

Noor Ashikin [email protected]

Kuhan [email protected]

Darshini M. [email protected]

Mohd Izhar [email protected]

Mohd Arsad [email protected]

Imran [email protected]

Tabassum [email protected]

Meeta [email protected]

Mashkurah Abdul [email protected]

12 September 2008

UAE Real Estate

Sector Focus

UAE Real Estate“Reaching New Heights”UAE’s real estate market is enjoying an unprecedented boom and is considered the most active of all real estate markets in the Gulf Cooperation Council (GCC) region. The real estate and business services sector in nominal terms continues to grow, recording a CAGR of 20% during 2003 - 2007. In 2007, the real estate sector showed a strong growth of 21% y-o-y, with the realty and construction sectors contributing 8% of GDP or USD15.19bln. The sector was buoyed by increasing investments in infrastructure, due to the country being positioned as an attractive tourist destination in addition to the increase in residential and non-residential units. Although Dubai is expected to witness a softening in the prices of certain developments and is forecast to gradually slide into a correction phase before consolidating, we maintain a positive outlook for the overall UAE real estate sector in 2008-09, fundamentally driven by Abu Dhabi and its huge demand-supply imbalance, in combination with the following factors:

• Solid macroeconomic foundation with GDP growth projection of 7.8% in 2008, on the back of sustained oil earnings and robust public infrastructure investments.

• Continuouseconomicdiversification,coupledwithhugefiscalsurplus,overtheyears has led to huge public expenditure on real estate projects. To-date, total existing and planned real estate projects are estimated at USD62tln.

• Due to the dollar-dirham peg, the declining US dollar has made UAE property cheaper for Europeans and Asians, both of which account for approx. 75% of UAE’s real estate investors.

• Stubbornly high inflation rates (2008F-12.3%)willmake the sector flourish asproperty isusedasahedgeagainst inflation.Asrisingrentalcostsremain theprimarycatalystoftheclimbinginflationrate,thetradeoffbetweenrentingandowning becomes more skewed towards owning property.

• UAE has one of the highest population growth rates in the world. This, coupled with the influxofexpatriates,has led toan increase indemand for residentialunits.

• Rising income levels in the UAE also account for the strong demand for real estate, which is currently at the low end of the range for real estate prices among countries of similar per capita income levels. UAE’s average annual per capita GDP is estimated at USD45,000.

• Abundant liquidity due to the relatively low impact of the subprime crisis and easy mortgage availability has kept demand for real estate high.

• Setting up of regulatory bodies and the introduction of investor-friendly foreign ownershiplawsinthecountryhaveboostedinvestorconfidenceinthesector.

REFER TO DISCLAIMER & DISCLOSURE AT THE END OF THIS PUBLICATION

Growth in real estate transaction volumes in the GCC in 2007

Source: Global Property Guide, KFH

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The dilemma for investors in the UAE real estate market is to assess the “true” demand for future housing supply, and also the reliability of planned supply. Planned supply of housing units is not expected to exceed demand for the next 2 years. We estimate that unit supply will be approximately 180,000 units for the three year period between 2008 and the end of 2010. However, in 2007, only approx. 30% of planned units were actually delivered, as the industry was hit by several production constraints. Most notably, contractors were constrained by an extremely tight labour market compounded by a new labour law that required much of the existing labour force to return home and reapply for residence visas as part of the amnesty programme. As these issues have been resolved, we should see a gradual improvement in contractors meeting delivery schedules.

Currently, demand for real estate in the UAE is greater than the available supply. There is still a shortage of units in the residential and commercial segments due to the unprecedented economic boom, high employment growth, regularity at which foreign companiesaresettingupbaseinthecountry,andhugeinflowofexpatriates.Dubaihas by far been the largest emirate in terms of real estate activity. This is followed by Abu Dhabi, which is currently engaged in real estate development projects estimated at USD136.2bln and has also witnessed the highest escalation in rents and property prices.

Although, the Dubai property market is crowded with several mega projects in the pipeline, signaling an expected oversupply situation, most of the projects are still under construction. Moreover constant delays in the delivery of new property has fuelled the demand for available property, and hence led to greater appreciation in rents and prices.ThereisagreatersupplydeficitinAbuDhabi,ensuringhugeopportunitiesfordevelopers.

The pent-up demand would require enormous supply in order to be satiated. This latent demand offers more security to developers rather than external demand, which to a large extent is the case in Dubai. The relatively immature and unexploited real estate markets of other emirates like Ajman, Ras al Khaima and Fujairah are also set to provide new avenues for investors, thus making the UAE a lucrative market in the years to come. Nevertheless, the UAE real estate sector may begin to face the risk of oversupply of certain types of developments (Dubai in 2010 and Abu Dhabi in 2013) given the aggressive capacity expansion plans in recent years.

Demand Drivers for Real Estate1) Solid macroeconomic foundationThe UAE is expected to maintain its solid track record for economic growth in 2008, with real GDP growth forecast at 7.8% on the back of the surge in oil prices in the past few years and strong regional liquidity. The downturn in the US is not likely to have asignificant impacton theUAE,asgrowthcontinuestobeunderpinnedbyrobustgovernment spending and new private sector investments in the non-oil sectors. Furthermore, private consumption growth will remain strong given the continued expatriatepopulationgrowthinthecountryandrobustconsumerconfidence.Movingforward, thenon-oil sectorswhich includefinancial services, tourism, industryandreal estate will continue to drive growth in the UAE. According to the UAE Ministry of Economy, the biggest contributor to the UAE’s GDP is the fast emerging real estate sector. In 2007, the sector contributed 8% to the country’s GDP.

The UAE is expected to maintain solid economic growth in 2008, with real GDP growth forecast at 7.8%

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2) Public expenditure and huge fiscal surplusOnthefiscalfront,weexpectthebudgetsurplusin2008togrowhighertoUSD54.5blnor 28.0% of GDP on the back of higher oil revenues and likely controls on government spendingtoreduceinflationarypressuresontheeconomy.Thefiscalbalancein2007was healthy at USD49.9bln or 27.6% of GDP, on the back of UAE’s low levels of public debt and higher revenues generated from the oil and gas sector. In 2007 approximately USD 0.4bln was allocated for infrastructure development while USD0.3bln was set aside for projects including real estate. As most of the development in real estate is undertakenbygovernment-ownedcompanies,asignificantportionofthesesurplusfunds is invested in government-sponsored real estate projects and infrastructure.

A significant proportion of the government surplus is invested in real estate

UAE’s Real GDP Growth Trend

Source: Central Bank of UAE, KFH Estimates

UAE’s Real Estate Sector Contribution to GDP

Source: Central Bank of UAE, KFH Estimates

Fiscal Position Trend (2003-2008F)

Source: Central Bank of UAE, IMF, KFH

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3) Dollar-dirham pegOn the currency front, the UAE dirham has been fixed against the US dollar fordecades. However, the dollar-dirham peg restricts the ability of the central bank to influenceinterestrates,inflationandtherealvalueofitscurrency,asithastomirrorthe US monetary policy to protect the dirham from market speculation. Although the declining US dollar has reduced the dirham’s purchasing power against other currencies,causinganincreaseinlocalinflationratesandincreasingcostsofimports,it had made UAE property cheaper for Europeans and Asians given that approximately 75% of investors in UAE’s real estate are from Europe and Asia.

USD/AED

Source: Bloomberg

Following a cut in US interest rates on 18th Sept 07, the UAE cut its interest rates ontheone-weekandone-monthCertificatesofDepositby15basispointsto4.60%and 4.70%, respectively, despite clear prospects of exchange rate losses and an increaseininflation.Subsequently,thecentralbanktrimmeditsrepurchaseratefivetimes from 4.5% in December 07 to 2.00% by 1st May 08 (12th Dec 07 by 50bps to 4.25%, 23rd Jan 08 by 75bps to 3.5%, 31st Jan 08 by 50ps to 3.0%, 19th Mar 08 by 75bps to 2.25% and 1st May 08 by 25bps to 2.00%). The interest rate cuts have made mortgages on UAE properties cheaper, thereby contributing to an increase in investments in the real estate sector.

UAE’s Repurchase Rate Trend (12th Dec 07-1st May 08)

Source: Central Bank of UAE, KFH

There has been speculation that the UAE may change its current policy of pegging the dirham to the USD. The UAE government has, to this point, stated that it would prefer to address any currency policy changes in tandem with the other members of the GCC. However, in our view, the government will have to address this issue alone inthenext18monthsifinflationstartstoeffectivelycrimpeconomicdevelopment.

Interest rate cuts have made mortgage on UAE properties cheaper

The dirham-dollar peg has made UAE property cheaper for Europeans and Asians investors

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Additionally, we feel the necessary institutions (monetary policy committees or instruments)arenotinplaceyettomanageafreefloatingcurrency.Therefore,weexpect to see a move to a basket of currencies and a gradual revaluation.

A stronger currency would improve our long term outlook for the real estate sector, but would slow price appreciation in the near term. Essentially, we feel it would slow foreign speculative demand for real estate in the near term, but provide for a more stable operating environment for developers and contractors in the longer term.

4) Record high inflation ratesTheUAE’srealestatesectorwillcontinuetoflourishamidststubbornlyhighinflationratesaspropertyisusedasahedgeagainstinflation.Inflationhasovertakenofficiallending rates in the UAE, making it cheaper for people to borrow than to keep money in deposit accounts, thus encouraging investments in real estate, the main driver of the surging cost of living.

TheUAE’sinflationratewasalreadyhighat9.3%in2006(2001:2.8%),underpinnedby a surge in domestic demand on the back of high economic growth over the years. This caused price pressures, in particular in the real estate market and in certain areasintheservicessector.Giventherecentinterestratecuts,inflationisprojectedto trend higher to 12.3% in 2008 (2007: 11%) as lower interest rates will result in higherliquidityandcreditgrowth.InflationintheUAEisdrivenmostlybyincreasedconsumer spending. However, the consumer price index (CPI) in the UAE will slide to 8% by the end of 2009 after scaling higher than 12% this year. Spiraling rents whichaccountformorethan50%oftheconsumerpriceinflationwillsoftenwithmoreresidential units coming to the market.

Inflation Trend

Source: UAE Central Bank, KFH Estimates


A survey shows that high inflation inDubai has pushed up its ranking, from 73rdplace in 2005 to 25th in 2006 and 10th in 2008, as one of the most expensive cities intheworld,underpinnedbyrisingcostofleasingandrenting.OfficerentsinDubaihave soared 30.7% during the past twelve months, making Dubai the tenth most expensive city in the world, more expensive than New York’s Manhattan, For instance, onthecommercialfront,rentalratesforofficespaceinDubaihavetripled,risingfromUSD24.5/sqftin2005toUSD125/sqftperannumin2008withofficeoccupancyratesat an all time high of 98%.

Recognisingrisingrentalcostsasaprimarycatalystoftheclimbinginflationrate,theUAE government announced plans to implement a series of measures to curb soaring rents in the residential and business sectors.

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These include restricting rental increases and expediting completion dates of new housing projects. In December 07, the government lowered its rent cap from 7% to 5%, though adherence to this is questionable as rental prices continue to skyrocket and demand for property outstrips supply. Thus, trade-off between renting and owning continues to be skewed towards owning due to rising rents and an expectation of price acceleration in the future.

We expect the pace of real estate price appreciation to accelerate in 2008 at approximately 28% as inflationary pressures are passed on to consumers. Priceappreciation should begin to slow in 2009 as more supply is delivered. However, we still expect a brisk increase of 17% in 2009. The gap between the high- and low-end of the market should widen, as we expect a lack of affordability to impact the low-end of the realtymarket first and consumerswill further differentiate developments bylocation and quality. The difference between the 5th and 95th percentiles is anticipated to grow from 165% in 2007 to 204% by 2011. The main driver of price appreciation should be rental yield compression. We have projected that yields should decline approximately 240 basis points to 5.35% over the next 4 years, as the rental market becomes more competitive and the rent/own trade-off continues to move in favour of ownership. Appreciation in rental costs should slow. We project 8% growth in rental prices for 2008, slowing to 3% by 2010.

Expect the pace of real estate price appreciation to accelerate in 2008 at approximately 28% as inflationary pressures are passed on to consumers

Real estate demand has been supported by substantial population growth over the last 5 years

UAE Real Estate ProjectionsGeneral Projections - UAE Residential Market

2007 2008F Avg. Price(USD/sq.ft.) 384 494 95th Percentile(USD/sq.ft.) 817.6 1070 5th Percentile(USD/sq.ft.) 308.6 382.3 High/Low Differential 165% 180% Avg. Annual Rent(USD/sq.ft.) 30 32 95th Percentile Change in Rent 9.70% 5t Percentile Change in Rent 3.80% Avg. Rental Yeild 7.72% 6.47% Avg. Change in Rents 8% Avg. Price Appreciation 28.87%Source: Globalpropertyguide.com, KFH

Moreover, supply constraints exist throughout the UAE construction industry. Owing tosignificantdemandonaglobalbasis,thereislittletheUAEcandotoaddresstheissueofinflationotherthanachangeinthecurrencyregime.Intheneartomediumterm, we expect the pricing power of the developers to continue. Hence, they should beabletocovercostinflationwithpriceincreases.However,wedoexpectthat,inthelonger term, there is the threat of prices striking potential purchasers out of the market. Intheworstcasescenario,thepass-oneffectofinflationcouldleadtoadryingupofliquidity, followed by substantial price declines. We expect the UAE government to address the problem prior to reaching this extreme scenario.

5) Population growthTheUAEhasoneofthehighestpopulationgrowthratesintheworld,ledbyaninfluxof new residents and strong growth in the construction sector. The construction sector accountsforafifthofUAE’stotalworkforce.Thedemandsideoftheequationforrealestate has clearly been supported by substantial population growth over the last 5 years. The UAE population has grown at a CAGR over 7% since 2002 and is projected to grow at a CAGR of approximately 5% over the next 5 years.

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Moreover, approximately 30% of the UAE’s total population falls within the age category of 15 years. In the next decade, this young population group will form a sustainable demand for real estate.

6) Rising per capita income levelsIn our view, new households alone are not the only drivers of demand. We contend that affordability and rising income levels must be considered in the demand equation as key drivers for the real estate industry.

While real estate values have come a long way over the last 5 years, however on a relative income basis, there is still room for higher valuations

Population Growth

Source: UAE Central Bank, KFH

UAE Per Capita Income Trend

Source: UAE Central Bank, KFH

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To assess the current property valuations in the UAE market, we have compared real estate prices per square meter relative to per capita GDP throughout the world. The UAE is currently at the low end of the range for real estate prices among countries of similar income levels (its per capita GDP is USD45,000). For countries with per capita GDP of between USD35,000 and USD45,000, the real estate price range is USD359.5/sq ft to USD1460 /sq ft. The prevailing value in the UAE is at the low end of the range at USD406.6/sq ft. We contend that while real estate values have come a long way over the last 5 years, on a relative income basis, there is still room for higher valuations.

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Average rental yields in the UAE, between 7.7%-8%, are substantially higher than the levels in countries of similar income range. Rental yields tend to decline as income levels improve. This tendency is driven by the increased ability of the population to financethepurchaseofrealestateratherthanrents.

Moreover, price appreciation in the secondary real estate market is driven primarily by affordability ratios rather than population growth. Essentially, we feel that the biggest impact to demand is the move from renting to owning property. In this case, both the availabilityandcostofmortgagefinancearekeydriversofdemand.AccordingtodatafromtheUAEGovernmentandtheIMF,mortgagefinanceisstillatlowlevelsrelativeto global norms. It currently stands at 5.9% of GDP in the UAE, compared to 130% in the US, 70% in the UK, and even 10% in Mexico. At prevailing mortgage rates (7% to 7.5%), a monthly payment (including principle payments) will equal between USD3.12/sq ft and USD3.3/sq ft compared to USD3.5/sq ft cost to rent. Embedded in the premium to own is not only the principle payment but also the additional utility value for aspects such as: predictability of future payments, potential future property appreciation, and general enjoyment from ownership. Additionally, the combination ofdeclininginterestratesandincreasingrentalchargesmakethecost/benefittrade-off even more attractive. As the trade-off between renting and owning continues to become more attractive in the UAE, we expect a further enhancement to demand beyond that of new households moving to the UAE.

7) Abundant liquidityLess impact of subprime crisis in the UAE – So far!To date, the UAE economy has been fairly insulated from the subprime crisis, mainly owing to the following reasons:• UAE’shugepoolofliquiditywithcurrentaccountandfiscalsurplusesatUSD46bln

and USD49.9bln respectively for 2007 has cushioned the country from the subprime crisis.

• UAE markets have proven their low correlation or immunity to developments in global capital markets given the domination of local retail investors in the region. Their low levels of Western institutional ownership have insulated the country fromtheebbsandflowsofgeneralemergingmarketfundflows.

• The direct exposure of UAE corporations and banks to the US subprime is almost negligible (<1% of total assets with bulk of exposure concentrated in structured products of high investment grade).

• Oil accounts for only 45% of total UAE exports and oil revenues are denominated in dollar. As the dollar weakens against global currencies, oil-producing countries are more likely to increase oil price to offset the relatively lower oil earnings.

Gross Rental Yields vs. Per Capita GDP

Source: GlobalPropertyGuide.com, IMF, KFH

Residential Prices vs. Per Capita GDP

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• UAEhasgraduallydiversifieditsexportmarkets,fromtraditionalUSmarkettotheEU, Japan and the rest of Asia. Given that exports to the US contribute less than 2% of the UAE’s total exports, the country’s export earnings will not be directly affected by an expected slowdown in the US economy moving forward.

Due to the above factors, the UAE has remained relatively immune to the liquidity crunch in the West, thereby sustaining high investments in the realty sector. It is worth noting, that ‘abundant liquidity’ in the country is largely in terms of domestic liquidity.

The US subprime liquidity woes have also failed to dent the UAE real estate mortgage market. The mortgage market in the region remains competitive, with more banks including Islamic Banks, entering the arena. Mortgage lending in the UAE almost doubled in 2007 amid a real estate boom with total home loans worth USD16.02bln as against USD8.5bln in 2006. Banks have boosted their mortgage offerings, encroachingonthemarketshareofhomefinancierslikeAmlakFinance,whichhasbeen expanding in new markets, including Egypt and Saudi Arabia, as competition intensifiesathome.

Moreover UAE’s commitment to the dollar-dirham peg which has forced it to track seven US interest rate cuts since September 2007 has pushed down home loan rates across the country as inflation soars. Inflation has overtaken official lendingrates in the UAE, making it cheaper for people to borrow than to keep money in deposit accounts, thereby encouraging investments in real estate, the main driver of the surging cost of living. Interest rates have decreased, although the interbank rate cuts have not been fully passed to customers. Some banks have reduced their Loan-to-Value(LTV)ratiostoreflectglobalcreditconditionsandtocomplywithindicationsfrom the UAE Central Bank that LTV ratios will possibly need to be capped at 85% in thefuture.ThismayreflectafeelingamongsomebanksthatthemarketinDubaiisat risk of overheating. ‘Buy to Let’ mortgages are now appearing in Dubai, with some banksnowwilling to include future rentalearnings fromafinancedpropertywhencalculating the customer’s repayment ability. Tamweel, for example, will allow a LTV of 75% for such properties, and include 75% of the future rental income in the repayment calculation. This type of mortgage is only available for completed properties.

The mortgage market in the region remains competitive, with more banks, including Islamic banks, entering the arena

Key UAE Mortgage Lenders and Terms of LoansLender Rate Loan to Loan to Maximum (Interest or Value Value Non- Term Profit) % Residents (%) Residents (%) YearsADCB 6.75-7.25 90 N/A 25-30Amlak 6.5-8.75 90 70-80 20Barclays 7.25-8.55 90 75 25-30CBD 6.0-6.75 80 N/A 25-30HSBC 7.25-8.25 75-85 75-85 25Lloyds TSB 7.99 70-85 65-70 15-20NBD 6.25-7.5 85 60-70 20Noor Islamic 7.0-8.25 90 N/A 30RAK Bank 6.95-8.7 75-90 75 25Standard Chartered 5.75-6.25 90 N/A 20Tamweel 7.4-8.65 95 70 25

Source: Various Banks, KFH Estimates

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8) Availability of Islamic FinancingTheemergenceofIslamicBanksinfinancingloansandmortgagesintheUAEhasalso provided more options to the UAE investors. Amlak Finance and Tamweel, the leaders of the UAE mortgage market, with 60% market share collectively, are both Shariah compliant. Given that the majority of the Dubai residents are Muslims, Shariah compliant lenders are likely to capture the larger market share in future as well. Some people argue that Islamic mortgage is high-priced. The fact is that the borrower may be paying a bigger amount as “down payment” compared to conventional mortgage, but will also get a better payment plan afterwards. This is the reason that non-Muslims are also getting increasingly interested in this type of home finance.Meanwhile itis also possible that non-Shariah compliant mortgages get rescheduled as Shariah compliant during the mortgage term.

However there are speculations that UAE banks should be more careful in providing excessive real estate mortgages as it could be hit by a credit crunch similar to the devastating US sub-prime crisis in the absence of a mortgage law. Although the lending activity in the fast-expanding real estate sector has so far remained reasonable, massive projects planned for the next few years could sharply boost financingactivities and deprive the banks the much-needed liquidity since real estate credits are normally long-term loans. UAE has made great strides in tightening the property market’s regulatory framework and now needs to have a mortgage law in place.

9) Legal changes to help build investor confidenceThe changes and the approach towards revamping the real estate regulations in the UAE have been positive from the investors’ point of view. The promulgation of new property laws in the individual emirates, regulating the sale and lease of land and buildings to citizens and expatriates, kick-started the property boom. The regulations vary from emirate to emirate, with some, such as Dubai, permitting foreign residents to purchase freehold properties in designated areas, whilst others, such as Abu Dhabi, limiting the acquisition of property by expatriates to leasehold properties. The land departments in each emirate are now endeavoring to frame regulations that will eventuallycreateaunifiedpropertylaw.

The major legal changes that have come in 2007 has been the passing of a broker’s law, the passing of an escrow law, and the creation of regulatory authorities such as the Real Estate Regulation Authority (RERA) in Dubai. Broker’s law came into force in January 2007 in Dubai which stipulates that all brokers, both individuals and companies, must be licensed with the Land Department. The department has been assigned the role of training and certifying all brokers to ensure that property transactions are conducted by licensed and trained brokers who are able to provide proper advice and professional service to their clients. Moreover Dubai’s Real Estate Regulatory Authority has announced the creation of a property court with operations starting in September 2008. The other emirates are also following suit by designing their own legal frameworks to protect the rights of all parties involved in real estate transactions.

Although measures have been taken to design a legal framework to protect the rights of the parties involved in real estate transactions in the UAE, the framework is still immature as is the realty market in the country which is expected to evolve over time. Despite the new regulations of property ownership in the UAE, there are still material concerns in the legal and regulatory procedures including, but not limited to, government approvals, mortgage laws, mortgage regulation, deed title registration, residency issues and inheritance laws.

Each emirate endeavoring to frame regulations that will create a unified property law

UAE Real Estate

13

A subcomponent of the Index of Economic Freedom, the property rights index measures the degree to which a country’s laws protect private property rights, and the degree to which its government enforces those laws. Higher scores are more desirable, i.e. property rights are better protected. The UAE has a score of 40, which is surprisingly the lowest in the GCC region. The index also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses toenforcecontracts.Protectionofpropertyrightsisasignificantfactoraffectingthedesirability of a residential real estate investment. In spite of huge investor interest in the UAE realty market, skepticism and uncertainty exist due to the relatively new legal framework and lack of information regarding the laws. However the formation of the property courts in emirates such as Dubai would help in strengthening investor confidenceinthesectorinthelongerterm.

Supply Side Bottlenecks / Challenges • Rising cost of cement and raw materials has been challenging for the real

estate sector in the UAE. We estimate that raw material costs alone would be approximately 19% higher in 2008.The UAE produces its own cement – 15 companies together produce 13.2mln tonnes of cement per annum. However, production has fallen short of demand since the beginning of the construction boom in 2003. The difference is met by imports – which has soared 74% from 1.70mln tonnes to 2.96mln tonnes in 2007. However, a stabilised market and a looming price control intervention by authorities imply that prices may not remain highindefinitely.

• The real estate and construction industries are facing a shortage of foreign workers and coping with increases in the cost of labour. Approximately 43% of all foreign workers in the UAE are Indians, making the Emirates particularly vulnerable to fluctuatingcurrenciesandrisingwagesinIndia.Basedonestimates,in2005anIndian worker earning USD80 to USD125 (Dh255 to Dh424) in the Gulf could earn twice as much as he could at home by signing up to a three-year contract in the GCC. In 2008, the same worker could earn USD250 a month in India, whilewagesintheGCChavebeenfixedattheoriginalcontractedamount,thusreducing the incentive to work overseas. Moreover, amnesty for illegal workers in 2007 saw more than 250,000 workers leaving the country. This in turn led to manpower supply issues and rising salaries among the unskilled workforce.

Skepticism and uncertainty exist due to the relatively new legal framework

Property Rights Index

Source: Wall Street Journal, KFH

0 10 20 30 40 50 60 70

UAE

Saudi Arabia

Qatar

Oman

Kuwait

Bahrain

UAE Real Estate

14

• Delays and cancellations in the delivery of projects in the UAE is also a major supply side issue. There are currently more than 160 projects facing delays; nevertheless we expect this number to fall as industry bottlenecks are addressed.

• Propertymarketsaredrivenbysupply,demandandfinance.Atpresentmortgagerates in the UAE are high by international standards and require a monthly mortgage payment of approximately USD5,000 per month on a USD565,500 apartment in Dubai Marina. For the average Dubai executive this monthly payment is beyond affordability. The cost of mortgage has become even more crucial to sustaining the real estate market as projects near completion and occupation.

The UAE government has been constantly taking measures to deal with these supply issue, however, it becomes important to mention at this juncture, that till the time supply side bottlenecks remain in the real estate and construction sector, the demand-supply gap will continue to exist thus putting an upward pressure on property prices andhencemakingthemarketmoreprofitableforbothdevelopersandinvestors.

Supply side bottlenecks have kept the demand-supply gap intact leading to high prices

SWOT Analysis of UAE Real Estate Sector

Source: KFH Research

Strengths

Solid Macro-EconomicFoundationHuge Fiscal SurplusDirham-Dollar PegRecordHighInflationRatesPopulation GrowthRising Per Capital Income LevelsAbudant LiquidityLegal changes to help buildinvestorconfidence

Opportunities

Attractive RentalsUnexploited markets off:Abu DhabiRas Al KhaimahAjman

Weaknesses

Rising cost of cement and raw materialsIncreasing cost of labourDelays and cancellations in the delivery of projectsHigh mortgage rates by international standards

Threats

Ambiguities in Legal StructureLack of statistics regarding availability and yields

UAE vs. Other GCC CountriesThe real estate boom is the GCC has been nothing short of spectacular. With an ever increasing number of projects underway, the industry is attracting investors who are shifting their focus from stock markets to the real estate sector. The UAE alone contributes around 60%of the property boom in the GCC countries with Dubai leading, with a share of 47% among the GCC nations. Abu Dhabi will take over the lead in the next 2-5 years as the emirate accounts for 14% of the market in the entire GCC.

UAE Real Estate

15

To sustain the boom for as long as possible, the GCC countries are liberalising laws and regulation to establish an organized and transparent real estate sector with a view to attract foreign investors. To diversify their base away from the conventional oil dependence, these countries are broadening the scope of their economies to develop their financial sector, tourism, trade and industry.The front-runners here areUAEand Bahrain, with Dubai, in particular, drawing the global public’s attention with its spectacular and visionary construction projects.

DubaiDubai’s real estate market is experiencing rapid growth after the regulatory changes, allowing freehold ownership for expatriate investors and setting up of a real estate regulatory authority (RERA). The total value of land transactions in Dubai last year was USD12.94bln. Approximately 2,329 land plots were sold in Dubai during April-June in 2008 with a combined value of USD7.74bln as against USD2.94bln for the sameperiod in2007.This reflectsanoverall rise inpricesanddemand forspaceacross the emirate.

Approximately 2,329 land plots were sold in Dubai during April-June in 2008 for USD7.74bln as against USD2.94bln for the same period in 2007

Comparison of Rentals and Yields in the GCC (Sept 08) City/Project Prime Rent Prime Rent Prime Yeild Outstanding Investment Details Office Retail Office Mega Volume (USD/sq ft)p.a. (USD/sq ft)p.a. Space Project (USD) Dubai 95.5 120.6 8.10% Downtown Burj 20bln Abu Dhabi 81.7 98.0 7.50% Saadiyat Islands 27bln Kuwait City 70.8 211.0 10.00% Silk City 86bln Manama 43.7 98.0 9.00% Bahrain Bay 1.5bln Doha 48.2 90.4 8.00% City of Lusail 5bln Muscat 37.7 - 9% Blue City 15bln Riyadh 43.7 90.4 10.00% NBIC Riyadh 0.7bln

Source: GCC Real Estate Developers, KFH Research

Land Transactions in Dubai-2007

Source: Dubai Land Department, KFH

Dubai land sales 2008

Source: Dubai Land Department, KFH

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UAE Real Estate

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The land sales in the emirate are expected to go up further in the coming months as the Dubai Strategic Plan 2015 gains momentum. The demand for space which is augmented by the developmental policies of the Government of Dubai is expected to hold strong in the future.

Real estate projects are expected to accelerate in response, as supply increases to cater to the expatriate demand. The growth curve of Dubai’s property market has not reached its peak and it is still very early to predict ‘a bubble burst’. There will be growing need for more real estate developments in Dubai in the short term. While the idea of the market suffering a bubble burst is ruled out for the next 2-3 years, saturation might come for certain types of developments as a result of misinterpretation and lack of statistics regarding demand-supply indicators in the market. For instance lack of data regarding actual demand for high-rise apartments might result in excess production of those units.

Saturation might come for certain types of developments in Dubai

The real estate cycle dynamics reveal that Dubai is heading towards equilibrium

Source: GRP Real Estate, KFH

40% 30%55%

75%30%

50%

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Early Stage Strong Growth Slowing Recession

Core Value Added Opportunistic

EquilibriumFallingMarket

Recovery

Economic Stages

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Real Estate

Dubai

Chart Analysis: The figure summarises the real estate sector dynamics and correlates it with various economic stages. The real estate market matures as the economy reaches the state of slow growth and the share of investment in opportunistic property assets diminishes.

Core: Assets that achieve relatively high percentage of return from income and that are expected to exhibit low volatility.

Value Added: Assets that exhibit one or more of the following attributes—achieve a significant portion of return from appreciation, exhibit moderate volatility and/or are not currently considered core property types.

Opportunistic: An asset that is expected to derive most of the return from appreciation or which may exhibit significant volatility in returns. This may be due to a variety of characteristics such as exposure to development, significant leasing risk, or high leverage, but may also result from a combination of moderate risk factors that in total create a more volatile return profile.

More importantly, developers in Dubai have increasingly overlooked one of the most salient aspects of real estate: maximizing development returns is not purely a function of building as much as possible i.e. supply increase. This would eventually lead to a saturation of demand and hence a correction in prices.

UAE Real Estate

17

With 80% of the total population comprising of expats in the UAE, total real estate units sold in the country are skewed towards the expat population. Asians top the list of property buyers in Dubai. 40% of the buyers of real estate in the Emirate are from Asia while 20% of the real estate units are bought by Europeans. Moreover different types of properties cater to different sections of the society. For e.g. demand for Condos is dominated by seasonal home buyers and short term expats especially singleprofessionals.Howevertheseekersofofficesorcommercialspacesarehighnet worth investors.

Real estate units sold in the country are skewed towards the expat population

Buyers of Property in Dubai

Source: Zawya, KFH

Asians40%

Europeans20%

UAENationals

15%

GCC & ArabNationals

13%

Iranians12%

Types of Property and Classification of Buyers Type Buyers Condos Vacation, seasonal home buyers, short term expatriate couples,

single professionals Villas Primary home for families and Long term expatriate couples and

Investors Offices CurrentlydominatedbymarketmovementsandinvestorsSource: KFH Estimates

Chart Analysis: The fig. summarizes how the role of Dubai’s various residential property investors will evolve. High net-worth individuals, real estate agencies and speculators were the main investors initiating Dubai’s property boom in 2003. The phase of steady growth that started in 2006 will continue till 2010 and demand will be driven by a different set of investors’ i.e. expatriates buying properties either as an investment or to avoid paying escalating rents.

Expected Investor Involvement in Buying Real Estate Assets in DubaiProperty Market 2003-05 2006-10 2010Phases (Boom) (Growth) (Stability)Investor Base Investor Involvement Foreigners High Moderate MaintainedHigh Net Worth Individuals High Moderate DecliningExpats- High Income Moderate Increasing IncreasingExpats-Mid Income Low Increasing IncreasingRE Agencies High Moderate IncreasingSpeculators High Moderate Diminishing

Source: KFH Estimates

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Housing Market PerformanceIn Dubai, we expect cumulative housing supply to overtake cumulative housing demand in early 2011. We expect actual deliveries to ramp up from an estimated 17,000 units in 2007 and peak at roughly 66,000 units in 2010. On the demand side, we expect incremental household growth to taper off in 2009 and 2010, before picking up again in 2011 as much of the required personnel for the expected hotel launchesandothertourismrelatedprojectsbeginstooffsetdeclinesfromfinancialand development sector growth.

Dubai Expected Supply vs. Demand

Source: Government of UAE, KFH

Dubai Exp. Deliveries & Household Growth

Housing PricesSlowing growth in terms of new household entrants to Dubai should relieve some pricing pressure in 2009. However, we believe much of that relief will be mitigated by existing pent-up demand through 2010.

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Capital Growth Appreciation (Launch to Current Price)

Source: Real Estate Agents, KFH Estimates

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TheGreens

DubaiMarina

(Emaar)

DubaiMarina

(Private)

JLT DiscoveryGarden

Internat'lCity

%

The huge supply, targets a number of different income groups, with each having distinctive market forces. The gap between the high and the low end of the market should widen, as we expect a lack of affordability to impact the low end of the market firstandconsumerstofurtherdifferentiatedevelopmentsbylocationandquality.

Expect the gap between the high and low end of the market to widen by 2010

Expect Dubai’s cumulative housing supply to overtake cumulative housing demand in early 2011

UAE Real Estate

19

Housing RentalThere has been a slowdown in the rate of increase of residential rents. The major reason for this slowdown is the recent availability of housing units, especially with the delivery of International City and the handover of several towers at Jumeirah Lake Towers and Downtown Burj Dubai. The reduction of the rent cap from 7% to 5%, however, does not seem to have had much of an impact.

Average Annual Rent of a 2-Bedroom Apartment in Dubai


There has been a slowdown in the rate of increase of residential rents with the delivery of new developments

Market Segment vs. Availability of Supply

Source: GRP Real Estate, KFH

Price/sq ft

Business BayBurj Dubai, Old Town,Dubai Marina

,

HighEndIncome

Int’ l City,Dubai Sports City,Discovery Gardens

MiddleIncomeSegment

LowCostHousing

1000

2000

Government,Dubai Municipality

AbundantExpected Supply Availability

Few

At present, Palm Jumeirah and Old Town Burj Dubai areas in Dubai command the highest annual rents, with studio and one-bedroom annual rentals at USD33,333 and USD46,666 respectively. On the other extreme, the lowest rentals can be found at International City with studios ranging from USD15,000 and one-bedroom units available at around USD18,333.

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UAE Real Estate

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When comparing year-on-year rental changes in Dubai, the highest increases were observed at the Greens for studios where average annual rents increased from USD17,500 to USD23,000, marking a 31% increase July 2008. Interestingly, two-bedroom units at International City witnessed a 36% increase in rents (from USD19,000 to USD26,000) when compared to the same period last year. The rental increase seen at International City is mainly due to relatively fewer two-bedroom apartments available at that price.

Average Annual Apartment Rent


Dubai Residential Market Valuation

Source: Colliers International, KFH

Total Office Supply Growth


010,00020,00030,00040,00050,00060,00070,000

JBR Tecom AlBarsha

DubaiMarina

TheGreens

Internat'lCity

US

D

Studio 1 Bedroom 2 Bedroom 3 Bedroom

Office Market PerformanceOfficespace inDubai isexpected togrowby125%within thenext threeyears to600mlnsqmfrom260mlnsqmattheendof2007.City’s320mlnsqmofofficespaceis almost occupied, resulting in high rents as growing working population puts more pressure on the available properties.

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Office space in Dubai is expected to grow by 125% within the next 3 years to 600mln sq m from 260mln sq m at the end of 2007

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UAE Real Estate

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Limiteddeliveryofnewofficeaccommodationhasresultedinapersistentundersupply,precipitating double-digit growth (42%) of rental rates year on year, supported by vacancy rates of less than 2% across the market. However, a correction at all rental levelsisexpectedstarting2010,asnewsupplyofofficesbecomesavailable.

Dubai Office Market Valuation


Dubai is one of the most expensive business cities in terms of commercial rents

Cost of Rent-Commercial Sector


Cost of Purchase-Commercial Sector

Dubai International Financial Centre and Sheikh Zayed Road are the most expensive business locations in the city. Commercial property prices are highest at Dubai International Financial Centre (USD 1,266.8/sq ft), followed by Dubai Marina (USD 906.2/sq ft). Once ready, Business Bay will overtake Sheikh Zayed Road as the prime area for business and trade in Dubai, the reason being the iconic tower of ‘Burj Dubai’, thetalleststructureintheworld.PriceindexforofficespaceinDubaiisexpectedtoexperience a 30% to 35% hike in the rates for 2008/2009. The commercial real estate sector in Dubai has outperformed the residential market in terms of investments and growth potential in the last three years and a major windfall for investors in this segment in the near future is foreseen.

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Moreover, Dubai will account for 71% of the total Gross Leasable Area (GLA) in the UAE in 2 years. Dubai (population 1.6mln) has approximately the same amount of office space under construction as Shanghai (population 20mln) and Moscow(population 10.4mln).

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Dubai is one of the most expensive business cities in terms of commercial rents making it an expensive place to do business than well-established business centers. However, Dubai’s commercial property selling prices are at the bottom, among business cities around the world estimated to be approximately USD700/sq ft. This in turn has resulted in abnormally high rental yields, which have reached an average of 27% compared the global average of 8%.However, our research shows that rental growth is slowing down. Rents have been affected in the main city, but on Sheikh Zayed Road, occupancy rates remain in excess of 90%. The real estate rental market will fragment into two distinct areas; that of old Dubai where rental rates and occupancy will continue to decline and in New Dubai where strong demand will spur the construction of new projects.

International Office Market Comparison


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Dubai London Moscow SingaporeG

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Existing Supply Forthcoming Supply

Rental Cycle Analysis Reveals That Dubai’s Commercial Rental Growth is Consolidating

Source: GRP Real Estate, KFH Estimates

RentalGrowth

Slowing

RentsFalling

Rental GrowthAccelerating

RentsBottoming

Out

Stockholm

AthensLondon

Paris

Frankfurt

Milan

Moscow

Warsaw

Dubai

Retail Market PerformanceIn its efforts to diversify the economy and to reduce its dependence on hydrocarbon revenues, the Dubai government has identified certain key industries to lead thediversification process and generate alternative revenue sources.Amongst theseindustriesaretourism,leisureandfinance,inadditiontotheairlineindustryandtheretail industry. The equation is quite elementary – fly in the tourists and let themshop! To this end Dubai has developed a highly successful marketing campaign that

In its efforts to diversify the economy Dubai government has identified certain key industries such as retail, tourism, leisure and finance

UAE Real Estate

23

promotes the city as a leisure and shopping destination of choice for the region, and the world. This has been achieved through the promotion of a number of Government sponsored shopping festivals, namely the Dubai Shopping Festival and Dubai Summer Surprises. A new generation of mega shopping malls, which includes Mall of theEmiratesandMallofArabia,areexpectedtofirmlyentrenchDubai’sdominancein the retail industry throughout the GCC. The highly successful Mall of the Emirates, at 223,000sq m gross leasable area (GLA), is currently the largest shopping centre in the GCC, whilst the Mall of Arabia (Phase 1) will have a GLA of more than 400,000sq m when it is launched in 2010. Dubai Festival City currently features an estimated GLA of 195,000 sq m(with 58,000 sq m under construction), whilst the Dubai Mall is expected to cover around 344,000 sq m of GLA.

Dubai Shopping mall rent


UAE is second worldwide, in terms of recreational shopping, behind only Hong Kong

Upcoming Retail Area in DubaiMalls in Dubai Completion GLA (Sq ft)

The Dubai Mall 2009 34400 Mall of Arabia 2010 40000 Dubai Marina Mall 2008 7700 Oasis Centre 2008 6000 Sports City Mall 2009 14000 Mirdiff City Centre 2009 18300Source: Colliers International, KFH

This massive increase in the supply of retail space is likely to result in short-term oversupply in the market.

Smaller and older malls are likely to experience sharp increases in vacancies, coupled with downward pressure on rental rates.

Older malls will be forced to review their viability, and look at repositioning themselves toappealtospecificmarketsegments.New,largermallswithstrongtenantmixes,should be able to maintain current absorption rates, but with reduced demand, could experience a softening in rentals. Growth in population, as well as increased tourist in-flow,shouldsustainanddrivedemandforalltypesofretailspace,butpredominantlyin larger, modern malls with high visitor attendances. In addition, world-class retail malls offer a positive contribution to the city’s hospitality sector, luring tourists to the world’s largest indoor ski slope, best in- class international brand retailers, and the Dubai Summer Surprises and Dubai Shopping Festivals. UAE is second worldwide, in terms of recreational shopping, behind only Hong Kong, where 34% of the people shop once a week for ‘entertainment’ compared against 30% of UAE residents.

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Hotel Market PerformanceWithover30,000hotel rooms in theDubaimarket,60%ofwhichareclassifiedasfourandfivestaraveraginganannualoccupancyofapproximately85%in2007whileachieving among the world’s highest room rates, it is evident that the UAE hospitality sector has achieved acclaim amongst regional and international investors. While skeptics sense that the market is unsustainable, and that occupancy rates are bound to decrease as more hotels enter the market, our forecast indicates that the future still looks bright. Based on an analysis of future supply the sector is able to absorb 8,000 to10,000roomsinadditiontothoseestimatedforcompletionoverthenextfiveyearswhile maintaining a market wide occupancy of 75%.

Hotel market’s optimism is attributed to fundamental ingredients that underpin the market:

• The diversity of the product offering is growing: With the inclusion of Travel Inn, Premier Inn, Holiday Inn Express, and Easy

Hotels joining Dubai’s growing hotel roster over the next few years.

• Airline capacity is increasing: With the expansion of regionally based carriers such as Emirates Airlines, Etihad

Airways, Air Arabia, Jazeera Airways and the increasing presence of international carriers such as Virgin Atlantic and Aer Lingus, competitive offers on airfare will emerge as well as a variety of new inbound markets, increasing the potential market of visitors to Dubai and the UAE to include price-sensitive travelers.

• Dubai as a brand is increasingly recognised globally: In addition, to the brand value of Dubai prevalent in the GCC and Middle East;

the number of expatriates in the market, the amount of international marketing undertaken both by the government and the private sector, and the targeted marketing done by the DTCM, has created strong tourism markets from Western and Eastern Europe, India, and South Asia. The pending approved destination status by China to the UAE combined with the growth of Emirates Airlines and EtihadAirlines,flightswillfurtherincreasethepotentialmarketofvisitors.

• Growth in cultural tourism to Abu Dhabi, the Northern Emirates, Fujairah and Oman:

This will create a tourism triangle with Dubai at its core. The promotion and growth of the neighbouring tourism markets and their differentiated positioning from Dubai will create complementing destinations to the emirate and generate additional demand from previously un-tapped markets.

Overallthehospitalitymarket,overthenextfourtofiveyears,isexpectedtoremainstrong, and is forecasted to diversify both horizontally, in the type of product offered, as well as vertically by price-point.

Average annual hotel occupancy was estimated to be 85% in 2007

Dubai’s hospitality market is expected to diversify in terms of products and prices

4*/5* Hotel Room Supply and Annual Growth Rate

Source: UAE Ministry of Tourism, KFH Estimates

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UAE Real Estate

25

As Burj Dubai registered UAE’s name in the book of world records, by becoming the tallest building in the world, Dubai government-owned property developer Nakheel announced plans to build a near mile-high tower, eclipsing the world’s tallest building. With investing in property in the UAE is seen as safe and rewarding haven, developers in Dubai are constantly coming up with several unique and innovative projects.

Jumeirah Beach Residence - In 2007, Jumeirah Beach Residence near Dubai Marinabecame the first freeholdDubaiProperties’ project to be completed,whenapproximately 6,500 apartments across 36 residential towers were handed over. More than 2,000 families have moved into the apartments since then.

The World - The World is a man-made archipelago of 300 islands constructed in the shape of a world map and located 4 kms off the coast of Dubai and is developed by Nakeel Properties at an estimated cost of USD14.0bln. By January 2008, 60% of the islandshadbeensold,20ofwhichwereboughtinthefirstfourmonthsof2007.

Palm Jumeirah - The Palm Jumeirah is now 20% complete. The handover of all units is expected to take place by the end of 2008. Once complete, the development will boast 940 two and three bedroom apartments and penthouses and a further 40 townhouses.

Palm Jebel Ali - The island is 50% larger than The Palm Jumeirah, and includes six marinas, a ‘Sea Village’, a water theme park and water homes built on stilts between the fronds and the crescent. The project is expected to be completed by Q4-2012. In March, Nakheel, which is also developing the Jumeirah and Jebel Ali palms, announced that the Deira project will be split into two parts – the palm-shaped island and a Corniche. Now, following further studies and talks with potential investors, it has released details of the revised plans.

Developers in Dubai are constantly coming up with several unique and innovative mega projects

Major Upcoming and Existing Real Estate Developments in Dubai

Source: Google Maps

UAE Real Estate

26

Palm Deira - world’s largest reclamation project - The Palm Deira is the world’s largest reclamation project, with 1.14bln cubic meters of land being reclaimed. Already a total of 198mln cubic meters of sand have been put in place. The new blueprint will see the creation of nine different areas. Five islands will form the massive Corniche – Deira, Al Mamzar, Central, South and North – which will be linked to a main Palm Trunk, Palm Fronds, Palm Crescent and Palm Crown. Phase one – Deira Island – will be the entrance to the entire development and will be connected by bridges to the existing Deira district between the mouth of Dubai Creek and Port Hamriya. Transport links will be integrated with existing road networks and the under-construction Dubai Metro.AccordingtoNakheelreclamationworkwasstillonscheduletobefinishedby2013 but completion date for the whole project is still not known.

Dubai Investment Park - More than USD6.6bln worth of residential projects are under construction in Dubai Investment Park, bringing the park’s total investment value to almost USD7bln. Phase 1 of Residential City, the mid-cost housing component of Dubai World Central (DWC), a hugely ambitious 140sq km urban aviation community underconstructioninJebelAli,hasbeensoldout.Thefirstresidentsareexpectedto live inResidentialCitybyJune2009,amovetimedtocoincidewith full-fledgedoperations at the world’s largest airport, Al Maktoum International Airport in Jebel Ali, construction of which is currently well under way.

Dubai Waterfront - Dubai Waterfront is being built on an area bigger than Manhattan and Beirut, offering investors over 250 master planned waterside communities with mixed-use, commercial, residential, resort and amenity areas. The handover to investorsof thefirstphaseofdevelopment,MadinatAlArab, theplannedurbandowntown at the heart of Dubai Waterfront, commenced in 2007.

Dubai-Singapore Parallel Case StudyDubai and Singapore have many similarities. Both have massive ports serving a huge hinterland, highly developed tourism sectors and are strong on business services andfinance.Also,thereislittledifferenceinthecurrentGDPpercapita(Singapore:USD48,000, Dubai: USD40,000), although Dubai’s GDP growth of 11% in 2007 was more than double, compared to Singapore’s GDP growth of 5%.

If we compare the real estate sectors of Singapore and Dubai, a typical downtown 1,000sq ft apartment will cost around USD1mln and can be rented for approximately USD36,000 per annum, giving a rental yield of 3.6% in Singapore. Whereas in Dubai the situation is completely reverse. A 1,000sq ft apartment in The Greens will cost approximately USD270,000, and the same apartment will rent for USD22,000, giving a rental yield of 8.1%. The activity in the real estate and construction sector is currently very low in Singapore as property yields are too low that it is not economical to build new real estate. However prices remain stubbornly high in the city-state.

The reason for the huge difference in prices and rental yields is that Singapore is an older, more mature market than Dubai, with clear property laws and a highly developed mortgage market. Singapore too went through its building booms and busts similar to that of present Dubai, and yet property owners that stuck it through have come out on top. The Singapore property market went through a boom that began in late1998, with property selling prices increasing a cumulative 37% over two years. This boom was followed by a very short period of stability, after which property prices dropped sharply. During the downturn, property prices fell by about 30%from their peaks. Therefore to understand where Dubai property will be in 10 years, Singapore is probably a suitable model to follow. However Dubai may not experience as sharp a fall in prices as Singapore did. We believe that Dubai real estate would experience a correction in the prices of certain residential developments whereas the commercial segment will continue to boom, offsetting the fall in residential prices to some extent. Thus Dubai’s correction will softly slide the real estate prices into a phase of stability beyond 2010.

Dubai may not experience as sharp a fall 30% in prices as Singapore did in 2000

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Abu DhabiThe wealthiest city in the world in terms of per capita income (2008F- USD70,000), with both 10% of the world’s oil in the ground and an estimated USD136.2bln real estate and infrastructure investments planned till 2010, Abu Dhabi till recently has been quiet in comparison to the other Emirates within the UAE in terms of putting themselves on the realty map. While the other Emirates (especially Dubai and Ras Al Khaimah) were quick to announce mega projects, Abu

Dhabi has been waiting and watching. The emirate’s patience or alternately lack of developmenthashadtwoeffects;thefirsthasbeenalackofsupplywhichhasdrivenrentals in both the residential and commercial sector to prices above Dubai. Rentals for primeofficespacecrossed150/sqft,muchbeforeSheikhZayedRoadhititscurrentlevels. The second more positive effect has been that Abu Dhabi has watched what Dubai has done and has decided to learn from its neighbour’s experience. The key difference is better planning, more greenery and better infrastructure to accommodate the upcoming developments’ needs.

In Abu Dhabi, a supply shortage is substantially clearer. We do not expect cumulative supplytomatchcumulativedemanduntil5years.Infact,wedonotexpectasignificantramp up in deliveries until 2013. The wealth of Abu Dhabi, coupled with its tight housing market, could lead to higher increase in prices in the UAE Capital as compared to Dubai, over the coming years. This might lead people to move to Dubai, pushing up prices there, especially in developments close to the border that are relatively cheap because they are less central. As Dubai becomes more expensive, some residents may shift to Sharjah and then Ajman, and so on. The result would be a consolidated UAE realty market with economic segmentation. Abu Dhabi was always aiming for the high end, and that’s exactly what it might get.

Singapore Real Estate Boom and Bust Cycle (Base Year 1998)

Source: URA Singapore, KFH

100105110115120125130135140145

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Source: Government of UAE, KFH

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Despite the announcement of numerous master-planned developments, the impact of a two year construction moratorium imposed between 1999 and 2001 is still evident in Abu Dhabi. Demand far exceeds supply in the UAE capital.

Cumulative Residential Supply


Aggregate Apartments Rents

Source: Colliers International, KFH Estimates

Housing RentalsOne and two-bedroom apartments currently enjoy the highest demand, whilst buildings with a reputation for effective property management and a good selection of amenities have waiting lists for potential tenants. In addition, new buildings enjoy high absorption levels, with some developers claiming that projects are 100% pre-let well in advance of construction completion. Rental prices have steadily increased over the past six years, with a price appreciation particularly marked at the upper end of the pricingscale.The inflationarypressures resulting fromrapid rentalprice increaseshave prompted the Abu Dhabi Government to cap rent increases at 5% per annum. We believe the 5% cap might have a perverse effect, leading property owners to ask for higher rents that capture expectations of future appreciation today.

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In Abu Dhabi, we do not expect cumulative supply to match cumulative demand until 5 years

A tight residential market and a lower base helped housing prices in Abu Dhabi to grow fast, 61% in Q2 2008 from Q4 2007

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Housing PricesPrice appreciation in the high income segment, notwithstanding the largest gap in the current market, remains in the middle income segment. Given the extremely limited facilities enjoyed by existing middle income properties, new buildings with a range of ancillary facilities are likely to perform particularly well. Overall benchmarks of building quality and facility provision now are increasing to meet occupier requirements. All new apartments, targeting middle income occupiers and above, offer central air conditioning and gas facilities. Almost 70% have underground car parking while around 25% provide a health club and/or gym to tenants. Provision of these associated facilities is now a minimum benchmark for new developments in Abu Dhabi. Economic growth and a shortage of supply have provided the natural stimulus for development activity in the Emirate. A tight residential market and a lower base helped housing prices in Abu Dhabi to grow faster, 61% in Q2 2008 from Q4 2007.

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Office Market PerformanceAbuDhabi’sofficesectorexperienceddevelopmentinspurtsbetween1978and2007.In recent years growth has not been as dramatic as witnessed in the early 1980s whenthesupplyofofficespacedoubledconsecutivelyin1982and1983.Since2000officesupplyhasgrownby50%toatotalof460,000sqmofGrossFloorArea(GFA).Withaspateofprojectsunderconstructionandplannedby2011,existingofficespacesupply will increase by a further estimated 85% to 850,000 sq m of GFA.

Abu Dhabi Residential Valuations


Cumulative Office Supply


Existing office space supply in Abu Dhabi will increase by an estimated 85% to 850,000 sqm of GFA

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Unsatisfied demand has resulted in average rental increases of over 30% in allofficeaccommodationbetween2005and2006.Therehavebeenfurtherincreasesof around 10% between 2006 and 2007, with the reduction in the average level of increase attributable to the government imposed rental cap. Despite this, rents are anticipated to continue to rise, until substantial supply enters the market from the end of 2009 onwards.

The continuous flow of new organizations, keen to establish themselves in theemirate, as well as the natural expansion of existing organizations, against the backdrop of benign economic conditions, serve as key demand drivers for real estate. These factors are further reinforced by the Abu Dhabi’s economic diversificationambitions,andthedevelopmentofplannedindustrial,financialandfreetradezones.According to statistics issued by the Abu Dhabi Chamber of Commerce & Industry (ADCCI), there were approximately 60,000 licensed businesses in the city in 2006, growingatanannualrateof5%.AbuDhabi’sdedicatedofficestockhasthefollowingcharacteristics:

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• Therearefewpurpose-builtprimarygradeofficebuildingsinthecity,andthebulkof them are owned by government or semi-government entities

• Occupancyratesinpurpose-builtofficebuildingsaretypicallyaround98%,withthe balance of space being subject to the natural vacancy rate which is associated withleasetransfersornewtenantfit-outs

• Thequalityofthestockis lowwiththemajorityofofficebuildingsinthecityofsecondary or tertiary grade. Nevertheless, the finishes of these buildings aregenerally fair and they offer functional office space, albeit lacking in moderncommunicationssystems,servicesandfloorplatedesignefficiency

• Virtually all buildings suffer from a lack of dedicated parking facilities

Abu Dhabi Office Market Valuations

Source: Colliers International, KFH Estimates

Upcoming Retail Area by Developments


Retail Market PerformanceIn 2000 there were no destination retail venues in Abu Dhabi. During the intervening period, there has been a notable shift towards the provision of international standard shopping malls, doubling-up as visitor destinations. The Marina Mall and the Abu Dhabi Mall both opened during 2001, contributing a total Gross Leasable Area (GLA) of 139,000 sq m, followed by a further 35,000 sq m at the Meena Retail Park in 2002. In 2006, Phase II of the Marina Mall contributed an additional 40,000 sq m of GLA to the city’s available retail mall stock. The opening of Al Raha Mall and Al Wahda Mall in May and July 2007 respectively increased the existing supply by a total of 172,500 sq m. Early indications suggest that these malls are performing in line with the operator’s expectations.

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Al RahaBeach, 36.50

% Al Yas

Island, 25%

Al ReemIsland, 15%

Zayed SportsCity, 8.40%

Khalidiya, 5.60%

Breakwater,4.70%

Between theBridges, 3.80%

Others, 5.70%

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Shopping mall Gross Leasable Area (GLA) in Abu Dhabi set to increase from 810,000sq m at present to 1.4mln sq m by 2010.The new malls have introduced the concept of convenience shopping in a climate controlled environment with the added benefitofdedicatedparking,crèche,andadequaterestroomfacilities–markingashiftaway from the city’s traditional ‘high-street’ retailing orientation. This continuing trend towards one-stop shopping environments, in tandem with increases in disposable incomeoverthelastdecade,hasbeenreflectedinthenumberofrecentlycompletedand forthcoming retail developments. The year 2010 is likely to represent a watershed for retail market performance in the city, with Sorouh Real Estate set to open the Al Reem Mall with 130,000sq m of GLA and the Al Yas development adding a further 300,000sq m of leasable area. In 2010, Abu Dhabi will have 0.87sq m of GLA per capita. Retail Services project that in order to support this volume of retail mall stock, an approximate annual retail expenditure of USD 4,900 per capita will be required.

Hospitality Market PerformanceHistorically, Abu Dhabi has been overshadowed by Dubai as a leisure tourist destination. Demand for hotel accommodation in the city is driven predominantly by business tourism, which accounts for 75% of overall hospitality market demand. In 2006 the Emirate witnessed average hotel room occupancy rates of 78.6%, while serviced apartments achieved approximately 80%. Average Room Rates (ARR) rose by approximately 40% compared to the previous year, to USD 167 and USD 235 for 4* & 5* rooms respectively. Early industry reports suggest that Q2 2008 occupancy rates have been maintained at 78.5%.

The Abu Dhabi Tourism Authority (ADTA) is seeking to increase the market share enjoyed by the leisure tourist segment to 40% by 2015. It plans to do so by developing destination attractions for cultural, sporting, and Meetings, Incentives, Conferences and Exhibitions (MICE) tourism segments. Such initiatives include the provision of dedicated hotels, resorts, art & culture venues, shopping malls and other facilities which aim to capitalise on Abu Dhabi’s endowment of natural islands, long stretches of beach, and its position as the UAE’s sociopolitical and cultural core.

The recent announcement of an agreement between Mubadala, a government-owned investment authority, and Formula 1 founder Bernie Ecclestone that Abu Dhabi will playhosttotheprestigiousracingcircuitfrom2010,hasbeenhailedasthefirstmajorstep in the city’s efforts towards becoming a more widely recognised leisure tourism destination. This has been complemented by the decision of the world-famous Louvre and Guggenheim museums to establish Middle East counterparts on Abu Dhabi’s Saadiyat Island, both scheduled for completion in 2012. In line with the government’s objective of stimulating tourism, the ADTA plans to license the construction of 17,000 new hotel rooms in the Emirate by 2015, of which 45% are in the 5* category.

Cumulative Hospitality Supply


Shopping mall GLA in Abu Dhabi set to increase from 810,000sq m in 2008 to 1.4mln sq m by 2010

ADTA is seeking to increase the market share enjoyed by the leisure tourist segment to 40% by 2015

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There are currently 9,500 rooms (including all hotel categories and serviced apartments) in the Emirate, with Abu Dhabi city accounting for approximately 8,000 rooms, with Al Ain, Al Dhafrah, Mafraq, Ruwais and Liwa providing the remainder. Approximately 8,500 hotel rooms are currently under construction in the city. Increases in the numbers of visitors to the Emirate and an expansion in the destination reach of Abu Dhabi based Etihad Airways have supported strong occupancy rates and ARR growth during the past 18 months. We expect this growth to be sustainable as Abu Dhabi carves out a position for itself as a business, sporting and cultural tourism destination.

Future Hospitality Supply-Market Share


Major Upcoming and Existing Real Estate Developments in Abu Dhabi

• Al Raha Beach development - In Feb, 2008 Aldar Properties entered an USD0.4bln joint venture with Investment Holdings, a local company, to develop the Al Khubeira precinct at its USD18.3bln Al Raha Beach development. The joint venture will develop an area of approximately 50,000 sq m. The Al Khubeira development will comprise residential towers and waterfront villas on reclaimed land. The project, occupying an area of 6.8mn sq m with a total built-up area of 12mn sq m, is due for completion in phases between 2009 and 2017.

• Abraj Towers (Phase I) - Situated adjacent to Al Raha Gardens and within the overallAlRahaBeachdevelopment,thefirstphasewascompletedinDec2007.The completed phase comprises 10 buildings with 198 residential units and in excessof4,800sqmofofficeandretailspace.Thewholedevelopmentincludingboth phases was sold in Jan 2008 to a newly created Joint Venture Company between Etihad Airways and ALDAR. The Joint Venture Company has leased the whole development to Etihad Airways for 20 years

• Al Raha Gardens - Al Raha Gardens is situated opposite Al Raha Beach, on the mainhighway leading fromAbuDhabi toDubai.Thefirstphasecomprisingof280 villas was completed in December 2007. Phase II consists of 470 villas and Phase III consists of 638 villas with expected completion in December 2008 and August 2009 respectively. The Phase IV consists of a new town centre and the master plan for the development was approved in March 2007.

• Shams Abu Dhabi - This project will be developed on Reem Island in Abu Dhabi by Sorouh Real Estate and occupy approximately 25% of the island. It will occupy 1.32mln sq m of which, 90% will be dedicated to residential buildings. When completed in 2011 it will be home to approximately 70,000 people. Sorouh’s Sky

5*, 45%

4*, 17.50%

3*, 10.70%

ServicedApartments, 2

6.80%

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Tower is destined to be the highest skyscraper in Abu Dhabi and Sorouh is also responsible for the USD243mln Golf Gardens luxury residential development adjoining Abu Dhabi Golf Club. In addition Surouh has launched Saraya Abu Dhabi, a new USD1.1bln mixed-use development in Abu Dhabi City, next to the Corniche Hospital.

• The Quay - The Quay planned at Abu Dhabi Tourist Club will be a mixed-use developmentwithleisure,residentialandcommercialelements,featuringafive-starhotel,AbuDhabi’sfirstaquarium,agatedresidentialcommunity,quaysideofficespaceanda60-berthmarina.

• Emerald Gateway project - Abu Dhabi Municipality announced its plan to develop a luxury residential and commercial real estate project at a cost of USD2.3bln in partnership with private companies. Located along the Coast Road halfway between downtown Abu Dhabi and Abu Dhabi International Airport, the development would include 88 towers on both sides of a 3.5 km segment of the arterial highway.

Ras Al KhaimahThe economy of Ras Al Khaimah is estimated to grow at a rate of 15% to 18% in 2008, thanks to the rapid advances the emirate has made in real estate and tourism sectors. Ras Al Khaimah’s portfolio of real estate projects follows an impressive vision of imagination and innovation, combined with environmental aesthetics. For decades, Ras Al Khaimah’s natural diversity and stunning landscape has made it a favorite getaway destination for many of its neighbors. Hotels in Ras Al Khaimah achieved a phenomenal 93% occupancy level during 2007. Ras Al Khaimah therefore only needs to address the rising demand for residential properties and high-end tourism resorts while still balancing its unique cultural and ecological assets.

A visionary Ras Al-Khaimah government has made a commitment to its growing tourism market, investing funds into building a superior and greener Emirate. Luxury ‘palm-like’ manmadeislands,fivestarhotels,world-classmarinasandluxuryresidentialpropertyareallsettoputRasAlKhaimahonthemap.PropertyinRasAl-Khaimahbenefitsfrom its beautiful natural surroundings, including the longest stretch of coastline in the Emirates, sparkling turquoise waters and picturesque mountains. And it’s all only 45 minutes drive from Dubai International Airport. With land and property space in Dubai in very short supply, its neighbour is reaping the advantage.

TakingaleafoutofDubai’sbook,RasAl-Khaimahhasdevelopedaflourishingfreetrade zone, several business parks and has numerous world class tourist attractions inthepipeline.NodoubtbenefitingfromtheexperienceDubai,RasAl-Khaimahhastaken a very practical approach to property investment. For example, the Emirate already has procedures in place to sell Freehold title ownership. With bold ambitions for tourism and development, this steady

emerging Emirate is the ideal investment opportunity. As well as attracting some USD28bln of domestic and foreign investment since 2000, Ras Al-Khaimah real estate has a long list of attractive investment qualities including: • Taxfreebenefit• 100% freehold• Stable rental market• Foreign ownership• Year-round rental, offering fantastic buy-to-let opportunities

Ras Al Khaimah’s economy is estimated to grow at a rate of 15% to 18% in 2008, led by real estate and tourism sectors

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• Natural beauty – stunning beaches and mountain backdrop• Growing tourist destination -the new holiday destination of the Middle East

The government of Ras al Khaimah has created two specialized companies to execute and oversee the emirate’s real estate development, RAK Properties’ and Rakeen. With a sound capital of USD544mln, the public joint stock company RAK Properties’ main aim is to attract foreign investors of repute to launch state-of-the-art projects in the emirate. To date, it has been highly successful in this goal, having reported a net profitofUSD135mlnfor2007,onlyitssecondfinancialyearsinceinception.Moreoverthe company recently expanded its activities to the Abu Dhabi and Dubai markets and is considering future overseas investment opportunities in Georgia, Tanzania, Morocco, Egypt, and India.

• Julfar Towers - Julfar Towers is a residential and commercial freehold development that will be built 4m (2.5 miles) north of Ras Al Khaimah’s city center. The USD109mln project will comprise of two 40-storey towers, one residential tower andoneofficetower,andisthefirstprojectbytheRasAlKhaimah’sgovernmentestablished development company, RAK Properties. Julfar Towers will have views of the creek, mangroves and mountains, along with being minutes away from the Manar Mall, beaches and golf club. The completion date of the project is end of 2008.

• Al Hamra Village - Located to the southern end of Ras Al Khaimah City, the 5mln sq m expanse is a picturesque sight that is set around salt water lagoons, a championship golf course and its own marina. The residential project is dubbed as an excellent real estate development project that allows freehold property ownersachancetoredefinethemeaningofluxuryliving.

• Mina Al Arab - On a much larger scale is Mina Al Arab (Port of Arabia), a landmark coastal development, spreading over 300 mln sq m and valued at USD2.7 bln. 50% of the area will be used for construction and parking—including numerous resort hotels, 5,042 residential units, and 593 villas and townhouses—and the restwillbepreservedtoretainitsnaturalbeautyandecology.Theproject’sfirstphase is on schedule to be completed by 2010.

• Al Marjan Islands - Al Marjan Island is an offshore island tourism development being built in the south-west of Ras Al Khaimah. The USD 1.8 bln (USD2.2 bln) project will be located close to the Al Hamra Fort hotel and Al Hamra Village, approximately 27 kilometers (17 miles) from the city’s center. Al Marjan Islands willcompriseoffiveman-madecoral-shapedislands,coveringover2.7mlnsqmand extend approximately 2 km (1.24 miles) into the Arabian Gulf. It will contain 10 major hotel sites, 50 large villa sites, a marina and marina village, and a water theme park.

• The Cove - The Cove is a beachfront property being built as the second freehold development project in the city of Ras Al Khaimah. The USD60.5mln beach resort willcover50acresandcontain134Nubianstyle furnishedchaletsandafive-star beach hotel. It is located to the south of the city’s center along Ettihad Road, approximately a 40 minute drive from the Dubai International Airport. The unique investment opportunity of The Cove is meant for individuals who would like to have a holiday home, which they visit for 4 weeks of the year, and the remaining 11 months would have a guaranteed 7% net return per annum. The owner also has the facility to sell the property back to the developer at the market value.

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• Gateway City-TheGatewayCitywillconsistoffivephases,extendingover400mln square feet. Phase 1 will consist of an integrated city to service, support and supplement the capital city of Ras Al Khaimah. The estimated time for completion has been set at 2012. The development will herald a new era in the development of the emirate of Ras Al Khaimah. It is being planned with the utmost credence to deeply entrenched social, cultural and environmental values, whilst relying heavily on the most stringent and tested technological advances.

• RAK Financial City - RAK Financial City is being developed by the RAK Investment Authority, RAKIA. The City comprises of 12 ultra modern towers and will be the centerofRAKbusiness.RAKFinancialCitywillofferbusiness,financial, legal,logistic and insurance services in a free-zone environment.

FujairahTheinfluxofexpatriatesinFujairah,whichreflectsitsrapideconomicdevelopment,hascreatedstrongdemandfor luxuryflats,villasandofficespaceinthelastthreeyears. This has prompted investors and landlords to build large number of apartments and charge rents which the average Fujairah resident cannot afford. The emirate’s remarkable economic development has resulted in hectic activity in the local real estatemarketduringthelastfewmonths,withdemandforflatsincreasingbymorethan25%over thenumberofavailableflats.Private investmenthasbeenpouringinto the construction sector to cope with the spurt in demand since 1995. This has sometimes matched the growth, but on other occasions fallen short of demand. The continuous increase in demand for low-cost housing and office space in Fujairahsince 1995 has resulted in a construction boom, with building companies cashing in on the situation.

Influx of expatriates has created strong demand for luxury flats, villas and office space in the last three years

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Major Upcoming and Existing Developments in Fujairah

• Fujairah Tower - The 45-storey building, the highest such building in Fujairah and on the East Coast, has become Fujairah’s new landmark which can be seen miles away from Fujairah city. Construction of Fujairah Tower started in early 1999 and was completed in 2007. The multi-million tower is located at the Fujairah city centre, close to Al Diar Siji Hotel. It has succeeded in attracting a large number of investorsandbusinessmenflockingtotheemiratetosetupeconomicprojects.

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• Mina Al Fajer Resort - The emirate of Fujairah is developing USD160mln mountain-sea resort property, Mina Al Fajer Resort, which will be completed beforetheendof2009givingFujairahthefirstofwhatisexpectedtobeagrowingnumber of world-class, exclusive real estate projects.

• Al Jabar Tower - Fujairah’s efforts into the freehold market have been limited to the 43-storey 170-meter Al Jabar Tower, which will contain 270 residential apartments, commercial shops and showrooms and is being developed by Al Jabel Contracting.

AjmanAjman is the smallest among the rest of the emirates with only 260 sq km of land but a long coastal line gives this desert area a unique look of its own. The government of UAE in 2004 made this land area a major real estate investment front by declaring it freehold. Ajman real estate has thus been thriving and witnessing some of the major development and construction boom. Situated in the north of Dubai and the second emirate to be pronounced as freehold area, Ajman real estate has become one of the majorrevenuegeneratingandprofitdisbursingareaintheUAE.

To date, developers in Ajman have announced projects worth approximately USD21.78bln

Total Investments in Real Estate and Land Prices in Ajman

Source: Ajman Investment and Development Authority

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Till date, developers in Ajman have announced projects with total investments of approximately USD21.78bln as against USD953.05mln in 2005, USD118.81mln in 2003. These projects are expected to add at least 65,000 units and are expected to become available between 2009 and 2012. Meanwhile land prices have sky rocketed from just USD11/sq ft in 2003 to as high as USD100/sq ft in 2008.

Ajman was the only emirate to introduce freehold property after Dubai as early as in 2002. Recently, the Government of Ajman opened a special department - Ajman Development and Investment Authority – to regulate real estate development activities in the emirate.

The department will study and prepare freehold laws, escrow account law and strata regulationssimilar toDubai’s. Itwill alsodealwithdisputes related tofinanceandcontractual obligations. Ajman is working hard to improve and enhance its infrastructure facilities and has allocated funds in excess of USD0.3bln. In the year 2007, the government of Ajman assigned USD136.2mln towards infrastructure. In Ajman, prices average USD60/sq ft for studios and USD48/sq ft for 1 bedroom apartments. Demand for smaller housing units like studios and 1 bedroom apartments is surging in Ajman, mainlybecauseoftheinfluxofexpatriatesfromemiratesofDubaiandSharjah.

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Comparison between Ajman and Dubai Property Prices

Source: Real Estate Agencies, KFH Estimates

Approximately 200 freehold residential towers are under construction in Ajman

Real estate in Ajman is visualizing its progress in two different approaches. Ajman real estate residency projects and Ajman real estate business development projects which include many on going and many future mid to mega level projects. Real estate companies are now investing heavily in the property ownership in Ajman because the market of Ajman is comparatively immature with respect to Dubai but with equal if not greater possibilities of becoming major business market of the world. The emirate is striving to make a name for itself in real estate and tourism, spearheaded by Ajman Investment and Development Authority (AIDA) in conjunction with its development arm Aqaar. The intention is to transform the emirate into a popular destination for both tourism and business. Approximately 200 freehold residential towers are either under construction or have been completed since the city’s freehold regulations opened up the possibility of 100% ownership rights.

In October 2007, it was reported that the average price of building materials had gone up 20% from the previous year and that outsourced labour costs had gone up 30%. However, the emirate’s ability to use local contacts and knowledge to get work done, as well as price caps on some materials, has helped to restrain these inflationaryforces.Inaddition,cheaperandmoreliberalworkpermitsintheemiratemean fewer problems with labour as has been seen throughout the rest of the UAE. Despite Ajman’s advantages, challenges remain. One of the major concerns for developers is infrastructure, particularly roads, electricity and other public services to keep construction projects running on time.

Major Upcoming and Existing Developments in Ajman

• Al Naeymiyah Towers - Al Naeymiyah towers in Ajman, are100% ownership apartments, available in the emirate of Ajman. The towers are in the area of al Naeymiyah, hence the name. Phase 1, consists of seven buildings and phase 2, andconsistsofeightbuildings,tototal15buildingswith16floorseach.

• Al Khor Towers - Al Khor Towers, also referred to as Creek Towers, are freehold residential buildings being built close to the Ajman Khor (Creek). Its towers are identical to the towers of Al Naeymiyah Towers. Al Khor Towers will contain nine 16-storeyapartmentbuildings,withonly4apartmentsperfloor.AlKhorTowerswill be easily seen across Ajman’s skyline and will be built in close vicinity to the Etisalat building and Ajman City Center.

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• Green City-It isthefirstofitskindprojectinAjmanoffering654villasspreadover an area of 1.42mln sq ft. conveniently located villas offer vast open spaces, elegantly designed homes and landscaped greenery all around. With retail areas nearby, Green City is not just residential development but a complete community.

• Uptown Ajman - The development offers 1504 freehold villas spread over 3.5mln sq ft of area. Inspired by French architecture, Uptown Ajman offers a choice of six different types of villas. With dedicated green areas and recreation facilities, the development boasts of convenient location on the Emirates Road

• Ajman One - The USD0.9bln project will cover 72,000 sq m. Phase 1, which started in 2007 will be completed in three years time, and will have 12 freehold residential towers forming the core of the development. The construction of phase 2,whichisvaluedatDhs1.7bln,isunderwayandwillconsistofthreeofficetowers,a convention centre, and a 4-star business hotel with serviced apartments.

SharjahAlthough Sharjah tried to follow Dubai’s lead in property development, the Emirate has not been able to successfully establish a freehold property law. As a result, properties in Sharjah are still leasehold. Investors who are being priced out of Dubai are now considering Sharjah as an alternative investment opportunity. With prices still far behind Dubai and rental demand growing, Sharjah is experiencing the front end cycle of a property boom. Moreover lower rents and property prices in Sharjah draw people from other emirates, even if it means a daily commute to Dubai or sometimes even Abu Dhabi.

Major Upcoming and Existing Developments in Sharjah

• Nujoom Islands - Nujoom Islands, also referred to as Stars Islands, is the largest commercial, residential and tourism development project in the city of Sharjah. The USD4.9bln project will be built in three stages, over a period of 5 years, near the village of Hamriya. 60% of Nujoom Islands will be landscaped with beaches, gardens, parks, and roads, while the remaining 40% will contain structures. The project is being developed by Saudi-based real estate company Al Hanoo Holding Company. Comprising residential, entertainment, retail and leisure developments on ten islands, all to be constructed in several phases, the project includes an International Business and Financial Centre (IBFC).

• Sharjah Marina - Another project that was announced at the end of December 2007 is the Sharjah Marina, a mixed development project located near Dubai’s Mamzar Park area to be developed by Burooj Properties at an estimated cost of USD4.0bln. This will be 1 mln sq ft of development which will consist of a 2 km canal, 2.5 km beachfront, low-rise buildings, commercial, residential, retail and touristic outlets. The project is expected to be completed in 2013.

• Sharjah Jewe l - Developer JMS has announced plans to unveil a luxury hotel and commercial tower, called the ‘Sharjah Jewel’, worth USD0.5bln, at the Al Mamzar Lagoon in Sharjah. The tower, which is ideally located at the pristine beaches of Al Mamzar Lagoon, will heighten the sense of luxury for anybody working or residing there, and afford good accessibility to Dubai and Sharjah. The unique ‘hanging’ form of the Sharjah jewel will continue to rise dramatically at groundfloorplus55floors.

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Umm al-QaiwainAccording the existing real estate law regulating land and property ownership in Umm Al Quwain, property ownership in the emirate is limited to UAE and GCC nationals or corporate bodies owned by them. However it allows foreigners and expatriates to buy land within Umm Al Quwain but only in pre-designated investment zones. They can alsoenjoythebenefitsofownershipoftheirsurfacepropertyonthebasisofa99-yearold lease period.

Having identified the real estate, tourism and trade industries as potential growthsectors, the planners of Umm Al Quwain have executed a rather ambitious expansion programme, aside from investing heavily in infrastructure development. It aims to integrate these components seamlessly to provide a unique development to bolster the local economy and generate employment for thousands. Developers investing in real estate projects in Umm Al Quwain will now enjoy massive tax holidays and improved amenities like good roads, water and electricity connections, ready availability and hassle-free transportation of construction materials. In addition, Umm Al Quwain is planning to develop industrial and business areas to complement its booming residential market in the hope that the miniscule emirate would attract not only would-be residents but also business speculators.

The major property investors in Umm Al Quwain include South Asians, primarily IndiansandPakistanis.IraniansandRussiansalsofigureamongthebusinessmenflockingtotheemirate.

Major Upcoming and Existing Developments in Umm al-Qaiwain

• Al Salaam City/ Madinat Al Salam - One of most extensive realty projects that has been unveiled in Umm Al Quwain is the Al Salaam City, referred to in Arabic as Madinat Al Salam; it is an integrated residential and commercial development within the city of Umm Al Quwain. The estimated cost of this city is approximately USD8.3bln. Al Salam City is to be constructed in three different phases over a period of 15 years and is composed mostly of residential districts, high-rise towers, parks, playgrounds and entertainment centres.

• Umm Al Quwain Marina - The positive happenings in the emirate’s real estate market have also lured big players like Emaar Properties; among the latest offerings from the Dubai-based real estate giant is the Umm Al Quwain Marina, a community of 8000 stylish homes, designer hotels, sports & yacht clubs and retail centres, along the ocean, lakes and canals. The USD3.3bln worth, Umm Al Quwain Marina is spread over 2000 acres of land and features 450 acres of navigable water area.

Although currently foreigners and expatriates are debarred from possessing any property in their names, there is widespread belief among real estate consultants that this could soon change, paving the way for freehold property ownership within Umm Al Quwain.

Property ownership in Umm Al Quwain is limited to UAE and GCC nationals, however foreigners can buy land

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Conclusion

Among the GCC countries, UAE stands out as the leading real estate market in the region with USD500bn worth of announced projects expected to be delivered over the next few years. With the 23rd place among the world’s most competitive countries (Global Competitive Report 2007-08 issued by the World Economic Forum) coupled with the failure of the U.S. sub-prime crisis to dent the UAE economy, the country is set to attract new international investors wishing to relocate to this part of the region in the years to come.

The real estate market in the UAE has been tremendously successful for investors over the last 5 years. The UAE realty valuations have had 300% cumulative average appreciation in just 5 years. Looking at where these valuations have come from, with such high rates of cumulative average appreciation, it would be impossible not to worry about current valuations especially as there is no established resale market to provideaproperbenchmarkforvaluations.However,ourviewisthatthesignificantregulatoryandstructuralchangesthroughouttheemiratesoffermorethansufficientjustification for today’s real estate valuations, considering the extremely low basevaluations in the earlier part of the decade.

Although the real estate supply in the UAE is expected to grow in 2008-09, projections of the sector must essentially be based on economic growth realities. The performance oftherealestatesectorisareflectionoftheoveralleconomy.WithaGDPforecastbetween 7-8% for the next 5 years and the emergence of the UAE as a hub for investments in infrastructure building, demand for residential, commercial, hospitality and retail real estate will continue to increase in the budding emirates of Abu Dhabi, RasAlKhaimahandAjman.AbuDhabi realtysectorwillcontinue to reapbenefitsof high prices due to the huge demand and supply gap which is expected to remain intact till 2013. Moreover improvements in legislation as well as further deepening of the mortgage market will also act as catalysts for growth. Furthermore the delays and cancellations in the delivery of projects due to supply side bottlenecks such as shortage of raw materials and rising cost of labour will ensure a phased out supply in the market thus prohibiting a huge correction in the short to medium term (2-5 years) Although we forecast a correction in property prices in Dubai by 2010 based on our demand-supply forecast, the decline would only be limited to certain sectors of residential developments such as high-rise apartments. Prices of commercial market real estate, villas and low-rise apartments will continue to be underserved as they are expected to continue being in demand post-2010 given limited supply pipeline, thus balancing the decline in other sub-sectors. Therefore we expect to see Dubai real estate softly landing into a phase of stability rather than a crash or a severe correction in2010,whiletheoverallUAErealtysectorwillcontinuetoflourishledbytherelativelyunexploited markets of Abu Dhabi, Ras Al Khaimah and Ajman.

UAE’s realty valuations have enjoyed 300% cumulative average appreciation in just 5 years

UAE realty sector will continue to flourish led by the relatively unexploited markets of Abu Dhabi, Ras Al Khaimah and Ajman

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Chart Analysis

Dubai Office Market Valuation

Abu Dhabi Office Market Valuation

Source: UAE Central Bank, Colliers International, KFH

Comparison between Ajman and Dubai Property Prices

Real Estate Sector to GDP Dubai Residential Market Valuation

Abu Dhabi Residential Market Valuation

Total Investments in Real Estate and Land Prices in Ajman

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UAE Real Estate

SECTORResearch

12 September 2008

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“Reaching New Heights”

We maintain a positive outlook for the overall UAE real estate sector in 2008-09, fundamentally driven by Abu Dhabi and its huge demand-supply imbalance

Dubai real estate would experience a correction in the prices of residential developments in 2010 whereas the commercial segment will continue to boom, offsetting the fall in residential prices to some extent


Documents

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