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BuildingCycles:Growthand(In)stability

•  RealestatepricecycleshavefourdisOncOvephases(i)recovery,(ii)expansion,(iii)hypersupplyand(iv)recession.Giventhesupply/demandmetricsatplayweopinethatDubaiiscurrentlyintherecessionphaseofitssecondcycleandisexpectedtoenteritsrecoveryphasebylate2016.Although,realestatepricecyclesareanindicaOonoffuturepricemovements,theyaregovernedbyunderlyingfundamentalsofsupplyanddemand,capitalflowsandbusinessacOvity.

•  Ananalysisofthepeakofthefirstpricecyclerevealsthatvillasout-performedapartmentsbymorethanafactorof2.Thislead

to a flurry of new developments flooding the villa segment in the second construcOon wave creaOng an over-supply,consequentlyleadingtothevillasegmentunderperformingapartmentsby15%inthiscycle.

•  Aparadigmshi^thathasoccurredduringthetwocycleshasbeentheshortageofaffordablehomes.AsDubai’spopulaOonconOnuestogrowbetween5-7%withthemiddle-classcomparingofthebulkofthepopulaOon,theneedforaffordablehomeshas been reflected in the second price cycle. Mid-income housing communiOes such as InternaOonal City and DiscoveryGardenshavefallenbyhalftothatofprimecommuniOessuchasDubaiMarinaandJumeirahIslandsinthethirdandfourthphaseofthepricecycle.

•  Whenmeasuringpricefallsandrises,indicesareagoodindicaOonofthegeneraldirecOonandhealthofthemarket,however

theyfailtoreflecttherealiOesontheground.UsingaMin-Maxanalysis,althoughhavingitsownlimitaOons,helpsshowthehighsandlowsofthemarket.AcomparisonbetweentwoindicatorsacrossfourcommuniOes,revealsthatthedropusingthemin-maxanalysisismorethantwicerelaOvetotheindices.ThisdropisnotareflecOonoftheenOremarketbuthelpsshowsnewlevelsofpricediscoveryintheformofdistresssales.

•  Thestrengthof theUSDollarhashada significant impacton realestateprices; thishasbeennaturalgiven thatnondollarcurrencyrelatedinflowsintothemarketaccountedfornearlyhalfofallinvestmentsmadeinthelastthreeyears.Thetaperingoffofforeigninflowshashadanimpactondecliningprices.

•  Giventheshapeshi^ingdynamicsofthecurrentpricecyclealongsidethedemandforaffordablehousingagainstthebackdropofanexpansionaryfiscalpolicyimpliesthatfurtherpricedeclinesmaybenearingatandend,andthataninflecOonpointisonthehorizon.

ExecuOveSummary

1  PriceCycles

2  SurgesandDeclines3  RealEstateandtheDollar4Conclusion

Contents

4

PriceCycles

“Behold,therecomesevenyearsofgreatplentythroughoutallthelandofEgypt.Andthereshallarisea^erthemsevenyearsoffamine;andalltheplentyshallbeforgoSeninthelandofEgypt”–KingJamesBible

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2014-04-01

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2015-02-01

2015-07-01

Phase1.Recovery

Phase2.Expansion Phase3.Hypersupply

Phase4.Recession

8years 4/5years

Phase1.Recovery

Phase2.ExpansionPhase3.Hyper

supplyPhase4.Recession

ThePropertyPriceCycleTheory

RealestatecyclescanbecategorizedintofourdisOncOvephases;(i)recovery,(ii)expansion,(iii)hypersupplyand(iv)recession.Thesephasesaredefinedby twostagesofup trends,whendemandoutstrips supplypushingpricesonanupwardtrajectory,andtwostagesofdowntrends,whensupplyoutstripsdemandcausingprices to fall.Whilst it isasourceofperpetualdebateas towhich stageof thecycleaanymarket isat, it appearsas ifDubai is currently in itssecondcycleinphase4aspricesconOnuetotaperdownwards.

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Index

8yearCycle

6yearCycle

10yearCylce

6

TimingsoftheCycles

8years 8years

6years

10years

TheOmeperiodsofrealestatecyclescanrangefrom4yearsto12years,usuallywithanaverageof8years.Theabovechartdepicts the scenarios that could occur in Dubai given different cycle lengths. In a six-year cycle we can expect prices toreboundinthethird-quarterof2016,asthemarketenterstherecoveryphaseof itsthird-cycle.However, ina longertermscenariowecanseeareboundin2018,orevenaslateas2020.Although,pricecycletheorycanbeaindicaOonofarebound,thelengthofthecyclesaregovernedbyfundamentalsofsupplydemandmetrics,capitalflowsandjobcreaOon.

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2019-04-01

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ThroughtheLookingGlass…8years 6years

IncepOonoffreehold

GlobalFinancialCrisisInflecOonPoint

DubaiWinsWorldExpo2020

OilPriceCrashBegins

WorldExpo2020

InflecOonPoint

Giventhefactthatconcernsof“hyper-supply”havebeenabated,andthatsupplyisalreadydraggingfarbelowesOmatelevels(refertoourpresentaOonthe“TautologyofSupply–2015Q4”)andthefactthattransacOonlevelshasalreadystarted towitness an increase in certain communiOes (refer to our presentaOon “Follow theMoney – 2015Q4“), itappearsasifDubai’srealestateisfollowinga6yearlifecycle,implyingthattherewillbeaninflecOonpointsomeOmein2016,asfiscalpolicysOmulatesenduserdemandonthebackofconOnuedjobcreaOon.

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8

SurgesandDeclines

“LookatmarketfluctuaOonasyourfriendratherthanyourenemy;profitfromyourfollyratherthanparOcipateinit”–WarrenBuffet

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TroughtoPeak PeaktoTrough TroughtoPeak PeaktoNow

Villas Apartments

PriceSurgesandDeclines

5.5years 2.5years 3.6years 1.1years

Cycles1:Jan2003–Jan2011 Cycles2:Jan2011–TillDate

AOme series analysis of the peaks and troughs of thefirstDubai real estate cycle shows that the villa segment hadappreciatedmorethantwicetothatoffapartments.Thisshortageofvillascanexplaintherushofdevelopersintothissegmentinthesecondcycle,leadingtoanoversupplyhighlightedinourpreviousreport,“Dubai:AcloserLookinto2013(Q1 2014)”. The oversupply became apparent on a relaOve basis as the apartment segment witnessed higherappreciaOonratestothatofvillasinthesecondpricecycle.

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Cycle2Peak Now Change

Jumeirah Islands 1,812 1,508 -16.8% Dubai Marina 1,818 1,523 -16.2%

Arabian Ranches 1,313 1,102 -16.1% Jumeirah Golf Estates 1,715 1,459 -14.9%

Downtown 2,574 2,217 -13.9% Springs and Meadows 1,241 1,078 -13.1%

Greens 1,558 1,360 -12.7% The Views 1,829 1,600 -12.5%

JLT 1,397 1,227 -12.2% Jumeirah Park 1,350 1,186 -12.1%

Palm Jumeirah (Apartments) 1,926 1,699 -11.8% Sports City 1,011 902 -10.8%

Palm Jumeirah (Villas) 2,783 2,500 -10.2% International City 778 711 -8.6%

DSO 935 855 -8.6% Discovery Garden 905 834 -7.8%

AnAnalysisofTroughs….

Cycle1Peak Trough Change

Greens 1,634 797 -51.2% Sports City 1,244 629 -49.4%

International City 733 387 -47.2% Arabian Ranches 1,456 791 -45.7% Discovery Garden 846 482 -43.0%

Downtown 2,568 1,480 -42.4% Palm Jumeirah (Villas) 1,744 1,129 -35.3% Springs and Meadows 1,261 848 -32.8%

Palm Jumeirah (Apartments) 1,699 1,152 -32.2% JLT 1,015 700 -31.0%

Dubai Marina 1,292 941 -27.2%

A comparison between the current and previous real estate cycles reveals that in the last downturn themid-income housing segmentincurredthe largestpricedrop.However, inthesecondcycleaparadigmshi^occurred,duetoashorrallofaffordablehousingandoversupplyofhigh-endunits,themid-incomesegmenthasbeenthemostresilientinthedownturn.

High-endProperXes

Mid-incomeCommuniXes

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TheMin-MaxEffect

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0%InternaXonalCity Greens JumeirahIslands JumeirahPark

Index

Min-Max

AlthoughindicesgenerallygiveareasonableindicaOonofmarketdirecOon,theyfailtocapturethefullextentofpeaksandtroughs.Theabovechartshowsthedropinpricesusinganindexandamin-maxscenario.AswecanseethatthefallsinallcommuniOesthroughthemin-maxanalysisaremuchlargerthantheindex,highlighOngthatpricedeclinesinthesecommuniOeshavebeendeeperthanthegeneralconsensus.ThisdropisnotareflecOonoftheenOremarketbuthelpsshowsnewlevelsofpricediscoveryintheformofdistresssales.

CommunityPriceChange(PeaktoTrough)IndexVs.Min-Max

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12

RealEstateMarketsandtheDollar

“IfinGodwetrust,thenallothersmustbringdata”–W.EdwardDeming

13

TheImpactoftheMightyDollar…

The above chart highlights the correlaOon between the US Dollar and real estate markets. As the table highlights,Dubai’srealestatemarketsappeartohavebeenimpactedthemostwiththeriseoftheUSD(thiswasreferredtoearlierinourpresentaOon“TheCuriousCaseofPaymentPlans”).Thisisnaturalgiventhefactthatnondollarcurrencyinflowsintotherealestatemarketcountedfornearlyhalfoftotalinvestmentsmadeinthelastthreeyears.TheresurgenceoftheUSDhasledtoataperingoffofforeigninflowsconsequentlyleadingtopricedeclines.

HongKong Singapore UK Canada Dubai USDollar

2011Q2 6.1% 2.0% -0.4% 2.7% 0.0% -1.9%2011Q3 -0.3% 1.3% 1.9% 3.4% 0.0% 5.9%2011Q4 -1.7% 0.3% -1.1% 0.3% 3.0% 1.8%2012Q1 1.7% -0.2% 0.0% -0.3% 1.0% -1.7%2012Q2 9.2% 0.5% 1.2% 2.3% 4.8% 3.3%2012Q3 4.6% 0.7% 1.8% 1.8% 4.6% -2.1%2012Q4 6.7% 1.8% -0.7% -0.7% 5.3% -0.2%2013Q1 5.2% 0.6% -0.1% -0.7% 1.7% 4.1%2013Q2 1.5% 1.0% 1.9% 1.6% 5.7% 0.3%2013Q3 1.9% 0.4% 2.6% 2.3% 7.0% -3.7%2013Q4 -0.2% -0.8% 1.0% 0.3% 8.7% -0.2%2014Q1 -0.4% -1.3% 2.3% 0.6% 12.0% 0.1%2014Q2 1.4% -1.0% 4.0% 1.5% 7.1% -0.5%2014Q3 5.4% -0.8% 3.9% 2.6% 0.0% 7.8%2014Q4 5.0% -1.1% -0.4% 0.4% -1.1% 5.4%2015Q1 5.4% -1.1% 0.8% 0.1% -5.1% 8.8%2015Q2 3.4% -0.9% 1.2% 1.5% -3.0% -3.0%2015Q3 -1.6% -1.3% 3.0% 0.0% -2.4% 0.9%

CorrelaXontoUSDollar 0.23 -0.19 0.01 -0.01 -0.44

RealEstateMarketsPriceChangeAgainsttheUSDollar

REIDINandothermarketsources

Conclusions PriceCycles SurgesandDeclines

RealEstateandtheDollar Conclusion

Real estate price cycles havef o u r d i s 3 n c3 v e p ha s e s(i) recovery, (ii) expansion, (iii)hypersupplyand(iv)recession

The3meperiodsof realestatecycles can range from 4 yearsto 12 years, usually with anaverageof8years

Although price cycle theory may given anindicaOon of market peaks and trough, theunderlyingengineisbasedonfundamentalsintheform of supply/demand, business acOviOes, andcapitalflows.Ina6yearcycle,weexpectarecoveryinlate2016,andpricespeakingby2019/2020 intherun-uptotheWorldExpo2020.Given these dynamics,we opine that the currentdiscounts available in the market are aSracOveprice points for bargain hunters to capitalize onthebullruninthefuture.

Giventhesupplyanddemandmetricsatplayweopine that Dubai is currently in the recessionphaseofitssecondrealestatecycle.AssupplyconOnuestolagandpricefallsstarttotaper, Dubai could be entering the recoveryphaseofitsthirdcycleinlate2016.However,inalonger term scenario we can see a rebound in2018,orevenaslateas2020.Apriceanalysisofoff-planprojectsversus readyproperOesfromtheirlaunchOlltheircompleOon,revealsthatbothappreciateatsimilarlevels.

In the first asset boom, villas had superior pricegrowthsbyafactorof2relaOvetoapartments.Thiscaused an oversupply of villas in the secondconstrucOonwave as developers tried to capitalizeonthegrowingdemand.Duetothelopsidednessofsupplyanddemand,apartmentsexperiencedhighergrowthratesinthesecondcycle.Asimilardynamictranspiredbetweentheaffordablehousing segment and prime properOes. Anoversupply in the first second cycle of primeproperOes and a shortage in affordable homes,caused a reversal of roles for price appreciaOon inthesegments.

Dubai has a moderately high inverse correlaOonbetween real estate prices and the US dollarstrength. When looked across a variety of ciOes,Dubai has the highest, for example, it is twice tothatofSingapore.This is natural given the fact that non dollarcurrency inflows into the real estate marketcounted fornearlyhalfof total investmentsmadeinthelastthreeyearsTheresurgenceoftheUSDhasledtoataperingoffof foreign inflows consequently leading to pricedeclines.

REIDIN.com is the leading real estate informaOoncompanyfocusingonemergingmarkets.REIDIN.comoffers intelligentanduser-friendlyonlineinformaOon soluOons helping professionals accessrelevant data and informaOon in a Omely and costeffecOvebasis.ReidinisthedataproviderfortheseresearchreportsConcordTower,No:2304,DubaiMediaCity,POBox333929Dubai,UnitedArabEmiratesTel.+97144331398Fax.+97143604788www.reidin.cominfo@reidin.com

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ResearchLibrary

Mansions and Maisonettes

Cuvology Size Matters tomorrowland Dollars and Sense

The Signal and the Noise

Killing them Softly

Curious Case of Payment Plans

The Ramadan Phenomena

The Metro Effect

Renters Ball

Sell in May and Go away

Path to Symbiosis Boom-Bust-Ology

Mystery and Variety of Mid-Income Housing

The Evolution of Dubai Communities

Follow The MoneyTautology of Supply

2015

2014ResearchLibrary

Shocks, Shift & Return to First

PrincipleHunt for Yields Amidst a Slowdown,

Underlying Strength

Where to Build Cityscape Effect

The New Normal Paradox of Affordable housing

Real Estate Value Guide

Tale of Two Markets

Road Ahead Buy Land Where the City Ends

Trophy Buying phenomena

A Closer Look into 2013

2013

What Now? The City is Built upon its Commerce

Road to ProsperityIf you Build it they will Come

OurAspiraOonandMoSo

“Nobarriercanwithstandthestrengthofpurpose”

HHGeneralSheikhMohammedBinRashidAlMaktoumTheRulerofDubaiandPrimeMinisterofUAE