Al Masah Capital: GCC Real Estate Sector

Transcription

1 Al Masah Capital: Sector December 215

2 GLOBAL REAL ESTATE MARKET Global real estate market fell back in 214 due to policy changes in China and other Asia Pacific countries, which led to weakening in land sales. However, sales volumes excluding land sales registered a robust growth courtesy of global liquidity in the markets. Real estate investment to gain traction in 215 Global real estate investment fell in 214 for the first time in 5 years, dropping 6.3% to USD 1.21 trillion from 1.29 trillion in 213. The slowdown was primarily due to drop in Chinese land purchasing affected by the policy related changes coupled with tightening measured in other APAC markets. Other regions recorded a strong performance with Americas up by 11.4% and Europe, Middle East and Africa (EMEA) up by 11.8% in 214 as compared to the previous year. Going forward, real estate investment is expected to gain traction in 215, growing by 11% to reach USD 1.34 trillion driven by increased activity in Americas and EMEA markets. Exhibit 1: Global Real Estate Investment (2115E) 1,6 1,4 USD bn 1,342 1,292 1,211 1, E Europe, Middle East & Africa Americas Asia Pacific Source: Cushman & Wakefield, Al Masah Capital Research Offices and hospitality sectors witnessed the strongest investment activity in 214 followed by retail and industrials. Investments in hospitality sector grew by 16.6% in 214, accounting for 5.5% of total new investments while office real estate investment accounted for nearly 27% of total new investments in 214. Multifamily residential sector registered a flat performance on the year with modest US growth offset by falls in Western Europe and parts of Asia. By fund type, sovereign wealth and private equity funds registered strong growth in real estate investments in 214. Private equity funds cut spending in Asia and increased their allocation to Southern Europe as well as Western Europe and North America while Sovereign Wealth funds continued to focus in Europe, but investment into North America and Asia grew at a faster pace. Pension funds were also active in 214 and increased spending in Northern Europe and Australia. 2

3 GCC ECONOMIC OVERVIEW Booming economy GCC s economy stood at USD 1.65 trillion in 214 as compared to USD billion a decade ago, growing at a CAGR of 11.9%. While the recent drop in oil prices have subdued GDP growth in the short term, the GCC economy is expected to recover on back of supportive economic policies and strong performance in nonoil sector. According to IMF, GCC's economy is estimated to reach USD 2. trillion by 22, with Saudi Arabia contributing USD 92 billion, followed by the UAE (USD 52 billion), Qatar (USD 269 billion), Kuwait (USD 196 billion), Oman (USD 81 billion), and Bahrain (USD 4 billion). Exhibit 2: GDP, Current Prices (2115, USD tn) 2.5 USD Trillion E 22P Saudi Arabia UAE Qatar Kuwait Oman Bahrain Source: IMF, Al Masah Capital Research While the GCC region as a whole is still heavily dependent on oil revenues, the nonoil sector comprising manufacturing, tourism, hospitality, and trade, has emerged as the major growth engine, especially in the UAE. Consequently, despite the steep decline in oil prices in H2 214, the GDP growth in GCC was not severely affected due to strong performance of the nonoil sector and the large cash buffers, which ensured steady levels of spending and investment. According to the IMF, the region's GDP grew at 3.6% in 214, at par with its performance in 213 and considerably higher than developed countries such as the US (2.4%) and the UK (2.6%) and the global GDP average which stood at 2.5%. Among the GCC countries, Qatar recorded the strongest growth of 6.2%, followed by Bahrain (4.5%), the UAE (3.6%), Saudi Arabia (3.5%), Oman (2.9%) and Kuwait (1.3%) in 214. Over the last five years, the GCC economy has grown at an average annual rate of 5.% against the world average growth rate of 2.8%. Within the GCC region, Qatar recorded the highest growth rate of 9.7%, followed by Saudi Arabia (5.2%), Bahrain (4.%) and the UAE (4.%) respectively. The increased contribution of the nonoil sector to the economy has been the major reason for the relatively better performance by the GCC countries, surpassing the growth rates of the developed countries in the last five years. 3

4 Exhibit 3: Average Annual GDP Growth During the Last Five Years (2114) 12.% 1.% 9.7% 8.% 6.% 4.% 2.% 5.2% 5.% 4.% 4.% 3.5% 3.3% 2.8% 2.2% 1.7%.% Qatar Saudi Arabia GCC UAE Bahrain Oman Kuwait World Average Average Annual GDP Growth Rate (%) US UK Source: IMF, Al Masah Capital Research Continued GDP growth in the region has translated into higher personal income levels. In 214, GCC s per capita income grew at 7.6% CAGR to reach USD 33,135 from USD 15,895 in 24, highlighting the region s rising affluence levels. The GCC region has a relatively higher per capita income as compared to the world average of around USD 1,84 and MENA average of USD 1,334. Within the GCC region, big differences in per capita income can be observed across the countries. Qatar boasts the highest per capita income of USD 93,397 in the GCC, nearly double of that in the UK (USD 45,63) and the US (USD 54,629). Kuwait has the second largest per capita income in the region of around USD 5,534, followed by the UAE (USD 42,522). Exhibit 4: Per Capita Income (214, USD) 35, 3, 25, USD Qatar US Kuwait 54,629 5,534 93,397 2, 15, 1, UK UAE GCC Saudi 45,63 42,522 33,135 25,49 5, Oman 2, World MENA 1,84 1,334 GCC per Capita Income (USD) Per capita Income (USD) Source: IMF, Al Masah Capital Research 4

5 Favorable Demographics During 2414, the GCC population grew at a CAGR of 4.%, almost double the rate witnessed in MENA during the same period and considerably higher than the world average of 1.2%. Moreover, the region also enjoys a favorable demographic dividend compared to some of the developed western countries. Nearly 7% of GCC s population is in the workingage group (aged 15 59), as against to less than 6% in the UK and US. Exhibit 5: GCC Population Growth and Workingage Population 6 millions GCC Population Source: IMF, Al Masah Capital Research Qatar 86.2% UAE 76.9% Kuwait 66.3% Bahrain 65.% Oman 59.9% US 57.8% UK 57.4% Saudi 51.8% Share of working age population Such a powerful and favorable demographic dividend has been one of the major drivers of consumer spending and investments. In the real estate sector, the residential housing and retail markets would significantly benefit from increased demand for housing and higher consumer spending by the workingage population. In the past decade, GCC's economic growth and government s efforts toward economic diversification has also increased regional job opportunity for expatriates. Data shows that, as of 214, 48.9% of the total GCC population consisted of expatriates while the proportion of expats visàvis locals varies significantly across member states. The expatriates accounts for more than 8% of the total population in Qatar and UAE while this share is less than 45% in Oman and Saudi Arabia. Exhibit 6: Share of GCC Expatriates Population (214) 1% 13% 16% 31% 8% 48% 51% 56% 6% 67% 4% 2% % 87% 84% 69% 52% 49% 44% Qatar UAE Kuwait Bahrain GCC Oman Saudi Arabia Share of expatriate in total population (%) Share of locals in total population (%) Source: E&Y, Gulf Migration, Emirates 24/7, IMF, Al Masah Capital Research 33% 5

6 The expatriate population plays a significant role in the growth of the regional economy with the education and real estate sectors receiving great impetus. The growing expat population has inevitably led to the increase in demand for larger and more luxurious housing which in turn has spurred construction in the premium residential real estate segment. Moreover, the government's decision to allow foreigners to own properties has also surged the real estate demand in the last few years. Tourism and Upcoming Major Events Most of the GCC nations have been developing their tourism industry as a part of their economic diversification strategy, with arrival numbers increasing in most destinations. The rising flow of tourists to GCC has also helped drive demand for real estate in hospitality and retail sector, particularly in Saudi Arabia and the UAE. On an average, these two countries annually receive more than 25 million tourists, accounting for 77.2% of the total estimated international tourist arrivals in the GCC in 214, to perform Hajj and Umrah at the holy city of Mecca and for leisure/business. Further, according to The World Travel & Tourism Council, international tourist arrivals in the GCC region are expected to grow at an annual average growth of 7.8% between 214 and 224. Exhibit 7: International Tourist Arrivals in GCC (in millions) in millions E 224F Saudi Arabia UAE Bahrain thers Source: The World Travel & Tourism Council; Al Masah Capital Research GCC countries are also organizing mega events such as the Dubai World Expo 22 in the UAE and the FIFA World Cup 222 in Qatar, which will provide a major boost to the region's tourism industry in the coming years. Further, successful resolution of the proposed unified visa program, which will enable travel across the Gulf region on a singleentry visa valid for a month or a multipleentry visa valid for a year, will further boost tourist inflow in the region. 6

7 GCC REAL ESTATE MARKET Post recession, GCC has emerged as an attractive destination for global investors and the real estate and construction sectors have become key economic barometers for the growth in the region. REAL ESTATE PROJECTS IN THE GCC According to Zawya Projects, the total value of ongoing and onhold real estate projects in the GCC was estimated at USD 1.72 trillion as of September 215. The UAE led the real estate market accounting for nearly 51% of the total regional projects by value (amounting to USD.88 trillion), followed by Saudi Arabia. Exhibit 8: Value of Real Estate Projects (ongoing and onhold) in GCC, as of Sept 215 Total Value of Real Estate Projects = USD 1.72 trillion 2.6% 2.2% 51.1% 12.6% 4.7% 26.8% UAE Saudi Arabia Qatar Kuwait Bahrain Oman Source: Zawya Projects, Al Masah Capital Research In terms of project status, nearly 66% of the GCC projects (by value) are currently ongoing, equating to a total value of USD 1.1 trillion while a substantial portion which equates to USD.6 trillion, are onhold as of September 215. Going forward, the sluggishness in real estate projects is expected to reduce as both countries have increased their pace in reviving the nonoil sectors, with the real estate industry being the primary benefactor. Exhibit 9: Real Estate Projects by Status (By Value), as of Sept 215 Total Project Value (USD bn) % 8% 6% 4% 2% % 73% 27% 56% 44% 37% 63% Source: Zawya Projects, Al Masah Capital Research 76% 82% 24% 18% 61% 66% 39% 34% Bahrain Kuwait Oman Qatar Saudi Arabia UAE GCC On Hold Ongoing 7

8 UAE REAL ESTATE SECTOR Introduction The UAE real estate sector suffered a sharp downturn following the global economic slowdown in 29. Since then, the sector has recovered at a swift pace that was well supported by improving economy, robust performance of nonhydrocarbon sectors and favorable policy decision. Consequently, the growth in real estate sector GDP has outpaced the total GDP growth in the UAE since 212. Exhibit 1: UAE GDP % Growth by Sector (2414) E 214E 2 3 Total GDP Growth Construction GDP Growth Real Estate and business Services GDP Growth Source: National Bureau of Statistics, Al Masah Capital Research The share of real estate GDP as a share of total GDP has also recovered since 211 and the sector has emerged as the second largest contributor to the UAE's overall GDP in 214. The real estate and construction sectors, collectively accounted for 19.3% of the UAE's total GDP in 214, with individual contribution of 1.3% and 9%, respectively. Exhibit 11: UAE GDP Contribution by Sector (2414) % share in total GDP E 214E Construction Real Estate and Business Services Source: National Bureau of Statistics, Al Masah Capital Research 8

9 The recovery in real estate market was also supported by increasing Foreign Direct Investments (FDI) which nearly doubled from AED 3.5 billion in 27 to AED 71.3 billion in 214. Foreign portfolio investments (FPI) also recovered from 29 economic slowdown to reach AED 4 billion in 212. Exhibit 12: FDI and FPI in Real Estate Sector (2712) 8 in AED Billions Source: National Bureau of Statistics, Al Masah Capital Research Impact of Oil Prices Foreign Direct Investments Foreign Porfolio Investments Lower oil prices are leading many in the GCC to wonder about the possible implications for real estate. According to Markit, the seasonally adjusted UAE and Saudi Arabia Purchasing Indices (PMI) remained well above the 5 mark during the last year, suggesting a healthy expansion in the markets private nonoil sectors. This is a positive indicator for real estate sector as nonhydrocarbon sector is an important source of demand for property owners in the region. Exhibit 13: UAE and Saudi Arabia Purchasing Manager Indices (214Q2 215) Jan/14 Feb/14 Mar/14 Apr/14 May/14 Jun/14 Jul/14 Aug/14 Sep/14 Oct/14 Nov/14 Dec/14 Jan/15 Feb/15 Mar/15 Apr/15 May/15 Jun/15 Saudi Arabia PMI UAE PMI A figure above 5 suggests economic expansion and below implies contraction. 5 means no change on previous month. Source: Markit, Al Masah Capital Research Jul/15 Aug/15 Moreover, despite posting huge fiscal deficits, the GCC governments are unlikely to cut back on current levels of spending and will utilize large fiscal reserves to fund infrastructure projects. These large publicly funded, infrastructurerelated schemes tend to stimulate hinterland construction activity, and thus support growth in the real estate sector. 9

10 Market Statistics UAE Office Market As of 214, the UAE (including Dubai and Abu Dhabi) holds the largest office stock of 1.7 million sqm of GLA in the GCC. While the office market largely remained oversupplied, the availability of good quality office space in prime locations such as Jumeirah Lake Towers, Business Bay, Tecom regions of Dubai, and Al Reem Island, Muroor, Corniche, and Sowwah Square, among others in Abu Dhabi were scarce in 214. Exhibit 14: UAE Office Supply (2117F) 5, 4, 3, Abu Dhabi Office Supply (in ' sqm) 1, 8, 6, Dubai Office Supply (in ' sqm) 2, 2,2 2,53 2,9 3, 3,1 3,2 3,34 3,655 4, 2, 5,6 6,3 7,1 7,4 7,6 7,8 8,5 8, E 216F Completed Future Supply 217F Completed E 216F Future Supply 217F Abu Dhabi real estate continues to offer a good depth and breadth of opportunities for occupiers, although there is a limited pipeline of new office space which will impact the market in the coming years. The supply of both Grade A and B office stock in Abu Dhabi stood at 3.1 million sqm in 214, growing at a CAGR of 8.95% from 2.2 million sqm in 21. Though the overall office segment of Abu Dhabi remained an oversupplied market, the city faced a shortage of Grade A office space in 214. The city is expected to receive fresh supply of 14, sqm of GLA office space in 215 with the total stock rising to 746, sqm between 215 and 217. With mixed availability of commercial space across the Abu Dhabi market, potential occupiers remain focused on prime Grade A stock, which is sustaining rents at the top end of the market. In Dubai, business occupier demand remained focused on high quality office space (Grade A) in prime locations due to limited availability within these offerings. The current market expects an increase in the supply of Grade A office space to meet the demand for quality. Single ownership buildings in the city continue to account for the majority of demand, while strata projects remain less popular. The supply of both Grade A and B office stock in Dubai stood at 7.6 million sqm in 214, growing at a CAGR of 7.93% from 5.6 million sqm in 21.The area around the Expo 22 site is expected to benefit most from the new demand, boosted by established infrastructure facilities such as Al Maktoum International Airport and Jebel Ali Free Zone. Dubai International Financial Centre (DIFC), Jumeirah Lakes Towers, Silicon Oasis and Dubai Investment Park are also expected to see new completions during the period. With significant additions anticipated in the Grade A space, Dubai s office stock is expected to reach a GLA of 8.5 1

11 million sqm in 215 and 8.7 million sqm in 216. The expected fresh supply of office stock stands at 1.24 million sqm between 215 and 217. Exhibit 15: UAE Office Vacancy & Gross Rental Yield Rates (2115) UAE Office Vacancy Rates (%) UAE Office Gross Rental Yield (%) 5% 16% 4% 37% 39% 13.% 12% 1.% 3% 3% 25% 25% 31% 8% 1.% 1.% 1.% 2% 21% 23% 9.% 29% 24% 23% 1% 8% 4% % Q2 215 Abu Dhabi Dubai % Abu Dhabi Dubai Increased demand for Grade A office space from the government sector and stateowned enterprises in Abu Dhabi led the vacancy rates to improve from 39% in 213 to 25% in 214. Similarly, increased business activity in the prime CBD area of Dubai due to its central location has led to the fall in vacancy rates from 29% in 213 to 24% in 214. As of Q2 215, the vacancy rate in Dubai further retracted to 23% while that in Abu Dhabi remained unchanged. The prime rental yield from both the markets remained unchanged at 1% as of Q While the government sector and stateowned enterprises continue to drive demand for large office spaces, the private sector is mainly focused on smaller office spaces, balancing the market occupancy rates in the UAE. Going forward, vacancy rates in both the major hubs are expected to remain unchanged as most nearterm completion projects have been precommitted. Exhibit 16: UAE Office Rentals (2114) 2,5 2, Abu Dhabi Office Rents (AEDper sqm PA) 2,5 2, Dubai Office Rents (AED per sqm PA) 1,5 1,5 5 2, 1,2 1,7 1,3 1,54 1,3 1,54 1,18 1,73 1,18 1,73 1,18 5 1,615 1,6 1,6 1,85 1,87 1, Q2 215 Grade A Grade B Q2 215 Prime CBD The Grade A office rent in Abu Dhabi stood at AED 1,73 per sqm PA in 214, registering an increase of 12.3% from AED 1,54 per sqm PA in 213, primarily due to the decline in fresh stock during the period and increased demand. On the other hand, Grade B rents 11

12 in the city remained muted in 214 at AED 1,18 per sqm PA, unchanged from previous year. As of Q2 215, the rentals of Grade A and Grade B offices remained at the same level as in 214. Going forward, the rents for Grade B offices are expected decline due to limited demand arising from lower oil prices and uncertain economic conditions. Abu Dhabi Office Market Rental Growth and Precrisis levels 8 Recent Build Old Stock Prime Fitted Prime Shell & Core 6 16 Good Typical building Low quality building % change during % decline since precrisis levels in 29 Similar to Abu Dhabi, Dubai faced a shortage of Grade A office space in 214. As a result, rents for office space in prime CBD area rose 1.1% in 214 to reach AED 1,87 per sqm PA from AED 1,85 per sqm PA in the preceding year. However, the increase was marginal during the year as compared to 213 when the rents witnessed a substantial hike of 15.6% due to limited supply and increased demand. Landlords of prime buildings in Dubai are adopting a more mature approach by gradually increasing asking rents as occupancy rates increase. 214 saw relatively limited new office supply coming to the market in Dubai, driving rental growth in some areas. As of Q2 215, the market witnessed a marginal hike in rental space of.5% with the current rate standing at AED 1,88 sqm PA, as tenants seek to optimize or rationalize their space requirements and consolidate their operations. With over 277, jobs estimated to be created by Dubai Expo 22, more multinationals and startups are expected to establish offices in Dubai, providing a further boost to the commercial market in the forthcoming years. Dubai Office Market Rental Growth and Precrisis levels Bur Dubai 2 Business Bay 7 DIFC 18 Dubai Investmen 6 Jumeirah Lake To 3 Sheikh Zayed Ro 18 Tecom C % change during % decline since precrisis levels in 29 12

13 According to Reidin, transaction levels in the office sector increased by 16% compared with 213 with close to 1,5 deals recorded by the Dubai Land Department in 214. The most transacted areas were Business Bay, Jumeirah Lake Towers and Tecom C, representing close to 8% of all office transactions in 214 from 9% in 213. In terms of size, most transactions in 214 were for midsized offices measuring from to 2, sqft, representing approximately 5% of all transactions, whereas small units of less than sqft represented 3%. Although transaction levels improved, sales price growth remained relatively slow, with a yearly increase of only 9% since Q4 213, and still 5% lower, on average, than at their peak in 28. Exhibit 17: Dubai Average Office Sales (AED per sqft PA, 2814) 5, 4, 3, 2, Business Bay DIFC Dubai Investment Park Jumeirah Lake Towers Tecom C Source: Asteco, Al Masah Capital Research In 215, the UAE office rentals are expected remain stable, which is good news for occupiers. However, vacancy rates will remain significant despite a continued gradual improvement in the strata title market, where different investors own one or more floors. Office rental rates in Dubai remained the highest in the UAE. After taking into consideration the cost and quality of living in Dubai & Abu Dhabi, many companies still opted to setup in Dubai rather than the capital. Sharjah and Al Ain predominantly appeal to local companies operating in these cities and, therefore, demand levels remained relatively subdued. Some of the major ongoing commercial projects in the UAE includes: Dubai World Central (Dubai), Chemicals Industrial City (Abu Dhabi), Expo 22 Site (Dubai), Dubai World Central Aviation City (Dubai) and The Opus (Dubai). 13

14 UAE Residential Market The UAE s residential sector remained upbeat buoyed by the positive macroeconomic, regulatory and population factors which continue to drive growth across all the regions. The country is also set to commence an AED 5.7 billion (USD 1.6 billion) affordable residential construction project to accommodate as many as 385, expatriate workers in a bid to improve the living standards for expatriates, who are increasingly returning to South Asia due to the rising rents. Further, the government has also proposed a new law that mandates developers to allocate about 15%2% of their projects to the affordable housing category. The implementation of such positive policy decision will drive the residential market in the country. Exhibit 18: UAE Residential Supply (2117F) 3 25 Abu Dhabi Residential Supply (in ' units) 5 4 Dubai Residential Supply (in ' units) E 216F 217F E 216F Completed Future Supply Completed Future Supply 217F Although the demand for residential units in Abu Dhabi stood at approximately 29, units for 214, only 244, units were available, demonstrating an undersupply condition in the city s residential market, including its affordable housing segment. Nevertheless, approximately 6, residential units are expected to enter the market by the end of 215, with the numbers further increasing to 6, and 13, in 216 and 217, respectively. With the resuming of government projects such as Louvre, new regulations for claiming housing benefits, and developers planning to push the onhold and delayed projects coupled with the launch new ones, the total stock of residential units is expected to increase to 25, and 256, units by the end of 215 and 216, respectively. As per Colliers International, the gap between residential demand and supply is currently 13.% in Dubai, indicating an oversupplied market. An additional 52, housing units are due to enter the market between 215 and 217. Going forward, this increase in supply is expected to be absorbed as the economy gains momentum and the city sees an increase in its expatriate workforce due to upcoming events such as Expo 22. Nearly 5.% of these additional units are likely to be targeted towards the uppermid and higherend of the market, concentrated across the areas of Business Bay, Dubai Marina, Culture Village, Legends, and Palm Jumeirah, among others. 14

15 Exhibit 19: UAE Residential Rentals (2114) 25 Abu Dhabi Residential Rents (in AED ' PA) 25 Dubai Residential Rents (in AED ' PA) Q2 215 Apartment (2 BR) Villa (3 B) The rents for 2BR apartments in Abu Dhabi increased 11% to reach AED 155, PA in 214 from AED 14, PA in 213, while that in the 3B villas increased 12% to reach AED 19, PA in 214 from AED 17, PA in the preceding year. The rental for 2BR apartments increased further during Q2 215 to AED 163, PA (up 4.9%) while there was marginal fall (down.6%) witnessed in the 3B villas during the same period, standing at AED 189, PA. In Dubai, the rents for 2BR apartments increased at a much higher rate of 18% than in Abu Dhabi to reach AED 15, PA in 214 from AED 127, PA in 213. However, the increase was comparatively less than that witnessed during 213, where the market rentals increased by almost 34%. As of Q2 215, the rents for 2BR apartments registered a fall of 11.1% to reach AED 133, PA. The rentals for 3B villas in Dubai increased at a much nominal pace of 5% in 214 to reach AED 228, PA from AED 217, PA in the previous year. During 213, the 3B villa rental rose by 19% with the market reaching a much stabilizing period as of Q2 215 touching the 213 mark, falling by 4.8% Q2 215 Apartment (3 (2BR) Villa (3 B) 15

16 Abu Dhabi Residential Rental Growth and Precrisis levels According to Asteco, the apartment and villa rents in Abu Dhabi are still 4%5% below the precrisis levels in 28. Further, while a prominent growth in rentals was observed in the last two years across segments and localities, it should take another 34 years for the rentals to reach the precrisis levels, assuming similar growth trend. Apartment Rentals Prime High End MidLow End Abu Dhabi Island Investment Areas Central Abu Dhabi Corniche Khaldiya/Bateen Al Raha Beach Marina Square Saadiyat Beach Shams Central Abu Dhabi Corniche Khaldiya/Bateen Reef Downtown MBZ & Khalifa City % Change during % decline since precrisis levels in 28 Residential Villa Rentals Khalidiya/Bateen Mushrif/Karama/Manaseer 4 Khalifa A&B Al Raha Gardens Golf Gardens Al Reef Saadiyat Beach Villas (Standard) Al Raha beach % Change during % decline since precrisis levels in 28 16

17 Dubai Residential Apartment Rental Growth and Precrisis levels In 214, average apartment rentals in some localities in Dubai reached the 28 levels while the remaining localities reported strong rental growths. Overall, apartment rentals across most Dubai localities will touch or exceed 28 levels by end of 215, if the current growth continues. The rental growth for residential villas was comparatively slower, with rents declining in some localities such as Arabian Ranches, Green Community and Mirdif during Apartment Rentals Business Bay Deira Discovery Gardens 2 Downtown Dubai Dubai Marina Greens Intl City Jumeriah Beach Residence Jumeriah Lake towers Jumeriah Village Palm Jumeriah Sheikh Zayed Road % change during % decline since precrisis levels in 28 Residential Villa Rentals Arabian Ranches Green Community Jumeirah Park Jumeirah Village Meadows Mirdif 3 Palm Jumeirah Springs % Change during % decline since precrisis levels in 28 17

18 A current shortage of residential stock for sale in Abu Dhabi in highend development areas has resulted in high asking prices on the secondary market. The achieved high sales volumes on newly launched projects in the city, such as Ansam on Yas Island, Al Hadeel at Al Raha Beach and Mamsha Al Saadiyat, proved a pentup demand in the market. On an average, apartment sale prices in 214 increased by almost 15% as compared to 213. Exhibit 2: Abu Dhabi Average Apartment Sales Price (AED per sqft, 2814) 2,5 Marina Square 2,5 Raha Beach/Al Bandar 2, 2, 2, 1,5 1,25 1, ,175 1,375 1,5 1,35 1,3 1,225 1,1 1,425 1, ,5 Raha Beach/Al Muneera 2,5 Raha Beach/Al Zeina 2, 2, 1,5 1, ,175 1,425 1,5 1,1 9 1, ,175 1, ,5 Reef Downtown 2,5 Sun & Sky Towers 2, 2, 1, ,5 1,25 1,25 1,13 1,5 1,325 1, In 214, sales transaction activity slowed down on back of higher prices coupled with a string of new regulations by the UAE Central Bank and fees (Dubai Land Department 18

19 transfer fees) made the process of purchasing property more expensive. Consequently, the average sales in 214 increased moderately by 6% as compared to the previous year. Exhibit 21: Dubai Average Apartment Sales Price (AED per sqft, 2814) 3, Business Bay 3, DIFC 2,7 2,5 2, 2,5 2,5 2, 1,6 1,5 1,3 1,35 1,875 1,875 1, ,225 1,3 1, , Discovery Gardens 3, 27 Downtown Dubai 2,5 2, , 2, 1,5 1, , , Dubai Marina 3, Greens 2,5 2,5 2, 1,8 1,9 1,75 2, 1,7 1,5 1, ,5 1,5 1, ,4 1,

20 3, International City 3, JBR 2,5 2,5 2, 1,5 5 1, , 1,5 5 2, 1, ,525 1, , JLT 3, Jumeirah Village 2,5 2,5 2, 2, 1,5 5 1, ,2 1,25 1,5 5 1, ,5 Palm Jumeirah 3, 2,8 2,5 2, 1,5 1,5 1,175 1,1 1,4 2, 2, In Abu Dhabi, average villa prices in 214 increased by 16% as compared to 213, driven by a lack of available stock. Despite high prices, the Saadiyat Beach villa community was in high demand standing at AED 1,55 per sqft from both investors and endusers due to the development s exclusivity. Prices for beach villas started from AED 5 million for a standard 4BR villa and AED 16 million for a St Regis branded 4BR unit. Al Muneera and Al Zeina at Al Raha Beach also featured a selection of sought after villas and townhouses, which have sea or canal views, where prices started from AED 4 million for a 4BR. Al Raha Gardens with sales price at AED 1,115 per sqft as of 214 and Golf Gardens with sales price at AED 1,2 per sqft remained popular with UAE national investors, as these 2

21 communities consistently yielded attractive rental returns. Hydra Beach (AED 66 per sqft) and Al Reef Villas (AED 845 per sqft) remained the cheapest amongst the lot. Exhibit 22: Abu Dhabi Villa Sales Price (AED per sqft, 2814) 2, Raha Gardens 2, Golf Gardens 1,5 1, , , , Saadiyat Beach Villas (Standard) 2, Hydra Village 1,55 1,5 1,375 1, , Al Reef Villas 1,

22 In 214, villa prices in Dubai were stable as compared to 213. Further, the 214 average prices were 3% lower than in 28 levels. For instance, average sale price for Arabian Ranches was AED 2,2 per sqft in 28 compared to AED 1,15 per sqft in 214. Palm Jumeirah is the only development that has experienced an increase from its 28 prices, with rates up by 4%, primarily due to the firm establishment of the Palm as a unique and exclusive villa community, appealing to both local and international buyers. Exhibit 23: Dubai Average Apartment Sales Price (AED per sqft, 2814) 3, Arabian Ranches 2, Dubai Sport City 2,5 2, 2,2 1,5 1,5 1,125 1,25 1, ,225 1, , Jumeirah Park 1,5 Jumeirah Village 1,5 1,5 1,175 1, , Meadows 3,5 Palm Jumeirah 2,5 2, 2,2 3, 2,5 2,75 3, 2,85 1, , 1,3 1,35 1,5 1,8 1,55 1,5 1,

23 2,5 Springs 2, 1,8 1, ,1 1, Some of the major ongoing residential projects in the UAE include: The Desert Rose City (Dubai), Al Falah (Abu Dhabi), Habtoor City Residential Towers (Duabi), North Wathba Development (Abu Dhabi), The Residences at The Marina (Dubai) and DAMAC Towers by Paramount (Duabi). UAE Retail Market The UAE retail real estate sector has continued to remain buoyant primarily driven by the country being a gateway for major international brands establishing its presence to cater to the huge demand for foreign goods and services across the GCC. Resultantly, the sector witnessed positive sentiments as a large number of projects were announced in 214, including plans to construct the world s biggest mall in Dubai, to be called Mall of the World, which is expected to be spread across 8 million sqm, at an estimated cost of USD 6.8 billion. Exhibit 24: UAE Retail Supply (2117F) 3, 2, Abu Dhabi Retail Supply (in ' sqm) 4, 3, Dubai Retail Supply (in ' sqm) 1,5 1,667 1,9 2,2 2,5 2,6 2,654 2,739 2, 2,418 2,775 2,8 2,9 2,9 2,9 3,94 3, E 216F 217F Completed Future Supply E 216F Completed Future Supply 217F The supply of retail space in Abu Dhabi stood at 2.5 million sqm as of 214, up 13.6% from 2.2 million sqm in 213. Irrespective of the increase in stock, the market remained largely undersupplied driven by the increasing demand for space. Going forward, the city is expected to receive a fresh supply of 217, sqm of retail space between 215 and 217, taking the total GLA to 2.82 million sqm by the end of 217. A number of super 23

24 regional malls are scheduled to enter the market from 218, which are expected to substantially increase Abu Dhabi s retail supply in the medium to long term. The release of new highend retail space into the market in the coming years is likely to push some of Abu Dhabi s older malls and shopping centers to maintain their profile in the face of increased competition. As a result, some established malls could lower their rents or seek to lock in key retailers through longerterm agreements to avoid any shift to the new developments. Dubai being the favorite destination for global retailers to establish their presence in the GCC, faces the challenge of shortage in available retail space with the market remaining undersupplied in 214 as it received little to no addition to its retail space during the year. The total supply of retail space in the city remained unchanged in 214 from the preceding year at 2.9 million sqm. However, with a host of new projects being announced, the city is expected to receive new stock of 194, sqm in 215. The supply of retail space in Dubai is expected to reach approximately 3.6 million by the end of 217, growing at a CAGR of 7.79% between 215 and 217. Exhibit 25: UAE Retail Vacancy Rates (2115) 25% UAE Retail Vacancy Rates (%) 2% 2% 2% 15% 15% 12% 1% 5% 5% 8% 8% 2% 2% 2% 2% 2% % Q2 215 Abu Dhabi Dubai Despite these new releases of fresh stock in 214, vacancy rates remained low at 2.% of the available GLA in Abu Dhabi, the same level at the close of 213. The vacancy rate in the city has remained constant, witnessing marginal fluctuation in the past three years and is expected to sustain during 215. Going forward, with the influx of super regional malls, the vacancy rates might take an upward swing, considering the supply outpaces the demand. Since Dubai s retail supply largely remained undersupplied in 214, the vacancy rates witnessed a significant fall from 12% in 213 to 8% in 214. As of Q2 215, the city s retail vacancy rate remained at the same level as of last year and with the influx of fresh stock during 21517, the demand is expected to weigh light on the vacancy rates. 24

25 Exhibit 26: UAE Retail Rentals (2114) 3,5 3, 2,5 2, 1,5 5 Abu Dhabi Rents (AED per sqm PA) 9, 8, 7, 6, 5, 2,75 2,75 2,75 2,9 3, 3, 1,2 1,9 1,9 1,9 1,86 1,86 4, 3, 2, Q2 215 AD Island Outside AD Island Dubai Retail Rents (AED per sqm PA) 5, 1,85 3,965 1,72 5,6 2,22 8,8 2, Q2 215 Primary Secondary Limited availability of retail space at prime locations in Abu Dhabi led average rents (inside and outside Abu Dhabi Island) to increase marginally by 1.3% in 214 to reach AED 2,43 sqm PA from AED 2,4 sqm PA in 213. Rents in Abu Dhabi Island stood at AED 3, per sqm PA in 214, rising 3.4% from the preceding year, while that in outside of Abu Dhabi Island fell by 2.1% to reach AED 1,86 during the same year. However, retail rents are expected to remain stable from 215 to 218, considering the strong inflow of stock matching the overall demand. Accordingly, in Q2 215, rents were flat at AED 3, per sqm PA in primary locations and AED 1,86 per sqm PA in secondary locations. In Dubai, the rents in a secondary location stood at AED 2,22 per sqm PA in 214, up from AED 1,72 per sqm PA in 213, while it was 5,6 per sqm PA in a primary location, up from 3,965 per sqm PA in 213. The demandsupply mismatch in Dubai resulted in exponentially higher growth in rents in Q The rentals for primary location rose 58.3% to AED 8,8 per sqm PA and secondary location increased 12.7% to AED 2,52 per sqm PA by end of Q Some of the major ongoing retail projects include: Dubai Mall of the World (Dubai), 5 Shopping Malls (Dubai), Art Centre (Dubai) and Dubai Festival City Mall Expansion Phase 2 (Dubai). UAE Hospitality Market The UAE tourism sector has significantly expanded in the past five years and the country is already among the top five countries in the world for new hotel openings during the period, in anticipation of over 25 million tourists expected to visit Dubai Expo 22. Consequently, the current market remains oversupplied and the key challenge would be to maintain tourist inflows post this mega event. 25

26 Exhibit 27: UAE Hotel Supply (21217F) 3, 25, 2, 15, 1, 5, 1, 21 Abu Dhabi Hotel Supply (in no. of keys) 13, ,7 212 Completed 18, , ,7 215E Future Supply 23, 216F 24,6 217F 1, 8, 6, 4, 2, 5,2 53,6 57, 6,2 64,4 65, 68, 76, E 216F 217F Completed Dubai Hotel Supply (in no. of keys) Future Supply Abu Dhabi s hospitality market noted a 11.4% rise in demand in 214, mainly due to an increase in transit visitors, offset by a 8.5% rise in supply. Approximately 1,55 hotel rooms were added to the market in 214, with about 3,3 additional rooms expected to enter in 215, taking the overall supply to 23,2 rooms by the end of 215, representing a yoy growth of 16.%. Additionally, the total number of rooms is expected to reach 25,9 units by 218, with the city receiving 6,2 fresh stock by 218. Such a rise in supply will be absorbed by the growth in demand as Abu Dhabi is focusing on the increasing visitors mainly for the leisure segment. Dubai, the regional hub for hospitality, tourism and shopping, is the world s biggest growing market outside of China since 28 in terms of new hotel openings. The city s hospitality market saw the entry of new operators and brands in 214, leading to the addition of nearly 4,2 keys, denoting a yoy increase of 7.%. The city s total room count stood at 64,4 in 214, up from 6,2 rooms in 213. With an additional 3, keys due for completion in 215, incremental rooms will total to 68, units until 215. The figures are projected to reach over 95,9 by the end of 218 with approximately 3,9 units expected to be added between 215 and 218. Exhibit 28: UAE Hotel Occupancy Rates (2115) 1% UAE Hotel Occupancy Rates (%) 9% 8% 75% 78% 8% 8% 79% 84% 7% 73% 75% 76% 73% 77% 6% 67% 5% Q2 215 Abu Dhabi Dubai 26

27 Reaping the government s efforts to promote tourism, the Abu Dhabi hotel occupancy rate increased to 73% in 214 from 67% in 213, denoting a strong performance during the year. In Q1 215, two major hotels were opened in Abu Dhabi, namely TRYP by Wyndham and the SwissBel hotel Corniche increasing the occupancy rate to 77% as of Q On the other hand, Dubai witnessed a marginal fall in occupancy rates to 79% in 214 from 8% in 213. However, the occupancy rate was back in track, rising to 84% as of Q Exhibit 29: UAE Hotel Room Rates (2114) 3 Abu Dhabi Hotel Room Rates (in USD per day) 3 Dubai Hotel Room Rates (in USD per day) Q2 215 Average Room Rates Witnessing a rise in occupancy rates, the average room rates in Abu Dhabi declined 4.7% in 214 to USD 141 per day from USD 148 per day in 213. As of Q2 215, the average rates rose 8.5% to stand at USD 153 per day. Following the same trend, the average room rates in Dubai declined 1.2% to USD 238 per day in 214 from USD 241 per day in 213. As of Q2 215, the average rates rose 4.6% to stand at USD 249 per day. Going forward, the supply of fresh stock is expected to weigh on the ADRs. Some of the major ongoing hotel projects include: Dubai Parks and Resorts (Dubai), Atlantis The Palm Expansion (Dubai), Dubai Paramount Tower Hotel And Residences (Dubai), Christened Damac Towers (Dubai) and Marvel Adventure Theme Park (Dubai) Q2 215 Average Room Rates 27

28 Real Estate Financing Despite increase in property prices, real estate lending by UAE banks fell by 1% to reach AED 277 billion in 214, suggesting that banks participation in financing real estate demand was limited during the year. Lending related to completed properties increased 3% to AED 195 billion while lending to properties under construction witnessed a decline of 8% in 214. Exhibit 3: Real Estate Lending by UAE Banks (2914) in AED billion Real Estate Lending by UAE Banks Source: National Bureau of Statistics, Al Masah Capital Research While the share of individual borrowers in total real estate lending increased from 34% in 213 to 36% in 214, overall corporate borrowing for real estate decreased by 2% to reach AED 179 billion in 214. The major decrease came from developers while hotel related businesses increased their borrowing by more than 2%. Exhibit 31: Real Estate Lending by Borrower and Property Type (214) 25 2 in AED billions By type of borrower in AED billions By type of property Individuals Corporates Source: IMF, Al Masah Capital Research Residential Nonresidential Hotels Developers Most recent changes in banks real estate lending reveal limited impact of the current market recovery with bank s exposure decreasing. Furthermore, bank lending is shifting towards completed properties and as such, becoming less exposed to fluctuations in the residential market and more influenced by general economic conditions. 28

29 Real Estate Market Sentiments According to the UAE Real Estate Market Sentiment Survey 215 conducted by YouGov, the Dubai real estate market will continue the growth momentum over the next 12 months which is perceived across the board by all respondents including real estate professionals, investors and potential home buyers. Nearly 6% of the investors and 69% of the real estate professionals expressed positive sentiments on the growth of real estate market. Surprisingly among the potential home buyers, younger age categories (18 to 24 years) were more optimistic about growth compared to older age groups (4+ years) 63% and 49% respectively. Exhibit 32: Real estate market growth in Dubai (215 Survey by YouGov) Real estate professionals 5% 25% 69% Investors 14% 26% 6% Potential home buyers 13% 33% 54% % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% Negative Neutral Positive Source: YouGov, Al Masah Capital Research From the investors' perspective, the focus on real estate in the portfolio mix is set to continue with a slight increase in real estate investments expected (45%) over the year ahead. As a result, distribution among the rest of investors portfolio mix is set to remain comparatively much less, among equities (18%), currencies (16%), commodities (16%), funds/indices (13%) and bonds (13%), according to investors interviewed by YouGov. Exhibit 33: Investors' Current vs Future Portfolio Mix (215 Survey by YouGov) Real Estate 43% 45% Equities Currencies Commodities Funds/ Indices Bonds 19% 18% 15% 16% 14% 16% 13% 13% 11% 13% % 1% 2% 3% 4% 5 Current In the next year Source: YouGov, Al Masah Capital Research 29

30 SAUDI ARABIA REAL ESTATE Saudi Arabia Office Market Business activities in Saudi Arabia remained buoyant in 214, with major cities such as Riyadh and Jeddah witnessing a substantial rise in stock and fall in vacancy rates. The average office rents (Grade A and Grade B) in Riyadh witnessed a decline during the year on the back of looming oversupply pressures, while that in Jeddah remained strong increasing substantially from the preceding year. Exhibit 34: Saudi Arabia Office Supply (2117F) 4, Riyadh Office Supply 1,2 3,5 (in ' sqm) 3, 2,5 8 2, 6 1, , , ,9 212 Completed 2, , ,4 215E 2,45 216F Future Supply 2,94 217F Jeddah Office Supply (in ' sqm) Completed E Future Supply F 1,57 217F The supply of office stock in Riyadh stood at nearly 2.3 million sqm in 214, growing at a CAGR of 14.25% from 1.35 million sqm in 21. In view of an increase in supply supplementing the demand, office stock is expected to reach 2.45 million sqm and 2.9 million sqm in 215 and 216, respectively. On the other hand, the supply of office stock in Jeddah reached 82 sqm in 214, growing at a CAGR of 23.15% from 357, sqm in 21, imputed by the completion of major projects in the city. Going forward, an additional 14, sqm of office space is expected to enter the market in 215, with further addition of 113, sqm in 216. Exhibit 35: Saudi Arabia Office Vacancy & Gross Rental Yield Rates (2115) KSA CBD Office Vacancy Rates (%) 35% 3% 3% 26% 25% 2% 18% 16% 18% 18% 16% 17% 15% 12% 1% 1% 6% 6% 5% % Q2 Riyadh Jeddah 215 KSA CBD Office Gross Rental Yield (%) 11% 1.5% 11% 1.% 1.% 1.3% 1% 1.% 1.% 1% 9.5% 9.5% 9% Riyadh Jeddah 3

31 While the office vacancy rates in Jeddah has reduced drastically in the past 4 years on back of increased economic activity in the city, the vacancy rates in Riyadh remained flat at around 16%18%, indicating a balance in demand and supply. The rental yields on the other hand have remained consistent in Riyadh and Jeddah over the past two years at 9.5% and 1.%, respectively. Exhibit 36: Saudi Arabia Office Rentals (2114) 1,6 Riyadh Office Rents (SAR per sqm PA) 1,4 Jeddah Office Rents (SAR per sqm PA) 1,4 1,2 1, ,2 7 1, , , , ,8 75 1,6 64 1, , , Q1 214 Grade A (CBD) Grade B (North Riyadh) The average office rent (Grade A and Grade B) in Riyadh stood at SAR 1,64 per sqm PA in 214, falling from SAR 1,74 per sqm PA in 213, primarily due to a supply glut. In Jeddah, the average office rent (Grade A and Grade B) increased to SAR 956 per sqm PA in 214 from SAR 98 per sqm PA in 213 driven by low vacancy rates. As of Q2 215, the average office rent in Riyadh and Jeddah maintained a stable rental trend of SAR 1,65 per sqm PA and SAR 955 per sqm PA, respectively. Moreover, rentals are expected to be further supported in both the cities by a limited amount of office space (154, sqm) entering the market in 215. Some of the major ongoing commercial projects include: King Abdullah Economic City, Sudair Industrial City, Jazan Economic City, Madinah Knowledge Economic City and Waad El Shammal Mining City. Saudi Arabia Residential Market Q1 214 Grade A (CBD) Grade B (Others) Saudi Arabia s population has quadrupled over the past four decades, thereby fueling the demand for residential sector. Moreover, only 3% of the residents own a residential property as of 214, which present a significant opportunity for the developers. Considering the demand pressure, the government is also undertaking favorable policy decisions such as the recent decision to tax undeveloped land in urban areas. Consequently, while the local developers have accelerated the new home delivery, several international players have also entered the market, which should further boost the overall activity. 31

32 Exhibit 37: Saudi Arabia Residential Supply (2117F) 1,2 Riyadh Residential 9 Supply (in ' units) Completed E F Future Supply 1,18 217F In 214, the residential stock in Riyadh stood at 97 housing units, which is expected to increase to 99, in 215. However, despite increase in development activity, the demand for residential units in Riyadh continues to outpace supply. As per Knight Frank (Riyadh Residential Research Report), the capital has a requirement of around 5, housing units per annum over the next five years to meet the growing demand. Although there are a number of large housing schemes planned to be completed in the short term, construction delays, labor shortages, and the lack of affordable land make it challenging to bridge the demandsupply gap for the subsequent years. Compared to Riyadh, the demandsupply gap in Jeddah is much more passive, with the total number of available residential units of 769, at the end of 214. Furthermore, the supply of residential units is expected to grow at a healthy rate with over 64, units likely to be added by the end of Jeddah Residential Supply (in ' units) Completed E F Future Supply F Exhibit 38: Saudi Arabia Residential Rentals (2114) Riyadh Residential Rents (in SAR ' PA) Q2 215 Apartment (2 BR) Villa (4 B) In Riyadh, the residential rentals have drastically increased in the past two years, mainly due to the persistent undersupply of housing and high land values. Residential property prices also witnessed a yoy growth of 5%7% in 214. In Jeddah, rents for apartments Jeddah Residential Rents (in SAR ' PA) Q2 215 Apartment (3 BR) Villa (4 B) 32