-2.6% -7.4% Change in residential capital values during Q PROPERTY MARKET OUTLOOK. Dubai, Winter 2016/17 RESIDENTIAL MARKET. cluttons.

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1 cluttons.com Dubai, Winter 2016/17 PROPERTY MARKET OUTLOOK RESIDENTIAL MARKET Capital values slip further Residential values continued to moderate during the third quarter, slipping by a further 2.6%, taking the annual rate of change to -7.4%. This means that average home values in Dubai have now drifted even further away from the last market high and stand -26.7% below the Q peak. Villa values receded by 2.6% during Q3, following a 2.5% contraction in Q2, taking the annualised rate of change to -7.8%. This figure does conceal the varied performance across the villa market in the third quarter. More affordable communities such as The Green Community and Jumeirah Village registered no change in values in Q3, while mid-range homes in locations such as Motor City, Emirates Living, Arabian Ranches, Victory Heights and Jumeirah Park recorded a negligible 0.1% increase in prices. Top end of the market remains worst performing segment The average price of a villa in Dubai during Q3 (AED 1,300 psf), was dragged down by the weak performance of the upper echelons of the market in locations such as The Palm Jumeirah (AED 2,250 psf) and Hattan Villas at The Lakes (AED 1,850 psf). The ongoing weakness at the top end of the villa property spectrum echoes the sharp slowdown in the appetite to purchase luxury homes. Over the last 12 months, villa values in these two locations have receded by11.9% and 11.1%, respectively. On the apartment front, average prices dropped by 2.5% in Q3, the fastest fall recorded since mid-2011, underscoring the ongoing market weakness. Unlike the villa market, the declines have been across the board, with The Burj Khalifa (-15.3%) and The Greens (-9.2%) registering the largest decreases over the last 12 months, corroborating our earlier expectation for corrections to persist across the market. -2.6% -7.4% Change in residential capital values during Q Annual rate of change in residential values at the end of Q3 2016

2 Performance of capital values villas and apartments Residential transactions in Dubai 25% 20% 15% 10% 5% 0% -5% 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Q Q Q Q Q Q Q Q Q Q Q Q Q Quarterly % change Number of transactions Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Apartments Villas/Townhouses Apartments Villas/Townhouses Source: REIDIN More positively, five of the 19 submarkets we monitor registered no change in values, suggesting a new floor may be emerging in some locations. These apartment submarkets included Motor City, Uptown Mirdiff, high-end apartments at JLT, midrange apartments in Business Bay and Emaar developments in Downtown Dubai. Transaction volumes remain weak Despite signs that some submarkets may be bottoming out, transaction volumes are still weak and reflect the general nervousness around commitments to purchase, while the wider issue of affordability remains a stubborn thorn in the market s side. Overall quarterly transaction volumes slipped by 21% during Q3. This was led by a 22% fall in apartment deal volumes, which are down 26% when compared to Q3 in Interestingly, the average price of a transacted villa has also fallen by 28.1% since the start of the year to stand at AED 3.9 million. Rental market remains fragile Following a sharp 4.4% fall in average rents across the city s freehold areas in Q2, which was the strongest decrease recorded in five years, the rate of decline moderated to -1.5% in Q3. The latest change leaves average rents 8% down on this time last year. Positively however, apartment rents were unchanged in Q3 across all the submarkets we monitor, hinting perhaps that this segment of the market may be starting to flatten out. On an annualised basis, villa rents are down by 9.4%, while apartment rents are 5.8% lower than this time last year. Similar to the sales market, the top end of the villa market in locations such as the Palm Jumeirah, Jumeirah Islands, Hattan (The Lakes) and Hattan (Arabian Ranches) have experienced the strongest rental drops over the last 12 months (-11.8%). Softer corrections ahead It s clear the market is still softening and the magnitude of declines, has, on average, intensified over the past six months, with average residential prices down 10.2%. There have of course been markets where values appear to have bottomed out, suggesting, as we previously highlighted, that some submarkets may have found their new price floor, but there remain a few quarters of further falls yet. The other issue is around supply, which continues to edge upwards. In fact, in the week leading up to Cityscape Global in early September, some 30,000 units were announced by developers, with 12,900 of those for Nakheel s emerging residential rental portfolio. Overall, nearly 34,000 residential units have been announced so far this year. Our expectation for the total number of completions this year remains unchanged at 8,300 units. We now expect 2017 to see 12,212 units complete, with 20,915 completions in 2018, up from our earlier estimate of 20,600, due to recent announcements. As has been the case historically, while the number of project announcements is progressing at an uninterrupted pace, the delivery timelines of these new schemes remain unclear. Our experience has shown that larger developments are often phased, with handovers being stretched over a period of months, if not longer. With this in mind, we have limited our supply database to schemes where sales have commenced, ground has been broken, or the developer has announced development phases. Turn around in 2017? For now, our view remains unchanged, with the residential sales market in Dubai likely to end the year with values down by close to 10% on average, and rents likely to be down by the same amount.

3 Dubai s residential property supply pipeline Performance of rents villas and apartments Number of units 25,000 20,000 15,000 10,000 AED per annum 600, , , , , , ,000 0 Apartments Villas/Townhouses Studio 1 bed 2 bed 3 bed 4 bed 5 bed Studio 1 bed 2 bed 3 bed 4 bed 5 bed Studio 1 bed 2 bed 3 bed High end Mid range Low end Low end International City, IMPZ, Discovery Gardens, Jumeirah Village Circle, Jumeirah Village Triangle, Sports City, JLT, Dubai Land Apartments Mid range Business Bay, The Views, Greens, Dubai Marina, JLT, Green Community-DIP High end Downtown Dubai, Dubai Marina, Palm Jumeirah, DIFC Looking ahead to 2017, key triggers to slow, or reverse, the market s fortunes are likely to continue emerging in the form of infrastructure projects linked to the World Expo in 2020 and other mega projects. These will help to sustain, or lift, public sentiment, which has proved instrumental in keeping the emirate s economic growth profile the most positive in the region. We have already seen the green light given to the construction of the World Expo 2020 site in September, while city-altering projects such as the Dubai Canal, Blue Waters Island, The Tower and the expansion of Al Maktoum International Airport proceed, generating jobs across the economy and helping to drive up residential demand for properties both for purchase and rent. These triggers are only just materialising and so it remains our view that the market will be unlikely to settle until late summer or early autumn next year. The top end of the sales and rental markets may lag the performance of the rest of the market, depending on how quickly the rate of creation of senior management white collar jobs starts to rise. Overall however, the market remains relatively inactive, as evidenced by transactional data. Villa handovers in particular are continuing apace, with completions currently taking place at the likes of Villa Lantana, Villa Nova, Akoya and Mira, which will add over 3,000 villas to the Dubai market this year. With global economic conditions remaining unstable, any sudden boost to supply in the next 12 to 18 months is likely to cause the current stability and projected bottoming out of the market to unravel, with further price falls likely to follow suit. Demand and supply are almost in sync currently, but this delicate balance can quickly be upset by a supply surge. Fountain Views, Downtown Dubai (786 serviced residential units)

4 OFFICE MARKET Performance of office rents at the DIFC Rents remain largely unchanged During Q3, rents across all of the 22 office submarkets we monitor registered no change. On an annual basis however, lower (-14%) and upper (-22%) rents at JLT continued to fall, exacerbated by a supply overhang that commenced with a sudden burst of completions in late 2014, positioning JLT as the weakest performing market in the city. Al Barsha (-18%), Garhoud (-18%) and Business Bay (-14%) rounded off the top three weakest performing markets in Dubai in the twelve months to the end of Q3, with upper limit rents falling to AED 90 psf in both Al Barsha and Garhoud, while rents in Business Bay slipped to between AED 60 psf and AED 145 psf, depending upon the delivery status of the space and whether the building is wholly owned, or under strata ownership. AED psf Q Upper limit Q Q Lower limit Q Q Q Q Q Q Q Q Global economic conditions limiting expansion plans While Dubai s office market has demonstrated a far greater degree of resilience compared to other regional locations in the face of a wobbly global economic picture, the level of requirements in the market is down on this time last year. In our experience, the consolidation activity in the finance and banking sector, in addition to the smaller oil and gas sector, which commenced about 18 months ago, is now winding down. The pharmaceutical, legal and technology sectors on the other hand, are amongst the most active occupier groups in the market and we are still seeing expansion activity from these tenants. However we have noted several instances of international corporate companies across multiple sectors delaying expansion plans until 2017/18 and opting to extend existing leases in the short term. It is worth noting however that this wait and see attitude amongst the international corporates we work with stems from concerns around the world economy, rather than domestic economic conditions, which remain relatively robust. This is corroborated by results of the September Emirates NBD Dubai Economy Tracker Index. Although the headline index fell to 55.1 in September, from 55.7 in August, it remains above the critical 50 mark, indicating continued expansion and growth. Firms continued to stockpile goods, suggesting an expectation of further economic improvement, although employment rates remained unchanged. Positive local sentiment is what differentiates the Dubai office market from its regional peers which are struggling with rising vacancies, rapidly diminishing demand and falling rents. Tight supply in key locations Free zones remain the centre of activity across the city, with occupiers firmly focused on submarkets in New Dubai such as TECOM s Dubai Internet City and Dubai Media City, which command the third highest rents in the emirate at quoting rates of up to AED 225 psf. A lack of new supply and a limited amount of grey space trading on the secondary market has helped to sustain rents in this particular submarket. In fact, some international occupiers such as Huawei and MasterCard are moving ahead with plans to develop build to suit premises at Dubai Internet City in collaboration with TECOM due to the dearth of space in this area. Elsewhere, in Central Dubai, the Dubai International Financial Centre (DIFC) still commands some of the highest rents in the city at between AED 370 psf to AED 500 psf for fully furnished, fitted space (but non serviced) at Index Tower. Overall vacancy rates in core DIFC areas remain minimal. The only significant amount of Grade A space in the pipeline is the USD 1 billion ICD Brookfield Place, which is set to complete in Q4 2018, or Q Until then, the supply dearth is expected to persist, placing further upward pressure on rents. Overall, average prime office rents across Dubai are still however about 50% down on the Q peak. Stable outlook The ongoing stability across the city s office markets is expected to persist. The lack of supply in the most sought after submarkets, coupled with a relatively buoyant domestic economy has meant rents have been sustained, as we expected. Looking ahead to the next six to twelve months, upper limit rents in key submarkets such as the DIFC or TECOM are likely to edge up by 3% to 5%, but elsewhere in the city, rents are expected to remain firm as we work our way through the challenging global conditions.

5 Office rent ranges in Dubai s key submarkets during Q3 Bur Dubai Business Bay JLT Deira Sheikh Zayed Road Downtown Dubai DIFC TECOM DIC/DMC/DKV Dubai Design District (D3) non-free-zone Dubai Design District (D3) free-zone One Central non-free-zone One Central free-zone AED psf Free zones remain the centre of activity across the city, with occupiers firmly focused on submarkets in New Dubai such as TECOM s Dubai Internet City and Dubai Media City Dubai Media City

6 For further details contact Murray Strang Head of Dubai murray.strang@cluttons.com Faisal Durrani Head of research faisal.durrani@cluttons.com Richard Paul Head of residential valuation, UAE richard.paul@cluttons.com Paula Walshe Head of international corporate services paula.walshe@cluttons.com Cluttons LLP This publication is the sole property of Cluttons LLP and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication. 1367