UAE REAL ESTATE MARKET THE. 2015: A Year In Review

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1 THE UAE REAL ESTATE MARKET 215: A Year In Review

2 Macroeconomic Overview ADJUSTING TO LOWER OIL PRICES AND SLOWER ECONOMIC GROWTH The pace of economic growth in the UAE has slowed significantly in 215, as the positive impact of lower oil prices on the global economy has been insufficient to offset the loss of revenue to both the government and the private sector. As a result, real GDP growth has fallen from 4.6% in 214 to 2.7% for 215, with a similar level of growth forecast for 216. Oil prices fell drastically over the second half of 214 and have continued to drift downwards in 215. While forecasts vary, the consensus is that prices will recover only modestly over the medium term, while remaining short of their levels. The IMF is currently suggesting average prices will remain between USD 5 and USD 6 per barrel until 22. Real GDP Growth ( F) Faced with both losses in oil revenues and higher expenditure on defense and security, the UAE Government is adjusting its budget to ensure fiscal sustainability and avoid long-term deficits. The two major components to the fiscal restructuring we can expect to see over the next 5 years are reduced government spending and 5 increased government revenue through taxation. Both of these (%) 4 have implications for the real estate sector Actual Forecast While we remain positive on the long term outlook for the UAE real estate market there is little doubt that the rebalancing of the fiscal position will result in headwinds and challenges over the next 12 months. Although governments will continue to spend on development and infrastructure projects, the level of this spending will inevitably be curtailed over the medium term as spending needs are realigned with the reality of lower oil revenues. Curde Oil Price (27 Nov 215) USD per barrel Jan 27 May 27 Sep 27 Jan 28 May 28 Sep 28 Jan 29 May 29 Sep 29 Jan 21 May 21 Sep 21 Jan 211 May 211 Sep 211 Jan 212 May 212 Sep 212 Jan 213 May 213 Sep 213 Jan 214 May 214 Sep 214 Jan 215 May 215 Sep 215 Source: US Energy Information Administration (EIA)

3 Strengthening US Dollar The real estate market in the UAE and particularly Dubai cooled down in 215 after expanding significantly in 213 and the first half of 214. Coupled with lower oil prices, the appreciation of the US dollar reduced demand for real estate and weighed on the performance of key sectors such as retail and tourism, as they become more expensive for visitors from Europe and countries with non-usd pegged currencies. The slowdown in tourist spending has particularly weighed down on the bottom lines of luxury retailers, as the influx of highspending tourists mainly from Russia slowed down on the back of a devaluing Ruble. USD vs International Currencies Index Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 USD/EUR USD/GBP USD/INR USD/RUB USD/CNY

4 Dubai Prime Rental Clock Q4 214 Q4 215 Hotel* Residential Retail Retail Residential Slowing Falling Slowing Falling Hotel* Accelerating Bottoming Out Accelerating Bottoming Out Office Office Prime Rental Clock Q4 214 Q4 215 Residential Residential Slowing Falling Office Slowing Falling Accelerating Bottoming Out Accelerating Bottoming Out Office Hotel* Hotel* Retail Retail * Hotel clock reflects the movement of RevPAR Note: The property clock is a graphical tool developed by JLL to illustrate where a market sits within its individual rental cycle. These positions are not necessarily representative of investment or development market prospects. It is important to recognise that markets move at different speeds depending on their maturity, size and economic conditions. Markets will not always move in a clockwise direction, they might move backwards or remain at the same point in their cycle for extended periods.

5 Office Market Summary SUPPLY The Dubai office market saw the delivery of 7, sq m of GLA in 215, increasing the total stock to 8.3 million sq m. Of the new supply, 26% was delivered in Business Bay, followed by the new Dubai Design District (17%), TECOM and Logistics City (13%). The year-end also saw the delivery of the first building in the new Dubai Trade Center District (DTCD). Looking ahead, an additional 6, sq m of GLA is expected to be delivered between 216 & 217, with around 35% of this proposed supply expected in Business Bay. Much less office space was completed in in 215, with just 146, sq m added, increasing the stock to around 3.3 million sq m of GLA. Projects delivered in 215 included Addax Tower on Reem Island and IRENA HQ in Masdar City. Approximately 34, sq m of office GLA is expected to enter the market in 216, dominated by the delivery of Bloom Central and ADIB HQ on Airport Road, Al Hilal Bank HQ on Al Maryah Island and ADNOC HQ on the Corniche. Dubai Office Supply ( F) Office Supply ( F) GLA ('s) sq m 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, ,51 7,474 7,615 8,289 8,289 8, GLA ('s) sq m 4, ,5 3, 2,5 2, 1,5 2,877 3,13 3,173 3,319 3,319 3,662 1, PERFORMANCE Both Dubai and remain two tiered office markets, with strong demand for single owned Grade A office, but little interest in secondary locations. In Dubai, vacancies in selected Grade A buildings are now minimal, pushing rents up 4%. However, overall commercial activity remained subdued and corporate activity focused on consolidation of operations as opposed to expansion. Meanwhile, rents in Grade B space (typically strata owned and located in less developed areas) continued to face downward pressure as supply outstrips demand in that segment. As more Grade A stock is delivered to the Dubai market over the next couple of years (e.g. Dubai Trade Center District/ICD Brookfield), rental rates across the Central Business District (CBD) are expected to remain flat. Vacancy rates across the CBD, currently at 19%, are expected to increase. Given the more limited supply of quality stock, Grade A office rents in increased 7% on an annual basis. Given lower demand from international corporates and government entities, Grade A rents are likely to remain stable in 216. While some progress is seen on the legislation governing the Global Marketplace (ADGM), it is likely that corporates with onshore activity will have to relocate, increasing vacancy rates on Sowwah Square and placing downward pressure on prime rents. CBD (per sq m) / Annual Change Dubai Average Grade A CBD (AED per sq m) Average Grade A (AED per sq m) 1,866 1,956 4% 1,73 1,85 7% Q4 214 Q4 215 Q4 214 Q4 215

6 Residential Market Summary SUPPLY Residential completions across the UAE in 215 remained lower than in recent years, a trend likely to continue into 216. A total of just 7,8 residential units were delivered in Dubai throughout the year, compared to the scheduled delivery of 25, units forecast by developers at the beginning of 215. Materialization rates have varied between 3-5 in Dubai in recent years. This means that much of the proposed future supply for 216 (26, units) will not be delivered on schedule. A similar trend has been witnessed in where the materialization rate of projects under construction was low in 215, with only 1, units delivered. The majority of expected supply in both emirates has now been pushed to late 216 and 217. These delays in project handover result from lower sales levels, reduced government spending and a realization amongst developers of the need to phase out supply in line with demand to avoid an oversupplied market. Dubai Residential Supply ( F) Residential Supply ( F) Number of Units ('s) Number of Units ( s) PERFORMANCE The residential market in both and Dubai witnessed subdued sales activity in 215. While lower oil prices coupled with geopolitical unrest negatively impacted investor sentiment, the strengthening of the U.S. dollar made UAE property more expensive for many overseas investors. In Dubai, data from the Land Department reveals falls of 33% and 28% in the volume and value of transactions respectively in the YT November 215, compared with the same period in 214. This comes as average rents and sales prices dropped 2% and 11% respectively in the YT November according to the REIDIN General Index. Following a rapid increase of residential rents and prices between 212 and 214, the market has now clearly stabilized, and we welcome this sign of a more mature market catering to end-user investors rather than speculative investors. This softening is expected to continue in 216 as the market adjusts to lower levels of activity. have performed better than sale prices in all sectors of the residential market in 215, increasing rental yields and the future attractiveness of the sector. In, the average sale price of 2 bedroom apartments remained flat over the year at approximately AED 16, per sq m, as weaker investor sentiment reduced transaction activity. Meanwhile rental rates for 2 bedroom apartments increased 4% in the first quarter of the year before flattening out at AED 163,. With average rentals declining in the Dubai market, 215 has seen a widening of the gap between residential rents in and Dubai. Residential Property Rent and Sale Indices Dubai Apartment (REIDIN) Apartment (JLL) Dubai Villa (REIDIN) Villa (JLL) Rent Sales Rent Sales Rent Sales Rent Sales -1% -3% -2% -13% 4% -4% -3% -11% 2% Q-o-Q Q-oQ Q-o-Q Q-oQ Q-o-Q Q-oQ Q-o-Q Q-oQ

7 Retail Market Summary SUPPLY Dubai saw much higher levels of new retail supply than in 215. saw the delivery of just 53, sq m of retail GLA, comprised mainly of non-mall retail space within mixed developments. In contrast, Dubai added 193, sq m of GLA dominated by the delivery of the extensions to Mall of the Emirates and Dragon Mart. Looking ahead, the supply of retail malls in is expected to pick up in 218 with the delivery of Al Maryah Central and Reem Mall. In Dubai, future supply will continue to feature large extensions to existing centers such as Dubai Mall, Citywalk, Festival City and Ibn Battuta. In Dubai, the supply of retail mall space is expected to increase 19% over the next two years to reach 3.5 million sq m of retail GLA, dominated by extensions to existing super regional malls. As developers continue to build retail centers the market is likely to face an oversupply of mall space, which, coupled with lower demand, is expected to reflect negatively on the sector s performance. Dubai Retail Supply ( F) Retail Supply ( F) GLA ('s) sq m 4, 3,5 3, 2,5 2, 1,5 1, ,817 2,862 2,914 3,17 3,17 3, GLA ('s) sq m 3, 2,5 2, 1,5 1, ,993 2,194 2,567 2,62 2,62 2, PERFORMANCE Activity in the retail market across the UAE came under pressure in 215 as the volume and value of retail sales slowed down. This comes as inflationary pressures and the devaluation of the Rouble and other non-usd pegged currencies compressed both household and tourist purchasing powers. In Dubai, the saturation and competitiveness of the retail market has pushed retailers to offer discounts and other attractive deals to entice customers. Faced with slowing retail sales over the year, some retailers are struggling to meet the high rental rates imposed, and landlords are having to revise their contracts and offer flexible deals in order to retain tenants. in 215 remained flat in both primary and secondary super regional malls in Dubai and are expected to decrease in 216 as the market moves further in the favor of tenants. In, retail rents in the prime malls are expected to remain stable in the short term given the more limited existing stock of good quality malls, the high purchasing power among residents and less dependency on tourist spending. The addition of a number of quality new retail malls in 217 / 218 is however expected to exert downward pressure on the lower quality malls in the medium term. Average Retail (% change Dubai Average Retail (% Change) Average Retail (% Change) Primary Secondary Island Off Island 3% Q-o-Q Q-oQ Q-o-Q Q-oQ

8 Hotel Market Summary SUPPLY Dubai s hotel market saw the addition of 2,7 hotel keys in 215, increasing the total supply to 67,1 keys. Major completions include St. Regis and Steinberger in Business Bay. Much higher levels of new supply are forecasted for the next 2 years with more than 18, additional rooms proposed in projects including The Address Boulevard, TRYP by Wyndham, Paramount Hotel & Residences and the Address Sky View, which will increase total supply to 86,2 rooms by the end of 217. This is expected to add further downward pressure on Average Daily Rates (ADR s). In, an additional 1, keys were delivered in 215, increasing supply to 2,7 keys at year end. The decision by the Tourism and Culture Authority (ADTCA) to limit the number of new hotel licenses is expected to control hotel supply in over the next couple of years. An additional 4,9 keys are however scheduled for delivery between 216 and 217 in the Emirate. Dubai Hotel Supply ( F) Hotel Supply ( F) Number of Rooms (s) ,5 9,6 57,3 6,8 64,4 67,1 67,1 76, Number of Rooms (s) ,6 1,3 15,7 18,15 19,7 2,7 24,3 25, PERFORMANCE The UAE hotel market saw mixed performance throughout 215. While ADR s remained flat in, room rates in Dubai saw a 9% decline during the year to October. Occupancy levels remained healthy in both markets, at 74% and 77% in and Dubai respectively. The slowdown in tourist arrivals coupled with the ongoing handover of hotel rooms in Dubai saw declining ADR s throughout 215. With occupancy rates remaining the highest in the region however, the hotel market in Dubai is now at more competitive levels than they were in 214. Looking ahead, Dubai s hotel market is expected to record a further softening in 216, followed by a pick-up in activity from 217 onwards with the delivery of Dubai Parks and in the run up to Expo, where the government is expecting 2 million guests by 22. In, the improvement of the Capital s tourist offerings and expansion of its national airlines (Etihad), has steadily increased the number of inbound tourists in 215 and the city is expected to draw in more tourists in the next couple of years. With the future supply of hotel rooms kept under control by the ADTCA, the hotel sector in is likely to see little change in its current performance levels. Hotel Performance Dubai Hotel Performance Source: STR Global Hotel Performance Occupancy (%) Average Daily Rates (USD) Occupancy (%) Average Daily Rates (USD) 78% 77% % 72% 74% YT Oct 214 YT Oct 215 YT Oct 214 YT Oct 215 YT Oct 214 YT Oct 215 YT Oct 214 YT Oct 215

9 216 and Beyond POTENTIAL Iran Potential upside (especially for Dubai) given likely increase in capital flowing out from Iran into UAE residential and retail sectors and the possibility that commercial operations serving Iran will base themselves in Dubai for the time being. Domestic reform / improved legislations New Open Data law is likely to improve transparency of Dubai market. The new real estate law comes into effect in January 216. It is likely to improve the efficiency of the residential sector, but fails to reintroduce a rental cap. RISKS Geopolitical unrest Hightening geopolitical tensions within the Middle East will continue to negatively impact sentiment and confidence. Increased spending on security and defence (estimated to be USD 15.7 billion in 215 and USD 17 billion for 216) will reduce government spending on other areas including construction and infrastructure. Higher interest rates Higher global interest rates will reduce liquidity and increase the cost of new development. Financial institutions likely to deposit their money with the Central Bank rather than investing in real estate development projects. Further clarification of the legal position of the Global Marketplace could provide a boost to the office market. Expansion of cultural and entertainment offerings Completion of new theme parks in Dubai and the Cultural District in are likely to further boost the tourism market. Cut back in government spending Lower levels of government spending will inevitably result in reprioritisation and delays in some announced projects. Uncertainty surrounding China Nervousness about the prospects for the Chinese economy could exert downward pressure on global economic growth.

10 Definitions & Methodology Future Supply JLL estimates of future supply are updated quarterly, based on physical inspections and data collected from developers. We remain cautious of the ability of some projects to meet their stated completion deadlines, with significant delays in project delivery leading to a low materialization rate. Interpretation of market positions in rental clock 6 o clock indicates a turning point towards rental growth. At this position, we believe the market has reached its lowest point and the next movement in rents is likely to be upwards. 9 o clock indicates the market has reached the rental growth peak, while rents may continue to increase over coming quarters the market is heading towards a period of rental stabilization. 12 o clock Indicates a turning point towards a market consolidation / slowdown. At this position, the market has no further rental growth potential left in the current cycle, with the next move likely to be downward. 3 o clock Indicates the market has reached its point of fastest decline. While rents may continue to decline for some time, the rate of decrease is expected to slow as the market moves towards a period of rental stabilization. Residential The supply and stock data is based on quarterly surveys of the entire Dubai and metropolitan areas. This data excludes labour accommodation and local Emirati housing supply. Completed buildings refer to those handed over for immediate occupation. Future supply is based on projects in the announced and under construction phases. Residential performance data is based on asking prices from a basket of selected developments in where as in Dubai it is based on the REIDIN monthly index. REIDIN Dubai Residential Property Price Indices (RPPIs) use monthly sample of offered/ asked listing price data as well as data on actual transactions. Office Completed buildings refer to those handed over for immediate occupation. Future supply is based on projects in the announced and under construction phases. Our supply figures exclude government owned and wholly occupied buildings. In Dubai, the Central Business District (CBD) includes DIFC, Downtown, DTCD and Sheikh Zayed Road as far as Interchange 1, but excludes Business Bay.

11 The rents recorded in this report are Average Grade A rents, based on JLL estimates of the open-market net rent (excluding service charges) for a new lease in basket of Grade A quality buildings, as at the survey date. Data relates to headline or face rents (exclusive of incentives). Vacancy rate is based on JLL estimates of all office buildings in, while in Dubai it relates to a basket of buildings in the CBD that make up around 8 of the CBD supply and 15% of the total current supply. Retail Classification of Retail Centers is based upon the ULI definition and based on their GLA: Super Regional Malls have a GLA of above 9, sq m Regional Malls have a GLA of 3, 9, sq m Community Malls have a GLA of 1, 3, sq m Neighbourhood Malls have a GLA of 3, 1, sq m Convenience Malls have a GLA of less than 3, sq m Malls are categorized into primary and secondary based on their turnover levels. Primary malls are the best performing malls with highest levels of turnover. Secondary malls are average performing malls with lower levels of turnover. Retail rents represents the open market net rent that could be expected for a notional line store on the main trading level in a basket of shopping centres, as at the survey date. These base rents exclude any additional turnover or sales related rentals. Vacancy rates are based on JLL estimates of vacancies in line stores in a basket of super regional malls in Dubai and super regional and regional malls in. Hotels Hotel room supply is based on existing supply figures provided by DTCM and ADTCA as well as future hotel development data tracked by JLL Hotels. Room supply includes all graded hotel rooms but excludes serviced apartments. Hotel performance data is based on a monthly survey conducted by STR Global on a sample of international standard midscale and upscale hotels.

12 Dubai Emaar Square Building 1 Office 43 Sheikh Zayed Road PO Box Dubai, UAE Tel: Fax: Trade Centre Building 7 th Floor, Office No. 3 PO Box Tourist Club Area, UAE Tel: Fax: For questions and inquires about the UAE real estate market, please contact: Craig Plumb Head of Research MENA craig.plumb@eu.jll.com David Dudley International Director Head of Office david.dudley@eu.jll.com Dana Salbak Research Manager MENA dana.salbak@eu.jll.com Mai Hassan Analyst mai.hassan@eu.jll.com Dana Williamson Head of Agency MENA dana.williamson@eu.jll.com Andrew Williamson Head of Retail MENA andrew.williamson@eu.jll.com Chiheb Ben-Mahmoud Head of Hotels & Hospitality MEA youtube.com/joneslanglasalle linkedin.com/companies/jones-lang-lasalle joneslanglasalleblog.com/emearesearch jll-mena.com 216 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Jones Lang LaSalle and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Jones Lang LaSalle and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.