-6.0% -1.9% Change in residential capital values during 2016 PROPERTY MARKET OUTLOOK. Abu Dhabi, Spring 2017 RESIDENTIAL SALES MARKET. cluttons.

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1 cluttons.com Abu Dhabi, Spring 217 PROPERTY MARKET OUTLOOK RESIDENTIAL SALES MARKET Capital value correction still ongoing saw capital values across Abu Dhabi s residential investment areas decrease by 6% on average. Sea view villas on Saadiyat Island were the weakest performing, registering a 19% downward adjustment during, leaving average values in this submarket at AED 1,8 psf; some AED 6 psf higher than the average across the rest of the submarkets we monitor. Apartments on Reem Island (-11.1%) experienced the second largest correction last year, dragging average prices down to AED 1,3 psf. The general weakness in the sales market has persisted into 217, with a further 1.9% drop being registered during 217, which has lowered the annual rate of change to -7.6%. Mid-range apartments on Al Reem Island (-8%) were the weakest performing in the first three months of the year. Ghadeer Villas (-5%) and -6.% -1.9% Change in residential capital values during Change in residential capital values during 217 apartments on Al Raha beach (-3.6%) rounded off the list of the top three weakest performing areas in. Al Reef Villas was the only submarket where any growth was registered. Prices here crept up by 2.4%, or in absolute terms, by AED 2 psf during the first three months of 217. Performance of residential capital values % Change 5% 4% 3% 2% 1% -1% -2% 212 Annual change 213 Quarterly change 217

2 Abu Dhabi Property Market Outlook, Spring 217 Economic conditions curbing demand The relative price stability of properties around the AED 8 psf to AED 1, psf mark is reflective of the continued and arguably strengthening focus on homes that are perceived to be more affordable. For over two years now we have been reporting on the deep and long lasting impact of the shock oil price collapse and its debilitating impact on oil dependent economies around the world. For Abu Dhabi, the impact was delayed to an extent by the fact that oil revenues only account for about 5% of total GDP. The new normal oil price level is squeezing public sector spending which remains a lynchpin of economic growth. Ratings agency Fitch claims that government spending declined by 1% last year, following an 18% decline in, which slowed non-oil GDP growth to 3.5% in, from 7.6% in. Meanwhile, Middle East Economic Digest (MEED) estimates that projects worth at least AED 297 million have been put on hold, while projects totalling AED 253 million are progressing. Cultural icons for the Emirati capital such as the Guggenheim and the Zayed National Museum are yet to be tendered, while the Louvre has had its opening date pushed back. Furthermore, wide ranging redundancy programmes in both the private and public sectors stemming from the weaker economic conditions are adversely impacting overall buyer demand levels. According to anecdotal evidence, organisations continue to trim senior level executive positions, which have historically been a key source of requirements for high end or luxury homes and it is this segment of the market that is experiencing the most significant price corrections. For potential home buyers, rising inflation and a higher cost of living, exacerbated by the seemingly constant downward readjustment of energy and utility subsidies, is adding to financial pressures stemming from the widespread reduction, or removal, of housing allowances. Clearly this is pushing the home ownership dream out of reach for many. Buyers remain cautious This is reflected in the level of enquiries we are receiving along with the fact that the majority of buyers on the market appear to be testing the waters and taking significantly longer to close deals, compared to two years ago. There is also a rising number of buyers looking for distressed sales, which are yet to materialise in any meaningful quantity. However, there is a growing number of residential investors who purchased off-plan homes over the last two years looking to exit the off-plan market prior to handover. In some instances, such as those who purchased property on Reem Island, the inability to achieve desired sale prices is prompting vendors to enter the rental market to generate cash flows. These accidental landlords are competing for a limited pool of tenants and this is hampering the rental market s ability to register any meaningful growth. We explore this theme in detail below. In general, there is a high level of caution and nervousness in the market. To an extent, some developers are moving to capitalise on the limited activity by increasing service charges and transfer fees, which is subsequently deterring buyers further as the underlying affordability challenges linger. Manazil Real Estate at Al Reef, for instance, has increased sales transfer fees from 2.5% to 5%. Performance of residential capital values on Saadiyat Island 2,25 2, AED psf 1,5 1,25 Q2 Q4 Q2 Q4 Q2 Q4 217 Saadiyat Villas Saadiyat Villas (Sea View) Saadiyat Apartments

3 Abu Dhabi Property Market Outlook, Spring 217 Purchasing appetite strong for the right product More positively, some developers have begun to adjust their residential offerings to match market demand. On Saadiyat Island for instance, TDIC s Saadiyat Lagoons, which will eventually accommodate over 4, homes, commenced sales of Phase 1, with prices for two bedroom homes starting at AED 2.4 million (or AED 1,123 psf), positioning it as one of the most affordable launches at Saadiyat Island. At an institutional level, we are aware of a number of requirements in both the residential and commercial markets for deals with a minimum ticket size of circa. AED 2 million; however, the number of available assets to satisfy this demand remains very limited. Performance of residential rental values during 217 AED / annum 25, 2, 15, 1, 5, Al Reef Golf Gardens Al Raha Gardens Hydra Village RESIDENTIAL RENTAL MARKET Economic woes driving rental market correction Away from the residential sales market, the impact of weaker economic conditions is continuing to hamper overall rental activity as well, with a very limited number of bulk corporate lease requirements and deals being recorded; a dynamic change for a market that was plagued by a lack of rental supply about 18 months ago. The removal of housing allowances by some organisations has also prompted a sudden upturn in households seeking personal loans to fund their rented accommodation and this has translated into a strong focus on areas perceived to offer the greatest value for money. The evolving market conditions have kept rental values under pressure, with registering a 12.6% fall in average rents across Abu Dhabi s residential investment areas. High end villas on Saadiyat Island (-28.2%) registered the most significant decreases in average rents last year, with five-bedroom villas experiencing a rent fall of over a third on average. As outlined above, a drop in the number of senior executive positions across the city s economy has filtered through to the rental market in the form of a dramatic weakening in demand for luxury rental property. Similarly, high-end apartments on Reem Island (-2.4%) and Golf Gardens (-16.3%) emerged as the next two weakest markets last year. Flexibility amongst landlords Interestingly, average apartment lease rates on Saadiyat Island have risen by 11% over the last 12 months, driven by the emergence of a community feel in the submarket as more residents move in to the area that has been positioned as an exclusive community. It is worth noting that when homes were first made available to tenants in this area over two years ago, landlords were forced to offer very competitive rents in order to entice tenants. Elsewhere, landlords are now demonstrating a greater amount of flexibility around tenancy terms, with many agreeing to shorter than normal break clauses, while also increasingly willing to accept offers below advertised rates. Households remain conscious of the prospect of redundancies and landlords are wary of the quieter conditions. Khidmah for example is now offering a range of incentives including a free month of rent and shopping vouchers and is even accepting rental payment in four cheques instead of one, which was the norm previously. This is a trend that is slowly spreading across the rental market in general. In cases where landlords are more amenable to discussing and renegotiating lease terms, we have seen tenants being extremely responsive and it is these landlords that are the best placed to weather the current downturn in the residential rental market. The downward pressure has lingered into 217, with average rents dropping by a further 2.3% during, which leaves rents 15% lower than this time last year.

4 Abu Dhabi Property Market Outlook, Spring 217 Performance of residential rents on Al Reem Island 18, 16, AED / annum 14, 12, 1, Al Reem Island (mid-range) Al Reem Island (high-end) High stock levels point to further subdued conditions As outlined above, there are a growing number of accidental landlords, particularly in submarkets like Al Reem island, where weaker than expected capital value appreciation is driving owners and investors to the rental market instead. This is boosting supply in an already oversupplied market, which is further enhancing the strengthening position of tenants. On Al Reem island for instance, the recently topped out 6-storey Leaf Tower (4 units) is expected to contribute to the growing supply surplus across the city. Looking ahead, with no respite expected from the economic pressures curtailing jobs growth and also catalysing redundancy programmes, it is our view that the residential rental market will continue contracting throughout 217. The supply demand equation is also clearly out of kilter, with supply levels likely to continue edging ahead of demand as the year progresses and more schemes complete. We forecast that average rents are likely to end the year 5% to 7% down on. The top end of the market is expected to register more substantial declines. Meanwhile, we forecast the residential sales market will also deteriorate further throughout 217, with values on average likely to fall by between 8% and 1%. Like the rental market, it is the top end of the market that will likely register steeper capital value drops. Average rents are likely to end the year 5% to 7% down on COMMERCIAL OFFICE MARKET Office rents weaken The stability of rents in Abu Dhabi s office market has given way to a widespread softening of rents. During Q4, prime (AED 1,85 psm), secondary (AED 1,5 psm) and tertiary (AED 75 psm) rents all declined by an average AED 5 psm. The cascading impact of economic fragility in the form of a wide scale reduction in requirements and enquiries has contributed to weaker rents across the board. The liquidity squeeze faced by the public sector as a result of the fall in oil revenues has resulted in the cancellation, or delay, of a multitude of high profile projects across the emirate as outlined above. As a result, we understand that a number of businesses reliant on public sector spending are being forced out of the market due to a lack of lucrative contracts, which is adding to the diminished number of enquiries and requirements. Grade A market insulation ends Even the city s Grade A market, which had been relatively well insulated to the downturn previously, is beginning to show cracks, with rents in most prime buildings dipping back throughout. However, Etihad Towers (AED 2,25 psm), Nation Towers (AED 2, psm) and Capital Tower (AED 1,5 psm) were amongst the limited exceptions. Addax Tower ended with headline quoting rents at AED 9 psm, some 31% lower than the end of, positioning it amongst the weakest performing buildings in the city. This trend has persisted into 217, with rents at Addax Tower slipping by a further AED 2 psf in the three months to the end of March.

5 Abu Dhabi Property Market Outlook, Spring 217 It was our expectation that a raft of lease incentives would precede any reduction in headline rents; however, with public sector requirements, which have been the primary driver of the majority of take up activity, on the back foot, many landlords appear to be rushing to adjust to a sharp fall in overall requirement levels. Landlords scramble to readjust Some landlords have begun to respond reactively to the softening conditions. Landlords are increasingly offering rent free incentives and are also open to negotiating headline rents, depending on the covenant strength of potential occupiers. Nation Tower (1%) and Etihad Towers (95%) remain amongst the schemes with the highest occupancy levels. Away from the top of the market, secondary and tertiary schemes in less core locations have seen rents fall by up to 15% in some cases over the last six months, while occupancy levels continue to slide. In fact, some buildings in core non-freehold areas are reporting vacancy rates as high as 3%. An occupier s market In these core, non-freehold areas, landlords remain reluctant to reduce rents and have likely been in the market for a long time, having experienced several downturns previously. In most instances, they are happy to have high vacancy levels as they have little incentive to drop rates as single ownership space is a rare commodity in central areas when the market is buoyant. Clearly the rising vacancy rates and falling rents are creating a golden opportunity for occupiers to cherry pick from locations they may have previously been priced out of, whilst also remaining firmly in the driving seat during rent negotiations. We have in fact noted a rising number of public and quasi government organisations capitalising on market conditions by downsizing or consolidating their operations; private sector occupier requirements are close to historic lows. With this in mind it is our view that rent corrections of between 5% to 1% are likely across the board by the end of 217 and the market s performance will remain hinged on the ability of the economy to shake off the drag generated by the low oil price environment. COMMERCIAL WAREHOUSE MARKET Bastion of stability Elsewhere in the city s commercial landscape, the warehouse sector appears to have emerged as a relative bastion of stability, with headline rents across the city s main industrial estates holding steady over the last six months. However, transactions appear to be taking place at lower rates. The only exception to this perceived stability has been Mussafah, where average lease rates fell by AED 5 psm to AED 45 psm between September and March 217. This has been driven by an increase in supply due to the delivery of speculatively built sheds, businesses downsizing or consolidating operations and a high level of relocation activity as occupiers move to estates that offer more modern warehouse facilities. As a result Mussafah has seen an upturn in the availability of second generation stock, in addition to newly built warehousing which is putting downward pressure on rents. Away from Mussafah, KIZAD continues to cement its position as Abu Dhabi s premiere industrial estate and main logistics and distribution hub. China s COSCO Shipping Co. s recent AED 2.7 billion commitment to build and operate a new container terminal, its first in the Gulf, is expected to significantly enhance the appeal of KIZAD to other international logistics operators. Performance of office rents in key buildings during 217 Performance of warehouse rents during 217 3, 5 2,5 4 AED psm 2, 1,5 1, AED psm Etihad Towers Adar HQ Nation Towers International Tower Capital Gate Captital Tower Addax Tower Abu Dhabi Global Market Mussafah ICAD ICAD 2 KIZAD Al Markaz Al Mafraq

6 For further details contact Edward Carnegy Head of Abu Dhabi Faisal Durrani Head of research faisal.durrani@cluttons.com Katie Burnell Residential sales and leasing manger katie.burnell@cluttons.com Cluttons LLP 217. 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. 1531