-0.9% -8.8% Quarterly change in capital values during Q PROPERTY MARKET OUTLOOK. Dubai, Spring 2017 RESIDENTIAL MARKET. cluttons.

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1 cluttons.com Dubai, Spring 217 PROPERTY MARKET OUTLOOK RESIDENTIAL MARKET Weakest capital value growth in five years saw values across Dubai s freehold residential areas slide by 8.8%, in line with our original forecast for of a decline of close to 1%. This marks the market s weakest annual performance in five years. The last time values declined by a similar magnitude in a 12-month period was 211 (-7%). registered a 1.9% drop in average capital values. While the weakness has persisted into 217, the magnitude of corrections appears to have slowed, with average prices moderating by.9%. The annual rate of change now stands at -7.8%. This latest correction leaves average residential values in the city at just over AED 1,3 psf, 28.7% below the % -8.8% Quarterly change in capital values during 217 Annual change in capital values during market peak. Overall, villa values were down by 6.8% in the 12 months to the end of March 217, while apartment prices dipped by a further.9% in 217, leaving them 8.5% lower than the same time last year. Performance of capital values villas and apartments Quarterly % change 25% 2% 15% 1% 5% -5% 211 Villas 212 Apartments 213 Pre Expo 22 win spike

2 Residential transaction volumes in Dubai 5, 1,8 Number of transactions 4,5 4, 3,5 3, 2,5 2, 1,5 1, ,6 1,4 1,2 1, Average transacted price (AED) psf Apartments transactions Villas transactions Apartments average transacted price Villas average transacted price Source: Reidin, Cluttons Top of the market remains weak 12 of the 32 submarkets we monitor registered price declines during, with the Burj Khalifa tower (-6.9%) itself leading the price falls. In fact, over the last 12months, the Burj Khalifa has registered a 25% correction in values, making it the weakest performer across the city. Hattan Villas at The Lakes (-13.5%), Hattan Villas at Arabian Ranches (-12.6%), villas on the Palm Jumeirah (-12.3%) and apartments on the Palm Jumeirah (-11%) rounded off the list of the five weakest performing markets over the last 12 months. These submarkets, particularly the villa sectors, are amongst the most expensive in Dubai. Their presence on the list of the most underperforming areas in the city reflects the continued buyer focus on areas perceived to offer the greatest value for money. The aversion to luxury, high-end homes stems from underlying affordability issues and perhaps more importantly, nervousness borne out of uncertainty surrounding the health of the global economy in the wake of recent events, including Britain s historic decision to leave the EU, persistent weakness in oil prices and the election of Donald Trump and the unknown impact the new US president s policies may have on global growth. Aside from the Burj Khalifa tower, the lifestyle and destination living appeal of Downtown Dubai has in a way insulated the market s performance from the fall out of global geopolitical events, which has also spurred development activity and new project launches in the last 12 months. That said, a limited number of vacant plots remain within the Mohammed Bin Rashid loop, suggesting that the resilience in values is likely to persist as new opportunities to purchase in this market start to diminish. In fact, there was a 47% drop in the number of units launched in Downtown Dubai during, with just 1,431 new homes released, compared to 2,14 unit launches in. Business Bay and Downtown Dubai Lifestyle and affordability central to price resilience Victory Heights (AED 1,125 psf), Arabian Ranches (AED 1,115 psf) and Emaar developments in Downtown Dubai (AED 2,1 psf) appear to have bucked this trend, with pricing holding steady over the last 12 months. Clearly the perception of good value and the entrenchment of existing communities have aided these markets stability. Although it is worth noting that over the last three years, values at Victory Heights and Arabian Ranches have declined by 19.1% and 1.3% respectively, suggesting these markets may be approaching their lowest ebb.

3 Off-plan market still buoyant Away from these more robust submarkets, demand in general remains relatively weak and is reflected in the volume of transactions registered across the city. According to the latest data from Reidin, secondary market transaction volumes during (11,239 deals) were down 18.4% on the previous year. The total number of transactions during the first two months in 217 has however risen by 14%, when compared to the same period in. Interestingly, the off-plan sales market continues to remain active and last year was responsible for 53% of all deals (23,844), representing on average about 1,5 apartment transactions and 31 villa sales each month (Reidin). The banking liquidity crunch created in the aftermath of the oil price collapse two years ago appears to have abated to an extent and this has certainly supported the steady performance of the off-plan sales market. Furthermore and arguably more importantly, the emergence of favourable payment plans continues to tempt buyers and perhaps investors to a greater extent. A number of recent project launches have trumpeted payment plans that extend well beyond handover, with most plans amounting to payments of between 3% to 4% prior to completion. These payment options have opened the door to continued ease of access to new home launches, which has helped to sustain prices in this segment of the residential sales market. Most investors appear to be readily able to amass payments that equate to 3% to 4% of the property value prior to seeking a mortgage. When banks are approached at circa. sixmonths prior to handover to finance the remaining payments, they appear to view financing properties imminently due to complete more favourably than those yet to break ground; this is a trend echoed across our network of banking contacts. Forecast residential supply pipeline Number of units 25, 2, 15, 1, 5, Aparetments Villas / townhouses Off-plan sales implications for the rental market The constant stream of new home launches over the last few years continues to trickle on to the rental market in the form of buy-to-let properties, which is creating challenges in some locations. At Arabian Ranches for instance, average annual rents sit between AED 17, to AED 22,, translating into a gross yield of about 5.5% to 6%. The nearby recently completed Mira villa community, which consists of 3-bedroom townhouses, has seen in excess of 1,2 units handed over in the last six months, acquired largely by the residential investment community. This newly handed over stock is now available for rent at between AED 12, to AED 14, per annum, positioning it as a cheaper alternative to Arabian Ranches. Tenants are aware of the burgeoning rental supply levels and are taking advantage of conditions by seeking out the best perceived value for money. In this instance, rents at Arabian Ranches are already coming under pressure and within the Mira community itself, landlords are competing with one another for a limited pool of tenants, which is also forcing rents downwards. For now, gross yields at Mira hover between 6.5% to 7%, making it an attractive location for buy-to-let investors and landlords. The constant stream of new home launches over the last few years continues to trickle on to the rental market in the form of buy-tolet properties, which is creating challenges in some locations.

4 Buy-to-let investment market Away from Arabian Ranches, Emaar s new mega-master planned community at Dubai Creek Harbour continues to move ahead, with 1,755 new off plan units released on to the market between January and March 217. Sales, like elsewhere in the off-plan market are progressing unhindered, with prices starting at around AED 1,8 psf. While this is higher than average across the rest of the city s residential freehold areas, low service charges, favourable payment terms, the prospect of higher yields, the reputation of Emaar and crucially, slightly smaller units, means that this stock is appealing to the buy-to-let investment community. The relative buoyancy of the investment market has also prompted developers such as Nakheel to embark on building a large build-to-rent portfolio. Plans for 2,9 units in this category are moving ahead at Nakheel s Deira Islands Mall Boulevard for instance, while a tender for 1, units spread across 42 towers at Nakheel s new Jebel Ali Gardens project is expected imminently. On completion in 22, the Jebel Ali Gardens project will double Nakheel s residential rental portfolio to 36, units. The residential investment market in Dubai has been slow to gain traction at an international level, with the bulk of activity being limited to older areas of the city, where investment is dominated by GCC nationals and Emirati buyers in particular. The presence of big ticket, institutional grade assets has been slow to materialise on both the residential and commercial fronts, although the latter has seen some movement recently in the form of Standard Chartered s Downtown Dubai building, or Business Bay s Ubora Tower, for instance. The creation of large build-to-rent portfolios bodes well for the future of the residential investment market as Nakheel s fully tenanted residential buildings in these new master planned communities are expected to become prized assets, especially as gross yields are likely to hover in the 6% to 8% range. Nakheel previously sold off a handful of buildings at Discovery Gardens during the early days of the project, however there have not been any other noteworthy large-scale deals since. Tenant demand still weak Despite the emerging focus on the residential investment market, tenant demand remains mute and has undoubtedly eased over the last 12 months, while the level of supply appears to have moved ahead of demand. As we previously explained, the rate of creation of senior level executive positions has fallen and this is reflected in the lower level of enquiries and budgets we are recording from prospective tenants. To a large extent, the redundancy programmes in the city s finance & banking sector and oil & gas sector have all but run their course, but the weak global outlook is putting other key sectors under pressure. The strength of the US dollar for instance, is to an extent undermining the ability of the emirate s tourism and hospitality sector to flourish, with anecdotal evidence of a slowing rate of job creation and even a handful of redundancies in Dubai s aviation sector, which remains a key driver of economic growth. Average rental values during 217 4, 35, 3, AED / annum 25, 2, 15, 1, 5, Studio 1 Bed 2 Bed 3 Bed 4 Bed Studio 1 Bed 2 Bed 3 Bed 4 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 Villas Apartments

5 Stable picture expected to emerge by year end While the short-term prospects appear relatively subdued, our view is that the rental market s fortunes remain tied to the looming 22 World Expo. At this stage, the mega event is one of the primary upside risks to our outlook. We know from experience that the lag between the take up of office space and the subsequent impact on the residential rental market is usually six to nine months. Construction contracts worth AED 11 billion, linked to the Expo, are expected to be announced throughout the course of 217, driving up the rate of job creation in its wake. New jobs that follow are likely to be centred on low to middle income groups, which will likely drive up competition for more affordable stock. For now, after posting the weakest performance in five years, average rents declined by 9.9% last year, in line with our forecast for a 1% fall. 217 experienced a further 4.7% decline in average rents. However, this does mask the fact that apartment rents held steady in the first three months of the year, while villas (-7.9%) registered their biggest quarterly drop in six years, leaving rents 17.7% down on. This behaviour has been underpinned by a dearth of requirements for more expensive homes for the reasons outlined above. With that in mind, it is our expectation that rents will continue moderating during 217, with an average decline of 5% to 7% likely over the course of the next six months, before there is the potential for a more stable picture to emerge, as the Expo effect starts to filter through. Villa rents are forecast to end the year by 15% to 2% down on, while apartments are expected to demonstrate greater stability, with average rents likely to decrease by a further 2% to 4% throughout 217. Any benefit from the Expo on the sales market is likely to lag the rental market, however the performance of this segment of the residential market remains closely linked to the wider macroeconomic picture across the region and globally, especially given the importance regional investment plays in driving demand for investment property in the city. Ahead of any Expo 22 linked boost to demand, the sales market is expected to register further corrections of up to 5% on average, with the top end of the secondary market likely to be impacted more severely; anything priced in excess of AED1,8 psf to AED 2, psf is likely to be slow to sell. Like the rental market, there is the potential for increased stability towards the back end of 217. We anticipate the picture for the off-plan market to remain upbeat, especially for schemes launched by reputed developers in and around established communities such as Dubai Marina or Downtown Dubai. We expect, rents to continue moderating during 217, with an average decline of 5% to 7% likely over the course of the next six months

6 OFFICE MARKET Office rents come under pressure in non-core locations Rents across most of the 24 submarkets we monitor remained relatively steady throughout, following strong growth in the preceding 12 to 18 months. However global economic anxiety and a subsequent scaling back or delaying of short term expansion projects, particularly amongst international corporate occupiers, has begun to impact on the resilience of rents. Similarly, average prime (AED 22 psf) and secondary (AED 1 psf) rents have also come under pressure over the last six months, dipping by AED 2 psf and AED 1 psf, on average, respectively. More positively for landlords, the market appears to have settled, with almost no change reported in headline upper or lower limit rents during the first three months of 217. Jumeirah Lake Towers Jumeirah Lake Towers (JLT) emerged as s weakest performing submarket, with lower and upper limit rents ending the year at between AED 6 psf and AED 14 psf, down from between AED 7 psf and AED 18 psf a year earlier. A supply surge at the start of and competition among existing landlords has undermined the ability of this submarket to record any meaningful improvement for a number of years. As a result, many occupiers, particularly those looking for smaller space, have been left firmly in the driving seat, able to cherry pick from a range of options while also being in a strong bargaining position with strata landlords. Business Bay and Garhoud were the city s next weakest performing markets during, driven by historic issues linked to an abundance of strata owned stock and more secondary stock than the market can absorb, particularly in the case of the latter. Office rent ranges in Dubai s key submarkets during 217 Dubai Science Park 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

7 Landlords holding firm We reported previously on some international corporate occupiers delaying decisions linked to significantly expanding their office footprints, however, there still remains a number of active sectors. At the start of the year we reported on the high levels of activity from the technology-media-telecoms (TMT) sector and this trend has persisted throughout the first quarter with a number of notable deals being handled by our commercial agency team for high profile international TMT corporates, in addition to the continuing activity in the healthcare and pharmaceuticals sector. In general, however, the overall slowdown in activity levels has resulted in headline rents dipping back marginally. High demand areas such as TECOM s Internet City and Media City, in addition to core locations within the DIFC remain well let, with stable rents. A limited supply pipeline in both markets is clearly supporting the stability in rents. Equally, demand from occupiers to secure a presence in these key areas is reflected in the fact that the DIFC s new eight storey Gate Village 11 Building, The Exchange, has been reportedly pre-leased, with completion not expected until late 217, or early 218. Away from the DIFC and TECOM, headline rents do not always reflect the growing adaptability amongst landlords to offer increasingly flexible lease terms and incentives, which is effectively a reduction in asking rents. Despite the mute conditions, landlords are still unwilling to lower rents at renewal and as the RERA Rent Index calculator only caters to a rising market, landlords are reluctant to decrease rates for existing occupiers. VAT threat to office rents stability Aside from macroeconomic downside risks to the commercial occupier market, we view the introduction of a Value-Added Tax (VAT) as having a potentially significant impact on our markets. Its introduction across the Gulf as at 1 January 218 was designed to maintain competitiveness across the region, however a lack of understanding on how, if at all, the new VAT is likely to impact commercial occupiers is starting to cause nervousness amongst some existing tenants. For many international occupiers, it is likely that this is something they will be able to take in their stride, given that they are used to taxation regimes in their own home markets; however, for international occupiers from the UK, or Europe, the prospect of a 5% tax on rental payments, combined with a rise in operational costs fuelled by the strength of the US dollar, may hamper take up activity in the short to medium term. We have already noted a handful of instances where landlords have been approached by tenants to make amendments to existing lease terms, with a view to trying to commit landlords to bear the cost of any additional taxes. It remains unclear at this stage whether firms operating within free-zones will be exempt from any potential VAT charges, however it is our expectation that any new tax will be applied across the board to avoid an exponential rise in requirements for free-zone office space. Global conditions to hamper office market As expected, stability in the office market has lingered longer than the residential sector. The prospect of further weakness in global economic conditions, which are already impacting the level of deal activity in the market, do not appear likely to subside in the near term. This coupled with the uncertainty stemming from a lack of information on how VAT may impact corporate occupiers is likely to keep rents under pressure over the next six months. Resilience in markets like the DIFC and TECOM is likely to persist, although no growth in headline rents is forecast. Performance of office rents at the DIFC AED psf Lower limit Upper limit

8 For further details contact Murray Strang Head of Dubai Faisal Durrani Head of research faisal.durrani@cluttons.com Richard Paul Head of residential valuation richard.paul@cluttons.com Paula Walshe Head of international corporate services paula.walshe@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. 1536