Residential Market Overview

Kingdom of Saudi Arabia RESIDENTIAL 213 Residential Market Overview Recently, the residential market in the Kingdom of Saudi Arabia observed one of its largest fundamental changes the approval of the long awaited mortgage law. Colliers investigates the potential impact and suggests how developers, financiers and investors can respond and take advantage of this new framework. Key Findings: > Full implementation of mortgage law is expected to increase home financing market size by 6% in coming five years. > Residential sale prices continue to rise - up to 18% in some segments. > Within Dammam & Al Khobar and Jeddah, residential sale prices have increased more for Apartments than Villas. KSA Mortgage Market Overview Market Penetration The mortgage market in the GCC region is significantly underdeveloped relative to other parts of the world. In 21, the ratio of residential mortgages to GDP in the European Union was 52.4% compared with 7.8% in the GCC region. Within the GCC, Saudi Arabia s ratio is low at 1% - 2% relative to other countries such as Dubai (14.%) and Bahrain (4.5%). Current State of the Market The home financing process in Saudi Arabia is starkly different than other countries. Factors influencing the difference are (i) the economic boom in the last 4 years, (ii) strong cultural values derived from the Islamic Law (Sharia), (iii) population growth rate above international averages, and (iv) an immature residential market (limited number of professional developers). Mortgage lending in the Kingdom is primarily based on salaries of individuals (with government employees being favoured over private sector employees). This is mainly attributed to the fact that KSA s low mortgage penetration can be attributed to three primary factors: (i) low transparency of information in the real estate market, (ii) delay in implementing the long awaited mortgage law, and (iii) a shortage in housing units. The government has taken a number of initiatives to develop the real estate sector in general and the housing market in particular. These include: 1. Real Estate Law 2. Escrow Law (under the Ministry of Commerce) 3. Development of economic cities 4. Establishment of Ministry of Housing 5. Development of affordable housing throughout Saudi Arabia (provision of 5, Residential Plots mandated by King Abdullah bin Abdulaziz, in March, 212) 6. Mortgage Law

foreclosures are currently not practiced in Saudi Arabia, thus the primary recourse for lenders, in case of default, is against a borrower s income. This is one aspect the new mortgage law is set to address. It is estimated that more than 5% of housing purchases in the Kingdom are made in cash, either from household savings or borrowed from friends and relatives. Two institutional channels are available for home financing: 1. Commercial banks and real estate financing firms 2. Government institutions (e.g. Real Estate Development Fund, Public Pension Authority, Ministry of Housing) Home Financing Market Size The mortgage law is expected to expand the target audience of home buyers, especially those fall under the monthly income bracket of SAR 6, 9,. Without the mortgage law, the estimated residential financing market size between 214 and 219 is SAR 131.2 billion. After the promulgation of the mortgage law, the potential market size is now estimated at SAR 29.9 billion, a 6% increase over the same 5-year period. Impact On Demand The mortgage law is expected to positively affect the demand for home financing and thus home purchases. It is expected that the number of home units, that will require financing over the next 5 years, will increase by 6%. Growth of the affordable housing sector will further stimulate demand for home finance. Households earning less than SAR 5, per month are not included within Colliers calculations due to their current affordability constraints. Demand For Financing (Units) Units Demanding Financing 6 5 4 3 2 Average demand per year for home financing (before the mortgage law) for the next five years is c.28, units. Upon the implementation of the mortgage law, this estimate is expected to increase to c.45, units. 1 214 With Mortgage 219 Without Mortgage Source: Colliers Analysis 2 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

Outlook The mortgage law is anticipated to have an impact over the medium to long term as consumers adjust payments in their spending patterns and banks adjust their lending patterns. Listed below are some of the expected trends and developments in the residential market: It is expected that increase in the lending appetite of banks toward low & mid-income households will increase. Loan durations will be extended up to 3 years (from the current 1 to 2 years), thus reducing monthly loan payments and improving affordability. The minimum 3% down payment outlined by SAMA would help regulate the market and inhibit speculation. Loan criteria is expected to ease while the private sector employees would be increasingly targeted. The mortgage law is expected to provide a framework to exercise foreclosures which would reduce lending risk and increase lending appetite, if broadly implemented. The increase expected in demand for housing units will exert short-term upward pressure on prices unless housing supply rises accordingly. Prices are expected to rise more for apartments than villas due to their lower unit price, which makes them relatively more affordable and easier to lease. The proper implementation of the mortgage law is expected to incentivise developers to build appropriate products in greater quantities, further providing momentum to the residential market. Mortgage law is anticipated to have an impact over the medium to long term as consumers adjust payments in their spending patterns Ministry of Housing Program The Ministry of Housing (MOH) continues its efforts to alleviate the housing shortage in Saudi Arabia. In August 212, MOH signed a series of contracts worth of SAR 4 billion to develop land plots totaling 26 million sqm throughout the country. The Program will provide infrastructure and public facilities to build 4, residential units to accommodate up to 25, people. This will bring the total infrastructure projects under construction by MOH to 57, and will provide housing capacity for c.6, units. The majority of the announced projects are located on the outskirts of major cities. Therefore, once the infrastructure for the upcoming projects is in place, Colliers believes that it will provide new corridors of growth in the areas surrounding the newly developed communities. Furthermore, these upcoming residential districts will provide opportunities to develop supporting commercial facilities. In broad terms, Colliers believes that MOH projects, in the coming 5 years will begin to fill the gap in the affordable residential market segment. However, current MOH projects would not fill the entire identified gap for all market segments. On the contrary, it might stimulate demand and provide new investment opportunities that previously did not exist. 3 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

Riyadh RIYADH Residential Market Overview in Major Cities Residential Performance Housing development trends in 213 indicates that Riyadh is rapidly growing towards the northern areas, where properties have the city s highest sale prices and experience faster than average absorption rates. The majority of Riyadh s housing supply is being delivered by mid and small scale developers. Professional developers have limited presence in the market but some have consistently delivered projects in recent years such as Rafal, Al Argan and Maskan Arabia. In 213, prices for villas increased by 15% while apartments experienced 1% growth. Despite apartments being relatively more affordable, apartments in Riyadh are less popular due to their lower quality when compared to similar developments in other major cities. North Riyadh has the highest sale prices as well as the highest absorption rates in the city. This is attributed to better infrastructure and the completion of a number of high profile projects (such as KAFD, Rafal Tower, and PNU). South Riyadh is mostly characterised by developments which target lower mid and low income segments of the population. New districts, such as Dar Al Baydah and Al Aziziyah, have better than average infrastructure. However, distance from other parts of the city makes South Riyad less desirable. As such, sale prices are the lowest in South Riyadh is albeit with healthy absorption. East Riyadh is the most attractive areas for middle income households, as it benefits from its connectivity to central Riyadh, but more importantly to the upcoming developments in North Riyadh. Prices are lower in East Riyadh compared with North Riyadh, but it is much higher than South Riyadh. Absorption for new developments is also reasonable indicating strong demand for this area. West Riyadh is the preferred neighbourhood for the city s high net worth individual s (HNWI s), particularly districts such as Khozama and Nakheel. In contrast, the new West Riyadh is characterised by upcoming districts such as Laban which comprise primarily of apartment developments, catering to low and lower mid-income households. Developer built projects typically have lower sale prices and slower absorption rates. In contrast, high end districts comprise owner built properties with minimal developer activity. Outlook An emerging young population increases demand, affecting both rental and sale prices. This factor provides barriers to increasing home ownership above current levels. Large scale developers have an important role to play in the current market as competition is low, demand is high and the mortgage law will potentially make residential products more accessible to the public. In conclusion, Colliers believes that the residential sector is the most attractive real estate sector within the city with minimal competition for large scale developers, provided they address the gap in the market. Villa Price Snapshot 5, 4, 3, 2, 1, Apartment Price Snapshot 5, 4, 3, 2, 1, South South West* West* Southwest Northeast Northwest Central Forthcoming Supply East Southwest Central Southeast North East Units Maskan Villas 292 Ajmakan Phase 1 5 Manazel Qurtubah (Phase 2) 1, Shams Al Riyadh 3,189 Ministry of Housing Projects 7, Northwest *Does not include high end districts. North *Does not include high income districts. Source: Colliers Market Research The above does not represent an exhaustive list of Riyadh s forthcoming supply. 4 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

Outlook Jeddah JEDDAH Residential Performance Jeddah s local authorities have invested substantially in infrastructure projects to facilitate the fast growing population and the urban expansion of the city. However, the housing market was unable to meet the demand and the majority of the delivered housing units have been developed through individually financed developers. Similar to Riyadh, professional developers are limited in Jeddah, with Ewaan, Emaar Middle East and Kinan taking the lead in developing community master plans. The strongest demand for housing in Jeddah is in the low to middle income segments of the population, with unplanned settlements being a major source of accommodation for the households. North Jeddah exhibits the highest concentration of construction activity in the city. The majority of units are of mid to high quality, and are larger in both built-up area and plot sizes compared with Jeddah s average. Northeast Jeddah is considered the most attractive area for mid-income households with an average sale price of SAR 3,138/sqm for apartment units, while SAR 4,75/sqm for villa units. Despite the relatively poor infrastructure and slow delivery of apartments, the area experiences good absorption of new supply. This trend points to increase demand for apartments, as villa prices typically exceed SAR 1.5 million within new districts in North Jeddah. South Jeddah has witnessed induced demand for apartments in newly emerging master planned communities such as Al Worood, Madain Al Fahd and Jeddah Gate, resulting in increased land prices. Despite high demand new supply has been limited due to deteriorating infrastructure, forming a major challenge for Jeddah Municipality and Jeddah Development and Urban Regeneration Company (JDURC). Colliers research indicates that sale prices increased by 12% and 16% for villas and apartments, respectively. This price growth is lower than the previous two years, although outlook remains strong with demand continuing to outstrip supply. Upscale waterfront apartments on the Corniche experienced comparatively low price increase with no additional supply. This is attributed to the slow absorption of units, leading to delays in construction. Jeddah s affordable housing supply remains inadequate, compared to demand. Capitalizing on the increasing demand in the residential market provides good opportunities for land owners and investors. However, speculations drive land prices higher, and restrict supply. Plans by the Ministry of Housing to ease supply pressure are progressing, having identified parcels of land for development. Recently, MOH signed contracts to develop the infrastructure for two large housing projects in Jeddah. The projects have a housing capacity of 14,87 residential units and serves an estimated population of 82, people. The overall outlook of Jeddah s residential sector remains positive with demand continuing to outstrip supply. The supply demand gap is expected to further widen as the population increases. Villa Price Snapshot 9, 8, 7, 6, 5, 4, 3, 2, 1, East Northeast Apartment Price Snapshot 6, 5, 4, 3, 2, 1, Northeast South Forthcoming Supply Northwest Central Central Units West Northwest Source: Colliers Market Research Saudia City 4, Abraj Al Hilal Residential Towers 6, Masharef 6, Thuwal Waterfront Development 6,1 Ruwais Project 15, Ministry of Housing Projects 14,87 The above does not represent an exhaustive list of Jeddah s forthcoming supply. 5 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

DAMMAM AL KHOBAR for land owners and investors. Sales of high end products appear to be slowing. However, the market offers opportunities in new upscale categories such as: Al Khobar is the only city in the country that offers quality vertical compounds that target professional expatriates such as Dhahran Tower and DTC. Dammam & Al Khobar Residential Performance The residential property markets in Dammam and Al Khobar is the dominant residential market in the Eastern Province. Dammam and Al Khobar hold significance as the major centre for oil production in the Kingdom and within the GCC. Midscale developers operating in Dammam and Al Khobar are more experienced relative to those in other major cities, both in terms of number and size of projects. Moreover, many developers use professional sales and marketing channels actively, a concept relatively absent elsewhere in the Kingdom. In terms of performance, Colliers has seen prices increase by 18% for apartments and only 4% for villas. Apartments target the mid-income segment of the population, which has the highest demand levels. The lower increase in prices for villas can be attributed to: Apartments and duplexes gaining more popularity due to their affordability, whilst villas remain the preferred type of accommodation. Saturation levels being achieved amongst this segment as all mid-scale developers are actively targeting this segment. Lack of differentiation amongst product types which are typically traditional block developments. Many upcoming districts in Dammam and Al Khobar currently lack proper social infrastructure (such as schools, hospitals, civic facilities) which has had an effect on the absorption rate and prices of residential units in many locations (such as Buhairat Al Nawras). Villas and duplexes sell at an average price of SAR 3,613/ sqm, while apartments are priced at SAR 3,53/sqm. New developments primarily target upper mid-to-high income households, leaving unmet demand for low to mid-income households. Outlook Dammam and Al Khobar have seen considerable population growth, which has increased demand for housing. The shortage is most pronounced in the low and mid-income segments. Developments targeting this segment are a strong opportunity High rise residences within mixed use developments have been popular in Jeddah and Riyadh after the concept was met with overwhelming success in other parts of the region. However, this type of development has not been introduced in Al Khobar. Villa Price Snapshot 5, 4, 3, 2, 1, South Khobar West Dammam Apartment Price Snapshot 5, 4, 3, 2, 1, East Dammam Forthcoming Supply Dhahran Dhahran South Dammam East Dammam South Khobar Units Murjana 255 Dammam Hills 292 Abraj Al Salam 5 Khobar Lakes 1, Ministry of Housing Projects 7, The above does not represent an exhaustive list of Dammam and Al Khobar s forthcoming supply. Source: Colliers Market Research 6 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

Conclusion & Identified Opportunities In terms of the overall offering of residential products, Colliers believes the following residential types offer attractive returns and strong market potential for the major cities: Land subdivision for serviced residential plots (such as Digital City in Riyadh). > raw land appreciation is minimal > high demand for owner built properties > banks are keen to finance such projects due to low risk and short payback periods Villa Residential Communities for Saudi Nationals are gaining interest from both buyers and developers (such as Riyadh s Al Rabiya Community). High Rise Residential Towers are gaining popularity in Riyadh and Dammam & Al Khobar (Riyadh s forthcoming supply in the next 5 years is 3,9 units, while Dammam & Al Khobar is estimated at 2, units). Tier B Compounds present a viable development opportunity in major cities of Saudi Arabia, however, the challenge of securing attractive land sizes at commercially viable prices is limiting their growth. Corporate Accommodation for short stay guests are in high demand and suffer from lack of supply. This is especially prevalent in Riyadh which has a high influx of white collar employees for short term stay due to the ongoing infrastructure projects and construction works (such as Riyadh Metro). Colliers has identified opportunities regarding upscale apartment communities for our clients, an offering currently not prevalent in the Saudi market. Demand is strong for a community living concept with the right level of facilities and amenities in attractive locations. Colliers believes there is a gap in the residential market of Saudi Arabia s major cities for such a product. Apartment products are present either in the form of high end luxury apartment units or low end apartment buildings. The historic preference residents have for villa units can be attributed to cultural preferences. However, the changing population, demographics and increasing pressure on affordability make apartment communities targeting the upper mid-income segment an attractive product. Luxurious High Rises Upscale Apartment Communities 3-4 Story Stand alone Building High-Rise Condos Prices: > SAR 1.3 MN/Unit Market Gap Typical Apartments Prices: < SAR 7,/Unit 7 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

Relative identified opportunities RIYADH JEDDAH DAMMAM/AL KHOBAR Relative Demand High Medium Low Capitalisation Rate (Yield)* 5%-7% 5%-7% 6%-8% Prices Medium High Low Gap (High, Mid & Low Income) All Segments Mid & Low Income Mid & Low Income Unique Investment Rationale Highest demand levels with developed land available at relatively reasonable prices. Specialised/unique developments have the highest potential in Jeddah due to its capacity to absorb higher prices relative to other major cities in KSA. Largest demand/supply gap is in the mid-income segment. This allows quick absorptions at the expense of slightly lower prices. Opportunities Large Scale Projects Block Developments Residential Towers Tier B Compounds Community Residences Large Scale Projects for Mid-Income Midscale Communities Specialized Leasehold Developments for Expats Waterfront Apartments Community Residences Tier B Compounds Duplex Units in Block Developments Capitalisation Rate (All Risks Yield) Statement: The actual or potential net rental income is capitalised at the Market Capitalisation Rate which is so called as it is the rate as evidenced from comparative sales and letting data at which the market capitalises the income. The capitaliser or multiplier produced by the market rate is known as the Year s Purchase (YP) and is calculated for perpetual income mainly for market rented freeholds. 8 RESEARCH REPORT 213 SAUDI ARABIA Residential Market Overview

482 offices in 62 countries on 6 continents $2 billion in annual revenue over 13,5 professionals 5,1 brokers $71 billion in transaction volume across more than 78, sale and lease transactions over 1.1 billion square feet under management (excluding residential properties) Contact Details In Saudi Arabia: Colliers International Al Mas Tower Office 63 P.O. Box 5678 Riyadh 11432 Kingdom of Saudi Arabia Jameel Square Office 24 Jeddah Kingdom of Saudi Arabia Ian Albert Regional Director Middle East MAIN +971 4 453 74 ian.albert@colliers.com Imad Damrah Managing Director Saudi Arabia MAIN +966 11 217 9997 MOBILE +966 5 417 2178 imad.damrah@colliers.com Khalid Smadi Director KSA Western Region MAIN +966 12 61 59 MOBILE +966 55 999 7365 khalid.smadi@colliers.com Colliers International Middle East Colliers International has been providing leading advisory services in the Middle East and North Africa region since 1996, and in Saudi Arabia since 24. Regarded as the largest and most experienced firm in the region, Colliers International s expertise covers Hospitality, Residential, Commercial, Retail, Education and Healthcare sectors together with master planning solutions, serviced from five regional offices. Colliers Research Services Group is recognised as a knowledge leader in the real estate industry, providing clients with valuable market intelligence to support business decisions. Colliers research analysts provide multi-level support across all property types, ranging from data collection to comprehensive market analysis and financial advisory. www.colliers.com BEST REAL ESTATE ADVISOR IN KSA FOR ADVISORY AND VALUATION SERVICES YEAR 211, 212, 213 Copyright 213 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Accelerating success.