UAE REAL ESTATE UPDATE

PRIVATE BANKING

November 2013

Prepared by Angad Rajpal, Analyst and Anthony Taylor, Fund Manager - Real Estate

Issue 7

DUBAI AWARDED EXPO 2020

Congratulations to the Dubai Expo 2020 Bid committee who compiled and deliveredon a successful, world class bid against strong competition. This is a huge opportunityfor Dubai, the UAE and the Middle East to further showcase what the region has tooffer on a global stage. The World Expo is a six month long event held every 5 years.It is a key meeting point for the global community to share innovations and makeprogress on issues of international importance such as the global economy,sustainable development and improved quality of life for the world’s population. Theevent attracts millions of visitors to the host city who visit pavilions, exhibitions andcultural events staged by hundreds of participants including nations, internationalorganisations and businesses.

There has been tremendous anticipation leading up to the announcement. Inevitably,when the merits of hosting this event are discussed, the local real estate market endsup as a topic in conversation.

So what will it mean for the Dubai, and the wider UAE real estate markets for thenext 6 years leading up to the event?

> An influx of qualified and unskilled labour - 277,000 new jobs are expected tobe created, principally in the hospitality and construction sectors

> Increased demand for all levels of accommodation

> Increased infrastructure spending: official public budget currently estimated atAED 30bn

> Positive sentiment to ride out any market corrections between 2014 and 2020

We anticipate there will be an initial uplift in real estate asking prices from sellers who would expect the values of their properties to go up. If this uplift is withina reasonable range, between say 5-10%, this should lead to increased transaction prices, particularly in the more competitive sectors of residential apartmentsand villas in freehold areas. However, if the initial increase is above this range, a spread will be created between the offer and asking prices. This will result infewer immediate transactions.

Following this potential adjustment in prices initially, the longer term growth forecast could well be muted. While house prices and rentals may rise followingthe announcement, this will in turn increase the cost of living in the country, with salaries not expected to increasing at the same rate. Salaried workers willeventually consider relocating to more affordable, less affluent locations. This may create a ceiling on house prices and rental increases. Growth rates above theunderlying income will compress yields and may result in speculation. High levels of speculation could result in a market correction, possibly before the event in2020. Positive growth in the real estate market should maintain an income yield that is desirable to investors i.e. rentals must increase at similar rate to prices.

Rental caps applied by Dubai’s Real Estate Regulatory Authority (“RERA”) will also mean a number of tenants will decide to remain in their current accommodationas moving will result in a significant increase in rental cost as they are forced to pay higher market rates. Therefore the initial increase in income to currentproperty owners may be delayed by one or two years.

The hospitality and commercial sectors are expected to follow the improving residential market on this announcement. The income for these two sectors is lessreliant on disposable household income, with hotels depending on foreign tourists and offices relying on the revenue of the businesses they house. They maytherefore experience more significant increases over the medium term. This will most likely be seen in the coming years as the event draws nearer and momentumfrom the government infrastructure spending gets passed down into local businesses.

Other Key Highlights for the year to date (YTD) are:> Dubai’s residential prices increased in Q3, up 13% Y-o-Y for villas and as much as 22% Y-o-Y for apartments. Rentals for residential units were up around

15% Y-o-Y.

> Abu Dhabi’s residential prices continue to improve with villa prices now up 13% Y-o-Y. Apartment prices have joined the recovery up 18% Y-o-Y. Thehousing allowance condition, for employees of government or government-related entities to reside in Abu Dhabi from September, has not immediatelybeen reflected in the rental growth figures but we expect this change in the next quarter and in 2014.

> The Dubai office market continues to show signs of recovery.

> Hotel occupancies in Dubai were at 76% in September 2013, up from 69% in the previous year

Abu Dhabi: Residential

In Abu Dhabi, sales prices appear to be gathering momentum in their recovery, up 18% and 13% Y-o-Y for apartments and villas respectively.Rental growth has not kept up with sales prices growth over the year but remains positive. The ruling that housing allowances for employeesof government, or government-related entities can only be claimed if the employee resides in Abu Dhabi came into effect in September 2013.This is expected to push up rental levels as affected employees commuting from Dubai will relocate to the capital, thereby increasing demand.

Abu Dhabi Residential Prices (AED per sq ft) Abu Dhabi Residential Rentals (AED per sq ft)

Dubai: Commercial

The commercial market in Dubai continues to show signs of itsrecovery. The market, however, remains divided. There is strongdemand for single-owned buildings from both investors andcorporate occupiers and less demand for strata-title (multipleowners) buildings. In certain locations within Dubai however, suchas JLT and Business Bay, we have seen the strata office marketimprove significantly over the last 6 months. We expect to see moreimprovement in the strata sector as investor confidence returns andpositive sentiment surrounding the Dubai Expo 2020 keeps thedemand high and the market buoyant. According to Cluttons, theDubai office rental market is up on average 10.7% Y-o- Y.

Dubai Office Lease Rates (AED per sq ft)

Source: Cluttons, Bloomberg (September 2013)

Primary Secondary Tertiary

0

100

200

300

400

500

Mar-07

Jun

-07

Sep-07

Dec-07

Mar-08

Jun

-08

Sep-08

Dec-08

Mar-09

Jun

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Sep-09

Dec-09

Mar-10

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-10

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Mar-11

Jun

-11

Sep-11

Dec-11

Mar-12

Jun

-12Sep

-12

Jun

-13Sep

-13

Dec-12

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Source: REIDIN.com (September 2013)

Apartments (LHS) Villas (RHS)

500

1000

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1000

Mar-07

Jun

-07Sep

-07D

ec-07M

ar-08Ju

n-08

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-09Sep

-09D

ec-09M

ar-10Ju

n-10

Sep-10

Dec-10

Mar-11

Jun

-11Sep

-11D

ec-11M

ar-12Ju

n-12

Sep-12

Jun

-13Sep

-13

Dec-12

Mar-13

Source: REIDIN.com (September 2013)

20

40

60

80

100

120

140

160

180

Mar-07

Jun

-07

Sep-07

Dec-07

Mar-08

Jun

-08

Sep-08

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Mar-09

Jun

-09

Sep-09

Dec-09

Mar-10

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Mar-11

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Sep-11

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Mar-12

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-12Sep

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Apartments Villas

Dubai: Residential

Dubai residential continues to perform well in the current market conditions. Apartment prices have rallied, up 16% YTD and 22% Y-o-Y.Villas prices also sustained their growth story in 2013, enjoying increases of 10% YTD and 13% Y-o-Y.

Rentals increased 16% and 13% YTD for apartments and villas respectively. Secondary locations such as Jumeirah Lake Towers (“JLT”), DubaiSports City and International City enjoyed above 20% rental growth Y-o-Y, albeit coming off lower bases.

Dubai Residential Prices (AED per sq ft) Dubai Residential Rentals (AED per sq ft)

Source: REIDIN.com (September 2013)

0

200

400

600

800

1,000

1,200

1,600

1,400

Mar-07

Jun

-07

Sep-07

Dec-07

Mar-08

Jun

-08

Sep-08

Dec-08

Mar-09

Jun

-09

Sep-09

Dec-09

Mar-10

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-10

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Dec-10

Mar-11

Jun

-11

Sep-11

Dec-11

Mar-12

Jun

-12Sep

-12

Jun

-13Sep

-13

Dec-12

Mar-13

Apartments Villas

Source: REIDIN.com (September 2013)

40

50

60

70

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90

100

110

Mar-07

Jun

-07

Sep-07

Dec-07

Mar-08

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Sep-11

Dec-11

Mar-12

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-12Sep

-12

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-13Sep

-13

Dec-12

Mar-13

Apartments Villas

Market News & Views

Dubai Land Department Transfer Fees doubled to 4%

The transfer fee has for a real estate transaction to be registered in the Dubai Land Department (“DLD”) has been doubled from 2% to 4%,in an attempt to curb the rapid increase in property prices and speculation in the market.

By law this fee should be shared equally by the buyer and seller. However, while at 2% and in the improving market conditions, this was oftenborne entirely by the buyer. The market is still deciding whether the buyer or both parties should incur this increase in transfer fee.

Confirmation of UAE Central Bank regulations on Mortgages

Following the initial announcement by the UAE Central Bank in December 2012, and in consultation with the Emirates banks’ association, theproposed mortgage regulations have been ratified in October 2013:

> 75% Loan-to-Value (“LTV”) for expatriates on first investments below AED 5M

> 80% LTV for UAE nationals on first investments below AED 5M

> Properties above AED 5M, 65% LTV for expatriates, 70% LTV for UAE nationals

> Subsequent purchases, 60% LTV for expatriates, 65% LTV for UAE nationals

> All off-plan properties 50% LTV

The new regulations will restrict some buyers entering the UAE real estate market, although it may not have the desired effect of “cooling”the real estate market, with over 80% of all transactions being settled in cash.

Dubai Cityscape 2013 – 8-10 October 2013

The recent show was 50% bigger than in 2012 and the showcase for Dubai real estate did not disappoint this year. Discussion panels at theevent focused on:

> New off-plan development requirements protecting investors

> Proposed regulations for real estate investment trusts (REIT)

> RICS Measurement Standards to be adopted in Dubai

> Risk management strategies and challenges for foreign investors

Anthony Taylor

Fund Manager – Real EstateEmirates NBD Asset Management

Emirates NBD is a premier sponsor of the EXPO 2020 bid

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