—Real Estate Sector UAE Initiation of Coverage January 17, 2007 New Leadership, New Vision

• The government of Abu Dhabi has embarked on a well publi- cized effort to transform the Emirate into a world class tourism and business destination. The authorities have taken several steps to achieve this long-term objective, the most notable of which has been the liberalization of ownership laws in residential and commercial sectors.

• Historically, the ownership of property in Abu Dhabi rested with the ruler of the Emirate. However, this changed with the passing of the property law in 2005, granting ownership rights to both locals and foreigners, although on differing terms. Similarly, the granting of a free zone status to the Industrial City of Abu Dhabi (ICAD) under a decree passed in 2005 allowed 100% business ownership to foreign investors for the first time in the Emirate.

• The relaxation of ownership laws is expected to significantly boost the participation of the private sector in the development of Abu Dhabi. Resultantly, the government has modified its role accordingly, laying greater emphasis on creating an environment conducive to future development. Key efforts being made by the authorities in this regard include: provision of an adequate legal structure, restructuring of government departments and devel- opment of physical infrastructure.

• The economic plan envisioned by the government is aimed at reducing the Emirate’s dependence on revenues from the oil & gas sector. The heavy industry sector has been identified as a key growth area in this regard where Abu Dhabi is anticipated to posses a distinct competitive advantage. Diversification also serves as a key theme within the oil & gas industry, with expan- sion into the downstream sector viewed as the key to value addition in the sector.

• Residential and tourism development also form an integral part of the government’s plan to diversify the economy. The relaxa- tion of ownership laws led to the announcement of a number of large scale mix-use projects, estimated at a value of over US$126 billion. The projects are expected to substantially add to the number of residential units in Abu Dhabi, with confirmed supply estimated at over 240,000 units over the next 10 to 15 year period. The hospitality sector is similarly expected to wit- ness a near tripling of hotel room supply over the next decade.

• In contrast to the large total supply expected to flow in from the recently announced projects, a very limited number of residen- tial units have actually been made available for sale to date. Consequently, even after assuming a relatively aggressive resi- dential supply schedule between 2007 and 2009, our analysis suggests a sizable excess demand of ca. 65,000 units at the end of the forecast period.

• The prevailing shortage in residential supply, combined with a rapid increase in population over the coming years, is expected to yield healthy sector returns for developers and investors alike. Prime Group Research Department This report is being issued to provide an overview of the key [email protected] developments taking place in the Emirate and serves as a pre- Tel: +971-2 -6910800 cursor to notes to be issued on listed real estate companies operating in Abu Dhabi. Fax: +971-2-6670907

PRIME EGYPT SALES TEAM PRIME UAE SALES TEAM Hassan Samir +202-300-5666 [email protected] Chahir Hosni +971-2-6910707 [email protected] Yasmine Guindy +202-300-5666 [email protected] Ahmad Hamdy +971-2-6910701 [email protected] Mohamed Fouad +202-300-5666 [email protected] Tarek Khayyat +202-300-5666 [email protected] Abu Dhabi—Real Estate Sector UAE

LIBERALIZING THE ECONOMY TO PROMOTE GROWTH

The ascension of Sheikh Khalifa bin Zayed Al Nahyan to the position of ruler of Abu Dhabi in late 2004 Pace of liberalization in- was accompanied by a marked increase in the pace of the liberalization and economic reform process creased under the new initiated by his predecessor. While the UAE as a whole has long maintained liberal policies by regional government standards, Abu Dhabi has been relatively conservative in opening its markets to foreigners, particularly in comparison to neighboring Dubai. However, the new leadership’s vision, combined with external pressure from bodies such as the World Trade Organization, is set to dramatically alter the social and economic outlook of the Emirate.

The government of Abu Dhabi has embarked on a well publicized effort to transform Abu Dhabi into a world class tourism and business destination. It has taken several steps to achieve this long-term ob- Ownership rules relaxed jective, with the most notable being the signing of a property law in 2005, whereby locals were for the to fuel growth first time permitted to buy and sell land throughout Abu Dhabi, while GCC nationals and other expatri- ates were granted permission to own land on freehold and leasehold basis respectively in designated areas. Similarly, one of the most significant steps taken by the government to boost industrial develop- ment was allowing 100% ownership rights to foreign investors in the Industrial City of Abu Dhabi (ICAD) in 2005. In fact, the granting of permission to foreigners to fully own business in ICAD high- lights the increased pace of liberalization under Sheikh Khalifa’s government. Although ICAD was es- tablished in 2004 under the rule of Sheikh Zayed Al Nahyan, it was not granted Free Zone status until late 2005 under the present government.

Abu Dhabi: More Progressive Than Generally Perceived

Progressive ownership The UAE’s Commercial Company Law limiting foreign ownership to a maximum of 49% is arguably the structures in key indus- most frequently cited corporate regulation in popular media. This reflects particularly negatively on Abu tries Dhabi due to the presence of large free-zones allowing complete ownership in other emirates. How- ever, focus on the restrictive ruling masks the fact that Abu Dhabi has embarked on a strategy of liber- alization and has adopted some of the most progressive ownership structures in the region in key in- dustries, particularly in the oil and power sectors.

Foreign companies al- In line with the trend followed by its fellow OPEC members, Abu Dhabi took steps in the 1970s to gain lowed to maintain 40% control of its oil industry by renegotiating contracts with international oil companies. However, while stake in oil production many of its peers opted for nationalization, Abu Dhabi decided to permit foreign oil companies to main- projects tain a 40% stake in large oil production projects. A new national oil company, ADNOC, was thus formed to take the remaining 60% stake. The government continues to implement this ownership structure, with foreign companies offered holdings in new projects as well. This stands in contrast to policy adopted by the majority of other oil producers in the region.

Abu Dhabi pursuing a Abu Dhabi is also pursuing a long-term goal of privatizing the water and electricity sector. As part of long-term goal of privatiz- the program, a number of Independent Water and Power Producers (IWPPs) have been established on ing water and electricity a Build, Own, Operate (BOO) basis as joint ventures between Abu Dhabi Water and Electricity Author- sector ity (ADWEA) and various international companies. The Emirate currently has six such projects, with ADWEA holding a 60% stake in each instance. The Oxford Business Group estimates that Abu Dhabi has attracted FDI worth AED33 billion in its infrastructure sector as a result of the launch of the IWPP program in 1997. With the latest privatization completed in 2006, the government has reaffirmed its commitment of increasing private sector participation in the infrastructure sector.

Ownership of non- The government has also announced its intention of transferring ownership of non-strategic industries strategic industries being to the private sector over the coming years. In fact, the authorities have already started implementing transferred to private this strategy, with the recent privatization of solid waste management in the form of an AED1.2 billion sector contract to Al Qudra Holding serving as a good example.

The political scenario in the country is also undergoing a slow, but steady reform. The appointment of the first woman minister in 2004 has widely been heralded as evidence of the government’s desire to Political environment un- improve the political framework. Elections were also held for the first time in 2005 to select the Board dergoing gradual reform of Directors for the Abu Dhabi Chamber of Commerce and Industry (ADCCI). Lastly, and arguably most significantly, elections were held for the first time in 2006 to select 20 of the 40 members of the Fed- eral National Council (FNC). The elections served as the first of a three-phased approach adopted by the government to transform the FNC into a more effective legislative body. The second phase will witness an enlargement of the Council, accompanied by an expansion in the powers of its members, while the final phase envisages an open election for half the Council. Given Abu Dhabi’s status as the capital of the country, we expect it to continue to be a key driver and beneficiary of the gradual over- haul of the political system.

Prime Research 2 Abu Dhabi—Real Estate Sector UAE

LAYING THE FOUNDATION FOR GROWTH

Prior to passing of the property law in 2005, the ownership of property in Abu Dhabi rested with the ruler of the Emirate and resultantly, all commercial and residential construction was conducted by Change in ownership specialized government agencies. However, the liberalization of ownership rules is expected to signifi- rights leading to modified cantly raise the participation of the private sector in the development of the Emirate. The AED34 billion role for the government Danet Abu Dhabi project by Al Qudra Holding serves as a good example in this regard. Consequently, the government has modified its role accordingly, placing greater emphasis on the development of an environment to facilitate growth. Efforts being made by the government in this regard can be classified into three broad categories: provision of an adequate legal framework, restructuring of government departments and development of physical infrastructure to promote investment in Abu Dhabi.

Legal Framework

The government of Abu Dhabi is pursuing a significant overhaul of the legal framework in the Emirate, aimed at creating a conducive environment for investors. As mentioned earlier, one of the most signifi- Ownership rules expected cant steps in this regard is the granting of ownership rights in the residential sector. However, the to be further relaxed government continues to allow only restrictive ownership rights, permitting non-Arab nationals to own land only in the form of a leasehold. In view of the presence of more liberal property laws in other emirates, we feel that Abu Dhabi is likely to further relax ownership regulations in the future. The re- cent decision by Aldar Properties to link permission of foreign ownership in the company to an amend- ment in Abu Dhabi’s real estate laws supports our assertion, suggesting such a change could take place in the relatively near future. It would be pertinent to mention here that, given Abu Dhabi’s status as the capital of UAE, as has been noted before it is more likely to wait for a federal law rather than issuing an emirate-specific law.

On the commercial front, the granting of 100% foreign ownership to investors in the Industrial City of Foreign investors granted Abu Dhabi in 2005 represents another marked change in the policies traditionally followed by the Emir- 100% ownership rights in ate. Additionally, the property law passed in 2005 grants foreign investors the permission to own com- ICAD mercial space in designated areas. It would be pertinent to mention here that our discussion with vari- ous real estate sales representatives suggests that foreign investors in office space in Abu Dhabi will still be subject to the 49% ownership limit if they wish to start a business on the premises. On the other hand, foreigners are permitted to operate fully owned businesses from office space in develop- ments such as City of Arabia in Dubai. We expect the government of Abu Dhabi to relax the restrictive ruling on business ownership as the pace of development in the Emirate increases and the planned projects start nearing completion.

In addition to relaxing ownership rules, the government is continuing to update various facets of the 7% rent cap enforced legal structure to ensure stable growth. A key example in this regard is the recently enforced 7% an- nual rent cap on residential and commercial property in Abu Dhabi. Driven by severe shortage in both residential and commercial space, rents in Abu Dhabi spiked in 2006, with anecdotal evidence suggest- ing increases of up to 50% in specific market segments. Keeping in view the negative impact inflation has had on residents in Dubai, the rent cap aims to avoid similar problems in Abu Dhabi. Thus, the limit on annual rent increase is expected to foster Abu Dhabi’s position as a more affordable alternative to Dubai, and hence support continued growth.

Restructuring Government Departments

In order to streamline operations and introduce efficiency in the public sector, a number of govern- Government departments ment departments are currently undergoing restructuring. The Abu Dhabi Executive Council aims to being restructured to establish three committees for economy, social affairs and infrastructure and environment through the introduce efficiency restructuring process. The most recent steps taken by the council in this regard involve the creation of three new local departments, namely the Department of Education, Culture, Youth and Sport, Headquarters, and Department of Labor and Social Affairs.

In addition to restructuring existing departments, the government has established a number of inde- Growth plans being imple- pendent organizations to implement the Emirate’s ambitious growth plans. Mentionable examples in mented through inde- this regard include Aldar Properties, Sorouh Real Estate and Tourism Development and Investment pendent companies Company. In addition to the aforementioned real estate related companies, a number of wholly owned companies have been formed by the government to drive economic development in the Emirate. One particularly notable example in this regard is that of Mubadala Development Company. Established in 2002, Mubadala has a mandate to establish new companies and to acquire strategic stakes in

Prime Research 3 Abu Dhabi—Real Estate Sector UAE

existing local and foreign companies. The pursuit of this strategy has yielded strong benefits for Abu Dhabi, with Mubadala’s 51% stake proving instrumental in the creation of the Dolphin Energy Com- pany. The energy company is currently in process of establishing a project to supply substantial quanti- ties of gas from Qatar to the UAE. Application of this approach has also reaped dividends outside the oil and gas sector, with Mubadala’s 5% stake in Ferrari facilitating the launch of the world’s first Ferrari Theme Park on Aldar’s .

It would be pertinent to mention here that the government appears to be pursuing an interesting pol- icy of acquiring key stakes in foreign companies and projects to both promote FDI in Abu Dhabi and Stakes in foreign compa- diversify its income base. The abovementioned Dolphin Energy Project and the Ferrari Theme Park nies and projects promot- serve as good examples of promotion of FDI in the Emirate through this strategy. In terms of diversifi- ing FDI and diversification cation, income generated through sizable stakes in foreign companies and projects by government entities is expected to decrease the Emirate’s dependence on the local oil and gas sector. Given an estimated asset base of US$600 billion, Abu Dhabi Investment Authority is expected to remain the Emirate’s primary vehicle for foreign acquisitions in this regard. The growing importance of such in- vestments can be gauged from the fact that a 10% return on ADIA’s investment base alone would yield AED220 billion or ca. 73% of the GDP of AED301.7 billion recorded by the Emirate in 2005. More- over, Mubadala is continuing to play an increasingly important role in this regard as well, with the US$400 million telecommunications license recently awarded by Nigerian authorities to the company serving as a good example. We expect the government to continue to follow this strategy in the fore- seeable future, which in turn is likely to result in long-term benefits for the Emirate.

Developing an Adequate Infrastructure

The considerable amount of economic and tourist activity expected to be generated from the on-going Well-developed infrastruc- large scale developments in Abu Dhabi requires the presence of a very well-developed infrastructure in ture required to cater for the Emirate. Keeping this in view, the government is currently renovating all facets of the existing economic and tourist infrastructure. Efforts being made in this regard can be divided into three categories, namely expendi- activity ture for enhancing productive capacity, upgrading the logistical network and developing specific infra- structure requirements related to various planned large-scale developments.

Enhancing Productive Capacity

In order to cater to the needs of the ongoing economic expansion in the Emirate, the government is planning to build two new ports in Abu Dhabi, The first, to be built in Taweelah, will be called Kahlifa Two new ports planned Port and Industrial Zone and is estimated to cost AED8 billion. A new company, Abu Dhabi Terminals, for Abu Dhabi was established in 2006 to manage the operations of the port. The company, in turn, is managed by DP World through a Management Services Agreement. Given that the city’s current port, Port Zayed, is not adequately positioned or equipped to meet the growing demands of Abu Dhabi’s industrial sector, all operations are expected to be transferred to within 5 years. Another port is planned in the industrial township of Musaffah and is scheduled to be operational by 2009. The Higher Corpora- tion for Specialized Economic Zones (HCSEZ) recently signed a contract with Royal Haskoning Consult- ants to conduct a feasibility study for the project. The port will be designed to handle industrial car- goes in the range of 5 to 9 million metric tons per annum.

The Industrial City of Abu Dhabi (ICAD) managed by HCSEZ epitomizes the Emirate’s attempt to up- grade its productive capacity. The city features integrated infrastructure for companies operating in Industrial zones to pro- non-oil economic sectors and is divided into various zones, with each zone catering to the require- mote integrated infra- ments of a specific industry. The success of the first phase of ICAD launched in 2004 prompted the structure facilities government to establish a second phase of the project in 2005 at a cost of AED400 million. Moreover, HCSEZ is now reportedly planning a third phase of the city and intends to establish an industrial zone in Al Ain as well.

Upgrading the Logistical Network

The ongoing logistics related development in Abu Dhabi is primarily aimed at facilitating the arrival of Focus on developing air visitors and new entrants in the Emirate, while simultaneously ensuring that the associated rise in travel facilities and road population does not lead to a problem of congestion similar to that witnessed in Dubai. Consequently, network the upgrading of air travel facilities and the existing road network in the Emirate form the cornerstone of the government’s plan of enhancing the logistical infrastructure.

Abu Dhabi launched a new multi-billion dollar airline in 2003. Titled Etihad Airways, the airline is cur- New airline launched in rently offering very attractively priced travel options to build its customer base. However, with the 2003 passage of time, it is expected to firmly position itself at the higher end of the market, inline with the tourism market being targeted by Abu Dhabi. The airline has been undergoing rapid expansion from the very beginning. It placed one of the largest orders ever of US$8 billion for 29 new airplanes at the Farnborough air show in 2004. In addition to these planes, the deliveries of which are staggered

Prime Research 4 Abu Dhabi—Real Estate Sector UAE

between 2005 and 2007, the airline has an option to purchase 15 more planes from both Airbus and Boeing. Etihad also appears to have designs on becoming a significant player in cargo transportation. Although still relatively small, the airline’s market share in Abu Dhabi has grown aggressively from 16% to 27% between May 2004 and 2005.

Abu Dhabi has also embarked on an aggressive redevelopment of its international airport. The AED25 billion project is divided into two broad phases, with the first phase involving development of new terminals and the second witnessing the construction of a totally new airport. The new Midfield Termi- Two-phased AED25 billion nal Complex is expected to be completed by 2010 with an initial capacity of 20 million passengers per project to redevelop air- annum, with further expansions leading to an ultimate level of 40 million passengers per annum. To port date, the Supervision Committee for the expansion of Abu Dhabi International Airport (SCADIA) has renovated the existing terminal and constructed a new one, almost doubling the airport’s capacity to 6.8 million passengers since August 2005. Another terminal dedicated to Etihad Airways is currently under construction and is expected to add a capacity of 3.5 million passengers upon completion next year. An AED100 million airport hotel is also being constructed under the program and is scheduled for completion in 2007. Utilities and cargo facilities at the airport are also undergoing a major overhaul, with capacity expected to double to 300,000 tons by early 2007 and to well over 2 million tons upon completion of the project.

In terms of development of the transportation network in the Emirate, the Road Sector and Technical 90 projects to be imple- Services Department of the Abu Dhabi Municipality is scheduled to implement 90 roads and public mented at a cost of transport related projects by 2021 at an estimated cost of AED10 billion. Notable projects in this regard AED10 billion to upgrade include extension of the New Corniche Road from the Sheraton Tunnel to Port Zayed and the develop- roads and public trans- ment of two interchanges on Al to replace existing intersection configurations at Difa’a port Street and at the Sea Palace. The latter project represents the first step in upgrading Al Salam Street- Eastern Corniche Road into a freeway. Additional projects planned by the Road Sector and Technical Services Department include development of four express ring roads, with two roads facing the eastern direction, one facing the western direction and the fourth directed towards Dubai.

In addition to the abovementioned, Abu Dhabi is planning to implement various smaller projects to enhance its logistical infrastructure, including a 30 kilometer monorail track scheduled for completion in Adequate infrastructure 2020. These efforts, particularly the establishment of a new airline and airport, should considerably necessary to promote improve Abu Dhabi’s image. The government expects the number of passengers passing through Abu targeted image Dhabi’s airport to substantially increase from 5.4 million in 2005 to 6.7 million in 2006. A more upmar- ket airport is thus a necessity to promote the new image being targeted by the government. Further- more, developments in Abu Dhabi have already placed it among the world’s top business and tourist destinations, as ranked by Middle East Travel and Expedia.co.uk respectively. Renovating the existing infrastructure to adequately cater to the forecasted growth is thus a necessity for the Emirate.

Infrastructure Development Relating to Large-Scale Projects

A number of the large-scale projects announced to date in Abu Dhabi are scheduled to be developed on previously uninhabited islands. Key examples in this regard include the and Reem Positioning of new pro- Island developments. Moreover, the largest on-shore project, the Beach development, is lo- jects leading to major cated at a considerable distance from the existing city center. The positioning of these projects has led infrastructure develop- to particular infrastructure development requirements which are not ordinarily witnessed in organically ment requirements expanding cities. Notable examples in this regard include construction of numerous bridges linking the islands to the mainland and reclamation of land for projects such as Al Raha Beach. While the develop- ment of individual projects is scheduled to be conducted by independent companies, the government is expected to continue to play a significant role in the development of infrastructure for the projects. In fact, the CEO of Sorouh, Mr. Mounir Haider, recently expressed the opinion that without government involvement in infrastructure development, properties in the new projects are likely to become unaf- fordable.

ECONOMIC DEVELOPMENT: FOLLOWING A TWO-PRONGED APPROACH

With Abu Dhabi owning 95% of the country’s oil reserves and 92% of its gas reserves, equivalent to Abu Dhabi a key benefici- 8.3% and 3.4% of the world’s proven oil and gas reserves respectively, the Emirate has been a key ary of boom in oil prices beneficiary of the boom in oil prices witnessed in recent years. In fact, the spike in prices of the com- modities positioned Abu Dhabi as the richest city in the world in terms of GDP per capita in 2005. In line with the trend being witnessed in the region, Abu Dhabi has embarked on a diversification pro- gram spurred by the petrodollar boom, aimed at reducing its economy’s dependence on revenues from the oil and gas sector. The government has identified industrial and tourism development as the two primary drivers of its diversification strategy.

Prime Research 5 Abu Dhabi—Real Estate Sector UAE

Industrial Development

Industrial development in Abu Dhabi has traditionally focused around the oil and gas sector. Account- ing for 48% and 41% of the Emirate’s GDP in 2004 and 2005 respectively, the sector is expected to continue to play a pivotal role in Abu Dhabi’s economy for the foreseeable future. However, the gov- Heavy industry key focus ernment has embarked on an aggressive strategy of diversifying into new economic areas, with par- area for economic diversi- ticular focus on heavy industry. Resultantly, the Emirate has witnessed a flurry of activity in the indus- fication trial sector in recent years, ranging from the establishment of ICAD to promote investment to the launch of large scale projects by the government, such as the US$5 billion Emirates Aluminum (EMAL) plant, to jumpstart the sector. Diversification also serves as a key theme in the oil and gas sector, whereby Abu Dhabi is attempting to introduce value-addition in the industry through development of the downstream sector.

It is interesting to note that the government of Abu Dhabi expects its economic efforts to complement, rather than compete with, the ongoing diversification program in Dubai. According to the Chairman of the Abu Dhabi Department of Economy, Sheikh Hamad bin Zayed Al Nahyan, while Dubai “has concen- Economic developments in trated on real estate, trade and logistics”, Abu Dhabi intends to utilize its resources to develop industry Abu Dhabi expected to “like aluminum, steel, petrochemicals and related industries like automobiles”. The establishment of complement ongoing EMAL as a joint-venture between DUBAL and Mubadala is an important example in this regard. Award- diversification program in ing of management rights of the new Khalifa Port at Al Taweelah to Dubai Ports World is another ex- Dubai ample. Such co-operation between the two emirates should minimize duplication of economic activities and hence reduce the possibility of an oversupply in the goods and services being produced. Moreover, we expect Abu Dhabi to be the greater beneficiary of collaboration between the two emirates due to the fact that it is likely to find itself at the unfavorable end of the first mover advantage in the case of direct competition with Dubai.

Reinvesting in the Oil Sector

Abu Dhabi intends to reinvest its windfall gains from high commodity prices to increase productive Investment worth US$20 capacity in the oil and gas sector. With total planned investment in the sector estimated at US$20 billion planned in the sec- billion, the expansion is expected to have an impact across the board, ranging from upstream and tor downstream operations to gas related activities. Oil production in particular is forecasted to witness a substantial increase from the current capacity of 2.67 million barrels per day (bpd) to 3.5 million bpd during the next five years. Natural gas production is similarly forecasted to rise from the current level of 4.5 billion cubic feet per day to 6 billion cubic feet per day by 2008.

Implementation of the Dolphin project designed to transport natural gas from Qatar to the UAE is also Dolphin project expected expected to help increase Abu Dhabi’s oil production capacity. Abu Dhabi utilizes the “gas drive” to boost production as method to extract from wells that have been depleted to the point that oil cannot rise to the surface on well its own. With the pipeline from Qatar freeing some of ADNOC’s reserves, more gas will be available to increase production from such wells. Given the age of a number of Abu Dhabi’s fields, the use of gas to extract oil will take on more and more importance.

The government is also attempting to transform Abu Dhabi into a regional hub for foreign companies Transforming Abu Dhabi operating in the oil and gas sector, with the Higher Corporation for Specialized Economic Zones accord- into a regional hub for oil ingly announcing a plan in 2006 to launch an AED4 billion Oil & Gas City in ICAD. The CEO of HCSEZ, & gas companies Norman Johnston, expects the benefits offered by the City, such tax-free status, easy immigration and capital repatriation, to lead to the establishment of regional offices in Abu Dhabi by 200-300 of the top 400-600 global companies in the sector.

Diversification in the Oil & Gas Sector

Expansion into the downstream oil and gas sector serves as a major component of Abu Dhabi’s goal of

diversifying the economy. A notable recent foray in in this regard involves the establishment of a Expansion into down- US$200 million melamine facility in Ruwais as a 60:40 joint venture between ADNOC and Agrolinz stream sector major com- Melamine International (AMI). The partnership in fact serves another example of Abu Dhabi’s strategy ponent of diversification of converting strategic investment stakes into FDI and resulted from the recent acquisition of a 50% program stake in AMI, a subsidiary of European oil and gas group OMV, by Abu Dhabi’s International Petroleum

Investment Company.

In addition to the abovementioned planned facility in Ruwais, ADNOC owns and controls a number of

other downstream companies, such as the Abu Dhabi Oil Refinery Company (TAKREER). Two subsidi- Various downstream com- aries particularly worth mentioning are Ruwais Fertilizer Industry and Abu Dhabi Polymers Company panies owned by ADNOC (Borouge). The former was established in 1980 as a joint venture with TotalFINAELF, while the latter

was set up in 1998 in collaboration with Borealis, one of Europe’s largest polyolefin producers. Borouge is currently in process of establishing the world’s largest cracker plant with a capacity of 1.5 million ton per annum. Estimated to cost US$1.3 billion, the plant represents the first phase of a broader

Prime Research 6 Abu Dhabi—Real Estate Sector UAE

expansion plan which will result in the tripling of Borouge’s capacity by 2010. Further phases in the expansion program will witness the establishment of the world’s biggest olefins conversion unit and two Borstar polypropylene plants.

Geographical diversifica- Abu Dhabi is also pursuing a strategy of geographical diversification in the oil & gas sector through tion through entry into expansion into neighboring countries. Examples include the awarding of exploration rights by Oman to regional markets Mubadala’s oil & gas subsidiary, Liwa Energy, in 2006 and the recent decision by Adnoc to establish a number of petrol pumps across Saudi Arabia.

Positioning Abu Dhabi to be a Leader in Heavy Industry

Proximity to key markets, availability of cheap labor, ample petrodollar fueled funds and low-cost en- ergy provide Abu Dhabi a distinct competitive advantage in industrial production. Recognizing these Aggressive expansion in factors, the government has identified heavy industry as a prime growth area for the Emirate. While the heavy industry sector Abu Dhabi has traditionally focused on the upstream oil and gas sector, the government is seeking to aggressively enter or raise capacities in industries such as aluminum and steel manufacturing.

To date, the Emirate’s most important non-petrochemical industrial project is the Emirates Iron and Steel Factory. Operational since 2001, the plant has a current capacity of 600,000 tons per year, with further expansion underway aimed at raising production to 800,000 tons per year. The aluminum sec- tor has also witnessed substantial activity in recent months, including the aforementioned Emirates Aluminum plant being set up as a joint venture between DUBAL and Mubadala. The first phase of the plant is expected to start production in 2010 with an initial capacity of 700,000 tons, with total produc- tion capability expected to reach 1.4-million tons upon completion.

As mentioned earlier, one of the most significant steps Abu Dhabi has taken to achieve its ambitions of becoming an industrial hub is the granting of 100% ownership to foreign investors in the Abu Dhabi ICAD designed to promote Industrial City (ICAD). Located 30 kilometers from Abu Dhabi City, ICAD is being developed by the investment in different Higher Corporation for Specialized Economic Zones (HCSEZ) to promote investments in various areas, sectors including textiles, chemicals, financial services and high-tech industries. 90% of the first phase of ICAD was reportedly leased by the end of August 2006, with ICAD-2 expected to be ready by the summer of 2007 and ICAD-3 currently in planning stage. HCSEZ is also be responsible for establishing an indus- trial zone in Al Ain.

Removal of the restrictive ownership law in the ICAD free-zone is likely to serve as a major milestone. Permission of 100% own- In addition to signaling willingness on part of the government to adopt a more liberal ownership struc- ership expected to pro- ture, it eliminates what is arguably one of the biggest hurdles to attracting foreign investment. In fact, mote FDI the UAE government has admitted in its Trade Policy Review submitted to the WTO that ownership restriction has affected the flow of FDI in the country.

Developing the Services Sector

While the government has announced its intention of primarily targeting heavy industry, it also intends Abu Dhabi ranked as most to develop other sectors in the Emirate. This is demonstrated by the inclusion of industries such as attractive destination in high-technology in ICAD. In fact, a recent study by ITQAN Management Consultancy ranks Abu Dhabi UAE for IT companies as the most attractive destination for IT companies and accounted for 47% of the country’s total IT spending in 2005.

The healthcare sector represents another important example in this regard, with 2006 witnessing the Developing the healthcare opening of Imperial College London Diabetes Center. Owned by Mubadala Development Company, the sector facility is managed by Imperial College London and expected to become a leading diabetes resource in the region. Mubadala also recently signed an agreement with USA based Cleveland Clinic to establish a world-class hospital in Abu Dhabi. Titled Cleveland Clinic Abu Dhabi, the specialty hospital will be de- veloped and operated by Cleveland Clinic and is expected to contribute significantly to the improve- ment of healthcare services in the region.

The government of Abu Dhabi is also attempting to upgrade the educational facilities in the Emirate. Upgrading educational Accordingly, an agreement was signed with the prestigious Sorbonne University, whereby the latter facilities in the Emirate established a campus in the Emirate. The university opened in October 2006 and is expected to enroll 1,500 students within three years.

Prime Research 7 Abu Dhabi—Real Estate Sector UAE

RESIDENTIAL AND TOURISM DEVELOPMENTS

Residential and tourism development form an integral part of the government’s plan to reduce the Projects worth over dependence of Abu Dhabi’s economy on revenues from the oil and gas sector. The government has US$126billion announced thus initiated a number of steps over the past two years to fuel growth in these sectors, the most no- since 2004 table of which was the relaxation of ownership laws in the Emirate. This led to the announcement of a number of large-scale projects in the Emirate, estimated at a total value over US$126 billion, scheduled to be developed over the next 10-15 years. In addition to serving the anticipated rise in residential demand resulting from increased industrial and commercial activity in Abu Dhabi, the scale of these projects is expected to add substantial value to the Emirate’s economy.

Government aims to pre- It is interesting to note that while Abu Dhabi has acknowledged the need to attract foreigners to pro- serve cultural heritage of mote economic development, the government has clarified its intention of preserving the Emirate’s Abu Dhabi cultural heritage. Resultantly, most new projects are separated from the existing residential center, either by distance or in the form of island based developments. Moreover, all large-scale developments have been designed as self-contained cities featuring both residential and commercial faculties.

Value of Key Projects Announced

Development Estimated Value (US$ million)

Yas Island 40,000

Saadiyat Island 27,248 Al Raha Beach 15,000

Tamouh Investments’ Section of 15,000 Reem Island

Danet Abu Dhabi 9,264

Najmat Abu Dhabi 8,174

Shams Abu Dhabi 6,800

Rawadat Abu Dhabi 1,499

Building Materials City 1,100

Saraya Abu Dhabi 954

Al Gurm Resort 350

Central Market Redevelopment 354

Golf Gardens 272

Raha Gardens 270

Table 1 Source: Company websites, Industry Sources

Key Projects Under Development in Abu Dhabi

Yas Island

The latest large-scale project to be announced in Abu Dhabi, Yas Island also stands as the most ex- pensive project to be announced in the Emirate to date, with an estimated value of US$40 billion. Lo- Most expensive develop- cated opposite Aldar’s Raha Beach development, the island is being developed by Aldar Properties and ment in Abu Dhabi covers a total land area of 2,500 hectares. Scheduled to commence construction in 2007, the project will consist of a Ferrari Theme Park offering a range of 24 themed attractions. In addition, the develop- ment will feature a motor sports racetrack, a water park, hotels, a total retail area of 300,000 square meters, golf courses, office space, villas and low-rise residential apartments.

Prime Research 8 Abu Dhabi—Real Estate Sector UAE

Al Reem Island

Al Reem Island is a commercial and residential development to be built on a natural island located off the northeastern coast of Abu Dhabi city. Expected to house 350,000 residents upon completion, the Reem Island being devel- project will be built by three developers, namely Tamouh Investments, Sorouh Real Estate and Al oped by three companies Reem Investments. Tamouh Investments is responsible for developing 60% of the island, while the latter two are responsible for developing the respective 20% balances. Sorouh’s section of the island is titled Shams Abu Dhabi and will feature what will be the tallest tower in Abu Dhabi upon completion. All residential apartments offered to sale in Abu Dhabi to date are based in either Tamouh Invest- ment's section of Reem Island or in Shams Abu Dhabi.

One particular project within Reem Island that requires special mention is the Marina Square develop- ment. Situated on Tamouh Investment’s section of the island and scheduled for completion in 2009, First section of Reem Marina Square is slated to be the first self contained community in Abu Dhabi. Featuring 17 towers, the Island Scheduled for Com- development will include residential units, office space, a five-star hotel and various leisure facilities. pletion in 2009 The bulk of the residential units currently available for sale to investors are featured in individual devel- opments in Marina Square.

Al Raha Beach Development

Built alongside 5.2 million square meters of natural beachfront, Aldar Properties’ US$15 billion Al Raha Beach development is expected to house 120,000 residents upon completion. Divided into eight dis- Expected to house tinct precincts, the development will feature 9 hotels, 4 marinas, parks and numerous leisure facilities 120,000 residents upon linked together by a network of canals, bridges and water transportation. It is interesting to note that completion Aldar Properties had originally launched a 228-apartment building titled Al Muneera in the Khor Al Raha district of the development, with the process reaching the registration phase. The sale of the apart- ments was however postponed, with the first sales in the development now expected to be held in the first half of 2007.

Saadiyat Island

The AED100 billion Saadiyat Island development is expected to play a vital role in the government’s Expected to play an im- attempt to boost the tourism sector in the Emirate. Located just 500 meters offshore Abu Dhabi city, portant part in boosting the 27 square kilometer mix-use project is expected to eventually house 150,000 residents in 8,000 tourism villas and 38,000 apartments. The island will consist of 19 kilometers of white sand beach, two golf courses and 29 hotels with over 7,000 rooms, including a seven-star facility. The development will also feature the region’s only Guggenheim museum. The establishment of the museum, which will be larger than any existing Guggenheim in the world, is widely recognized as a major achievement for Abu Dhabi. The Emirate is also reportedly engaged in discussions with the French government to build a Louvre Museum on the Island

Al Raha Gardens

Featuring 1,500 villas and townhouses, Al Raha Gardens was the first development to offer ownership First development offering rights in Abu Dhabi and accordingly received tremendous investor interest, with all residential units ownership rights in Abu being sold in a matter of minutes. The project was launched prior to the passing of the new property Dhabi law and consequently is only available for sale to UAE nationals. It features residential units ranging from 3 bedroom townhouses to 5 bedroom villas and will form a part of Al Raha Beach development. The project will also consist of two secondary schools and a kindergarten, community retail services, a polo and equestrian center and a polo hotel to be managed by an international operator.

Danet Abu Dhabi

One of the largest private The first project to be launched by the real estate arm of Al Qudra Holding, the AED34 billion Danet sector real estate projects Abu Dhabi is designed as an urban community. One of the largest private sector real estate projects in in the Emirate Abu Dhabi, the development witnessed strong interest from investors, with all available plots being sold out within 45 days after launch. The project is expected to feature 34 multi-storied commercial and residential towers and a four-star hotel. The project will be offered for sale to UAE nationals, with the company indicating the possibility of permitting ownership rights to GCC nationals at a later date.

Prime Research 9 Abu Dhabi—Real Estate Sector UAE

Central Market Redevelopment

The government has awarded Aldar Properties the right to conduct the AED1.3 billion redevelopment Development to feature a of the Central Market. Located at the intersection of Khalifa Street, Airport Road and Hamdan Street, 5-star hotel, an office the project is scheduled for completion in multiple phases extending up to 2010. The development will tower and a residential also feature a 52-storey five-star luxury hotel featuring 250 rooms and 200 serviced apartments, a 58- tower storey office tower and a residential tower consisting of 525 apartments. The first phase of the project involves development of the new Souq and is scheduled for completion in 2008.

Tourism: Targeting the Elite

Tourism development forms a cornerstone of the government’s plan to raise the image of Abu Dhabi in Abu Dhabi targeting the the international community and to diversify its economic base. However, the government has also high-end tourism market clarified from the outset that it intends to target the high-end tourism market as opposed to of mass tourism. This goal is driven in part by the Emirate’s intention of maintaining its cultural heritage. Con- sequently, all major tourism related initiatives announced to date are directly targeted at the high end of the market, with the Ferrari Theme Park and the Guggenheim museum serving as good examples in this regard. Moreover, according to the Chairman of ADTA, Sheikh Sultan bin Tahnoon Al Nahyan, 45% of the hotel rooms to be built in the next decade will belong to the five-star category.

Dual Goal Envisioned by Master Plan

The tourism market in Abu Dhabi has traditionally been dominated by government and business travel- Master Plan envisions ers. This has resulted in relatively low average length of stay in hotels in the Emirate. In order to ad- growth in number of tour- dress this problem, the Master Plan envisioned by the government to enhance tourism in Abu Dhabi ists and an increase in encompasses two goals: a sizable increase in the number of tourists in the Emirate and a substantial proportion of leisure tour- increase in the proportion of leisure tourists in the total mix. The targeted increase in number of tour- ists ists from 834,000 in 2003 to 3,0005,000 in 2015 translates into a CAGR of ca. 11.3%. We feel that this number represents an achievable target for the Emirate, particularly in view of the numerous leisure facilities being developed on the new projects.

It would be pertinent to mention here that the government has taken a number of initiatives over the Various initiatives taken past few years to achieve its targeted tourism objectives. Two particularly notable efforts in this regard by government to boost was the establishment of the Abu Dhabi Tourism Authority (ADTA) in 2004 and the launch of Etihad tourism in Emirate Airways in 2003. The ADTA has been mandated to market Abu Dhabi as a tourist destination and to overlook the required infrastructure and product development. These two factors are expected to have contributed significantly in boosting hotel occupancy rate to over 80% from 2004 onwards, against a relatively static occupancy rate during the 1997-2003 period.

Occupancy Rate and Average Length of Stay for Hotels in Abu Dhabi

1997 1998 1999 2000 2001 2002 2003 2004 2005

Avg. Length of - 4 3 3 3 3 3 3 2.6 Stay (Days)

Occupancy (%) 65 66 64 67 67 68 68 82 85

Table 2 Source: TRI Hospitality Consulting

Tourism Targets 2015

Purpose 2003 2015

Leisure 167,000 (25%) 1,125,000 (41%)

MICE 40,000 (5%) 236,000 (8%)

Business 627,000 (75%) 1,554,000 (51%)

Total 834,000 3,005,000

Table 3 Source: Abu Dhabi Tourism Authority

Prime Research 10 Abu Dhabi—Real Estate Sector UAE

Number of Hotel Rooms Set to Boom in Abu Dhabi

The number of hotel rooms in Abu Dhabi is forecasted to nearly triple from 9,959 in 2005 to ca. 27,000 17,000 hotel rooms to be in a decade’s time. The 17,000 hotel rooms expected to be added in this period are also forecasted to added over the next dec- significantly raise the quality of supply currently available in the Emirate. In comparison to Dubai, ho- ade tels in Abu Dhabi tend to be older, with most properties except Crown Plaza and Millennium hotel more than 10 years old.

Most of the new hotel supply is slated for construction on the recently announced large-scale projects. For examples, as mentioned earlier, Saadiyat Island is expected to consist of 29 hotels, while Aldar Properties planning to build a total of 32 hotels, with the Al Raha Beach hotel scheduled to consist of 8 hotels. In fact, the hotels to be built by Aldar Properties alone are forecasted to double the current room capacity in the Emirate.

Hotel Market in Abu Dhabi

1998 1999 2000 2001 2002 2003 2004 2005 Hotel Rooms Supply 5,828 5,999 6,085 6,525 6,856 7,668 7,857 9,959

Avg. Daily Rate for 4 371 363 323 327 327 319 334 405 and 5-star Hotels

Table 4 Source: TRI Hospitality Consulting

DEMAND & SUPPLY DYNAMICS

Residential Supply Expected to Increase Significantly

Residential supply ex- The large scale developments announced in Abu Dhabi are expected to substantially increase the sup- pected to increase sub- ply of residential units in the Emirate over the next ten to fifteen year period. The table below provides stantially over next 10-15 a summary of the key projects announced to date, along with the projected number of residential units years associated each development. It would be pertinent to mention here that most developers have opted to announce the number of residents expected to live in the developments, instead of forecasting the actual number of residential units. Consequently, we assume an average of three residents per house- hold to estimate the total number of residential units for such projects. This assumption is inline with the expectation of number of residents per household in projects of similar quality in Dubai.

Planned Supply of Residential Units Development Housing Residen- Expected Capacity tial Units Completion

Reem Island

Shams Abu Dhabi 100,000 33,333* 2011 Najmat Abu Dhabi 80,000 26,667* 2012

Tamouh Investments Section 170,000* 56,667* of Reem Island

Al Raha Beach 120,000 40,000* 2016

Saadiyat Island 150,000 46,000 2018

Public Housing Project - 31,000 2011

Al Reef Villas - 4,000 2010

Other - 3,000 2007-2012

Total 240,667

Table 5 Source: Company websites, Industry Sources * : Estimated

Prime Research 11 Abu Dhabi—Real Estate Sector UAE

Residential supply un- In addition to the abovementioned, a number of the projects were announced recently that are ex- known as yet on a num- pected to house a substantial number of residents. The developers of these projects, however, have ber of projects not yet provided any indication on the total number of residential units. Some mentionable projects in this regard are highlighted in the table below. In order to demonstrate the impact these developments could to have on total residential supply, we provide a range-based estimate of residential units for each project. The lower end of each range assumes that the project consists of low-rise buildings, while the upper end of the range assumes 20 floors per building. In addition, we assume each floor in the buildings consists of 11 apartments.

Other Projects Expected to Substantially Add to Residential Supply

Development Scope Estimated Number of Residential Units

Yas Island The development will feature golf villas, waterfront N/A apartments and other residential units

Building Materials City 32 residential towers 2,000—7,000

Rawadat Abu Dhabi 70 low-rise buildings, mostly residential 4,000

Danet Abu Dhabi 34 commercial and residential buildings 2,000—7,500

Saraya Abu Dhabi 30 commercial and residential buildings 1,500—6,500

ICAD Housing Project HCSEZ intends to provide housing for over 100,000 25,000 people in ICAD

Table 6 Source: Company websites, Industry Sources, Prime Estimates

Limited Residential Units Made Available for Sale

It is interesting to note that, in contrast to the large scale of the total residential supply associated with the ongoing projects in Abu Dhabi, very limited supply has been made available for sale to investors to date.

Residential Units in New Developments Available for Sale in Abu Dhabi

Development Residential Units Expected Completion

Marina Square (Reem Island)

Ocean Terrace 387 2009

Tala Tower 375 2009

Marina Heights I 240 2009

Marina Heights II 270 2009

Shams Abu Dhabi

Sky Tower 598 2009

Waterfront Residences 430 2009

Oceanscape 193 N/A

Villas

Golf Gardens 389 2008

Raha Gardens 1,500 2008

Total 4,382

Table 7 Source: Company websites, Industry Sources

Prime Research 12 Abu Dhabi—Real Estate Sector UAE

Less than 4,500 residen- As indicated in the table above, the total number of residential units made available for sale to inves- tial units made available tors to date stands at less than 4,500 units. Moreover, Raha Gardens, which accounts for ca. 34% of for sale the total supply, was open only to UAE nationals, thus further reducing the investment options avail- able for expatriate investors. It would be pertinent to mention here that plots for development of resi- dential towers were sold on a number of other projects, such as Danet Abu Dhabi and Najmat Abu Dhabi, however no individual residential units were offered. Similarly, Manazel Real Estate announced the launch of villas and apartments in the Al Reef villas project, but no individual units are available for investors yet. The relatively slow roll-out for residential projects in Abu Dhabi can most likely be attrib- uted to the following reasons:

Developers preparing 1. As mentioned earlier, a number of the large-scale projects in the Emirate require substantial infra- infrastructure prior to structure development due to their positioning. In contrast to the general practice in Dubai, de- offering units velopers in Abu Dhabi appear to be implementing these requirements prior to offering residential units for sale. For example, TDIC recently issued a tender for the construction of a 1.5 kilometer bridge to link Saadiyat Island to Abu Dhabi.

2. Off-plan sales continue to be slow in Abu Dhabi in comparison to Dubai. For example, our discus- Off-plan sales slower in sion with sales representatives for Marina 101 in Dubai Marina indicated that over 70% of apart- Abu Dhabi ments were sold in the tower within a period of a few weeks. In contrast, few developments in Abu Dhabi have witnessed sales at the same pace, with some projects still offering units directly from the developer despite being available for sale since the first half of 2006. The difference in pace of sales could be attributable to the initial stage of development in Abu Dhabi, with investors still waiting for the Emirate to “prove” its ability to achieve the ambitious goals set by the govern- ment.

3. Prices for residential units available for sale in Abu Dhabi are comparable to those found in Dubai. Prices for residential units For example, prices in the Tala Tower being developed by Sorouh Real Estate on Reem Island in Abu Dhabi comparable range from AED812,596 for a 1 bedroom apartment to AED2,152,391 for a 3 bedroom apartment, to those in Dubai translating into per square foot prices of AED932 and AED1,111 respectively. In contrast, Colliers International estimates an average price of AED1,120 per square foot in Dubai Marina. While it could be argued that the location of Tala Tower (adjacent to the marina) makes the comparison to the average of Dubai Marina unjustifiable, it is important to keep in view that the latter is con- sidered one of the most iconic developments in Dubai. Tala Tower, on the other hand is among the first offering in the relatively untested market of Abu Dhabi. Moreover, our discussion with various developers indicates that these prices are reflective of prices in other offerings in the Emirate as well.

4. Some developers in Abu Dhabi also appear to be developing amenities on their projects prior to Amenities being added to rolling out residential supply, with Saadiyat Island serving as an important example in this regard. developments prior to sale While agreements have been put in place to build a Guggenheim Museum and for Rotana to man- offering age a 5-star resort on the island, no residential units on the project have yet been offered for sale to investors. Similarly, while Aldar’s agreement with Ferrari will result in the creation of a Ferrari Theme Park on Yas Island, no residential units have been sold as yet either on Yas Island or on the Raha Beach development. The development of such amenities prior to the sale of residential units is likely to permit developers to charge higher prices for their offerings than would be other- wise possible.

Absence of freehold own- 5. The decision by Abu Dhabi to continue to offer ownership to non-Arab expatriates only on a ership restricting investor leasehold basis also serves as an important psychological factor restricting the increase in investor interest interest. This holds particularly true in light of the fact that other Emirates, most notably Dubai and Ras Al Khaimah, have granted freehold ownership rights to all expatriates.

It would be pertinent to mention here that the initial slow pace of roll-out has important implications Completion of projects for the real estate sector in Abu Dhabi. Most developments made available for sale in 2006 are not likely to take longer than expected to be completed prior to 2009. Assuming that projects announced for sale in 2006 are reflec- originally indicated tive of future offerings, developments released in 2007 will be completed in 2010, while those launched in 2008 will be completed in 2011 and so on. Given the announced completion dates ranging between 2010-2012 for a number of large scale projects, such as Sham Abu Dhabi and Najmat Abu Dhabi, the Emirate’s real estate market is either likely to witness a of rash residential offerings from developers during the 2007-2009 period or the completion of the projects will be spread over a longer period than originally indicated. We feel that the latter is more likely to hold true, particularly in view of the fact that off-plan sales have received relatively subdued interest from investors in comparison to Dubai.

Prime Research 13 Abu Dhabi—Real Estate Sector UAE

Demand-Supply Analysis Based on Historical Averages

Estimating Demand

Given the lack of availability of adequate data in the UAE, accurately estimating demand for residential units represents a difficult task. This holds particularly true for Abu Dhabi due to the early stages of development in the Emirate. Anecdotal evidence suggests that the resident population in the Emirate is undergoing a rapid change, with affluent non-Arabs forming a greater proportion of the total mix.

The current development in Abu Dhabi is reminiscent of the change witnessed in Dubai following the 15% of incoming expatri- launch of the now world-renowned commercial and residential projects in 2002. That said, we expect ate population expected affluent foreigners to continue to form a bigger proportion of the expatriate population in Dubai than to belong to “addressable that based in Abu Dhabi for the foreseeable future. Consequently, in order to estimate the demand for market” in 2007 residential units in Abu Dhabi, we utilize the same methodology used in our real estate sector report “Visions of Grandeur” published in July 2006, with one important modification: we assume that only 15% of the expatriates entering Abu Dhabi in 2007 will serve as the source of ongoing demand for the new residential supply, followed by a slight rise in this percentage in 2008 and 2009 respectively. In contrast, our July 2006 report presented an indicative demand for Abu Dhabi by assuming that 30% of the expatriates entering the Emirate each year serve as ongoing demand, inline with our expectation for Dubai. However, after closer consideration, we feel that the proportion of affluent expatriates en- tering Abu Dhabi is likely to be lower than that for Dubai. Resultantly, for conservativeness's sake, we assume that the proportion of incoming expatriates in Abu Dhabi who belong to the addressable mar- ket will be half that of Dubai. Moreover, we maintain our definition of an addressable market as indi- viduals earning a minimum salary of AED10,000 per month (see our real estate sector report “Visions of Grandeur” for more detail).

In addition to estimating ongoing demand using Population by Age Group the abovementioned methodology, we assume 2002a 2003a 2004a 3% of population belong- that 3% of the population belonging to the 15-40 years age bracket serves as pent-up demand for ing to 15-40 age group Less than 15 955,811 1,022,974 1,094,025 serving as pent-up de- residential units in the Emirate. As indicated in the mand table on the right, this age group formed ca. 55% 15 to less than 40 2,049,545 2,210,520 2,364,144 of the total population in the UAE in 2004. Assum- ing that this figure is reflective of the population 40 to less than 60 687,983 742,953 793,013 based in Abu Dhabi as well, we estimate pent-up demand of 31,000 residential units in 2007, which 60 and above 60,661 64,553 68,818 is then forecasted to increase by the anticipated growth rate for the Emirates population. This Table 8 Source: Ministry of Planning methodology is inline with that utilized for estimat- ing pent-up demand for Dubai in our July 2006 report.

Demand Forecast for Residential Units

2006e 2007f 2008f 2009f

Population 1,939,097 2,075,000 2,220,000 2,375,000

Growth 7.00% 7.00% 7.00%

Change in Population 136,000 145,000 155,000

Addressable Market (%) 15% 17% 19%

Addressable Market Size 20,400 24,650 29,450

Additional Demand from 31,000 2,000 2,300 existing Population

Table 9 Source: Prime Estimates

Prime Research 14 Abu Dhabi—Real Estate Sector UAE

Estimating Supply

As mentioned earlier, there is a significant disconnect between the total residential supply expected to Supply forecast incorpo- flow into the Emirate upon completion of the numerous projects underway and announced deliveries rates organic growth and over the next two to three year period. Moreover, the pace of roll-out could increase substantially from deliveries from new devel- the current year as other large-scale developments, such as Raha Beach and Najmat Abu Dhabi, start opments adding to the residential supply. However, considering the time gap required for construction between the launch of a project and its subsequent completion, we have opted to utilize the organic growth witnessed in Abu Dhabi over the past decade as an initial basis for our forecast for residential supply in the 2007-2009 period. The forecast was then adjusted to account for the residential units launched in 2006 on the new developments, which are expected to add to the total supply in 2009 (see page 12 for details).

Number of Residential Units in Abu Dhabi and Dubai

1980 1985 1995 2005

Abu Dhabi 60,643 105,749 153,803 287,189

Dubai 45,102 69,909 111,722 237,728

Table 10 Source: Ministry of Planning

As indicated in the table above, a total of ca. 133,000 residential units were added in Abu Dhabi be- tween 1995 and 2005. The translates into an average of ca. 13,000 per year, considerably higher than An average of 13,000 the averages of ca. 9,000 and ca. 5,000 units in the 1980-1985 and 1985-1995 periods respectively. residential units added in However, it must be noted that, due to the uneven nature of construction activity in Abu Dhabi, these Abu Dhabi each year be- averages are not reflective of the actual number of units built in individual years during the said peri- tween 1995-2005 ods. This assertion is supported by the case for Dubai as well, whereby the Emirate recorded an aver- age addition of ca. 12,600 residential units each year between the 1995-2005 period, yet it is esti- mated that only 2,000-3,000 units were added in 2004, despite the launch of numerous residential projects post 2002.

Based on the abovementioned information, we forecast a supply of 13,000 residential units for 2007. Supply of 13,000 residen- This implies a continuation of the “normalized” roll-out pace witnessed in the 1995-2005 period, ex- tial units forecasted for cluding the recently announced major projects. Moreover, the delivery of residential units is projected 2007 to witness a more rapid increase in 2009 than in 2008 as the various towers launched on Reem Island start adding to the residential supply. It would be pertinent to mention here that this analysis is pri- marily meant to demonstrate the ample opportunity afforded to both developers and investors by the prevailing shortage in residential units in the Emirate, with the actual supply likely to remain considera- bly lower than the projections presented in the table below.

Forecasted Residential Supply Based on “Normalized” Roll-Out

2007f 2008f 2009f

Residential Supply 13,000 14,300 17,875

Growth 10% 25%

Table 11 Source: Prime Estimates

As illustrated in the table below, Abu Dhabi’s real state market is likely to be characterized by an un- Abu Dhabi likely to con- dersupply situation for the foreseeable future. Even after assuming an aggressive roll-out schedule, the tinue to witness excess market is still projected to record excess demand of over 60,000 residential units. The demand and demand supply dynamics thus bode well for developers as well as real estate investors in the Emirate.

Excess Demand in the Residential Market

2007f 2008f 2009f Total Demand 51,400 65,050 82,500

Annual Supply 13,000 14,300 17,875

Excess Demand 38,400 50,750 64,625

Table 12 Source: Prime Estimates

Prime Research 15 Abu Dhabi—Real Estate Sector UAE

7% Rent Cap: Positive and Negative Implications

One particularly important development that could play a vital role in determining future demand in Rent cap could limit gains Abu Dhabi is the recently imposed 7% cap on rents in the Emirate. While the limit should ensure con- available to investors tainment of inflation in Abu Dhabi, it could also have the negative impact of dampening investor inter- est. Rapid rent increases have proven instrumental in driving property prices in Dubai and hence gen- erating investor interest,. For example, Bond Real Estate estimates that villas in Springs that were originally offered at a price range of AED448,888 to AED795,888 now generate rents of AED110,000 to AED120,000 per annum. This, in turn, has helped in pushing prices of the villas to AED1.6 million to AED1.7 million. While the hike in rents witnessed in Abu Dhabi in 2006 should result in a yield in the 6- 7% range even at current rental rates for investors in new properties, the cap is likely to limit the gains available to them. While this implies that end-users and long-term investors attracted by healthy yields are likely form a larger component of demand in the Emirate, a smaller role for speculators also sug- gests that Abu Dhabi’s market is unlikely to witness the hype seen in Dubai in recent years.

Rental Yields for New Properties Based on Existing Rents

Apartment Type Indicative Price (AED) Annual Rent (AED) Rental Yield

One-bedroom 800,000—1,000,000 50,000-65,000 6.25%-6.5%

Two-bedroom 1,200,000-1,500,000 75,000-100,000 6.25%-6.6%

Three-bedroom 1,900,000-2,300,000 120,000-180,000 6.3%-7.8%

Table 13 Source: Prime Estimates, Colliers International, Industry Sources

It is important to keep in view that, while the yields indicated in the table above are based on prevail- ing rents, the indicative prices represent properties that will not be ready prior to 2009. This implies Hike in rents in 2006 re- that rents will undergo two 7% increases prior to completion of the residential units currently available sulting in healthy yields for sale, assuming the rent cap will remain in place during 2008 as well. Moreover, rental increases for new tenants tend to be significantly higher than the rental cap, as witnessed in Dubai following the imposition of the 15% cap last year. Last, but not least, the quality of the new residential supply is expected to be considerably higher than that of currently available residences. This difference is likely to justify a small premium as well. Thus, the abovementioned yields are likely to prove to be a conser- vative estimate of the yield long-term investors can expect from investment in off-plan properties in Abu Dhabi.

The imposition of a rent cap at the early stages of development in Abu Dhabi is likely to have both positive and negative implications for future expansion of the real estate sector in the Emirate. The Government needs to curtailment of inflation should help in maintaining Abu Dhabi’s image as a more affordable alternative balance positive and to Dubai, leading to an increase in the number of small to medium sized businesses being established negative impact of rent in the Emirate. This, in turn, is expected to attract more affluent expatriates and hence increase de- cap mand for quality accommodation. In fact, anecdotal evidence suggests this process is already well underway. On the other hand, as mentioned above, a restriction on the annual increase in rents could prove to be a limiting factor for the potential capital gains available to investors. Moreover, while higher quality of the new apartments will justify a premium over the existing residential supply, tenants are unlikely to be willing to pay a significantly higher amount than the prevailing rentals at that time. Consequently, the government needs to ensure that the cost of the rent cap does not exceed the benefit expected from it, with a higher rent cap in 2008 serving as a viable alternative if investor inter- est remains subdued.

Conclusion

Driven by the vision of the new government, Abu Dhabi is undergoing a major transformation aimed at turning the Emirate into a regional business and tourism hub. The real estate sector is likely to become a primary beneficiary of this change. Moreover, the prevailing shortage in residential supply, combined with a rapid increase in population over the coming years, is expected to yield healthy sector returns for developers and investors alike. This report is being issued to provide an overview of the key devel- opments taking place in the Emirate and serves as a precursor to notes to be issued on listed real estate companies operating in Abu Dhabi.

Prime Research 16 Abu Dhabi—Real Estate Sector UAE

HEAD OFFICE PRIME SECURITIES S.A.E. Regulated by CMA license no. 179 Members of the Cairo Stock Exchange 2 Wadi El Nil St., Liberty Tower, 7th-8th Floor, Mohandessin, Giza, Egypt Tel: +202 3005700/770/650/649; Fax: +202 760 7543 Email: [email protected]

PRIME EMIRATES LLC. (UAE) Members of the ADSM and DFM Shiekh Zayed 1st Street, Khaldiyah, Abu Dhabi, UAE. PO Box 60355 Tel: +971 2 6910800 Fax: +971 2 6670907 Email: [email protected]

This document has been compiled by Prime Securities S.A.E. and obtained from information we believe to be fair and accurate at the time of publication. This report should not be construed as a solicitation to subscribe to or sell any investment. We accept no responsibility or liability to the accuracy of this document and our opinions are subject to change without notice. Investors should understand that statements regarding future prospects might not be realised and Prime Securities S.A.E. shall not bear any legal obligation as a result of direct or indirect losses arising from information herein. Foreign currency rates of exchange may also affect the value, price or income of any security or related investment referred to in this report. Prime Securities S.A.E, an affiliate of the full service firm Prime Group, may currently, or in the future have business relationships with companies covered in this report. Copyright 2007 Prime Securities S.A.E. All rights reserved. You are hereby notified that distribution and copying of this document is strictly prohibited without the prior approval of Prime Securities S.A.E.

Prime Research 17

UAE

This page has intentionally been left blank

Prime Research 18