GCC Real Estate

X GCC Real Estate

Al Masah Capital Management Limited

Level 9, Suite 906 & 907 ETA Star - Liberty House Dubai International Financial Centre Dubai-UAE P.O.Box 506838 Tel: +971 4 4531500 Fax: +971 4 4534145 Al Masah Capital: GCC Real Estate Sector Email: [email protected] Website: www.almasahcapital.com

Disclaimer: This report is prepared by Al Masah Capital Management Limited (“AMCML”). AMCML is a company incorporated under the DIFC Companies Law and is regulated by the Dubai Financial Services Authority (“DFSA”). The information contained in this report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities in any jurisdiction. The information in this report is not intended as financial advice and is only intended for professionals with appropriate investment knowledge and ones that AMCML is satisfied meet the regulatory criteria to be classified as a ‘Professional Client’ as defined under the Rules & Regulations of the appropriate financial authority. Moreover, none of the report is intended as a prospectus within the meaning of the applicable laws of any jurisdiction and none of the report is directed to any person in any country in which the distribution of such report is unlawful. This report provides general information only. The information and opinions in the report constitute a judgment as at the date indicated and are subject to change without notice. The information may therefore not be accurate or current. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable in good faith, but no representation or warranty, express, or implied, is made by AMCML,as to their accuracy, completeness or correctness and AMCML does also not warrant that the information is up to date. Moreover, you should be aware of the fact that investments in undertakings, securities or other financial instruments involve risks. Past results do not guarantee future performance. We accept no liability for any loss arising from the use of material presented in this report. This document has not been reviewed by, approved by or filed with the DFSA. This report or any portion hereof may not be reprinted, sold or redistributed without our prior written consent.

51 December 201 5

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GLOBAL REAL ESTATE MARKET

Global real estate market fell back in 2014 due to policy changes in China and other Asia Pacific countries, which led to weakening in land sales. However, sales volumes excluding land sales registered a robust growth courtesy of global liquidity in the markets. Real estate investment to gain traction in 2015

Global real estate investment fell in 2014 for the first time in 5 years, dropping 6.3% to USD 1.21 trillion from 1.29 trillion in 2013. The slowdown was primarily due to drop in Chinese land purchasing affected by the policy related changes coupled with tightening measured in other APAC markets. Other regions recorded a strong performance with Americas up by 11.4% and Europe, Middle East and Africa (EMEA) up by 11.8% in 2014 as compared to the previous year. Going forward, real estate investment is expected to gain traction in 2015, growing by 11% to reach USD 1.34 trillion driven by increased activity in Americas and EMEA markets.

Exhibit 1: Global Real Estate Investment (2010-15E) 1,600 USD bn 1,342 1,400 1,292 1,211 1,200 983 928 515 1,000 818 657 502 800 453 437 600 434 480 417 375 400 272 318 184 200 291 348 200 220 211 260 0 2010 2011 2012 2013 2014 2015E

Europe, Middle East & Africa Americas Asia Pacific Source: Cushman & Wakefield, Al Masah Capital Research

Offices and hospitality sectors witnessed the strongest investment activity in 2014 followed by retail and industrials. Investments in hospitality sector grew by 16.6% in 2014, accounting for 5.5% of total new investments while office real estate investment accounted for nearly 27% of total new investments in 2014. Multifamily residential sector registered a flat performance on the year with modest US growth offset by falls in Western Europe and parts of Asia.

By fund type, sovereign wealth and private equity funds registered strong growth in real estate investments in 2014. Private equity funds cut spending in Asia and increased their allocation to Southern Europe as well as Western Europe and North America while Sovereign Wealth funds continued to focus in Europe, but investment into North America and Asia grew at a faster pace. Pension funds were also active in 2014 and increased spending in Northern Europe and Australia.

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GCC ECONOMIC OVERVIEW

Booming economy

GCC’s economy stood at USD 1.65 trillion in 2014 as compared to USD 535.7 billion a decade ago, growing at a CAGR of 11.9%. While the recent drop in oil prices have subdued GDP growth in the short term, the GCC economy is expected to recover on back of supportive economic policies and strong performance in non-oil sector. According to IMF, GCC's economy is estimated to reach USD 2.0 trillion by 2020, with Saudi Arabia contributing USD 902 billion, followed by the UAE (USD 502 billion), Qatar (USD 269 billion), Kuwait (USD 196 billion), Oman (USD 81 billion), and Bahrain (USD 40 billion).

Exhibit 2: GDP, Current Prices (2010-15, USD tn)

2.5 USD Trillion 1.99 2.0 1.65 1.58 1.64 0.20 1.44 1.44 0.27 1.5 0.18 0.17 0.18 1.14 0.13 0.15 0.19 0.20 0.21 0.17 0.20 0.50 1.0 0.12 0.37 0.40 0.40 0.13 0.35 0.36 0.29 0.5 0.90 0.67 0.73 0.74 0.75 0.53 0.65

0.0 2010 2011 2012 2013 2014 2015E 2020P Saudi Arabia UAE Qatar Kuwait Oman Bahrain

Source: IMF, Al Masah Capital Research

While the GCC region as a whole is still heavily dependent on oil revenues, the non-oil sector comprising manufacturing, tourism, hospitality, and trade, has emerged as the major growth engine, especially in the UAE. Consequently, despite the steep decline in oil prices in H2 2014, the GDP growth in GCC was not severely affected due to strong performance of the non-oil sector and the large cash buffers, which ensured steady levels of spending and investment. According to the IMF, the region's GDP grew at 3.6% in 2014, at par with its performance in 2013 and considerably higher than developed countries such as the US (2.4%) and the UK (2.6%) and the global GDP average which stood at 2.5%. Among the GCC countries, Qatar recorded the strongest growth of 6.2%, followed by Bahrain (4.5%), the UAE (3.6%), Saudi Arabia (3.5%), Oman (2.9%) and Kuwait (1.3%) in 2014.

Over the last five years, the GCC economy has grown at an average annual rate of 5.0% against the world average growth rate of 2.8%. Within the GCC region, Qatar recorded the highest growth rate of 9.7%, followed by Saudi Arabia (5.2%), Bahrain (4.0%) and the UAE (4.0%) respectively. The increased contribution of the non-oil sector to the economy has been the major reason for the relatively better performance by the GCC countries, surpassing the growth rates of the developed countries in the last five years.

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Exhibit 3: Average Annual GDP Growth During the Last Five Years (2010-14)

12.0% 9.7% 10.0%

8.0%

6.0% 5.2% 5.0% 4.0% 4.0% 3.5% 3.3% 4.0% 2.8% 2.2% 1.7% 2.0%

0.0% Qatar Saudi GCC UAE Bahrain Oman Kuwait World US UK Arabia Average Average Annual GDP Growth Rate (%)

Source: IMF, Al Masah Capital Research

Continued GDP growth in the region has translated into higher personal income levels. In 2014, GCC’s per capita income grew at 7.6% CAGR to reach USD 33,135 from USD 15,895 in 2004, highlighting the region’s rising affluence levels. The GCC region has a relatively higher per capita income as compared to the world average of around USD 10,804 and MENA average of USD 10,334. Within the GCC region, big differences in per capita income can be observed across the countries. Qatar boasts the highest per capita income of USD 93,397 in the GCC, nearly double of that in the UK (USD 45,603) and the US (USD 54,629). Kuwait has the second largest per capita income in the region of around USD 50,534, followed by the UAE (USD 42,522).

Exhibit 4: Per Capita Income (2014, USD)

35,000 USD Qatar 93,397 30,000 US 54,629 25,000 Kuwait 50,534

20,000 UK 45,603 UAE 42,522 15,000 GCC 33,135 10,000 Saudi… 25,409 5,000 Oman 20,832 World 10,804 0 2004 2009 2014 MENA 10,334

GCC per Capita Income (USD) Per capita Income (USD)

Source: IMF, Al Masah Capital Research

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Favorable Demographics

During 2004-14, the GCC population grew at a CAGR of 4.0%, almost double the rate witnessed in MENA during the same period and considerably higher than the world average of 1.2%. Moreover, the region also enjoys a favorable demographic dividend compared to some of the developed western countries. Nearly 70% of GCC’s population is in the working-age group (aged 15–59), as against to less than 60% in the UK and US.

Exhibit 5: GCC Population Growth and Working-age Population 60 millions Qatar 86.2% 50 50 UAE 43 76.9% Kuwait 66.3% 40 34 Bahrain 65.0% 30 Oman 59.9% 20 US 57.8%

10 UK 57.4%

0 Saudi… 51.8% 2004 2009 2014 GCC Population Share of working age population Source: IMF, Al Masah Capital Research

Such a powerful and favorable demographic dividend has been one of the major drivers of consumer spending and investments. In the real estate sector, the residential housing and retail markets would significantly benefit from increased demand for housing and higher consumer spending by the working-age population.

In the past decade, GCC's economic growth and government’s efforts toward economic diversification has also increased regional job opportunity for expatriates. Data shows that, as of 2014, 48.9% of the total GCC population consisted of expatriates while the proportion of expats vis-à-vis locals varies significantly across member states. The expatriates accounts for more than 80% of the total population in Qatar and UAE while this share is less than 45% in Oman and Saudi Arabia.

Exhibit 6: Share of GCC Expatriates Population (2014) 100% 13% 16% 31% 80% 48% 51% 56% 67% 60%

40% 87% 84% 69% 52% 49% 44% 20% 33% 0% Qatar UAE Kuwait Bahrain GCC Oman Saudi Arabia Share of expatriate in total population (%) Share of locals in total population (%)

Source: E&Y, Gulf Migration, Emirates 24/7, IMF, Al Masah Capital Research

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The expatriate population plays a significant role in the growth of the regional economy with the education and real estate sectors receiving great impetus. The growing expat population has inevitably led to the increase in demand for larger and more luxurious housing which in turn has spurred construction in the premium residential real estate segment. Moreover, the government's decision to allow foreigners to own properties has also surged the real estate demand in the last few years. Tourism and Upcoming Major Events

Most of the GCC nations have been developing their tourism industry as a part of their economic diversification strategy, with arrival numbers increasing in most destinations. The rising flow of tourists to GCC has also helped drive demand for real estate in hospitality and retail sector, particularly in Saudi Arabia and the UAE. On an average, these two countries annually receive more than 25 million tourists, accounting for 77.2% of the total estimated international tourist arrivals in the GCC in 2014, to perform Hajj and Umrah at the holy city of Mecca and for leisure/business. Further, according to The World Travel & Tourism Council, international tourist arrivals in the GCC region are expected to grow at an annual average growth of 7.8% between 2014 and 2024.

Exhibit 7: International Tourist Arrivals in GCC (in millions)

80 in millions 70 5.5 6.8 60

40 39.9 3.4 30 4.5 20 4.5 12.2 3.5 10 5.6 20.7 14.4 8.6 0 2004 2014E 2024F

Saudi Arabia UAE Bahrain 0thers

Source: The World Travel & Tourism Council; Al Masah Capital Research

GCC countries are also organizing mega events such as the Dubai World Expo 2020 in the UAE and the FIFA World Cup 2022 in Qatar, which will provide a major boost to the region's tourism industry in the coming years. Further, successful resolution of the proposed unified visa program, which will enable travel across the Gulf region on a single-entry visa valid for a month or a multiple-entry visa valid for a year, will further boost tourist inflow in the region.

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GCC REAL ESTATE MARKET

Post recession, GCC has emerged as an attractive destination for global investors and the real estate and construction sectors have become key economic barometers for the growth in the region. REAL ESTATE PROJECTS IN THE GCC

According to Zawya Projects, the total value of ongoing and on-hold real estate projects in the GCC was estimated at USD 1.72 trillion as of September 2015. The UAE led the real estate market accounting for nearly 51% of the total regional projects by value (amounting to USD 0.88 trillion), followed by Saudi Arabia.

Exhibit 8: Value of Real Estate Projects (ongoing and on-hold) in GCC, as of Sept 2015

Total Value of Real Estate Projects = USD 1.72 trillion

2.6% 2.2% 51.1%

12.6%

4.7% 26.8%

UAE Saudi Arabia Qatar Kuwait Bahrain Oman

Source: Zawya Projects, Al Masah Capital Research In terms of project status, nearly 66% of the GCC projects (by value) are currently ongoing, equating to a total value of USD 1.1 trillion while a substantial portion which equates to USD 0.6 trillion, are on-hold as of September 2015. Going forward, the sluggishness in real estate projects is expected to reduce as both countries have increased their pace in reviving the non-oil sectors, with the real estate industry being the primary benefactor.

Exhibit 9: Real Estate Projects by Status (By Value), as of Sept 2015 Total Project Value (USD bn) 37.2 217.7 45.2 81.3 460.9 879.4 1721.8 100%

80% 37% 56% 61% 66% 60% 73% 76% 82% 40% 63% 44% 20% 39% 34% 27% 24% 18% 0% Bahrain Kuwait Oman Qatar Saudi Arabia UAE GCC On Hold Ongoing Source: Zawya Projects, Al Masah Capital Research

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UAE REAL ESTATE SECTOR Introduction

The UAE real estate sector suffered a sharp downturn following the global economic slowdown in 2009. Since then, the sector has recovered at a swift pace that was well supported by improving economy, robust performance of non-hydrocarbon sectors and favorable policy decision. Consequently, the growth in real estate sector GDP has outpaced the total GDP growth in the UAE since 2012.

Exhibit 10: UAE GDP % Growth by Sector (2004-14) 40

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E -10

-20

-30 Total GDP Growth Construction GDP Growth Real Estate and business Services GDP Growth Source: National Bureau of Statistics, Al Masah Capital Research

The share of real estate GDP as a share of total GDP has also recovered since 2011 and the sector has emerged as the second largest contributor to the UAE's overall GDP in 2014. The real estate and construction sectors, collectively accounted for 19.3% of the UAE's total GDP in 2014, with individual contribution of 10.3% and 9%, respectively.

Exhibit 11: UAE GDP Contribution by Sector (2004-14) 14.0 % share in total 12.0 GDP

10.0

8.0

6.0

4.0

2.0

- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E Construction Real Estate and Business Services

Source: National Bureau of Statistics, Al Masah Capital Research

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The recovery in real estate market was also supported by increasing Foreign Direct Investments (FDI) which nearly doubled from AED 30.5 billion in 2007 to AED 71.3 billion in 2014. Foreign portfolio investments (FPI) also recovered from 2009 economic slowdown to reach AED 4 billion in 2012.

Exhibit 12: FDI and FPI in Real Estate Sector (2007-12) 80 in AED Billions 71.3 70 59.9 60 54.3

50 46.2 39.8 40 30.5 30

20 7.3 10 5.6 2.0 3.9 4.3 4.0 0 2007 2008 2009 2010 2011 2012 Foreign Direct Investments Foreign Porfolio Investments Source: National Bureau of Statistics, Al Masah Capital Research Impact of Oil Prices

Lower oil prices are leading many in the GCC to wonder about the possible implications for real estate. According to Markit, the seasonally adjusted UAE and Saudi Arabia Purchasing Indices (PMI) remained well above the 50 mark during the last year, suggesting a healthy expansion in the markets’ private non-oil sectors. This is a positive indicator for real estate sector as non-hydrocarbon sector is an important source of demand for property owners in the region.

Exhibit 13: UAE and Saudi Arabia Purchasing Manager Indices (2014-Q2 2015) 63.0

60.0

57.0

54.0

51.0 Jul/14 Jul/15 Jan/14 Jan/15 Jun/14 Jun/15 Oct/14 Apr/14 Apr/15 Sep/14 Feb/14 Feb/15 Dec/14 Aug/14 Aug/15 Nov/14 Mar/14 Mar/15 May/14 May/15 Saudi Arabia PMI UAE PMI A figure above 50 suggests economic expansion and below implies contraction. 50 means no change on previous month. Source: Markit, Al Masah Capital Research

Moreover, despite posting huge fiscal deficits, the GCC governments are unlikely to cut back on current levels of spending and will utilize large fiscal reserves to fund infrastructure projects. These large publicly funded, infrastructure-related schemes tend to stimulate hinterland construction activity, and thus support growth in the real estate sector.

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Market Statistics

UAE Office Market

As of 2014, the UAE (including Dubai and Abu Dhabi) holds the largest office stock of 10.7 million sqm of GLA in the GCC. While the office market largely remained oversupplied, the availability of good quality office space in prime locations such as Jumeirah Lake Towers, Business Bay, Tecom regions of Dubai, and Al Reem Island, Muroor, Corniche, and Sowwah Square, among others in Abu Dhabi were scarce in 2014.

Exhibit 14: UAE Office Supply (2010-17F) 5,000 Abu Dhabi Office Supply 10,000 Dubai Office Supply (in '000 sqm) (in '000 sqm) 4,000 8,000

3,000 6,000

2,000 4,000 8,700 8,700 8,500 8,500 3,655 3,655 7,800 7,800 7,600 7,600 7,400 7,400 3,340 3,340 7,100 7,100 3,200 3,200 3,100 3,100 3,000 3,000 2,900 2,900 1,000 6,300 2,530 2,530 2,000 5,600 2,200 2,200

- - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Abu Dhabi real estate continues to offer a good depth and breadth of opportunities for occupiers, although there is a limited pipeline of new office space which will impact the market in the coming years. The supply of both Grade A and B office stock in Abu Dhabi stood at 3.1 million sqm in 2014, growing at a CAGR of 8.95% from 2.2 million sqm in 2010. Though the overall office segment of Abu Dhabi remained an oversupplied market, the city faced a shortage of Grade A office space in 2014. The city is expected to receive fresh supply of 140,000 sqm of GLA office space in 2015 with the total stock rising to 746,000 sqm between 2015 and 2017. With mixed availability of commercial space across the Abu Dhabi market, potential occupiers remain focused on prime Grade A stock, which is sustaining rents at the top end of the market.

In Dubai, business occupier demand remained focused on high quality office space (Grade A) in prime locations due to limited availability within these offerings. The current market expects an increase in the supply of Grade A office space to meet the demand for quality. Single ownership buildings in the city continue to account for the majority of demand, while strata projects remain less popular. The supply of both Grade A and B office stock in Dubai stood at 7.6 million sqm in 2014, growing at a CAGR of 7.93% from 5.6 million sqm in 2010.The area around the Expo 2020 site is expected to benefit most from the new demand, boosted by established infrastructure facilities such as Al Maktoum International Airport and Jebel Ali Free Zone. Dubai International Financial Centre (DIFC), Jumeirah Lakes Towers, Silicon Oasis and Dubai Investment Park are also expected to see new completions during the period. With significant additions anticipated in the Grade A space, Dubai’s office stock is expected to reach a GLA of 8.5

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million sqm in 2015 and 8.7 million sqm in 2016. The expected fresh supply of office stock stands at 1.24 million sqm between 2015 and 2017.

Exhibit 15: UAE Office Vacancy & Gross Rental Yield Rates (2010-15) UAE Office Vacancy Rates (%) UAE Office Gross Rental Yield (%) 50% 16% 13.0% 40% 37% 39% 12% 10.0% 30% 30% 25% 25% 31% 8% 10.0% 10.0% 10.0% 9.0% 20% 21% 23% 29% 24% 23%

4% 10% 8%

0% 0% 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2015 Abu Dhabi Dubai Abu Dhabi Dubai

Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Increased demand for Grade A office space from the government sector and state- owned enterprises in Abu Dhabi led the vacancy rates to improve from 39% in 2013 to 25% in 2014. Similarly, increased business activity in the prime CBD area of Dubai due to its central location has led to the fall in vacancy rates from 29% in 2013 to 24% in 2014. As of Q2 2015, the vacancy rate in Dubai further retracted to 23% while that in Abu Dhabi remained unchanged. The prime rental yield from both the markets remained unchanged at 10% as of Q4 2013. While the government sector and state-owned enterprises continue to drive demand for large office spaces, the private sector is mainly focused on smaller office spaces, balancing the market occupancy rates in the UAE. Going forward, vacancy rates in both the major hubs are expected to remain unchanged as most near-term completion projects have been pre-committed.

Exhibit 16: UAE Office Rentals (2010-14)

2,500 Abu Dhabi Office Rents 2,500 Dubai Office Rents (AEDper sqm PA) (AED per sqm PA)

2,000 2,000

1,500 1,500

1,000 1,000 2,000 2,000 1,880 1,880 1,870 1,870 1,850 1,850 1,730 1,730 1,730 1,730 1,700 1,700 1,615 1,615 1,600 1,600 1,600 1,600 1,540 1,540 1,540 1,540 1,300 1,300 500 1,300 500 1,200 1,200 1,180 1,180 1,180 1,180 1,180 1,180

- - 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 Q2 2015 2015 Prime CBD Grade A Grade B Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

The Grade A office rent in Abu Dhabi stood at AED 1,730 per sqm PA in 2014, registering an increase of 12.3% from AED 1,540 per sqm PA in 2013, primarily due to the decline in fresh stock during the period and increased demand. On the other hand, Grade B rents

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in the city remained muted in 2014 at AED 1,180 per sqm PA, unchanged from previous year. As of Q2 2015, the rentals of Grade A and Grade B offices remained at the same level as in 2014. Going forward, the rents for Grade B offices are expected decline due to limited demand arising from lower oil prices and uncertain economic conditions.

Abu Dhabi Office Market Rental Growth and Pre-crisis levels 80 Recent Build Old Stock

60 54 54 45 41 41 40

20 16 6 0 0 0 0 Prime Fitted Prime Shell & Good Typical building Low quality Core building

% change during 2013-2014 % decline since pre-crisis levels in 2009

Similar to Abu Dhabi, Dubai faced a shortage of Grade A office space in 2014. As a result, rents for office space in prime CBD area rose 1.1% in 2014 to reach AED 1,870 per sqm PA from AED 1,850 per sqm PA in the preceding year. However, the increase was marginal during the year as compared to 2013 when the rents witnessed a substantial hike of 15.6% due to limited supply and increased demand. Landlords of prime buildings in Dubai are adopting a more mature approach by gradually increasing asking rents as occupancy rates increase. 2014 saw relatively limited new office supply coming to the market in Dubai, driving rental growth in some areas. As of Q2 2015, the market witnessed a marginal hike in rental space of 0.5% with the current rate standing at AED 1,880 sqm PA, as tenants seek to optimize or rationalize their space requirements and consolidate their operations. With over 277,000 jobs estimated to be created by Dubai Expo 2020, more multinationals and start-ups are expected to establish offices in Dubai, providing a further boost to the commercial market in the forthcoming years.

Dubai Office Market Rental Growth and Pre-crisis levels 80 71 71 68 70 60 58 60 55

30 18 18 20 11 7 6 10 3 2 0 0 Bur Dubai Business DIFC Dubai Jumeirah Sheikh Tecom C Bay Investmen Lake To Zayed Ro

% change during 2013-2014 % decline since pre-crisis levels in 2009 12

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According to Reidin, transaction levels in the office sector increased by 16% compared with 2013 with close to 1,500 deals recorded by the Dubai Land Department in 2014. The most transacted areas were Business Bay, Jumeirah Lake Towers and Tecom C, representing close to 80% of all office transactions in 2014 from 90% in 2013. In terms of size, most transactions in 2014 were for mid-sized offices measuring from 1,000 to 2,000 sqft, representing approximately 50% of all transactions, whereas small units of less than 1,000 sqft represented 30%. Although transaction levels improved, sales price growth remained relatively slow, with a yearly increase of only 9% since Q4 2013, and still 50% lower, on average, than at their peak in 2008.

Exhibit 17: Dubai Average Office Sales (AED per sqft PA, 2008-14)

5,000

4,000

3,000

2,000

1,000

0 2008 2009 2010 2011 2012 2013 2014

Business Bay DIFC Dubai Investment Park Jumeirah Lake Towers Tecom C

Source: Asteco, Al Masah Capital Research

In 2015, the UAE office rentals are expected remain stable, which is good news for occupiers. However, vacancy rates will remain significant despite a continued gradual improvement in the strata title market, where different investors own one or more floors. Office rental rates in Dubai remained the highest in the UAE. After taking into consideration the cost and quality of living in Dubai & Abu Dhabi, many companies still opted to setup in Dubai rather than the capital. Sharjah and Al Ain predominantly appeal to local companies operating in these cities and, therefore, demand levels remained relatively subdued.

Some of the major ongoing commercial projects in the UAE includes: Dubai World Central (Dubai), Chemicals Industrial City (Abu Dhabi), Expo 2020 Site (Dubai), Dubai World Central - Aviation City (Dubai) and The Opus (Dubai).

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UAE Residential Market

The UAE’s residential sector remained upbeat buoyed by the positive macroeconomic, regulatory and population factors which continue to drive growth across all the regions. The country is also set to commence an AED 5.7 billion (USD 1.6 billion) affordable residential construction project to accommodate as many as 385,000 expatriate workers in a bid to improve the living standards for expatriates, who are increasingly returning to South Asia due to the rising rents. Further, the government has also proposed a new law that mandates developers to allocate about 15%-20% of their projects to the affordable housing category. The implementation of such positive policy decision will drive the residential market in the country.

Exhibit 18: UAE Residential Supply (2010-17F) 300 Abu Dhabi Residential 500 Dubai Residential Supply (in '000 units) Supply (in '000 units) 250 400 200 300 150 256 250

244 244 200 236 414 225 100 395 379 377 366 356 194 342 185 323 50 100

- - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Although the demand for residential units in Abu Dhabi stood at approximately 290,000 units for 2014, only 244,000 units were available, demonstrating an undersupply condition in the city’s residential market, including its affordable housing segment. Nevertheless, approximately 6,000 residential units are expected to enter the market by the end of 2015, with the numbers further increasing to 6,000 and 13,000 in 2016 and 2017, respectively. With the resuming of government projects such as Louvre, new regulations for claiming housing benefits, and developers planning to push the on-hold and delayed projects coupled with the launch new ones, the total stock of residential units is expected to increase to 250,000 and 256,000 units by the end of 2015 and 2016, respectively.

As per Colliers International, the gap between residential demand and supply is currently 13.0% in Dubai, indicating an oversupplied market. An additional 52,000 housing units are due to enter the market between 2015 and 2017. Going forward, this increase in supply is expected to be absorbed as the economy gains momentum and the city sees an increase in its expatriate workforce due to upcoming events such as Expo 2020. Nearly 50.0% of these additional units are likely to be targeted towards the upper-mid and higher-end of the market, concentrated across the areas of Business Bay, Dubai Marina, Culture Village, Legends, and Palm Jumeirah, among others.

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Exhibit 19: UAE Residential Rentals (2010-14)

250 Abu Dhabi Residential Rents 250 Dubai Residential Rents (in AED '000 PA) (in AED '000 PA)

200 200

150 150 228 217 100 100 217 190 189 182 175 175 170 163 160 155 154 152 150 145 140 135 133 127 50 120 50 95 86 81

- - 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 Q2 2015 2015 Apartment (3 BR) Villa (3 B) Apartment (2 BR) Villa (3 B) Apartment (2BR) Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

The rents for 2BR apartments in Abu Dhabi increased 11% to reach AED 155,000 PA in 2014 from AED 140,000 PA in 2013, while that in the 3B villas increased 12% to reach AED 190,000 PA in 2014 from AED 170,000 PA in the preceding year. The rental for 2BR apartments increased further during Q2 2015 to AED 163,000 PA (up 4.9%) while there was marginal fall (down 0.6%) witnessed in the 3B villas during the same period, standing at AED 189,000 PA.

In Dubai, the rents for 2BR apartments increased at a much higher rate of 18% than in Abu Dhabi to reach AED 150,000 PA in 2014 from AED 127,000 PA in 2013. However, the increase was comparatively less than that witnessed during 2013, where the market rentals increased by almost 34%. As of Q2 2015, the rents for 2BR apartments registered a fall of 11.1% to reach AED 133,000 PA. The rentals for 3B villas in Dubai increased at a much nominal pace of 5% in 2014 to reach AED 228,000 PA from AED 217,000 PA in the previous year. During 2013, the 3B villa rental rose by 19% with the market reaching a much stabilizing period as of Q2 2015 touching the 2013 mark, falling by 4.8%.

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Abu Dhabi Residential Rental Growth and Pre-crisis levels

According to Asteco, the apartment and villa rents in Abu Dhabi are still 40%-50%

below the pre-crisis levels in 2008. Further, while a prominent growth in rentals was observed in the last two years across segments and localities, it should take another 3-4 years for the rentals to reach the pre-crisis levels, assuming similar growth trend.

Apartment Rentals

60 Mid-Low End High End 48 48 48 50 42 40 38 40 Prime 30 22

20 14 11 12 9 8 8 9 8 10 5 6 5 6 5

Shams

Corniche Corniche Al Raha Beach Raha Al Marina Square Saadiyat BeachSaadiyat

Downtown Reef Khaldiya/Bateen Khaldiya/Bateen Abu Dhabi Island Investment Areas Investment Central Dhabi Abu Central Dhabi Abu MBZ & Khalifa City

% Change during 2013-2014 % decline since pre-crisis levels in 2008

Residential Villa Rentals

80 61 60 48 49 43 40

20 12 8 10 3 3 3 0 0 -4 -20 Al Reef Al

Khalifa A&B Golf Gardens Al Raha beach Al Raha Gardens Raha Al Khalidiya/Bateen

Mushrif/Karama/Manaseer

Saadiyat BeachSaadiyat Villas (Standard) % Change during 2013-2014 % decline since pre-crisis levels in 2008

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Dubai Residential Apartment Rental Growth and Pre-crisis levels

In 2014, average apartment rentals in some localities in Dubai reached the 2008

levels while the remaining localities reported strong rental growths. Overall, apartment rentals across most Dubai localities will touch or exceed 2008 levels by end of 2015, if the current growth continues. The rental growth for residential villas

was comparatively slower, with rents declining in some localities such as Arabian Ranches, Green Community and Mirdif during 2013-14.

Apartment Rentals

40 36 33 30 30

19 20 18 14 15 15 12 14 13 13 10 10 7 10 5 3 4 1 1 0 -2 Deira

-10 Greens Intl City Intl

Business Bay Dubai Marina Palm Jumeriah Jumeriah Village Downtown Dubai Downtown Discovery Gardens

Road Zayed Sheikh Jumeriah Lake towers

Jumeriah Beach Residence

% change during 2013-2014 % decline since pre-crisis levels in 2008

Residential Villa Rentals 50 40 40 35

30 25 22 20 17 20 15 10 9 10 8 0 0 -1 -2 -3 Mirdif

-10 Springs

Meadows Jumeirah Park

Palm Jumeirah Jumeirah Village Arabian Ranches Green Community

% Change during 2013-2014 % decline since pre-crisis levels in 2008

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A current shortage of residential stock for sale in Abu Dhabi in high-end development areas has resulted in high asking prices on the secondary market. The achieved high sales volumes on newly launched projects in the city, such as Ansam on Yas Island, Al Hadeel at Al Raha Beach and Mamsha Al Saadiyat, proved a pent-up demand in the market. On an average, apartment sale prices in 2014 increased by almost 15% as compared to 2013.

Exhibit 20: Abu Dhabi Average Apartment Sales Price (AED per sqft, 2008-14) 2,500 Marina Square 2,500 Raha Beach/Al Bandar

2,000 2,000 2,000

1,550 1,375 1,425 1,500 1,500 1,350 1,300 1,175 1,225 1,100 1,025 1,025 1,000 965 1,000 1,000

500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014

2,500 Raha Beach/Al Muneera 2,500 Raha Beach/Al Zeina

2,000 2,000

1,425 1,500 1,500 1,175 1,175 1,200 1,100 1,100 1,015 975 925 930 1,000 900 1,000 900

500 500

0 0 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014

2,500 Reef Downtown 2,500 Sun & Sky Towers

2,000 2,000

1,475 1,500 1,500 1,325 1,250 1,250 1,130 1,000 1,050 1,000 825 1,000

500 550 500 500

0 0 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014

Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

In 2014, sales transaction activity slowed down on back of higher prices coupled with a string of new regulations by the UAE Central Bank and fees (Dubai Land Department

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transfer fees) made the process of purchasing property more expensive. Consequently, the average sales in 2014 increased moderately by 6% as compared to the previous year.

Exhibit 21: Dubai Average Apartment Sales Price (AED per sqft, 2008-14) 3,000 Business Bay 3,000 DIFC 2,700

2,500 2,500 2,050 2,000 2,000 1,875 1,875 1,600 1,500 1,500 1,500 1,350 1,225 1,300 1,300 1,000 900 1,000 1,000 750 700

500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

3,000 Discovery Gardens 3,000 Downtown Dubai 2700

2,500 2,500 2325 2200

2,000 2,000

1400 1,500 1,250 1,500 1300 1300 1100 1,000 825 885 1,000 550 500 450 450 500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

3,000 Dubai Marina 3,000 Greens

2,500 2,500

1,900 2,000 1,800 2,000 1,750 1,700 1,400 1,500 1,500 1,375 1,100 1,050 1,050 1,000 925 950 1,000 1,000 825 775

500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

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3,000 International City 3,000 JBR

2,500 2,500 2,000 2,000 2,000 1,625 1,525 1,500 1,500 1,050 1,100 925 925 1,000 1,000 1,000 675 710 500 425 500 325 350 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

3,000 JLT 3,000 Jumeirah Village

2,500 2,500

2,000 2,000

1,400 1,500 1,500 1,200 1,250 1,100 925 1,000 850 1,000 875 700 750 650 600 500 475 500 500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

3,500 Palm Jumeirah

3,000 2,800

2,500 2,000 2,000 2,000 1,500 1,400 1,500 1,175 1,100 1,000

500

0 2008 2009 2010 2011 2012 2013 2014

Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

In Abu Dhabi, average villa prices in 2014 increased by 16% as compared to 2013, driven by a lack of available stock. Despite high prices, the Saadiyat Beach villa community was in high demand standing at AED 1,550 per sqft from both investors and end-users due to the development’s exclusivity. Prices for beach villas started from AED 5 million for a standard 4BR villa and AED 16 million for a St Regis branded 4BR unit. Al Muneera and Al Zeina at Al Raha Beach also featured a selection of sought after villas and town-houses, which have sea or canal views, where prices started from AED 4 million for a 4BR. Al Raha Gardens with sales price at AED 1,115 per sqft as of 2014 and Golf Gardens with sales price at AED 1,020 per sqft remained popular with UAE national investors, as these

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communities consistently yielded attractive rental returns. Hydra Beach (AED 660 per sqft) and Al Reef Villas (AED 845 per sqft) remained the cheapest amongst the lot.

Exhibit 22: Abu Dhabi Villa Sales Price (AED per sqft, 2008-14) 2,000 Raha Gardens 2,000 Golf Gardens

1,500 1,500

1,115 1,020 1,000 900 890 1,000 870 825 860 850 810 770 730 770

500 500

0 0 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014

2,000 Saadiyat Beach Villas (Standard) 2,000 Hydra Village

1,550 1,500 1,375 1,500

1,000 1,000

660 600

500 500

0 0 2013 2014 2013 2014

2,000 Al Reef Villas

1,500

1,000 845 745 600 560 520 540 500

0 2009 2010 2011 2012 2013 2014

Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

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In 2014, villa prices in Dubai were stable as compared to 2013. Further, the 2014 average prices were 30% lower than in 2008 levels. For instance, average sale price for Arabian Ranches was AED 2,200 per sqft in 2008 compared to AED 1,150 per sqft in 2014. Palm Jumeirah is the only development that has experienced an increase from its 2008 prices, with rates up by 4%, primarily due to the firm establishment of the Palm as a unique and exclusive villa community, appealing to both local and international buyers.

Exhibit 23: Dubai Average Apartment Sales Price (AED per sqft, 2008-14) 3,000 Arabian Ranches 2,000 Dubai Sport City

2,500 2,200 1,500 1,500 2,000 1,250 1,125

1,500 1,000 900 1,225 850 1,150 750 750 950 850 1,000 750 750 500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

2,000 Jumeirah Park 1,500 Jumeirah Village

1,500 1100 1,500 975 1,000 1,175 1,175 850

1,000 800 600 725 650 500 475 500 550 500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

3,000 Meadows 3,500 Palm Jumeirah 3,000 2,850 2,500 3,000 2,750 2,200 2,500 2,000 2,000 1,800 1,800 1,500 1,300 1,350 1,550 1,500 1,500 1,000 1,000 1,000 850 850 1,000

500 500

0 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

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2,500 Springs

2,000 1,800

1,500

1,100 1,075 1,000 850 900 650 650

500

0 2008 2009 2010 2011 2012 2013 2014

Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Some of the major ongoing residential projects in the UAE include: The Desert Rose City (Dubai), Al Falah (Abu Dhabi), Habtoor City - Residential Towers (Duabi), North Wathba Development (Abu Dhabi), The Residences at The Marina (Dubai) and DAMAC Towers by Paramount (Duabi). UAE Retail Market

The UAE retail real estate sector has continued to remain buoyant primarily driven by the country being a gateway for major international brands establishing its presence to cater to the huge demand for foreign goods and services across the GCC. Resultantly, the sector witnessed positive sentiments as a large number of projects were announced in 2014, including plans to construct the world’s biggest mall in Dubai, to be called ‘Mall of the World’, which is expected to be spread across 8 million sqm, at an estimated cost of USD 6.8 billion.

Exhibit 24: UAE Retail Supply (2010-17F) 3,000 Abu Dhabi Retail Supply 4,000 Dubai Retail Supply (in '000 sqm) (in '000 sqm)

3,000 2,000

2,000 2,739 2,739 2,654 2,654 2,600 2,600 3,513 3,513 1,000 2,500 2,200 2,200 3,094 3,094 2,900 2,900 2,900 2,900 2,900 2,900 2,800 2,800 2,775 2,775 1,900 1,900

1,667 1,667 1,000 2,418 2,418 1,500 1,500

- - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

The supply of retail space in Abu Dhabi stood at 2.5 million sqm as of 2014, up 13.6% from 2.2 million sqm in 2013. Irrespective of the increase in stock, the market remained largely undersupplied driven by the increasing demand for space. Going forward, the city is expected to receive a fresh supply of 217,000 sqm of retail space between 2015 and 2017, taking the total GLA to 2.82 million sqm by the end of 2017. A number of super

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regional malls are scheduled to enter the market from 2018, which are expected to substantially increase Abu Dhabi’s retail supply in the medium to long term. The release of new high-end retail space into the market in the coming years is likely to push some of Abu Dhabi’s older malls and shopping centers to maintain their profile in the face of increased competition. As a result, some established malls could lower their rents or seek to lock in key retailers through longer-term agreements to avoid any shift to the new developments.

Dubai being the favorite destination for global retailers to establish their presence in the GCC, faces the challenge of shortage in available retail space with the market remaining undersupplied in 2014 as it received little to no addition to its retail space during the year. The total supply of retail space in the city remained unchanged in 2014 from the preceding year at 2.9 million sqm. However, with a host of new projects being announced, the city is expected to receive new stock of 194,000 sqm in 2015. The supply of retail space in Dubai is expected to reach approximately 3.6 million by the end of 2017, growing at a CAGR of 7.79% between 2015 and 2017.

Exhibit 25: UAE Retail Vacancy Rates (2010-15)

25% UAE Retail Vacancy Rates (%) 20% 20% 20%

15% 15% 12%

10% 8% 8% 5% 5% 2% 2% 2% 2% 2%

0% 2010 2011 2012 2013 2014 Q2 2015

Abu Dhabi Dubai Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Despite these new releases of fresh stock in 2014, vacancy rates remained low at 2.0% of the available GLA in Abu Dhabi, the same level at the close of 2013. The vacancy rate in the city has remained constant, witnessing marginal fluctuation in the past three years and is expected to sustain during 2015. Going forward, with the influx of super regional malls, the vacancy rates might take an upward swing, considering the supply outpaces the demand. Since Dubai’s retail supply largely remained undersupplied in 2014, the vacancy rates witnessed a significant fall from 12% in 2013 to 8% in 2014. As of Q2 2015, the city’s retail vacancy rate remained at the same level as of last year and with the influx of fresh stock during 2015-17, the demand is expected to weigh light on the vacancy rates.

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Exhibit 26: UAE Retail Rentals (2010-14)

3,500 Abu Dhabi Rents (AED per sqm PA) 9,000 Dubai Retail Rents (AED per sqm PA) 8,000 3,000 7,000 2,500 6,000 2,000 5,000

1,500 4,000 8,008 8,008 3,000 3,000 3,000 3,000 2,900 2,900 2,750 2,750 2,750 2,750 2,750 2,750 3,000 1,000 5,060 5,060 2,000 5,000

500 3,965 1,000 2,502 2,502 1,200 1,900 1,900 1,900 1,860 1,860 2,220 2,220 1,850 1,850 - - 1,720 2010 2011 2012 2013 2014 Q2 2012 2013 2014 Q2 2015 2015 Primary Secondary AD Island Outside AD Island Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Limited availability of retail space at prime locations in Abu Dhabi led average rents (inside and outside Abu Dhabi Island) to increase marginally by 1.3% in 2014 to reach AED 2,430 sqm PA from AED 2,400 sqm PA in 2013. Rents in Abu Dhabi Island stood at AED 3,000 per sqm PA in 2014, rising 3.4% from the preceding year, while that in outside of Abu Dhabi Island fell by 2.1% to reach AED 1,860 during the same year. However, retail rents are expected to remain stable from 2015 to 2018, considering the strong inflow of stock matching the overall demand. Accordingly, in Q2 2015, rents were flat at AED 3,000 per sqm PA in primary locations and AED 1,860 per sqm PA in secondary locations.

In Dubai, the rents in a secondary location stood at AED 2,220 per sqm PA in 2014, up from AED 1,720 per sqm PA in 2013, while it was 5,060 per sqm PA in a primary location, up from 3,965 per sqm PA in 2013. The demand-supply mismatch in Dubai resulted in exponentially higher growth in rents in Q2 2015. The rentals for primary location rose 58.3% to AED 8,008 per sqm PA and secondary location increased 12.7% to AED 2,502 per sqm PA by end of Q2 2015.

Some of the major ongoing retail projects include: Dubai Mall of the World (Dubai), 5 Shopping Malls (Dubai), Art Centre (Dubai) and Dubai Festival City Mall Expansion - Phase 2 (Dubai). UAE Hospitality Market

The UAE tourism sector has significantly expanded in the past five years and the country is already among the top five countries in the world for new hotel openings during the period, in anticipation of over 25 million tourists expected to visit Dubai Expo 2020. Consequently, the current market remains oversupplied and the key challenge would be to maintain tourist inflows post this mega event.

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Exhibit 27: UAE Hotel Supply (2012-17F) 30,000 Abu Dhabi Hotel Supply 100,000 Dubai Hotel Supply (in no. of keys) (in no. of keys) 25,000 80,000 20,000 60,000 15,000 600 , 40,000

10,000 24 23,000 23,000 76,500 76,500 20,700 20,700 19,700 19,700 68,000 68,000 18,150 18,150 65,000 65,000 64,400 64,400 60,200 60,200 15,700 15,700 5,000 20,000 57,000 53,600 53,600 13,987 13,987 50,200 50,200 10,000 10,000 - - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Abu Dhabi’s hospitality market noted a 11.4% rise in demand in 2014, mainly due to an increase in transit visitors, offset by a 8.5% rise in supply. Approximately 1,550 hotel rooms were added to the market in 2014, with about 3,300 additional rooms expected to enter in 2015, taking the overall supply to 23,200 rooms by the end of 2015, representing a y-o-y growth of 16.0%. Additionally, the total number of rooms is expected to reach 25,900 units by 2018, with the city receiving 6,200 fresh stock by 2018. Such a rise in supply will be absorbed by the growth in demand as Abu Dhabi is focusing on the increasing visitors mainly for the leisure segment.

Dubai, the regional hub for hospitality, tourism and shopping, is the world’s biggest growing market outside of China since 2008 in terms of new hotel openings. The city’s hospitality market saw the entry of new operators and brands in 2014, leading to the addition of nearly 4,200 keys, denoting a y-o-y increase of 7.0%. The city’s total room count stood at 64,400 in 2014, up from 60,200 rooms in 2013. With an additional 3,000 keys due for completion in 2015, incremental rooms will total to 68,000 units until 2015. The figures are projected to reach over 95,900 by the end of 2018 with approximately 30,900 units expected to be added between 2015 and 2018.

Exhibit 28: UAE Hotel Occupancy Rates (2010-15)

100% UAE Hotel Occupancy Rates (%)

90% 84% 80% 78% 80% 79% 80% 75%

77% 70% 75% 76% 73% 73% 67% 60%

50% 2010 2011 2012 2013 2014 Q2 2015 Abu Dhabi Dubai Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

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Reaping the government’s efforts to promote tourism, the Abu Dhabi hotel occupancy rate increased to 73% in 2014 from 67% in 2013, denoting a strong performance during the year. In Q1 2015, two major hotels were opened in Abu Dhabi, namely TRYP by Wyndham and the Swiss-Bel hotel Corniche increasing the occupancy rate to 77% as of Q2 2015. On the other hand, Dubai witnessed a marginal fall in occupancy rates to 79% in 2014 from 80% in 2013. However, the occupancy rate was back in track, rising to 84% as of Q2 2015.

Exhibit 29: UAE Hotel Room Rates (2010-14)

300 Abu Dhabi Hotel Room Rates 300 Dubai Hotel Room Rates (in USD per day) (in USD per day)

250 250

200 200

150 150 261 249 243 241 239 238 236

100 218 100 195 153 148 50 141 50

- - 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 Q2 2015 2015 Average Room Rates Average Room Rates Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Witnessing a rise in occupancy rates, the average room rates in Abu Dhabi declined 4.7% in 2014 to USD 141 per day from USD 148 per day in 2013. As of Q2 2015, the average rates rose 8.5% to stand at USD 153 per day. Following the same trend, the average room rates in Dubai declined 1.2% to USD 238 per day in 2014 from USD 241 per day in 2013. As of Q2 2015, the average rates rose 4.6% to stand at USD 249 per day. Going forward, the supply of fresh stock is expected to weigh on the ADRs.

Some of the major ongoing hotel projects include: Dubai Parks and Resorts (Dubai), Atlantis The Palm Expansion (Dubai), Dubai Paramount Tower Hotel And Residences (Dubai), Christened Damac Towers (Dubai) and Marvel Adventure Theme Park (Dubai).

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Real Estate Financing

Despite increase in property prices, real estate lending by UAE banks fell by 1% to reach AED 277 billion in 2014, suggesting that banks’ participation in financing real estate demand was limited during the year. Lending related to completed properties increased 3% to AED 195 billion while lending to properties under construction witnessed a decline of 8% in 2014.

Exhibit 30: Real Estate Lending by UAE Banks (2009-14) 300 279 277 in AED billion 254 238 241 250 199 200

150

100

0 2009 2010 2011 2012 2013 2014 Real Estate Lending by UAE Banks

Source: National Bureau of Statistics, Al Masah Capital Research

While the share of individual borrowers in total real estate lending increased from 34% in 2013 to 36% in 2014, overall corporate borrowing for real estate decreased by 2% to reach AED 179 billion in 2014. The major decrease came from developers while hotel related businesses increased their borrowing by more than 20%.

Exhibit 31: Real Estate Lending by Borrower and Property Type (2014) By type of borrower By type of property 250 250 in AED in AED billions billions 200 183 179 200

150 150 127 130

96 98 86 100 100 83

42 36 50 50 26 32

0 0 2013 2014 2013 2014 Residential Non-residential Individuals Corporates Hotels Developers Source: IMF, Al Masah Capital Research

Most recent changes in banks’ real estate lending reveal limited impact of the current market recovery with bank’s exposure decreasing. Furthermore, bank lending is shifting towards completed properties and as such, becoming less exposed to fluctuations in the residential market and more influenced by general economic conditions.

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Real Estate Market Sentiments

According to the UAE Real Estate Market Sentiment Survey 2015 conducted by YouGov, the Dubai real estate market will continue the growth momentum over the next 12 months – which is perceived across the board by all respondents including real estate professionals, investors and potential home buyers. Nearly 60% of the investors and 69% of the real estate professionals expressed positive sentiments on the growth of real estate market. Surprisingly among the potential home buyers, younger age categories (18 to 24 years) were more optimistic about growth compared to older age groups (40+ years) - 63% and 49% respectively.

Exhibit 32: Real estate market growth in Dubai (2015 Survey by YouGov)

Real estate professionals 5% 25% 69%

Investors 14% 26% 60%

Potential home buyers 13% 33% 54%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Negative Neutral Positive

Source: YouGov, Al Masah Capital Research

From the investors' perspective, the focus on real estate in the portfolio mix is set to continue with a slight increase in real estate investments expected (45%) over the year ahead. As a result, distribution among the rest of investors’ portfolio mix is set to remain comparatively much less, among equities (18%), currencies (16%), commodities (16%), funds/indices (13%) and bonds (13%), according to investors interviewed by YouGov.

Exhibit 33: Investors' Current vs Future Portfolio Mix (2015 Survey by YouGov)

43% Real Estate 45%

19% Equities 18%

15% Currencies 16%

14% Commodities 16%

13% Funds/ Indices 13%

11% Bonds 13%

0% 10% 20% 30% 40% 5 Current In the next year Source: YouGov, Al Masah Capital Research

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SAUDI ARABIA REAL ESTATE

Saudi Arabia Office Market

Business activities in Saudi Arabia remained buoyant in 2014, with major cities such as Riyadh and Jeddah witnessing a substantial rise in stock and fall in vacancy rates. The average office rents (Grade A and Grade B) in Riyadh witnessed a decline during the year on the back of looming oversupply pressures, while that in Jeddah remained strong increasing substantially from the preceding year.

Exhibit 34: Saudi Arabia Office Supply (2010-17F) 4,000 Riyadh Office Supply 1,200 Jeddah Office Supply (in '000 sqm) (in '000 sqm) 3,500 1,000 3,000 2,500 800 2,000 600 1,500 1,057 1,057 944

2,904 2,904 400 840 821

1,000 2,450 2,400 2,400 715 2,300 2,300 2,100 2,100 622 1,900 1,900 1,669 1,669

500 200 467 1,350 1,350 357 - - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

The supply of office stock in Riyadh stood at nearly 2.30 million sqm in 2014, growing at a CAGR of 14.25% from 1.35 million sqm in 2010. In view of an increase in supply supplementing the demand, office stock is expected to reach 2.45 million sqm and 2.90 million sqm in 2015 and 2016, respectively. On the other hand, the supply of office stock in Jeddah reached 821,000 sqm in 2014, growing at a CAGR of 23.15% from 357,000 sqm in 2010, imputed by the completion of major projects in the city. Going forward, an additional 104,000 sqm of office space is expected to enter the market in 2015, with further addition of 113,000 sqm in 2016.

Exhibit 35: Saudi Arabia Office Vacancy & Gross Rental Yield Rates (2010-15) KSA CBD Office Vacancy Rates (%) KSA CBD Office Gross Rental Yield (%) 35% 11% 30% 30% 26% 10.5% 25% 11% 18% 18% 18% 17% 10.0% 10.0% 20% 16% 16% 10.3% 10% 15% 12% 10% 10.0% 10.0% 10% 6% 6% 10% 5% 9.5% 9.5%

0% 9% 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 2015 Riyadh Jeddah Riyadh Jeddah

Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

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While the office vacancy rates in Jeddah has reduced drastically in the past 4 years on back of increased economic activity in the city, the vacancy rates in Riyadh remained flat at around 16%-18%, indicating a balance in demand and supply. The rental yields on the other hand have remained consistent in Riyadh and Jeddah over the past two years at 9.5% and 10.0%, respectively.

Exhibit 36: Saudi Arabia Office Rentals (2010-14)

1,600 Riyadh Office Rents (SAR per sqm PA) 1,400 Jeddah Office Rents (SAR per sqm PA)

1,400 1,200 1,200 1,000 1,000 800 800 600 1,374 1,374

600 1,178 1,305 1,305 1,267 1,267 1,100 1,100 1,254 1,254 1,092 1,092 1,080 1,080 1,060 1,060 1,200 1,200 400 929 883 882

400 873 750 733 715 690 640 700 200 200

- - 2010 2011 2012 2013 Q1 2010 2011 2012 2013 Q1 2014 2014 Grade A (CBD) Grade B (Others) Grade A (CBD) Grade B (North Riyadh) Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

The average office rent (Grade A and Grade B) in Riyadh stood at SAR 1,064 per sqm PA in 2014, falling from SAR 1,074 per sqm PA in 2013, primarily due to a supply glut. In Jeddah, the average office rent (Grade A and Grade B) increased to SAR 956 per sqm PA in 2014 from SAR 908 per sqm PA in 2013 driven by low vacancy rates. As of Q2 2015, the average office rent in Riyadh and Jeddah maintained a stable rental trend of SAR 1,065 per sqm PA and SAR 955 per sqm PA, respectively. Moreover, rentals are expected to be further supported in both the cities by a limited amount of office space (154,000 sqm) entering the market in 2015.

Some of the major ongoing commercial projects include: King Abdullah Economic City, Sudair Industrial City, Jazan Economic City, Madinah Knowledge Economic City and Waad El Shammal Mining City. Saudi Arabia Residential Market

Saudi Arabia’s population has quadrupled over the past four decades, thereby fueling the demand for residential sector. Moreover, only 30% of the residents own a residential property as of 2014, which present a significant opportunity for the developers. Considering the demand pressure, the government is also undertaking favorable policy decisions such as the recent decision to tax undeveloped land in urban areas. Consequently, while the local developers have accelerated the new home delivery, several international players have also entered the market, which should further boost the overall activity.

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Exhibit 37: Saudi Arabia Residential Supply (2010-17F) 1,200 Riyadh Residential 900 Jeddah Residential Supply (in '000 units) Supply (in '000 units) 800 1,000 700 800 600 500 600 400 811 792 990 781 980 971 769 754 1,018 1,018 936 735 909 719 400 882 858 300 600 200 200 100 - - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

In 2014, the residential stock in Riyadh stood at 971,000 housing units, which is expected to increase to 990,000 in 2015. However, despite increase in development activity, the demand for residential units in Riyadh continues to outpace supply. As per Knight Frank (Riyadh Residential Research Report), the capital has a requirement of around 50,000 housing units per annum over the next five years to meet the growing demand. Although there are a number of large housing schemes planned to be completed in the short term, construction delays, labor shortages, and the lack of affordable land make it challenging to bridge the demand-supply gap for the subsequent years.

Compared to Riyadh, the demand-supply gap in Jeddah is much more passive, with the total number of available residential units of 769,000 at the end of 2014. Furthermore, the supply of residential units is expected to grow at a healthy rate with over 64,000 units likely to be added by the end of 2017.

Exhibit 38: Saudi Arabia Residential Rentals (2010-14)

160 Riyadh Residential Rents 140 Jeddah Residential Rents (in SAR '000 PA) (in SAR '000 PA) 140 120 120 100 100 80 80 60 125 122 139 138 117 115 115 60 113 121 117 112

96 40 40 20 41 39 20 38 36 33 36 35 31 32 31 28 25 - - 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 Q2 2015 2015 Apartment (3 BR) Villa (4 B) Apartment (2 BR) Villa (4 B) Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

In Riyadh, the residential rentals have drastically increased in the past two years, mainly due to the persistent undersupply of housing and high land values. Residential property prices also witnessed a y-o-y growth of 5%-7% in 2014. In Jeddah, rents for apartments

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rose 6.3% and those for villas rose 0.4% in 2014 as compared to a fall 4.4% and 5.7% witnessed in both the segments in 2013, respectively. Further, the western region of Jeddah remained the preferred residential location, recording the highest rental increases.

Going forward, new mortgage law (limiting maximum loan amount to 70% of the property value), which came into effect in November 2014, is likely to discourage residential transactions, especially for the middle income segment that relies heavily on financing, in the short term. However, entry of international developers should boost the construction activity in the long term.

Some of the major ongoing residential projects include: 500,000 Houses Program, Shams Al Arous, Jeddah Housing Project, and Jabal Omar Development Phase 1. Saudi Arabia Retail Market

Saudi Arabia is one of the largest retail markets in the GCC. Growth in population and personal incomes coupled with increasing consumer preference toward modern retail outlets due to limited entertainment avenues, has boosted the demand of hypermarkets and malls in the country. Consequently, leading retailers such as Panda and Carrefour are on a robust expansion drive. For instance, Panda, the largest retailer in the country, is aiming to expand its outlets from 210 in 2014 to 250 by end of 2015. The growth in retail sector is also well supported by favorable policy decisions such as the recent announcement of Saudi Arabian General Investment Authority (SAGIA) to ease restrictions on foreign investors that will allow them 100% ownership in retail and wholesale businesses as compared to the present level of up to 75%. Going forward, the influx of foreign investment will support the sector growth and will enable the government to improve employment opportunities in the country.

Exhibit 39: Saudi Arabia Retail Supply (2010-17F) 2,500 Riyadh Retail Supply 1,400 Jeddah Retail Supply (in '000 sqm) (in '000 sqm) 1,200 2,000 1,000 1,500 800

1,000 600 1,150 1,150 1,718 1,718 949 400 923 923 861 1,495 1,495 1,400 1,400 1,400 1,400 780 770

500 1,300 688 1,200 1,200 1,073 1,073 1,043 1,043 200 - - 2010 2011 2012 2013 2014 2016F 2017F 2015E 2010 2011 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

During 2010-14, the retail stock in Riyadh increased by approximately 40% to reach GLA 1.4 million sqm in 2014. While the growth in retail stock in Jeddah was relatively slower during the same period, however the stock is expected to increase drastically in 2016-17 with the expected completion of several large projects. In 2014, the retail stock in Jeddah stood at 923,000 sqm of GLA, with an expected addition of 352,000 sqm GLA by end of 2017.

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Moreover, the supply of retail stock is also well supported by the demand, which is evident from the declining vacancy rates in both cities. In Riyadh, the vacancy rates fell from 16% in 2010 to 8.0% in Q2 2015 while in Jeddah vacancy rates fell to approximately 7% in Q2 2015 as compared to 13% in 2010.

In Riyadh, the rentals for average mall space surged to SAR 2,788 per sqm PA in 2014 from SAR 2,509 per sqm PA in 2013 (up by 11.1%), primarily driven by the high occupancy rates witnessed during the year. By segments, the rents for super regional malls stood at SAR 2,836 per sqm PA in 2014, up from SAR 2,767 per sqm PA in 2013, while that in community retail centers rose to SAR 2,740 per sqm PA in 2014 from SAR 2,250 per sqm PA in 2013.

Exhibit 40: Saudi Arabia Retail Vacancy Rate (2010-15) Saudi Arabia Retail Vacancy Rates (%) 20% 16% 16%

15% 12% 10% 10% 13% 10% 12% 8%

4% 8% 7% 5% 7%

0% 2010 2011 2012 2013 2014 Q2 2015

Riyadh Jeddah Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Similarly, in Jeddah, the rents for average mall space witnessed a rise of 5.0% to reach SAR 2,395 per sqm PA in 2014 from SAR 2,280 per sqm PA in 2013. By segments, the rents for super regional malls stood at SAR 2,990 per sqm PA in 2014, up from SAR 2,710 per sqm PA in 2013, while that in community retail centers fell to SAR 1,800 per sqm PA in 2014 from SAR 1,850 per sqm PA in 2013 mainly due to low demand.

Exhibit 41: Saudi Arabia Retail Rentals (2010-14)

3,000 Riyadh Retail Rents (SAR per sqm PA) 3,500 Jeddah RetailRents (SAR per sqm PA)

2,500 3,000

2,500 2,000 2,000 1,500 1,500 2,825 2,825 2,788 2,788 2,562 2,562 2,509 2,509 2,918 2,918

1,000 2,267 2,136 2,136 2,400 2,400 1,000 2,395 2,280 2,280 2,234 2,234 2,100 2,100 500 500

- - 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 Q2 2015 2015 Average Mall Rents Average Mall Rents Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

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As of Q2 2015, both Riyadh and Jeddah witnessed a further heave in retail rentals with the average mall (including regional, super-regional, and community retail centers) rentals reaching SAR 2,825 per sqm PA and SAR 2,918 per sqm PA respectively.

Some of the major ongoing retail projects include: Al-Shamiyah Mecca, Riyadh Ajmakan, Tareeq al-Mawazee and Al Diriyah Festival City. Saudi Arabia Hospitality Market

In the past decade, the hospitality industry in Saudi Arabia has grown by leaps and bounds on the back of strong economic growth coupled with large government investment in infrastructure and hotel industry, which was largely inspired by the economic diversification initiative. Consequently, the business tourism has grown drastically and the country currently organizes approximately 0.1 million business meetings per year in about 600 conferences or meetings venues. The growth in business tourism is also well complemented by increasing number of religious tourists to the holy cities of Makkah and Madinah. Accordingly to Colliers, visitors to Makkah and Madinah are expected to reach around 25 million by 2025 from just over 17.5 million in 2014.

Exhibit 42: Saudi Arabia Hotel Supply (2012-17F) 20,000 Riyadh Hotel Supply 16,000 Jeddah Hotel Supply (in no. of keys) (in no. of keys) 14,000 15,000 12,000 10,000 10,000 8,000 6,000 15,500 15,500 11,900 11,900

5,000 13,000 4,000 10,900 9,900 9,900 9,500 9,500 8,500 8,500 8,500 8,500 10,100 10,100 7,300 7,300 7,400 7,400 2,000 6,800 - - 2012 2013 2014 2016F 2017F 2015E 2012 2013 2014 2016F 2017F 2015E Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

As of 2014, Riyadh remained an oversupplied market with supply reaching 9,900 keys from 6,200 keys in 2011. The city is expected to receive an additional 2,900 keys in 2015 taking the overall supply to approximately 13,000 by the end of this year. The overall supply is expected to be further boosted going forward on the back of increased demand generated by corporate tourists visiting the city.

Jeddah, on the other hand, is an undersupplied market, with supply reaching 8,500 keys in 2014, up from 6,800 keys in 2012. An anticipated increase in economic activities in the city is expected to absorb the additional 5,300 keys planned to be delivered between 2015 and 2017. Jeddah has a pipeline of noteworthy projects, including large hotel projects by leading brands, which highlight the increased interest of international and regional investors in the Saudi Arabian hospitality sector.

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Exhibit 43: Saudi Arabia Hotel Occupancy Rate (2010-15) Saudi Arabia Hotel Occupancy Rates (%) 100% 79% 78% 74% 76% 75% 80% 73%

60% 67% 60% 56% 57% 56% 40% 53%

20%

0% 2010 2011 2012 2013 2014 Q2 2015 Riyadh Jeddah Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

Riyadh witnessed a substantial boost in tourism with the hotel occupancy rates rising to 60% in 2014 from 56% in 2013. It is further anticipated that the growth is going to sustain in 2015 with the occupancy rate rising to 67% in the second quarter. Jeddah, on the other hand, recorded a subdued growth compared to Riyadh during the year. The city witnessed a marginal decline in 2014 with the occupancy rate falling to 76% from 78% in the previous year. The occupancy rates have historically been higher in Jeddah as compared to Riyadh, as the former is also swamped with domestic tourists apart from the expatriate visits.

Exhibit 44: Saudi Arabia Hotel Room Rates (2010-14)

300 Riyadh Hotel Room Rates 300 Jeddah Hotel Room Rates (in USD per day) (in USD per day)

250 250

200 200

150 150 261 254 249 245 244 242 237 234 234 228 226 100 100 224

50 50

- - 2010 2011 2012 2013 2014 Q2 2010 2011 2012 2013 2014 Q2 2015 2015 Average Room Rent Average Room Rent Source: Jones Lang LaSalle(JLL), Al Masah Capital Research

In Riyadh, the ADR (average daily room rate) fell by 6.7% in 2014 to reach USD 237 from USD 254 in 2013, driven by the increase in occupancy rates during the year and the market remaining oversupplied. In Jeddah, the ADR increased to USD 261 in 2014 from USD 244 in 2013, as the occupancy rate witnessed a marginal decline during the year and the market receiving a nominal supply.

Some of the major ongoing hotel projects include: Hilton Riyadh, King Abdulaziz Center for World Culture, Jeddah Fairmont Hotel, and Jabal Omar Development Phase 2.

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BAHRAIN REAL ESTATE

Bahrain Office Market

In 2014, the demand for commercial office space remained subdues on back of low economic activity, which can be largely attributed to the decline in oil prices. The market remained oversupplied and the trend is expected to continue in the short term. Further, the demand for smaller, fitted-office units that offer cost effective turnkey solutions is expected to increase in the short term.

Exhibit 45: Bahrain Office Rentals (2010-14)

12.0 Bahrain Office Rents (BHD per sqm PA)

10.0

8.0

6.0 10.0 4.0 8.0 8.0 7.5 7.5 7.0 2.0

0.0 2010 2011 2012 2013 2014 Q1 2015

Financial Harbour & SEEF (fitted-out space) Source: Gluttons, Al Masah Capital Research

Bahrain office rentals declined by 6.3% in 2014 to reach BDH 7.5 per sqm PA from BHD 8.0 per sqm PA IN 2013 as vacancy rates maintained an upward trend across the country. While the take up activity remained strong for smaller units (under 250 sqm) as of the start of 2015, largely driven by customers who want to lower capital expenditure and enhance flexibility. While Grade A international class office developers endeavor to protect market perception by staying firm on rentals, new occupier take up has been limited in this segment.

According to CBRE, the commercial office market has become fragmented with landlords who have been able to adapt to current market demands, performing better than those who have continued with traditional approaches to leasing space. Landlords proposing flexibility in their offering, providing smaller, partitioned units as well as traditional space are faring better in terms of occupancy rates and income in the current economic climate. Despite the office market remaining weak, developers are keen to proceed with large floor plans, largely driven by the positive market sentiments witnessed in the past years. Considering oil prices remain subdued, the Bahrain office market could continue to be impacted in terms of limited return on rental value. Moreover, if oil prices remain low for an extended period, the GCC Support Fund for Bahrain could be re-negotiated which is expected to significantly lower demand prospects.

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Bahrain Residential Market

The residential market in Bahrain remained undersupplied as of 2014 as the country witnessed limited construction activity during the year due to a challenging political environment. However, the residential construction sector is expected to improve steadily in 2015, deriving benefits from the GCC funding and the involvement of the private sector. Housing remained the government’s biggest construction priority with more than 55,000 on the waiting list for affordable housing. As per Quick-Wins, construction of 9,232 housing units was announced in 2014 comprising of projects worth USD 2.2 billion of which 2,548 units are scheduled for completion in 2015, while about 1,443 and 5,241 units are planned for completion by 2016 and 2017, respectively.

Exhibit 46: Bahrain Residential Rental Market (2010-15) 800 Bahrain Residential Rents (BHD per unit PA) 700 600 500 400 300 750 750 750 600 200 100 0 2012 2013 2014 Q1 2015 2 BR Apartments (Al Juffair) Source: Cluttons, Al Masah Capital Research Bahrain’s residential real estate market activity has slowed down, primarily in areas dominated by expats such as Amwaj Islands and Reef Island where the annual change in rents stood at 2.2% and 3.6% respectively at the end of Q1 2015. The rentals for 2BR apartments in Al Juffair remained unchanged since 2013, suggesting market saturation. As of Q1 2015, apartments and villas continued to perform equally with those in Saar, Adliya, and Amwaj Islands witnessed increasing demand driven by the jobs created through the government’s ongoing infrastructure development programs. Additionally, the appeal for Saar and Amwaj Islands are increasing with market stability and added community infrastructure being developed. Going forward, landlords are expected to remain subdued on imposing in any rent increase.

Some of the major ongoing residential projects include: Villamar Residential Complex, PPP Affordable Housing Scheme, Wahat Al Muharraq and Al Ramli Housing Units.

Bahrain Retail Market

Bahrain's retail sector continued to remain resilient recording the highest growth in 2014, in terms of new developments in the community mall segments. Further, the supply of retail units outpaced their demand, creating an oversupply situation, primarily driven by newly delivered and upcoming developments announced in 2014, including destination malls such as The Avenues which is under construction opposite the Bahrain Bay on Manama Corniche and Seef Mall Muharraq which opened in the first quarter 2015. Consequently, developers are growing wary of the rising number of mega malls in the country and as a result, many are now focusing on smaller retail centers that are part of new residential or commercial schemes.

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Some of the major ongoing retail projects include: Dragon City and Janabiya Retail Center. Bahrain Hospitality Market

According to hotel industry benchmark STR Global data, the Bahrain market picked up with occupancy rates in Manama during 2014 averaging 56% as compared to 48% in 2013. According to CBRE, Q2 2015 witnessed the busiest time of the year for the hospitality sector, with the Bahrain Formula 1 Gulf Air Grand Prix taking place in April during which hotels reported over 90% occupancy across all classes. Although the average occupancy reported for hotels, particularly in the five-star bracket has been modest, the development in this area shows no sign of abating.

Going forward a surge in new projects entering the hospitality market both in the luxury and mid-range segments are expected to provide a much needed boost to Bahrain’s economy. According to KPMG, more than 1,500 new hotel rooms are expected to enter the Bahrain market in the next three years, predominantly in the upscale and luxury segment. The world's largest hotel company, US-based Wyndham Hotel Group, has four new properties - Ramada Hotel and Suites Amwaj, Hawthorn Suites by Wyndham, Ramada Manama City Centre and the Wyndham Grand - lined up for opening in the kingdom later in 2015 and early 2016. Going forward, Dubai-based Emaar Hospitality Group plans to bring its flagship hotel brands, The Address Hotel and Resort and Vida Hotel and Resort, to the country and other luxury five-star hotels looking to establish a presence in Bahrain include Shaza Hotels and Melia Hotels International, a Spanish hotel chain. Additionally, the proximity of Saudi Arabia is expected to result in a spillover of local and regional tourist traffic into Bahrain, helping to stabilize the market.

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KUWAIT REAL ESTATE MARKET

Kuwait Office Market

The office market in Kuwait is still recovering from the global financial crisis in 2009, albeit at a much slower rate. The office market remain oversupplied, with marginal y-o-y improvement in occupancy rates. The challenging regulatory framework and the inadequate infrastructure facilities are key deterrent to entry of foreign investments into the country, thereby discouraging demand for office space. Several newer initiatives undertaken by the government are expected to change the negative investor perception going forward and increase in FDI and businesses into the country should create demand in the long term.

Some of the major ongoing commercial projects include: Al Khiran Commercial and Residential Complex, Al Farwaniyah Courts Complex, Ministry of Education Headquarters, and Kuwait Investment Authority Headquarters. Kuwait Residential Market

The overall residential market is currently undersupplied, with the demand for the government-funded housing units to reach 110,300 units by end of 2015 and 175,000 units by 2020, registering a CAGR of 8.0% between 2014 and 2020. Kuwait’s residential market primarily includes properties built under the government housing program and administered by the Public Authority for Housing Welfare (PAHW).

Exhibit 47: Kuwait Break-down of Sales Value by Segment (Q1 2015)

10.6%

50.5% 38.9%

Residential Investment Commercial

Source: Ministry of Justice, Al Masah Capital Research

As of Q1 2015, the residential segment was the biggest contributor to the overall sales value in the Kuwaiti real estate sector, approximately 50.5% compared with 44.1% in 4Q 2014. During the quarter, the number of transactions in the sector fell 20.0%, while sales value declined 12.5%. The occupancy rates were stable at 90%-96%, along with stable average apartment rentals basis.

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Some of the major residential projects include: Khiran Residential City, North West Sulaibikhat Residential City, and Jaber Al Ahmad City N1 & N3 Kuwait Retail Market

As per Ventures Middle East, Kuwait remains a largely undersupplied market, displaying the lowest retail mall space per capita (59% lower than its GCC peers), indicating a potential for further growth. The market is ripe for development, with a total projected construction of GLA of 440 million sqm to be added up by 2020. Moreover, the country's large consumer base and subsequent spending will triggered the growth of the retail construction market in the coming years.

Some of the major ongoing retail projects include: Jaber Al Ahmad New City, The Avenues-phase 4 and Al-Khiran. Kuwait Hospitality Market

The hospitality segment in Kuwait remains largely underpenetrated in comparison to its GCC peers. However, the country has undertaken measures to promote itself as a strategic business destination in recent times, which has boosted its hospitality sector in 2014. With over a year of political stability as well as a return of consumer and investor confidence, the government is increasing its focus on the tourism sector, which will eventually translate into an improved hospitality market in the future.

Some of the major ongoing hospitality projects include: Sheikh Jaber Cultural Center and Sharq Equestrian Club Building.

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OMAN REAL ESTATE

Oman Office Market

The office real estate segment in Oman has witnessed an alarming undersupply of Grade A commercial space since the beginning of 2014, primarily due to high activity in its petrochemicals sector as a result of the Khazzan Gas Field Project. On the other hand, the country’s Grade B and C office spaces remained oversupplied in 2014. As per Savills, an additional 152,000 sqm of Grade A office space is expected to be completed by early 2016 and this planned supply appears sufficient to accommodate the additional anticipated demand over the next 4-5 years.

Exhibit 48: Oman Office Rentals Market (2010-15) 14 Oman Average Office Rents (OMR per sqm PA)

12 11 10 10 10 9 9 8.5 8 8 8 8 8 8 8 8 8 7 7 7 7 7 6 6 6 6 6 6 6 6 6 6 6 6 5 4 4 4 4 4 4

0 CBD Qurum Al Khuwair Shatti Al Ghubrah Azaiba Qurum 2010 2011 2012 2013 2014 Q1 2015

Source: Cluttons, Al Masah Capital Research

In the last (2-3 years), the office rentals in Oman remained stagnant or declined due to a supply glut. Demand for Grade A offices remained steady while rentals for offices in either less desirable locations or offering inferior facilities, such as insufficient parking spaces declined. Further, several large projects are on the verge of completion and will increase the total stock significantly by end of 2016, thereby increasing the pressure on rentals going forward.

Some of the major ongoing commercial projects include: Al Athaiba National Bank of Oman Headquarters, Sohar Industrial Estate Expansion Stage 7 and Salalah Administrative Headquarters. Oman Residential Market

The country saw higher demand for quality residential units in 2014 across prime locations in Muscat, especially in areas such as the Wave, Madinat Qaboos, Qurum, Shatti Al Qurum, and Muscat Hills, where private investment is permitted. With rising demand, several new developments are due for completion from 2015 to 2020, including the development of Oman’s first residential zone named Zaha which comprises of a range of villas and apartments, part of the Saraya Bandar Jissah project. The project commenced construction in 2015 and is expected to be completed by 2017.

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Exhibit 49: Oman Residential Rentals Market (2010-15) 1,000 Oman Average 2BR Rental Rates (OMR per month) 876 900 800 800 800 775 800 750 876 750 750 700 775 700 750 600 500 500 450550 450 400 400 500 400

300

200

100

0 Shatti Al Qurum Azaiba Al Khuwair The Wave Muscat Hills

2012 2013 2014 Q1 2015 Source: Cluttons, Al Masah Capital Research

After recording weak growth in 2014, the residential rentals remained flat as tenants have become budget-conscious and look for properties with high-quality finishing and low rents. Moreover, going ahead, lower oil prices would impact the employment growth in the country, which could further affect the residential rental market.

Some of the major residential projects include: Batinah Coastal Road Residential Project, Dar Al Zain, Al Mazyona Housing Units and Rimal Phase 2. Oman Retail Market

The growth rate in Oman’s retail sector remains stable, matching a healthy demand for organized retail space. The total retail stock in Muscat stood at approximately 300,000 sqm in purpose-built retail centers in 2012 and reached nearly 550,000 sqm by the end of 2014, excluding a large number of mixed-use buildings, predominant in areas such as Ruwi, Ghubrah North, and Al Khuwair. Going forward, the country has plans for a number of new malls to be constructed, including the extension of the Grand Mall, to meet the growth in demand for retail space.

As of Q1 2015, the outlook for retail rentals remained positive, driven by strong focus on attracting value brands in shopping malls. However, new supply coupled with consumer confidence would determine rents in the future.

Some of the major ongoing retail projects include: Mall of Oman, Muscat City Center, and Muttrah Fish Market. Oman Hospitality Market

The hospitality real estate in Oman remains largely undersupplied despite government's increased focus on tourism. As part of Oman's Vision 2020, the government plans to increase the available room count to 20,000 rooms by 2015 as compared to 13,200 rooms in 2014 and welcome 12 million annual visitors by 2020. The government therefore announced the construction of four hotels with 583 rooms in 2013.

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Additionally, the hospitality segment has also attracted considerable interest from private sector, brands such as Rotana Hotel Management Corporation Limited, Kempinski Hotels, and Fairmont Hotels & Resorts, among others, are expected to enter the untapped market in the near term.

Some of the major ongoing hospitality projects include: City Hotels Muscat Phase 1, Shaza Salalah Hotel and Resort, Jebel Sifah Four Seasons Hotel, and The Wave Muscat Kempinski Hotel.

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QATAR REAL ESTATE

Qatar Office Market

The supply of Grade A office space in Doha is expected to grow at a CAGR of 9.7% thereby reaching 3.6 million sqm in 2017. For Grade B and Grade C commercial space, Qatar’s office sector is mired in oversupply challenges, with limited demand. Accordingly, the current vacancy levels stood at a high 29.0% (in case of Grade B and Grade C space) and Doha’s office market remains largely in favor of occupiers.

Exhibit 50: Qatar Office Supply Market (2010-17) Supply of Grade A Office Space in Doha (‘000 sqm) 4,000 3,649 3,505 3,500 3,278

3,000 2,763 2,536 2,268 2,500 2,144 2,000 1,485 1,500

1,000

500

0 2010 2011 2012 2013 2014E 2015F 2016F 2017F

Doha Grade A Office Space

Source: Colliers International, Al Masah Capital Research

While the Grade A commercial space (located in Diplomatic City and West Bay), which are short in supply, command high rents of QAR 150 to QAR 250 per sqm per month in 2014, the rentals for oversupplied Grade B office space remained stagnant at QAR 110 - QAR 150 per sqm.

Some of the major ongoing commercial projects include: Energy City Qatar Phase 1 Infrastructure, Qatar Economic Zones, New Camp Package CP 05 and Lusail Commercial Tower. Qatar Residential Market

As per Colliers International, the residential market remained undersupplied in 2014, creating a supply shortage of 37.0%. The overall demand for units stood at an approximate 177,000 in 2014, whereas the market supply was estimated at 129,000 units in the same year. An undersupply situation caused rents in the residential sector to increase by 10.0% in 2013 and 4.0% in 2014, with the upward trend anticipated to continue throughout 2015. Approximately 25 residential towers on The Pearl and an additional nine towers in the Diplomatic District are expected to be released into the market in the first half of 2015, increasing the overall supply by 7,200 apartment units. The residential demand is expected to reach 266,000 units by 2018, which should balance the demand-supply gap.

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Some of the major ongoing residential projects include: Dara Apartments, Barwa Al Baraha, The Pearl Qatar Panorama Hilton Residence and Darwish Tower. Qatar Retail Market

As per Ventures Middle East, the country accounted for the largest share of projects completed in the retail segment in 2014, across the GCC. The cumulative retail space in Qatar currently amounts to approximately 773,000 sqm of GLA, across 14 major developments. Qatar is expected to continue its aggressive expansion in the coming years as the supply of retail space is expected to nearly double to reach 1.5 million sqm of GLA in 2017, in light of the FIFA World Cup 2022.

Exhibit 51: Qatar Retail Supply Market (2010-15) Qatar Retail Supply (in mn sqm) 1,600

1,400

1,200

1,000

800 1,500 600 1,450

400 1,000 773 200 420 420 - 2013 2014E 2015E 2016F 2017F 2018F

Completed Future Supply

Source: Colliers International, Al Masah Capital Research

Some of the major ongoing retail projects include: Qatar Entertainment City Downtown, Mall of Qatar, Tawar Mall, North Gate Mall and Office Buildings Phase 1 and Marina Mall. Qatar Hospitality Market

Anticipating the surge in tourists due to 2022 FIFA World Cup, Qatar has planned for the development of several hotels in Doha in the next few years, with the number of hotel rooms increasing to 95,000 by 2022 from 15,000 in 2013. As of 2014, Qatar’s hospitality pipeline comprised 44 hotels in varying stages of planning or construction, primarily in the luxury, upper upscale and upscale segments. These projects are slated to deliver 11,000 additional keys into the market by 2018.

Qatar’s demand for hotel rooms has been on the rise, with a recorded growth of approximately 12.1% per annum between 2009 and 2014. The supply is estimated to have increased by approximately 13% over the same period, resulting in an occupancy level of 72% in 2014. This marginal mismatch in the growth pace of supply and demand has led to a decline in room rates, as the market competes for customers.

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PRIVATE EQUITY IN GCC REAL ESTATE

Private equity investment in the GCC real estate is still recovering from the economic recession in 2009. The recovery rate has been slow due to cautious investor sentiments and the industry has a long way to go before it reaches the pre 2009 levels of investment. During 2010-14, a total of 9 deals worth USD 41.8 million were struck in GCC real estate sector as compared to 34 deals, worth USD 420.0 million during 2005-2009. Further, most of the deal activity was concentrated in Saudi Arabia (5) and the UAE (3) during 2010-14.

Exhibit 52: PE Transactions in GCC Real Estate (2004-14) 200 11 12

150.4 160 147.9 8 9 8 120 84.0 4 4 80 4 2 2 2 37.7 30.0 40 1 8.7 3.1 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Deal Value (USD million) Deal Count Source: Zawya, Thomson Banker, Al Masah Capital Research

Some of the recent PE deals in real estate sector includes:

x In April 2014, Malaz Capital purchased an established residential compound in Dhahran, Saudi Arabia with over 900 units through the Malaz Real Estate Opportunities Fund I, a CMA regulated real estate closed ended private equity fund. The compound value is in excess of SAR 2 billion (USD 0.5 billion) and is fully leased through a long term lease agreement. The Fund’s size is SAR 745.0 million (USD 198 million), its term is expected to be 10-12 years during which it is projected to generate a return of 16% to its investors. x In January 2014, Malaz Capital purchased an established residential compound in Riyadh, Saudi Arabia with over 700 units through the Malaz Real Estate Opportunities Fund II, a CMA regulated real estate closed ended private equity fund. The compound’s value is in excess of SAR 1 billion (USD 0.2 billion) and is fully leased through a long term lease agreement. The Fund’s size is SAR425.0 million (USD 113 million), its term is expected to be 10-12 years during which it is projected to generated approximately an IRR of 19% or more to its investors. x In June 2014, Gulf Capital, the Abu Dhabi-based alternative asset manager, announced a USD 30 million investment in a business owning and managing schools in the UAE. Evolvence Knowledge Investments (EKI) operates three schools in the UAE, including Repton School and Foremarke Hall, both in Dubai, and Repton School Abu Dhabi. It also holds a majority stake in Abu Dhabi’s oldest nursery, Humpty Dumpty. The investment through Gulf Capital’s

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regional fund, Gulf Credit Partners will be used to help the company open more schools elsewhere in the GCC. x On May 2014, SEDCO Development, partnered with NCB Capital launched the Al-Ahli SEDCO Residential Development Fund, a public close-end Sharia compliant investment opportunity, which will provide investors with capital growth by purchasing land plots in Jeddah for development, construction and sale of residential apartments targeting the middle income segments of the population.

As compared to the buy deals, the PE exit deals in GCC real estate market has been relatively low. In total, 10 PE exit deals were struck during 2004-2015. Some of the active players were Global Opportunistic Fund I, with 4 deals worth USD 47 million followed by Markaz accumulating 4 deals valued at USD 26 million.

Exhibit 53: PE Exit Deals in GCC Real Estate (2004-14) Size Stake IRR Fund Name Year Target Company Country (USD mn) (%) (%) Markaz Real Estate 2007 Deeyar IPO UAE 2 - - Opportunities Fund

ALARGAN International Real Global Opportunistic Fund I 2008 Kuwait 14 4.0% 41.0% Estate Company K.S.C.

KFIC ME Private Equity Fund 2008 Gulf Holding Company Kuwait - 2.4% -

Signature Clubs International Abraaj Real Estate Fund 2009 UAE - 80.0% - Ltd

Markaz Real Estate 2011 Lusail Development Qatar 5 20.0% 3.9% Opportunities Fund

Dar Al-Arkan Real Estate Saudi Global Opportunistic Fund I 2011 5 - - Development Company Arabia Kinan International for Real Saudi Global Opportunistic Fund I 2012 Estate Development Company 27 8.7% - Arabia Limited Kuwait Business Town Real Global Opportunistic Fund I 2012 Kuwait 1 2.9% - Estate Company K.S.C.P.

Markaz Real Estate Saudi 2012 Al Falah Land project 10 50.0% 5.9% Opportunities Fund Arabia

Markaz Real Estate 2014 Abu Dhabi Reem Island UAE 9 100.0% 0.8% Opportunities Fund

Source: Zawya, Thomson Banker, Al Masah Capital Research

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As of September 2015, Zawya reports a total of 16 real estate focused funds, worth USD 1.6 billion, that are investing or raising capital for investments in the GCC real estate sector.

Exhibit 54: GCC Real Estate Fund Raising Activity (Fund Raising & Closed Funds) Size Fund Name Status Fund Manager Geographic Focus (USD mn) Abraaj Real Estate Fund Investing The Abraaj group Europe, MENA 113.5 Al Ahli SEDCO Residential Investing NCB Capital Saudi Arabia 93.341 Development Fund Al-Dhawahi Real Estate Development Investing Swicorp Saudi Arabia 38.963 Fund Al-Futtaim MENA Real Estate Al Futtaim Investment Investing MENA 500 Development Fund Management Limited ASAS L.P. Investing The Abraaj Group MENA & Turkey 100

Boubyan Global Real Estate Fund Investing Boubyan Bank K.S.C.P. Kuwait, MENA -

GCC Real Estate Fund Investing Global Inv House GCC 100 Malaz Real Estate Opportunities Investing Malaz Capital Saudi Arabia 102.675 Fund I Malaz Real Estate Opportunities Investing Malaz Capital Saudi Arabia 86.14 Fund II Jordan, Lebanon, Markaz Investing Kuwait Fin Centre Qatar, Saudi Arabia, 58.955 Syria, UAE GCC, Jordan, Middle East Real Estate Investing Corporate Finance House Lebanon, Middle 30 Opportunities Fund II East REIF I Investing Itqan Capital Saudi Arabia -

REIF II Investing Itqan Capital Saudi Arabia -

REIF III Investing Itqan Capital Saudi Arabia -

Shuaa Saudi Hospitality Fund I Investing SHUAA Capital PSC Saudi Arabia 142.678 PineBridge Investments PineBridge GCC Real Estate Fund I Fund Raising Middle East B.S.C. GCC 200

Source: Zawya, Thomson Banker, Al Masah Capital Research

In addition to above, there are 17 real estate funds, with combined worth of USD 1.45 billion that are currently active in the GCC. Further, Saudi Arabia and the UAE remain the key geographic focus for most of these funds.

Exhibit 55: GCC Funds With Asset Focus on Real Estate (Active) Size Fund Name Fund Manager Geographic Focus (USD mn) Samba Capital and Investment Samba Real Estate Saudi Arabia 500.30 Management Company Markaz Real Estate Kuwait Financial Centre K.P.S.C. Kuwait 395.39

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ANB-Al MubarakDyiar Jeddah Real Arab National Bank Saudi Arabia 182.35 Estate Al Awwal Real State Development Alawwal Capital Company Saudi Arabia 84.90 Fund Saudi Fransi Real Estate Saudi Fransi Capital Saudi Arabia 69.55

KSB City Real Estate Fund KSB Capital Group Saudi Arabia 47.86

Aljazira Residential Projects Fund 2 Aljazira Capital Saudi Arabia 30.75

MEFIC Real Estate Income Fund MEFIC Capital Saudi Arabia 27.26

KSB Real Estate Opportunity KSB Capital Group Saudi Arabia 27.06 The Investor Real Estate Fd For The Investor for Securities Company Saudi Arabia 25.64 Multiple Projects Al Jazira Residential Projects Fund Aljazira Capital Saudi Arabia 22.31

Alrabia Real Estate Fund FALCOM Financial Services Saudi Arabia 14.51 Al Imtiaz Investment Group Al-Imtiaz Real Estate MENA 12.58 Company - K.S.C. Al Dar Asset Management Company Al Dar Real Estate GCC 11.70 K.S.C.C. Emirates NBD Asset Management Emirates Real Estate - AED UAE 0.00 Limited Emirates NBD Asset Management Emirates Real Estate (EREF) Acc UAE 0.00 Limited Emirates NBD Asset Management Emirates Real Estate (EREF) Inc UAE 0.00 Limited Source: Zawya, Thomson Banker, Al Masah Capital Research

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Al Masah Capital Management Limited

51 December 201 5

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