Landmark 2q2009 Uae

Park Place, Office 201 Sheikh Zayed Road, Dubai United Arab Emirates Tel: +971 (4) 329 8484 [email protected]

Down But Not Out Q209 Dubai and Abu Dhabi Residential Real Estate Report

EXECUTIVE SUMMARY DUBAI Confidence beginning to stabilize Early signs are emerging that investor confidence is stabilizing and that a price floor may be imminent in Dubai’s residential sale market. Improved investor confidence is shown through a shift in investment perspective, with a subsequent rapid decrease in the volume of property listings. Potential sellers are increasingly unwilling to lower sale prices any further and are therefore taking their residential units off the market, while adopting a longer investment horizon. Concurrently, leasing listings are increasing, as owners seek short- and medium-term alternatives to selling residential properties.

Contributors Jesse Downs Head of Research

Early stages of bottoming out

Nuno Ribeiro Senior Research Analyst Asad Sawani Associate, Financial Services Daniel Seleanu Research Editor

Landmark Advisory is also observing signs that the market may be nearing a price floor, as bid-ask spreads narrow. In select areas, listed prices are moving toward actual transactional values, indicating that listings are nearing sellers’ lowest acceptable prices. Across Dubai, we expect the first price floors to emerge in Q409, as consumer demand defines one side of the price equation. Location, fitting quality, available amenities and facilities, as well as the integration of the master development, will determine which areas and projects bottom-out first. Defining the other side of the price equation are sellers, whose motivations are usually less homogenous than buyer motivations, but are equally important in determining price equilibrium and finding price floors.

Flight to quality prompts relocation trend

Investor confidence starting to stabilize in Dubai

Lower rents lead tenants to upgrade to bigger, better-located units

Residential sales volumes are low, and average residential sale prices have declined 23%-32%. Controlled samples show rental rates have declined 9%-41% since Q408. Residential leasing is currently restructuring, as tenants upgrade, generally preferring larger and/or better-located units over discounts on existing accommodations. Tenants are giving up their studios and moving into 1- or 2-bedroom apartments, while others are exchanging apartments in favor of villas.

Relocation boosting end-user demand Relocation within Dubai primarily involves moving from relatively low-cost developments, like International City and Discovery Gardens, to premium areas, like Dubai Marina, whose prices have fallen considerably. As units become more affordable, former residents are moving back to Dubai from price-havens like Sharjah and the Northern Emirates. Better pricing, higher quality units, and lifestyle preferences continue to attract residents working in Abu Dhabi. The pent-up demand for Dubai properties (from within Dubai and from other emirates) will support prices and eventually put a floor under areas and projects targeted during this upgrading phase. In particular, these areas and projects include Dubai Marina, Palm Jumeirah, Mirdiff, and Jumeirah/Umm Sequim.

LANDMARK ADVISORY RESEARCH

ABU DHABI Parallel trends

Lower prices, better quality, and lifestyle attract demand from Abu Dhabi

Trends are slightly more advanced in Abu Dhabi, with confidence starting to solidify and price floors emerging based on the primary market price for each development. Endusers constitute the majority of current demand, as investor interest has abated. Prices increasingly differentiate according to consumer preferences and the changing buyer profile.

Proximity to CBD and development integration become key demand drivers Proximity to the existing central business district on Abu Dhabi Island is becoming a key factor of end-user demand and prices. We expect this trend to continue for the next 2 years, until the master developments become more tightly integrated as they near completion. Potential end-users are likely to discount the value of housing in the first phases of master developments, due to infrastructure limitations and the inconvenience of living on a construction site.

Abu Dhabi rents likely to correct…but by how much? End-users likely to discount the value of housing in first phases due to infrastructure limitations and ongoing construction

Abu Dhabi faces growing competition from Dubai’s increasingly affordable leasing market, which continues to attract more residents from the capital. Having sky-rocketed in 2008, rents in Abu Dhabi stabilized in Q109, and declined marginally in some cases. Since Q408, apartment rents were stable, while villa rents declined 10%-15%. Further rent cuts are likely due to increased unit supply in the capital and the growing attraction to Dubai’s lower prices. However, Abu Dhabi’s traditionally robust demand for housing and controlled supply is likely to prevent a significant correction.

Secondary market declines intensified, but show signs of stabilizing

Secondary market prices started stabilizing at end-Q109

Abu Dhabi’s primary off-plan market remains frozen, while secondary market prices fell more sharply in Q109 than in Q408. Since Q408, prices declined 15%-20% for apartments and 25%-30% for villas. Despite these declines, however, prices began to stabilize at the end of Q109, indicating a possible price-floor. Off-plan owners are considering the near-imminent handover of certain developments as a milestone that is likely to boost prices. As such, owners of nearly-completed properties are increasingly unlikely to offer discounts for immediate sales.

Marginal population growth will maintain demand surplus Abu Dhabi’s population will continue to grow, though at a far slower pace than projected by the Abu Dhabi 2030 Strategic Plan. Even with a conservative 2% growth estimate and imminent supply boost, the market will remain undersupplied for several years.

EXECUTIVE SUMMARY

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LANDMARK ADVISORY RESEARCH

DUBAI REAL ESTATE UPDATE

SALES

Listing volumes declining rapidly as sellers pull units off the market

While sales volumes in Dubai have dropped considerably in the first quarter of 2009, early positive signs are emerging. One of the most significant changes is that listing volumes are declining rapidly, with more potential sellers unwilling to further lower their prices, preferring instead to hold onto their properties until prices recover. This is a good early sign that confidence is stabilizing, as owners take a medium- to long-term perspective on the property market. At the moment, there are many good opportunities in the market, and endusers/investors with cash can negotiate a significant discount from the remaining pool of motivated sellers. While the negotiating window varies depending on the seller’s motivation, discounts can reach 50% in some cases.

Dubai quarterly sale price index In Q109, the average sale price for apartments decreased 23% to AED 1,146 per square foot, while average sale prices for villas decreased 32% to AED 1,076 per square foot. Since off-plan sales are stagnant, Landmark Advisory’s transactional data sample for Dubai consists of only completed and nearly completed units.

Dubai Quarterly Residential Sales Price Index  (Q109) 1600 1400

AED/ft²

1200 1000 Apartments

800

Villas

600 400 200 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2004

2005

2006

2007

2008

2009

Source: Landmark Advisory Research

Sale prices at Q407 prices

Residential sale prices are currently at Q407 levels, with YOY declines of 4% for apartments and 9% for villas. Sales are currently centered on high-end master developments that are closer to completion. Approximately 40% of sales in the last quarter occurred in the Dubai Marina/Jumeirah Beach Residence area.

Dubai Q109 Price Movements Average: Down 34% Apartments: Down 29% Villas: Down 39%

The current transactional dataset is skewed toward high-end property, raising the average sale price. However, when controlling for the high-end bias by creating an equally weighted sample of both medium- and high-end transactions, the average residential price declines reach 34%, with apartment and villa prices falling 29% and 39%, respectively.

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LANDMARK ADVISORY RESEARCH

Lack of Financing Hits Villa Sales

Only apartments saw cash-buys

The lack of financing has severely impacted villa sales. The higher total cost of villas limits the pool of potential buyers in a market dominated by cash-buys and mortgages requiring significant down-payments. The only entirely cash-buys were for apartments, while villas were all purchased with some financing.

15%-20% Spread between Completed vs. Imminently Completed Properties Market transactions currently indicate a 15%-20% price difference between completed and imminently completed properties after controlling for variation in quality and location. In general we use the term “nearly completed,” which refers to properties due for completion within the next 6 months. In this case, “imminently completed” refers to properties in completed structures with units due for handover within 1-2 months. Our analysis indicates that this is due to uncertainty surrounding the handover as well as the availability of near identical completed substitutes.

Currency depreciation key differentiator among expatriate sellers Since July 2008, major currencies (except the Chinese Yuan) have been falling against the USD/AED. Most notably, the British Pound and Russian Ruble lost 36% and 46%, respectively against the AED.

Currency Trends Country

Currency Name

Code

YOY

Apr 09 vs. Jul 08

India

Rupee

INR

-26%

-17%

Pakistan

Rupee

PKR

-29%

-19%

UK

Pound

GBP

-36%

-36%

Russia

Ruble

RUB

-46%

-46%

EU

Euro

EUR

-22%

-22%

China

Yuan

CNY

+3%

+0.6%

Iran

Rial

IRR

-9%

-8%

Source: Landmark Advisory Research

Some expat owners can sell at a loss, but still profit from exchange rates

Due to GBP depreciation, British investors paying peak prices for today’s discounted properties

Exchange rate remains an incentive to sell The Dirham’s appreciation relative to major world currencies continues to leave some foreign investors insulated against falling property prices in the UAE. Because they can repatriate Dirhams into their home currencies at a favorable rate, certain foreign owners can sell their local property at a loss, but still make a profit on the exchange rate. Accordingly, some of the lowest transaction prices may have been prompted more by currency depreciation and not necessarily by genuine distress.

Exchange rate barrier to investment Despite significant local price declines, foreign currency depreciation has effectively increased the cost of purchasing property over the last 9 months. For example, since Q308, the dirham has appreciated 36% over the Pound, while UAE property prices have fallen by 38% over the same period. As a result, English investors would pay peak prices for today’s discounted properties.

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LANDMARK ADVISORY RESEARCH

Bid-ask spread shrinking in select areas Initial price floors starting to emerge

Bid-ask spreads in March primarily varied between 12% and 33%, but in some cases reached 44%. In select areas and for specific projects, evidence is growing that spreads are coming down to within 10% and 15%. This indicates that initial price floors could be emerging; however, bottoming-out is a slow and varied process that will depend largely on seller motivation and consumer demand. Moreover, additional price declines in the summer, coinciding with the end of the school year, will lengthen this process.

Dubai: Sample Bid-Ask Spreads March 2009 Springs 3 BR Townhouse Motor City 2 BR Apartment

Market List Price

LP List Price

Transaction Price

(AED/ft²)

(AED/ft²)

(AED/ft²)

1,119

1,113

972

740

Market Bidask Spread

LP Bid-ask Spread

850

-24%

-24%

650

-33%

-12%

Source: Landmark Advisory Research

LEASING Leasing trends show continued demand for housing in Dubai

Leasing rates continue to fall, but transaction volumes are increasing, which shows continued demand for residential property in Dubai. The increased leasing volume is driven by the upgrading trend,pent-up demand from other emirates, relocations within Dubai, and credit scarcity that either pushes or locks people into the leasing market. Additional support is provided by pent-up demand from tenants previously sharing accommodations. As rents declined over the past quarter, the incentive to share housing declined, which led many residents to seek their own units. Short-term leasing remains strong, representing nearly a quarter of all new contracts. The remainder were annual leases.

Leasing transactions show a flight to quality The leasing market in Dubai is witnessing a widespread flight to quality. Tenants are upgrading, generally preferring larger and/or better-located units over discounts on existing accommodations. Tenants are giving up their studios and moving into 1- or 2bedroom apartments, while others are exchanging apartments in favor of villas. Relocation trend: Tenants moving from International City & Discovery Gardens to areas like Dubai Marina

Relocation within Dubai primarily involves moving from relatively low-cost developments, like International City and Discovery Gardens, to premium areas, like Dubai Marina, whose prices have fallen considerably. As units become more affordable, former residents are moving back to Dubai from former price-havens like Sharjah and the Northern Emirates. Better pricing, higher quality units, and lifestyle preferences continue to attract residents working in Abu Dhabi.

Average Rents buoyed by upgrading trend Flight to quality and upgrading buoyed the average leasing transaction rates with average apartment rents falling 4% and villa rents falling 11%. These average rents are skewed upwards and do not represent the total market leasing declines. A more detailed analysis based on a controlled sample follows, which illustrates that aggregate market rental declines vary from 9% to 41%, depending on the area and project.

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LANDMARK ADVISORY RESEARCH

Quaterly Residential Leasing Trends Average Rents, Q109 vs. Q408 350000

Annual Rents

300000 250000 Q408

200000

Q109 150000 100000 50000 Apartments

Villas

Source: Landmark Advisory Research Note: Average Rents are based on transactional data, which is skewed upward compared to the aggregate market trend. This shows the flight to quality, with new residents preferring to lease higher quality units and existing residents upgrading. For an analysis representative of aggregate market trends refer to the section “Rental Trends by Individual Project Show Greater Rent Declines” on page 7.

The average rents were controlled to give equal weight to all unit sizes. The average rent for apartments was just over AED 177,500. For villas, the average was AED 271,615. The apartment average includes studios, 1-, 2-, and 3-bedroom units; the villa average includes 2-, 3-, 4-, and 5-bedroom villas/townhouses. The transactional means for villas and apartments is lower due to a transactional bias toward small units in each category.

Apartment rents declining In Q109, average apartment rents decreased 4%, with 1-bedroom apartments declining the most, at 15%. Compared to 1-bedroom apartments, rents for 2- and 3-bedroom apartments remained more stable, as demand for larger units focused primarily on upscale projects in premium locations, like the Shoreline, Old Town, JBR, and high-end buildings in the Marina, like Marina Promenade. Leasing transactions for 1-bedroom apartments were more evenly distributed along the price spectrum.

Quaterly Apartment Leasing Trends Rents, Q109 vs. Q408 300000 250000

Annual Rents

Dubai average apartment rents down 4%; 1-bedrooms down 15%

200000 Q408

150000

Q109

100000 50000 0 Studio

1 BR

2 BR

3 BR

Source: Landmark Advisory Research

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LANDMARK ADVISORY RESEARCH

Villa leasing volumes grow Average villa rents decreased 10%, but transactions went up 26%

Average villa/townhouse rents decreased 11%, but rental volumes increased 26%. Rents for 2-bedroom townhomes and 4-bedroom villas declined the most. Preliminary evidence suggests that villa rents declined more than apartments due to the household dispersion trend. Especially for villas, falling rents are reducing the incentive to share accommodations, thus increasing demand for smaller apartments and villas.

Quarterly Villa Leasing Trends Rents, Q109 vs. Q408 500000 450000

Annual Rents

400000 350000 300000 250000

Q408

200000

Q109

150000 100000 50000 0 2 BR Villa

3 BR Villa

4 BR Villa

5 BR Villa

Source: Landmark Advisory Research

Rental trends by individual projects show greater rent declines Flight to quality prevented steep rental declines

As mentioned above, the flight to quality has kept the average leasing transaction prices from declining farther in Q109. Using a controlled sample of select areas, comparing rent levels of select projects by time-period, illustrates price trends more clearly. The projects were selected based on the ability to control for quality variance. Three of the areas selected have consistent quality (Springs, JBR, and Discovery Gardens) while the fourth sample, Dubai Marina, was controlled for quality variance and did not include standard quality units. As the first three weeks of April saw rent cuts accelerate more rapidly, current pricing was also included.

250000

Rental Trends Over the Last 6 Months Average Leasing Rates in Select Areas

200000 150000

6 months ago 3 months ago

100000

1 month ago 50000

Current Rates*

0 Springs (2 BR)

JBR (2 BR)

Marina (1 BR)

Discovery  Gardens (1 BR)

Source: Landmark Advisory Research *The Current Rates are based on a review of pricing (closed 15 April 2009) based on transactions, mystery shopping, and broker interviews. All other data is based on Landmark Advisory's transactional databases.

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LANDMARK ADVISORY RESEARCH

Declines in rental rates varied significantly. Comparing current rates with average rates from Q408 shows that rents decreased 9%-41% depending on the location and project. Dubai Marina and Jumeirah Beach Residences showed greater price stability over the past six months compared to areas like Springs and Discovery Gardens. This indicates that standard-quality developments are suffering greater price declines. Our analysis shows that this is due to rental inflation experienced in 2008, which had a greater effect on the pricing of standard-quality projects.

Rental Trends Since Q308 Average Declines in Select Areas

‐20% ‐25%

Discovery Gardens (1 BR)

‐15%

Dubai Marina (1 BR)

‐10%

JBR (2 BR)

‐5%

Springs (2 BR)

0%

Current vs Q308 Current vs Q408 Current vs Q109

‐30% ‐35% ‐40% ‐45% ‐50% Source: Landmark Advisory Research

Rental yields to fall once lending improves

Rental Yields up to 12% in Q109 Average rental yields for apartments and villas vary between 6% and 12%. Stifled credit markets are the primary obstacle to improved residential sale prices. The result is that rental yields remain strong; often up to 12% or, in some cases, higher. Once lending accelerates and financing to end-users is more readily available, then rental yields will stabilize.

END-USER PREFERENCES Tenants prefer apartments in Dubai Marina and villas in Emirates Living Dubai Marina accounted for 30% of all apartment leases in Q109

Dubai Marina was the most popular area for all leasing (units of all types), accounting for 30% of all new annual lease contracts in Dubai. 16% of new annual contracts were for units in Emirates Living. Jumeirah Lake Towers, Jumeirah Beach Residences, and Downtown Burj Dubai each represented approximately 10% of all new annual leasing contracts. Short-term leasing showed similar trends; Dubai Marina and Emirate Living were the most preferred locations, together constituting over two-thirds of the shortterm leasing market. Isolating apartments, Dubai Marina is the most popular area among renters, accounting for 30% of all new annual contracts; JLT, JBR, Downtown Burj Dubai and Emirates Living follow. Together, these five areas constitute approximately 80% of all new annual apartment rentals. Not surprisingly, apartments accounted for most short term rentals. Dubai Marina and Emirates Living were the most popular areas for rents lasting less than one year.

Emirates Living accounted for 40% of all villa rentals in Q109

For villas, the most popular area to rent is Emirates Living, with 40% of all new annual contracts, followed by Mirdiff and Jumeirah/Umm Sequim. Similar trends were observed in sales, with the Dubai Marina/Jumeirah Beach Residence area proving most popular among buyers.

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LANDMA ARK ADVISORY Y RESEARCH

Broker surv vey: Tenants s prefer Dubai Marina/JBR R Landmark Ad dvisory’s broke er surveys track the number o of sales and le easing inquiriess for specific area as around Dubai. 52% of leasing brokers p polled cited Dubai Marina as the area of mosst interest to potential tena ants. Other ren ntal areas attrracting significcant interest were e Jumeirah Bea ach Residence es and Mirdiff/A Al Warqaa.

Broker Su urvey:  Po opular Areass of Inquiry ffrom Potentiial Tenants (March 2 2009)

52% of brokers b cited Dubai D Marina as the e most popular area fo potential ten for nants

Mirdifff/Al  Warrqa 10% %

JBR 10%

Jumeirah 7% meirah Islands Jum 6% Discovery  Gardens 3% Otther 13%

Palm Jumeirah 3% Sheikh Zayed d  Road 3% Green  Communityy 3%

Dubai Marina 52%

Others 3%

Source: Landmarkk Advisory Research

Broker surv vey: Buyers prefer p Dubai Marina 35% of sale brokers polled cited Dubai Marina (exclu uding JBR) as the area of most m interest to potential buye ers. Other are eas registering g notable inte erest were Palm Jumeirah, Ju umeirah Lake Towers, T Jumeirrah Beach Ressidences, and Emirates E Living g.

Broker SSurvey: Popular Are eas of Inquiryy from Potential Buyers (March 2009)

Brokers co onfirm flight to quality q a key demand driver as

JLT 10%

JBR 10%

Emirates Livingg 10% Dub bai Sports City 6%

JJumeirah Islands 3% In nternational City 3%

Palm Jumeirah P 13%

Oth her 16 6% Other 10%

Dubaii Marina 3 35%

Source: Landmarkk Advisory Research

driver, with ma any people movving Brokers conffirm that flight to quality is a key demand-d to Dubai fro om other emira ates, primarily Sharjah and Abu Dhabi. The T same fligh ht to quality is driving the rela atively large number n of relocations among current Du ubai residents takking advantage e of lower price es for larger units and/or bette er locations. Du ubai Marina is one of the most popular p areas for f relocation.

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LANDMARK ADVISORY RESEARCH

DEMAND & SUPPLY Dubai attracting demand from Abu Dhabi & other emirates Dubai’s population will decline this year

Widespread corporate downsizing is thinning out the population of Dubai. At the same time, the falling property prices have led former residents to move back to Dubai from Sharjah and the Northern Emirates. Additionally, Dubai is absorbing expatriate workers from Abu Dhabi, which will help to mitigate falling local demand. However, Dubai’s population will still shrink in 2009, with various sources, including UBS and EFG Hermes, predicting population declines ranging from 8% to 17%.

24,000 units to be delivered in 2009

New supply will push down sale prices and leasing rates

On the supply side, our supply database currently shows that approximately 24,000 additional residential units are expected to be delivered in 2009. These figures were compiled through quarterly site visits to assess the status of each project, including construction pace and likely delivery date. This is, however, subject to future variability in the construction pace and additional delays in the handover process. While it is difficult to quantify at this juncture, Landmark Advisory expects additional downward revisions to construction schedules and subsequent revision of supply estimates over the next eight months. Handover of additional supply will put more downward pressure on residential sale prices and rents. While this will inevitably have an effect on aggregate price averages, the precise effect will depend on supply and demand fundamentals in each micromarket in the city. Dubai is more complex in this regard compared to other metropolitan areas, due to its multiple central business districts (CBDs). These various CBDs, micromarket supply trends, and end-user preferences will define price trends in each area.

Absorption from pent-up demand may mitigate supply surplus

2009 supply surplus: 30,000 to 52,000 units

With 24,000 new units added to the vacancies caused by emigration, our analysis shows a 30,000-52,000-unit surplus, depending on absorption patterns and actual rate of population decrease. Pent-up demand has accumulated over the past 3-4 years in Dubai, resulting in accommodation-sharing and relocations to Sharjah and the Northern Emirates. The extent of this supply surplus will ultimately depend on the ability of the pent-up demand to absorb newly released and recently vacated units.

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LANDMARK ADVISORY RESEARCH

SALES & LEASING FORECASTS   Dubai Residential Price Trends Trend

Asset

↓

Market

Movement in Q209

Sales

Significant new supply of apartments expected for completion this year, which will compound the supply surplus; trends will be particularly strong in specific areas of oversupply; prices will decline as a group of motivated sellers enter the market in Q2/Q309.

Leasing

With new leasing supply coming into the market, as well as upcoming vacancies in existing supply, leasing rates are likely to decline further, particularly in Q309, after the school year ends.

Sales

Prices will decline, as a group of motivated sellers enter the market in Q2/Q309; given the higher total cost of villas, financing will be even more crucial for the villa sales market.

Leasing

Some additional supply expected in 2009; leasing rate declines will coincide with the end of the school year in Q309.

Apartments

↓

↓ Villas

↓

Source: Landmark Advisory Research

Sales Forecasts Sellers increasingly unwilling to lower prices

Decline in sale listings show early signs of confidence Leasing volumes show sustained demand for housing in Dubai, supported by pent-up demand from other emirates. Sales, however, have waned, primarily due to credit scarcity, as opposed to lack of demand. We are now seeing the early signs of confidence stabilizing, as sellers are increasingly removing their properties from the market until resumed lending unlocks pent-up demand.

Group of motivated sellers to enter market in Q309

Sale prices to decline in Q2/Q309, coinciding with end of school year

A smaller group of motivated sellers are already entering the market. They are primarily owners listing their properties because they are planning to relocate outside of the UAE. Many of these households are families whose departure will coincide with the end of the school year. Given their motivation and time constraints, pricing will be flexible in the coming months leading up to Q309. All else equal, this trend will bring down average transaction prices in Q2/Q309. Villa and apartment sales will depend on the location and quality. The availability and cost of financing remain a critical issue; however, it has an even greater impact on villa demand and prices.

Many tenants planning to relocate in Q309

Leasing Forecasts Upgrading trend to continue through Q309 Given the widespread expectation that rents will keep falling in the summer, coinciding with the end of the school year, initial evidence suggests that many tenants are planning to relocate in Q309. Landmark Advisory expects the upgrading, relocation, and household dispersion trends to continue apace with rent declines. This will support demand and fill some of the void from Dubai’s expected population decline; however, it is not expected to neutralize this effect.

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LANDMARK ADVISORY RESEARCH

Leasing rates to soften in Q209 On average, leasing rates will continue to soften in Q209 and decline in Q309, after the school year ends. Rental declines will vary, with units in preferred locations and in quality projects experiencing less price volatility.

REGULATION Planned Amendment to Article 11 of Dubai Law 13 of 2008 Amendment to clarify sale cancellation rules for developers and tenants

The existing law, enacted 31 August 2008, gave developers the right to retain 30% of purchaser payments in the event of cancelation. However, there was widespread confusion regarding whether the 30% referred to the total price or to the amount already paid. The amendment aims to clarify the sale cancellation process, including the payments that must be returned to or collected from the purchaser. The amendment will be retroactive, thereby negating all previous cancellation provisions in all off-plan contracts signed in the past.

Amendment Details 1. Before proceeding with a sale cancellation, developers must notify the Dubai Land Department (DLD) that a default has occurred. The DLD will then give the purchaser 30 days to meet his/her financial obligation. 2. If the 30-day period expires without payment, the following rules will apply a. If construction is 80% complete, the developer will retain the full amount already paid and may also demand payment of all remaining installments. If the purchaser cannot pay the rest, the developer may then auction the property. b. If construction is at least 60% complete, then the developer is owed 40% of the cancelled contract’s total value. If more than 40% has already been paid, the developer must repay the difference. c. If construction has already commenced, but is less than 60% complete, the developer will be entitled to 25% of the purchase price. (Construction commencement will be defined by site hand-over to contractors with approved construction plans.) d. If a developer has not started construction, but is not at fault for the delay, then the developer can cancel the contract and keep 30% of the money paid by the purchaser.

Amendment will boost confidence by holding developers accountable

3. After official cancellation, developers will have one year to return funds to the purchaser. However, if the property is resold, then repayment must occur within 60 days. 4.

In the event that RERA cancels a project directly, then developers must return all funds to the purchaser.

The tiered penalties will deter short-term, speculative investment behavior promoted by low down-payments. Developers will be insulated from acute financial deficits caused by hasty contract cancellations. For investors, the clearly defined law will improve confidence by solidifying expectations and holding developers accountable in the event of construction delays and cancellations. Investor confidence stabilizing & price floor shaping-up in Dubai

Despite the likely benefits, the retroactive nature of the new law will negatively affect some off-plan owners who purchased during the boom. Developers will be able to retain more money from investors, while gaining significant control once construction has commenced. The overall effect will be greater transparency in the market, with clear expectations for each stakeholder. This will also encourage developers to continue building and avoid massive additional jobs cuts, which would have an adverse, knock-on effect on the local economy.

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LANDMARK ADVISORY RESEARCH

New law for residency visas a positive step, but more clarification required

New law for residency visas to support residential demand A recently announced federal law will allow foreign property owners to apply for 6month, renewable, multiple-entry residency visas. Prior to the market peak in Q308, second-home demand constituted a significant portion of overall residential demand. This law will, therefore, have a positive impact on the local real estate market as the issue of residency visa is often a prerequisite for existing and potential second home buyers. The specific details of the law still need to be outlined, but they will ultimately determine the law’s actual impact on the local property market. One issue will be the renewal process; a cumbersome renewal procedure will limit demand.

Only half of properties transacted in 2009 were sold for AED 1 million or more

Stipulations in the law could preclude existing owners or potential buyers from qualifying. One of the most significant aspects for potential investors may be the minimum property value requirement, which is assumed to be AED 1 million. Based on Landmark Advisory’s transactional data, 80% of properties transacted in 2008 were sold for AED 1 million or above. Based on recorded transactions for Q109, however, only 50% were above AED 1 million. With property prices declining, much of the second home demand would be pushed into the upscale segment of the residential market and further support the flight to quality in 2009. Another crucial factor requiring clarification is the process of valuing property purchased off-plan. Depending on the original purchase price, off-plan properties should appreciate as they near completion. Presumably there would be a valuation process at the time of completion to more accurately represent current market value. While the overall impact is likely to be positive, the actual effect of this new law on the property market will depend on the details expected in subsequent bylaws.

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LANDMARK ADVISORY RESEARCH

ABU DHABI REAL ESTATE UPDATE SALES Secondary market prices fell 15%-20% for apartments and 25%-30% for villas

Price declines accelerate in Q109 After falling 5%-15% in Q408, price declines have accelerated in Q109: Secondary market prices fell 15%-20% for apartments and 25%-30% for villas. The majority of sellers have realized that to attract immediate buyers they must significantly discount listed prices. However, despite relatively large declines in listing prices, transactions remain sparse. Of the limited transactions in Abu Dhabi, most are distressed sales or focused on nearly completed projects, like Al Reef villas or Marina Square.

Abu Dhabi Average Listed Prices 2,500 

AED/ft²

2,000  1,500  1,000  500  ‐ Q1 2008

Q2 2008

Q3 2008 

Villas/Townhouses

Q4 2008

Q109

Apartments

Source: Landmark Advisory Research

Al Reef & Hydra Village: Heavy percentage losses, but relatively mild Al Reef & Hydra Village suffered steepest price declines, at 20%-25

Al Reef and Hydra Village saw the steepest quarterly price declines, at 20%-25%. Prices for Al Reem Island and Al Raha Beach fared better, but still fell 10%-15% over the same period. Since Q308, price declines for Abu Dhabi’s main freehold master developments are as follows:

Price Declines (%) Q109 vs. Q308 Al Raha Beach

15% - 20%

Al Reem Island

15% - 20%

Al Reef

30% - 35%

Hydra Village

30% - 35%

Source: Landmark Advisory Research

While Al Reef and Hydra village suffered the worst percentage declines, absolute declines were relatively minor, because average secondary listing prices and primary prices for these developments were always lower that those of Al Reem Island and Al Raha Beach. Therefore, a relatively small absolute decrease would translate into a significant percentage decline.

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LANDMARK ADVISORY RESEARCH

Average Listed Prices by Master Development 2,500 

AED/ft²

2,000  1,500  1,000  500  ‐ Al Raha Beach Q108

Al Reem Island Q208

Q308

Al Reef Q408

Hydra Village Q109

Source: Landmark Advisory Research

End-users replacing investors as predominant buyers

Changing buyer profile 2008 saw investors flock to Abu Dhabi, hoping to make the same sky-high profits seen in Dubai’s real estate boom. Since then, however, the buyer profile has changed. Endusers have replaced investors as the predominant buyers of freehold property. While end-users show heightened interest in developments like Al Reef’s Arabian District and Al Reem Island’s Marina Square, investors are waiting for prices to bottom-out in order to maximize future returns.

Off-plan prices: Al Reem Island maintains premiums better than Raha Beach Sun & Sky Tower keeping 15% and 30% premiums, respectively

For specific projects on Al Raha Beach and Al Reem Island, prices keep falling. The hardest hit were Sun and Sky Tower, with 25%-30% price declines in Q109. However, even the lowest (distressed) prices for Sun & Sky are still above their primary market prices by 15% and 30%, respectively. Similarly, Marina Square prices declined 10%15%, but still keep a 10%-15% premium over primary prices. Al Raha Beach districts, like Al Zeina, Al Muneera, and Al Bandar, saw prices fall 15%-20% in Q109. The lowest (distressed) prices on Al Raha have now fallen up to 10% below primary market levels.

Al Reem’s advantage: lower launch prices & proximity to central Abu Dhabi The resiliency of premiums on Marina Square and Sun & Sky Towers comes from their near completion date (Q1/Q210), low launch prices, and proximity to central Abu Dhabi. The latter 2 factors (low primary market price and central location) are the key attributes missing from Al Bandar and Al Zeina, whose prices are falling toward or below their primary prices, despite being close to completion.

Average Listed Prices Projects Completed before 2012  3,000  2,500  AED/ft²

Resilient premiums a function of low launch-prices and proximity to central Abu Dhabi

2,000  1,500  1,000  500  ‐ Al Bandar

AL  Al  AL Zeina Sun Tower Sky Tower Marina  Khubeira Muneera Square OP Q208 Q308 Q408 Q109

Source: Landmark Advisory Research

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LANDMARK ADVISORY RESEARCH

Q109 Prices: Primary, Secondary and Distressed Sale  Prices 2,500 

AED/ft²

2,000  1,500  1,000  500  ‐ Al Bandar Al Khubeira Primary Price

Al  Muneera

Al Zeina Sun Tower Sky Tower

Lower Limit Avg. (Secondary Price)

Marina  Square

Distressed Sale

Average

Source: Landmark Advisory Research

Bid-Ask Spreads Lowest price listings are increasingly representative of market values

Since Q308, sellers had been listing properties with prices well above what buyers were willing to pay, leaving significant room for negotiation. Consequently, as seller motivation increased, so too did their willingness to lower listed prices. While published prices kept falling, sellers began to reach their break-even points. As a result, the lowest sample of listings in Abu Dhabi is increasingly representative of market values. Of the transactions actually taking place in Abu Dhabi, most are at the lowest end of listed prices. For example, two units from Al Reef Villas were sold in April 2009 at AED 567 per square foot, 8% less than the average listed prices for these units. Sky Tower registered a transaction 6% below the average listed price.

Sellers reaching lowest acceptable price Abu Dhabi properties selling at lowest end of listings

Based on current trends, many sellers appear to have reached their lowest acceptable price points. Even if buyers refuse to buy at these prices, sellers are unwilling to go any lower. Since the off-plan units in question are nearing completion, and credit availability is likely to improve in the short- to medium-term, sellers are choosing to hold out. As described in last quarter’s report, market listings are chaotic. Identical properties can be priced differently according to purchase date. For example, the average price spread for Al Reef Villas can be as high as 47%, and Sky Tower’s average price spread can reach 43%. However, current market values are at the lower limit of price listings, indicating that the majority of listed property is still overpriced.

Abu Dhabi: Bid-ask Spreads Development

Unit Type

Transaction Price

Distressed Average Listed Price

Listing Price Range

Bid-Ask Spread

(AED/ft²)

(AED/ft²)

(AED/ft²)

(%)

Al Reef Villas, Arabian Community

3 BR Villa

557

565

537-790

8%

Sky Tower, Al Reem Island

2 BR Apt

1500

1370

1,305-1,864

6%

Source: Landmark Advisory Research

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LANDMARK ADVISORY RESEARCH

LEASING Rents stabilizing; probable correction ahead Abu Dhabi’s over-heated rental market achieved relative stability in Q109, and some rents have even shown initial signs of downward correction.

Apartments rents stable Apartment rents remained stable, indicating strength in that sector

Asked apartment rents remained stable during Q109, indicating the relative strength of the apartment segment. Prime areas like the Corniche and Khalidya have not seen significant rent changes, but rents are starting to fall in areas like Muroor, Salam Street and Hamdan Street. While investors are generally unwilling to lower rents, some are beginning to strain under the pressures of global economic recession. As owners’ cashflow requirements become more acute, so too does their willingness to negotiate cheaper rents.

Villa rents declining Average villa rents, however, decreased 10%-15%; 4-bedroom units took the hardest hit, with listed prices falling up to 20%. For example, the first phase of Al Raha Gardens (townhouses) was delivered in Q408 and was expected to be absorbed rapidly by pentup demand. So far, however, occupancy is low, and asked rents have already decreased below initial levels. The faltering demand for villas in Abu Dhabi is likely due to intense competition from Al Ain and especially Dubai, where housing costs are plunging. For many expats, low rents and lifestyle preferences justify the decision to work in Abu Dhabi but live in Dubai.

Rental yeilds to remain stable at 6%-9% Relative to current sale and leasing prices, average market rental yields are now at 7%10%. Even with a conservative scenario where rents and sale prices fall another 25% and 15%, respectively, rental yields would still be 6%-9%, which is still high compared to mature markets.

Average Quarterly Rents 700,000  Annual Rents (AED)

Average villa rents decreased 10%-15%

600,000  500,000  400,000  300,000  200,000  100,000  ‐ 1 

2 

3 

4 

Apartments Q308

5 

6+

Villas Q408

Q109

Source: Landmark Advisory Research

Increasing supply will help soften rents In Q109, the number of rental listings increased, especially in areas like the Corniche, Tourist Club Area, and Hamdan Street. The supply boost put negative pressure on rents.

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LANDMARK ADVISORY RESEARCH

DEMAND & SUPPLY Population expected to grow, but at slower pace On the demand side, we expect Abu Dhabi’s population to keep growing, but at a much slower pace than the Abu Dhabi 2030 strategic plan’s 6% annual growth target until 2012. Due to residential supply constraints and economic slowdown, Abu Dhabi’s population will likely grow 2% in 2009/2010. Even at 2% growth, undersupply will still reach 27,000 units

Under this conservative 2% growth scenario, Abu Dhabi’s property market will still be undersupplied by 27,900 units. At 6% growth, which is highly unlikely, the housing shortage would reach 45,000 units. The basic demand fundamentals in Abu Dhabi remain strong, which translates into good long-term prospects for investors able to raise capital and enter the market during this economic downturn.

Good long-term prospects for investors able to raise capital

Demand for high-end properties (i.e. over AED 1,000 per square foot) is robust and likely to exceed supply for several years to come, with a supply deficit for high-end units likely to reach 10,000 units in 2010. This situation is unlikely to change by 2013, even with the 2% population growth assumption mentioned above.

Delays to re-phase supply pipeline Supply delivery forecasts are highly unstable due to project delays and cancellations, not all of which are announced publicly. Even if few projects have been cancelled in Abu Dhabi, delays are likely to proliferate, as some developers are starting to face construction financing problems. The majority of project slowdowns are on Reem Island and Raha Beach

The majority of slowdowns are on Al Reem Island (Al Shams, City of Lights, and especially Najmat) and on Al Raha Beach, where the Al Dana district is being postponed. These delays will impact Abu Dhabi’s supply pipeline beyond 2010.

Residential Units

Supply Pipeline 12,000  10,000  8,000  6,000  4,000  2,000  ‐ 2009 Low End Supply

Medium End Supply

2010 High End Supply

Source: Landmark Advisory Research

Government & developers beginning to focus on medium- to low-income projects

Our estimates remain unchanged, with 14,500 units delivered by end-2010. Of these, 55% will be high end, but during 2009, the majority of deliveries will be medium-end from Hydra Village and Al Reef Villas. Alongside Abu Dhabi’s government, developers are turning their attention to building medium- to low-income residential areas.

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LANDMARK ADVISORY RESEARCH

Accumulated Demand & Supply Projections 

Residential Units

300,000  250,000  200,000  150,000  100,000  50,000  ‐ 2008  Accumulated Supply

2009 

Accumulated Demand - Landmark

2010  Accumulated Demand - 2030 Plan

Source: Landmark Advisory Research

Accumulated Demand & Supply Projections:  High‐End Units Residential Units

50,000  40,000  30,000  20,000  10,000  ‐ 2008  Accumulated High End Supply

2009 

2010 

Accumulated High End Demand

Source: Landmark Advisory Research

Developer discounts necessary to sell inventory and prevent defaults

Developers must reconsider prices With current prices well below 2008 levels, Abu Dhabi developers that launched at or above AED 2,000 per square foot will now have to reconsider their prices. Discounts are necessary not only to sell the remaining inventory, but also to prevent defaults by buyers who only paid 20% and now have an incentive to walk away. Good candidates are Al Khubeira and Al Dana on Aldar’s Al Raha Beach, which launched at AED 2,000 per square foot and AED 3,000 per square foot, respectively, or the Gate Tower on Sorouh’s Al Reem Island, which launched at AED 2,400 per square foot. For these developments, average distressed listed prices are now close to or below their primary market prices.

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LANDMARK ADVISORY RESEARCH

Investor Motivation: Incentives to Hold or Default Payments Made

Original Price

Price Threshold

Distressed Sale Prices

(% Total Price)

(AED/ft²)

(AED/ft²)

(AED/ft²)

Al Khubeira

20%

2,000

1,600

1,857

Gate Tower

30%

2,400

1,680

1,500

Al Dana

20%

3,000

2,400

3,000

Projects

Source: Landmark Advisory Research *Based on announced payment plans schedules for each development

Developers must do more than just help find mortgages

With credit scarcity still plaguing the economy, developers will have to do more than just help investors acquire mortgages. Moving forward, price reductions and flexible payment plans will be the key. Developers also have the option to keep building, with the intention of launching sales closer to completion. Primary market prices in some developments, however, are likely to be adjusted to current market levels.

New opportunities for developers Falling land prices & low construction costs allow development at 50%-70% lower prices while maintaining profit

Despite the prevailing economic downturn, excellent opportunities are emerging for developers. Land prices are dropping, master developers are establishing JVs, and construction costs have fallen considerably. In combination, these factors would allow developers to launch at prices 50% to 70% below 2008 levels, while still maintaining significant profit margins. The question is, would these developers be able to launch off-plan? We believe this is unlikely. For the next few years, developers will have to rethink their financing and sales strategies. Developers that are able to obtain construction financing through syndications, mezzanine finance, and/or investment funds would be able to deliver a well-priced product with excellent returns.

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LANDMARK ADVISORY RESEARCH

SALES & LEASING FORECAST Abu Dhabi Residential Price Trends Trend

Asset

Market

Movement in Q209

Sales

Prices likely to stabilize or experience slight declines in the short-term; delivery of first units expect to encourage price recovery

↓

Leasing

With more supply entering the market, rental levels especially for low quality units are likely to undergo considerable price corrections

→

Sales

After significant declines through Q109, prices are likely to stabilize, particularly for near completed properties;

Leasing

Rental levels are expected to keep decreasing, especially for bigger units, and villas located outside Abu Dhabi Island.

↓ Apartments

Villas ↓

Source: Landmark Advisory Research

Proximity to central Abu Dhabi will be major price determinant

Sales Forecasts End-user preferences take over With the freehold market about to deliver units, new demand fundamentals will emerge. During the speculative boom, most investors/speculators were not particularly focused on location, build-quality, and amenities. With the buyer profile changing from speculator to end-user, market preferences will change as owners begin to inhabit new properties.

First phase of Raha Beach unlikely to attract end-users until master development integration improves

Once handovers start in Q110, proximity to Abu Dhabi’s city center will become a major determinant of price. In addition, the composition and quality of retail and commercial services will be a key to attracting the pent-up demand from the rental market. For example, the premiums maintained in Q109 by developments like Marina Square and Sun & Sky Towers are a function of their proximity to Abu Dhabi’s urban center. For Al Raha Beach, the majority of potential first-phase end-users are likely to be deterred by the lack of amenities and infrastructure. In addition, new inhabitants of those areas will be living on a construction site for over a year.

Prices of nearly completed properties showing early signs of stabilizing

Q209 prices will decline, but much less that in Q109

Secondary market listing prices for off-plan properties continued to fall in Q109. However, by the end of Q109, sellers of nearly completed properties had slowed the pace of price-cutting. If this trend holds, it would indicate that more sellers are holding out for a likely price boost upon handover. Such an outcome would signal the possible emergence of a price floor in Abu Dhabi.

Relative stability and marginal declines in Q209 During Q209, prices are likely to remain relatively stable or decline marginally, though not nearly as severe as in Q109. Developments like Marina Square and Sun & Sky Towers are likely to maintain premiums over primary market prices, while Al Raha Beach prices are likely to stabilize at current levels. Toward the end of 2009, properties being completed imminently are likely to see prices increase above current premiums.

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LANDMARK ADVISORY RESEARCH

Prices will appreciate on delivery As properties near completion at end-2009, prices will appreciate over current premiums

As seen in Dubai, there is an average 15%-20% price spread between comparable completed and nearly completed properties. Therefore, investors are likely to see an immediate price appreciation upon unit handover, in addition to rental returns. However, end-users will differentiate new properties according to relative amenity limitations associated with first-phase handovers in uncompleted master developments.

Leasing Forecasts Rents for villas and low-quality apartments likely to fall Rents will begin correcting in Q209, especially for villas and low-end apartments

After Q109, where apartment rents stabilized and villa rents began to fall, Q209 will likely see average rent levels begin to correct downward, especially for villas and lowend apartments. These declines will be precipitated by the delivery of units in Al Reef Villas and Raha Gardens, amid the continued outflow of demand to neighboring markets.

Increased competition from Dubai’s leasing market Rents in Dubai are likely to keep falling, thus widening the Dubai-Abu Dhabi rent gap that is already cutting into Abu Dhabi’s vaunted demand surplus. The resulting supplydemand dynamics will put negative pressure on Abu Dhabi rents. If rent levels in Abu Dhabi do indeed fall noticeably, then internal relocation is likely to shift demand patterns, as tenants opt for better quality units over discounts on current accommodations. This process would form part of the redefinition of Abu Dhabi’s highend segment because of the new units coming online.

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LANDMARK ADVISORY RESEARCH

FINANCING: DUBAI & ABU DHABI

BANK FINANCING

Banks continue to choke lending with restrictive policies

With EIBOR presently declining, acceleration of inter-bank lending is likely to occur, which would, in theory, signal improved consumer lending. However, banks continue to impose highly restrictive lending policies that choke credit availability. These restrictions do not necessarily imply a lack of liquidity. Instead, they highlight the risk-averse disposition of banks, which are reluctant to back mortgages on properties that are still depreciating. Banks also prioritize capitalization over lending because of escalating default rates. LTV ratios continue to improve in Dubai and remain stable in Abu Dhabi at 75% (average), but they may fall if credit conditions and oil prices worsen. Lower LTVs would worsen demand for real estate, especially for off-plan units. Interest rates are now 7.5%-10% and are stabilizing and will likely decline gradually in the coming year. Even if recent government initiatives may improve the overall availability and effectiveness of financing, in the short term, lending policies will remain restrictive and the cost of borrowing is likely to remain high.

Lending barriers and cost of borrowing to remain high in short-term

Currently, customers’ career fields are a decisive factor affecting lending approval, thus cutting off property demand by limiting the pool of potential buyers.

DEVELOPER FINANCING With the property market in traction, developers are using new strategies to curb defaults and lower the receivables risk. These initiatives aim to help customers sustain their payments, so that developers can maintain a positive cash flow from which to pay contractors.

Developers adopting new strategies to prevent defaults

Abu Dhabi’s Bloom Properties initiated new payment plans and declared that price revisions will reflect falling construction costs. Other developers have announced possible discounts; Reem Island’s Arady may cut prices by 20%, while Deyaar, the UAE’s second largest developer, announced discounts between 25% and 30%. Other strategies include unit consolidations, unit-exchanges between cancelled and ongoing projects. In addition, developers are structuring and restructuring payment plans to accommodate post-handover payments for varying periods. This type of arrangement is an alternative to mortgages, which are currently difficult to acquire for many existing owners and willing buyers. Developers can therefore have greater flexibility and control in dealing with buyers/owners to ensure full payment and prevent defaults.

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LANDMARK ADVISORY RESEARCH

DEVELOPERS & DEVELOPMENTS: DUBAI & ABU DHABI As two major cities growing rapidly within commuting distance, Abu Dhabi and Dhabi have real estate markets that are at once inextricably linked and highly independent. Comparative analysis of residential supply built by the largest public developers in each city shows similar price trends.

Average Residential Price Trends by Developer Q109 vs. Q308 Emaar

‐10%

Aldar

‐5%

Surouh

0%

‐15% ‐20% ‐25%

‐20% Avg. Abu Dhabi = ‐27%

‐23% ‐28%

‐30% ‐35%

Avg. Dubai = ‐38%

‐40% ‐45% Source: Landmark Advisory Research

DUBAI: EMAAR IS THE PREFERRED DEVELOPER Overall, however, there is a strong sales trend favoring Emaar master developments and units developed specifically by Emaar. Approximately two-thirds of all property transactions in the data set were for units in Emaar’s master developments, villa communities, and apartment complexes. Over half of all units sold were developed directly by Emaar.

Controlled average residential sale price fell 38% since Q308 Landmark Advisory created a controlled sample representing large and master developers in Dubai. Controlled for location and developer, our analysis shows that residential unit sale prices declined on average by 38% in the past 6 months (36% for apartments, and 40% for villas).

Dubai Average Residential Sale Price Decline Q109 vs. Q308  (controlled sample)

‐34%

Total

‐32%

Villas

‐30% Apartments

Emaar units accounted for over 60% of all Q109 sales

‐36% ‐38% ‐40% ‐42%

Source: Landmark Advisory Research

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LANDMARK ADVISORY RESEARCH

Over half of leased units were in Emaar master developments Leasing transaction patterns generally mirrored sales trends. 57% of new residential unit leases were in Emaar master developments (59% of apartments and 52% of villas). 39% of new residential leases were in projects/buildings developed directly by Emaar (38% of apartments and 48% of villas).

ABU DHABI: PROXIMITY TO CBD IS KEY Over the past 6 months, Aldar unit prices fell 20%, while Sorouh’s fell 23%

A controlled sample of price data shows an average price decline of 27% over the past 6 months (37% for villas and 18% for apartments). Over the same period, prices for Aldar’s residential units declined on average by 20%, while Sorouh’s declined 23%.

Abu Dhabi Average Residential Price Declines Q109 vs. Q308  (controlled sample)

‐10%

Total

Villas

Apartments

0%

‐20% ‐30% ‐40% Source: Landmark Advisory Research

Sorouh’s projects retain premiums in secondary market Price performance strongly linked to proximity to Abu Dhabi CBD

However, Sorouh’s secondary market transactions have retained premiums over primary levels, while Aldar’s units average closer to primary market prices. Landmark Advisory’s analysis shows a positive correlation between a development’s price performance and its proximity to the existing central business district (CBD) on Abu Dhabi Island. Price and demand levels will fare better for properties closer to the CBD, as end-user demand continues to replace investor demand. Accordingly, end-user priorities relate to amenities, infrastructure, and master development integration and cohesion. End-users are recognizing the disadvantages of living in first-phase properties located in unfinished master developments. They will increasingly differentiate first-phase properties based on ease of access to alternative/nearby amenities and facilities (like those found on-island in Abu Dhabi). These differentiators are already being reflected in prices. Overall, this trend is likely to continue for the next 2-3 years, until masterdevelopments integrate community-sustaining elements among project phases.

Lease rates to soften Rents have begun to ease, and will continue to do so, as additional supply becomes available. With initial handovers expected toward Q409/Q110, rents in the freehold/leasehold developments will increasingly differentiate according to a property’s proximity to central Abu Dhabi.

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LANDMARK ADVISORY RESEARCH

COMPARATIVE DEVELOPMENT PRICE TRENDS Average Residential Price Declines  Q109 vs. Q308 Dubai

Abu Dhabi

0% ‐5% ‐10% ‐15%

Apartments

‐20%

‐18%

Villas

‐25% ‐30%

Total 

‐27%

‐35% ‐36% ‐38% ‐40%

‐40% ‐45%

‐37%

Source: Landmark Advisory Research

Mid- to low-end properties not spared by price correction

Average Price Declines for Apartments: Dubai and Abu Dhabi  Q109 vs. Q308 Abu Dhabi

Dubai

‐25% ‐30%

Sun & Sky

Al Raha Beach

‐11%

Al Reem Island

Al Bandar

Business Bay

International City

DT Burj Dubai

Jumeirah Lake Towers

‐20%

Discovery Gardens

‐15%

Dubai Marina

‐10%

Palm Jumeirah

‐5%

Jumeirah Beach Residence

0% Greens

Downward trend hits all segments with low- to middle-income hit hardest in some cases

Despite claims that high-end properties have been hit hardest by falling prices since Q308, transactional analysis proves otherwise. For Dubai, price declines vary and, in some cases, affect low- to middle-income properties more dramatically. International City and Discovery Gardens are good examples. Landmark Advisory’s analysis shows that recent price trends are primarily linked to the market’s dramatic shift from undersupply to oversupply.

‐19% ‐20% ‐21%

‐24% ‐28% ‐28%

Avg = ‐18%

‐35% ‐36%

‐40% ‐45%

‐39% ‐39% Avg = ‐36%

‐50%

‐43% ‐44% ‐47%

Source: Landmark Advisory Research

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LANDMARK ADVISORY RESEARCH

Incoming supply to weaken prices further

Forecasts and trends are highly variable due to complex interaction of emerging factors

Until this year, a significant demand surplus, magnified by rampant speculation, inflated the prices of low- to medium-end units to exorbitant levels. These projects are now nearing completion, with a few thousand units likely being delivered this year. The result will be a low-end supply boost in a market characterized by aggregate oversupply and end-user flight to quality. As such, newly released, low- to mediumend properties are likely to experience acute price correction The high-end Business Bay, on the other hand, is plagued not only by lack of demand, but also delays and infrastructure problems. In reality current price trends and forecasts are highly variable. This will continue as residential real estate becomes increasingly differentiated according to end-user preferences. In Abu Dhabi the overall trends are more difficult to discern as the majority of freehold/leasehold units are off-plan high-end. Quality differentiation is expected to coincide with actual delivery of apartments.

Average Villa Price Declines:  Dubai and Abu Dhabi   Q109 vs. Q308 Abu Dhabi

Dubai

‐30%

Al Reef

Hydra Village

Jumeirah Islands

‐20%

Arabian Ranches, Al Reem

Palm Jumeirah

‐10%

Springs

0%

‐31% ‐40%

‐36%

‐36% ‐40% ‐43%

‐50% Avg = ‐40%

‐48% Avg = ‐37%

‐60% Source: Landmark Advisory Research

Villa price declines similar for both high- and low-end units

Middle-market villa communities, like The Springs and Arabian Ranches (Al Reem) have declined 36-40%, while more luxury villas have declined 36%-48%. Based on this sample, standard villas declined an average of 38%, while luxury villas declined 42%. Despite a 4% spread, this could also be correlated with other issues like quality and developer preferences. The Springs and Arabian Ranches were developed by Emaar (the preferred developer based on Q109 transactional data), while Palm Jumeirah and Jumeirah Islands were developed by Nakheel. These specific projects were used here because the transaction data for villa sales was concentrated in specific areas during Q109. The villa market in Abu Dhabi is more concentrated, with fewer freehold/leasehold villa developments launched. Hydra Village and Al Reef villas were launched as relatively standard product. Comparing the standard stock in Dubai and Abu Dhabi shows similar trends. While Dubai declined on average 38%, similar villas (off-plan) declined 37% over the same period. Without stock of freehold/leasehold high-end villas widely available in the primary or secondary market, it is difficult to conduct additional comparative analysis.

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LANDMARK ADVISORY RESEARCH

Implications for Developers In Dubai, Emaar is faring best in terms of demand and pricing; both tenants and buyers are recognizing the value of their properties. With a clear flight to quality, endusers are pushing the differentiation of pricing in favor of quality developers like Emaar and preferred locations like Dubai Marina.

Location and first-phase integration problems expose certain Abu Dhabi developers to short- to medium-term risk

In Abu Dhabi, the issue of proximity and integration will leave certain developers more vulnerable in the short- to medium-term. For example, Aldar’s entire freehold/leasehold portfolio is in off-island developments on the city outskirts. Comparatively, Sorouh will be less affected, as its freehold/leasehold properties are centered on Al Reem Island, which is close to the city’s CBD. In particular this will affect master developers’ ability to sell land to sub-developers and at what price.

SUMMARY In both Abu Dhabi and Dubai, preliminary signs of potential recovery are beginning to emerge. Price floors are forming, as more sellers refuse to lower prices below current levels. In addition, bid-ask spreads are narrowing, with advertised prices better reflecting sellers’ lowest acceptable prices. In Dubai, however, expected population declines and additional supply will push sale prices and leasing rates down further over the next 3-6 months. In Abu Dhabi, off-plan owners are considering the near-imminent handover of certain developments as a milestone that is likely to boost prices. As such, owners of nearlycompleted properties are increasingly unlikely to offer discounts for immediate sales. Likewise, many individual sellers in Dubai are halting discounts, leaving the sales market, and choosing instead to generate income through leasing. They are suspending sales until lending improves and buyers are more willing to meet minimum seller expectations. In terms of confidence, this pattern indicates that general seller motivation is shifting away from anxiety, as owners adopt a more patient outlook. The resulting increase in leasable unit-supply will put more downward pressure on Dubai rents, which are already plunging. However, demand for Dubai rentals remains strong, boosted by excess demand from Abu Dhabi, inflows from Sharjah, and internal flight to quality. Abu Dhabi’s sky-high rents stabilized in Q109, and declined marginally in some cases. Further rent cuts are likely due to imminent supply growth and competition from Dubai’s increasingly affordable leasing market, which continues to attract residents from the capital. In Q109, Abu Dhabi’s secondary market prices fell more sharply than in Q408, but began to stabilize heading into Q209, Even with conservative 2% growth and upcoming supply boost, the market will remain undersupplied for several years. However, potential end-users are likely to avoid the first phases of master developments due to infrastructure & amenity limitations and the inconvenience of living on a construction site.

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LANDMARK ADVISORY RESEARCH

DISCLAIMER Information contained herein was obtained from sources believed to be reliable. While we are confident in its accuracy, we offer no guarantees, warranty or representation about it. It is the reader's responsibility to independently confirm accuracy and completeness. Any projections, opinions, assumptions or estimates used in this report represent the market’s performance at the time of publication. This information is published exclusively for use by Landmark Advisory and may not be reproduced without prior written consent from Landmark Advisory. Analyst certification The analysts responsible for this report certify that the opinions expressed herein accurately reflect their personal views and that no part of their compensation was, is, or will be directly or indirectly related to the recommendations or views contained in this research report or any outcomes thereof. Additional disclosures 1. This report is dated as at 19 April 2009. 2. All market data included in this report are dated as at close 19 April 2009, unless otherwise indicated in the report. 3. Landmark Advisory has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. Analysts and other staff involved in the preparation and dissemination of research are managed and operated independently of Landmark Properties. Organizational barriers between the brokerage and advisory/research businesses ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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