Report. Dubai s Real Estate Market. (Fourth Quarter)

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1 Y o u r T r u s t e d R e a l E s t a t e A d v i s o r s Report Dubai s Real Estate Market (Fourth Quarter)

2 Report Dubai s Real Estate Market (Fourth Quarter) Dubai September 25, 2007 The following report is an update of information about the real estate sector in Dubai and includes 4 sections: General Considerations, Residential Property, Offices and the Hospitality Sector. RichVille maintains its commitment to our vision of Dubai s very positive potential as we see that the emirate is on its way to becoming one of the top five business and tourism destinations of the world. This report is based on the review of several reports and statistics from leading international real estate companies, information websites as well as a number of government sources. 1 However it is worth mentioning that very few official statistics are available from reliable government sources, therefore, most of the reports and statistics used are not considered official numbers. Most of the projections presented in this report are based on the sources mentioned bellow and RichVille s expert opinion. General Economic, Political, Social & Infrastructure Considerations: The Government of Dubai has launched several initiatives to regulate the real estate sector including the new ESCROW account law that demands all developers to deposit all sales proceeds into a protected account to be comanaged by the bank. The Real Estate Regulatory Authority (RERA) is also an initiative launched by the government of Dubai to regulate the real estate sector including rents and owners associations. These regulations are meant to provide additional guarantees to local and foreign investors and to further boost the development industry. However, these regulations will also mean that many small developers are likely to exit the market (probably before completing projects they already launched). In general, the demand for property in Dubai has shifted from speculators to end buyers including property users and long-term investors. We expect an increase in the number of foreign investors coming to Dubai looking for mid to long-term returns. The demand for development plots over the past few months has increased considerably leading to an average increase of 25% in prices in some areas like Business Bay, Culture Village and Dubai Marina. There is also a huge shift to investing in offices instead of residential properties. The market has witnessed the banks involvement in the development sector as well as projects introduced by the banks (or their development subsidiaries), this has led to the banks dominating the market over the past 12 months by offering competitive prices, most importantly, offering attractive financing deals for end buyers. These projects have been selling out within weeks if not days. With fewer reports talking about the bubble, we feel that the critics of Dubai s real estate growth are starting to realize that the bubble is just a myth however; while we don t rule out some small market corrections here and there, Dubai s continued growth is guaranteed for the next 15 years at least. Dubai s real estate market cycle: Years Phase Uncertainty Stability Maturity 1 The sources included reports from MEED, Colliers, EFG-Hermes, CBRE, Cushman & Wakefield, Jones Lang Lasalle, Shuaa Capital, JAJ Consultants, E&Y, Deloitte, Dubai Statistics Department, Property Weekly Magazine, UAE Interact and UAEpropertytrends.com.

3 The UAE in general and Dubai in particular enjoy a very stable political atmosphere, and has a visionary leader that is determined to make Dubai the best place in the world, moreover he has delivered on his previous promises,making Dubai a world-class city in less than 5 years by introducing a series of regulations that attracted investments, companies and top professionals from all over world. In Dubai s Vision 2015 released earlier this year, Dubai is to become a Global City with a projected GDP growth of around 11% to reach AED 397 Billion (US$108 Billion) up from US$ 37 billion in Dubai has been one of the fastest growing economies in the world with an average GDP growth of around 21% between 2002 and The vision calls for diversifying income sources to become less reliant on Oil while focusing more and more on tourism, shopping and business. According to the 2005 census, Dubai s population was estimated at 1.2 million with an average annual growth of 7% over the past 10 years. Inflation in Dubai ranged between % over the past 3 years. The decline of the US Dollar (and therefore of the Emirate Dirham) has made Dubai properties less expensive to acquire by foreign investors, especially those from countries like UK and India where property prices have peaked. 10. Dubai is one of the few international business hubs that offer a tax-free environment both for businesses and individuals, it is also one of the highest per capita incomes in the world. And even with the hidden taxes of Dubai (positioned as fees) and relatively high living costs, Dubai is proving to be a major attraction for investors, professionals and multinational companies interested in setting up regional offices or in some cases re-locating their head office to one of the free zones in Dubai. 11. Dubai has allocated tens of billions of dollars for infrastructure projects including the largest airport in the world currently under construction in Jebel Ali as well as the metro and several new highways and bridges. 12. With so many attractive projects planned or being built including the tallest tower in the world (Burj Dubai), the largest mall in the world (Mall of Arabia), the largest manmade islands (The Palms and The World) and Dubai Land; one of the largest entertainment districts in the world and home to the upcoming Universal Studios, Dubai is attracting an increasing number of tourists from around the world, and once all these projects are completed ( ) Dubai is projected to receive around 15 million tourist making it one of the main tourist destinations globally. 13. The lack of political stability in several neighboring countries, the war in Iraq and the aftermath of 9/11 have resulted in the migration of capital and professionals (with their families) into the politically stable and safe environment in Dubai boosting demand for real estate and injecting a significant amount of capital into the economy.

4 Residential Property Residential Property Demand Dubai s 2005 census report showed that Dubai s population grew by an average increase of 7% annually over the past 10 years to 1.2 million as of However, further reports showed that the population growth rate averaged around 15% during 2005 and 2006, confirming RichVille s assumptions in the first report earlier this year that the future growth will be accelerated and not based on the previous 10-year 7% average. We estimate that Dubai s population will continue to grow by 10% - 15% average to reach 2.25 million by the end of Other reports published by the government also projected the population to reach 4 million by In addition to the increase in population, the population mix is also projected to shift more to mid-high and high income professionals. Other demand drivers include second home buyers from GCC countries and other UAE emirates, long-term foreign investors (individuals, investment companies and funds) as well as many buyers from different parts of the world who are parking (landing or freezing) their wealth in Dubai due to political problems or economic constraints in their countries. Based on the above increase in population and an average of 2.5 persons per residential unit (international average), RichVille estimates that the additional demand between the end of 2006 and the end of 2010 will be around 350,000 units. Dubai s Estimated Population Growth: Year Population 1,200,000 1,380,000 1,587,000 1,825,050 2,044,056 2,248,462 4,000,000 Change % 15% 15% 15% 12% 10% 78% Dubai Population Growth Estimates 4,000,000 3,187,500 2,375,000 1,562, , Recent reports showed high demand for villas, although villas do not offer high return on investment for investors, however, villas previously offered high capital appreciation which is highly unlikely to continue as most future buyers will be actual residents and end users of these villas. Population Due to the significant increase in rental rates, more of Dubai residents are considering buying properties instead of renting. They are faced with the main current obstacle however, which is the lack of new mid-income projects (projects targeting people with mid-income) and the unfavorable financing terms and high interest rates on property loans.

5 Residential Market Supply Industry reports provided varied projections for the supply of residential units. Currently the number of units available in Dubai is just over 250,000. Based on the number of future units in projects already launched, residential unit supply between the end of 2006 and the end of 2010 should be around 500,000. However, due to expected project delays, we estimate that only 60% of these projects will be actually completed by the end of 2010 which results in an actual supply of around 300,000 units. So far, most of the projects launched and approaching completion have been high-end projects in areas like Burj Dubai, Dubai Marina, JBR, JLT, Business Bay and Culture Village. Other areas targeting mid-income buyers like International City and Discovery Gardens will provide some relief for this market segment, however, there is still a huge gap between supply and demand for mid-income properties. The problem is that construction costs have increased dramatically over the past two years pushing the prices of any new mid-income development to become more expensive than high-end properties launched over the past 3 years. We believe that the supply shortage of mid-income properties can only be resolved through government intervention by implementing one or more of the following measures: 1. The government (or government-owned companies) builds these mid-income properties and rents them out at a subsidized rate. 2. The government provides development land to developers at a very low cost (under AED 50 per sq ft) and at the same time subsidizes the cost of construction material. 3. The government subsidizes the mortgage interest / profit rates to allow mid-income buyers to afford buying these properties. The current profit / interest rates are relatively high resulting in higher monthly payments. Without these measures, it will not be feasible for developers to develop mid-income properties which will cause the problem to continue and become more complicated over the coming years. Residential Market Prices, Rental Rates and Returns Projections: Prices: The average prices for off-plan residential properties range from AED 800 per sq ft for mid-income to AED 1,200 for high-income properties. Prices in some new areas like Culture Village are over AED 1,400 per sq ft. Prices have been stable for the past 12 months and are likely to stay at these levels for the next few years. The stability comes after the boom that occurred between 2002 and 2006 during which saw prices of apartments and villas increased by as high as 100% and 200% respectively Rental Rates: With occupancy rates still at around 98%, rental rates for completed projects have been increasing steadily over the past 12 months. Rates have increased by more that 20% in the past 6 months despite the rent caps imposed by the government. Rents have almost doubled over the past 4 years leading to many families re-locating to the Northern emirates or even sending their families back home. This is mostly driven by the huge shortage in supply of residential units. We expect rental rates to increase by an additional 10% over the next 12 months but go back to last year s levels after that. Returns: Current returns for off-plan or under construction residential properties are still around 12 13% and are expected to remain at these levels in 2007 and 2008 and will probably go down to around 10% beyond 2008 due to the additional supply. However, capital appreciation on these properties is around 20% over 24 months. Given that international average returns are around 7-8%, Dubai will continue to be an attractive investment option for both local and foreign investors.

6 Offices 1. Current office space in Dubai is around 16 million square feet with an occupancy rate of 98% resulting in a shortage of office space. 2. At AED 300 (US$ 82) occupation cost, Dubai is considered the 10 th most expensive city in office rent (13 th according to other reports) Recent reports showed occupation cost reaching US$ Office rents have increased by almost 40% over the past 12 months with Class A office rents increasing to (US$62-83) up from (US$48-60) in June Prices of off-plan office space increased by 20%-30% over the past 6 months and are expected to continue to increase. 5. Prices of land dedicated for office-use in Business Bay have increased by over 20% in the last 6 months driven by the very high demand from major developers as well as successful sales of new projects in that area. Office Space Demand 1. The elements driving office space demand will continue to be strong and include the expansion of existing companies, the set up of many new Free Zone (and non-free Zone) companies, many multinational companies setting up their regional offices in Dubai and in some cases re-locating their head office to Dubai (like Halliburton) and the shift from older CBD s to newer ones. In addition, current size of office space per person in Dubai is around 100 sq ft which is significantly below the international average of around sq ft. 2. To quantify demand, we came up with the following rationale: a. Total projected population growth from end of 2006 up to end of 2010 is estimated to be around 870,000 b. According to reports, the working population is around 70% of the total population. c. If we assume that 50% of the work force are blue colar personnel who don t require office space d. Considering that the average office space is 120 sq ft per person e. Therefore, projected demand between the end of 2006 and the end of 2010 is estimated to be around 36.5 million sq ft (870,000 x 70% x 50% x 120) Estimated Office Space Demand Projections Year Total Population 1,380,000 1,587,000 1,825,050 2,044,056 2,248,462 Y-O-Y Change 207, , , ,406 Office Space Demand 8,694,000 9,998,100 9,198,252 8,585,035 36,475,387 Office Space Supply 1. Based on published reports, the upcoming supply of office space in Dubai will be around 35 million square feet by the end of 2010 with additional supply of over 30 million square feet in the 5 following years. These projections take into consideration a delivery delay in 60% of the launched projects. Office Space Supply & Demand Projections: Year Total Supply (in millions) Demand (in millions)

7 Office Space Supply & Demand Projections Supply (in millions) Demand (in millions) Office Space Prices, Rental Rates and Returns Projections: Office Prices: Given the increased demand for office space by investors over the past 6 months and the high returns on office space (rental income and capital appreciation), we expect that office space prices for off-plan projects will increase by as much as 20% over the coming 12 months. If we take into consideration that current rental rates are around AED 300 (US$82) per sq ft, then the fair price for a completed office project will be around AED 3,000 (US$822) based on the 10% rule of thumb currently used in the market. This number is almost double current prices for office space sold off-plan in Dubai. Office Rental Rates: Due to the huge gap between office space supply and demand extending over the next 18 months, we expect office rents to further increase by around 30% in the next 12 months then gradually come back down to current rates once the projects in Business Bay are delivered. Office Returns: As demonstrated in the supply and demand projections analysis, and while the supply increases compared to existing inventory of office space, the demand continues to be as strong. However, the gap between supply and demand will start to shrink leading to a more realistic rental rates. Current rental income returns for off-plan office space are around 20% plus around 30% in capital appreciation once the project is completed. We expect this trend to continue for the next 18 months with some softening starting in 2009 Office Space Prices and Rental Rates Projections: Year Office Rental Rates (AED per sq ft) Off-plan Office Prices ( AED per sq ft) 1,500 1,800 1,700 1,600 Return On Investment 20.0% 21.7% 18.8% 16.9% Note: Prices are based on Business Bay Benchmark

8 Office Space Prices & Rental Rates Projections Office Prices Rental Rates Office Prices Rental Rates

9 The Hospitality Market Dubai s hospitality market is driven by the emirate s vision to attract 15 million tourists by the end of 2010 (up from 6 million in 2006). Significant steps have been taken to achieve this vision with multi billion dollar project announced or launched including the Jebel Ali airport, Burj Dubai, the Palm islands, the World Island, Universal Studios, Bawadi Hotel Strip as well several mega mall projects like Dubai Mall, Mall of Arabia and the retail district / mall in Bawadi. Emirates Airline is also increasing the number of planes in its fleet significantly to cope with the increased demand. Considering these factors, it seems that demand for hotel rooms will increase significantly, however, so will supply. According to government statistics, the total number of rooms available in the market is 42,000 (32,000 hotel rooms and 10,000 hotel apartment rooms). Number of Hotels & Hotel Apartments in Dubai Number of Properties Number of Rooms Five Star Hotels 42 12,578 Four Star Hotels 49 7,603 Three Star Hotels 41 4,358 Two Star Hotels 39 2,969 One Star Hotels 125 4,318 Other Hotels Total Hotels ,971 Luxury Hotel Apartments 26 3,306 Standard Hotel Apartments 93 6,561 Other Hotel Apartments Total Hotel Apartments ,057 Grand Total ,028 Current occupancy rates in Dubai are 85%, with beach hotels achieving an average rate as high as 90%, while city hotels are at 83%. Average Room Rate is currently at AED 1,132 (US$308) with an increase of 14.6% over last year s rates. The Average RevPar is around US$ 269 up by 16.3% from last year. Hotel Rooms Demand: Based on the 2010 numbers 15 million tourists and an average of two room nights per guest, the expected demand for rooms is estimated at 82,000 rooms. Hotel Rooms Supply: Industry repots expect the number of hotel rooms in Dubai to double to up to 80,000 by the end of 2010 with more projects expected to be completed and delivered thereafter. Impact of Supply & Demand on Room and accompany Rates: The completion of the hotel projects is expected to spread equally over the coming 3.5 years, therefore, creating a balance of increase between both supply and demand. This also means that the current shortage in supply will no longer exist which will lead to some gradual drop in both room rates and occupancy rates by 2009 and beyond. Due to the high occupancy rates, hotel apartments have actually been used the same as hotels (per night basis as opposed to mid to long-term stays). This is not likely to continue beyond 2009.

10 Conclusion: Dubai s economy and growth are very promising and all three real estate sectors (residential, offices and hospitality) are performing very well and are likely to continue this trend for the next two years at least. While we still expect some minor corrections in certain market segments along the way, the long term perspective for Dubai is very positive and the Bubble is now history. And in case major problems arise in the property sector during the upcoming years the government of Dubai has many tools and functions in place to support the sector and deal with any market turbulence. RichVille Advisory Group: RichVille Advisory Group is a Dubai-based real estate advisory and marketing company offering turn-key investment and development solutions to investors and developers in the GCC. The company has over AED 2 billion in projects under management and is working with several local, regional and international clients operating in the GCC. Tariq Ramadan Chairman of RichVille Advisory Group

11 P.O.Box: Dubai, United Arab Emirates Tel: Fax: info@richvilleproperties.com