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April 2011 Real Estate in the MENA Region

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Table of Contents For your Queries ..................................................................................................................................... 2

Table of Contents ................................................................................................................................... 3

Executive Summary ................................................................................................................................ 5

1 Global Overview of the industry ........................................................................................................ 7

1.1 US housing market – over the years .................................................................................................. 7

1.2 Events leading to the housing bubble ................................................................................................ 8

1.3 What went up, came down ..............................................................................................................12

1.4 Beyond the US market ......................................................................................................................14

2 MENA Real Estate: Market Dynamics and Industry Structure .......................................................... 17

2.1 Rules and regulations – the lack of it ................................................................................................17

2.2 Opening up of the market ................................................................................................................17

2.3 Labor profile .....................................................................................................................................18

2.4 MENA gets its Realty Exchange .........................................................................................................18

2.5 Residential real estate ......................................................................................................................18

2.6 Office real estate ..............................................................................................................................19

2.7 Retail real estate ..............................................................................................................................19

2.8 Hospitality real estate ......................................................................................................................19

3 Industry scenario and regional trends ............................................................................................. 20

3.1 Hydrocarbons power economic growth ............................................................................................20

3.2 Demographic Drivers ........................................................................................................................22

3.3 Liquidity driving real estate growth ..................................................................................................24

3.4 Dubai Story ......................................................................................................................................26

3.5 Country‐wise real estate overview ...................................................................................................29

3.5.1 Bahrain ........................................................................................................................................................ 30 3.5.2 Egypt ........................................................................................................................................................... 31 3.5.3 Jordan ......................................................................................................................................................... 32 3.5.4 Kuwait ......................................................................................................................................................... 34 3.5.5 Lebanon ...................................................................................................................................................... 35 3.5.6 Oman .......................................................................................................................................................... 36 3.5.7 Qatar ........................................................................................................................................................... 38 3.5.8 Saudi Arabia ................................................................................................................................................ 39 3.5.9 United Arab Emirates .................................................................................................................................. 41

4 Regulatory environment in the MENA region .................................................................................. 45

5 Opportunities and Challenges ......................................................................................................... 50

5.1 Opportunities ...................................................................................................................................50

5.1.1 Affordable Housing ..................................................................................................................................... 50

5.1.2 Governments liberalizing regulation ........................................................................................................... 50 5.1.3 Huge urban, young and expatriate population ........................................................................................... 51

5.2 Challenges ........................................................................................................................................52

5.2.1 Volatile construction costs .......................................................................................................................... 52 5.2.2 Funding Challenges ..................................................................................................................................... 52 5.2.3 Need for better transparency and governance ........................................................................................... 54

6 Future Outlook ................................................................................................................................ 55

7 Appendix ......................................................................................................................................... 57

7.1 MENA Real Estate Company Profiles ................................................................................................57

7.1.1 Inovest......................................................................................................................................................... 57 7.1.2 Seef Properties ............................................................................................................................................ 58 7.1.3 TMG Holding ............................................................................................................................................... 59 7.1.4 Union Land Development Company ............................................................................................................ 60 7.1.5 National Real Estate Company ................................................................................................................... 61 7.1.6 Commercial Real Estate Company .............................................................................................................. 62 7.1.7 Solidere ....................................................................................................................................................... 63 7.1.8 Ezdan Real Estate Company ........................................................................................................................ 64 7.1.9 Barwa Real Estate Company ....................................................................................................................... 65 7.1.10 Dar Al Arkan Real Estate Company ............................................................................................................ 66 7.1.11 Emaar Properties ........................................................................................................................................ 67 7.1.12 Aldar properties .......................................................................................................................................... 68 7.1.13 Union Properties ......................................................................................................................................... 69 7.1.14 Emaar The Economic City (EEC) .................................................................................................................. 70

7.2 Major Projects in the Region ............................................................................................................71

7.3 Acronyms .........................................................................................................................................72

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Executive Summary The past couple of years have been far from easy for the global economy, which saw financial systems in most developed countries almost completely breaking down. Even today, when experts believe the worst to be over, the economic impact of the crisis is only gradually retreating. Amid talks of a broad‐based recovery led by emerging markets, what is yet to be seen is how long it takes for developed economies to return to normalcy, and the eventual landscape when it does happen. The macroeconomic balance is likely to be more evenly distributed between the two groups. What—or who—triggered the crisis? Enough was said during the crisis about the financial jugglery and plain greed that led to such a mammoth turmoil. There are indeed no misgivings about the recklessness of the bankers who added layers upon layers of indirections over underlying physical assets that were, to put it mildly, unworthy. One would be tempted to lay the entire blame on these financial wizards for pushing the limits, and rightly so, to a great extent. Nonetheless, as a logical corollary, questions were raised over the efficacy of a system that allowed such indiscriminate market play. Taking a step back, the epicenter of the debacle was the real estate industry, which came under the spotlight as much as financial services. The dream run in property prices through the ‘90s and well into half a decade in the new century—when US housing indices surged between 150% and 200%—was simply too glamorous for anyone to ignore. Everyone wanted to be a part of the saga, be it developers, property owners, bankers, mortgagers, or insurers. The notion of perpetually appreciating value and the availability of money was too heady a mix for anyone to remain sane. End‐users looking to fulfill the American dream of owning a home were soon outnumbered by investors booking profits and churning their realty holdings like any other financial instrument. Commercial banks went on an overdrive to extend credit to less‐than‐deserving individuals, again under the assumption that prices would continue to rise forever. The peak years saw as high as 20% of all mortgages being extended to subprime customers in some categories. Amid the frenzy, they just ignored a fundamental rule – regardless of diversification, risk is directly correlated with reward and the two cannot be decoupled. High returns just do not go hand in hand with low risk. The real estate industry has had a rollercoaster ride during the past decade, with US home prices spiking almost 90% until the peak in 2006 and crashing as much as 30% since then. The industry suffered serious setbacks in the US, as prices collapsed to record lows last seen during 2002‐03, and demand eroded in the absence of credit. The situation was similar in many other developed countries, where the crisis unfolded later. The Middle East’s joyride… On the other hand, altogether different dynamics played out in the emerging markets in Asia and the Middle East. Strong economic growth over the past decade led to substantial increases in personal income levels and GDP per capita, which rose annually by an average 6% across emerging and developing economies. Furthermore, these markets have traditionally been conservative and only recently have been opening up avenues for private participation. Particularly in the case of the Middle East, foreign ownership laws for properties are taking shape only now and governments are releasing their control, albeit partially, on certain critical areas of their economies. …that came to a screeching halt The windfall from the oil price run until 2008 and economic diversification led to huge infrastructure spending. The immensely prosperous period saw large‐scale projects, each more extravagant than the previous. With average transaction values up by more than 200% between 2005 and 2007, Dubai did see a bubble that popped as liquidity tightened following the global crisis. Similar to developed countries, governments in the region came to the rescue with interventions and indirect bailouts in cases. For the regional housing market, the 2008‐09 period was not easy, even as many earlier believed in the Middle East being decoupled from the global crisis. Virtually all MENA countries were affected by declining property prices. Residential property prices in Dubai are estimated to have fallen by as much as 50% from their 2008 peaks, and the overall price level is not expected to bounce back before the end of 2011 or later. The other countries of the region are now struggling with oversupply issues, especially in the upscale segment, which had seen a wild frenzy during the boom. A number of developers across the region started facing difficulties, leading to a wave of project delays and cancellations. On a positive note however, the crisis did bring to light—albeit painfully—the need for the region’s markets to develop better regulatory frameworks and important enablers like mortgage financing.

Lessons learnt…possibly! More recently, the sector seems to be stabilizing across the region. Markets like Dubai that suffered a hard landing are now being outperformed especially by those that were not in the limelight until recently. Clearly, one such example is Lebanon, which was relatively insulated from the heat of the regional real estate turmoil, as reflected in the 13% year‐over‐year increase in property sales during 2010. Saudi Arabia is considering a new mortgage law, which is expected to boost residential demand once in force. Qatar is set to benefit from its continued GDP growth run and is likely to clock a whopping 18.5% in 2011. On a more optimistic note, given the sound fundamentals, other countries of the region are expected to grow in the range of 3.2%‐5.0% in 2011 according to IMF estimates. The characteristics of this growth would most likely be different from that was seen during the pre‐crisis years. Earlier, development was fuelled by huge foreign inflows and, therefore, focused on the more profitable upscale segment. This time around, the quantum of demand for more affordable housing is much higher. In addition to the residential segment, commercial real estate, including hospitality and retail, will see further growth. With most governments looking at tourism as the new growth engine and an economic diversification plank, the prominence of hotels, resorts, and associated infrastructure will only reinforce that. The trend will also foster the development of critical infrastructure such as utilities that will make the market more conducive to further construction activity. The continued increase in income levels and changing lifestyles, coupled with population growth and strong demographics, augurs well for the retail industry, which has seen phenomenal rise in recent years. Retail‐linked real estate activity will continue to remain on the growth track with the increasing popularity of modern formats like malls and supermarkets. Yet another difference compared to the past will be the geographical expanse of the development in the post‐crisis era. The rise in the number of projects in the previously not‐so‐hot areas like the Northern Emirates and Oman is testimony to the more broad‐based nature of the current recovery. The primary drivers of demand have a strong fundamental element than just being speculative or investor‐driven. Moreover, governments and industry stakeholders seem to have learnt a lesson or two from the recent crisis and are pushing for a more refined regulatory framework aimed at evolving a more efficient and inclusive system in due course. The otherwise protected property market is opening up to ownership by foreigners in a phased manner. Intrinsically, regulations are being framed to set up better tracking and control of market participants in order to keep speculation and foul play under check. This shift in power from the respective governments to independent regulatory bodies will bring in transparency, restore investor confidence, and usher in sustainable growth in the longer run despite short‐term hurdles.

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1 Global Overview of the industry Real estate is a legal term that encompasses land along with improvements to the land, such as buildings, fences, wells and other site improvements that are fixed in location accounted as immovable. Real estate includes things such as commercial and residential property. Real estate is often considered synonymous with real property (sometimes called realty). Residential property is defined as property which is zoned for single‐family homes, multi‐family apartments, townhouses, condominiums, and/or co‐ops. Commercial property, on the other hand, is defined as real estate zoned for business or industrial use.

1.1 US housing market – over the years

From a historical perspective, a property crisis similar to the recent subprime debacle occurred in the wake of the Great Depression. However, home mortgage was a very different instrument in the 1920s. Typically, the loan‐to‐value ratios did not exceed 50%; they were short‐term (5‐10 years); and carried a variable rate of interest. Accordingly, refinancing of loans was a common practice and easily accomplished in those days, given the prevailing environment of brisk economic growth, and rising incomes and property values – not too different from the situation prior to the 2007 housing price slump. Not surprisingly, when property prices fell in the 1930s by as much as 50% from their peaks, a tidal wave of defaults and foreclosures followed, with financial institutions trying to resell properties that came back under their ownership.

The severe distress in the housing and mortgage market prompted federal intervention in order to stem loan defaults and foreclosures. The National Housing Act of 1934 marked the beginning of the transformation in the housing finance system, which has constantly changed over the decades. Between 1933 and 1938, the US government established the Home Owners’ Loan Corporation (HOLC) to purchase mortgage defaults, the Federal Housing Administration (FHA) to provide mortgage insurance, and—following the disbanded HOLC—the Federal National Mortgage Association (FNMA) to foster a secondary market for FHA mortgages. FNMA, known generally as Fannie Mae, was one of the two government‐sponsored enterprises (GSE) that bore the brunt of the recent financial crisis and, consequently, placed under federal conservatorship. With the establishment of FHA, a new mortgage type was introduced – the fixed‐rate, self‐amortizing, long‐term instrument as we know it today.

In the following years, the US housing market underwent substantial transformation. The private sector, attracted by high profitability, entered the mortgage insurance market and gained increasing prominence in due course. FHA’s mortgage insurance share fell from 29.4% of the mortgage market in the 1970s to less than 10% by the mid‐1990s. Two major entities were formed following further developments in the secondary mortgage markets. The objective of Government National Mortgage Association (GNMA), known as Ginnie Mae, was to securitize mortgages insured by FHA or other government agencies, while the Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, was supposed to provide competition and boost liquidity. Consequent to the inflationary surge in the late 1960s and 1970s, most mortgage providers recognized the interest rate risk carried by fixed‐rate mortgages and the difficulty of funding such mortgages through short‐term deposits, as was the practice before. This was the reason behind the increasing popularity of home loan securitization, which made it

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Home ownership rates in the US

Source: US Census, Bloomberg, Blominvest

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Source: Board of Governors of the Federal Reserve System, US Bureau of Economic Analysis, Blominvest

possible to sell mortgage‐backed securities (MBS) to investors who could provide longer‐term funds. Soon, securitization became a dominant source of funds for long‐term residential mortgages. By the end of 2003, Fannie Mae and Freddie Mac guaranteed or held over USD 3.6 trillion mortgages, representing 60% of the accessible market or 47% of the market in general.

1.2 Events leading to the housing bubble

Meanwhile, the American Dream of owning a home became part of the central theme of long‐term political agenda. A supportive regulatory environment fostered the notion of every American family owning a home. This encouraged people to switch from rented accommodation to taking home loans. Mortgage debt rose from less than a quarter of GDP at the beginning

of the 1950s to three‐quarters by the beginning of 2000s, surpassing the American GDP in 2006. In comparison to total household income, it climbed from 20% to 101% between 1949 and 2008. At the same time, homeownership increased considerably from 44% in the 1940s to over 67.2% by 2009.

Naturally, the steep rise in housing demand had a wholesome impact on prices. The S&P Case‐Shiller National Index started moving up around 1991 and did not decline even once until the housing bubble burst. It accelerated drastically during the second half of the decade, zooming 80‐90% during 2005‐06. In comparison, the index had gained just over 60% between 1987 and 2000. The composite index for the 10 major cities in the US recorded an even more drastic surge, with prices at the peak of the bubble higher by almost 260% compared to those in 1987. While in the 1980s and 1990s, US median home prices fluctuated between 2.9 and 3.1 times the median household income; the ratio was 4.0 in 2004 and climbed to 4.6 by 2006, according to the Harvard Joint Center for Housing Studies. Similarly, the Housing Affordability Index, published by the National Association of Realtors, which reflects how easily a median‐income family qualifies for a mortgage on a median‐priced home, fell from 140 in 1993 to less than 100 by July 2006.

One would expect demand to have suffered in the face of such massive price hikes. On the contrary, financial inexperience, the myopia of investors/customers, and the ‘need’ to own home drove people to continue taking more home loans. Banks and other lenders—eager to retain clients—encouraged and even exploited the extremely profitable trend. Low‐interest rates fuelled the reverential attitude toward homeownership and the prejudice for rental accommodation. Mortgage brokers and government programs fostered the attitude as well. Consumers were enthused at the prospect of getting a mortgage at rates never seen before which, together with the lack of proper guidance, led them to take home loans they could hardly afford. Contrary to economic fundamentals, the social sentiment and a certain kind of hubris were fuelling further mortgages. Lenders felt secure in the idea of booking profits by reselling the property in the event of a default. On the other hand, consumers assumed that if mortgage payments proved too high to service, they could take advantage of the rising equity value and refinance loans on favorable terms amid an upward market. According to

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Homebuyer Affordability Composite Mortgage Index

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* Seasonally Adjusted Annual Rate Source: Bloomberg, Blominvest

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Michael Strauss, chief economist at Commonfund, almost everyone in the system was lulled into a "false sense of security that housing prices would always go up."

In addition to resulting in increased mortgage financing, growing home equity encouraged people to view their homes as a ready source of credit that allowed them to juggle their debt or finance other needs. Home‐equity loans (HEL) allowed homeowners to borrow cash against the value of the house and use it toward personal consumption or purchase another house, because of which a number of already‐owned houses became collaterals. The practice became so popular that today industry insiders tend to say that by cashing in on the value of the equity as soon as it went up, American consumers were using their homes as cash machines. Net home equity extraction in the US (excluding household investment expenditure) grew from USD 72.4 bn in 1991 to ten times as much in 2004 on a yearly basis, reflecting the volume of Mortgage Equity Withdrawal (MEW) activity. At the same time, as a proportion of disposable income, it rose from 2.6% at the beginning of 1991 to almost 9.4% during the first quarter of 2006. And according to a study by former Fed Chairman Alan Greenspan and Fed economist James Kennedy, consumers spent 50% of the home equity loan they raised on consumption, contributing to the country’s GDP during the past

several years. According to some analysts, had it not been for this MEW‐fuelled spending, the US could have slipped into a recession soon after the dotcom bubble. The sheer scale of MEW activity added to the pressure on prices after the market collapsed, because a number of houses that had been owned for several years started entering foreclosures as well.

It was the innovation in complex housing finance derivative instruments that spurred the growth in household debt from 60%‐70% of disposable income during the ‘70s and ‘80s to almost 130% by 2007. Fixed‐rate mortgages (FRMs), which were always the preferred instrument, started losing their popularity in favor of adjustable‐rate mortgages (ARMs). Normally, a self‐balancing mechanism governed the demand for FRMs and ARMs. Being subject to federal fund rates, FRMs became relatively expensive if rates went up, and demand shifted to ARMs. Within this mechanism, growth in FRM rates and in ARM originations could not be sustained for long, as it was always terminated by the eventual decline in Fed rates. In other words, Fed rates, FRM costs, and ARM originations moved more or less in sync.

The situation changed in 2003 when volumes of ARMs clearly decoupled from both Fed rates and FRM costs, rapidly shot up despite the latter two not registering any major movements. This indicated that the growth in ARMs was detached from fundamentals, as opposed to the earlier popularity as a substitute for the relatively more expensive FRMs. This time, however, the cost of FRMs barely changed. What, then, were the factors behind such a surge in the popularity of the adjustable‐rate variant? The answer is closely related to how the housing bubble took shape in the first place.

A combination of factors such as the new‐fangled credit instruments, increased investor appetite for risk, rising house prices, and the belief that the housing bull market would last forever led to the housing bubble. Primary market players, mostly residential property investors, began to commit increased amounts of capital. On one side were Americans aspiring for a home, which had remained elusive earlier. Investors formed the other group of buyers, hoping to buy a property and sell it after a year or two for substantial profits. However, increased housing affordability did not lead to demand growth, but what did was the more accessible mortgage instruments that tempted hoards of consumers to take a loan. ARMs are contracts where the borrower pays a below‐market interest rate or “teaser rate” for a specified initial period, which would “reset” at some point in future to cause monthly payments to leap dramatically. The growth in ARMs was not only in numbers, but also in flavors. One such variant called Interest‐only ARMs did not require repayment of principal during the initial period. Another called Payment Option Loans were characterized by payment of a variable amount, with any interest outstanding added to the principal. Of

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ARMs applications ‐anomalities start in 2003

ARMs applications as % of total applications (left axis)Federal funds rate (right axis)30‐year fixed mortgage average rate (right axis)

Source: Bloomberg, Blominvest

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course, such loans meant a considerable increase in monthly payment at a later stage. According to a First American CoreLogic study, one‐third of ARMs between 2004 and 2006 carried the so‐called “teaser rates” of less than 4% interest, which on average were set to double on reaching the “reset date”. Close to 23% of all mortgages taken in 2005 were “interest‐only” ARMs, and more than 8% were “payment option” ARMs.

The whole process worked because everyone believed—yet again—that the uptrend in housing prices would continue forever. Borrowers assumed they would be able to refinance their loans or resell properties in case of any difficulty in paying off the increased monthly rate. Mortgage lenders felt secure knowing they held an asset that was skyrocketing in price. Meanwhile, mortgage origination was becoming an extremely profitable business due to the rising demand from the next level of players –investment banks. Eager to satisfy this demand, lenders sent mortgage brokers door‐to‐door to extend loans and encourage existing homeowners to collateralize their homes and take cash under an HEL. Once lenders and brokers exhausted the pool of prime loans and creditworthy customers, attention turned toward the remaining customer base that had limited financial credibility in comparison. To this end, they introduced increasingly lax lending standards and less documentation from the borrower. Stated Income, Verified Assets (with no income proof) loans were followed by No Income, Verified Assets contracts. Finally, No Income, No Assets (NINA) products—also referred to as NINJA loans—appeared; a credit score was the only prerequisite to qualify for a loan. Thus, the value of subprime mortgages carrying higher default risk saw a spike, going up from an estimated USD 35 bn in 1994 to USD 600 bn by 2006, while their share in all one‐ to four‐family mortgage originations jumped from 4.5% to 20% over the same period, according to Ben Bernanke, Chairman of the Federal Reserve Board.

In effect, anyone could get a mortgage, including scores of people who would never have qualified. Borrowers keen to get a loan misrepresented income documents, and mortgage brokers misrepresented the applicant’s actual income and inflated loan amounts. As a result, reports of suspected fraud by federally regulated institutions more than doubled between 2003 and 2006, and the value of mortgage fraud estimated by federal agencies stood at USD 1‐6 bn in 2005 alone.

In the traditional model, where banks sell mortgages to borrowers and earn interest in return for assuming the risk of default, the likelihood of extending loans or entering into contracts with consumers with poor credit rating was minimal. During the past several years, the mortgage market had very little in common with the traditional and straightforward borrower‐lender relationship. Securitization brought the financial markets and Wall Street’s investment bankers, with their huge appetites for mortgage‐backed securities, into the housing market. Thus, smaller‐scale banks and brokers, primary loan originators, forfeited ownership, and transferred the entire risk to investors.

The dot‐com bust led to the US stock markets plunging and many companies going bankrupt. In order to revive the economy, the Fed lowered interest rates. From over 6.5% in mid‐2000, the rate fell below 2% in December 2001, and reached a trough of 0.98% in December 2003. Yields of US Treasuries—one of the most popular investment instruments worldwide—fell considerably. The slump in fund rates attracted even more Wall Street and international investors to the US home loan market. According to Ceyla Pazarbasioglu, assistant director of the Monetary and Capital Markets Dept. at the International Monetary Fund (IMF), global investors were holding around USD 36 trillion in fixed‐income securities as of 2000 ‐ a figure that almost doubled to USD 70 trillion by 2008. Reflecting the disequilibrium in the global savings system, a large part of the money came from developing countries such as China with a foreign exchange reserve of more than USD 2.4 trillion and Abu Dhabi with an estimated Sovereign Wealth Fund (SWF) asset base of USD 875 bn, almost one‐quarter of the total global SWF wealth. These investors were more than happy to respond to the increasing credit needs of developed countries, especially the US. With the appeal of US Treasuries on the decline, they turned to the US housing market as an emerging and relatively high‐yielding opportunity.

Foreign investments in US real estate grew rapidly. Of course, investors were not interested in traditional forms of ownership such as individual mortgages because of the default risk associated with them. Instead, they plowed capital through Wall Street, and funds were linked to the underlying assets through increasingly complex financial instruments. The baseline for all of these was mortgage industry securitization and the shift in the credit risk.

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Federal funds effective rate

Source: Fed, Blominvest

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Securitization dates back to the 1970s when government agencies sought funding through the issuance of bonds, which enabled larger liquidity for the mortgage industry. However, the market’s acceleration began only in the mid‐1990s, when private

participation shot up and broke the earlier dominance of GSEs. MBS, originated by non‐agency entities, increased during the period 1996‐2006 from USD 52 bn to USD 917 bn, or 11% to 43% of the total. During the same period, the total value of MBS issued climbed from USD 493 bn to USD 2.1 trillion, and the outstanding value at the end of 2007 reached USD 9.1 trillion. Clearly, the appetite of the financial sector for MBS was huge. To quote a residential mortgage trader at Morgan Stanley during the mortgage boom, “…it was unbelievable. More people wanted bonds than we could actually produce. That was our difficult task…trying to produce enough.”

MBS—bonds made by bundling a number of mortgages—were not the final stage in the evolution of mortgage‐based investment instruments. These pools of mortgages were sliced into tranches—typically three—with varying degrees of risk, maturity, and interest rates. The bottom tranche would be the last one to receive income and the first to bear losses, and naturally packed in the highest yield. Finally, the tranches were put together to form Collateralized Debt Obligations (CDOs) or, in the case of mortgages, Collateralized Mortgage Obligations (CMOs). According to the Securities Industry and Financial Markets Association (SIFMA), global CDO issuance grew from USD 68 bn in 2000 to USD 520.6 bn in 2006. The overall CDO market was estimated at over USD 1.5 trillion as of 2005. The surge in CDOs was made possible by Credit‐Default Swaps (CDS)1, prices of which were the basis of a formula used to calculate the correlation between the default risk of different loan products put together in a single security, enabling quick and easy pricing. In fact, by 2005 the share of CDOs with CDS as underlying assets (synthetic CDOs) in total CDOs issues stood at 75%.

As much as 60%‐80% of mortgages were turned into securities in the years leading up to the crisis. The contribution of subprime MBS to the total MBS pool was growing, reaching 23% in 2005‐2006, up from 5%‐6% at the beginning of the decade. Clearly, as the demand for residential real estate kept rising, quality deteriorated and fueled the development of innovative mortgage products

1 CDS is an agreement in which a buyer of the swap receives credit protection and makes a series of payments to the seller and, in exchange, receives a payoff (the par value) in case a credit instrument experiences default. A CDS is used to transfer the credit exposure on a fixed income instrument from the buyer to the seller.

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'000

Global CDO Issuance

Source: SIFMA, Blominvest

0%

5%

10%

15%

20%

25%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Share of subprime MBS in total MBS originated

Source: Milken Institute, Blominvest

based on loans to consumers deemed less creditworthy. CDOs, termed “financial weapons of mass destruction” by Warren Buffet in 2003, spread the risk manifold, and rating agencies gave higher ratings to the top tranches. However, as it later turned out, these ratings based on the same formula using CDS prices not only obscured the risk, but also magnified it in some manner by pooling together securities with similar default risks. A shared misconception among those who created and traded mortgage‐based financial innovations was that they were able to determine exact correlations between individual mortgage defaults. These relations were believed to be so accurate that they allowed investors to pick the desired risk and return combination of tailored derivative products. In hindsight, financial engineers proved to be overconfident about their ability to forecast how assets will perform upon aggregation. When conditions changed and housing prices started heading south, it turned out there was a positive correlation across virtually all mortgages – contrary to earlier assumptions. Financial models designed in the era of escalating house prices turned out to be as good—or as bad—as the underlying toxic loans.

1.3 What went up, came down

In retrospect, the defining moment in the US housing market happened during 2H06. As home values kept rising, many families and individuals could no longer meet the standards of traditional instruments. In such an environment, mortgage brokers and lenders were forced to cast a wider net. Soon loans were offered to borrowers with poor credit ratings and modest income levels. Some of them were even prone to defaulting on their first or second payment itself. A situation of homebuyers who overreached and homebuilders who overbuilt developed. The construction boom reached all‐time highs. Slowly, the supply‐demand fundamentals were pushed out of balance. When home prices started plunging back to earth, from the stratospheric levels, homeowners found themselves under water, and homebuilders had surplus inventory of unsold houses. Suddenly, the number of defaults started to increase, triggering foreclosures. Other potential homebuyers were increasingly difficult to find for mortgage brokers. Technically, 2Q06 was the quarter when house prices declined precipitously for the first time in almost fifteen years, and remained stagnant for several months thereafter. However, the distress in the housing market became evident by March 2007. Prices started falling as rapidly as 20% annually by 2008. Home prices plunged the most in the first quarter of 2009 at 18.9% year‐over‐year, and the decline continued for the remainder of 2009. In 2010, home prices gained 2.26% in the first quarter, 3.81% in the second quarter, but in the third quarter price dipped 1.51%.

0

100

200

300

400

500

Mar‐05

Sep‐05

Mar‐06

Sep‐06

Mar‐07

Sep‐07

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Case ‐ Shiller Index (1Q05 ‐ 1Q10)

National Composite 10 Source: Standard and Poor’s, Blominvest

0

10

20

30

40

50

Feb‐05

Jun‐05

Oct‐05

Feb‐06

Jun‐06

Oct‐06

Feb‐07

Jun‐07

Oct‐07

Feb‐08

Jun‐08

Oct‐08

Feb‐09

Jun‐09

Oct‐09

Feb‐10

US Delinquencies as % of total mortgages of each category

Subprime Delinquencies Alt‐A Delinquencies

Prime Delinquencies

0

5

10

15

20

Feb‐05

May‐05

Aug

‐05

Nov‐05

Feb‐06

May‐06

Aug

‐06

Nov‐06

Feb‐07

May‐07

Aug

‐07

Nov‐07

Feb‐08

May‐08

Aug

‐08

Nov‐08

Feb‐09

May‐09

Aug

‐09

Nov‐09

Feb‐10

US Foreclosures as % of total mortgages of each category

Subprime Foreclosures Alt‐A ForeclosuresPrime Foreclosures

Source: Bloomberg, Blominvest Source: Bloomberg, Blominvest

13


The period of decline coincided, obviously, with rising mortgage defaults and increasingly difficult refinancing. When borrowers could not refinance loans to better terms after ARMs hit reset dates, they either decided to default, or were forced to default as outstanding loan values exceeded prevailing asset valuations. Foreclosures rose sharply, bringing a huge number of houses on the market, depressing prices further. Not surprisingly, the first borrowers to lag with payments and default were subprime, because of both higher interests and weakest financial rating. By 2006, from a relatively steady level (although higher than other categories), subprime delinquencies and foreclosures were on a clear uptrend. Subprime defaults were followed by Alt‐A loans – a category of mortgage loans given on the basis of a limited number of documents, and lie between subprime and prime loans in terms of risk. Finally, prime borrowers with good credit ratings began defaulting, and foreclosures rose in this category as well. Financial institutions noticed the trend change in late 2006 and shut down mortgage purchases, particularly for the ones carrying the highest risk. With a portfolio of subprime

mortgages for which there was suddenly no demand, most often bought from brokers with borrowed money, several mortgage companies went bankrupt. Investment banks, which were major lenders to mortgage companies, never recovered most of those loans. Mezzanine CDO, very popular among investors, was a type comprising the BBB‐rated tranches of MBSs. However, most of them were until then rated as “high investment grade” and assigned AAA, in the belief that the financial engineering reduced their risk bearing. Eventually, they were downgraded to “below investment grade” and ended up as junk.

The ultimate impact of mortgage‐related losses became known only after some time, since the prominence of CDS obscured the exposure of individual institutions. Gradually, the entire US financial system felt the shockwaves, including major investment banks, which had often acquired mortgage‐related assets using extensive leverage. After the initial reluctance, when rating agencies started downgrading MBS,

holders had to write‐down asset values. As much as USD 85 billion in mortgage securities were downgraded in 3Q07, USD 237 billion in 4Q07, USD 739 billion in 1Q08 and USD 841 billion in 2Q08. According to Fitch, the number of downgrades increased by another 2,000 during 2009 compared to that in 2008. For banks, write‐downs meant the need to boost their capital in order to maintain their capital ratios. However, this was difficult, particularly at a time when the subprime mortgage crisis was turning into a systemic credit crisis. While the contagion of the housing market implosion began spreading widely, investors became increasingly wary about declining asset values and money markets tightened. The meltdown in the housing markets triggered severe liquidity shortages. In August 2007, French bank BNP Paribas stopped withdrawals from its hedge funds because it could not fairly value the underlying MBS; within a week, the wholesale market for inter‐bank lending shut down.

0

5

10

15

20

1999 2001 2003 2005 2007 2009Num

ber of rating

changes, '000

Global Structured Finance Ratings

Upgrades Downgrades

Source: Fitch, Blominvest

0

10

20

30

40

2003 2004 2005 2006 2007

Leverage Ratios

Lehman Brothers Bear Stearns Merrill LynchGoldman Sachs Morgan Stanley

Source: Company reports, Blominvest

Tranche (USD mn)

Initial Ratings (March 2007)

Ratings (as of 2008)

AAA

BB‐

B

CCNot Rated

Collateralized Debt Obligation (CDO) Structure

Source: Wall Street Journal, Blominvest

"It would be somewhere around Halloween of 2006. We started seeing our securities that were 6, 7, 8 months old start to perform poorly. We started to dig into the details. Wow, property values stopped increasing. Something is turning around bad here. What do we do?"

‐ Mike Francis (Executive director at Morgan Stanley

on the residential mortgage trading desk during the beginning of the subprime mortgage crisis, on: “This

American Life”, Episode: 355. The Giant Pool of Money)

In September 2008, Fannie Mae and Freddie Mac, holding the bulk of US residential mortgages, were placed under government conservatorship. They continued to bear losses from mortgage defaults: in 2009, they topped the Fortune 500’s list of biggest money losers, with USD 72 bn in red for Fannie Mae, and USD 21.6 bn for Freddie Mac. During the same month when the two GSEs were effectively nationalized, Lehman Brothers, unable to restructure its debt, filed for bankruptcy, and Bank of America agreed to acquire Merrill Lynch. In the preceding May, Bear Stearns was fire‐sold to JPMorgan Chase. The remaining two investment banks, Morgan Stanley and Goldman Sachs, transformed into commercial banks, agreeing to come under more stringent regulations. The combined write‐downs of the five investment banks engaged in the real estate market and other asset‐backed securities (ABS) reached almost USD 80 bn. In January 2009, Creditflux, a research house, estimated that credit write‐downs of banks and other financial institutions worldwide had exceeded USD 520 bn since the beginning of the subprime crisis.

1.4 Beyond the US market

The financial crisis caused by the housing market collapse had its roots in the US and reached other parts of the world, through financial and economic linkages and not directly through real estate. This is because the real estate sector in most parts of the world, except Europe and a few other developed economies, is quite different. While a bird’s eye view reveals visible similarities such as low occupancy and speculation, the overall market dynamics varies across countries. For instance, in most developing economies, property is purchased by paying cash up front and not through large bank funding, obviating a US‐like situation. In countries where mortgage markets exist, laws regarding down payments and equity percentage are relatively very conservative. For example, first‐time homebuyers in China now have to pay over 30% of the property price for a home of more than 90 sq m – up from 20% prior to April 2010.

Many emerging economies are experiencing strong population growth with urbanization rates growing alarmingly, thereby increasing housing demand. According to recent research by property consultant Knight Frank, the second quarter of 2010 has shown encouraging upticks on a QoQ basis. However, after a dismal 2009, the downturn in the real estate sector continued during the first quarter of 2010 in many countries. In some countries, average home prices saw double‐digit declines. While there is a definite rebound, prices continue to remain subdued. None of the remaining countries included in the report saw a decline of 10% or more. The Nordic region was the strongest, with prices in Norway rising 5.3% and those in Finland moving up by 3.9%, and even the US saw a rebound with a 1.7% quarterly increase in average prices in the second quarter of 2009 during the crisis. On the other hand, Dubai continued to lose ground with residential property prices falling 40% in the first three months of 2009. In fact, the biggest price declines during the crisis were reported from Latvia and the UAE. Property prices in Dubai are estimated to have dropped around 60% since the 2008 peak. In Latvia, prices dropped by 33.8% in 2008 and 52.8% in 2009. Industry analysts opine that these two countries are witnessing a slow recovery since the first quarter of 2010. Buoyed by positive long‐term growth trends in emerging countries such as China and India, the Asian real estate sector is set to recover and exhibit steady growth in 2010 and 2011.

In many European countries, property prices zoomed between 2000 and 2006, and stabilized in 2007. Since then, prices have fallen sharply. For instance, home prices in Ireland witnessed a 35% plunge during the second quarter of 2010, compared to prices in the same quarter of 2007. In addition to a combination of international and domestic factors, similar to other European countries, loose lending practices and corruption in the banking sector contributed to this severe decline in Irish property prices. In Spain, new house prices plunged to their lowest ever level of 89.5 in third quarter of 2010, from the base level of 100 taken for 2007. Severe unemployment, bankruptcy of major companies, and long‐term (40‐year and 50‐year) mortgages created higher volatility in property prices. .

0%

20%

40%

60%

80%

100%

CDOs of ABS

Corporate credit

RMBS exposures

Other or undefined

All write‐downs

Crisis‐related writedowns

Insurers/asset managers North American banks

European banks Asia/emerging market banks

Source: Creditflux, Blominvest

15


Funds flowing back into the sector

In many countries, the fundamentals of the real estate sector are improving as reflected in the stabilizing markets. In the US, a home loan interest rate of below 5% has kicked‐off a refinancing revival of sorts. Globally, funds seem to be flowing back into the sector, and credit metrics are likely to improve going forward. While recovery is still absent in most parts of the world including key EU nations, the US is on a recovery path, albeit slow, while Latin America and the Asia‐Pacific are on a steady rally, with several emerging economies demonstrating strong resilience. Hong Kong’s prices are back to pre‐crisis levels. Many real estate developers across the world are looking for sources of funding to get back on the growth track. For instance, in March 2010, Morgan Stanley AIP Phoenix Global Real Estate Secondaries 2009 closed a USD 370 mn fund for secondary interests in private equity (PE) real estate funds. The Carlyle Group invested and committed USD 5.2 bn in 2009, spending nearly 50% of its invested capital last year on “corporate and real estate transactions.” According to data provided by PE data research firm Preqin, 12 real estate PE firms received commitments worth USD 9.8 bn during 1Q10, up from USD 9.4 bn in 4Q09. Morgan Stanley Real Estate Fund VII Global received commitments of USD 5.2 bn, making it the fifth‐largest PE real estate fund of all time. Meanwhile, real estate investments in Asia jumped 59% to $62 billion during the second half of 2010 with Japan, Hong Kong, Singapore and China being the most active markets. More recently, LaSalle Investment Management reportedly invested up to $1.8 billion in Japan. In Europe, the continent’s largest retail complex, CentrO near Dusseldorf, Germany, is set to get around $950 million for a 50% stake sold to Canada Pension Plan Investment Board.

In the Middle East region, Saudi Arabia’s 4.8 mn sq m Knowledge Economic City raised USD 272 mn from an initial public offering (IPO) in May 2010, while Bahrain‐based investment house Arcapita launched a USD 500 mn real estate fund in February 2010. Owing to the tight funding environment in major developed countries, fund houses and companies are diversifying options and are turning to Asia and the Middle East. Sovereign wealth funds, Asian REITs, institutions, and wealth managers are being approached for funding, following the growth in their home economies. Market expectations are changing as well, with seasoned managers willing to accept lower returns if they can extend investment avenues.

Realty fears still not fully allayed While one would expect the return of cheer with the revival, concerns are already rife over fears of another property bubble in some countries. According to Canadian Real Estate Association (CREA), home prices were up 19.6% YoY, surging to an average of USD 328,537 in January 2010. The spectacular growth in the real estate sector in China, Hong Kong, S. Korea, and Singapore is threatening to build into a bubble with the potential to rattle the world economy, which is still getting back on its feet. Real house prices index provided by the IMF for this group of countries resumed its upward spiral and rose to 150 towards the end of 2009, after reaching a trough of around 135 during the first half of 2009. According to latest data, the index was on the verge of exceeding its pre‐downturn levels during 1Q10. In China, real estate loan growth made a U‐turn in 1Q09 and surged during the remainder of the year to unprecedented levels. According to consensus, the property market is sucking away money from the

‐100%

‐80%

‐60%

‐40%

‐20%

0%

20%

Percent change in housing index between previous peak period and 12/2009

US, UK,France,Ireland

China, Hong Kong SAR, Singapore, KoreaIndia

Australia,New Zealand

Latvia, Lithuania,Estonia,Bulgaria

Source: IMF, Blominvest

0

50

100

150

200IMF price‐to‐income index in 2009

(2001=100)

US, UK, France, Ireland, Spain

China, Hong Kong SAR, Singapore,Korea

IndiaAustraliaNew Zealand

Latvia, Lithuania,Estonia, Bulgaria


0

50

100

150

200IMF price‐to‐rent index in 12/2009

(09/2007=100)

US, UK,France,Ireland

China, Hong Kong SAR, Singapore,Korea

IndiaAustralia New Zealand

Latvia, Lithuania,Estonia, Bulgaria


secondary fund markets in the country. While the price‐to‐income index for the four countries looks moderate, the price‐to‐rent index is high at 128.5 —almost the highest among the regions analyzed—indicating substantial speculative activity. Meanwhile, Eastern Europe, especially the Baltic States, saw the most massive real estate collapse, with prices crashing almost 85% from their 3Q07 peaks. Elsewhere, India remains the most expensive country for buying or renting properties relative to average income, although prices have somewhat eased since mid‐2008.

The exuberance in East Asia’s real estate sector is primarily because of the policy measures adopted by the respective governments such as interest rate reductions (leading to low‐mortgage rates) and housing‐related tax incentives in China and Korea, stimulating lending. However, governments in these countries have moved to rein in the hyper‐development – for example, China has launched several precautionary measures recently to curb a housing bubble. These include raising the down payment amount to a maximum of 50%, the minimum mortgage interest rate to 110% of the central bank’s benchmark lending rate (for second‐home purchases), and limiting the number of homes a citizen can buy. Korea and Hong Kong have also raised down‐payment requirements, while Singapore has increased land supply and has banned certain mortgage loans. As a result, transaction values started declining toward the end of 2009. These countries appear to have learnt from the US experience, even as the net result of these measures remains to be seen. However, developments in East Asian property markets need to be watched closely. Elsewhere, the debt crisis in Spain and Greece and the stability of Dubai’s economy need careful scrutiny in order to gauge the overall trajectory for the sector. Across the world, high unemployment and a likely shift in government policies from fiscal and monetary stimulus to deficit reduction may drag growth in the sector.

17


2 MENA Real Estate: Market Dynamics and Industry Structure The Gulf Cooperation Council (GCC) region scores relatively high in terms of government support to the real estate sector. In many cases, members of the ruling family or the government hold majority stakes in companies, either wholly or in part. Apart from ownership support, the availability of land at low prices and sustained growth opportunities make the sector quite attractive. While it has the required support, one of the major drawbacks is its heavy concentration, both geographically and operationally. Geographically, the sector is concentrated in a few pockets, and operationally to a limited number of very large projects. Meanwhile the magnitude of the exposure varies. While what transpired in Dubai received wide public attention, similar—if not as severe—things were happening in other parts of the region as well. Dubai’s debt had two aspects ‐ one was the size of the debt and the other was the lack of clarity and transparency in ownership structures. The crisis led to Dubai being regarded as “overbuilt and low yielding” in real estate investment circles. The United Arab Emirates (UAE) has a gross rental yield of a little above 5%. A large inventory backlog and departure of foreign nationals will further worsen Dubai’s yields to between 4.5% and 5%. Interestingly, despite geopolitical issues, Jordan and Egypt have yields between 7% and 9%. Jordan’s property sector has found favor from Iraqis, Palestinians, Lebanese, and expat Jordanians looking for a safe haven underpinned by lower prices amid easing oversupply. On the other hand, Egypt’s realty market has been historically undersupplied owing to a tight mortgage market, in addition to a growing population.

2.1 Rules and regulations – the lack of it The lack of regulation and inadequate transparency, from governments and developers alike, has been the bane of the real estate sector in the region. The industry experienced severe corrections during the global financial crisis owing to the absence of an effective regulatory authority, which led to numerous defaults and government interventions. In most GCC countries, governments manage and supervise the activities of the sector. However, after the crisis, several countries are setting up regulatory authorities and independent bodies for better monitoring and control. For instance, Dubai set up the Real Estate Regulatory Agency (RERA) on July 31, 2007 to regulate its property market and a number of other countries have similar plans in the pipeline. In January 2009, the Ajman government created Ajman Real Estate Regulatory Establishment to regulate the emirate’s property and construction sector. Ras Al Khaimah set up a new property regulatory authority in June 2009 to monitor developments, thus giving investors a new layer of protection. In countries like Bahrain and Qatar, the government is the regulator of all real estate activities, apart from being a large stakeholder through ownership and shareholding. Saudi is considering the rollout of a mortgage law sometime this year. Largely, governments are looking at issues regarding mortgages, foreclosures, payment collection, dispute resolution, repossession, and the registration processes for land, property agents, and companies.

2.2 Opening up of the market Many GCC countries have paved the way for foreign nationals to own property. Dubai saw a whole new market develop after the foreign property ownership law was passed in March 2006. According to data from Global Realty Partners (2007), the share of Asians in the region’s property buyers is about 40%, while Europeans including Russians account for 20% across property categories. Arab nationals, including those from the GCC, make up 28%, and Iranians account for 12%. Essentially, the bulk of real estate and property demand in the GCC stems from the expat community. However, the situation is quite different in Saudi Arabia. A property law passed in 2000 allowed foreign nationals to own real estate in the country, although with certain riders. The law allows a non‐Saudi, non‐GCC property holder who is a legal resident of the country to purchase property for personal use. The law also permits foreign investors who look to own real estate for commercial purposes. International companies can purchase employee housing for licensed projects. Foreign ownership of land is allowed under permission from the Saudi Arabian General Investment Authority, which requires the value of the development project to be above SAR 30 mn and the investment to be made within five years of the original purchase date. The five‐year restriction on sale applies to the real estate sector in general, in order to curb speculative practices. The holy cities of Makkah and Madinah are off‐limit for foreign ownership. In early 2010, Saudi Arabia announced plans to set up the country’s first freehold city, King Abdullah Economic City, opening doors for foreign ownership in the country's real estate market.

2.3 Labor profile For decades, the Gulf has depended on professionals and unskilled workers from other countries in Asia. However, during the past couple of years, labor issues are weighing down the construction and real estate industry. The issues range from shortages, long working hours to compensation disputes. According to a March 2008 study by Project Management Institute (PMI), the Gulf could face the risk of being under‐staffed by up to 5 mn workers over the upcoming five years. PMI reasoned that the booming Asian countries are keeping low‐cost workers at home, as the wage differential is not substantial anymore. The bulk of migrant workers earn a monthly wage of less than USD 400 in the Gulf markets. Migrant workers are vulnerable to exploitation like confiscation of documents, low wages, poor working conditions, lack of local language skills, lack of legal protection, and long working hours. Part of the problem is because of inadequate regulation, and the situation is likely to improve with governments undertaking active measures to introduce reforms.

2.4 MENA gets its Realty Exchange In June 2010, the International Real Estate Exchange Group (IREX), a newly formed joint venture and the world’s first global real estate securities exchange, announced plans to open a regulated securities marketplace for listing and trading real estate assets in key financial centers around the world. IREX Europe/MENA will be headquartered in London with a strong presence in Dubai to serve the Middle East and North Africa (MENA) region, while IREX Canada will be headquartered in Vancouver. Both exchanges will be launched within the next two years and will be dedicated for trading in asset‐backed real estate securities. The exchanges will allow three types of properties for listing – new, under development, and developed. The exchange will create a wide variety of financial instruments such as real property investment units (RPI Units), REITs, common/preferred shares, trust structures, and debt securities. The exchange will boost the development of real estate in the region by providing increased liquidity and visibility. Around 20 big developers from the GCC region have already expressed interest toward listing on the exchange. The bursting of the real estate bubble has hit many companies hard, because of which a large number of players are either folding up or consolidating through liquidation, mergers, or cancelled licenses, leaving a major chunk of the market with the larger companies.

2.5 Residential real estate In the MENA region, the rapidly growing local population is the key driver for the residential segment. In the GCC countries and Jordan, this is further augmented by strong inflows of expatriates. Housing prices, driven by this strong fundamental demand, have been rising across the region. Speculative activity is pressuring prices, especially in prominent markets such as Dubai where foreign ownership laws are relatively more liberal. In addition to the historically prominent cities such as Cairo and Beirut, new metropolitan centers such as Dubai, Doha, and Abu Dhabi have emerged over the past decade. These new cities are relatively better organized, have efficient infrastructure, and are planned from scratch. On the contrary, certain locations in the region have not received adequate attention until date. In some of these locations such as parts of Lebanon excluding Beirut and the Northern Emirates in the UAE, the availability of even basic infrastructural development—especially utilities—is struggling to support new projects. A common feature of residential markets across the region has been investor interest in high‐end luxury projects, driven by the margin squeeze due to high construction costs. However, after these costs declined in the wake of the realty crisis, demand for upscale housing is faltering, and developers are shifting focus toward affordable housing in order to cater to the demand that is now driven by end‐users vis‐à‐vis investors. Another trend in the rental segment is the shift of balance from property owners to tenants, as seen in the latter upgrading to higher quality accommodation and owners becoming more flexible with rental terms.

0%

20%

40%

60%

80%

100%

Dubai Oman Qatar Saudi UAE

Workforce Composition (2007)

Other Real estate Construction

Source: Markaz, Blominvest

19


As opposed to the past, when owners insisted on upfront payments for an entire year—often supported by corporate employee packages—the market is now opening up to tenants occupying properties on a monthly payment basis.

2.6 Office real estate The offices segment in the MENA region has a well‐developed and established legislation and market infrastructure. The region’s governments have been concentrating on moving away from their dependence on the oil sector and have been investing heavily in the ‘knowledge city’ concept. Several zones have been developed and more such big‐budget projects are underway. The segment is closely tied to the overall stability in the region. Currently, large‐scale office developments are underway in the GCC, especially in locations such as the UAE and Saudi Arabia. The region’s advantage lies in its strategic location and advantageous time zone. However, following the recession, demand for commercial space even in Dubai is on a downtrend. In December 2009, property consultant Knight Frank estimated that about 40% of Dubai’s office space to be lying vacant as the emirate’s construction boom outpaced demand. Office space that is likely to become functional soon calls for a large number of new jobs. For instance, the UAE needs to create at least 150,000 white‐collar jobs to absorb the amount of commercial real estate expected to hit the market within the next two years. Knight Frank estimates that Bahrain would need a 30% increase in office workers to fill up available seats.

2.7 Retail real estate The retail industry in the MENA region has been booming in recent years, benefitting from rising disposable incomes and changing lifestyle. With shopping malls becoming popular spots for entertainment and socializing, consumers have developed westernized tastes and are beginning to enjoy upscale shopping in contemporary outlets. The nine countries under study hold about 11.6 mn sq m of Gross Leasable Area (GLA) of shopping centers and another 7.6 mn sq m is under development, according to Retail International. Of the existing floor space, 88% is located in the GCC region itself, with Saudi Arabia alone accounting for 41%. Overall, it is believed that retail floor demand in the region is still ahead of the supply; however, prices have come visibly down. The financial crisis reduced the numbers of tourists ‐ an important driver for the retail sector ‐ in addition to affecting income levels of local populations.

2.8 Hospitality real estate According to research data from the Projects & Leads Journal, the GCC countries are home to over 470 active hotel projects valued at USD 1.17 bn, growing at 11.4% annually. The UAE tops the number of projects with 258, while Saudi Arabia has 83 followed by Oman (39), Bahrain (35), Qatar (29), and Kuwait (27). In May 2010, the hotel development pipeline in the MENA region declined by nearly 1,000 rooms to 127,938 across 468 hotels, according to STR Global. Dubai Tourism anticipates that the entry of 16,000 to 20,000 new hotel rooms in Dubai this year would see room rates plunging, which could lead to a slight uptick in tourist activity.

Beirut ‐ Lebanon

Cairo ‐ Egypt

Sharm ElSheikh‐Egypt

Kuwait City ‐ Kuwait

Manama ‐ Bahrain

Amman ‐ Jordan

Dubai ‐ UAE

Riyadh ‐ KSA

Doha ‐ Qatar

Abu Dhabi ‐ UAE

Muscat ‐Oman

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Compound Annual RevPAR Change (2000‐2008)

Source: STR – Hotel Market Benchmark Data, Jones Lang LaSalle Hotels, Blominvest

3 Industry scenario and regional trends

3.1 Hydrocarbons power economic growth

The GCC countries hold around 60% of the world’s proven oil reserves as of end 2008, according to British Petroleum (BP). Saudi Arabia alone holds 21% or 1,258 bn barrels of global crude oil reserves. The region’s gas reserves account for a remarkable share of total proven reserves as well, contributing over 42% to the global figure. Qatar alone is home to as much as 25.46 trillion cubic meters or 14% of the world’s total natural gas reserves. The Middle East region began exploring its oil fields in the 1930s, and the first oil well was established in 1932 in Bahrain followed by discoveries in other GCC countries. Around 1944, the Middle East accounted for slightly less than 5% of global oil supply. Since then, the industry has developed rapidly, and today 40% of total oil supply originates from the region.

Naturally, the hydrocarbon sector plays a pivotal role in the economic development of the region, which can be broadly divided into two groups: oil‐exporting countries and oil‐importing countries. The oil exporters—Saudi Arabia, Kuwait, Oman, Bahrain, Qatar, and the UAE—rely on oil and gas revenues and foreign trade receipts for their public‐spending budgets. The hydrocarbon sector contributes around 80% on average to the fiscal and current account balance. Over the years, robust hydrocarbon revenues and prudent fiscal management helped these countries accumulate a huge amount of wealth that is now finding its way through broad‐based diversification and development initiatives. By the end of 2008, fiscal surpluses in the GCC countries averaged 26% of their respective GDPs, and the external current account for the region stood at USD 262 bn (24% of GDP).

020406080

100120140160

Dec‐99

Dec‐00

Dec‐01

Dec‐02

Dec‐03

Dec‐04

Dec‐05

Dec‐06

Dec‐07

Dec‐08

Dec‐09

Dec‐10

USD

p/b

Brent crude spot prices, 1999‐2010

Source: EIA, Blominvest

0%

20%

40%

60%

80%

100%

Bahrain Kuwait Oman Qatar KSA UAE

Share of the hydrocarbon sector

in total

Importance of the hydrocarbon sector in the economies of the GCC, 2008

Share in total GDP Share in total public revenues Share in total exports

Source: Central Banks, Various news agencies, Blominvest

Current account and reserves in MENA

0

200

400

600

800

1000

'02 '03 '04 '05 '06 '07 '08 '09 '10F '11F

USD

bn

Current account balance Reserves


‐10

10

30

50

70

BHR EGY JOR KWT LBN OMN QAT KSA UAE

USD

'000

GDP per capita in countries under study in 2000, 2005 and 2010

2000 2005 2010F


0%

5%

10%

15%

20%

25%

0

2

4

6

8

10

Egypt Jordan Lebanon

USD

bn

Remittances in Egypt, Jordan and Lebanon, 2008

Value, USD bn As % of country's GDP


21


Meanwhile, official reserves surged ten‐fold to USD 515 bn compared to the levels in 2003. In addition, SWFs held an estimated USD 600 bn to USD 1 trillion in assets as of end‐2008. Moreover, the external and domestic debt in these countries was down from 66% of GDP in 2002 to 12% of GDP at the end of 2008.

On the other hand, the region’s net oil importers—Egypt, Jordan, and Lebanon—have benefited indirectly from their oil‐rich neighbors. The oil wealth finds its way into these countries through three major channels. Firstly, the GCC employs hundreds of immigrants from these countries, which implies considerable repatriation of funds back to the home countries. In 2006, an estimated 50‐60% of total remittances in the three oil‐importers came from their oil‐rich neighbors. Secondly, the more prosperous GCC neighbors represent an important destination for exports, especially from Jordan and Lebanon, which account for about 20% of domestically produced goods by value. Finally, the GCC countries form an important source of foreign direct investment (FDI), channeling huge capital inflows into the other countries in the region that are not as prosperous in the absence of oil revenues. Again, GCC capital flows favor Lebanon and Jordan over other countries in the extended region. Lebanon attracts a substantial 60% of its total FDI from GCC states, while Jordan has lured 70‐80% from the broader Arab region, with GCC‐originated investments sharing the bulk.

Regional governments, however, have taken cognizance of the volatility of oil revenues and future uncertainties. As a result, they undertook conscious diversification efforts that channel this oil‐driven wealth into other sectors. The contribution of real non‐oil GDP to total real GDP for the entire GCC has gone up from around 57% at the beginning of the 1990s to 65% in 2008. As to the real estate sector, it remained an important contributor to the region’s GDP. However, in 2008, the global economic crisis impacted real estate prices in the region, thereby reducing the contribution of the real estate sector to GDP.

0%

10%

20%

30%

40%

50%

'03 '04 '05 '06 '07 '08 '09F '10F

Savings and investment in the Middle East as % of GDP

Savings Investment

‐5%

0%

5%

10%

15%

20%

Bahrain Kuwait Oman* Qatar KSA UAE

AAGR

Average annual growth rate of total, non‐oil and oil GDP, 2004‐2009

Real GDP Real oil GDP Real non‐oil GDP

Source: IMF, Blominvest Source: IMF, Blominvest

Real Estate as % of GDP

2

4

6

8

10

Saudi Kuwait Bahrain Oman Egypt Qatar

2003 2004 2005 2006 2007 2008

Source: Central Banks, Blominvest

Some countries have developed leading financial and trading hubs, and still others have followed suit with new development ideas ranging from scientific incubators to renewable energy centers. The evidence of the scale of economic activities by the respective governments to achieve this diversification is the rise in demand from the public budget as compared to aggregate demand. According to IMF, the non‐oil primary deficit in the GCC—a measure of this contribution—increased by 10% from its pre‐oil boom average to 51% of non‐oil GDP at the end of 2008. The value of investment projects in the region surged more than

seven‐fold from USD 300 bn in 2004 to USD 2.5 trillion by end‐2008. This impressive economic transformation involved surpluses from oil being invested in varied sectors such as petrochemicals, infrastructure, real estate, telecom, financial services, utilities, and tourism, among others. The concentration of such investments into real estate was the highest in the UAE, and contributed to the bubble, as it later became evident. Looking for ways to push hydrocarbon receipts into the broader economy, governments contributed to the rapid build‐up of credit in the region. The massive credit growth was mainly due to lending to the construction and real estate industry, which led to huge concentration risk for banks and disproportionately high leverage for some private industry players.

3.2 Demographic Drivers

Apart from the oil‐driven economic boom in the MENA region resulting in higher personal incomes, another fundamental factor behind the growth has been favorable demographics. The population of the countries under study has grown phenomenally during the past few decades, more than doubling from 59 mn in 1980 to an estimated 129 mn in 2010. The region’s average annual growth rate (AAGR) during the period at 2.6% was twice as high as that of the world’s AAGR.

The region is characterized by a young population with

‐60%

‐30%

0%

30%

'04 '05 '06 '07 '08 '09F

% of G

DP

Central government fiscal balance

Jordan

EgyptLebanon

GCC, non‐oil balance

GCC, overall balance

0%

50%

100%

150%

200%

'04 '05 '06 '07 '08 '09F

% of G

DP

Total government debt

GCC

Lebanon

JordanEgypt

Source: IMF, Blominvest Source: IMF, Blominvest

0

20

40

60

80

100

120

QAT KSA OMN UAE KUW BAH EGY JOR LEB

% of population living in urban areas (2010 estimates)

Source: UN, Blominvest

0%

1%

2%

3%

4%

0

50

100

150

200

'80 '85 '90 '95 '00 '05 '10

Annual growth

Mn people

Population, MENA and world

MENA population, mnWorld population growth, %MENA population growth, %

0

20

40

60

BAH EGY JOR KUW LEB OMA QAT KSA UAE

% of total population

Population aged 0‐24 in the countries under study, 2010

Source: US Census Bureau, IMF, Blominvest Source: US Census Bureau, Blominvest

23


around 30% to 55% below the age of 25 years. Such a huge young population implies the possibility of strong growth rates to sustain in the future as well. In fact, the region’s population is projected to increase by more than 2% annually during the upcoming years. The availability of a large pool of working age individuals has the potential to shape the economic fortunes of the region. The demographic profile indicates huge potential for real estate demand, and this need for housing will lend a positive momentum to the market in the future.

An important factor for the real estate industry is the rapid urbanization in recent years. Due to the specific geography of the MENA region— which includes rather smaller countries and generally difficult living conditions—urbanization and concentration of population in a few pockets tend to be very high. While the global average percentage of people living in urban areas is 50.6%, the percentage in the GCC region is as high as 80.3%. In Kuwait and Qatar, the urbanization rate exceeds 95%. Egypt is the only country where the rate does not exceed 70%; in fact, it stands at a relatively low 42.8% due to a large population that is spread around the huge Nile delta.

The urban population in the MENA region has been increasing sharply since the 1950s. Although the urbanization process seems to have slowed down, it remains quite impressive with an AAGR of over 2.5% in the past two decades. The increase was the largest in the UAE, where the number of people living in cities has been rising at a compounded annual growth rate (CAGR) of 7.9% since 1950. However, the most phenomenal transformation in the relative shares of urban and rural populations was seen in Oman, where in the mid‐20th century only 8.6% of the population lived in cities against an estimated 71.7% in 2010. For the entire region, the progress was from 30.8% in 1950 to 58% in 2010 (or 82% for all the eight countries in 2010, excluding Egypt). Such increase in densities translates into an urban sprawl and the pressing need for expanding the region’s main cities. The population of Cairo is almost 12 mn, and the city has grown to become the largest agglomeration in the MENA region, and eleventh largest globally. Rapid economic growth after the oil boom in the 1970s, large‐scale migration from rural areas, government policies, and globalization trends turned Dubai into a major global metropolis. From some 20,000 inhabitants in 1950, its population surged to almost 1.4 mn estimated for 2010, more than doubling during the last 15 years alone. In fact, of the biggest cities in the region under study, the more established centers like Cairo and Alexandria in Egypt gave way to smaller ones in terms of the speed of development. Apart from Dubai, the cities of Dammam, Riyadh and Kuwait City witnessed the fastest growth rates during the last 60 years.

0

1

2

3

4

5

6

QAT OMN UAE KUW BAH JOR LEB

Mn

Urban population

1980 1990 2000 2010E

0

10

20

30

40

KSA EGY

Mn

Urban population ‐ Saudi & Egypt

1980 1990 2000 2010E

Source: UN, Blominvest Source: UN, Blominvest

‐150

‐100

‐50

0

50

100

150

BAH EGY JOR KUW LEB OMN QAT KSA UAE

'000

people (Per year)

Net migration in MENA countries

1995‐2000 2000‐2005 2005‐2010 2010‐2015


Alexandria Ca

iro

Amman

Kuwait C

ity

Beiru

t

Madinah Ri

yadh

Jiddah

Makkah

Dubai

0

2

4

6

8

10

12

14

Mn

10 biggest cities in the region under study (2010 estimates)


Immigration has been another factor to drive real estate growth, especially in the GCC, which are the main regional importers of workforce. Egypt and Lebanon are net exporters, while Jordan, where Iraqi immigration currently contributes to positive net migration, is expected to have negative labor flows during 2010‐2015 and beyond. Of the GCC, Qatar, Saudi Arabia, and the UAE have been attracting the highest numbers of foreign workers. According to the United Nations (UN) projections, labor inflows to the entire GCC will retain a similar though declining level in the future. For labor‐importing countries including Jordan, migration will continue to create additional demand for real estate, on top of the one already resulting from growing local populations. In Dubai, for example, immigrants contributed to the majority of the 7.6% population growth between 1Q07 and 1Q08, reflecting 110 thousand new comers a year. Standard Chartered Bank estimated that assuming an average size of an expatriate family is similar to that of EU – 2.5 persons per household – 44 thousand new housing units would be necessary each year to keep up with the growing population numbers. Egypt, Jordan, and Lebanon also feel the impact of the regional workforce dynamics since people who immigrate to neighboring countries for employment purposes often invest money earned abroad in property back home. These migration trends are, however, highly pro‐cyclical. Economic prosperity attracts foreign workers who create demand for housing, while economic downturns result in their outflow from destination countries, due to job losses. This can further depress property markets. Due to the exceptionally high percentages of immigrants in the GCC populations, this is among the factors that have played a part in the MENA real estate scenario.

3.3 Liquidity driving real estate growth

A key enabler of the dynamic growth in the sector was abundant liquidity, fueled by soaring oil revenues and access to capital markets. Credit to the private sector started seeing certain anomalies in 2004‐2005, when growth accelerated rapidly, especially in Qatar, Saudi Arabia, and the UAE. The IMF suggested a visible upward shift from the trend of credit/non‐oil GDP ratio for most GCC countries starting 2005. By 2008, the deviation recorded by all GCC countries ranged from 3% in Oman to 83% in Saudi Arabia and to over 100% in the UAE. Average credit growth across the GCC was almost 23% a year between 2003 and 2008, resulting in higher leverage and weaker balance sheets for banks.

Data confirms that the construction and real estate sectors were among the major drivers for this credit growth. In most countries under study, credit to both construction and real estate—wherever data is available—has been increasing faster than that to the private sector. This was most evident in Bahrain where credit to construction as a share of total credit to the private sector grew from 9% in 2004 to 27% in 2009. Kuwait and Qatar were the other prominent cases where the percentage of credit to real estate rose from 15% to 24% and from 14% to 21%, respectively.

50%

70%

90%

110%

130%

150%

170%

'04 '05 '06 '07 '08

Private sector credit/Non‐oil GDP (2004‐2008)

BAH

OMN

KWT

KSA

QAT

UAE


0

20

40

60

80

100

120

Bahrain Kuwait Oman Qatar KSA UAE

USD

bn

"Excess" credit‐deviation from the '92‐'04 Trend Line (2008)


0%

20%

40%

60%

80%

100%

120%

140%

LEB EGY JOR KSA QAT BAH KUW OMN UAE

Credit to private sector as % of deposits (2008)


25


One of the reasons behind the rapid growth in credit has been low interest rates. Most countries continue to peg their currencies to the US dollar, except for Egypt, and Kuwait where the dinar is pegged against a basket of currencies with the USD and Euro carrying major weights. Since the subprime crisis, the US Fed’s main concern was to stimulate the economy by cutting interest rates to historical lows, in addition to other measures. In order to maintain parity with the dollar, central banks in MENA countries eased their monetary policies as well. As a result, lower interest rates resulted in higher money supply. In the GCC, broad money grew at an AAGR of 19% between 2004 and 2008, compared to 10% earlier. Egypt, Jordan, and Lebanon recorded a 12‐15% increase in M2 during the same period. This cheap money, resulting from low interest rates on loans, pushed credit expansion even further.

In effect, such a credit environment led to the build‐up of vulnerabilities. Banks increasingly took on higher leverage and, therefore, risk. In all the GCC countries, capital adequacy ratios reduced between 2003 and 2008. Even though capital adequacy remained relatively high—between 10% and 20% for most countries—it did not help arrest the credit spike. Similarly, commercial bank reserves with central banks plunged in most countries during Q2 and Q3 of 2008. At the same time, external financing of banks increased substantially, resulting from their need to look for higher amounts of capital to grant new loans.

Central bank Repo rates in GCC

1%

2%

3%

4%

5%

6%

7%

8%

Jan‐07

May

‐07

Sep‐07

Jan‐08

May

‐08

Sep‐08

Jan‐09

May

‐09

Sep‐09

Jan‐10

May

‐10

Sep‐10

BAHUAE

KSAOMN KWT

QAT

Source: Central Banks, Bloomberg, Blominvest

Central bank Repo rates in Egypt, Jordan and Lebanon

1%

3%

5%

7%

9%

11%

13%

15%

Jan‐07

May‐07

Sep‐07

Jan‐08

May‐08

Sep‐08

Jan‐09

May‐09

Sep‐09

Jan‐10

May‐10

Sep‐10

JOR

EGY

LBN

Source: Central Banks, Bloomberg, Blominvest

0

10

20

30

40

50

60

70

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

USD

bn

External loans to the non‐bank sector

JORLBN BAH

OMN

EGY

KWT

QAT

KSA

UAE

Source: BIS, Blominvest

0

10

20

30

40

50

60

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

USD

bn

External loans to the banking sector

JOR OMNLBN

EGY

QAKWT

KSA

BAH

UAE

Source: BIS, Blominvest

0%

20%

40%

60%

80%

BAH KUW OMN QAT KSA UAE EGY JOR LEB

Credit growth by sector, 2004‐08 CAGR

Private sector, total Construction Real estate


0%

10%

20%

30%

BAH KUW OMN QAT KSA UAE JOR LEB

Credit by sector as % of total private credit, 2008

Construction Real estate Source: Central Banks, Blominvest

The non‐banking sector became increasingly indebted abroad ‐ a trend that was most pronounced in the UAE. Non‐GCC countries, especially Lebanon and Jordan, however maintained limited exposure to external financing, which buffered them from the direct impact of the financial crisis.

3.4 Dubai Story

Dubai has been the incontrovertible flagship real estate market in the MENA region. Experiencing an incredible building boom during the past several years, the emirate has seen some of the most extravagant and spectacular projects coming to life. However, during the market correction, the debt‐fueled extravaganza came to a screeching halt. The Dubai debacle made headline news within not only the region, but worldwide as well. The developments in Dubai are representative of stories in the rest of the region and are, therefore, key to gaining further insights into the broader scenario. The global financial crisis contributed to the meltdown…

With the onset of the financial crisis during the second half of 2008, the initial optimism of the MENA region being decoupled from the global economy and immune to the rippling crisis went bust. Developed economies, under the pressure of the downturn, cut back on oil demand, because of which crude prices nosedived after reaching all‐time highs in July 2008. The impact to revenues and public finances of the MENA regions’ oil exporters was phenomenal. Current accounts are estimated to have reduced during 2009, even as the effect on 2008 yearly figures was cushioned by the extraordinary first half performance. In the UAE, the 2009 balance went into the red for the first time in many years. Egypt, Jordan, and Lebanon felt the heat as well, given their reliance on capital inflows—remittances and investments—and trade with

their oil‐rich neighbors. Despite reduced dependence on its already small oil revenues—due to relatively limited reserves—Dubai felt the pressure as well. In order to accelerate its economic diversification, the emirate became heavily reliant on credit including foreign financing. The emirate went to great lengths to position itself as a regional trade and finance hub. In order to attract business from abroad, it introduced favorable regulations and set up special economic zones. As a result, along with the other emirates, it climbed to the 33rd position in the latest “Doing Business” report by the World Bank and the International Finance Corporation, scoring even higher in the real estate and construction permits categories. FDI was flowing into the UAE, particularly into the real estate sector. Dubai was the favored destination with 75% of all start‐ups set up in the country between 2003 and April 2009, of which 42% came from the US and UK, according to online database fDi Markets. During the first four months of 2009, the emirate attracted 119 FDI projects or two‐third of those for the entire UAE. International companies, which were eagerly setting up shop in Dubai, created additional demand for commercial real estate.

020406080

100120140160

Jul‐0

8

Sep‐08

Nov

‐08

Jan‐09

Mar‐09

May‐09

Jul‐0

9

Sep‐09

Nov

‐09

Jan‐10

Mar‐10

May‐10

West Texas Intermediate, USD p/b


0

2000

4000

6000

8000

10000

‐6

‐4

‐2

0

2

1Q06 3Q06 1Q07 3Q07 2Q08 4Q08 2Q09 1Q10Index

AED

bn (quarterly data)

Dubai Financial Market performance

Net foreign trading, AED bn DFM General Index


‐5%

0%

5%

10%

15%

20%

25%

‐10

0

10

20

30

40

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09E '10F

USD

bn

UAE current account balance

USD bn As % of GDP


27


The economic boom in Dubai and the wider MENA region attracted foreign capital flows through avenues other than FDI. External financing of banks soared, as Dubai’s institutions became increasingly reliant on foreign credit to extend domestic loans. During the first eight months of 2008, bank loans surpassed local resources. Portfolio investments from abroad surged as well, totaling AED 48 bn for the five years from 2004 to 2008. Net foreign investments on the Dubai Financial Market (DFM) stock exchange peaked to AED 11.9 bn in 2007, up from AED 2.3 bn in 2006. Part of this foreign investment was, in fact, speculation money on the revaluation of UAE Dirham. Investors took large speculative positions in the UAE’s stock markets on the de‐pegging of the currency from the US dollar in the face of repeated Fed interest rate revisions. These funds were among the first to reverse flows when it became clear that the UAE’s central bank would not change its currency regime.

In addition to external financing, the residential real estate sector benefitted from the influx of foreigners. Close to 95% of Dubai’s population comprised of expatriates who came in at the height of its economic and real estate boom, leading to increased demand for additional housing, particularly in the premium segment. Dubai became the preferred location for foreign property investors looking to capitalize on this real estate boom. Multiple agencies from all over the world specialized in property sales across the region. Everyone wanted to be part of the real estate miracle.

This increased Dubai’s exposure to the sudden change in the global economic scenario. External liquidity started to dry up faster than expected. International banks, hit by increasing regulation and the need to move resources to troubled divisions, cut funding to local institutions and were strapped for cash. Stock exchanges embarked on a major sell‐off, accounting for a negative AED 5.4 bn in net trading during 3Q08, driven by deterioration in financial positions and increased risk aversion. As per the Institute of International Finance (IIF), external loans, reserves, and net resident lending nosedived during 2009, reflecting the sudden contraction in international capital flows. This included FDI as well, which declined rapidly despite being stable generally. Deteriorating economic conditions forced property developers to scale back projects and cut jobs, and the real estate sector took the biggest hit since the boom. In comparison to 14 real estate FDI projects in the UAE during the January‐April 2008 period, only 8 were launched during the same period in 2009. Thus, the strong ties between Dubai and the global financial system, which fuelled the emirate’s economy during the boom, were severed. In the absence of external funds, Dubai found it very difficult to refinance its debts. This orchestrated a double impact on the real estate sector. Firstly, the industry was highly reliant on credit — as of 2008, credit to the construction sector in the UAE accounted for 15% of the total private credit, while Kuwait Financial Centre estimates that in 2007 bank loans to real estate mortgages in the country contributed another 13.5%. This figure is believed to have increased by almost 85% since 2005, compared to the 35% increase of the private sector lending in general. It can be safely assumed that most of that credit went to Dubai. When banks—with increasing liquidity problems—suddenly froze lending, it turned out that real estate activity, which depended heavily on credit, was up against a wall.

‐20

0

20

40

60

80

100

2008 2009E 2010F 2011F

USD

bn

Capital inflows to Africa and the Middle East*

Private inflows, net FDI, netPortfolio investment, net Private creditors, net

* Countries included: Egypt, KSA, Lebanon, Source: IIF, Blominvest Morocco, Nigeria, South Africa, UAE

‐50

0

50

100

150

200

250

'01 '02 '03 '04 '05 '06 '07 '08 '09F '10F '11F

Resident financing of the GCC economies

Debt liabilities Resident lending, netReserves excluding gold

Source: IIF, Blominvest

0

50

100

150

200

250

‐60%

‐30%

0%

30%

60%

90%

1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10

Index points (1Q

07=100)

Index change

Colliers International Dubai House Price Index

Dubai house price index Change YoY Change QoQ

Source: Colliers International, Blominvest

“The speculative buyers were more than 50 percent of the market (…) They have disappeared”

‐ Eckart Woertz (Gulf Research Center)

Secondly, real estate demand was badly affected by the exodus of foreign companies and expatriates. Attracted by the boom, they poured into Dubai and generated a large part of the property demand. However, as the downturn took hold, the exuberance subdued and they started retreating. Residential estates and commercial properties, which had suffered from undersupply in the years prior to the bust, witnessed a trend reversal. The Colliers International Dubai Foreign Ownership Index declined by 47% between 3Q08 and 3Q09. However, as buyers for existing properties were increasingly difficult to find, new developments that had started during the influx of foreign companies and workers kept entering the market. Due to the longer cycle of real estate development, immediate adjustment of supply was a virtual impossibility, and the resultant oversupply was a primary driver of the market crash. … but the Emirate’s real estate had become an asset bubble before global spillovers came into the picture

The frenzied growth in Dubai’s real estate market accelerated around the beginning of 2007. Real estate transactions measured in both volume and value terms skyrocketed, followed by house prices. According to Asteco, average office rents grew annually by 86% during 2006 and 55% during 2007. During the same period, residential rents increased 25% and 18%, respectively. Initially, the upward trend was backed by fundamentals sound enough to keep such growth intact. Favorable demographics, a positive business environment, and a booming economy ensured healthy demand for real estate. Riding the wave of the opulence, ample liquidity was the perfect enabler. In the years that followed, demand growth far outstripped supply, and many analysts believed the market was healthy and did not suspect any asset bubble. A few analysts were concerned about the phenomenal rise in the sector’s contribution to GDP from the six‐year average of 10% to 15.2% as of 2006. However, the consensus grossly underestimated the speculation rife in the market. Indeed, it is not easy to measure speculation as data providing direct insights is unavailable, and the distinction between speculative and investment transactions is blurred. Nonetheless, some inferences can indeed be drawn from the pace of the price rise. During 1Q08, real estate prices in Dubai increased by as much as 42% QoQ, while annual increases during the first three quarters of the year stood between 70% and

80%. Another sign was the sudden surge in average transaction values. Between 2004 and 2006, the transaction value trend accelerated markedly and skyrocketed to staggering levels during the first three quarters of 2007. Although factors other than speculation can affect both prices and average transaction values, it is unlikely that supply‐demand fundamentals alone could cause such steep increases.

The most infamous form of speculation in the Dubai market was the so‐called real estate “flipping”, even though there is not sufficient data to determine the exact dimensions of the activity. Flipping involves buying and selling a property even before it is finished, and flourished due to the common practice of trading “off‐plan” properties – developments before completion, some of which are sold even before construction starts. The rationale behind such a system lies in the developers’ strategy to secure part of the funds and sales to mitigate risk. To find buyers for off‐plan tranches, developers offered attractive payment plans with relatively low down payments, followed by installments upon completion of specified construction stages. Normally, completed properties should trade at a premium compared to off‐plan

0

2

4

6

8

10

12

0

300

600

900

Jan‐00

Apr‐01

Jul‐02

Oct‐03

Jan‐05

Apr‐06

Jul‐07

Oct‐08

Jan‐10

AED

bn

Transactions

Number and value of transactions in Dubai

Number of transactions Transaction value, USD bn

Source: Dubai Land Department, Blominvest

0

3

6

9

12

15

18

Jan‐00

Jan‐01

Jan‐02

Jan‐03

Jan‐04

Jan‐05

Jan‐06

Jan‐07

Jan‐08

Jan‐09

Jan‐10

AED

mn

Monthly average transaction value in Dubai

Source: Dubai Land Department, Blominvest

29


properties, since they can generate rental income at no risk. However, a study by Standard Chartered Bank in July 2008 revealed that there was virtually no difference between Dubai’s off‐plan and completed developments in the secondary markets, reflecting unusually high demand for the former. Most likely, this demand originated from speculative investors who found it convenient to buy such properties at high leverage and sell at a profit before the next installments were due. According to the bank, if an investor paid only 10% as down payment, a property appreciation of 10% in effect implied an earned return of 100%. In such a scenario, a large part of the demand was because of speculative purchases wherein investors had no intention of living in the property. Even though the exact volume of the speculative demand was difficult to determine, estimates by Dubai‐based Gulf Research Center pegged it at more than 50% of the total, clearly indicating the presence of a perilous bubble.

Dubai’s real estate market also witnessed another phenomenon associated with such an asset bubble – companies used buoyant investor sentiment to perpetrate fraudulent misrepresentations. As financial improprieties such as the Dynasty Zarooni and Deyaar Development cases rocked Dubai, it became clear that the market growth had preceded the development of an adequate regulatory framework. Investors disappointed with fraudulent developers who showed fake evidence of construction were among the first to become wary of market developments and withdrew.

This domestically generated real estate bubble did not take much time to burst. The primary trigger was the deterioration in the global economic environment. However, even in the absence of such an external impulse, a serious correction was just a matter of time. It did not take long for speculators to start pulling out once signs of price stabilization and worsening financial conditions became apparent. This further pressured prices, which, in turn, affected genuine longer‐term investors who intended to either earn rental income or live in the properties. As Dubai’s economy felt the heat, the backlash of job losses and bankruptcies deepened, accelerating the flight of foreign companies and expatriate workers. At the same time, because of long construction cycles, supply could not adjust in time to changing market conditions. As per data by Dubai Statistics Center, the number of units—as well as cumulative value of completed buildings—was still well above the long‐term average as of 4Q09, declining slower than house prices, which had nosedived by over 50% from their peak levels in 3Q08 to their lowest in 2Q09, according to the Colliers International index.

Currently, house prices in Dubai seem to have stabilized. However, amid ongoing concerns of an oversupply, prices may dip to some extent going forward. The nature of housing demand has seen a significant shift, with a major part now coming from end‐users as the uncertainty has eliminated—or at least minimized—speculation. During the boom, the focus was on upscale property and mega‐projects such as Burj Khalifa, which has now shifted to more livable and affordable projects. On the financing front, the scenario has undergone a sea change. Following the bubble, and in the aftermath of the crisis, banks have clamped down on lending, and the present loan‐to‐value ratios are in the range of 75%‐90% vs. 80%‐90% seen during the peak period between 2007 and mid‐2008. As a result, the off‐plan market has been on a constant decline, which is clearly visible in the price differential compared to completed developments. Since the beginning of 2009, completed properties have traded at a notable premium to off‐plan properties. In fact, during 1Q10, Colliers International did not record any transactions for properties that were more than six months due for completion. In general, Dubai’s real estate market—the worst‐hit in the MENA region—is still under a rather painful correction and may experience further volatility for some time, though opinion is divided. While Credit Suisse estimates a further downslide of 20% this year, many real estate firms project modest price increases toward the end of the year.

3.5 Country‐wise real estate overview

The global economic crisis and the Dubai debt crisis have had a substantial impact on the real estate market in the MENA region. Although some stakeholders managed to contain the fallout, the debacle revealed financial vulnerabilities that need immediate attention. Investors in all the countries under study held a negative sentiment as market developments impacted liquidity and funding costs directly. However, despite lingering concerns about the fallout on the broader economy, market dynamics and recent developments have been unfolding a different story in each country. The countries have been individually reviewed on

0

300

600

900

0

2

4

6

8Q205

Q405

Q206

Q406

Q207

Q407

Q208

Q408

Q209

Q409

Completed

buildings

AED

bn

Number and value of completed buildings in Dubai

Value (AED bn) Number of completed buildings Source: Dubai Statistics Center, Blominvest

multiple dimensions that include residential vs. commercial property development, the nature of the retail industry, and the level of tourism activity – drivers that are central to the real estate industry in general.

3.5.1 Bahrain

Bahrain is the fifth most densely populated country in the world, and land scarcity is a key factor driving real estate prices. Similar to the UAE, Bahrain has been developing land reclamation projects out of necessity than ambition. Several large reclamation projects are underway and the volume of such work increased by 90% between 2002 and 2007, despite which land supply continues to fall short of demand.

Compared to other Gulf countries, Bahrain’s 50% expatriate population is small on a relative basis. Foreign nationals are entitled to 100% land ownership in designated areas located mainly in Manama. In these areas, demand for residential real estate is visibly higher and concentrated in the upscale segment. However, demand for almost half the residential freehold projects comes from Bahraini nationals, implying greater stability than other markets dominated by foreign buyers. Investment projects in Bahrain are very popular among Saudis, Kuwaitis, and other GCC nationals.

The residential market remains undersupplied, particularly in the low‐ to middle‐income segment, due to land shortages. The upward movement of construction costs was another reason, forcing developers to focus on higher margin luxury projects. For the Bahraini population, affordability is often an issue since a typical housing loan is equal to approximately half the cost of a family home. So far, prices have corrected in areas such as Juffair and Seef, primarily inhabited by foreign nationals. Market speculation is nominal and does not contribute much to overall demand.

Favorable business‐friendly ratings and a highly developed financial sector are driving the commercial real estate segment in Bahrain, as reflected in the presence of over 400 financial companies in the country. However, competition from Dubai and Qatar has affected the market, although the pressure has somewhat eased following relatively strong economic performance during 2009 compared to other GCC peers. Going forward, this will likely be a major challenge despite office rents being lower than in other countries. A large supply has either entered the market or is in the pipeline and will add to the estimated 500,000 sq m as of 2009, primarily in central Manama. The Bahrain Financial Harbor and Bahrain World Trade Center opened in 2008, providing office space that exceeded prevailing average standards. Therefore, a few shifts are likely in the market, with companies moving to sophisticated office space, forcing secondary‐tier developments to raise standards through refurbishments or renovations.

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1 Bedroom 2 Bedrooms

1500

1700

1900

2100

2005 2006 2007 2008

USD

Average rent for a 3 Bedroom apartment in Manama

Source: Cityscape Intelligence, Blominvest Source: Global Property Guide, Blominvest

Bahrain real estate supply

Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e Residential (No. of Units) 131,215 140,793 151,071 162,100 173,933 183,883 199,683 211,883 227,883

Office (GLA sq m, Manama) 100,000 115,000 120,000 289,626 340,000 390,000 410,000 550,000 N/A

Retail (GLA sq m, Manama) 218,339 243,339 291,439 330,000 485,000 625,000 866,000 976,000 1,076,000

Hospitality (4&5 Star Rooms, Manama)

3,843 4,419 5,082 5,845 6,721 8,077 9,473 10,358 10,858

Note: Residential Supply ‐ Total Country Supply, Office Supply ‐ Grade A, Retail Supply ‐ Shopping Malls Source: Cityscape Intelligence, Blominvest

31


Bahrain accounts for around 6% of GLA (Gross Leasable Area) in the GCC region. Private retail spending is the fourth highest in the region. The retail and hospitality sectors are correlated and dependent on visitors from other GCC countries, especially Saudi Arabia. Bahrain City Centre Mall, which opened in September 2008, is the biggest retail development occupying 150,000 sq m of GLA until date. Although no major downturn is visible in the commercial segment, the situation may change as commercial license issuance has been on the decline.

The Bahraini government plans to implement a coordinated tourism strategy and is ready with a blueprint. This will boost tourism further, benefitting the leisure and hospitality real estate segments as well. The government is launching a new drive to develop beaches and historical sites to draw more visitors. Private investments include hotel chains such as Japan’s Nikko Hotels International, Turkey’s Rixos, US Hilton Hotels, Four Seasons, Raffles, Marriott, Kempinski, and a second Ritz Carlton among others. Interestingly, most of the new hotel supply is targeted at the upper end of the market.

Going forward, Bahrain’s real estate sector will benefit from the near 40% decline in construction costs, which will allow the development of affordable housing, thereby tapping a segment that has the largest potential. Other segments may see some volatility as large amounts of new supply are expected to enter the market over the next three to five years. So far, only a few projects are on hold, compared to the rest of the region.

3.5.2 Egypt

Egypt has the largest population and the lowest GDP per capita among the MENA countries under study. Therefore, emphasis on the lower‐end of the real estate market is stronger. Certain characteristics, such as low purchasing power, large households, and traditional way of shopping at corner stores, as opposed to modern retail formats, have posed a few challenges for the sector. Cairo—by far the largest city in the MENA region with an urban population of around 12 mn—is emerging as an international real estate market. However, limited space in the city’s central part has been an issue. Other areas that have seen foreign investments include the coastal belt, which is particularly relevant for the hospitality segment.

A rapidly growing population has exacerbated undersupply concerns in the residential segment. The estimated shortage in the low‐ to middle‐end market is 2.5 mn units, and the new supply amounts to just about 300,000 homes a year. Foreign investments in second‐tier housing are limited, as returns are lower, where as many as 85% of the houses go unregistered due to high fees and inadequate enforcement of regulations. During 2008, investors shifted focus recognizing the huge demand potential in this segment. Meanwhile, prices of high/luxury segments experienced downward pressure during 2009, renewing the risk of an oversupply in the medium‐ to long‐term. Several projects currently underway include housing communities in Cairo’s suburbs, such as SODIC’s Westown and Eastown, and Talaat Moustafa Group’s Madinaty, with a planned capacity of over 600,000 inhabitants.

Similar to the situation in the residential segment, demand for office space is concentrated in the central part of Cairo. Despite severe congestion, traffic problems, and space shortage, this location is the popular business district in the city, especially for large corporations and multinationals. Given the limited supply in the high‐end market, grade‐A office space was running on full occupancy as of end‐2008. Most of the current projects are focused outside the city center though, with an estimated demand for over 1.7 mn sq m of new GLA by 2012. A major chunk of this demand will likely come from the outsourcing sector, which has

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been quite successful in Egypt in recent years. The government plans to address issues such as traffic congestion, pollution, and airline connectivity to help the country buck up against rising competition from other business locations in the region.

Independent outlets dominate the fragmented Egyptian retail sector with small grocery stores accounting for 90%‐95% of all food shops. However, in a fast growing retail scenario, modern retail formats are becoming increasingly popular. Egyptian player

Metro is the market leader. Import tariff reductions in 2005 and 2007 attracted international players as seen in the rapid expansion by Carrefour with its chain of hypermarkets. Over the past decade, shopping malls have attracted a growing number of people. High‐end mall supply, estimated at 314, 000 sq m of GLA at the end of 2008, is expected to reach over 1 mn sq m by 2013. The most popular and best‐known mall is the City Stars complex near Heliopolis, with 643 outlets and 150,000 sq m of retail space.

Tourism plays a major part in the Egyptian economy, contributing an estimated 13% to the country’s GDP as of 2010, according to the World Travel and Tourism Council (WTTC). Cairo is an important leisure center—mainly for Giza and centrally located areas along the Nile—as well as a business location, with as many as 15,000 five‐star hotel rooms as of 2009. The central area of the city is congested, because of which further scope for greenfield construction is limited. The main tourist resorts are Sharm‐El‐Sheikh on the Sinai Peninsula and Hurghada on the Red Sea coast. The global economic crisis has taken its toll on the tourism sector, especially given its impact on Europe, which is the country’s main market. Hotel occupancy rates remained low in 2008 and early 2009, although the situation has improved since then. In the long‐term, Egypt’s popularity owing to its historical sites, coral reefs, and beaches will boost tourist activity and sustain growth.

3.5.3 Jordan

The fundamental dynamics that have fuelled real estate growth and housing demand in Jordan include political stability, investments from the GCC, and political unrest in neighboring Iraq that led to the influx of immigrants. According to ABC Investment, the sector grew at a CAGR of 6.1% during the period 2004‐2008, attaining a peak in 2005 and slowing thereafter. The global economic downturn, coupled with tightening liquidity, hurt foreign investment, and the large number of Iraqis returning home had a negative effect on the property market. Property development is concentrated in the capital city of Amman, although port city Aqaba with a Special Economic Zone (SEZ), Mafraq with an SEZ underway, and Zarqa are showing robust potential. The existence of a fully formalized real estate market several years ago attracted megaprojects such as the USD 10 bn Marsa Zayed mixed‐use project in Aqaba. Despite being a positive development for Jordanian real estate, this led to speculative trading and, in turn, a sharp increase in land prices estimated at 60% YoY in September 2008. Megaprojects are generally the first victims in a slowdown, given their overdependence on foreign buyers who have left the market, and are over‐priced and ill suited for the larger community.

Egypt real estate supply

Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012eResidential (No. of Units) 1,529,600 1,659,330 2,000,000 2,180,000 2,360,000 2,540,000 2,740,000 2,940,000 3,140,000

Office (GLA sq m, Cairo All Categories)

1,704,344 1,806,605 1,915,001 2,029,901 2,151,695 2,280,797 2,417,644 2,827,644 3087644

Office (GLA sq m, Cairo Grade A)

N/A N/A N/A N/A 657,000 710,000 1,750,000 2,150,000 2,400,000

Retail (GLA sq m, Cairo) 152,000 252,000 302,000 314,000 314,000 780,000 900,000 1,020,000 1,100,000

Hospitality (4&5 Star Rooms, Cairo)

11,900 11,900 11,900 13,047 14,637 15,658 16,008 16,508 17,508

Note: Residential Supply ‐ Total Country Supply, Retail Supply ‐ Shopping Malls Source: Cityscape Intelligence, Blominvest

33


Residential demand has come in a large part from foreign investors, who are authorized to buy land on the condition of holding it for at least five years. Furthermore, real estate investments have been kept free of capital gains tax. Demand from the GCC, Iraq, Europe, and from Jordanians living overseas coupled with local buying led to unprecedented growth in the sector. However, demand from foreign nationals has waned due to the economic downturn, leaving the residential market, especially the high‐end segment, rather oversupplied.

The office segment has benefitted from trade agreements with other countries over the past several years. Moreover, Jordan’s appeal to companies and non‐governmental organizations (NGOs) to consider the country as an alternative location to Iraq fuelled growth as well. In Amman, grade‐A GLA more than doubled between 2004 and 2008 from 150,000 sq m to 302,190 sq m and will expand to 800,000 sq m by end‐2010 with the completion of new projects. However, Amman is yet to make its mark as a business center in the context of the MENA region, because multinationals and businesses tend to prefer Dubai, Bahrain, and Egypt. Therefore, new office space will likely exacerbate oversupply in the current economic scenario.

Jordan’s retail market lacks the potential of its bigger and wealthier neighbors, primarily due to a relatively smaller population and lower disposable incomes. However, as is the case elsewhere, shopping malls are gaining prominence, with mall GLA expected to exceed 1 mn sq m by 2010. Mecca Mall, Abdoun Mall, and Istiklal Mall are the leading malls, while Abdali’s Boulevard will add another 74,300 sq m upon completion. However, the slowdown in economic growth and unemployment will make it difficult to justify this additional supply, shifting the bargaining power from owners to tenants.

Travel and Tourism contributes a little above 20% to Jordan’s GDP, and the country has been trying to position itself as a tourist destination. The government’s current strategy is to promote high‐end, sustainable tourism, focusing on new markets in the Gulf and India, and niche markets such as medical and religious tourism. Hotel occupancy rates in the country averaged 55%, while Amman registered 66%, as tourists prefer to stay in cheap hotels or with family/friends. A number of higher‐end projects are underway in Amman and Aqaba in order to gradually attract more tourists and increase revenues.

Overall, the global economic slowdown has affected Jordan’s property sector with 2009 prices 15% lower than those in 2008. Depending on future economic growth, real estate may suffer from subdued income levels domestically and fewer international tourists. On the other hand, a faster‐than‐expected rebound may raise the concern of a real estate bubble leading to tightening monetary policy.

800

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1600

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2400

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Averge property sales prices in Amman

Apartment Villa

Source: Cityscape Intelligence, Blominvest

Jordan real estate supply

Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e

Residential (No. of Units)

1,193,458 1,220,536 1,245,918 1,280,586 1,335,322 1,365,322 1,405,322 1,445,322 1,485,322

Office (GLA sq m, Amman)

150,000 150,000 150,000 175,000 302,190 792,190 792,190 792,190 905000

Retail (GLA sq m, Amman)

362,500 362,500 362,500 522,500 617,500 887,500 1,052,500 1,102,500 1,152,500

Hospitality (4&5 Star Rooms, Amman)

4,882 5,165 5,238 5,234 5,394 6,145 6,835 7,435 7,435

Note: Residential Supply ‐ Total Country Supply, Office Supply ‐ Grade A, Retail Supply ‐ Shopping Malls Source: Cityscape Intelligence, Blominvest

3.5.4 Kuwait

The two major differentiators of Kuwait’s real estate market are limited foreign investments and government dominance. In order to liberalize its property market in compliance with the World Trade Organization (WTO) norms, Kuwait’s parliament passed a law allowing GCC nationals to own land and property, which came into force in 2004. However, private activity in the sector is limited, as the government continues to own 95% of the land and is the most influential developer through state agencies, most notably the Mega Projects Agency and the Public Authority for Housing Welfare (PAHW). Private players typically participate through build‐operate‐transfer (BOT) schemes, wherein they hand over the projects to the state after a predefined period. The government’s land ownership led to massive shortages, and office rents nearly doubled between 2003 and 2008 at an average 15% annual growth. Prices were up across the sector, with a trend reversal not seen until 2009, when deteriorating economic conditions and liquidity constraints took their toll. However, according to latest data from Kuwaiti authorities, sales numbers and values are on the rise again and stand close to early‐2008 levels. Even though this is driven more by land than building transactions, it points to strong investor sentiment and an overall positive outlook.

According to Cityscape Intelligence, the residential segment accounts for more than half of the total real estate activity. Given the limitations on ownership, expatriates dominate the rental market, while the freehold market is largely reserved for Kuwaitis. The legislation conferring ownership rights on GCC nationals is yet to have a strong influence on the market, having coincided with the economic crisis. High‐rise residential developments are characteristic to Kuwait owing to the shortage of land. Real estate transactions have been on a decline since 2008, and the residential segment may suffer from oversupply of small apartments built mainly for rental purposes. Nonetheless, further liberalization toward foreign investments will help revive the market.

Cityscape Intelligence reports that commercial space accounts for 6% of all the buildings in Kuwait and is concentrated around Kuwait City and Sharq. The development was fuelled by investors expecting Kuwait to emerge as a destination, especially for companies that planned to use Kuwait as the base for their Iraqi operations; however, this is yet to materialize fully. Office rents recorded a strong uptrend between 2003 and mid‐2007, after which they started to decline. Developments underway include the USD 250 mn Kuwait Business Town and the Al Hamra Tower, even as oversupply concerns in the near future could trigger a dip in occupancy rates.

Growth in the retail segment slowed down with high vacancy rates reported in 2009, and the scenario looks bleak with Global Investment House predicting a 10%‐15% decline in rents during 2010 as well. However, the medium‐ to long‐term outlook remains positive. Driven by rising disposable incomes of a 95% urban population, Kuwait’s retail sector is expected to thrive on large‐scale, high‐end projects. By end‐2008, total GLA in the country was estimated at 600,000 sq m with another 200,000 sq m in the pipeline. Avenues Mall, which is poised to be the largest shopping mall in Kuwait upon completion of its four phases totaling USD 2 bn, opened its initial capacity in 2007. The 360 Mall opened recently as well, while the launch of the Mall of Kuwait is awaited.

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Kuwait real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e


326,916 329,974 334,606 342,926 355,126 365,126 376,126 391,126 406,126

Office (GLA sq m, Kuwait City)

941,329 1,017,576 1,100,000 1,188,660 1,284,466 1,387,994 1,500,000 N/A N/A

Retail (GLA sq m, Kuwait City)

294,428 340,080 388,059 505,303 608,035 926,035 1,036,035 1,068,035 1,118,035

Hospitality (4&5 Star Rooms, Kuwait City)

2,537 2,568 2,600 4,648 5,732 6,634 7,147 8,262 9,232

Note: Residential Supply ‐ Total Country Supply, Office Supply – All categories, Retail Supply ‐ Shopping Malls Source: Cityscape Intelligence, Blominvest

35


Tourism is not the major focus area in Kuwait, and domestic tourists are likely to be the main source of business growth in the upcoming years. As of 2009, four‐ and five‐star hotels had 5,700 rooms with an additional 4,000 expected by 2012. However, the new capacity is likely to pressure the already oversupplied market, as occupancy rates came down from 65% on average in 2005 to 50% in 2008. Moreover, the WTTC does not foresee a positive long‐term outlook for the sector.

3.5.5 Lebanon

Lebanon’s real estate market contributes nearly 15% to GDP and is a preferred destination for GCC investors. The property sector has weathered the global economic crisis and the period of geopolitical uncertainty. The sector has shown fortitude, supported by foreign capital inflows, remittances by Lebanese living overseas, rising incomes, favorable legislative changes, mortgage availability, and improving liquidity. The sector has emerged intact and posted record growth on the back of strong fundamentals and limited speculative activity. Between 2004 and 2008, the number of construction permits grew at an AAGR of 12.6% and at 17.6% in terms of value. Even though growth slowed down during the economic crisis, the uptrend was seen toward the end of 2009 and the positive outlook continued during 2010. Since the beginning of 2010, bank‐lending activity has been rising, recording higher‐than‐average growth in recent years. There is excess liquidity in the Lebanese market, garnering from banks an increase in mortgage lending. Although real estate lending standards are conservative, overall lending to the real estate sector increased during the year, helping to raise property prices in the country. Some issues are still in the way of the sector to realize its full potential including political uncertainty, land shortage, regulatory shortcomings, prominence of unlicensed real estate agents, and volatile construction costs. However, strong fundamental demand is boosting the overall momentum in the sector.

Lebanese have a penchant for owning homes instead of renting, but affordability is limited to the middle‐upper and upper income groups. As the urban population continues to grow at 1.2%, far ahead of the 0.1% growth rate for rural population during 2005‐2010, developers are beginning to favor the mid‐ and lower‐end of the market. Demand for middle‐income housing is strong among locals, while Gulf nationals and Lebanese expats looking for second homes and vacation homes with higher standards are driving the higher‐end market. Although residential supply has increased from 880,000 units in 2004 to 967,000 in 2010, as forecast by the Kuwait Financial Centre, it is unlikely to meet demand, and vacancy rates may fall below 4%. According to Cityscape Intelligence, Beirut’s share of the total residential market is 11.6%, with a prominence of apartment blocks, characteristic of the capital’s landscape, and with also the highest prices.

Lebanon—and Beirut in particular—is a preferred location for international companies looking to set up regional operations due to relatively lower office space prices. The influx of foreign companies started in the early 1990s, with Procter & Gamble, Merrill Lynch, Bank of New York, and American Express establishing their Middle East offices in Beirut. Although competition from neighboring countries has stiffened in recent times, Lebanon has a definite cost advantage. As a result, high‐quality office space is in deficit, and occupancy rates are close to 100%. As opposed to the residential segment, commercial tenants prefer to lease space instead of buying, as it allows increased flexibility. Developers are increasingly adjusting to these needs, especially since

commercial rents are markedly higher than residential. According to Cityscape Intelligence, yields from the office segment averaged 5%‐7% in 2008, against 3%‐4.2% for residential rents. High‐grade office space is concentrated in downtown Beirut, especially in the Beirut Central District, where rents could be as high as USD 500 per sq m. However, shortage of such space and

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rising prices are driving smaller tenants to move out, boosting demand in areas such as Jnah, Ashrafieh, Verdun, and Baabda with prices soaring over 50% between 2006 and 2009.

Strong domestic demand and tourist activity are the key drivers for the retail sector in Lebanon. According to Retail International, Beirut currently holds 470,000 sq m of GLA and another 128,000 sq m is under development. Cushman and Wakefield’s 2009 survey for retail rental prices ranked Beirut the most expensive among the ten Arab cities that were included. Beirut’s prime downtown locations are in the central district, but Verdun and Ashrafieh have managed to attract top international designer brands. Despite high prices (USD 2,000 per sq m), vacancy rates are low. The most prominent shopping malls are ABC Ashrafieh, ABC Dbayeh, City Mall, and Habtoor Mall, in addition to the Souks of Beirut, which opened its first phase in 2007.

Lebanon’s tourism sector has remained strong in recent times, recording a 47% growth in international tourist numbers from 1.3 mn in 2008 to 2 mn in 2009. Thus, for the first time, tourism surpassed the 1970s figures when Beirut was referred to the “Paris of the Middle East” before war ravaged the country. Hotel occupancy rates surged from 49.2% in 2008 to almost 70% in 2009.

However, the supply of 5,500 rooms during 2009 was markedly below the 1974 level of 6,500. With brands such as Hilton, Four Seasons, Ritz Carlton, Intercontinental, Mövenpick, Le Meridien, Radisson SAS, as well as a number of independent three‐star hotels planning to set up ventures in Beirut, the balance may shift sooner than expected. Looking forward, political stability will be the fundamental determinant, despite high demand, and will be a key factor behind the country’s ability to tap investment potential fully in the medium‐ to long‐term.

3.5.6 Oman

Oman’s real estate market, one of the youngest in the Gulf, has been dominated by strong end‐user demand. Public infrastructure investments, high liquidity resulting partially from low interest rates, and improved regulation were the key growth drivers. Between 2002 and 2006, property sales transactions surged from 21,113 to 53,230, and the market remained buoyant during 2007‐2008 owing to increased immigration and economic diversification. During the two years until June 2008, supply constraints pushed residential land prices up by a whopping 400%. Speculation was rife in transactions, particularly for land adjacent to major projects. Prices started plunging beginning 2009 and, contrary to other countries under study, available figures do not show a rebound so far during 2010. For instance, the Blue City project had sold around USD 75 mn worth of units as of June 2010 vis‐à‐vis its August 2009 target of USD 639 mn. In June 2010, Dubai‐based investment company Essdar Capital obtained almost all senior debt of Blue City development for USD 655.5 mn, in what was tagged a landmark distressed real estate deal in the region. Other mega‐projects, mainly mixed‐use, are currently underway with completion expected within the next decade. Given this supply, the market is due for a correction in the medium‐term, although long‐term fundamentals remain healthy.

Lebanon real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e


1,027,878 1,019,001 1,045,585 1,072,682 1,100,302 1,129,039 1,158,331 1,188,331 1,218,331

Office (GLA sq m, Beirut)

251,139 276,253 303,878 334,266 367,693 404,462 444,908 489,399 538,339

Retail (GLA sq m, Beirut)

83,805 173,000 201,000 173,000 200,000 270,000 320,000 335,000 350,000

Hospitality (4&5 Star Rooms, Beirut)

4,000 4,000 4,000 4,370 5,026 5,982 6,232 6,482 6,982

Note: Residential Supply ‐ Total Country Supply, Office Supply – Grade A, Retail Supply ‐ Shopping Malls Source: Cityscape Intelligence, Blominvest

37


Oman’s residential market is suffering from short supply, as vacancy rates stood at 5% in 2008, down from 13% in 2003. Prices for residential units doubled between 2004 and 2007, and the growth continued until 1Q09. New supply is expected to hit the market during the upcoming decade with projects such as Blue City, The Wave, Yenkit, Tilal Al Khuwair, and Muscat Golf and Country Club comprising of over 17,500 residential units. There has been mixed evidence from initial property sales. While The Wave sold 60% of properties within the first two days of its seventh property release, Blue City has been short of its sales targets and is struggling to meet its financial commitments. This raises the concern of a possible supply‐demand mismatch, especially in the current economic scenario when demand is down due to the exodus of foreigners, and lower GDP per capita.

A rising number of international companies and successful private sector developers in Oman pushed Muscat into the group of 35 most expensive commercial markets in the world in 2008, according to the Oxford Business Group (OBG). The consultancy reported that office property prices rose by at least 50% annually between 2004 and 2007, despite which, tenants flocked to occupy new office space upon launch during 2009, especially in the case of grade‐A developments. However, demand is expected to remain flat during 2010, with a possible medium‐term correction following a likely new supply of 200,000 sq m of office space in Muscat by 2012.

While Omanis have benefited from increasing disposable incomes and are changing their conservative spending patterns toward

luxury international brands, the retail industry has been slow to capitalize on this shift. Only a few years ago, affluent locals used to travel to Dubai for a wholesome shopping experience. The landscape is now changing with the launch of contemporary retail infrastructure. The largest shopping mall in Muscat—the Muscat City Centre—is likely to be displaced by the Muscat Grand Mall after 2011 as the preferred shopping destination. Upon completion, the new mall will boast of 220,000 sq m of GLA, over three times that occupied by City Centre. Shopping malls aside, retail activity is concentrated in Quorum. Gradually, the market is expanding outside the capital with the opening of two shopping malls in Sohar and two others under construction; and the first shopping center underway in Salalah. In the short‐term, retail spending is not expected to increase significantly during 2010, but the retail segment is poised to benefit from its young and increasingly brand‐conscious population in the longer run.

Tourism is central to the government’s diversification plans. Between 2000 and 2008, international tourist arrivals increased by almost 50%, reflecting the dynamic growth in Oman, which is regarded as a safe and welcoming destination by Western visitors. During the same year, revenues of four‐ and five‐star hotels—the biggest segment grossing higher revenues within the hotel industry—recorded annual growth rates of 22% and 34.7%, respectively. Room occupancy rates climbed to 68%, which indicates that supply is under pressure given the seasonality associated with the hospitality market. Currently, there are 9,400 hotel/motel rooms in Oman, according to Cityscape Intelligence. Global Investment House (GIH) estimates another 5,500 rooms to be added by 2012 as large‐scale mixed‐use projects such as Blue City, The Wave, and Omagine enter the market, while tourist arrivals are forecast to recover by 2012. This could lead to a supply overhang in the short‐term, but the overall outlook remains positive, with the WTTC expecting international visitor numbers to increase more than 75% by 2020 compared to 2008 levels.

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370

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395

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Average price per housing unit Muscat*

*Calculated on the basis of Source: Cityscape Intelligence, Blominvest Ma'abela apartments, The Wave apartments and Qurum villas

Oman real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e

Residential (No. of Units) 440,715 450,653 460,815 471,207 481,832 492,698 503,808 513,808 523,808

Office (GLA sq m, Muscat) 86,384 90,703 95,238 100,000 105,000 125,000 185,000 205,000 225,000

Retail (GLA sq m, Muscat) 157,143 182,007 246,448 261,670 281,170 287,770 315,770 365,770 385,770

Hospitality (4&5 Star Rooms, Muscat)

2,990 3,105 3,426 4,106 4,106 4,435 4,685 4,935 5,435


3.5.7 Qatar

Qatar’s real estate market is flourishing on the robust GDP growth of between 13% and 15% during the period 2006‐2008 and over 9% even in the midst of the crisis in 2009, as per IMF data. Supported by the recently introduced favorable regulations, foreign investment—including that to real estate—was on the rise; FDI reached USD 1.14 bn in 2007 alone, increasing almost seven‐fold on 2006. Another advantage has been the limited number of speculators in the market and lower volatility, resulting

from the sector’s infancy compared to other GCC countries. During the boom in the 2000‐2006 period, demand grew at a CAGR of 8%, translating into nearly 10,000 housing units annually, according to Cityscape Intelligence. During the same period, supply grew at a CAGR of 5%, or by 5,500 units a year. This mismatch pushed the market out of balance, resulting in a large supply gap and price spikes, both in rental and freehold segments. The Qatar Real Estate Index increased by 261% between 2001 and 2008. When the repercussions of the global crisis led to liquidity squeeze and demand slowdown, the market went into a correction mode. However, the government’s timely interventions including massive equity purchases by Qatar Investment Authority (QIA) and the takeover of banks’ investment portfolios by Qatar Central Bank helped mitigate the impact. Lending activity declined 7% during 1Q09, but real estate lending picked up later during the year, according to reports by industry insiders. Rentals and sale prices of apartments stabilized after recording the steepest plunge between 4Q08 and 1Q09.

Qatar’s strong economic growth was accompanied by a spike in inflation. Housing CPI increased 146% between 2004 and 2008, and was up 19.6% in 2008. Coupled with the growing supply‐demand imbalance, this transformed Doha into one of the most expensive residential property markets in the region. Between mid‐2006 and 2007, rentals in some areas grew 50% and apartment yields reached 14% in 2008, according to Cityscape Intelligence. The housing market turned highly profitable for

property owners who preferred to deal with corporate customers offering rented accommodation to employees. However, weakening demand due to liquidity constraints and sapped investor confidence, followed by the market correction, made rental terms more flexible in due course. Further easing of the price pressure could be driven by the forecast of an estimated 33,000 housing units entering the market between 2009 and 2012. However, the country’s market has strong fundamentals, as evident from the robust demand for high‐end properties. In January 2009, at the peak of the bearish period, properties on Qanat Quartier, part of The Pearl‐Qatar, were sold within an hour generating USD 413 mn in revenues. On the other hand, affordable housing remains grossly undersupplied.

Office occupancy rates in Doha’s major commercial district West Bay were around 98% in 2008, pushing office prices up and causing rentals to grow by 40% and 26% during 2005 and 2006, respectively. Demand was concentrated in grade‐A developments, which attracted companies from the hydrocarbon sector. West Bay currently boasts of approximately 850,000 sq

3.0

3.5

4.0

4.5

5.0

1Q09 2Q09 3Q09 4Q09 1Q10

USD

'000

Average apartment sales price, Qatar (USD/sq m)

0

100

200

300

400

2002 2003 2004 2005 2006 2007 2008

Qatar Real Estate Index

Source: Cityscape Intelligence, Blominvest Source: Qatar Statistics Authority, DTZ Research, Blominvest

Qatar real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e


Office (GLA sq m, Doha) 299,250 332,500 381,947 451,555 1,131,555 1,481,555 1,661,555 1,891,555 2,031,555

Retail (GLA sq m, Doha) 278,212 284,212 431,212 437,212 500,000 646,000 934,000 959,000 1,028,000

Hospitality (4&5 Star Rooms, Doha)

2,990 3,105 3,426 4,744 5,592 7,639 11,668 12,668 13,668


39


m of office space, and a major expansion is likely in the near future. Doha’s commercial supply is expected to rise by 550,000 sq m between 2010 and 2012, which will ease pressure on prices. Demand is not expected to decline due to fundamental factors such as surging GDP growth and ongoing development of the natural gas industry. The government is adding to the demand and is leasing offices instead of building them. Grade‐A occupancy rates were 85%‐90% as of September 2009, with the rent gap between prime and not‐so‐prime locations reaching 65%, as per Cityscape Intelligence.

Rising income levels are shaping Qatar’s high‐end retail industry, which is concentrated in the capital city of Doha. Shortage of grade‐A retail space has had its impact, pushing prices up during the past few years. At the end of 2008, vacancy rates were less than 1%, and some locations were running waiting lists for future tenancy. Demand did not ease even during 2009, with occupancy rates at upscale malls averaging 95%‐100%. Boutique spaces in downtown Doha command the highest rents that can reach as much as USD 110 per sq m monthly. The Villagio Mall and the City Centre Mall, the largest shopping malls in Qatar, are the two contemporary and trend‐setting retail establishments with a GLA of 265,000 sq m between them and accounting for nearly 40% of the total. Retail space is projected to triple soon, with new developments such as Regency Mall and others at West Bay Lagoon, as well as the expansion of existing malls. Cityscape Intelligence expects supply to exceed demand by 2012, although the country’s affluent population’s penchant for luxury brands will foil any serious imbalances in the market.

Going forward, the infrastructure sector will get a boost from the 2022 FIFA World Cup. The country has plans to spend around $100bn on infrastructure projects, according to Arabian Business. For the mega sporting event, the country has plans to build 12 stadia costing $2bn each and arrange around 90,000 new hotel rooms. The government has already announced rail projects worth $25bn and has plans for a $10bn Doha International airport to handle around 50mn passengers a year. Other projects in the pipeline include a $7bn deep‐water port. The event will likely boost the local property market and the volume of sales and prices will see an uptrend in the country. In addition, the World Cup will boost tourism and hospitality sectors.

In the past, Qatar’s hospitality segment has benefitted from the growth in business travel, which accounts for 95% of all arrivals, according to the Qatar Tourism Authority (QTA). International tourist arrivals grew at a CAGR of 10% between 2004 and 2008 to 1.1 mn. Although the number dropped by 5% during 2009, growth is expected to resume in 2010 and sustain going forward. The government is actively promoting tourism, having announced a USD 17 bn spending plan in 2008, which focuses on the meetings, incentives, conferences, exhibitions (MICE) segment. However, another element of the strategy includes attracting a broader tourist base with the target to expand non‐business share from 5% to 30%. This will help extend the average visit length, which is only 2‐3 days for business tourists, and address vacancy imbalances between the MICE peak and off‐peak periods. The latter will be particularly significant as a number of new establishments enter the market, with Renaissance, Marriott, Shangri‐La and Accor already launched and Hilton, Inter Continental, Dusit, Thani and Kempinski opening soon. Given Deloitte’s average yearly occupancy estimates of 75% as of 2008, there are concerns of a possible oversupply outside peak business periods in case of subdued demand.

3.5.8 Saudi Arabia

The real estate industry in Saudi Arabia, the most populous Gulf country, has been driven by its demographics. Expatriates, at only around one‐quarter of the entire population, have a lesser influence on the market compared to other GCC countries, which implies reduced demand volatility. On the other hand, almost all locals aspire to own a home although currently less than half do so, translating into huge unmet demand. Speculation and volatile foreign investor activity have not influenced real estate activity as in other countries, which helped the kingdom remain relatively shielded from the economic crisis. According to Cityscape Intelligence, demand is outpacing supply across all market segments, although the gap is least in the commercial segment. Characteristic to Saudi Arabia is the strong government participation in realty, which led to the development of the six “Economic Cities” ‐ a mega‐project estimated at USD 70 bn. Currently, work on four cities is underway with the government playing a major role, while the private sector will likely take the lead by 2014‐2015.

1.3

1.4

1.5

410415420425430435440445450

2H08 1H09 2H09 1H10

SAR mn/unit

SAR '000/unit

Average sales asking prices in Saudi Arabia

Apartment (LHS) Villa (RHS)

Source: Banque Saudi Fransi, Blominvest

Supply shortage is visibly high in the residential segment, which accounts for most of the activity; nearly 90% of the permits issued over the past several years were for residential purposes. The existing 4 mn units as of the beginning of 2009 could not match demand, with occupancy rates as high as 95%. Global Investment House estimates that an additional 1.5 mn units will be required by 2015, an average of 200,000 units a year. The gap has been the primary reason behind the uptrend in the National Housing Index, which according to the Ministry of Finance rose by 7% in 2007 and by another 9.5% during 1Q08. Residential yields of around 8% were among the highest in the MENA region during 2009, as per Cityscape Intelligence. As with other countries of the region, the focus of development has been the upper‐end of the market, creating a supply‐demand mismatch.

With demand primarily determined by the middle‐income segment, this puts additional pressure on prices. Notably, the shift toward nuclear families compounds the demand, especially in the apartment segment, which was earlier dominated by expatriates. In order to address housing shortage, USD 6 bn was allocated to state body Real Estate Development Fund (REDF) as part of the 2009 budget. However, by all estimates, this still fell short of demand. Thus, the private sector will have to play an increasingly important role in the future. The current demand surge led to the development of the six economic cities, which will provide housing for 4‐5 mn residents by 2020, thereby easing the pressure in the long‐term. On the financing front, introduction of a mortgage law will unlock pent‐up demand, since the absence of mortgage infrastructure including ownership, repossession, eviction, and a foreclosure law is an important hurdle to cross.

The office space market is concentrated in Riyadh and Jeddah. Riyadh, accounting for nearly two‐third of demand witnessed tight supply before the global crisis, with occupancy rates between 90% and 100% at the upper‐end of the market, and growth in rental prices averaging 13% a year. Thereafter, the supply‐demand gap narrowed markedly, as foreign companies reduced their presence in Saudi Arabia and the job market contracted, especially in the service sector that contributed a large part of the total demand. On the other hand, substantial supply expansion is underway. Cityscape Intelligence estimates close to 174,000 sq m of office space being added in 2008 and 2009 and another 480,000 sq m between 2010 and 2012 of which nearly half will be concentrated in the upscale segment. Riyadh has begun to experience the aftershocks of the financial crisis, since occupancy rates fell to 46% in 1Q09, and both prices and rental rates suffered declines. Jeddah remains the healthier of the two cities with vacancy rates lingering around 6% during 1H09 and an average annual rent reduction of 10%. According to Banque Saudi Fransi research, office rates in Jeddah reversed the downtrend during 1Q10, while Riyadh saw some declines during the quarter. Going forward, the decision to base the GCC Central Bank in Riyadh will certainly elevate the city’s prominence and help attract more business.

Saudi Arabia, the largest retail market in the Middle East, accounts for 36% of the total retail GLA in the region under study, but only for 16% of the GLA under development, according to Retail International. Interestingly, Jeddah has 1.9 mn sq m of retail space or a 45% share of the total. The value of the Saudi retail sector is expected to increase from USD 24 bn in 2009 to USD 34.7 in 2012. In the current global downturn, the sector’s lack of dependence on tourist activity turned out to be an advantage, as it is driven by more stable domestic demand. As a result, although tourist‐dependent retail in the region’s other countries is slowing down due to declining international arrivals, Saudi’s retail sector is witnessing higher growth rates. The Fawaz Alhokair Group, among the largest owners of shopping malls in Saudi Arabia, has a network of 11 malls with a combined GLA of over 700,000 sq m. The Savola Group operating 14 shopping malls has signed a MoU for the first phase of development in the Knowledge Economic City located in Madinah, indicating the role that the six economic cities will play on the future landscape of retail.

The Saudi tourism sector depends on religious visitors, who account for over half of the total inbound tourist numbers. The second most important segment is business travel, while leisure tourism is relatively insignificant presently. Nonetheless, the government is planning a turnaround with a number of new initiatives aimed at increasing the share of leisure tourism, while initiating measures to improve domestic and foreign inbound numbers. According to WTTC estimates, the number of international arrivals declined 30% during 2009, but is expected to improve during 2010. Across the Kingdom, 17 hotels are under development, which could cause a temporary decline in occupancy rates that averaged 69% in 1Q09. Cityscape however expects this to be only a short‐lived phenomenon.

Saudi Arabia real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e


4,390,000 4,520,295 4,654,458 4,792,602 4,934,846 5,081,313 5,232,126 5,374,411 5,520,919

Office (GLA sq m) 829,284 870,748 914,286 960,000 1,008,000 1,133,680 1,275,030 1,434,005 1,612,800

Retail (GLA sq m) 2,033,407 3,396,641 4,507,313 4,869,530 5,094,870 5,336,030 5,987,946 6,063,946 6,188,946

Hospitality (4&5 Star Rooms)

45,074 47,135 50,856 55,431 59,865 62,858 64,116 N/A N/A


41


3.5.9 United Arab Emirates

The United Arab Emirates (UAE) is a federation of seven emirates. Abu Dhabi is the largest emirate, has one‐third of the UAE’s population, and accounts over half of the total GDP. It hosts the seat of the federal government as well as the central bank. The real estate sector in Abu Dhabi has been developing at a slower pace and in a more conservative way compared to Dubai. Freehold property laws enabling foreign nationals to invest and own were introduced in 2005, three years after Dubai. Investor interest in the emirate’s property sector was evident in the subsequent rise in FDI inflows, which amounted to USD 3.3 bn during 2007, 38% of the total FDI to Abu Dhabi. The emirate has been affected by the Dubai debt crisis not only because of tight liquidity and negative investor sentiment, but because rental rates and prices slumped as well. However, the construction sector remained active, with USD 6.1 bn of contracts awarded within the first fourth months of 2009 alone. Hydra Properties, Aldar, and Sorouh reported 20%, 10%, and 8% payment delays, respectively around mid‐2009. Rapidly improving economic performance aside, the sector will benefit from Abu Dhabi’s long‐term urban development plan announced in 2007, which includes the development of two city centers in an organized urban framework.

The realty sector in Dubai, which is home to some of the landmark architectural developments in the region—and possibly the world—has seen spectacular ups and downs. By mid‐2009, 50%‐70% of projects began to experience delays, as per Oxford Business Group. Delays prior to the crisis were due to high construction costs, as opposed to the credit crunch in present times. New mega‐projects are unlikely at least for some time; however, this may result in a better balance of supply across the different segments of the market. The resumption of delayed and shelved projects will ease pressure on the market, which is currently experiencing a supply overhang.

The other five emirates are Sharjah, Ras Al Khaimah (RAK), Ajman, Fujairah, and Umm Al Quwain (UAQ), also referred to as the Northern Emirates. The real estate sector in these emirates is tied to developments in Abu Dhabi and Dubai. During the boom, demand spillovers drove property prices higher in these emirates, but as Dubai became cost‐competitive, the five emirates also saw a trend reversal. However, each emirate tracks its own development and unique proposition: industry in Sharjah with two free zones; tourism in RAK; and transportation in Fujairah, which already has the world’s third‐largest bunkering port. Such focused development will continue to drive and sustain the real estate sector in these emirates in the future.

Across the UAE, the exodus of foreign workforce from the country has affected the residential segment. This was more pronounced in Dubai, where 80% of the population comprised of foreign nationals. This coupled with other factors such as the outflow of speculative funds and the overall demand disruption led to declines of around 36% YoY in 4Q09 for residential unit prices, according to Jones Lang LaSalle. The consultancy also reported a drop in rental rates for apartments and villas of 39% and 46%, respectively between 4Q08 and 4Q09. However, there are signs the market may be bottoming out since QoQ villa rents dipped only about 1% in 4Q09, while rents for apartments increased 3%. Overall, the high‐end market has suffered, with highest declines in locations like New Dubai; prices of smaller units around Burj Khalifa have been relatively more stable.

Abu Dhabi remained undersupplied in the residential segment during the few years in the run‐up to the crisis, with a supply shortage of 50,000 units in 2008, according to the Abu Dhabi Chamber of Commerce. Many developments targeted the high‐end category, where vacancy rates are currently very high. The middle‐market still requires further development to meet demand, and developers like Manazel Real Estate are seeking to exploit the potential. According to Jones Lang LaSalle, rental rates for two‐bedroom apartments in Abu Dhabi have been on the decline since 4Q08. During the period 4Q08‐1Q10, rentals dropped by an overall 29%, but the pace of the decline has been slower since 2H09. Overall, the market is expected to shift focus to the middle‐income group, as end‐users drive the market, instead of property owners, although the virtual disappearance of off‐plan sales is forcing developers to reschedule plans. Sharjah and Ajman have both benefited as close alternatives to Dubai, despite increased volatility in their respective markets. Between 2005 and 2006, residential rents in Sharjah increased by 40%, according to Cityscape Intelligence. As a result, less affluent tenants migrated further north to Ajman and UAQ. However, RAK proved to be the most expensive Northern Emirate in 1H09, with annual apartment rental rates of AED 43,500 for a one‐bedroom and AED 62,500 for a two‐bedroom unit. A common challenge for the Northern Emirates is poor infrastructure, which translates into heavy traffic congestion in certain places and project delays due to long waiting periods for utility connections.

‐40%

‐20%

0%

20%

40%

60%

80%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Nominal annual house price change in UAE


Dubai’s prominence as a regional financial and commercial hub, coupled with the development of its Free Zones like Jebel Ali Free Zone, Dubai Internet City, Dubai Media City, and Dubai International Financial Centre (DIFC), accelerated the demand for commercial real estate. This demand, furthered by speculator construction activity, drove office rents up by 30%‐60% in some cases during 2007‐2009. Real estate consultancy Cushman Wakefield rated Dubai as the fifth most expensive city in the world for office space in 2008. However, the crisis halted Dubai’s impressive commercial development. During 1Q09, issuance of new commercial licenses dropped by 34% YoY, and license cancellations increased by 15%. Owing to subdued demand from the shrinking business sector, occupancy rates in new developments like Jumeirah Lake Towers stood at a mere 10%‐20% by mid‐2009 and at 50%‐80% in B and C grade space. Average prime rental rates fell 45% between 4Q08 and 4Q09, according to Jones Lang LaSalle, even as DIFC and Burj Khalifa Downtown fared relatively better. A number of developments are currently delayed or on hold, which will shield the market from a deluge of new office supply. However, Global Investment House (GIH) estimates around 2.8 mn sq m to enter the market by 2011, making any major recovery unlikely in the immediate term. Burj Khalifa was launched beginning 2010; however, its impact on the performance of neighboring office space is yet to be seen. Abu Dhabi has seen office supply grow by 25% on average per annum prior to 2009. Currently, international quality office space accounts for only 17% of the total. It has experienced the most benign price declines as well, although prime segment rents have fallen from AED 3,800 per sq m in 1Q09 to AED 2,500 per sq m in 1Q10. Inferior quality commercial units—often converted residential buildings—have been hurt the most. Overall vacancy rates are expected to rise from the levels of less than 1% in 1H09 to around

30% between 2010 and 2012. As new supply enters the market with developments such as Sowwah Island and Al Reem Island, rents will experience some volatility, giving companies the opportunity to shift from second‐grade to Grade‐A offices, which will become more affordable.

Northern Emirates remain a more cost‐effective business spot in the UAE. In particular, Sharjah’s costs are estimated to be 35% lower than in other emirates. Through the RAK Business Invest program, RAK is building its advantage through an aggressive realty investment strategy aimed mainly at foreign investors. Such measures, coupled with the development of industrial clusters, ports, and free zones have attracted foreign investments. Many businesses, however, still treat Northern Emirates as substitute locations for Dubai. Since prices have slumped in Dubai, demand is expected to shift back from Northern Emirates, exerting downward pressure on prices. In fact, office supply in the Northern Emirates does not match the quality offered in Dubai or Abu Dhabi. Therefore, in order to make the proposition attractive, these emirates will need to overhaul infrastructure and maintain lower pricing to remain competitive.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

AED

'000/sq m

AED

mn/unit

Average property prices in Dubai

Residential sales (LHS) Office rents, AED (RHS)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

50

100

150

200

250

300

Q110 Q409 Q309 Q209 Q109 Q408

'000

AED

/sq m

AED

'000/unit

Average rents in Abu Dhabi

Residential rents (LHS) Office rents (RHS) Source: Cityscape Intelligence, Blominvest Source: Cityscape Intelligence, Blominvest

43


Dubai has attracted a lot of attention in recent years due to its large‐scale development of the retail industry. As of 1Q10, the emirate had 2.7 mn sq m of GLA, according to Retail International, with another 1.4 mn sq m under development. Characteristic to Dubai’s retail scene are the pioneering mega‐complexes that combine luxury brand outlets, high‐profile leisure units, and hotels, such as the Dubai Mall opened in 2008. By 2Q09, occupancy rates stood at an average of 90%‐95%, accompanied by below‐par performance by new developments. However, rents could not remain immune to the crisis during 2009 and declined by 29% on average to AED 264 per sq ft, with a 13% QoQ fall during 4Q09 itself. Rental rates in some of the biggest malls remain the highest, even as the problem of low occupancy persists. Abu Dhabi has seen a decline in retail rental rates as well, with average rents for line stores in enclosed malls falling by 15% from the mid‐2008 peak of AED 3,230 per sq m. However, with the retail segment comprising 16 major developments remaining undersupplied, these reductions were more a function of the depressed payment ability of tenants due to relatively poor sales. The pent‐up demand, as well as expected revenue increase from tourists in the future—presently the emirate’s retail market is dominated by locals and expatriates—implies robust potential in the medium‐term. The retail segment in the Northern Emirates is much less developed than in Dubai or Abu Dhabi, and the combined GLA accounts for only about 18% to the country’s total. However, major developments are underway, concentrated in large mixed‐use projects such as Nujoom Islands, Al Hamra Village, Mina Al Arab, and Salam City. According to Retail International, the GLA in Northern Emirates will increase by 62% upon completion of projects currently underway.

The opening of the impressive Atlantis Resort on Palm Jumeirah in September 2008 was one of the last landmark events marking the emirate’s real estate boom. In 2008, Dubai had the third‐highest average room rate in the world at USD 300 and the second‐highest revenue per available room (RevPar) at USD 237, according to Deloitte. Between 2000 and 2008, tourist inflows more than doubled from 3.4 mn annually to 7.5 mn. However, supply more than kept pace, with the combined number of four‐ and five‐star hotel rooms rising from 9,600 to 28,500. Last year, Dubai’s tourism sector felt the pinch of the global crisis, as RevPar fell by 33% and occupancy rates were down to 73% from 82.6% in 2008. Project cancellations in hospitality real estate multiplied; however, Bank of America Merrill Lynch estimates that an additional 7,000 rooms will enter the market in 2010‐2011, thus adding to the volatility. Abu Dhabi’s government plans to develop tourism and bring down the dominance of business‐related revenues from the current 60%, even though the focus on corporate and government segments has helped the emirate weather the crisis well. Average occupancy rate in the emirate was 75% in 2009, down from over 80% in 2008. With hotel room stock increasing by over 2,600 YoY to approximately 16,100 in 2009, RevPar dropped by about one‐third, even though the average daily rate (ADR) barely declined to around AED 1,400. According to Jones Lang LaSalle, the market will likely experience some oversupply in the short‐term with the entry of 26,500 rooms by 2013. However, strong economic performance and the government’s tourism‐focused strategy should see the market recover thereafter.

The Northern Emirates are nurturing ambitious tourism plans, as reflected in the increased number of visitors. Sharjah recorded over 1.5 mn visitors during 2008. The emirate is focusing on segments like cultural, educational, and eco‐tourism, and is upgrading its 23 museums. The emirate also has the best supply of hotel rooms among the Northern Emirates with 8,523 rooms

Abu Dhabi real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e

Residential* (No. of Units) N/A 163,483 168,483 180,000 186,000 190,000 198,500 202,000 212,000

Office** (GLA sq m) 294,671 309,389 743,000 845,014 1,360,000 1,630,000 1,850,000 2,050,000 2,250,000

Retail (GLA sq m) 364,299 408,172 453,746 564,000 564,000 800,000 1,250,000 1,410,000 1,410,000

Hospitality (Total Rooms) 7,710 8,642 9,498 10,469 11,500 14,500 17,500 20,000 23,000

Hospitality (4&5 Star Rooms) N/A N/A 6202 6504 7170 8613 11455 14296 15113

Dubai real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e


Office (GLA sq m) 1,074,902 1,182,392 1,240,000 1,362,000 1,900,000 3,240,000 4,200,000 5,090,000 5,190,000

Retail (GLA sq m) 790,956 1,128,310 1,305,394 1,585,028 2,035,000 3,017,342 3,985,100 3,985,100 4,534,000

Hospitality (4&5 Star Rooms) 14,642 16,252 17,796 20,206 22,955 32,312 35,133 37,954 40,775

Northern Emirates real estate supply Sector 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e


Office (GLA sq m) 269,466 309,885 356,368 376,368 406,368 436,368 466,368 496,368 526,368

Retail (GLA sq m) 302,187 318,910 380,986 395,986 423,857 423,857 457,792 457,792 457,792

Hospitality (4&5 Star Rooms) 4,150 4,230 4,271 4,500 4,800 5,600 6,300 7,000 7,700

Note: Office Supply – Grade A Space, Retail Supply ‐ Shopping Malls , *Villas & apartments, **All categories Source: Cityscape Intelligence, Blominvest

available as of 2Q09. Around 10 hotels are under construction, some of which are included under Nujoom Islands – a mixed‐use project. RAK is planning to triple room supply, adding 3,700 rooms within the upcoming few years. The decision to hold the 2010 America’s Cup regatta in the emirate boosted the plans, although the venue was changed later. Seeking to capitalize on this newfound attention, RAK is planning to increase the number of visitors ten‐fold to 2.5 mn by 2012. Some of the projects underway in RAK and Fujairah include Al Hamra Palace, Jebel Jais Resort, Mina Al Arab, Kempinski Fujairah Resort, Robinson Club, Fujairah Dana (Pearl), and Fujairah Paradise. Meanwhile, a USD 4.1 bn Emirates City project is currently underway in Ajman, and the UAQ is developing the Marina waterfront community.

45


4 Regulatory environment in the MENA region The MENA real estate sector, a prominent plank in the overall economic diversification drive in the region, was not immune to the worst of the 2008‐09 financial crises. When the market collapsed and numerous investors found themselves struggling to salvage their capital under mostly under‐developed regulatory regimes, attention turned to the need to have a sound and secure regulatory environment. Having understood the crucial role of a good legal system in attracting investments, governments in the GCC countries have become proactive in developing a framework to increase market attractiveness, encourage cross‐border transactions, and ensure more clarity in property laws. A major recent breakthrough is that some countries in the region are allowing foreign nationals to hold 100% ownership in residential properties and in certain other designated sectors. However, many hurdles remain, not least the lack of transparency in terms of legal security and data, which is a key barrier for investors.

Although numerous efforts have been put in by the GCC countries to set up a favorable environment for investors/institutions there are a few investment barriers, which slow down the region’s growth.

• Lack of transparency in terms of legal framework, political stability and working procedures (Shariah‐compliance) • Adjusting European banks to Shariah structuring • Scarcity of data for market research and lack of historical real estate prices and trends • Language and cultural issues

Ease of Property Registration

The property market in any part of the world is characterized by common problems like choosing the right location, the ease in acquiring the property and the costs incurred to develop the property. In such a case, it is very important for developers to be able to get the right mix of all such important parameters.

MENA Regulatory Framework Real Estate Regulator Regulatory

Regime Recent Changes Which companies

could benefit? Egypt Minimal regulations

through Ministry of Housing

Weak New property tax law, mortgage regulations positive

Mixed ‐ secondary market transactions could increase

Saudi Yes, but weak Strong Off‐plan sales now require approval, which can take some time

Incumbents and locals

Dubai Yes Strong Residency Visa law, off‐plan law and mortgage law passed, foreclosure law

All Dubai Developers

Abu Dhabi No, through dept. of Municipal Affairs

Medium New laws to be rolled out in 1H10 All Abu Dhabi developers

Lebanon No Weak None Solidere

Oman No Medium Already in place (Integrated Tourist complex)

Domestic and foreign companies, developers

Qatar No Medium Permanent Residency Visa law All local developers

Jordan No Weak None NA

Kuwait No Weak Amendment to BOT law and City of Silk project

External government financing, increase investor appetite and increasing work for developers

Bahrain No Medium Renewable Residency Visa law and Designated areas system

Domestic and foreign companies, developers

Source: EFG Hermes, Blominvest

As per a joint study by the World Bank and International Finance Corporation (IFC) on the ease of doing business, overall, the MENA region stands second in the organization’s ranking with an average of 36.1 days for registering a property as compared to 25 days in the top‐ranked OECD countries. Among the MENA countries and globally, Saudi Arabia and the UAE are the lowest in terms of number of days (2 days) required for property registration. Within the non‐GCC economies, Egypt has the longest procedure at a minimum of 72 days, while it is only 21 days in the case of Jordan. However, the cost as a percentage of total property value for the country is the highest in the MENA region at 7.5%. Overall, the cost for the GCC countries is much lower compared to that in BRIC countries and developing economies. Saudi Arabia, with the least number of days required to register a property and no related costs, seems to have the friendliest procedures. Similarly, the other GCC economies have marginal costs of below 3% of the total property value.

Bahrain The Kingdom’s real estate sector has become an important element in the region’s investment profile. Moreover, laws relating to local companies investing abroad have remained quite flexible. Bahrain does not follow a lease registration system, which further leads to uncertainty among investors interested in the property. However, laws that are more sophisticated need to be put in place as more number of projects near completion. Rules pertaining to GCC nationals owning properties in Bahrain are relaxed, as both non‐Bahraini nationals and the corporate sector can own properties and land in the Kingdom. Meanwhile, land available for foreign ownership is restricted to certain designated areas and depends on land use. As per the latest amendments, any foreigner can hold land on a freehold basis in designated areas and residential units of certain types of properties anywhere in the Kingdom. In a bid to restore investor confidence, property buyers will be given a five‐year renewable residence visa in Bahrain. If it is a corporate entity, ownership of the built property and land must form a part of the company’s objectives and interests.

Egypt Egypt has seen rapid economic growth in recent times, boosting further investments in real estate. Various Middle Eastern developers are establishing offices in the country and have shown interest to develop projects. Meanwhile, although Egypt has a well‐established legal system, certain laws and practices call for more clarity. In a bid to increase the share of officially registered properties, which currently stands at 15% because of high land registration fees, the government has established a real estate registry for mortgage properties. In 2005, registration fee for property purchases had declined from 12% of the property price to 3% and was capped at EGP 2000. A special division has been set up within the Enforcement of Judgments Department of the Ministry of Justice for enforcing foreclosures. On the investment side, the domestic stock exchange has issued a series of ministerial decrees to create various funds including real estate and realty funds that are traded on the exchange.

Jordan Jordan permits foreigners freehold and leasehold of properties for both investment and personal use subject to their home countries extending the same facility to Jordanians. However, the development of the obtained property should be completed within five years of receiving approval. With regard to corporate ownership, foreign companies are allowed to operate, while entities/individuals holding a majority share in a Jordanian company are subject to similar restrictions applying to the company. Overall, the Jordanian market is short of well‐established regulations and controls.

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

0

20

40

60

80

100

Bahrain

Egypt

Jordan

Kuwait

Lebanon

Oman

Qatar

Saudi

U.A.E.

Brazil

China

France

Germany

India

Japan

Norway

Russia

U.K.

U.S.

Days

Easier to register property in GCC

Time (days) Cost (% of property value)

Source: IFC, Blominvest

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Kuwait Kuwait has not really been able to establish itself in the real estate sector. Major developers in the region and most Kuwaiti investors have a very small proportion of their investments locally, as they generally pool money in different avenues around the world. Additionally, lack of regulation and procedural delays add to the sector’s woes. Legislation restricts foreign ownership as well. Paradoxically, the country has the highest property prices due to the lack of quality commercial space. The recently announced City of Silk project valued at USD 58 bn is expected to not only whet investor appetite, but also boost sub‐developers who would be required to work on sizeable zones within the project. The success of the project could translate into a better real estate regulatory framework. The recent amendment to the BOT law allows the Kuwaiti government to seek external financing in industrial projects. The BOT mechanism offers developers and investors incentives to build and operate a project within a fixed period with the ultimate aim of transferring ownership to the government without any consideration or compensation. However, the developer is prohibited from mortgaging a property under the BOT scheme. Only the Central Authority can approve concessions on the project, if any, on a case‐by‐case basis. Meanwhile, the BOT rule is not applicable to residential projects where the end‐users are required to pay freehold or leasehold interests on their units.

Lebanon Lebanon has a Real Estate Law governing acquisition of property rights by Lebanese nationals as well as regulations for non‐Lebanese; however, enforcement is sometimes weak. Non‐Lebanese individuals and corporates can acquire real estate rights upon obtaining a license for properties exceeding 3,000 sq m. The area can only be used for the purpose specified in the license agreement, and the project should be completed within five years from the registration date. Registration can be completed in eight steps, and the estimated necessary time for the procedure is 25 days, according to the “Ease of Doing Business 2010” report. As many as five institutions have to be approached, which makes the registration process complicated. A registration fee of 6% of the value is applicable on land and property transactions.

Oman The Omani law lays down the idea of integrated tourist complexes with relaxed foreign ownership rules. Pursuant to the law, non‐Omani individuals and companies can own and build complexes for residential, commercial, and investment purposes in areas designated by the government as integrated tourist complexes. Whenever required, the law is amended to change ownership rules, and new projects are given the status of an integrated tourist complex. While giving the authority to establish internal rules and regulations for the project, developers are required to fulfill certain government requirements. The newly amended lease rules in the country include a 7% cap on rent increases every three years, appropriate notification, and registration when a property is sold, leased, or lease contracts are renewed. Oman follows other GCC countries in corporate ownership and allows foreign nationals to practice their businesses and economic initiatives. The law allows wholly owned GCC companies to own land for property development in the region.

Qatar Qatar opened up its real estate sector in 2004 after it passed the Foreign Ownership of Real Estate Law. With this, non‐Qatari investors could own and invest in real estate projects and properties in the country. Qatar also follows a system of designated areas like Bahrain, Abu Dhabi, and Dubai. The easing of foreign ownership laws has boosted growth in the sector. Additionally, a law regarding leasehold (Law No.4 of 2008) introduced a series of measures to curb escalation in rental prices. However, in order to ensure a smoother property market and attract more foreign capital, the country needs a real estate regulatory authority. In 2006, the enactment of laws that made it easier for non‐Qatari property owners to secure residence permits attracted further investments. As per the law, any foreigner who buys a freehold property in designated housing projects was eligible for a permanent residence visa until he/she holds the property in his/her name.

Saudi Arabia The latest feather to the regulations in Saudi Arabia has been the addition of the mortgage law, which is very important for the development of the sector. The law is still under consideration and is likely to be enforced mainly to enhance investor confidence and formulate a framework for the registration of mortgages over title and security for banks. Foreign nationals can own real estate, but ownership is subject to many restrictions such as legal residency and the property is not for investment but for personal use. Although restrictions on foreign ownership of real estate have been eased, laws do not permit ownership in the holy cities of Makkah and Madinah.

UAE Dubai Dubai seems to be ahead of all GCC countries when it comes to an efficient regulatory framework for the real estate sector. In 2008, the Dubai government introduced a raft of new legislations designed to create a highly developed real estate regulatory framework. RERA, a subsidiary of the Dubai Land Department, was established to regulate, formulate, manage, and license real estate activities in the emirate. RERA banned transfer fee on property, after which the Land Department is the legal authority that can charge the same. Meanwhile, the Land Department will maintain two registers – one for completed property (the register) and one for ‘off‐plan’ sales (the pre‐register). Therefore, even off‐plan ‘interests’ will need to be registered at the Land Department. Some of the RERA mandates are as follows: • Standardizing procedures for the secondary residential property market. The necessary documentation will be available on

the internet only for licensed real estate brokers registered with the Land Department. • If current rent is below market price, the rental cap of 5% will not be applicable and the property owner can apply to the

Rent Committee for an increase in line with open market value. • Arbitrate disputes between parties, and a real estate dispute committee, operating under the Dubai Chamber of Commerce,

will settle all real estate related disputes. • Introduced formal training and certification for real estate brokers in 2009 in an effort to regulate the market and ensure

fair dealing for sellers and purchasers alike.

Furthermore, in 2008 the Dubai government launched the Escrow account system in a bid to increase transparency in the market and to safeguard foreign investments from fraudulent developers. The money in the Escrow account would be used for construction purposes and not for any payments to creditors. However, the underlying concern is that Escrow account managers are allowing developers to use the money for payments and cost purposes. In 2002, Dubai was the first in the region to introduce a law allowing foreigners to buy and own freehold property. Further, amendments including the issue of residence visas for any purchased freehold property were introduced. The initiative resulted in the establishment of publicly quoted state‐owned real estate developers, Emaar Properties and Al Nakheel Properties, both engaged in the development of large‐scale real estate projects that are now open to foreign investors. Additionally, to capitalize on the freefall in property prices, the UAE government introduced the issuance of multiple‐entry visas from June 1, 2009 to homeowners subject to conditions that the property price should be at least USD 273,000, expatriate income should be USD 2,700, and the investor should own the property. Abu Dhabi The burst of the speculative bubble in the Abu Dhabi real estate market highlighted the need for setting up a regulatory authority. The Abu Dhabi government is looking to set up a body similar to Dubai’s RERA to create a transaction database. The upcoming Escrow Law is an important step in this direction for developers. The existing Urban Planning Council, which is the supervisory body for development activities in Abu Dhabi, has highlighted the importance of affordable housing. It introduced the concept of designated investment areas under which the laws are more liberal. Further relaxing laws in 2005, the government permitted both GCC and UAE nationals to own properties through their corporate vehicles. While foreign nationals can only hold leasehold interests in the areas, they can own the structures that they develop on such leasehold land.

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In early 2009, Abu Dhabi announced plans to establish a real estate regulatory authority for overseeing policies, strategies, regulations, and laws in order to streamline property rent, sale, and purchase. The new regulatory authority will curb unscrupulous traders and check inflationary pressures in the sector. This will not only boost construction activity in the region, but will also bring down rents and reduce the number of realty brokers. The primary objective of Plan Abu Dhabi 2030 by the Urban Planning Council is to optimize development. Although the master plan and the Urban Planning Council manage Abu Dhabi’s development, the sales process is less controlled.

Rent Caps An additional measure introduced by most countries in the face of the soaring house prices have been rent caps to provide property owners and tenants an agreeable framework and also to assuage the public outcry against increasing rents. The GCC countries set rent caps by early 2008 in order to curb rental hikes, to provide tenants legal protection from absurd rises, and to reduce inflationary pressures in the sector and the broader economy. In order to safeguard and stabilize its economy from the debt crisis, the Dubai government, along with the RERA, decided to set limits for increasing property rates in 2010. Recently, the Dubai ruler issued a decree approving the recent RERA price index as the benchmark for increasing rents. Details of the decree: Rent value Increases allowed

If 26‐35% less than RERA guidelines 5%



More than 55% 20%

Corporate Governance Framework Following is a table with some of the biggest companies in the Middle East regions regarding their operational structures and regulations followed:

Company Majority Share holder

Minorities Protected

Govt. Ownership

Mgmt Meets with Investors/Analysts

Transparency Related Party Transactions

Recent Mgmt Changes

Egypt ERC Yes Neutral 15% Frequently High No Yes, neutral Heliopolis Housing

Yes Neutral 80% Rarely Medium No No

Nasr City Yes Neutral 4% Rarely Medium No No OD Holding Yes Neutral 0% Frequently High No No PHD Yes Neutral 0% Frequently Medium No Yes, neutral SODIC No Neutral 0.4% Frequently Medium No No TMG Yes Neutral 7.8% Frequently Medium No Yes, neutral

Saudi Akaria Yes Neutral 70% Rarely Medium No No Dar Al‐Arkan No Neutral 0% Rarely Low No No

Dubai Deyaar No Yes 2.8% Frequently High No Yes, Positive Emaar No Yes 31.2% Previously more,

Now less Medium Some No

Union Prop No Neutral 0% Previously, Not at all now

Low No Yes, Negative

Abu Dhabi

Aldar No Neutral 26.2% Frequently Medium Few Yes, Positive Sorouh No Yes 7.2% Frequently High Few Yes, Positive

Lebanon Solidere No Neutral 0% Frequently Medium Some No Source: EFG Hermes, Blominvest

5 Opportunities and Challenges

5.1 Opportunities

5.1.1 Affordable Housing

In the MENA region, as in other parts of the world, affordable housing targets the middle‐ and lower‐income groups. However, unlike other regions such as Europe, where the segment receives government subsidies, such housing in the MENA region forms part of the regular real estate sector and carries less luxurious features. During the housing boom, the segment was neglected with most developers concentrating on the high‐end segment, partly due to the squeeze on margins. Besides, investors—and not end‐dwellers—drove the market because of which the high profile, well‐marketed developments were more popular.

However, following the housing slowdown, focus has shifted to this otherwise neglected segment. Now, affordable housing is an attractive market with clear supply shortages across all the countries under study. Construction costs have eased in Bahrain and Saudi Arabia by around 40% and in Dubai by as much as 65% from the peaks of 2009, providing developers the opportunity to focus on such projects. At the same time, strong fundamentals are driving market dynamics, as demand has shifted away from speculators and short‐term investors to end‐users. Customers are looking for properties with facilities more suited for everyday comfort and not just architectural grandeur.

With the large and unsatisfied property demand from the lower‐ and middle‐income groups, affordable housing is poised to be the next lucrative market segment. Developers who shift focus to this middle‐income category can benefit from this present niche, as the era of mega‐projects is not likely to return, at least in the short‐term. Companies like Manazel Real Estate with Al Reef Villas in Abu Dhabi and Ossis B.S.C with Amwaj Islands in Bahrain are beginning to concentrate on the middle‐income category. Developers believe that Bahrain will need 80,000 housing units by 2020 targeting the middle‐ and lower‐income segments. In this direction, the Bahraini government has announced plans to build 50,000 low‐cost housing units by 2014. A unique feature of the segment is its rising importance in governments’ strategies. The Saudi National Housing Initiative, launched by King Abdullah in 2008, includes plans to build 120,000 affordable units in the country. Elsewhere, in Lebanon, the Housing Bank and the Public Housing Institute have been providing low‐interest, long‐term housing loans to low‐ and middle‐income households.

5.1.2 Governments liberalizing regulation

Real estate is a major contributor—other than hydrocarbons—to the Middle East economy. In order to fuel growth and protect the economy from exogenous factors, a uniform regulatory framework needs to be developed across the region with appropriate laws and regulations. The creation of RERA in Dubai was possibly the first wholesome step toward improving the regulatory framework in the region.

The regulatory environment, as it stands today, can be further improved by introducing a number of changes, some of which are listed below:

• Formulation of rules and regulations with regard to establishing a Foreign Real Estate Fund.

• Access to local banks, developers, agents, and others involved at the fund transaction level.

• Flexibility in rules regarding fund structure, asset allocation, compliance etc.

Most of the GCC economies are concerned over the development of a proper regulatory framework as compared to the rest of the Middle Eastern region. Most GCC countries have opened up their property markets, in some way or another, to foreign investors.

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Kuwait and Saudi Arabia

The Kuwaiti real estate market activity is expected to develop after the latest amendments to mortgage laws 8 & 9 and permits for construction of new residential areas. Extended credit for the segment is likely to improve in the medium‐term. Similarly, Saudi Arabia awaits the passing of a new mortgage law that allow banks to establish a separate mortgage business and support related financing in the region, which will further accelerate the property market.

Kuwait Finance House would be the first Shariah‐compliant bank to deal in mortgaging and financing of private real estate. This could have a positive impact on the residential real estate market with increased activity during the upcoming quarters.

Oman

Easing foreign property ownership rules will increase the demand for integrated tourist complexes. Under the Omani foreign ownership law, foreign property buyers can get a full residence visa only after the title deed has been changed to their names. Homebuyers can get a multiple three‐week visiting visa each time they come when their property is under construction, after which they can apply for a two‐year residency. Buyers are also entitled to get residency visas for their family and parents. The residency would be cancelled and then transferred to the new owner when the property is sold.

Qatar

Qatar has passed a similar law allowing foreign nationals to hold 100% ownership in sectors such as consultative and technical services, information technology, and distribution services. Qatar has also decided to slash the corporate tax rate to 10% from 35% starting January 2010 in order to encourage foreign investments in the country and to position itself as a business hub and announce its openness to doing business.

UAE

The UAE government’s involvement in finalizing Nahkeel’s debt restructuring and reaching an agreement with 99% of its lenders in respect of Dubai World’s debt will likely bolster confidence in the sector. On the downside, Dubai imposed a 5% mandatory housing tax for all residential units, effective January 2011. This tax may have a negative effect on the residential segment, especially at a time when the market activity is low.

Egypt, Jordan and Lebanon

In Egypt, implementation of a new real estate tax will subject new communities outside Cairo to taxation for the first time, which will keep prices under control. In Jordan, increasing bank lending to builders and government support to boost the residential rental market will have a positive effect on the sector.

Lebanon’s real estate sector is non‐speculative because of the country’s stringent regulatory framework, characterized by low leverage to developers and consumers. However, increasing bank lending will likely boost property prices in the short‐term.

5.1.3 Huge urban, young and expatriate population

Population trends form an important factor in determining and identifying the overall trends of a market. Real estate development is closely tied to demographics, which are key fundamental drivers of demand. Factors such as household mobility for access to jobs play an important role as well, as these help shortlist the most appropriate locations for building new communities with a variety of mixed uses and facilities to consumers.

In absolute numbers, populations in countries under study are rather small at fewer than 10 mn except for Egypt and Saudi Arabia. However, it is population, growing at a CAGR of 2.6% between 1950 and 2010 that makes the region attractive to real estate investments. The ‘effective’ population keeps changing due to factors such as variations in labor supply and increased expatriate workforce implying more income earners and more consumers. However, while the inflow of expatriates may slow down in the short‐term compared to the earlier trend, the population growth rate will remain encouraging as compared to the global population growth rate.

Demographics, urbanization, and a growing population—coupled with the increased focus on tourism—are the major reasons for the rapid growth in real estate. According to a World Bank report, the urban share of total population is expected to exceed 70% by 2015 as against an average of 54% in developing countries. Despite declining fertility rates in the region, MENA population has a huge growth momentum, since one in every three persons is aged between 10 and 24 years, as per Britannica. Such a young and work‐ready population, which is increasingly mobile and willing to move out of family homes, will boost future real estate growth.

5.2 Challenges

5.2.1 Volatile construction costs

Despite the fact that Middle East contractors benefited when cement prices plunged during the first half of 2009, some faced major setbacks in profitability. With the economic recovery, commodity prices including cement will likely bounce back to earlier levels. Similarly, building material prices that were relatively stagnant during the past six months are expected to increase during 2010 with the trend already reflected in the 1.3% rise in the US Construction Materials Price Index in January 2010.

As per the annual survey of international costs conducted by Gardiner & Theobald Inc., despite declining material costs in other countries, construction costs increased an average 8.6% in 2008 and 2.6% in 2009 for Asia, Middle East, Africa and Latin America as a group. Real estate prices in the Middle East entered the correction phase as early as April 2009. However, during this period, prices of various building materials increased almost 15% in the Middle East region, compared to the first quarter of the year. Meanwhile, experts believe this is a major correction phase, which would subsequently reshape the industry. The correction would not only lead to a price shift in construction materials, but will stabilize the market as well. Although real estate prices are stabilizing in the Middle East as macroeconomic conditions improve, the cost of financing and interest rates continue to remain above 7% per annum, supporting lenders more than borrowers.

Although there is much variance between global and Middle East construction costs, their price movements are correlated to overall global economic conditions. According to the chairperson of Danube Building Materials, one of the major reasons for the increase in building material costs is the escalation in freight rates for imports from China. Due to rising demand, freight rate is estimated to reach USD 1,500 per container from USD 1,000 as of December 2009.

Construction activity in the GCC is on a rollercoaster ride with the fluctuations in oil and commodity prices, currency fluctuations, credit crunch, and other macroeconomic volatilities. These uncertainties in construction activity have led to labor shortages and deficit in material resources, further pushing the overall costs of construction in the region.

During the period 2007‐2009, labor costs in the region soared 67%, with 40% of the increase due to a three‐fold increase in the cost of accommodation. Meanwhile, steel and cement, which constitute approximately 30% of the overall construction costs appreciated substantially. Globally, the rise in steel prices from May 2007 to May 2008 was 67%, but the increase was approximately 90% and 50% in the UAE and Saudi Arabia, respectively, within the first half of 2008. Similarly, cement prices were up 50% during 2007 and increased 23.5% in the UAE and 12.5% in Saudi Arabia between February and August of 2008. Due to the unprecedented increase in labor costs and commodity prices, contractors added a contingency of 30% or more to total prices, thereby inflating project costs.

Consequently, many projects were either cancelled or deferred. As a result, foreign investors either pulled out resources, or decided to delay projects. Currently, construction costs are markedly below their peak levels, providing some respite to developers. With an economic revival on the horizon, construction costs may see an uptick once again.

5.2.2 Funding Challenges

Real estate is a key asset class for the modern investor and is an important contributor to the overall economy. A developed and well‐organized financial sector is critical to the development of the real estate sector. The current real estate financial system wherein banks play an extensive role may not be the most efficient of all systems. Besides, other financial institutions (including Shariah‐compliant) follow a similar style of functioning as well. Our analysis of the post bubble scenario shows that such a system does not really offer any cushion or a fallback mechanism to the funding system. With a funding source similar to that of conventional banks, which is public deposits, Islamic financing institutions like Amlak and Tamweel were not large enough to support the entire mortgage market. Hence they were also exposed to similar vulnerabilities as a result.

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After the crash, many banking and mortgage providers became highly cautious. With the Gulf real estate sales largely impacted by the prohibitive cost of mortgages, a system to refinance mortgages issued by banks to end‐users through a government‐refinancing agency or through a mortgage‐backed bond issuance, with or without recourse, should be in place. Meanwhile, there is opportunity for integration among the different financial markets in the MENA region. This will help increase their respective efficiencies and spur further development.

As per statistics by MEED and IMF World Economic Outlook, infrastructure investment required in the MENA region would exceed the USD 900 bn mark during the next five years. Despite being one of the largest project finance markets in the world, the scale of investment is too huge for regional governments to be able to fund by themselves. Therefore, they are now looking to private sector participation in infrastructure projects that would give private investors the opportunity to invest in these projects alongside major contractors and operators. Meanwhile, private equity investors are interested in the region due to the attractive risk‐return profile of the underlying assets.

Challenges in the lending system:

Bank lending is the primary source of funding for the Real Estate sector. However, as information regarding total credit required is not generally available, excess credit finds its way into the system during an up cycle, while lending is severely curtailed in times of a downturn. The lack of a long‐term savings organization, an under‐developed debt market and vulnerability to external equity investments in the sector underscores the criticality of an effective bank lending mechanism.

Ideally, bank lending should be restricted to working capital needs of master developers and contractors and for short‐ to medium‐term project financing. Imposing sector caps on bank lending can also curb the lending excesses when regulators foresee a property bubble. However, sector caps hamper lending precisely at a time when credit is required to bail the sector out of an impending slump. Moreover, the end use of a loan cannot be accurately determined at the time of issuance and hence not be completely reliable when imposing sector caps.

Volatile lending sources: The GCC economy is more vulnerable to oil price fluctuations, which are closely related to the movement of GDP. Furthermore, the sources of lending are volatile in nature. Sustained growth in deposits, irrespective of the trends in nominal GDP, assists the economy with more credit during a downturn. In addition, stability in nominal non‐oil GDP is essential for such growth in deposits to sustain.

Asset‐liability mismatch: This poses a challenge to the lending system because of the following: The need for repeated churning of short term deposits (with maturities of less than a year in the region) in order to service long‐term loans. Such a deposit structure does not offer sustainable support to longer term lending associated with project financing and mortgages. Government borrowing and funding through foreign sources will serve as short‐term solutions.

Lack of a mass savings organization: Apart from General Organization of Social Insurance of Saudi Arabia, other pension funds that can augment longer‐term savings and channel them toward lending for investments like real estate are non‐existent, as expatriates are not included in such schemes. Not only do Islamic conventions exist in the savings framework, Gulf economies also do not really have a social security structure. Additionally, the local population derives a large part of its economic security from stable and safe government jobs and, therefore, the concept of savings is not very appealing.

Role of SWF: Abu Dhabi Investment Authority (ADIA) is considered the world’s largest SWF and, like many other such funds, invests globally and has not really focused on the region’s financing markets, although a slight shift was witnessed during the economic crisis. A more planned move in coordination with the available SWF funds will improve banks’ lending structure and gear the financing environment to meet long‐term objectives. In addition, the existing bond market in the region needs further improvement to attract SWFs.

Volatile external equity: Global investors and high net worth individuals consider GCC properties as an asset class. However, this source of equity financing adds volatility to property prices and erodes the value of the collateral in the short‐term, especially when investments are withdrawn during a crisis. The mark‐to‐market necessity and the fact that the collateral is worth less than 100% of the total loan value imply extreme caution in fresh lending by banks.

5.2.3 Need for better transparency and governance

The real estate crisis brought to surface the inadequate transparency in the sector, which coupled with poor governance, resulted in excessive losses for investors. There were instances when developers misrepresented facts, falsified information, and perpetrated fraud on investors regarding the progress of projects. As the bubble burst, high profile financial improprieties rocked Dubai, the prominent of which included Dynasty Zarooni and Deyaar Development. Dubai realty found itself the most vulnerable due to the uncontrolled pace of development in recent years. The emirate however did take steps to instill greater confidence, such as creating the regulatory authority RERA and mandating Escrow accounts. However, some developers did not adhere to regulations, and existing laws were not enforced in a number of cases. It was also felt that RERA was not disclosing enough information about developers pertaining to their default rates and ability to finance projects.

Investors became wary of the Dubai property market as soon as the closet opened. As a result, demand eroded, and the market started to collapse. The “fallout” had ramifications in neighboring countries as well, denting investor confidence. In order to regain trust of investors—especially that of foreign investors—regional authorities would need to formulate effective reassuring measures along with improving and enforcing regulatory checks. Broadly, an independent regulatory authority with clear guidelines and directives can ensure and protect the interests of all stakeholders involved, be it investors, developers, or consumers. Disputes need to have a quick and unbiased redressal mechanism. The Dubai crisis is a wake‐up call—to say the least—and underscores the importance of transparency in the sector. The value of the free flow of information and proper enforcement of laws can go a long way in eliminating risks for investors and consumers alike and make the market more efficient despite short‐term hurdles.

55


"We will see a market correction and the phasing out of newly formed investment companies that operated as 'single‐project' real estate companies with no operational assets. These companies got funding during the boom, but will not be able to anymore as lenders are being very selective and only extending credit to seasoned developers with a track record, a diversified portfolio and market reputation"

‐ Abdulaziz Al Nafisi (Salhia Real Estate)

6 Future Outlook

Amid optimism of an economic revival, recent data from the US housing market does not confirm an assured turnaround in the real estate sector. Boosted by the impending expiration of tax incentives for first‐time and certain existing homebuyers, home sales were on the rise during the months leading to April 2010. In May, however, they fared much worse than analysts’ expectations, as new home sales dropped 32.7% to a record low SAAR at 300,000 units, while existing home sales fell 2.2% to an annualized 5.6 mn units. In line with the data, housing starts fell by 10% during May, again markedly below analysts’ expectations of a 4% decline. Existing home sales jumped 7.6% year‐over‐year in June 2010, however, sales declined in the range of 19.1%‐27.6% year‐over‐year between July and November. In December 2010, existing home prices dipped marginally at 2.9%. The revival of the real estate market certainly seems contingent on the overall economic performance, which is recovering from its fragile status in 2010.

On the other hand, economic performance of the region under study makes it stand out, in contrast to other developed economies. The IMF estimates the GCC non‐oil GDP growth for 2009 at about 2.8%, showing healthy fundamentals despite the hydrocarbon‐fuelled volatility. Among the region’s non‐GCC countries, Jordan recorded a similar rate, while Egypt and Lebanon fared even better at 4.7% and 9%, respectively. The expected strong economic rebound during 2010 will be, in large part, due to the concerted financial, fiscal, and monetary measures undertaken by the respective governments. However, liquidity issues persist, and investor outlook continues to remain cautious. This is evident from the regional bourses, most of which have now stabilized, albeit at levels much lower than the pre‐crisis period. Dubai’s DFM Index lost 75% between June 2008 and June 2010. Moreover, CDS spreads on regional sovereign debt are still high, after their descent back to normal was stalled by the Dubai World crisis.

The changed conditions in the MENA region’s real estate sector will certainly modify the dynamics of funding. Escrow accounts were introduced to bring in transparency into the property markets. However, highly leveraged projects, especially in Dubai, allegedly used a few escrow funds to acquire land instead of their mandated use in construction, ceased. Off‐plan property sales, which offered a leverage opportunity for short‐term investors and enabled sale of the property a couple of times before it was even completed, were similarly disrupted. Institutional funding became restrictive as banks and other financial institutions came under pressure from the risk of further losses. Finally, the Dubai World story turned investors cautious about assuming implicit guarantees for quasi‐sovereign and certain private entities—including some real estate players—driving up debt prices. These changed market conditions, where speculators and short‐term investors have stopped playing a major role, will lead to a new supply‐demand balance underpinned by more sustainable pricing levels.

The fundamental drivers for the sector remain strong though, lending a positive long‐term outlook across all the countries under study. Favorable demographic factors that include a young and growing population will ensure continuing demand for property, supported by the shift from extended family households to nuclear families. Personal incomes are on the rise across the region, riding on fast GDP growth owing to oil revenues and economic diversification. The strong economic performance vis‐à‐vis other regions has attracted foreign businesses as well, resulting in the development of business hubs and economic zones and, in turn, to growth in commercial real estate. Business travel, as well as leisure tourism, has been on the rise with government support, particularly in the high‐end hospitality segment. Prior to the crisis—between 2000 and 2008—the number of international visitor arrivals in the Middle East was up by 112% to almost 62 mn, according to WTTC. The contribution of tourism and travel to the region’s GDP increased from 8.8% to 11.4% during the same period. Owing to growing tourist numbers and higher disposable incomes for local populations, the retail industry has thrived as well, with mega‐shopping malls forming prime destinations on itineraries. High‐end brands have been extremely successful, and the popularity of shopping as a leisure activity has boosted the development of related real estate.

Despite the overall positive outlook and strong fundamentals, short‐term challenges in the aftermath of the recent crisis prevail. In Dubai—the epicenter of the real estate bubble—property prices fell by as much as a 50% in some areas. In June 2010, Arabtec’s CEO Riad Kamal opined that Dubai would need another four to five years to absorb the current oversupply in the market. According to MEED, the project market in the GCC region fell in value by 19% during 1H10 to USD 49 bn when compared with the same period in 2009. Realty markets in all the countries under study have corrected, with Qatar, Lebanon, and Saudi

“With projects cancelled, some deservedly so, and the speculative investment in real estate gone, we can now focus on the real issues: public space, cohesive vision, transit linkages"

‐ Hisham Youssef (Senior International Design Manager at Gensler,

an architecture and consulting firm)

Arabia leading the present recovery. According to a recent study by Oxford Business Group, Qatar is poised to outperform other regional markets during 2010, with the sector growing by as much as 7%.

Going forward, government interventions are required to focus on certain central issues in the real estate sector. During the boom years, the relative underdevelopment of the regulatory framework and the lack of transparency were not major deterrents to attracting funds. However, now with higher levels of risk aversion and tight liquidity, changes are mandatory for markets to be sustained in future. This is especially true for developments that depend on the private sector and not the government, such as the Economic Cities in Saudi Arabia. Knowledge Economic City, the first of these cities, plans to raise USD 8 bn through direct investment and a listing on the Saudi stock exchange, according to Sami Baroum, managing director of the project’s largest private investor Savola.

In fact, greater transparency is at the core of the pan‐regional agenda for future real estate growth. The establishment of adequate real estate frameworks, ideally with a dedicated regulatory authority in each country, should be the top priority. Regulators, in turn, would need to enforce appropriate governance mechanisms in order to minimize—or gradually eliminate—fraud. Dubai’s RERA was the pioneer in this direction, though investors continue to believe that further amendments are required, especially around information disclosure. The long‐awaited list of projects cancelled by RERA is yet to be published, even as the agency introduced a government‐guaranteed fund in July 2010 to finance the completion of 40 shortlisted projects. Ras Al Khaimah Investment Arm (RAKIA) announced a regulatory authority, dubbed Rakia RERA, at the beginning of 2009. Another important step required is to open up mortgage markets, as most countries in the region lack a formal or developed legal framework for such lending. Saudi Arabia is currently reviewing a new mortgage legislation, which is expected to boost the real estate market, resulting in up to a five‐fold increase within the next couple of years.

During the years of rapid growth and development, the focus was more on architectural grandeur than harmonized development of urban space. The impact of the crisis is being addressed through sound policies, which will likely restore momentum in the real estate sector, albeit at a steadier pace this time around. Nonetheless, the dynamics surrounding the fundamental stakeholders—investors, contractors, and end‐users—will not really change. While the challenges remain, future growth will likely be redefined and move away from the earlier focus on the upscale segment. Therefore, restoring normalcy in the real estate market will change skylines and lead to the creation of more livable cities that are better suited to the grassroots‐level needs of communities.

57


7 Appendix

7.1 MENA Real Estate Company Profiles

7.1.1 Inovest

Inovest, a Bahrain‐based Shariah‐compliant investment company, has three core business areas: asset management, private equity & venture capital, and real estate investment. Its main activities include acquisition, development, and sale of raw land, and commercial and residential properties. Through its real estate development arm Tameer, it provides real estate and infrastructural development projects. The company, formerly known as Al‐Khaleej Development Company BSC, changed its name to Inovest BSC in January 2009. In addition, it has a collaboration agreement with Tharawat Investment House to establish a water filter manufacturing facility named Bahrain Water Technology Company.

Peer Group Analysis Inovest Altijari NREC

Return on Assets (%) N/A 1.27 3.21

Return on Equity (%) N/A 2.21 7.81

Debt/equity (%) 35.11 65.79 75.55

P/E N/A 28.85 7.28

Net margin (%) 155.67 6.99 19.64

Market Cap*. (USD mn) 151.8 490.6 418.1

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Inovest, along with its regional partners, is planning to enter the Saudi oil market in 2010 by setting up an oil services company with a capital of USD 10 mn. Inovest will hold at least a 10% stake in the Bahrain‐based new joint venture firm Oil World. • It is also seeking to foray into the pharma industry by setting up pharmaceutical laboratories at an estimated cost of USD 100 mn. The project, which is still under study, is part of the company’s new strategy to change its identity and activities. • Inovest has established a company to provide warehousing services to individuals and institutions. The project, in partnership with strategic investors, is estimated to cost USD 50 mn.

Financial Analysis For 2010 fourth quarter, Inovest reported net income of negative BHD 5.17 mn, as compared to BHD 2.2 mn in 4Q 2009. Meanwhile, during the quarter, the company’s total real estate investments stood at BHD 87.13 mn. Additionally, the company registered negative revenue of BHD 3.3 million during the quarter. The company’s total assets stood at BHD 139.27 mn, while total liabilities were at BHD 61.96 mn.

Management Outlook Inovest aims to increase its presence in sectors such as alternative energy, agriculture, information technology, telecommunications, and oil and petroleum. Going forward, the company is likely to cut down on real estate activities and shift focus to other growth areas.

Company Overview


Major Shareholders Holding (%)

Corporate 23.60

Private 6.10

Public 13.60

Other 49.64


Source: Annual Report, Blominvest

Key Financials (BHD’000)

4Q10 4Q09

Total Revenues (3,320.99) N/A EBITDA (4,327.96) N/A

Net Earnings (5,169.80) (2,216.70)

Free Cash Flow N/A N/A Total assets 139,271.41 N/A Total Liabilities 61,963.13 N/A Shareholders' Equity

77,308.28 N/A

Enterprise Value N/A N/A


7.1.2 Seef Properties

Saudi‐based Savola Group, a public shareholding company, is primarily.

Seef Properties BSC (Seef), established in 1999, is a Bahrain‐based real estate developer of retail, residential, commercial, leisure and recreational facilities. The firm was set up under the aegis of the Ministry of Industry & Commerce, Government of Bahrain to manage the Seef Mall complex and other government properties. It was initially set up as a wholly owned subsidiary of the Housing Bank. The company now owns and manages two separate commercial shopping centers – The Seef Mall and the Isa Town Mall. It also operates the Magic Island recreational facility located within the Seef Mall. Additionally, the company is engaged in managing leasable properties and establishing serviced apartments.

Peer Group Analysis Seef Dar Al Arkan

Return on Assets (%) 2.31 6.20

Return on Equity (%) 5.69 10.36

Debt/equity (%) 0.00 52.96

P/E 9.03 6.00

Net margin (%) 46.99 33.98

Market Cap.* (USD mn) 136.6 2,620.6

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Recently Seef Properties announced a major expansion plan costing BHD 2.5 mn for the Isa Town Mall including the construction of a new wing (3,607 sq m) featuring a dedicated food court, a key department store, and Magic Island – one of the Kingdom's largest indoor family entertainment and recreation facilities. • Seef has collaborated with global cruise giant Royal Caribbean Arabia for its cruise ship Brilliance of the Seas and with leading Italian cruise liner Costa Luminosa. The objective is to offer travelers aboard the ship a complete Bahraini experience including a trip to Seef Mall and special discounts at all its outlets. • In January 2010, the company signed an agreement with Lightspeed Communications, Bahrain's first alternative fixed‐line telecommunications operator, in order to offer value‐added and innovative services for residential and business customers.

Financial Analysis For 2010 third quarter, Seef Properties reported a 13.7% decrease in total revenues to BHD 2.82 mn, as compared to BHD 3.27 mn in 3Q 2009. Additionally, net earnings declined 27.8% to BHD 1.41 mn from BHD 1.95 mn in the same period a year ago. Meanwhile, total assets increased 2.6% to BHD 110.02 mn and total liabilities narrowed by 12.7% to BHD 6.66 mn. During the quarter, shareholders equity increased 3.8% to BHD 103.35 mn from BHD 99.58 mn recorded earlier. Recently, in January, the company unveiled a BHD 2.5 mn refurbishment plan, which will feature new designs for shopping mall as well as enhance facilities and amenities.

Management Outlook Seef Mall is planning to renovate its premises in order to enhance the ambience and to provide a complete shopping experience for visitors. Company officials believe that they are seeking sustained growth and stability which will benefit the company once the economy is back on track.

Company Overview

Source: Bloomberg, Blominvest Major Shareholders Holding

(%)Government 21.00

Corporate 14.37

Public 48.46

Private 16.17



Key Financials (BHD’000)

3Q10 3Q09

Total Revenues 2,825.38 3,274.78

EBITDA 1,410.80 1,953.35

Net Earnings 1,327.59 1,886.71

Free Cash Flow 224.20 1,468.75

Total assets 110,018.67 107,220.23

Total Liabilities 6,663.94 7,637.93 Shareholders' Equity

103,354.73 99,582.30

Enterprise Value 39,869.19 57,026.59


59


7.1.3 TMG Holding

Talaat Moustafa Group Holding (TMGH), an Egypt‐based joint stock holding company operates as a community real estate developer. Incorporated in April 2007, TMGH invests, establishes, and participates in companies within different business sectors, such as real estate, hotels and hospitality, construction and housing. TMG operates through four subsidiaries and has stakes in companies, which own and operate a number of hotels in Egypt. It has a land bank of 50 million sq m, of which 8.5 million sq m is developed.

Peer Group Analysis TMG Seef



Debt/equity (%) 11.52 0.00

P/E 13.71 9.03

Net margin (%) 19.84 46.99

Market Cap.* (USD mn) 2,236.9 136.6

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • TMG Holding has received approval from Saudi authorities to sell off‐plan real estate units for its Nassamat Al Riyadh project in Riyadh City. Areez Ltd., a 50‐50 joint venture between TMG Holding and Al Oula Real Estate Development Co, will develop the project. • TMG’s major real estate project Madinaty could continue despite a court ruling that a government body had sold land to the company illegally, as per the Egyptian Minister of Housing. The ruling, which is likely to have a negative impact on the company’s stock, is because the Ministry of Housing gave the Madinaty land to the company, while land is generally allocated through a competitive bidding process. The project is located in new Cairo with around 120,000 housing units.

Financial Analysis TMG reported a 33.8% slump in net profit during 2010 third quarter to EGP 201.23 mn, as compared to EGP 304.22 mn in 3Q 2009, mainly due to a fall in real estate unit sales. Total revenue was down 13.2% to EGP 1.01 bn as compared to the same period a year ago pulled down by a fall of 17% in the recognized revenue from real estate units that have been delivered. Meanwhile, during the quarter the company’s net cash outflow multiplied several times to EGP 590.46 mn from EGP 69.93 mn recorded a year ago. Total assets increased 2.2% to EGP 54.32 bn, while total liabilities also accumulated by 2.7% to EGP 29.23 bn. Meanwhile, the debt‐to‐equity ratio stood at 1:9, indicating the company’s low‐gearing and prudent cash management.

Management Outlook Based on 1Q10 sales increase, the company expects to boost the group’s ongoing profitability and maintain healthy margins, as well as avail liquidity required to fulfill various construction needs. Subsequently, the sales budget for 2010 will likely be achieved.

Company Overview



Public 41.42

Corporate 50.17

Government 7.46

Other investors 0.95


Source: Annual Report, Blominvest Key Financials (EGP’000)

3Q10 3Q09

Total Revenues 1,014,155 1,167,995

EBITDA 191,467 355.272

Net Earnings 201,232 304,224

Free Cash Flow (590,463) (69,929)

Total assets 54,317,318 53,132,137

Total Liabilities 29,231,728 28,474,639Shareholders' Equity

25,085,591 24,657,497

Enterprise Value 16,889,444 15,891,055


7.1.4 Union Land Development Company



Corporate 34.30

Public 57.06

Private 5.66

Government 2.98



Key Financials (JOD’000)

3Q10 3Q09

Total Revenues 4,991.82 2,079.31 EBITDA 1,365.44 710.32 Net Earnings 1,320.97 608.30 Free Cash Flow (5,284.20) (1,283.71) Total assets 75,295.53 83,832.38 Total Liabilities 17,683.76 26,040.56 Shareholders' Equity

57,611.77 57,791.82

Enterprise Value

96,535.13 147,102.76


Union Land Development, established in 1995, is a Jordan‐based public shareholding company engaged in real estate operations—primarily housing, trading, industrial, agricultural, and tourism projects. The company, which owns six wholly owned real estate and contracting subsidiaries, was formed through a merger between the Jordan Gulf Company for Real Estate Investments and Petra for Projects and Equipment Rentals. Further, it also exports and imports construction material and equipment, machines, tractors, and vehicles.

Peer Group Analysis ULDC TMG



Debt/equity (%) 26.50 11.52

P/E 1,810 13.71

Net margin (%) 2.46 19.84

Market Cap.* (USD mn) 101.5 2,236.9

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Financial Analysis During 2010 third quarter, Union Land Development Company recorded a 140.1% increase in total revenue to JOD 4.99 mn from JOD 2.08 mn in 3Q09. Meanwhile, net income doubled to JOD 1.32 mn, compared to JOD 608,300 in the same period a year ago. Furthermore, total assets declined 10.2% to JOD 75.29 mn from JOD 83.83 mn, while total liabilities dropped 32.1% to JOD 17.68 mn from JOD 26.04 mn. However, shareholders equity declined by a marginal 0.3% from JOD 57.79 mn in 3Q09 to JOD 57.61 mn in 3Q10.

Company Overview

61


7.1.5 National Real Estate Company

Kuwait’s fourth biggest property company, National Real Estate Company KSC (NREC) has been operating in the real estate sector since 1973. The company is primarily engaged in real estate investment and management, as well as undertaking real estate construction and maintenance. NREC’s real estate activities focus on acquiring, developing, purchasing, and managing various commercial and industrial properties, as well as commercial malls, resorts, and retail centers. NREC has subsidiaries, entities and developments that are spread across the region, including the UAE, Egypt, Jordan, Lebanon, Iraq, Djibouti, and Libya. Some of its projects include Sharq Market‐ a collection of retail shops; Watya Complex‐ a commercial complex; El Joan Resort‐ a holiday resort.

Peer Group Analysis NREC Inovest Altijari

Return on Assets (%) 3.21 N/A 1.27

Return on Equity (%) 7.81 N/A 2.21

Debt/equity (%) 75.55 35.11 65.79

P/E 7.28 N/A 28.85

Net margin (%) 19.64 155.67 6.99

Market Cap.* (USD mn) 418.1 151.8 490.6

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • NREC announced the opening of its Palm City residential project in Libya at an approximate cost of USD 140 mn. The project will be listed on the Italy and Malta bourses from July 2010, subject to investors in Libya, Malta, and Kuwait receiving a 20%‐25% share offer in Palm City.

• The company is planning two projects in Abu Dhabi at a combined cost of more than USD 1 bn. The first one is the construction of a shopping mall in Al Reem Island scheduled for 2013 opening, while the second consists of four residential towers on the island’s waterfront.

• The Kuwaiti company recently forayed into the UAE retail market by announcing The Reem Mall, a mixed‐use development comprising of rooftop boutique office units, 170 apartments, and a four star hotel with more than 500 rooms and suites.

Financial Analysis National Real Estate Company’s total revenues during 2010 third quarter decreased 7.7% to KWD 11.31 mn from KWD 12.26 mn in 3Q09. However, net earnings were down 69.1% to KWD 2.22 mn from KWD 7.19 mn in the same period a year ago. At the end of 3Q10, free cash outflow stood at KWD 1.75 mn. Total assets and total liabilities increased 7% and 7.6% to KWD 630.83 mn and KWD 347.69 mn respectively. In addition, shareholders’ equity accumulated 6.2% to KWD 283.14 mn from KWD 266.59 mn earlier.

Management Outlook Looking ahead, NREC is focusing on the development and construction of The Reem Mall & Carina Views Residences, which will be an important landmark in Abu Dhabi and the UAE. Moreover, the development of The Grand Heights project in Egypt ‐ the largest real estate projects in the 6th of October City ‐ will improve the company's financial position, supporting NREC’s stability and presence in Kuwait.

Company Overview



Government 10.00

Public 59.48

Corporate 30.52



Key Financials (KWD’000)

3Q10 3Q09

Total Revenues 11,311.72 12,262.01 EBITDA 4,585.09 9,727.11 Net Earnings 2,221.56 7,196.57 Free Cash Flow (1,746.71) N/A Total assets 630,829.11 589,756.35 Total Liabilities 347,693.54 323,168.82 Shareholders' Equity

283,135.58 266,587.48

Enterprise Value

365,103.66 448,603.21


7.1.6 Commercial Real Estate Company

The Commercial Real Estate Company KSCC (Al‐Tijaria), established in 1968, is a Kuwait‐based public shareholding company primarily engaged in real estate investment and development activities in accordance with Sharia principles. While Al‐Tijaria’s main focus is directed towards commercial property investment in Kuwait and the Gulf, it offers contracting and construction, land reclamation, and property development and management services for the commercial, agricultural, industrial, and tourism sectors. Al‐Tijaria has a diversified portfolio of real estate investments, and bids for projects released by the Kuwaiti government to the private sector. The company has two wholly owned subsidiaries, Al‐Areen Real Estate Co. and Al‐Shefaa Kuwaiti Medical Care Co.

Peer Group Analysis Altijari NREC Inovest

Return on Assets (%) 1.27 3.21 N/A

Return on Equity (%) 2.21 7.81 N/A

Debt/equity (%) 65.79 75.55 35.11

P/E 28.85 7.28 N/A

Net margin (%) 6.99 19.64 155.67

Market Cap.* (USD mn)

490.6 418.1 151.8

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • In late 2009, Al Tijaria obtained a USD 221 mn five‐year credit facility from Commercial Bank of Kuwait to repay Shariah‐compliant loans. The company has to repay a USD 155 mn international Murabaha contract, and 50% of a USD 100 mn Sukuk Ijara contract.

Financial Analysis During 2010 third quarter, Commercial Real Estate Company (Al Tijaria) revealed that its total revenues slumped multiple times to KWD 1.61 mn from KWD 9.12 mn in 3Q09. In addition, the company’s net earnings plummeted to KWD 112,610 from KWD 8.59 mn earlier. Both total assets and total liabilities increased by 2.2% and 0.8% to KWD 419.52 mn and KWD 177.89 mn. Furthermore, shareholders equity widened by 7.6% to KWD 241.63 mn.

Management Outlook The company announced that it would continue its strategic alliances with other real estate companies known for their competency and accumulative experience. Further, in order to ensure the success of its various projects, Commercial Real Estate Company has started establishing a number of entities to manage its regional projects. Besides, the company’s upcoming project Symphony Complex that includes the Hotel Missoni Kuwait is expected to provide service, style and food, which will ensure a hotel experience that, is tailored to the needs of the modern traveler.

Company Overview

Source: Bloomberg, Blominvest Major Shareholders Holding (%)

Corporate 14.95

Public 85.05



Key Financials (KWD’000)

3Q10 3Q09

Total Revenues 1,612 9,119.26 EBITDA 966.73 8,200.23 Net Earnings 112.61 8,591.46 Free Cash Flow 3,333.84 (2,724.08) Total assets 419,522.01 410,556.64 Total Liabilities 177,896.07 176,476.46 Shareholders' Equity

241,625.94 234,080.18

Enterprise Value

304,008.39 375,558.18


63


7.1.7 Solidere

Established in 1994, Solidere ‐ The Lebanese Company for the Development & Reconstruction of Beirut City s.a.l., is primarily engaged in the reconstruction and development of the Beirut city center. The company offers services through two main divisions namely Land Development and Real Estate Development. The Land Development division is active in town planning; parceling and urban management; site preparation, including related activities. The Real Estate division implements real estate development projects through joint ventures, with partners and other developers. The development project covers 191 hectares (472 acres) of land. While Solidere’s shares are listed on the Beirut Stock Exchange, its GDRs are traded on the London Stock Exchange.

Peer Group Analysis Solidere EEC

Return on Assets (%) 7.80 ‐6.42


Debt/equity (%) 14.12 0.00

P/E 21.72 N/A

Net margin (%) 50.63 ‐1,401.32

Market Cap.* (USD mn) 3,142 1,495.9

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments Deyaar Development is partnering with Lebanon’s largest developer Solidere to build low‐cost homes near Beirut. A proposal has been submitted to Solidere for necessary cooperation. The companies will seek land from the Lebanese government for the venture, and will agree to provide mortgage loans for low‐income buyers.

Financial Analysis For FY09, Solidere’s full‐year consolidated net profit increased 3.6% to LBP 561.27 bn, as compared to LBP 530.14 mn in FY08. Net earnings for the full year increased 3.2% to LBP 284.18bn. Revenues from the sale of plots of land increased 19% Y‐o‐Y to USD 305.08 mn and the company still has a backlog of sales contracts worth USD 429 mn signed in previous years that will be included in the financial results of the coming three years. In addition, revenue from rented properties increased 25.8% to USD 27.25 mn, while revenue from rendered services slumped 53.0% to USD 3.14 mn. Meanwhile, it has proposed a dividend payout of USD 1.25 per share for FY09.

Management Outlook While land sales continue to dominate Solidere’s revenues, the company plans to maintain ownership of some land to develop rental properties. According to company officials, 95% of space in South Souks, part of the Beirut Souks commercial district developed by Solidere, has been leased and is expected to operate at full capacity in 2011. As for North Souks, Solidere is experiencing higher demand for its space and expects to offer longer‐term contracts than the South Souks agreements. Rentals from the South Souks inaugurated in 4Q09 are expected to enhance Solidere’s revenue by an estimated USD 22 mn annually, thereby increasing the share of its rental income. Furthermore, the opening of the North Souks (Cineplex in 2012 and a Department Store in 2013) is expected to enhance revenue by another USD 20 mn annually.

Company Overview


Public 100.00



Key Financials (LBP’000)

2009 2008

Total Revenues 561,273,195 530,135,726EBITDA 370,863,950 366,407,425Net Earnings 284,176,925 275,448,809Free Cash Flow N/A 440,760,344Total assets 3,604,353,256 3,683,816,006

Total Liabilities 884,976,102 891,994,496Shareholders' Equity

2,719,377,154 2,791,821,509

Enterprise Value 5,590,911,753 3,682,332,639


7.1.8 Ezdan Real Estate Company

Qatar’s biggest property developer by market value, Ezdan Real Estate Company QSC, formerly the Iskan Real Estate Co., is a Qatar‐based public shareholding company that operates in the real estate sector. Established in 1960, the company is engaged in real estate ownership, development and trade activities. The group has contributed towards the renovation of several old residential districts in Doha utilizing latest technologies in the architectural field. Ezdan, one of the oldest real estate companies in Qatar and the GCC, has developed the largest number of houses in Qatar and has emerged a pioneer in the Qatari housing field.

Peer Group Analysis Ezdan Barwa



Debt/equity (%) 11.05 376.06

P/E 14.43 10.73

Net margin (%) 51.68 77.46

Market Cap.* (USD mn) 18,206.2 3,792.6

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Ezdan is in talks with a Malaysian real estate fund for the sale of its properties in Doha for almost QAR 1 bn. The properties are spread over 18 areas and consist of nine residential units all rented out. According to the Qatar’s legal usufruct systems of property, foreign nationals can acquire these residential units for a period of 99 years. During January 2010, the company announced the proposal to develop a QAR 2.5 bn project called Asia Towers in partnership with Qatar General Insurance & Reinsurance Co., and Al Sarri Trading Co. Ezdan will hold a 32.5% stake in the project, predicted to be the largest real estate project in Qatar, while the other two companies will own a 33.75% share each.

• In March 2010, Ezdan signed an agreement with Unicorp Infotech for implementing Oracle system and for training its employees for ISO certification within six months time. Besides, Ezdan has signed a contract with the BFK Co., seeking assistance for qualifying an ISO certification.

Financial Analysis During 2010 third quarter, Ezdan Real Estate Company posted a 2.6% increase in total revenues to QAR 106.11 mn from QAR 103.42 mn in 3Q09. However, net earnings fell 41.7% to QAR 54.83 mn from QAR 94.02 mn in the same period a year ago. Total assets multiplied several times to QAR 31.44 bn from QAR 7.58 bn, while total liabilities also increased multifold to QAR 3.98 bn from QAR 800.3 mn. Shareholders’ equity jumped to QAR 27.45 bn from QAR 6.78 bn earlier. Meanwhile, for the nine‐month period, the company’s real estate investment volume increased to QAR 11.21 bn.

Company Overview



Corporate 99.98

Other 0.02 Source: Bloomberg, Blominvest


Key Financials (QAR’000)

3Q10 3Q09

Total Revenues 106,109 103,421 EBITDA 74,827 84,893 Net Earnings 54,837 94,022 Free Cash Flow N/A N/A Total assets 31,440,570 7,584,853 Total Liabilities 3,983,841 800,347 Shareholders' Equity 27,456,729 6,784,506



65


7.1.9 Barwa Real Estate Company

Barwa Real Estate Company QSC (Barwa) is a Qatar‐based real estate investment firm engaged in investment, development, and management of properties. It is also involved in Shariah‐compliant construction, land refurbishing and trading. Additionally, Barwa’s operations include production of precast construction material, banking and investment, real estate and portfolio management, as well as environmental and health‐related activities. It operates through a number of subsidiaries and joint ventures locally and internationally.

Peer Group Analysis Barwa Ezdan



Debt/equity (%) 376.06 11.05

P/E 10.73 14.43

Net margin (%) 77.46 51.68

Market Cap.* (USD mn) 3,792.6 18,206.2

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Barwa bought Park House development in London from UK’s largest property owner and developer Land Securities Group for GBP 250 mn. Construction will be completed by November 2012. The deal is in keeping with Barwa’s strategy of investing in international commercial property. • In April 2010, it announced the closure of its offer to acquire the share capital of Qatar Real Estate Investment Co., in exchange for shares in Barwa. By coming together both companies intended to create a world‐class real estate business that would allow them to compete with global industry leaders on new projects, both domestic and international. • Besides regional developments, Barwa is planning to launch two USD 500 mn investment funds in the Russian and Brazilian real estate sectors to deepen links with emerging markets.

Financial Analysis Barwa Real Estate posted an 11.6% increase in net profit for 2010 third quarter to QAR 277.16 mn from QAR 248.35 mn, majorly due to higher property sales and doubling of rental revenues. Due to a region‐wide real estate slump, the company’s total revenue was down 58.9% to QAR 357.8 mn from QAR 871.06 mn recorded earlier. Meanwhile, in June 2010, the company made one of its first major wholly owned investment in United Kingdom through the purchase of Park House development in London. Looking ahead, the company expects to sell its assets in 2011 in order to meet obligations subsequent to the repayment of QAR 4.3 bn in Islamic financial facilities.

Management Outlook During April, Barwa announced that it expects to complete its Saliyah housing project by July, a year behind schedule. That project, along with the start of leasing Barwa Village is expected to contribute to operational earnings during 2010.

Company Overview



Government 45.00

Public 55.00



Key Financials (QAR’000)

3Q10 3Q09

Total Revenues 357,799 871,061 EBITDA 110,453 684,983 Net Earnings 277,164 248,350 Free Cash Flow N/A N/A Total assets 64,986,265 29,550,598 Total Liabilities 54,044,268 24,213,670 Shareholders' Equity

10,941,997 5,336,927



7.1.10 Dar Al Arkan Real Estate Company

Dar Al Arkan Real Estate Development Company, established in 1994, is a Saudi Arabia‐based public shareholding company specializing in residential real estate catering to the middle‐class segment. It develops master‐planned lifestyle residential communities offering developed land parcels, apartments, and villas. It is also involved in wholesale trading in electric tools, paints and building materials, and car sales through cash and installments. In total, Dar Al‐Arkan has seven offices and branches across the Kingdom, including Mecca, Jeddah and Madinah. Dar Al‐Arkan currently retains an “A‐” corporate credit rating with a stable outlook from Capital Intelligence.

Peer Group Analysis Dar Al Arkan Ezdan



Debt/equity (%) 52.96 11.05

P/E 6.00 14.43

Net margin (%) 33.98 51.68

Market Cap.* (USD mn) 2,620.6 18,206.2

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Dar Al Arkan closed deals worth SAR 1 bn with local companies in order to set up the Riyadh Shams project in the capital city. Housing, the first phase of the project will be completed by 2010 at a cost of SAR 250 mn. It will include villas, sales offices, state‐of‐the‐art electronic facilities, a school, a mall, a mosque, and a play area of 1 mn sq‐m including a garden and a park. Similarly, the company has some 25 projects spread across the Kingdom.

Financial Analysis Dar Al Arkan reported a 28.7% drop in net profit for 2010 fourth quarter to SAR 330.44 mn, compared to SAR 463.74 mn registered in the year ago period mainly due to lower land and residential unit sales. Revenue decreased 20.0% to SAR 972.39 mn from SAR 1.21 bn. Free cash flow during the quarter swung to negative SAR 208.65 mn from SAR 1.17 bn. Total assets were down marginally to SAR 23.35 bn from the earlier recorded SAR 23.60 bn, while total liabilities also edged down SAR 8.85 bn from SAR 9.47 bn. For 2011, it estimates to generate USD 80 mn from renting some assets. Looking ahead, the company’s chief executive said that they expect rent income to increase steadily from almost zero to USD 267 mn by end‐2015.

Management Outlook Looking ahead, Dar Al Arkan anticipates 2010 revenues to be in line with 2009 levels and expects to raise more debt to fund expansion and pay off maturing Islamic bonds. Outstanding debt stood at SAR 8.34 bn as of 2009 and the company is subject to hefty Sukuk repayments in 2010 and 2012. Favorable demographics and undersupply will drive the demand for residential units in 2010, as per the company’s chairperson.

Company Overview



Corporate 27.60

Public 11.01

Private 29.00

Other 32.39



Key Financials (SAR’000)

4Q10 4Q09

Total Revenues 972,392 1,215,864

EBITDA 357,744 518,612

Net Earnings 330,436 463,741Free Cash Flow (208,651) 1,173,624Total assets 23,348,861 23,596,790Total Liabilities 8,849,233 9,472,873Shareholders' Equity

14,499,628 14,123,917



67


7.1.11 Emaar Properties

Company Overview

Emaar Properties PJSC, established in 1997, is a UAE‐based company engaged in property investment and development, property management services, education, healthcare, retail and hospitality sectors, as well as investing in financial service providers. With 6 business segments and more than 60 active companies, the company has presence in 36 countries across the MENA region, Asia, Europe, and North America. Its domestic projects include Burj Khalifa, Dubai Marina, Arabian Ranches and Emirates Hills, among others. The company operates through wholly owned subsidiaries.

Peer Group Analysis Emaar Aldar Union

Return on Assets (%) N/A ‐22.29 N/A

Return on Equity (%) N/A ‐121.15 N/A

Debt/equity (%) N/A 766.98 N/A

P/E 8.99 N/A N/A

Net margin (%) 7.15 ‐1,284.54 N/A

Market Cap.* (USD mn) 5,057.9 1,310.1 314.4

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Emaar is reviving plans to invest in the hospitality sector in India through its joint venture company Emaar MGF. The company is seeking for a viable option to launch the iconic Armani brand hotels in India. Emaar MGF plans to raise up to AED 3.19 bn, with 10% of the targeted fund through a pre‐IPO placement. Meanwhile, it has already entered into joint ventures with Accor for the development and operation of budget hotels, and with Premier Travel Inn for the development and operation of mid‐market category hotels in India.

Financial Analysis Emaar’s 2010 fourth quarter revenue increased 28.9% to AED 3.83 bn from AED 2.97 bn in 4Q 2009, mainly due to healthy income growth from malls, retail and hospitality segment. During 2010, the company handed over almost 3,500 units including 770 in the Burj Khalifa and almost 420 units in the international markets. Net profit for the period slumped several times to AED 274 mn from AED 720.12 mn a year earlier. Total liabilities declined 9.4% to SAR 31.94 bn from SAR 35.27 bn. However, shareholders’ equity increased 7.3% to SAR 30.99 bn from SAR 28.88 bn. For 2011, additional recurring rental revenue would be derived from healthcare and educational assets it has transferred to customers.

Management Outlook The chairman of Emaar believes 2011 will a significant year with strong revenue streams from international operations. In addition, Emaar expects to handover properties to buyers in developments such as Jeddah Gate and Al Khobar Lakes in Saudi Arabia, as well as at projects in Turkey and Egypt. An analyst at Nomura believes that in 2011 Emaar will have a total of AED 500 mn in impairments relating to lender Amlak. The company’s stake in the lender could be written down to zero. Meanwhile, Emaar is seeking to sell almost $2 billion of Islamic bonds as its appetite for higher yielding assets increases.



Government 31.22

Public 68.78



Key Financials (AED’000)

4Q10 4Q09

Total Revenues 3,830,000 2,970,299 EBITDA N/A 1,058,214 Net Earnings 274,000 720,117 Free Cash Flow N/A N/A Total assets N/A 64,144,797 Total Liabilities 31,942,230 35,265,789 Shareholders' Equity

30,991,129 28,879,007

Enterprise Value N/A 31,232,447


7.1.12 Aldar properties

Abu Dhabi’s largest real estate developer, Aldar Properties PJSC, was launched in 2005. It undertakes and operates a portfolio of real estate projects in the UAE. Leading Abu Dhabi institutions, shareholders and investors have a stake in the company. It owns over 50 mn sq‐m of land in strategic locations throughout the Emirate of Abu Dhabi. Currently, Aldar is building the Yas Marina F1 circuit, which is bound to become a key tourist and entertainment destination. The company has announced assignments worth more than USD 75 bn.

Peer Group Analysis Aldar Emaar Union

Return on Assets (%) ‐22.29 N/A N/A

Return on Equity (%) ‐121.15 N/A N/A

Debt/equity (%) 766.98 N/A N/A

P/E N/A 8.99 N/A

Net margin (%) ‐1,284.54 7.15 N/A

Market Cap.* (USD mn) 1,310.1 5,057.9 314.4

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Aldar Properties is planning to build 2,600 homes, including townhouses and apartments in two projects ‐ Al Zeina and Al Muneera located on the Al Raha Beach. The company recently said it has agreed to sell real estate assets including a Ferrari theme park and convertible bonds to the government for AED 19.2 bn (USD 5.2 bn) in order to reduce its debt. • Aldar’s custom designed new and used car showrooms and servicing facilities Motor World is set for launch within a few months. The first phase of almost 100 showrooms is likely to begin in April 2011 with 75% of these showrooms already sold.

Financial Analysis Aldar Properties reported a multi‐fold increase in its total revenues to AED 867.06 mn during 2010 fourth quarter, as against AED 239.97 mn in the same quarter in 2009. During the quarter, the company recorded its biggest quarterly net loss of AED 11.14 bn, as compared to AED 562.91 mn in the year‐ago period. Net loss included impairments of AED 10.8 bn. Meanwhile, free cash flows narrowed to a negative balance of AED 325.64 mn, compared to AED 2.57 bn earlier. Total assets and total liabilities were down 28.5% and 13.1%, respectively. With improving market conditions, the company expects to return to net profit in 2011 and 2012. Aldar expects to sell assets worth USD 1.49 bn to the government in order to meet its mounting debt obligations.

Management Outlook Standard & Poor said the close ties between the government of Abu Dhabi and Aldar provide a brighter outlook for the company. The company’s chief financial officer expects the company to return to profitability in 2011 and 2012 as the real estate market has entered a recovery phase. At the Central Market mixed‐used development, remaining work on the Souk, which opened during the second half of 2010, is progressing and the project is scheduled for delivery in 2012. New projects include a major infrastructure development for Al Ain Municipality.

Company Overview


Government 26.15

Public 55.00

Corporate 8.16

Other 10.69




4Q10 4Q09

Total Revenues 867,059 239,966

EBITDA (4,061,089) (893,836)Net Earnings (11,137,709) (562,914)Free Cash Flow (325,641) (2,574,503)Total assets 47,344,182 66,224,398Total Liabilities 43,097,397 49,573,863Shareholders' Equity

4,246,785 16,650,532

Enterprise Value

36,018,092 41,222,456


69


7.1.13 Union Properties

Union Properties PJSC is a UAE‐based public joint stock company engaged in real estate investment and development activities. The company acts as a holding company to its subsidiaries, and offers property development, management and maintenance services. Further, it undertakes related real estate services, such as interior design, contracting, district cooling, project management, facilities management, theme park operations, motor racing track operations, and duct trading and manufacturing. Its property portfolio comprises of properties for rent and for sale. The company operates through seven wholly owned subsidiaries and two joint venture companies.

Peer Group Analysis Union Aldar Emaar

Return on Assets (%) N/A ‐22.29 N/A

Return on Equity (%) N/A ‐121.15 N/A

Debt/equity (%) N/A 766.98 N/A

P/E N/A N/A 8.99

Net margin (%) N/A ‐1,284.54 7.15

Market Cap.* (USD mn) 314.4 1,310.1 5,057.9

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • Union Properties is continuing to hold talks with Ernst & Young for sourcing funds for the AED 1.68 bn F1‐X theme park in MotorCity. The AED 3.5 bn MotorCity development includes five components – Dubai Autodrome, F1 Theme Park, Business Park MotorCity, Uptown MotorCity, and Green Community MotorCity. So far, no commitments have been made to third parties.

• Union Properties revealed it has finalized the sale of Ritz Carlton Hotel, DIFC for a value of AED 1.1 bn. The proceeds from the same will be utilized towards reducing the company’s debt position and for completing the few remaining assets at the company’s flagship development, The MotorCity.

Financial Analysis Union Properties’ 2010 fourth quarter losses widened almost five‐fold, following losses on valuation of properties. During the year, the company used its Ritz Carlton hotel sale proceeds of AED 1.1 bn towards its debt obligations and to complete remaining projects.

Management Outlook Going forward, Union Properties is aiming to set up a hospitality and leisure division this year to manage its portfolio of five hotels and a suspended Formula One theme park. The company seeks to set up a property‐management unit.

Company Overview



Corporate 52.69

Public 47.31




4Q10 4Q09

Total Revenues N/A 1,177,567 EBITDA N/A 265,616 Net Earnings (778,087) (148,033) Free Cash Flow N/A (530,270) Total assets N/A 17,464,852 Total Liabilities N/A 11,980,096 Shareholders' Equity

N/A 5,484,756

Enterprise Value N/A 8,794,471


7.1.14 Emaar The Economic City (EEC)

Emaar, The Economic City, is a consortium led by Emaar Properties along with high‐profile Saudi investors. Based in Jeddah, the company was incorporated to plan and develop the King Abdullah Economic City (KAEC) in Saudi Arabia, spread over a total area of 168 million sq m. EEC’s core activities include property development, real estate investment and property related services. The company created history of sorts through the most successful public offering made in July 2006 with more than half of the Saudi population subscribing to it. KAEC comprises of six zones ‐ the port, industrial valley, resort, educational zone, residential district, and financial island. Based on initial forecasts, the project and its components will create up to one million employment opportunities in various industries and service‐oriented companies that will open in KAEC. Located off‐the Red Sea coast, the city will be home to 2 million residents.

Peer Group Analysis EEC Solidere

Return on Assets (%) ‐6.42 7.80


Debt/equity (%) 0.00 14.12

P/E N/A 21.72

Net margin (%) ‐1,401.32 50.63

Market Cap.* (USD mn) 1,495.9 3,142

*as of Jan. 31, 2011 Source: Annual Report, Blominvest Recent Developments • EEC and Saudi Total Lubricants Co. (subsidiary of Total) have signed an agreement to establish a lubricants manufacturing facility on approximately 65,000 sq m of a leased plot in the Industrial Valley in KAEC. With initial investment of over SAR 37.51 mn, the plant will create employment opportunities for 50 people.

Financial Analysis Emaar The Economic City announced that its 2010 fourth quarter revenues narrowed to SAR 14.73 mn from SAR 21.52 mn in the same quarter in 2009. Additionally, net loss stood at SAR 206.36 mn, compared to SAR 69.88 mn in the year‐ago period. Total assets were down 4.5% to SAR 8.89 bn, while total liabilities increased 11.5% to SAR 1.59 bn. During the quarter, shareholders’ equity dipped to SAR 7.30 bn from SAR 7.88 bn in 4Q09. In December 2010, the company discontinued a SAR 390 mn contract awarded to Freyssinet Saudi Arabia in 2008, after almost 60% of the project was completed. A payment of SAR 208 million was already made to the contractor.

Management Outlook The first phase of EEC’s flagship project King Abdulla Economic City (KAEC) is underway and is scheduled to be complete by 2011. Furthermore, completion of Phase 1 is expected to improve the market sentiment by boosting investor confidence and gathering more industrial units in KAEC, following the opening of the seaport. Industries are expected to benefit from the port, which will provide a logistics facility covering Asia, Europe, and Africa. Revenues growth is primarily due to the increasing number of agreements/deals related to development projects in KAEC, and resulting from partial completion of the seaport.

Company Overview



Corporate 65.21

Public 30.00

Private 1.29

Other 3.50



Key Financials (SAR’000)

4Q10 4Q09

Total Revenues 14,726 21,518 EBITDA (44,033) (70,316) Net Earnings (206,358) (69,878) Free Cash Flow n/a (153,683) Total assets 8,885,285 9,305,135 Total Liabilities 1,587,421 1,423,458 Shareholders' Equity

7,297,864 7,881,677



71


7.2 Major Projects in the Region

Country Project name Project Type Value (USD bn)

Status

Bahrain Albilad Real Estate Investmemt Company ‐Water Garden City

Community Development 9.75 Ongoing

Egypt International Real Estate Projects Group ‐Dream Farms

Community Development 26.2 Ongoing

Egypt Damac Properties - Gamsha Bay Community Development 16.30 On HoldEgypt Talaat Moustafa Group (TMG) ‐ Madinaty Community Development 14 Ongoing

Jordan Al Maabar Jordan Investments Company - Marsa Zayed Mixed Development 10.00 Ongoing

KSA Modon ‐ Sudair Industrial City Industrial Zones 40 Ongoing

KSA SAGIA ‐ Jazan Economic City Free Zones/Economic Zones 30 Ongoing

KSA Kingdom Holding Company ‐ Kingdom City Community Development 27 Ongoing

KSA SAGIA ‐ King Abdullah Economic City (KAEC) Free Zones/Economic Zones 27 Ongoing

KSA SAGIA ‐ Ras Al Zour Resource City Free Zones/Economic Zones 25 Ongoing

KSA KHC ‐ World's Tallest Tower Mixed Development 20 Ongoing

KSA Modon ‐ Jazan Industrial City Industrial Zones 17 Ongoing

KSA Kingdom Holding Company - Kingdom Tower Mixed Development 13.60 On Hold

KSA Limitless ‐ Al Wasl Community Community Development 12 Ongoing

KSA Emaar Middle East ‐ Jeddah Hills Community Development 11.2 Ongoing

Kuwait Kuwait PAHW ‐ Sabah Al Ahmad Future City Community Development 27 Ongoing

Kuwait Kuwait PAHW - Khairan Residential City Community Development 20.00 OngoingOman Blue City Company 1 ‐ Al Madina A'Zarqa Community Development 20 Ongoing

Oman DSME/Omran - Frontier Town Community Development 20.00 OngoingOman Oman Ministry of Finance ‐ Duqm New

Downtown Community Development 20 Ongoing

Qatar UDC - The Pearl Qatar Community Development 14.00 OngoingUAE Meraas Development ‐ Jumeirah Gardens City Community Development 95 Ongoing

UAE Dubai Properties ‐Mohammad Bin Rashed Gardens

Community Development 55.5 On Hold

UAE Dubailand ‐ Bawadi Community Development 54.5 Ongoing

UAE ALDAR Properties ‐ Yas Island Development Community Development 40 Ongoing

UAE Abu Dhabi Urban Planning Council ‐ Capital District

Community Development 40 Ongoing

UAE Nakheel - Nakheel Harbour and Tower Mixed Development 38.00 On HoldUAE TDIC ‐ Saadiyat Island Development Community Development 27.25 Ongoing

UAE Abu Dhabi Future Energy Company - Masdar Carbon Free City Community Development 22.00 Ongoing

UAE Dubai Properties ‐Mudon Development Community Development 21 On Hold

UAE Sama Dubai - The Lagoons Community Development 21.00 On HoldUAE Bawadi ‐ Asmaran Development Community Development 16.4 Ongoing

UAE ALDAR Properties ‐ Al Raha Beach Community Development 15 Ongoing

UAE Al Zorah Development Company ‐ Al Zorah Development

Community Development 14 Ongoing

UAE Dubai Properties ‐ Culture Village Community Development 13.6 Ongoing

UAE Limitless ‐ Downtown Jebel Ali Community Development 13 On Hold

UAE Nakheel - Palm Deira Mixed Development 12.50 On HoldUAE Nakheel ‐ Mina Rashid Community Development 12 On Hold

UAE Bunya for Projects ‐ Reem Island Community Development 10 Ongoing

UAE RAKIA ‐ RAK Gateway City Community Development 10 Ongoing

Source: Various news agencies, Blominvest

7.3 Acronyms AAGR Average Annual Growth Rate IREX Real Estate Exchange Group ABS Asset‐Backed Securities KAEC King Abdullah Economic City ADIA Abu Dhabi Investment Authority MBS Mortgage‐Backed Security ADR average daily rate MENA Middle East & North Africa ARM Adjustable‐Rate Mortgage MEW Mortgage Equity Withdrawal ATM Automatic Teller Machine MICE Meetings, Incentives, Conferences & Exhibitions BOT Build‐Operate‐Transfer NGO Non‐Governmental Organization BP British Petroleum NINA No Income, No Assets BRIC Brazil, Russia, India, China NREC National Real Estate Company KSC CAGR Compound Annual Growth Rate OBG Oxford Business Group CDO Collateralized Debt Obligation OECD Organization for Economic Co‐operation and

Development CDS Credit‐Default Swaps P/E Price/EquityCMO Collateralized Mortgage Obligations PE Private EquityCPI Consumer Price Index PMI Project Management Institute DFM Dubai Financial Market QIA Qatar Investment Authority DIFC Dubai International Financial Centre QTA Qatar Tourism Authority FDI Foreign Direct Investment RAK Ras Al Khaimah FHA Federal Housing Administration RAKIA Ras Al Khaimah Investment Arm FHLMC Federal Home Loan Mortgage Corporation REDF Real Estate Development Fund FNMA Federal National Mortgage Association REIT Real Estate Investment Trust FRM Fixed‐Rate Mortgage RERA Real Estate Regulatory Agency GCC Gulf Cooperation Council RevPar Revenue per available room GDP Gross Domestic Product RPI Units Real Property Investment Units GLA Gross Leasable Area SAAR Seasonally Adjusted Annual Rate GNMA Government National Mortgage

Association SEZ Special Economic Zone

GSE Government‐Sponsored Enterprise SIFMA Securities Industry and Financial Markets Association

HEL Home‐Equity Loans Sq m Square metersHOLC Home Owners’ Loan Corporation SWF Sovereign Wealth Fund IFC International Finance Corporation TMGH Talaat Moustafa Group Holding IIF Institute of International Finance UAQ Umm Al Quwain IMF International Monetary Fund UN United NationsIPO Initial Public Offering WTTC World Travel and Tourism Council

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