UAE Real Estate Recovery slow, yet deep value at current levels

Transcription

1 UAE Real Estate Recovery slow, yet deep value at current levels MARCH 2011

2 2 UAE REAL ESTATE SECTOR: OVERVIEW & SUMMARY 3 UAE REAL ESTATE SECTOR: TRENDS & OUTLOOK 11 SOROUH: STANDING TALL ON SOUND LIQUIDITY 29 ALDAR: RESTRUCTURING EASES FUNDING CONCERNS 49 EMAAR: A DIVERSIFIED PROPERTY PLAY 72 DEYAAR: STRATEGIC DIRECTION LACKS CLARITY 97

3 Middle East real estate companies trading at discount to emerging market peers Current P/E P/BV P/E P/BV 2010E 2011E 2010E 2011E Middle East Aldar Properties NM 0.23 NM NM Dar Al Arkan Emaar the economic city NA 0.76 NM NM Sorouh Real Estate PJSC Deyaar Development PJSC NM 0.21 NM Barwa Real Estate Company QSC Talaat Moustafa Group Holding Emaar Properties PJSC SODIC NA Average Asia China Resource Land Agile Property SINO Land co Shanghai Forte Land DLF 20.3 N/A Untiteach 14.6 N/A Ayala Land Jababeka NM Average Russia and Emerging Europe AFI Development N/A GTC N/A N/A LSR OPEN Investments N/A Average Latin America JHSF Participacoes SA Cyrela EVEN Construtora e Incorporadora SA Inpar SA LPS Brasil - Consultoria de Imoveis SA Average Middle East real estate companies are trading at a significant discount to their emerging market peers In terms of current multiples, Middle East real estate companies are trading at an average discount of more than 50% on P/B basis compared to their peers in Asia, Russia and Latin America In terms of forward multiples, Middle East real estate companies trade at an discount of % on FY 2011E P/B basis compared to their peers in Asia, Russia and Latin America Whilst we expect recovery to be slow, we believe this is already priced in and the UAE Real Estate sector offers deep value at current levels Source: Bloomberg, Al Mal Capital analysis 3

4 UAE Real Estate Sector Outlook Prices to remain under pressure in the near to medium term Segment Dubai Abu Dhabi Residential Demand Supply scenario Oversupply expected to peak in 2011 According to MEED demand-supply equilibrium expected to be reached post 2015 Market is expected to remain undersupplied at least until 2015 Office Demand Supply scenario Retail Demand Supply scenario Market is expected to remain oversupplied in the medium term Demand likely to remain sluggish Market is likely to see limited supply coming by 2013 Demand is expected to be supported by growth in tourism Market is expected to remain oversupplied in the medium term Demand likely to remain sluggish Market is expected to remain undersupplied at least until 2013 Growth in retail spending by tourists is expected to drive demand Real Estate prices Prices are expected to continue decline until 2013 and bottom-out by the end of 2013 Prices are expected to continue decline until 2014 and bottom-out by the end of 2014 Anticipated timing of real estate market recovery* Beyond 36 months Beyond 36 months Source: Al Mal Capital analysis, *Based on JLL Middle East Investor Sentiment report Oct

5 UAE Real Estate Sector: Requirements for recovery Dec 2009 Dec 2010 Dec 2009 Dec 2010 Macro Economic Global economic stability Recovery in oil prices Stability in employment levels Financial / Liquidity Recovery in equity markets Recapitalization of banking sector Increased funding available to real estate sector Real Estate Increased occupier demand Stabilization of pricing levels Increasing transaction levels Supporting Factors Recovery in tourism Concerted Government action Required Underway Achieved Source: Jones Lang LaSalle, Al Mal Capital analysis 5

6 UAE Real Estate Sector Emaar is the most diversified property play in UAE EMAAR Business Segments Development of residential and commercial property for sale Emaar Malls Emaar Hospitality Emaar Healthcare Largest real estate developer in the Middle East in terms of sales and market capitalization Presence across all real estate sub-segments Significant presence in international markets outside UAE Sales of AED12.2 Bn in 2010 Business Description DEYAAR Real estate development and management Leasing and property management Electrical contracting and maintenance Engaged in office and residential real estate development Operations primarily concentrated in Dubai Sales of AED483.3 Mn in 2010E SOROUH Land sales Property development and sales Investment properties Construction/contracting segment Engaged in land sales, and residential community development in Abu Dhabi Sales of AED1.21 Bn in 2010 ALDAR Land sales Property development and sales Investment properties Construction/contracting segment Largest real estate developer in Abu Dhabi, in terms of market capitalization Engaged in land sales, and real estate development in Abu Dhabi Source: Company Filings, Zawya Projects, Al Mal Capital analysis 6

7 Sorouh Outperform Target Price AED1.78 Upside 63.5% Investment Summary (1/2) Stable revenue growth (CAGR of 18.9% during ), driven by strong pipeline of residential rental projects in Abu Dhabi Strong foothold in Abu Dhabi s attractive residential sector with 89% of the project pipeline in residential segment Highest EPS growth (Projected to rise from AED0.01 in 2010 to AED0.38 in 2012) amongst its regional peers and strong EBITDA margin (34.8% and 45.8% in 2011 and 2012) Attractive valuation as the stock trades at a discount of 38.6% to its peer group average in terms of forward 2011E P/B multiples However, discount is unjustified and the magnitude should be lower considering that Sorouh offers the best opportunities in Abu Dhabi s residential real estate market Aldar Outperform Target Price AED2.14 Upside 57.3% New restructuring plan eases Aldar s funding concerns, as the company would receive AED10.9 Bn from sale of certain infrastructure assets on Yas Island in 2011 Aldar recognized AED11.3 Bn related to impairment charges under the new restructuring plan during 4Q 2010, which impacted its bottom-line during 2010 However, we expect Aldar to be profitable from 2012 onwards driven by strong overall top-line growth. Aldar is projected to make net profit of AED246 Mn in 2012, further rising to AED465 Mn during 2013 Aldar s rising share of investment property is likely to provide top-line stability. Total revenue is expected to grow at a CAGR of 15.0% during to reach AED 10.0Bn by 2014 Valuation at a considerable discount- Aldar is trading at a discount of 34.0% to its peers on the basis of FY 2011E P/B multiple Magnitude of discount is unjustified as the new restructuring plan is expected to strengthen Aldar s capital structure and help meet its financial obligation. Source: Al Mal Capital analysis 7

8 Emaar Outperform Target Price AED4.01 Upside 35.8% Market Deyaar perform Target Price AED0.24 Upside 6.4% Investment Summary (2/2) Emaar s revenue is projected to grow at a CAGR of 8.6% during , compared to the negative CAGR growth of 12.0% during , driven by steady progress on its property sales and rental projects coupled with expansion in international markets such as Saudi Arabia, Turkey and Egypt Post 2013, revival in prices, coupled with Emaar s focus on the high margin rental business, is expected to boost net income and margins Emaar s net income is projected to grow at a CAGR of 14.8% during from AED2.45 Bn in 2010 to AED4.25 Bn in 2014, translating into strong EPS growth Robust balance sheet and ability to refinance debt, due to strong capitalization and stable cash flow generation capacity Upside bias as the stock trades at a discount of 9.7% to its peer group average in terms of forward (FY2011E) P/B multiples Discount is unjustified and expect Emaar to trade at a marginal premium given its more diversified business model and stable EPS growth compared to its UAE peers, such as Aldar and Deyaar, which are currently incurring losses Steady progress on current projects, coupled with the rise in recurring income, is expected to support top-line growth in 2011 and 2012 Deyaar is expected to report net profit of AED118.5 Mn (EPS of AED0.021) in 2011; it is expected to incur a loss of AED423.3 Mn in Net income is further expected to register a growth of 15.7% YoY in 2012, resulting in an EPS of AED0.024 However, the company lacks clarity on strategic direction and visibility on international projects is limited Deyaar is trading at a deep discount of 69.0% to its peers on the basis of FY 2011E P/B multiple We believe the discount is justified, given the lack of long-term direction, which clouds earnings and EPS visibility Source: Al Mal Capital analysis 8

9 Coverage Universe: Trading Multiples COMPANY MKT CAP (USD Mn) P/B P/E CUR FY10E FY11E CUR FY10E FY11E ROE (TTM) EPS CAGR ( ) P/B (TTM) Sorouh % 267.1% 0.47 Peer Avg Premium (Discount) % (21.3%) (27.8%) (38.6%) (29.3%) (29.4%) (71.0%) (21.3%) Aldar NM NM NM NM NM 0.23 Peer Avg Premium (Discount) % (63.6%) (35.7%) (34.0%) NM NM NM (63.6%) Emaar 4, % 6.5% 0.62 Peer Avg Premium (Discount) % 7.7% (5.1%) (9.7%) (0.6%) (16.5%) (52.3%) 7.7% Deyaar NM NM 5.0 NM NM 0.21 Peer Avg Premium (Discount) % (67.7%) (69.2%) (69.0%) NM NM (37.8%) (67.7%) Source: Bloomberg, Al Mal Capital analysis 9

10 10 UAE REAL ESTATE SECTOR: OVERVIEW & SUMMARY 3 UAE REAL ESTATE SECTOR: TRENDS & OUTLOOK 11 SOROUH: STANDING TALL ON SOUND LIQUIDITY 29 ALDAR: RESTRUCTURING EASES FUNDING CONCERNS 49 EMAAR: A DIVERSIFIED PROPERTY PLAY 72 DEYAAR: LACKING STRATEGIC DIRECTION 97

11 Dubai s growth mantra build and they will come.adopted by Abu Dhabi as reflected in its 2030 plan Historically, Dubai has always been willing to take additional risks and help the Emirate s Government achieve its growth targets Dubai successfully coined the build and they will come philosophy through: Significant investments in large scale infrastructure projects by dredging the Dubai Creek during the 1960s and 70s Kicked off the build and they will come philosophy for Dubai Building of the Jabel Ali Port and free zones in the 1970 s Establishment of Dubai International Airport and its subsequent expansions over the period In the last decade, the philosophy has been exemplified by the real estate sector, marked by mega projects such as The Palm (2003), The World (2003), and the Burj Khalifa (2010) Abu Dhabi has also taken on the same mantra with its 2030-Urban Structure Framework Plan After Dubai, Abu Dhabi now adopts the build and they will come mantra with its 2030 plan The plan envisages a city with a population of ~3 Mn by 2030 compared to ~1 Mn in 2009 The plan aims to attract 7.9 Mn annual tourists by 2030 compared to ~2 Mn in 2009 To support the growth in population and tourist arrivals, the Abu Dhabi Government plans to invest in transportation, hospitality, education and healthcare The Abu Dhabi Government is committed to investing USD400 Bn under its Abu Dhabi Economic Vision Plan 2030 Source: UAE Central bank, Al Mal Capital analysis 11

12 UAE: Dubai was the epicenter of the regional real estate boom and bust Higher degree of speculative investment Significant foreign investment in Dubai s real estate sector compared to other GCC countries supported by the Emirates' greater integration with the rest of the world and abundance of cheap capital Foreigners accounted for 30% of the transactions in Dubai during 2008, up from an average of 10% between 2001 and 2007 Limited end-user driven demand Dubai developers off-plan sales model led to a booming real estate market and attracted speculative investments Liquidity squeeze The U.S. subprime mortgage market collapse led to a global credit crunch. This crisis almost froze credit flow, resulting in a collapse in asset and oil prices Banks have had to rein in soaring credit growth and rebalance their books in the face of falling asset prices and expectations of rising loan defaults Weakening population trend and oversupply Slowdown in economic activity led to many expatriates leaving the Emirate. This adversely affected housing demand, which had grown above the trend growth in population Strategic shift for UAE developers with greater emphasis on investment income Key real estate players started moving from being mainly developers to landlords in order to earn stable rental income from unsold stock The Dubai real estate sector witnessed significant price correction and was the most adversely impacted in the GCC, given thehigher degree of speculative investment in the Emirate Source: Colliers International, Al Mal Capital analysis 12

13 Rent (USD/sqm) Price (USD/sqm) Across GCC, real estate prices corrected the most in Dubai RESIDENTIAL PRICE DECLINE IN GCC (%) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 RESIDENTIAL RENTAL DECLINE IN GCC (%) Riyadh Jeddah Dubai Abu Dhabi Doha (Qatar) 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 1Q 10 2Q 10 Riyadh Jeddah Dubai Abu Dhabi Doha 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 1Q 10 2Q 10 Price corrections in Dubai s real estate sector were the most severe amongst GCC countries, largely due to the higher degree of speculative investments in the Emirate Average residential price in Dubai declined 52% between 3Q 08 and 2Q 10, significantly higher than the 27% in Riyadh and 32% in Doha Average residential rentals in Dubai were down 49% between 3Q 08 and 2Q 10 compared to 37% in Abu Dhabi, 31% in Doha, and 6% in Riyadh Average office rentals in Dubai tumbled 61%, during the same period as against the 24% and 21% declines reported by Doha and Abu Dhabi, respectively Revenue Per Available Room (RevPar) for Dubai hotels also plummeted 49% between 3Q 08 and 2Q 10, much higher than the 30% in Riyadh and 27% in Qatar Also, residential yields were comparatively low During 2008, residential yields in Dubai stood at 6% compared to 8% in Doha and 9% in Riyadh Falling rents reduced yields, which made the sector less attractive and drove down capital values Source: Colliers International, Al Mal Capital analysis 13

14 Price (USD/Sqm) No escape for Abu Dhabi despite strong fundamentals RESIDENTIAL PRICE DIFFERENTIAL-DUBAI vs ABU DHABI 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Dubai (LHS) Price differential (RHS) Abu Dhabi (LHS) Price differentiation between Abu Dhabi and Dubai peaked during 1Q 09 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 1Q 10 2Q 10 2,500 2,000 1,500 1, The boom in the real estate prices in Abu Dhabi between 2005 and 1H 08 was primarily driven byfundamentals Shortage across sub-segments, coupled with speculative investment demand initially, led to a boom in prices Despite strong fundamentals, Abu Dhabi s real estate sector could not escape the correction in the regional real estate sector While residential prices declined 47% between 3Q 08 and 2Q 10, office rentals tumbled 37% during the same period This price correction was largely driven by a combination of factors such as: Heightened risk of the ongoing economic slowdown Evaporation of speculative investment demand Worsening investor and consumer sentiment, mainly after Dubai World s debt default Financing squeeze amid curtailed credit flow across the region Dubai properties acting as a substitute, with people working in Abu Dhabi and living in Dubai, given the higher rents in Abu Dhabi, thus reducing yields and capital values Price differentiation between Dubai and Abu Dhabi increased significantly following the steeper correction in Dubai, as prices in Dubai corrected faster than in Abu Dhabi Thus the price correction in Abu Dhabi was inevitable Source: Colliers International, Al Mal Capital analysis 14

15 Future UAE supply being reduced through large number of real estate project cancellations REAL ESTATE PROJECT BREAKDOWN IN UAE Others, 20% The UAE accounted for 58% (AED1.1 Trn) of the total real estate and construction projects in GCC followed by Saudi Arabia (19%) during 1Q 09 Dubai and Abu Dhabi together accounted for 77% (~AED850 Bn) of the Emirates' total real estate and construction projects Ajman, 3% Abu Dhabi, 35% Dubai, 42% Evaporation of speculative demand and significant price corrections led to a large number of projects being either cancelled or put on hold The UAE witnessed the highest number (38.6%) of projects either cancelled or on hold in the construction sector, followed by Oman (6.6%) during 1Q 09 STATUS OF CONSTRUCTION PROJECT ACROSS GCC-1Q 09 Active Hold/Cancelled 100% 38.6% 6.6% 3.0% 2.3% 2.2% 1.5% 80% 60% 40% 93.4% 97.0% 97.7% 97.8% 98.5% 61.4% 20% 0% UAE Oman Bahrain Qatar Kuwait KSA The value of real estate and construction projects either put on hold or cancelled in the UAE was more than USD75 Bn By contrast, only 1.5%, or ~USD20 Bn, of the total construction and real estate projects were either put on hold or cancelled in Saudi Arabia during 1Q 09 Real Estate Regulatory Agency (RERA) in Dubai has unveiled a plan to control supply RERA will not allow developers to construct new projects unless they have sufficient funds to complete them on schedule RERA is also taking initiatives to help revive stalled projects Introduced the Tayseer scheme to fund stalled projects Source: Colliers International, MEED Project, Al Mal Capital analysis 15

16 USD Bn AED Bn UAE BUDGET SPENDING Sector to benefit from counter-cyclical measures and Government support (1/2) Despite the downturn, UAE s macro-fundamentals continue to remain sound UAE REAL GDP GROWTH ( ) E 2011E % Nominal GDP (LHS) % 2.4% 3.2% 3.9% Real GDP growth (RHS) 4.1% % 4.1% F 2011F 2012F 2013F 2014F 2015F 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% The IMF expects the UAE economy to expand by 2.4% in 2010 and accelerate at an average rate of 3.9% during The external balances of trade should improve from 4.0% of GDP in 2009 to 6.7% in 2015, with the expected revival in exports The strong fiscal surplus amassed by the UAE Government enabled it to implement counter-cyclical measures The budget spending in 2009 increased 21% to AED42.2 Bn. Budget spending is further expected to increase by 6.3% in 2011 to reach AED43.6 Bn A substantial part of the budget has been allocated for infrastructure investments USD10 Bn has been raised through the issue of bonds to fund diversification and restructure Government-linked entities Abu Dhabi Government also stepped up efforts to shore up UAE s economy USD400 Bn investment under Abu Dhabi Economic Vision 2030 to continue as planned Guaranteed funds for USD22 Bn zero-carbon Masdar City project Source: IMF, Al Mal Capital analysis 16

17 Sector to benefit from counter-cyclical measures and Government support (2/2) AED50 Bn lending facility by the UAE central bank USD swap facilities to local banks AED25 Bn in 2-yr deposits with local banks Restructuring of the two largest mortgage finance companies Measures taken by UAE Government Injection of USD4.4 Bn in new capital All these measures taken by the Federal Government have or aare likely to breathe fresh life into the UAE economy Banks directed to provide details of loans>aed10 Mn Higher fiscal spending and approval of Dubai World to alter terms on its USD24.9 Bn debt Infrastructure investments and repayment of AED3.9 Bn by Nakheel to its trade creditors Source: UAE Central bank, Al Mal Capital analysis 17

18 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 AED Mn Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 AED Bn Gradual recovery in availability of financing as well as investor sentiment MORTGAGE FINANCE IN UAE Real estate mortgage loans (LHS) Mortgage financing in UAE slowed down during 2009, reacting to the collapse in the Emirate s real estate sector YoY Growth (RHS) % 15% 10% 5% 0% Mortgage financing grew by a mere 12.6% YoY in 2009 to AED141.7Bn, after the 122.8% YoY growth recorded in 2008 Lenders became more cautious and tightened lending criteria However, real estate financing in the UAE is gradually picking up Residential mortgage finance has grown by 14.4% during December 2009-October 2010 GROWTH IN BANKS CREDIT IN UAE Total credit (LHS) % MoM Growth (RHS) 1,000, , , , , , , % 0.90% 0.60% 0.30% 0.00% -0.30% -0.60% -0.90% -1.20% On YoY basis, mortgage financing in UAE increased by 17.1% during October 2010 Credit to the construction sector has also increased 2.1% during December 2009-October 2010 Mortgage lenders have begun to reduce rates in 2011 Value and volume of real estate transaction increased 50% and 49% QoQ, respectively, during Q This, in turn, could unlock significant housing demand, especially in the affordable housing segment Source: UAE Central bank, Al Mal Capital analysis 18

19 Housing units (000') Housing units (000') Dubai residential segment oversupply likely to continue exerting downward pressure on prices DUBAI RESIDENTIAL SUPPLY The residential segment in Dubai is expected to remain oversupplied, despite projects cancellations and delays Total supply Net new supply Housing supply estimated to have increased by 12% or 41,000 units in 2010 to reach 371,000 units Total residential demand was expected to be 266,000 in 2010, leading to an oversupply of 105,000 units We expect the oversupply situation to continue in the medium- to longterm Oversupply is likely to peak in 2011 and reach 119,000 units This is expected to apply downward pressure on housing prices in Dubai E 2011F 2012F 2013F 2014F Prices and occupancy levels are likely to continue declining until 2013 DUBAI RESIDENTIAL OVERSUPPLY Tota l Dema nd Tota l Supply Overs upply E 2011F 2012F 2013F We expect average prices in Dubai to fall by a further 5% and 4% in 2011 and 2012, respectively Prices are expected to continue decline in 2013 and bottom-out by the end of 2013 With the gradual revival in private sector activity and improving market sentiments, we expect prices to stabilize from 2014 onwards Source: Colliers International, Al Mal Capital analysis 19

20 Residential units (000') Residential units (000') Residential units (000') Abu Dhabi residential segment to remain undersupplied FUTURE RESIDENTIAL DEMAND-ABU DHABI HOUSING DEMAND-SUPPLY GAP IN ABU DHABI Total housing demand (LHS) Source: Colliers International, Al Mal Capital analysis New demand (RHS) Total housing demand (LHS) Shortage Total housing Supply (LHS) Abu Dhabi s residential segment, unlike that in Dubai, is likely to remain undersupplied Housing delivery rates have been significantly lower than demand, so far. During 2009, Abu Dhabi faced a cumulative shortage of ~48,000 units Total demand for residential units is forecast to reach ~278,000 by 2013, an increase of approximately 52,000 units from 2009 We expect demand to receive a boost with the establishment of Abu Dhabi Finance Company, set up to enhance the availability of mortgage finance in the Emirate The Urban Planning Council expects undersupply to extend beyond 2013, and continue at least until 2015 Undersupply would peak during 2010 to reach ~32,160 units before gradually declining through 2013 Supply is forecasted to reach ~251,228 units in 2013, indicating a deficit of approximately ~26,300 units during the same year Prices in Abu Dhabi could see an upward trend only post

21 However, prices to continue downtrend until 2014 We believe, despite overall shortage in the Abu Dhabi s residential market, prices should continue to decline until 2014 due to: Demand for housing units, especially for medium to high-income segment, should see an increasing preference for Dubai over Abu Dhabi given prices in Abu Dhabi s Expensive proposition compared to Dubai coupled with new supplies coming in to the market should continue to put downward pressure on prices until 2014 Abu Dhabi are still costlier than in Dubai New supplies narrowing the demand-supply gap Expected sluggishness in private sector activity should continue to dent investor confidence We believe, the current level of premium that Abu Dhabi is enjoying over Dubai should decline as more properties are delivered in to the market and Dubai remains a substitute Given the expected decline in premium and fact that prices in Abu Dhabi have not so far fallen as much as Dubai, prices in Abu Dhabi should continue to fall at a greater rate and for longer than Dubai Hence, prices in Abu Dhabi could to see an upward trend only post 2014 Source: Colliers International, Al Mal Capital analysis 21

22 Population CAGR ( ) Growth of expatriate population remains key to sustainable housing demand in UAE over the long term UAE S YOUNG POPULATION BASE 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Size of the bubble represents population size as of 2009 Oman Kuwa it Bahrain Qatar UAE Saudi Arabia 0% 10% 20% 30% 40% 50% 60% 70% % Popula tion between PROPORTION OF EXPATRIATES IN GCC COUNTRIES (%) Locals Expatriates Residential demand in the UAE is primarily driven by expatriates rather than locals Expatriates account for nearly 85% of UAE s population compared to 30% in Saudi Arabia The UAE had amongst the fastest growing populations in the world (CAGR of 5.6% during ) It has one of the youngest population bases among GCC countries Approximately 53% of the population is between the ages of 20 and 39, compared to the GCC average of 44% for the same age group The pipeline of key public infrastructure projects and gradual revival in economic activity are expected to create more employment opportunities for expatriates in the UAE 100% 80% 60% 40% 20% 0% 85% 78% 15% 22% 60% 40% UAE Qatar Kuwait Saudi Arabia 30% 25% 70% 75% Oman Lower housing and office costs as a result of the economic crisis again make the UAE an attractive base for multinationals looking to do business in the region The quality of life in the UAE and the tax free status should allow the Emirate to attract knowledge workers required to drive a growing economy Source: Colliers International, Al Mal Capital analysis 22

23 Sqm Mn Sqm Mn Office rentals to stay subdued amid wave of new supply DUBAI OFFICE DEMAND-SUPPLY Office supply Office demand E 2011F 2012F ABU DHABI OFFICE DEMAND-SUPPLY The office segments in both Dubai and Abu Dhabi are likely to remain oversupplied, given the expected wave of new supply We expect office space in Dubai to expand at a CAGR of 21.8% during to reach 6.5 Mn sqm by 2012, up by 80.6% over 2009 Office space in Abu Dhabi is also expected to register a healthy CAGR of 13.9% over to reach 2.4 Mn Sqm Demand on the other hand would take time to absorb the new supply Demand from the private sector would be limited, as it remains cautious on expansion plans International companies could also follow a selective approach when carrying out their expansion plans in Dubai and Abu Dhabi 3.0 Office supply Office demand Demand for office space in Dubai would reach 3.2 Mn sqm by 2012 More than half the supply would remain under-absorbed According to Colliers International, the oversupply in Dubai is expected to be absorbed only in E 2011F 2012F Demand for office space in Abu Dhabi is projected to reach 2.3 Mn Sqm by 2012, suggesting oversupply of 0.1 Mn sqm We expect office rentals in UAE (Dubai and Abu Dhabi) to continue their downward trend in 2011 and 2012 Source: Colliers International, Al Mal Capital analysis 23

24 USD/sqm Rental yields rentals in Dubai to bottom out by 2012; yields to peak up from 2013 RESIDENTIAL RENTAL DECLINE IN UAE (%) RENTAL YIELDS IN DUBAI AND ABU DHABI 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Dubai 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 1Q 10 2Q 10 Dubai Rental yield in Dubai to peak up from 2013 Abu Dhabi Abu Dhabi 9.5% 9.7% 9.7% 9.7% 9.8% 7.8% 7.6% 7.4% 7.6% 7.7% 2010E 2011F 2012F 2013F 2014F Rental market in both Dubai and Abu Dhabi witnessed significant correction following the global credit crunch Average residential rentals in Dubai and Abu Dhabi were down 49% and 37%, respectively between 3Q 08 and 2Q 10 Also, average office rentals in Dubai and Abu Dhabi tumbled 61% and 21%, respectively between 3Q 08 and 2Q 10 While office vacancy rates in Dubai increased from 2% in 3Q 08 to 33% in 2Q 10, vacancy rates in Abu Dhabi grew from 1% to 8% during the same period Considering the significant pipeline of new supply, we expect rentals in Dubai to continue declining and bottom out by the end of 2012 However, prices would continue to decrease, thus pushing up yields from 2013 onwards Also, mortgage rates are likely to continue declining eventually, mortgage would cost lower than rental yields This, in our view, could stabilize the property prices in Dubai by 2014 Rentals in Dubai will be further supported by the Emirate emerging as an alternative for Abu Dhabi, besides attracting people from other Emirates, such as Sharjah, as better infrastructure and other amenities make it a more affordable destination However, rental yields in Abu Dhabi are likely to be higher than in Dubai due to shortage across sub-segments Source: Colliers International, Al Mal Capital analysis 24

25 Hotel rooms Hotel guests (Mn) Hospitality segment continues to offer attractive opportunities in both Dubai and Abu Dhabi (1/2) GUESTS ARRIVAL AND OCCUPANCY RATES IN DUBAI Hotel Guests (LHS) Occupancy rates (RHS) % 84% % 80% % 76% % 72% % 68% % % H 2010 Tourist arrivals in Dubai continue to increase despite the global economic slowdown Hotel guest arrivals in Dubai increased 9.0% YoY during 1H 10 Occupancy rates were also sustained at 71.7% during 1H 2010, despite an increase in hotel rooms Hotel occupancy rates stood at 81.5% and 70.0% in 2008 and 2009, respectively The growth in guest arrivals was driven by an increase in leisure tourism in Dubai DUBAI NEW HOTEL ROOM SUPPLY Total supply Net new supply 50,000 4,900 40,000 3, ,586 30,000 27,000 1,000 20,000 10,000 40,000 The Abu Dhabi hospitality market also remained buoyant in 1H 10 Guest arrivals grew 16.0% YoY during 1H 10 Although the occupancy rate declined by 2%, it still remained healthy at 64% during 1H E 2011F 2012F 2013F 2013F Source: Colliers International, Dubai Department of Tourism and Commerce Marketing 25

26 Hospitality segment continues to offer attractive opportunities in both Dubai and Abu Dhabi (2/2) Going forward, the hospitality segment in Dubai and Abu Dhabi is expected to offer attractive opportunities Dubai could witness oversupply situation in 4- and 5- star hotel category The Dubai Department of Tourism and Commerce Marketing expects the Emirate to attract 15 Mn tourists by 2015 compared to the 4.2 Mn during 1H 2010, a CAGR of 29% over Visitors to Abu Dhabi are forecast to increase from 1.5 Mn in 2009 to more than 2.1 Mn by 2013, an increase of 40% Expected increase in tourist arrivals should help both Dubai and Abu Dhabi to absorb some of the new supply and sustain hotel occupancy rates, especially in thelow-cost hotel segment However, Dubai could witness an oversupply situation in the 4- and 5- star hotel category, given that supply in this segment is expected to increase by 43% between 2009 and 2013 Source: Colliers International, Dubai Department of Tourism and Commerce Marketing 26

27 Retail segment in Abu Dhabi holds potential to unlock significant value RETAIL SPENDING BY GROUPS IN ABU DHABI Tourists, 11.1% Citizens, 41.4% A young population, coupled with growing tourism, is driving strong brand awareness, and hence, preferences High GDP per capita of ~USD65,000 should drive expansion in the retail sector, particularly non-food retail According to Colliers International, Abu Dhabi is currently undersupplied with retail space of approximately 700,000 sqm, accounting for 110% of the existing retail space Demand for retail space is expected to remain high Non-Citizens, 47.4% RETAIL SPENDING GROWTH IN ABU DHABI % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 14.4% 5.4% 4.5% 3.9% Touris ts Tota l Citizens Non-Citizens Emergence of Abu Dhabi as an international tourist destination, driven bythe Abu Dhabi 2030 plan, is likely to support growth Proportion of tourist spending could increase to more than 11% of the total retail spending in Abu Dhabi by 2013 Retail spending by tourists is expected to grow at an annual rate of 14.4% between 2009 and 2013, as they look to make the most of the Emirate s duty free offerings As for Dubai, the retail segment should see limited supply coming in the market by 2013 The supply of retail space in Dubai will increase by only 2.3% over from 2.25 Mn sqm in 2009 to 2.30 Mn sqm in 2013 Source: Colliers International, Dubai Department of Tourism and Commerce Marketing 27

28 28 UAE REAL ESTATE SECTOR: OVERVIEW & SUMMARY 3 UAE REAL ESTATE SECTOR: TRENDS & OUTLOOK 11 SOROUH: STANDING TALL ON SOUND LIQUIDITY 29 ALDAR: RESTRUCTURING EASES FUNDING CONCERNS 49 EMAAR: A DIVERSIFIED PROPERTY PLAY 72 DEYAAR: LACKING STRATEGIC DIRECTION 97

29 Sorouh Real Estate Standing tall on sound liquidity March 2011

30 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Sorouh: Investment Summary (1/2) Strong balance sheet, sound liquidity position RATING Target Price Source: Bloomberg, Al Mal Capital analysis Outperform AED1.78 Upside 63.5% Price (13 Mar 2011) 1.09 Market Cap. (AED Mn) 2,809 Market Cap. (USD Mn) 765 Shares Outstanding 2,625 Price 52wk H/L 2.62/0.98 Ticker (Bloomberg) Ticker (Reuters) DFMGI SOROUH SOROUH UH SOR.AD SOROUH: Sound balance sheet and liquidity position Significant presence in Abu Dhabi s attractive residential segment should boost top-line Undersupply in Abu Dhabi s residential segment is likely to extend beyond 2013, and continue at least until 2015 undersupply peaked during 2010 to reach ~32,160 units Sorouh is well placed to capture the growth in Abu Dhabi s residential segment majority of Sorouh s residential projects are expected to be completed at a time when Abu Dhabi would still be facing a housing shortage Its strong foothold in the residential segment and the expected pick up in land sales volume are likely to boost Sorouh s top-line in 2011 and We expect Sorouh s revenue to grow 94.8% and 4.2% YoY to AED2.35 Bn and AED2.45 Bn in 2011 and 2012, respectively This should result in healthy bottom-line and EPS growth. We expect Sorouh s net income to grow to AED750.2 Mn in 2011 compared to just AED16.2 Mn in We also expect net income to increase 40.4% YoY in 2012 to AED Mn, translating into an EPS of AED0.38 compared to AED0.27 in 2011 Growing presence in hospitality market to lend greater stability to rental income Abu Dhabi is expected to witness strong growth in tourist arrivals, primarily due to the Government s efforts to promote the Emirate as a tourist destination Visitors to Abu Dhabi are forecast to increase from 1.5 Mn in 2009 to more than 2.1 Mn by 2013 This should boost the demand for hotel rooms in Abu Dhabi This, in turn, should boost Sorouh s rental income from investment properties. Share of revenues from investment properties is expected to rise to 39.3% in 2013, further increasing to 46.5% in 2014, compared to a meager 4.5% in 2009 and 13.3% in

31 Valuation approach Weight Price (AED) NAV approach 50% 1.85 DCF approach 25% 1.71 P/BV approach 25% 1.71 Weighted average fair price Valuation multiples A 2010A 2011F EPS (AED) P/E P/B BV/share Sorouh: Investment Summary (2/2) Strong balance sheet, sound liquidity position Strong balance sheet and liquidity position The company s debt to equity ratio, at 27%, is one of the lowest in the sector Comfortably placed to meet its financial obligations in 2011 (AED1.3 Bn) and 2012 (AED380.4 Mn) Projected to have net cash surplus of AED1.2 Bn in 2011 and AED1.8 Bn in 2012 Attractive valuation At its current P/E of 6.2x, Sorouh trades at a discount of 29.3% to its peer group average of 8.8x. In terms of P/B, Sorouh trades at a discount of 21.3% versus the peer group average of 0.60x In terms of forward multiples, Sorouh trades on a 0.37x 2011E P/B and 3.8x 2011 P/E, a discount of 38.6% and 71.0% on a P/B and P/E basis, respectively, versus a peer group average of 0.60x 2011P/B and 13.0x 2011P/E We believe the discount is unjustified and should be significantly lower Sorouh offers the best exposure to substantial opportunities in Abu Dhabi s residential and hospitality segment Highest EPS growth (Projected to rise from AED0.01 in 2010 to AED0.38 in 2012) amongst its regional peers and strong EBITDA margin (34.8% and 45.8% in 2011 and 2012 ) Our valuation based on the NAV, DCF and P/BV multiple methodologies returns a weighted average target price of AED1.78, an upside of 63.5% Estimates 2008A 2009A 2010A 2011F 2012F 2013F Revenues (AED 000 ) 3,723,428 3,102,708 1,205,176 2,347,818 2,446,830 2,027,209 EBITDA (AED 000 ) 1,695, , , ,635 1,121, ,332 EBITDA margins 45.5% 20.2% 27.0% 34.8% 45.8% 41.7% Net income (AED 000) 1,784, ,998 16, ,222 1,053, ,899 Debt/Equity 64.4% 34.4% 27.1% 26.8% 19.6% 15.1% Dividend Yield 9.2% 9.2% 0.0% 4.2% 5.9% 4.5% Source: Bloomberg, Al Mal Capital analysis 31

32 Sorouh Real Estate Overview Significant presence in Abu Dhabi residential sector KEY FACTS Revenues (AED Mn)-FY ,205.2 Net income (AED Mn)-FY Price to Book (TTM) 0.47x Price to Earnings (TTM) 6.20x ROA-FY 2010A 0.1% ROE-FY 2010A 0.3% Debt/Equity 27.1% SOROUH S SHAREHOLDING PATTERN Al Joud Investment, 11.63% Abu Dhabi Investment Company, 6.97% BUSINESS OVERVIEW > Established in 2005, Sorouh is engaged in the business of real estate development and land sales, primarily in the Emirate of Abu Dhabi Sorouh s core business involves developing residential and commercial property for investment and sale The company has a substantial land bank of 57.7 Mn sqm SEGMENTS > The company operates in four major segments: Land sales Property development and sales Investment properties Construction/contracting segment Some of Sorouh s landmark developments include Golf Gardens, Shams Abu Dhabi, The Gate District and Towers on Reem Island and Alghadeer Sorouh is an integral part of the Abu Dhabi Government s 2030 development plan Abu Dhabi Government holds ~7% stake in Sorouh through Abu Dhabi Investment Company MARKETS SERVED > Public, 81.40% UAE (Abu Dhabi, Dubai) Source: Company filings, Al Mal Capital analysis 32

33 A 2011F 2012F 2013F 2014F AED Mn Investment Thesis Increasing proportion of investment property to provide topline stability SOROUH S REVENUE MIX BY SEGMENT (%) 100% 80% 60% 40% 20% 0% Land sales 13.8% 3.4% 1.7% 6.5% 4.5% 37.9% 86.2% 94.9% 51.1% 38.8% 17.4% 13.2% GROWTH IN REVENUE FROM INVESTMENT PROPERTY 1, Investment Properties Source: Company filings, Al Mal Capital analysis 30.5% Property development and sales Construction/ Contract revenue 11.8% 13.0% 18.0% 21.9% 12.0% 25.2% 17.8% 39.3% 46.5% 58.5% 61.8% 42.7% 31.6% F 2012F 2013F 2014F Revenues (LHS) % Growth (RHS) % 100% 50% 0% -50% -100% Historically, land sales have been the largest revenue driver for Sorouh Contributed c.95% and 51% to Sorouh s top-line in 2008 and 2009, respectively However, its share declined to 30.5% during 2010 due to fall in land price in Abu Dhabi and low land sales volume Share of land sales to total revenue is projected to increase to 58.5% (AED1.37 Bn) and 61.8% (AED1.51 Bn) in 2011 and 2012, respectively driven by expected growth in land sales volume which should off-set decline in price during 2011 and 2012 However, land sales is projected to start declining from 2013 onwards, as Sorouh focuses more on rental revenues Share of land sales to total revenue is projected to decline to 42.7% and 31.6% in 2013 and 2014, respectively Sorouh is actively following a strategy of increasing the share of income from investment property in its revenue mix in the long term Share of revenue from investment property is expected to be 12.0% (AED280.8 Mn) and 25.2% (AED616.7 Mn) in 2011 and 2012, respectively Share of revenues from investment property to rise to 39.3% in 2013, further increasing to 46.5% in 2014 Driven by the strong residential rental project pipeline, particularly Al Rayyana and Khalidiya village, which are expected to be fully delivered by 2014 Together Al Rayyana and Khalidiya Village are projected to contribute AED1.01 per share to our estimate of AED3.02 per share for rental properties Rising share of investment property likely to provide stability to revenue, as it would ensure recurring income 33

34 Sorouh Talaat Moustafa Dar Al Arkan Deyaar Development Emaar Properties United Development Aldar Properties Barwa Aldar United Devp Dar Al Arkan Sorouh Emaar Properties Deyaar Talaat Moustafa EEC Investment Thesis Healthy balance sheet and sound liquidity to help navigate through troubled times (1/2) DEBT-TO-EQUITY RATIO OF GCC REAL ESTATE PLAYERS Sorouh enjoys a strong balance sheet and liquidity position 500.0% 400.0% 300.0% 200.0% 100.0% 0.0% 431.6% 219.3% 135.6% Peer group average-104% 55.5% 27.1% 23.0% 15.8% 8.7% 0.0% The company s debt to equity ratio at 27.1% in 2010 is one of the lowest in the sector Debt to total asset ratio at 12.5% is significantly low compared to 56.9% for Aldar Properties and 15.1% for Emaar Properties The company also enjoys the highest quick ratio (1.8x) among its local as well as regional peers The company has been able to effectively manage debt repayment outflows with operating cash flows QUICK RATIO OF GCC REAL ESTATE PLAYERS During 3Q 2010, the company repaid a AED1.2 Bn non-convertible sukuk The company also raised a AED1.5 Bn club loan on favorable terms, repayment of which is closely matched to cash inflows Source: Company filings, Al Mal Capital analysis 34

35 AED Mn Investment Thesis Healthy balance sheet and sound liquidity to help navigate through troubled times(2/2) SOROUH S FUNDING POSITION Outflows AED ( 000) Debt repayment due (1,339,556) (394,677) Capex (750,539) (78,299) Working capital (154,789) (118,449) Total (A) (2,244,884) (591,424) Inflows AED ( 000) Net income 750,222 1,053,085 Cost of development 823, ,189 Total (B) 1,573,538 1,582,274 Net Balance (671,346) 990,849 Opening Cash Balance 1,920, ,123 Surplus/(Deficit) 1,249,169 1,987,972 LIQUIDITY ANALYSIS 6,000 4,000 2, , ,734-1,921 3,156 2,240 We believe the company is comfortably placed to repay its financial obligations in 2011 and 2012, totaling AED1.7 Bn A significant earnings boost is expected in 2012, as the company starts generating rental income from projects such as Al Rayyana, Al Ain Mall and Sas Al Nakhl Sorouh s cash balance stood at AED1.3 Bn as of December 2010 Land sales are expected to pick up in 2012 compared to 2010 and 2011 due to higher sales volume Infrastructure work on key projects, such as Shams Abu Dhabi, is complete and can be sold without incurring any additional cost Our analysis suggests that the company will have cash surplus of AED1.25 Bn in 2011 and AED1.99 Bn in 2012 The company is projected to incur total capital expenditure of AED773 Mn over ,000 Capex ( ) Working capital Debt repayment due Current cash balance Op. cash flow ( ) Net balance Source: Company filings, Al Mal Capital analysis 35

36 Investment Thesis Lulu Island could add significant value LULU ISLAND VALUATION Sorouh received land at Lulu Island for free from the Government of Abu Dhabi Total Built up Area (000's) 5,000 Selling Price (AED/ sqm) 990 Gross Market Value of land 4,950,000 Cost of Development 3,465,000 Gross margin 30% Net Value of Land 1,485,000 Number of Shares 2,500,000 Value per Share 0.59 SOROUH S NAV BY SEGMENTS Lulu Island, 13.2% Development Projects, 1.2% The company recently announced plans to develop Lulu Island into a high-end mixed-use development However, the project currently lacks visibility with respect to timeline and completion schedule We have used a conservative approach to value Lulu Island We have only valued the saleable land area for Lulu Island, given the lack of visibility Based on our assumption, the project could add AED0.59 per share to our valuation It would add 13.2% to our NAV valuation (before discount) Land Bank, 18.4% Rental Properties, 67.2% Going forward, the project holds significant potential to add further value, if the company manages to develop the project Source: Company filings, Company Website, Al Mal Capital analysis 36

37 Investment Thesis Well placed to leverage housing segment potential PROJECT PIPELINE BY SEGMENT Commercial & Retail, 11% Majority of Sorouh s current developmental projects focus on the residential segment 89% of the properties for sale are in the residential segment The company is well placed to benefit from the attractive dynamics in Abu Dhabi s affordable housing market with projects such as Al Rayyana and Khalidiya Village Name Completion Date Residential, 89% SOROUH S KEY RESIDENTIAL PROJECT PIPELINE Units/BUA for rent in sqm Al Rayyana 3Q ,537 units Al Ghadeer ,000 sqm Projects of the other Abu Dhabi developer such as Aldar focus on the high-end residential segment Sorouh s project deliveries are also well timed Most of its current projects are likely to hit the market before 2012 Major residential projects, such as Golf Gardens, and Sun & Sky Towers, have been completed and are in the process of being handed over, which increases revenue visibility Abu Dhabi is expected to face a shortage of 121,000 housing units during Khalidiya Village ,000 sqm Gate Tower ,000 sqm Source: Company filings, Company Website, Al Mal Capital analysis 37

38 Price in AED Valuation Valuation at a discount to peer average Market PB Company Country Cap. Fwd Fwd Current (USD Mn) FY10 FY11 Sorouh Real Estate UAE Aldar Properties UAE Emaar Economic City KSA 1, Dar Al Arkan KSA 2, Emaar Properties PJSC UAE 4, Deyaar Development UAE Barwa Real Estate Qatar 3, Talaat Moustafa Group Egypt 2, Peer group average Sorouh premium/ (discount)% (21.3%) (27.8%) (38.6%) STOCK PRICE (AED) AND P/BV BAND Fair value: x Jan-08 Jul-08 Jan-09 Aug-09 Feb-10 Aug-10 Mar-11 Sep-11 Sorouh is currently trading at a P/B multiple of 0.47x (peer group average of 0.60x), a discount of 21.3% to its peers on TTM basis In terms of forward multiple, Sorouh is trading at a discount of 38.6% to its peers on the basis of FY 2011E P/B multiple We believe the magnitude of the discount is unjustified and should be significantly lower for Sorouh as, It offers the best exposure to substantial opportunities in Abu Dhabi s residential and hospitality segment It is expected to witness highest EPS growth amongst its regional peers. EPS is projected to rise from AED0.01 in 2010 to AED0.38 in 2012 Sorouh has strong and liquid balance sheet Source: Bloomberg, Al Mal Capital analysis 38

39 39 Valuation NAV Method Rental properties AED 000 AED/share Tilal Liwa Hotel 1,665, Sun & Sky towers- Commercial 1,673, Al Rayyana 2,127, Al Ain Mall 1,659, Khalidiya Village 408, Al Ghadeer 3, Total 7,537, Lulu Island Valuation Total Built up Area (000's) 5,000 Selling Price (AED/ sq-m) 991 Gross Market Value of land 4,950,000 Cost of Development 3,465,000 Gross margin 30% Net Value of Land 1,485,000 Number of Shares 2,625,000 Value per Share 0.59 Development Projects AED 000 AED/share Gate Towers 51, Watani 61, Al Ghadeer 15, Total 128, NAV ESTIMATE AED 000 AED/share Total NAV: Development Projects 128, Rental properties 7,537, Land bank 2,069, Total NAV (net of liabilities') 6,229, NAV of Lulu Island 1,485, Premium / (discount) to NAV (%) (40%) Estimated NAV 4,628,