CountryView UNITED ARAB EMIRATES

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1 CountryView UNITED ARAB EMIRATES Key Facts Capital City Governance Federation Area million sq km (Rank) 0.08 (114) Population million 5.1 The United Arab Emirates comprises seven emirates and is ruled by a Supreme Council. The country is oil-rich but, following a diversification programme, it is now also known as a financial centre. in particular is now recognised as an international business centre with the population dominated by expatriates. Abu Dhabi is also growing in popularity for international business. Islam is the main religion in the UAE although the Emirates are seen to be very tolerant towards other cultures and religions. This more liberal approach, together with the low tax regime, has been key to attracting foreign businesses to set up in the country. The UAE has one of the highest living standards and economic opportunities of almost anywhere in the Middle East and South Asia. Regional Map Country Map Population Structure % % 65+ 1% GYPT CYPRUS SYRIA LEBANON JORDAN IRAQ KUWAIT Al Manamah BAHRAIN QATAR N QATAR GDP PPP, $bn (Rank) 188 (52)* Muscat UNITED ARAB EMIRATES GDP per cap PPP ($) 38,284* IRAN AFGHA UDAN Suakin Mecca Riyadh SAUDI ARABIA UNITED ARAB EMIRATES OMAN ERITREA ETHIOPIA YEMEN DJIBOUTI OM GDP Growth* % % GDP by Sector Agriculture 1% Industry 49% Services 50% Average Inflation* % % POPULATION The United Arab Emirates borders Oman and Saudi Arabia. The Ministry of Economy estimates the population stands at nearly 5.1 million inhabitants. 79% of the population are of working age and around 85% are expatriates. is the capital city but, because of the high number of foreign companies and expatriates, is the largest city in UAE with 1.7 million inhabitants. Abu Dhabi is therefore the second largest city at 1.6 million people. EMIRATES POPULATION (MILLION) Corruption Index (Rank, where 1=least corrupt) 6.5 (30) 1.72 * 1.62 Source: CIA, IMF, Transparency International, 2009 data *estimates Sharjah 1.01 Ajman 0.25 Ras Al Khaimah 0.24 Fujairah 0.15 Umm Al Quwain 0.06 Source: Ministry of Economy, UAE 2009 data

2 CountryView United Arab Emirates POLITICS AND GOVERNANCE As part of efforts to secure its trading routes with India during the 19th century, the UK entered into protectorate agreements with individual sheikhdoms in the Gulf covering much of the present-day UAE. Economic development and foreign interest increased significantly when oil was discovered off the coast of in When the UK withdrew ten years later the sheikhdoms formed a federation and in 1971 the UAE became an independent state. The hereditary rulers of the seven emirates form the Supreme council which is the highest federal authority in the UAE. They have been working under a permanent constitution since 1996 with as their capital. The Sheikh of (Sheikh Khalifa bin Zayed al-nahyan) is the president. The councilappointed prime minister is the ruler of, a position currently held by Sheikh Mohammed bin Rashid al-maktoum. The economy is driven by industry (61%) and services (38%), with agriculture contributing only 2% to the economy. Despite efforts at economic diversification, nearly 40% of GDP is still directly based on the oil and gas industry and the UAE (largely ) continues to control around 9% of the world s oil reserves. Each emirate has a very different economic structure, however. s economy is heavily based on oil, while its plans for diversification are focused on steel, aluminium and petrochemical industrial activity. In contrast, has limited natural resources and growth has been strategically developed around tourism and the financial services sector in order to attract foreign investment. As the plans for as a financial and tourist hub have been implemented there has been significant growth in construction and real estate development. In turn, a wide range of service industries have developed to support the workforce, much of which is expatriate. The government has increased spending on job creation and infrastructure expansion but is also opening up the utilities sector to private sector involvement. The UAE is heavily reliant on expatriate labour (approximately 80-85% of UAE residents) which has led to employment policies to boost locals employment (Emiratisation). Together with economic diversification, this is the government s main aim. In early 2007, a formal UAE Government Strategy was launched. During the 34th anniversary of the Federation, H.H. Sheikh Khalifa Bin Zayed Al Nahyan announced a comprehensive plan for the UAE Government,which specifically focused on Social Development, Economic Development, Government Sector Development, Justice and Safety, Infrastructure and Rural Area Developments. ECONOMIC STRUCTURE AND GROWTH The United Arab Emirates is a small country in geographic terms but, according to Worldbank estimates it ranks 52nd in terms of GDP (PPP). Estimated per Capita earnings are the third highest in the region at $38,284 in The country has a sizeable annual trade surplus. GDP Per Capita PPP, $, est ,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Qatar Kuwait United Arab Emirates Bahrain Oman Saudi Arabia Libya Lebanon Kazakhstan Iran, Islamic Republic of Azerbaijan Tunisia Algeria Egypt Turkmenistan Jordan Syrian Arab Republic Georgia Iraq Pakistan Yemen, Republic of Sudan Tajikistan Afghanistan, Rep. of. Following 8.4% average annual real GDP growth in the UAE economy suffered a downturn during 2009 as the global recession hit. According to estimates*, the UAE economy contracted by around 3.5% as construction volumes waned and oil prices declined. Positively, the economy is expected to return to growth in 2010 (EIU forecasts 2.5% growth) and will pick up further momentum in The recent debt crisis to hit government-backed World may impact on expected growth and foreign investment forecasts, although financial support from is helping to stabilise the market. BUSINESS ENVIRONMENT Regulation: Relaxation of UAE laws has resulted in an increase of foreign investments, especially in the real estate sector following changes to property ownership law. The property law no.7 legalised freehold ownership of land and property for UAE and Gulf Cooperation Council (GCC) citizens, and gave similar rights to non-gcc expatriates in pre-designated areas in This was soon followed by similar laws in other Emirates including Ajman, Ras Al Khaimah and. Since then, many new regulations have also been brought in to safeguard investors as well as developers. Restrictions: There are major restrictions on business investment within the UAE, including a limit of 49% foreign ownership for businesses. However legislative change is expected to alter this for at least some sectors in the next year or so. Freezones: Over the last two decades Freezone s have played an important role in developing the economy and have are an important tool in attracting foreign direct investment into the country. The UAE *source: Economist Intelligence Unit

3 is currently home to 23 Freezones targeting different sectors of the business market. Benefits offered by Freezones include:100% foreign ownership; 100% repatriation of capital and profits; 100% free transfer of funds; 100% exemption of import and export duties;100% exemption from corporate and personal income taxes, for the company, the Investor and their employees; single window clearance (i.e. faster processing times) for all the government and administrative works and no restrictions on employment. Transparency: Accurate economic data is relatively hard to obtain in the UAE, compared with many other markets. Although government sources do exist, they are not updated as regularly as many other markets. There is also conflicting population data because of the fluctuating expatriate work-force. Tax: The government generates revenue by charging for a number of services (e.g. tenants are charged 5% of their annual rent). The UAE has become a popular location for international firms to set up office operations as there is no personal income tax and only foreign banks and energy firms pay corporate tax. As of 2009, however, some UAE firms will have to pay Islamic tax (Zakat of 2.5% on their net operating capital). Office Stock (m sq m), Cairo Office Prime Rents, 1,400 1,200 1, Istanbul Istanbul Cairo Casablanca Muscat Manama Kingdom of Bahrain US$/sq m/annum Office Prime Yields, Casablanca /sq m/annum est. Tunis CountryView United Arab Emirates PROPERTY OWNERSHIP AND TAXATION Under Law No. 19 of 2005, UAE nationals and corporate entities wholly owned by them have the right to acquire freehold ownership to properties anywhere in the country whilst GCC nationals have the right to own freehold land only within designated areas known as Investment Zones. In addition, both GCC and other foreign nationals are given the right to freehold ownership of units or floors in buildings in the Investment Zones. As such, expatriates may acquire the right of usufruct (the right to use property belonging to another person for one s own profit, utility and advantage) for up to 99 years and musataha (the right to build and develop on the land belonging to another person for a fixed term) for up to 50 years. These are both renewable by mutual consent in Investment Zones. These ownership rights are capable of being sold, mortgaged, pledged or assigned. Further to this, the Executive Council has the power to grant exceptions for non-nationals to own land outside an investment zone in any area of ; a similar system is in operation in. The only real estate tax is for property registration and varies from 1-2%. However, as previously mentioned charges 5% housing tax for leased properties. For industrial warehouses in there is 14% 12% 10% 8% 6% 4% 2% 0% Cairo Muscat Manama also a municipality tax of about 15% of the rent which is paid for by the tenant. REAL ESTATE MARKET MATURITY The real estate industry has played a key role in the expansion of the UAE economy over the past few years, and has itself generated further economic activity to support the growing expatriate workforce with housing, facilities and services. The upward trend experienced by the UAE property market since early 2000 came to a halt in Q and started to decelerate as the adverse impacts of the global economic crisis hit the local economy. Casablanca Istanbul 2010, CB Richard Ellis, Inc.

4 CountryView CountryView United Arab Emirates bahrain The main real estate markets in the UAE are the emirates of (which is most developed) and Abu Dhabi. These markets have expanded rapidly in order to support government diversification plans towards tourism and business and financial services in and also towards the metal industry in. s infrastructure is currently far more developed than many other cities in the Middle East, however the wider economic downtown has had an impact on the region with a number of high-profile projects either put on hold or cancelled. There are still a significant number of infrastructure and development schemes under construction, with further remaining in the pipeline for both Emirates. has invested US$4.2 billion in the Metro project, one of the most modern systems in the world. The Red line of the project was opened in September According to the figures released by Rail Agency of Roads and Transport Authority (RTA), the number of passengers handled by Metro for the first five months was almost 10 million passengers. REAL ESTATE MARKET TRENDS DEVELOPMENT The vast majority of real estate activity in is development, and the number of transactions involving completed buildings is, so far, negligible. The market has developed rapidly since 2005 with high levels of office, retail and residential development in Business Bay, Marina, Emirates Living and the Burj Downtown area of the City. As of there is approximately 4.8 million sq m of office stock and 350,000 residential units in while has around 1.9 million sq m of office stock. Development levels have slowed considerably since the start of the recession and it is likely that Abu Dhabi will try to reign in the scale of its development going forward to help mitigate risk against further financial uncertainty and to help stabilise the economy. In contrast to, the real estate market has developed at a much slower pace, and virtually all asset types are supply constrained. There is a significant amount of residential and office space under development which should help to ease these restrictions, however infrastructure including school and healthcare facilities are also in short supply. LEASING TURNOVER Demand for office space in outstripped supply for many years as the market evolved. The global recession has, however, slowed the influx of expatriate workers and for the first time vacancy rates, which were virtually zero, have increased. Office demand in the past few years has primarily been driven by architectural and construction companies, as well as media firms. However, the severe slowdown of construction activity has scaled back demand. New office space continues to emerge from both existing and new office districts. During the course of 2009 a total of 0.58 million sq m of new office accommodation entered the market which was mainly in freehold areas. Nearly half of the total new stock which completed during 2009 was sold on a strata title basis (i.e. multiple lots within one building). The ratio of strata to single ownership buildings will shift significantly during as the vast majority of expected new office supply has been pre-sold on a strata basis. RENTS AND YIELDS Prime office rents in the UAE rose sharply, peaking in the first half of 2008 in both (which ranked in the top ten most expensive office locations in May 2010) and has witnessed widespread cutbacks and redundancies across almost all sectors as many firms try to reduce operating expenses in the face of the ongoing financial crisis. The resulting decline in demand for office space has coincided with a significant increase in available supply, mainly from within the newer secondary office locations. Unsurprisingly, available office space is outstripping demand as new completions add further pressure to existing vacant stock. Interestingly rents in the DIFC Freezone have held up more strongly than elsewhere in the CBD, has resulted in a clear distinction between prime and secondary locations, and building quality. RESIDENTIAL PRICES The residential real estate market in the UAE has - and continues to witness - a major correctional phase, with sale and lease rates experiencing a significant drop for the first time since the property market opened to foreign investment. The market started to show the first signs of a slowdown in the latter part of 2008, however the exception has been residential lease rates in the Emirate of. Despite some declines these remain high due to limited housing supply. Falling lease levels have provided an opportunity for existing tenants to move to better quality apartments at the same cost as their existing units. The high volume of new supply across all property sectors, coupled with the continuation of the economic downturn is expected to result in some further decline in lease rates, although any reduction will be marginal compared to the drop since Q

5 Lease rates for prime residential properties in at the end of 2009 ranged between US$21,800-25,800/appartment/ annum for a one bedroom unit. Rental rates in are likely to see some more contraction during the course of the year as a substantial volume of new residential accommodation (apartments and villas) reaches the final stages of construction. The pressure on lease and occupancy REAL ESTATE MARKET PRACTICES Basis of Measurement / Valuation Method Market Transparency Rent Payment Rent Escalation & Rent Review Tenant Covenant Service Charge Property Taxes & Other Costs Agents Fees Incentives Lease Length & Terms Lease Renewal Selling a lease Repairing Liability rates will be most prominent in the emerging new residential developments such as Silicon Oasis, International Media Production Zone and Motor City. In, a prime one bedroom apartment is almost 50% more expensive than with lease rates around US$32,700-38,150/apartment/ annum as at Q However these rates will see continued decline as competition with increases and further stock completes. Measurement varies within the country. For leasing purpose in areas are quoted in square feet for office space while for shopping centres it is quoted in square meters. In the measurement is in square metres for both office and retail use. For sales, the standard area measurement followed is in square feet throughout the country. Transparency in the UAE market is limited. Market information, such as lease lengths, areas, and rents for recent transactions are generally not made available to the public. However, agents normally have access to details of specific transactions for rent review and research purposes. However, the transaction information on land and finished real estate properties is available from the land Department website for all transactions of. Typically, the tenant pays rent quarterly in advance in the form of four post-dated checks given at the start of the year. The annual rent usually remains fixed for the duration of the term. If a new lease is agreed then the rent will increase to the prevailing market level. This is not as important an issue in the region as it is elsewhere. As the annual rent is paid in advance in the form of post-dated cheques. The tenant pays service charges on multi-let property to cover items such as building management, security, cleaning and general upkeep and repair of premises. Service charges may or may not provide for a sinking fund to replace large capital items such as lifts (elevators). Insurance can be included in the service charge or charged separately. Service charges range from AED per sq ft per year depending on the building. The UAE enjoys a low-tax environment. However, the tenant pays a Municipality Tax of 5% on annual rental. On property purchases, the buyer pays processing fees, normally 1.5% of the purchase price, to the land department of the UAE government when acquiring property. Agent fees are generally calculated as a percentage of the yearly rent and usually paid by the tenant. Fees will be equivalent to about 5% of the first year s rent. Landlords rarely engage external consultants, choosing to employ their own representatives. A new tenant may expect to receive a rent free of between one and three months. Lease terms for residential properties are for one year. For offices lease terms are between one and four years. Traditionally most leases are for one year, but more recently landlords of newly completed office buildings have offered five-year leases. When the lease comes to an end, the law provides for a statutory right of renewal. Any disputes will be handled by the Rental Committee of the Real Estate Regulatory Authority (RERA). It is not common for occupiers to sell their leases. However, as the lease length for the region is only one to three years this is not such a critical issue. Sometimes a tenant will reserve the right to dispose of their interest with the Landlord s consent, which is not to be unreasonably withheld. The Landlord undertakes to repair and maintain the structure and common parts and will pass the costs of these back to the tenants via the service charge. CountryView United Arab Emirates 2010, CB Richard Ellis, Inc.

6 CountryView CountryView United Arab Emirates bahrain For more information regarding the CountryView, please contact: Middle East Nick Maclean Managing Director CB Richard Ellis Middle East Building 6, 8th Floor Emaar Square UAE t: e: nick.maclean@cbre.com EMEA Research & Consulting Nick Axford Executive Director, EMEA Research CB Richard Ellis St Martin s Court, 10 Paternoster Row London EC4M 7HP t: e: nick.axford@cbre.com Research & Consulting Matthew Green Associate Director, CB Richard Ellis Middle East Building 6, 8th Floor Emaar Square UAE t: e: matthew.green@cbre.com Catherine Bushnell Analyst, EMEA Research CB Richard Ellis St Martin s Court 10 Paternoster Row London EC4M 7HP t: e: catherine.bushnell@cbre.com Mohammed Faheem Senior Analyst CB Richard Ellis Middle East Building 6, 8th Floor Emaar Square UAE t: e: mohammed.faheem@cbre.com For more information on market characteristics read our MarketViews at: DISCLAIMER 2010 CB RICHARD ELLIS Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis. Copyright 2010 CB Richard Ellis 2010, CB Richard Ellis, Inc.