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Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH September 2012 Research Highlights: A study to analyze key emerging residential trends in Qatar and provide an outlook for 2012 & 2013

Markaz Research is available on: Bloomberg - Type “MRKZ” <Go> Thomson Research, Reuters Knowledge Nooz Zawya Investor ISI Emerging markets

Thomas K. Mathew Senior Research Analyst +965 2224 8051 tmathew@markaz.com Venkat Ramadoss ACA, CFA Manager +965 2224 8548 rvenkateshwaran@markaz.com Bassam N. Al-Othman Executive Vice President +965 2224 8011 bothman@markaz.com Kuwait Financial Centre “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 markaz.com

Qatar Residential

Premium residential – Mixed bag - Incremental residential demand to grow at a slower rate of c.4.5% during 2012-13; supply growth to slow as well. - Total demand for 1 & 2 BR premium apartments to outstrip supply in 2012 & 13; Pearl to benefit from this emerging trend.

Qatar residential – to grow at 4.5% CAGR over 2010-13 We expect population in Qatar to grow by 3.4% over 2011-15 (CAGR), driven by growth in expats at 3.7% over the period, in turn ascribed to the 9% growth projected for the non-hydrocarbon sector over 2011-15. We believe that this would result in incremental residential demand of c.14,500 housing units for 2012 & 2013 combined, growing by c.4.5%, as against the 6.2% growth during 2004-10. We expect supply of apartments and villas to grow at a much slower pace in 2012 & 13 than the 14.6% growth registered during 2004-2010. Key drivers are the slower pace of underlying fundamentals, project cancellations and delays post the recent economic crisis. Current investment landscape – favors premium apartments Qatar’s regulations restrict ownership interests for non-Qataris to 3 select zones and also provides for acquiring leasehold usufruct rights for 99 years in 18 additional zones. Given the landscape of the market, and return expectations from the perspective of a typical nonQatari investor investing in residential properties, we consider residential properties in The Pearl & West Bay Lagoon as the relevant locations. As these are premium housing locations and as the returns generated by villas are not comparably lucrative, we consider premium apartments as the relevant demand and supply for analysis. Premium apartments – diverse trends Vacancy rates of c.5% were noticed for premium apartments as of Q1-12, as against our ‘relevant demand model’ for premium apartments which indicates the demand to exceed supply. Also, prices and rentals are not entirely reflecting the undersupply scenario portrayed by the model. This conflicting trend is due to the competition from villas for premium apartments with 3 and more bed rooms. This resulted in vacancies of c.20% for premium 3 BRs, while the demand for premium 1 & 2 BR apartments was clearly higher than supply, and were close to fully occupied. We estimate 1 & 2 BR premium apartments supply to be c.8,000 units as of Q1-12, which were almost fully occupied; and we expect demand to be higher at c.10,750 units. Our forecasts for incremental cumulative demand for 2012-13 stands at c.1,750 units, compared to supply estimates of c.3,200 units. We thus expect the total demand for premium apartment to be marginally above supply, and believe 1 & 2 BR apartments at The Pearl to benefit from this trend, based on its locational advantages & superior quality. Rentals, prices and cap rates – stability to continue We forecast premium apartment rentals & prices to remain mostly stable, as the competition in the market still remains high, in spite of improving investor confidence and strong demand side fundamentals. However, we expect Pearl 1 & 2 BR rentals to witness increases ahead of their competition, once further incremental demand for premium apartments is realized.


MENA REAL ESTATE RESEARCH September 2012

Qatar real estate fundamentals Real hydrocarbon GDP to remain flat post 2013 due to the North Fields gas moratorium

Qatar’s real GDP continued to post robust growth in 2011, growing 14% Y-o-Y, with hydrocarbon GDP being the primary growth catalyst. Qatar’s real GDP is expected to grow by c.5.6% over 2012-15 with a shift in GDP growth drivers likely to emerge. Growth over the period is forecasted to be largely ascribed to a 9% growth in non-hydrocarbon GDP, as LNG production remains constant due to the North Field’s gas moratorium until 2014, thereby limiting hydrocarbon GDP growth. Exhibit-1: Economic growth trends

Non-hydrocarbon GDP to grow by c.9% over 2011-15

Source: IMF, QSA, Markaz estimates

Non-hydrocarbon GDP to drive 3.7% expat population growth We believe the population would grow by c.3.4% over 2011-15 and derive our forecasts from IMF, Qatar Statistics Authority (QSA) and estimates by the Economist Intelligence Unit. Furthermore, we expect expat population to grow by 3.7% in 2012 and over 2011-15, driven mainly by growth in non-hydrocarbon sector going forward. Growth in the non-hydrocarbon sector is expected to drive an influx of service oriented and highly skilled expat personnel, to cater to the large number of infrastructure projects towards both the commissioning & post completion stages of development. Our forecasts seem on the lower side, and we would deem upward revisions as plausible. Exhibit -2 shows our expat population forecasts based on the underlying drivers over 2009-15. Exhibit-2: Economic and expat population growth trends Growth in the nonhydrocarbon sector to drive large influx of highly skilled expat personnel in to Qatar

Source: QSA, IMF, EIU, Markaz estimates

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MENA REAL ESTATE RESEARCH September 2012 In their Staff Report for the 2011 Article IV Consultation, IMF forecasted Qatar real GDP to moderate to 6% in 2012. Moreover, IMF expected hydrocarbon GDP growth to slow down to less than 3 percent as against QSA estimates of 7%. Although unlikely, we view any decisions to lift the moratorium before 2014 as a significant positive surprise, owing to Qatar’s success in inking highly profitable oil-indexed LNG contracts with its consumers, and its close proximity to cater to the Asian(mainly Japan, Korea) LNG demand pull.

c. 100 Bn earmarked for large infrastructure projects such as roads, ports, airports and metro, as per IMF est.

Exhibit-3 depicts Qatar’s 2011-16 National Development Strategy, guiding the Services sector (mainly transportation, communications and financial services) to be the core growth area contributing to nonhydrocarbon growth of c.6.1%, followed by manufacturing (1.5%) and construction (1.3%). IMF estimates government investment in infrastructure, mainly in roads, completion of port, airport and metro to be in the tune of USD 100 Bn, which in our view would drive nonhydrocarbon growth. Furthermore, as per KPMG estimates, small and medium enterprises (SMEs) contributed 28% to Qatar’s GDP in 2011, second to only hydrocarbons which accounted for 55% of the GDP. We expect the growth of SMEs with the aid of liquidity provided by the newly launched junior bourse to provide further impetus to the shift to nonhydrocarbons as the primary growth driver for the economy. Exhibit-3: Sectoral breakdown of non-hydrocarbon growth

Source: National Developments Strategy 2011-16

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MENA REAL ESTATE RESEARCH September 2012

Qatar residential – demand, supply and outlook Incremental residential demand of c.14,500 housing units for 2012 & 2013 combined

As per the Qatar census -2010 statistics, the total number of housing units in Qatar was 259,066 units, out of which 93,376 units were apartments, 62,496 were villa residences and the remaining were marginal housing units. Units were occupied by households, nonhouseholds such as labor gathering and also for non-housing purposes such as a place of work. The total number of households as of 2010 was 146,707 with an average household size of 5.3. We believe the number of households to have grown marginally from this level to 152,926 as of 2011. Exhibit-4: 2010 demand & supply breakdown

Source: QSA, Markaz analysis

Total number of households growing at a CAGR of c.4.5% over 2010-13

We expect incremental residential demand of c.14,500 housing units for 2012 & 2013 combined, growing by a CAGR of c.4.5% from 2010, lower compared to the 6.2% CAGR growth in households during 20042010. Incremental population in households is expected to be aided by growth in expat population working in highly skilled areas, as against low skilled areas such as household services & construction; largely ascribed to the higher growth projected for the non-hydrocarbon sector over 2012-15. The non-hydrocarbon sector is expected to attract highly skilled & service oriented expats catering to infrastructure projects post completion. To cite a case in point, IMF estimates c.30,000 additional skilled employment opportunities with the completion of the new international airport. Exhibit-5: Qatar household trends (2010-15)

Source: QSA, Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012 Furthermore, we forecast total household size to drop to 5.2 in 2013 from 5.3 in 2010, as we expect the expat household size to drop to 4.8 in 2013, (2010: 4.9) from increasing inflow of skilled expats with lower family sizes. We forecast the Qatari household size to remain stable at around 7.1 over the period. The average household size in Qatar declined from 7.1 to 6.7 in villas and 4.0 to 3.5 in apartments, from 2004 to 2010, driven by an inflow of expats with lower household size than Qatari households. We expect this trend to continue, and forecast total number of households to grow by c.4.5% over 2010-13 to c.167,300 units from c.146,700 in 2010. Aggregate residential trends to remain balanced Apartment stock grew at a CAGR of 16.3% over 2004-2010

Supply of apartment stock and villa residences grew at a CAGR of 16.3% and 12.1% respectively during 2004-2010, largely driven by the unprecedented economic growth witnessed during 2004-2008. Construction permits statistics is not provided by the Qatar Statistics Authority of late and thus statistical estimation of the forthcoming aggregate supply for Qatar is difficult to ascertain. Nevertheless, we believe that total residential supply would grow at a much slower pace in 2012 & 13, than witnessed over 2004-2010 due to the slower pace of underlying fundamentals and project cancellations and delays that occurred due to the global financial crisis. Taking a cue from the stability in overall rentals (refer Exhibit-6) and our belief that trends in supply would have adjusted themselves to adapt for the lower demand compared to prior expansionary periods, we believe that the residential sector would experience a balanced supply scenario during 2012-13, with pockets of both attractive and oversupplied sub-segments. Exhibit-6: Trends in overall residential rentals

Overall residential supply over 2012-13 to remain balanced

Source: NAI Qatar, Markaz analysis

Longer term economic outlook for Qatar is expected to be driven by the country’s need to enhance its infrastructure in general & on account of the World Cup – 2022, the diversification efforts as outlined in Qatar-2030 plan, and expansions in hydrocarbon GDP. The resultant growth in population would drive housing demand which would lead to healthy activity in the sector.

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MENA REAL ESTATE RESEARCH September 2012

Qatar Residential Landscape Regulatory Landscape The Qatar residential landscape, segregated into distinct investment zones with different ownership interests and features would react differently to market gyrations. The objective of our study was to identify residential investment zones, a non-Qatari investor can invest in, to meet his/ her desired return objectives in the current market scenario. Qatar’s three unrestricted freehold investment zones are The Pearl, West Bay Lagoon and Al Khor

The Qatar residential real estate landscape is categorized into properties under three ownership titles; freehold, leasehold and restricted. Non GCC nationals are entitled to unrestricted freehold title only within three designated investment zones which are The PearlQatar, West Bay Lagoon and the Al Khor Resort Project. In addition, "right of usufruct" can be acquired for 99 years in 18 designated areas (for details, please refer appendix 2). Non Qatari GCC nationals are entitled to unrestricted freehold title in three additional investment zones; Lusail, Al Khuraj and Thaayleb Mountain. Freehold title in all other locations is restricted to Qatari nationals, while GCC nationals can have freehold title with a restrictions on number of properties (maximum of 3), aggregate area (max of 3,000 sq.m) and use (only for private use).

Exhibit-7: Popular expatriate housing districts

Source: Google Earth, Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012 Competitive Landscape

Relevant demand – High income households likely to choose premium apartments

Analyzing the landscape from the point of view of non-Qatari nationals investing in residential properties to generate return from rental yield and price appreciation, we look closely at the characteristics of the various expatriate housing areas with a focus on the two residential freehold ownership zones, The Pearl and West Bay Lagoon. Although Lusail, Al Khor, Al Khuraj & Thaayleb Mountains are areas of investment interest to non-Qatari GCC nationals, we exclude it from our landscaping analysis currently, as they are in the very early stages of their development. However, Lusail is being master planned as a high income residential zone and would develop as a full-fledged residential zone by 2022 and hence, our longer term analysis considers Lusail as part of the focus area. Also, our analysis focusses more on apartments as against villas, as we do not expect rental yields from villas (c.2.0%) to be as lucrative as those for apartments (c.5.0%), for an investor.

Exhibit-8: Expatriate housing districts comparison

Source: Markaz analysis, * Assessed on a qualitative scale - Not good; Fair; Good & Very Good

Based on the current investment landscape prevalent in Qatar, locational advantages mentioned in the table above & unattractive returns generated from villas, an investor would focus on investments into apartments at The Pearl or Diplomatic District. Tenants at these locations typically include high income households. Therefore, the “relevant demand” for our analysis to follow would be the demand from high income households likely to choose premium apartments like those available in The Pearl as their residence. Exhibit-9: High income household residential options

Source: Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012 Furthermore, to perform a competitive analysis and to understand the choices available to a typical potential tenant for apartments in the Pearl, we analyze the type of residences preferred by high income bracket expats. We compare Pearl apartments with West Bay Lagoon, West Bay apartments and, villa compounds that are favored by expats with larger family size considerations and villa preferences and the output of the study is captured in Exhibit-10 below. Exhibit-10: Pearl apartments vs. competition

Source: Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012

Premium apartments - demand & supply

2010 supply of high income apartments c.9% of total apartments supply

Our analysis of ‘relevant demand’ & ‘relevant supply’ focuses on the apartment demand from high income households, as mentioned. We relied on data from Qatar’s official 2010 census and extensively analyzed the same to model the relevant demand and supply position as of 2010. We used the data as the basis for estimating trends in incremental demand from 2010 till now and for forecasting future trends (refer Appendix 1 for model details). Premium apartments – diverse trends Our model to estimate the demand for high income apartments (relevant demand model) suggested that the existing demand outstrips the supply of premium apartments, which accounted for c.9% of the total apartments supply as of 2010. On the demand side, we estimate that households with family sizes suitable for apartments and can afford premium apartments as well are higher in the range of 12% to 21%, depending on the assumption used for their housing budget (Refer Appendix-1 for relevant demand model). However, the gap between demand and supply is not reflected in rental & price trends noticed for premium apartments (Refer Exhibits 17, 18 & 19). While the declines in prices can be explained partly by the financial crisis, the declining rentals and existence of vacancies intrigued us to study this sub-segment in further detail and we analyzed the various room sizes to understand the apparent contradiction. Exhibit 11: 2010 apartment supply position

3BR apartments face stiff competition from villa residences

Source: QSA, DTZ, Markaz analysis

As of Q1-2012, the stock of premium apartments at Diplomatic District and Pearl, i.e., the relevant supply, is estimated at c.10,500 units as per DTZ. Estimates of vacancy rates stood at c.5% as of Q1-12. 3 BR units accounted for a quarter of the total stock of supply and almost all of the vacancies mentioned above, implying a vacancy rate of c.20% for 3 BR units. The total number of households who have a family size suitable for a premium 3 BR apartment is c.9,100 and the typical household income for such households is c. QAR 70,000 as per our estimates. This assumes that households allocate 24% of their income towards housing as against QSA estimates that the average household allocation towards housing to be closer to 30%. The intriguing rationale of the existence of vacancies in such a scenario is due to the competition from villa compounds.

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MENA REAL ESTATE RESEARCH September 2012 Exhibit-12: 2012 3BR+ apartment relevant demand- supply

2012 premium apartment supply for premium apartments lower than relevant apartment demand

Source: QSA, DTZ, Markaz analysis

While the choice of residing in a villa or an apartment is primarily a personal preference factor, the choice of lower sized high income households are normally straightforward as they mostly prefer apartments. However, the choice of high income households with family sizes between 4-6 is not as straightforward as the lower size households. These households have a wide range of residence options starting from premium villas, non-premium villas, premium apartments and very limited instances of non-premium apartments as well. Various types of premium and non-premium villa compounds are available in Doha, and are popular among mid to high income expatriates. Thus, 3BR premium apartments are likely to face stiff competition, primarily from non-premium villas, as households with larger family sizes would mostly prefer to reside in a villa, given ample choices to choose from. These villas are located in non-investment zones and supply forecasts are not extensively available as well. We therefore consider that 3BR premium apartments would not be an interesting investment proposition mainly due to its positioning vis-Ă vis the competition. 1 & 2 BR premium apartments demand outstrips supply 1 & 2 BR premium apartment demand in Q12012 c.10,750 units vs. supply of c.8,000 units

Unlike premium 3 BRs, households who need and can afford premium 1 & 2 BR apartments have very limited choices of quality residential units available. Currently, units in Diplomatic District are the only available alternative for households evaluating a 1 & 2 BR apartment residence at The Pearl. For premium 1 & 2 BR apartments as of Q112; we estimate a supply of c.8,000 units; while we derive a demand estimate of c.10,750 units. This demand estimate is driven by the assumption that households allocate 24% of their income towards housing, as psycho-economic factors such as uncertainty in job conditions due to macroeconomic instability leads to lower willingness on part of households to spend more and allocate a lower budget for housing. However, we believe that the impending growth in non-oil economy and the improved macro-economic conditions would improve the willingness to allocate closer to the potential 30% of the overall household income for housing stated above, and lead to higher realization of the demand potential for premium 1 & 2 BR apartments.

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MENA REAL ESTATE RESEARCH September 2012

Premium apartments short term outlook

1 & 2 BR premium apartment demand to grow 4.9% over 2011-13

We forecast aggregate relevant demand for 1 & 2 BR premium apartments to grow by 4.9% over 2011-13, leading to a cumulative demand of c.1,750 units over the two year period and grow at a CAGR of 4.7% over 2011-15 (c.4,300 units cumulatively). Our view is underpinned by a 4.8% growth in high income expat population over 2011-13, lower family sizes of incoming expat households, a diversion of existing expat households to premium apartment units, second home preferences and favorable household affordability trends. The incoming high income expats are expected to largely constitute of expats from developed economies who would have smaller family sizes and prefer quality residences allocating a higher budget for housing. As a result, we expect 1 & 2 BR premium apartments at Pearl to benefit from this trend. Exhibit-13: 2010-2015 premium apartment demand build-up

Incremental demand/supply trends to be balanced

Source: Markaz estimates

2013 1 & 2 BR premium apartments demand supply balanced

Pearl 1 & 2 BR to benefit from limited competition and superior quality

On the supply side, we estimate that c.3,200 1 & 2 BR premium apartment units would be added over 2012 & 13, higher than the cumulative incremental demand estimate mentioned earlier. However, supply tends to get adjusted downwards more than upwards compared to expectations and, this would lead to more evenly balanced incremental demand-supply trends. Moreover, demand side factors such as strong demand for high end housing over 2012/13 and the likely upward revisions to demand drivers would contribute its part, curtailing any concerns of incremental supply not being taken up. As a result of the factors discussed above, we expect incremental demand / supply trends for premium 1 & 2 BR apartments to be more balanced than oversupplied. Also, we do not expect relevant supply at Lusail to compete with Pearl over 2012 & 13, as the completion and handing over of the first few buildings itself is likely to happen beyond this period.

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MENA REAL ESTATE RESEARCH September 2012 Exhibit-14: Incremental supply at Pearl & Diplomatic District

Supply to be more backend loaded; downgrades to supply estimates likely

Source: DTZ, Markaz analysis

For premium apartments as a whole, we estimate the incremental cumulative demand for the period 2012-13 at c.3,200 units, while supply estimates stand at c.4,300 units, considering the current completion run rate. However, taking into consideration, that supply would be more back-end loaded in nature, we expect our supply estimate to have more downside risk.

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MENA REAL ESTATE RESEARCH September 2012

Premium apartments long term outlook Premium apartment demand to grow by 3.6% CAGR over 2011-22

For the longer term, we expect demand to grow at a CAGR of 3.6%, with incremental demand of c.15,500 units being realized over 201122, as more highly skilled expats enter Qatar, towards the finishing stages of the major infrastructure projects and, preparations to the lead up to the World Cup. Exhibit-15: Long term premium apartment demand

Source: Markaz analysis

Lusail to dominate long term supply

Long term premium apartment supply to mainly come from Lusail

On the supply side, premium apartment stock is expected to grow by over 45,000 units over the next 11 years, largely ascribed to the additional supply from Pearl (c.12,100 units) and Lusail (31,000 units). However, these supply estimates are subject to project delays as is evident from current project trends, and therefore future supply is likely to be more back-end loaded in nature. Also premium apartment supply estimates from Lusail run the risk of downward revisions, as project developers could deviate from the initial plan of constructing premium apartments, depending upon trends that emerge in future, which could further tighten the demand/supply situation and lead to lower future competition for Pearl apartments. Exhibit-16: 2011 vs. 2022 relevant supply

Source: DTZ, Lusail, Markaz analysis

We consider the premium residential segment to be the most sensitive to a shift in the underlying drivers and believe that our forecasts reflect close to a conservative scenario as we expect potential 1) upward bias to GDP forecasts 2) upward revisions to our population forecasts and 3) future migration & second home preferences of existing households living in villas with much higher disposable incomes to upmarket residences like Pearl. Kuwait Financial Centre â&#x20AC;&#x153;Markazâ&#x20AC;?

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MENA REAL ESTATE RESEARCH September 2012

Trends in rents, cap-rates and prices Apartment rentals recovered post Q3-11

Overall apartment rents in Qatar have declined c.24% on an average since its peak in Q3-08, with 1BHK and 2BHK declining c.25% & c.28% respectively while 3BHK declined lower at c.20%. Furthermore, rentals at Diplomatic District & Pearl have declined 23% & 17% respectively, on an average since the start of handing over of units in these developments. Asteco reported that rentals in Pearl & Diplomatic District have remained stable since Q1-11 and that 1 & 2 BR premium apartment rentals had increased in Q2-12 by c.8%. Exhibit 17: Apartment rental trends

Source: Asteco, Markaz analysis

Rents to remain stable

High competition for 1 & 2 BR to keep Pearl rentals stable

We forecast premium apartment rentals to remain mostly stable, as the competition in the market still remains high, in spite of improving investor confidence and strong demand side fundamentals. However, we expect Pearl 1 & 2 BR rentals to witness increases ahead of their competition, once further incremental demand for premium apartments is realized. Asteco highlighted that demand for 1-BR apartments at Pearl & Diplomatic district was beginning to outstrip supply, mainly from the recent influx of expats from mature markets, who prefer quality residences. Exhibit-18: Premium apartment rental trends

Borrowing-cap rate spread of +0.8% & Pearl 1 & 2 BR apartments

Source: Asteco, NAI Qatar, Markaz analysis

Average gross cap rate for a typical 2 BR at the Pearl based on sale prices & rents quoted by market reports stands at c.7.0%, remaining fairly stable at those levels since Q1-11, while net cap rates are at c. 5.1% after considering the service charges. Although the rate appears low compared to some other markets in the region, we believe the low cap rate is justified by underlying factors that drive fair cap rates.

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MENA REAL ESTATE RESEARCH September 2012

Pearl cap rates factor in lower risk from better construction quality, & lower future depreciation

Fair cap rates are understandably a function of macro, sector & property specific expectations of investors & the prevailing investment climate. The current cap rates at Pearl reflect macro factors such as the current low interest rate environment that prevails both in Qatar & globally, and the lack of many other attractive investment avenues of the same risk grade for capital flow. Pearl’s existing cap rates, also takes sector specific expectations of more balanced demand/supply into account, and factors in the property specific investor view of lower risk from higher construction quality, both in respect of amenities offered and expected life of buildings. Exhibit-19: Pearl - 2 BR average cap rates and prices

Pearl prices have remained stable from Q1-11

Source: QCB, Asteco, Markaz analysis

The current mortgage rate for a typical creditworthy borrower stands at 4.3%, indicating a spread of +0.8% over the cap rate for a typical 2 BR apartments in the Pearl. We do consider the presence of a spread between cap rates and borrowing rates as natural, typical of the region’s dynamics of being a renters market. Further, current borrowing rates represent close to trough level rates leaving limited headroom to exploit the borrowing –cap spread going forward. However, investors are likely to benefit from even a marginal cap rate contraction, given current mortgage rates and rentals trends. Our quick calculation shows that Pearl 2 BR apartment investors, leveraged c.80% are likely to realize an IRR up to 14.7 % over 2012 & 13 from even a marginal 10 bps cap rate contraction. We estimate an IRR sensitivity of c. 4.0 % per 10 bps change in cap rates, funded by 80% debt financing.

10bps decrease in cap rates could lead to an investor IRR of c.15% over 2012 & 13

Exhibit-20: IRR from Pearl 2BR -cap rate contraction (-10bps)

Source: Asteco, Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012

Real estate sector liquidity

Real estate lending grew c.49% in 2011 over 2010

Liquidity supported by internal deposit funding of c.50%

Real estate lending had increased significantly on a relative basis in 2011 over 2010, growing by c.49% (+ c.89% vs. 2009), and we expect this to be a function of the extent to which the real estate and construction sectors contributed to non-hydrocarbon economic activity. However post 2011, the growth in lending has stabilized, growing c.7.5% in Q2-12 over Q4-11. Credit lending to real estate as a percentage of total credit grew from 14.4% in 2010 to 19.7% in Q112, surpassing peak 2009 levels, before marginally declining in Q2-12 to 17.9%. Furthermore, RE credit grew from c.23% of private credit in 2010 to c.35% in Q2-11 and increased from c.9.0% of total assets in 2010 to c.11.6% in Q2-12, both witnessing minor declines Q-o-Q and stabilizing in Q2-12. The liquidity to the sector is expected to remain healthy, as real estate prices stabilize (in some cases possible moderate gains) and further demand is realized from Govt. investments into infrastructure. It is also noteworthy that in 2009, the Govt. purchased QAR 15Bn worth of real estate investment portfolios that local banks had on their books, to enable banks to provide additional liquidity to the real estate sector. Exhibit -21 provides an indication of real estate lending trends provided by banks in Qatar. Exhibit-21: Trends in RE sector credit

Liquid assets remained over 36% over 2009-11

Source: QCB, Markaz analysis

We expect the liquidity situation for the Qatari banking system to not be vulnerable to an external funding crisis, as liquidity is supported predominantly by internal deposit funding. This is evident from the fact that internal funding from banks and customer deposits constituted c. 50% of the overall asset position as on Jun-12, and has remained over 50% since Q1-09 mostly. Also, resident customer deposits amount to c.93% of overall customer deposits and has remained above 90% of total customer deposits mostly since Q1-09. The total liquid assets-to-total asset ratio remained over 36% over 2009-2011, providing ample room for lending activities. These factors eliminate the fear of liquidity bottlenecks, from sources of funding which are transitory in nature and confirms our view that, credit lending to the real estate sector would remain healthy and is unlikely to witness any major setbacks.

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MENA REAL ESTATE RESEARCH September 2012 Exhibit-22: Qatar liquidity funding position

Source: QCB, Markaz analysis

Qatar real estate transactions improved by over 90% between Q1-11 & Q2-12

Transaction trends also give an indication of the liquidity environment prevalent in real estate markets. An analysis of the Qatar RE transactions shows a healthy trend in the real estate sector, as the value transacted has increased by over 90% in Q2-12, as compared to Q1-11. The value transacted has been increasing steadily since Q1-11, likely due to improved sentiment and likely aided by higher lending to the sector which grew from 26% of private sector credit in Q1-11 to 35% in Q1-12, benefiting from higher credit to the private sector which grew c.18% in absolute terms. Exhibit-23: Transactions* on trailing quarter summation basis

Source: MOJ, Markaz analysis, * MOJ does not include Pearl transactions data Note: Transaction data before W13 2011 is not publicly available

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MENA REAL ESTATE RESEARCH September 2012

Appendix 1 Relevant demand estimation methodology Using our proprietary relevant demand model, we analyzed and forecasted demand potential for high income households likely to consider Pearl apartments as a residential option. QSA census statistics for our base year-2010 indicate that 779,246 people resided in 146,707 households, while the number of households defined as “high income households” based on the head of household income, amounted to 72,949. We ventured to model high income households by considering key additional factors such as family sizes and income generated by working dependents. Exhibit 24 depicts our demand estimation methodology. Exhibit-24: Relevant demand methodology

Source: Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012 Exhibit-25: Qatar 2010 households

Exhibit-26: Households based on household income

Source: QSA, Markaz analysis

Our analysis of 2010 Qatar household data indicate that, despite 72,949 households having high income head of households, the relevant demand for premium residences was significantly lower at 43,972 households. This is due to the fact that c.40% of the high income households as per the Census classification (high income head of households) would not be able to afford premium residences or, avail similar residential options. Of the 43,972, relevant demand for premium apartments was c.31,000 constituting only c.21% of overall household demand. As evident from Exhibit 26, majority of the households were in the QAR 26,000-39,000 household monthly income bracket, and households with a monthly household income of QAR75,000+ amounted the least. Size of the households is the primary determinant factor to estimate the demand for 1 & 2 BR premium apartments, estimated at c.16,600 units from our model, based on a 30% allocation of household income towards housing. This estimate primarily considers high income earning households with a family size less than 4, along with a factor adjustment to consider the psycho â&#x20AC;&#x201C; economic factors for willingness to seek a premium apartment as not all high income households with small family size should choose to live in premium apartments. Exhibit-27: 2012 & 2013 premium apartment trends

Source: Markaz analysis

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MENA REAL ESTATE RESEARCH September 2012 Relevant demand sensitivity Key variability factors in our model that allocates/cuts off number of households from the affordability bracket include, budget allocated for housing, number of families with only non-working dependents etc. Furthermore, our model also incorporates movement of households from apartments to villas and villas to apartments based on the sensitivity of household income to aforementioned parameters. The incremental/erosion of demand, as a result is not linear when moving across affordability levels and only non-working dependent families percentages, as can be seen in Exhibit 28. Our analysis further incorporates the sensitivity of apartment preference of 4-6 member households who 1) can afford high end villas, but prefer premium and 2) cannot afford high end villas, but can afford high end apartments, but still prefer non-premium villas. Our relevant demand model derives relevant demand for premium apartments to be c. 21% of the aggregate households in 2012, and estimates premium residential sensitivity of close to 328 units to a 1% change in population growth. Exhibit-28: Total premium apartment units sensitivity

Source: Markaz analysis

Exhibit-29: 2012 & 13 incremental 1 & 2 BR premium apartments sensitivity

Source: QSA, Markaz analysis

Kuwait Financial Centre â&#x20AC;&#x153;Markazâ&#x20AC;?

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MENA REAL ESTATE RESEARCH September 2012

Appendix-2 The 18 areas where 99 years ‘usufruct rights’ can be acquired:                 

Musheireb Fereej Abdul Aziz Al Doha Al Jadeeda Ghanim Al Qadeem Al Rifa Al Hitmi Al Salata Bin Mahmoud Rawdat Al Khail Al Mansoura & Bin Dirham Najma Umm Ghuwailina Al Khulaifat Al Sadd New Mirqab & Al Nasser Doha International airport Al Dafna & Onaiza & Al Qitar Lusail, Al Kharaij & Jebel Thiya

Kuwait Financial Centre “Markaz”

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MENA REAL ESTATE RESEARCH September 2012

Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is owned by Markaz and is privileged and proprietary and is subject to copyrights. Sale of any copies of this report is strictly prohibited. This report cannot be quoted without the prior written consent of Markaz. Any user after obtaining Markaz permission to use this report must clearly mention the source as “Markaz”. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. This report may not consider the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily indicative of future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of Markaz, Markaz has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Markaz’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or Markaz’s website shall be at your own risk. For further information, please contact Markaz at P.O. Box 23444, Safat 13095, Kuwait; Email: research@markaz.com; Tel: 00965 1804800; Fax: 00965 22450647.

Kuwait Financial Centre “Markaz”

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Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH

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