uae real estate sector update october 2008

8/6/2019 UAE Real Estate Sector Update October 2008

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abcGlobal Research

Top down, demand is now the key

issue, as it is being undermined by

affordability, the credit squeeze, and

negative sentiment

Bottom up, it is not about a potential

price correction, but rather the long-

term demand story (ie, oil prices)

We retain our Overweight (V) rating on

Aldar, Emaar, and Sorouh, but cut our

target prices to reflect purelymacro concerns

Our proprietary analysis of supply dynamics in Dubai

suggests that forecasts are overstated. Our findings differ

considerably from those of many in the market. We estimate

that no more than 95,000 units (10% CAGR) and 195,000

bedrooms will hit the market by 2010.

The central issue is no longer oversupply but demand, which is

being undermined by several factors. Price appreciation is

breaching affordability, as illustrated by the compression of

rental yields. This will be further amplified by upward pressure

on mortgage rates and declining loan-to-value (LTVs). The

situation has not been helped by the stock markets steep

decline, which highlights the fact that the region is not immune

to global trends. The fall-out from the markets decline is

wealth destruction and risk aversion. All this, combined with

the weeding out of speculatively driven demand and incessant

corporate scandals, is bound to lead to some price weakness.

While the global credit crunch is placing a strain on domesticliquidity, we believe that Aldar, Emaar, and Sorouh have

enough funds to finance their near-term investment needs.

Bottom up, it is not about a potential price correction but the

long-term demand story (volumes rather than prices). While

we remain strong believers in the domestic demand story, to

address macro concerns we apply probabilities to the

companies projects based on visibility and viability in the

event of a downturn. We also revise our beta for all three

companies to reflect increased market volatility. However,

we maintain our price assumptions, which are already at a

c20%-30% discount to current market prices. Our new target

prices for Aldar, Emaar, and Sorouh, imply 24%, 10%, and

35% discounts to NAV, respectively.

Global Emerging Markets

UAE Real Estate

UAE Real EstateSector UpdateSupply is no longer the key issue

Aldar Properties

Overweight (V), target price cut to

AED16.0 (from AED25.3)

Emaar PropertiesOverweight (V), target price cut to


Sorouh Real Estate

Overweight (V), target price cut to


14 October 2008

Majed Azzam *

Analyst

HSBC Bank Middle East Limited

+971 4 4236933 [email protected]

Ankur Khetawat *

Analyst

HSBC Bank Middle East Limited

+971 4 4236930 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations

Issuer of report: HSBC Bank Middle East Ltd

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
http://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/


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Financials & valuation: Aldar Properties Overweight (V)Financial statements

Year to 12/2007a 12/2008e 12/2009e 12/2010e

Profit & loss summary (AEDm)

Revenue 1,227 6,439 10,280 13,215EBITDA 158 2,546 3,678 4,895Depreciation & amortisation 0 -39 -177 -313Operating profit/EBIT 158 2,507 3,502 4,582Net interest -62 -240 -872 -1,220PBT 1,941 4,791 5,630 6,363HSBC PBT 1,941 4,791 5,630 6,363Taxation 0 0 0 0Net profit 1,941 4,791 5,630 6,363HSBC net profit 1,941 4,791 5,630 6,363

Cash flow summary (AEDm)

Cash flow from operations 158 -3,193 4,450 5,657Capex 0 -19,844 -14,531 -16,354FCF enterprise 158 -22,797 -9,209 -9,476Cash flow from investment 0 -19,844 -14,531 -16,354Dividends -345 -557 -889 -1,126Change in net debt -2,966 9,137 10,970 11,822FCF equity 96 -23,037 -10,081 -10,696

Balance sheet summary (AEDm)

Tangible fixed assets 8,339 20,981 38,335 57,376Current assets 13,871 22,449 17,930 12,220Cash & others 7,616 9,798 7,828 5,006

Total assets 22,715 44,361 57,195 70,527Gross debt 4,390 15,710 24,710 33,710Net debt -3,226 5,911 16,882 28,704Shareholders funds 13,861 22,005 26,746 31,983Invested capital 10,195 27,061 42,772 59,830

Ratio, growth and per share analysis

Year to 12/2007a 12/2008e 12/2009e 12/2010e

Y-o-y % change

Revenue 554.2 424.8 59.7 28.6EBITDA 1512.3 44.5 33.1EBIT 1487.7 39.6 30.9PBT 55.3 146.8 17.5 13.0

HSBC EPS 146.8 17.5 13.0

Ratios (%)

Revenue/IC (x) 0.2 0.3 0.3 0.3ROIC 2.4 13.5 10.0 8.9ROE 22.7 26.7 23.1 21.7ROA 14.4 15.0 12.8 11.9EBITDA margin 12.9 39.5 35.8 37.0Operating profit margin 12.9 38.9 34.1 34.7EBITDA/net interest (x) 2.6 10.6 4.2 4.0Net debt/equity -23.3 26.9 63.1 89.7Net debt/EBITDA (x) -20.4 2.3 4.6 5.9CF from operations/net debt 26.4 19.7

Per share data (AED)

EPS Rep (fully diluted) 0.53 1.31 1.54 1.74HSBC EPS 0.53 1.31 1.54 1.74DPS 0.20 0.20 0.26 0.38NAV 8.04 7.90 7.96 9.52NAV (adjusted) 18.64 21.10 23.00 25.10

Valuation data

Year to 12/2007a 12/2008e 12/2009e 12/2010e

Premium/ (discount) to NAV 0.7 0.8 0.8 0.6Premium/ (discount) to NAV (adj) 0.3 0.3 0.2 0.2PE* 11.6 4.7 4.0 3.6FCF yield (%) 0.7 -173.5 -75.9 -80.6Dividend yield (%) 3.6 3.6 4.7 6.9

Note: * = B ased on HSBC EPS (fully diluted)

Issuer information

Share price (AED) 6.19 Target price (AED) 16.00 Potent'l tot rtn (%) 158.5

Reuters (Equity) ALDR.AD Bloomberg (Equity) ALDAR UHMarket cap (USDm) 4,216 Market cap (AEDm) 15,475Free float (%) Enterprise value (AEDm) 20,531Country Uni ted Arab Emirates Sector Real EstateAnalyst Majed Azzam Contact 971 04 507 7380

Price relative

2

4

68

10

12

14

16

2006 2007 2008 2009

2

4

68

10

12

14

16

Aldar Properties Rel to ABU DHABI SEC MKT GEN INDEX

Source: HSBC

Note: price at close of 13 Oct 2008


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Financials & valuation: Emaar Properties PJSC Overweight (V)Financial statements

Year to 12/2007a 12/2008e 12/2009e 12/2010e


Revenue 17,546 20,412 30,008 31,674EBITDA 5,169 6,615 9,748 9,901Depreciation & amortisation 0 -408 -923 -1,019Operating profit/EBIT 5,169 6,207 8,825 8,882Net interest 960 163 -170 -104PBT 6,530 6,830 10,311 11,241HSBC PBT 6,530 6,830 10,311 11,241Taxation -14 -36 -309 -562Net profit 6,555 6,758 9,804 10,296HSBC net profit 6,555 6,758 9,804 10,296


Cash flow from operations 3,461 1,177 6,391 8,654Capex -2,055 -2,155 -3,257 -2,578FCF enterprise 1,703 -944 3,304 6,180Cash flow from investment -3,167 -2,155 -3,257 -2,578Dividends -1,189 -1,218 -1,319 -1,961Change in net debt -66 4,008 -1,815 -4,115FCF equity 2,663 -780 3,134 6,076



Total assets 54,752 61,449 67,793 78,585Gross debt 8,396 8,948 8,948 8,948Net debt 1,597 5,605 3,789 -326Shareholders funds 35,884 41,280 49,765 58,100Invested capital 28,691 37,350 42,562 44,702


Year to 12/2007a 12/2008e 12/2009e 12/2010e

Y-o-y % change

Revenue 25.3 16.3 47.0 5.6EBITDA -10.0 28.0 47.4 1.6EBIT -10.0 20.1 42.2 0.7PBT 2.1 4.6 51.0 9.0

HSBC EPS 1.7 3.1 45.1 5.0

Ratios (%)

Revenue/IC (x) 0.7 0.6 0.8 0.7ROIC 19.7 18.7 21.4 19.3ROE 19.9 17.5 21.5 19.1ROA 11.5 11.4 15.7 14.7EBITDA margin 29.5 32.4 32.5 31.3Operating profit margin 29.5 30.4 29.4 28.0EBITDA/net interest (x) 57.3 95.1Net debt/equity 4.4 13.4 7.5 -0.5Net debt/EBITDA (x) 0.3 0.8 0.4 0.0CF from operations/net debt 216.8 21.0 168.7


EPS Rep (fully diluted) 1.08 1.11 1.61 1.69HSBC EPS 1.08 1.11 1.61 1.69DPS 0.20 0.20 0.32 0.34NAV 5.89 6.78 8.17 9.54NAV (adjusted) 13.60 14.69 16.67 16.83

Valuation data

Year to 12/2007a 12/2008e 12/2009e 12/2010e

Premium/ (discount) to NAV 1.0 0.8 0.7 0.6Premium/ (discount) to NAV (adj) 0.4 0.4 0.3 0.3PE* 5.3 5.1 3.5 3.4FCF yield (%) 10.3 -3.1 13.2 28.0Dividend yield (%) 3.5 3.5 5.6 5.9


Issuer information


Reuters (Equity) EMAR.DU Bloomberg (Equity) EMAAR UHMarket cap (USDm) 9,806 Market cap (AEDm) 35,990Free float (%) 68 Enterprise value (AEDm) 32,061Country Uni ted Arab Emirates Sector REAL ESTATEAnalyst Majed Azzam Contact 971 04 507 7380

Price relative

3

8

13

18

23

28

2006 2007 2008 2009

3

8

13

18

23

28

Emaar Properties PJSC Rel to ABU DHABI SEC MKT GEN INDEX

Source: HSBC



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Financials & valuation: Sorouh Real Estate Overweight (V)Financial statements

Year to 12/2006a 12/2007e 12/2008e 12/2009e


Revenue 630 2,321 3,556 6,066EBITDA -242 1,151 1,518 1,853Depreciation & amortisation 0 0 -1 -5Operating profit/EBIT -242 1,151 1,517 1,848Net interest 567 88 -19 -101PBT 976 1,257 1,541 1,746HSBC PBT 976 1,257 1,541 1,746Taxation 0 0 0 0Net profit 976 1,257 1,612 1,746HSBC net profit 976 1,257 1,612 1,746


Cash flow from operations -146 1,055 479 1,424Capex -769 -5 -1,181 -3,459FCF enterprise -980 1,146 -596 -1,934Cash flow from investment -1,736 -28 -1,197 -3,459Dividends -209 -308 -403Change in net debt 188 -317 2,438FCF equity -412 1,234 -615 -2,035



Total assets 4,351 7,221 18,767 22,264Gross debt 41 233 4,235 4,235Net debt -1,413 -1,225 -1,541 897Shareholders funds 3,470 4,463 5,742 7,085Invested capital 1,621 3,004 3,733 7,515


Year to 12/2006a 12/2007e 12/2008e 12/2009e

Y-o-y % change

Revenue 268.3 53.2 70.6EBITDA 31.9 22.0EBIT 31.8 21.8PBT 28.9 22.6 13.3

HSBC EPS 28.9 28.2 8.4

Ratios (%)

Revenue/IC (x) 0.8 1.0 1.1 1.1ROIC -29.9 49.8 45.0 32.9ROE 56.2 31.7 31.6 27.2ROA 19.2 20.5 12.3 9.0EBITDA margin -38.4 49.6 42.7 30.5Operating profit margin -38.4 49.6 42.6 30.5EBITDA/net interest (x) 0.4 81.3 18.3Net debt/equity -40.7 -27.4 -27.2 12.8Net debt/EBITDA (x) 5.8 -1.1 -1.0 0.5CF from operations/net debt 158.8


EPS Rep (fully diluted) 0.39 0.50 0.64 0.70HSBC EPS 0.39 0.50 0.64 0.70DPS 0.10 0.12 0.16NAV 1.39 1.79 2.30 2.83NAV (adjusted) 10.14 11.07 15.07 16.13

Valuation data

Year to 12/2006a 12/2007e 12/2008e 12/2009e

Premium/ (discount) to NAV 4.0 2.9 2.3 1.8Premium/ (discount) to NAV (adj) 0.5 0.4 0.3 0.3PE* 13.1 10.4 8.1 7.4FCF yield (%) -3.7 10.9 -5.5 -18.3Dividend yield (%) 2.2 2.6 3.5


Issuer information


Reuters (Equity) SOR.AD Bloomberg (Equity) SOROUH UHMarket cap (USDm) 3,562 Market cap (AEDm) 13,075Free float (%) Enterprise value (AEDm) 11,616Country Uni ted Arab Emirates Sector REAL ESTATEAnalyst Majed Azzam Contact 971 04 507 7380

Price relative

0

2

46

8

10

12

14

2006 2007 2008 2009

0

2

46

8

10

12

14

Sorouh Real Estate Rel to ABU DHABI SEC MKT GEN INDEX

Source: HSBC



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Top down: supply is less ofan issue

Dubai supply forecasts look overstated

Dubai unit supply forecast (units)

-

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

2005 2006 2007 2008 2009 2010

3.0

3.1

3.1

3.2

3.2

3.3

3.3

3.4

3.4

3.5

3.5

HSBC Supply est . Colliers Supply est .

Demand People per dwel ling

Source: HSBC Research, Colliers International, Better Homes

Our proprietary analysis of supply dynamics in

Dubai shows that forecasts have clearly been

overstated. Having analysed both sides of the

equation, ie, the number of units and the number

of bedrooms, our findings differ considerably

from those used by many in the market. We

estimate that no more than 95,000 units will hit

the market between 2008 and 2010, against the

widely quoted figure of 160,000 units. Also, we

estimate that only 190,000 additional bedrooms

will come on to the market by year-end 2010.

This is less than half the common estimate of

400,000 bedrooms, based on an assumed 2.5

people per dwelling.

but demand is beingundermined by several factors

1. Affordability: price growth picking upagain after brief moderation during

the summer

Price/sq m (y-axis) vs. GDP/capita in USD (x-axis)

London

TokyoNew York

Singapore

Hong Kong AmsterdamRome Paris

Moscow Barcelona

ShanghaiPrague

0

2,000

4,000

6,000

8,000

10,000

12,000

0 20,000 40,000 60,000 80,000

DubaiAbu Dhabi

Kiev

Cairo

Budapest

Warsaw

Source: Colliers International, Jones Lang LaSalle, CB Richard Ellis, Pricewaterhouse,

HSBC Research

After a brief period of moderation in price growth

over the summer, concerns about overheating

came to the forefront once again in September.

Average prices jumped 17% m-o-m in Dubai and

11% in Abu Dhabi, compared with an average of

2%-3% m-o-m during the summer months. The

main cause for concern, however, is that, while

prices remain on an upward spiral, rental rates in

Dubai seem to be stabilising, thereby compressing

rental yields. This shows that we have reached a

level where affordability is getting breached. As

the above chart shows, we are very quickly

approaching the regression line, which, in our

view, provides a reasonable basis for comparison

of affordability.

Investment summary


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Price growth seems to be picking up again (USD/sq m)

Dubai Jun-08 Aug-08 Price

Sep-08 Price

RentalYield

Apartments 5,238 5,395 3% 6,266 16% 5.2%Villas 4,558 4,604 1% 5,690 24% 4.0%Weighted average 5,136 5,274 3% 6,180 17%

Abu DhabiApartments 4,981 5,255 5% 5,848 11%Villas 3,550 3,617 2% 3,804 5%Weighted average 4,767 5,009 5% 5,542 11%

Source: HSBC Research, Better Homes

2. Global credit crunch restrictingdomestic liquidity; upward pressure on

mortgage rates

Credit squeeze clearly demonstrated by widening spreadbetween LIBOR and EIBOR

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

LIBOR 3M EIBOR 3M

Source: Reuters

Liquidity in the system is now coming under

strain. As highlighted in the above chart, this is

clearly demonstrated by the increasing spread

between EIBOR and LIBOR, with the domestic

cost of borrowing on an upswing. While the UAE

Central Bank recently announced a USD13.6bn

liquidity injection, the terms on which banks

could tap this facility were rather onerous, as the

CBU weighs inflationary pressure against growth.

Total UAE mortgage book in USDm

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2008e 2009e 2010e

Units to be delivered 2008-10 New launches 2008-10

On old units

10%

14%

18%

22%

26%

30%

Mort gage to GDP

Source: Central bank data, HSBC estimates

We estimate that the UAE mortgage book will

grow by roughly 330% to USD70bn, or 26% of

GDP, by the end of 2010. While our estimated

mortgage/GDP ratio is relatively low, given the

current liquidity strain, mortgage rates are likely

to come under upward pressure.

3. Heightened risk perception lower

mortgage LTVsFurthermore, given the heightened risk perception

surrounding the real estate sector, banks are likely to

lower mortgage LTVs. Early evidence suggests that

this has already begun: for instance, HSBC Home

Finance department recently reduced its mortgage

LTVs from 85% to 60% on apartments and 70% on

villas. Also, Tamweel and Amlak reduced their

LTVs from 90% to 75% and 65%, respectively.

Additionally, anecdotal evidence suggests that the

spread between mortgage providers property

valuations and the actual property prices has

widened significantly. This means that LTPs (loan to

price) are increasingly falling below the LTVs.

4. Negative sentiment and

tighter regulation

The recent stock markets decline has not helped,

as it highlighted the regions vulnerability to

global trends in equity, debt and property. The

fall-out from the decline is wealth destruction andrisk aversion, which add to liquidity constraints,

hitting demand for property. All this, in


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combination with the weeding-out of

speculatively driven demand and incessant

corporate scandals, is bound, in our opinion, to

lead to some weakness in property prices.

Conclusion: rental yields suggest

possible price falls of up to 22% in off-

plan units and 12% in ready units

Arguably, investors should hold on to their

property as long as rental yields cover most of the

mortgage payment. However, markets do notalways act rationally and a slight softening in

prices could lead to panic selling.

Bottom up: its not about apotential price correction butthe long-term demand story

Our economist, Simon Williams, and strategist,

John Lomax, are both strong believers in the

regions long-term domestic demand story. (please

refer to The revised case for GCC equity markets, 1

October 2008.) For most reasonable oil price

scenarios, few domestic demand plays look much

better than the Gulf. Based on current infrastructure

plans, the breakeven oil price required for fiscal

balance is highest in Saudi Arabia (USD55/bbl).

MEED (Middle East Economic Digest) projects that

about USD2.2trn will be spent on infrastructure

over what we have interpreted as the next five years.

At the same time, the secular growth story could be

enhanced by global de-bottlenecking. Slower global

growth and a reduction in infrastructure spending

ought to help on the Gulf supply side. This could

play out in terms of lower prices and better access to

input materials.

Aldar still our preferred pick, thoughEmaar is the most immune to any

property market downturn; while

Sorouh is the most susceptible despite

having the highest earnings visibility

Perceptions that the real estate sector in the UAE

and Dubai in particular is set for a correction

have hardened in recent weeks, as has scepticism

about project execution. In large part this trend

reflects a global repricing of risk, but in our view

real estate names have been oversold. Based on

our analysis, it seems that the market is only

factoring in those projects that are most certain

(ie, those already under development, which have

already achieved considerable sales). As a

potential price correction would have only a

limited impact on pre-sold projects, this leads us

to believe that the market is more concerned about

the long-term demand story.

To address purely macro concerns, we applyspecific probabilities to each companys projects

and land valuations, based on visibility and

viability in the event of any downturn. We also

revise our beta for Aldar from 1.3 to 1.4, for

Sorouh from 1.0 to 1.5, and for Emaar from 1.0 to

1.2 to reflect increased market volatility.

However, we maintain our price assumptions,

which are already at a c20%-30% discount to

current market levels and, as such, take into

account any potential price weakness.

Valuation breakdown

AED per share ____________ Aldar____________ ____________ Sorouh ___________ _____________ Emaar ____________Valuation Probability Current Valuation Probability Current Valuation Probability Current

Projects under development 10.7 80% 8.6 3.0 100% 3.0 6.6 90% 5.9Highly probable projects 4.6 70% 3.2 5.0 70% 3.5 6.5 60% 3.9

Future projects 2.4 50% 1.2 - - 3.4 50% 1.7Land 7.6 60% 3.0 7.3 40% 2.9 - -Investments - - - - 2.4 100% 2.4Total value 25.3 16.0 16.3 9.4 18.9 13.9

Source: HSBC estimates


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Dubai supply forecasts overstated

Dubai unit supply forecasts (units)

-

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

2005 2006 2007 2008 2009 2010

3.0

3.1

3.1

3.2

3.2

3.3

3.3

3.4

3.4

3.5

3.5

HSBC Supply est . Colliers Supply est .

Demand People per dwelling

Source: HSBC Research, Colliers International, Better Homes

Dubai bedroom supply forecasts (bedrooms)

-

50,000

100,00 0

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2007 pent up 2008 2009 2010

1.60

1.65

1.70

1.75

1.80

1.85

1.90

Number of BRs new est. Number of BRs prev est.

Number o f p eo ple Peop le per B Rs Source: HSBC Research, Better Homes

In light of recent market turmoil, some investors

have started to question Colliers Internationals

supply forecasts. We have therefore complementedthe work carried out by Colliers with our own

proprietary analysis of supply dynamics in Dubai,

analysing both sides of the equation number of

units and number of bedrooms. Our findings differ

considerably from those used by many in the

market. We estimate that no more than 95,000 units

will hit the market between 2008 and 2010, against

the widely quoted figure of 160,000 units. (For

methodology please refer to the appendix.) Also,

we estimate that only 190,000 additional bedroomswill come on to the market by year-end 2010. This

is less than half the common estimate of 400,000

bedrooms, based on an assumption of 2.5 people

per dwelling.

At first glance our numbers look low, but

considering that the total number of existing units

in Dubai is roughly 300,000, our estimates still

imply 30% growth by year-end 2010. Additionally,

the fact that studio and one-bedroom units account

for more than 50% of forthcoming supply indicates

to us that supply has been overestimated.

Top down

Our proprietary supply analysis implies that no more than 95,000

units (c10% CAGR) and 190,000 BRs are likely to hit the market

by 2010

Affordability, the credit squeeze and negative sentiment to put

pressure on demand, but we feel the stock prices already reflect this

Current rental yields suggest that prices of off-plan units could fall

by up to 22%, while prices of ready units could come down by 12%


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Villas account for roughly 20% of forthcoming supply (units)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2008 2009 2010

A par t ment s Vi llas

83%

81%76%

17%

19%

24%


Breakdown of appartment supply by number ofbedrooms (units)

-

5,000

10,000

15,000

20,000

25,000

30,000

2008 2009 2010

St udio 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom


Breakdown of villa supply by number of bedrooms (units)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010

2 Bedroom 3 Bedroom 4 Bedroom 5 Bedroom 6 Bedroom


After brief slowing in the summer, pricegrowth seems to be picking up again

Prices appear to be rising once again

DubaiApartments Jun-08 Aug-08 Price

Sep-08 Price

RentalYield

Internat ional Cit y 2,680 2,782 4% 3,216 16%Dubai Land 3,726 3,694 -1% 3,967 7%Dubai Inv. Park 3,451 3,967 15% 3,779 -5% 9.5%Down Town Jebel Ali 4,067 3,879 -5% 4,028 4% -JLT 4,160 4,248 2% 4,970 17% 8.0%Greens 5,046 5,151 2% 6,559 27% 7.4%Business Bay 5,612 5,679 1% 6,438 13% -

Dubai Marina 5,788 6,066 5% 6,345 5% 6.2%The Palm Jumeirah 6,515 7,095 9% 7,819 10% 4.3%DIFC 8,617 8,866 3% 9,561 8% -Burj Dubai 10,301 10,341 0% 12,894 25% 3.2%Average 5,238 5,395 3% 6,266 16% 5.2%

VillasJumeirah Village 2,650 2,727 3% 3,477 28% -Dubai Inv. Park 3,290 3,348 2% 3,688 10% 5.8%Dubai Land 3,718 3,782 2% 5,386 42% -Emirates Living 4,825 4,970 3% 6,230 25% 5.3%Arabian Ranches 4,547 4,565 0% 6,078 33% 4.1%The Palm Jebel Ali 6,175 6,521 6% 6,435 -1% -The Palm Jumeirah 8,980 9,124 2% 11,474 26% 2.2%Average 4,558 4,604 1% 5,690 24% 4.0%

Total average 5,136 5,274 3% 6,180 17%

Abu DhabiApartments Jun-08 Aug-08 Price

Sep-08 Price

Rental

YieldAl Reef 2,715 3,026 11% 3,723 23%Al Ghadeer 4,838 5,263 9% 5,591 6%Al Raha Beach 6,069 6,180 2% 7,207 17%Al Reem Island 6,304 6,550 4% 6,614 1%Average 4,981 5,255 5% 5,848 11%

VillasHydra Village 2,439 2,351 -4% 2,510 7%Al Reef 2,668 2,926 10% 3,231 10%Al Raha Gardens 4,694 4,216 -10% 4,369 4%Al Ghadeer 4,398 4,975 13% 5,107 3%

Average 3,550 3,617 2% 3,804 5%

Total average 4,767 5,009 5% 5,542 11%


After a brief period of moderation in price growth

over the summer, which we welcomed as a positive

sign of the market side-stepping an overshoot,

September has again brought concerns about

overheating to the forefront. Prices jumped 17% m-

o-m on average in Dubai and 11% in Abu Dhabi,

compared with an average of 2%-3% m-o-m duringthe summer months. It is worth noting, however,

that these figures may be inflated, as they reflect


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asking prices and not actual transactional prices.

Unfortunately no data are available on the latter,

however, anecdotal evidence suggest that the

discount, if any, is only marginal.

In our opinion, the underlying issues are not being

addressed the failure to materialise of expected

supply (as previously mentioned we expect only

95,000 units to hit the market by year-end 2010

compared with the commonly quoted figure of

160,000 units), or continuous and unabatingspeculation (units are usually flipped before the

second payment is due). This latter problem

persists despite recent indications that the

government will introduce regulations to curb

speculatively driven demand. Speculation is further

encouraged by Islamic financing practices, where,

other than the initial down-payment (usually

between 5-10%), no payments are made until the

unit is delivered (although the amount involved is

limited by the buyers debt service ratio).

The greatest cause for concern, however, is that,

while prices remain on an upward spiral, rental

rates in Dubai seem to be stabilising, thereby

compressing rental yields. This shows that we

have reached a level where affordability is

beginning to be breached.

Price/sq m (y-axis) vs. GDP/capita in USD (x-axis)

London

Tokyo New York

Singapore

Hong Kong Amsterdam

RomeParis

MoscowBarcelona

ShanghaiPrague

0

2,000

4,000

6,000

8,000

10,000

12,000

0 20,000 40,000 60,000 80,000

Dubai

Abu Dhabi

Kiev

Cairo

BudapestWarsaw

Source: Colliers International, Jones Lang LaSalle, CB R ichard Ellis, Pricewaterhouse,

HSBC Research

As the above chart shows, we are very rapidly

approaching the regression line, which, in our

view, provides a reasonable comparison of

affordability. This comparison takes into account

the regions uneven income distribution and the

recycling of petrodollars overseas, which may be

mitigated by the lack of taxation and exclusion of

the labourer population from GDP figures (blue-

collar workers account for c40% of the population

but should be excluded as they are not part of our

target market). Also, contrary to market

perception, our analysis shows that the average

apartment size in Dubai is 110 sq m, which is in

line with the global average, and therefore makes

the comparison consistent.

Affordability now being hit

Contrary to past trends, as the table on the bottom

of the next page shows, in most instances rental

income no longer fully covers the mortgage

payment. This means that it is becoming more

costly for investors to finance multiple properties

through rent. It is also important to point out that,for most tenanted units, rental yields are actually

lower owing to the rental cap. As such, our

estimates, which are based on current achieved

rentals, overstate the average yields for new

prospective buyers.

Dubai future supply breakdown by affordability (units)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2 008 2009 2010

Affordable (USD1,000-2,500) Mid-end (USD2,500-6,000)

High-end (USD6,000-9,500) Vi l las (USD6,000-40,000)

44%29 %

18%


While prices in the UAE are becoming less

affordable, Dubai (unlike Abu Dhabi, which isstill at an early stage of development, with most

developers focused on the high end) offers a wide


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range of units catering to most income levels. Our

analysis shows that in Dubai there is a healthy

mix of accommodations, as developers are

starting to focus more on affordable housing. The

most notable development in this respect is

Nakheels International city and Discovery

Gardens. We estimate that roughly 30% (c30,000

units) of upcoming supply could be classified as

affordable housing (average unit price between

USD200,000 and USD350,000).

Global credit crunch putting strain on

domestic liquidity

Given the prevailing negative real interest rate

environment, bank deposit growth has not kept

pace with loan growth, while the global credit

crunch has placed wholesale funding under

pressure. However, the credit squeeze in the UAE,

unlike the US, is driven by strong credit demand

rather than equity erosion. Furthermore, since

discussion of currency revaluation has subsided,

banks have witnessed an outflow of speculative

money, which is putting additional strain on the

system. The situation has been further exacerbated

by heightened risk perception surrounding the

UAE and Dubai specifically over the past few

months, with CDS spreads widening to 470bp

which is in line with Romania (Baa31/BBB-

/BBB) and El Salvador (Baa3/BB+/BB+). Even

more peculiar are the CDS levels of Aa2/AA rated

Abu Dhabi and Qatar: they trade wider than

Poland, which is rated up to three notches lower.

While our estimated Dubai external debt/GDP

ratio of 65-70% may raise some concerns, our

Contrary to past trends, in most instances rental income no longer fully covers the mortgage payment

Apartment % ofTotal Av. Unitprice USD Av. PriceUSD/sq m Av. Apt.size/sq m Down-pmtUSD Monthlypmt USD Av. Monthlyrental USD Av. RentUSD/sq m pa Rentalyield

Dubai Investment Park 11% 238,158 3,779 63 23,816 1,727 1,878 358 9.5%Impz 3% 316,727 4,662 68 31,673 2,296 - - -Downtown Jebel Ali 3% 333,978 4,028 83 33,398 2,421 - - -Internat ional City 3% 343,869 3,216 107 34,387 2,493 - - -Jumeirah Village 6% 358,469 3,477 103 35,847 2,599 - - -Dubailand 13% 1,391,546 14,558 96 139,155 2,749 - - -Dubai Silicon Oasis 3% 476,310 3,345 142 47,631 3,453 - - -Jumeirah Lake Towers 12% 522,883 4,970 105 52,288 3,791 3,496 399 8.0%The Greens 1% 576,307 6,559 88 57,631 4,178 3,542 484 7.4%Emirates Living 3% 727,078 6,304 115 72,708 5,272 3,833 399 6.3%Dubai Marina 15% 762,622 6,345 120 76,262 5,529 3,965 396 6.2%DIFC 1% 1,014,375 9,561 106 101,438 7,355 - - -Culture Village 1% 1,128,325 6,377 177 112,832 8,181 - - -Business Bay 4% 1,323,853 6,438 206 132,385 9,598 - - -

Downtown Burj Dubai 16% 1,330,508 12,894 103 133,051 9,647 3,529 410 3.2%Palm Jumeirah 4% 1,508,397 7,819 193 150,840 10,936 5,467 340 4.3%Weighted average 705,171 6,266 113 70,517 5,113 - 388 5.2%

VillasDubai Marina 3% 841,941 6,884 122 84,194 6,104 - - -Jumeirah Village 8% 892,837 3,477 257 89,284 6,473 - - -Al Furjan 14% 1,504,725 4,439 339 150,472 10,910 - - -Dubai Investment Park 7% 1,630,622 3,688 442 163,062 11,823 7,902 214 5.8%Jumeirah Park 6% 1,630,629 4,990 327 163,063 11,823 - - -Jumeirah Golf Estates 1% 2,132,999 5,550 384 213,300 15,465 - - -Dubailand 31% 2,299,033 5,386 427 229,903 16,669 - - -Arabian Ranches 8% 2,710,654 6,078 446 271,065 19,653 9,371 252 4.1%Emirates Living 11% 3,082,441 6,230 495 308,244 22,349 13,545 329 5.3%Palm Jebel Ali 3% 3,405,558 6,435 529 340,556 24,691 - - -Palm Jumeirah 8% 7,756,279 11,474 676 775,628 56,236 14,038 249 2.2%

Weighted average 2,556,169 5,690 421 255,617 18,533 11,346 279 4.0%

Total weighted average 981,237 6,180

Note: for monthly mortgage payments we assume 10% down-payment, 7.5% mortgage rate, and a 20-year tenureSource: HSBC Research, Better Homes


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economist, Simon Williams, and head of credit

research, Chavan Bhogaita, believe market

sentiment is over-exaggerated (please refer to

Overdone, 25 September 2008).

Out of step (five-yr CDS)

0

100

200

300

400

500

0

100

200

300

400

500

Source: HSBC

That does not, however, negate the fact that

liquidity in the system is now coming under

strain. As highlighted in the following chart, this

is clearly demonstrated by the increasing spread

between EIBOR and LIBOR, with the domestic

cost of borrowing on an upswing. Although the

UAE Central Bank recently announced a

USD13.6bn liquidity injection, the terms on

which banks could tap this facility were rather

onerous, as the CBU weighs inflationary pressure

against growth.

Credit squeeze clearly demonstrated by widening spreadbetween LIBOR and EIBOR

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

LIBOR 3M EIBOR 3M

Source: Reuters

Upward repricing of mortgage ratesand lower LTVs to put further

pressure on demand

Total UAE mortgage book in USDm

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2008e 2009e 2010e

Units to be delivered 2008-10 New launches 2008-10

On old units

10%

14%

18%

22%

26%

30%

Mort gage to GDP

Source: Central Bank data, HSBC estimates

We estimate that the UAE mortgage book will

grow by roughly 330% to USD70bn, or 26% of

GDP, by the end-2010. While our estimated

mortgage/GDP ratio is relatively low, given the

current liquidity strain, mortgage rates are likely

to come under upward pressure. Furthermore, in

light of heightened risk perception surrounding

the real estate sector, banks are likely to lower

mortgage LTVs. Early evidence suggests that this

has already begun. For instance, ADCB recently

revised its mortgage rates upward by 50bp, while

Tamweel plans to increase its rates to 8.4% from

c7.4%. Furthermore, HSBC Home Finance

department recently reduced its mortgage LTVs

from 85% to 60% on apartments and 70% on

villas. Tamweel and Amlak also reduced their

LTVs from 90% to 75% and 65%, respectively.

Additionally, anecdotal evidence suggests that the

spread between mortgage providers property

valuations and actual property prices has widened

significantly. This means that LTPs are

increasingly falling below LTVs, putting further

pressure on demand.


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Current rental yields suggest possibleprice falls of up to 22% in off-plan

units and 12% in ready units

The central issue is no longer supply dynamics. Our

analysis shows that the market in Dubai will remain

tight at least until 2010. Also, as we mentioned in

our previous reports, the government can manage

supply through its direct and indirect ownership in

Dubais largest developers. As the following chart

shows, we estimate that roughly 90% of upcoming

supply in Dubai is controlled by Nakheel, Dubai

Holding, and Emaar.

Three largest developers control 90% of upcomingsupply (units)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2008 2009 2010

Nakheel Dub ai Ho ld ing Emaar Other


The main concern now is demand, which is being

undermined by several factors. Price appreciation is

breaching affordability, as illustrated by the

compression in rental yields. This will be further

amplified by upward pressure on mortgage rates anddeclining LTVs. The situation has not been helped

by the recent stock markets decline, which has

highlighted the fact that the region is not immune to

global trends, whether in equity, debt, or property.

The fall-out from the decline is wealth destruction

and risk aversion, which add to liquidity constraints.

All this, in combination with the weeding-out of

speculatively driven demand and incessant corporate

scandals, is bound, in our opinion, to lead to some

weakness in property prices.

But not all properties are created equal: we draw a

specific distinction between off-plan and ready

units, and break it down further by segment. In

our opinion, the off-plan market will be the

hardest hit and the first to be affected, given the

high level of speculation. On the other hand, we

believe that ready units will be supported by

demand, and any weakness will therefore be less

pronounced. The fall in prices should be limited to

the level where rental yields are at the mortgage

rate or at a slight discount, which will vary from

segment to segment. Ideally luxury developments

should command a premium or in other words a

lower yield. Villas should be the least affected

given their scarcity (we estimate that such units

account for roughly 20% of supply).

The table on the following page illustrates the

potential price change based on our estimate of a

fair discount of rental yields and the mortgage

rate, depending on the unit and segment. We haveused discounts of 100bp for affordable housing,

150bp for mid-range and 200bp for high-end; for

villas we add another 150bp to the discount

applied to apartments. Although overall we

estimate that average prices could decline 12% for

apartments and 8% for villas, the table on the

following page shows that in certain areas there is

still room for further price appreciation.

According to our calculation, Downtown Burj

Dubai and Palm Jumeirah are likely to be thehardest hit.


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As we stated above, we believe any price weakness

in off-plan units will be more severe. Ideally, the

discount to ready units should be equivalent at least

to the amount of rent payable until delivery . We

derive a weighted rental sum until year-end 2010 of

USD88,000 for apartments and USD233,000 forvillas, based on forecast deliveries. On this basis, we

estimate a potential price decline of around 22% for

apartments and 16% for villas. However, this is

assuming Islamic financing (ie, where no mortgage

payments other than the initial down-payment are

made until delivery), whereas conventional

financing should command a higher discount as both

rental and mortgage payments would have to be

made simultaneously.

In Abu Dhabi the market is tighter than Dubai and

prices are lower; however, most properties in Abu

Dhabi are off-plan, ie, in the segment most

vulnerable to a downturn. We therefore believe

that any price weakness in Dubai will be reflected

in Abu Dhabi, in terms of its severity.

We stress that our analysis is only an indication.

Arguably, investors should hold on to their

property as long as rental yields cover most of the

mortgage payment. However, markets do not

always act rationally, and a slight softening in

prices could lead to panic selling. Furthermore,

given the tightness in the market, we assume that

rental rates will remain stable and will not reflect

any downturn in property prices. If rentals do

decline, then the price weakness should be more

pronounced. It is also important to point out that

current rental yields are higher than our numbers

for ready units, which, in most instances, were

Dubai residential market potential price change

Apartments Change Av. Unit priceUSD

Av. Apt.size/sq m

Av. PriceUSD/sq m

Av. RentUSD/sq m

Rental yield Discount tomortgage rate

Dubai Investment Park 238,158 63 3,779 358 9.5%Dubai Investment Park adj. 46% 346,783 63 5,503 358 6.5% 1.0%Jumeirah Lake Towers 522,883 105 4,970 399 8.0%Jumeirah Lake Towers adj. 34% 699,234 105 6,646 399 6.0% 1.5%The Greens 576,307 88 6,559 484 7.4%The Greens adj. 23% 708,469 88 8,063 484 6.0% 1.5%Dubai Marina 762,622 120 6,345 396 6.2%Dubai Marina adj. 4% 792,929 120 6 ,597 396 6.0% 1.5%Emirates Living 727,078 115 6,304 399 6.3%Emirates L iv ing adj . 5% 766,532 115 6,646 399 6.0% 1.5%Downtown Burj Dubai 1,330,508 103 12,894 410 3.2%Downtown Burj Dubai ad j. -42% 770,065 103 7,463 410 5.5% 2.0%Palm Jumeirah 1,508,397 193 7,819 340 4.3%Palm Jumeirah adj . -21% 1,192,856 193 6,184 340 5.5% 2.0%Weighted average 835,311 113 7,422 388 5.2% Weighted average adj. -12% 736,727 113 6,546 388 5.9% 1.6%

VillasDubai Investment Park 1,630,622 442 3,688 214 5.8%Dubai Investment Park adj. 16% 1,896,466 442 4,290 214 5.0% 2.5%Emirates Living 3,082,441 495 6,230 329 5.3%Emirates L iv ing adj . 17% 3,612,052 495 7,301 329 4.5% 3.0%Arabian Ranches 2,710,654 446 6,078 252 4.1%Arabian Ranches adj . -8% 2,498,968 446 5,603 252 4.5% 3.0%Palm Jumeirah 7,756,279 676 11,474 249 2.2%Palm Jumeirah adj . -38% 4,813,171 676 7,120 249 3.5% 4.0%Weighted average 2,914,630 421 6,917 279 4.0% Weighted average adj. -8% 2,692,584 421 6,390 279 4.4% 3.1%

Off-plan apartments -22% 648,874

Off-plan vi llas -16% 2,459,161



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purchased at much lower prices. This will

increase the propensity to hold, and further limit

any downturn.

Our bottom-line view is that price softening in the

real estate market is not only healthy, but

necessary at this point for the sustainability of the

economic story.

Long-term demand story still intact

Our economist, Simon Williams, and strategist,

John Lomax, are both strong believers in the

regions long-term domestic demand story (please

refer to The revised case for GCC equity markets, 1

October 2008). John argues that, even if the current

financial crisis is resolved, US and global growth is

set to weaken. It therefore makes sense to focus on

areas with a particularly good domestic demand

story and for most reasonable oil price scenarios

there are few domestic demand plays that look

much better than the Gulf. Based on current

infrastructure plans, the breakeven oil price required

for fiscal balance is highest in Saudi Arabia

(USD55/bbl). MEED projects that about USD2.2trn

will be spent on infrastructure over what we have

interpreted as the next five years. At the same time,

the secular growth story could be enhanced by

global de-bottlenecking. Slower global growth and a

reduction in infrastructure spending ought to help

on the Gulf supply side, which could play out in

lower prices and better access to input materials

eg, steel prices could fall significantly. It could also

help, for example, on the contracting side, but there

are clearly other possible examples too. All this

ought to facilitate project implementation.

To some extent, the GCC (especially Dubai) is a

derived play on global growth partly in terms of

visitor flows and partly in terms of demand for

property (where negative wealth effects for

potential UK buyers, for example, will take a toll).

For the UAE, tourism flows are, indeed, likely to

be dampened, so hotels may have a tougher time,

although it is worth noting significant levels of

intra-Middle Eastern tourism. Nevertheless, the

corporate outlook actually has scope to be more

buoyant as the business sector seeks to

compensate for the downturn in demand

elsewhere by tapping into the Middle Eastern

growth story. New immigrants will still need

somewhere to live if they do not wish to buy,

expect a vibrant buy-to-let market to continue to

develop. In this context, rental yields remain

attractive relative to local (or indeed international)

returns on cash. This could be motivated either by

the high-net-worth sector or by some form of

local institution. Overall there is very little sign of

a slowdown in GCC macro growth at this juncture

and overall we expect the figures to hold up.

Furthermore, the oil price has remained high

despite current financial market trauma. We

recently favoured a play on cyclical weakness in

oil prices, but are increasingly drawn back to the

secular story of oil prices staying higher forlonger. This is important because although

regional growth in no way requires oil prices at

USD100/bbl, equities have tended to perform

badly at times when oil prices have been falling

as shown in the chart below. If we are right in

considering that oil prices are now more stable,

this should allow international investors to look at

the region through a more constructive lens.

GCC ex Saudi Index vs oil prices

0

200

400

600

800

1000

1200

0

20

40

60

80

100

120

140

160

MSCI GCC COUNTRIES X SAUDI ARABIA $

London Brent Crude OilIndex U$/BBL

0

200

400

600

800

1000

1200

0

20

40

60

80

100

120

140

160

MSCI GCC COUNTRIES X SAUDI ARABIA $

London Brent Crude OilIndex U$/BBL

Source: Thomson Financial Datastream


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Valuation

Under our research model, for stocks with a

volatility indicator, the Neutral band is 10

percentage points above and below the hurdle rate

for UAE stocks of 9.5%. This translates to a

Neutral band of -0.5% to 19.5% around the

current share price. Our 12-month target prices of

AED16.0, AED13.9, and AED9.4 for Aldar,

Emaar, and Sorouh imply a potential total return

of 158%, 136%, and 80%, respectively, which are

above the Neutral band. Therefore, we reiterate

our Overweight (V) rating on all three stocks.

We retain our Overweight (V) rating

on Aldar, Emaar, and Sorouh but cut

our target prices to AED16.0,AED13.9, and AED9.4, respectively

We value real estate companies using a

combination of DCF analysis and land valuation.

Where the company has a final master plan, we

use DCF. Otherwise, we use land valuation only.

To address macro concerns, based on the analysis

described below, we applied specific probabilities

to each companys projects and land valuations.

As shown in the table below, we apply the lowest

probabilities to projects that have the lowest

visibility and are most vulnerable to any real

estate market downturn. We also revise our beta

for Aldar from 1.3 to 1.4, for Sorouh from 1.0 to

Bottom up

It is not a potential price correction, but rather the long-term

demand story, that will ultimately drive valuations, we believe

Adar still our preferred pick, although Emaar is the most immune

to any UAE property market downturn, while Sorouh is the most

susceptible despite having the highest earnings visibility

Our new target prices for Aldar, Emaar, and Sorouh, imply 24%,

10%, and 35% discount to 2008 NAV, respectively

Valuation: Emaar most immune and Sorouh most vulnerable to any market deterioration

AED per share ____________Aldar____________ ____________ Sorouh ____________ _____________Emaar ____________Valuation Probability Current Valuation Probability Current Valuation Probability Current

Projects under development 10.7 80% 8.6 3.0 100% 3.0 6.6 90% 5.9Highly probable projects 4.6 70% 3.2 5.0 70% 3.5 6.5 60% 3.9

Future projects 2.4 50% 1.2 - - 3.4 50% 1.7Land 7.6 60% 3.0 7.3 40% 2.9 - -Investments - - - 2.4 100% 2.4Total value 25.3 16.0 16.3 9.4 18.9 13.9



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1.5, and for Emaar from 1.0 to 1.2 to reflect

increased market volatility. However, we maintain

our price assumptions, which are already at a

c20%-30% discount to current market price, and

therefore take into account any potential price

weakness. Also, given the companies high

earnings visibility, with future revenues reflecting

pre-sales, we reiterate our earnings forecasts.

Valuation: Emaar most immune and

Sorouh most vulnerable to anymarket deterioration, in our view

Perceptions that the real estate sector in the UAE

and Dubai in particular is set for a correction

have hardened in recent weeks, as has scepticism

about project execution. In large part the trend

reflects a global repricing of risk, but in our view,

real estate names have been oversold. Based on

our analysis, it seems that the market is only

factoring in those projects that are most certain

(ie, projects under development which havealready achieved considerable sales). Given that a

potential price correction would have only a

limited impact on pre-sold projects, this leads us

to believe that the market is more concerned about

the long-term demand story. To better understand

the market-implied valuation, we have broken the

companies projects down into four categories

according to their visibility. (1) Projects under

development: those launched with considerable

pre-sales. (2) Highly probable: projects that have

been master-planned /are to be launched soon /are

of a strategic nature. (3) Future projects: those still

at the concept phase. (4) Land: unserviced raw

land/not master-planned.

In terms of valuation, we believe that Sorouh is

the most susceptible to any real estate market

deterioration, given that roughly half of its value

comes from Sheih Al Sedira (SAS) land.

Although we currently value SAS veryconservatively at AED400 per sq m, its isolated

location and vast size mean that, in the event of a

slowdown, that land could be worth close to

nothing. Nonetheless, we believe Sorouhs other

developments, such as Shams and Lulu, which are

located just off the Abu Dhabi city coast, will

always have high intrinsic value.

Emaar, on the other hand, is the most immune to a

property market downturn, in our opinion. The

companys most valuable project, Downtown Burj

Dubai (AED7.5 per share), is centrally located

(between DIFC and Business Bay), and as suchshould always be in demand. The companys

growing investment property portfolio further

supports its valuation, while its overseas

operations, which are gaining significance,

provide a hedge against any downturn in the

UAE. Although our top-down analysis suggests

that Burj Dubai is at risk of a correction, the effect

on our valuation should be limited given our

conservative price assumptions (at a 30% discount

to current reported prices). Furthermore, Emaarhas already pre-sold roughly one-third of the

project. That said, however, the effect on future

projects would be more pronounced.

Aldars valuation is also more robust, as most of

its land bank is centrally located. In our opinion,

the huge pent-up demand in Abu Dhabi, as well as

the need for a new housing stock, should support

projects currently under development. Also,

CBREs land valuation, which represents a

substantial part of Aldars value, is fairly

conservative (AED1,300 per sq m compared with

current transactional prices of AED7,000 per sq

m), and as such already discounts a potential

downturn, in our view. Additionally, the

companys close relationship with the government

and the strategic nature of some of its projects,

(eg, Yas Island), should provide further comfort.


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Our new target prices for Aldar, Emaar,and Sorouh, imply 24%, 10%, and 35%

discounts to NAV, respectively

TPs implied discount to 2008e NAV (AED per share)

0

5

10

15

20

25

Emaar Aldar Sorouh

0%

5%

10%

15%

20 %

25%

30 %

35%

40 %

NAV TP Imp lied d isco unt t o NAV


For Aldar and Sorouh, our NAV calculation

includes net land value (land valuation minus land

recognised on the companies books) and equity

(book value plus sukuk). In line with our DCF, we

use CBREs latest land value for Yas Island,excluding plot sales, which we now incorporate

into our model. For SAS, we use our own land

valuation. We base the value of Mina Zayed and

Lulu Island land on a profit-sharing scenario. For

Emaar, since the companys land is not

recognised on its books, we value it at fair value

using the residual method. We assume a

developer margin of 20% on revenues and worked

back to the value of land on the basis of prevailing

market prices and costs. We also marked the valueof associates and subsidiaries to market. We

revalued the companys investment property

portfolio (malls, offices and hotels), which is

recognised at cost. To value the investment

properties, we use a capitalisation rate of 7.4%

(WACC terminal growth rate), while to

calculate NOI (net operating income), we apply

margins of 75% for retail and office, and 30% for

hotels. On our estimates, investment properties

have a potential for revaluation of AED21bn, tobe released by 2010 (it includes land pertaining to

investment properties). This is in addition to the

AED13bn already recognised on the balance sheet

at cost. Please note that Emaar has not yet

reflected any fair-value gains.

Earnings visibility: Sorouh highest,

Aldar lowest

Given that the revenues to be recognised over the

coming two years reflect sales booked this year

and last, Sorouhs sales-based business model

(sell 80%, hold 20%) offers the highest earnings

visibility. As the following table shows, Sorouhhas already booked total sales of cAED27bn, of

which cAED22bn have yet to be recognised. By

contrast Aldars business model, which is geared

more towards investment properties (sell 60%,

hold 40%) and staggered land sales, offers the

lowest earnings visibility (AED6bn of revenues to

be recognised). Emaars more mature business

model, which is based on strong sales and

growing rental business (ie, a recurring income

stream), also offers high earnings visibility.

Pre-sales offer high earnings visibility

AEDbn Total sales Revenuesrecognised

Revenue to berecognised

Aldar 11.1 5.1 6.0Sorouh 26.5 4.6 21.9Emaar 36.2 25 11.2

Note:Total sales and revenues since 2006; for Emaar revenue to be recognised representsroughly 12,400 units in the UAESource: Company data, HSBC Research

Emaars overseas operations are gaining significance

Unitslaunched

Units sold %Sales

Emaar UAE 36,266 32,151 92%

Emaar InternationalEmaar MGF India 6,391 4,581 72%Emaar Egypt 1,757 1,178 67%Emaar Pakistan 1,331 884 66%KAEC, Saudi Arabia 1,017 764 75%Emaar Middle East, SaudiArabia

567 367 65%

Emaar Syria 455 318 70%Emaar Morocco 316 218 69%Emaar Turkey 208 141 68%Total international 12,042 8,451 70%

Total units 48,308 40,602 84%

Source: Company data


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Domestic credit squeeze has limitedimpact on Aldar, Sorouh and Emaar

Although the global credit crunch is placing a

strain on domestic liquidity, we do not expect

Aldar, Sorouh, and Emaar to face any financing

problems, at least in the near term. As such, we

expect project execution to remain on track.

Aldars decision to raise substantial financing last

year and earlier this year was timely and entailed

competitive terms. The company has secured

sufficient financing to fund its medium-term

investment needs. Currently, Aldar has an unused

AED13bn credit facility and is unlikely to face

any problems drawing that cash down, as roughly

AED9bn was issued by the government of Abu

Dhabi. We estimate that Sorouhs sales-based

business model will generate enough positive cash

flows to fund its cash needs over the next two

years. For Emaar, meanwhile, rental income from

upcoming investment properties and a stronger

contribution from overseas operations should help

reduce its cash requirements.

We believe Aldar, Sorouh, and Emaar will not face any financing problems, at least in the near term (H1 2008)

AEDbn Grossdebt

Cash Net debt Unusedfacility

0-1 Yr 1-3 Yrs 3 yrs > Net cash Flowfrom H208 to 09

PositionFY09e

Emaar 8.9 7.4 1.5 1.3 7.5 -2.2 3.915% 84% 0%

Aldar 15.1 16.1 -1 13 1 4.5 9.6 -8.3 6.87% 30% 64%

Sorouh 4.2 7.2 -3 0.1 0.1 4 0.4 7.52% 2% 95%

Total 28.2 30.7 -2.5 13 2.4 12.1 13.6 -10.1 18.2

Note: for Aldar, convertibles are not included in debt. Data as of 30 June 2008, except for Sorouh where it includes recently issued sukuk. Cash flows are HSBC esti matesSource: Company data, HSBC estimates


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Aldar valuation breakdown (AED per share) Sorouh valuation breakdown (AED per share) Emaar va

8.6

3.21.2

3.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Definite projects

(under dev.)

Highly probable

projects

Future projects Land

3.0

3.5

2.9

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Definite projects

(under dev.)

Hi ghly probabl e projects Land

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

D

Source: HSBC estimates Source: HSBC estimates Source: HSB

HSBC Real Estate Valuation Matrix

Projects under development Highly probable Future projects Land InvestmenLaunched with considerable

pre-sales

Master-planned/to be launched

soon/of a strategic nature

Projects still at the concept

phase

Unserviced raw land/no master

plan

Strategic

entities

Valuation visibility High LowPrice change impact Low HighSales volume Impact Low High

Aldar 8.6 3.2 1.2 3.0 - Sorouh 3.0 3.5 - 2.9 - Emaar 5.9 3.9 1.7 - 2.4

Aldar Al Raha Beach (East) Al Raha Beach (West) Motor World Mina Zayed (50%)Central Market Yas Island Yas Island (62%)Al Raha GardenYas Island

Sorouh Khalidiya Village Lulu Island SAS Land- 13m sq mAl Oyoun Village Al Mashthal SAS Land- 33m sq m

Saraya Shams Phase 2Shams Phase 1 & 2 Al Ghadeer Phase 2Al Ghadeer Phase 1 Gateway HotelGolf GardensAL Ain Comm CentreAl Nagfa Hotel

Emaar Burj Dubai Downtown Burj Dubai Downtown Al Usailly KAEC, SaEmirates Hills Al Mashraf Height Emaar International (40%) Emaar MGDubai Marina Bawadi Amlak FinaBawadi Umm Al Quain Marina Dubai BanUmm Al Quain Marina Emaar International (40%)Emaar International (30%)

Source: Company, HSBC Research


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Risks specific to Aldarand Sorouh

Unprecedented cost inflation: Given the

extraordinary amount of construction activity in

the region, supply bottlenecks are bound to

occur, created by factors ranging from salary

hikes to appreciation in raw material costs. This

would have a negative effect on Aldar and

Sorouhs margins and, hence, their valuations.

Execution risk: The sheer scale of

development at Aldar and Sorouh will stretch

management and operational capacity,

introducing the risk of delays and/or even

project cancellation.

Governance: Aldar and Sorouh are still

operating in an underdeveloped regulatory

environment, where minority interests can

be overlooked.

Concentration risk: since all of Aldar and

Sorouhs projects are in Abu Dhabi, their

exposure to any downturn in the property

market there is very high.

Emaar-specific risks

Unprecedented cost inflation: Given the

extraordinary amount of construction activity

in the region, supply bottlenecks are bound to

occur, created by factors ranging from salary

hikes to appreciation in raw material costs.

This would have a negative effect on Emaars

margins and, hence, its valuation.

Execution risk: The sheer scale of

development at Emaar will stretch

management and operational capacity,

introducing the risk of delays and/or even

project cancellation.

Governance: Emaar still operates in an

underdeveloped regulatory environment,

Real Estate Comparables

Bloomberg Company Region Rating Currency Closing Price MCap (USDm) PE 08 PE 08 P/NAV

EMAAR UH Emaar Propert ies PJSC United Arab Emirates Overweight (V) AED 5.9 9,866 5.1 3.5 0.4ALDAR UH Aldar Proper ties Uni ted Arab Emirates Overweight (V) AED 6.2 4,216 4.7 4.0 0.3SOROUH UH Sorouh Real Estate United Arab Emirates Overweight (V) AED 5.2 3,562 8.1 7.4 0.3DLFU IN DLF Ltd India Underweight (V) INR 308.9 19,115 6.70 6.66 0.69UT IN Uni tech Ltd India Underweight (V) INR 94.5 5,896 9.19 6.56 0.51IBREL IN Indiabulls Real Estate India Overweight (V) INR 118.2 1,648 7.11 6.90 0.563383 HK Agile China NR HKD 3.4 1,623 2.91 5.75 0.201109 HK CRL China NR HKD 8.1 4,883 19.47 12.13 0.44688 HK COLI China NR HKD 9.0 9,057 12.80 9.86 0.492007 HK C G China NR HKD 2.3 4 ,740 7.31 5.75 0.30

272 HK SOL China NR HKD 3.0 1,610 5.24 6.37 0.21TMGH EY TMG Egypt Overweight (V) EGP 4.3 2,755 6.59 2.99 NAOCDI EY SODIC Egypt Overweight EGP 74.3 683 13.08 8.83 NA101 HK Hang Lung Properties Ltd Hong Kong Overweight (V) HKD 15.1 12,224 12.23 10.70 NA83 HK Sino Land Company Ltd Hong Kong Overweight (V) HKD 7.1 7,879 10.34 4.80 NA410 HK Soho China Limited Hong Kong Overweight (V) HKD 2.2 2,524 11.38 1.43 NA1109 HK China Resources Land Hong Kong NR HKD 8.1 4,883 19.47 12.13 0.4612 HK Henderson Land Dev. Hong Kong NR HKD 31.1 8,559 11.42 10.64 0.4683 HK SINO Land Co Hong Kong NR HKD 8.1 5,033 6.74 8.79 0.3616 HK Sun Hung Kai Properties Hong Kong NR HKD 71.0 23,342 12.23 11.14 0.47GTC PW GlobeTrade Centre Poland Overweight (V) PLN 18.0 2,367 9.38 2.39 0.79ECH PW Echo Investment SA Poland Neutral (V) PLN 3.0 841 NA 5.28 0.77

Source: HSBC Research, Bloomberg NR = not rated


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where minority interests can be overlooked.

The shares-for-land-swap deal with Dubai

Holding, which weighed heavily on the stock,

was recently abandoned in favour of the

50/50 joint venture with Bawadi.

Oversupply: while there is a risk of

oversupply in Dubai, we believe the real

estate market will remain strong. However, an

oversupply would have negative implications

on future sales, since it could force Emaar toabandon some projects.

Currency risk: a currency revaluation would

lead to translation losses, since contributions

from foreign subsidiaries, as well as the value

of foreign investments, would decline.

However, part of the losses would be

recouped by foreign investors.


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Aldar financialsAldar income statement (AEDm)

Year to December 2006 2007 2008e 2009e 2010e 2011e 2012e

Sale of land - - 4,469.9 3,004.8 3,310.8 4,236.2 7,120.5Sale of properties - 1,187.3 1,847.1 7,095.6 9,467.9 6,073.4 3,621.8

Rental income 178.3 33.8 121.5 179.6 352.7 649.7 1,661.7Hotel revenue - - - - 84.0 345.5 2,812.4Revenue 187.5 1,226.8 6,438.5 10,280.0 13,215.3 11,304.7 15,216.5

Cost of land - - (1,316.7) (537.6) (537.6) (717.4) (1,420.5)Cost of properties - (648.3) (1,647.5) (5,288.8) (6,798.4) (4,357.5) (2,712.0)Direct rental expenses (156.5) (15.1) (27.6) (26.9) (52.9) (97.4) (249.3)Hotel direct costs - - - - (54.6) (224.5) (1,828.1) (156.7) (666.9) (2,991.8) (5,853.3) (7,443.5) (5,397.0) (6,209.8)% of sales 84% 54% 46% 57% 56% 48% 41%Gross profit 30.8 560.0 3,446.8 4,426.8 5,771.8 5,907.7 9,006.7Margin 16% 46% 54% 43% 44% 52% 59%Operating expenses:SGA expenses (264.3) (402.0) (1,029.5) (1,233.6) (1,585.8) (1,356.6) (1,826.0)Fair value gain on inv properties 1,414.4 1,821.2 2,480.4 3,000.0 3,000.0 3,500.0 3,000.0Other operat ing income - - 60.1 205.6 264.3 226.1 304.3Other income - - 30.1 102.8 132.2 113.0 152.2Other operating expenses - - - - - - -

Operating expenses 1,150.2 1,419.2 1,541.1 2,074.8 1,810.6 2,482.6 1,630.5

EBIT (incl revaluation gain) 1,181.0 1,979.2 4,987.9 6,501.6 7,582.4 8,390.3 10,637.2Margin 630% 161% 77% 63% 57% 74% 70%Net financing cost (6.0) (462.4) (239.7) (871.6) (1,219.7) (1,344.5) (1,346.5)Other fin. Income/charges 74.7 400.9 - - - - -Associate income - 23.7 43.1 - - - -Gain on disposal of subsidiary - - - - - - -Profit before taxes 1,249.7 1,941.3 4,791.2 5,630.0 6,362.7 7,045.8 9,290.7

Income taxes - - - - - - -Minority shareholders' interest - - - - - - -Net profit (loss) 1,249.7 1,941.3 4,791.2 5,630.0 6,362.7 7,045.8 9,290.7Margin 666% 158% 74% 55% 48% 62% 61%

Appropriation of net incomeDividend - - 858.8 1,272.5 1,292.3 1,858.1DPS - - 0.3 0.4 0.4 0.5Payout ratio 0% 0% 15% 20% 18% 20%Basic EPS 1.1 1.7 1.7 1.9 1.9 2.5Number of shares 1,725.0 2,786.5 3,358.1 3,358.1 3,661.9 3,661.9Fully diluted EPS 0.5 1.3 1.5 1.7 1.9 2.5Fully diluted shares 3,661.9 3,661.9 3,661.9 3,661.9 3,661.9 3,661.9

- - - - - - -EBITDA excl reval gains (233.4) 157.9 2,546.3 3,678.3 4,895.0 5,336.3 8,151.6Margin -124% 13% 40% 36% 37% 47% 54%EBIT excl reval gains (233.4) 157.9 2,585.1 3,855.1 5,207.6 5,782.2 8,666.0Margin -124% 13% 40% 38% 39% 51% 57%

Source: Company data, HSBC estimates


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Aldar balance sheet (AEDm)


Current assetsCash and cash equivalents 895.0 7,615.8 9,798.4 7,828.2 5,006.0 1,399.5 (1,391.0)0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Trade & other receivables (current and noncurrent)

181.8 2,372.0 4,619.0 3,592.6 2,566.1 1,539.7 513.2

Receivable from project finance 2.0 3.0 3.0 3.0 3.0 3.0 3.0Development properties 854.3 3,879.9 8,029.1 6,506.2 4,645.1 3,392.3 7,942.7Development work in progress 0.0 0.0 0.0 0.0 0.0 0.0 0.0Short-term investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0Current assets 1933 13,871 22,449 17,930 12,220 6,334 7,068

Investments in associates 120.1 239.0 581.6 581.6 581.6 581.6 581.6Other financial assets 109.7 111.6 113.0 113.0 113.0 113.0 113.0Refundable costs 55.1 80.8 103.4 103.4 103.4 103.4 103.4Other non-current assets 0.0 9.4 58.2 58.2 58.2 58.2 58.2Long-term assets/non current 284.8 440.8 856.3 856.3 856.3 856.3 856.3

Intangible asset 38.1 64.6 73.9 73.9 73.9 73.9 73.9Hotels 0.0 0.0 1,259.6 3,811.0 6,432.9 8,769.2 9,023.4Property, plant and equipment 13.0 487.2 929.1 1,029.5 1,125.0 1,215.7 1,301.9Investment properties 2,839.7 7,851.8 18,792.5 33,494.8 49,818.4 60,475.2 69,790.2Permanent 2,890.8 8,403.6 21,055.1 38,409.2 57,450.2 70,534.0 80,189.5

Total assets 5,108.7 22,715.1 44,360.8 57,195.4 70,526.7 77,724.7 88,113.7

LIABILITIESTrade & other payables 548.6 3,149.3 4,047.6 3,148.1 2,248.6 3,675.6 6,183.4Borrowings-short term 618.3 756.9 0.0 0.0 0.0 0.0 0.0Notes payable 16.3 16.4 15.1 8.5 2.5 0.3 0.0

Current liabilities 1,183.2 3,922.6 4,062.7 3,156.6 2,251.2 3,676.0 6,183.4

Borrowing & long-term debt 16.8 3,633.1 15,709.8 24,709.8 33,709.8 33,709.8 33,709.80.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Obligation under finance lease/ retentions 120.2 312.5 591.9 591.9 591.9 591.9 591.9Other financial liabilities 0.0 293.7 279.4 279.4 279.4 279.4 279.4Advances from customers 513.9 682.7 1,697.4 1,697.4 1,697.4 1,697.4 1,697.4Provision for employee services 3.6 9.0 14.1 14.1 14.1 14.1 14.1Long-term liabilities/non current 654.5 4,930.9 18,292.7 27,292.7 36,292.7 36,292.7 36,292.7

Minority interest in subsidiaries 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Paid-up capital 1,725.0 2,223.1 2,786.4 3,358.0 3,358.0 3,661.7 3,661.7Statutory & other reserves 109.6 2,432.8 4,788.8 7,468.7 7,468.7 10,727.8 10,727.8Retained earnings 1,436.3 3,033.4 7,620.4 12,361.1 17,597.8 23,371.0 31,252.5Shareholder's equity 3,271.0 1,3861.6 22,005.5 26,746.2 31,982.9 37,756.1 45,637.6

Total liabilities and equity 5,108.7 2,2715.1 44,360.8 57,195.4 70,526.7 77,724.7 88,113.7



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Aldar cash flow statement (AEDm)


Operating activities:Net profit before minorities - - 4,941.4 5,630.0 6,362.7 7,045.8 9,290.7Depreciation & amortisation - - 38.8 176.8 312.6 446.0 514.4Change in work ing capital - - (5,499.2) 1,643.2 1,982.2 3,704.0 (1,016.5)Interest income & exp - - 239.7 871.6 1,219.7 1,344.5 1,346.5Interest recd - - 296.5 256.5 181.2 75.1 1.9Interest paid - - (890.7) (1,128.1) (1,400.9) (1,419.6) (1,348.4)Fair value gain on inves tment property - - (2,480.4) (3,000.0) (3,000.0) (3,500.0) (3,000.0)Provision for employee end-of-service benefits - - - - - - -

Net cash generated from operating activities - - (3,353.9) 4,449.9 5,657.4 7,695.8 5,788.6

Investment activities:Capex (excl hotel properties) - - (18,568.4) (11,852.3) (13,473.6) (7,306.8) (6,465.0)Additions to hotel properties - - (1,275.5) ( 2,678.6) (2,880.0) (2,723.0) (704.8)Additions to investment properties - - - - - - -Associates - - (43.1) - - - -Subsidiary - - - - - - -Additions to development WIP - - - - - - -Acquisition/sale of financial assets - - - - - - -Movement in >3-month bank deposits - - - - - - -

Net cash generated from investment activi ties - - (19,887.0) (14,530.9) (16,353.6) (10,029.8) (7,169.9)Financing activities:Dividends paid - - - (889.2) (1,126.0) (1,272.5) (1,409.2)Share issue - - 3,562.8 - - - -Bank borrowings raised - - - - - - -Net share issuance fee - - - - - - -Borrowings repaid - - 11,319.8 9,000.0 9,000.0 - -

Others - - - - - - --

- - - - - - -

Net cash generated from financing activities - - 14,882.6 8,110.8 7,874.0 (1,272.5) (1,409.2)Net addition (deduction) in cash - - (8,358.3) (1,970.2) (2,822.2) (3,606.5) (2,790.5)Cash at beginning of fiscal year - 6,799.4 6,799.4 (1,558.9) (3,529.1) (6,351.3) (9,957.8)Cash at end of f iscal year - 6,799.4 (1,558.9) (3,529.1) (6 ,351.3) (9,957.8) (12,748.3)

Source Company data, HSBC estimates


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Sorouh income statement (AEDm)

Year to December 2006 2007e 2008e 2009e 2010e 2011e 2012e

Land sale - 2,000.8 2,956.2 2,822.1 1,914.2 1,210.3 1,931.2Contract revenue - - - - - - -Sale of properties - - 533.0 3,163.4 12,901.8 4,938.8 5,922.9Rental income 630.2 320.2 67.0 80.6 227.2 540.2 717.3Hotel revenue - - - - - 808.6 1,126.0

- - - - - - -Revenue 630.2 2,321.0 3,556.2 6,066.1 15,043.3 7,498.0 9,697.3

Land development cost - (848.4) (1,137.8) (1,390.3) (695.6) (63.2) (94.8)Construction cost (incl landdevelopment)

- - (358.8) (2,256.7) (10,666.3) (2,946.4) (2,883.4)

Direct rental expenses (643.1) (152.9) (16.3) (16.1) (45.4) (108.0) (143.5)Hotel direct costs - - - - - (525.6) (731.9) (643.1) (1,001.3) (1,513.0) (3,663.2) (11,407.3) (3,643.3) (3,853.6)% of sales 102% 43% 43% 60% 76% 49% 40%Gross profit (12.9) 1,319.6 2,043.2 2,402.9 3,636.0 3,854.7 5,843.7Margin -2% 57% 57% 40% 24% 51% 60%Operating expenses:Selling and marketing expenses (63.7) (165.1) (322.2) (303.3) (752.2) (374.9) (484.9)General and administrative expenses (53.9) (99.8) (229.1) (252.0) (272.2) (291.2) (225.7)Other operating income - - - - - - -

Fair value gain on financial 650.5 - - - - - -Operating expenses 532.8 (264.9) (551.3) (555.3) (1,024.3) (666.1) (710.6)EBIT (incl revaluation gain) 519.9 1,054.7 1,492.0 1,847.6 2,611.7 3,188.6 5,133.2Margin 82% 45% 42% 30% 17% 43% 53%Net financing cost 558.3 70.0 (55.5) (101.3) (158.1) (146.7) (120.5)Other fin. income/charges 9.1 18.2 36.8 - - - -Gain/(loss) on financial assets (111.7) 96.0 24.7 - - - -Profit before taxes 975.5 1,257.4 1,541.2 1,746.3 2,453.6 3,041.9 5,012.7Income taxes - - - - - - -Minority Shareholders' interest - - (70.5) - - - -Net Profit (loss) 975.5 1,257.4 1,611.7 1,746.3 2,453.6 3,041.9 5,012.7Margin 155% 54% 45% 29% 16% 41% 52%Appropriation of net incomeDividend - 250.0 300.0 402.9 436.6 613.4 760.5

DPS - (0.10) 0.12 0.16 0.17 0.25 0.30Payout ratio - -26% 0.2 0.3 0.3 0.3 0.3Basic EPS 0.4 0.5 0.6 0.7 1.0 1.2 2.0Number of shares 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0Fully diluted EPS 0.4 0.5 0.6 0.7 1.0 1.2 2.0Fully diluted shares 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0

- - - - - - -EBITDA excl reval gains (130.5) 1,054.7 1,493.5 1,852.6 2,619.1 3,198.2 5,144.8Margin -21% 45% 42% 31% 17% 43% 53%EBIT excl reval gains (130.5) 1,054.7 1,495.0 1,857.6 2,626.5 3,207.8 5,156.4Margin -21% 45% 42% 31% 17% 43% 53%


Sorouh financials


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Sorouh balance sheet (AEDm)


Current assetsCash and cash equivalents 1,453.7 1,457.7 5,776.2 3,338.0 4,099.3 4,219.3 5,187.2Assets held for sale 0.0 614.8 417.2 417.2 417.2 417.2 417.2Trade & other receivables 251.8 2,080.3 3,042.1 2,366.1 1,690.0 1,014.0 338.0

Development properties 414.5 1,082.1 6,247.0 9,403.4 4,237.5 6,457.1 7,689.7

Short-term investment 0.0 126.8 85.2 85.2 85.2 85.2 85.2Current assets 2,544 5,362 15,568 15,610 10,530 12,193 13,718

Investments in associates and LTinvestments

139.3 174.0 256.2 256.2 256.2 256.2 256.2

Other non-current assets 297.2 59.8 140.7 140.7 140.7 140.7 140.7Long-term assets/non current 436.5 233.9 396.9 396.9 396.9 396.9 396.9

Intangible asset 345.4 345.4 345.4 345.4 345.4 345.4 345.4Hotels 0.0 0.0 479.8 1,477.7 2,539.9 2,927.4 3,081.8Property, plant and equipment 6.2 18.0 36.0 61.0 83.6 103.9 122.3Investment properties 834.7 853.0 855.6 855.6 2,728.5 4,073.7 5,036.7Investment properties underdevelopment

184.7 408.4 1,085.5 3,516.6 3,493.7 3,491.4 5,246.9

Permanent 1,371.0 1,624.7 2,802.3 6,256.3 9,191.1 10,941.7 13,833.1

Total assets 4,351.2 7,220.7 18,767.3 22,263.6 20,117.6 23,531.8 27,947.7

LIABILITIESTrade & other payables 743.7 2,177.3 8,541.3 10,694.2 6,531.2 7,516.9 7,680.6

Borrowings short term 11.7 42.6 116.0 116.0 116.0 116.0 116.0Notes payable short term 71.5 208.5 178.5 178.5 178.5 178.5 178.5Current liabilities 827.0 2,428.4 8,835.8 10,988.8 6,825.8 7,811.4 7,975.1

Borrowing & long-term debt 29.3 190.2 4118.7 4118.7 4118.7 4118.7 4118.7Obligation under finance lease 23.8 0.0 0.0 0.0 0.0 0.0 0.0

Notes payable long term 0.0 135.9 135.9 135.9 135.9 135.9 135.9Provision for employee services 0.9 3.3 5.5 5.5 5.5 5.5 5.5Long-term liabilities/non current 54.0 329.3 4,260.0 4,260.0 4,260.0 4,260.0 4,260.0

Minority interest in subsidiaries 0.0 0.0 (70.5) (70.5) (70.5) (70.5) (70.5)Paid-up capital 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0Statutory & other reserves 92.3 218.0 216.7 216.7 216.7 216.7 216.7

Retained earnings 878.0 1,745.0 3,025.3 4,368.7 6,385.7 8,814.2 13,066.4Shareholders equity 3,470.2 4,463.0 5,671.5 7,014.9 9,031.9 11,460.4 15,712.6

Total liabilities and equity 4,351.2 7,220.7 18,767.3 22,263.6 20,117.6 23,531.8 27,947.7



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Sorouh cash flow statement (AEDm)


Operating activities:Net profit before minorities 975.5 - 563.6 1,746.3 2,453.6 3,041.9 5,012.7Depreciation & amortisation 1.4 - 1.5 5.0 7.4 9.6 11.6Change in working capital 31.7 - (933.2) (327.5) 1,678.9 (557.9) (392.9)Interest income & exp (558.3) - 81.7 101.3 158.1 146.7 120.5Interest recd 547.9 - 55.9 174.0 117.2 128.6 154.7Interest paid - - (137.6) (275.3) (275.3) (275.3) (275.3)Fair value gain on investment property (650.5) - - - - - -Impairment of goodwill 242.9 - - - - - -Provision for employee end of service

benefits399.8 - - - - - -

Net cash generated from operatingactivities

1,102.2 - (368.1) 1,423.8 4,140.0 2,493.7 4,631.4

Investments activities:Capex (excl hotel properties) (7.6) (4.9) (21.4) (30.0) (30.0) (30.0) (30.0)Additions to hotels properties - - (479.8) (997.9) (1,062.2) (387.4) (154.4)Additions to investment properties (761.6) - (679.7) (2,431.1) (1,849.9) (1,342.9) (2,718.6)Associates (123.3) - - - - - -Subsidiary - - 0.1 - - - -Additions to development WIP (468.6) - - - - - -Acquisition/sale of financial assets (374.7) (23.3) (16.0) - - - -Movement in >3-month bank deposits - - - - - - -

Net cash generated from

investment activities(1,735.9) (28.1) (1,196.9) (3,459.0) (2,942.2) (1,760.3) (2,903.0)

Financing activities:Dividends paid - (209.0) (308.0) (402.9) (436.6) (613.4) (760.5)Share issue 2,105.0 - - - - - -

Bank borrowings raised - 49.5 1.9 - - - -Net share issuance fee (5.3) - - - - - -Borrowings repaid (12.3) - 4,000.0 - - - -Others - 7.5 - - - - -

-

- - - - - - -

Net cash generated from financingactivities

2,087.4 (152.0) 3,693.9 (402.9) (436.6) (613.4) (760.5)

Net addition (deduction) in cash 1,453.7 (180.1) 2,128.9 (2,438.1) 761.2 120.0 967.9Cash at beginning of fiscal year - 1,845.9 1,665.8 3,794.7 1,356.6 2,117.8 2,237.8Cash at end of fiscal year 1,845.9 1,665.8 3,794.7 1,356.6 2,117.8 2,237.8 3,205.7



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Emaar income statement (AEDm)

Year to December 2005a 2006a 2007a 2008e 2009e 2010e 2011e 2012e

Sale of Land 4,082.7 8,154.5 1,357.5 753.5 - - - -Sale of Villas and Condominiums 4,153.1 5,240.7 16,188.5 17,088.3 27,263.0 27,640.9 29,020.4 40,600.9Sale of Commercial Units - 410.9 - 1,330.6 - - - -Rental Income 125.6 199.4 - 727.7 2,026.4 2,255.2 2,725.8 3,719.6Hotel Revenue - - - 511.5 718.6 1,778.1 1,864.8 1,955.8Revenue 8,361.4 14,005.5 17,546.1 20,411.6 30,008.0 31,674.2 33,611.0 46,276.3

Cost of Land (1,604.0) (3,527.7) (163.5) (50.7) - - - -Cost of Vil las & Condominiums (1,963.5) (3,368.3) (10,477.0) (11,214.2) (17,884.4) (18,737.6) (19,166.6) (25,143.4)Direct Rental Expenses (18.2) (12.8) - (86.7) (202.6) (225.5) (272.6) (372.0)Hotel Direct Costs - - - (241.6) (395.2) (977.9) (1,025.6) (1,075.7) (3,585.7) (7,039.4) (10,640.5) (12,015.3) (18,482.2) (19,941.1) (20,464.8) (26,591.1)% of sales 43% 50% 61% 59% 62% 63% 61% 57%Gross Profit 4,775.7 6,966.1 6,905.5 8,396.3 11,525.7 11,733.1 13,146.2 19,685.2Margin 57% 50% 39% 41% 38% 37% 39% 43%Operating Expenses:SGA Expenses (1,021.8) (1,400.4) (2,119.0) (2,470.1) (3,300.9) (3,484.2) (3,697.2) (5,090.4)Other Operating Income 247.6 383.5 382.2 530.0 600.2 633.5 672.2 925.5Other Income - - - 293.5 300.1 316.7 336.1 462.8Other Operating Expenses (66.0) (207.0) - (298.3) (300.1) (316.7) (336.1) (462.8)Operating Expenses (840.2) (1,224.0) (1,736.8) (1,944.8) (2,700.7) (2,850.7) (3,025.0) (4,164.9)

EBIT (incl Revaluation Gain) 3,935.5 5,742.1 5,168.7 6,451.5 8,825.0 8,882.4 10,121.2 15,520.4Margin 47% 41% 29% 32% 29% 28% 30% 34%Net Financing cost 326.1 274.4 148.0 163.1 (164.8) (100.1) 23.5 315.9Other fin. Income/charges 122.5 253.3 811.6 - - - - -Associate Income 99.1 128.1 402.0 719.7 1,656.3 2,462.7 2,959.1 3,542.5Gain on Disposal of Subsidiary 245.8 4.9 - - - - - -Profit before Taxes 4,729.1 6,402.8 6,530.2 7,334.4 10,316.5 11,245.1 13,103.8 19,378.7

Income Taxes - (47.1) (13.9) (40.9) (309.5) (562.3) (655.2) (968.9)Minority Shareholders' Interest 2.2 15.4 (38.8) 35.9 198.1 382.8 613.9 925.5

Net Profit (Loss) 4,731.2 6,371.1 6,477.6 7,257.6 9,809.0 10,300.1 11,834.7 17,484.2Margin 57% 45% 37% 36% 33% 33% 35% 38%

Source: Company Data, HSBC estimates

Emaar financials


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uae real estate sector update october 2008

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