UAE Real Estate Sector Update October 2008

Global Emerging Markets UAE Real Estate
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Global 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 longterm demand story (ie, oil prices) We retain our Overweight (V) rating on Aldar, Emaar, and Sorouh, but cut our target prices to reflect purely macro 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
UAE Real Estate Sector Update

Supply is no longer the key issue
Aldar Properties Overweight (V), target price cut to AED16.0 (from AED25.3) Emaar Properties Overweight (V), target price cut to AED13.9 (from AED21.0) Sorouh Real Estate Overweight (V), target price cut to AED9.4 (from AED17.6)
14 October 2008
Majed Azzam * Analyst HSBC Bank Middle East Limited +971 4 4236933 majed.a.azzam@hsbc.com Ankur Khetawat * Analyst HSBC Bank Middle East Limited +971 4 4236930 ankur.khetawat@hsbc.com
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 domestic liquidity, 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.
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 NASD regulations Issuer of report: HSBC Bank Middle East Ltd
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Global Emerging Markets UAE Real Estate 14 October 2008
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Financials & valuation: Aldar Properties

Financial statements Year to 12/2007a 12/2008e 12/2009e 12/2010e Valuation data Year to Premium/ (discount) to NAV Premium/ (discount) to NAV (adj) PE* FCF yield (%) Dividend yield (%)
Note: * = Based on HSBC EPS (fully diluted)
Overweight (V)
12/2007a 0.7 0.3 11.6 0.7 3.6 12/2008e 0.8 0.3 4.7 -173.5 3.6 12/2009e 0.8 0.2 4.0 -75.9 4.7 12/2010e 0.6 0.2 3.6 -80.6 6.9
Profit & loss summary (AEDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (AEDm) Cash flow from operations Capex FCF enterprise Cash flow from investment Dividends Change in net debt FCF equity 158 0 158 0 -345 -2,966 96 -3,193 -19,844 -22,797 -19,844 -557 9,137 -23,037 4,450 -14,531 -9,209 -14,531 -889 10,970 -10,081 5,657 -16,354 -9,476 -16,354 -1,126 11,822 -10,696 1,227 158 0 158 -62 1,941 1,941 0 1,941 1,941 6,439 2,546 -39 2,507 -240 4,791 4,791 0 4,791 4,791 10,280 3,678 -177 3,502 -872 5,630 5,630 0 5,630 5,630 13,215 4,895 -313 4,582 -1,220 6,363 6,363 0 6,363 6,363
Issuer information Share price (AED) 6.19 Target price (AED) 16.00 Potent'l tot rtn (%) 158.5
Reuters (Equity) ALDR.AD Market cap (USDm) 4,216 Free float (%) Country United Arab Emirates Analyst Majed Azzam
Bloomberg (Equity) ALDAR UH Market cap (AEDm) 15,475 Enterprise value (AEDm) 20,531 Sector Real Estate Contact 971 04 507 7380
Price relative
16 14 12 10 8 6 4 2 2006
Aldar Properties
16 14 12 10 8 6 4 2 2007 2008 2009

Rel to ABU DHABI SEC MKT GEN INDEX
Balance sheet summary (AEDm) Tangible fixed assets Current assets Cash & others Total assets Gross debt Net debt Shareholders funds Invested capital 8,339 13,871 7,616 22,715 4,390 -3,226 13,861 10,195 20,981 22,449 9,798 44,361 15,710 5,911 22,005 27,061 38,335 17,930 7,828 57,195 24,710 16,882 26,746 42,772 57,376 12,220 5,006 70,527 33,710 28,704 31,983 59,830
Ratio, growth and per share analysis

Source: HSBC
Year to Y-o-y % change Revenue EBITDA EBIT PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (AED) EPS Rep (fully diluted) HSBC EPS DPS NAV NAV (adjusted)
12/2007a
12/2008e
12/2009e
12/2010e
Note: price at close of 13 Oct 2008
554.2
55.3
424.8 1512.3 1487.7 146.8 146.8
59.7 44.5 39.6 17.5 17.5
28.6 33.1 30.9 13.0 13.0
0.2 2.4 22.7 14.4 12.9 12.9 2.6 -23.3 -20.4
0.3 13.5 26.7 15.0 39.5 38.9 10.6 26.9 2.3
0.3 10.0 23.1 12.8 35.8 34.1 4.2 63.1 4.6 26.4
0.3 8.9 21.7 11.9 37.0 34.7 4.0 89.7 5.9 19.7
0.53 0.53 0.20 8.04 18.64
1.31 1.31 0.20 7.90 21.10
1.54 1.54 0.26 7.96 23.00
1.74 1.74 0.38 9.52 25.10
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Financials & valuation: Emaar Properties PJSC

Overweight (V)
12/2007a 1.0 0.4 5.3 10.3 3.5 12/2008e 0.8 0.4 5.1 -3.1 3.5 12/2009e 0.7 0.3 3.5 13.2 5.6 12/2010e 0.6 0.3 3.4 28.0 5.9
Profit & loss summary (AEDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (AEDm) Cash flow from operations Capex FCF enterprise Cash flow from investment Dividends Change in net debt FCF equity 3,461 -2,055 1,703 -3,167 -1,189 -66 2,663 1,177 -2,155 -944 -2,155 -1,218 4,008 -780 6,391 -3,257 3,304 -3,257 -1,319 -1,815 3,134 8,654 -2,578 6,180 -2,578 -1,961 -4,115 6,076 17,546 5,169 0 5,169 960 6,530 6,530 -14 6,555 6,555 20,412 6,615 -408 6,207 163 6,830 6,830 -36 6,758 6,758 30,008 9,748 -923 8,825 -170 10,311 10,311 -309 9,804 9,804 31,674 9,901 -1,019 8,882 -104 11,241 11,241 -562 10,296 10,296
Reuters (Equity) EMAR.DU Market cap (USDm) 9,806 Free float (%) 68 Country United Arab Emirates Analyst Majed Azzam
Bloomberg (Equity) EMAAR UH Market cap (AEDm) 35,990 Enterprise value (AEDm) 32,061 Sector REAL ESTATE Contact 971 04 507 7380
Price relative
28 23 18 13 8 3 2006
Emaar Properties PJSC
28 23 18 13 8 3 2007 2008 2009

Balance sheet summary (AEDm) Tangible fixed assets Current assets Cash & others Total assets Gross debt Net debt Shareholders funds Invested capital 12,028 30,270 6,799 54,752 8,396 1,597 35,884 28,691 16,978 31,308 3,344 61,449 8,948 5,605 41,280 37,350 19,312 33,661 5,159 67,793 8,948 3,789 49,765 42,562 20,872 40,431 9,275 78,585 8,948 -326 58,100 44,702

Source: HSBC
12/2007a
12/2008e
12/2009e
12/2010e
25.3 -10.0 -10.0 2.1 1.7
16.3 28.0 20.1 4.6 3.1
47.0 47.4 42.2 51.0 45.1
5.6 1.6 0.7 9.0 5.0
0.7 19.7 19.9 11.5 29.5 29.5 4.4 0.3 216.8
0.6 18.7 17.5 11.4 32.4 30.4 13.4 0.8 21.0
0.8 21.4 21.5 15.7 32.5 29.4 57.3 7.5 0.4 168.7
0.7 19.3 19.1 14.7 31.3 28.0 95.1 -0.5 0.0
1.08 1.08 0.20 5.89 13.60
1.11 1.11 0.20 6.78 14.69
1.61 1.61 0.32 8.17 16.67
1.69 1.69 0.34 9.54 16.83
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Financials & valuation: Sorouh Real Estate

Overweight (V)
12/2006a 4.0 0.5 13.1 -3.7 12/2007e 2.9 0.4 10.4 10.9 2.2 12/2008e 2.3 0.3 8.1 -5.5 2.6 12/2009e 1.8 0.3 7.4 -18.3 3.5
Profit & loss summary (AEDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (AEDm) Cash flow from operations Capex FCF enterprise Cash flow from investment Dividends Change in net debt FCF equity -146 -769 -980 -1,736 1,055 -5 1,146 -28 -209 188 1,234 479 -1,181 -596 -1,197 -308 -317 -615 1,424 -3,459 -1,934 -3,459 -403 2,438 -2,035 630 -242 0 -242 567 976 976 0 976 976 2,321 1,151 0 1,151 88 1,257 1,257 0 1,257 1,257 3,556 1,518 -1 1,517 -19 1,541 1,541 0 1,612 1,612 6,066 1,853 -5 1,848 -101 1,746 1,746 0 1,746 1,746
Reuters (Equity) SOR.AD Market cap (USDm) 3,562 Free float (%) Country United Arab Emirates Analyst Majed Azzam
Bloomberg (Equity) SOROUH UH Market cap (AEDm) 13,075 Enterprise value (AEDm) 11,616 Sector REAL ESTATE Contact 971 04 507 7380
Price relative
14 12 10 8 6 4 2 0 2006
Sorouh Real Estate
-412
14 12 10 8 6 4 2 0 2007 2008 2009

Balance sheet summary (AEDm) Tangible fixed assets Current assets Cash & others Total assets Gross debt Net debt Shareholders funds Invested capital 1,026 2,544 1,454 4,351 41 -1,413 3,470 1,621 1,279 5,362 1,458 7,221 233 -1,225 4,463 3,004 2,457 15,568 5,776 18,767 4,235 -1,541 5,742 3,733 5,911 15,610 3,338 22,264 4,235 897 7,085 7,515

Source: HSBC
12/2006a
12/2007e
12/2008e
12/2009e
268.3
28.9 28.9
53.2 31.9 31.8 22.6 28.2
70.6 22.0 21.8 13.3 8.4
0.8 -29.9 56.2 19.2 -38.4 -38.4 0.4 -40.7 5.8
1.0 49.8 31.7 20.5 49.6 49.6 -27.4 -1.1
1.1 45.0 31.6 12.3 42.7 42.6 81.3 -27.2 -1.0
1.1 32.9 27.2 9.0 30.5 30.5 18.3 12.8 0.5 158.8
0.39 0.39 1.39 10.14
0.50 0.50 0.10 1.79 11.07
0.64 0.64 0.12 2.30 15.07
0.70 0.70 0.16 2.83 16.13
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Investment summary
Top down: supply is less of an issue
Dubai supply forecasts look overstated
Dubai unit supply forecast (units)
225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 2005 2006 2007 2008 2009 2010 3.5 3.5 3.4 3.4 3.3 3.3 3.2 3.2 3.1 3.1 3.0
but demand is being undermined by several factors

1. Affordability: price growth picking up again after brief moderation during the summer
Price/sq m (y-axis) vs. GDP/capita in USD (x-axis)
12,000 10,000 Singapore 8,000 6,000 4,000 2,000 0 0 20,000 40,000 60,000 80,000 Hong Kong Rome M oscow Amst erdam Paris Barcelona Dubai Shanghai Prague Kiev Budapest Warsaw Cairo Abu Dhabi Tokyo London New York
HSBC Supply est . Demand
Colliers Supply est . People per dwelling
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.
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.
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Price growth seems to be picking up again (USD/sq m) Dubai Apartments Villas Weighted average Abu Dhabi Apartments Villas Weighted average Jun-08 Aug-08 Price Sep-08 Price Rental Yield 5,238 4,558 5,136 5,395 4,604 5,274 3% 1% 3% 6,266 16% 5,690 24% 6,180 17% 5.2% 4.0%
Total UAE mortgage book in USDm

80,000 70,000 60,000 50,000 40,000 30,000 18% 26% 30%
22%
4,981 3,550 4,767
5,255 3,617 5,009
5% 2% 5%
5,848 11% 3,804 5% 5,542 11%
20,000 14% 10,000 10% 2008e 2009e 2010e

Unit s t o be deliver ed 2008- 10 On old unit s New launches 2008- 10 Mor t gage t o GDP
Source: HSBC Research, Better Homes
2. Global credit crunch restricting domestic liquidity; upward pressure on mortgage rates
Credit squeeze clearly demonstrated by widening spread between LIBOR and EIBOR
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 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: 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 LTVs

Furthermore, 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.
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.
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 and risk 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 offplan 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 not always act rationally and a slight softening in prices could lead to panic selling.
Aldar still our preferred pick, though Emaar 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 apply specific 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.
Bottom up: its not about a potential price correction but the 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.
Valuation breakdown AED per share Projects under development Highly probable projects Future projects Land Investments Total value
Source: HSBC estimates
____________ Aldar ____________ ____________ Sorouh ___________ _____________ Emaar ____________ Valuation Probability Current Valuation Probability Current Valuation Probability Current 10.7 4.6 2.4 7.6 25.3 80% 70% 50% 60% 8.6 3.2 1.2 3.0 16.0 3.0 5.0 7.3 16.3 100% 70% 40% 3.0 3.5 2.9 9.4 6.6 6.5 3.4 2.4 18.9 90% 60% 50% 100% 5.9 3.9 1.7 2.4 13.9
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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%
Dubai supply forecasts overstated

Dubai unit supply forecasts (units)
2 2 5,0 00 2 00 ,0 00 175,0 00 150 ,0 00 12 5,0 00 100 ,0 00 75,0 00 50 ,0 00 25,0 00 2 00 5 20 0 6 20 07 2 0 08 2 00 9 2 010 3 .5 3 .5 3 .4 3 .4 3 .3 3 .3 3 .2 3 .2 3 .1 3 .1 3 .0
HSBC Supply est . Demand
Colliers Supply est . People per dwelli ng
Source: HSBC Research, Colliers International, Better Homes
Dubai bedroom supply forecasts (bedrooms)

500 ,00 0 4 50 ,00 0 40 0 ,00 0 3 50 ,00 0 30 0 ,00 0 2 50 ,00 0 20 0 ,00 0 150 ,00 0 10 0,00 0 50 ,00 0 2 00 7 p ent up 2 00 8 2 00 9 2 010 1.6 0 1.70 1.6 5 1.75 1.8 5 1.8 0 1.9 0
In light of recent market turmoil, some investors have started to question Colliers Internationals supply forecasts. We have therefore complemented the 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 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 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.
Number o f B Rs new est. Number o f p eo ple
Numb er of BRs prev est . Peop le per B Rs
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Villas account for roughly 20% of forthcoming supply (units)

3 5,0 00 3 0,0 00 17% 2 5,0 00 2 0,0 00 15,0 00 8 3% 10,0 00 5,0 00 20 08 20 09
Apar t ment s Villas
After brief slowing in the summer, price growth seems to be picking up again
Prices appear to be rising once again Dubai Apartments Jun-08 Aug-08 Price Sep-08 Price Rental Yield
19 % 24 %
81%
76 %
20 10
Breakdown of appartment supply by number of bedrooms (units)

30,000 25,000 20,000 15,000 10,000 5,000 2008
St udio 1 Bedroom
International City 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% Down Town Jebel Ali 4,067 3,879 -5% 4,028 4% JLT 4,160 4,248 2% 4,970 17% Greens 5,046 5,151 2% 6,559 27% Business Bay 5,612 5,679 1% 6,438 13% Dubai Marina 5,788 6,066 5% 6,345 5% The Palm Jumeirah 6,515 7,095 9% 7,819 10% DIFC 8,617 8,866 3% 9,561 8% Burj Dubai 10,301 10,341 0% 12,894 25% Average 5,238 5,395 3% 6,266 16% Villas Jumeirah Village Dubai Inv. Park Dubai Land Emirates Living Arabian Ranches The Palm Jebel Ali The Palm Jumeirah Average Total average Abu Dhabi Apartments Al Reef Al Ghadeer Al Raha Beach Al Reem Island Average Villas Hydra Village Al Reef Al Raha Gardens Al Ghadeer Average Total average
9.5% 8.0% 7.4% 6.2% 4.3% 3.2% 5.2%
2,650 3,290 3,718 4,825 4,547 6,175 8,980 4,558 5,136
2,727 3,348 3,782 4,970 4,565 6,521 9,124 4,604 5,274
3% 3,477 28% 2% 3,688 10% 2% 5,386 42% 3% 6,230 25% 0% 6,078 33% 6% 6,435 -1% 2% 11,474 26% 1% 5,690 24% 3% 6,180 17%
5.8% 5.3% 4.1% 2.2% 4.0%
2009
2 Bedroom 3 Bedr oom
2010
4 Bedroom
Breakdown of villa supply by number of bedrooms (units)

8 ,00 0 7,00 0 6 ,00 0 5,00 0 4 ,00 0 3 ,00 0 2 ,00 0 1,00 0 2 00 8
2 Bedroom 3 Bedroom
Jun-08 Aug-08 Price Sep-08 Price Rental Yield 2,715 3,026 11% 3,723 23% 4,838 5,263 9% 5,591 6% 6,069 6,180 2% 7,207 17% 6,304 6,550 4% 6,614 1% 4,981 5,255 5% 5,848 11%
2,439 2,668 4,694 4,398 3,550 4,767
2,351 2,926 4,216 4,975 3,617 5,009
-4% 10% -10% 13% 2% 5%
2,510 7% 3,231 10% 4,369 4% 5,107 3% 3,804 5% 5,542 11%
2 0 09
4 Bedr oom 5 Bedroom
20 10
6 Bedroom
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% mo-m on average in Dubai and 11% in Abu Dhabi, compared with an average of 2%-3% m-o-m during the 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 unabating speculation (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)
12,000 10,000 Singapore 8,000 6,000 4,000 2,000 0 0 20,000 40,000 60,000 80,000 Hong Kong Rome M oscow Amst erdam Paris Barcelona Dubai Abu Dhabi Shanghai Prague Kiev Cairo Budapest Warsaw Tokyo London New York
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 (bluecollar 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)
3 5,000 3 0,000 2 5,000 2 0,000 15,000 10,000 5,000 2 008
Aff o rdable (USD1,000- 2,500) High -end ( USD6, 000-9 ,500)
44%
29 % 20 09
18% 2010
Mid-e nd (USD2,5 00-6,0 00) Villas (USD6,000- 40,000 )
Source: Colliers International, Jones Lang LaSalle, CB Richard Ellis, Pricewaterhouse, HSBC Research
As the above chart shows, we are very rapidly approaching the regression line, which, in our
While prices in the UAE are becoming less affordable, Dubai (unlike Abu Dhabi, which is still 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 Dubai Investment Park Impz Downtown Jebel Ali International City Jumeirah Village Dubailand Dubai Silicon Oasis Jumeirah Lake Towers The Greens Emirates Living Dubai Marina DIFC Culture Village Business Bay Downtown Burj Dubai Palm Jumeirah Weighted average Villas Dubai Marina Jumeirah Village Al Furjan Dubai Investment Park Jumeirah Park Jumeirah Golf Estates Dubailand Arabian Ranches Emirates Living Palm Jebel Ali Palm Jumeirah Weighted average Total weighted average % of Total 11% 3% 3% 3% 6% 13% 3% 12% 1% 3% 15% 1% 1% 4% 16% 4% Av. Unit Av. Price price USD USD/sq m 238,158 316,727 333,978 343,869 358,469 1,391,546 476,310 522,883 576,307 727,078 762,622 1,014,375 1,128,325 1,323,853 1,330,508 1,508,397 705,171 3,779 4,662 4,028 3,216 3,477 14,558 3,345 4,970 6,559 6,304 6,345 9,561 6,377 6,438 12,894 7,819 6,266 Av. Apt. Down-pmt size/sq m USD 63 68 83 107 103 96 142 105 88 115 120 106 177 206 103 193 113 23,816 31,673 33,398 34,387 35,847 139,155 47,631 52,288 57,631 72,708 76,262 101,438 112,832 132,385 133,051 150,840 70,517 Monthly pmt USD 1,727 2,296 2,421 2,493 2,599 2,749 3,453 3,791 4,178 5,272 5,529 7,355 8,181 9,598 9,647 10,936 5,113 Av. Monthly Av. Rent rental USD USD/sq m pa 1,878 3,496 3,542 3,833 3,965 3,529 5,467 358 399 484 399 396 410 340 388 Rental yield 9.5% 8.0% 7.4% 6.3% 6.2% 3.2% 4.3% 5.2%
3% 8% 14% 7% 6% 1% 31% 8% 11% 3% 8%
841,941 892,837 1,504,725 1,630,622 1,630,629 2,132,999 2,299,033 2,710,654 3,082,441 3,405,558 7,756,279 2,556,169 981,237
6,884 3,477 4,439 3,688 4,990 5,550 5,386 6,078 6,230 6,435 11,474 5,690 6,180
122 257 339 442 327 384 427 446 495 529 676 421
84,194 89,284 150,472 163,062 163,063 213,300 229,903 271,065 308,244 340,556 775,628 255,617
6,104 6,473 10,910 11,823 11,823 15,465 16,669 19,653 22,349 24,691 56,236 18,533
7,902 9,371 13,545 14,038 11,346
214 252 329 249 279
5.8% 4.1% 5.3% 2.2% 4.0%
Note: for monthly mortgage payments we assume 10% down-payment, 7.5% mortgage rate, and a 20-year tenure Source: 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)
500 400 300 200
Upward repricing of mortgage rates and lower LTVs to put further pressure on demand
Total UAE mortgage book in USDm
80,000 70,000 60,000 50,000 40,000 30,000 20,000 14% 10,000 2008e 2009e 2010e
Unit s t o be deliver ed 2008- 10 On old unit s New launches 2008- 10 Mor t gage t o GDP
30% 26%
22% 18%
100 0
10%
Source: Central Bank data, HSBC estimates
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 spread between LIBOR and EIBOR
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08
LIBOR 3M EIBOR 3M
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.
Source: Reuters
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Current rental yields suggest possible price 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 upcoming supply (units)
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 2008 Nakheel 2009 Dubai Holding Emaar 2010 Other
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 have used 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 the hardest hit.
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 and declining 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.
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Dubai residential market potential price change Apartments Dubai Investment Park Dubai Investment Park adj. Jumeirah Lake Towers Jumeirah Lake Towers adj. The Greens The Greens adj. Dubai Marina Dubai Marina adj. Emirates Living Emirates Living adj. Downtown Burj Dubai Downtown Burj Dubai adj. Palm Jumeirah Palm Jumeirah adj. Weighted average Weighted average adj. Villas Dubai Investment Park Dubai Investment Park adj. Emirates Living Emirates Living adj. Arabian Ranches Arabian Ranches adj. Palm Jumeirah Palm Jumeirah adj. Weighted average Weighted average adj. Off-plan apartments Off-plan villas
Change Av. Unit price USD 46% 34% 23% 4% 5% -42% -21% -12% 238,158 346,783 522,883 699,234 576,307 708,469 762,622 792,929 727,078 766,532 1,330,508 770,065 1,508,397 1,192,856 835,311 736,727
Av. Apt. size/sq m 63 63 105 105 88 88 120 120 115 115 103 103 193 193 113 113
Av. Price USD/sq m 3,779 5,503 4,970 6,646 6,559 8,063 6,345 6,597 6,304 6,646 12,894 7,463 7,819 6,184 7,422 6,546
Av. Rent USD/sq m 358 358 399 399 484 484 396 396 399 399 410 410 340 340 388 388
Rental yield 9.5% 6.5% 8.0% 6.0% 7.4% 6.0% 6.2% 6.0% 6.3% 6.0% 3.2% 5.5% 4.3% 5.5% 5.2% 5.9%
Discount to mortgage rate 1.0% 1.5% 1.5% 1.5% 1.5% 2.0% 2.0% 1.6%
16% 17% -8% -38% -8% -22% -16%
1,630,622 1,896,466 3,082,441 3,612,052 2,710,654 2,498,968 7,756,279 4,813,171 2,914,630 2,692,584 648,874 2,459,161
442 442 495 495 446 446 676 676 421 421
3,688 4,290 6,230 7,301 6,078 5,603 11,474 7,120 6,917 6,390
214 214 329 329 252 252 249 249 279 279
5.8% 5.0% 5.3% 4.5% 4.1% 4.5% 2.2% 3.5% 4.0% 4.4%
2.5% 3.0% 3.0% 4.0% 3.1%
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 for villas, 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
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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 for longer. 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
1200 1000 800 600 400 200 0 160 140 120 100 80 60 40 20 0
MSCI GCC COUNTRIES X SAUDI ARABIA $ London Brent Crude OilIndex U$/BBL
Source: Thomson Financial Datastream
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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
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
Valuation: Emaar most immune and Sorouh most vulnerable to any market deterioration AED per share Projects under development Highly probable projects Future projects Land Investments Total value
____________ Aldar____________ ____________ Sorouh____________ _____________Emaar ____________ Valuation Probability Current Valuation Probability Current Valuation Probability Current 10.7 4.6 2.4 7.6 25.3 80% 70% 50% 60% 8.6 3.2 1.2 3.0 16.0 3.0 5.0 7.3 16.3 100% 70% 40% 3.0 3.5 2.9 9.4 6.6 6.5 3.4 2.4 18.9 90% 60% 50% 100% 5.9 3.9 1.7 2.4 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.
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 such should 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, Emaar has 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.
Valuation: Emaar most immune and Sorouh most vulnerable to any market 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 have already 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 very conservatively at AED400 per sq m, its isolated location and vast size mean that, in the event of a
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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)
25 40% 35% 20 30% 25% 20% 10 15% 10% 5% 0 Emaar NAV
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, Sorouh has 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 Aldar Sorouh Emaar Total sales 11.1 26.5 36.2 Revenues Revenue to be recognised recognised 5.1 4.6 25 6.0 21.9 11.2
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0% Aldar TP Sorouh Implied discount 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 value of 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, to be released by 2010 (it includes land pertaining to investment properties). This is in addition to the
Note: Total sales and revenues since 2006; for Emaar revenue to be recognised represents roughly 12,400 units in the UAE Source: Company data, HSBC Research
Emaars overseas operations are gaining significance Units launched Emaar UAE Emaar International Emaar MGF India Emaar Egypt Emaar Pakistan KAEC, Saudi Arabia Emaar Middle East, Saudi Arabia Emaar Syria Emaar Morocco Emaar Turkey Total international Total units
Source: Company data
Units sold 32,151
%Sales 92%
36,266
6,391 1,757 1,331 1,017 567 455 316 208 12,042 48,308
4,581 1,178 884 764 367 318 218 141 8,451 40,602
72% 67% 66% 75% 65% 70% 69% 68% 70% 84%
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Domestic credit squeeze has limited impact 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 Emaar Aldar Sorouh Total Gross debt 8.9 15.1 4.2 28.2 Cash 7.4 16.1 7.2 30.7 Net debt 1.5 -1 -3 -2.5 13 13 Unused facility 0-1 Yr 1.3 15% 1 7% 0.1 2% 2.4 1-3 Yrs 7.5 84% 4.5 30% 0.1 2% 12.1 3 yrs > Net cash Flow from H208 to 09 -2.2 Position FY09e 3.9 6.8 7.5 18.2
0% 9.6 64% 4 95% 13.6
-8.3 0.4 -10.1
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 estimates Source: Company data, HSBC estimates
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20 Global Emerging Markets UAE Real Estate 14 October 2008
Aldar valuation breakdown (AED per share)

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Definite projects (under dev.) Highly probable projects F uture projects Land 8.6 1.2 3.2 3.0
Sorouh valuation breakdown (AED per share)

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Definite projects (under dev.) Highly probable projects Land 3.0 3.5 2.9
Emaar valuation breakdown (AED per share)

16.0 2.4 14.0 12.0 3.9 10.0 8.0 6.0 4.0 2.0 Definite projects (under dev.) H ighly probable projects Future projects Investments 5.9 1.7
HSBC Real Estate Valuation Matrix Projects under development Launched with considerable pre-sales Valuation visibility Price change impact Sales volume Impact Aldar Sorouh Emaar Aldar Highly probable Future projects Master-planned/to be launched Projects still at the concept soon/of a strategic nature phase Land Investments Unserviced raw land/no master Strategic investments in other plan entities Total value
High <---------------------------------------------------------------------------------------------------------------------------------> Low Low <---------------------------------------------------------------------------------------------------------------------------------> High Low <---------------------------------------------------------------------------------------------------------------------------------> High 8.6 3.0 5.9 Al Raha Beach (East) Central Market Al Raha Garden Yas Island Khalidiya Village Al Oyoun Village Saraya Shams Phase 1 & 2 Al Ghadeer Phase 1 Golf Gardens AL Ain Comm Centre Al Nagfa Hotel Burj Dubai Downtown Emirates Hills Dubai Marina Bawadi Umm Al Quain Marina Emaar International (30%) 3.2 3.5 3.9 Al Raha Beach (West) Yas Island 1.2 1.7 Motor World 3.0 2.9 Mina Zayed (50%) Yas Island (62%) 2.4 16.0 9.4 13.9
Sorouh
Lulu Island Al Mashthal Shams Phase 2 Al Ghadeer Phase 2 Gateway Hotel
SAS Land- 13m sq m SAS Land- 33m sq m
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Emaar
Burj Dubai Downtown Al Mashraf Height Bawadi Umm Al Quain Marina Emaar International (40%)
Al Usailly Emaar International (40%)
KAEC, Saudi Arabia Emaar MGF India Amlak Finance Dubai Bank
Source: Company, HSBC Research
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Real Estate Comparables Bloomberg EMAAR UH ALDAR UH SOROUH UH DLFU IN UT IN IBREL IN 3383 HK 1109 HK 688 HK 2007 HK 272 HK TMGH EY OCDI EY 101 HK 83 HK 410 HK 1109 HK 12 HK 83 HK 16 HK GTC PW ECH PW Company Emaar Properties PJSC Aldar Properties Sorouh Real Estate DLF Ltd Unitech Ltd Indiabulls Real Estate Agile CRL COLI CG SOL TMG SODIC Hang Lung Properties Ltd Sino Land Company Ltd Soho China Limited China Resources Land Henderson Land Dev. SINO Land Co Sun Hung Kai Properties GlobeTrade Centre Echo Investment SA Region United Arab Emirates United Arab Emirates United Arab Emirates India India India China China China China China Egypt Egypt Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Poland Poland Rating Overweight (V) Overweight (V) Overweight (V) Underweight (V) Underweight (V) Overweight (V) NR NR NR NR NR Overweight (V) Overweight Overweight (V) Overweight (V) Overweight (V) NR NR NR NR Overweight (V) Neutral (V) Currency AED AED AED INR INR INR HKD HKD HKD HKD HKD EGP EGP HKD HKD HKD HKD HKD HKD HKD PLN PLN Closing Price 5.9 6.2 5.2 308.9 94.5 118.2 3.4 8.1 9.0 2.3 3.0 4.3 74.3 15.1 7.1 2.2 8.1 31.1 8.1 71.0 18.0 3.0 MCap (USDm) 9,866 4,216 3,562 19,115 5,896 1,648 1,623 4,883 9,057 4,740 1,610 2,755 683 12,224 7,879 2,524 4,883 8,559 5,033 23,342 2,367 841 PE 08 5.1 4.7 8.1 6.70 9.19 7.11 2.91 19.47 12.80 7.31 5.24 6.59 13.08 12.23 10.34 11.38 19.47 11.42 6.74 12.23 9.38 NA PE 08 P/NAV 3.5 4.0 7.4 6.66 6.56 6.90 5.75 12.13 9.86 5.75 6.37 2.99 8.83 10.70 4.80 1.43 12.13 10.64 8.79 11.14 2.39 5.28 0.4 0.3 0.3 0.69 0.51 0.56 0.20 0.44 0.49 0.30 0.21 NA NA NA NA NA 0.46 0.46 0.36 0.47 0.79 0.77
Source: HSBC Research, Bloomberg NR = not rated
Risks specific to Aldar and 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,
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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 to abandon 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 financials
Aldar income statement (AEDm) Year to December Sale of land Sale of properties Rental income Hotel revenue Revenue Cost of land Cost of properties Direct rental expenses Hotel direct costs % of sales Gross profit Margin Operating expenses: SGA expenses Fair value gain on inv properties Other operating income Other income Other operating expenses Operating expenses EBIT (incl revaluation gain) Margin Net financing cost Other fin. Income/charges Associate income Gain on disposal of subsidiary Profit before taxes Income taxes Minority shareholders' interest Net profit (loss) Margin Appropriation of net income Dividend DPS Payout ratio Basic EPS Number of shares Fully diluted EPS Fully diluted shares EBITDA excl reval gains Margin EBIT excl reval gains Margin
Source: Company data, HSBC estimates
2006 178.3 187.5 (156.5) (156.7) 84% 30.8 16%
2007 1,187.3 33.8 1,226.8 (648.3) (15.1) (666.9) 54% 560.0 46%
2008e 4,469.9 1,847.1 121.5 6,438.5 (1,316.7) (1,647.5) (27.6) (2,991.8) 46% 3,446.8 54%
2009e 3,004.8 7,095.6 179.6 10,280.0 (537.6) (5,288.8) (26.9) (5,853.3) 57% 4,426.8 43%
2010e 3,310.8 9,467.9 352.7 84.0 13,215.3 (537.6) (6,798.4) (52.9) (54.6) (7,443.5) 56% 5,771.8 44%
2011e 4,236.2 6,073.4 649.7 345.5 11,304.7 (717.4) (4,357.5) (97.4) (224.5) (5,397.0) 48% 5,907.7 52%
2012e 7,120.5 3,621.8 1,661.7 2,812.4 15,216.5 (1,420.5) (2,712.0) (249.3) (1,828.1) (6,209.8) 41% 9,006.7 59%
(264.3) 1,414.4 1,150.2 1,181.0 630% (6.0) 74.7 1,249.7 1,249.7 666%
(402.0) 1,821.2 1,419.2 1,979.2 161% (462.4) 400.9 23.7 1,941.3 1,941.3 158%
(1,029.5) 2,480.4 60.1 30.1 1,541.1 4,987.9 77% (239.7) 43.1 4,791.2 4,791.2 74%
(1,233.6) 3,000.0 205.6 102.8 2,074.8 6,501.6 63% (871.6) 5,630.0 5,630.0 55%
(1,585.8) 3,000.0 264.3 132.2 1,810.6 7,582.4 57% (1,219.7) 6,362.7 6,362.7 48%
(1,356.6) 3,500.0 226.1 113.0 2,482.6 8,390.3 74% (1,344.5) 7,045.8 7,045.8 62%
(1,826.0) 3,000.0 304.3 152.2 1,630.5 10,637.2 70% (1,346.5) 9,290.7 9,290.7 61%
(233.4) -124% (233.4) -124%
0% 1.1 1,725.0 0.5 3,661.9 157.9 13% 157.9 13%
0% 1.7 2,786.5 1.3 3,661.9 2,546.3 40% 2,585.1 40%
858.8 0.3 15% 1.7 3,358.1 1.5 3,661.9 3,678.3 36% 3,855.1 38%
1,272.5 0.4 20% 1.9 3,358.1 1.7 3,661.9 4,895.0 37% 5,207.6 39%
1,292.3 0.4 18% 1.9 3,661.9 1.9 3,661.9 5,336.3 47% 5,782.2 51%
1,858.1 0.5 20% 2.5 3,661.9 2.5 3,661.9 8,151.6 54% 8,666.0 57%
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Aldar balance sheet (AEDm) Year to December Current assets Cash and cash equivalents 0.0 Trade & other receivables (current and non current) Receivable from project finance Development properties Development work in progress Short-term investment Current assets Investments in associates Other financial assets Refundable costs Other non-current assets Long-term assets/non current Intangible asset Hotels Property, plant and equipment Investment properties Permanent Total assets LIABILITIES Trade & other payables Borrowings-short term Notes payable Current liabilities Borrowing & long-term debt 0.0 Obligation under finance lease/ retentions Other financial liabilities Advances from customers Provision for employee services Long-term liabilities/non current Minority interest in subsidiaries Paid-up capital Statutory & other reserves Retained earnings Shareholder's equity Total liabilities and equity
2006 895.0 0.0 181.8 2.0 854.3 0.0 0.0 1933 120.1 109.7 55.1 0.0 284.8 38.1 0.0 13.0 2,839.7 2,890.8 5,108.7
2007 7,615.8 0.0 2,372.0 3.0 3,879.9 0.0 0.0 13,871 239.0 111.6 80.8 9.4 440.8 64.6 0.0 487.2 7,851.8 8,403.6 22,715.1
2008e 9,798.4 0.0 4,619.0 3.0 8,029.1 0.0 0.0 22,449 581.6 113.0 103.4 58.2 856.3 73.9 1,259.6 929.1 18,792.5 21,055.1 44,360.8
2009e 7,828.2 0.0 3,592.6 3.0 6,506.2 0.0 0.0 17,930 581.6 113.0 103.4 58.2 856.3 73.9 3,811.0 1,029.5 33,494.8 38,409.2 57,195.4
2010e 5,006.0 0.0 2,566.1 3.0 4,645.1 0.0 0.0 12,220 581.6 113.0 103.4 58.2 856.3 73.9 6,432.9 1,125.0 49,818.4 57,450.2 70,526.7
2011e 1,399.5 0.0 1,539.7 3.0 3,392.3 0.0 0.0 6,334 581.6 113.0 103.4 58.2 856.3 73.9 8,769.2 1,215.7 60,475.2 70,534.0 77,724.7
2012e (1,391.0) 0.0 513.2 3.0 7,942.7 0.0 0.0 7,068 581.6 113.0 103.4 58.2 856.3 73.9 9,023.4 1,301.9 69,790.2 80,189.5 88,113.7
548.6 618.3 16.3 1,183.2 16.8 0.0 120.2 0.0 513.9 3.6 654.5 0.1 1,725.0 109.6 1,436.3 3,271.0 5,108.7
3,149.3 756.9 16.4 3,922.6 3,633.1 0.0 312.5 293.7 682.7 9.0 4,930.9 0.1 2,223.1 2,432.8 3,033.4 1,3861.6 2,2715.1
4,047.6 0.0 15.1 4,062.7 15,709.8 0.0 591.9 279.4 1,697.4 14.1 18,292.7 0.1 2,786.4 4,788.8 7,620.4 22,005.5 44,360.8
3,148.1 0.0 8.5 3,156.6 24,709.8 0.0 591.9 279.4 1,697.4 14.1 27,292.7 0.1 3,358.0 7,468.7 12,361.1 26,746.2 57,195.4
2,248.6 0.0 2.5 2,251.2 33,709.8 0.0 591.9 279.4 1,697.4 14.1 36,292.7 0.1 3,358.0 7,468.7 17,597.8 31,982.9 70,526.7
3,675.6 0.0 0.3 3,676.0 33,709.8 0.0 591.9 279.4 1,697.4 14.1 36,292.7 0.1 3,661.7 10,727.8 23,371.0 37,756.1 77,724.7
6,183.4 0.0 0.0 6,183.4 33,709.8 0.0 591.9 279.4 1,697.4 14.1 36,292.7 0.1 3,661.7 10,727.8 31,252.5 45,637.6 88,113.7
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Aldar cash flow statement (AEDm) Year to December Operating activities: Net profit before minorities Depreciation & amortisation Change in working capital Interest income & exp Interest recd Interest paid Fair value gain on investment property Provision for employee end-of-service benefits Net cash generated from operating activities Investment activities: Capex (excl hotel properties) Additions to hotel properties Additions to investment properties Associates Subsidiary Additions to development WIP Acquisition/sale of financial assets Movement in >3-month bank deposits Net cash generated from investment activities Financing activities: Dividends paid Share issue Bank borrowings raised Net share issuance fee Borrowings repaid Others Net cash generated from financing activities Net addition (deduction) in cash Cash at beginning of fiscal year Cash at end of fiscal year
Source Company data, HSBC estimates
2006 -
2007 -
2008e 4,941.4 38.8 (5,499.2) 239.7 296.5 (890.7) (2,480.4) (3,353.9)
2009e 5,630.0 176.8 1,643.2 871.6 256.5 (1,128.1) (3,000.0) 4,449.9
2010e 6,362.7 312.6 1,982.2 1,219.7 181.2 (1,400.9) (3,000.0) 5,657.4
2011e 7,045.8 446.0 3,704.0 1,344.5 75.1 (1,419.6) (3,500.0) 7,695.8
2012e 9,290.7 514.4 (1,016.5) 1,346.5 1.9 (1,348.4) (3,000.0) 5,788.6
6,799.4 6,799.4
(18,568.4) (1,275.5) (43.1) (19,887.0) 3,562.8 11,319.8 14,882.6 (8,358.3) 6,799.4 (1,558.9)
(11,852.3) (2,678.6) (14,530.9) (889.2) 9,000.0 8,110.8 (1,970.2) (1,558.9) (3,529.1)
(13,473.6) (2,880.0) (16,353.6) (1,126.0) 9,000.0 7,874.0 (2,822.2) (3,529.1) (6,351.3)
(7,306.8) (2,723.0) (10,029.8) (1,272.5) (1,272.5) (3,606.5) (6,351.3) (9,957.8)
(6,465.0) (704.8) (7,169.9) (1,409.2) (1,409.2) (2,790.5) (9,957.8) (12,748.3)
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Sorouh financials
Sorouh income statement (AEDm) Year to December Land sale Contract revenue Sale of properties Rental income Hotel revenue Revenue Land development cost Construction cost (incl land development) Direct rental expenses Hotel direct costs % of sales Gross profit Margin Operating expenses: Selling and marketing expenses General and administrative expenses Other operating income Fair value gain on financial Operating expenses EBIT (incl revaluation gain) Margin Net financing cost Other fin. income/charges Gain/(loss) on financial assets Profit before taxes Income taxes Minority Shareholders' interest Net Profit (loss) Margin Appropriation of net income Dividend DPS Payout ratio Basic EPS Number of shares Fully diluted EPS Fully diluted shares EBITDA excl reval gains Margin EBIT excl reval gains Margin
2006 630.2 630.2 (643.1) (643.1) 102% (12.9) -2%
2007e 2,000.8 320.2 2,321.0 (848.4) (152.9) (1,001.3) 43% 1,319.6 57%
2008e 2,956.2 533.0 67.0 3,556.2 (1,137.8) (358.8) (16.3) (1,513.0) 43% 2,043.2 57%
2009e 2,822.1 3,163.4 80.6 6,066.1 (1,390.3) (2,256.7) (16.1) (3,663.2) 60% 2,402.9 40%
2010e 1,914.2 12,901.8 227.2 15,043.3 (695.6) (10,666.3) (45.4) (11,407.3) 76% 3,636.0 24%
2011e 1,210.3 4,938.8 540.2 808.6 7,498.0 (63.2) (2,946.4) (108.0) (525.6) (3,643.3) 49% 3,854.7 51%
2012e 1,931.2 5,922.9 717.3 1,126.0 9,697.3 (94.8) (2,883.4) (143.5) (731.9) (3,853.6) 40% 5,843.7 60%
(63.7) (53.9) 650.5 532.8 519.9 82% 558.3 9.1 (111.7) 975.5 975.5 155%
(165.1) (99.8) (264.9) 1,054.7 45% 70.0 18.2 96.0 1,257.4 1,257.4 54%
(322.2) (229.1) (551.3) 1,492.0 42% (55.5) 36.8 24.7 1,541.2 (70.5) 1,611.7 45%
(303.3) (252.0) (555.3) 1,847.6 30% (101.3) 1,746.3 1,746.3 29%
(752.2) (272.2) (1,024.3) 2,611.7 17% (158.1) 2,453.6 2,453.6 16%
(374.9) (291.2) (666.1) 3,188.6 43% (146.7) 3,041.9 3,041.9 41%
(484.9) (225.7) (710.6) 5,133.2 53% (120.5) 5,012.7 5,012.7 52%
0.4 2,500.0 0.4 2,500.0 (130.5) -21% (130.5) -21%
250.0 (0.10) -26% 0.5 2,500.0 0.5 2,500.0 1,054.7 45% 1,054.7 45%
300.0 0.12 0.2 0.6 2,500.0 0.6 2,500.0 1,493.5 42% 1,495.0 42%
402.9 0.16 0.3 0.7 2,500.0 0.7 2,500.0 1,852.6 31% 1,857.6 31%
436.6 0.17 0.3 1.0 2,500.0 1.0 2,500.0 2,619.1 17% 2,626.5 17%
613.4 0.25 0.3 1.2 2,500.0 1.2 2,500.0 3,198.2 43% 3,207.8 43%
760.5 0.30 0.3 2.0 2,500.0 2.0 2,500.0 5,144.8 53% 5,156.4 53%
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Sorouh balance sheet (AEDm) Year to December Current assets Cash and cash equivalents Assets held for sale Trade & other receivables Development properties Short-term investment Current assets 2006 1,453.7 0.0 251.8 414.5 0.0 2,544 2007e 1,457.7 614.8 2,080.3 1,082.1 126.8 5,362 2008e 5,776.2 417.2 3,042.1 6,247.0 85.2 15,568 2009e 3,338.0 417.2 2,366.1 9,403.4 85.2 15,610 2010e 4,099.3 417.2 1,690.0 4,237.5 85.2 10,530 2011e 4,219.3 417.2 1,014.0 6,457.1 85.2 12,193 2012e 5,187.2 417.2 338.0 7,689.7 85.2 13,718
Investments in associates and LT investments Other non-current assets Long-term assets/non current Intangible asset Hotels Property, plant and equipment Investment properties Investment properties under development Permanent Total assets LIABILITIES Trade & other payables Borrowings short term Notes payable short term Current liabilities Borrowing & long-term debt Obligation under finance lease
139.3 297.2 436.5 345.4 0.0 6.2 834.7 184.7
174.0 59.8 233.9 345.4 0.0 18.0 853.0 408.4
256.2 140.7 396.9 345.4 479.8 36.0 855.6 1,085.5
256.2 140.7 396.9 345.4 1,477.7 61.0 855.6 3,516.6
256.2 140.7 396.9 345.4 2,539.9 83.6 2,728.5 3,493.7
256.2 140.7 396.9 345.4 2,927.4 103.9 4,073.7 3,491.4
256.2 140.7 396.9 345.4 3,081.8 122.3 5,036.7 5,246.9
1,371.0 4,351.2
1,624.7 7,220.7
2,802.3 18,767.3
6,256.3 22,263.6
9,191.1 20,117.6
10,941.7 23,531.8
13,833.1 27,947.7
743.7 11.7 71.5 827.0 29.3 23.8
2,177.3 42.6 208.5 2,428.4 190.2 0.0
8,541.3 116.0 178.5 8,835.8 4118.7 0.0
10,694.2 116.0 178.5 10,988.8 4118.7 0.0
6,531.2 116.0 178.5 6,825.8 4118.7 0.0
7,516.9 116.0 178.5 7,811.4 4118.7 0.0
7,680.6 116.0 178.5 7,975.1 4118.7 0.0
Notes payable long term Provision for employee services Long-term liabilities/non current Minority interest in subsidiaries Paid-up capital Statutory & other reserves Retained earnings Shareholders equity Total liabilities and equity
0.0 0.9 54.0 0.0 2,500.0 92.3 878.0 3,470.2 4,351.2
135.9 3.3 329.3 0.0 2,500.0 218.0 1,745.0 4,463.0 7,220.7
135.9 5.5 4,260.0 (70.5) 2,500.0 216.7 3,025.3 5,671.5 18,767.3
135.9 5.5 4,260.0 (70.5) 2,500.0 216.7 4,368.7 7,014.9 22,263.6
135.9 5.5 4,260.0 (70.5) 2,500.0 216.7 6,385.7 9,031.9 20,117.6
135.9 5.5 4,260.0 (70.5) 2,500.0 216.7 8,814.2 11,460.4 23,531.8
135.9 5.5 4,260.0 (70.5) 2,500.0 216.7 13,066.4 15,712.6 27,947.7
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Sorouh cash flow statement (AEDm) Year to December Operating activities: Net profit before minorities Depreciation & amortisation Change in working capital Interest income & exp Interest recd Interest paid Fair value gain on investment property Impairment of goodwill Provision for employee end of service benefits Net cash generated from operating activities Investments activities: Capex (excl hotel properties) Additions to hotels properties Additions to investment properties Associates Subsidiary Additions to development WIP Acquisition/sale of financial assets Movement in >3-month bank deposits Net cash generated from investment activities Financing activities: Dividends paid Share issue Bank borrowings raised Net share issuance fee Borrowings repaid Others Net cash generated from financing activities Net addition (deduction) in cash Cash at beginning of fiscal year Cash at end of fiscal year
2006 975.5 1.4 31.7 (558.3) 547.9 (650.5) 242.9 399.8 1,102.2
2007e -
2008e 563.6 1.5 (933.2) 81.7 55.9 (137.6) (368.1)
2009e 1,746.3 5.0 (327.5) 101.3 174.0 (275.3) 1,423.8
2010e 2,453.6 7.4 1,678.9 158.1 117.2 (275.3) 4,140.0
2011e 3,041.9 9.6 (557.9) 146.7 128.6 (275.3) 2,493.7
2012e 5,012.7 11.6 (392.9) 120.5 154.7 (275.3) 4,631.4
(7.6) (761.6) (123.3) (468.6) (374.7) (1,735.9)
(4.9) (23.3) (28.1)
(21.4) (479.8) (679.7) 0.1 (16.0) (1,196.9)
(30.0) (997.9) (2,431.1) (3,459.0)
(30.0) (1,062.2) (1,849.9) (2,942.2)
(30.0) (387.4) (1,342.9) (1,760.3)
(30.0) (154.4) (2,718.6) (2,903.0)
2,105.0 (5.3) (12.3) 2,087.4
(209.0) 49.5 7.5 (152.0)
(308.0) 1.9 4,000.0 3,693.9
(402.9) (402.9)
(436.6) (436.6)
(613.4) (613.4)
(760.5) (760.5)
1,453.7 1,845.9
(180.1) 1,845.9 1,665.8
2,128.9 1,665.8 3,794.7
(2,438.1) 3,794.7 1,356.6
761.2 1,356.6 2,117.8
120.0 2,117.8 2,237.8
967.9 2,237.8 3,205.7
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Emaar financials
Emaar income statement (AEDm) Year to December Sale of Land Sale of Villas and Condominiums Sale of Commercial Units Rental Income Hotel Revenue Revenue Cost of Land Cost of Villas & Condominiums Direct Rental Expenses Hotel Direct Costs % of sales Gross Profit Margin Operating Expenses: SGA Expenses Other Operating Income Other Income Other Operating Expenses Operating Expenses EBIT (incl Revaluation Gain) Margin Net Financing cost Other fin. Income/charges Associate Income Gain on Disposal of Subsidiary Profit before Taxes Income Taxes Minority Shareholders' Interest Net Profit (Loss) Margin
Source: Company Data, HSBC estimates
2005a 4,082.7 4,153.1 125.6 8,361.4 (1,604.0) (1,963.5) (18.2) (3,585.7) 43% 4,775.7 57%
2006a 8,154.5 5,240.7 410.9 199.4 14,005.5 (3,527.7) (3,368.3) (12.8) (7,039.4) 50% 6,966.1 50%
2007a 1,357.5 16,188.5 17,546.1 (163.5) (10,477.0) (10,640.5) 61% 6,905.5 39%
2008e 753.5 17,088.3 1,330.6 727.7 511.5 20,411.6 (50.7) (11,214.2) (86.7) (241.6) (12,015.3) 59% 8,396.3 41%
2009e 27,263.0 2,026.4 718.6 30,008.0 (17,884.4) (202.6) (395.2) (18,482.2) 62% 11,525.7 38%
2010e 27,640.9 2,255.2 1,778.1 31,674.2 (18,737.6) (225.5) (977.9) (19,941.1) 63% 11,733.1 37%
2011e 29,020.4 2,725.8 1,864.8 33,611.0 (19,166.6) (272.6) (1,025.6) (20,464.8) 61% 13,146.2 39%
2012e 40,600.9 3,719.6 1,955.8 46,276.3 (25,143.4) (372.0) (1,075.7) (26,591.1) 57% 19,685.2 43%
(1,021.8) 247.6 (66.0) (840.2) 3,935.5 47% 326.1 122.5 99.1 245.8 4,729.1 2.2 4,731.2 57%
(1,400.4) 383.5 (207.0) (1,224.0) 5,742.1 41% 274.4 253.3 128.1 4.9 6,402.8 (47.1) 15.4 6,371.1 45%
(2,119.0) 382.2 (1,736.8) 5,168.7 29% 148.0 811.6 402.0 6,530.2 (13.9) (38.8) 6,477.6 37%
(2,470.1) 530.0 293.5 (298.3) (1,944.8) 6,451.5 32% 163.1 719.7 7,334.4 (40.9) 35.9 7,257.6 36%
(3,300.9) 600.2 300.1 (300.1) (2,700.7) 8,825.0 29% (164.8) 1,656.3 10,316.5 (309.5) 198.1 9,809.0 33%
(3,484.2) 633.5 316.7 (316.7) (2,850.7) 8,882.4 28% (100.1) 2,462.7 11,245.1 (562.3) 382.8 10,300.1 33%
(3,697.2) 672.2 336.1 (336.1) (3,025.0) 10,121.2 30% 23.5 2,959.1 13,103.8 (655.2) 613.9 11,834.7 35%
(5,090.4) 925.5 462.8 (462.8) (4,164.9) 15,520.4 34% 315.9 3,542.5 19,378.7 (968.9) 925.5 17,484.2 38%
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Emaar balance sheet (AEDm) Year to December Current Assets Cash and Cash Equivalents Assets held for sale Trade & Other Receivables Receivable from Project Finance Development Properties Development Work in Progress Short term investment Current Assets Investments in Associates Long Term Investments Other non-current assets Long Term Assets/ Non Current Intangible asset Hotels Property, Plant and Equipment Investment Properties Permanent Total Assets LIABILITIES Trade & Other Payables Borrowings-short term Notes Payable Current Liabilities Borrowing & long term debt Provision for employee services Long Term Liabilities/Non current Minority Interest in Subsidiaries Paid - Up Capital Statutory & Other Reserves Retained Earnings Shareholder's Equity Total Liabilities and Equity
2005a 10368.0 0.0 717.5 0.0 3025.8 0.0 2047.1 18087 3366.8 1555.8 0.0 5317.9 0.0 0.0 1875.6 6924.5 8800.1 32204.7
2006a 2329.3 0.0 600.9 0.0 11121.4 0.0 1518.6 19129 7043.5 973.3 0.0 8444.4 2962.0 0.0 4184.6 6970.5 14117.0 41690.1
2007a 6799.4 0.0 825.9 0.0 18269.0 0.0 1752.9 30270 8892.6 183.7 0.0 9492.2 2962.0 0.0 7109.2 4918.5 14989.7 54751.8
2008e 3583.1 0.0 1020.7 0.0 21594.5 0.0 1930.9 31547 9479.7 0.0 0.0 10460.9 2962.0 518.7 9521.5 6937.9 19940.0 61948.0
2009e 5303.7 0.0 2166.1 0.0 20987.1 0.0 1930.9 33806 11136.0 0.0 0.0 12117.2 2962.0 1414.7 9587.7 8310.1 22274.4 68197.4
2010e 9421.9 0.0 375.5 0.0 25432.4 0.0 1930.9 40579 13598.8 0.0 0.0 14580.0 2962.0 1344.8 9650.6 9876.2 23833.7 78992.2
2011e 17452.5 0.0 225.3 0.0 24717.5 0.0 1930.9 47744 16557.9 0.0 0.0 17539.1 2962.0 1278.4 9710.5 11374.9 25325.8 90609.0
2012e 36194.1 0.0 75.1 0.0 19125.1 0.0 1930.9 60743 20100.4 0.0 0.0 21081.6 2962.0 1215.3 9767.3 12835.3 26779.9 108604.7
5527.6 0.0 733.1 6260.7 238.7 9.0 247.7
6265.4 0.0 875.8 7141.3 3992.2 12.0 4004.2
8747.4 0.0 1005.2 9752.6 8395.9 16.3 8412.3
9668.1 0.0 858.1 10526.2 8948.4 27.3 8975.8
7519.6 0.0 667.4 8187.1 8948.4 27.3 8975.8
9784.0 0.0 476.7 10260.7 8948.4 27.3 8975.8
11202.9 0.0 286.0 11489.0 8948.4 27.3 8975.8
13346.5 0.0 95.3 13441.8 8948.4 27.3 8975.8
135.4 5780.2 13922.7 5862.5 25696.3 32204.7
565.9 6075.6 14669.1 9237.0 30544.7 41690.1
702.6 6091.2 15197.7 14596.9 36586.9 54751.8
667.2 6091.2 15863.8 19825.5 42446.0 61948.0
865.3 6091.2 15863.8 28216.0 51034.6 68197.4
1248.1 6091.2 15863.8 36554.3 59755.7 78992.2
1862.0 6091.2 15863.8 46329.0 70144.3 90609.0
2787.6 6091.2 15863.8 61446.3 86187.1 108604.7
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Emaar cash flow statement (AEDm) Year to December Operating Activities: Net Profit before Minorities Depreciation & amortization Change in Working Capital Interest Income & Exp Interest Recd Interest Paid Provision for employee end of service benefits Net cash generated from operating activities Investments activities: Capex (Excl Hotel Properties) Additions to Hotels Properties Additions to Investment Properties Associates Subsidiary Additions to Development WIP Acquisition/ sale of financial assets Movement in >3 months bank deposits Net cash generated from investment activities Financing activities: Dividends paid Share issue Bank Borrowings Raised Net Share Issuance Fee Borrowings Repaid Others Net cash generated from financing activities Net addition (deduction) in cash Cash at beginning of fiscal year Cash at end of fiscal year
2005a 4,729.1 99.0 1,554.5 1.6 6,065.7
2006a 6,355.7 118.0 (3,491.2) 3.0 2,882.2
2007a 3,266.9 77.2 (1,396.7) 3.1 1,586.9
2008e 3,805.8 407.7 (5,367.6) 35.0 121.6 (156.6) (1,154.1)
2009e 10,007.0 922.6 (2,877.2) 164.8 103.7 (268.5) 8,052.5
2010e 10,682.8 1,018.9 (581.0) 100.1 168.4 (268.5) 11,120.8
2011e 12,448.6 1,094.8 2,093.2 (23.5) 291.9 (268.5) 15,636.7
2012e 18,409.8 1,169.4 7,695.5 (315.9) 584.3 (268.5) 27,274.6
(1,475.2) (263.3) (2,350.1) (150.8) (1,344.7) (1,152.3)
(2,501.4) (183.7) (3,387.9) (4,223.4) 152.8 252.2
(2,055.0) (649.3) (249.5) 623.0 (835.9)
(1,629.9) (525.2) (477.3) -
(2,309.6) (947.5) (1,656.3) -
(2,578.1) (2,462.7) -
(2,586.9) (2,959.1) -
(2,623.5) (3,542.5) -
(6,736.5)
(11,360.6)
(3,166.6)
(2,632.4)
(4,913.4)
(5,040.9)
(5,546.1)
(6,166.0)
(340.3) 8,077.6 (400.0) 134.9 7,472.1
(2,355.2) 1,478.3 5,133.0 (3,567.0) (5.2) 683.9
(1,189.1) 79.9 5,299.1 (1,626.0) 4.1 2,567.9
(1,418.5) (1,418.5)
(1,961.8) (1,961.8)
(2,060.0) (2,060.0)
(2,366.9) (2,366.9)
6,801.4 -
(7,794.4) -
988.1 6,799.4 7,787.5
(3,786.5) 6,799.4 3,012.9
1,720.7 3,012.9 4,733.6
4,118.1 4,733.6 8,851.7
8,030.6 8,851.7 16,882.3
18,741.7 16,882.3 35,624.0
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Appendix
Supply analysis
In our opinion, off-plan listings are the best indicator of forthcoming supply given that: (1) most developments are pre-sold before construction breaks ground; (2) construction work takes three years to complete on average. Therefore, it is safe to assume that developments that have not yet been launched will not be delivered by the end of 2010. As such, in order to gauge future supply, we looked at off-plan listings by Better Homes (the leading real estate broker in the UAE), and, based on its market share, worked out total potential deliveries by end-2010. The company states that it controls roughly 30% of the market, which was in line with our expectations, but we have crosschecked to verify this figure. Gulf News provides the most comprehensive listings available we believe that it covers over 90% of units available for sale and can therefore be taken as a proxy for the size of the market. We found a total of 24,000 listings (both off-plan and ready units), while Better Homes has a total of 3,000 listings. If we account for the double-listing of properties by different brokers and Better Homes own listing on Gulf News, we estimate Better Homes market share at c20%, but reduce it to 10% in our analysis to be more conservative. Based on a 10% market share we estimate that there are roughly 20,000 off-plan units on the secondary market. This does not, of course, represent the total amount of off-plan units, as: (1) 20%-30% are held by developers to be released on delivery; and (2) others are held by end-users or speculators that are betting on further price appreciation. We assume that two-thirds are being held and therefore not reflected on the secondary market. We then cross-checked our figures with the delivery schedules of Emaar, Nakheel, and Union Properties. Additionally, we included nonfreehold and rental-only properties, such as Discovery Gardens (c35,000-unit investment property owned by Nakheel). As such we estimate that no more than 95,000 units will hit the market between 2008 and 2010.
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HSBC Global Research website

To maximise your access to HSBC Global Research please visit our website at www.research.hsbc.com where you can:
View the latest research and access archived reports Visit the dedicated product pages, including Emerging Markets and Climate Change Filter estimates for more than 1,000 companies under equity coverage Set up personal filters to put your research interests at your fingertips Look up HSBC research analyst contact details
E-mail subscriptions You can receive research directly via e-mail as soon as it is published. To set up subscriptions to research reports, contact your Relationship Manager. If you are having problems or need assistance with the website service, please contact your HSBC Relationship Manager or e-mail: ecare@hsbcib.com. http://www.research.hsbc.com
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Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Majed Azzam and Ankur Khetawat
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate, regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the analysts' valuation for a stock. From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors should take. Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts. For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.
Rating distribution for long-term investment opportunities

As of 13 October 2008, the distribution of all ratings published is as follows: Overweight (Buy) 51% (20% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 33% 16% (18% of these provided with Investment Banking Services) (7% of these provided with Investment Banking Services)
Share price and rating changes for long-term investment opportunities

Aldar Properties (ALDR.AD) Share Price performance AED Vs HSBC rating history Recommendation & price target history From N/A Target Price To Overweight (V) Value 14.24 20.30 20.40 18.90 25.30 Date 29 June 2007 Date 29 June 2007 29 November 2007 18 March 2008 29 April 2008 14 July 2008
23 18 13 8 3 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08
Price 1 Price 2 Price 3 Price 4 Price 5

Source: HSBC
Source: HSBC
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Emaar Properties PJSC (EMAR.DU) Share Price performance AED Vs HSBC rating history
Recommendation & price target history From N/A Target Price To Overweight (V) Value 23.00 21.00 Date 20 February 2008 Date 20 February 2008 14 July 2008
27 22 17 12 7 2 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08
Price 1 Price 2
Source: HSBC
Source: HSBC
Sorouh Real Estate (SOR.AD) Share Price performance AED Vs HSBC rating history
Recommendation & price target history From N/A Target Price To Overweight (V) Value 5.93 13.20 14.40 17.60 Date 04 September 2007 Date 04 September 2007 29 November 2007 18 March 2008 14 July 2008
17 12 7 2 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08
Price 1 Price 2 Price 3 Price 4

Source: HSBC
Source: HSBC
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HSBC & Analyst disclosures

Disclosure checklist Company ALDAR PROPERTIES SOROUH REAL ESTATE
Source: HSBC
Ticker ALDR.AD SOR.AD
Recent price 6.03 5.02
Price Date 10-Oct-2008 10-Oct-2008
Disclosure 4 4
1 2 3 4 5 6 7 8 9 10 11
HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 30 September 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. As of 31 August 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company.
Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 2 3 This report is dated as at 14 October 2008. All market data included in this report are dated as at close 13 October 2008, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. As of 30 September 2008, HSBC beneficially owned 5% or more of a class of common equity securities of the following company(ies): ALDAR PROPERTIES As of 30 September 2008, HSBC beneficially owned 2% or more of a class of common equity securities of the following company(ies): ALDAR PROPERTIES, SOROUH REAL ESTATE
4 5
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Disclaimer
* Legal entities as at 22 August 2007 Issuer of report 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking HSBC Bank Middle East Ltd Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC PO Box 4604 Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Dubai UAE Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets Telephone: +97 14 5077333 (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Fax: +97 14 3535079 Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Website: www.research.hsbc.com Shanghai Banking Corporation Limited, Seoul Securities Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Mltiplo. In the UAE this document has been approved by HSBC Bank Middle East Ltd (HBME) for the information of its customers and those of its affiliates only. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. It is not intended for Private Customers in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by HSBC Stockbroking (Australia) Pty Limited (ABN 60 007 114 605) for the general information of its wholesale customers (as defined in the Corporations Act 2001). It makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Bank Middle East Ltd is registered in Jersey, Channel Islands, is authorised and regulated by the Jersey Financial Services Commission and is a member of the Dubai International Financial Exchange. Copyright. HSBC Bank Middle East Ltd. 2008, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank Middle East Ltd. MICA (P) 258/09/2008
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GEMs Research Team

Multi-asset
Global Philip Poole Global Head of Emerging Markets Research +44 20 7991 5641 philip.poole@hsbcib.com
Fixed Income
Pieter Van Der Schaft +852 2822 4277 pietervanderschaft@hsbc.com.hk Virgil Esguerra +852 2822 4665 virgilesguerra@hsbc.com.hk Alejandro Mrtinez-Cruz Debt Markets +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx Hernan M Yellati Debt Markets +1 212 525 6787 hernan.m.yellati@us.hsbc.com
Economics
Latin America Andre A Loes +55 11 3371 8184 andre.a.loes@hsbc.com.br Javier Finkman +54 11 4344 8144 javier.finkman@hsbc.com.ar Ramiro D Blazquez +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar Jonathan Heath +52 55 5721 2176 jonathan.heath@hsbc.com.mx Juan Pedro Trevino-Gutierrez +52 55 5721 2179 juan.trevino@hsbc.com.mx Lorena Dominguez-Torres +52 55 5721 2172 lorena.dominguez@hsbc.com.mx Asia Qu Hongbin +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann +852 2822 4556 fredericneumann@hsbc.com.hk Robert Prior-Wandesforde +65 6239 0840 robert.prior-wandesforde@hsbc.com.sg Christopher Wong +852 2996 6917 christopherwong@hsbc.com.hk Janus Chan +852 2996 6975 januschan@hsbc.com.hk CEMEA Juliet Sampson +44 20 7991 5651 juliet.sampson@hsbcib.com Alexander Morozov +7 49 5721 1577 alexander.morozov@hsbc.com Murat Ulgen +90 21 2366 1625 murat.ulgen@hsbc.com.tr Simon Williams +971 4507 7614 simon.williams@hsbc.com
Equity CEMEA
Europe Will Manuel Head of CEMEA Company Research +44 20 7992 3602 will.manuel@hsbcib.com John Lomax Head of Equity Strategy, GEMs +44 20 7992 3712 john.lomax@hsbcib.com Wietse Nijenhuis +44 20 7992 3680 wietse.nijenhuis@hsbcib.com Maciej Baranski +44 20 7991 6782 maciej.baranski@hsbcib.com Anisa Redman +44 20 7991 6822 anisa.redman@hsbcib.com Herve Drouet +44 20 7991 6827 herve.drouet@hsbcib.com Sergey Fedoseev +44 20 7991 6831 sergey.fedoseev@hsbcib.com Veronika Lyssogorskaya +44 20 7992 3684 veronika.lyssogorskaya@hsbcib.com Turkey Cenk Orcan Co-Head of Turkey Equity Research +90 212 376 4614 cenkorcan@hsbc.com.tr Bulent Yurdagul Co-Head of Turkey Equity Research +90 212 376 4612 bulentyurdagul@hsbc.com.tr Levent Bayar +90 212 376 4617 leventbayar@hsbc.com.tr Tamer Sengun +90 212 376 4615 tamersengun@hsbc.com.tr Pinar Ceritoglu +90 212 376 4613 pinarceritoglu@hsbc.com.tr Erol Hullu +90 212 376 4616 erolhullu@hsbc.com.tr Cagan Orsun +90 212 376 46 20 caganorsun@hsbc.com.tr Israel Avshalom Shimei +972 3 710 1197 avshalomshimei@hsbc.com Yonah Weisz +972 3 710 1198 yonahweisz@hsbc.com United Arab Emirates Kunal Bajaj +971 4 507 7458 kunalbajaj@hsbc.com Majed Azzam +971 4 507 7380 majed.a.azzam@hsbc.com Egypt Alia El Mehelmy +202 2529 8438 aliaelmehelmy@hsbc.com Wael Orban +202 2529 8437 waelorban@hsbc.com Ahmed Hafez Saad +202 2529 8436 ahmedhafezsaad@hsbc.com
Credit
Dilip Shahani +852 2822 4520 dilipshahani@hsbc.com.hk Becky Liu +852 2822 4392 beckyjliu@hsbc.com.hk Devendran Mahendran +852 2822 4521 devendran@hsbc.com.hk Zhiming Zhang +852 2822 4523 zhimingzhang@hsbc.com.hk Olga Fedatova +44 20 7992 3707 olga.fedotova@hsbcib.com Chavan Bhogaita +971 4507 7695 chavanbhogaita@hsbc.com Keerthi Angammana Credit Strategy +44 20 79915431 keerthisri.angammana@hsbcib.com United Arab Emirates Chavan Bhogaita Head of Credit Research +971 450 77695 chavanbhogaita@hsbc.com
Currency
Clyde Wardle +1 212 525 3345 Richard Yetsenga +852 2996 6565 Daniel Hui +852 2822 4340 Perry Kojodjojo +852 2996 6568 Marjorie Hernandez +1 212 525 4109 clyde.wardle@us.hsbc.com richard.yetsenga@hsbc.com.hk danielpyhui@hsbc.com.hk perrykojodjojo@hsbc.com.hk marjorie.hernandez@us.hsbc.com
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GEMs Research Team (continued)

Equity CEMEA (continued)
Asia Sanjeev Kaushik India Head of Research +91 22 2268 1271 sanjeevkaushik@hsbc.co.in Real Estate Herald van der Linde +852 2996 6575 heraldvanderlinde@hsbc.com.hk Ashutosh Narkar +91 22 3023 1474 ashutoshnarkar@hsbc.co.in Louisa Fok +852 2996 6629 louisawmfok@hsbc.com.hk Michelle Kwok +852 2996 6918 michellekwok@hsbc.com.hk Alvin Wong +852 2996 6621 alvincmwong@hsbc.com.hk
Equity Strategy Garry Evans +852 2996 6916 Steven Sun +852 2822 4298 Leo Li +852 2996 6919 Jacqueline Tse +852 2996 6602
garryevans@hsbc.com.hk stevensun@hsbc.com.hk leofli@hsbc.com.hk jacquelinetse@hsbc.com.hk
Banks Todd Dunivant Head of Banks, Asia-Pacific +852 2996 6599 tdunivant@hsbc.com.hk York Pun +852 2822 4396 yorkkypun@hsbc.com.hk Saumya Agarwal +91 22 2268 1235 saumyaagarwal@hsbc.co.in Kathy Park +82 2 3706 8755 kathypark@kr.hsbc.com Shary Wu +852 2996 6585 sharywu@hsbc.com.hk Katherine Lei +852 2996 6926 katherinelllei@hsbc.com.hk Insurance John Russell +852 2822 4321 john.russell@hsbc.com.hk Patricia Cheng +852 2996 6584 patriciacheng@hsbc.com.hk Industrials Sumeet Agrawal +91 22 2268 1243 sumeetagrawal@hsbcib.in Steve Man +852 2822 4395 steveyfman@hsbc.com.hk Sandeep Somani +91 22 2268 1245 sandeepsomani@hsbc.co.in
Sachin Gupta +91 22 2268 1079 Mark Webb +852 2996 6574 Azura Shahrim +852 2996 6976 Eric Lin +852 2996 6570 Natural Resources Daniel Kang +852 2996 6669 Sarah Mak +852 2822 4551 Steven Hong Xing Li +852 2996 6941 Gary Chiu +852 2822 4297 Scully Tsoi +852 2996 6620 Chris Chan +852 2996 6619 sachin1gupta@hsbc.co.in markwebb@hsbc.com.hk azurashahrim@hsbc.com.hk ericpklin@hsbc.com.hk
Consumer Brands Sean Yang +852 2822 4342 seanyang@hsbc.com.hk Percy Panthaki +91 22 2268 1240 percypanthaki@hsbc.co.in Jessie Guo +852 2996 6572 jessieytguo@hsbc.com.hk Summer Wang +852 2822 4337 summerwywang@hsbc.com.hk TMT Steven C Pelayo +852 2822 4391 stevenpelayo@hsbc.com.hk Tse-yong Yao +852 2822 4397 tse-yongyao@hsbc.com.hk Tucker Grinnan +852 2822 4686 tuckergrinnan@hsbc.com.hk Walden Shing +852 2996 6751 waldenshing@hsbc.com.hk Shishir Singh +852 2822 4292 shishirkumarsingh@hsbc.com.hk Rajiv Sharma +91 22 2268 1239 rajivsharma@hsbc.co.in Wanli Wang +8862 8725 6020 wanliwang@hsbc.com.tw Frank Su +8862 8725 6025 frankkssu@hsbc.com.tw Christine Wang +8862 8725 6024 christineccwang@hsbc.com.tw Leo Tsai +8862 8725 6022 leocytsai@hsbc.com.tw Small & Mid-cap Herald van der Linde +852 2996 6575 heraldvanderlinde@hsbc.com.hk
Ken Ho +852 2996 6593 Elaine Lam +852 2822 4398 Parash Jain +852 2996 6717 Sandeep Somani +91 22 2268 1245 kenho@hsbc.com.hk elainehlam@hsbc.com.hk parashjain@hsbc.com.hk sandeepsomani@hsbc.co.in
danielkang@hsbc.com.hk sarahmak@hsbc.com.hk stevenhongxingli@hsbc.com.hk garychiu@hsbc.com.hk scullytsoi@hsbc.com.hk chris.chan@hsbc.com.hk

UAE Real Estate Sector Update October 2008

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UAE Real Estate Sector Update October 2008

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Global Emerging Markets UAE Real Estate

UAE Real Estate Sector Update

Global Emerging Markets UAE Real Estate 14 October 2008

Financials & valuation: Aldar Properties

16 14 12 10 8 6 4 2 2007 2008 2009

Ratio, growth and per share analysis

424.8 1512.3 1487.7 146.8 146.8

59.7 44.5 39.6 17.5 17.5

28.6 33.1 30.9 13.0 13.0

0.2 2.4 22.7 14.4 12.9 12.9 2.6 -23.3 -20.4

0.3 13.5 26.7 15.0 39.5 38.9 10.6 26.9 2.3

0.53 0.53 0.20 8.04 18.64

1.31 1.31 0.20 7.90 21.10

1.54 1.54 0.26 7.96 23.00

1.74 1.74 0.38 9.52 25.10

Global Emerging Markets UAE Real Estate 14 October 2008

Financials & valuation: Emaar Properties PJSC

28 23 18 13 8 3 2007 2008 2009

Ratio, growth and per share analysis

25.3 -10.0 -10.0 2.1 1.7

16.3 28.0 20.1 4.6 3.1

47.0 47.4 42.2 51.0 45.1

5.6 1.6 0.7 9.0 5.0

0.7 19.7 19.9 11.5 29.5 29.5 4.4 0.3 216.8

0.6 18.7 17.5 11.4 32.4 30.4 13.4 0.8 21.0

0.7 19.3 19.1 14.7 31.3 28.0 95.1 -0.5 0.0

1.08 1.08 0.20 5.89 13.60

1.11 1.11 0.20 6.78 14.69

1.61 1.61 0.32 8.17 16.67

1.69 1.69 0.34 9.54 16.83

Global Emerging Markets UAE Real Estate 14 October 2008

Financials & valuation: Sorouh Real Estate

14 12 10 8 6 4 2 0 2007 2008 2009

Ratio, growth and per share analysis

53.2 31.9 31.8 22.6 28.2

70.6 22.0 21.8 13.3 8.4

0.8 -29.9 56.2 19.2 -38.4 -38.4 0.4 -40.7 5.8

1.0 49.8 31.7 20.5 49.6 49.6 -27.4 -1.1

1.1 45.0 31.6 12.3 42.7 42.6 81.3 -27.2 -1.0

0.39 0.39 1.39 10.14

0.50 0.50 0.10 1.79 11.07

0.64 0.64 0.12 2.30 15.07

0.70 0.70 0.16 2.83 16.13

Global Emerging Markets UAE Real Estate 14 October 2008

but demand is being undermined by several factors

HSBC Supply est . Demand

Colliers Supply est . People per dwelling

Source: HSBC Research, Colliers International, Better Homes

Global Emerging Markets UAE Real Estate 14 October 2008

Total UAE mortgage book in USDm

4,981 3,550 4,767

5,255 3,617 5,009

5,848 11% 3,804 5% 5,542 11%

20,000 14% 10,000 10% 2008e 2009e 2010e

Source: HSBC Research, Better Homes

Source: Central bank data, HSBC estimates

3. Heightened risk perception lower mortgage LTVs

4. Negative sentiment and tighter regulation

Global Emerging Markets UAE Real Estate 14 October 2008

Global Emerging Markets UAE Real Estate 14 October 2008

Dubai supply forecasts overstated

HSBC Supply est . Demand

Colliers Supply est . People per dwelli ng

Sorouh valuation breakdown (AED per share)

Emaar valuation breakdown (AED per share)