UAE Real Estate - Deutsche Bank

Deutsche Bank Markets Research Middle East Real Estate, Construction and Building Materials

Industry

UAE Real Estate

Date

28 November 2013

Forecast Change

Real Estate Athmane Benzerroug

Positive sector outlook; Dubai Expo to support valuations, Buy Emaar Emaar is our top pick, Aldar rated Hold We continue to see positive momentum in the Dubai property market, triggered by attractive yields and property prices close to historical average. With Dubai hosting World Expo 2020, the sector should continue to attract strong investor interest, in our view. Emaar emerges as a winner among UAE property developers given its solid brand name, proven ability to sell new projects and strong government links. High quality retail/hotel assets (70% of EV) should provide leverage to strong Dubai tourism growth. The current share price offers c.30% upside to our AED8.1 target price, while for Aldar (Hold, TP AED2.5) positives seem already priced in.

Research Analyst (+971) 4 4283938 [email protected]

Top picks Emaar Properties (EMAR.DU),AED6.39

Buy

Source: Deutsche Bank

World Expo 2020, another leg to the Dubai growth story and the sector With Dubai hosting World Expo 2020, we estimate that the city would need significant infrastructure investments (c.USD43bn, or 47% of estimated 2013 GDP) which will boost employment, population/tourist growth (already at +5%/+10% p.a. respectively), supporting housing/hospitality demand. With projections for tourist visitors of 25m in 2020 (including the impact of the World Expo), up from 10m in 2012, the infrastructure requirements to absorb the anticipated number of tourist visitors are significant. UAE property market: Abu Dhabi catching up but no broader recovery Dubai property prices are up c.50% since 9M11 but still 45% below the peak of 2008 and close to the average price of the last 8 years. Compared with other major cities in the world, Dubai offers attractive property prices/rental yields and a low tax environment. Moreover, the Emirate’s “safe-haven” status, strategic location and growing tourism sector continue to attract investor interest. While Dubai has seen a broader recovery, the pick-up in prices in Abu Dhabi remains restricted to prime locations while we believe that long-term recovery will be dependent on the government’s ongoing initiatives to diversify the economy and control supply. Upside for Emaar, but limited for Aldar and other UAE names Our valuation of Aldar factors in a similar cap rate to Emaar (7.9%) for retail assets, which we believe leaves little room for upside as Aldar’s Yas Mall is set to open next year (70% pre-leased) while Emaar’s retail assets are generating substantial cash flows (c60% of EV). Our valuation of Aldar also factors in a potential revival of land sales similar to the past cycle. For Deyaar, Union Properties and RAK Properties, we maintain our Hold rating. After a strong YTD rally, UAE names are trading on par with EM peers (1.0x 2014E P/BV) and last seven years’ average P/BV multiple. Risks: UAE developers are exposed to the availability of mortgages, project financing, population growth, MENA economic conditions and consumer confidence, which are driving the real estate market. Also, project delays or cancellations and the failure to recover receivables and meet debt repayments could materially impact our earnings/valuation.

This report changes estimates, target prices and/or ratings for several stocks under our coverage. For details please see the individual company sections.

________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

28 November 2013 Real Estate UAE Real Estate

Table of contents

Executive summary ............................................................. 3 Outlook ................................................................................................................. 3 Valuation and risks ............................................................................................... 4

Aldar trading at par with Emaar despite nascent recurring income portfolio .................................................................. 5 Historical P/BV and P/NAV evolution ................................................................... 5 UAE developers – Historical P/BV vs. Dubai residential prices .............................. 6

Dubai growth story put into context of residential and hospitality market .............................................................. 10 Favorable macro backdrop ................................................................................. 10 Main drivers of Dubai property market .............................................................. 10 Future housing requirement in line with historical supply................................. 12 Where we stand in the pre-sales cycle: Emaar case study ............................... 14 Dubai property cycle: comparison with Singapore and Hong Kong ................. 15 Dubai property vs. global comparison favors Dubai .......................................... 16 Dubai in the context of World Expo 2020 .......................................................... 17

UAE property market: Abu Dhabi catching up but no broader recovery ............................................................... 21 Residential market: Dubai rebound, Abu Dhabi catching up but recovery not broad based ........................................................................................................ 21 Hospitality sector: Dubai, the regional tourism hotspot, AD also benefiting .... 25

Company section ............................................................... 28 Emaar Properties ............................................................... 29 Aldar Properties ................................................................. 38 Deyaar Development ......................................................... 56 RAK Properties .................................................................. 61 Union Properties ................................................................ 65

Page 2

Deutsche Bank AG/London


Executive summary Outlook Dubai has been transformed into an important hub for global trade with 2m inhabitants in 2012, a figure that has doubled in the past 10 years. We believe Dubai will continue to provide employment opportunities (improving economic fundamentals with GDP growth of c.5%) and keep its attractiveness in the context of its “safe-haven” status, low tax environment, world-class infrastructure and entertainment/retail propositions. On the back of these drivers, Dubai’s population could reach 3.1m in 2020 (assuming CAGR of 5% vs. 7% historically). To cater for the growing population, incremental housing requirements should represent c.170,000 units by 2020 (c.21,000 per year), in line with the historical average (c. 22,000 per year). That said, we believe that government initiatives to control future supply will be key. On the residential side, Dubai has witnessed 24 months of property price growth since end-2011 (+c.50% vs. Sept. 2011 lows) while current prices are close to the average of the past eight years and c.45% below the 2008 highs. We believe that Dubai will continue to witness interest (market mainly driven by foreigners) as compared with other major cities in the world. Dubai offers attractive property prices/rental yields (gross yields c.6% or c.2x Singapore and Hong Kong) and exposure to a growing tourism sector. The hospitality sector’s role as a driver of Dubai’s recovery (CAGR: 10% p.a., or 2x GDP growth and population growth) is set to continue with the city expecting 20m tourists by 2020 up from 4.7m in 2002 and 10m in 2012. To meet the government target of 20m tourists p.a. by 2020 Dubai would need an additional c.81,000 hotel rooms and serviced apartments, or 2x existing stock. This should lead to an additional requirement of 10,000 hotel rooms and serviced apartment units p.a. vs. historical average of 6,600 units p.a. World Expo 2020 should result in an additional flow of 5m tourists in 2020 and thus, incremental demand for hotel rooms. Emaar remains our top pick among MENA developers, offering attractive exposure to Dubai real estate/hospitality growth and superior quality assets. At CMP, the market is implicitly valuing retail assets at P/E of c.7.5x 2014E (or cap rate of 13.4%) vs. c.20x (5/6% cap rate) for global mall operators. Spin-off could lead to benchmarking Emaar’s retail portfolio against global peers, which should lead to re-rating of the stock. Finally, if we were to use the global average cap rate of 5.9%, this would imply an AED9.7 target price (c.+55% vs. latest closing price). We rate Aldar Properties as a Hold. Our valuation factors in a similar cap rate to Emaar (7.9%) for retail assets, which we believe leaves little room for upside as Aldar’s Yas Mall is set to open next year (70% pre-leased) while Emaar’s retail assets are generating substantial cash flows (c60% of EV). Further, our valuation also factors in a potential revival of land sales similar to the last cycle.


Page 3


Valuation and risks We use an SOTP approach to value UAE developers, as we believe it better captures the diverse nature of their businesses and assets. UAE developers are exposed to the availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence, which are driving the real estate market. Also, project delays or cancellations and the failure to recover receivables and meet debt repayment could materially impact our earnings/valuation.

Page 4



Aldar trading at par with Emaar despite nascent recurring income portfolio Historical P/BV and P/NAV evolution Emaar’s share price re-rating began in 2012, which is around the same time the Dubai real estate sector started showing signs of bottoming out. After rerating, Emaar trades at a 10% premium to BV (at cost) vs. historical discount of c.5%. In our view, Emaar’s premium to BV should continue to increase going forward as the company should benefit from Dubai hospitality growth and new project launches while potential spin-off of retail assets could unlock value. Emaar is trading at a c.35% discount (vs. c.50% six-year average) to 2012 NAV (the last update from the company). Figure 1: Emaar – P/BV evolution 150%

Figure 2: Emaar – P/NAV evolution 10%

+137%

0%

125%

-10%

100%

-20% 75%

-30%

50%

-35%

-40% -50%

25%

Avg: -4%

0%

Avg: -55%

-60% -70%

-25%

-80%

-50%

-88%

-90%

-65%

Source: Company, Deutsche Bank, Bloomberg Finance LP

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-13

Jul-12

Jan-13

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jul-08

Jan-09

Jan-08

Jul-07

-100%

Jan-07

-75%

Source: Company, Deutsche Bank, Bloomberg Finance LP

Currently Aldar’s share price already captures growth prospects with a P/BV at par with Emaar Properties (despite superior asset quality for Emaar), after considering 2013/15 outlook. Note that Aldar’s BV is at fair value (at mark to market while Emaar’s BV is at historical cost) which shows an optically low P/BV multiple. Figure 3: Aldar P/BV* – Premium/(Discount) to Emaar P/BV

2013E

2014E

2015E

Aldar

1.14

1.01

0.98

Emaar

1.10

1.04

0.98

3%

-3%

0%

Aldar premium/(discount) to Emaar Average premium/(discount)

0%

Source: Deutsche Bank * Note that Aldar BV is marked to market while Emaar’s BV is at cost


Page 5


Although historically Aldar has traded at a c.10% premium to Emaar, we remind investors that the historical premium remains skewed to extraordinary events including: 1) the rampant collapse of Dubai real estate starting in 4Q08 while the crisis in the Abu Dhabi market remained less volatile; 2) Aldar’s three asset bailouts by the Abu Dhabi government, which involved significant impairments resulting in a lower book and higher valuation (premium). Figure 4: Aldar’s P/BV*

Figure 5: P/BV premium/discount – Aldar vs. Emaar*

5.50

130%

2nd Aldar restructuring

Dubai RE crisis

110%

4.50

90% 3rd Aldar restructuring

70% 50% 30% 10%

Average P/BV

Source: Deutsche Bank, Bloomberg Finance LP – * Note that Aldar BV is marked to market while Emaar’s BV is at cost

02-Oct-13

02-May-13

02-Jul-12

02-Feb-12

02-Apr-11

02-Sep-11

02-Nov-10

02-Jan-10

02-Jun-10

02-Oct-08

Aldar over Emaar

02-Mar-09

02-May-08

02-Jul-07

02-Feb-07

02-Apr-06

-50%

02-Sep-06

02-Oct-13

02-Apr-13

02-Oct-12

02-Oct-11

02-Apr-12

02-Oct-10

02-Apr-11

02-Oct-09

P/BV

02-Apr-10

02-Oct-08

02-Apr-09

02-Apr-08

02-Oct-07

02-Oct-06

02-Apr-07

-30%

02-Apr-06

-0.50

Issue of convertible bodns

-10%

0.50

02-Dec-07

1.50

02-Aug-09

2.50

1st Aldar restructuring

02-Dec-12

3.50

Average Premium/Discount

Source: Deutsche Bank, Bloomberg Finance LP – * Note that Aldar BV is marked to market while Emaar’s BV is at cost

UAE developers – Historical P/BV vs. Dubai residential prices Figure 6: UAE developers – Historical P/BV

Figure 7: UAE developers – Historical P/BV vs. Dubai residential prices

4.50

2.5

3,000

4.00

2,500

3.50

2.0

3.00

2,000

2.50

1.5

2.00

1,500

1.50

1.0 1,000

1.00 0.50

0.5

500

Avg. P/BV UAE Developers

Average

0.0

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

0.00

Dubai Avg. Residential Selling Prices (AED/sqft) Source: Deutsche Bank

Page 6

UAE Developers P/BV



Target

Mkt Cap

Price

USD m

P/BV (x) 2012

P/E (x)

2013E 2014E

2012

2013E

Div yield (%) 2014E

2012

ROE (%)

2013E

2014E

2012

Gearing (%)

2013E

2014E

2012

EBITDA margin

2013E

2014E

2012

2013E

2014E

UAE Aldar Properties

AED

Hold

2.4

2.5

5,142

0.6

1.1

1.0

2.6

14.0

7.3

4.3

2.1

2.1

16.1

20.3

14.5

124.6

52.7

21.7

25.7

34.0

62.3

Emaar Properties

AED

Buy

6.2

8.1

10,597

0.7

1.1

1.1

9.4

16.4

14.7

3.1

1.6

1.6

6.6

7.1

7.5

24.2

17.0

12.2

40.5

36.6

38.3

Deyaar Development

AED

Hold

0.7

NA

1,086

0.5

1.0

1.0

61.0

40.6

31.2

0.0

0.0

0.0

1.0

2.7

3.2

17.5

13.4

10.0

17.0

25.4

21.4

Rak Properties

AED

Hold

0.7

NA

398

0.4

0.4

0.4

8.6

14.7

13.6

0.0

0.0

0.0

4.0

2.7

2.8

27.7

37.8

34.6

Union Properties

AED

Hold

0.9

NA

843

0.5

1.1

1.1

NM

12.9

24.2

0.0

0.0

0.0

7.1

12.3

4.5

133.3

40.1

27.1

7.7

13.1

10.6

18,066

0.5

1.1

1.0

9.0

14.7

14.7

0.0

0.0

0.0

6.6

7.1

4.5

24.2

17.0

12.2

25.7

34.0

34.6

UAE

(1.9)

(1.5)

(1.0)

Arriyadh Development Co

SAR

Sell

27.9

20.1

744

1.5

1.8

1.8

10.0

12.7

18.9

7.2

7.6

5.1

15.1

14.1

9.5

(19.5)

(19.1)

(10.9)

72.6

73.3

76.8

Dar Al Arkan

SAR

Buy

10.0

11.7

2,865

0.5

0.6

0.6

10.5

13.1

12.2

0.0

0.0

0.0

6.2

4.9

5.0

23.6

19.5

19.6

37.5

34.2

36.1

Emaar Economic City

SAR

Hold

12.3

10

2,788

0.9

1.3

1.3

44.3

96.3

47.5

0.0

0.0

0.0

2.5

3.1

2.8

25.4

29.1

31.4

50.2

51.7

32.3

Saudi Real Estate Co.

SAR

Hold

33.6

34.2

1,075

1.2

1.2

1.2

21.5

26.6

25.8

3.7

3.0

3.0

5.6

5.0

5.3

7,472

1.1

1.3

1.3

16.0

19.8

22.3

1.8

1.5

1.5

5.9

4.9

5.2

Saudi Arabia

(1.6)

(2.5)

(3.2)

57.8

70.8

70.1

11.0

8.5

8.2

54.0

61.3

53.1

Palm Hills Developments

EGP

Hold

2.5

2.2

379

0.8

0.8

0.7

NA

33.0

22.7

0.0

0.0

0.0

(3.9)

2.9

3.8

25.4

20.0

14.5 -

39.5

9.3

9.8

SODIC

EGP

Hold

21.3

21.7

259

0.9

0.8

0.8

6.3

8.4

9.0

0.0

0.0

0.0

12.4

10.4

8.7

5.3

12.9

10.9

21.6

18.8

20.0

TMG Holding

EGP

Hold

5.5

4.7

1,608

0.4

0.4

0.4

14.5

14.3

11.6

0.0

0.0

0.0

2.2

3.0

3.6

12.5

10.8

7.7

19.3

21.1

21.1

Egypt

2,246

0.8

0.8

0.7

10.4

14.3

11.6

0.0

0.0

0.0

2.2

3.0

3.8

12.5

12.9

10.9

19.3

18.8

20.0

MENA

27,780

0.7

1.1

1.0

10.2

14.5

16.8

0.0

0.0

0.0

5.9

4.9

4.8

20.5

15.2

11.5

26.7

34.1

33.5

PIK GROUP

RUB

Buy

2.0

3.5

Russia

1,133

11.5

2.2

1.5

11.1

6.6

5.0

0.0

0.0

0.0

244.4

51.7

36.2

NM

120.6

69.0

17.2

17.7

18.9

1,133

11.5

2.2

1.5

11.1

6.6

5.0

0.0

0.0

0.0

244.4

51.7

36.2

NM

120.6

69.0

17.2

17.7

18.9

33.4

16.2

SINPAS REIT

TRY

Buy

1.1

1.7

323

0.8

0.5

0.5

11.4

7.1

5.7

1.8

2.8

3.5

7.1

9.4

9.9

EMLAK REIT

TRY

Buy

2.7

3.3

5,092

1.9

1.2

1.2

11.6

9.6

10.0

4.3

5.2

5.0

13.1

17.0

12.1

Turkey

5,415

1.3

0.9

0.8

11.5

8.4

7.8

3.0

4.0

4.3

10.1

13.2

11.0

CEEMEA ex. MENA

6,547

1.9

1.2

1.2

11.4

7.1

5.7

1.8

2.8

3.5

13.1

17.0

34,327

0.8

1.1

1.0

11.1

14.0

13.6

0.0

0.0

0.0

6.6

7.1

CEEMEA Source: Deutsche Bank, company data

23.6

10.8

8.0

16.3

(55.2)

(38.9)

39.4

45.7

44.3

14.1

(15.8)

(14.1)

23.7

31.0

30.3

12.1

14.1

23.6

10.8

17.2

17.7

18.9

5.3

20.5

17.0

10.9

25.7

34.0

32.3

(5.2)

28 November 2013

Price

Real Estate

Currency Rating Current

UAE Real Estate


Figure 8: Deutsche Bank’s real estate sector comparables (as of 26 November 2013) – 1/3

Page 7

Mkt Cap

P/BV (x)

Price 10.0

USD m 3,796

2012 2013E 2014E 1.2 0.7 0.6

P/E (x)

Div yield (%)

ROE (%)

2013E 4.9

2014E 4.4

2012 5.1

2013E 6.0

2014E 6.4

2012 21.1

2013E 16.1

Gearing (%) 2014E 14.9

2012 55.6

2013E 58.5

EBITDA margin

AGILE PROPERTY

CNY

Hold

CHEUNG KONG HLDGS

HKD

Buy

122.7

146.4

36,659

0.8

0.8

0.7

9.3

11.7

10.5

3.0

2.6

2.6

9.9

6.9

7.3

7.8

5.4

5.1

51.2

47.0

38.5

CHINA RESOURCES LAND

HKD

Buy

20.6

27.3

15,442

1.8

1.6

1.4

12.6

12.2

9.3

2.1

1.7

1.7

16.3

13.5

15.7

40.5

52.4

42.5

31.3

28.8

33.5

COLI

HKD

Buy

23.5

31.2

24,721

2.2

1.8

1.5

7.8

8.9

7.4

2.3

1.8

1.9

23.8

22.1

21.9

20.5

24.7

10.1

36.3

37.7

41.9

COUNTRY GARDEN HOLD

CNY

Buy

5.0

6.5

10,770

1.5

1.6

1.4

6.6

8.1

6.2

5.4

4.6

6.1

20.3

21.2

24.1

64.6

66.7

59.4

28.4

25.9

27.1

FRANSHION

HKD

Buy

2.5

4.0

2,954

0.9

0.7

0.7

11.5

8.6

7.3

3.2

3.2

3.6

12.3

10.4

11.2

44.6

29.1

11.0

41.0

39.7

39.7

GUANGZHOU R&F PROP

CNY

Buy

12.2

18.6

5,079

1.3

1.0

0.9

5.0

5.4

4.0

7.6

7.3

7.5

22.5

20.1

23.0

84.9

94.6

75.3

35.2

27.2

31.7

SHK PROPERTIES LTD

HKD

Buy

100.0

137.1

37,281

0.7

0.7

0.7

12.2

13.7

12.5

3.3

3.1

3.4

13.2

11.0

5.4

16.2

12.3

16.4

38.3

39.3

36.6

SHUI ON LAND LTD

CNY

Buy

2.5

5.0

1,856

0.3

0.3

0.3

6.2

4.0

4.2

6.7

6.7

6.7

6.7

8.9

7.3

65.6

54.0

43.5

47.5

51.5

50.5

SINO LAND CO

HKD

Buy

10.8

16.5

8,235

0.7

0.6

0.6

17.2

9.1

7.7

3.8

4.2

4.2

11.3

7.2

8.1

6.6

1.1

44.9

43.2

30.0

146,793

1.0

0.8

0.7

8.5

8.8

7.4

3.5

3.7

3.9

14.8

12.2

13.1

42.5

40.8

37.3

38.5

35.1

China & HK

2012 5.7

2014E 60.8

2012 33.8

2013E 32.1

2014E 33.7

(7.6) 29.4

CAPITALAND LTD

SGD

Buy

3.0

4.4

10,222

1.0

0.8

0.8

34.8

26.1

17.9

2.3

2.3

2.3

6.2

6.1

4.5

44.7

47.2

40.7

20.2

30.2

28.5

CITY DEVELOPMENTS

SGD

Hold

9.9

11.2

7,192

1.6

1.1

1.1

17.2

15.7

14.3

1.2

1.6

1.3

9.6

9.5

8.1

24.6

18.5

14.6

31.9

36.1

30.5

KEPPEL LAND

SGD

Buy

3.5

4.3

4,343

1.0

0.8

0.8

10.6

13.1

13.0

3.7

2.3

2.3

14.5

6.6

6.3

22.1

26.9

20.5

23.6

24.2

19.1

WING TAI HLDGS

SGD

Hold

2.0

2.2

1,158

0.5

0.6

0.5

6.5

4.8

9.1

5.6

6.6

3.5

12.0

21.5

6.1

16.6

13.7

9.3

27.1

32.8

27.9

22,914

1.0

0.8

0.8

13.9

14.4

13.6

3.0

2.3

2.3

10.8

8.0

6.2

23.3

22.7

17.6

25.4

31.5

28.2 37.1

Singapore DLF

INR

Buy

147.5

220.0

6,820

1.3

1.4

0.8

30.0

52.1

20.2

0.8

0.9

1.2

4.6

2.6

4.3

82.2

69.7

50.7

40.5

33.8

SOBHA DEVELOPERS

INR

Buy

323.4

400.0

509

1.6

1.5

1.3

12.0

13.3

8.1

2.0

1.9

2.2

10.7

11.4

16.8

56.2

51.8

39.2

33.1

25.1

27.0

7,329

1.4

1.5

1.0

21.0

32.7

14.2

1.4

1.4

1.7

7.6

7.0

10.5

69.2

60.8

45.0

36.8

29.5

32.1

India SUMMARECON

IDR

Buy

830.0

1,200.0

Indonesia

1,017

3.7

2.7

2.3

14.1

11.4

10.8

1.0

2.0

2.6

26.1

26.0

22.9

(34.2)

11.9

1.3

32.2

39.6

42.0

1,017

3.7

2.7

2.3

14.1

11.4

10.8

1.0

2.0

2.6

26.1

26.0

22.9

(34.2)

11.9

1.3

32.2

39.6

42.0

AYALA LAND

PHP

Hold

27.4

28.4

8,857

4.5

3.9

3.6

32.1

38.2

31.8

1.0

1.2

1.3

12.4

11.2

11.8

44.6

22.1

27.5

29.5

30.3

30.4

FILINVEST LAND

PHP

Buy

1.3

2.2

732

0.8

0.7

0.6

9.3

8.5

7.7

3.6

3.6

3.6

7.7

7.9

8.3

51.1

52.5

59.2

33.5

34.8

34.7

MEGAWORLD

PHP

Buy

3.3

3.8

2,232

1.1

1.2

1.1

7.6

13.3

12.6

1.4

0.9

0.9

11.0

9.7

9.1

27.7

30.3

33.9

11,821

1.1

1.2

1.1

9.3

13.3

12.6

1.4

1.2

1.3

11.0

9.7

9.1

29.5

30.3

33.9

Philippines

(8.3) 44.6

(8.9) 22.1

(9.5) 27.5

LAND AND HOUSES

THB

Buy

10.1

15.4

3,165

3.2

3.1

2.9

13.9

17.5

14.8

5.0

4.0

4.7

18.7

18.3

20.1

76.9

83.1

81.2

19.9

20.9

21.3

LPN

THB

Hold

18.4

22.0

849

3.2

2.7

2.3

11.1

10.3

8.8

4.5

4.9

5.7

28.6

29.0

28.9

19.9

19.7

23.6

20.8

20.4

21.1

PREUKSA REAL ESTATE P

THB

Hold

21.3

22.0

1,452

2.3

2.0

1.7

9.5

9.6

9.4

3.2

3.1

3.2

21.0

22.4

19.5

79.4

88.8

104.8

19.3

19.5

19.8

QUALITY HOUSES PCL.

THB

Buy

2.8

6.0

804

1.4

1.7

1.6

7.4

12.8

12.0

8.6

5.0

5.3

16.6

13.6

13.7

134.9

134.2

140.3

10.8

10.3

10.7

6,270

2.7

2.4

2.0

10.3

11.6

10.7

4.8

4.4

5.0

19.9

20.3

19.8

78.2

86.0

93.0

19.6

20.0

20.4

Thailand SP SETIA

MYR

2,244

1.8

1.3

1.2

19.3

15.9

14.1

2.8

3.5

3.8

10.8

8.6

9.1

57.9

38.6

36.6

21.1

19.7

19.4

2,244

1.8

1.3

1.2

19.3

15.9

14.1

2.8

3.5

3.8

10.8

8.6

9.1

57.9

38.6

36.6

21.1

19.7

19.4

Asia

198,388

1.3

1.2

1.1

11.1

11.7

9.4

3.2

3.1

3.4

12.4

11.2

11.2

44.6

38.6

36.6

31.9

30.3

30.5

Emerging Markets

232,715

1.1

1.1

1.0

11.1

12.9

11.2

2.9

2.3

2.4

11.7

10.4

8.9

25.4

24.1

20.1

30.4

31.2

31.1

Other Asian countries

Source: Deutsche Bank, company data

Buy

2.9

4.3

28 November 2013

Target

Price 8.5

Real Estate


UAE Real Estate

Page 8



USD

Buy

Target Price 27.0

Mkt Cap

P/BV (x)

USD m 6,996

2012 2013E 2014E 1.8 1.5 1.4

P/E (x) 2012 5.6

2013E 16.1

Div yield (%) 2014E 12.3

2012 2.0

2013E 0.2

ROE (%)

2014E 0.0

2012 8.5

2013E 12.0

Gearing (%) 2014E 13.7 NM

2012 40.2 NM

2013E 63.3 NM

EBITDA margin

2014E 57.1

2012 6.6

2013E 10.7

2014E 12.1 10.3

K. HOVNANIAN

USD

Hold

5.0

4.5

725

NM

NM

NM

NM

27.0

10.4

0.0

0.0

0.0

NM

NM

NM

4.0

9.3

KB HOME

USD

Hold

17.8

21.0

1,560

2.9

2.8

2.5

NM

24.0

11.4

1.3

0.6

0.6

(14.9)

13.6

22.3

317.7

209.6

212.2 -

2.5

6.3

7.9

LENNAR

USD

Hold

36.1

38.0

6,860

2.1

1.8

1.6

9.1

17.6

16.2

0.6

0.4

0.4

22.5

12.7

12.3

67.3

82.3

87.7

8.8

13.0

13.7

M.D.C. HOLDINGS

USD

Buy

30.4

43.0

1,473

2.0

1.2

1.1

23.9

4.6

12.9

6.6

0.0

3.3

26.3

32.7

9.2

12.4

10.9

29.6

22.0

12.8

13.0

MERITAGE HOMES

USD

Buy

43.8

52.0

1,581

1.8

1.9

1.7

10.8

14.6

10.7

0.0

0.0

0.0

17.9

15.7

17.5

79.6

63.4

49.5

5.1

10.3

11.8

PULTEGROUP, INC.

USD

Hold

19.0

19.0

7,241

3.2

1.6

1.5

17.0

13.2

16.9

0.0

0.8

1.1

10.0

76.8

9.0

56.8

14.5

13.0

11.3

15.6

15.9

RYLAND HOMES

USD

Buy

40.0

49.0

1,791

3.2

2.0

2.1

29.8

6.0

11.4

0.5

0.3

0.3

9.3

26.9

20.0

98.9

59.3

62.5

6.3

10.3

11.7

TOLL BROTHERS

USD

Buy

34.9

39.0

United States

5,903

1.8

1.8

1.7

9.2

45.4

24.5

0.0

0.0

0.0

17.1

4.3

7.4

29.3

47.1

46.2

11.8

13.6

16.4

34,130

2.0

1.8

1.6

10.8

16.1

12.3

0.5

0.2

0.3

13.5

14.6

13.0

62.1

61.3

53.3

6.6

10.7

12.1 13.2

BARRATT DEVELOPMENT

GBP

Buy

346.7

394.0

3,355

0.5

1.0

1.0

13.6

15.5

12.1

0.0

1.1

2.8

2.3

2.5

8.7

6.5

1.8

8.6

7.1

BELLWAY

GBP

Hold

1,531.0

1,592.0

2,940

0.9

1.5

1.4

11.2

16.8

12.1

2.7

2.0

2.8

7.2

9.2

11.8

6.7

3.6

10.0

11.6

13.8

15.3

BERKELEY GROUP HLDGS

GBP

Hold

2,430.0

2,358.0

3,303

1.5

2.1

2.1

13.6

11.4

15.4

0.0

4.6

3.1

15.6

17.3

17.8

5.3

(3.4)

(15.9)

21.9

20.7

21.5

BOVIS HOMES

GBP

Buy

822.5

1,008.0

1,737

1.0

1.3

1.2

15.8

18.8

11.8

1.9

1.6

2.4

6.1

7.3

10.7

(1.7)

(1.1)

(6.8)

14.7

15.1

16.8

PERSIMMON

GBP

Hold

1,246.0

1,310.0

6,003

1.2

1.9

1.7

11.6

15.7

12.9

1.5

6.1

2.0

8.9

11.4

13.3

(10.1)

(4.7)

(5.2)

13.4

15.5

16.7

REDROW

GBP

Hold

288.4

294.0

988

0.7

1.3

1.5

11.1

11.4

12.6

0.0

0.6

1.6

5.9

9.2

12.5

2.5

14.9

29.3

10.3

12.1

14.5

TAYLOR WIMPEY PLC

GBP

Buy

114.5

151.0

5,745

1.1

1.6

1.5

11.1

14.2

12.0

1.2

4.8

1.3

12.1

11.8

13.1

3.0

2.3

5.1

11.4

15.3

16.2

YIT CORPORATION

EUR ndation

9.5

NA

1,651

1.8

1.4

1.2

12.9

9.7

7.9

0.0

5.7

7.0

14.5

12.5

16.5

72.1

62.8

51.1

11.0

9.8

11.0

25,722

1.0

1.4

1.4

12.2

14.8

12.1

0.6

3.3

2.6

8.0

10.3

12.8

4.1

2.0

1.9

11.5

14.4

15.7 33.0

Europe

(1.4)

AUSTRALAND

AUD

Hold

3.7

3.7

1,958

1.0

1.1

1.0

11.2

14.6

14.2

7.8

5.8

6.0

5.8

5.5

5.6

46.8

49.0

48.7

25.7

34.5

LEND LEASE

AUD

Buy

11.0

12.4

5,388

1.1

1.1

1.5

8.6

9.5

11.5

5.0

4.7

3.9

13.6

13.5

12.8

16.8

10.1

20.3

6.2

6.2

6.1

7,346

1.0

1.1

1.3

9.9

12.1

12.9

6.4

5.3

4.9

9.7

9.5

9.2

31.8

29.5

34.5

16.0

20.4

19.5

Australia DAIWA HOUSE INDUSTRY

JPY

Hold

1,966.0

2,000.0

8,802

1.0

1.4

1.6

17.1

11.0

16.1

2.5

2.8

1.9

5.1

9.5

10.6

20.2

17.2

1.3

8.6

8.7

7.8

MITSUBISHI ESTATE

JPY

Hold

2,824.0

3,150.0

27,644

1.6

2.9

3.1

32.7

50.4

71.5

0.9

0.7

0.4

4.6

3.6

4.4

118.7

151.9

145.1

21.1

20.7

24.1

155.8

170.7

171.4

14.6

MITSUI FUDOSAN

JPY

Hold

3,450.0

3,900.0

18,153

1.3

2.0

2.5

23.2

25.3

45.5

1.7

1.3

0.6

4.8

5.3

5.5

13.4

14.3

PANAHOME

JPY

Hold

717.0

675.0

1,052

0.8

0.8

0.9

14.6

11.9

14.9

2.8

2.9

2.8

5.1

5.9

6.2

(17.9)

(10.9)

(12.1)

4.7

5.1

6.0

SEKISUI CHEMICAL

JPY

Hold

1,194.0

1,150.0

4,513

1.1

1.3

1.4

12.1

12.4

14.7

2.3

2.5

1.8

8.1

7.8

9.8

12.6

3.8

4.6

9.3

9.2

10.7

SEKISUI HOUSE

JPY

Hold

1,383.0

1,550.0

6,459

0.6

0.9

1.2

17.1

11.2

12.8

2.7

3.6

3.2

3.9

6.1

9.6

12.6

11.2

16.4

5.8

6.5

8.2

SUMITOMO FORESTRY

JPY

Buy

NA

1,400.0

1,570

0.8

0.9

1.1

12.8

8.2

10.9

2.2

2.3

1.6

5.6

8.8

10.7

4.7

2.9

3.3

4.1

4.3

SUMITOMO R&D

JPY

Hold

4,840.0

4,800.0

12,829

1.7

2.7

3.3

14.6

17.8

33.3

1.2

0.9

0.4

9.9

10.1

10.5

434.7

386.7

352.5

26.6

25.7

25.9

TOKYO TATEMONO

JPY

Hold

1,013.0

935.0

(0.5)

4,308

0.9

2.1

1.5

12.6

53.7

55.6

1.7

0.4

0.5

5.3

3.9

3.1

212.2

195.9

282.9

20.4

14.4

20.5

Japan

85,330

1.0

1.4

1.5

14.6

12.4

16.1

2.2

2.3

1.6

5.1

6.1

9.6

20.2

17.2

16.4

9.3

9.2

10.7

World

385,243

1.1

1.3

1.2

11.6

13.1

12.2

2.0

2.0

2.1

9.9

10.1

9.8

25.0

22.1

20.5

20.9

20.7

21.1

Source: Deutsche Bank, company data

28 November 2013

D.R. HORTON

Price 19.9

Real Estate


UAE Real Estate



Page 9


Dubai growth story put into context of residential and hospitality market Favorable macro backdrop Dubai witnessed a strong economic recovery since the 2009 crisis with annual GDP growth close to 4/5%, mainly driven by Trade and Tourism sectors (c.50% of GDP). Dubai remains the regional logistic hub between Asia and US/Europe with the second busiest airport in the world after Heathrow. Figure 11: Dubai GDP growth (at

Figure 12: Dubai GDP contribution

constant prices)

by sector – 2012

5.0%

Others 15%

4.4%

4.0%

3.5%

3.5%

Manufacturing 16%

3.3%

Figure 13: Dubai population (m) 3.0 2.5

3.0%

CAGR: 5.0% CAGR: 6.4%

2.0

2.0%

Real estate & Construction 20%

1.0% 0.0%

1.8

1.9

2

2.1

2.2

2.3

2.4

1.6 1.5 1.0

-1.0% -2.0% -3.0%

Transport, trade & tourism 49%

-2.7%

-4.0% 2008

2009

2010

2011

2012

Source: Dubai Statistics Center

0.5 0.0 2008

Source: Dubai Statistics Center

2009

2010

2011

2012

2013E

2014E

2015E

Source: Dubai Statistics Center, Deutsche Bank

Main drivers of Dubai property market We believe that the Dubai property market will continue to capture the attention of investors, which should lead to price appreciation over the midterm. Dubai’s improving transport, trade and tourism sectors highlight the strength of its economic recovery, which should lead to growing investor confidence spreading to the property market. The main drivers of the Dubai market are:

Strong population growth of c.5% per year.

Connectivity: Dubai real estate attracts investors from a diverse pool of nationalities given its geographic location, which straddles east and west, as well as north and south. This simple fact has been capitalized on by the authorities, who have developed a strong logistics and transportation hub, acting as a natural magnet for businesses and for wealthy individuals from the four corners.

Capital hedging: the UAE currency (Dirham) is pegged to the US dollar, offering EM investors a natural hedge against possible volatility in their base currencies.

Tax-free income repatriation.

Page 10



Political stability and personal security increasingly important factors especially for regional Arab investors.

Increasingly global branding: Dubai is increasingly compared to global EM or global cities, rather than just EM cities. As current prime property prices remain cheaper than those in most global cities, and given Dubai’s world class infrastructure, entertainment, leisure and sports offerings, Dubai is an increasingly strong contender for second home options.

Figure 14: Type of property buyers in Dubai by value of transaction – 1H13

Others 25%

GCC 30%

Russia 3% Iran 4% Pakistan 6%

Arabs ex GCC 9% UK 8%

India 15%

Source: Dubai Land Department, Deutsche Bank


Page 11


Future housing requirement in line with historical supply Dubai has been transformed into an important hub for global trade with 2m inhabitants in 2012 and a residential stock of c.355,000 units (freehold areas). Both population and residential stock have doubled in the past 10 years. One of seven emirates that comprise the UAE, it is considered a safe, inclusive and cosmopolitan destination. We believe Dubai will continue to provide employment opportunities (improving economic fundamentals with GDP growth of c.5%) and keep its attractiveness in the context of “safe-haven” status, low tax environment, world-class infrastructure and entertainment/retail propositions. On the back of these drivers, Dubai’s population would reach 3.1m in 2020 (assuming CAGR of 5% vs. 7% historically). To cater for the growing population, incremental housing requirement should represent c.170,000 units by 2020 (c.21,000 per year vs. c.22,000 per year for the past six years). That said, we believe that government initiatives to control future supply will be key. On the tourism side, the stock of hotels/hotel apartments was close to c.80,410 units to meet the requirement for over 10m tourists during 2012, which doubled from the 2002 level. The hotel industry has seen robust growth over the past decade, mainly driven by the flourishing tourism industry and the increasing number of international airport passengers coming to Dubai. Dubai’s government has set a target of 20m tourists p.a. by 2020 supported by increasing airport’ capacity (Dubai is the world’s second busiest airport for international passengers) and new tourism projects, which should generate additional demand. Assuming c.20m tourists visit Dubai during 2020 (up from 10m in 2012) would mean an additional c.81,000 hotel rooms and serviced apartments or 2x existing stock. This should lead to an additional requirement of 10,000 hotel rooms and serviced apartment units p.a. (assuming serviced apartments will continue to represent c.30% of the hospitality stock or c. 2,900 units p.a.). This does not factor in Dubai’s potential successful bid for World Expo 2020, which should result in an additional flow of 5m tourists in 2020 and thus, incremental serviced apartment requirement.

Page 12



Figure 15: Dubai growth story put into context of residential and hospitality market

Dubai residential market

Housing requirement vs. historical supply Past

Present

Future

Market

Hitorical trend

2002

2012

2020

2013-20

2007-2012

525k Housing requirement (Demand) 355k 21k units per year 142k

3.1 m Supply in Dubai for last 6 years : 22K units per year

2.1 m 1.0 m

Po p ula tio n Ho us ing Sto c k

Hospitality requirement vs. historical suppl Past

Present

Future

Market

Hitorical trend

2002

2012

2020

2013-20

2007-2012

Dubai hospitality market

162k H:115k, SA:46K Hotel rooms/serviced apartments requirement 10k units per year H:7.1k, SA:2.9k

80k H:57k, SA:23k 20.0 m 31k H:23k, SA:8k 10.0 m 4.8 m

Supply in Dubai for last 6 years : 6.6K units per year

To uris ts Ho s p ita lity Sto c k ( H: Ho tel, SA: Serv ic ed Ap a rtm ent) Source: Deutsche Bank, Dubai Department of Tourism and Commerce, Company, Jones Lang LaSalle


Page 13


Where we stand in the pre-sales cycle: Emaar case study We try to evaluate where we stand in the Dubai residential property market cycle. To understand the potential sales that the Dubai market can absorb, we looked at Emaar’s pre-sales as a proxy for the Dubai market. Two clear observations we make are that:

Residential pre-sales peaked in June 2008 following a boom period starting in 2006 (in line with residential prices).

The current pre-sales level is up 5x from the 2012 level, when the Dubai market started recovering from the end-2011 level, but c.50% below the peak seen in June 2008/c.26% below 2007, suggesting room for further growth.

Our conclusion is that:

The current level of pre-sales reflects renewed investors’ confidence but is still well below the growth levels seen in 2006-07 and far from the 2008 peaks. Pre-sales closely track residential property price trends, and if property prices continue to appreciate, pre-sales by Dubai developers should increase in line, reflecting growing investor confidence.

Figure 16: Emaar’s pre-sales (USDm)

Figure 17: Emaar’s pre-sales per month (USDm)

5,000 4,353

4,500

600

548

4,000 3,287

3,500

500

3,000 2,500

2,233

2,000 1,500 1,000 500

363

400 Emaar did not disclose level of pre sales Given crisis period, level of pre sales should be insignificant

2,153 269

300 200

186

593 100 49

2006

Source: Deutsche Bank, Company

Page 14

2007

1H08

2008

2009

2010

2011

2012

2013-YTD AUG

Source: Deutsche Bank, Company



Dubai property cycle: comparison with Singapore and Hong Kong We have tried to put into perspective the Dubai property market cycle by comparing it with similar markets driven by foreign investor demand and tourism (namely, Singapore and Hong Kong). Our main conclusions are:

The Dubai real estate crash has been harsher/faster than that in Singapore and HK.

It took around three years for Dubai to start recovering, in line with the Singapore market but less than the six years for HK.

Singapore and HK prices have recovered 70% and 40%, respectively, in the two years since bottoming out. Dubai has recovered c.50% since bottoming out two years ago.

Both the Singapore and HK markets witnessed a phase of stable prices after the sharp recovery, before starting a new uptrend. For the Singapore market, prices remained stable for a long period (c.4 years), while for the HK market, there was one year of stable prices after the long bottoming-out phase.

It took around nine years from the peak for both the Singapore and HK markets to start a new secular uptrend. If the Dubai property market follows the same path as these two similar markets, it may near the peak next year before witnessing stable prices for the next 3-4 years and starting its next uptrend.

Figure 18: Evolution of Dubai, Singapore, HK residential prices 140

Peak Singapore: Q2 1996

120

Peak Hong Kong: Q2 1997

100 80 60 HK : +270% in c.10 years - CAGR: 14%

40 Peak Dubai: Q3 2008

20

Dubai residential

Hong Kong residential

T+17Y

T+16Y

T+15Y

T+14Y

T+13Y

T+12Y

T+11Y

T+10Y

T+9Y

T+8Y

T+7Y

T+6Y

T+5Y

T+4Y

T+3Y

T+2Y

T+1Y

Peak

T-1yr

-

Singapore residential



Page 15


Dubai property vs. global comparison favors Dubai The Dubai property market is characterized by a high level of cash transactions (anecdotal evidence suggests c.80%) and is dominated by foreign investors. While fundamental demand drivers like population growth of c.5% (largely represented by an influx of expatriates) are in place, strong investor demand triggered by high yields, as indicated by the high level of cash transactions, bodes well for the absorption of new supply. Despite displaying a strong price recovery over the past seven quarters, prices for prime luxury properties in Dubai are still lower than those in most other cities that are relevant to highnet-worth investors. Figure 19: Average selling price of prime properties across major cities and growth – 2012 25%

6,000

20% 5,000 15% 10%

4,000

5% 3,000

0%

2,000

-5% -10%

1,000

-15% -

-20%

Avg. Price (US$/sqft.)-Prime Properties

Growth (yoy)-2012

Source: Knight Frank Wealth report 2013, Prices are average of price range mentioned in the report. For Dubai, we have considered Burj Khalifa tower, Deutsche Bank

Page 16



Dubai in the context of World Expo 2020 Infrastructure investments for World Expo 2020 The site for Dubai World Expo 2020 would be Dubai Trade Center – Jebel Ali, a 438 hectare site on the south-western edge of Dubai, almost equidistant from the centers of Abu Dhabi and Dubai. The DP World-owned Jebel Ali Port, which is among the top ten busiest ports in the world, is close to Dubai Trade Center – Jebel Ali. With major international airports in Dubai and Abu Dhabi, and further linked through emirates such as Sharjah, the UAE is a wellconnected destination.

For full details on Dubai Expo, please refer to the MENA Strategy report – 19 June 2013 published by Aleksandar Stojanovski Strategy Report June 2013

Undoubtedly, Dubai has the most advanced infrastructure among its regional peers and is the city best placed, in a regional context, to host an event such as the World Expo. Nevertheless, with projections for tourist visitors of 25m in 2020, up from 10m in 2012, the infrastructure requirements are significant. Although some of the expected visitors could be absorbed by the existing and expected infrastructure in Abu Dhabi, the city would still need significant (c.47% of estimated 2013 GDP) investments should the event be awarded to Dubai. By our estimates, c.USD43bn in infrastructure investments would be required to solely host the Expo event, though the spending could be reduced significantly if we were to consider that up to 30-40% of the visitors could benefit from the neighboring infrastructure, mainly Abu Dhabi. We summarize some of the investment requirements that Dubai would need by 2020 in order to absorb the anticipated number of tourist visitors and to potentially host the World Expo 2020. Figure 20: Estimated capital spending of c.USD43bn Infrastructure Spending Airport Expansion Construction of hotel rooms and hotel apartments

Creation of additional retail space Metro expansion plan

Estimated Cost

Method

USD 7.8bn

Based on Dubai airports authority projections

USD24bn

Estimates based upon c.25m tourists visiting Dubai in 2020E, 95% occupancy rates and with average current construction costs of AED1.5m per hotel room

USD9bn

Estimates based on the projected population growth, number of expected tourists in 2020, 10% vacancy rates and average construction cost of AED 1000 per sq ft

USD1.38bn

Jebel Ali Port – T3 Terminal

USD 1bn

Sum Total

USD43bn

Based on Dubai roads and transport authority (RTA) Based on DP World Website – Jebel Ali Port

Source: Deutsche Bank, Dubai Airport Authority, Dubai Roads and Transport Authority, expo2020dubai.ae website


Page 17


The hospitality and retail proposition The hotel industry has seen robust growth over the past few years, mainly driven by the flourishing tourism industry and the increasing number of international airport passengers coming to Dubai. An increase in the airlines’ capacity plus the announcement of new tourism projects should generate additional demand. Over 10m tourists visited Dubai in 2012, up 9% over 2011. A 13% surge in airport arrivals in 2012 has helped support the demand for tourism, and for hotels and hotel apartments in particular. Hospitality requirements

We see a robust hotel supply pipeline over the next couple of years, which would be vital to absorb the expected tourism demand in the future. According to Dubai Tourism and Commerce marketing, approximately 3,500 rooms were added to Dubai’s hospitality supply in 2012, representing growth of 6.5% YoY. With some major projects due for completion in the coming years, we can expect the addition of some 11,000 rooms by the end of 2015. According to our projections, assuming c.25m tourists visit Dubai during 2020 (up from 10m in 2012), maintaining 95% occupancy rates and with average current construction cost of AED1.5m per room, we forecast the additional need for c.47,000 hotel rooms and 22,000 hotel apartments. A build-up of such capacity could require up to USD24bn over the period (30% of 2012 GDP). In addition to the developers, this would also be a significant opportunity for the ancillary sectors. Also, some part of this development would go to adjacent areas, especially Abu Dhabi as visitors are also expected to travel from nearby areas. Figure 21: Dubai hotel supply (no. of rooms, ‘000) 140 120 47

100 80 5

60

4

3

40 20

57

58

63

66

69

2012

2013E

2014E

2015E

2016E

-

Completed

Under Construction

Extra Construction Required

Source: JLL – Dubai Real Estate Market Overview

Page 18



Retail requirements

Large Super Regional Centers, which constitute 66% of mall-based retail space, dominate the Dubai market. According to JLL, the share of Super Regional malls is expected to rise further and is projected to account for 78% of the total retail GLA by the end of 2015. Some of the existing retail centers have recently launched expansion plans, including Dubai Mall (93,000sqm). Further, some large-scale shopping centers have been announced, some are nearing completion and some are underway including phase 2 of the Al Ghurair Center (35,000sqm), the extension to Dragon Mart (158,000sqm), etc. All of these would add to the existing retail space of 2.8m sqm. Population growth and tourist arrivals will be the key drivers to support the Dubai retail market. Based on the projected population growth and number of expected tourists by 2020, some 3m sqm of additional retail space could be required. At an average cost of AED10,000 per sqm, this would represent some USD9bn of investment in the form of construction costs and ancillary activities. Winning the bid for World Expo 2020 would boost the sector and also trigger speedy completion of the projects under construction. Figure 22: Dubai – Retail stock (GLA in ‘000s sqm)

Figure 23: Dubai – Breakdown of under-construction retail space Boutique 1%

7,000

Community Mall 3%

6,000 5,000

Regional 11%

3,069

4,000 3,000

48

168

179

2,816

2,864

3,027

2,000 1,000

2,648

2,774

2010

2011

2,816

3,206 Super Regional 85%

Completed

2012

2013E

Under construction

2014E

2015E

Extra construction required

Source: JONES LANG LASALLE – Dubai Real Estate Market Overview, Deutsche Bank

2020E

Source: JONES LANG LASALLE – Dubai Real Estate Market Overview

Tourism

His Excellency Helal Saeed Al Marri, Director General of Dubai’s Department of Tourism and Commerce Marketing and CEO of the Dubai World Trade Center said: “Tourism is a vital pillar of Dubai’s economy and has contributed to the city’s economic growth, success and diversification. With the strength of Dubai’s infrastructure, geographic location and global connectivity, Dubai Expo 2020 can expect to attract 25m visitors during the six months between October 2020 and April 2021, 71% of whom would originate from outside the host nation for the first time in Expo history. This is important because the additional demand created by World Expo would provide real and exciting opportunities in employment, new attractions and incentives for the travel and tourism sector, not just for the UAE but for neighboring countries in the region and beyond.” A recent report on the economic impact of Expo 2020 by Oxford Economics shows that Dubai Expo 2020 would support over 277,000 jobs. According to


Page 19


the report, a total of 77,149 jobs would be created during 2013 to 2021, 40% of which would be within the travel and tourism sector. Further it estimates that 90% of the projected 277,149 employment opportunities would be generated during 2018 to 2021, close to and around the Expo time with the demand generated by the 25m expected visitors. Of this 90%, 147,000 jobs would be created in the travel and tourism sector, indicating the significant potential to convert a high percentage into permanent jobs to serve the expanded economy in the post-Expo period. Abu Dhabi tourism proposition We expect part of the tourism demand to be absorbed by Abu Dhabi and consequently reduce the burden in the development of the related sectors in Dubai. On average, about 30% of the 25m visitors expected by 2020 would be traveling from areas within two hours’ vicinity of the event venue. Abu Dhabi also holds a strong proposition both in terms of quantity as well as quality of hospitality and retail space on offer. Hence, we expect the benefits from the significant pick-up in tourist arrivals by 2020 to be partially passed on to the regional real-estate developers, led by Aldar Properties.

Figure 24: Abu Dhabi – Retail stock (GLA in ‘000s sqm)

Figure 25: Abu Dhabi – Breakdown of retail stock by type

3,000 214 291

2,500 349 2,000 1,500 1,000 1,536

1,667

1,770

1,781

2010

2011

2012

2013E

2,130

Super Regional Mall and Regional Mall 40%

Neighbourhood & Convenience Mall 5% Community Mall 7%

2,422

500 Non Malls 48%

Completed Source: Abu Dhabi statistics center

Page 20

2014E

2015E

Under construction Source: JONES LANG LASALLE – Abu Dhabi Real Estate Market Overview



UAE property market: Abu Dhabi catching up but no broader recovery Residential market: Dubai rebound, Abu Dhabi catching up but recovery not broad based From 2006 to 2008, Dubai property prices saw a sharp increase with the launch of off-plan projects and strong interest from foreign investors (average property prices rose 135% during the period). After the Lehman Brothers collapse and the global financial crisis, the Dubai market witnessed a sharp decline in property prices from end-2008 until late 2011. This was driven by a conflation of three factors: 1) loss of investor confidence globally, 2) a globalto-local liquidity crunch and 3) high supply of domestic real estate. As indicated in Figure 26, we are in the mid-cycle in terms of property prices, with current prices close to the last eight years’ average. Dubai has witnessed 24 months of property price growth since end-2011 (+c.50% vs. Sept. 2011 lows; source: Deutsche Bank proprietary index). 2012 marked the dawn of positive sentiment in Dubai, with investors seeking “safe-haven” and value properties following the Arab Spring. Meanwhile, key developers (Emaar/Aldar/UPP) successfully secured funding and/or restructured their balance sheets. In addition, improving market sentiment led developers to launch new projects, which were easily absorbed by the market. In Abu Dhabi, price recovery started with a lag of almost one year, but is now catching up with Dubai rebound. Residential prices have risen by c.18% YTD 2013, after -11% YoY in 2012. But the recovery is more evident in established locations within master development zones, while secondary locations continue to witness pressure. Rentals also mirrored the same trend with prime buildings seeing uptick, though broader market continuing to see declining rentals.


Page 21


Figure 26: Dubai average residential prices (USD/sqft) and yoy growth 700

Figure 27: Dubai residential prices (USD/sqft) 80%

700

60%

600

655

612 600

2006-1H13 average price : USD345/sqft

500 371

400

364

40%

-45% 400

328 300

500

20% 285

261

275

244

363

0% 300

200

-20%

100

-40%

240

+50%

200 100

-60%

2006

2007

2008

2009

Selling price (USD/Sqft)

2010 Average

2011

2012

1H13

High - june 2008

Annual change in prices


Low - Sept. 2011

Current


Figure 28: Abu Dhabi average residential prices

Figure 29: Abu Dhabi residential prices (USD/sqft)

(USD/sqft) and yoy growth 500 450

10%

500

5%

450

0%

400

446

400 337

350

2009-1H13 average price: USD327/sqft

300

299

285

265

-5%

446

-31%

350

307

300

250

259

-10%

250

200

+20%

-15%

200

150 -20% 100 -25%

50 -

-30% 2009

2010

Selling price (U SD/Sqft)

Source: Deutsche Bank, JLL

2011 Average

2012

1H13

Annual change in prices

150 100 50 High 2009

Low 2012

Current

Source: Deutsche Bank, JLL

Dubai price increase more prominent in Tier 1 communities; quality spreads widening While the Dubai property prices have increased across communities, the increase has been more pronounced in Tier 1 communities (primary locations as defined by DB proprietary index on Dubai property prices), reflecting investor’s preference for quality. The quality spread has widened to 3.2x (the price of the most expensive communities vs. least expensive communities), c.+55%, after bottoming in June 2009.

Page 22



Figure 30: Residential prices in Dubai – USD/sqft

Figure 31: Quality premium*− apartments

700

3.50

650 600

3.00

550 500

2.50

450 400 350

2.00

300 250

Source: Deutsche Bank. DB’s proprietary index is based on average of residential listing prices, both apartments and villas, across 16 important freehold locations in Dubai.

Aug-13

Feb-13

May-13

Nov-12

Aug-12

Feb-12

Quality Spread (x)

May-12

Nov-11

Aug-11

Feb-11

May-11

Nov-10

Aug-10

Feb-10

May-10

Nov-09

Aug-09

Feb-09

May-09

Nov-08

Aug-08

May-08

1.50

200

Average

Source: Deutsche Bank, * Quality premium = Price of apartments in Old Town Island/Dubai Sports City

Gross yields have compressed to 6.6% as rents have lagged the property price increase, a trend apparent since 2Q11. In spite of the recent decline in rental yields, Dubai rental yields remain attractive vs. major cities in the world.

Figure 32: Evolution of Dubai gross rental yields −

Figure 33: Gross rental yields

Apartments 7%

8%

6% 5% 7%

4% 3% 2%

6%

1% 0%

Dubai

Amsterdam

Copenhagen

Tokyo

Istanbul

Kuala Lumpur

Sydney

Berlin

Madrid

New York

Rome

Paris

Hong Kong

Singapore


Delhi


London

Housing yield

Mumbai

Monaco

5%

Source: Globalpropertyguide.com, Deutsche Bank

Page 23


Dubai residential supply low close to historical levels, Abu Dhabi higher Dubai’s residential market stock stands at c.364,000 units as of 3Q13. In 201314, c.39,000 units are expected to enter the market (or c.20k per year vs. 33k per year historically). A large part of the forthcoming new supply is concentrated in secondary areas. 2013-14 supply is, in our view, the reflection of delayed deliveries post-crisis. On the current schedule monitored by Jones Lang LaSalle, the pipeline of deliveries is expected to taper off going into 2014/15 (c.4% of stock). Given the recent project launches by developers and new announcements that should be unveiled during the Dubai Cityscape 2013 (October), we expect new supply to pick up. Moreover, new players should enter the market after the rebound in selling prices and relatively low inflation in construction costs, leading to increased supply.

Figure 34: Dubai – New residential supply* 22k units p.a.

60

Figure 35: Dubai – New supply: primary vs. secondary location -2013-15

20k units p.a. 20% 18%

50

16%

Prim ary 26%

14%

40

12% 30

10% 8%

20

6% 4%

10

2% -

Secondary 74%

0% 2007

2008

2009

2010

New supply (000)

Source: JLL, Deutsche Bank – * Freehold areas

2011

2012

2013E

2014E

New supply as % of stock

Source: JLL, Deutsche Bank: * Primary Dubai Marina, Business Bay, JLT, Palm Jumeirah Secondary: Dubailand, IMPZ, Sports City, Jumeirah Park, DSO, Al Jadaf, Tecom, Al Barsha, Dubai Waterfront, Others

On the supply front, Abu Dhabi should add c.34,000 residential units over 2013-14 or 17k per year vs. 10k units over last three years. Despite increased supply, we expect prices to remain steady going forward given a stable job market owing to increased capital spending by the government, influx of government employees from Dubai to Abu Dhabi.

Page 24



Figure 36: Abu Dhabi – New residential supply* 30

Figure 37: Abu Dhabi – Residential units by the end of 2013 15%

17k units p.a.

10k units p.a.

13%

25

11% 20

Villa 33%

9%

15

7% 5%

10

Apartment 67%

3% 5

1%

0

-1% 2010

2011

2012

New supply (000)

2013E

2014E

New supply as % of stock

Source: JLL, Deutsche Bank – * Freehold areas

Source: JLL

Hospitality sector: Dubai, the regional tourism hotspot, AD also benefiting The Dubai hospitality sector has seen robust growth over the last few years, mainly driven by the flourishing tourism industry. Abu Dhabi has also seen increasing tourist arrivals (+10% p.a.) though number of tourists is not comparable to Dubai. Dubai is perceived as a “safe-haven” destination among other regional markets hit by the Arab Spring offering entertainment, leisure, and sports attractions along with developed infrastructure. Dubai, being a major hub for the region’s Meetings Incentives Conference & Events (MICE), also plays a major role in attracting business visitors. Over 10m tourists visited Dubai during 2012, up 9% over 2011. More than 5.5 million tourists visited Dubai in 1H13, an increase of 11% yoy.

Figure 38: Total tourists arrivals in Dubai (m)

Figure 39: Total tourists arrivals in Abu Dhabi (m)

12

3.0 10.0

10

2.4

2.5

9.1

2.1

8.3 7.5

8

7.6

2.0

7.0 6.2

6 4.8

5.0

1.8

6.4

5.4

1.5

1.3

1.4

1.5

1.5

2007

2008

2009

1.2

4

1.0

2

1.0 0.7

0.8

0.5

2002

2003

2004

2005

2006

2007

Source: Dubai Department of Tourism and Commerce


2008

2009

2010

2011

2012

2002

2003

2004

2005

2006

2010

2011

2012

Source: Abu Dhabi Tourism Authority

Page 25


Dubai hospitality indicators point to a strengthening economy Dubai’s improving hospitality sector indicators highlight the strength of its economic recovery, which should support investor confidence and bode well for the property market. The key recent trends are:

Current occupancy rates are above the 2007 peak despite new supply

Current RevPar is close to the 2007 peak (c.+50% above the trough seen in 2010)

Strong demand growth, with guest nights posting a 20% CAGR for serviced apartments/10% for hotels during 2007-12, driven by growth in the number of guests and increasing length of stay

Hospitality stock growth of 12% annually since 2007 or an additional c.37,500 units, with serviced apartments having a 34% share of incremental supply

Consequent to higher demand growth, the share of serviced apartments in total guest nights increased from 17% in 2003 to 30% as of 1H13.

Figure 40: Dubai Hospitality – Trend in occupancy rates 90% 86%

84%

85%

Figure 41: Dubai Hospitality – Trend in RevPar (USD) 180

85%

153

160

144

82% 140

80%

120 101

75%

94

95

Hotel

Serviced Apartment

100

70%

80

70% 66%

66

60

65%

40 20

60% Serviced Apartment

Hotel

Serviced Apartment

Pre crisis (2007)

Hotel

Crisis (2009)

Serviced Apartment

Hotel

Serviced Apartment

Post crisis (1H13)

Source: Dubai Department of Tourism and Commerce, Deutsche Bank

Hotel

Serviced Apartment

Pre crisis (2007)

Crisis (2010)

Hotel

Post crisis (1H13)


Figure 42: Dubai Hospitality stock

Figure 43: Dubai Hospitality – Share of incremental supply (2007-12)

70,000

35%

60,000

30%

50,000

25%

40,000

20%

30,000

15%

20,000

10%

10,000

5%

-

Serviced Apartments Units 34%

Hotel Rooms 66%

0% 2003

2004

2005

Hotel Apartment U nits

2006

2007

2008

Hotel Rooms

2009

2010

2012

1H13

Serviced Apartment units as % of total


Page 26

2011




Figure 44: Dubai Hospitality – Yoy growth in guests

Figure 45: Dubai Hospitality – Yoy growth in guest nights 40%

30%

35%

25%

30% 20% 25% 15%

20%

10%

15%

5%

10% 5%

0% 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1H13

0% 2003

-5% Hotel Apartment

Hotel

Average H. Appt


2004

2005

2006

Hotel Apartment

Average Hotel

2007

2008

Hotel

2009

2010

2011

Average H. Appt

2012

1H13

Average Hotel


Figure 46: Length of stay (days)

Figure 47: Serviced apartments’ share of guest nights

6.0

35%

5.5

30%

5.0 4.5

25%

4.0 3.5

20%

3.0 2.5

15%

2.0 1.5

10% 1.0 2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1H13

5% Serviced Apartment


Hotel

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1H13


Key drivers of serviced apartment growth in Dubai Our discussions with market participants provide some key insights into the demand for serviced apartments:

The higher share of Gulf Cooperation Council (GCC) nationals in Dubai’s tourist arrivals could lead to an increase in demand for serviced apartments, as GCC customers prefer to stay with their families in an ‘at-home’ environment for longer holidays. This has resulted in higher purchases of serviced apartments by GCC customers and by other customers in expectation of higher future leasing demand.

Better affordability of serviced apartments over hotel rooms, resulting in higher preference by corporate and leisure customers. On average, room rates for serviced apartments are c.30% lower than hotel room rates. We believe that the gap will narrow going forward with new serviced apartments in prime locations which will trigger higher rates.


Page 27


Company section

Page 28



Rating

Company

Athmane Benzerroug

Buy

Emaar Properties


Middle East

UAE Real Estate, Construction and Building Materials

Real Estate

Reuters

Bloomberg

EMAR.DU

EMAAR DB

Price at 26 Nov 2013 (AED) Price Target (AED)

6.22

52-week range (AED)

6.34 – 3.62

8.10

Price/price relative 7.0 6.0

Retail assets undervalued, leveraged to Dubai residential market Uniquely positioned to capture best of both worlds – strong hospitality growth and recovering property market Emaar Properties is uniquely positioned to capture Dubai’s strong hospitality growth (2x GDP growth) and recovering property market (+50% from Sep’11 lows). Emaar’s recurring income portfolio (retail and hotels 70% of our valuation) is a direct proxy to Dubai’s growing tourism sector, which remained unscathed even during the global economic downturn. Given Emaar’s land bank at premium location and its brand positioning, we expect strong appetite (sold overnight) for new projects that Emaar may unveil in the future, thus leading to robust cash flow generation and potential upside to our valuation. Retail spin-off can unlock true value creation potential Emaar’s retail portfolio (c.60% of our asset value) continues to exhibit impressive growth (+22% YTD). Recent headlines suggest potential spin-off of retail assets which would help investors to fairly value the assets with the disclosure of financials. At CMP, the market is implicitly valuing retail assets at P/E of c.7.5x 2014E (or cap rate of 13.4%) vs. c.20x (5/6% cap rate) for global mall operators. Spin-off could lead to benchmarking Emaar’s retail portfolio against global peers, which should lead to re-rating of the stock. If we were to use the global average cap rate of 5.9%, this would imply an AED9.7 target price (c.+55% vs. latest closing price).

5.0 4.0 3.0 2.0 10/11

4/12

10/12

4/13

Emaar Properties Dubai Financial Mark (Rebased)

Performance (%)

1m

3m

12m

Absolute

6.9

3.0

66.2

Dubai Financial Market General Index

9.0

14.8

77.0


Stock data Market cap (AED)(m) Shares outstanding (m) Free float (%) Dubai Financial Market General Index

37,888.1 6,091 68 2,884.4


Pre-sales robust; new launches should further strengthen investor sentiment Shadowing Dubai recovery, Emaar recorded pre-sales of AED9.0bn in 9M13 (3x 2012 level). Given strong investor appetite, we expect Emaar to launch new projects, driving further positive sentiment for the stock. Moreover, Emaar has recently increased its focus on serviced apartments (pricing premium to classic apartment), which should result in a strong uptick in margins. Reiterating Buy with positive catalysts ahead We believe SOTP best captures the value of Emaar’s businesses. We value Emaar’s recurring retail assets at cap rate of 7.9% (vs. 5/6% for global mall operators). We value launched development projects using DCF and land bank in Downtown Dubai only. Emaar remains our top pick among MENA developers, offering attractive exposure to Dubai hospitality and real estate with superior quality assets at prime locations. Emaar trades at 1.0x 2014E P/BV (in line with EM peers). Key risks: economic/geopolitical conditions, project delays, customer defaults, and a possible conflict of interest between the government and minority shareholders.


Page 29

28 November 2013 Real Estate UAE Real Estate Fiscal year end 31-Dec

Model updated:27 November 2013 Running the numbers

2011

2012

2013E

2014E

0.32 0.29 0.10 5.1

0.35 0.35 0.10 5.3

0.39 0.39 0.10 5.6

0.44 0.44 0.10 6.0

6,091 18,268 16,106

6,091 19,815 17,239

6,091 38,923 34,475

6,091 38,923 33,249

P/E (DB) (x) P/E (Reported) (x) P/BV (x)

9.3 10.2 0.51

9.4 9.4 0.72

16.4 16.4 1.13

14.7 14.7 1.07

FCF Yield (%) Dividend Yield (%)

0.6 3.3

5.8 3.1

6.9 1.6

5.2 1.6

EV/Sales (x) EV/EBITDA (x) EV/EBIT (x)

2.0 4.8 6.4

2.1 5.2 6.7

3.6 9.9 12.7

3.4 9.0 11.4

Sales revenue Gross profit EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit

8,112 4,236 3,370 841 0 2,528 -170 -231 0 -174 1,954 36 124 0 1,794

8,240 4,179 3,336 767 0 2,569 -361 -97 0 0 2,111 4 -12 0 2,119

9,537 4,686 3,486 770 0 2,716 -244 -110 0 0 2,362 5 -14 0 2,371

9,642 4,906 3,691 774 0 2,916 -166 -110 0 0 2,640 5 -15 0 2,650

DB adjustments (including dilution) DB Net profit

174 1,967

0 2,119

0 2,371

0 2,650

476 -375 101 -46 -588 -45 -116 -694 -2,634

1,670 -516 1,154 37 -594 520 154 1,272 -1,241

3,205 -529 2,676 0 -609 -209 -2,517 -660 -131

2,583 -556 2,028 0 -609 -1,074 0 345 -1,034

2,865 16,299 46 10,698 30,146 60,054 11,121 17,344 28,465 31,308 281 31,589 8,256

3,711 16,040 46 10,797 30,557 61,151 11,646 16,686 28,332 32,534 285 32,819 7,936

5,568 15,799 46 10,589 30,844 62,845 11,437 16,841 28,278 34,296 272 34,567 5,869

5,912 15,580 46 10,381 33,109 65,029 10,363 18,073 28,436 36,337 257 36,594 4,451

nm na 41.5 31.2 34.0 5.8 5.3 0.5 26.1 14.9

1.6 7.7 40.5 31.2 28.7 6.6 6.3 0.7 24.2 7.1

15.7 11.9 36.6 28.5 25.7 7.1 5.5 0.7 17.0 11.1

1.1 11.8 38.3 30.2 23.0 7.5 5.8 0.7 12.2 17.6

Financial Summary DB EPS (AED) Reported EPS (AED) DPS (AED) BVPS (AED)

Middle East UAE Real Estate

Emaar Properties Reuters: EMAR.DU

Bloomberg: EMAAR DB

Weighted average shares (m) Average market cap (AEDm) Enterprise value (AEDm)

Valuation Metrics

Buy Price (27 Nov 13)

AED 6.39

Target Price

AED 8.10

52 Week range

AED 3.71 – 6.39

Market Cap (m)

AEDm 38,923 USDm 10,597

Income Statement (AEDm)

Company Profile Emaar is a diversified real estate player headquartered in Dubai, UAE. Its business model was formerly based on the development of master-planned communities in Dubai. From 2005, the company has embarked on an aggressive expansion strategy aiming to diversify its sources of income. This has led Emaar to retain and operate certain assets (malls, hotels) which generate recurring income. The company has also set up ventures into several promising neighboring markets (ME/ Indian subcontinent).

Price Performance 7.0 6.0 5.0 4.0 3.0

Cash Flow (AEDm)

2.0 Nov 11

May 12

Nov 12

Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital

May 13

Emaar Properties Dubai Financial Market General Index (Rebased)

Margin Trends 44 40 36

Balance Sheet (AEDm)

32 28 11

12

13E

EBITDA Margin

14E

EBIT Margin

Growth & Profitability 20

8

15

6

10

4

5

2 0

0 11

12

13E

Sales growth (LHS)

14E ROE (RHS)

Solvency 20

30 25 20 15 10 5 0

15 10 5 0 11

12

Net debt/equity (LHS)

13E

14E

Cash and other liquid assets Tangible fixed assets Goodwill/intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders’ equity Minorities Total shareholders’ equity Net debt

Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates

Net interest cover (RHS)

Athmane Benzerroug +971 4 4283938

Page 30

[email protected]



Investment thesis Outlook Emaar remains the best way to get exposure to Dubai’s hospitality growth and property market recovery, in our view. Its high-quality portfolio contributes c.70% to assets (DBe), while on the residential front, Emaar should continue to record strong unit pre-sales given solid track record and brand name. Despite headwinds, international operations are picking up, while funding risks have abated after refinancing the Turkey/Egypt debt and strong cash flow generation driven by pre-sales. Overall, we believe Emaar offers exposure to profitable themes at attractive valuation. Buy.

Valuation SOTP best captures the value of Emaar’s diverse businesses, in our opinion. We use a 7.9% cap rate to value the retail assets (vs. c.5/6% cap rate for global mall operators). We include successful residential project launches and the remaining land in Downtown Dubai. The stake in Economic City is taken at fair value, while EMGF (Indian associate) is valued at 0.7x 2012E EMGF’s BV. We write off the entire value of Amlak and take book value for the other minority stakes. We use country-specific assumptions to value the residual land bank.

Risks UAE developers are exposed to availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence, which are driving the real estate market. Also, project delays or cancellations and failure to recover receivables could materially impact our earnings forecasts/valuation. Emaar’s specific downside risks include: 1) lack of visibility on international operations and potential strain on the group’s cash-flows, and 2) potential conflict of interest between the Dubai government and minority shareholders.


Page 31


Valuation Target price of AED8.1 – c.30% upside potential We believe SOTP best reflects the diverse nature of Emaar. On our target price, Emaar should trade at 1.4x 2014E P/BV vs. 1.0x for EM and 1.2x for global peers.

Rental portfolio: We apply a capitalization rate of 7.9% on Emaar’s 2014E retail net operating income. We conservatively expect 15%/6% growth in retail NOI in 2013/14 after c.22% growth in 9M13. To derive the cap rate, we have leveraged Deutsche Bank global research on mall operators and applied the global median cap rate spread over sovereign 5Yr CDS (5.6%) plus the one-year average of Dubai’s 5Yr CDS.

Figure 48: Calculation of cap rate Cap rate

5 Yr CDS SPREAD

Cap rate – CDS

Malaysia

5.2%

1.13%

4.1%

Singapore

5.9%

Na

Na

US

6.3%

0.33%

6.0%

Europe (including UK)

5.9%

0.30%

5.6%

Global

5.9%

0.33%

5.6%

Dubai

7.9%

2.3%*

5.6%

Source: Deutsche Bank, *1 year average of Dubai’s 5Yr-CDS

To put things into perspective, we value Emaar’s retail assets at 12.7x 2014E P/E, compared to a median of c.20x for global mall operators.

Hotels: We apply a capitalization rate of 10% to value Emaar’s hospitality business, implying 10x 2014E EV/EBITDA, which compares to c.11x for global hotel operators.

Figure 49: Global hospitality multiples 2014E

P/BV

P/E

EV/EBITDA

Australia

1.6

17.3

8.3

Asia

3.6

24.9

12.1

Europe

1.7

18.8

7.2

US

1.5

22.0

12.1

Global

1.8

21.3

10.7

Source: Deutsche Bank estimates

Emaar the Economic City: to value Emaar’s stake (31%) in EEC (listed on the Saudi stock market), we have considered Deutsche Bank’s fair value of SAR10/share. This implicitly values the EEC investment at c.1.1x 2014E P/BV.

Indian EMGF stake (49%): valued at AED4bn (AED0.6 per share); this includes AED2.7bn of loans and an AED1.4bn equity stake (which values the equity part at 0.7x EMGF’s 2012E BV vs. Indian peers’

Page 32



1.0x), which is c.40% lower than the stake value on Emaar’s book given lack of visibility on current litigations.

Other assets: we fully write off stakes/loans in Amlak (AED1bn) given a lack of visibility, while all other stakes/loans are taken at the cost incurred by Emaar.

Development projects (unit sales): we use a DCF discounted at a WACC of 12.0% (1.1 beta, 12.3% CoE, 7.0% CoD) for properties in Dubai and a 25% discount rate for international projects (such as in Egypt/Pakistan/Syria). We only consider projects launched to date and deliveries over 2013-15E.

Residual landbank:

UAE land bank: we include the Downtown Dubai land based on a selling price of AED2,000/sqft, at a 30% gross profit development margin. We exclude all other land (l’Usaily, Umm Al Quwain Marina and Bawadi).

International land bank: we apply specific assumptions, equivalent to a 40-70% discount to the 2008 FV/benchmark price.

Our target price includes potential dilution of 7% (arising on conversion of AED1.8bn bond to equity in 2015 at a strike price of AED4.38 per share i.e. issue of approximately 408m new shares). Figure 50: SOTP AED m Rental portfolio – UAE

Value Per share (AED) % of assets

Comment

30,952

4.8

56%

FV @ 7.9% cap. rate-2014E

Hospitality – UAE

6,505

1.0

12%

FV @ 10% cap rate-2014E

Emaar the Economic City – KSA

2,545

0.4

5%

DBe fair value (listed on Tadawul)

Other equity investments and loans to associates

4,861

0.7

9%

EMGF stake @ 0.8x 2012E BV, Amlak @ zero

Development projects – UAE

1,435

0.2

3%

DCF @ 12% discount rate

Development projects – Egypt

1,653

0.3

3%


564

0.1

1%


Landbank – UAE

3,721

0.6

7%

Only Downtown Dubai

Landbank – Egypt

1,243

0.2

2%

40% discount to 2007 auction prices

Landbank – other countries

1,808

0.3

3%

Average 70% discount to 2008 FV

Total FV of assets

55,287

8.5

100%

Net debt (2013E)

Development projects – other countries

(5,869)

(0.9)

Adjustment for conversion of bond to equity (2015)

1,786

0.3

Securities (2013E)

1,265

0.2

(77)

(0.0)

52,391

8.1

Pensions (2013E) Equity value Diluted number of shares (m) SOTP per share

Added back debt as considered in equity dilution

6,493 8.1



Page 33


Figure 51: FV of assets: breakdown by revenue stream Development properties - Intl. 19%

Other assets 3%

Figure 52: FV of assets: breakdown by asset type Land - Egypt 2% Land - UAE 7%

Land - other countries 3%

Others 1%

EMGF - India 7%

Development properties - UAE 10% Rental portfolio / hotels - UAE 68%

EEC - KSA 5% DP - other countries 1% DP - Egypt 3%

Rental portfolio / hotels - UAE 68%

DP - UAE 3%



Recurring income generating assets (hotels and malls in Dubai) still account for almost two-thirds of our valuation. In terms of country exposure, UAE (Dubai) remains by far the largest valuation contributor, mainly thanks to the recurring income portfolio. Three countries (India, Egypt and Saudi Arabia) account for c. 55% of the FV of assets (exrecurring income).

Figure 53: FV of assets (including recurring income):

Figure 54: FV of assets (ex-recurring income): breakdown

breakdown by country

by country

Others India 4% 7%

Others 13%

KSA 6%

UAE (Dubai) 31%

Egypt 5%

India 23%

UAE (Dubai) 78%

KSA 17%


Page 34

Egypt 16%




7.0

0.5

0.4

-0.6 0.2

0.0

8.1

0.9 1.0

6.0 5.0

0.4

KSA

8.0

Egypt

0.6

Equity value

9.0

Pensions

Figure 55: Equity value (AED per share)

4.8

4.0 3.0 2.0 1.0 Securities

Net debt

Others

India

UAE (Dubai)

Hotels

Rental

0.0


Sensitivity analysis: target price sensitivity to retail business cap rate We have looked at Deutsche Bank’s global mall coverage to put the cap rate we use to value Emaar’s retail business into perspective. Our 7.9% cap rate is calculated by adding the global median cap rate spread over sovereign 5YrCDS (which is 5.6%) to Dubai’s 5Yr-CDS. However, as shown in Figure 57, our cap rate for Emaar’s retail business continues to be higher than that for global mall operators (valued at c. 5/6% cap rate), reflecting investors’ perception of Dubai risk. All in all, for every 100bps decrease in cap rate assumption, our target price increases by c.10%. If we were to use the global average cap rate of 5.9%, this would imply an AED9.7 target price.

Figure 56: DB cap rate vs. global mall operators 9.0%

Figure 57: Emaar’s TP sensitivity to cap rate assumption 12.0

7.9%

8.0% 5.9%

5.2%

5.9%

6.3%

10.0

TP (AED/sh)

7.0% 6.0%

@ Global Retail/Commercial

11.0

5.0% 4.0%

9.0

3.0% 2.0%

6.0 5.0 Cap rate (%)

0.0% Malaysia

Global 5Ys-CDS


Dubai

8.8

Implied CDS (BPS)*

8.1 7.5

7.1

4.9%

5.9%

6.9%

7.9%

8.9%

10%

Nm

30

130

230

330

430

Spread (Cap rate - CDS)

Source: Companies, Deutsche Bank, Bloomberg Finance LP


US

9.7

8.0 7.0

1.0%

@ current DB cap rate

11.0

Source: Deutsche Bank, Bloomberg Finance LP, *Dubai 5Yr-CDS; BPS = Basis point

Page 35


Key themes Dubai Mall holds significant upside potential Emaar’s management has created commendable value for shareholders (we estimate a c.25% IRR for recurring income assets). Given the lack of financial transparency, however, we believe investors are underestimating the value creation. A spinoff of retail assets could help investors crystallize the asset value based on its own merits. As per our calculation, at the current market price, retail (c.60% of our SOTP) is implicitly valued at c.7.4x 2014E P/E (or c.13.6% cap rate), while our valuation is close to c12.7x and global peers’ are trading at close to c.19.8x (see our global valuation table in Figure 69). Figure 58: Implicit valuation of retail assets AEDm

Current market price

DBe

Emaar value per share (AED)

6.2

8.1

No of outstanding shares (M)

6,091

6,499

Equity value

37,888

52,391

+Net debt (2013E)

5,700

4,083*

+Securities (2013E)

(1,265)

(1,265)

+Pensions (2013E)

77

77

= Total FV of assets – (A)

42,569

55,287

Total FV of assets (ex-Retail) – (B)

24,335

24,335

Implicit FV of Retail – (A-B)

18,234

30,952

2,445

2,445

DBe Net operating income of Retail (2014E) Implicit P/E of Retail Implicit cap rate

7.5

12.7

13.4%

7.9%

Source: Bloomberg Finance LP, Deutsche Bank – * Adjusted for convertible bond as it is reflected in number of shares (diluted)

Implicit P/E of 7.5x for quality asset like Dubai Mall (c.80% of retail NOI) seems unreasonable to us. We attribute lack of financial information for this gap in valuation and believe that spin-off of retail could act as a major trigger to bridge this gap. As per our calculations, for every 1x P/E re-rating of retail assets, our target price increases by c.5%. Figure 59: Value unlocking potential of retail asset @ Global average P/E

@DB TP P/E (2014E NOI)

10.7

11.7

12.7

13.7

14.7

19.8

Implicit value of retail (AEDm)

26,062

28,507

30,952

33,397

35,842

48,415

Value accretion/dilution vs. DBe SOTP – (AEDm)

(4,890)

(2,445)

-

2,445

4,890

17,463

(0.75)

(0.38)

-

0.38

0.75

2.69

7.3

7.7

8.1

8.4

8.8

10.7

-9%

-5%

0%

5%

9%

33%

Value accretion/dilution vs. DBe SOTP – (AED/share) Implicit target price (AED/share) % change in TP Source: Bloomberg Finance LP, Deutsche Bank

Page 36



Concern on dilution impact of convertible bonds over done Emaar’s AED1.8bn convertible bonds are maturing in December 2015. Bonds are expected to be converted at a conversion price of AED4.38/share. This should result in issue of c.410m new shares or dilution of c.7%. Despite dilution in 2015, we estimate Emaar’s EPS to record strong yoy growth as a result of higher deliveries in 2015. Regarding investors’ concern on conversion of bonds prior to 2015 at the option of company, this should trigger at strike price of AED6.57 (+6% from CMP). We highlight that the company is paying interest rate of c.7.5% on these bonds i.e. c.AED135m or 5% of 2014E earnings. Even if bonds are converted before maturity, earnings dilution risk should be limited to c.2%. Nevertheless, we are factoring the dilution impact in calculation of our target price.

Summary of our estimates We expect Emaar’s earnings to grow at a CAGR of 15% over 2013-14, which should accelerate going into 2015E on start of deliveries from strong pre-sales achieved during 2013 (BLVD Hotel apartments, Fountain Views, Sky Views, Burj Vista etc.). Moreover, higher pricing realized on pre-sales should also drive higher margins in development properties. Recurring income could also surprise us positively as we factor c.6% yoy growth in 2014E and 2015E, unlike 2013E (+15% yoy). Moreover, we do not factor in Dubai Mall expansion in our estimates, which should further boost recurring income from 2015E onwards. Figure 60: Estimate summary AEDm

2011

2012

2013E

2014E

Revenues

8,112

8,240

9,537

9,642

% growth

-33%

2%

16%

1%

Gross Profit

4,236

4,179

4,686

4,906

as a % of sales EBITDA as a % of sales Net Income as a % of sales % growth

52%

51%

49%

51%

3,370

3,336

3,486

3,691

42%

41%

37%

38%

1,794

2,119

2,371

2,650

24%

26%

15%

17%

-27%

8%

12%

12%

Source: Company data, Deutsche Bank estimates


Page 37


Rating

Company

Athmane Benzerroug

Hold

Aldar Properties


Middle East


Real Estate

Reuters

Bloomberg

ALDR.AD

ALDAR DH

Near- to medium-term positives priced in, lacks further catalysts; Hold Near-to-medium-term positives priced in, lacks further catalysts; Hold Aldar should see earnings momentum led by recognition of asset sales to government and growing recurring income. Recurring income is expected to grow strongly over next three years with retail (primarily Yas Mall) and residential units contributing c.70% of incremental recurring income growth. After the merger with Sorouh and asset sales, balance sheet has strengthened with 2x book value and sharp reduction in leverage (125% in 2012 to 54% currently). That said, our valuation includes a 7.9% cap rate for retail assets, in line with Emaar which leaves little room for upside given risks associated with nascent stage of the portfolio. Finally, we value part of land bank assuming land sales over the next five years equal to past cycle.


2.41

52-week range (AED)

2.95 – 1.24

Price/price relative 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 10/11

4/12

10/12

4/13

Aldar Properties ADSM General Index (Rebased)

Performance (%)

1m

3m

12m

Absolute

3.0

5.8

100.0

ADSM General Index

1.4

-0.1

45.8


Stock data Market cap (AED)(m)

Equity story driven by recurring income evolution and deleveraging Aldar’s historical earnings have been volatile due to business model oriented towards asset sales to government (including residential units). However, going forward, recurring income should dominate the earnings given growing leasing portfolio and fading of government asset sales. We estimate recurring income should contribute c.70%/90% of revenues/gross profit by 2015. Around 70% of incremental recurring income should be driven by Yas Mall and Sorouh residential portfolio. Strengthened balance sheet following the merger with Sorouh should also ease the company’s liquidity position, thus improving its credit profile and access to debt financing.

2.50

Shares outstanding (m) Free float (%)

18,870 4,482 59

ADSM General Index

3,861.1


Need for refinancing despite government receivables Strong deleveraging should continue with debt repayments of c.AED11.3bn by 3Q14. Government cash collection of AED8.1bn by 2017 (c.90% by 2015) should ease liquidity and help bring down leverage to c.21% by 2014E. That said, Aldar could still require c.AED7bn of additional debt over 2013-15E. Aldar has already arranged refinance of AED4.0bn. Given Aldar’s strong links to the government (Abu Dhabi government owns c40%) and local banks, coupled with its deleveraged profile, we believe further refinancing should not be challenging. Target price AED2.5; catalysts priced in the valuation – Hold We use SOTP to value Aldar. For investment property, we use an effective cap rate of 7.9% (in line with Emaar Properties). For development property, we use DCF with 13.8% discount rate, while we discount the net government receivables at 10%. We value part of land bank assuming sales over five years. Despite considering cap rate equivalent to Emaar (with superior asset quality) to value investment property (c.60% of EV) and factoring in most valuable land parcels (c.15% of EV), we see limited upside from current levels. Upside risks include: 1) return of land activity in Abu Dhabi, 2) higher-than-expected recurring income evolution. Downside risks include: 1) sharp rental correction in Abu Dhabi/muted performance from Yas Mall, 2) unproductive infrastructure capex, 3) failure to arrange timely debt refinancing and 4) delay in securing new construction contracts with the Abu Dhabi government.

Page 38



Model updated: 27 November 2013 Running the numbers

2010

2011

2012

2013E

2014E

-0.38 -3.59 0.05 0.9

-0.04 0.12 0.05 1.7

0.45 0.30 0.05 2.0

0.17 0.33 0.05 2.1

0.33 0.33 0.05 2.4

3,530 11,263 40,716

4,482 6,114 18,697

4,482 5,225 15,418

7,863 18,870 26,671

7,863 18,870 21,929


nm nm 2.41

nm 11.2 0.53

2.6 3.9 0.64

14.0 7.3 1.14

7.3 7.3 1.01


nm 1.6

9.8 3.7

47.9 4.3

nm 2.1

7.8 2.1

22.7 nm nm

2.8 15.1 29.0

1.4 5.3 6.2

4.3 12.6 14.7

4.1 6.7 7.4

1,791 288 -361 514 0 -875 -455 -28 -11,301 0 -12,658 0 0 0 -12,658

6,743 1,646 1,234 590 0 644 -982 102 721 60 546 0 0 0 546

11,404 3,238 2,928 435 0 2,493 -612 121 -662 0 1,341 0 0 0 1,341

6,234 2,158 2,120 300 0 1,820 -504 50 1,235 3 2,605 0 20 0 2,585

5,285 1,878 3,292 320 0 2,972 -410 50 0 0 2,611 0 40 0 2,571

11,301 -1,358

-721 -175

662 2,002

-1,235 1,349

0 2,571

-4,018 -4,338 -8,356 0 -126 502 5,914 -2,065 -2,361

2,785 -2,185 600 0 -1 -10,082 12,205 2,723 3,068

3,520 -1,018 2,503 0 -200 -4,237 -427 -2,362 1,095

503 -1,829 -1,326 0 -382 -2,563 6,176 1,906 -1,113

1,570 -100 1,470 0 -393 -6,551 3,655 -1,819 -1,311

2,432 20,901 25 687 23,300 47,344 32,572 10,525 43,097 4,247 0 4,247 30,140

4,158 10,867 8 818 24,267 40,118 17,559 14,772 32,330 7,787 0 7,787 13,401

2,260 9,710 3 868 19,200 32,041 13,320 9,847 23,167 8,873 0 8,873 11,061

4,166 16,948 3 1,353 22,713 45,183 13,045 15,276 28,321 16,587 275 16,862 8,879

2,347 16,728 3 1,403 20,058 40,539 6,494 14,965 21,459 18,766 315 19,081 4,147

nm na -20.2 -48.9 nm -121.1 242.2 8.4 709.7 nm

276.4 89.8 18.3 9.6 41.0 9.1 32.4 3.7 172.1 0.7

69.1 na 25.7 21.9 16.7 16.1 8.9 2.3 124.7 4.1

-45.3 -61.6 34.0 29.2 15.2 20.3 29.3 6.1 52.7 3.6

-15.2 90.6 62.3 56.2 15.3 14.5 1.9 0.3 21.7 7.2

Financial Summary DB EPS (AED) Reported EPS (AED) DPS (AED) BVPS (AED)


Aldar Properties Reuters: ALDR.AD

Bloomberg: ALDAR DH


Valuation Metrics

Hold Price (27 Nov 13)

AED 2.40

Target Price

AED 2.50

52 Week range

AED 1.25 – 2.95

Market Cap (m)

AEDm 18,870 USDm 5,138


Company Profile Aldar Properties is a real estate developer based in Abu Dhabi, United Arab Emirates. The company develops real estate projects such as commercial, residential, retail and hotels. The company is 40% owned by Abu Dhabi government. Aldar owns a significant portion of investment property assets in Al Raha Beach and Yas Island.

Price Performance 3.2 2.8 2.4 2.0 1.6 1.2 0.8 0.4 Nov 11


Sales revenue Gross profit EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit

Cash Flow (AEDm) May 12

Nov 12


May 13

Aldar Properties ADSM General Index (Rebased)



-40 -80 10

11

12

EBITDA Margin

13E

14E

EBIT Margin


50

200

0 -50

100

-100

0


-150

-100 10

11

12

13E

Sales growth (LHS)

Key Company Metrics

14E ROE (RHS)

Solvency 800

8

600

6

400

4

200

2 0

0 10

11

12


13E

14E

Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates



[email protected]


Page 39


Investment thesis Outlook Key drivers (recurring income growth/deleveraging) of Aldar’s equity story remain on track. Following the merger with Sorouh, recurring portfolio looks well diversified with balance of retail, residential, office and hotel assets. Recognition of government asset sales and growing recurring income should drive earnings in short to medium term. With short-term debt obligations and Abu Dhabi government receivables, the liquidity situation looks manageable with the company in advanced stages of finalizing refinancing arrangements. Having said that, we believe near-to-medium-term positives are already priced in and it lacks further catalysts at this stage. With limited upside to our target price, we rate Aldar Hold.

Valuation We use sum-of-the-parts to value Aldar. For investment property, we use a cap rate of 7.9% on 2015E discounted NOI. For development property we use DCF, while we discount the net government receivables at discount rate of 10%. We value part of land bank assuming land sales over the next five years equal to past cycle at a selling price of AED140/sqft (equivalent to price a sub-developer would be willing to pay). Residual land bank offers potential upside once the company develops it or market strengthens from here on.

Risks UAE developers are exposed to availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence, which are driving the real estate market. Also, project delays or cancellations and failure to recover receivables and meet debt repayment could materially impact our earnings/valuation. Key upside risks for Aldar include 1) return of land activity in Abu Dhabi, 2) higher-than-expected recurring income evolution. Downside risks include: 1) sharp rental correction in Abu Dhabi/muted performance from Yas Mall, 2) unproductive infrastructure capex, 3) failure to arrange timely debt refinancing and 4) delay in securing new construction contracts with the Abu Dhabi government.

Page 40



Valuation We use SOTP to value Aldar Properties at AED2.5 per share To value Aldar Properties (including acquired assets of Sorouh), we use sumof-the-parts approach, to capture the diverse nature of the group’s assets. Our target price stands at AED2.5, implying an exit P/BV of 1.0x 2014E (in line with Emaar / EM peers). In our view, Aldar should trade at discounted valuation given the Aldar’s recurring portfolio is in nascent stage, while development property pipeline remains shallow and contract revenues heavily depends on low margin Abu Dhabi government projects.

We estimate the gross receivables from Abu Dhabi government at AED7.8bn (AED7.2bn for Aldar and AED600m for Sorouh infrastructure sales) and capex of AED1.8bn from 2014-17E. We then discount the yearly net cash flow at 10%.

For investment properties, we use a cap rate of 7.9% on 2015E discounted NOI.

For development properties, we use a DCF method with WACC of 13.8% (RFR 5%, ERP 7.0%, beta 1.7, cost of debt 7% and gearing of 45%). Development properties valuation is reflected in net cash of 2013E as most of the development properties should be delivered by 2013 end and we assume majority of the cash collection by year end.

We value part of land bank (Yas Island, Al Raha Beach and Shams Abu Dhabi) of 7.8m sqm, being part of master planned communities with developed infrastructure. We assume land sales over the next five years equal to past cycle at a selling price of AED140/sqft (equivalent to price a sub-developer would be willing to pay assuming AED1,200/sqft selling price, construction cost of AED700/sqft and margin of 30% on developed property). We assume development cost on land (infrastructure) at AED65/sqft, implying gross profit margin of 53%.

Abu Dhabi government receivables contribute to c.20% of EV, whereas investment properties (including hotels) account for c.60%.


Page 41


Figure 61: SOTP Valuation SOTP

AEDm

AED/share

AD Govt. receivables

5,243

0.7

19% AED7.8bn of receipts, AED1.8bn capex over 2014-17E

Investment properties

16,509

2.1

58% 7.9% Cap rate on 2015E discounted NOI

63

0.0

0% DCF @ 13.8 %WACC

Government Project management

1,180

0.2

4% DCF @ WACC of 13.8%

Associates, JVs

1,016

0.1

4% Unlisted entities @ 2013E BV – except Etihad JV (valued at cap rate)

Development Properties

Land bank

% of assets Valuation methodology

4,316

0.5

15%

Enterprise Value

28,327

3.6

100%

Net debt 2013E

(8,879)

Pensions

Assuming land sales over the next five years equal to past cycle

(96)

Net asset value

19,352

Number of shares (m)

7,863

NAV per share

2.5


Figure 62: Total assets breakdown

Figure 63: Investment portfolio (inc. hotel) – Asset breakdown

AD Govt receivables 19%

Hotels 13%

Office 23%

Landbank 15%

Associates, JVs 4% Government Project management 4%

Others (schools, leisure) 3%

Residential 28%

Investment properties 58%

Development Properties 0%

Retail 33%



To derive the cap rate, we have leveraged Deutsche Bank global research on mall operators and applied the global median cap rate spread over sovereign 5Yr CDS (5.6%) plus the one-year average of Dubai’s 5Yr CDS. Figure 64: Calculation of cap rate Cap rate

5 Yr CDS SPREAD

Cap rate – CDS

Malaysia

5.2%

1.13%

4.1%

Singapore

5.9%

Na

Na

US

6.3%

0.33%

6.0%


5.9%

0.30%

5.6%

Global

5.9%

0.33%

5.6%

Dubai

7.9%

2.3%*

5.6%

Source: Deutsche Bank, *1 year average of Dubai’s 5Yr-CDS

Page 42



Target price sensitivity to investment properties’ cap rate Our implied cap rate for recurring income portfolio of Aldar is 7.9% (in line with Emaar Properties) on 2015E discounted NOI. We abstain from replicating our Emaar’s method to estimate the cap rate (global cap rate spread over CDS + sovereign CDS) to Aldar’s investment properties given that there is a disconnect between Abu Dhabi’s sovereign risk (less riskier than Dubai) and Aldar’s asset portfolio (more riskier than Emaar/Yas Mall to open next year), hence if we use the “Cap spread + CDS “ method, we get a cap rate of c.6.3% (vs. 7.9% for an asset like Emaar’s Dubai Mall), which seems unreasonable. However, as shown in Figure 66, for every 100bps decrease in cap rate assumption, our target price increases by c.3%. If we were to use the global average cap rate of 5.9%, this would imply an AED2.6 target price.

Figure 65: Deutsche Bank cap rate vs. global mall

Figure 66: Aldar’s target price sensitivity to cap rate

operators

assumption

9.0%

2.80

7.9%

8.0% 2.70

6.0%

5.9%

5.2%

5.9%

6.3% TP (AED/sh)

7.0%

5.0% 4.0% 3.0%

@ Global Retail/Commercial REIT's cap rate

2.72

@ current DB cap rate

2.60 2.61 2.50

2.53 2.46

2.40

2.0%

2.41

1.0%

2.36

2.30

2.32

0.0% Malaysia

Global 5Ys-CDS

Source: Deutsche Bank, Bloomberg Finance LP



US

Spread (Cap rate - CDS)

Dubai

2.20

Cap Rate (%) Implied CDS (BPS)*

4.9%

5.9%

6.9%

7.9%

8.9%

9.9%

10.9%

Nm

30

130

230

330

430

530

Source: Deutsche Bank, Bloomberg Finance LP, *Dubai 5Yr-CDS; BPS = Basis point

Page 43


Market values Aldar’s retail assets at c.9% vs. c.13% for Emaar, which seems optimistic Aldar’s retail portfolio of c.0.45m sqm will only mature by 2015 end (Yas Mall represents c.60% of leasable area and will complete by end of 1Q14). Contrast this to Emaar’s matured retail portfolio of 0.47m sqm (Dubai Mall represent c.70% of leasable area). Despite Emaar’s matured retail portfolio with high quality asset like Dubai Mall, the market is valuing Aldar retail assets at c.7.4% cap rate (Global average 5.9%) vs. 15% for Emaar. We clearly see the discrepancy here and potential for re-rating of Emaar. As per our calculation, at the current market price, Aldar’s retail assets (c.20% of our asset value) are implicitly valued at c.13.5x 2014E P/E (vs. Dubai Mall at 6.6x), while our valuation is close to 12.7x (global peers’ are trading at c.20.0x (see our global valuation table Figure 69). Figure 67: Implicit valuation of Retail Assets AEDm

Current market price

DBe

2.4

2.5

Equity value per share (AED) No. of shares outstanding (m) Equity Value +Net debt 2013E +Pension

7,863

7,863

18,949

19,352

8,879

8,879

96

96

+Associates/JVs

(1,016)

(1,016)

=Total FV of assets -- (A)

26,908

27,311

Total FV of assets (excl. Retail -- (B)

21,767

21,767

5,140

5,544

Implicit FV of Retail -- (A-B) 2015E Net Operating Income of Retail (discounted to 2014E)-DBe

438

438

Implicit P/E of Retail (2014E)

11.7

12.7

8.5%

7.9%

Implicit cap rate (2014E) Source: Deutsche Bank, Bloomberg Finance LP

As per our calculations, for every 2x P/E de-rating of Retail assets, our target price decreases by c.5%. Aldar’s retail assets should be valued at discount to Emaar’s retail assets. Even after considering the implied P/E of 7.4x for Emaar’s retail assets (based on current Emaar’s share price), potential downside in Aldar’s target price is close to 12%. Figure 68: Potential risk in Aldar’s target price P/E (2014E-NOI) Implicit Value of Retail (AEDm) Value accretion/dilution vs. TP (AEDm)

@ CMP

@ DB TP

8.7

10.7

11.7

12.7

14.7

Global Average 19.8

3,791

4,667

5,140

5,544

6,420

8,676

(1,753)

(876)

(403)

-

876

3,132

(0.22)

(0.11)

(0.05)

-

0.11

0.40

Implicit target price (AED)

2.24

2.35

2.41

2.46

2.57

2.86

% Change in TP

-9%

-5%

2%

0%

5%

16%

Value accretion/dilution vs. TP (AED/share)

Source: Deutsche Bank estimates, Bloomberg Finance LP

Page 44



Figure 69: Valuation: Global retail/commercial REITs (26 November 2013) Currency

Price

Mcap (LCm)

Mcap (USDm)

Sunway REIT

MYR

1.27

3,710

-

1.1

9.1

5.2%

IGB REIT

MYR

1.24

1,315

432

1.2

19.2

4.8%

Pavilion REIT

MYR

1.32

1,231

405

1.2

15.8

5.4%

CMMT

MYR

1.46

2,588

-

1.2

10.9

4.8%

Hektar REIT

MYR

1.55

621

-

1.0

9.9

7.7%

9,466

837

1.2

10.9

5.2%

Malaysia

P/BV

P/E

2014E

2014E

Cap rate

A-REIT

SGD

2.25

5,402

-

1.1

12.9

5.8%

Mapletree Industrial Trust

SGD

1.35

1,713

1,395

1.2

14.9

6.3%

Mapletree Logistics trust

SGD

1.05

2,112

1,721

1.0

13.5

6.0%

CapitaCommercial trust

SGD

1.485

3,373

2,747

0.9

19.7

5.2%

CapitaMall Trust

SGD

1.93

5,333

4,344

1.2

17.8

5.1%

K-REIT

SGD

1.17

3,262

-

0.9

8.9

6.4%

Mapletree Commercial Trust

SGD

1.225

1,722

1,403

1.2

18.8

5.1%

Suntec REIT

SGD

1.55

2,804

2,284

0.8

18.9

6.0%

25,721

13,893

1.1

16.3

5.9%

Singapore

DDR Corp

USD

16.02

5,216

5,216

1.3

59.9

6.8%

Equity One, Inc

USD

22.56

2,906

2,906

2.4

47.0

6.3%

Federal Realty Investment Trust

USD

104.39

6,885

6,885

6.5

28.8

5.3%

Kimco Realty Corp.

USD

20.87

8,523

8,523

1.8

26.6

6.7%

Ramco-Gershenson Property Trust

USD

15.93

962

962

1.1

51.5

7.5%

Regency Centers

USD

47.44

4,378

4,378

2.3

40.5

6.3%

Retail Properties of America

USD

13.14

3,077

3,077

1.5

NM

7.3%

Urstadt Biddle Properties Inc

USD

19.14

446

446

1.0

27.9

6.5%

Weingarten Realty Investors

USD

28.96

3,850

3,850

1.4

50.5

6.7%

General Growth Properties

USD

20.89

19,766

19,766

2.0

32.2

5.8%

Macerich Co.

USD

56.85

8,491

8,491

1.7

34.2

5.5%

Simon Property Group

USD

150.13

54,400

54,400

3.3

31.8

5.3%

Taubman Centers In

USD

66.6

5,924

5,924

15.5

40.2

5.0%

124,825

124,825

1.8

37.2

6.3%

US

Unibail

EUR

NA

25,488

33,955

1.2

16.8

5.4%

Hammerson (UK & France)

GBP

514.5

5,856

9,279

0.8

20.1

6.0%

Corio (continental Europe)

EUR

32.13

4,237

5,644

0.9

12.7

6.6%

Land Securitites

GBP

955.5

9,680

15,340

0.9

25.2

4.7%

British Land (UK)

GBP

609

7,586

12,022

1.0

19.8

5.9%

52,846

76,241

0.9

19.8

5.9%

215,796

1.2

19.8

5.9%

Europe (including UK) Global Source: Deutsche Bank estimates, Bloomberg Finance LP


Page 45


Land bank offers potential upside once the market recovers Aldar holds a gross land bank of 77m sqm (830m sqft) or equity adjusting land bank of 75m sqm (808m sqft). Figure 70: Aldar land bank m sqm

Stake

Stake adjusted (m sqm)

Stake adjusted (m sqft)

Yas Island

7.41

100%

7.41

79.61

Al Raha Beach

3.64

100%

3.64

39.06

Motor World (phase 2)

2.71

100%

2.71

29.12

Al Falah Town Center

2.15

100%

2.15

23.09

Nareel Island

0.71

100%

0.71

7.60

Al Gurm (phase 2)

0.70

100%

0.70

7.52

Al Merief

0.69

100%

0.69

7.42

Sheibat Al Watah

0.48

100%

0.48

5.12

Shabhat

0.25

100%

0.25

2.73

Eastern Mangroves

0.22

100%

0.22

2.36

Noor Al Ain

0.09

100%

0.09

0.93

Capital District

0.05

100%

0.05

0.55

Al Mutarad

0.02

100%

0.02

0.27

Sub total

19.1

19.1

205.4

Aldar

Sorouh Seih Sdeirah

52.26

100%

52.26

561.26

Lulu Island

5.03

60%

3.02

32.39

Al Naqlah Neighborhood

0.52

100%

0.52

5.58

Al Mashtal

0.14

100%

0.14

1.51

Shams Abu Dhabi

0.13

100%

0.13

1.39

Al Ajban

0.03

100%

0.03

0.30

Saraya

0.02

100%

0.02

0.22

Sub total

58.1

56.1

602.7

Total

77.2

75.2

808.0

Source: Company data

In our SOTP, we value only part of Yas Island, Al Raha Beach and Shams Abu Dhabi land bank considering these parcels are part of master communities and infrastructure is also developed. We assume that the company will be able to sell these land parcels over the next five years as it has been the case historically (c.AED2.0bn land revenues per year on an average by combined entity of Aldar and Sorouh). Figure 71 explains the sensitivity of Aldar’s target price to different levels of land price; for every 10% increase/decrease in land selling prices, the target price is affected by c.4%.

Page 46



Figure 71: Aldar’s target price sensitivity to selling price of land Land bank considered in valuation (m sqm)

7.8

7.8

7.8

7.8

7.8

Land bank considered in valuation (m sqft)

84.0

84.0

84.0

84.0

84.0

Px (AED/sqft) of GFA of land

113

126

140

154

169

Development Cost (AED/sqft)

65

65

65

65

65

Net Land Value (AED/sqft)

48

61

74

88

104

Land Margin (%) Potential land bank value (AEDm) No. of years to sell land Present Value of land bank (AEDm)

42%

48%

53%

58%

61%

4,030

5,086

6,260

7,434

8,725

5

5

5

5

5

2,778

3,506

4,316

5,125

6,015

Land bank value/share

0.35

0.45

0.55

0.65

0.76

Current target price

2.46

2.46

2.46

2.46

2.46

Potential new TP

2.27

2.39

2.46

2.56

2.68

% change

-8%

-4%

0%

4%

9%


We acknowledge that large land bank offers potential for further development or higher land sales once market conditions improve. However, in our opinion, sufficient infrastructure and tourism/employment opportunities should exist before sub-developers will be willing to buy land. Therefore, we have selectively chosen land parcels in our valuation and excluded most of the land parcels as we think the location of these plots remains unfavorable and would require an extremely bullish market for the market to value this land.


Page 47


Key themes Recurring income growth in focus: Yas Mall is the key Until 2012, Aldar’s business model was mainly driven by asset sales to government and development properties (residential unit sales). In 2012, the company generated c. AED1.4bn of recurring revenues (13% of the top line, mainly offices, hotels), which compares to AED4.1bn for Emaar Properties (50% of the top line, mainly retail & hotels in Dubai). Aldar acquired Sorouh in 2013 with merger effective from 15 May 2013. Following the merger and completion of its flagship retail asset, i.e. Yas Mall, Aldar’s business model should progressively be dominated by recurring income generation (retail, hotels, residential, offices, schools, others). The merger should result in well-diversified recurring income portfolio with Aldar’s current portfolio of hotels and offices balanced through addition of Sorouh’s residential leased portfolio. To put things into perspective, we estimate that by 2015, total recurring income should represent close to two-thirds of the top line (vs. 41% for Emaar) and 83% of the group gross profit (vs. 59% for Emaar). According to our estimates, the investment portfolio should generate c.AED2.9bn of recurring income by 2015, (c.2.0x 2012 / c.60% of Emaar’s 2015 recurring income), in line with company guidance of c.AED3.0bn. We estimate that the gross profit should reach c.AED1.5bn (note that for Aldar, the GP is c.3/4% higher than the net operating income) or c.3.2x 2012 level / c.45% of Emaar’s 2015 recurring gross profit. Our estimates are close to management guidance. Figure 72: Aldar – Revenue and gross profit breakdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2%

2%

13% 31%

86%

2015E

2012

Revenue Breakdown Dev. Prop. & asset sales to AD gov.

83%

83%

69%

2012

17%

15%

2015E GP Breakdown

Total recurring

Government works / contracting

Source: Deutsche Bank, Aldar Properties, Note: Acquisition impact of Sorouh w.e.f.15 May 2013

Page 48

Figure 73: Emaar – Revenue and gross profit breakdown 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

50%

41% 59%

66%

50%

59% 41%

34%

2012

2015E

2012

2015E

Revenue Breakdown

GP Breakdown

Development Properties

Total recurring

Source: Deutsche Bank, Emaar Properties



Figure 74: Aldar investment property revenue (AEDm) 3,500 3,000

Figure 75: Aldar investment property gross profit (AEDm) 80%

1,800

90%

70%

1,600

80%

1,400

70%

1,200

60%

1,000

50%

800

40%

600

30%

60%

2,500

50% 2,000 40% 1,500 30% 1,000

20%

400

20%

500

10%

200

10%

-

0%

-

2009

2010

2011

2012

IP Revenue (AEDm)

2013E

2014E

2015E

0% 2012

% of Total Revenue

2013E

2014E

IP Gross Profit (AEDm)


2015E % of Total Gross Profit


Figure 76: Emaar investment property revenue (AEDm) 6,000

60%

5,000

50%

Figure 77: Emaar investment property gross profit (AEDm) 70%

3,600 3,400

65%

3,200 4,000

40%

3,000

30%

2,000

20%

60%

3,000 2,800

55%

2,600

50%

2,400 1,000

10%

-

0% 2009

2010

2011

IP Revenue (AEDm) Source: Deutsche Bank, Emaar Properties


2012

2013E

2014E

2015E

% of Total Revenue

45%

2,200 2,000

40% 2012

2013E

IP Gross Profit (AEDm)

2014E

2015E

% of Total Gross Profit

Source: Deutsche Bank, Emaar Properties

Page 49


2013-15E: recurring income CAGR of 30%, recurring income space 1.5x Aldar plans to build up its recurring income portfolio over the next two years following the completion of retail projects (mainly Yas Mall) and residential units (new units to be delivered on The Gate, Al Rayyana from Sorouh and leasing of unsold units on Raha Beach from Aldar). We would highlight that the recurring income ramp-up of Aldar is subject to market conditions in Abu Dhabi in 2013/15 in the office, residential and retail segments. Figure 78: Aldar – Recurring income revenue (AEDm)

Figure 79: Aldar – Recurring income revenue 100%

3,500

22%

27% 3,000

16%

18%

19%

19%

80% 9% 11%

2,500

60%

10%

9%

2,000

8%

7%

10% 17%

25%

40%

1,500

22%

20% 15%

1,000

13%

20%

500

29%

28%

24%

21%

2012

2013E

2014E

2015E

0%

0 2012 Hotels

Offices

2013E Retail

Schools

2014E

Residential

2015E

Other IP - Management fees + Op villages, leisure


Hotels

Offices

Retail

Schools

Residential

Other IP - Management fees + Op villages, leisure


We estimate that Aldar’s equity adjusted rental space (office, residential & retail, excluding hotel) was close to 0.5m sqm, which increased to 1.0m sqm following the merger with Sorouh. Further, we expect rental space to increase to 1.5m sqm by 2015 which would mean 0.5m sqm increase in two years, mainly driven by Yas Mall, The Gate and Al Rayyana. Meanwhile, we expect recurring income to grow from AED1,754m in 2013E to AED2,942m by 2015E (+AED1.2bn). Finally, we estimate that c.70% of the recurring income growth between 2013 and 2015E will come from Yas Mall and leasing of residential units. Figure 80: Aldar recurring space evolution (m sqm) until

Figure 81: Incremental revenue contribution 2013-15E

2015E

per segment (AEDm)

1.80

3,500

1.60 3,000

1.40 1.20

2,500

1.00 2,000

0.80 0.60

1,500

0.40 1,000

0.20 Aldar Current

Aldar Under Development

Residential

Source: Deutsche Bank, Aldar Properties

Page 50

Sorouh Current Office

Sorouh Under Development

Aldar Sorouh Combined

Retail

500

0 Aldar 2013

Retail

Residential

Hotels

Other IP

Schools

Office

Aldar 2015E




Figure 82: Breakdown of recurring revenues (2013E) Other IP Management fees + Op villages, leisure 22%

Hotels 28%

Residential 9%

Figure 83: Breakdown of recurring revenues (2015E) Other IP Management fees + Op villages, leisure 18%

Hotels 21%

Residential 19%

Schools 10% Retail 10%

Offices 21%


Figure 84: Breakdown of gross profit (2013E) Other IP Management fees + Op villages, leisure 11%

Hotels 14%

Offices 13%

Schools 7%

Retail 22%


Figure 85: Breakdown of gross profit (2015E) Other IP Management fees + Op villages, leisure 10%

Hotels 13%

Residential 16% Residential 25%

Offices 18%

Schools 4% Offices 38% Retail 17%


Schools 2% Retail 32%


Yas Mall and residential units the main contributors to revenue growth We estimate that Yas Mall will contribute c.40% of the incremental recurring revenues (of AED1.2bn) from 2013-15E. Yas Mall is located on Yas Island and will be the second-largest mall in the UAE after Emaar’s flagship Dubai Mall (c.233k sqm of gross leasable area or c.75% of Dubai Mall). Yas Mall is still under construction (90% complete) and should complete by end of 1Q 2014. The mall is currently c.70% pre-leased. We expect that the asset will generate c.AED435m by 2015 which compares to AED2.8bn for Emaar’s Dubai Mall asset.


Page 51


Figure 86: Yas Mall main assumptions Leasable area (sqm)

2014E

2015E

2016E

2017E

2018E 232,835

232,835

232,835

232,835

232,835

Occupancy

40%*

85%

95%

95%

95%

Rent/sqm/year

2,200

2,200

2,200

2,310

2,426

Revenue (AEDm)

205

435

487

511

537

Gross Profit (AEDm)

154

348

389

409

429

Gross Profit Margin

75%

80%

80%

80%

80%

Source: Deutsche Bank, Occupancy of 80% for 2014E but Yas mall is expected to open end 1H14

The second major contributor to the incremental revenues by 2015 should come from the expansion of the residential portfolio. We estimate that the Aldar’s residential units available for lease will jump to c.4,800 units (c.3x 2012 level) mainly due to completion of the Gate and Al Rayyana. All in all, we estimate that the revenues from the residential portfolio will triple by 2015 to AED550m (from c.155m in 2013E). Note that our assumptions take into account 80% occupancy by 2015E (vs. c.40% in 2013E) which implies that Aldar will be able to lease its units in a challenging Abu Dhabi market.

Figure 87: Incremental recurring revenue contribution 2013-15E per segment Other IP Management fees + Op villages, leisure 13%

Hotels 11%

Figure 88: Annual incremental recurring revenue contribution 2013-15E (AEDm) 3,500

Offices 1%

3,000 2,500 2,000

Retail 39%

Residential 33%

1,500 1,000 500

Schools 3%


Page 52

0 2012 Total

2013E

2014E

2015E

2015E Total




Strong deleveraging to continue on debt repayments; refinancing still required despite government receivables Aldar to repay 65% of its debt in 2013/2014 At the end of 3Q13, Aldar had short term (by 3Q14) debt repayment due of AED11.3bn, of which AED1.7bn is due in 4Q13 and remaining AED9.6bn is to be paid by 3Q14. We estimate total c.AED16.0bn debt repayment over 2013/2014 (AED6.6bn already paid in 9M13), which should represent c.65% of debt repayments over 2013-18E. Figure 89: Aldar debt maturity - AEDm

Figure 90: Emaar debt maturity – AEDm 120%

12,000

120%

9,000 8,000

100%

10,000

100% 7,000

80%

8,000

80%

6,000 5,000

60%

6,000

60% 4,000

40%

4,000

40%

3,000 2,000

20%

2,000

20% 1,000

0%

2013E

2014E

2015E

2016E

Debt maturity

2017E

2018E

2019E

2020E

0%

-

2021E

2013E

Cummulative

Source: Deutsche Bank estimates, Aldar Properties

2014E

2015E

Debt Maturity

LT Cummulative

Source: Deutsche Bank estimates, Emaar Properties

Government receivables to partially meet debt obligations Aldar saw four asset sales to Abu Dhabi government since 2009 representing c.AED48.5bn of assets (c.93% from Aldar assets sales). According to our calculation, c.AED34.6bn (70%) has been received by the company as of end 2012 and we expect the remaining AED13.8bn to be received over 2013-17E (AED8.1bn pending at the end of 3Q13). Going forward, we expect Aldar to receive the majority of the receivables, or AED7.4bn, by 2015, thus supporting debt repayment. Figure 91: Aldar’s government receivables position

Figure 92: Aldar’s government cash receivables (AEDm)

(AEDm) 7,000 5,998

Remaining , 13,757 , 28%

6,000

5,398

5,000 4,000 3,000

Settled till 2012, 34,643 , 72%

2,000

1,666

1,000 348

348

2016E

2017E

0 2013E Source: Deutsche Bank, Aldar Properties


2014E

2015E

Source: Deutsche Bank, Aldar Properties

Page 53


Figure 93: Outstanding Abu Dhabi government receivables to Aldar (AEDm) Government based business / receivables

2013E

2014E

2015E

2016E

2017E

Total

Cash to be received from Plan 1 (Aldar)

348

348

348

348

348

1,739


550

950

-

-

-

1,500


-

3,500

1,318

-

-

4,818

Cash to be received from reimbursable infra. costs (Aldar)

2,500

-

-

-

-

2,500

Cash to be received from infra. / unit sales (Sorouh)

2,600

600

0

0

0

3,200

Total cash collection from asset sales to the government

5,998

5,398

1,666

348

348

13,757

49

122

122

122

292

705

Other contract jobs Watani – Emirati Housing Urban Planning Council (UPC) – Emirati Housing Property management (Aldar) Total cash collection related to government business Total company’s cash collection Govt. cash collection as a % of total cash collection

66

-

-

-

-

66

170

170

170

170

170

850

6,283

5,689

1,957

639

810

15,379

10,288

9,454

5,927

4,787

6,235

36,693

61%

60%

33%

13%

13%

42%


Aldar should need AED7bn of new funding by 2015, which seems manageable According to our calculations, Aldar should have AED21.7bn of cash collections over 2013-15E, while its commitments are c.AED26.0bn (debt repayment of AED17.9bn, capex of AED4.8bn and AED3.3bn of other commitments), meaning the company needs to raise c.AED7.0bn (assuming cash balance does not fall below AED2.5bn). Having said that, Aldar has already secured AED4.0bn of refinancing, meaning it has to arrange financing for another AED3bn. Given Aldar’s strong links to the government (AD owns 65%) and local banks, coupled with its deleveraged profile and improved credit rating, we believe refinancing should not be challenging. Figure 94: Aldar cash flows (AEDm) 2013E

2014E

2015E

Total 2013-15E

2,260

4,166

2,347

2,260

Government receivables

4,841

5,398

1,666

11,905

Sorouh cash acquired

1,635 710

1,197

1,549

3,457

1,393

-

-

1,393

Government business cash collection

192

307

307

805

Net land sales cash collection

150

63

-

213

11,181

11,130

5,868

21,667

(2,029)

Cash in hand Cash Inflows

Net recurring income cash collection Net development property cash collection

Total Cash Available

1,635

Cash Outflows Capex

(1,829)

(100)

(100)

Capex – Completion of assets sold to government

(1,400)

(1,000)

(400)

(2,800)

Debt Repayment

(6,563)

(9,551)

(1,800)

(17,914)

Other operating items (SG&A, interest, dividends etc) Total Cash Outflows Funding Excess/Shortfall

(1,224)

(1,133)

(919)

(3,275)

(11,015)

(11,784)

(3,219)

(26,018)

166

(653)

2,649

(4,351)

Debt raised

4,000

3,000

0

7,000

Closing Cash (AEDm)

4,166

2,347

2,649

2,649

Net debt

8,879

4,147

2,044

Gearing

53%

22%

10%


Page 54



We expect Aldar’s gearing to stand at 53% for 2013, which should taper down going forward to 22% by 2014E which compares to 12% for Emaar. Figure 95: Aldar net debt (AEDm) and gearing

Figure 96: Emaar net debt (AEDm) and gearing

35,000

800%

9,000

30,000

700%

8,000

600%

25,000

500% 20,000

30%

25% 7,000 6,000

20%

5,000 15%

400% 4,000

15,000 300% 10,000

200%

5,000

100%

-

0% 2009

2010

2011

2012

2013E

Net Debt (AEDm)

2014E

2015E

3,000

10%

2,000 5% 1,000 0%

2009

2011

2012

Net Debt (AEDm)

Gearing


2010

2013E

2014E

2015E

Gearing

Source: Deutsche Bank estimates, Emaar Properties

Summary of our estimates Overall, we expect strong momentum in Aldar’s earnings starting 4Q13. 4Q13 should see strong earnings as a result of The Gate deliveries to customers and the government, which should continue in 1Q14 also. Moreover, AED1.6bn infrastructure re-imbursement by government should directly flow into net profit on recognition, although timing of recognition remains uncertain. We expect partial recognition in 4Q13, with the remainder in 2014E. Yas Mall opening in 2014 and leasing of residential units should also boost recurring income earnings. Although 2014E NP looks flat over 2013E, but 2013E NP was lifted by extra-ordinary gain on Sorouh’s acquisition. So, adjusting for one-offs, NP should see strong growth. Beyond 2014E, earnings should drop as asset sales for Abu Dhabi government fades. Further, we expect margins to improve in 2013/14E (thanks to growing investment portfolio and recognition of asset sales).

Figure 97: Estimate summary AEDm

2011

2012

2013E

2014E

Revenues

6,743

11,404

6,234

5,285

% growth

276%

69%

-45%

-15%

Gross Profit

1,646

3,238

2,158

1,878

24%

28%

35%

36%

1,234

2,928

2,120

3,292

as a % of sales EBITDA as a % of sales Net Income as a % of sales % growth

18%

26%

34%

62%

642

1,341

2,585

2,571

10%

12%

41%

49%

-105%

109%

93%

-1%



Page 55


Rating

Company

Athmane Benzerroug

Hold

Deyaar Development


Middle East


Real Estate

Reuters

Bloomberg

DEYR.DU

DEYAAR DB

Market overestimating potential benefits while ignoring risks Resurgent Dubai property market driving new launches; positives over priced With investor confidence returning to Dubai property market, Deyaar, like other local developers, has announced new projects in prime localities of DIFC (Central Park Ph2) and Business Bay (two mix use towers). Given investor preference for prime localities, we expect good response to these projects. Having said that, the majority of Deyaar’s value is locked in receivables and inventory. Current valuation is pricing in recovery of receivables and inventory at book value, while ignoring risks of default and contingent payments. Despite improving sales and deliveries, inventories remain high Deyaar sold one of its office buildings in Business Bay for AED141m recently after recording c.AED170m sales earlier this year. Phase I of Central Park project (80% completed) in DIFC is also sold out. The company has started deliveries for “The Burlington”, a commercial tower in Business Bay. That said, the company still carries inventory of AED2.2bn (land-20%, finished units-45% and unfinished units-35%) or c.56% of equity value. Book value locked in high risk receivables Deyaar holds c.AED2.6bn (66% of equity) of long-term receivables (2016E), mostly pertaining to unit/land sales in Dubai to related parties. In our view, these receivables hold high default risk as most of the sales was achieved during peak times (pre-2009) or 2010 and property values are down by c.45% since 2008 peak. As per latest financial statements, receivables of c.AED1.4bn have already been reduced by AED730m (c.20% of market cap.) as a result of amended agreement with maturity date advanced from 2016 to short term. Moreover, these receivable may not necessarily be settled in cash, but could be in the form of other considerations such as buying land in return.


0.69

52-week range (AED)

0.74 – 0.32

NA

Price/price relative 0.9 0.75 0.6 0.45 0.3 0.15 10/11

4/12

10/12

4/13

Deyaar Development Dubai Financial Mark (Rebased)

Performance (%)

1m

3m

Absolute

4.9

76.5

12m 99.2


9.0

14.8

77.0


Stock data Market cap (AED)(m) Shares outstanding (m) Free float (%)

3,987.1 5,778 56


2,884.4


Potential payment liability from Sky Gardens dispute with Taaleem Deyaar is involved in a legal dispute with Taaleem (an education provider) for payment of a 33% stake in Sky Gardens, a property in DIFC. As per Taaleem’s contention, Deeyar needs to pay them AED237m for the stake as per agreement signed in late 2008, while Deyaar contends that the agreement is not binding. The court proceedings started in late October 2013 and will be concluded by the second week of November. Valuation and risks The stock is currently trading at 1.0x 2014E P/BV, in line with UAE/EM peers. We believe the majority of Deyaar’s book value is trapped in inventory and high risk receivables. Assuming Deyaar settles its liabilities (AED2.3bn) with receivables (AED2.0bn after taking a hit of AED730m as mentioned above) and cash available (AED286m), current valuation factors that Deyaar would be able to sell its inventory and investments at c.1.2x their recorded value of c.AED3.2bn. In our view, the market is over estimating the potential benefits driven by Dubai property market recovery, while ignoring the risks. UAE developers are exposed to the availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence. Project delays or cancellations and failure to recover receivables could also have a material impact on our earnings and valuation.

Page 56




2010

2011

2012

2013E

2014E

DB EPS (AED) Reported EPS (AED) DPS (AED) BVPS (AED)

-0.01 -0.40 0.00 0.8

0.02 0.01 0.00 0.7

0.01 0.01 0.00 0.7

0.02 0.02 0.00 0.7

0.02 0.02 0.00 0.7


5,778 2,238 2,519

5,778 1,565 1,845

5,778 1,974 1,474

5,778 4,085 3,454

5,778 4,085 3,346


nm nm 0.39

11.6 41.5 0.32

61.0 51.1 0.54

40.6 38.1 1.02

31.2 31.2 0.99


nm 0.0

2.5 0.0

nm 0.0

3.5 0.0

2.9 0.0


1.0 nm nm

2.3 261.8 nm

2.7 15.7 16.8

5.6 21.9 23.4

4.0 18.6 19.7

2,643 -46 -68 11 0 -79 -33 -3 -2,222 0 -2,337 3 -35 0 -2,305

806 99 7 9 0 -2 142 -1 -98 0 41 4 0 0 38

552 199 94 6 0 88 -55 1 6 0 40 1 0 0 39

620 246 158 10 0 148 -35 -12 7 0 107 0 0 0 107

843 280 180 10 0 170 -29 -10 0 0 131 0 0 0 131

2,222 -83

98 135

-6 32

-7 101

0 131

-106 -2 -107 0 0 -115 46 -177 1

41 -1 39 0 0 -141 234 132 303

-53 0 -53 0 0 -13 10 -57 -90

143 0 143 0 0 -118 4 29 20

118 0 118 0 0 -118 4 4 -33

442 3,785 565 288 3,027 8,108 1,012 2,687 3,699 4,409 0 4,409 570

340 1,261 0 297 4,897 6,794 916 2,018 2,934 3,860 0 3,860 576

204 251 0 1,184 4,833 6,472 887 1,679 2,567 3,905 0 3,905 684

233 278 0 1,168 4,806 6,485 769 1,703 2,472 4,012 0 4,012 537

237 268 0 1,154 4,801 6,460 651 1,665 2,316 4,143 0 4,143 415

nm na -2.6 -3.0 nm -41.4 0.1 0.2 12.9 nm

-69.5 na 0.9 -0.2 0.0 0.9 0.2 0.2 14.9 nm

-31.5 -76.1 17.0 15.9 0.0 1.0 0.1 0.1 17.5 1.6

12.2 211.5 25.4 23.8 0.0 2.7 0.1 0.0 13.4 4.2

36.1 30.0 21.4 20.2 0.0 3.2 0.1 0.1 10.0 5.8

Financial Summary


Deyaar Development Reuters: DEYR.DU

Bloomberg: DEYAAR DB

Valuation Metrics


AED 0.71

Target Price

AED NA

52 Week range

AED 0.32 – 0.75

Market Cap (m)

AEDm 4,085 USDm 1,112


Company Profile Established in 2001, Deyaar is one of the leading real estate development companies in Dubai. The company is the real estate arm of Dubai Islamic Bank which owns a 41% stake. Deyaar’s operations are divided across four business units: property development, lease management, asset management, and fund management. The company’s current project portfolio includes residential and commercial tower developments. The stock is listed on the Dubai market since 2007.

Price Performance 0.9 0.75 0.6


0.45 0.3

Cash Flow (AEDm)

0.15 Nov 11

May 12

Nov 12


May 13

Deyaar Development Dubai Financial Market General Index (Rebased)



0 -10 10

11

12

EBITDA Margin

13E

14E

EBIT Margin

Growth & Profitability 60 40 20 0 -20 -40 -60 -80

10 0 -10 -20 -30 -40 -50 10

11

12

13E

Sales growth (LHS)

14E ROE (RHS)

Solvency 7 6 5 4 3 2 1 0

20 15 10 5 0 10

11

12


13E

14E





[email protected]


Page 57


Investment thesis Outlook Deyaar holds significant unsold inventory/receivables which form a significant part of book value. The receivables portion includes related party receivables, mostly pertaining to unit/land sales in Dubai, which are long term in nature (2016E). In our view, these receivables hold high default risk as most of the sales were achieved during peak times (pre-2009) or in 2010, while property values are significantly below those levels. Further, the investment portfolio remains immature, thus burdening cash flows. Hold.

Valuation We have a neutral view on the stock.

Risks UAE developers are exposed to the availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence. Project delays or cancellations and failure to recover receivables could also have a material impact on our earnings and valuation.

Page 58



Key themes Large low-quality receivables / inventory render significant risk Deyaar holds c.AED4.9bn (1.2x equity) of unsold inventory/receivables with significant exposure to high risk receivables. The receivables portion (AED2.6bn, 66% of equity) includes related party receivables, mostly pertaining to unit/land sales in Dubai, which are long term in nature (2016E). These receivables carry a high default risk as most sales were achieved during peak periods (pre-2009) or in 2010 and property values are down c.45% since then. As per latest financial statements, receivables of c.AED1.4bn have already been reduced by AED730m (or c.20% of market cap) as a result of amended agreement (with maturity date reduced from 2016 to short term). In addition to receivables risk, c.55% of inventory is under construction or in the planning stage (land), thereby exposed to execution risk.

Figure 98: Breakdown of core real estate portfolio

Figure 99: Breakdown of inventory

(AED5.8bn) Investment in JVs 16%

Land 19% Unsold inventory (incl land) 39%

Unfinished units 37%

Related party receivables 45%

Source: Deutsche Bank, Company data


Finished units 44%


Page 59


3Q13 below expectations after one-off gains In 3Q13, Deyaar reported NP of AED40m (+49% qoq, +6.5x yoy). However, 3Q included gain of AED28m on disposal of subsidiary. Adjusted NP stood at AED13m vs. consensus AED14.1m and Deutsche Bank’s estimate of AED19m, or -32% our estimate/-9% consensus. Revenues came in at AED104m (+11% qoq, -24% yoy, -45% consensus/our estimate), with GPM of 53% (our estimate: 36%). We highlight that during the last two quarters higher GPM for Deyaar was mainly driven by reversal of provisions, while 1Q13 saw forfeiture income with no associated cost, thus driving up the margin. Figure 100: 3Q13 deviation table AEDm Revenues Gross profit Gross margin Net Income Net margin

3Q13 3Q13E % dev.

2Q13 % qoq

3Q 12

% yoy

Cons. % Dev

104

197

-47%

94

11%

137

-24%

190

-45%

55

71

-23%

91

-40%

45

21%

NA

NA

53%

36%

540%

14.1

187%

40

19

39%

10%

98% 113%

27 29%

33% 49%

6 5%

7%

Source: Deutsche Bank estimates, Bloomberg Finance LP

Summary of our estimates We expect Deyaar’s earnings to benefit from Dubai property market recovery with NP growth of 84% over 2013-14. Apart from delivery of Burlington Tower, sale of completed units from inventory should also drive revenue growth in 2013E, which should continue going into 2014E given significant inventory.


2011

2012

2013E

Revenues

806

552

620

843

% growth

-70%

-31%

12%

36%

Gross profit as a % of sales EBITDA

2014E

99

199

246

280

12%

36%

40%

33%

7

94

158

180

1%

17%

25%

21%

38

39

107

131

as a % of sales

5%

7%

17%

16%

% growth

NA

2%

178%

22%

as a % of sales Net income


Page 60



Rating

Company

Athmane Benzerroug

Hold

RAK Properties


Middle East


Real Estate

Reuters

Bloomberg

RPRO.AD

RAKPROP DH

Positive signs visible, but market not fundamentally attractive Positive response to new launch RAK Properties primarily operates in Ras Al Khaimah, the north most part of the UAE with limited local demand. Mina Al Arab is the flagship beach front project of RAK Properties spread over 30m sqft. Recently, RAK Properties launched Flamingo Villas (104 units) and Lagoon Heights (apartment tower) and has been able to sell c.50% of the villas in a short period of time. 40% of the buyers of villas were Emiratis and c.25% from Indian sub-continent, indicating increasing interest of investors. Market not attractive but slowly catching up Ras Al Khaimah property market suffers from lack of developed infrastructure and low local demand (one-tenth of Dubai’s population size). However, things have started to move slowly with emirate taking note of the infrastructure deficit. Government has taken initiatives to leverage on its proximity to Dubai and promote tourism, which should aid development of economy. Ras Al Khaimah is investing in roads and airport development with encouraging tourists/airport passenger growth. Despite positive signs, small population base makes the property market less attractive.


0.67

52-week range (AED)

0.74 – 0.37

NA

Price/price relative 0.8 0.7 0.6 0.5 0.4 0.3 0.2 10/11

4/12

10/12

4/13

RAK Properties ADSM General Index (Rebased)

Performance (%)

1m

3m

Absolute

7.4

15.9

12m 92.1

ADSM General Index

1.4

-0.1

45.8


Stock data Market cap (AED)(m) Shares outstanding (m) Free float (%) ADSM General Index

1,460.0 2,000 95 3,861.1


Balance sheet comfortable, government support in place RAKP’s balance sheet remains sound (gearing only 4%) with a comfortable liquidity situation due to long-term government debt along with recently secured credit lines. However, the strategy remains unclear and returns uncertain as it continues to invest cash in the fundamentally weak RAK real estate market. Valuation and risks RAK Property is trading at 0.4x 2014E P/BV or discount to UAE/EM peers. RAK Properties book value primarily comprises of investment properties (50%) and properties under development (50%) with no clear break up of land, finished and unfinished units. Opaque investment book makes it difficult to gauge the true book value. Further, visibility on returns and strategy remain limited. UAE developers are exposed to the availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence. Project delays or cancellations and failure to recover receivables could also have a material impact on our earnings and valuation. Specific risks for RAK Properties: 1) high dependence on a single project (Mina Al Arab), 2) its strategy is sometimes difficult to read and 3) little visibility on the investment portfolio composition and value.


Page 61



2011

2012E

2013E

2014E

0.03 0.09 0.00 1.7

0.08 0.05 0.00 1.7

0.08 0.07 0.05 1.8

0.05 0.05 0.05 1.8

0.05 0.05 0.05 1.8

2,000 929 347

2,000 731 334

2,000 1,360 834

2,000 1,360 844

2,000 1,360 860


16.7 5.0 0.26

4.4 6.7 0.17

8.6 9.7 0.38

14.7 14.0 0.38

13.6 13.6 0.38


nm 0.0

nm 0.0

9.0 7.4

6.3 7.4

6.2 7.4


2.3 8.7 9.0

0.6 1.9 2.0

1.4 5.0 5.3

2.9 7.7 8.5

2.6 7.5 8.2

151 48 40 1 0 38 17 0 132 0 187 0 0 0 187

521 153 171 5 0 167 0 0 -58 0 109 0 0 0 109

596 144 165 9 0 157 2 0 -18 0 140 0 0 0 140

288 84 109 10 0 99 -6 0 5 0 97 0 0 0 97

333 95 115 10 0 105 -5 0 0 0 100 0 0 0 100

-132 56

58 167

18 158

-5 93

0 100

-197 -160 -357 0 -2 -185 8 -537 -231

-24 -64 -88 0 -2 92 20 21 -187

133 -10 123 0 0 -152 95 65 -16

137 -51 86 0 -100 -100 0 -114 34

134 -50 84 0 -100 0 0 -16 24

437 1,449 0 661 2,447 4,995 517 1,147 1,664 3,331 0 3,331 80

307 1,826 0 548 2,560 5,241 457 1,344 1,802 3,439 0 3,439 150

372 1,740 0 459 2,253 4,824 305 933 1,238 3,586 0 3,586 -67

258 1,780 0 463 2,253 4,755 205 967 1,172 3,584 0 3,584 -53

242 1,821 0 463 2,253 4,779 205 991 1,196 3,584 0 3,584 -37

nm na 26.2 25.4 0.0 5.8 106.1 128.8 2.4 nm

244.1 200.7 32.9 32.0 0.0 3.2 20.2 22.1 4.4 nm

14.6 -5.4 27.7 26.2 71.5 4.0 1.7 1.1 -1.9 nm

-51.7 -41.4 37.8 34.4 102.8 2.7 17.6 5.1 -1.5 15.5

15.6 8.2 34.6 31.6 99.9 2.8 15.1 5.0 -1.0 20.4



RAK Properties Reuters: RPRO.AD

Bloomberg: RAKPROP DH


AED 0.68

Target Price

AED NA

52 Week range

AED 0.37 – 0.74

Market Cap (m)

AEDm 1,360 USDm 370

Company Profile RAK Properties is a Public Joint Stock Company (PJSC) formed in February 2005 with the support of the Government of Ras Al Khaimah (RAK). The company is active in real estate development projects in the coastal and inland areas of Ras Al Khaimah. RAK Properties also runs an investment portfolio diversified in real estate and private equity. The stock is listed on the Abu Dhabi stock exchange

Price Performance 0.8 0.7 0.6 0.5 0.4 0.3 0.2 Nov 11

2010

Financial Summary


Valuation Metrics

Income Statement (AEDm) Sales revenue Gross profit EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit

Cash Flow (AEDm) May 12

Nov 12


May 13

RAK Properties ADSM General Index (Rebased)



28


24 10

11

12E

EBITDA Margin

13E

14E

EBIT Margin

Growth & Profitability 300 250 200 150 100 50 0 -50 -100

7 6 5 4 3 2 1 0 10

11

12E

13E

Sales growth (LHS)

14E ROE (RHS)

Solvency 25

5 4 3 2 1 0 -1 -2 -3

20 15 10 5 0 10

11

12E


13E


14E



Page 62

athmane benzerroug@db com



Investment thesis Outlook Although RAK Properties’ valuation may look attractive we maintain Hold on unclear strategy. The B/S remains sound and the liquidity position looks comfortable due to long-term loans from the RAK government and available credit lines. However while RAKP suffers from high defaults/unsold units, instead of preserving cash, it continues to invest cash in a fundamentally weak real estate market, which makes us skeptical on the strategic direction. An opaque investment book makes it difficult to gauge the true B/V. Hold.




Page 63


Summary of our estimates We expect Rak Properties earnings to fall in 2013 on the back of lower deliveries and should remain flat next year as we do not expect significant pick-up in deliveries.

Figure 102: Estimate summary 2011 Revenue % growth

2012

2013E

2014E

521

596

288

333

244%

15%

-52%

16%

Gross Profit

153

144

84

95

as % of sales

29%

24%

29%

28%

EBITDA as % of sales

171

165

109

115

33%

28%

38%

35%

Net Income

108

147

97

100

as % of sales

21%

25%

34%

30%

-42%

36%

-34%

149%

% growth Source: Company data, Deutsche Bank estimates

Page 64



Rating

Company

Athmane Benzerroug

Hold

Union Properties


Middle East


Real Estate

Reuters

Bloomberg

UPRO.DU

UPP DB


0.92

52-week range (AED)

0.99 – 0.38

Price/price relative

Balance sheet improves after asset sales, but valuation stretched; Hold

1.0

Asset sales steers balance sheet back in shape; valuation unappealing Union Properties has been able to bring back its balance sheet in better shape after asset sales and utilizing proceeds to repay debt. UPP’s gearing now seems comfortable at 42% (from 133% in 2012). UPP has resorted to asset sales in the past also to ease pressure on liquidity. That said, after selling prime assets, UPP is left with inventory in secondary locations of Dubai (lower prices/rental yields). In the long term, demand should be driven by potential development of infrastructure and influx of population in these areas, which should mean longer time frame to sell inventory. UPP trades at P/BV of 1.1x 2014E (higher than UAE/EM), despite low quality assets, which are already marked at fair value.

0.2 10/11

Balance sheet improves after asset sales UPP sold assets worth AED2.5bn to related parties (mainly ENBD Bank – the major shareholder), in addition to third party asset sales. The major assets sold include residential units in Index Tower, Limestone House, Uptown motor City and hotels – The Courtyard by Marriott and Renaissance. UPP has utilized proceeds to settle c.AED2.0bn of debt from ENBD. This has resulted in reduction in gearing from 133% in 2012 to 42% at the end of 3Q13.

NA

0.8 0.6 0.4 4/12

10/12

4/13

Union Properties Dubai Financial Mark (Rebased)

Performance (%)

1m

3m

12m

Absolute

6.6

118.0

137.3


9.0

14.8

77.0


Stock data Market cap (AED)(m) Shares outstanding (m) Free float (%) Dubai Financial Market General Index

3,093.0 3,362 47 2,923.9


After prime asset sales, focus now shifts to expansion in secondary locations UPP has resorted to asset sales in difficult times to ease liquidity. However, after selling its marquee asset Ritz Carlton Hotel in 2010 and residential units to ENBD in prime location, i.e. DIFC, we believe UPP is left with inventory in secondary locations of Dubai (Green Community/Motor City). UPP now plans to focus on expansion of its development project Green Community, which is located near Jabel Ali, Dubai. In our view, this development holds future potential due to proximity to new international airport and upcoming infrastructure development. Meanwhile, we expect demand to be on the softer side with UPP continuing to sell its existing inventory at a slow pace. Valuation and risks We have a neutral view on the stock. After significant share price outperformance YTD 2013, we believe current valuations are stretched with UPP trading at 1.1x 2014E P/BV, higher than UAE/EM peers. UPP’s book value comprises primarily of inventory (AED3.2bn or 1.1x equity value) in secondary areas of Dubai and receivables (AED1.9bn or 65% of equity value) and are already marked to fair value in the balance sheet. In our view, the premium to book value is unappealing despite positive momentum in Dubai property market. UAE developers are exposed to the availability of mortgage and project financing, population growth, MENA economic conditions and consumer confidence. Project delays or cancellations and failure to recover receivables could also have a material impact on our earnings and valuation.


Page 65



2010

2011

2012

2013E

2014E


0.04 -0.46 0.00 1.2

0.06 -0.47 0.00 0.7

-0.01 0.05 0.00 0.8

0.07 0.10 0.00 0.9

0.04 0.04 0.00 0.9


3,366 1,511 7,095

3,362 1,188 4,412

3,362 1,335 4,281

3,362 3,224 3,671

3,362 3,224 3,263


10.6 nm 0.31

6.1 nm 0.37

nm 7.6 0.52

12.9 9.6 1.11

24.2 24.2 1.06


nm 0.0

9.2 0.0

nm 0.0

20.0 0.0

nm 0.0

2.5 15.6 16.8

0.9 7.4 7.6

2.6 34.0 40.0

1.5 11.8 12.5

1.9 17.6 19.7

2,868 618 456 34 0 422 -315 36 -1,706 0 -1,563 0 0 0 -1,563

4,925 741 599 22 0 577 -395 14 -1,766 0 -1,570 0 0 0 -1,570

1,642 243 126 19 0 107 -164 10 222 0 176 0 0 0 176

2,374 317 312 19 0 293 -108 65 85 0 334 0 0 0 334

1,748 264 186 20 0 166 -97 65 0 0 133 0 0 0 133

1,706 143

1,766 196

-222 -47

-85 250

0 133

167 -341 -175 0 0 225 661 711 -39

116 -6 110 0 0 -2,457 2,399 51 -124

-241 -113 -354 0 0 -209 587 24 -163

715 -70 645 0 0 -2,070 1,608 182 512

63 -120 -57 0 0 -483 400 -140 -25

489 3,124 41 436 10,798 14,888 6,509 4,422 10,931 3,957 0 3,957 6,020

235 4,398 41 430 4,075 9,178 3,888 2,902 6,791 2,387 0 2,387 3,654

227 4,740 0 469 3,654 9,092 3,643 2,887 6,529 2,563 0 2,563 3,415

410 3,038 0 715 2,863 7,027 1,572 2,557 4,129 2,897 0 2,897 1,163

270 2,638 0 780 2,732 6,420 1,089 2,300 3,389 3,031 0 3,031 820

nm na 15.9 14.7 nm -33.1 11.9 10.1 152.1 1.3

71.7 37.8 12.2 11.7 nm -49.5 0.1 0.3 153.1 1.5

-66.7 na 7.7 6.5 0.0 7.1 7.1 6.2 133.3 0.7

44.5 na 13.1 12.3 0.0 12.3 3.1 3.9 40.1 2.7

-26.4 -46.5 10.6 9.5 0.0 4.5 7.1 6.2 27.1 1.7

Financial Summary


Union Properties Reuters: UPRO.DU

Bloomberg: UPP DB

Valuation Metrics


AED 0.96

Target Price

AED NA

52 Week range

AED 0.39 – 1.03

Market Cap (m)

AEDm 3,224 USDm 878



Company Profile Union Properties is an established developer headquartered in Dubai, UAE, with a 20-year track record of delivering residential, commercial, and retail space. Having departed from its traditional role as property owner and manager in 2005 to capitalize on opportunities made available by a new property law, it is now selling residential and commercial space, as well as managing franchised leisure destinations.

Price Performance 1.2 1.0 0.8


0.6 0.4

Cash Flow (AEDm)

0.2 Nov 11

May 12

Nov 12


May 13

Union Properties Dubai Financial Market General Index (Rebased)

Margin Trends 16 14 12 10 8 6

Balance Sheet (AEDm) 10

11

12

EBITDA Margin

13E

14E

EBIT Margin


20 10 0 -10 -20 -30 -40 -50 -60

50 0 -50 -100 10

11

12

13E

Sales growth (LHS)

14E ROE (RHS)

Solvency 200

3 3 2 2 1 1 0

150 100 50 0 10

11


12

13E

14E





Page 66

[email protected]



Investment thesis Outlook UPP’s balance sheet considerably improved in 2013 thanks to asset disposal. That said, the key issue now is quality of assets left in the books, a significant portion of which is in fringe developments where demand is low (lower prices/rental yields). Moreover, the company records its assets at fair value in books, thus any premium to book appears unappealing. With no company specific growth driver in place, we expect UPP to be driven by sentiment on Dubai real estate. The stock is likely to remain one of the most volatile stocks among UAE developers in our view. Hold




Page 67


Key themes Liquidity seems manageable but inventory sales is the key UPP has sold c.AED2.5bn assets to ENBD, of which c.AED1.8bn from investment properties (completed residential units) and AED700m from development properties (mainly hotel). The proceeds have been utilized to repay c.AED2.0bn of debt, thus leaving AED1.6bn of gross debt in balance sheet (of which short-term debt is c.AED500m). UPP has cash balance of AED360m at the end of 9M13 or requirement of c.AED150m to bridge debt obligation, which should be manageable if UPP continues to sell its inventory and achieve decent pre-sales on its new launch of Green Community.

Figure 103: Breakdown of core real estate portfolio (AED5.6bn) Investment in JVs 9%

Receivables 34%

Inventory 57%


Page 68



Summary of our estimates We expect 2013 UPP’s earnings to be boosted by asset sales to ENBD which should normalize back in 2014 while margins should remain soft.


2011

2012

2013E

2014E

Revenues

4,925

1,642

2,374

1,748

% growth

72%

-67%

45%

-26%

741

243

317

264

15%

15%

13%

15%

Gross profit as a % of sales EBITDA as a % of sales Net income

599

126

312

186

12%

8%

13%

11%

(1,570)

176

334

133

as a % of sales

NA

7%

17%

16%

% growth

NA

11%

14%

8%



Page 69


The author of this report wishes to acknowledge the contribution made by Yugesh Suneja and Chanchal Gupta, employees of Evalueserve, a third-party provider of offshore research support services to Deutsche Bank.

Page 70



Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company

Ticker

Recent price*

Disclosure

Emaar Properties

EMAR.DU

6.30 (AED) 27 Nov 13

14

Aldar Properties

ALDR.AD

2.40 (AED) 27 Nov 13

NA

Deyaar Development

DEYR.DU

0.69 (AED) 27 Nov 13

NA

Union Properties

UPRO.DU

0.95 (AED) 27 Nov 13

NA

RAK Properties

RPRO.AD

0.68 (AED) 27 Nov 13

NA

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Athmane Benzerroug


Page 71


Historical recommendations and target price: Emaar Properties (EMAR.DU) (as of 11/27/2013) 7.00

Previous Recommendations 2

6.00

1

Security Price

5.00

4.00

Current Recommendations Buy Hold Sell Not Rated Suspended Rating

3.00

2.00

*New Recommendation Structure as of September 9,2002

1.00

0.00 Dec 11

1.

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Mar 12

27/02/2013:

Jun 12

Sep 12

Dec 12

Date

Buy, Target Price Change AED6.80

Mar 13

2.

Jun 13

24/10/2013:

Sep 13


Historical recommendations and target price: Aldar Properties (ALDR.AD) (as of 11/27/2013) 3.50

Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

3.00

Security Price

2.50

2.00

Current Recommendations Buy Hold Sell Not Rated Suspended Rating

2

1.50

1 1.00


0.50

0.00 Dec 11

1.

11/05/2012:

Page 72

Mar 12

Jun 12

Sep 12


Dec 12

Date

Mar 13

2.

Jun 13

08/11/2012:

Sep 13

Downgrade to Hold, AED1.40



Historical recommendations and target price: Deyaar Development (DEYR.DU) (as of 11/27/2013) 0.80


0.70

Security Price

0.60 0.50

Current Recommendations 0.40

Buy Hold Sell Not Rated Suspended Rating

0.30 0.20


0.10 0.00 Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Date

Mar 13

Jun 13

Sep 13

Historical recommendations and target price: Union Properties (UPRO.DU) (as of 11/27/2013) 1.20


1.00

Security Price

0.80



0.40


0.20

0.00 Dec 11

Mar 12


Jun 12

Sep 12

Dec 12

Date

Mar 13

Jun 13

Sep 13

Page 73


Historical recommendations and target price: RAK Properties (RPRO.AD) (as of 11/27/2013) 0.80


0.70

Security Price

0.60 0.50



0.30 0.20


0.10 0.00 Dec 11

Mar 12

Jun 12

Sep 12

Dec 12

Date

Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Mar 13

Jun 13

Sep 13

Equity rating dispersion and banking relationships 600 500

53 % 39 %

400 300 200

26 %

100

23 %

8%

16 %

0

Buy

Hold

Companies Covered

Sell

Cos. w/ Banking Relationship

Global Universe

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

Page 74



Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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Page 75

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