Real Estate Consult Dubai

Impact of Global Recession
on
Real Estate in the United Arab Emirates

Eric P Stoclet

Global Environment - Economy
 Global Recession?
o The World Bank expects the global economy will contract between 1 and 2% in 2009. Drop in trade
to be “worst in 80 years” with global exports declining 2.1%, first drop since 1982
o International Labor Organization (UN) estimates 50 million jobs could be lost in 2009
 Driven by over-leverage in many asset classes, in particular real estate
 De-leveraging to be long and painful and will re-shape global financial systems
 US estimated by many economists to start recovering only in 2010
o Q4 2008 GDP -6.2%, Warren Buffett: US economy has “fallen off a cliff”
o March unemployment rate hits 8.5%, unemployment expected by many to reach double-digits
o Case-Schiller housing index has dropped 28% from its peak and is still dropping
o Some signs of “bottoming out”
 Bank earnings for Q1 have beaten expectations though mostly on trading/fixed income
generated revenues. Core businesses still show signs of stress
 DJIA up 21.7% at 21/4/2009 from 03/09 low of 6,547, though still in negative territory for 2009
 April University of Michigan Confidence Index: 61.9, up from 57.3 in March and better than
expectations of 58.5
o IMF forecasts US to contract 2.6% in 2009
 EU tends to lag the US by 6-12 months
o Q4 2008 GDP -1.5%;
o January unemployment rate hits 8.2%
o IMF expects EU economy to shrink 3.2% in 2009
o Few signs of bottoming with possible exception UK seeing some glimmers of hope on real estate
front

Monday, April 27, 2009 3

 China slowing down, but there are positive signs
o Q4 2008 GDP +6.8%, slowest pace in 7 years, Q1 2009 saw even slower growth at 6.1%
o December 2008 official urban unemployment rate rises to 4.2% (Chinese Academy of Social
Scientists estimates 9.4%) for the first time in 5 years
o March exports drop 17.1%, imports drop 25.1% year-on-year though this was better than
February‘s export drop of 25.7%
o Signs of improvement on the back of USD 585 billion stimulus package implemented 11/2008:
 Industrial output expanded 5.1% Q1 2009 and was up 8.3% year-on-year in March, against
3.8% in January and February
 Fixed asset investment was up 28.6% in March from 26.5% in February.
 Spending on property development grew by 4.1% Q1
 Retail sales remain strong, up 14.7% in March
o World Bank forecasts growth of 6.5% for 2009, Macquarie 7.5% - 8%
 India not faring well either
o Q4 2008 GDP +5.3%, down from average of 9% in last three years;
 Q4 growth essentially on the back of government spending
 Barcap sees 2009 growth of 4%, ADB 5%
o Official unemployment stands at 8.2% but statistics is believed to cover only organized sector of the
economy which employs only 10% of the workforce

 General view that recovery timing hard to predict and generally anemic


US Residential RE
 US residential
o At 12/2008, down 28% from June 2006 peak
o Further drops likely through end of 2009, potentially 10-20%


US Commercial RE

 Signs of distress are appearing in the US on the commercial real estate front
o Delinquencies have “rocketed”,…
o as banks are tightening lending criteria across the board
o General Growth, 2nd largest mall owner in the US, files for bankruptcy in April 2009, one of
largest real estate failures ever in the US
 While delinquency rates are still much lower than in the early ‘90’s,outstanding loans are
more than 4X higher
 As a result, banks are already grappling with larger delinquent portfolios than in 1991


US RE When the Recovery?

 For indicators to recover to pre-recession levels in 1990 it took:
o from S&P/Case Schiller housing index high in 10/89, 8.3 years to recover (01/98)
o from University of Michigan confidence index high in 09/88, 8.3 years to recover
o from unemployment 03/89 low of 5%, 8.2 years to recover (05/97)
 …and 1990 was a much milder recession
o Unemployment levels have already exceeded those seen in 1990s: 06/90 peak of 10.0 million
(7.8%); 03/09: 13.2 million (8.5%)
 With asset prices –in particular housing- fuelled by massive liquidity availability and all-
time low rates post 2000 internet bubble, will real estate prices ever see 2006/2007
highs again?

EU Residential RE

Source: RICS, Financial Times

 Housing prices in the US peaked several quarters before Europe though both followed
very similar growth patterns
 Comparisons between European countries inaccurate as data lacks consistency across
countries (what is measured, timeliness, etc.)
 Regardless, available data clearly shows EU housing market under severe stress:
o Most markets show significant drop in prices
o Data lag probably accounts for those markets that still showed positive growth in 2008


EU Commercial RE

 As the recession bites, values are dropping across all real estate asset classes and…
 generally across all EU geographies although prime locations are relatively less affected


GCC Economic Forecast

159.7

19.68

116.9

270
467.7

56.32
2008 GDP in USD billions at official exchange rate - Source: The World Factbook – CIA
Real GDP Growth and Average Inflation from poll of 14 economists' forecasts - Source: Reuters

 Consensus forecast for 2009 is for a substantial slowdown across all GCC economies with
contraction in Kuwait and risk of contraction in some of the other GCC member countries


UAE Economic Forecast

Source: Reuters Source: US Energy Information Administration

 Select drivers of the UAE economy and global prospects for 2009
o Oil prices, which topped USD 140 pb in 2008 are currently trading around USD 50 pb
 March poll of 30 analysts by Reuters indicates an average price of USD 49.73 pb for 2009
o WTO forecasts of drop of 9% by volume in global trade for 2009
 Among 45 countries for which World Bank has January trade data, average fall in exports
from a year ago was 32%
o United Nations World Tourism Organization expects global tourism to drop by up to 2%
o Financial services industry is contracting worldwide
o Population in Dubai expected to drop (8% UBS, 17% EFG Hermes) in 2009
o Substantial real estate oversupply in certain areas of the country and for certain asset classes, in
particular given global environment


UAE Economic Forecast

 Some signs are pointing to a bottoming out:
o Lending slowly coming back to the market
o DFM and ADX are up substantially from their February lows
o Dubai USD 10 billion issuance has stabilized the market
o Abu Dhabi’s USD 3 billion bond issue was oversubscribed by more than 2 x by international
investors
 though it is still too early to tell when the bottom will be…
o Strong likelihood of further population decrease in Dubai with impact felt in September/October
o Impact on Northern Emirates has so far not been evident but with Dubai becoming cheaper it is
bound to hurt


UAE Residential Real Estate – Abu Dhabi

Source: Landmark Advisory Source: Landmark Advisory

 Abu Dhabi residential prices started falling in Q4
2008 and continue to do so in 2009 (average
listing prices down 20-25% for villas and 15-20%
for apartments). Further drops (+/- 10%) are likely
through year end
 Rents have remained pretty stable from Q3 2008
through February 2009 after having registered
substantial increases in H1 2008, and are likely to Source: Landmark Advisory
remain relatively stable through 2009


UAE Residential Real Estate - Dubai

Source: Collier’s International
Source: Landmark Advisory

 Dubai residential peaked in October
 Dropped 8% through December and continues falling
 Apartment and villa rents topped out in Q4 and Q3 2008 respectively
 Forecast for 2009 is for further, fairly substantial, drops both in sales prices (apartments to be
more severely impacted than villas) and rents
 There appears to be a consensus that villa prices will remain stable though it is hard to justify
this given prospect of population decrease and dearth of financing


UAE Commercial Real Estate – Office Abu Dhabi

Source: Collier’s International, Asteco


 Abu Dhabi
o Office rental rates dropped on average 25% in Q4 2008 with Grade B and C office space
worst affected
o Nonetheless, Q4 2007 – Q4 2008 rent growth was 30%
o Market to remain weak as big Abu Dhabi companies move into their purpose built offices


UAE Commercial Real Estate – Office Dubai

Source: Collier’s International, Asteco


 Dubai
o Office prices hit their high Q3 2008 and are estimated to have lost 30% since
o Vacancy rate now exceeds 15%
o Downward trend expected to continue through 2009


UAE Commercial Real Estate - Retail
 Average retail lease rates in Abu Dhabi
dropped 10 – 14% Q4 2008 to Q1 2009
 Yields remain relatively stable as capital
values have decreased in line with lease
rates
 Corniche area has highest average lease
rates at AED 3,300 psqm
 Average rental rates range from USD
1,760 psqm to USD 2,346 psqm


 Drop in tourism and population will
continue putting significant pressure on
rental rates
 Current average rental rates are USD
1,615 psqm



UAE Commercial Real Estate - Hotel

Source: Collier’s International, STR Global, Emirates Business 24/7

 Weakness in tourism given global economic situation and substantial number of rooms
which came on line in 2008 and are scheduled to come on lin in 2009 does not bode well
for the sector
 By 2011, Abu Dhabi is expected to add 13,000 rooms with Dubai looking to add 9,000
rooms over the next three years
 Dubai occupancy rates could drop below 70% for 2009
 Because of its lack of supply, Abu Dhabi should be better able to retain high occupancy
levels


All the pain has not yet been taken…
 De-leveraging is far from over
 Financing is key to the real estate market
 Banks need to clean out existing portfolio,
 recapitalize and regain access to international debt markets, and
 believe that the worst is over
 Equity investors will be looking at a number of opportunities in the “distressed” real estate
arena worldwide and gauging where their investment risk/return is optimized; non-core
markets are likely to be put on the backburner for 2-3 years
 Job losses and businesses contracting will result in less demand and/or additional supply
of real estate product in the markets
 Existing oversupply has to work its way out of the system

2009 will be a difficult year for real estate in the UAE
Re-testing pre-crisis peaks in Dubai is unlikely for quite a while, if ever
Real estate will return to a more balanced pricing model with prices driven
by real supply and demand dynamics and not pure speculation


What Does It Mean For Your Institution?

Assets are worth less…
 Supply is increasing in all real estate asset classes
o Slowdown in the economy, population decrease
 Businesses contracting, reduced needs for office and industrial space
 Retailers downsize, close stores and reduce their footprint
o World economy shrinking
 tourism down
 hotel occupancy rates dropping
o Past excess building of residential + foreclosures
 more housing on the market

 Funding (banks, funds, private equity,…) is still extremely hard to get
o Commercial real estate: Little or no ability to finance new projects and difficulties in rolling-over
existing financing
o Residential mortgages are seeing some signs of life but not enough to make a difference


… and harder to dispose of

 Non-performing Loans & Non-performing Assets will increase substantially over the next
two years
 Marginal loans (high loan-to-value –LTV-, poor cash flow) will default
 Most at risk: real estate financed in 2006 – 2008 in Dubai, 2007 on in other Emirates

 Real estate developers and investors will have to liquidate assets in a “bear” market to
meet loan maturities or risk defaulting
 Banks will have little ability to sell repossessed real estate


Credit Cycle in a Bank – Credit Sourcing & Approval


Credit Cycle in a Bank – Credit Delivery & Monitoring


Credit Cycle in a Bank – Remedial Management


Issues for Financial Institutions

V  Problem loans
I
i
s
 Past-due/Non-Performing Loans (NPL)
s
s  Restructuring
i
b
u  Collateral legal issues & value
e  Write-downs
l
s
e  Foreclosure/Non-Performing Assets (NPA)
 Risk Issues
o Underwriting process
 Portfolio/Lending criteria
 Due diligence process
 Risk management process
R o Credit Administration
o  Legal documentation
o  Disbursement/Loan monitoring
 Problem recognition
t
 Remedial management
o Early warning
C  Portfolio analysis
a • Distribution (asset class, geography,…)
u • Aging
• Covenant (LTV,…) deterioration
s /Exception tracking
e  Economic analysis
s
 Organizational issues
o Location in organization’s structure
o Target setting
o Compensation
o Annual budgeting process

Addressing the Visible Issues

Diagnostic Assessment Deliverables

 Institution’s view on the  Loan reviews  One year/Five year
economy? o Significant portion of asset/liability strategy for the
portfolio
 Asset growth & funding o Collateral and cash flow
business
strategy? coverage  Recommendations:
 Capital & liquidity o Covenant and covenant o Portfolio monitoring
monitoring o Loan monitoring
adequacy o Early warning process
o Problem recognition
 Review of existing credit o Problem recognition
policies  Review of non-performing  Action Plans:
 Portfolio review / distressed assets o Write-downs / write-offs
o Geography o Reserves
o Significant portion of
o Asset class o Distressed / NPL
portfolio
o Vintage workouts / restructuring /
o Collateral valuation
o Level of NPLs disposal strategies
o Legal review of documents
o Collateral valuation / o Action plans and  Support
coverage effectiveness o Define strategy /approach
o Level of write-down / with regulatory bodies
write-off o Dimension impact on
 Review workout / stakeholders
restructuring strategies
o Loan modification
o Foreclosure
o Liquidation
 Staffing level &
qualifications

Stage 2: Root causes

Diagnostic Assessment Deliverables

 As per Stage 1  Risk Management  Recommendations:
 In addition: o Credit Policies o Credit Policies
o In-depth review of credit  Appropriateness o Approval process
policies  Effectiveness o Credit Administration
o Full review of credit  Application process
administration process,  Exception process o Appropriate organization
including regulatory & monitoring structure
reporting o Approval process  Action Plans:
o In-depth review of staffing  Independence o Approval process
adequacy  Effectiveness o Credit administration
 Support
 Credit Administration o Define strategy /approach
o On-boarding new loans with regulatory bodies
o Disbursement process o Dimension impact on
o Loan monitoring stakeholders
(covenants, payments,…)
o Collateral valuation
o Legal process
(documentation,
amendments,…)

 Organizational issues
o Staffing adequacy and
appropriateness
o Organization chart


Thank you!

Eric Stoclet

 27 years banking experience, 25 with
Citigroup
 10+ years real estate financing; $3+
billion financing of commercial and
residential real estate; mortgage portfolio
purchases/sales; $2+ billion buy/sell-side
advisory mandates; portfolio/asset
management of $2+ billion investment in
German non-performing mortgage loans
 Workout/capital structuring skills gained
restructuring exposure totaling $4+ billion
during early ‘90’s US real estate crisis and
2002 Argentine crisis. Member of various
creditor committees representing debt in
excess of $20 billion
 Senior Credit Officer of Citigroup with
Real Estate initial
 Hands-on experience in operations,
financial controls, and risk management


Real Estate Consult Dubai

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