UnitasConsultancy(AGLOBALCAPITALPARTNERSGROUPCOMPANY) Q22016STRICTLYCONFIDENTIAL

OfficeNo.1706,IndigoIcon,PlotNo.F,JumeriahLakeTowers,Dubai,UAE1

Dubai:ThePsychologyofOff-PlanThisdocumentisprovidedbyUnitasConsultancysolelyfortheusebyitsclients.Nopartofitmaybecirculated,quoted,orreproducedfordistribuTonoutsidetheorganizaTonwithoutpriorwriWenapproval.

ExecuTveSummary•  Upswingsinreal-estatemarkets,typicallysparkaconstrucTonfrenzycausingdeveloperstolaunchaseriesofnewprojectsin

ordertotryandcapitalizeonthesurge indemand,asseen in2002and2012. Inorder fordeveloperstoaWractbuyerstheytypicallyreleaseoff-planproperTesatadiscounttothereadymarket.Thisistocompensatefortherisksinvolvedinbuyingoff-plan (i.e. delays, build risk), and the loss of rental income over the duraTon on the project. However, the flexibility of thepayment-planscoupledwiththedevelopertrackrecordcaneitherincreaseordecreasethediscount.

•  CeterusParibus, off-planproperTesareanaWracTvepurchase if thepricediscount is greater than the lossof rental incomeduring the duraTon of the project. The evoluTon of the price curve typically clusters into “investor neutrality” zone, as themarketadjuststoreflectpricesthatarefactoringintoaccountthediscountratethatistheopportunitycostofrent.ThishasbeenreflectedinthepricecurvetrajectoryoflaunchesinArabianRanchesaswellasDowntown.

•  Inabull-cycleitistypicalforoff-planproperTestotradeatasignificantpremiuminstantlya`erthelaunch.Thisiscausedbyspeculatorsenteringthemarkettotryand‘flip’properTesonthedepositamounttomakesupernormalprofits.However,as“irraTonalexuberance” fadesawayand themarket recalibrates, speculatorswhocouldnot resell thepropertygo throughaliquidity crunch as they try tomeet their next payment forcing thepremiums to fall. This fall is further amplifiedwhen themarketturnsbearish,andtransacTonalacTvitydips.

•  Apriceanalysisoff-planproperTesrevealsthatthecloseritgetstocompleTon,themoreitmimicstheready-priceindex.UsingCasaasanexamplediscountat the launch,but soonout-performed ready-villa segmentas speculatorsentered themarket.However,asitcameclosertocompleTonthediscountreceded,eventuallytradingatparitywiththeready-stock.

•  Forthelongterminvestor,apartfromlocaTonalbenefits,theraisond’etreforinvestmentsinoffplanrealestateistheextent

ofdiscountthatisbeingofferedrelaTvetothereadymarket.

1  ReadyPricesandLaunches2  Whentobuyandselloff-planproperTes?

3  DynamicsandTrendsofOff-planUnits4Conclusions

Contents

4

“Historyisarelentlessmaster.Ithasnopresent,onlythepastrushingintothefuture.Totrytoholdfastistobesweptaside”-JohnF.Kennedy

ReadyPriceandLaunches

0

200

400

600

800

1000

1200

1400

1600

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NumberofUnits(Launched) Prices

ReadyPricesareaLeadingIndicatorofOff-planLaunchAcTvity+0.76correlaTon

Readypricesaretheleadingindicatorofoff-planlauncheswithastrongcorrelaTonof+0.76.Aspricesbegintotrendupwards,profitmarginsinconstrucTonprojectsexpand,causingdeveloperstoreleasenewprojectstotryandcapitalizeonthesurgeindemand.ThistrendhasbeenwitnessedsincetheincepTonoffreeholdin2002.Inmid-2014,aspricesbegantodip,developersslowedtheannouncementofnewprojects,whichcanbewitnessedin2015.Inthefirstquarterof2016,2513unitshavebeenlaunched,beingsomewhatbelowthatof2015,althoughtheriseintransacTonalacTvityanda“baseeffect”inpricesaugurforanacceleraTonofoffplanlauncheslateronintheyear.

REIDIN

ReadyPricesandNumberofUnitsLaunched

6

“IguessIshouldwarnyou,ifIturnouttobeparTcularlyclear,you'veprobablymisunderstoodwhatI'vesaid”-AlanGreenspan

WhentoBuyandSellOff-planUnits

AtLaunch

WhentoBuyandSellOff-PlanProperTes

ReadyPrices0%

-20%

Lila-9%

Azalea-15%

Discou

nt/PremiumtoRe

ady

AWracTve

Indiffe

rent

CompleOonDate

UnaWracTve

AWracTve

Indiffe

rent

UnaWracTve

Lila-1%

CompleTonTimeline

The above graphs explains the price dynamics of the off-plan properTes. Usually developers release off-plan properTes at adiscounttothereadymarket.ThereasonforthediscountistocompensateforthelossofrentTllthecompleTonoftheprojectandbuild-risk.AsthepropertygetsclosertocompleTon,thediscountfactordiminishes.ItisagainstthisconstructthatoffplanlaunchesmustbeevaluatedfortheirrelaTveaWracTveness.

CompletedProperty

LossofRenta

l

Off-PlanProperty

NEUTRAL

BUYTradingDiscounttoReadybymore

thanthelossofrental

SELL

Unitas

ReadyPrices

AWracTve

Indiffe

rent

UnaWracTve

AWracTve

Indiffe

rent

UnaWracTve

OpportunityCostofRent

AtLaunch

ArabianRanches:ToBuyorNottoBuyOff-Plan

0%

-15%

Lila-9%

Yasmeen-7%

Azalea-15%

Discou

nt/PremiumtoRe

ady

CurrentPrices(Mar‘16)

Lila-1%

Yasmeen4%

Azalea-2%

SELL

BUY

NEUTAL

Jan2014

Sept2014

Feb2015Unitas&REDIN

InArabianRanches,thelaunchofoffplanprojectsin2014and2015werewithinthezoneofwhattheexpectedpricewastobe,relaTvetoreadyprojects.Sincethen,thethreecommuniTeshavebeenpricedbythemarketwithinthenarrowzoneof“investorneutrality”,withthediscountfactordiminishingaseachofthecommuniTesgetsclosertohandover.

CompleTonTimeline

ReadyPrices

AWracTve

Indiffe

rent

UnaWracTve

AWracTve

Indiffe

rent

UnaWracTve

OpportunityCostofRent

AtLaunch

Downtown:ToBuyorNottoBuyOff-Plan

0%

-15%

BurjVista12%

Discou

nt/PremiumtoRe

ady

CurrentPrices

SELL

BUY

NEUTRALBLVDPoint

-13%

BLVDHeights-26%

Forte-15%

BurjVista6%

BLVDPoint1%

BLVDHeights-16%

Forte-8%

Unitas&REDIN

CompleTonTimeline

AsimilardynamichasplayedoutwithinDowntownDubai,whereunitsthatwere launched inthebuyandsellzonehavenowclusteredaroundtheneutralarea,asmarketforcescorrectedforthediscountsandpremiums.Whatisimportanttonoteisthatinallinstances,thepriceshaveconvergedtothatofreadypricesastheprojectmovesclosertocompleTon.

Apr2013

Jan2014

Jun2015

Sep2014

1,000,000

1,050,000

1,100,000

1,150,000

1,200,000

1,250,000

1,300,000

1,350,000

OP Premium

TheHills(LowOP)

TheHills(HighOP)

BeWaryofDifferentLaunchPrices…ALookattheHills

Amajorfactorbuyersshouldconsiderwhenpurchasingoff-planproperTesisthelaunchprice.Sincedeveloperslaunchunitsindifferentphases,theopeningpricewilldifferineachlaunch.TheaboveexampleshowsintheHills,thesameunitsaretradingatdifferentpremiums.OverTmethegapnarrowsbetweenthelaunchpricesastheunitsgetclosertocompleTon.

Unitas

TheRelaOonshipbetweenlaunchPricesandPremiums

UnitDetails

Community Hills

Type OneBedroom

Size 873sq`

View JLT

Developer Emaar

AED

PaymentPlansembeddedinthepriceoffplan

0%

5%

10%

15%

20%

25%

100%Now-0%CompleTon

80%Now-20%CompleTon

60%Now-40%CompleTon

40%Now-60%CompleTon

20%Now-80%CompleTon

0%Now-100%CompleTon

Unitas

Theabovegraphsexplainstheeffectofpaymentplansonthepricingofoff-planproperTes.AstheinvestorisalwaysevaluaTngtheopportunitycostofmoney,thisembedsitselfintheformofpaymentsplans.Atanextreme,(100%payableonready),thereshould be no discount offered to the prevailing launch prices, which implies that on themargin, the price trajectorywill beenTrelyinfluencedbytheanimalspiritsofspeculaTveforces.Ceterusparibus,thediscountofferedtoreadypricesareafuncTonofthepaymentplansthatareofferedatlaunch(wherebythediscountrateistheopportunitycostofrent).

TheRelaOonshipbetweenPaymentPlansandpricescomparedtoready

Discou

ntto

Ready

12

“OurirraTonalbehaviorsareneitherrandomnorsenseless-theyaresystemaTcandpredictable.Weallmakethesametypesofmistakesoverandover,becauseofhebasicwiringofourbrains”–DanAriely

DynamicsandTrendsofOff-planUnits

900.00

950.00

1,000.00

1,050.00

1,100.00

1,150.00

1,200.00

1,250.00

1,300.00

15%Down-Payment

15%Installment

10%Installment

15%Installment

15%Installment

15%Installment

15%CompleTon

EnterstheReadyMarket

Off-PlanMarketCycles:Casa(ArabianRanchesII)

Marketentersabearmarket

MarketentersaBullRun

REIDIN

Theabovegraphillustratesthemarketcycleofatypicaloff-planunit.UsingCasaasanexample,wewitnessthatinabullmarketthere is a sudden rush of speculators, trying to ‘flip’ the units in order tomake super-normal returns.However, as irraTonalexuberancefadesawayandthemarketrecalibrates,speculatorswhocouldnotresellthepropertygothroughaliquiditycrunchastheytrytomeettheirnextpaymentforcingthepremiumstofall.Thisfallisfurtheramplifiedwhenthemarketturnsbearish,andtransacTonalacTvitydips.

CasaOff-PlanPriceCycle

PricePerSquareFoot

600

650

700

750

800

850

Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016

Off-PlanMarketCycles:Reem(MiraCommunity)

LiquidityCrunch

15%Down-Payment

15%Installment

10%Installment

10%Installment

15%Installment

15%Installment

10%Installment

10%HandoverMarketenters

abearmarket

MarketentersaBullRun

DistressBuying

UNITAS*

*Datausedfrommarketsources

Asimilartrendcanwitnessed intheMiracommunityoffplanpricetrajectorycycle, fromlaunchtocurrent. It is imperaTvetonotehere,thatpricevolaTlityisthehighestwhenthepaymentsmadearelow,therebyallowingspeculaTveforcestodominateprice acTon. As the paymentsmade increase, speculaTve forces recede, allowing for a stable path of prices and an eventualconvergencetothereadyproduct.

ReemOff-PlanPriceCycle

PricePe

rSqu

areFoot

FollowingOffPlanfromLaunchtoCompleTon

1000

1050

1100

1150

1200

1250

1300

1350

1400

1,000.00

1,050.00

1,100.00

1,150.00

1,200.00

1,250.00

1,300.00

1,350.00

1,400.00

Casa ArabianRanches

Prices:CasaandArabianRanches

REIDIN

Theabovegraphillustratesthepriceperformanceoftwooff-planprojectoverthelastthreeyears.WewitnessthatCasatradedatadiscountatthelaunch,butsoonout-performedready-villasegmentasspeculatorsenteredthemarket.However,asitcameclosertocompleTonthediscountreceded,eventuallytradingatparitywiththeready-stock.

600

650

700

750

800

850

1000

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

DubaiVilla Mira

Prices:CityWideVillasandMira

REIDIN/Unitas*

*Datausedfrommarketsources

ConclusionsReadyPriceandLaunches WhentoBuyandSellOff-PlanUnits

DynamicsandTrendsofOff-Plan Conclusion

Ceterus Paribus, off-planproper5es are an a6rac5vepurchase if the price discountismore thanthe lossof rentalincome during the dura5on oftheproject

Usually developers release off-planproper5esatadiscounttothe ready market. The reasonfor this is to compensate forthe loss of rent 5l l thecomple5on of the project andbuild-risk.

For the long term investor, the raTonale forinvesTng in off plan, factoring into account forlocaTonaldifferences,isthediscountfactorthatisbeing offered, which is itself a funcTon of thepaymentplan;bothvariablesareembeddedinthelaunchprice.ItisimperaTvetonotethatearlyonintheoffplancycle,thereisamplifiedvolaTlityduetotheanimalspirits influenced by speculaTve acTvity. As theprojectnearstocompleTon,volaTlityrecedesasitconvergeswiththereadymarketpricelevels.

Ready prices are a leading indicator of off-planlaunches,aswitnessedduringthe2002and2012bull-run.Aspricesbegin to escalatedevelopers enter themarket to try and capitalize on the surge indemand.In mid-2014, as prices began to dip, developersslowedtheannouncementofnewprojects,whichcanbewitnessedin2015.

Typically, developers price off-plan units at adiscounttotheirreadycounterparts,tocompensatecompensate for the loss of rentTll the compleTonoftheprojectandbuild-risk.As the property gets closer to compleTon, thediscount factor diminishes. It is against thisconstruct thatoffplan launchesmustbeevaluatedfortheirrelaTveaWracTveness.InArabianRanchesandDowntown,thelaunchofoffplan projects that started in either the buy or sellzonehaveclusteredaroundthezoneof“neutrality”,as market forces diminished the premiums ordiscountsrelaTvetoreadymarket.

Inabull-market,off-planreleasesusuallytradeatapremium instantly a`er the launch due to thesudden surge of demand driven by speculatorstryingtocapitalizeonsuper-normalprofits.However,as irraTonalexuberancefadesawayandthemarketrecalibrates,speculatorswhocouldnotresellthepropertygothroughaliquiditycrunchasthey try to meet their next payment forcing thepremiumstofall.A comparison of price movements between off-plan and ready units converge, as the formercomesclosertocompleTon.

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