asia pacific property digest - flv.soufun.com

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Jones Lang LaSalle • Asia Pacific Property D

igest • First Quarter 2008

Asia Pacific Property DigestGreAter ChinAFirst Quarter 2008

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Jones Lang LaSalle Research – Asia PacificASiA PACiFiCDr Jane Murray Head of Research – Asia Pacific+852 2846 [email protected]

GreAter ChinA

hOnG KOnGMarcos Chan Head of Research – Hong Kong and Macau +852 2846 [email protected]

MACAuAlvin Mak Assistant Manager+853 2871 [email protected]

ShAnGhAiKenny ho Head of Research – China+86 21 6133 [email protected]

beiJinGbenjamin Christensen Head of Research – Beijing+86 10 5922 [email protected]

ChenGDuShelly Xie Senior Research Analyst+86 28 8665 [email protected]

GuAnGzhOuLily Li Head of Research – Guangzhou+86 20 3891 [email protected]

tiAnJinStefanie zou Research Analyst+86 22 8319 [email protected]

tAiPeiJeffrey hurren Head of Research – Taiwan+886 2 8758 [email protected]

nOrth ASiA

JAPAntakeshi Akagi Head of Research – Japan+81 3 5501 [email protected]

SOuth KOreADarren Krakowiak Head of Research and Consulting – South Korea+82 2 3704 [email protected]

SOuth eASt ASiA

SinGAPOreDr Chua Yang Liang Head of Research – South East Asia and Singapore+65 6474 [email protected]

inDOneSiAAnton Sitorus Head of Research – Indonesia+62 21 515 [email protected]

the PhiLiPPineSKatherine Marcelo Research and Consulting Manager+63 2 751 [email protected]

thAiLAnDDan tantisunthorn Head of Research – Thailand+66 2 679 [email protected]

VietnAMbuu Le Manager – Research and Consulting+84 8 910 [email protected]

MALAYSiA (JOneS LAnG WOOttOn in ASSOCiAtiOn With JOneS LAnG LASALLe)Malathi thevendran Executive Director – Researchtel +60 3 2161 [email protected]

WeSt ASiAManisha Grover Head of Research and Consulting – West Asia+91 80 4118 [email protected]

inDiAAbhishek Kiran Gupta Head of Research – India+91 22 6658 [email protected]

AuStrALASiAKathryn Matthews Head of Research and Consulting – Australasia and Australia+61 2 9220 [email protected]

neW zeALAnDChris Dibble Researching and Consulting Manager+64 9 366 [email protected]

inDuStriAL reSeArChbarnaby Martin Industrial Research Manager+86 21 6133 [email protected]

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Asia Pacific economy

and Property Market . . . . . . . . . . 4

Greater China . . . . . . . . . . . . . . . 10

hong Kong . . . . . . . . . . . . . . . . . . 12

Grade A Office . . . . . . . . . . . . 12

Retail . . . . . . . . . . . . . . . . . . . . 18

Luxury Residential . . . . . . . . . 19

Industrial - Warehouse . . . . . 20

Macau . . . . . . . . . . . . . . . . . . . . . 21

Retail . . . . . . . . . . . . . . . . . . . . 21

High-End Residential. . . . . . . 22

beijing . . . . . . . . . . . . . . . . . . . . . 23

Office . . . . . . . . . . . . . . . . . . . . 23

Prime Retail . . . . . . . . . . . . . . 24

Residential . . . . . . . . . . . . . . . 25

Industrial . . . . . . . . . . . . . . . . . 26

Chengdu . . . . . . . . . . . . . . . . . . . . 27

Office . . . . . . . . . . . . . . . . . . . . 27

Retail . . . . . . . . . . . . . . . . . . . . 28

Industrial - Business Parks . . 29

Industrial - Manufacturing . . 30

Guangzhou . . . . . . . . . . . . . . . . . 31

Office . . . . . . . . . . . . . . . . . . . . 31

Retail . . . . . . . . . . . . . . . . . . . . 32


Shanghai . . . . . . . . . . . . . . . . . . . 34

Office . . . . . . . . . . . . . . . . . . . . 34

Retail . . . . . . . . . . . . . . . . . . . . 37

Luxury Residential . . . . . . . . . 38

High-End Residential. . . . . . . 39


Industrial - Logistics . . . . . . . 41

Industrial - Manufacturing . . 42

tianjin . . . . . . . . . . . . . . . . . . . . . 43

Office . . . . . . . . . . . . . . . . . . . . 43

Retail . . . . . . . . . . . . . . . . . . . . 44

Industrial - Logistics . . . . . . . 45

taipei . . . . . . . . . . . . . . . . . . . . . . 46

Office . . . . . . . . . . . . . . . . . . . . 46


tA b L e O F C O n t e n t S

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modestly as emerging economies account for a large share of its exports including commodities. Direct impacts from the financial market upheaval will be felt less acutely in most of the region’s economies as banks generally have less exposure to sub-prime related debt and the financial systems of many countries such as China have been sheltered by government restrictions.

…partly offset by internal momentumMost economies in Asia Pacific can still count on the strength of domestic demand. China’s annual GDP growth slowed to 10.6% in 1Q08 from 11.2% in 4Q07, but growth in fixed investment continued to surge ahead at a rate of 25.9% y-o-y in 1Q08. The EIU expects China’s growth this year will moderate to 9.6%, still an aggressive rate of expansion. A similar mild slowing of growth in India is expected this year, with GDP forecast to slow to 7.8% from 9.2% in 2007. Investment growth from both domestic and international sources should continue at a brisk pace. In the mature economies of Hong Kong, Singapore and Australia, tight labour markets and announced tax cuts should help shore up consumer demand this year. An exception to the domestic demand story is Japan, where

Asia Pacific economyGlobal Growth Weakens, but Asia Pacific Will Continue To OutperformDr Jane Murray Head of Research - Asia Pacific

Spillover from the global slowdown…Global economic growth will decelerate in 2008 due largely to a sharp slowdown in some of the world’s major economies, including the US, UK, Eurozone and Japan. Major central banks have injected massive amounts of liquidity into the financial system to bolster credit availability, and the US Federal Reserve may further reduce interest rates this year in addition to the 325-basis-point easing between September 2007 and April 2008. The effects of the sub-prime crisis have been most pronounced in the US and Western Europe to date, but all countries will be affected to some extent through global linkages. According to the Economist Intelligence Unit (EIU), world output in 2008 is projected to expand by 2.8%, or 1.5 percentage points less than the average of the last four years.

The global slowdown is expected to chiefly affect the Asia Pacific region through the international trade channel, while FDI inflows should be relatively unaffected. Exports from China and North Asia will be hardest hit by weakened import demand in the developed economies, but a knock-on effect will be felt in the rest of the region particularly South East Asia due to intra-regional trade links. Australian export growth is likely to slow only

Figure 1: Real GDP Growth

Source: Economist Intelligence Unit, April 2008

y-o-

y (%

)

12

China

2007 2008F

4

2

0

India

Vietnam

Singapore

Philippines

Malaysia

Indonesia

Hong Kong

Taiw

anKorea

Thailand

Australia

New ZealandJapan

8

6

10

2009-12F

Figure 2: Consumer Price Inflation


y-o-

y (%

)

20

Vietnam

2007 2008F

420

Indonesia IndiaChina

Philippines

Korea

New Zealand

Australia

Thailand

Singapore

Hong Kong

Malaysia

Taiw

anJapan

2009-12F

86

1210

1614

18

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growth has been slowing, due partly to a major decline in housing investment and more bearish consumer sentiment (Figure 1).

inflation a growing threat…Led by surging demand for food and energy and high rates of capacity utilisation, cost pressures are picking up in most of the region. China is still grappling with escalating consumer prices which recorded an 8.3% increase in March, with food price inflation running at an alarming 21.4%. In India, the CPI for industrial workers rose 7.9% y-o-y in March, the fastest pace since 1999 and well above the Reserve Bank’s target of 5%. In Hong Kong, the gradual appreciation of the renminbi and the weakening of the US dollar have resulted in higher import prices, which are being passed through to retail prices. Inflation in Singapore has accelerated from 1.6% in 1Q07 to 6.6% in 1Q08. Meanwhile inflation in Australia has broken through the central bank’s 2-3% target band to register a 4.2% annual increase in the March quarter. Japan remains the only major regional economy that is seeing comparatively little inflationary pressures (Figure 2).

…leading to higher interest ratesGovernments around the region remain vigilant to inflation risks, recognising rapidly rising prices as a major threat to economic and social stability. Most central banks are leaning towards monetary tightening to help moderate inflation going forward. For example, the People’s Bank of China has increased bank reserve ratios from 14.5% to

16% since January and the Reserve Bank of Australia has raised its cash rate target by fifty basis points since the beginning of the year. The Reserve Bank of India raised the banking sector’s cash reserve ratio to 8.25% in April, the thirteenth increase since mid-2004. Hong Kong is an exception to this trend and has seen major declines in interest rates over the last six months due to the pegging of the local currency to the US dollar.

regional outlook remains strongThe global economy faces a considerably more challenging environment over the next 12 months than in the last few years. There is still a high degree of uncertainty as to how the sub-prime crisis will play out. At this stage, the general consensus is that world output will continue to expand moderately in 2008 and that emerging economies in Asia, the Middle East, Latin America and Central and Eastern Europe will continue to outperform by a significant margin.

According to the EIU, the aggregate output of the Asia Pacific region excluding Japan is still expected to expand at a strong pace of 6.9% in 2008. This is only slightly lower than the 7.1% pace projected in January, and almost three times the forecast growth of the global economy. Of the major economies, China and India will lead the way, while at the other end of the spectrum, Japan’s aggregate output is expected to expand only marginally by 1.1%. The ASEAN economies are expected to grow by an average of 5.5%, while Australia and New Zealand are expected to expand by a healthy 3% or so.

Key Performance indicators


GDP (%) Prime Lending rate (%)

CPi (%) employment Growth (%)

retail Sales Growth (%)

industrial Production (%)

2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009FHong Kong 4.0 4.6 5.9 6.4 4.3 3.4 1.9 1.5 5.5 3.1 0.4 -0.4

China 9.6 9.0 8.0 7.8 5.0 3.6 1.1 1.0 10.0 7.9 15.7 13.0

Taiwan 4.3 4.4 4.7 5.3 2.6 1.5 1.1 0.7 1.0 2.2 4.9 5.1

Japan 1.1 1.3 1.9 2.2 0.6 0.8 -0.9 -0.7 -0.6 1.6 2.2 2.7

South Korea 4.5 4.4 6.1 5.8 2.9 2.3 0.5 0.5 2.6 2.6 4.8 5.6

Philippines 5.4 5.5 8.7 9.3 5.1 3.6 2.4 3.1 3.7 5.3 5.5 5.5

Singapore 4.4 4.7 5.3 5.6 4.3 1.6 2.1 1.2 4.7 4.2 5.0 5.3

Malaysia 5.8 5.9 6.3 6.4 2.8 2.3 2.0 2.0 4.5 4.1 3.8 5.2

Thailand 4.7 4.3 6.4 6.2 5.0 2.9 1.2 1.2 -0.6 2.6 6.0 5.2

Indonesia 5.9 6.3 13.0 12.4 6.8 6.1 2.4 2.5 4.4 4.4 4.4 4.0

India 7.8 7.2 12.8 12.0 5.8 5.5 2.3 2.3 5.7 6.0 6.5 8.0

Australia 2.9 2.5 10.3 9.9 3.4 3.1 2.2 0.9 1.4 3.9 3.2 2.7

New Zealand 1.8 2.6 13.2 12.9 2.9 2.3 1.1 1.1 1.1 3.6 -0.4 1.5

Vietnam 8.0 8.4 11.8 12.0 18.2 9.0 2.2 2.5 0.8 4.9 15.4 16.5

World 2.8 3.0 NA NA 4.3 3.4 1.4 1.3 1.9 2.5 NA NA

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Asia Pacific Property MarketIncreased Caution But Fundamentals Remain StrongIn the previous edition of the Asia Pacific Property Digest, we highlighted the emergence of increased market risks and the need for a careful watching brief as global events unfolded. While the property markets in Asia Pacific have lagged both the US and Europe in being impacted by the sub-prime fallout, there is now evidence that they will not escape unscathed. To date, this has been seen mainly in relation to investment volumes, while leasing activity and associated indicators have posted another healthy quarterly result.

Continuing occupier demand with some caution creeping in… Over the first quarter of 2008, occupier demand held up well in the region’s office markets. Tenants have a renewed focus on costs, but this is yet to be reflected in headcount reductions. Combined with minimal new supply in most markets, vacancy levels have remained at low, often sub-frictional, levels. Beijing, Bangkok and Jakarta are exceptions to this trend, each seeing significant injections of new supply to the market by year end. Rental rates have reached new highs in key financial markets including Hong Kong, Tokyo, Singapore and Sydney, where Grade A vacancy levels are all below 5% (Figure 3).

To date, there has been a mixed reaction in the office markets most vulnerable to the sub-prime fallout. For example, a sharp slowing in rental growth is under way in Tokyo, Singapore is seeing the beginnings of a softening in pre-let rates, while Shanghai has begun to brace itself for slowing demand in Pudong amongst its vital financial services tenants. At the other end of the spectrum, the Manila office market has seen strong growth in business process outsourcing due to the increased emphasis by MNCs on lowering operational costs. Consistent with the latter trend, the decentralisation from expensive CBD locations to cheaper peripheral or suburban sites is key to the real estate strategies of many corporations. Singapore, for example, is seeing strong enquiry levels for built-to-suit options in business park locations, driving up rental levels in these districts.

The retail sector continues to be supported by tight labour market conditions and solid domestic spending in most countries, a notable exception being Japan where consumer demand remains sluggish. Additional factors driving retail sales include the growth in tourist volumes and expansionary government budgets in Hong Kong, Singapore and Australia. High occupancy costs as well as supply constraints remain the major impediments to retailer expansion. Similarly, the high-end residential

sector has benefited from buoyant labour market conditions to date, with continued strength in leasing and sales activity.

…while investment activity sees some softeningDirect commercial real estate investment in Asia Pacific reached a new high of USD 121 billion in 2007, up 27% on 2006. In early 2008, the region’s capital markets have felt some impact from the sub-prime fallout. Debt availability has tightened across most of the region with loan-to-valuation ratios falling, interest rates trending higher and stricter lending covenants in place. Emerging markets including China and India are less exposed to the global credit crunch, but debt funding is also limited there due to local monetary tightening measures to cool the economy and rein in inflation.

The impact on pricing and transaction volumes has been most evident in the region’s more mature markets. In Tokyo, Singapore, Sydney and Melbourne, office capital values appear to have peaked, while a slowing in price growth is also likely for Hong Kong. Because these markets account for the lion’s share of investment activity, we do expect a decline in overall transaction volumes in Asia Pacific this year following the record result in 2007.

That said, there is still plenty of equity looking to be placed in real estate assets by investors such as German core funds who are less reliant on debt funding. Another interesting trend is the re-emergence of Japanese investors in overseas markets, particularly in the developing markets of China, India and Vietnam. A more

Figure 3: Grade A Vacancy Rate for Key Office Markets, 1Q08

Source: Jones Lang LaSalle

0% 5% 10% 15% 20% 25%

AucklandSeoul

Hong KongShanghai

SingaporeTokyo

SydneyManila

MumbaiDelhi

TaipeiKuala Lumpur

BangkokBeijing

Jakarta

Ho Chi Minh City

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* The concentric circles represent the estimated length of the current property cycle in each of the respective markets.

industrialPrime residential

Prime retailGrade A Office

AbOut the AuthOr

Dr Jane Murray joined Jones

Lang LaSalle in 1998 and in April

2005 was appointed as Head

of Research - Asia Pacific. In

this role, Jane leads a team of

140 professional researchers

in the region, which forms part

of a network of around 300

researchers in 60 countries

around the globe.

The Asia Pacific Research team produces a range of outputs to

assist the clients of the Firm with their decision making, including

comprehensive market monitoring and analysis across major

institutional-grade real estate markets in the region; forecasts of

key real estate indicators; consultancy projects; thought leading

research papers on topical issues as well as regular publications.

general pick-up in investment activity levels is expected towards the end of the year.

Asia Pacific outlook remains positiveUnderpinned by rapidly changing economic and financial environments, the next twelve months promises to be a particularly interesting period for the global and regional property markets. Within Asia Pacific, some softening in occupier demand and associated indicators is likely compared with the very strong activity levels of the last year. However, it is important to note that the underlying market fundamentals remain in good shape, a situation which is very different to recent cycles when vacancy levels and corporate profitability were not so healthy. These characteristics, together with the relatively attractive returns on offer and significant structural changes under way, will also help to shore up regional investment activity over the short to medium term.

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* Refers to net rent except for Tokyo (gross rent), Singapore,Jakarta, Beijing, Chengdu and Ho Chi Minh City (effective rent), Melbourne, Sydney and Brisbane (gross effective rent), Hong Kong (net effective rent on NFA), Tianjin, Guangzhou and Shanghai (net rent on GFA), Taipei, Mumbai, Delhi, Bangalore, Chennai, Hyderabad and Kolkata (gross rent on GFA).** Capital values are quoted on NLA except for Beijing, Shanghai, Hong Kong, Guangzhou, Chengdu, Tianjin, Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Kolkata (all quoted on GFA).+ Percentage changes are based on local currency of individual markets except Jakarta.++ The USD exchange rate as at end-Mar 2008.

Grade A Office Market Vacancy

rate (%)rentAL VALueS* CAPitAL VALueS Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm

pa++12-month outlook

q-o-q+

(%)y-o-y+

(%)USD

psm++12-month outlook

Tokyo CBD 3.0 1.1 13.4 1,796 -2.1 17.0 39,528 3.2

Seoul CBD 0.0 4.2 5.6 595 4.6 21.2 6,584 5.5

Beijing 16.5 1.7 21.2 430 6.8 13.8 3,348 7.5 - 9.5

Shanghai (Central Puxi) 2.0 3.1 13.6 456 3.1 19.1 5,865 7.3 - 8.9

Guangzhou 27.1 -0.4 -0.7 288 1.6 9.8 3,493 7.8 - 9.4

Chengdu 24.9 4.6 18.4 170 3.4 14.2 1,627 9.5 - 12.0

Tianjin 26.0 3.0 11.5 241 3.2 12.0 2,500 9.7

Taipei CBD 8.4 1.3 7.3 300 5.6 19.0 6,254 4.8

Hong Kong Central 1.1 12.7 38.7 1,796 7.4 45.6 22,103 4.9 - 7.4

Singapore 2.7 9.1 51.9 1,370 0.0 44.3 22,636 5.5 - 6.1

Kuala Lumpur CBD & GT 9.3 0.2 2.4 160 0.3 5.3 2,073 7.15 - 7.35

Makati CBD 3.5 2.4 18.2 207 1.2 11.2 1,862 10.0 - 10.5

Bangkok CBD 14.3 -0.9 -2.6 199 -0.8 0.1 2,524 6.6 - 8.2

Jakarta CBD 19.7 1.9 6.9 113 0.7 4.1 1,385 - 8.0 - 8.2

Ho Chi Minh City CBD 0.0 15.0 86.0 756 - - - - -

Delhi CBD & SBD 4.9 6.8 37.1 939 6.1 31.1 8,157 11.5

Mumbai CBD & SBD 3.8 0.6 17.6 898 0.0 16.0 7,968 11.3

Bangalore CBD & SBD 0.3 0.4 17.6 187 0.0 17.4 1,705 11.0

Chennai CBD & SBD 8.2 0.0 8.4 181 0.0 14.1 1,642 11.0

Hyderabad CBD & SBD 2.0 3.6 42.9 185 2.4 46.9 1,781 10.4

Kolkata CBD & SBD 1.4 7.7 42.3 366 5.2 44.0 3,274 11.2

Sydney CBD 3.4 6.1 25.4 667 -0.3 18.6 10,583 5.25 - 6.00

Melbourne CBD 0.9 3.6 12.5 369 -0.5 12.7 6,574 5.75 - 6.75

Brisbane CBD 0.4 1.8 36.0 766 -2.2 41.6 9,902 5.75 - 6.25

Auckland CBD 0.3 1.2 9.4 342 1.2 7.3 4,632 6.75 - 8.00

* Rents are net prime rent except Beijing and Guangzhou (net effective rent on NLA), Chengdu and Tianjin (net rent on GFA), Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Kolkata (gross rent).** Capital values are quoted on NLA except for Beijing, Chengdu, Hong Kong, Macau and Guangzhou (all quoted on GFA).+ Percentage changes are based on local currency of individual markets.++ The USD exchange rate as at end-Mar 2008.

Prime retail rentAL VALueS* CAPitAL VALueS Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Beijing -0.5 -1.3 986 -0.5 -1.4 6,949 6.8 - 8.8

Shanghai 4.0 11.6 2,265 4.9 13.6 19,556 11.1

Guangzhou 5.7 14.0 948 - - - - -

Chengdu 2.8 6.2 647 3.5 23.8 8,445 7.7

Tianjin 5.3 22.5 635 2.5 9.1 7,168 8.9

Macau (Prime Street Shops) 7.4 11.7 1,857 6.2 13.5 30,940 6.0

Hong Kong (Prime Street Shops) 8.4 23.6 5,532 5.8 22.1 140,879 3.9

Hong Kong (Premium Prime Shopping Centres)

3.5 13.0 3,059 - - - - -

Hong Kong (Overall Prime Shopping Centres)

5.0 13.5 1,960 - - - - -

Singapore 0.5 2.5 3,321 2.8 13.2 63,616 5.2

Kuala Lumpur (City Centre) 2.5 14.7 970 7.9 19.7 9,989 7.0 - 10.0

Metro Manila 1.2 5.8 448 0.6 5.0 3,790 11.0 - 11.5

Bangkok 0.8 2.5 569 0.7 6.3 4,766 11.4 - 12.4

Jakarta 0.4 1.0 488 0.0 -0.3 3,182 15.0 - 15.5

Delhi 0.0 12.9 1,128 0.0 7.8 10,252 11.0

Mumbai 0.0 9.1 967 0.0 4.5 8,827 10.9

Bangalore 3.0 22.1 551 0.0 20.3 4,845 11.4

Chennai 1.3 16.9 245 0.6 7.5 2,215 11.1

Hyderabad 0.0 23.3 596 0.0 23.8 5,316 11.2

Kolkata 0.0 5.5 934 0.0 6.7 8,400 11.1

Sydney (Regional) 0.9 4.6 1,659 - - - - - 5.9

Sydney (Sub-regional) 1.0 4.1 825 - - - - - 6.5

Auckland 0.8 3.0 1,564 0.8 -2.6 22,747 6.25 - 7.50

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Luxury residential

* Rents are net rent except for Shanghai (gross rent), Beijing (net effective rent) and Jakarta (effective rent).** Capital values are quoted on NLA except for Beijing, Shanghai, Hong Kong and Macau.+ Percentage changes are based on local currency of individual markets except Jakarta. ++ The USD exchange rate as at end-Mar 2008.

rentAL VALueS* CAPitAL VALueS Yield (%)q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Beijing (Luxury Apt) 16.5 6.2 200 12.3 50.2 3,359 5.5 - 7.5

Shanghai (Luxury Apt) 1.2 -0.5 369 0.8 15.7 4,924 5.1 - 7.2

Shanghai (High-end Apt) -1.1 -0.5 199 0.2 14.1 3,297 4.5 - 8.5

Macau (Overall) 6.9 22.4 149 11.9 36.2 4,698 3.2

Hong Kong (Overall) 5.9 22.2 690 10.0 31.0 23,142 3.0

Singapore 1.7 27.4 580 0.0 36.7 21,309 2.7

Kuala Lumpur 0.4 1.0 151 0.5 3.7 1,955 7.5 - 8.0

Makati 1.8 10.9 150 3.9 18.1 2,179 6.8 - 7.4

Bangkok -1.9 -7.0 125 -0.1 -1.0 2,545 4.9 - 5.2

Jakarta 0.0 0.9 144 0.4 -1.9 1,315 10.8 - 11.2

BUSINESS PARKS rentAL VALueS CAPitAL VALueS Yield (%)q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Taipei 10.0 10.0 177 15.0 37.9 3,084 5.0

Shanghai 5.5 13.4 180 4.7 10.5 1,716 10.5

Singapore 7.8 132.8 304 5.1 64.9 3,005 9.9 - 10.3

Beijing 3.5 - 192 - - - - -

Chengdu 2.9 16.7 45 3.9 14.5 645 7.0

Guangzhou 1.5 6.5 81 - - - - -

* Indicates newly covered markets.+ Percentage changes are based on local currency of individual markets.++ The USD exchange rate as at end-Mar 2008.^ Tokyo and Jakarta updates coverage twice per year. As such, the quarterly percentage change is based on half-yearly data.^^ Chengdu and Jakarta updates manufacturing coverage twice per year.

MANUFACTURING rentAL VALueS CAPitAL VALueS Yield (%)q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Singapore 6.8 52.2 126 4.5 65.5 2,248 5.4 - 5.8

Melbourne 5.0 16.8 76 3.7 14.9 1,014 7.0 - 8.0

Brisbane 0.7 5.7 97 -4.4 2.6 1,257 7.0 - 7.75

Chengdu^^ 8.6 6.1 20 - - - -

Shanghai 2.0 7.0 37 4.5 28.3 441 8.4

Bangkok 0.1 -2.2 62 - - - - -

Jakarta^ - - - - - - - - -

Chennai* - - 73 - - - - -

Hyderabad* - - - - 0.0 14.6 115 - -

industrial LOGISTICS rentAL VALueS CAPitAL VALueS Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Hong Kong 2.9 4.3 118 3.0 5.7 1,686 6.5 - 7.0

Sydney 0.0 1.7 95 -5.3 -0.6 1,354 7.00 - 7.50

Melbourne -0.2 4.4 62 - - - - 6.75 - 7.50

Brisbane 0.0 4.0 113 - - - - 7.00 - 7.75

Shanghai 3.0 10.9 64 1.9 18.6 670 9.6

Tokyo (Bay Area)^ - - - - - - - - -

Tokyo (Inland)^ - - - - - - - - -

Tianjin* -0.3 4.6 46 1.2 11.2 488 9.5

Auckland* 0.8 3.2 103 0.8 4.9 1,308 7.25 - 8.50

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How Will China’s Property Markets Perform in Challenging Economic Conditions?Kenny hoHead of Research – China

Domestic woesNegative economic news dominated the international and domestic headlines throughout the first quarter of 2008. In China, inflation registered an 11-year high of 7.1% increase y-o-y in January, only to grow even faster at 8.7% in February and 8.3% in March. In response to these headline inflation numbers, the People’s Bank of China rose bank reserve ratios from 14.5% January to 16.0% since January. Also in February, just ahead of the Chinese New Year, large parts of central and southern China were hit by record levels of snowfall, damaging infrastructure and leaving millions of people unable to return home for the holidays.

In the financial markets, even though some Chinese banks also suffered from sub-prime related losses, the Chinese financial system as a whole was well protected from troubles in the U.S., thanks to a largely domestic capital market. Nevertheless, the Chinese stock markets experienced the worst sell-off in recent years as the price bubble deflated and valuations returned to more reasonable, but by no means cheap, levels. The Shanghai Index fell from a high of 6,200 in November 2007 to a low of just under 3,500 by the end of March.

Meanwhile, the currency gained a whopping 4% in the first quarter against the US dollar, thereby reducing the competitiveness of Chinese exports in already declining foreign markets.

tough times for developersAmidst already challenging macroeconomic conditions, Chinese developers recently have become the main targets of government tightening measures. After a year of record sales, capital raising and land acquisition, many developers now find themselves short of cash. As explained in our previous articles, the Chinese government’s concern has not been to lower overall housing prices, but to ensure the availability of affordable housing supply. One action the government took to achieve this policy goal was to increase rural land supply in anticipation that developers will use it to develop affordable residential units.

However, fervent land prices in the second half of 2007 acted against such government actions and effectively turned land meant for affordable housing into future

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AbOut the AuthOr

Kenny leads a team of forty

researchers covering office,

retail, residential and industrial

property sectors across twenty

cities in China. He is an expert

in issues relating to property

investment and development

in China, and he has frequently

commented in international as well as local media. He has

been instrumental in the significant expansion of the Firm’s

premier Real Estate Intelligence Service (REIS) in China,

offering quarterly market data, forecast and analyses on sixteen

emerging Chinese cities.

high-cost residential units. In response, the government cut off developers’ finances by tightening domestic loans and by restricting foreign direct and indirect (via capital markets) investments into Chinese real estate companies. Compared to just a quarter ago, when developers had little interest in partnering with property investment funds, today these same developers are scrambling to secure investment from anyone and everyone.

Occupier demand for real estate unaffected thus far In contrast to the tight real estate investment and capital markets, occupancy demand for real estate remains high in all sectors. According to our latest first-quarter data, office demand continued to be strong in the major cities as rental levels showed significant increases in Shanghai (up 3.1%) , Beijing (up 1.7%), Chengdu (up 4.6%) and Tianjin (up 3.0%). The feedback from our leasing teams has been that, with the exception of a few large international banks which suffered significant losses recently, the majority of corporations are sticking to their expansion plans. Even for corporations that might be rethinking their expansion plans, we believe this to be a temporary delay rather than a reversal of their China business strategy. On the residential side, contrary to media reports of a market rebound in certain cities such as Shanghai, we found no evidence of a substantive rebound. In fact, the reported rebound proved to be mostly seasonal and was consistent with market performance during the same periods in 2006 and 2007 (Figure 1).

rMb appreciation begin to weigh in on rental growthWhile it is too early to determine the full impact of the US economic downturn on the Chinese economy, we maintain a positive outlook on mid- to long-term real estate demand. However, demand growth might

not necessarily translate into future rental growth. In fact, we are concerned that the increasing pace of RMB appreciation will begin to pull against rental growth.

For the office sector, even though we saw solid rental increases in 1Q08 on the back of the strong leasing market, tenants are likely to have tighter cost controls going forward and be more reluctant to accept increases in both the exchange rate and real rent.

For the luxury and high-end residential leasing markets, where expatriate housing demand growth is slowing and supply is plenty, we are already seeing rentals softening. In Shanghai, for example, luxury residential rents (in RMB terms) have been on a constant decline, dropping by 2.7% since 3Q05. In other words, US dollar rents have been rising while renminbi rents have been falling. This trend is likely to continue over the next twelve months. The only sector in which we do not expect the strong renminbi to have an impact on rentals is the retail sector. Since retailers make their sales revenue in local currency, the currency gains from sales should offset currency losses in occupancy costs.

Conclusion: Cash is king, but only in renminbi In conclusion, our view is that the current market slowdown is largely due to uncertainty surrounding macroeconomic conditions, both domestic and abroad. Inflation is expected to ease in the second half of the year while the economy remains on a pace to achieve over 9% annual growth. With real demand staying strong, we believe that current market conditions provide a good buying opportunity for investors. Given the government’s tight control of real estate capital markets, we believe it will be the foreign investors with access to renminbi and domestic players with strong balance sheets who shall come out ahead.

Figure 1: Seasonal rebound in transaction volume

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DemandOccupier demand for Hong Kong’s Grade A office space remained strong in 1Q08. In spite of growing uncertainties in global financial markets, banking and finance sector tenants continued to be amongst the most active in expanding offices within the city.

The limited availability of vacant space and higher rentals in traditional core area markets continued to underpin market activity in the non-core area markets. JPMorgan, PricewaterhouseCoopers, Morgan Stanley, and Citibank, were among some of the more notable companies leasing office space in the non-core area markets in 1Q08.

The completion of the heavily pre-committed One Island East (OIE) in Hong Kong East contributed to boosting net take-up to about 1.9 million sq ft (net) in 1Q08. With low vacancy curbing net take-up in the core-area markets, the majority of new demand was largely met in recently completed buildings such as 633 King’s Road and OIE in Hong Kong East; International Commerce Centre (ICC) in West Kowloon; and Millennium City 6 and Kwun Tong 223 in Kowloon East.

Great Eagle’s announced sale of the Langham Place development (excluding Langham Hotel) in Mongkok for HKD 12.5 billion to Champion REIT was the largest transaction recorded in 1Q08. Included in the sale was the 772,500-sq ft (gross) office tower portion of the development, reportedly priced at HKD 6,815 per sq ft (gross). The sale is expected to be finalised in 2Q08.

SupplySwire Properties’ flagship OIE Grade A office building in Quarry Bay was the only new supply completed in 1Q08. With a total office floor area of 1.17 million-sq ft (net), it is amongst the largest and tallest buildings in Hong Kong. The building was 87% pre-committed at the time it was issued with its occupation permit.

The unwavering demand from occupiers saw overall vacancy drop to 4.2% at end-1Q08. All the key office sub-markets recorded a tightening in vacancy levels, including Hong Kong East despite the completion of OIE.

Asset PerformanceTightening vacancy levels allowed landlords to continue raising rentals, especially in the core area markets where the supply-demand imbalance was most acute. The 13.2% q-o-q growth posted in 1Q08, pushed average rentals in the overall market to a new all-time high for the Hong Kong Grade A office market.

On the other hand, higher prices and a heightened aversion to risk by investors saw the growth in overall capital values slow to 6.3% q-o-q in 1Q08 after surging 15.1% q-o-q in 4Q07.

12-Month OutlookWhile demand for Grade A offices was relatively robust in 1Q08, this was largely due to the release of pent-up demand. With many of the larger requirements in market now satistfied, demand is likely to taper in the next 12 months, especially if the contagion of the US sub-prime mortgage market-induced credit crunch spreads further into Asia and curbs economic growth. Notwithstanding, rental levels are expected to remain high in view of the low vacancy levels across the city, especially in the core-area office markets.

Hong Kong: Grade A Office

* Rental values are based on NFA** Capital values are based on GFA

With many of the larger requirements in market now satistfied, demand is likely to taper in the next 12 months, especially if the contagion of the US sub-prime mortgage market-induced credit crunch spreads further into Asia and curbs economic growth.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate (Overall)

4.2%

net effective rent HKD 64.0 psf pm

Capital Value HKD 10,625 psf

investment Yield 3.4% - 7.4%

Growth rental Value Capital Value

q-o-q 13.2% 6.3%

1 Year 33.9% 33.6%

3 Years 147.3% 67.7%

For 2008, take-up, completions and vacancy rate are YTD figures. Future supply is for the full year.

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Hong Kong: Grade A Office – Central

DemandDespite being the most affected by the ongoing turmoil in the global capital markets, banking and finance sector tenants remained amongst the most active in leasing offices in Central in 1Q08.

Pre-commitment leasing in Central’s only source of upcoming Grade A office supply in 2008, Nexxus Building, began to gather momentum, with 30% of the building already being leased by end-1Q08. However, the low vacancy environment in Central also continued to drive strong interest from long-term Central tenants into newly completed buildings outside of Central such as International Commerce Centre (ICC) in West Kowloon and One Island East (OIE) in Quarry Bay. In view of the low vacancy situation, net take-up in Central amounted to only 119,420 sq ft (net) in 1Q08.

Though several Grade A office buildings were reportedly being marketed for sale, no en bloc sales involving Grade A offices buildings in Central transpired in 1Q08. Sales were confined to traditional strata-titled office properties such as The Center, Cosco Tower, Lippo Centre, 9 Queen’s Road, and Bank of America Tower.

SupplyNo new Grade A office buildings were completed in Central in 1Q08. Works continue on Nexxus Building, the refurbishment of the former Hang Seng Building, which remains on schedule for completion in 3Q08. The building is the only source of new Grade A office supply in Central in 2008.

At 1.1%, vacancy in Central was down to a near 20-year low at end-1Q08. The low vacancy was due in part to the large number of Grade A office buildings at 100% occupancy, especially amongst the highest quality buildings.

Asset PerformanceThe acute supply-demand imbalance in Central saw landlords continue to push rentals to new record highs. After breaching their historic all-time highs at the end of 4Q07, average rentals increased a further 12.7% q-o-q in 1Q08.

A 7.4% q-o-q increase in 1Q08, saw average capital values eclipse their previous 1994 peaks to reach a new all-time high for the Central Grade A office market.

Major Leasing transactionsBBVA leased 25,000 sq ft (lettable) in Two International Finance Centre;

Baker & Mckenzie leased 20,400 sq ft (gross) in Admiralty Centre I;

Johnson Stokes & Master leased 23,800 sq ft (gross) in Vicwood Plaza;

ICAP leased 25,145 sq ft (gross) in The Center; and

Taubman leased 14,000 sq ft (gross) in Aon China Building.

Major Sales transactions9, 11 & 16/F of Cosco Tower were sold to Joy Wisdom Ltd for HKD 569.9 million (HKD 9,620 per sq ft (gross));

79/F of The Center was sold to Magic Ace for HKD 293 million (HKD 22,175 per sq ft (gross));

20/F of Worldwide House was sold to Magic Ace for HKD 215 million (HKD 12,880 per sq ft (gross));

15/F of Bank of America Tower was sold to A12 Ltd for HKD 251 million (HKD 18,100 per sq ft (gross)); and

Units 4-5 on the 30/F of Nine Queen’s Road Central were sold to Modern Metro for HKD 101.9 million (HKD 18,760 per sq ft (gross)).

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12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 12.7% 7.4%

1 Year 38.7% 45.6%

3 Years 194.8% 75.6%

1Q08

Vacancy rate 1.1%





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DemandLeasing activity in Wanchai/Causeway Bay continued to be underpinned by the relocation of tenants from Central and the in-house expansion of tenants. Examples of some larger tenants from Central opting to lease offices in Wanchai/Causeway Bay in 1Q08 included Samsung relocating to Central Plaza and global conglomerate GE leasing offices in The Lee Gardens to accommodate a partial relocation of their offices away from Central.

However, the inflow of tenants relocating from Central was partially offset by the outflow of tenants into other sub-markets after being unable to secure expansion requirements within Wanchai/Causeway Bay. Tenants such as P&T Architects & Engineers and Allianz Insurance were amongst the most notable to do so in 1Q08. The inflow/outflow of tenants together with low vacancy curbed net take-up in the sub-market to 32,550 sq ft (net) in 1Q08.

The slowdown in investment activity saw sales transactions largely confined to strata-titled properties, with regularly transacted strata-titled office buildings such as Convention Plaza, Wu Chung House and Harcourt House all recording sales in 1Q08.

SupplyThere were no new Grade A office buildings completed in Wanchai/ Causeway Bay in 1Q08.

Vacancy within the sub-market continued to trend downwards through 1Q08 despite being at near 20-year lows entering the quarter. As at end-1Q08, vacancy was down to 1.9%, the first time below the 2% level since 1988.

Asset PerformanceAverage rentals surged a further 15.1% q-o-q in 1Q08 as landlords sought to capitalise on the limited availability of vacant space on Hong Kong Island and in Tsimshatsui. The rate of growth was the strongest in a quarter since 2Q93.

The subdued sentiment of investors saw growth in average capital values slow to 4.6% q-o-q in 1Q08 after increasing 14.9% q-o-q in 4Q07.

Major Leasing transactionsSamsung leased 39,910 sq ft (lettable) in Central Plaza;

Pfizer leased 7,630 sq ft (lettable) in Central Plaza;

Buspak leased 8,245 sq ft (lettable) in Sunning Plaza;

Jetro leased 9,445 sq ft (lettable) in Hopewell Centre;

GE leased 31,000 sq ft (lettable) in The Lee Gardens; and

Maxim’s leased 6,315 sq ft (lettable) in Dah Sing Financial Centre.

Major Sales transactions24/F of OTB Building was sold for HKD 60.2 million (HKD 8,200 per sq ft (gross));

25/F of OTB Building was sold for HKD 64.4 million (HKD 8,780 per sq ft (gross));

Units 4-9 on the 22/F of Wu Chung House was sold to Ever Real Holdings for HKD 97 million (HKD 6,560 per sq ft (gross)); and

9/F of Harcourt House was sold to a local investor for HKD 180 million (HKD 10,555 per sq ft (gross)).

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Hong Kong: Grade A Office – Wanchai/Causeway Bay


1Q08

Vacancy rate 1.9%





q-o-q 15.1% 4.6%

1 Year 31.6% 27.5%

3 Years 113.3% 63.8%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


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Hong Kong: Grade A Office – Tsimshatsui

DemandThe Tsimshatsui Grade A office market continued to experience relatively strong levels of transaction activity in 1Q08, albeit with the majority of new lettings being for small-to-medium offices, typically less than 10,000 sq ft.

Demand was largely underpinned by the expansion requirements of incumbents and the relocation of tenants from Hong Kong Island. Prudential Assurance, Novi Footwear, and NYK Logistics were some of the tenants that took up expansion space in Tsimshatsui during 1Q08. Meanwhile, ANA, China Construction Bank and Replay were amongst the most prominent tenants to relocate offices from Hong Kong Island to Tsimshatsui. The robust levels of leasing saw net take-up in the sub-market amount to about 43,440 sq ft (net) for 1Q08.

While sales of smaller office properties below HKD 20 million remained strong, activity for more expensive properties slowed in line with the overall market. Sales above HKD 20 million concluded in 1Q08 were largely focused on traditional strata-titled Grade A office properties in Tsimshatsui East.

SupplyNo new Grade A office buildings were completed in Tsimshatsui in 1Q08.

Relatively stronger levels of demand for Wharf’s portfolio of buildings along Canton Road helped vacancy in Tsimshatsui tighten down to 4.2% at the end of 1Q08.

Asset PerformanceTightening vacancy and steady levels of demand led to landlords adopting a more aggressive stance in rental negotiations. As a result, average rentals grew by 15.2% q-o-q in 1Q08, the strongest amongst all the key office sub-markets in Hong Kong.

The relatively more active investment market, compared with the other office sub-markets, helped push average capital values up by 8% q-o-q in 1Q08. Again, this was strongest growth among the key sub-markets in 1Q08.

Major Leasing transactionsANA leased 7,585 sq ft (gross) in The Gateway II, Tower 6;

Prudential Assurance expanded 7,820 sq ft (gross) in The Gateway, Tower 3;

China Construction Bank leased 6,070 sq ft (gross) in The Gateway II, Tower 6;

Yue Yuen Industrial Holdings expanded in-house 6,375 sq ft (gross) in The Gateway II, Tower 6; and

The Hong Kong Polytechnic University leased 11,455 sq ft (gross) in Chinachem Golden Plaza.

Major Sales transactionsUnits 1-5 & 10-14 on the 12/F of Wing On Plaza were sold to Cheer Mega for HKD 138.9 million (HKD 10,115 per sq ft (gross));

Units 1-5 on the 4/F of Silvercord Block 2 were sold to Giovinni for HKD 72.5 million (HKD 7,760 per sq ft (gross));

Units 6-8 on the 26/F of Concordia Plaza were sold to a private investor for HKD 76.16 million (HKD 12,000 per sq ft (gross)); and

Units 9-11 on the 26/F of Concordia Plaza were sold to Gain Legend Development for HKD 31.3 million (HKD 12,000 per sq ft (gross)).

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1Q08

Vacancy rate 4.2%





q-o-q 15.2% 8.0%

1 Year 27.4% 23.8%

3 Years 82.8% 63.7%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


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DemandThe low vacancy in Hong Kong East entering at the start of 1Q08 saw leasing activity focusing on 633 King’s Road in North Point, a building completed in 2Q07, and One Island East (OIE) in Quarry Bay.

As one of only two new Grade A office buildings to be completed on Hong Kong Island until 2010, OIE drew strong interest from tenants across a variety of industry sectors, especially those from banking and finance. The quarter saw JPMorgan, CLSA, Fidelity and Citigroup all commit to space within the building, joining DBS Bank as key tenants. Meanwhile, demand for 633 King’s Road also picked up noticeably in 1Q08, attracting strong interest from Hong Kong Island tenants seeking offices for relocation and expansion. Amongst the largest tenants to relocate to the building in 1Q08 was P&T Architects & Engineers, who leased five floors as part of their relocation from offices in Wanchai.

The completion of OIE, which was 87% pre-committed when issued with its occupation permit, helped push net take-up to 1.15 million sq ft (net) in 1Q08, more than the total amount achieved in the sub-market over the past five years, combined.

Investment activity in Hong Kong East slowed in line with the overall market. The few transactions recorded were restricted to Island Place Tower and Citicorp Centre.

SupplySwire Properties’ 1.17 million-sq ft (net) OIE Grade A office development in Quarry Bay was the only new supply completed in the sub-market in 1Q07.

The strong levels of pre-commitment leasing achieved in OIE not only kept vacancy levels in Hong Kong East low but combined with steady demand in other buildings within the sub-market, tightened vacancy to 2.9% at end-1Q08.

Asset PerformanceThe high level of pre-commitment leasing at OIE coupled with low vacancies across Hong Kong Island, pushed average rentals up by 10.9% q-o-q in 1Q08.

Average capital values, on the other hand, registered only a 1.2% q-o-q increase for the quarter, reflecting the relative slowdown in transaction activity in 1Q08.

Major Leasing transactionsNeo Derm leased 21,195 sq ft (lettable) in One Island East;

Club 21 leased 39,770 sq ft (lettable) in One Island East;

Allianz Insurance leased 16,395 sq ft (lettable) in Cityplaza 4;

P&T Architects & Engineers leased 55,225 sq ft (gross) in 633 King’s Road; and

Deutsu Young & Rubicam leased 10,045 sq ft (gross) in 633 King’s Road.

Major Sales transactionsUnion Park Tower was sold en bloc to a local investor for HKD 203 million (HKD 5,145 per sq ft (gross));

11/F of Island Place Tower was sold to King Strand Ltd for HKD 106.4 million (HKD 6,550 per sq ft (gross)); and

7/F of Island Place Tower was sold to Ontop Creation for HKD 102.6 million (HKD 6,320 per sq ft (gross)).

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Hong Kong: Grade A Office – Hong Kong East


12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 2.9%





q-o-q 10.9% 1.2%

1 Year 17.6% 11.8%

3 Years 124.5% 47.3%


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Hong Kong: Grade A Office – Kowloon East

DemandLeasing activity in Kowloon East continued to benefit from tightening vacancy levels across the other key office sub-markets. The sub-market continued to attract tenants seeking offices to cater for expansion, cost-effective accommodation and upgrading opportunities. Some Hong Kong Island tenants that leased offices into Kowloon East in 1Q08 included S.W.I.F.T. (FE), EC Harris, and PricewaterhouseCoopers.

Millennium City 6 and Kwun Tong 223, both completed in 2007, drew the strongest interest within the sub-market, with occupancy in Millennium City 6 rising to 83% by end-1Q08. Meanwhile, in one of the largest leases transacted in 1Q08, PricewaterhouseCoopers became the first tenant to lease offices in Kwun Tong 223 after committing to about 93,000 sq ft (gross) in the building.

Net take-up in Kowloon East amounted to about 196,060 sq ft (net) in 1Q08, buoyed by the strong leasing in Millennium City 6 and Kwun Tong 223 which accounted for more than 70% of the total net take-up achieved in the sub-market during the quarter.

The investment market was highlighted by the release of 12 floors for strata-titled sale in the 18-storey Millennium City 3 by Sun Hung Kai Properties. As of end-1Q08, a total of three floors had been sold to two independent parties.

SupplyNo new Grade A office buildings were completed in Kowloon East in 1Q08.

The strong leasing in Millennium City 6 and Kwun Tong 223 drove vacancy in Kowloon East down to 13.6% at end-1Q08.

Asset PerformanceGrowing interest in Kowloon East as a viable office location for traditional core-area tenants and the limited availability of vacant space in the overall market enabled landlords to increase average rentals by 10.7% q-o-q in 1Q08 despite double-digit vacancy.

Meanwhile, the relative strength of demand from owner-occupiers together with the increase in rentals saw average capital values increased by 3.7% q-o-q in 1Q08.

Major Leasing transactionsGeneral Mills leased 18,445 sq ft (gross) in Enterprise Square 5;

S.W.I.F.T. (FE) leased 17,115 sq ft (gross) in Millennium City 6;

PricewaterhouseCoopers leased 93,000 sq ft (gross) in Kwun Tong 223;

Black & Veatch leased 18,860 sq ft (gross) in Millennium City 6; and

EC Harris leased 17,605 sq ft (gross) in Millennium City 6.

Major Sales transactions20/F of Millennium City 3 was sold to Wealthfaith Holdings for HKD 48.84 million (HKD 6,000 per sq ft (gross));

Units 1-3, 5-8 on the 28/F of Enterprise Square 3 were sold to Eagle Luck for HKD 105 million (HKD 6,520 per sq ft (gross)); and

7-8/F of Millennium City 3 were sold to Hong Kong Baptist University for HKD 89.54 million (HKD 5,500 per sq ft (gross)).

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Kwun Tong 223Image courtesy of Henderson Land

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 13.6%





q-o-q 10.7% 3.7%

1 Year 25.0% 10.6%

3 Years NA NA


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Hong Kong: Retail

* Rental values of shopping centres are based on LFA.** Rental and capital values of prime street shops are based on GFA.*** The index basket was re-audited in 1Q08.

DemandHong Kong’s retail consumption levels remained relatively high through 1Q08. Retail sales were buoyed by optimism in the labour market and year-end bonuses which fuelled local spending, and an expanding inbound tourism market, which saw visitor arrivals increasing by 9.4% y-o-y in the first two months of 2008. Coupled with the higher consumption around the Chinese New Year holiday period, retail sales values grew by 16.4% y-o-y in the first two months of the year.

Big-ticket item retailers and luxury brands remained keen on expanding their presence in the city in spite of the surge in prime retail rents. Gucci, for example, relocated and expanded to a 4,000-sq ft (gross) store in Times Square; Bvlgari opened its first set of ‘twin stores’ in Pacific Place; Louis Vuitton opened a 36,000-sq ft (gross) store in Harbour City, their second largest store in the world; while other prominent brands such as Cartier, Coach and Hermès are also expected to open new flagship stores in the near future.

The Financial Secretary, in his 2008/09 Budget Speech, proposed a number of wealth sharing measures costing a total of HKD 28 billion in the upcoming fiscal year, equating to about 3% of Hong Kong’s total private consumption expenditure in 2007. These rebates and tax savings are likely to translate into higher local spending, albeit not until later in the year.

Activity in the investment market was subdued in 1Q08 with relatively fewer transactions being recorded compared with previous quarters, particularly for properties above HKD 100 million. The market was highlighted by the announced sale of Great Eagle’s Langham Place development (excluding the Langham Hotel) in Mongkok to Champion REIT for HKD 12.5 billion. The 589,845-sq ft (gross) shopping mall component of the development was reportedly sold for HKD 7.4 billion or about HKD12,520 per sq ft.

Supply

Five of the recently converted office-to-retail floors in World Trade Centre in Causeway Bay, whose retail element is branded under the name of wtc more, opened in 1Q08 with all floors being occupied by F&B operators. Another 50,000 sq ft (gross) of floor space is still under conversion is expected to be completed in 2Q08.

Asset PerformanceLandlords of retail properties continued to capitalise on the rising demand from retailers, who remained active in securing premises to cater for expansion. As a result, rentals remained on the rise in 1Q08, with average rentals for Premium Prime Shopping Centres rising 3.5% q-o-q , while those in Prime Centres rose 5% q-o-q. Average rentals in High Street Shops rose 8.4% q-o-q.

The strength of leasing demand lent support to the growth in capital values in 1Q08 despite a relative slowdown in investment activity. Average capital values of High Street Shops rising by 5.8% q-o-q in 1Q08.

12-Month OutlookThe tight labour market and the positive effects arising from the rebates and tax cut measures proposed in 2008/09 Budget are likely to strengthen domestic demand. While some of this optimism may dissipate if the turmoil in the global finance market prevails, any uncertainties in the short-term future may be offset by a strengthening inbound tourism market, stemming from the continuing emergence of Macau’s gaming industry and the Beijing Olympic Games.

12-MOnth OutLOOK

rentAL VALuePRIME STREET SHOPSPREMIUM PRIME SHOPPING CENTRESOVERALL PRIME SHOPPING CENTRES

CAPitAL VALuePRIME STREET SHOPS

Growth q-o-q 1 Year 3 Years

Premium Prime Shopping Centres rental Value

3.5% 13.0% 37.6%

Overall Prime Shopping Centres rental Value

5.0% 13.5% 34.6%

Prime Street Shops rental Value

8.4% 23.6% 38.1%

Prime Street Shops Capital Value

5.8% 22.1% 25.7%

1Q08 rental Value

Capital Value

Yield

Premium Prime Shopping Centres

HKD 184.3 psf pm

NA NA

Overall Prime Shopping Centres

HKD 118.1 psf pm

NA NA

Prime Street Shops

HKD 333.3 psf pm

HKD 101,857 psf

3.9%

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* Rental and capital values are based on GFA

DemandFollowing cuts to the US Federal Fund Rate, Hong Kong’s Best Lending Rates (BLRs) saw a further 150-basis-point cut in 1Q08 to a range of 5.25-5.5%, bringing nominal mortgage rates down to an average of 2.5%, the lowest since February 2005.

The number of residential Sale and Purchase Agreements (ASPs) contracted 8.9% q-o-q to 36,917 in 1Q08 as the market euphoria that gripped buyers in 4Q07 subsided on the back of growing concerns over the global economic outlook. Notwithstanding, the total number of ASPs transacted in 1Q08 was still up 58.3% y-o-y and at their highest level for a corresponding quarter since 1997.

The primary luxury residential sales market was highlighted by the launch of Sun Hung Kai Properties’ stratification of The Royal Tower in the Mid-levels. The initial 30 units made available for sale were reportedly sold at prices above HKD 20,000 per sq ft. Meanwhile, in the secondary market, the price divergence between older properties and new detached houses in traditional high-end residential areas continued to widen. In one of the most notable transactions recorded during the quarter, a unit in Severn 8 on The Peak was sold for HKD 54,951 per sq ft, about three times the Hong Kong Island average.

Leasing demand for high-end properties remained robust through 1Q08, with quality properties on Hong Kong Island remaining the most popular. In spite of the uncertainties in the global economy, housing allowances for expatriates residing in the city remained broadly stable. The most prominent transaction in 1Q08 was for a house in 40 Peak Road (5,874 sq ft) at The Peak, which was leased for HKD 330,000 per month exclusive.

SupplyA total of 469 residential units were completed in the first two months of 2008, of which 12 were luxury units. The 2008/09 Application List saw the total number of residential sites increased to 42, up from 33 in the previous list. The new list has the potential to deliver a total of about 13,000 units.

Asset PerformanceCapital values of luxury residential properties continued to accelerate in 1Q08, increasing a further by 10% q-o-q, albeit with the bulk of the growth being achieved in the first month of 2008 when sentiment was high. With the supply-demand imbalance remaining firmly in the favour of landlords, rents for luxury residential properties increased 5.9% q-o-q.

12-Month OutlookThe Hong Kong economy has so far escaped the brunt of the financial turmoil that has slowed the US and EU economies. As of end-1Q08, there was no apparent contraction in corporate headcounts, even amongst the global investment banks that have been hardest hit by the financial turmoil. Indeed, we expect expatriate demand for luxury properties to remain relatively high for the remainder of the year and coupled with low vacancy and the limited availability of new supply, will lend support to a further rise in both rental and capital values over the next 12 months.

Hong Kong: Luxury Residential We expect expatriate demand for luxury properties to remain relatively high for the remainder of the year and coupled with low vacancy and the limited availability of new supply, will lend support to a further rise in both rental and capital values over the next 12 months.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

net rent HKD 41.6 psf pm


investment Yield 3.0%


q-o-q 5.9% 10.0%

1 Year 22.2% 31.0%

3 Years 46.5% 36.9%

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DemandDemand for warehousing space in Hong Kong remained relatively robust through 1Q08 on the back of an expanding external merchandise trading sector. Growing trade with the EU, other Asian countries, and Mainland China helped offset the continuing contraction of exports to the US. The total value of all trade in 1Q08 amounted to HKD 1,345.4 billion, representing an 11.1% y-o-y increase.

Some of the more notable transactions concluded during the quarter included:

an end-user leasing 9,650 sq ft (gross) in Lucky Industrial Building in Kwai Chung for HKD 5 per sq ft per month;

a Japanese logistics company leasing 25,165 sq ft (gross) in Global Gateway (HK) in Tsuen Wan for HKD 7.5 per sq ft per month;

a 3PL operator leasing 21,085 sq ft (gross) in Texaco Centre in Tsuen Wan for HKD 4.5 per sq ft per month;

a logistics operator leasing various units totalling 40,000 sq ft (gross) in Texaco Centre in Tsuen Wan for HKD 4.2-4.5 per sq ft per month; and

Avion Logistics leasing 7,420 sq ft (gross) in QPL Industrial Building in Tsuen Wan for HKD 4 per sq ft per month.

Property fund Goodman continued to expand their warehouse portfolio in Hong Kong, acquiring Tins Plaza in Tuen Mun en bloc for HKD 862.7 million, the largest sales transaction recorded during 1Q08.

SupplyNo new warehouses were completed in 1Q08.

Cathay Pacific won a 20-year non-exclusive franchise contract to build and operate a new cargo handling facility at Hong Kong International Airport. The new facility will have a total Construction Floor Area of about 2.5 million sq ft and is scheduled to be completed by 2011. Meanwhile, Nan Fung’s 844,600-sq ft development in Kowloon Bay was changed from warehouse to office use and hence removed from our 2009 supply schedule.

Asset PerformanceLow vacancy coupled with relatively stable levels of demand growth, allowed landlords to push rentals higher, leading to average rentals increasing 2.9% q-o-q in 1Q08.

The relative strength of demand and the potential for higher rental reversions helped lift average capital values by 3% q-o-q in 1Q08.

12-Month OutlookHong Kong’s external trading sector has thus far remained resilient amidst contracting exports to the US. However, growth over the next 12 months is likely to moderate as demand for Mainland exports weakens on the back of a slowing global economy. While, growing domestic consumption levels on the Mainland may help reduce the relative severity in the slowdown of trade, warehousing demand is nonetheless expected to wane in the quarters ahead. Notwithstanding, low vacancy and the limited availability of new supply over the same period will help keep rental and capital values on an even keel.

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Hong Kong: Industrial – Warehouse


12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 2.9% 3.0%

1 Year 4.3% 5.7%

3 Years 29.3% 45.0%

1Q08

Vacancy rate NA




Hong Kong’s external trading sector has thus far remained resilient amidst contracting exports to the US. However, growth over the next 12 months is likely to moderate as demand for Mainland experts weakens on the back of a slowing global economy.

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DemandWith the opening of MGM Grand Macau in December 2007, Macau’s tourist arrival increased by 13.9% y-o-y to 4.8 million visitors in the first two months of 2008. The opening of new casinos and retail offerings also raised the total number of imported labour to 87,705 as of end-February, up 27.4% y-o-y. Both rising visitor arrivals and imported labour boosted retail sales to surge by 40.3% to MOP 4.2 billion in 4Q07. In particular, sales of big-ticket items like jewellery and watches saw the strongest y-o-y growth of 77%. In some cases, large retailers were willing to pay higher rent to keep their shops in prime locations. For example, a cosmetic chain store has renewed its lease in Rua de S. Domingos at about HKD 500 per sq ft (gross), doubling the average rental value in the area.

SupplyThe expansion of the retail portion in Wynn Macau was completed in 1Q08, adding 11 new luxury brand outlets to the arcade. In Grand Canal Shoppes of The Venetian Macao, a number of new shops including Q’ggle, Marathon Sports and Manchester United were opened during the quarter.

Moving forward, more new supply is coming in the pipeline. While New Yaohan Department Store delayed its relocation to Nam Van District to May, The Shoppes at Four Seasons in Cotai Strip, with 211,000 sq ft of retail space, is expected to open in mid-2008.

Asset PerformanceIn view of the optimistic retail market, growing retailers’ demand for prime retail space helped pull high-street shop rentals up by 7.4% in 1Q08. Capital values also rose by 6.2% during the quarter, edging up the investment yield to 6%.

12-Month OutlookIn our March 2008 edition of Macau Economic Insight, we pointed out that both rising population and escalating tourism receipts are set to underpin the retail growth in the next few years. Our forecast shows that Macau’s retail sales will grow at a robust CAGR of 35% per annum between 2008 and 2010. Even with the ample supply due for completion in the next few years, we do not expect any notable setback in Macau’s retail productivity in the medium to long run. However, competition for tenants will likely remain the case in many of the upcoming malls, limiting rental growth potential in the near future.

Macau: Retail


12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 7.4% 6.2%

1 Year 11.7% 13.5%

3 Years NA NA

1Q08

Vacancy rate NA




MGM Grand Macau

Rising population and escalating tourism receipts are set to underpin Macau’s retail growth in the next few years. We do not expect any notable setback in Macau’s retail productivity in the medium to long run.

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Macau: High-End Residential

DemandFollowing the US interest rate cuts, Macau’s average best lending rates were further lowered from 6.75% to 5.25% during 1Q08, the lowest level since May 2005. Coupled with the rising inflation, the deepening of the negative real interest rate environment continued to boost demand for property investment.

Meanwhile, the impressive government land sale results helped improve market sentiment. Two residential sites at the waterfront of Fai Chi Kei with an estimated combined GFA of about 670,000 sq ft were sold by public tenders in January. Local developer, Tin Wai Investment won both tenders for a total of MOP 1.42 billion (accommodation value of MOP 2,264 per sq ft and MOP 2,048 per sq ft, respectively).

In view of the positive sentiment, developers launched a number of residential projects for sale during the quarter. In Tower 2 of The Praia, the first batch of 120 units were launched for sale, and over 93% of the units were sold for HKD 3,500–4,700 per sq ft (gross). The remaining 80 units in La Cite in the Pearl district were also launched for sale, and over 75% of the units were sold for an average price of HKD 3,500 per sq ft (gross). The Residencia Macau at the waterfront of the Pearl district was also launched for sale with prices ranging from HKD 4,000 to HKD 5,500 per sq ft (gross).

In Taipa, about 75% of the 196 units in The Buckingham were sold for an average price of about HKD 5,000 per sq ft (gross). Of this, Marriott Vacation Club International acquired 30 units with a total GFA of about 41,380 sq ft (gross) for its time-sharing business.

SupplyThere was no new supply in 1Q08. However, it is estimated that about 2,700 residential units will be completed in the remainder of the year.

Asset PerformanceThe strong investment demand stemming from lower interest rates and rising inflation, helped push capital values up a further 11.9% in 1Q08. The growing leasing demand from expatriates and backed by the tight availability of supply also put upward pressure on high-end residential rentals, which grew by 6.9% during the quarter. This caused the investment yield to fall slightly to 3.2%.

12-Month OutlookAlthough there are increasing concerns about potential price consolidation after years of run-up, the bright local economic outlook, coupled with the deepening of negative real mortgage rates, will continue to lend support to real estate assets. On the other hand, the continuous inflow of expatriates is putting stronger demand pressure on leasing properties, especially those having a close proximity to the emerging Cotai Strip. As such, we remain optimistic that both the capital values and rents will grow further in the next 12 months.


* Total private residential

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08





q-o-q 6.9% 11.9%

1 Year 22.4% 36.2%

3 Years 59.5% 62.9%

The deepening of the negative real interest rate environment continued to boost demand for property investment. The bright local economic outlook, coupled with the deepening of negative real mortgage rates, will continue to lend support to real estate assets. On the other hand, the continuous inflow of expatriates is putting stronger demand pressure on leasing properties.

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The first quarter of 2008 brought a continued high level of growth and activity in the Beijing office market. Several new buildings entered key areas, and expansion and relocation requirements drove strong demand across the market.

DemandMany large MNCs are taking advantage of current market conditions not only to expand their space, but also to upgrade into higher-quality buildings at comparable rental levels. Recognising the impossibility of doing fit-outs during the Olympic Games period, occupiers are either pushing to get fully moved in before June or are signing short-term extensions with the intention of delaying relocation activity until September. On the back of this demand, total absorption reached 245,532 sqm in 1Q08—comparable to the high absorption levels witnessed in 2H07.

In 1Q08, the CBD continued to be the most popular destination for relocation and expansion with firms absorbing 95,338 sqm of new space. Some noticeable transactions in the CBD in 2Q08 include Cisco moving from its 8,000-sqm space in Oriental Plaza into a 12,000-sqm space in Yintai Centre, and PwC leasing approximately 5,000 sqm of space in Prosper Centre to complement its existing space in Fortune Plaza.

SupplyWith the completion of five projects, 397,172 sqm of new supply was delivered to the market in 1Q08. Three of the new buildings—PICC Tower, Taikang International Financial Centre and China Central Place Tower Three—are located in the CBD. Despite entering with some pre-leasing commitments, new completions drove CBD vacancy up 3.3% q-o-q to 30.4%. Fifth Square, a Grade A building, entered the East Second Ring Road area. It will bring substantial competition to older, more established buildings in the Chaoyangmen area such as Fullink Plaza and China Life Tower. Despite the substantial influx of new space, overall vacancy rose by less than 1% to 16.5%.

Asset PerformanceStrong rental growth in Finance Street and Zhongguancun, combined with stability in the CBD, pushed overall average rentals up 1.7% q-o-q to RMB 251 per sqm per month. Capital values rose 6.8% q-o-q to RMB 23,478 per sqm. Resulting from these changes, yields for the overall office market compressed 0.5% q-o-q to 9.2%. There was an inordinately high level of second-hand strata-titled office transactions in 1Q08, as some local companies sought to purchase as opposed to lease space, and some owners moved to offload these assets. The decision on the part of owners is potentially driven by the realisation that strata-titled office space is increasingly less competitive as more wholly owned Grade A space enters the market.

12-Month OutlookA total of 618,574 sqm of prime office space is expected to enter the market in 2Q08, which will serve to drive up overall vacancy rates despite expected strong demand. Importantly, several of the upcoming projects are high-quality buildings located in less-established office areas such as Wangjing and the Olympic Green area. Over time, these areas are poised to emerge as secondary office sub-markets, creating decentralised options for more rent-sensitive tenants.

Beijing: Office

* Rental Value is based on NLA** Capital Value is based on GFA*** Series have been revised in 1Q08 to better reflect the current market conditions

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 16.5%

effective rent RMB 251 psm pm

Capital Value RMB 23,478 psm



q-o-q 1.7% 6.8%

1 Year 21.2% 13.8%

3 Years 21.4% 22.2%


Many large MNCs are taking advantage of current market conditions not only to expand their space, but also to upgrade into higher-quality buildings at comparable rental levels.

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Beijing: Prime Retail

Demographic drivers for the Beijing retail market grew dynamically in 2007. Urban Resident’s disposable income increased 11.2% y-o-y to RMB 21,989 per capita per annum and total retail spending increased 14% y-o-y to RMB 377 billion. In January and February 2008, retail sales continued to grow, expanding by 14.9% y-o-y over this two-month period.

DemandWith an eye on promising economic and demographic conditions and the upcoming Olympic Games, demand for quality retail space was robust in 1Q08. Many of the more established shopping centres, such as Oriental Plaza and China World Trade Centre, continue to enjoy very high occupancy. The vacancy rate for the overall prime retail market dropped 3% q-o-q to 7.1%.

Strong demand is further demonstrated by active leasing in new projects and dynamic pre-leasing in developments scheduled for completion before the Olympic Games. Vacheron Constantine opened a second Beijing store in Oriental Plaza, Bulgari opened a flagship store in Shin Kong Place, C & A opened their first Beijing store in the recently refurbished Beijing apm and Uniqlo, a Japanese fashion retailer, opened stores in both Beijing apm and Joy City. Also of note, Zara is expanding their presence in Beijing with confirmed leasing deals at Joy City in Xidan and Solana near Chaoyang Park.

SupplyCompletion of renovations at Beijing apm (formerly known as Beiing Sun Dong An Plaza) re-introduced 120,000 sqm of retail space in 1Q08. Joy City, located in the Xidan Area was also completed, adding 76,400 sqm to the market. Sun Hung Kai Properties’ decision to refurbish Beijing apm is likely driven by the increasing quality of new supply and the necessity to improve their shopping environment to maintain competitiveness.

Asset PerformanceBoth overall rental value and capital value decreased 0.5% q-o-q with net effective rent dropping to RMB 576 per sqm per month and capital value decreasing to RMB 48,722 per sqm. This relative stability in the market is a result of well balanced supply and demand dynamics.

12-Month OutlookWith an estimated 710,630 sqm of new supply expected to enter the market before the Olympic Games, the overall vacancy rate is projected to increase to approximately 20%. Pre-leasing is active currently, but most new developments will still enter with at least 30% to 40% vacancy. Importantly, most of those retailers that hope to have new venues operational in August have already signed pre-leasing deals. It will be critical to have fit-out work completed before the government stops providing the necessary construction licenses, which is anticipated to come into effect in May or early-June.

Beyond the Olympic Games it is projected that we will see some slowdown in leasing activity, although retailers will persist in viewing the Beijing market as a key priority. Growing incomes, developing consumerism, and increasing amounts of quality supply are all critical factors behind continued retailer expansion and new set-ups.

* Rental Value is based on NLA** Capital Value is based on GFA

With an eye on promising economic and demographic conditions and the upcoming Olympic Games, demand for quality retail space was robust in 1Q08.


q-o-q -0.5% -0.5%

1 Year -1.3% -1.4%

3 Years 17.3% 63.9%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 7.1%

net effective rent RMB 6,912 psm pa



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Beijing: High-end and Luxury Residential

According to statistics from the Beijing Real Estate Transaction Website, total transaction volume in 1Q08 fell 36% y-o-y. This sharp decline in transaction volume correlates with substantially slower housing-price growth in the first two months of 2008. Research from the National Development and Reform Commission and National Bureau of Statistics indicate that average sales price growth in the overall market slowed to 1% m-o-m in January and 0.3% m-o-m in

February.

DemandDespite signs of stabilisation in the mass market, there was substantial growth in the luxury residential market, indicating continued, strong demand for what is perceived to be limited supply. This demand is further driven by rising disposable incomes and a continued lack of investment options for wealthy Chinese. Prices at the upper echelons of the market continue to grow, with Park Hyatt Residences in the CBD recording transaction prices above RMB 62,000 per sqm in 1Q08.

Leasing demand was very strong in 1Q08, driven by the forthcoming Olympic Games as well as by MNC expansion—especially those companies in the professional and financial services industries. With the expectation that short-term tenants will pay exorbitant rentals during the two-week Olympic Games period, many high-end and luxury-apartment owners are demanding substantially higher rents even for long-term leases. This was the first quarter where this Olympics effect had a salient impact on the market, and rental increases were most pronounced for serviced apartments. Interestingly, vacancy in luxury apartments rose 2% q-o-q, as some landlords withheld their units from the long-term leasing market in the hope that they could find a short-term, highly lucrative tenant for August 2008.

SupplyA total of 1,905 high-end and luxury units were completed in 1Q08, bringing the total supply to almost 36,000 units. The price per square metre for these new projects, which are primarily located in the vicinity of the CBD and Third Embassy District, ranged from RMB 24,000 to RMB 32,000 per sqm. Most of these properties were completed with between 80% and 95% of units already sold.

Asset PerformanceWith solid demand for luxury apartments and increasing quality in new supply, capital values rose sharply, climbing 12.3% q-o-q to RMB 23,555 per sqm. Owing to the upcoming Olympic Games, luxury apartment rent for the overall market grew 16.5% q-o-q to RMB 117 per sqm per month. On the back of this strong rental growth, initial yield rose from 6.5% in 4Q07 to 6.8% in 1Q08. This is the first time in the last two years that gross rental yield has risen q-o-q.

12-Month OutlookThe growth in rental values witnessed this quarter is expected to be a short-term phenomenon as rents are anticipated to return to near end-2007 levels after the Olympic Games. In the sales market, the enforcement of the 70/90 policy (70% of a development’s gross floor area must be used to build units smaller than 90 sqm) will serve to constrict the number of large layout, luxury units, creating a premium for those units available in the second-hand market.


Despite signs of stabilisation in the mass market, there was substantial growth in the luxury residential market, indicating continued, strong demand for what is perceived to be limited supply.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 16.5% 12.3%

1 Year 6.2% 50.2%

3 Years -4.8% 49.0%

Luxury Apartments 1Q08

Vacancy rate NA

net rent RMB 1,404 psm pa



��

Beijing: Industrial

The ongoing government-driven upgrade away from pollution-intensive industry and towards high-value manufacturing and R&D is changing the

landscape of the Beijing industrial market.

DemandDemand for logistics facilities remained very strong in 1Q08. The key drivers are increased cargo activity in Tianjin Port and Beijing Capital International Airport, growing consumption in Beijing and rising demand from major retailers for logistics services. Vacancy in the logistics market reached 16% in 1Q08—a slight q-o-q decrease. In the manufacturing sector, key indicators were stable. Large-scale and medium-scale manufacturers in Beijing generally build factories and offices for self-use, creating less demand in the leasing market. Exceptions to this are smaller-sized, higher-quality manufacturing units such as those in Fuxing Group Park (BDA), which enjoyed very strong demand from international and domestic small and medium enterprises (SMEs). There has also been an increase in the number of larger CBD-type tenants considering campus-style space in peripheral areas, specifically Zhongguancun and the BDA.

SupplyThere were no substantial completions in the Beijing industrial market in 1Q08. Looking at future supply trends, it is important to observe how recent regulations governing industrial land zoning will impact developments. The Ministry of Land and Resources implemented a regulation stipulating that no more than 7% of a land plot zoned for industrial use can be utilised for administration space. This is challenging, considering that most logistics facilities utilise at least 10% of developed land for office and administration. The objective of this new regulation is to ensure that large industrial plots are not utilised for commercial or residential development, but it will nonetheless be challenging to implement.

Asset PerformanceLogistics development is relatively open to foreign investment, unlike residential, commercial and retail markets, where there are substantial regulatory hurdles. This makes logistics facilities a popular option for international investors as they look for ways to gain exposure to Beijing’s dynamic property market. There were no major transactions in 1Q08, but there are investors that are actively seeking opportunities, indicating that we may see some transactions in 2Q08.

Rentals for logistics, manufacturing and business park facilities remained relatively stable at RMB 29.1 per sqm per month, RMB 29.7 per sqm per month and RMB 112.2 per sqm per month, respectively. Owing to limited transaction activity, it is difficult to accurately quantify capital values in the Beijing industrial market. However, for well-located logistics facilities, values are currently estimated at RMB 5,000 per sqm.

12-Month OutlookThe logistics market is expected to continue to be the key industrial sector as the government is supportive of low-impact developments and demand drivers are anticipated to expand. Although three properties, with a total GFA of 87,000 sqm, will enter the logistics market in 2H08, capital values of well-located properties will likely continue to rise in the next 12 months. With more MNCs entering business park space, there will be upward pressure on rentals in this sector. Lease-only business park space is limited as the majority of existing space, especially in the BDA, is oriented towards smaller domestic users that typically prefer to purchase rather than lease.

The logistics market is expected to continue to be the key industrial sector as the government is supportive of low-impact developments and demand drivers are anticipated to further expand.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

Average Gross rental (rMb per sqm per annum)

zone 1Q08

Logistics Sector 349

Manufacturing Sector 356

business Parks 1,346

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DemandInfluenced by the Chinese New Year, the Chengdu office leasing market slowed down in 1Q08, with net take-up amounting to 6,593 sqm—approximate a third of that in 4Q07. Considering the seasonal setback in the first quarter of every year, this figure was quite encouraging for the Chengdu office market as the absorption in 1Q07 only amounted to 1,114 sqm.

In 1Q08, high-quality offices performed well in the leasing market while old Grade A buildings contributed little. Newly completed buildings such as Shangri-La Centre witnessed several whole-floor leasing transactions. For instance, Nike leased an entire floor of 1,111 sqm in Shangri-La Centre. On the other hand, old Grade A buildings such as First City Plaza were losing competitiveness in the market due to their ageing facilities. This was evidenced by the gradual relocation of some high-end tenants to better-quality buildings. For example, Hesen Power, a local power company, relocated to Shangri-La Centre from First City Plaza this quarter, leasing 2,914 sqm. As few small-sized to medium-sized local companies entered the market in 1Q08, the vacancy rate of these old buildings started to pick up, while the overall vacancy rate continued to fall by 2.1 percentage points q-o-q to 24.9%.

In terms of tenant profile, financial services companies were still the major force of office space absorption, accounting for 34.4% of the total leasing transaction recorded in 1Q08. Enterprises from industry and consumer product sectors also formed a sizeable portion of the recorded transacted space, accounting for 22.1% and 20.6%, respectively.

SupplyThere was no new completion in 1Q08. The new supply expected in 2008—Air China Century Centre and Lippo Tower—will complete their fit-outs and enter the market in 2Q08, adding 136,500 sqm to the Grade A office stock.

Asset PerformanceAlthough some old Grade A offices command lower prices, the average effective rental rose by 4.6% q-o-q to RMB 99.30 per sqm per month in 1Q08. The dynamics of the rise in rentals for the overall market are mainly high-quality buildings, which are very popular in the leasing market.

12-Month OutlookThere will be more relocations of MNCs and high-profile domestic companies from ageing Grade A buildings, which will bring large demand for high-quality projects. Meanwhile, new entrants will continue to be the active force of office-area absorption. Marsh, the world’s leading risk and insurance services firm, has obtained approval from the China Insurance Regulatory Commission to set up branches in Chengdu. In terms of supply, the leasable areas from the two new supply this year will be limited as these buildings are strata-titled and the majority of space will be occupied by owners. With huge demand against limited supply, we expect the rental and capital values of Chengdu Grade A offices to continue rising. However, old Grade A buildings may negatively affect the overall vacancy.

Chengdu: Office


1Q08

Vacancy rate 24.9%





q-o-q 4.6% 3.4%

1 Year 18.4% 14.2%

3 Years NA NA

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


��

DemandWith retail sales and urban disposable income recording average growth rates of 13.3% and 9.7%, respectively, since 2000, Chengdu’s retail sector has been robust. While the majority of retail properties were targeted at mid-range consumers, the city also became home for many luxury brands such as Louis Vuitton and Dior, as well as upmarket department stores such as Maison Mode and Isetan.

In the cycle of a supply boom since 2004, Chengdu has seen generally decreasing vacancy rate with slight fluctuations when new supply enters the market. With an average vacancy rate of 18.82% from 2005 to 2007, the overall vacancy fell 10.8% y-o-y to 11.3% in 1Q08. With no new supply coming into the market, take-up is relatively small compared with that in 4Q07, when 413,000 sqm was delivered. Of the 5,383 sqm of net absorption in 1Q08, F&B operators were particularly active. Talk, which was established by Maison Mode, is located on the fifth floor of Maison Mode Tianyi Store. It took up 1,300 sqm of space in the store and is regarded as the only high-end restaurant located in the high-end retail property. Little Swan, a hotpot chain from Chongqing, occupied 1,000 sqm in Fortune Centre.

SupplyCurrently, there are three major retail precincts in Chengdu. Chunxi Road and Yanshikou in the city centre and Luomashi in the north-west of downtown Chengdu are the most popular retail destinations. The Chengdu prime retail market boom started in 2004, following the development of a number of shopping malls. Currently, the city has 19 department stores and 11 shopping malls, with a total stock of 1,422,300 sqm.

No new supply came into the market this quarter. The tight supply situation is expected to continue throughout 2008. The only new supply will be the 150,000-sqm E-go shopping mall, which is expected to enter the market at year-end. E-go is located in Yanshikou and will cater to youth fashion and will target the mass segment.

Asset PerformanceRentals for prime retail space in Chengdu continue to grow, with a healthy pace of growth of around 3.4% q-o-q over the past three years. Rentals slightly rose by 2.77% to RMB 378 per sqm per month in 1Q08.

As Chunxi Road and Yanshikou are established prime retail precincts, rents in these two areas have always been the highest. Top properties in core locations continued to command high rentals, especially as there was no new supply in these areas in the near future. However, rents of strata-titled properties even in some traditional retail precincts like Luomashi decreased to attract tenants and lower vacancy rate.

12-Month OutlookThe year 2008 is anticipated to be uneventful for the prime retail market as there will be no large supply in the market. Nevertheless, lured by the fast-growing economy and rising disposable income in Chengdu, retailers, especially F&B and recreational operators, will more actively seek retail space to tap the potential of the market. Meanwhile, demand from foreign banks that are actively seeking prime street-front shops, along with the tight supply in 2008, may drive up the rental level.

Chengdu: Retail


1Q08

Vacancy rate 11.3%





q-o-q 2.8% 3.5%

1 Year 6.2% 23.8%

3 Years NA NA

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

��



DemandDemand for business park space continued to be very strong in 1Q08, with a total take-up of 40,461 sqm and vacancy rate declining from 11% to 6.5%. Chengdu High-Tech Development Zone (CDHT) South Zone performed the best, with a total take-up of 29,735 sqm, accounting for 73.5% of the whole market. According to the CDHT government’s plan, the New South area, where CDHT South Zone is located, has developed from being ‘the sub-centre’ to ‘the new business centre’ of Chengdu. This shift requires a more diversified industry structure, such as real estate and financial services. For instance, Hutchison Whampoa Properties leased 450 sqm in South Chengdu High-Tech Plaza (phase II) in 1Q08. Vacancy rate in other districts saw slight decline ranging from 2% to 8%, mainly boosted by state-owned enterprises (SOEs) and private companies in a broad-based industry.

The main sales-and-lease-back transactions included:

Oracle (Chengdu) Solutions Centre leasing 2,800 sqm in Icon Hi-Tech International Plaza (D);

a large state-owned company acquiring 15,000 sqm in Tianfu Creative Garden;

Wuhou Agriculture Investment Company purchasing 800 sqm in Dcosi in Wuhou National Science Park; and

Neptune Group Ltd (a Hong Kong-based electrical equipment and supplies company) acquiring

1,000 sqm in Icon Hi-Tech International Plaza (D).

Supply

Only 3,400 sqm of new supply in Wuhou National Science Park entered the market in 1Q08. South Chengdu High-Tech Plaza phase II (19,295 sqm) and Redstar 35 (17,000 sqm), which were scheduled for completion this quarter, postponed their delivery date again. By end-2008, a large supply of 554,037 sqm will be delivered to the market, 5.9 times higher than that in 2007. CDHT will provide 378,437 sqm of space, accounting for 68.3% of the total. Private companies were encouraged to develop business parks. In addition, some companies from other provinces also showed interests in business park investment. For example, Sichuan Duoyuan Real Estate from Zhejiang Province has invested in International Fortune Park in Longtan City Industry Zone of Chengdu, which will be completed in October 2008. The park is targeting small and medium enterprises (SMEs), which are mainly engaged in high-tech industries.

Asset PerformanceThe effective rentals grew by 3% q-o-q from RMB 310 to RMB 318 per sqm per annum in 1Q08. The rise in rentals was mainly attributed to the strong demand in CDHT. Rentals in Chengdu South High-Tech Plaza rose from RMB 480 per sqm per annum to RMB 528 per sqm per annum due to the shortage of available space in CDHT. The average capital value rose 3.88% q-o-q to RMB 4,524 per sqm because of the huge demand in all districts. Owing to the faster growth of capital value, market yield witnessed an increase to 8.56%, 2.85% higher compared with that in 4Q07.

12-Month OutlookDespite the large supply in 2008, future projects in the next 12 months are unlikely to have a negative impact on the vacancy rate. This is because Tianfu Software Park phase II will account for 46% of the overall supply in 2008 and it mainly targets large-scale companies that need large space. Some projects that have already started pre-leasing registered very high occupancy rates. With the good performance of the sales and leasing segments, we anticipate that sales prices and rentals will continue to rise gradually in the next 12 months.

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Chengdu: Industrial – Business Parks

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

Average effective rental (rMb per sqm per annum)

zone 1Q08

Chengdu hi-tech industrial Development zone

417

Jinjiang industrial zone 374

Qingyang Concentrated industrial Development zone

340

Chengdu Cross-Straits technological industry Park

215

Wuhou national Science Park 261

Jinniu Concentrated industrial Development zone

306

Average Capital Value (rMb per sqm)

zone 1Q08


6,067

Jinjiang industrial zone 4,000


5,000


2,500

Wuhou national Science Park 4,080

Jinniu Concentrated industrial Development zone

5,500

�0

DemandThe first quarter of 2008 saw a take-up of 74,200 sqm, most of which was contributed by Chengdu Cross-Straits Technological Industry Park (CNSTP) and Longtan City Industry Zone of Chengdu (in Chenghua district). Two properties, Huayin Industrial Port phase I and Chengdu Cross-Strait SMEs Science-Technology Park (part of phase II) in CNSTP, which were delivered to the market at end-2007, both recorded high occupancy rate of 75%.

Small-sized and medium-sized enterprises (SMEs) were quite active in space absorption. After the issuance of a new regulation that stipulated that all land plots for industrial use must be transacted through public auction, more SMEs that are lacking in capital were forced to lease standard factories instead of setting up their own.

Standard manufacturing in Chengdu Export Processing Zone, which is located in Chengdu High-Tech Development Zone (West), attracted foreign companies, owing to its high-quality and favourable policies such as VAT and consumption tax exemptions. For instance, Japanese invested company Sumico (a heavy machinery manufacturer) leased standard factories of 10,000 sqm. In addition, Fiberxon, an American-owned optical telecommunications company, leased 13,000 sqm in Chengdu Export Processing Zone.

Supply

A total of 92,586 sqm of new supply was delivered to the market in 4Q07-1Q08. CNSTP and Longtan City Industry Zone of Chengdu offered new supply of 60,586 sqm and 32,000 sqm, respectively. Some companies from other provinces also invested in manufacturing in Chengdu. For example, Huayin Group from Zhejiang Province invested in Huayin Industrial Port (40,586 sqm). By end-2008, CNSTP will offer new supply of 120,000 sqm, which mainly target SMEs from food, medicine, mechanical, electronic, light industry etc.

Asset PerformanceThe overall rental rose 4.4% from RMB 145 to RMB 151 per sqm per annum compared with that in 3Q07. Areas such as Qingyang Mould Park saw a noticeable rental rise from RMB 144 per sqm per annum to RMB 180 per sqm per annum, owing to their good investment environment and location. In terms of capital value, there is only one project—Qingyang Mould Park—that is currently available for sale. Prices of space in the project reached RMB 2,500 per sqm, 8.7% higher than that in 3Q07.

12-Month OutlookIn 2007, the value-added industrial output of Chengdu rose 22.3% y-o-y, contributing to 49% of the economy’s growth rate compared with 47.6% in 2006. Driven by the robust economy, an increasing number of private companies are beginning to invest in manufacturing and are building standard factories in industrial districts such as Wenjiang and Pixian County. All projects that will be completed in 2008 involve investment from local companies. SMEs from food manufacturing, machinery, medicine, high technology and biotechnology will continue to be the major drivers of demand. As such, we expect both rentals and capital value to remain on the rise in the next 12 months.

Chengdu: Industrial – Manufacturing

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


zone 1Q08


189

Chengdu economic and technology Development zone

150


113


170

Chengdu Modern industry Port 143

Longtan City industrial zone of Chengdu

143


zone 1Q08


450

Chengdu economic and technology Development zone

405


180


525

Chengdu Modern industry Port 180

Longtan City industrial zone of Chengdu

480

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DemandFollowing the strong demand level during 2007—the highest annual absorption since 2000—1Q08 continued to see substantial demand. Despite a potential US recession stemming from the sub-prime mortgage crisis, its impact on the expansion of foreign banking and financial institutions in Guangzhou was so far limited. This is due to the fast growth business strategies of financial companies in Guangdong Province and South China. A lot of foreign banks continued to expand considerable office space in newly completed Grade A premises in the Tianhe CBD and Zhujiang New Town. Both expansion and relocation cases for foreign banks over 1Q08 included Standard Chartered (4,000 sqm) and Korea Development Bank (1,000 sqm) at International Finance Place (IFP) in Zhujiang New Town.

Among the absorbed office space of 64,099 sqm in 1Q08, demand is boosted by the newer Grade A office buildings in the Tianhe CBD and Zhujiang New Town, especially those properties with higher quality that were completed in 2007, such as IFP, China Shine Plaza and Teem Tower. In addition, the completion of China International Center in 1Q08 raised the absorption rate in the Dongshan sub-market, the first time since the relocation trend moving from Dongshan to Tianhe district (including Tianhe CBD and Zhujiang New Town) took place in the past two years.

SupplyGuangzhou saw 137,000 sqm of new supply coming online throughout 1Q08, bringing the total office stock to reach 2,024,542 sqm. The 120,000-sqm China International Center was the only new supply that was completed after the completion in 2005 of Guangdong Telecom Plaza in Dongshan, the traditional precinct in Guangzhou, and there will be a lack of future supply in the next few years as well. Single-ownership buildings in the new supply in 2008 are still absent. With the exception of 25% of office space that was held by landlord for lease, the remaining space in China International Center and another new completion in the Tianhe CBD—Victory Plaza phase II (17,000 sqm)—were sold strata-titled.

Overall vacancy rate rose 1.9% q-o-q to 27.1% in 1Q08, as a result of continuous new completions entering the market. In view of the sustained demand, vacancy rate in Tianhe district fell from 27.9% in 4Q07 to 25.7% during 1Q08.

Asset PerformanceRentals continued to be stagnant due to sufficient new supply and high vacancy levels in the range of 20–30% over the past four quarters. Overall rental edged down 0.4% q-o-q throughout 1Q08. With the exception of Tianhe district, where a slight increase was registered, rents in other sub-markets saw marginal decreases during the quarter.

The investment market was stable on the back of tightening monetary policy and limited availability of supply for sale. Overall capital value grew by 1.6% compared with in the previous quarter. In 1Q08, GZI REIT acquired Yue Xiu Neo Metropolis Plaza, a non-Grade A office in Yuexiu district, for RMB 685 million and added the property into its portfolio.

12-Month OutlookGiven the significant supply stream in Guangzhou, coupled with the slow absorption rate in some new supply, more concerns on demand will be brought up in the future. Nevertheless, increasing demand from domestic companies and a very moderate upcoming supply forecast over the next 12 months are likely to lower the overall vacancy level in 2008. As such, there remains a relatively stable projection for rents in the near future.

Guangzhou: Grade A Office

* Rental and Capital Values are based on NFA** Revision of property basket in 3Q07

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 27.1%

net effective rent RMB 168 psm pm




q-o-q -0.4% 1.6%

1 Year -0.7% 9.8%

3 Years 12.0% 32.9%


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Guangzhou: Retail

DemandDespite the depressive real estate market in Guangzhou, retail sales of consumer goods maintained a high growth. For the first two months, total retail sales stood at RMB 50.2 billion, recording a 15% growth over the same period last year. During the seven-day Chinese New Year Holiday, sales of 12 major retailers in Guangzhou amounted to RMB 0.452 billion, marking an unprecedented y-o-y growth of 40.7%. Among these retailers, Friendship Store, Grandbuy, TeeMall, Trust Mart and Gome outperformed the total average. Cosmetics, luxury goods, high-end appliances and jewellery are still the favourite goods for consumers.

Leasing transactions reported during 1Q08 include the following:

Salvatore Ferragamo, an Italian fashion brand, leased 200 sqm on the ground floor of La Perle, its first shop in Guangzhou;

Burberry expanded in La Perle despite already opening two shops in the shopping centre and the neighbouring Friendship Store;

Cavalli, an Italian fashion brand for the young, rented a store on the second floor of La Perle, making its first appearance in the Guangzhou market;

Orrefors, a Swedish crystal brand, leased a store on the ground floor of TeeMall, and it is scheduled to open in May.

With the debut of more international brands in Guanghzou, another department store named Meidong Department Store will reportedly open in 2009 in Nonglin Road—the city’s famous shopping area where Wangfujin Department Store is also located. With a planned retail GFA of 40,000 sqm, Meidong Department Store is positioned as a high-end department store, which will have a tenant mix similar to that of La Perle.

Carrefour signed a strategic partnership with Grandbuy Co Ltd, a leading local retailer in Guangzhou. Their co-operation will focus on retail property development in Guangdong Province and in the further southern China area.

SupplyNo new supply was witnessed in 1Q08 despite strong market demand for retail properties. The majority of the 195,500 sqm of retail space is scheduled to enter the market in 4Q08. As such, it is expected that fierce competition for prime retail stock will be seen and more international brands will make their debut in Guangzhou.

Asset PerformanceOwing to tight supply, prime retail properties in the Tianhe CBD and Huanshi Road emerged as the first choice for new brands in the Guangzhou market. Average rental for prime shopping malls recorded a q-o-q growth of 5.7% in 1Q08, reaching RMB 554 per sqm per month. Prime malls in the Tianhe CBD and Huanshi Road are making adjustments of their tenants and have attracted more international brands.

12-Month OutlookLured by rapid economic growth and escalated consumption structure, more international brands, especially luxury brands, are eager to make a foothold or expand their brand influence in the local market. Since most of the scheduled supply will come in late-2008, we are optimistic about rental growth in the local market.

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* Rental values is based on GFA


q-o-q 5.7% NA

1 Year 14.0% NA

3 Years NA NA

1Q08

Vacancy rate NA

net effective rent RMB 554 psm pm

Capital Value NA

investment Yield NA

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

nA

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DemandThe economic growth of business parks in Guangzhou continued to be robust in 2007. The total GDP of Guangzhou Development District (GDD) reached RMB 94.8 billion in 2007—the fourth consecutive year that it topped all national development districts. GDD’s contracted FDI exceeded USD 2 billion for the first time and was recorded at USD 2.247 billion in 2007, a y-o-y growth of 23.06%. Detailed examples of FDI in GDD are as follows:

Nippon Express, the biggest logistics company in the Asia-Australia region and a Fortune 500 company, opened its multi-function logistics centre in Yonghe Economic Zone, which will mainly provide logistics service for automobile and related products. So far, the number of Fortune 500 companies in GDD reached 100.

Vasto, a world-famous luxury brand from Italy, rented a 9,000-sqm office in the comprehensive research and incubator area in Guangzhou Science City to house its Chinese headquarters. The research and incubator area includes a group of buildings for offices, R&D, retail, finance, entertainment and other purposes and is planned to be the future administration and service centre of Guangzhou Science City. Part of the area rented by Vasto is located on the first floors of two office buildings in Group A Buildings and will be used for product exhibition.

Guangzhou Steel Trading Center, the biggest and most diversified electronic steel trade market of Guangzhou, started operation in Guangzhou Science City. It covers a site area of 50,000 sqm and offers six platforms including trading, information and financial pledge services. It aims to develop into the biggest trade market in China in five years.

SupplyIn 1Q08, the biggest supply of offices in business parks came from the comprehensive research and incubator area in Guangzhou Science City. With a total construction area of 435,600 sqm, the area comprises three building clusters with different functions. Group A, totalling 201,100 sqm, consists of two buildings for retail and entertainment and four office buildings. Meanwhile, Group B and C with a total GFA of 234,500 sqm, are built for research and business incubators. According to Investment Promotion Bureau of GDD, exterior finish for these offices was completed this quarter, and the buildings will be operational in early 2Q08. On the other hand, it will take some time for the retail and entertainment buildings to open due to leasing difficulties.

Asset PerformanceOverall average rentals remained stable in 1Q08, with Science City and Tianhe Software Park recording slight changes in their rental rates. Average rentals edged up 1.55% over that in 4Q07. Rentals for industrial offices ranged between RMB 20 and RMB 95 per sqm per month (gross), with Tianhe Software Park commanding the highest rents among all the business parks.

12-Month OutlookAfter being stable for a long time, the surge in property prices finally affected rents of business park offices inside the urban area. We believe that this rental increase is supported by limited stock and will remain stable in the future. Meanwhile, it will take a long time for the market to absorb the 300,000 sqm of new supply in GDD, and rentals may experience a slight decrease. For the overall market, we expect rentals to stay stable in 2008.

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Guangzhou: Industrial – Business Parks


q-o-q 1.5% NA

1 Year 6.5% NA

3 Years NA NA

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

nA


zone 1Q08

Science City 342

tianhe Software Park 763

haizhu & Panyu Area 558

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Shanghai: Office

DemandDriven by strong expansion-driven demand, overall vacancy in the Shanghai office market remained extremely low at 1.66% in 1Q08. The decentralisation of large downtown tenants freed up substantial space in established downtown buildings, only to be quickly snapped up by service-sector tenants that are expanding. As a result, this quarter saw active pre-leasing of upcoming buildings along both sides of the Huangpu River. New space commitments are still designed to have ample space available for headcount growth. Park Place in Puxi is already 70% pre-leased and will not be handed over until 2Q08. Mirae Asset Tower in Pudong, which is scheduled for completion in 3Q08, also reached over 40% pre-commitment. The negative impact of the US sub-prime mortgage crisis on Lujiazui, Shanghai’s financial district, has been very limited.

SupplyTwo new projects in the central Lujiazui area in Pudong—One Lujiazui (73,461 sqm) and Standard Chartered Tower (45,000 sqm)—were completed in 1Q08. Standard Chartered Bank occupies a large portion of the latter for its own use. In Puxi, Plaza 336 was completed, adding 29,154 sqm to the market.

Eight additional Grade A offices are in the pipeline for 2008, with those in Pudong alone contributing a total of 544,773 sqm. Meanwhile, two new major projects along Nanjing West Road—Park Place and The Exchange—will be completed in Puxi. This will add a much-needed space of 153,000 sqm to the market.

Asset PerformanceOn the back of robust demand, overall rents rose to RMB 9.10 per sqm per day in 1Q08, up 3.1% q-o-q. Rents in the core CBD area, the focus of many service-sector tenants, maintained a slight premium and showed hikes from RMB 9.70 per sqm per day to RMB 10.08 per sqm per day. Furthermore, several landlords of office buildings in Puxi such as The Headquarters Building and 1 Corporate Avenue were asking higher rents for the limited remaining space in their properties.

Shanghai Industry Investment Group acquired Wan Tai Building, an office and retail complex located near Jing’an Temple, from China Enterprises for RMB 870 million or RMB 30,313 per sqm of GFA. This was the only notable en bloc sales transaction this quarter.

12-Month OutlookWe will continue to watch for any change in demand in the Lujiazui area, especially among foreign banks. However, we expect that the landlord market in Pudong will remain unchanged until 3Q08, when 544,773 sqm of office space comes online. Therefore, rentals in Pudong are expected to rise to a plateau by mid-year. By end-2008, rental levels will be slightly higher than that at end-2007. Rental growth in Puxi will continue at a solid pace throughout the next 12 months. We will continue to watch whether Puxi occupiers that need large, high-quality space will move to Pudong, although there is no obvious sign of this trend picking up so far.


1Q08

Vacancy rate 1.7%





q-o-q 3.1% 3.0%

1 Year 16.3% 22.2%

3 Years 44.6% 56.1%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


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Shanghai: Office – Pudong

DemandDemand for office space in Pudong continued to be strong, as most service-sector occupiers pushed ahead with their robust expansion plans. Two newly completed offices witnessed high leasing activity. At the time of handover in 1Q08, pre-commitment in One Lujiazui and Standard Chartered Tower was 50% and 80%, respectively. Any negative impact stemming from the US sub-prime mortgage crisis was thus far limited, with the exception of the revised expansion plans for Citibank and UBS. Yamato Securities expanded and took 1,000 sqm in Aurora Plaza. Furthermore, we also saw many local financial firms that are quite aggressive in the Pudong market in 1Q08. For instance, Chang Xin Fund took 1,900 sqm in One Lujiazui, while Nanyang Commercial Bank leased 3,600 sqm in Mirae Asset Tower. Guo Tai Fund leased 4,000 sqm in SWFC, a key example of movement from Puxi to Pudong. Formerly located in Huangpu district’s Grade B Gang Tai Building, the move also represents a swift flight to quality.

SupplyTwo new projects—One Lujiazui and Standard Chartered Tower—were completed in 1Q08, adding a total GFA of 118,461 sqm to the market. Partly due to unusually harsh construction weather throughout January and February, completions of several major projects were delayed. For instance, both the completions of SWFC and Mirae Asset Tower were delayed from 2Q08 to 3Q08. The first wave of the supply peak will occur in 2H08 in Pudong with six prominent buildings coming to the market, spaced out somewhat more evenly than previously expected. The completion of Golden Landmark was again postponed, and the building’s timeline remains unclear. Each new building in the market is also pursuing its own distinct leasing strategy. These three issues taken together will likely continue to dampen competition and rental undercutting in Lujiazui buildings.

Asset PerformanceAs a result of strong demand and quite limited supply, rentals continued to rise in 1Q08. Average rentals rose by 3.21% q-o-q to RMB 9.82 per sqm per day. In the upcoming buildings, the large gap between asking and transaction rents, as mentioned in 4Q07, has started to decline. Furthermore, with better-quality office space added into the rental basket, Pudong’s average rent is not expected to decline. While no notable en bloc transaction took place in the Pudong Grade A office market, Jasper Tower sold another two floors, totalling 3,974 sqm of GFA, to a Jiangsu company for RMB 68,000 per sqm. The building had a strata title sale at only RMB 60,000 per sqm several months earlier.

Major Leasing transactionsChang Xin Fund took up 2,000 sqm in One Lujiazui;

Guo Tai Fund leased 4,000 sqm in SWFC;

Yamato Securities leased 1,000 sqm in Aurora Plaza; and

Zhonghai Fund Management leased 3,000 sqm in One Lujiazui.

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12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 1.0%

net effective rent RMB 3,586 psm pa




q-o-q 3.2% 3.2%

1 Year 21.8% 29.3%

3 Years 63.4% 71.2%


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DemandDemand in Puxi remained strong during 1Q08. Plaza 336, which was completed in 1Q08, ended the quarter with an 80% occupancy rate. Park Place, which is located near Jing’an Temple, achieved 70% pre-commitment, with an additional 20% nearly finalised. Large MNCs still showed aggressive demand for Grade A office space. For instance, EISAI China pre-leased 3,887 sqm in Park Place, while Inbev took 1,500 sqm in Shanghai Central Plaza. New space commitments are still designed to have ample space available for headcount growth. A few financial-sector tenants showed a preference for Puxi, which is previously assumed to be a Pudong-only phenomenon. For example, JP Morgan relocated from Pudong and pre-leased 5,375 sqm in Park Place. The decentralisation of large downtown tenants freed up substantial space in established downtown buildings, only to be quickly snapped up by service-sector tenants that are expanding. Agilent relocated from Raffles City to take up 6,000 sqm in Zhangjiang.

SupplyPlaza 336 was the only new supply in 1Q08, adding 29,154 sqm of much-needed space to Puxi. Park Place and The Exchange are scheduled for completion in 2Q08 and 3Q08, respectively, providing an additional 153,000 sqm of space in total in the Puxi market. There are high hopes for The Exchange to benefit from the spill-over effect brought about by Plaza 66, as the two are within walking distance from each other. Although the current Grade A supply situation in Puxi is still tight, several renovation plans were seen among older buildings and value-added services were rolled out by landlords to face growing fierce competition from newer buildings and in order to achieve higher rentals. Westgate Tower is preparing a renovation in 2008 or 2009, and Plaza 66 already launched a shuttle-bus service to provide a convenient metro station link.

Asset PerformanceAs a result of the strong demand and few supply options, rents remained on an upward trend in 1Q08. Average rentals in Puxi rose by 3.09% q-o-q to RMB 8.79 per sqm per day. We witnessed one major investment transaction in this quarter: Shanghai Industry Group purchased Wan Tai Building from China Enterprises for RMB 30,313 per sqm when the development is still in the process of construction. This is the second time the building changed ownership.

Major Leasing transactionsEISAI China pre-leased 3,887 sqm in Park Place;

Inbev took up 1,500 sqm in Shanghai Central Plaza;

JP Morgan pre-leased 5,375 sqm in Park Place; and

NIS Group leased 1,000 sqm in Bund Center.

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Shanghai: Office – Puxi


12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 3.1% 3.1%

1 Year 13.6% 19.1%

3 Years 36.4% 49.8%

1Q08

Vacancy rate 2.0%





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Shanghai: Retail

DemandBoosted by the Chinese New Year, total retail sales in Shanghai over the first two months of 2008 reached RMB 72.173 billion, up 17.7% y-o-y. In particular, the catering industry achieved sales of RMB 10.59 billion, up 21.5% y-o-y.

Statistics show that China is now the third-largest luxury market in the world. This high expectation for the market lures international high-end retailers to expand in the country at a faster pace. In 1Q08, a 1,500-sqm jewellery and watch corridor opened in the basement of Plaza 66. The corridor comprises stores of 13 world-famous jewellery and watch brands, with some of the outlets being their first in China. These brands include Richard Mille, a high-end mechanical brand from Switzerland, and Chaumet, a luxury jewellery brand owned by LVMH Group. Overall, average vacancy rate declined moderately by 0.6 percentage points to a historical low of 3.1%.

SupplyDragon Gate Mall, a 36,000-sqm mall in Yu Garden with F&B as its main theme, opened for business in 1Q08. Another mall, which is called Metro Plaza—a mixed-use project with a total retail area of around 50,000 sqm—opened this quarter in Changning district. Current major tenants in the project are middle-end to high-end men’s wear shops, such as D’urban, Lubiam and Marco Azzali. Besides Metro Plaza, two other retail projects, Hongxin Plaza and Hongqiao International Business Centre, will also be opened soon. They will respectively provide 43,600 sqm and 25,000 sqm of retail space. The three malls are all located near the Loushanguan Road Station of metro line 2. A new retail cluster is taking shape around the transport hub.

Asset PerformanceOn the back of strong demand, rents continue to rise at a stable pace in 1Q08. Average rent for prime ground-floor space in malls rose to USD 5.87 per sqm per day, up 3.99% q-o-q. Even F&B retailers, traditionally a retailer group paying lower rentals than those in the fashion industry, have become ready to accept much higher rents. In some projects, F&B tenants are now generating comparable turnover to ground-floor fashion tenants. Leveraging on that, landlords can ask higher rents. Over the last two years, average rental for F&B retailers nearly doubled.

12-Month OutlookIn order to consolidate the domination of Nanjing Road (West) in the Shanghai retail market, the government made a new development plan to reposition some projects and six branch streets along the road. Golden Eagle Department Store and Jiu Guang Department Store will undertake trade-mix upgrading in the next few months. Meanwhile, six mixed-use projects along Nanjing Road (West), with a total retail area of around 380,000 sqm, are under construction. All these projects are expected to help relieve the tightness of the market and create a better retail atmosphere in the area. We expect that similar projects will be seen in other prime retail areas, and competition among the areas will become fiercer.


q-o-q 4.0% 4.9%

1 Year 11.6% 13.6%

3 Years 61.7% 82.1%

1Q08

Vacancy rate 3.1%




12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

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DemandThe quarter started with a weak buying sentiment on the sales side due to the new government measure on housing mortgages, which was introduced in 4Q07. However, after the Chinese New Year, the luxury residential market in Shanghai witnessed a gradual pick-up in buying demand from overseas investors. This is evidenced by the active negotiations in the secondary market. Nevertheless, with no major new launches available in 1Q08, the primary sales market remained subdued.

In contrast to the sales market, the luxury leasing market saw solid demand in 1Q08, driven by new expatriates coming to Shanghai. The increasing student enrolment at international schools in Shanghai indicates the rising number of senior expatriates coming to the city. As a result of the solid leasing demand from expatriates, Cascogne Apartment, a luxury serviced apartment project in Xuhui District, reached an occupancy rate of over 40% three months after its completion in December 2007.

SupplyThe sales market recorded no major project launching new units for pre-sale in 1Q08. Meanwhile, the leasing market saw 152 serviced apartment units that were opened for lease, with 116 units from Pinnacle Huashan in Changning district and 36 units from Cascogn Apartment in Xuhui District. However, in the sales market, several projects in the pipeline are expected to come online for pre-sale over the next 12 months. These include 474 units from Lakeville phase III, 60 units from Lanxin Apartment in Luwan District, 50 units from Prince Hills and 30 units from Central Residences II in Changning district. Meanwhile, Huashan Residence, a serviced apartment project in Jing’an District, will be opened in 2Q08, offering 43 units with sizes ranging from 310 to 450 sqm for lease.

Asset PerformanceOn the back of solid leasing demand, average rents of luxury apartments stood at RMB 215.50 per sqm per month in 1Q08, up 1.2% q-o-q. Average capital values of luxury apartments in Shanghai continued to rise, although at a much slower rate of 0.8% q-o-q, driven by the continuous buying interest from wealthy locals as well as foreigners. In the residential investment market, institutional investors remained active although the government tightened control on foreign investment in China’s real estate market. A total of 105 units in Fortune Residence in Lujiazui were sold to an undisclosed investor, with a registered transaction price of RMB 28,000 per sqm. Meanwhile, Mirae Asset acquired Shama Luxe at Xintiandi, a serviced apartment project in Luwan District, from Gateway Capital for a total consideration of over RMB 900 million.

12-Month OutlookPotential home buyers, particularly from Hong Kong and Taiwan, remain optimistic over the future growth in housing prices of luxury apartments in downtown Shanghai. This is evidenced by a high level of purchase interest shown in Lakeville phase III. The upward trend of capital values for luxury apartments in Shanghai is anticipated to continue over the next 12 months. Given there is a significant amount of luxury serviced apartment units that are ready for the market in the next quarters, vacancy rates for luxury apartments are likely to be on the rise in spite of the increasing number of expatriates in Shanghai.

Shanghai: Luxury Residential



q-o-q 1.2% 0.8%

1 Year -0.5% 15.7%

3 Years 2.8% 6.4%

1Q08

Gross rent RMB 2,586 psm pa



12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

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Shanghai: High-end Residential

DemandThe rise in down payment for second-home buyers, coupled with the Chinese New Year festival, resulted in a low transaction volume in the mass housing market in 1Q08. The total transaction volume of new residential properties in 1Q08 in Shanghai dropped to 3.7 million sqm, down 37% q-o-q or 20% y-o-y. However, the high-end residential market in Shanghai continued to outperform the mass market. Buying demand remained solid this quarter. Home buyers were actively seeking to buy high-end residential properties in the secondary housing market due to the lack of new units available for sale in the primary market. In addition, after 174 units in Maison Des Artistes, which was developed by Hutchison Whampoa and is located in Changning district, were offered for pre-sale on 21 March, 47 units were sold by the end of March.

Leasing demand for high-end apartments remained stable in 1Q08, as evidenced by the stable trend in vacancies for high-end apartments. It is worth mentioning that among the different areas, the Lujiazui area in Pudong District outperformed the average, with most leases being signed during the quarter. Vacancies for projects in the area such as Yanlord Garden and Shimao Riviera Garden dropped by 3–4% q-o-q in 1Q08. This was mainly attributed to the booming office market in the Lujiazui area.

SupplyIn 1Q08, 174 units from Maison Des Artistes in Changning district were the only major new supply in the high-end residential market. Major new completions this quarter include 169 units from Le Marquis in Xuhui District and 155 units from The Bund Side in Huangpu District. In the leasing market, Shama Xujiahui in Xuhui District, a serviced apartment project acquired by Morgan Stanley in 2006, was opened to the public, adding 217 units to the market. Looking forward, we expect to see more new supply of high-end apartments in terms of pre-sale. Projects that are anticipated to launch new units for sale in the next two quarters include Yongye Apartment phase II and Shanghai Dynasty in Luwan District, Maison Des Artistes in Changning District and Eight Park Avenue in Jing’an District.

Asset PerformanceOn the back of solid leasing demand from expatriates, rental values for high-end serviced apartments rose by 0.62% q-o-q, reaching RMB 146.90 per sqm per month in 1Q08. However, due to the increased supply from the secondary market, rental values for high-end non-serviced apartments dropped slightly by 1.8% q-o-q to RMB 105.90 per sqm per month. In the secondary sales market, the majority of home sellers believe that the current market stagnation is not likely to last long, and therefore they are not willing to lower their sales prices. As a result, capital values of high-end apartments remained almost unchanged this quarter at RMB 23,115 per sqm.

12-Month OutlookWith more new units available for sale in the primary market over the next 12 months, it will be interesting to watch how well these new offerings will be accepted by the market. We expect buying demand in the primary and secondary sales markets to remain strong in 2008. The possibility of a decline in the sales prices of high-end apartments is believed to be remote in the next 12 months.



q-o-q -1.1% 0.2%

1 Year -0.5% 14.1%

3 Years 0.1% 1.0%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Gross rent RMB 1,394 psm pa



�0

Shanghai: Industrial - Business Parks

DemandDemand for high-quality office space in Shanghai business parks remained strong during 1Q08, as MNCs continue to flow into the market. A growing number of downtown tenants are turning to business parks for large expansion rooms and lower rentals in these areas. Recently, Agilent relocated from Raffles City in Huangpu District to Zhangjiang, taking 6,000 sqm in the new Microports development. This quarter also saw some local companies being quite aggressive in leasing space in business parks. For example, 51.com, a domestic online recruitment company, expanded and leased 4,000 sqm in First Shanghai phase II. Location that offers easy access to mass transport links continues to be a key factor that drive demand. Microelectronics Port phase II, which is located near the Zhangjiang subway station, saw substantial pre-commitment of 70% only one year after its completion. The desire to be an owner-occupier remains quite strong. Kohler relocated its regional headquarters to Shibei Industrial Park, acquiring 12,000 sqm in the park.

SupplyWith the addition of City of Elite Blocks 6 and 7 in Jinqiao, about 20,000 sqm of space entered the market in 1Q08. Higher-grade offerings increasingly blurred the line between traditional decentralised office space and business parks. As a result, we are seeing pre-leasing, which was previously a characteristic of the office market, in many of the new projects under construction. Pre-commitments were also picking up in Capital of Leaders phase II in Zhangjiang. Six of the nine floors of Modern Services Complex Building B have been pre-leased in 1Q08. Small, stand-alone units continue to be popular, as shown in Gems Park and Shanghai Business Park.

Asset PerformanceWith several new projects added to the business park property basket, vacancy levels rose slightly to 11.1% in 1Q08. Rental levels are up 2.4% q-o-q, reaching RMB 3.45 per sqm per day. Asking rents in excess of RMB 5 are appearing more often in highly popular clusters around the Zhangjiang metro station.

This quarter saw growing interest from investors in the business park sector. CapitaLand bought Modern Service Complex Building A (W16) in Caohejing before the project’s construction was completed. The pure office-use building will be completed in 2Q08, with a total GFA of around 40,000 sqm. The transaction price of the investment has not been announced.

12-Month OutlookFuture demand is expected to remain robust, with steady, incremental increases each month. However, plenty of new projects amounting to new supply exceeding 1 million sqm of GFA will come online in the market in 2008. Therefore, we expect more competition to emerge in the market as developers are becoming increasingly geared towards meeting the needs of tenants. For instance, Jin Qiao Business Park Blocks B, C and D and most parts of Pudong Software Park phase III will be offered as build-to-suit options.


zone 1Q08

Knowledge & innovation Centres

1,825

ibP 1,387

zhangjiang 1,388

Caohejing 1,131

Shibei 953

zizhu 730


zone 1Q08

ibP 19,000

Knowledge & innovation Centres

15,000

Caohejing 12,598

zhangjiang 13,727

Shibei 8,810

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

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Shanghai: Industrial – Logistics

DemandDemand for high-quality warehouses remained strong in 1Q08. Local third-party logistics (3PLs) companies have started to make preparations for the coming 2010 World Expo. Such case was seen from Sinotrans, which leased 120,000 sqm of space in Pudong after being designated as the logistics provider for the expo. With an eye for future expansion, some manufacturing companies in Songjiang were seeking larger warehouse space, where their logistics operations could run closely to the production lines. Meanwhile, some manufactures were forced to relocate to higher-quality facilities after the warehouses they previously lease collapsed during the snowstorm in January and February.

SupplyThe quarter saw the completion of a warehouse in Qingpu, adding 150,000 sqm of space into the market. Some Japanese retailers have been showing strong interests in the project. Prologis acquired a 40,000-sqm manufacturing facility in Heqing, Pudong and started developing it into a standard warehouse. It is scheduled to be completed in 2Q08 after its interior upgrade and refurbishment.

Asset PerformanceAverage rent in Shanghai was at RMB 1.23 per sqm per day, representing a stable 3.0% q-o-q growth. Due to the scarcity of developable land, logistics developers were looking for acquisition opportunities. Driven by this, 1Q08 witnessed another strong quarter for capital-value growth. Average capital value was at RMB 4,700 per sqm, up 1.86% q-o-q. Since the growth of capital value outpaced that of rentals, investment yield fell by 5 basis points to 8.85% in 1Q08.

12-Month OutlookIn viewing future land supply shortage in Shanghai, international developers will accelerate their pace of acquiring land in neighbouring cities, where we have seen a growing number of ongoing land transactions. In the leasing market, the need for upgrade will create another demand base for international-standard logistics facilities. Therefore, vacancy will remain low, and rental growth will not stop or even slow down.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


zone 1Q08

Waigaoqiao 500

Lingang 402

baoshan 383

Songjiang 365

Pudong Airport 420

northwest 442

Minhang 420


zone 1Q08

Waigaoqiao 5,600

baoshan 4,000

northwest 4,800

Songjiang 3,900

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Shanghai: Industrial – Manufacturing

DemandDemand remained consistent in 1Q08. Hertz leased 3,000 sqm of space in Xinzhuang Industrial Park. Meanwhile, a German machinery manufacturer and a Swiss company respectively took up 2,500 sqm and 1,800 sqm of manufacturing space in Qingpu Industrial Park. At the same time, some factories in Jiading and Qingpu collapsed due to the snowy weather in January and February, which resulted in some urgent compulsory relocation needs.

SupplyIn 1Q08, two new projects were completed in Xinzhuang and Baoshan Industrial Park. The total new supply fell from 175,000 sqm in 4Q07 to 70,000 sqm in this quarter due to tightened land quota. In observing end-users’ strong needs for single-storey factories, developers have been building an increasing percentage of such facilities. Xinzhuang Industrial Park brought 45,000 sqm of space to the market, 44% of which were single-storey properties compared with only about 35% in 4Q07.

Asset PerformanceAverage asking rentals rose to RMB 0.72 per sqm per day in 1Q08, up by 2% compared with in 4Q07. The growth was mainly attributed to Xinzhuang Industrial Park, where asking rentals rose to RMB 0.90 per sqm per day. Rents in other industrial parks remained almost unchanged. Average land value reached RMB 529 per sqm in 1Q08, up 2.2% q-o-q. Ufi Filters, a European auto-parts manufacturer, purchased 6,700 sqm of land in Qingpu Industrial Park for RMB 2.32 million.

12-Month OutlookFuture supply tends to be tight since some industrial parks are trying to turn industrial-use land for commercial use. Such cases have been seen in Jinqiao Industrial Park, Waigaoqiao and Jiading. The government of Jiading decided to relocate manufacturing space in Jiading Industrial Park from the south to the north and use the southern part for residential and commercial development in the future. Therefore, although Jiading district has set a strategy focusing on developing the automotive industry, we still expect that limited raw land will be released to the market for auto manufacturers. Future competition in land acquisition in Jiading will be fierce, thus land prices will be driven up.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


zone 1Q08

Xinzhuang 329

Songjiang 274

baoshan 292

nanhui 248

Jiading 219

Qingpu 245

Fengpu 219

Average Land Value (rMb per sqm)

zone 1Q08

Xinzhuang 750

Songjiang 465

baoshan 450

nanhui 420

Jiading 600

Qingpu 525

Fengpu 495

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Tianjin: Office


DemandOwing to the Chinese New Year, the Tianjin office market saw a slower pace of activity in 1Q08. Net absorption was only 1,269 sqm, resulting in a slight decline in vacancy from 27.2% in 4Q07 to 26.0% in this quarter. Almost all transactions occurred in the best building in town—The Exchange Tower 2. The service industry, namely professional services and finance corporations, were the key contributors. The Executive Centre, which is the first serviced-office operator in Tianjin, opened in The Exchange Tower 2 in March, occupying a whole floor of 1,409 sqm. MSD Pharmaceutical Company Ltd also leased 400 sqm in the same building to set up its representative office. Additionally, Overseas Chinese Banking Corporation Ltd (OCBC) relocated its Tianjin branch from Tianjin International Building to the Exchange Tower 2. Even though there were only a handful transactions, a number of tenants are aggressively looking for space in the city and are negotiating with landlords. The next quarter is expected to be more active.

SupplyNo Grade A project was delivered to the market during 1Q08, and this supply shortage is anticipated to continue throughout the year. The vacancy rate will further decrease until the completion of Tianjin Centre, a Grade B building, in early 2009. As the first serviced office in Tianjin, The Executive Centre is now offering space and service to clients that need instant and flexible occupation, especially those from the finance industry.

Asset PerformanceDuring 1Q08, asking rentals of Grade A properties experienced only mild fluctuation. As a result, effective rentals posted a 2.99% q-o-q growth, reaching RMB 141.03 per sqm per day, up from RMB 136.93 per sqm per day in 4Q07. The Exchange Tower 2, remains at a vantage point in Tianjin’s office market. Benefiting from the appreciation of quality office space, capital values reached RMB 17,528 per sqm in 1Q08.

12-Month OutlookIn the coming 12 months, only some potential Grade B supply will be delivered, which will help to ease the strong demand for quality office space to a certain extent. More service-sector firms are coming into the city, while manufacturing firms including Nokia, Murata, etc. are also actively expanding. We expect to see the continuous set-up and expansion of foreign banks, taking advantage of the incentives of the master reform plan of Binhai New Area (BNA) and the establishment of the over-the-counter (OTC) market. In addition, qualified financial corporations will be allowed to their launch pilot operation and financial product innovation in Tianjin.


q-o-q 3.0% 3.2%

1 Year 11.5% 12.0%

3 Years -8.9% 20.0%

1Q08

Vacancy rate 26.0%

effective rent RMB 1,692 psm pa




12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

��

Tianjin: Retail

DemandThe first quarter of 2008 saw luxury brands actively open stores in several prime retail projects in Tianjin. Louis Vuitton opened its first store in the city in Friendship Department Store, covering 345 sqm of space. Bulgari also leased 124 sqm in the same retail property. After its renovation and upgrading, Friendship Department Store has successively attracted more than 20 global luxury brands. Fendi and Loewe opened their new stores in Hisense Plaza, another prominent high-end retail project in the city, occupying 178 sqm and 150 sqm respectively.

Maison Mode leased 18,000 sqm in Magnetic International Shopping Mall to open its first outlet in Tianjin, offering brands like Chloé, Timberland, Nine West, etc. Before that, Maison Mode has already opened its first department store in Tianjin in International Plaza.

The renovation of The Exchange Mall’s basement will be completed in June. Upon the basement’s reopening, the mall will offer a variety of new F&B brands to cater to the growing consumption demand.

SupplyThe only new supply in 1Q08 was the 25,700-sqm Phoenix Plaza, which was developed by Tianjin Modern Group. The developer has changed its leasing strategy, opting to lease the entire property to a single anchor tenant. As the project is situated in Hebei district, which is not a main retail sub-market, Phoenix Plaza was completed empty, pushing the overall vacancy rate up to 13.9%. No projects are in the pipeline through 2008, and we believe that the vacancy rate will be stable, while experiencing a mild decrease until the delivery of Tianjin Center in early 2009.

Asset PerformanceTraditionally, the first quarter of each year is the peak season due to the celebration of the New Year and Spring Festival. Thanks to the good sales momentum, rentals grew to RMB 431 per sqm per month in 1Q08, a rise of 5.26% q-o-q. Attractive sales turnover boosted wholly owned prime retail properties to command higher prices. Capital values grew by 2.5% compared with in 4Q07, reaching RMB 50,259 per sqm.

12-Month OutlookIn 2009, only two retail projects along Nanjing Road will enter the market. This will lead to very limited new supply to be delivered before 2010. At present, a number of projects are undergoing tenant-mix adjustment and upgrading to maximise their revenues as well as improve project image. Landlords are showing preference for offering the best street-shop space to international brands that have excellent reputations.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 5.3% 2.5%

1 Year 22.5% 9.1%

3 Years 79.9% 61.8%

1Q08

Vacancy rate 13.9%




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Tianjin: Industrial – Logistics

DemandThe strong demand from 3PLs continues to drive take-up in Tianjin’s logistics market, with manufacturing corporations mainly absorbing large space. Aisan Electrical Motor occupied 600 sqm in TransWell Customs Supervision Warehouse, the only Customs supervision warehouse in the airport area. Hesheng Plastics recently leased 5,000 sqm in the newly completed ProLogis Park TEDA phase II. Jinji Logistics, the biggest 3PL provider for Samsung in China, pre-leased 17,000 sqm in ProLogis Park in Xiqing district, which is scheduled to be completed by early 2009. The overall vacancy rate rose to 27.75%, mainly because of the underperformance of some non-bonded projects.

SupplyTwo logistics projects were completed during 1Q08, delivering 92,558 sqm of quality warehouse space to the market. ProLogis Park TEDA phase II in TEDA and Tianjin Textile First Storage in Airport Industrial Park contributed 52,558 sqm and 40,000 sqm, respectively. This is just the prelude of the huge supply that will enter the market in 2008. A number of projects developed by international logistics players will be completed in the following quarters, and the airport and East Port will house most of the new supply.

Asset PerformanceEffective rental in 1Q08 reached RMB 0.89 per sqm per day. In addition, average rentals of most logistics properties are quite stable. However, ProLogis slightly lowered its asking rental to take up a larger share in the market. Capital values grew by 1.18% q-o-q, reaching RMB 3,419 per sqm. International investors are showing great interest in Tianjin’s logistics market, with the airport area getting the most attention in 1Q08. Recently, both Citi Property Investors and ProLogis signed agreements with Tianjin to promote their logistics business in the city. Additionally, the latter will set up its investment arm in Airport Industrial Park.

12-Month OutlookHuge new supply is anticipated to be completed this year, leading to a supply peak and pushing vacancy rate significantly higher. This could be seen especially in some non-bonded projects that are facing stiff competition. We believe that the completion of a small portion of the new projects will be postponed to 2009. Nonetheless, Tianjin’s great growth potential – the central government’s goal to develop the city into an international logistics centre and the remarkable progress Tianjin has made, is attracting more attention from international developers and investors. For instance, Adidas AG decided to set up its international transshipment centre in Tianjin. Prior to this, Motorola Inc. and Toyota Motor Corporation have already set up their international logistics distribution centres in the city.


zone 1Q08

Overall 325


zone 1Q08

Overall 3,419

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

��

The investment market’s appetite for office stock grew stronger over the quarter, but this increased demand was met by a healthy boost to most vendors’ asking prices.

DemandDemand for Grade A office space was strong prior to the March presidential election as it appears that some occupiers were intent on signing contracts to circumvent the steep rental increases that were perceived to be in the offing.

The investment market’s appetite for office stock grew stronger over the quarter, but this demand was met by a healthy boost to most vendors’ asking prices.

SupplyTwo owner-occupied Grade A office properties came on-stream during 1Q08, bringing an additional 13,622 ping (45,020 sqm) to the market. The 8,377-ping (27,686 sqm) AEGON Building is located along Jian Guo North Road in the Non-core CBD, while the 5,245-ping (17,335 sqm) Yuanta Core Pacific Securities building is situated in Dunhua South.

Asset PerformanceIn recognition of the outcome of the recent presidential election, which has directly affected the commercial property market, we adjusted both our capital values and initial gross yields over the first quarter. While we are cognizant of the fact that there are no recent transactions to substantiate this movement, we are more concerned with providing an accurate depiction of what an investor could expect upon entering the market. Accordingly, we feel the change is justified and have attempted to place the said figures closer to what both vendors and purchasers have conveyed in recent meetings. In spite of this, we suspect that our adjustments are on the conservative side so we do not rule out further yield compression before rents begin to make up some ground on capital values.

Although a number of prominent institutional landlords have stated their intention to significantly bolster their rent rolls, we have yet to see conclusive evidence that the market will accept this. While our assumptions are calling for strong rental growth going forward, it remains unclear what type of tenants will be willing to accept such increases. This is particularly the case with some attractive alternatives—primarily Neihu and Nangang—offering comparable building specifications on the city fringe, but at much more affordable rates.

12-Month OutlookWith the Grade A office market still providing a positive yield spread over debt, we anticipate further cap rate compression over the next four quarters. This will be further bolstered by the extremely strong sentiment felt among local players regarding the future of the Taipei office market.

After discounting the excitement over recent political events, the fundamentals of the Grade A office market are still pointing to strong rental growth until mid-2009. Furthermore, depending on the pre-leasing progress of Walsin Lihwa Building—which represents the next Grade A space for lease—the market may continue to favour landlords even after the building comes to the market in 2009.

In keeping with the past, this rental growth will not be evenly distributed among all four sub-markets, with Xinyi and Dunhua South as the beneficiaries.

Taipei: Grade A Office


12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 1.3% 5.6%

1 Year 7.3% 19.0%

3 Years 14.1% 41.4%

1Q08

Vacancy rate 8.4%

Gross rent NTD 2,512 per ping pm

Capital Value NTD 628,000 per ping



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Taipei: Office – Xinyi

DemandWe saw little respite in the strong demand for Xinyi’s space over 1Q08, as evidenced by the 3,269 ping (10,804 sqm) of new lease agreements that were signed during the quarter.

After three quarters of tepid take-up figures, Taipei 101 Tower saw the re-emergence of strong demand for its space from occupiers, with deals concluded during 1Q08 amounting to 1,800 ping (6,000 sqm). Consequently, we anticipate that the massive tower’s occupancy will increase by roughly 4 percentage points in the near term.

Exchange Square II, Taipei 101 Tower and President International Tower collectively accounted for almost all of Xinyi’s 2,663 ping (8,801 sqm) of absorption over 1Q08. As we have stated in the past, President International Tower is close to being fully leased and will continue to see its vacancy rate trend down as tenants complete their fit-outs and commence operations in the property.

SupplyNo new Grade A office stock was completed during the quarter. Although the sub-market’s skyline is dotted with construction cranes, not all of the projects that are under construction will be devoted entirely for office use. Our current estimates call for about 15,000 ping (49,500 sqm) of supply in 2009, followed by a similar figure in 2010. To put this into perspective, Xinyi has averaged a net absorption rate of about 18,000 ping (59,500 sqm) per annum over the preceding three years.

Asset PerformanceXinyi’s average rents climbed a respectable 1.9% over 1Q08, marking a considerable 15.3% rise from a year ago. While the nearly 2% lift does not appear extraordinary in and of itself, we will add the caveat that the majority of landlords seem committed to seeing this growth gain momentum in the future.

Over 1Q08, we bumped up capital values to NTD 736,851 per office ping (NTD 222,950 per sqm) to bring them closer to where we feel they should be. While we have no concrete evidence to support this, we are confident that most investors would jump at acquiring an office property in Xinyi that provided them with an initial investment yield of 4.7% (gross). The last en bloc office property to change hands in Xinyi was Yageo Corp Building in 1Q07, which was transacted at close to NTD 700,000 per office ping (NTD 211,800 per sqm).

Major Leasing transactionsING expanded into an additional 1,322 ping (4,369 sqm) in the Taipei 101 Tower;

Sisley signed on to take up 198 ping (654 sqm) in the Taipei 101 Tower;

The Boston Consulting Group (BCG) leased 129 ping (393 sqm) in the Taipei 101 Tower; and

A local technology company committed to 266 ping (879 sqm) in Xin Ji building.

>

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We saw little respite in the strong demand for Xinyi’s space over 1Q08, as evidenced by the 3,269 ping (10,804 sqm) of new lease agreements that were signed during the quarter.


President International Tower


q-o-q 1.9% 6.3%

1 Year 15.3% 22.7%

3 Years 22.8% 36.7%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 13.2%





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Over the last two quarters, 93% of the district’s 4,200-ping (13,900 sqm) net absorption has come on the back of tenants moving into Shin Kong Min Sheng Building.

DemandAlthough the Dunhua North sub-market recorded a drop of 2 percentage points in vacancy over 1Q08, it should not be misconstrued as demand that is evenly dispersed throughout the district. To support this, it is worth noting that Shin Kong Min Sheng Building had 2,400 ping (7,900 sqm) of take-up, which is greater than the entire district’s 2,000 ping (6,600 sqm). In other words, had it not been for the absorption taking place in Shin Kong Min Sheng Building, the sub-market would have seen its vacancy rate increase. Furthermore, in scrutinising the data over the last two quarters, 93% of the district’s 4,200-ping (13,900 sqm) net absorption has come on the back of tenants moving into this single property. Nonetheless, it is confirmation that a newer property in Dunhua North can still see strong demand for its space.

Looking forward, there are two possible demand drivers in the works. One is the nearby Sungshan Airport hosting direct flights with China, and the other is the extension of the Brown (Neihu) MRT line. The latter will connect the area to Neihu Technology Park, although it is worth mentioning that Dunhua North does not have an MRT station at its epicentre.

SupplyThe next parcel of new supply that will come on-stream will be the refurbished 10,000-ping (33,000 sqm) Taipei Financial Center, which is slated for a 2010 completion date.

Asset PerformanceOver a three-year period, Dunhua North has exhibited the weakest rental growth among all the four sub-markets. Although it appears that demand for the area is still relatively strong, we have also seen that any attempt to increase rents by a substantial margin is met with the departure of tenants.

Major Leasing transactionHewlett-Packard leased 1,500 ping (5,000 sqm) in Shin Kong Min Sheng Building.

Major Sales transactionPrecious Jade Construction purchased ten floors of Asiaworld Shopping Mall (five office floors) from Asiaworld Group for NTD 3.72 billion (USD 122 million).

>

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Taipei: Office – Dunhua North


Asiaworld 1Q08

Vacancy rate 5.9%





q-o-q 0.8% 4.8%

1 Year 0.7% 13.7%

3 Years 2.0% 23.9%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


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Taipei: Office – Dunhua South

DemandAlthough there is a scarcity of Grade A space available for lease in Dunhua South, the area consistently sees rental growth, underpinned by lease renewals from foreign and domestic financial companies. This strongly suggests that most occupiers are content to ante up the sizeable rental increases to remain in the neighbourhood.

Some notable occupiers that are poised to either expand their space requirements or take up vacant space in the sub-market include Deutsche Bank and BlackRock.

SupplyThe 5,200-ping (17,200 sqm) Yuanta Core Pacific Securities headquarters building received its occupancy permit in 4Q07. The 13-storey property came into the market 100% occupied by its owner. As such, it will only marginally affect our vacancy figures, but it will have no bearing on our rental statistics. The next building to come online in the sub-market will be the 13,600-ping (45,000 sqm) Chunghwa Telecom Building, slated for completion in 2009. Aside from the 15,000-ping (49,500 sqm) Walsin Lihwa Building in Xinyi, the Chunghwa Telecom Building will be the only other parcel of new supply in 2009. Consequently, we expect the property to become fully leased in a very short span, particularly given its location, which is very near Xinyi district.

Asset PerformanceThe only other sub-market outside of Xinyi to register significant y-o-y rental growth at 5.9% was Dunhua South. Most of this rise came on the back of lease renewals, which is not surprising given that the area does not contain a large amount of vacant office space that is desirable to most occupiers.

Going forward, we anticipate that Dunhua South’s average rents will continue to see significant growth on renewals, as the bottom of the last trough was recorded four to five years ago. This was a period when many occupiers signed lease agreements at a much lower rate, and they will now face steep increases to remain in their current location. It is worth noting that during the four quarters between 2Q04 and 1Q05, Dunhua South saw 14,000 ping (46,300 sqm) of take-up, representing about 17% of the sub-market’s leased space.

In line with the adjustments we made to initial gross yields in other sub-markets, we lowered Dunhua South’s cap rates by 20 basis points. This had the effect of lifting capital values to NTD 618,500 per office ping (NTD 187,141 per sqm). The most recent transaction for Grade A office space in the sub-market saw Cathay Life Insurance increase its dominance in the area by acquiring roughly 50% of Dun Nan Continental Building (CEC Dunnan) in 1Q07. At that time, Cathay Life paid roughly NTD 720,000 per office ping (NTD 217,851 per sqm), although it is worth noting that the building is one of the area’s premier properties.

Major Leasing transactionsBlackRock leased 400 ping (1,322 sqm) in Dun Nan Continental Building; and

A local law firm signed for 400 ping (1,322 sqm) in Dun Nan Continental Building.

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We anticipate that Dunhua South’s average rents will continue to see significant growth on renewals.


Chunghwa Telecom Building


q-o-q 1.3% 5.5%

1 Year 5.9% 15.3%

3 Years 11.8% 40.0%

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

1Q08

Vacancy rate 4.2%





�0

1Q08 was a quarter that saw no major lease agreements signed for Grade A office space.

DemandThere are a few large construction projects in the pipeline for the Non-core CBD. However, it remains unclear whether they will translate into increased demand for Grade A office space. Perhaps the most promising of the new projects is the Radium 9 development, which is situated across the street from the Taipei Main Station. The mixed-use, build-operate-transfer (BOT) 50-year leasehold project will come into the market in 4Q08, with all 800 residential units sold and the 6,000 ping (19,800 sqm) of office space used to house the Radium Life Tech Corp headquarters. In addition, the facility will offer 21,000 ping (69,400 sqm) of retail space, the five-star China Trust Hotel and a Warner Village Cinema, all of which are likely to be seen as desirable to office employees.

Other future projects that should contribute towards invigorating the district include the Taipei Twin Towers—56-storey and 76-storey office buildings that are likely to incorporate retail and hotel amenities—and the redevelopment of land adjacent to Chiang Kai-shek Memorial Hall. All of this should be welcome news to landlords in the sub-market, as 1Q08 was a quarter that saw no major lease agreements signed for Grade A office space.

Although there were no Grade A office properties to change hands over 1Q08, three smaller transactions took place over the period for an accumulative amount of NTD 901 million (USD 29.6 million).

SupplyThe 8,800-ping (29,000 sqm) AEGON Building (formerly Meifu Construction Building) received its occupancy permit in 4Q07. AEGON Taiwan will lease the entire building from Citadel (equity fund), who purchased it from Meifu Construction Corp in 3Q07.

The next Grade A building slated for completion will be the 10,400-ping (34,400 sqm) CTCI. The property is aiming for a 3Q08 completion date and will enter the market 100% occupied as CTCI will use it as its headquarters.

Asset PerformanceAs the only sub-market registering a contraction in y-o-y rental figures, the Non-core CBD has succeeded in differentiating itself from the other sub-markets as a Tier II market, which is most suitable to local SMEs. The premium between the Non-core CBD and Xinyi has increased to 40%, while a similar comparison to Dunhua South and Dunhua North equates to lease differences of 20% and 12%, respectively.

Major Leasing transactionsTUV Rheinland expanded into an additional 235 ping (777 sqm) in Kuo Hua Life Insurance Building.

>

Taipei: Office – Non-core CBD


Aegon Building

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue


q-o-q 0.5% 4.4%

1 Year -2.6% 10.8%

3 Years 4.7% 34.4%

1Q08

Vacancy rate 7.0%





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Taipei: Industrial – Business Parks (Neihu)

DemandDemand for industrial office space in Neihu has tapered off, with the exception of properties located near Reiguang Road. The artery, which bisects the Xihu sub-market, serves as the main thoroughfare and represents the most sought-after section of the Neihu Technology Park.

Our records indicate that very few lease agreements were signed over 1Q08, and the institutional landlords we have spoken with reported difficulty in sourcing tenants for their vacant properties.

SupplySupply has become a concern for some landlords, a few of whom have been struggling to fill their current holdings for an extended period of time. While some of our competitors have put the vacancy rate at less than 10%, we are of the opinion that the true figure is closer to 15%. This is the result of the large amount of property that is strata-titled among a variety of landlords.

Asset PerformanceOffice rental growth in Neihu has been confined to the aforementioned properties along Reiguang Road and is most aptly characterised as modest. This is the consequence of Neihu still struggling to shake off the constraints off excessive supply, a problem which is further exacerbated by inconsistent demand.

In spite of this, a number of investors continue to chase assets in Neihu, which has put upward pressure on capital values, driving them more than 30% compared with a year earlier.

12-Month OutlookThe industrial property market will face two opposing forces going forward. On one hand, the sub-prime fallout may constrict demand for high-tech merchandises as well as the components needed to manufacture them, which are produced by a number of Taiwan’s exporters. On the other hand, recent political events may stimulate demand for space and assets in Neihu, based on the expectation that the nearby Sungshan Airport will be one of the airports to host direct flights to mainland China. The implementation of such flights could see Neihu become a good location for high-tech companies to locate their regional headquarters.

We anticipate further yield compression in Neihu over the next 12 months as rents are impeded by supply and investors continue to bid up prices based on what they feel may transpire with regard to direct air links to the Mainland. However, the inception of MRT (subway) Line will alleviate some of the downward pressure on yields, as rents in Xihu are buoyed once the system begins revenue service in mid-2009.

We anticipate further yield compression in Neihu over the next 12 months as rents are impeded by excessive supply and investors continue to bid up prices based on what they feel may transpire with regard to direct air links to the Mainland.

12-MOnth OutLOOK

rentAL VALue

CAPitAL VALue

Average Asking rental ntD per ping per month

zone 1Q08

neihu technology Park NTD 1,480

Average Capital Value ntD per ping

zone 1Q08

neihu technology Park NTD 309,687

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About Jones Lang LaSalle researchJones Lang LaSalle Research is a multi-disciplinary professional group with core competencies in economics, real estate market analysis and forecasting, locational analysis and investment strategy. The group is able to draw on an extensive range and depth of experience from the Firm’s network of offices, operating across more than 700 cities worldwide. Our aim is to provide high-level analytical research services to assist practical decision-making in all aspects of real estate.

The Asia Pacific Research Group monitors rentals, capital values, demand and supply factors, vacancy

rates, investment yields, leasing and investment activity, and other significant trends and government policies relating to all sectors of the property market including office, retail, residential, industrial and hotels. We deliver a range of global, regional and local publications as well as research-based consultancy services.

www.research.joneslanglasalle.comwww.joneslanglasalle.com

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Real Estate Intelligence Service (REIS)

In an increasingly global marketplace, having a trusted adviser is essential. At Jones Lang LaSalle, we have a vision. We aim to help you unlock the value of real estate in a changing world by offering you insights, regional capabilities and intellectual capital.

Jones Lang LaSalle’s Real Estate Intelligence Service (REIS) combines international expertise with local knowledge. All insights are carefully prepared by Jones Lang LaSalle’s highly qualified market-based researchers and are updated regularly. With consistent methodology and deliverables, we enable you to accurately compare diverse property markets in different cities, an edge that puts you at the forefront to capitalise on emerging opportunities.

Real estate professionals across the globe have been relying on the REIS in their decision-making process for two decades in Australia and New Zealand, and over one decade in Asia.

unMAtCheD COVerAGe

The REIS offers comprehensive coverage in Asia Pacific.

We have aggressively expanded the REIS coverage to enable you to identify new opportunities. This approach of aligning our service with your expansion strategies ensures that you are always a step ahead:

AuStrALiA

• Adelaide • Brisbane

• Canberra • Melbourne

• Perth • Sydney

neW zeALAnD

• Auckland • Wellington

ASiA

• Bangalore • Bangkok

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• Delhi • Guangzhou

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We have recently significantly expanded coverage in 17 Tier II and Tier III Chinese cities, and 3 Indian cities:

ChinA

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• Zhengzhou

inDiA

• Hyderabad • Kolkata

• Pune

The REIS provides clients in-depth analyses in these key investment sectors:

• Investment-grade offices

• Luxury residential

• International-standard retail

• Industrial

FOr SubSCriPtiOn DetAiLS AnD enQuirieS, PLeASe COntACt

Glyn nelson Head of Operations, REIS-Asia+65 6494 [email protected]

Kenny ho Head of Research – China

+86 21 6133 5450

[email protected]

n Ananthanarayanan Head of REIS – India+91 44 4299 [email protected]

nigel Southern Head of REIS – Australia+61 2 9220 [email protected]

Chris Dibble Researching and Consulting Manager – New Zealand+64 9 366 [email protected]

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Copyright © Jones Lang LaSalle 2008. All rights reserved. No part of this publication may be reproduced or copied without prior written permission from Jones Lang LaSalle. Information in this publication should be regarded solely as a general guide. Whilst care has been take in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part.

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