Hong Kong Real Estate Market Review 1H 2011

13 July 2011

Key market observations observations

Accelerating growths in 1H11 despite rising economic uncertainties and higher barriers set for home buyers
Risk Levels (12-mth Outlook) 5 4 3 2 1 0

Global Economic 5 Long-term over-supply 4 3 2 Short-term over-supply 1 0 Local Economic China Economic

Accelerating growth in rents and capital values across all property sectors in 1H11 Despite rising economic uncertainties, overall fundamentals remained healthy to support further market growth, albeit at a relatively slower pace Longer-term supply pressure across the key property sectors is relieving as more government land is put up for auction/tender

Yield Attractiveness Capital Value Levels Jun-10 Jun-11

Source: Jones Lang LaSalle estimates

Interest Rates Rental Levels

Grade A Office Market

Sustained leasing demand entering into 2011, after experiencing a record year in 2010
Net Take-Up by Submarket
1.3 1Q 2011
N F A, sq ft (m illion)

Annual Net Take-Up Overall Market

4.5 4.0 3.5
NFA, sq ft (million)

2Q 2011

0.8

3.0 2.5 2.0 1.5 1.0 0.5 0.0

0.3

-0.2 Overall Central WC/CWB TST HK East Kln East

-0.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 till June

Source: Jones Lang LaSalle

Vacancy levels remained low across all submarkets

Vacancy (all other submarkets, %)

9 8 7 6 5 4 3 2 1 0

Vacancy (Kowloon East, %) 30

25 20 15 10 5 0 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul08 08 08 08 09 09 09 09 10 10 10 10 11 11 11
Central Wanchai/ Causeway Bay 2.3% 3.0% Hong Kong East 3.2% 3.7% Tsimshatsui 3.1% 4.1% Kowloon East 11.2% 10.8% Overall 4.8% 4.7%

Central Tsim Sha Tsui Wanchai/Causew ay Bay Overall Hong Kong East Kowloon East

1H11 End-2010

3.7% 3.0%

Source: Jones Lang LaSalle

Grade A office rentals approaching peak levels

180

Rental Value Index (Jan 2010 = 100)

160

Rental Value Central

1Q11 9.2% 7.9% 10.3% 1.1% 7.1% 8.1%

2Q11 6.6% 5.1% 7.1% 7.5% 4.3% 6.3%

1H11 16.4% 13.4% 18.1% 8.7% 11.7% 15.0%

140

Wanchai/ Causeway Bay Hong Kong East

120

Tsimshatsui
100

Kowloon East Overall

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

80

Central Hong Kong East Kowloon East

Source: Jones Lang LaSalle

Wanchai / Causeway Bay Tsimshatsui Overall

Accelerating capital value growth despite a low yield environment

180

Capital Value
160
Capital Value Index (Jan 2010 = 100)

1Q11 13.1% 13.0% 10.7% 4.6% 10.1% 11.8%

2Q11 9.1% 9.8% 4.3% 5.5% 5.1% 8.2%

1H11 23.3 % 24.1% 15.5% 10.3 % 15.8 % 21.0%

Central
140

Wanchai/ Causeway Bay Hong Kong East Tsimshatsui Kowloon East

120

100

80

Overall
Oct-08 Oct-09 Jan-08 Jan-09 Jan-10 Oct-10 Jan-11 Jul-08 Jul-09 Jul-10 Apr-08 Apr-09 Apr-10 Apr-11 Jul-11

60

Central Hong Kong East Kowloon East

Source: Jones Lang LaSalle

Wanchai / Causeway Bay Tsimshatsui Overall

No rebound in short-to-medium term new supply

Grade A Office Supply (sq ft, NFA)
3,000,000

2,500,000 Central 2,000,000 Kowloon East Wanchai / Causeway Bay Other Decentralised Areas

1,500,000

1,000,000

500,000

0 2011
Source: Jones Lang LaSalle

2012

2013

2014

2015

Further rental growth is expected despite a relative slowdown in growth momentum

Risk Levels (12-mth Outlook) 5 4 3 2 1 0

Global Economic 5 4 3 2 1 0 Occupancy Costs China Economic

Recent economic uncertainties may slow business growth momentum Low space availability will provide sustained support to overall rentals, despite potential pressure in buildings with returning spaces Longer-term supply pressure is relieving as more government land is put up for auction/tender

Tax Environment

Long-term Space Availability

Short-term Space Availability Jun-10 Jun-11

Source: Jones Lang LaSalle estimates

Other Operating Costs

Retail Property Market Retail

Buoyant market fundamentals supporting rental growth

Total Retail Sales
40 35 30 25 20 15 10 5 0 -5 -10 Jan Jan-11 Mar Nov May Nov Mar Jul Sep-09 May Sep
Y o Y G rowth (%)
Y o Y Growth (%)

Tourist Arrivals
65 55 45 35 25 15 5 -5 -15 -25 Jun Oct Jul May-10 Jan-11 N ov D ec Apr Mar May Aug Sep Feb

Total Retail Sales Value

T otal Retail Sales Volume

Long Haul Mainland Chinese

Source: Hong Kong Tourism Board

Short Haul Total Tourist Arrivals

Source: Census & Statistics Department

Aggressive rental biddings by international retailers

Source: Jones Lang LaSalle; market sources

Retail rents set new record highs in 1H11

180 170 160 150
Index (Jan 2010 = 100)

Rents / CVs High Street Shop Rents Overall Prime Shopping Center Rents Premium Prime Shopping Center Rents High Street Shop Capital Values
Oct-08 Oct-09 Jan-08 Jan-09 Jan-10 Oct-10 Jan-11 Jul-08 Jul-09 Jul-10 Apr-08 Apr-09 Apr-10 Apr-11 Jul-11

1Q11 4.6% 2.7%

2Q11 4.9% 2.8%

1H11 9.7% 5.5%

140 130 120 110 100 90 80 70

4.0%

3.8%

7.9%

12.7%

7.7%

21.3%

Overall High Street Shop Rents Premium Prime Shopping Centre Rents
Source: Jones Lang LaSalle

Overall Prime Shopping Centre Rents High St Shop CVs

Same old story about tourism consumption remains valid

Risk Levels (12-mth Outlook) 5 4 3 2 1 0

Global Economic 5 4 3 2 1 0

Tourist consumptions to remain as a key driver for retail revenue growth Local consumer confidence is expected to remain generally strong despite a marginal rise in economic uncertainties and inflationary pressure Strengthened RMB to provide continued support on luxury goods demand despite rumors about potential luxury tax goods tax in China

Over-supply

China Economic

Rentals

Tourism Market

Consumer Confidence Jun-10 Jun-11

Source: Jones Lang LaSalle estimates

Retail Warehouse Market

External trading sector posts slower growth

40 34.3 29.9 30 26.0 24.3 27.7 24.2

24.6 20.7

20
Y-o-Y Growth (%)

15.1 14.4 10 3.3 0 2Q09 -10 -10.4 -12.9 -14.9 -20 Total Imports Total Exports -14.3 3Q09 4Q09 -2.0 1Q10 2Q10 3Q10 4Q10 1Q11 Apr-May 9.6 7.2

Source: Census & Statistics Department

Demand base continues to broaden

3Q10
Source: Jones Lang LaSalle

4Q10

1Q11

2Q11

Both capital values and rental values on new record highs

130

120
Index (Jan 2010 = 100)

1Q11
110

2Q11 2.8% 7.4%

1H11 7.1% 13.6%

Rental Values Capital Values

4.2% 5.8%

100

90

Oct-08

Oct-09

Jan-08

Jan-09

Jan-10

Oct-10

Jan-11

Jul-08

Jul-09

Jul-10

Apr-08

Apr-09

Apr-10

Rental Value

Capital Value

Source: Jones Lang LaSalle

Apr-11

Jul-11

80

Further rental growth is expected despite some market uncertainties

Risk Levels (12-mth Outlook) 5 4 3 2 1 0

Rental Level

Global Trade Market 5 4 3 2 1 0

Recent rebound in Japanese industrial production numbers points to a recovery in external trade growth and demand momentum
China Trade Market

But prolonged slow growth in the US and rising uncertainties in Europe remained as key concerns Tight vacancy and limited new supply is expected to provide further support to rental growth

Over-supply

Local Retail Market

Jun-10 Jun-11
Source: Jones Lang LaSalle estimates

Residential Residential Market

A marked slowdown in sales volume after the austerity measures

18 16
N o. of S & P A greem ents ('000)

2005: 8,600 /mth

2006: 6,900 /mth

2007: 10,300 /mth

2008: 8,000 /mth

2009: 9,600 /mth

1H11: 2010: 11,300 /mth 9,200 /mth

1H11

14 12 10 8 6 4 2 0 S e p -0 5 S e p -0 6 S e p -0 7 S e p -0 8 S e p -0 9 S e p -1 0 Ja n -0 5 Ja n -0 6 Ja n -0 7 Ja n -0 8 Ja n -0 9 Ja n -1 0 M a y-0 5 M a y-0 6 M a y-0 7 M a y-0 8 M a y-0 9 M a y-1 0 Ja n -1 1 M a y-1 1

8% 18% 25% 49%

>$10m $5-10m

$3-5m

<$3m

< $1m
Source: Land Registry

$1-2m

$2-3m

$3-5m

$5-10m

> $10m

Similar direction on luxury residential sales market

2011 YTD* No. of Transactions Total Consideration $16.7 bil $14.0 bil $8.8 bil $20.0 bil
Total Consideration(HK$ bil)

1,200 1,000
No. of Transactions

$20-30m $30-50m $50-100m >$100m

687 371 131 71

30 25 20 15 10 5 0

800 600 400 200 0 20 - 30m 30 - 50m 50 - 100m >100m

20 - 30m

30 - 50m

50 - 100m

>100m

2H09
Source: EPRC, Market Sources * Preliminary Figure

1H10

2H10

1H11*

Active land sale market to ratify the supply shortage problem

Land Sale Record for the 2011/12 Financial Year
Disposal Type Tender Tender Auction Auction Auction Auction Auction Auction Award Date Jun-11 Jun-11 Jun-11 Jun-11 May-11 May-11 May-11 Apr-11 Location Lee Kung Street, Hung Hom Junction of Gillies Avenue South & Bulkeley Street, Hung Hom Ping Kwai Road, Ping Shan, Yuen Long Borrett Road, Hong Kong Ngau Tam Mei, Yuen Long 62 Begonia Road, Kowloon Tong Former Lingnan College Site, Stubbs Road 7 Ko Shan Road, Hung Hom Price (HKD mil) 801 406.3 300 11,650 662 579 4,490 1,525 AV (HKD) 7,640 7,202 4,587 26,763 6,548 15,742 24,829 9,934 Purchaser Cheung Kong (Holdings) Hong Kong Ferry Cheung Kong (Holdings) Cheung Kong (Holdings) Cheung Kong (Holdings) China Overseas Sun Hung Kai Properties Nan Fung & Wing Tai
No. of units from unsold sites: 15,200

Residential sites sold so far in 2011, fetching a total of

HKD

20.4 bil
No. of units from sold sites: 800

Source: Lands Department, Jones Lang LaSalle estimates

Limited new supply and softened sentiment combined to thin primary sales volume in 1H11 Key launches in 1H11
18,000 16,000 14,000 No. of Primary Sales 12,000 10,000 8,000 6,000 4,000 2,000 0 2008 2009 2010 Jan-May 2011

~90% sold

~95% sold 100% sold

Source: Land Registry, Market Sources

~90% sold

Further capital value growth despite a slowdown in sales volume

150 140 130 120
Index (Jan 2010 = 100)

1Q11
Luxury Residential Capital Values Luxury Residential Rental Values Mass Residential Capital Values

2Q11 7.3% 2.6% 4.2%

1H11 16.2% 4.9% 10.1%

110 100 90 80 70 Jan-08 Jan-09 Jan-10 Jan-11 Jul-08 Jul-09 Jul-10 Jul-11 60

8.3% 2.3% 5.7%

Luxury Residential Capital Value Mass Residential Capital Value

Source: Jones Lang LaSalle

Luxury Residential Rental Value

Rising market risks but not at hazardous levels

Risk Levels (12-mth Outlook) 5 4 3 2 1 0

Global Economic 5 Govt. Policy 4 3 2 1 0 China Economic

Low holding costs remained intact despite the recent marginal rise in effective mortgage rates Transaction volume to remain at relatively low levels but prices should be able to hold firm With buyers holding back purchase decisions, leasing demand is expected to pick up, lending greater support to rents

Over-supply

Credit Availabilty

Affordability Price Level

Jun-10 Jun-11
Source: Jones Lang LaSalle estimates

Interest Rate Labour Market

Investment Market

Sustained investment demand despite higher prices and lower yields

Total Considerations in HKD bil (property transactions > HKD 100 mil)

100 90 80 70 60 50 40 30 20 10 0 1H10 2H10

Total Volume: 123 Total Volume: 174

Total Volume: 297

Total Volume: 159

2010

1H11

Source: Jones Lang LaSalle; EPRC

Residential sector remained as the focus of the investment market

Total Volume by Sector
HKD 100 mil transactions

Total Consideration by Sector

HKD 100 mil transactions (HKD billion)

2010
Retail, 81, 27%

2010 Total : 297 transactions

Residential , 122, 42%

Retail, $17.7, 19%

Total : HK$93.2 bil

Office, $39.5, 42%

Residential, $31.8, 34%

Office, 78, 26%

Industrial, 16, 5%

Industrial, $4.2, 5%

1H11
Retail, 48, 30% Residential , 71, 45%

1H11 Total : 159 transactions

Office, 33, 21% Retail, $10.0, 23% Residential, $19.3, 46%

Total : HK$42.6 bil

Industrial, $0.9, 2%

Source: Jones Lang LaSalle; EPRC

Industrial, 7, 4%

Office, $12.4, 29%

Key investment transactions in 1H11 (> HKD 100 mil)

Sector Property Purchaser Considerations

Honest Motors Building (en bloc) Office Millennium City Phase 3 (10 floors) Skyline Commercial Centre (en bloc) 9 Queen's Road Central (whole floor) Nan Fung Plaza Retail Tropicana Garden Arcade The Pemberton No. 3 Deep Water Bay Road Residential Arts Mansion 20-22 South Bay Road Emperor International Square Industrial Culturecom Centre
Source: Jones Lang LaSalle; EPRC

CITIC Pacific AEW Pamfleet TBC The Link REIT JEBN Assets Management Pioneer Global Group TBC Phoenix Property Investor TBC Central Source Ltd Liu & Chen Ltd

HKD 580 mil HKD 510 mil HKD 387 mil HKD 382 mil HKD 1.17 bil HKD 191.6 mil HKD 523 mil HKD 888.8 mil HKD 1.84 bil HKD 880 mil HKD 850 mil HKD 286 mil

Thank you