asia pacific real estate strategic outlook

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Asia Pacific Real Estate Strategic Outlook March 2015 Research Report Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. For Professional Clients (MiFID Directive 2004/39/EC Annex II) only. For Qualified Investors (Art. 10 Para. 3 of the Swiss Federal Collective Investment Schemes Act (CISA)). Not for distribution. For institutional investors only.

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Page 1: Asia Pacific Real Estate Strategic Outlook

Asia Pacific Real Estate Strategic Outlook

March 2015

Research Report

Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. For Professional Clients (MiFID Directive 2004/39/EC Annex II) only.

For Qualified Investors (Art. 10 Para. 3 of the Swiss Federal Collective Investment Schemes Act (CISA)). Not for distribution.

For institutional investors only.

Page 2: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015

Table of Contents

Executive Summary ............................................................................. 1

Our View .................................................................................. 2

The Economy ....................................................................................... 4

Economic Outlook ................................................................... 6

Risks to the Forecast ............................................................... 7

Strategic Real Estate Outlook .............................................................. 9

Strategic Views ........................................................................ 9

Capital Markets ...................................................................... 11

Investment Market Outlook .................................................... 14

Leasing Market Outlook ......................................................... 18

Property Sectors and Returns ............................................................ 22

Office ..................................................................................... 22

Retail ..................................................................................... 24

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

Appendix: Real Estate Market Forecasts ........................................... 28

Important Information ......................................................................... 30

Research & Strategy Team – Alternatives and Real Assets .............. 32

The opinions and forecasts expressed are those of Asia Pacific Real Estate Strategic Outlook and not necessarily those of Deutsche AWM Distributors, Inc. All opinions and claims are based upon data at the time of publication of this article (February 2015) and may not come to pass. This information is subject to change at any time, based upon economic, market and other conditions and should not be construed as a recommendation.

Prepared By:

Koichiro (Ko) Obu Head of Research & Strategy, Asia Pacific [email protected] Mark Ho Property Market Research [email protected] Natasha Lee Property Market Research [email protected] Minxuan Hu Property Market Research [email protected] Mark Roberts Head of Research & Strategy [email protected]

Page 3: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 1

Executive Summary Real estate performance across much of the Asia Pacific region has been a balance

between a strong capital market and a softer but recovering leasing market, particularly in

the office sector. Japan, China and Singapore experienced noticeable improvements in

the leasing market in 2014. The five year returns forecasts were slightly trimmed

compared to our previous view, as we believe further cap rate compression will be limited

in most markets.

Economy: Growth for the Asia Pacific macro economy continued to taper in 2014 with

exports remaining in a soft patch while governments exercised more prudence on the

fiscal front. China experienced headwinds in investment due to its sagging housing and

manufacturing sectors. Knock-on effects were felt in the Australian export industries,

especially as the commodity sector continues to slow down. Consumer sentiment in

Japan and South Korea were both eroded due to the consumption tax (VAT) hike and the

Sewol Ferry tragedy, respectively, in 2014. The region’s growth momentum is turning,

however, with export growth prospects becoming more positive and governments having

moved to support growth more proactively, Monetary conditions and interest rates are

either being maintained or eased in key economies such as Japan and South Korea

where stronger growth is expected in 2015.

Office: Within the Asia Pacific real estate industry, the office sector accounted for half of

the transaction volume in 2014. Acquisitions have become more challenging given the

compressed yields and the prospects of interest rate rises in the medium term. Leasing

demand remained generally healthy, supported by the resilient services sector and low

unemployment rates in all the key countries of between 3.0% and 4.0%, except for

Australia where it exceeds 6.0%. Some markets including Singapore, Hong Kong and

Shanghai are faced with sizeable new pipeline supply which puts some pressure on rental

growth, although for the latter, robust growing leasing demand should mitigate those

pressures.

Retail: Retail sales were generally soft in major markets in the region in 2014, although

consumer sentiments are expected to turn modestly more upbeat in 2015 on the back of

the pick-up in the regional economy, interest rate cuts, dissipating global uncertainties and

a stable employment outlook. For most countries in the region, depressed oil prices

should also provide an added boost for private consumption. Meanwhile, the threat from

online retailing continued to mount at the expense of bricks and mortar players. Against

the backdrop of cautious optimism, neighbourhood centres and suburban retail that are

relatively more centred around non-discretionary and food and beverage spending are

expected to outperform.

Industrial/Logistics: The export-related segment of the industrial market is likely to

benefit from the gradual, if unspectacular, global economic recovery while some

weakness is expected to remain in the domestic environment. E-commerce and third party

logistics companies (3PLs) are expected to continuously drive leasing demand for the

modern logistic space. Structural changes are unfolding in the supply chain across the

region, reflecting ongoing migration of labour intensive manufacturing segments to

emerging countries while developed countries continued to scale the value-added ladder.

Consequently, there remains much scope for expansion within the modern logistics

segment, an investment theme that should remain in favour with investors.

Page 4: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 2

Investments: Commercial real estate transaction volumes (excluding land transactions)

in 2014 totalled US$137 billion in the Asia Pacific region, a healthy 18.0% increase from a

year earlier, according to Real Capital Analytics. The volume remains at the elevated level

of 2014 on a preliminary basis where Japan leads the pack followed by Australia and

China. There is a growing concern, however, among the investors over the current tight

cap rates. Although central banks are expected to remain accommodative in the near-

term, the prospects of interest rate normalization further down the road would negatively

affect the capital values in low yielding markets.

Against this backdrop, our five-year return expectations were mildly trimmed from the

previous forecast. We have accounted for the rising interest rates by factoring in higher

reversionary cap rates in most markets. We believe that capital gains have already been

realized due to the strong investment market and future returns will be driven more by

stable income growth. Some of the key changes to our forecasts include:

▪ Strengthened rental growth for the Beijing and Shanghai office market based on the

revised demand outlook from a services sector expansion, financial liberalization, and

multi-national corporations.

▪ Lower returns for Singapore and Hong Kong due to a supply increase in the near

future and increased pressure from a US interest rate rise.

▪ Lower returns for Brisbane and Perth office markets given a subdued occupier

demand from the mining sector and new supply expected in Perth.

Our View

CORE | Focus on cash flows. Established markets in the mature economies of Australia,

Japan, and South Korea provide some defensive traits. Deutsche Asset and Wealth

Management (Deutsche AWM) anticipates that healthy economic fundamentals in 2015

could help support the office markets in Melbourne, Sydney, Tokyo, Osaka and Seoul

where combined returns are forecast to average 8-9% over the medium term, although

accessibility to prime assets is becoming more challenging for institutional investors. The

income component of logistics properties can provide attractive investment opportunities

with a steady income stream and a higher yield—typically in excess of 5.5%.

VALUE ADD | Choose markets with mispricing and repositioning opportunities.

Secondary locations in mature markets and China provide such plays. However,

accessibility to product, competition from domestic capital, and limited exit opportunities

make such openings a challenge. There may also be opportunities in core locations in

mature North Asian markets by taking on leasing up risks for newly constructed but vacant

office properties. Retail is a strong candidate for a value-add proposition including the

improvement of foot traffic and a fresher tenant mix. Real estate assets in emerging

markets typically have less sophisticated asset management skills that fail to extract the

true value of these properties. To complement the expansion of online retail, we have also

witnessed the conversions of older industrial properties to distribution/logistics facilities.

This is particularly true for the mature markets in Australia, Hong Kong and Singapore.

OPPORTUNISTIC | Develop in under-supplied markets. In many emerging markets,

development provides a viable route to access the real estate market. This means taking

on construction risk, including managing the construction process and the necessary

permits from local authorities. For example, the lack of modern logistics facilities in China

has attracted a growing number of players including Goodman (Australia), Global

Page 5: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 3

Logistics Properties (Singapore), and Prologis (U.S.). Experienced logistics developers

can increase supply of this property type to meet the very high specifications of tenants.

Residential development is also another familiar opportunistic play although margins have

since fallen in China. As consolidation in China’s property sector continues, the

recapitalisation of some cash-starved developers could also provide an opportunity to

enter the Chinese real estate market.

Select opportunities with caution. Bond-type prime assets have become scarce due to

limited deal flow, difficulty in meeting cash yield requirements, and the expected negative

impact from rising interest rates in some of the markets. While we still expect modest

returns; caution should be taken when investing in the highly cyclical office markets of

Hong Kong and Singapore due to near future rental corrections and the possibility of rising

cap rates. Currently these markets are dominated by end users and private investors with

strata-title transactions often seen. We favour non-discretionary suburban retail as it

provides a cushion against fluctuations in discretionary spending, although the negative

impacts of online retailing cannot be fully discounted. Neighbourhood centres and

suburban retail typically attract these types of tenants.

Page 6: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 4

The Economy The Asia Pacific macro economy experienced a temporary lull in 2014 with soft domestic

demand seen in some of the region’s large economies. China’s growth continued to taper

with ongoing structural reforms and drags from the housing and manufacturing sectors.

Australian export industries were affected by it especially as the commodity sector

continues to slow down. Consumer sentiment in Japan was eroded due to the

consumption tax (VAT) hike in April 2014 while weak consumption prevailed also in South

Korea especially after the Sewol Ferry tragedy. The region’s growth momentum is turning,

however, with signs of stabilization on the housing market in China supported by the

implementation of the policy rate cut together with accommodative fiscal policy. Growth-

supportive monetary and fiscal measures were introduced in other mature economies

such as Japan and South Korea and should stimulate stronger growth in 2015.

Risks remain, however, such as the financial sector vulnerabilities in China, slowdown the

Eurozone coupled with more international geopolitical risks from Russia, the Middle East

to North Asia. Without any shocks or unexpected shifts in the baseline, the regional

economy is set for healthy growth over the coming years, but the full scale recovery is

expected after 2016 following the current struggle in commodity prices. Regional GDP

growth in Asia Pacific is estimated to be 5.6% in 2015, only a mild increase from 5.5% in

2014 according to the IMF’s report published in October 2014.

Real GDP growth & unemployment rates

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management; Oxford Economics, February 2015 Past performance is not a reliable indicator of future performance

External demand: Outlook for external demand has been upgraded, with the U.S.

economy now on track for solid recovery providing the brightest spark. While the

Eurozone economy is still fragile, prospects appear more sanguine following the ECB’s

accommodative monetary measures implemented in January 2015. However, headwinds

from a slowing China are expected to persist. China has become the largest trading

partner for many countries in the Asia Pacific region, including Australia, South Korea and

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 5

to a lesser degree Japan, and these economies are experiencing a slowdown especially

in the commodity and manufacturing sectors.

Exports to China (as % of total exports)

Source: Consensus Economics February 2015

Monetary policy: The Bank of Japan (BoJ) continues to maintain a policy of ultra-low

interest rates, which pushed the yen’s value further down to around 118 yen against the

U.S. dollar as of January 2015, close to the lowest value in seven years. The devalued

yen has helped to boost corporate earnings of large export-led manufacturers in Japan.

Bank of Korea (BoK) and People’s Bank of China (PBoC) also lowered the policy rates in

the second half of 2014, respectively, with the intention to stimulate the weak domestic

economy. The Reserve Bank of Australia (RBA) has trimmed its policy rate by another

25bps to a record low of 2.25% in February 2015 amidst concerns that the economy is

facing another year of below average growth.

Policy rates in major Asia Pacific economies

Source: Deutsche Asset & Wealth Management; Bloomberg, February 2015

Inflation: Overall inflationary environment across Asia is expected to remain benign, with

consumer prices in Asia forecast to ratchet down marginally from 3.7% in 2014 to 3.5% in

2015.With regional governments generally adopting a growth-supportive stance at the

moment, the timing of interest rate rises have been deferred. Nevertheless, long term

interest rates (10-year government bond yield) are forecasted to rise gradually by about 1-

2 percentage points in all markets we cover across the region over the next five years,

according to Oxford Economics, reflecting an eventual return to normal levels. Deutsche

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Page 8: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 6

AWM anticipates a risk of cap rates increasing in some markets, especially in the small

and open economies of Hong Kong and Singapore (cap rates are already widened in

Singapore).

Inflation & long-term interest rates

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management; Oxford Economics, February 2015 Past performance is not a reliable indicator of future performance

Economic Outlook

Japan: Japan’s prime minister Abe unveiled a new growth strategy in 2014 including

corporate tax cuts, an investment policy change on Japan’s government pension fund and

deregulation of the labour market. The corporate sector remained healthy in 2014 and the

unemployment rate fell to its lowest level since 1997. Domestic consumption struggled,

however, due to the negative effects from the VAT hike in April 2014 which resulted in the

economic slump. Japan is expected to witness a modest economic recovery in 2015 given

Abe, who tightened his grip on power at the victory in the lower house election in

December 2014, is set to implement further stimulus and reform initiatives.

South Korea: South Korea’s GDP expanded by 3.0% in 2014 driven by a recovery in

exports, while consumer sentiment was eroded by the Ferry disaster. In August 2014, the

government announced a $40 billion stimulus package aimed at propping up the economy

whilst the BoK lowered the policy rate twice in the year to 2.0%. External conditions

remain challenging for exporters with subdued trade volumes among emerging countries

while the Free Trade Agreement with China should bring about positive effects on the

trading volumes. BoK estimates a 3.4% growth in 2015.

China: Growth is expected to dip further before rebounding in the second half of the year

to record around 7.0% in 2015, compared to 7.4% in 2014. Given a still-robust

employment outlook, policy makers are expected to continue pushing ahead with

economic reforms in 2015, albeit more cautiously than before as growth concerns have

mounted. Already, the pilot free trade zone set up in Shanghai as a test bed for

liberalization measures has attracted the attention of multinational companies that are

eager to tap new opportunities brought about by more efficient movement of capital and

goods. The scheme will be expanded to three other areas – Tianjin, Fujian and

Guangdong – in 2015, marking gradual progress towards further market liberalization.

Drags from the property sector persist as inventory levels remain elevated despite the

rebound in transaction volume. Overcapacity and restructuring challenges remain for the

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Long Term Interest Rate Inflation(%)

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 7

manufacturing sector, but improved export prospects due to U.S. recovery could provide

some modest relief. Supportive macro measures introduced in end-2014 – interest rate

cut, liquidity injection and expansion of infrastructure investments – as well as additional

interest rate and reserve requirement rate cuts in the first half of 2015 should help to lift

the economy in the second half of the year. Low oil prices and a benign inflationary

environment would afford policy makers headroom for more supportive measures when

necessary. The fiscal positions of local governments pose a key risk and bears close

watching.

South East Asia: Growth in key South East Asian economies are generally expected to

recover in 2015, riding on trade tailwinds from the U.S. recovery and lower oil prices, but

also reflecting low-base effects of 2014. However for Malaysia and Indonesia, declining

commodity prices and currency pressures would weigh on consumption and add to capital

outflow risks. Although consumer sentiments have improved, particularly in India and

Thailand, the recovery remains tentative. Contrasting central banks bias reflects the

uneven picture across the region, dovish in India and Indonesia and hawkish in Malaysia

to avert capital flight.

Singapore: The economy could experience modest growth of 3.0% in 2015 as it gains

strength from a stronger expansion in developed economies. The unemployment rate is

expected to remain low at 2.0%. However, household consumption could remain

lacklustre, dampened by the weakening housing market. To bolster growth, the Singapore

central bank has moved to slow down its currency appreciation ahead of its scheduled

review in April in order to support its trade reliant economy.

Australia: Increased home building on the back of record-low interest rates has been a

driver of growth for Australian economy while the growth rate moderated due the price

correction in commodities in the second half of 2014. The economy faces a number of

constraints as the recovery in non-mining investment and labour market indicators remain

patchy. The RBA anticipates that the economy will be slightly below trend in 2015 with

growth forecasts of 2.75% before rebounding to a healthy level in 2016 and 2017.

Risks to the Forecast

China’s housing market slump: Asian economies’ high correlation to Mainland China

and also the Euro bloc renders them susceptible to shocks from these economies.

Although the residential sector’s outlook has improved in China, its financial sector

remains under threat from the shadow banking sector and strained fiscal positions of local

governments. China needs to maintain the right balance in pursuing reforms to rectify

these issues while maintaining sufficient growth to support employment. Meanwhile,

economic uncertainties in Europe continue to persist. Any shocks to Europe would be

sharply felt in export-reliant Asia.

Japan coming up short on delivering much needed structural changes: Aggressive

monetary easing and fiscal stimulus have put Japan’s economy on a path toward healthy

recovery, although it currently struggles with a slump in consumer spending following the

consumption tax (VAT) hike in April 2014. Attention from economists has now turned

towards much needed structural reforms as the key to Japan’s long-term economic

sustainability. These include corporate tax cuts, investment policy change on Japan’s

government pension fund, and deregulation of the labour market.

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 8

Disorderly U.S. interest rate normalization triggering volatility: Interest rate

normalization is next on the agenda for the U.S. Federal Reserve after winding down of

the quantitative easing program. While this is well anticipated by the market, the manner

in which interest rates are hiked could yet generate market volatility. Key REIT markets,

such as Singapore, Japan and Australia, are structurally sensitive to long term interest

rate volatility since REITs are invested by yield seeking investors. We’ve reflected

increases in the long term interest rates in our base cases for each market but cap rates

might widen more than our expectation.

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 9

Strategic Real Estate Outlook Real estate performance across much of the Asia Pacific region has been a balance

between a strong capital market and a softer but recovering leasing market, particularly in

the office sector. Japan, China and Singapore experienced relatively stronger office

leasing demand in 2014. The recovery is expected to extend into 2015 for key markets

with the exception of Australia, where leasing demand is likely to remain subdued.

Continued global and domestic capital flows into quality assets in the region contributed to

a further cap rate compression during the period, especially for the developed markets of

Japan, South Korea and Australia. Given the current low yields and the possibility of

interest rate rises in the medium term, capital growth prospects have diminished over our

forecast horizon. Accordingly, the five year returns forecasts are slightly trimmed

compared to our previous view, since we believe further cap rate compression is limited if

at all in most markets. Nevertheless, future cap rate widening could yet create good entry

opportunities for investors seeking to gain exposure within the region.

Annual total return by sector in Asia Pacific (weighted average), 2001-2019F

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Strategic Views

Although the macro economy, capital markets, and real estate fundamentals have all

moved broadly in line with our previous forecast in August 2014, we have since witnessed

further tightening of cap rates. It has become more challenging for investors seeking

prime asset investment opportunities in some markets in the region to achieve their

returns objectives with some possibly choosing to trade up the risk curve in response. We

hold the view that while part of the cap rate compression was driven by anticipation of a

recovering rental cycle, other structural driving forces were also at play: (1) diversification

needs as evident from the gradual but steady increase in cross-border transactions since

2011 and (2) higher allocation to real estate by institutional investors. As revealed in

Preqin’s Investor Outlook for the second half of 2014, 52.0% of institutional investors

committed to private real estate funds in just the first eight months of 2014 compared to

the average of 41.0% for each of the years from 2011 to 2013. So while pressures on cap

rate widening will intensify with expectations of eventual interest rate rises, we believe that

some of the fears may be exaggerated. As such, we favour markets with relatively good

yield spreads to mitigate risks arising from cap rate widening and healthy leasing

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 10

fundamentals to provide increasing rental income to drive returns going forward. In

addition, we believe that there is some more way to go for the cross border diversification

trend and as such, prefer gateway cities with their deep markets and greater appeal to

foreign investors.

▪ Commercial markets in Tokyo and Osaka provide attractive yield spreads and are

likely to provide good performance in the medium term, fuelled by the recovery in

space demand from the corporate sector and well under control supply. Total returns

look modest on an unlevered basis but excess returns are one of the highest due to

the very low interest rate environment. Given the tight cap rates in prime areas, we

suggest that yield-seeking investors look toward frequently transacted mid-sized

grade-B assets, forward commitment or suburban retail.

▪ The Seoul market is expected to provide stable performance. Led by the leasing

market recovery, foreign investors are back and stiffly competing with domestic

capital for investment. Since deal flow is limited for prime office and high street retail,

we propose that investors consider asset repositioning and/or suburban retail

portfolios in order to achieve minimum required cash returns on their investments.

▪ Melbourne and Sydney remain attractive due to the highest yields among mature

economies. Due to the short-term softness of the Australian economy driven by the

slowdown in the mining sector, there are short-term challenges such as elevated

vacancy rates of about 10.0% and generous incentives granted to tenants in the main

markets. We expect, however, rental growth to revert to trend from 2016 onwards

given a limited new supply and the recovery of space demand.

▪ The income component of logistics properties together with their longer leases and

stable or stepped-up rents provide attractive investment opportunities. Because of

limited liquidity yields are higher than other sectors making it is especially attractive

for income seeking investors. The combined average property level total return is

expected to be around 10.0% for logistics investments across the region in the

medium term.

Opportunities with caution:

▪ Moderating headline growth and sizeable new pipeline supplies in decentralized

areas puts pressure on the Chinese leasing market. In the investment market, owner

occupiers and domestic investors are driving valuations to challenging levels. There

remains a further attractive upside for Tier-1 cities, however, from ongoing structural

reforms and the return of leasing appetite from multi-national corporations (MNCs).

Local partnerships could be the key to source deals.

▪ In the highly cyclical office markets of Hong Kong and Singapore, rental corrections

are expected. Cap rates are tight in the office sector and investment opportunities are

limited only for non-yield seeking investors such as private investors or end users

(owner occupation). Initial yields can be negatively affected by any increases in long-

term interest rates occurring over the medium term. Opportunities are likely to arise in

Singapore when cap rates start to decompress.

▪ We favour non-discretionary retail as this provides a cushion against fluctuations in

discretionary spending, although the negative impact of online retailing cannot be fully

discounted. Neighbourhood centres and suburban retail typically attract these types of

tenants, and annual gross returns are expected to be in the high single digits on an

unlevered basis for most markets in the region.

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 11

Capital Markets

Transactions: Commercial real estate transaction volumes (excluding land transactions)

in 2013 totalled US$137 billion in the Asia Pacific region, a healthy 18.0% increase a year.

The volume remains at the elevated level of 2014 on the preliminary basis where Japan

leads the pack followed by Australia and China.

Asia Pacific transaction volume

Note: Figures exclude land acquisitions and developments, hospitality and apartments/residential Source: Real Capital Analytics; Deutsche Asset & Wealth Management, February 2015 Past performance is not indicative of future returns

REITs: REIT stock indices in major markets in the region experienced healthy growths in

2014 while the amount of fundraising halved down from 2013 when it exceeded US$20

billion, the all-time high. Although listed REITs remain one of the main purchasers of real

estate, volume declined in Japan and Singapore.

Equity capital raised by listed REITs

Note: Figures exclude land acquisitions and developments, hospitality and apartments/residential Source: Real Capital Analytics; Deutsche Asset & Wealth Management, February 2015

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DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 12

Investor Profile: Domestic buyers still dominate the investment market in the region while

cross border investors have stepped up their activities in search of diversification. The

volume share of transactions by REITs slightly declined from 28.0% in 2013 to 26.0% in

2014 on the preliminary basis while cross border investors share increased from 19.0% in

2013 to 28.0% in 2014 on the preliminary basis according to Real Capital Analytics.

Institutional investors with preferences over income-producing assets remain challenged

by strong competition from REITs and private investors in acquisition activities.

Accordingly, Asian investors are expected to remain active in outbound cross-border

investments, reflecting the desire to explore higher yielding offshore markets. These

include investors from China, Hong Kong, Singapore, South Korea, Malaysia and Taiwan

which could contribute to yield convergence among global markets.

Asia Pacific investor profile

Note: Figures exclude land acquisitions and developments Source: Real Capital Analytics; Deutsche Asset & Wealth Management, February 2015

Looking ahead, the trend of global and domestic capital chasing prime office assets and

favourable credit conditions could result in further mild cap rate compression in some

markets such as Japan, Australia and South Korea by 20-50 basis points before yields

start to decompress in years to come. Yields are forecast to rise in other markets,

including Hong Kong and Singapore, which will affect the capital values in these highly

cyclical markets. The market witnesses a continuation of the forward funding trend as

banks remain cautious in their lending for development.

Office sector: Initial yields and 10Y government bond yield

f = forecast Note: There is no guarantee the forecast returns shown will materialise Source: Deutsche Asset & Wealth Management; Oxford Economics, Global Insight, February 2015 Past performance is not indicative of future returns

136

84

63

112 114 115

137

117

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013 2014E

Unknown

User/Other

Institutional

Private

Listed / REITs

Cross-Border

(US$bn)

0%

1%

2%

3%

4%

5%

6%

7%

8%

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

SydneyCBD

MelbourneCBD

Hong KongOverall

Tokyo Osaka SeoulCBD

BeijingOverall

ShanghaiOverall

SingaporeRaffles Pl.

10Y Govt. Bond Yield Initial Yield

Page 15: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 13

Given low yields in the office sector, some investors may try to seek opportunities in the

retail sector. Institutional grade assets are tightly held by local developers in some

countries, the lack of investment grade stock available capping deal volumes. Investment

demand for retail assets in China softened due to the government’s anti-corruption

campaign which restricts using luxury goods for bribery purposes, while retail sales

struggled in Japan after the consumption tax hike implemented in April 2014.

Retail sector: Initial yields and 10Y government bond yield

f = forecast. Past performance is not indicative of future returns Note: There is no guarantee the forecast returns shown will materialise Source: Deutsche Asset & Wealth Management; Oxford Economics, Global Insight, February 2015

Investor interest in the industrial and logistics sector has grown due to higher yields and

the gradual maturity of the sector. The supply of modern facilities continues to lag demand

from retailers and 3PLs as a large number of such assets are owned privately or tightly

held by developers in some markets. A further mild yield compression is expected in

Japan and Australia, while it stabilizes at the current level in other markets.

Industrial sector: Initial yields and 10Y government bond yield

f = forecast. Past performance is not indicative of future returns Note: There is no guarantee the forecast returns shown will materialise Source: Deutsche Asset & Wealth Management; Oxford Economics, Global Insight, February 2015

0%

2%

4%

6%

8%

10%

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

201

0 2

012

201

4 2

016f

201

8f

SydneyRC

MelbourneRC

SydneyNeighbourhood

Hong KongOverall

Tokyo Seoul BeijingCore

ShanghaiPrime

SingaporePrime

SingaporeSuburban

10Y Govt. Bond Yield Initial Yield

0%

2%

4%

6%

8%

10%

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

f

20

10

2

01

2

20

14

2

01

6f

20

18

fSydneySouth

MelbourneSouth East

Hong Kong Tokyo Seoul Beijing Shanghai SingaporeHigh Tech

10Y Govt. Bond Yield Initial Yield

Page 16: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 14

Credit markets: The financing environment has become more accommodative than the

previous period in major markets due to the positive effects of recent rate cuts and

supportive measures. “All-in” funding costs fell more than 40 basis points in Australia,

China, Singapore and South Korea last year while it was as low as 1.0% in Japan.

Typical commercial lending terms

Source: Bloomberg, Deutsche Asset & Wealth Management, February 2015

Investment Market Outlook

Japan: On the back of very favourable credit conditions the transaction volume in

Japan in the rolling 12 months to September 2014 was around JPY 4.7 trillion,

indicating a 27.0% increase from the same period the previous year, and the second

largest volume amount in the last fifteen years. Cap rates are expected to remain tight

in this environment below 4.0% for prime assets in Tokyo or around mid 4.0% in Osaka.

Foreign investors have been attracted by the recovering rental markets, healthy yield

spreads together with the yen’s depreciation, while some investors try to avoid prime

sectors. The main target opportunities and types of assets include forward commitment,

hospitality, suburban retail malls, grade-B offices and offices with vacant spaces.

Transaction Volume and Lending Attitude by Banks in Japan

Sources: Urban Research Institute, Bank of Japan, Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

LTV (%) Reference rateSpread(bps)

Interest rate(bps)

Australia 60% 3M BBSW Rate : 2.7% 100 - 200 370 - 470China 50-60% 3-5Y PBOC lending rate: 6.0% 150 - 200 750 - 800Hong Kong 40-50% 1Y HIBOR: 0.85% 300 - 350 385 - 435Japan 50% 5Y JPY swap rate: 0.25% 50 - 100 75 - 125Singapore 65% 3M Swap Offer Rate: 0.55% 115 - 130 170 - 185South Korea 50-60% 5Y KTB: 2.1% 140 - 190 350 - 400

-36

-24

-12

0

12

24

36

0

1

2

3

4

5

6

2000

.09

2001

.03

2001

.09

2002

.03

2002

.09

2003

.03

2003

.09

2004

.03

2004

.09

2005

.03

2005

.09

2006

.03

2006

.09

2007

.03

2007

.09

2008

.03

2008

.09

2009

.03

2009

.09

2010

.03

2010

.09

2011

.03

2011

.09

2012

.03

2012

.09

2013

.03

2013

.09

2014

.03

2014

.09

transaction volume (12 months, LHS) lending attitude DI (6 months prior, RHS) (JPY tn)

Diffusion Index (D

I)

Page 17: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 15

South Korea: The investment market is still dominated by domestic investors, while

international investors increase activities. Given cap rates standing at 5.0% or lower for

prime office in Seoul’s CBD, many investors have moved up the risk spectrum and

considered transactions as asset repositioning, leasing ups, forward commitment, asset

conversions, or more opaque sectors such as suburban retail and industrial. Cap rates

compressed more than 100 basis points in the last three years in the Seoul office sector

and are expected to move further downward in accordance with the lowered interest rate.

Transaction Volume in South Korea

Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

China: Transaction volumes have come off roughly 20.0% in 2014 from the previous

year’s level. While investor interest in the logistics sector has intensified, investors have

also become more cautious towards the office and retail sectors, particularly in lower tier

cities as a sizeable pipeline supply looms nearer. In the meantime, domestic investors

continue to turn their attention overseas as outbound investment rules relaxed further.

Transaction Volume in China

Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

0

2

4

6

8

10

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

201

4E

Other Cities

Seoul Industrial

Seoul Retail

Seoul Office

(KRW tn) Transaction Valume (Korea - All Sectors)

0

4

8

12

16

20

24

28

2007

2008

2009

2010

2011

2012

2013

14 Y

TD

14Q

1

14Q

2

14Q

3

Office Retail Industrial Apt Hotel(USD bn)

Page 18: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 16

Hong Kong: Transaction volume reached its highest level in the third quarter of 2014

since the introduction of Double Stamp Duty in the first quarter of 2013, reflecting

recovering investor sentiments. Activities continued to be dominated by local end-users

while the risk of rising interest rates has seen investors growing more cautious. Given the

generally low yield environment, many investors have adopted a value-add strategy

including converting older but well located buildings to other uses. We could anticipate

some properties to come to market as local developers offload non-core properties to

bolster cash reserves.

Transaction Volume in Hong Kong

Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

Singapore: Similar to the situation in Hong Kong, core investors have grown increasingly

wary of widening yields on the expectation of rising interest rates. Nevertheless, the office

sector has seen a number of en-bloc transactions in 2014, driven by opportunistic

investors looking to capitalize on the rebound in rents and improved sentiments in the

strata-title segment. Looking ahead, investment activities in the core space could

potentially pick up with some funds looking to offload properties as they approach the end

of their fund lives.

Transaction Volume in Singapore

Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

0

4

8

12

16

20

2007

2008

2009

2010

2011

2012

2013

14 Y

TD

14Q

1

14Q

2

14Q

3

Office Retail Industrial Apt Hotel(USD bn)

0

4

8

12

16

2007

2008

2009

2010

2011

2012

2013

14 YTD 0

14Q

1

14Q

2

14Q

3

Office Retail Industrial  Apt Hotel(USD bn)

Page 19: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 17

Australia: Investors continue to retain a strong interest in Australia given the higher

yields, asset liquidity and greater transparency compared to other Asian markets. The

transaction volume in the country in 2014 exceeded the historical high recorded back in

2007. The asking prices for buildings in core Central Business District (CBD) locations

appear demanding with cap rates going below 6.0% for long term leased assets. However,

we believe the low cap rates is in part due to relatively high vacancy rates of about 10.0%

at the moment, a result from the earlier wave of new completions as is the case in

Melbourne. As the leasing markets regain traction, current vacant space would yet provide

an additional source of rental growth. We expect hedging costs to remain a challenge for

foreign investors.

Transaction Volume in Australia

Source: Real Capital Analytics, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

0

10

20

30

2007 2008 2009 2010 2011 2012 2013 2014

Office Retail Industrial Hotel Apartment(AUD bn)

Page 20: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 18

Leasing Market Outlook

Japan: Office space demand in Japan remains healthy fuelled by a resilient corporate

sector. The office vacancy rate in central Tokyo fell to 5.5% in December 2014 from 7.3%

a year ago. With only a moderate level of new supply planned, the healthy demand supply

balance is expected to persist in coming years. Office rents in Tokyo entered the recovery

cycle in 2014 and a further recovery is expected ahead.

Office Supply and Vacancy Rate in Tokyo

Source: Miki Shoji, Jones Lang LaSalle, Mori Building, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

Vacancy rates have continued improving across all other major cities in Japan. Vacancy

rates in Osaka, Nagoya, Fukuoka and Sapporo declined to 8.0% or below as of the end of

December 2014, by well absorbing new supply provided in each market in recent years.

Office Vacancy Rates in Major Japanese Cities

Source: Miki Shoji, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

0

2

4

6

8

10

0.0

0.4

0.8

1.2

1.6

2.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

15E

16F

17F

18F

Grade-A (LHS) Grade-B&C (LHS) Vacancy (RHS) (%)(million sqm)

Forecast

0

4

8

12

16

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

.06

2014

.12

Sapporo Fukuoka Nagoya Osaka Tokyo(%)

Page 21: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 19

South Korea: New office supply peaked in 2010-2013 in the Seoul CBD, pushing up the

vacancy rate to over 9.0% in 2013 which was followed by a mild recovery to 8.0% in 2014.

Given the limited amount of new supply planned going forward, the vacancy rate is now

expected to decline in the second half of 2015 onwards.

Office Supply and Vacancy Rate in Seoul

Source: Mate Plus, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

China: Leasing demand continued to surprise on the upside despite slowing headline

GDP growth, a reflection of structural changes in the economy. The services sector

continued to expand healthily, driven by domestic firms, especially from the rapidly

growing finance, IT and professional services sectors. While foreign firm demand

remained quiet, signs are emerging that this may change soon. 58 multinational

companies received approvals to set up regional or global headquarters in Shanghai in

2014, with many citing continued liberalizations in the free trade zone as an important

consideration. In Beijing, healthy demand and limited supply have driven vacancy to a

historically low level. Looking ahead, office demand in Shanghai and Beijing are expected

to strengthen further, sustained by domestic demand and the eventual return of foreign

demand. Improved prospects for mergers and acquisitions as well as IPOs could provide

additional boosts.

Office Supply and Vacancy Rate in Beijing and Shanghai

Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

0.0%

2.4%

4.8%

7.2%

9.6%

12.0%

-

40

80

120

160

200

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

201

4 E

201

5 F

CBD CBD GBD YBD Vacancy CBD (%)(000 py)

0%

7%

14%

21%

28%

0.0

0.3

0.6

0.9

1.2

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

2015

F

2016

F

2017

F

2018

F

SH new supply BJ new supplySH vacancy rate (RHS) BJ vacancy rate (RHS)

(mn sqm)

Page 22: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 20

Hong Kong: Considerable new office supply arriving in decentralized areas at a period of

soft leasing demand is expected to drive rents lower in Hong Kong where landlords have

historically been responsive to vacancy rate movements. Meanwhile, consolidation in the

financial sector poses further downside risks, although this might be offset to some extent

by anticipation of a pickup in mergers and acquisitions activity in Mainland China.

Office Supply and Vacancy Rate in Hong Kong

Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

Singapore: Office vacancy rate have been receding since 2011 and are expected to

taper further in 2015, given the subdued new office completions from 2013 to 2015.

However, an unprecedented wave of office supply is expected in 2016, which would

reverse the falling vacancy rate trend and put the rental market under pressure through till

2017 as the market digests this new supply. We have pencilled in a rental correction of

about 8.0% during this period with Marina Bay and Shenton Way being most vulnerable

as the new supply is concentrated in these submarkets.

Office Supply and Vacancy Rate in Singapore

Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

0%

2%

4%

6%

8%

0

100

200

300

400

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

2017

F

2018

F

New supply Net absorption Vacancy rate (RHS)(tho. sqm)

-2%

0%

2%

4%

6%

8%

10%

12%

-50

0

50

100

150

200

250

300

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

2017

F

2018

F

2019

F

(tho. sqm)Supply Absorption Vacancy Rate (RHS)

Page 23: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 21

Australia: Office supply in Melbourne peaked in 2013 and only a moderate new supply is

expected in the next three years while Sydney will see the supply surge in 2016, including

Sydney International Towers, three new towers at Barangaroo. The vacancy rate in

Sydney is expected to widen in 2016 before it declines to 10.0% or below the following

year.

Office Net Supply and Vacancy Rate in Sydney and Melbourne

Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

There has been a strong correlation between the vacancy rate and tenant incentives in

Australia. On the back of the elevated vacancy rate landlords are now required to provide

generous incentives to tenants, about 31.0% or a 37 month rent free period, is given to

tenants for ten year leases in Sydney, this is expected to recover only mildly going forward.

Office Vacancy Rate and Rent Free Period in Sydney and Melbourne

Source: Jones Lang LaSalle, Deutsche Asset & Wealth Management, February 2015 There is no guarantee forecast returns shown will materialize

-3%

0%

3%

6%

9%

12%

-50

0

50

100

150

200

2000

2002

2004

2006

2008

2010

2012

2014

2015

F

2017

F

2019

F

supply (LHS)vacancy (RHS %)

(000 m2)Melbourne

-3%

0%

3%

6%

9%

12%

-50

0

50

100

150

200

2000

2002

2004

2006

2008

2010

2012

2014

2015

F

2017

F

2019

F

supply (LHS)vacancy (RHS %)

(000 m2) Sydney

0%

3%

6%

9%

12%

0

10

20

30

40

2003

2005

2007

2009

2011

2013

2016

F

2018

F

rent f ree

vacancy (%)(months)Melbourne

0%

3%

6%

9%

12%

0

10

20

30

40

2003

2005

2007

2009

2011

2013

2016

F

2018

F

rent f reevacancy (%)(months)

Sydney

Page 24: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 22

Property Sectors and Returns

Office

Fundamentals: Vacancy rates recovered in many markets in the region in 2014 including

all Japanese cities, most Chinese cities, Kuala Lumpur and Singapore, while they were

almost flat in other major markets including Seoul, Hong Kong, Sydney and Melbourne

and widened substantially in Brisbane and Perth given the slowdown of the mining sector.

We expect vacancies to recover over the medium term in most markets as confidence

returns to the corporate sector and the level of new supply is kept under control. The

exceptions will be Nagoya, Shanghai, Guangzhou, Hong Kong and Kuala Lumpur where a

large amount of supply is planned.

Office sector: Projected vacancy rate in selected markets

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Office rental growth is anticipated at a healthy level of around 5.0% or more in Singapore,

Beijing and Tokyo in 2015, while growth will be more moderate in other cities. Significant

rental decline is expected in Hong Kong, Perth and Brisbane. Looking ahead in the longer

term, a healthy growth of over 4.0% per annum is likely in Shanghai while more moderate

growth of around 3.0% is expected in key markets including Beijing, Melbourne, Sydney,

Tokyo and Seoul. In Singapore where unprecedented supply is in the pipeline, more than

5.0% of rental decline is expected in 2016 while a negative 1.0% growth on average is

expected in Hong Kong including decentralized areas over the five year horizon.

12.6%

12.5%

12.4%

11.3%

11.1%

10.8%

9.1%

9.1%

7.7%

6.6%

6.5%

5.9%

5.8%

5.1%

4.8%

3.6%

3.4%

2.1%

1.4%

14.9%

8.9%

16.6%

14.8%

9.6%

8.0%

10.9%

10.1%

8.5%

5.6%

2.8%

9.0%

4.6%

8.0%

5.2%

4.0%

5.3%

2.0%

2.3%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Perth - CBD

Kuala Lumpur

Brisbane - CBD

Singapore - Shenton Way

Shanghai - Puxi

Nagoya

Melbourne - CBD

Sydney - CBD

Yokohama

Guangzhou

Shanghai - Pudong

Seoul - CBD

Hong Kong - Overall

Osaka

Tokyo

Hong Kong - Central

Singapore - Marina Bay

Beijing - Overall

Singapore - Raffles Place

Average 2015 to 2019

2014

Page 25: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 23

Office sector: Projected rental growth between 2015f and 2019f

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Except for cities in Greater China, there is an inverse relationship between the expected

vacancy rate and rental growth forecast in most cities. Weak leasing conditions are

expected in Perth and Brisbane due to negative effects from the slowdown in the

commodity sector and also in Hong Kong, Nagoya and Kuala Lumpur due to the supply

surge in the pipeline.

Office sector: Projected vacancy rate vs rental growth between 2015f and 2019f

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

-4.5%

-1.0%

3.2%

4.6%

5.0%

5.0%

5.3%

6.0%

10.1%

10.1%

12.5%

13.0%

13.9%

14.5%

15.1%

15.3%

16.5%

21.2%

22.8%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

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

Shanghai - Puxi

Shanghai - Pudong

Beijing - Overall

Melbourne - CBD

Sydney - CBD

Tokyo

Singapore - Raffles Place

Seoul - CBD

Singapore - Marina Bay

Hong Kong - Central

Singapore - Shenton Way

Guangzhou

Kuala Lumpur

Yokohama

Osaka

Brisbane - CBD

Perth - CBD

Nagoya

Hong Kong - Overall

2015 2016 2017 2018 2019 5Y Cumulative(CAGR)

(4.5%)

(4.2%)

(3.2%)

(3.0%)

(-1.0%)

(-0.2%)

(0.5%)

(0.9%)

(1.0%)

(1.0%)

(1.1%)

(1.8%)

(1.9%)

(2.3%)

(2.6%)

(2.6%)

(2.9%)

(3.0%)

(1.1%)

Nagoya

S'pore Raffles Pl.

S'pore Shenton Way

Melbourne

S'poreMarina Bay

Shanghai PudongGuangzhou

SeoulTokyo

Shanghai - Puxi

Beijing

Perth

Brisbane

Sydney

Hong Kong - Overall

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Vac

anc

y R

ate

(20

15f -

201

9f)

Rental Growth p.a. (2015f - 2019f )

Yokohama

Kuala Lumpur

HK - Central

Osaka

Page 26: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 24

Performance: Modest high single digit returns are expected in most cities in the APAC

office sector over the next five year average, driven by healthy rental growth and

stabilizing cap rates. Shanghai, Beijing, Sydney, Melbourne and Seoul will be among the

top performers while Tokyo and Japanese cities are expected to provide the best excess

returns over the long term risk free rate (10-year government bond yield). The

performance of the regional financial hubs, Hong Kong and Singapore, could be weak

where cap rate expansions seem inevitable over the period, which could negatively affect

capital returns.

Office sector: Projected compounded annual return and excess return

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Retail

Fundamentals: Retail sales were generally below trend in most major countries in the

region in 2014 including Japan, South Korea, China and Australia due to various reasons

including tax increases, anti-corruption measures and weaker consumer sentiments. The

outlook for 2015 should be more positive, however, in line with recovery in the economy,

especially in non-discretionary products.

The current retail environment continues to be a tenants’ market with landlords offering

better incentives such as rent-free periods and contributions to fit-outs. Vacancy rates

could start to inch upwards on the back of growing supply and lower pre-commitment

rates mainly in decentralized areas. In 2015, retailers’ space demand is likely to remain

stable in the majority of locations as consumer sentiment bounces back.

The region’s strongest rental growth in the next five years is expected in Beijing, followed

by Shanghai, Singapore Prime and Guangzhou although growth will be more muted in

suburban, decentralized areas in these cities due to an influx of new supply. In other

markets in the region, such as Australian cities and Seoul, rental growth will be at healthy

levels of about 2.0% or above, almost in line with inflation rates. Rental growth is expected

to be weaker in Tokyo due to the negative impact of the consumption tax increase back in

2014 and the next one planned in 2017.

-1.5%2.2%4.1%4.2%

4.6%6.3%

6.5%7.4%

7.8%7.8%

8.0%8.3%8.3%8.4%

9.0%9.1%

9.6%9.7%

10.6%

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

-2% 0% 2% 4% 6% 8% 10%

Shanghai - Puxi (5.5%)Shanghai - Pudong (4.6%)

Beijing - Overall (4.5%)Sydney - CBD (3.8%)

Melbourne - CBD (3.7%)Seoul - CBD (4.1%)

Kuala Lumpur (3.3%)Brisbane - CBD (3.1%)

Tokyo (7.2%)Perth - CBD (2.6%)

Osaka (7.0%)Yokohama (6.7%)

Guangzhou (1.4%)Nagoya (5.5%)

Singapore - Marina Bay (1.3%)Singapore - Raffles Place (0.9%)Singapore - Shenton Way (0.8%)

Hong Kong - Central (-2.0%)Hong Kong - Overall (-5.6%)

Avg 10Y Bond Yield Total Return (5Y CAGR)Excess Return Excess Return

Page 27: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 25

Retail sector: Projected rental growth between 2015f – 2019f

f = forecast RC= Regional Centres SRC= Sub-regional centres Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Performance: Since there is concern of a demand shift from bricks-and-mortar to online

retailing, there is a clear trend among institutional investors toward long term leases. Also

the impact from online retail is expected to be stronger in the discretionary retail segment,

such as apparel, than non-discretionary segment of food and daily commodities.

Looking ahead, the performance of neighbourhood centres in Australia appears most

attractive due to higher yields compared to larger-sized formats, such as regional centres

(RC). Healthy excess returns (i.e. annual total returns minus bond yields) of about 3-5%

are expected in most key retail markets in the region except for Chinese cities and Hong

Kong.

Retail sector: Projected compounded annual return and excess return

f = forecast RC= Regional Centres SRC= Sub-regional centres Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

5.0%

5.9%

8.5%

10.0%

10.5%

11.3%

11.6%

11.6%

12.0%

12.0%

12.6%

13.8%

15.0%

22.0%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

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

Beijing - Core (4.4%)

Shanghai - Prime (3.0%)

Singapore - Prime (2.8%)

Guangzhou - Prime (2.5%)

Sydney - RC (2.4%)

Melbourne - RC (2.4%)

Kuala Lumpur - KLCC (2.3%)

Hong Kong - Overall (2.3%)

Seoul (2.3%)

Sydney - SRC (2.1%)

Melbourne - SRC (2.0%)

Sydney - Neighbourhood (1.7%)

Singapore - Suburban (1.2%)

Tokyo (1.0%)

2015 2016 2017 2018 2019 5Y Cumulative(CAGR)

10.4%9.8%

9.5%9.0%

8.7%8.5%

8.2%8.0%

6.7%6.7%6.6%

6.4%6.2%

5.5%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

0% 2% 4% 6% 8% 10% 12%

Sydney - Neighbourhood (5.2%)Kuala Lumpur - KLCC (4.8%)

Beijing - Core (4.4%)Sydney - SRC (3.8%)

Melbourne - SRC (3.5%)Seoul (4.2%)

Melbourne - RC (3.0%)Sydney - RC (2.8%)

Shanghai - Prime (1.6%)Singapore - Prime (3.4%)

Hong Kong - Overall (2.5%)Singapore - Suburban (3.1%)

Guangzhou - Prime (1.1%)Tokyo (4.7%)

Ave 10Y Bond Yield Total Return (5Y CAGR)Excess Return Excess Return

Page 28: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 26

Industrial

Fundamentals: Although some weakness is expected to remain in the domestic

environment, e-commerce and third party logistics companies are expected to propel

leasing demand in the modern logistic space across the region. Occupiers with big space

requirements are likely to find it challenging to secure space in modern logistics facilities.

The supply of new modern logistics assets in the Asia Pacific region will be about 30.0%

lower in 2015 compared to 2014, and the lack of supply of large modern quality facilities

will persist in many markets in the region, especially in still evolving Chinese cities. This

supply situation encourages major tenants to pre-commit or develop built-to-suit logistics

facilities and distribution warehouses to meet their needs.

Future demand will be supported by steady retail sales growth, a growing middle class

population, the expansion of the e-commerce sector and the recovery in foreign trade. In

Hong Kong has witnessed a high level of relocation demand from tenants of obsolete

industrial buildings that are to be converted to other uses as part of the government’s

revitalisation policy1, rental growth could be stronger due to the lack of quality space.

Rental growth is expected to be more moderate at around 2-4%, broadly in line with

inflation, in other markets in the region as tenants and shoppers remain mindful of costs.

In Tokyo expected supply surge will be well absorbed within two years, while rental growth

is expected to be minimal.

Industrial sector: Projected rental growth between 2015f – 2019f

Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Performance: Tenant demand continues to outstrip supply for logistics real estate assets

in most markets, while a great deal of supply is expected in 2015 in cities like Tokyo and

Singapore. Thanks to higher yields, increasing transparency of the sector and strong

underlying space demand, the industrial sector has provided higher returns than the office

and retail sectors in the past five years, and is expected to maintain the higher returns in

the coming years too (see page 8). Five-year return forecasts for Chinese tier-1 cities,

Australian cities, Singapore, Seoul and Hong Kong all look favourable with about 8-10%

annual returns, although access to good quality assets is limited in Hong Kong, China and

1 This policy was implemented by the government in April 2010 and it directs most obsolete industrial

stock to be converted to non-industrial commercial uses, including office.

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

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

Hong Kong (4.6%)

Shanghai (4.1%)

Singapore - High Tech (3.6%)

Singapore - Logistics (3.4%)

Beijing (3.2%)

Melbourne - South East (2.8%)

Sydney - South (2.7%)

Sydney - Outer CW (2.5%)

Brisbane - South (2.4%)

Melbourne - West (2.3%)

Seoul (2.0%)

Tokyo (1.1%)

Singapore - Conventional (0.3%)

2015 2016 2017 2018 2019 5Y Cumulative(CAGR)

Page 29: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 27

Seoul. Tokyo is expected to provide good excess returns in the forecast period, while

conventional industrial formats in Singapore are expected to be minimal among investors.

Industrial sector: Projected compounded annual return and excess return

f = forecast Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

11.9%10.7%

10.3%10.1%

10.0%9.9%

9.9%9.6%9.5%

9.1%8.8%

7.1%4.4%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

0% 2% 4% 6% 8% 10% 12%

Shanghai (6.8%)

Beijing (5.6%)

Melbourne - South East (5.1%)

Singapore - High Tech (6.8%)

Brisbane - South (4.8%)

Singapore - Logistics (6.6%)

Sydney - South (4.6%)

Melbourne - West (4.4%)

Sydney - Outer CW (4.3%)

Seoul (4.8%)

Hong Kong (4.6%)

Tokyo (6.3%)

Singapore - Conventional (1.1%)

Ave 10Y Bond Yield Total Return (5Y CAGR)Excess Return Excess Return

Page 30: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 28

Appendix:

Real Estate Market Forecasts Using our market forecasts as a guide, this report has focused on the strategic outlook for

the Asia Pacific region’s economy, real estate investment, and commercial property

fundamentals. This outlook was based on the following assumptions and logic:

Justifications to Deutsche AWM forecast outlook

Outlook Justification

Slower and gentler recovery in

the Grade B Tokyo and Osaka

office market. Retail and industrial

sectors provide higher yields.

Office supply peaked in 2012 in Tokyo and vacancy has since

improved. The recovery in the Grade A office market is now

followed by a gentle recovery in the Grade B market as the

economy rebounded to trend growth. Industrial and suburban

retail attracts yield seeking investors.

Stable returns for the Seoul office

market in the medium term.

Suburban retail and industrial

sectors provide higher yields.

Fundamentals in the office sector are set to improve, though

more completions in late 2015 will likely limit any strong recovery

in the CBD in the near term. Opportunities remain in less

transparent retail and logistics sectors given the lack of

professionally managed product in the market.

Office returns in Beijing and

Shanghai to be limited. Returns

in the logistics markets hold

steady.

Take-up still lags in the Beijing and Shanghai office markets with

returns limited by oversupply in decentralized areas. On the other

hand, returns in the logistics sector look healthy as demand

continues to outstrip supply.

Yields in the Hong Kong office

market shift outward. Rents and

returns in the logistics sector

continue to rise.

Rising interest rates will likely result in an outward movement of

Hong Kong office yields. Office returns are likely to be modest in

the medium term while retail returns will likely remain flat. The

lack of industrial and logistics space will lead to rising rents and

returns in this sector.

Singapore office rents will

decline in 2016. Office cap rates

widen.

A surge of new supply planned in the CBD over the next two

years while the market enjoys a rental turn around. As global

conditions improve, further rental growth is expected, but wider

cap rates remain a risk as interest rates rise.

Returns in the office markets of

Sydney and Melbourne prove

resilient. Retail investors enjoy

steady returns for neighbourhood

retail centres. Industrial markets

hold up well.

Despite the short-term challenges of soft demand in the office

sectors of Melbourne and Sydney, fundamentals will revert to

trend from 2015 onwards. We expect stronger rental growth and

limited new supply to drive this resilience. The retail returns for

neighbourhood centres hold steady given the defensive nature of

these assets. Logistics returns track decently as demand

outstrips supply and higher yields draw more interest from

investors, both local and offshore.

Note: There is no guarantee the forecasts will materialise Source: Deutsche Asset & Wealth Management, February 2015

Page 31: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 29

Deal Flow and Accessibility Challenges Below shows deal flow and accessibility challenges for commercial real estate

investments especially for cross border investors. Hedging costs are expensive in

Australia and South Korea for Euro and US dollar investors 2 and this can be an

impediment for cross border investors when competing with domestic investors. In Japan

local investors and developers have the upper hand in the cost of capital due to extremely

cheap borrowing costs in the local debt market.

Onshore holding structures in China need to be in the form of foreign-invested enterprises

(FIEs) or wholly owned foreign enterprises (WOFEs) to receive equity investments from

foreign parties. Conversion of structures is required if the existing holding structure is not

in either of these forms and is subjected to regulatory approval, which introduces

regulatory uncertainties.

more favorable neutral less favorable

2 For example, hedging costs stood around 270 basis points in Australia and around 170 basis points in

South Korea for Euro investors as of the end of 2014.

Target Market Cities Sectors Deal FlowChallenges for

Foreign Investors

AustraliaMelbourne/

SydneyOffice/Retail/

Industrial/Logistics Hedging Cost

JapanTokyo/Osaka

Office/Retail/Industrial/Logistics

Cost of Capital

(Leverage Level)

SouthKorea

SeoulOffice/Retail

Hedging Cost

Industrial/Logistics

Singapore SingaporeOffice/Retail/

Industrial/Logistics

China Tier 1 citiesOffice/Retail

Holding Structure

Industrial/Logistics

Hong Kong Hong KongOffice/Retail/

Industrial/Logistics

Page 32: Asia Pacific Real Estate Strategic Outlook

DEUTSCHE ASSET & WEALTH MANAGEMENT Asia Pacific Real Estate Strategic Outlook | March 2015 30

Important Information Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or any of its subsidiaries. Clients will be provided Deutsche Asset & Wealth Management products or services by one or more legal entities that will be identified to clients pursuant to the contracts, agreements, offering materials or other documentation relevant to such products or services. In the U.S., Deutsche Asset & Wealth Management relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Australia Limited (ABN 37 006 385 593) an Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for direct real estate business), and Deutsche Asset Management (Hong Kong) Limited (for real estate securities business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N); in the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited and Deutsche Asset Management (UK) Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Limited and Deutsche Alternative Asset Management (Global) Limited; in addition to other regional entities in the Deutsche Bank Group.

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The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance.

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Notice to Investors in Switzerland: This presentation document has been prepared upon your request exclusively on a best effort basis and intends to respond to your investment objective/strategy as a sophisticated and qualified investor within the meaning of the Swiss Collective Investment Schemes Act of June 23, 2006 (“CISA”). This document has not been approved by the Swiss Financial Market Supervisory Authority (“FINMA”) under the Swiss Collective Investment Schemes Act of June 23, 2006 ("CISA"). The products contained in this presentation may not be registered with the Swiss Financial Market Supervisory Authority (“FINMA”), and therefore, not supervised by the FINMA. As a result, you cannot claim any protection for unregistered products under the CISA. Notice to Investors in the United Kingdom: Issued and approved in the UK by Deutsche Bank AG London Branch. Deutsche Bank is authorised under German Banking Law (competent authority: BaFin – Federal Financial Supervising Authority) and Deutsche Bank AG London Branch is regulated by the Financial Conduct Authority for the conduct of UK business. This document is a “non-retail communication” within the meaning of the FCA’s Rules and is directed only at persons satisfying the FCA’s client categorisation criteria for an eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client.

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The views expressed in this document constitute Deutsche Bank AG or its affiliates' judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. The information contained herein must be kept strictly confidential. No further distribution is allowed without prior written consent of the issuer.

Any forecasts provided herein are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Investments are subject to risks, including possible loss of principal amount invested.

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Europe

Simon Durkin Head of Research & Strategy, Europe [email protected] Tom Francis Property Market Research [email protected] Matthias Naumann Property Market Research [email protected]

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