asia pacific vision q4 2012 abridged

Q4 2012

ASIA PACIFIC VISION The Investment Outlook For Major Property Markets (Abridged Version)

ASIA PACIFIC VISION | Q4 2012

DISCLAIMER Forecasts and projections regarding the likelihood of various sectoral, market and investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. CBRE Global Investors' clients may have acquired properties in the sectors and regions described in this research report. In addition, CBRE Global Investors is continuously marketing to new clients that will invest in properties within the sectors and regions covered. CBRE Global Investors Middle East Limited provides this material on behalf of CBRE Global Investors. CBRE Global Investors Middle East Limited is regulated by the Dubai Financial Services Authority. This marketing material is intended only for Professional Clients (as defined by the DFSA) no other persons should act upon it. Past or projected performance is not necessarily a reliable indicator of future results.


WELCOME TO ASIA PACIFIC VISION

Exactly four years ago, the very darkest days of the Global Financial Crisis (GFC) were upon us. Key economic and financial indicators were in free fall, signifying the onset of the worst global recession since the 1930s. It was in that final quarter of 2008 when, amidst such uncertainty, my colleagues (including 4 co-authors of this current report) and I were drafting our Asia Pacific View 2009. What did we say in that report? And what has happened since? Among the key messages in that edition of four years prior, we noted that:

Distressed sellers are emerging across the region. There is a need to recapitalize on real estate assets which are otherwise very attractive. Since then, we have seen that domestic investors, in particular proved to be keen buyers as extra-regional capital withdrew to their source markets. The home-bias became quite pronounced in a number of Asia Pacific markets, but there was comparatively little distressed deal flow in this region. Although consumer confidence continues to fall, we believe retail will be a defensive asset during the downturn. Recent pan-Asian total return results from IPD have proved this to be true: retail real estate outperformed the other property types on an unlevered total return basis for both the 5 year and 3 year periods through the end of 2011. Keen to placate dissatisfaction or potential unrest from the economic fallout, governments around the region are trying to make housing more attainable for their citizens. As the most regulated property type, policy-makers across much of the region have been suppressing residential prices in the past few years. Housing affordability in China is vastly more improved today than two years ago. China has also been more responsive to inequality issues: it has constructed 4.8 million affordable housing units in the first nine months of this year alone. Any signs of a recovery in US demand will also be keenly watched in the region. Indeed this statement is as true today as it was then!

We feel that the long, bumpy road to recovery for the global economy still has some way to go. Imbalances that had built up for a decade or so need a long time to adjust. The news from the Eurozone is especially worrisome and a heightened global systemic risk environment persists. Having endured a sizable shock test in 2008/09 the real estate markets of Asia Pacific have rebounded. Far from being synchronized, they display a number of divergent pricing trends and offer a diverse set of opportunities for investors with various risk-return appetites. Shane Taylor

Asia Pacific Head of Research & Strategy


ASIA PACIFIC VISION Q4 2012 TABLE OF CONTENTS

ASIA PACIFIC ECONOMIC OUTLOOK ........................................................................ 1

ASIA PACIFIC DIRECT INVESTMENT MARKET ............................................................ 3

AUSTRALIA .............................................................................................................. 5

CHINA .................................................................................................................... 7

HONG KONG ......................................................................................................... 9

INDONESIA ........................................................................................................... 11

JAPAN ................................................................................................................... 13

KOREA, REPUBLIC OF ............................................................................................ 15

MALAYSIA ............................................................................................................. 17

SINGAPORE .......................................................................................................... 19

TAIWAN ................................................................................................................ 21

VIETNAM ............................................................................................................... 23

ASIA PACIFIC VISION | Q4 2012 | 1

ASIA PACIFIC ECONOMIC OUTLOOK

As a heightened environment of global

economic and financial risk remains, the negative impacts have been felt in the Asia Pacific economies as well. Many forecasting agencies, including the Economist Intelligence Unit (EIU), have lowered their 2012 and 2013 GDP growth expectations for a number of the Asian economies, particularly the more export-dependent economies such as Singapore, Hong Kong and Taiwan. Domestic demand in the region has held up well so far; however, the continued weakness in the developed world will inevitably pose some challenges for the region in the short-term. The EIU forecasts the Asia Pacific region to grow by 4.5% and 4.8% for 2012 and 2013 respectively. (Figure 1) Consensus Economics (as of October 2012) is slightly more optimistic, with the mean forecast of GDP growth at 4.8% for both 2012 and 2013 for the full Asia Pacific region. Excluding Japan, the regional growth rate is even higher at 6.1% and 6.6% for this year and next.

A number of the regions economies are forecast to grow below their respective historic trends in the next few years, notably Australia, China, South Korea and Singapore. Yet we are encouraged that forecast growth in Japan for the next few years is expected to surpass its own historic GDP growth trends. Some South East Asian countries have had their growth prospects upgraded in recent months, notably Malaysia, while Indonesia and Thailand are also likely to see an acceleration of their growth rates relative to respective trends over the next 5 years. (Figure 2)

Inflationary pressures in most Asia Pacific economies have continued to abate thus far this year. This allows many of the Central Banks and other regulatory authorities a little more scope to stimulate growth should the global economy further deteriorate in the coming year. Still, a fine balancing act needs to be made in finding just the right mix of policy measures so that inflation does not re-emerge as a problem in the medium term. Once again, and in contrast to the other countries of the region, for Japan a flat (at best) or deflationary outlook is forecast. (Figure 3) Following on from the announcement of the third round of quantitative easing (QE3) in the U.S., concerns have increased in some markets that further asset price bubbles in selected markets may result. Meanwhile, China recently announced that it would bring forward some planned infrastructure projects; this had been a favored

method of economic stimulus back in 2008 and 2009.

Despite current policy rates being at, or fairly close to, the low end of their historic range, there is still more room for policy flexibility in most Asia Pacific countries than elsewhere in the world. This is particularly so for countries which kicked off their tightening cycle as early as 2010. We noted in our last edition of Asia Pacific Vision that in spite of their sub-trend growth, Australia and South Korea may nonetheless remain the two fastest-growing economies among the OECD members, and both may have sufficient firepower to stimulate their economies if necessary. Indeed, in just the past few weeks, the Central Banks of both countries cut policy rates once again in attempts to shield them from the worst of the global slowdown. Both of these Central Banks had been among the more aggressive in tightening monetary policy in 2010 and 2011, but now they too are in a more accommodative mode. (Figure 4)

Labor markets continue to remain very tight in the major economies of the region and this bodes well for consumption-related sectors. For some Asia Pacific countries, unemployment rates are close to their lowest levels in a decade. (Figure 5) Surveys of net hiring intentions in the major economies of the region have recently highlighted some more caution. However many firms, especially in the services sectors, still indicate a willingness to hire new staff in the coming year. Shortages of skilled workers in some segments and in some countries place greater emphasis on boosting the education and training of students and workers.

With a large and still growing demographic base and increasing numbers of the regions inhabitants living in cities, modern residential stock, new retail formats and logistics facilities to support these new retail supply chains are needed. In all the major markets of the region, retail sales growth for this year and the next two years is projected to equal or surpass the growth of the past three years. (Figure 6) Big emerging markets such as Vietnam, China, India and Indonesia together with high-growth tourism areas including Hong Kong, Malaysia and Singapore are forecast to record retail sales growth of between 7.5% to 20% each year until 2014.


ASIA PACIFIC ECONOMIC OUTLOOK CHARTS

FIGURE 1: ANNUAL GDP GROWTH: MAJOR REGIONS FIGURE 2: ANNUAL GDP GROWTH: MAJOR ASIA PAC

COUNTRIES

Source: Economist Intelligence Unit Source: Economist Intelligence Unit

FIGURE 3: CHANGE OF CONSUMER PRICES FIGURE 4: POLICY RATES

Source: Economist Intelligence Unit Source: CEIC

FIGURE 5: UNEMPLOYMENT RATES FIGURE 6: RETAIL SALES GROWTH, PA

Source: CEIC Source: Economist Intelligence Unit

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ASIA PACIFIC DIRECT INVESTMENT MARKET

Direct investment in the regions real estate

markets totaled over USD 63 billion in Q2 2012 according to Real Capital Analytics (RCA) which was up 10% q/q but was down 21% from the same period in 2011. For the full H1 2012 period, the total transaction volume of over USD 128 billion was down a sizable 35% from H1 2011. However certain markets in the region were notably more traded in H1 relative to the same period in 2011, particularly Hong Kong retail (where volumes were up 60%) and office (up 26%), Tokyo retail (up 55%) and industrial (up 25%) and Sydney office (up 57%). When China land sales were excluded, the volume of real estate transactions for the region in Q2 2012 was broadly in line with the long-term average. (Figure 1) The Tokyo office market, with over USD 6.2 billion in deals during H1 2012, was the worlds second most active market for the period (after London metropolitan area offices) while Hong Kongs very active retail and office markets also made the global top ten list of highest deal volumes during H1 2012.

Land sales in China were down 49% y/y in H1 2012 and the investment implications of this trend is further explored in our final section on enhanced strategies. For just the Q2 period, Chinas total real estate transaction volume was down 26% y/y and this was largely attributable to the falling number and price of land plot sales. Singapore and South Korea underwent y/y falls in Q2 as well. (Figure 2) In contrast to the sharp rise in the volume of sales of development sites in the US and UK in H1 2012 on a y/y basis, the major markets of Asia Pacific all recorded falls for the same period: Singapores volume of development site sales were down 41% in H1 2012 compared to the same period last year, while Hong Kong was down 17% and Japan down 24%. For all real estate, Australias surging volume of sales at approximately USD 6.5 billion in Q2 2012 alone, was the highest quarterly volume since 2007. RCA data highlights the important role that foreign buyers (especially Asian capital sources) have had in driving those acquisitions.

Transaction-based cap rates for H1 2012 have continued to display some highly divergent trends. (Figure 3) Very generally, cap rates have stabilized for Japan with recent evidence of some compression. For the Australian deals of the recent quarters, the weighted cap rate for the main property types has been broadly flat and overall is notably higher than for many

other markets within Asia Pacific region. For Hong Kong, cap rates have already compressed to very low levels. Clearly pricing in these three markets has diverged widely and whereas the spread between the transaction cap rates of these three key markets was around 140 bps in mid 2007 it is currently over 550 bps.

As we reported previously, further progress has been made in terms of investment performance measurement of unlisted real estate in the region. ANREV (the Asian Association of Investors in non-listed Real Estate Vehicles) released its first-ever index of fund performance in late 2011, revealing that positive total returns (in local currency terms) of 8.2% had been achieved for the regions funds in 2011, following total returns of 10.3% in 2010. This came after negative performance in 2008 and 2009 but with high 20.6% returns in 2006 and 23.2% returns in 2007 prior to the GFC. These results are based on the performance of 65 funds with a gross asset value of USD 65.2 billion. Re-calibrating the performance based on investment style of the constituent funds, it can be seen that core strategies proved the most defensive over the past five years. (Figure 4) The collective performance of value add funds fell farthest and has been slower to rebound.

June 2012 saw the release of the IPDs latest Pan Asian Returns, an additional indicator of the increasing transparency and performance of the regions real estate markets. Drawing from a universe of over USD 244 billion, total returns of 8.4% were recorded for 2011 (unlevered and based on weighted national returns in LCUs). The total return combines an income return of 5.6% with capital growth of 2.7%. The 2011 result was up from the total return recorded in 2010 of 6.6%. The regional return is boosted by the inclusion of IPDs separate indices for Australia and New Zealand and when combined, results in a total return of 8.7% in 2011 (and draws from a combined universe of over USD 391 billion). As we had forecast back in 2009, retail real estate is the most defensive property type in the region and it also outperformed on a relative basis. (Figure 5) The strongest performers in the region for the three and five year periods (to the end of 2011) were Hong Kong and China. (Figure 6) Note that as with other IPD returns data, these are unlevered returns denominated in local currency units.


ASIA PACIFIC DIRECT INVESTMENT MARKET CHARTS

FIGURE 1: ASIA PACIFIC INVESTMENT VOLUMES, USD BN PER QUARTER

FIGURE 2: MOST TRADED MARKETS IN ASIA PACIFIC

Source: Real Capital Analytics Source: Real Capital Analytics, Note: Figures denote Y/Y change

FIGURE 3: CAP RATE TRENDS, SELECTED MARKETS FIGURE 4: ANREV TOTAL RETURN INDEX, BY FUND STYLE

Source: Real Capital Analytics Note: blended cap rate for office, retail and industrial transactions

Source: ANREV

FIGURE 5: PAN ASIA TOTAL RETURN BY SECTOR FIGURE 6: PAN ASIA TOTAL RETURN BY COUNTRY

Source: Investment Property Databank Source: Investment Property Databank

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China Land

Other Property Types

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1015202530354045

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AUSTRALIA

GDP growth which is below trend, yet

nonetheless positive is the bittersweet base case for Australia in the outlook period. Growth is moderating with the EIU forecasting a 3.2% growth rate in 2012 and 3.0% in 2013. (Figure 1) The Consensus Economics mean GDP forecast for 2012 is now 3.4% (i.e. 10 bps higher than the mean forecast of three months prior). However, the mean forecast for 2013 is now 2.9% (which is 20 bps lower than the mean of three months prior). The Reserve Bank of Australia cut the policy rate another 25bps at their October meeting to 3.25%, the lowest level since October 2009.

After 21 successive years of positive annual GDP growth, the near to medium term future of Australias economic growth rate has perhaps rarely been as uncertain as now. Since July 1st its export iron ore prices have slid considerably. Usually when prices for its mineral exports fall, the AUD falls as well. Yet the AUD has recently remained strong and above parity with the USD and this continues to harm the competitiveness of Australias other exports. Part of the reason is that its comparatively high interest rates and AAA credit rating have made its government bonds so attractive. Government bond yields remain at close to historically low levels. (Figure 2) Indeed the overwhelming majority of Australias government bonds in recent quarters have been purchased by foreign investors.

The most mining-dependent state economy, Western Australia, has recorded strong real estate returns on the back of the recent boom in its exports. Retail real estate total returns in the state were over 11% in the year to June 2012 according to PCA/IPD and its industrial returns even higher at over 17% (unlevered and in local currency terms). Its capital city, Perth, saw CBD office returns surpass 14% as did Brisbane, capital of the other major mining state of Queensland. Going forward, these locations may be harder hit in a global systemic shock scenario affecting the commodities sector.

Nationally, the all property total returns (also unlevered, in local currency terms) were 10% for the year to June 2012, according to PCA/IPD. These returns continue to be in line with our performance forecasts. (Figure 3) The PCA/IPD index which represents over AUD 135 billion of real estate assets has continued to outperform the main A-REIT index, the broader

equity index and the all series/maturities bond index for Australia over the 10 and 15 year periods. Total returns have also very easily outstripped CPI over the 1, 3, 5, 10 and 15 year periods.

Office sector total returns were 10.5% y/y as of June 2012 (with income returns delivering 7.5% and capital growth of 2.9%). Our forecast of the sector has moderated slightly, yet the average annual five year total return is in the low double digits, reflecting falling vacancy rates and reasonable rental growth (albeit at a different pace depending on the city). (Figure 4) Prime vacancy rates are currently lower than in most cities of the OECD-member countries and upcoming supply pipelines are below trend.

Yield spreads between property and government bonds are currently very wide, although they should narrow later in the outlook period. Thus, although the sector has notched up two years of solid performance already, we continue to believe that it is close to the start of an ongoing cyclical rebound.

The retail real estate sector has recently been the relative underperformer just as we had forecast, with total returns of 9.1% y/y in June 2012. Vacancy rates will likely remain in the low single digits given still fairly favorable demographics and little new supply, but we expect the sectors income and capital value growth to be lower than historic long term averages. (Figure 5) Consumers and retailers face a number of headwinds in the coming few years which will likely challenge the sector, but we still forecast average annual total returns in the high single digits for the coming five year period and so continue to believe that this sector has a legitimate role in any truly global real estate portfolio.

The industrial sector remains attractive given its high income returns, which were 8.8% y/y as of June 2012. However, capital growth was much more modest at just under 1% for the same period. Import volumes should continue to expand over the next few years and with limited speculative development in the main markets, supply pipelines are fairly benign. We are forecasting total returns broadly in line with the historical average to continue for the coming five year period. Thus, the five year forecasts contain some rental uplift and modest capital value growth. (Figure 6)


AUSTRALIA CHARTS

FIGURE 1: ANNUAL GDP GROWTH, Y/Y FIGURE 2: LONG TERM GOVERNMENT BOND YIELD


FIGURE 3: PROPERTY TOTAL RETURNS BY SECTOR FIGURE 4: SYDNEY OFFICE RENT AND CAPITAL VALUE GROWTH TRENDS

Source: Property Council of Australia/International Property Databank for historical (national) index, CBRE Global Investors forecasts (for Sydney)

Source: CBRE Research, CBRE Global Investors

FIGURE 5: SYDNEY SHOPPING CENTER RENT AND CAPITAL VALUE GROWTH TRENDS

FIGURE 6: SYDNEY INDUSTRIAL RENT AND CAPITAL VALUE GROWTH TRENDS

Sources: CBRE Research, CBRE Global Investors Sources: CBRE Research, CBRE Global Investors

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CHINA

In Q3 2012, Chinas GDP further slowed to

7.4% y/y from 7.6% y/y in Q2, which was broadly in line with expectations. The Consensus Economics mean GDP forecast for 2012 is now 7.7% (as of October). The government is confident that the annual GDP growth target of 7.5% is achievable. The lowering of the official growth target earlier this year suggests that they are comfortable with a more moderate pace of expansion going forward. With m/m rebounds in industrial production, retail sales, fixed asset investment, together with easing inflation, the September economic data suggests a broadly stabilized economic growth pattern in China.

While industrial production rebounded from its three-year low of 8.9% y/y in August to 9.2% y/y in September, domestic demand including retail sales and fixed asset investment showed a similar upward trend suggesting a moderate rebound of the economy. September trade data suggests a surge in both imports and exports. Yet, this stabilization may not persist if the external economic environment further weakens. The EIU is expecting a negative contribution to GDP from net exports for both 2012 and 2013. (Figure 1)

Real interest rates continue to remain in positive territory, thanks to lower food prices which have led to a decelerating consumer price index. (Figure 2) The latest CPI reading was 1.9% y/y in September, further easing from 2.0% y/y in August. Year-to-date (through September) CPI of 2.8% y/y reveals that the current CPI is close to the level of the Central Banks target of 3%, hence there may be room for monetary easing with the Central Bank potentially poised to cut the policy rate further should CPI remain below the target for the rest of 2012.

In contrast to the weak manufacturing PMI, which traditionally reflects manufacturing activities that are mainly export-related, the non-manufacturing PMI, which focuses on the service related sectors, portrays a very different picture. (Figure 3) In fact, with the exception of seasonality in the Chinese New Year period (usually around February every year), non-manufacturing PMI reveals that the service industry has been in an expansion mode since 2009. Computer and software companies for example are among the most optimistic groups surveyed. Therefore, the fast

development of the service sector amid the ongoing economic restructuring has supported the overall office and logistics sectors particularly well.

According to the National Bureau of Statistics, in August 2012 there were 36 cities which recorded a m/m residential price increase out of the 70 cities monitored, compared with zero cities recording average price increases in January 2012. (Figure 4) In contrast, the number of cities which recorded a decline in the m/m price fell to 20 in August 2012 down from 52 in December 2011. This illustrates the high degree of cyclicality of the residential market in China whereby sentiment can shift very quickly, particularly when real housing demand is artificially suppressed by restrictive policies. This is also in-line with our earlier estimation that overall, there is a housing shortage in China and there is a need to supply the end-user and upgrade demand with appropriately sized and valued stock. We continue to believe that supportive policies towards end-users will be the key driver for the on-going recovery in the overall residential market.

As the national trend of service sector expansion continues, office demand remained broadly stable in the first half of 2012 with domestic companies and state-owned enterprises the key drivers in absorbing office space. The strong momentum continues in Beijing given limited new supply and solid demand. (Figure 5) In Shanghai, however, financial institutions and MNCs are generally more cautious given the higher than historical average of new supply that has led to flat rental performance in H1 2012. If this trend continues, Beijing could be overtaking Shanghai to become the most expensive office market in China in terms of occupier costs in 2013.

Retail continued to be the best performing sector in the first half of 2012 as international retailers were active in the leasing market. Yet a high level of new supply across many cities in China may push vacancy higher over the medium term especially in selected Tier 2 and 3 cities. Domestic investors, in particular, continue to exert high interest for well-located retail properties. We expect cap rates for core retail properties to remain broadly stable over the medium term as Chinas real estate market continues to develop. (Figure 6)


CHINA CHARTS

FIGURE 1: CHINAS REAL GDP & COMPONENTS, % Y/Y

FIGURE 2: INFLATION, DEPOSIT RATE AND REAL* INTEREST RATE, %

Source: Economist Intelligence Unit Source: CEIC. *Real interest rate defined as 1Y deposit rate minus CPI

FIGURE 3: NON-MANUFACTURING PMI FIGURE 4: RESIDENTIAL PRICE TRENDS IN 70 MAJOR CITIES, M/M PRICE CHANGE, # OF CITIES

Source: CEIC, National Bureau of Statistics Source: CEIC, National Bureau of Statistics

FIGURE 5: OFFICE RENTAL INDEX, 2003Q1=100 FIGURE 6: SHOPPING CENTER CAP RATES BY CITY

Source: CBRE ERIX Source: CBRE ERIX, CBRE Global Investors

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Net Exports Fixed investment

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BeijingShanghaiGuangzhou


HONG KONG

Hong Kongs open economy is highly exposed

to the global economic slowdown, with the trade sector proving to be the main drag on GDP growth this year. The EIU forecasts GDP growth of just 1.8% for 2012. (Figure 1) In Q2 2012, economic growth contracted modestly (by 0.1%) q/q. Consistent with the weakness in the trade sector, (Figure 3) merchandise exports plummeted 14.0% q/q in Q2 2012 (compared to 7.4% q/q for Q1). The government lowered the GDP growth range to 1% - 2% from its previous forecast of 1% - 3% for 2012.

The negative impact of declining exports is somewhat offset by solid private consumption growth of 3.7% y/y in Q2 2012. A strong employment market and income growth are helping to support domestic household spending. The unemployment rate recently fell to 3.2% on a seasonally adjusted basis while at the same time median household income increased by 5.1% y/y. The EIU forecasts a slower pace of growth for private consumption and personal disposable income in 2013 at 3% y/y and 0.4% y/y, in real terms respectively.

According to the Hudson Report (in the April 2012 release), Hong Kong is the only market surveyed in Asia where hiring expectations are increasing, thus indicating a tight labor market. (Figure 2) The global economic outlook has created a mixed picture for the Central Grade A office market in Hong Kong, where take-up and rental trends have become more building-specific. Induced by stronger than expected demand from the non-banking/finance sector, take up in Central turned positive to 126,000 sqft in Q2 after falling for the two previous quarters. Thus, the vacancy rate declined to 5.1% in Q2 2012 from 5.7% in the previous quarter. (Figure 4)

The office sector saw rents decline in Q2 (down 2.0% q/q), but at a much slower pace compared to the fall in Q1 2012 (down 9% q/q). Weakening demand from multinational corporations and banks has led to softening of rents in the top tier Grade A office buildings. The scarcity of Grade A office supply in Central will continue in 2013 and 2014, which will likely prevent rents from undergoing a significant correction. We forecast rents to fall by 15% for Central Grade A office for the full year of 2012. (Figure 5) On the demand side, sound economic fundamentals will continue to favor non-banking and finance sectors, which in return, supported expansion plans during

Q2 2012, regardless of the headwinds from the Eurozone. Relocation activities will continue to support rent performance in emerging office sub-markets. Relocation of cost-cautious tenants from Central continued to support rental growth in the decentralized districts. The rental gap between Central and other key submarkets is narrowing. (Figure 6)

The slowdown of global demand posed many challenges for industrial space providers, especially for those spaces dominated by export-oriented tenants. However, rising demand from the strong retailing sector and the growing data center sector have somewhat compensated for the faltering leasing demand from exporters. For Q2 2012, rents grew 3.5% q/q. Over the longer-term, there will be a potential reduction in new supply due to redevelopment or rezoning for other uses. This potential shortage in supply together with the growing demand for quality industrial premises will likely introduce new challenges and opportunities in the industrial real estate sector.

During the first six months of 2012, retail sales growth decelerated to 13.1% y/y (vs 23.6% y/y growth for the same period last year). During the period, 15.6 million mainland tourists visited Hong Kong, representing a 22.7% y/y increase. The reason for the divergence between decelerating retail sales and increased mainland visitors is that the average per capita spending of mainland tourists is declining. The key risks to the outlook include: increasingly cautious retailers concerned by the global uncertainties and the falling per capita spending from mainland tourist consumers.

With fears that the latest round of quantitative easing will further inflate residential property prices, the Hong Kong Monetary Authority quickly responded and announced a series of mortgage tightening measures to curb liquidity-driven demand. Year to date, prices have increased 13.2% (for mass) and 10.3% (for luxury), surpassing the previous peak (which was in 1997) by 18.2% and 30.6%, respectively. Further increases in property prices may weaken the political clout of the new government. Hence, policy risk is heightened in this sector.


HONG KONG CHARTS

FIGURE 1: ANNUAL GDP GROWTH, Y/Y FIGURE 2: UNEMPLOYMENT RATE AND NET HIRING INTENTIONS

Source: Economist Intelligence Unit Source: Census & Statistics Department; Hudson

FIGURE 3: IMPORTS AND EXPORTS, Y/Y FIGURE 4: OVERALL GRADE A OFFICE RENT AND VACANCY

Source: Census & Statistics Department Source: CBRE

FIGURE 5: CENTRAL OFFICE RENT GROWTH FORECAST FIGURE 6: CENTRAL OFFICE RENT PREMIUM OVER OTHER OFFICE SUB-MARKETS

Source: CBRE Global Investors Source: Colliers, DTZ, Savills, CBRE Global Investors

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15%

20%

25%

050

100150200250300350

00Q2

02Q2

04Q2

06Q2

Q208

10Q2

12Q2

Rental Index

Central Office Rent (LHS)Vacancy Rate (RHS)

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

01 03 05 07 09 11 13 15 17

0%50%

100%150%200%250%300%350%400%450%

00 01 02 03 04 05 06 07 08 09 10 11 12

Wanchai/CWB

TST

Island East

Kowloon East


INDONESIA

Indonesias economic growth rate surpassed

consensus expectations, increasing 6.4% y/y in Q2 2012, driven by robust consumption and investment. Household consumption grew 5.0% y/y, government spending grew 7.0% y/y and investment increased by 12.3% y/y. Overall, Indonesia is expected to achieve its long-term average growth trend in 2012, with Consensus Economics predicting a GDP growth rate of 6.1% and the EIU forecasting 5.9%. (Figure 1) This will place Indonesia as one of the best performing economies in the world in 2012. Economic reforms in the past 10 years have earned Indonesia improved sovereign credit ratings, and with plentiful natural resources, Indonesia possesses great potential to become an economic powerhouse in the next decade. Employment growth is forecast to be strong. (Figure 2) McKinsey predicts that Indonesia will become the 7th largest economy in the world by 2030; it is currently ranked in 16th place.

Office leasing activity remained active in Q2 2012, with expansion from existing tenants in the oil & mining, IT, and banking sectors. Spaces were taken up in newly completed buildings, which were offering competitive prices. Strong demand drove up rents in Q2 2012. Although there were two major office completions earlier this year, the CBD office occupancy rate rose 1.3 percentage points to 91.3%. WTC 2 will soon be completed and it recently signed a lease commitment with a local bank, Bank Permata, who will be taking up 17,500 sqm (31% of total NLA) for its relocation and expansion. International bank, Standard Chartered also took up 10,000 sqm (18% of total NLA) in the same building.

Although office pre-commitment levels have been positive, over 60% of the total supply pipeline released in 2012 is still available. We expect the vacancy rate will rise in H2 2012 and rents will only grow marginally for the remainder of this year. We are, however, confident in Indonesias growth profile and expect further company expansions to absorb the new space and thus lead to further rental increases from 2013 onwards. (Figure 3) Positive sovereign re-ratings from Moodys and Fitch, could potentially attract further FDI in the coming decade, and thus increased demand for further real estate development and occupation. On the investment front, demand for strata-titled offices remained high and most

acquisitions were for owner occupation, particularly from telecommunications, insurance and law firms.

The retail sector is supported by the rapidly growing middle class, (Figure 4) as well as a sizable young population with a median age of just 28.2 years. The growing trend of gated community developments on the periphery of large metropolitan areas presents retail development opportunities. There is a growing trend of smaller regional mall developments in suburbs with increasing populations.

Retail space demand from local and foreign retailers remained healthy thus far in 2012 as was the case in 2011, generating strong retail sales growth. (Figure 5) The second quarter saw an addition of one major mall (Ancol Beach City, located in North Jakarta), which pushed occupancy levels down slightly to 87.5%. Ground floor rents remained at the same rate at Rp949,000 per sqm per month. There is a larger supply pipeline in H2 2012 and 2013, of 212,000 sqm and 391,000 sqm, respectively. Of the supply for the remainder of 2012, 88% is already pre-committed and this indicates optimism in the retail market. Another notable mall scheduled for completion in 2H 2012 is Kota Kasablanka, which is already 90% pre-committed. This mall will have tenants such as the international brand hypermarket Carrefour, and fashion retailers SOGO, Nike, Giordano, and Zara. On the local front, ACE hardware, Electronic Solution and Cinema XXI also took up space in the upcoming mall.

New foreign brands have entered the market and many more are expected to launch their products in Jakarta in the coming decade. There is no shortage of foreign brands targeting Indonesia. Japanese convenience store, FamilyMart, is to open 300 stores by 2015. U.S. Shoe retailer, PayLess Shoes, opened its first store in Jakarta in April 2011, and now has announced plans to open 150 stores over the next three years. IKEA furniture stores are to open in 2014, through retail giant PT Hero Supermarket (HERO) as the franchiser of IKEA. Going forward, retail rents are likely to grow positively for 2012 on the back of a resilient economy, and from the expected expansion of local and foreign brands. (Figure 6) However, rental growth may likely be limited to the low single digits again next year by the large incoming supply targeted for 2013, which represents about 9% of current stock.


INDONESIA CHARTS

FIGURE 1: REAL GDP GROWTH AND INFLATION RATE FIGURE 2: EMPLOYMENT GROWTH RATE


FIGURE 3: JAKARTA OFFICE RENT AND CAPITAL VALUE GROWTH TRENDS

FIGURE 4: GROWTH IN INCOME COHORTS

Source: CBRE ERIX, CBRE Global Investors Source: CBRE ERIX, CBRE Global Investors

FIGURE 5: INDONESIA RETAIL SALES GROWTH AND INTERNATIONAL TOURISM RECEIPTS

Source: Economist Intelligence Unit

FIGURE 6: JAKARTA RETAIL RENT AND CAPITAL VALUE GROWTH TRENDS

Source: CBRE ERIX, CBRE Global Investors

0%

1%

2%

3%

4%

5%

6%

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8%

11 12 13 14 15 16

GDP CPI

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

11 12 13 14 15 16

-10%

-5%

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02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Rent Growth Capital Growth

0

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20

30

40

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70

80

90

100

98 99 02 04 06 08 10 12 14

Perc

enta

ge o

f To

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ouse

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sin

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h In

com

e Ba

nd

Up to 1k 1k-3k 3k-5k 5k-10k10k-15k 15k-25k Above 25k

4.8%11.8%

28.3%

15.4%

67.2%

74.6%

52.7%

38.4%

23.7%

0%

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25%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

0001 0203 0405 0607 0809 1011 12 13 14 15 16

International tourism receipts USD Mn (LHS)Retail Sales Growth (RHS)Private Consumption Growth (RHS)

-15%

-10%

-5%

0%

5%

10%

15%

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17



JAPAN

According to preliminary estimates, the

Japanese economy expanded by 3.3% y/y in Q2 2012, led by a 5.5% y/y increase in business investment. A revival in industrial production (up 5.1% y/y in Q2 2012) was also observed. On a less positive note, domestic demand remained subdued with private consumption slowing to 3.3% growth y/y. Private consumption is expected to fall further as domestic car sales will most likely plummet upon the expiration of government subsidies. In addition, Tohoku reconstruction demand is thought to have peaked during the first half of 2012, so we may expect a fall in demand attributed to a deceleration of those activities. The latest findings of the Bank of Japans Tankan September 2012 Survey indicated a slowdown in corporate sentiment as the business sentiment of large manufacturers worsened for the first time in three quarters. Nevertheless, business sentiment of the real estate sector continued to witness a moderate recovery. (Figure 1) Consensus Economics (as of October 2012), mean forecast is for real GDP growth of 2.3% in 2012 and of 1.3% in 2013.

Japans core property markets are at the initial stages of a cyclical recovery according to our forecasts and the latest total returns from IPD suggest that all major property types are now performing in positive territory: the annualized total return for all property was 3.6%, with a 5.2% income return and -1.5% capital return. (Figure 2) The office sector is the last of the major property types to recover.

Office rents in the Tokyo central five wards are at their lowest point in a decade and they continued to fall throughout Q3 2012, albeit at a slower pace (down just 1.5% from year-end 2011). The large amount of new office supply which entered the market in H1 2012 pushed the vacancy rate higher to just over 9% for office buildings with floor plates over 500 tsubo, exceeding the overall vacancy rate of 7.2% for all buildings. Despite the temporary rise in vacancy rates, asking rents have increased by 2.9% compared to year-end 2011 for those office buildings located in inner Tokyo, which we believe indicates the start of the market recovery as new supply has peaked. According to Sanko Estate, the vacancy rate for large sized buildings with floor plates over 200 tsubo was just 6.2% for Tokyos inner 3 Wards.

As a premium has been placed on modern facilities with strong seismic-resistant structures, market polarization has been evident.

Relocation trends have been characterized by moves from older buildings to better locations/grades; this is leading to higher vacancies in lower grade buildings and those in secondary locations. We forecast office rents to bottom in 2012 and to pick up over the five year outlook: particularly for large-sized Grade S/A buildings. (Figure 3) Historically, office has been the most volatile sector in Japan and with weak performance over the past five years, we now expect improving conditions for the coming five year period.

Rents for residential units in Tokyo are expected to pick up in the five year outlook, although growth prospects may be limited. High quality, strong specification-assets in high-amenity locations within the inner wards have been outperforming.

More investors are seeking residential investments in secondary cities such as Osaka, Nagoya and Fukuoka in order to take advantage of the potential for cap rate compression. We expect yields to compress by roughly 20 - 40 bps over the next five year period for quality assets located in regional cities, as yield spreads between Tokyo and regional cities have widened to a range of 100 -120 bps, well above the historical spread of 70 - 80 bps. (Figure 4)

Multi-tenant logistics facilities in Greater Tokyo witnessed vacancy rates fall to just 3.6% by Q2 2012. (Figure 5) Although average industrial rents may have already reached bottom, most relocations are centered on facility realignment plans that aim to lower total costs; hence, it may take some time before effective rent levels start to increase. But for prime assets, tight new supply and steady demand may likely provide a slight rental upside in the outlook.

The retail sector will likely continue to be the less favored sector for investment demand given the sectors broad structural challenges. Japans retail sales fell for the first time in eight months in July (down 0.8% y/y). Payouts of summer bonuses by large companies fell 2.5% this year, and this may have contributed to the sales decline. The planned increase in the consumption tax rate may also negatively affect consumer spending in the medium to long terms. Due to weak performance in shopping center sales, (Figure 6) key tenants and master lessees have attempted to negotiate down their rents at many suburban shopping centers; going forward, rents are expected to remain generally flat.


JAPAN CHARTS

FIGURE 1: REAL ESTATE CONDITIONS DIFFUSION INDEX FIGURE 2: IPD ANNUALIZED TOTAL RETURN BY SECTOR , %

Source: Bank of Japan Source: IPD

FIGURE 3: TOKYO OFFICE VACANCY RATE, % FIGURE 4: RESIDENTIAL CAP RATE TRENDS, YIELD SPREAD TO TOKYO, %

Source: CBRE Research, CBRE Global Investors Source: JREI, CBRE Global Investors

FIGURE 5: VACANCY TREND FOR GREATER TOKYO LOGISTICS

FIGURE 6: JAPAN Y/Y SHOPPING CENTER SALES TRENDS

Source: CBRE Research Source: Japan Council of Shopping Centers

-40-30-20-10

0102030405060

3Q

199

9

2Q

200

0

1Q

200

1

4Q

200

1

3Q

200

2

2Q

200

3

1Q

200

4

4Q

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6

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7

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8

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9

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201

0

4Q

201

0

3Q

201

1

2Q

201

2

Real Estate Industry (All Enterprise)Real Estate Industry (Large Enterprise)Real Estate Industry (Medium- Sized Enterprise)Real Estate Industry (Small Enterprise)

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

05 06 07 08 09 10 11 12

OfficeResidentialRetailAll PropertyOther

0%

2%

4%

6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 10 11 12

Large Sized Buildings (Floor Plate over 200 tsubo)Mid - Large Sized Buildings (Floor Plate 100 - 200 tsubo)Mid Sized Buildings (Floor Plate 50 - 100 tsubo)All Buildings

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%

04 05 06 07 08 09 10 11 12 13 14 15 16

Sapporo OsakaFukuoka Nagoya

0%

5%

10%

15%

20%

2Q04

2Q05

2Q06

2Q07

2Q08

2Q09

2Q10

2Q11

2Q12

Vac: All

Vac: Existing

-15%-12%

-9%-6%-3%0%3%6%9%

12%15%

06 07 08 09 10 11 12

SC Total Sales (ALL)

Total Sales Moving Average (since July 2002)


KOREA, REPUBLIC OF

The Korean economy continues to lose

momentum amid a slide in global demand for its exports. Real GDP growth slipped to its lowest level in almost three years after posting a modest expansion of 2.4% y/y for Q2 2012. This was below market expectations and was lower than the 2.8% rise recorded in Q1 2012. Weakening exports largely explain the subdued headline growth figure, but the softness in domestic demand played a role as well, given the contraction in fixed investment and the slowdown in private consumption growth. The EIU forecasts economic growth of 2.8% and 3.7% for 2012 and 2013, respectively. (Figure 1)

The soft GDP growth reading paved the way for the Bank of Korea to cut the main interest rate for a second time this year, this time by 25 bps to 2.75%. This is once again approaching the 2% policy rate level of 2009 at the height of the GFC although the BOK then raised the rate by 125 bps between July 2010 and June 2011. The sharp drop in August inflation to 1.2% y/y was no doubt a factor for the cut in borrowing costs. Consensus Economics mean expectations for CPI growth for 2012 and 2013 are 2.3% and 2.7%, respectively. Over the period (2012-16), the employment growth rate is forecast to barely increase at just 0.2% per year, well below the average at 0.9% over the past five years (2007-2011). (Figure 2) Nonetheless, the unemployment rate is very low by global standards.

Seouls three main office sub-markets have shown a clear disparity in terms of supply and demand. The vacancy rate for the Central Business District (CBD) reached 14.4% in Q2 2012, while Gangnam Business District (GBD) and Yoido Business District (YBD) were just 1.9% and 2.9%, respectively. (Figure 3) The ongoing supply cycle delivered two new buildings to the market in Q2 2012; Dongil building (GFA 43,798 sqm) in the GBD and Junghak-dong building (GFA 83,802 sqm) in the CBD. New office supply has triggered a tenant flight to quality, leading to stable vacancy levels among prime grade offices, while the secondary office vacancy rate has increased to double-digit levels.

Domestic capital continues to play a major role by enlarging the cash position into office investment (particularly for grade A offices) amidst a low interest rate environment. Over the mid-to-long term, the absorption of new supply

and the continuing economic recovery (hopefully on a more sustainable footing thus reducing occupational risk) could potentially lead to favorable entry pricing for secondary assets which could benefit from cyclical recovery. For the outlook period (2012-16), Seoul prime effective office rents are forecast to decrease by around 0.5% per year. The GBD and YBD should likely prove to be more defensive office investment locations while CBD prime rents are expected to come down further by 2.1% per year with deterioration in the near term but positive growth returning in the latter part of the outlook. (Figure 4)

Despite the comparatively healthy growth outlook for the Korean retail market, (Figure 5) domestic consumer sentiment slightly weakened in Q2 2012. The drop of consumer sentiment in August suggests a potential decline of future retail sales. Following momentum from the successful completion and opening of retail property developments such as Times Square, COEX Mall and D-Cube City, development of mixed use shopping malls is being witnessed. Construction of an underground mixed use retail mall below the Seoul International Finance Centers (SIFC) in Yoido with a retail area of 89,000 sqm (GFA) was delivered in August 2012. Square One, with a retail area of 168,000 sqm (GFA) was completed in Incheon last month.

In H1 2012, several retail property transactions were witnessed in the market. Investment yields for shopping malls in Greater Seoul will likely remain around 6% in 2012. Over the outlook period (2012-16), Seoul shopping mall rents are forecast to increase by around 4.9% per year, while capital values are expected to grow at 6.7% per year. (Figure 6)

In the logistics sector, global investors have been seeking acquisition of logistics centers. Domestic institutional investors are more gradually showing some interest as traditionally these had not been key investment targets. The hotel sector has also been garnering attention amid some strong tourist arrival volumes. The attractiveness of the hotel and logistics sectors in the Greater Seoul area remain steady in terms of both leasing and investment demand. Reflecting sanguine interest in these sectors, entry yields for hotel and logistics edged down slightly this year and will likely remain stable in the near-term.


0%

1%

2%

3%

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5%

12 13 14 15 16

Real GDPAve. 2002-2011

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

-1%

0%

1%

2%

3%

02 04 06 08 10 12 14 16

Employment Growth (LHS)

Unemployment (RHS)

KOREA, REPUBLIC OF CHARTS

FIGURE 1: GDP GROWTH FORECAST, Y/Y FIGURE 2: EMPLOYMENT GROWTH FORECAST & UNEMPLOYMENT RATE


FIGURE 3: SEOUL PRIME OFFICE VACANCY RATES FIGURE 4: PRIME OFFICE RENT & CAPITAL VALUE TRENDS

Source: CBRE ERIX Source: CBRE Global Investors

FIGURE 5: REAL RETAIL SALES & CONSUMER EXPENDITURE, PA

FIGURE 6: PRIME RETAIL RENT & CAPITAL VALUE TRENDS

Source: Economist Intelligence Unit Sources: CBRE Global Investors

-4%

0%

4%

8%

12%

16%

20%

Q1 02

Q1 03

Q1 04

Q1 05

Q1 06

Q1 07

Q1 08

Q1 09

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Q1 11

Q1 12

CBD GBD YBD Total

-25%

-15%

-5%

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25%

02 04 06 08 10 12 14 16

Rental Growth Capital Value Growth

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Retail Sales

Consumer Expenditure

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07 08 09 10 11 12 13 14 15 16

Capital Value Growth Rental Growth


MALAYSIA

Malaysia posted a solid 5.4% q/q economic

growth rate in Q2 2012. The strong performance was driven by domestic demand even as net exports weakened. The pickup in domestic demand was broad based with services and manufacturing leading the way. Inflation has been easing but the central bank has kept the overnight policy rate at 3.0% to remain accommodative of business activity and domestic demand in light of slower projected economic growth. In a scenario where oil prices fall, there will likely be a significantly negative impact to Malaysias economy, given that oil & gas revenues constitute around 40% of government income. The EIU forecasts 4.4% and 5.4% real GDP growth rates for 2012 and 2013, while the next five years will average 5.3% per annum through 2016. (Figure 1) Malaysia is one of the few countries where Consensus Economics has recently increased its 2012 GDP growth expectations.

Office leasing activity among large financial institutions continues to remain limited. Take-up in newly-completed buildings such as Menara Binjai and Menara Prestige remains slow, but we continue to see a flight to quality with some MNCs relocating from older city-center buildings to these newer buildings. The vacancy rate rose slightly with the completion of Menara Felda @ Platinum Park. The vacancy rate is projected to rise further with more completions in H2 2012. The slower take-up in new buildings has not yet translated into a decline in rents but may do so in the future as landlords strive to fill up space. Grade A rents remain broadly stable, between RM6-RM8 per sqft per month. Capital values for office space have remained broadly stable thus far in 2012. Our view is for a weakness in rental and capital values in the short-term, but as Malaysia continues to reform and demand picks up, we believe rents and prices may rise from 2013 onwards. (Figure 3)

Despite some concerns about issues including job security, rises in food prices, and the global economic outlook in general, Malaysias consumer confidence improved. In the latest survey by the Malaysian Institute of Economic Research, the confidence index rose from 114.3 to 114.9 points. Also, Nielsen's latest global online consumer confidence survey places Malaysia in the seventh best position among the 56 countries surveyed.

Retail sales are projected to grow at 6% in 2012, according to the Malaysia Retailers Association. There were two major mall openings recently: Setia City Mall and Paradigm Mall. The malls achieved remarkable occupancy rates of higher than 90% each upon opening. This continues a trend of pre-commitment levels of greater than 90% for new mall openings, reflecting strong demand from retailers and the underlying strength of shoppers. The Paradigm Mall has a NLA of 680,000 sq ft spread across 6 levels and has established local as well as international retail names such as Tesco, Golden Screen Cinema, Harvey Norman, Marks & Spencer and Zara as its major tenants.

Overall, the retail occupancy rate and rents in KLC remained stable during the quarter. The retail sector continues to be our top performance pick in Malaysia. The city of Kuala Lumpur still has a limited number of good quality retail malls. New malls in good locations are likely to attract the interest of institutional investors. With healthy income growth, favorable demographics and the rise of the middle class, Malaysias medium to long term retail demand fundamentals appear promising, and we expect to see an increasing number of international brands entering in the coming years. H&M is expected to open their first store at the end of 2012. We believe rents will rise gradually as will capital values in the coming years amid the healthy state of these markets. (Figure 4)

Developers continue to offer incentives, such as early bird discounts and free built-in cabinets/wardrobes to increase condominium sales, particularly in the high-end segment, where the subsale market has been slow. With a large number of completions in KLCC, rents were under pressure throughout 2011 and the same trend is likely to persist in 2012. Rents fell 2.4% in Q2 2012 in KLCC. Although mortgage rates are low, the implementation of restrictive lending guidelines such as using net income, instead of gross, for assessment will certainly reduce affordability. The high-end condominium market is our least preferred sector, given challenging leasing and a potential oversupply environment. We therefore are forecasting negative trends for rental and capital values over the next two years. (Figure 6)


MALAYSIA CHARTS

FIGURE 1: FORECAST GDP GROWTH AND INFLATION RATE

FIGURE 2: EMPLOYMENT GROWTH


FIGURE 3: KUALA LUMPUR OFFICE RENT AND CAPITAL VALUE GROWTH TRENDS

FIGURE 4: KUALA LUMPUR RETAIL RENT AND CAPITAL VALUE GROWTH TRENDS

Source: CBRE ERIX, CBRE Global Investors Source: CBRE ERIX, CBRE Global Investors

FIGURE 5: MALAYSIA RETAIL SALES GROWTH AND INTERNATIONAL TOURISM RECEIPTS

FIGURE 6: KUALA LUMPUR RESIDENTIAL RENT AND CAPITAL VALUE GROWTH TRENDS

Source: Economist Intelligence Unit Source: CBRE ERIX, CBRE Global Investors

0%

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11 12 13 14 15 16

GDP CPI

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-8%

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95 97 99 01 03 05 07 09 11 13 15

International tourism receipts USD Mn (LHS)Retail Sales Growth (RHS)

-15%

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15%

03 04 05 06 07 08 09 10 11 12 13 14 15 16



SINGAPORE

Singapores economic growth moderated to a

rate of 1.7% y/y in H1 2012, compared to a 4.8% y/y rate in H2 2011. Both private and government consumption slowed. Net exports fell 6.6% y/y. With its export engine constrained by the global slowdown and the government to-date unwilling to extend fiscal support, the Singapore economy is set to remain soft for the rest of this year. Fiscal stimulus also comes with the challenge of containing a persistently high inflation rate; thus any policy measures for the remainder of this year will face a delicate balance amid the uncertain direction of the global economy. Against this backdrop, the EIU forecasts 2.6% and 4.0% real GDP growth rates for 2012 and 2013. (Figure 1) Property transaction volumes have also moderated this year. (Figure 2)

Office leasing activities in Q2 2012 were driven by take-up from the energy, commodities, insurance, and professional and legal services sectors. The larger occupiers, such as the banks, still remained cautious. With the lower rents, some firms took the opportunity to consolidate into better quality buildings.

With no notable office completions and with resilient net absorption, the vacancy rate was 8.4% in the core CBD by the end of Q2. The next notable supply is Asia Square 2, with an expected completion date in H2 2013, and it will add to the vacancy rate. (Figure 3) Rents in Q2 2012 continued to trend downwards, falling by 4.7% in the quarter to SGD 10.10 per sqft. While further rental decline is forecast, we expect the pace to ease in H2 2012. We believe the office sector will face challenges over the next 12 months, but with an assumption of stronger economic growth and a lower supply pipeline in the next three years, we expect a rebound of the office sector in 2014, and possibly by H2 2013.

Tourism receipts rose by 8% y/y in Q1 2012, with almost all components seeing an increase. Accommodation spending underwent the biggest increase, followed by shopping. The number of mainland Chinese tourists continued to grow, with a 32% y/y increase in the first quarter, and they are now clearly the second largest nationality (after Indonesians) to visit Singapore. The tight labor market added support for a resilient retail sector thus far in 2012. The unemployment rate has been steady for the past 12 months and currently stands at a low rate of just 2.0% (Figure 4) driving private

consumption and consumer spending. Retail sales (excluding motor vehicle sales) grew by 2.3% in 2Q 2012 y/y.

The lack of new supply in prime locations (notably Orchard Rd) may offer some of those landlords a better prospect on rental growth. New international brands continue to seek retail space in Singapore and Asia in general. Baby Phat (US), Tally Weijl (Switzerland) and Shana (Spain) have recently taken up new space in suburban malls in Singapore. The suburbs are expected to see several new regional malls being built in conjunction with the development of transport nodes and may provide sectoral segmentation. We believe the retail sector is the most defensive property type and is likely to continue to deliver good total return growth in the years ahead.

The challenges of the global economy continue to plague industrial output in Singapore, which is highly sensitive to global trade cycles. (Figure 5) The slowdown in industrial output appeared to have stabilized in June and July, but slipped into negative territory again in August. The dip in the overall PMI was attributed to a further decline in new orders as well as first-time contraction in stockholdings of finished goods and imports. The outlook for industrial activities remained cautious as most operators have kept their strategic plans on hold while waiting for more concrete signs of a global economic recovery. Overall, industrial rents may likely be under pressure in H2 2012 amid some incoming supply, yet the medium to long term fundamentals remain sound as Singapore plays an increasingly important role as a regional high tech and transportation hub.

The residential sector underwent a surge in sales volumes in Q2 2012, (Figure 6) with over 5,300 units sold. However, this sector presents high downside risk amid the uncertain economy, expectation of large new supply over the next few years, and a tightly regulated market. The residential sector is our least favored sector although niche opportunities may arise which offer attractive risk-adjusted returns. Niche projects are typically launched by good developers, and located in close proximity to MRT stations, and/or have high quality finishes and in many cases, exhibit a combination of these attributes.


SINGAPORE CHARTS

FIGURE 1: REAL GDP AND INFLATION RATE, Y/Y FIGURE 2: PROPERTY TRANSACTION VOLUME, USD MN

Source: Economist Intelligence Unit Source: Real Capital Analytics

FIGURE 3: OFFICE RENTAL GROWTH, VACANCY RATE & GDP GROWTH

FIGURE 4: UNEMPLOYMENT RATE AND CHANGE IN RETAIL RENT AND CAPITAL VALUE TRENDS

Source: Economist Intelligence Unit, CBRE ERIX, CBRE Global Investors Source: Economist Intelligence Unit, CBRE ERIX, CBRE Global Investors

FIGURE 5: EXPORTS AND CHANGE IN INDUSTRIAL RENT AND CAPITAL VALUE TRENDS

FIGURE 6: RESIDENTIAL PRICE AND TRANSACTION VOLUME

Source: Economist Intelligence Unit, CBRE ERIX, CBRE Global Investors Source: Singapore Urban Redevelopment Authority Note: Price reflects all condominium properties, including non-completed projects

0%

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GDP CPI

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Q4 09

Q1 10

Q2 10

Q3 10

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Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Rolling 12-mo. Total Quarterly Vol.

-10%

-7%

-4%

-1%

2%

5%

8%

11%

14%

-55%-40%-25%-10%

5%20%35%50%65%80%

96 98 00 02 04 06 08 10 12 14 16

Rental Growth (LHS) Real GDP Growth (RHS)

Vacancy Rate (RHS) -15%

-10%

-5%

0%

5%

10%

15%

20%0%

1%

2%

3%

4%

5%

6%

Q401

Q3 02

Q2 03

Q1 04

Q4 04

Q3 05

Q2 06

Q1 07

Q4 07

Q3 08

Q2 09

Q1 10

Q4 10

Q3 11

Q2 12

Unemployment Rate (LHS)Change in Rent (RHS)Change in Capital Value (RHS)

-15%

-10%

-5%

0%

5%

10%

15%

0

20

40

60

80

100

120

Q2 01

Q2 02

Q2 03

Q2 04

Q2 05

Q2 06

Q2 07

Q2 08

Q2 09

Q2 10

Q2 11

Q2 12

Total Export (LHS)

Change in Rent (RHS)

Change in Capital Value (RHS)

0

2,000

4,000

6,000

8,000

10,000

0

50

100

150

200

250

Q2 01

Q2 02

Q2 03

Q2 04

Q2 05

Q2 06

Q2 07

Q2 08

Q2 09

Q2 10

Q2 11

Q2 12

Price Index (LHS)

Total transaction volumes (unit) (RHS)


TAIWAN

With export growth losing momentum across

the region, Taiwans economy is unavoidably affected. Since the economy is heavily reliant on exports, the uncertain future of the Eurozone and some moderating momentum in the Chinese economy have already begun to weigh down on export revenues. Taiwan recorded a mild economic contraction of -0.18% in Q2 2012. Taiwans government has lowered its 2012 economic growth forecast to 1.66% from the previous 2.08%. Also, Consensus Economics mean forecast of 1.5% (as of October 2012) was 100 bps lower than in July at 2.5%.

Inflationary pressure has been rising in Taiwan mainly due to surging food prices resulting from severe storms. Inflation reached a 4-year high of 3.42% in August from 2.46% in July. Accordingly, the government raised its latest forecast for full-year consumer price inflation to 1.93%, a little higher than its previous estimate. (Figure 1) Rising inflation has prevented the Central Bank from taking more drastic monetary actions amid the weakening export outlook. The discount rate was unchanged at 1.875%. Nonetheless, the Central Bank warns of further inflationary risk fueled by QE3 in the U.S. A relatively steady labor market, with unemployment remaining unchanged at 4.2%, has facilitated domestic consumer spending in Taiwan. (Figure 2)

Net absorption in the office sector further improved in H1 2012. There was a noticeable increase in demand in the Xinyi district in Q2 and thus the vacancy rate saw significant improvement, falling to 9.7% in Q2, compared to 12.3% in Q1. For Q2 2012, capital values were flat. (Figure 3) MNCs appear to be waiting on the sidelines, resulting in a potential slowdown in rental growth for the remainder of 2012. Declining vacancy, backed by moderate take-up and normalization of supply, will likely support rental growth in 2013. We forecast a small decline in overall Taipei Grade A office rents and capital values of -2.0% and -2.4% respectively for the full year of 2012.

A steady increase of mainland tourists continued to benefit the retail sector in Taiwan. For the first seven months of 2012, a total of 4.17 million tourists visited Taiwan, representing a 25.5% y/y increase over the same period last year. Mainland Chinese

tourists ranked first, with nearly 1.5 million arrivals, representing an increase of 55.4% y/y. Japanese tourists ranked second, up 21.9% y/y at 815,900. (Figure 4) Over 6.1 million mainland tourists have visited Taiwan, after the restrictions on visits by mainland Chinese tourists to Taiwan were eased by Taiwans government in July 2008.

Retail sales grew by 2.8% y/y for the first seven months of 2012. The further expansion of the independent traveler schedule to more mainland Chinese cities by the end of 2012 will further boost incoming volumes of tourists. This should likely support retail rental growth and yield compression. (Figure 5) Over the medium to longer term, individual travel (rather than group travel) from the mainland will become a strong boost to tourism and hence retail sales, even in the less prime locations of Taiwan. We have recently upgraded our forecasts on retail rental and capital values to increase by 4.4% y/y and 6.2% y/y in 2012, respectively.

Weaker exports have affected investment activities and industrial production. Demand from overseas markets for a number of Taiwanese products like IT/telecommunication items, plastics, machinery and optical equipment has weakened, resulting in a drag on Taiwans export performance. On the investment side, industrial-office transactions accounted for the majority of deals driven mainly by owner-occupiers' acquisitions. Some Taiwanese manufacturers are being bolstered by Japanese companies seeking production capacity support from Taiwan, following Japan's earthquake and tsunami in 2011, which has proved to be a stimulus to industrial production in the medium term.

The rental rate in Neihu continued its upward trend due to limited supply and its proximity to MRT stations in Xihu. (Figure 6) It has benefited from the relocation of occupiers from the Taipei CBD, and demand has increased at a steady pace. Thus, vacancy dropped to a new two year low of 5% in Q2 2012. Among all three submarkets in the Neihu Technology Park, the vacancy rate at Xihu and Wende continued to improve at 5.0% and 15.2%, respectively. However, Jiuzong district experienced increasing vacancy at 21.8%. Its relatively high vacancy continues to limit rental growth.


TAIWAN CHARTS

FIGURE 1: ANNUAL GDP GROWTH AND CHANGE OF CPI

FIGURE 2: UNEMPLOYMENT RATE

Source: Economist Intelligence Unit Source: CEIC

FIGURE 3: TAIPEI OFFICE CAPITAL VALUES AND YIELDS FIGURE 4: NUMBER AND SOURCE OF INTERNATIONAL VISITORS

Source: CBRE ERIX Source: CEIC

FIGURE 5: TAIPEI HIGH STREET RETAIL RENTAL VALUES AND YIELDS

FIGURE 6: NEIHU INDUSTRIAL OFFICE RENTAL AND CAPITAL VALUE TRENDS

Source: CBRE ERIX Source: CBRE Global Investors

0%

1%

2%

3%

4%

5%

11 12 13 14

Real GDP CPI

3%

4%

5%

6%

7%

07 08 09 10 11 12

0%

1%

2%

3%

4%

5%

6%

7%

050,000

100,000150,000200,000250,000300,000350,000400,000450,000

Q103

Q104

Q105

Q1 06

Q107

Q108

Q109

Q110

Q111

Q112

(in NT$/Ping)

Capital Value (LHS)

Prime Yield (RHS)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

08 09 10 11 12

Japan China Hong Kong Others

0%

1%

2%

3%

4%

5%

6%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

Q108

Q109

Q110

Q111

Q112

Average Prime Rent, NT$/SQM (LHS)

Prime Yield, %(RHS)

-3%0%3%6%9%

12%15%18%21%24%27%30%

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Rental Growth Capital Value Growth


VIETNAM

Vietnams economy improved in Q2 2012,

with a 4.7% y/y growth rate. Ho Chi Minh City, (HCMC) also known as the commercial capital of Vietnam, achieved an even stronger growth rate of 8.1% y/y. Trade and service industry expansion were the major GDP contributors and accounted for roughly 55% of the growth. Inflation declined rapidly to below 5.5% y/y in July 2012 from the disturbingly high peak of 23.0% in August 2011. The rapid descent has mostly been driven by supply-side factors such as food and fuel. In response to lower inflation, the Central Bank of Vietnam cut various policy rates by around 400-500bps this year. Further easing is likely if the inflation rate continues to drop.

At this stage, Vietnams macroeconomic environment is a little more stable amid better economic management this year. However, the soundness of the banking sector remains a concern. Fitch ratings agency has projected a high level of bad-debt in 2012, in the order of 13% of total loans. Bank weakness will be a drag on growth, but there are some mitigating factors. The government is taking steps to address banks impaired assets, and it may have some fiscal space to absorb some of the banks bad debts. External debt is low, for which Vietnams foreign exchange reserves appear sufficient to cover the near term external debt obligations. The EIU is forecasting a growth rate of 5.3% in 2012 and 6.0% in 2013. (Figure 1)

Demand for HCMC office space has mostly been driven by upgrades, as landlords reduce rents to fill up occupancy in anticipation of sluggish demand and further supply later in the coming year. Overall, the Grade A vacancy rate declined by 2.1% to 16.8% in Q2 2012. (Figure 2) The Grade B vacancy rate similarly fell by 1.8% to 13.1% as rents declined by 3.3%. We expect landlords to remain keen to fill up occupancy and are more flexible with rent negotiations, in light of an uncertain global economy in the year ahead. We feel that demand for office space will be softer as FDI growth will likely be lower next year, and we are concerned with the upcoming amounts of new supply. But ongoing project delays are alleviating some of the downward rental pressures. (Figure 3)

Retailer expansion has been moderate in 2012 to date, but some expansion came from international brands, including KFC, Burger King, and Calvin Klein. These were all located in District 1 of the HCMC CBD. Retailers are concentrating in the CBD locations as retail sales in outlying districts have not demonstrated a satisfactory level of demand for further expansion. Landlords appear willing to lower the base rents but still retain a turnover rental component. Base rents fell by 5.8% for department stores and 2.6% for shopping centers in Q2 2012. A significant amount of retail space is scheduled to be completed in H2 2012. This supply coupled with an already high vacancy rate of 15.5%, will continue to exert downward pressure on rents.

Despite rising retail sales figures in H1 2012, we believe the retail sector will experience slower occupier demand, and in an environment of large upcoming new supply, will make it unattractive in the short-term. (Figure 4 & 5) However, we are optimistic of the retail sectors outlook in the medium to long-term, and believe there is potential for rental and capital growth. Since Vietnam joined the WTO in 2007 and opened its retail distribution to foreigners in 2009, retail chains have proliferated in the CBD and across selected suburbs. We expect more foreign brand entrances in the coming years.

Residential developers continue to offer various incentives to attract buyers. The most popular are extension payment schedules. Looking ahead, the residential sector should continue to face price pressures on the back of an uncertain economy in the year ahead as well as large incoming supply. Developers need to compete on pricing to generate cash flows for their business. Our outlook for the residential sector remains fairly bleak for the coming few quarters, while prices are forecast to fall further. (Figure 6) However, we are optimistic about the long-term drivers of Vietnam residential, which are supported by growth of the middle class, a young population structure, ongoing urbanization, strong household formation rates, and a desire and ability to upgrade housing conditions and standards of living.


VIETNAM CHARTS

FIGURE 1: REAL GDP GROWTH AND INFLATION RATE FIGURE 2: HCMC OFFICE NET ABSORPTION AND OCCUPANCY RATE


FIGURE 3: HCMC OFFICE RENT AND CAPITAL VALUE GROWTH TRENDS

FIGURE 4: HCMC RETAIL RENT AND CAPITAL VALUE GROWTH TRENDS


Note: There is no data point for capital growth between 2001 to 2006


FIGURE 5: VIETNAM RETAIL SALES GROWTH AND INTERNATIONAL TOURISM RECEIPTS

FIGURE 6: HCMC RESIDENTIAL RENT AND CAPITAL VALUE GROWTH TRENDS


0%2%4%6%8%

10%12%14%16%18%20%

11 12 13 14 15 16

GDP CPI

0%10%20%30%40%50%60%70%80%90%100%110%

-50

0

50

100

150

200

250

300

350

400

01 02 03 04 05 06 07 08 09 10 11 1H12

Net Absorption, '000s sqft (LHS)Occupancy Rate, % (RHS)

-60%-40%-20%

0%20%40%60%80%

100%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17


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

08 09 10 11 12 13 14 15 16 17


0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

95 97 99 01 03 05 07 09 11 13 15

International tourism receipts, Mn USD (LHS)

Retail Sales Growth, % (RHS)

-40%

-20%

0%

20%

40%

60%

80%

06 07 08 09 10 11 12 13 14 15 16 17



CBRE GLOBAL INVESTORS

CBRE Global Investors is one of the worlds largest real estate investment management firms with $91.2 billion in assets under

management.1 The firm sponsors real estate investment programs across the risk/return spectrum in North America, Europe and Asia

for investors worldwide including public and private pension funds, insurance companies, sovereign wealth funds, foundations,

endowments and private individuals. Programs include core/core-plus, value-added and opportunistic strategies through separate

accounts and commingled equity funds, debt investment, global multi manager programs and listed global real estate securities

vehicles.

A cornerstone of CBRE Global Investors is a timely, disciplined research process. Our dedicated global Investment Research Group

provides a strategic understanding of both local real estate markets and global economic and capital markets trends, which shapes

highly informed real estate investment strategies and decisions.

REGIONAL HEADS OF RESEARCH NORTH AMERICA EUROPE ASIA PACIFIC

DOUG HERZBRUN Global Head of Research [email protected] TEL: + 1 213 683 4238

EUGENE PHILIPS Head of Europe Research [email protected] TEL: +31 70 34 18694

SHANE TAYLOR Head of Asia Pacific Research [email protected] TEL: +852 2846 3042

1 Assets under management (AUM) refers to fair market value of real estate-related assets with respect to which CBRE Global Investors provides, on a global basis, oversight, investment management services and other advice, and which generally consist of properties and real estate-related loans; securities portfolios; and investments in operating companies, joint ventures and in private real estate funds under its fund of funds program. This AUM is intended principally to reflect the extent of CBRE Global Investors' presence in the global real estate market, and its calculation of AUM may differ from the calculations of other asset managers. As of June 30, 2012.


This document has been prepared by:

Shane Taylor

Based in Hong Kong, Shane is the Head of Research & Strategy for Asia Pacific and is a member of the regional management team and regional investment committee. He had formerly been a part of the Global Research & Strategy team of ING Real Estate, based in New York City, since 2006. He spent three years as a Researcher with the Australian Housing and Urban Research Institute in Brisbane, before joining RP Data-Marketshare in Sydney and then relocating to the US for higher studies. He worked as a consultant for the World Bank in Washington DC and as a researcher and teaching assistant at the Graduate School of Architecture, Planning and Preservation and the School of International and Public Affairs at Columbia University in New York City. He holds Bachelors and Masters degrees from institutions in Australia and a PhD in Urban Planning from Columbia University. He was recently a guest editor for a special China edition of the ICSC research journal.

Chas Sun

Chas joined the firm in 2007 and is based in Hong Kong. He is a regional analyst covering Asias key markets with additional emphasis on China. He specializes in analyzing macroeconomic trends and real estate market fundamentals. He is also responsible for the regional forecasting activities and is a regular contributor to industry related publications. In 2011, he was seconded for seven months to Beijing to research global real estate trends for a Chinese institutional investor and gained exposure to the listed real estate markets. He formerly worked as a researcher for a New York based economic think-tank run by Nobel laureate economist Joe Stiglitz. He holds a MPA in economic policy management and energy studies from Columbia University in New York City and a B.S. in finance from the University of Southern California in Los Angeles.

With contributions from:

Juliet Cha

Juliet joined the firm in 2007 and is based in Seoul. She is responsible for all research related activities in Korea including acquisitions, dispositions, asset planning and forecasting of markets. She is also heavily involved in investor services. She holds an MSc in Property from the University of Aberdeen in the U.K. Prior to joining the firm, she was with Colliers International, where she worked as a property valuer. Juliet is a member of the Royal Institute of Chartered Surveyors.

Angela Du

Angela joined the firm in 2007 and is based in Shanghai. She is responsible for all research related activities in China and specializes in property level research. She is a current CFA (Chartered Financial Analyst) charter holder. She holds a B.S. in finance in Renmin University of China in Beijing and is currently studying the MBA program of Hong Kong University. She formerly worked as a property consultant with JLL.

Danny Goldman Lee

Danny joined the firm in 2007 and is based in Singapore. He is a South East Asia real estate specialist and provides research and strategic support to internal and external clients of CBRE Global Investors. He has over 10 years of diverse research experience which included eq

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