Q HK$billion Total exports. Feb HK$billion Private Consumption Expenditure. HK$billion Q Dec 2010 Feb 2011 %

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Cory Phelps
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8%, more than offsetting the 2.7% contraction in 2009. This indicates that the Hong Kong economy staged a broad-based expansion in 2010.

1 PROPERTY INSIGHTS Hong Kong Quarter 1, 2011 Market Overview Hong Kong s real GDP increased by 6.2% year-on-year (y-o-y) in Q4, whereas the growth is primarily driven by merchandise trading and financial industry. For 2010 as a whole, the real GDP grew robustly by 6.8%, more than offsetting the 2.7% contraction in This indicates that the Hong Kong economy staged a broad-based expansion in With the economy fully recovered by now, the outlook for 2011 is for the Hong Kong economy to return to a normal growth of 4% to 5%. Total exports continued to soar, up 24.9% y-o-y to reach HK$227.8billion (US$29.2billion) in real terms in Feb 2011, mainly due to the boom of inbound tourism and increasing purchase power of mainland visitors (Table 1). Based on the grinding recovery for advanced economies and booming growth in emerging economies, the exports prospects for Hong Kong are generally positive, and the growth space will slow down. Trends & Updates Economic Overview Strong consumer confidence pushed the consumption expenditure up by 7.1% y-o-y in real terms, thanks to improving income and job market conditions (Table 1). Investment staged a notable rebound aim sanguine business sentiments. The surge in public sector building and construction activities also supported the strong domestic demand. Table 1 Economic indicators y-o-y change (%) Indicator Period Unit Value GDP at constant prices* Q Total exports Feb Private Consumption Expenditure Q Unemployment rate (seasonally adjusted) Dec 2010 Feb 2011 % pts Visitor arrivals Feb 2011 Million Composite CPI Feb Total retail sales value Jan *In chained (2008) dollars Source: Census and Statistics Department HKSAR, Hong Kong Tourism Board

2 Visitor arrivals amounted to 2.9 million in Feb 2011, up 2.0% y-o-y. As economic and labour market conditions improved, total retail sales rose 28.2% y-o-y to reach HK$37.6billion (US$4.82billion) in Jan Inflation was on an upward trend in 2010, reaching 2.4% in The inflation momentum continued in Feb 2011, with a CPI increase of 3.7% y-o-y. As more visible imported inflation from the soaring food price and bulk commodity prices, the inflation is forecast at 4.5% in Residential Overview With the introduction of the market-cooling Special Stamp Duty (SSD) by the Government in Q4 2010, transaction volume dropped in early 2011, especially during the Chinese New Year holidays. However, the market significantly rebounded 24.3% month-on-month (m-o-m) in February. Meanwhile, the number of Sales and Purchase Agreements further climbed 9.7% m-o-m to reached 13,838 in March 2011, amounting to 36,602 in Q (Figure 1). Figure 1 Transaction volume of residential building units Number of S&P Agreements 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Source: The Land Registry HKSAR In February, the seasonally adjusted unemployment rate dropped to a 2-year low of 3.6% (Table 1). The improving labour market and booming economic conditions underpin the development of local residential market. As a result, government measures only had a short-term impact on the market, and the residential price witnessed further increases in Q Thanks to the upbeat market sentiment, the local residential market boomed in Q DTZ residential index of all markets strongly surged 15.7% q-o-q and reached new highs. In particular, the DTZ luxury residential index reached 215.1, posting a 26.6% y-o-y increase (Figure 2 & Table 2). Propelled by the improving wage levels and economic outlook, the mass residential market was again outperformed by the luxury market. DTZ mass residential index also jumped 22.1% y-o-y to reach Meanwhile, the overall DTZ residential index reached 191.0, or a 24.2% q-o-q increase (Figure 2 & Table 2).

3 Figure 2 Residential price index (Q Q1 2011) DTZ Index (Jan 2000 = 100) Mass residential Luxury residential Overall Source: DTZ Research Table 2 Private residential market statistics Total stock (no. of units) Price index (Jan 2000 = 100) q-o-q change (%) y-o-y change (%) Mass market 1,013, Luxury market 81, Overall 1,095, Source: Rating and Valuation Department HKSAR, DTZ Research Looking forward, due to the solid economic fundamentals, growing price levels, and increasing participation of mainland buyers, we envisage that the local residential market will further climb on the back of strong user-end s demand, in particular, the overall luxury residential market will see about 10% q-o-q price increase next quarter. As the residential market continued to bloom in Q1, the luxury residential investment market also rebounded sharply from Q In Q1 2011, 28 major luxury residential investment deals were recorded, representing a 86.7% q-o-q increase. In total, the consideration value reached HK$6,167 million, posting a 125.7% q-o-q growth (Table 3). Table 3 Total number of key luxury residential deals (HK$million) Q Q Q Number of deals Total consideration value 5,248 2,732 6,167 * for transaction over HK$100 million Source: DTZ Research

4 Feature Story Rate increase s impact limited Introduction Many Hong Kong banks raised the mortgage rates in March. Two banks suspended the H-based mortgage plans whilst most of other banks raised their H-based mortgage rates by 0.2%, a slight increase of the borrowers cost. However, according to DTZ Research s research from the interest cost and supply-demand analysis, it is unlikely to cause dominant effect towards the housing price in Hong Kong. Cost of mortgages Small rise in interest cost The monthly installment will increase slightly for only approximate 2% after the rise of H-based plans from H+0.7% to H+0.9%. Before that, the mortgage rate is 2.25% for P-based plans and 1.13% for H-based plans. For instance, for a house of HK$5 million with 70% of mortgage for 20 years, the H-based installment will be 12% less than the P-based one before the mortgage rate changes (Table 4). Hence the H-based mortgage plan is more favorable for the moment. After the change, the H-based plan is still more economic and the monthly payment will increase slightly by only 2%, which is unlikely to lead to severe detrimental effect towards housing price. However, the signal of this change is worth noting. Table 4 Interest Rate Property Price (HK$) Monthly Rental Income (HK$) Yield Monthly Installment (HK$) Net loss/ profit (HK$) 10, % 16,300 (5,883) HIBOR + 0.9% = 1.13% Feb ,000,000 14,583 18, % 4.50% 16,300 16,300 (1,717) 2,450 10, % 16,617 (6,200) HIBOR + 0.9% = 1.33% Mar ,000,000 14, % 16,617 (2,034) 18, % 16,617 2,133 10, % 18,123 (7,706) P^ - 3% = 2.25% Feb & Mar ,000,000 14, % 18,123 (3,540) 18, % 18, ^Assumes the Hong Kong Dollar Prime Rate (P) is 5.25% Mortgage rate remains low The current mortgage rate is still much lower than the bubble level from the historical view. Concerns about the skyrocketing house price arise, as some reports regard the current situation as the Asia Financial Crisis in Jun However, the interest rate, as an important indicator of the cost of housing, for the moment is far from that of The current mortgage rate (1.33%~2.25%) is much lower than the 11% level in Jun 1997 and the 3.25% level in the global financial crisis in Negative real mortgage rate continues The current mortgage rate is still negative in real terms after the change, represented by soaring inflation and low mortgage rates. On one hand, given the inflation of 3.7% and the low nominal mortgage rate (1.03%~2.25%) in Feb, the real mortgage rate is actually negative (-2.67%~1.45%). Given the SAR s prediction of 4.5% inflation in 2011 and the latest mortgage rate, this abnormal situation of negative real mortgage rate is unlikely to change in 2011, which implies one could make money simply by mortgaging. On the other hand, the likelihood of raising interest rate in 2011 for the US is small as the latest sluggish 9.0% and 8.9% US unemployment rates in Jan and Feb respectively. Thereby, the negative cost of mortgage in real terms is anticipated to continue in the medium term.

Demand Affordability ratio soared but still far from the peak Moreover, the buoyant housing demand and price are supported by the current affordability ratio.

5 Demand Affordability ratio soared but still far from the peak Moreover, the buoyant housing demand and price are supported by the current affordability ratio. This is the essential factor towards housing price. External demand grows The emerging demand from the mainland intensified the disequilibrated market and also contributed to the price growth. As the rapid increase of mainland millionaires by the soaring real estate industry and the stagnant sentiment in mainland real estate market by the tightening policies, mainland capitals targeted on the Hong Kong residential market for either investment or hedging purposes. These capitals, accounted for about 20% of the demand, were enough to cause market disequilibrium and push price up further. Supply Severe supply shortage continues The supply of private houses is in severe shortage in recent years from the historical view. For instance, the new supply of residential (13,405 Units) in 2010 is far from the level (18,518 Units), and the level (26,536 Units). This shortage will persist with only 10,958 units expected in This supply shortage together with the soaring demand will dominate the market price upward. Summary The existing low mortgage cost in nominal term or negative mortgage cost in real term can sustain the mortgage market in short and medium term, despite of the slight rise in mortgage rate. On the other hand, the demand-over supply will continue to dominate the market price upward, as a result of the lack of supply, together with the robust demand from the local indicated by the installment affordability and the soaring demand from mainland investors. This research report has been prepared by DTZ Research specially for distribution to Citibank customers.

6 GENERAL DISCLOSURE Disclaimer - DTZ Research This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ May 2011 Disclaimer - Citibank The market data and information herein contained ( Information ) is the product or service of a third party not affiliated to CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES. None of the Information represent the opinion of, counsel from, recommendation or endorsement by CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES, OFFICERS, EMPLOYEES OR AGENTS. You may not use the Information for any unlawful purpose or any purpose not expressly permitted hereby. Reproduction of the Information in any form is prohibited. NO WARRANTY. The Information is provided as is, without warranty of any kind, it has not been independently verified by CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES, OFFICERS, EMPLOYEES OR AGENTS and use of the Information is at your sole risk. CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES, OFFICERS, EMPLOYEES OR AGENTS shall not be liable and expressly disclaim liability for any error or omission in the content of the Information, or for any actions taken by you or any third party, in reliance thereon. The Information is not guaranteed to be error-free, or to be relied upon for investment purposes, and CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES, OFFICERS, EMPLOY- EES OR AGENTS make no representation or warranty as to the accuracy, truth, adequacy, timeliness or completeness, fitness for purpose, title, non infringement of third party rights or continued availability of the Information. LIMITATION OF LIABILITY IN NO EVENT SHALL CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES, OFFICERS, EMPLOYEES OR AGENTS, BE LIABLE FOR ANY LOSS OR DAMAGE OF ANY KIND WHATSOEVER (INCLUDING, WITHOUT LIMITATION, ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES, OR DAMAGES FOR LOSS OF PROFITS, BUSINESS INTERRUPTION, AND ANY AND ALL FORMS OF LOSS OR DAMAGE, REGARDLESS OF THE FORM OF ACTION OR THE BASIS OF THE CLAIM, WHETHER OR NOT FORESEEABLE ) ARISING OUT OF THE USE OF THE INFORMATION (PROVIDED IN ANY MEDIUM), EVEN IF ANY OF CITIBANK NA, CITIGROUP INC OR ITS AFFILIATES, OFFICERS, EMPLOYEES OR AGENTS, HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE. COUNTRY SPECIFIC HONG KONG 2011 CITIBANK CITIBANK IS A REGISTERED SERVICE MARK OF CITIGROUP INC. Citibank and Arc Design is a registered service mark of Citibank, N.A. or Citigroup Inc. Citibank (Hong Kong) Limited

PROPERTY INSIGHTS. Market Overview. Central s rental drop slows. Hong Kong Quarter 2, 2012

PROPERTY INSIGHTS. Market Overview. Central s rental drop slows. Hong Kong Quarter 2, 2012 PROPERTY INSIGHTS Hong Kong Quarter 2, 212 Market Overview Central s rental drop slows While office rents in Sheung Wan/Central/ Admiralty dropped 3.3% quarter-on-quarter (q-o-q) to reach HK$17 (US$13.7)