By Andrew Haskins Executive Director Research Asia

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2 By Andrew Haskins Executive Director Research Asia Conditions in Asian investment property markets remain firm, supported by high economic growth and low real interest rates. Hong Kong and Singapore have been especially strong, with Hong Kong set to be Asia's top investment market in India also seems to be maturing as an investment market. With high growth and low real rates set to persist, transaction volumes could rise again in 2018, and yields may fall even further. Thus we stay positive about Asian investment property, and point to Singapore as a source of value. What could go wrong? In our view, the greatest risk to investment property values in Asia is a global financial downturn, stimulated by rich valuations (notably in equities). We highlight the long-run risk that artificial intelligence may cause severe temporary disruption in the financial sector, reducing demand for space. In our view, these outcomes are significantly more probable than a major Asian conflict. Executive Summary Global and Asian economies strengthen further Economic conditions have strengthened around the world, and 2017 will see the highest global growth since In Asia, China, Hong Kong, Singapore and Japan should all achieve higher growth in 2017 than in However, momentum in India has slowed. Capital markets in Asia remain firm Across Asia, investment in completed properties is still strong, although a shift to undeveloped land continues. Hong Kong and Singapore have shone as investment targets, and Hong Kong will almost certainly overtake Tokyo as Asia's biggest investment property market in Increasing activity in India may be a sign that India is at last starting to mature as an investment market. Low real interest rates set to last over , driving investment markets Colliers' Hong Kong Investor Survey suggests strong conditions should persist in key Asian centres in the near term. We agree, and point out not only that Hong Kong ought to enjoy negative real interest rates until early 2020, but also that real interest rates should stay low or even fall in Singapore, China and India over Yields remain low Yields are stable or falling in most of Asia, and across most property sectors. In Singapore, recovering occupier markets are driving rents, while prime office properties offer a 1-2 percentage point yield spread over bonds. It remains one of our preferred markets in valuation terms. What could go wrong? In our view, the greatest risk to investment property markets in Asia is a global financial downturn, prompted by high equity valuations. We assign a 35% probability to this scenario. We highlight the chance that investment markets may suffer from signs of reduced demand for leased CBD office space from financial tenants due to artificial intelligence (20% probability). In our view, these outcomes are significantly more likely than a major Asian conflict (10% probability). Figure 1. Summary of prime grade APAC office property markets City Rent growth ( avg pa) City avg vacancy (end Q2 2017) City avg vacancy (end 2020E) Net income yld* 10 year bond yld Spread Hong Kong* 1.1% (2.5%) 4.5% (2.8%) 7.0% (4.8%) 2.6% (2.0%) 1.7% 0.9% (0.3%) Singapore¹ 1.7% 8.5% 5.8% 3.3%-4.0% 2.1% 1.2%-1.9% Shanghai² -2.1% 13.9% 11.3% 3.6% (4.0%) 3.9% -0.3% (0.1%) Beijing -0.5% 8.7% 16.6% 4.1% 3.9% 0.2% Shenzhen -0.4% 17.0% 19.0% 3.9% 3.9% 0.0% Taipei 0.3% 9.8% 10.5% 2.8% 0.9% 1.9% Bangalore 6.1% 7.8% 6.5% 8.6% 7.0% 1.6% Sydney 4.4% 6.2% 5.4% 5.4% 2.5% 2.9% Notes.* Average for all Hong Kong; figures in brackets are for Hong Kong Island. ¹ Singapore figures are for CBD. ² Shanghai: first yield is for CBD; yield in brackets is for DBD. Source: Research, Bloomberg, as of 24 November 2017

3 Contents Executive Summary... 2 Global and Asian economies strengthen further... 5 Chinese economy still accelerating... 5 Hong Kong to record far faster growth for 2017 than in Singapore economy on a roll, with occupier markets picking up... 6 India: duller growth in 2017, but property market firm and long-run outlook strong... 7 Capital markets in Asia remain firm.. 8 Investment in completed properties still strong, but shift to undeveloped land continues... 8 Country investment markets: Hong Kong, Singapore and India shine... 8 Hong Kong set to surpass Tokyo as APAC's top urban investment centre this year Chinese property investment capital shifts to Asia Low rates set to last over , driving investment markets Colliers' Hong Kong Investor Survey suggests strong conditions should persist 13 Real interest rates set to stay low in key Asian countries Yields remain low Yields low or still falling in most markets.. 17 Few clear catalysts for yields to rise What could go wrong?... 19

4 Global financial downturn Artificial intelligence causes disruption earlier than expected Conflicts in Asia Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

5 Global and Asian economies strengthen further Economic conditions have strengthened around the world, and 2017 will see the highest global growth since We can summarise near-term prospects for the global economy and major Asian markets as follows: > Global economies are mostly firm, and 2017 will see the highest global growth since 2010 > In Asia, China, Hong Kong, Singapore and Japan should all achieve higher growth in 2017 than in However, momentum in India has slowed > Real GDP growth in China should reach 6.8% in 2017, and only slow to about 6.4% in 2018 > Demand from China has driven a pick-up in advanced economies which has become selfsustaining. In particular, the Eurozone is enjoying near-boom conditions this year > Global growth in 2018 ought to be bolstered by US fiscal stimulus as the impulse from China fades We comment below on economic prospects in China, Hong Kong, Singapore and India, which are the markets of greatest significance in this study. Chinese economy still accelerating Announced in July, YOY real GDP growth for China in Q exceeded most forecasts, reaching 6.9% or the same as in Q1. The high figure partly reflected strength in housing sales growth and housing starts, notably in smaller cities. However, resilience in residential property was not the only factor. Notably, goods exports growth rose from 9.6% YOY in Q1 to 10.2% in Q2, driven by firm global demand. Moreover, growth in industrial value added rose to 7.6% YOY in June, while household consumption growth and retail sales were also robust. After the announcement, Oxford Economics raised its forecast for Chinese real GDP growth for 2017 as a whole from 6.3% to 6.8%, compared to 6.7% in Certain parts of China, notably the north-east, still face economic pressures. Moreover, following the Q2 GDP data there were signs of moderation in trade activity which suggested that H2 would be cooler than H1. As announced in October, real GDP growth for Q3 duly eased slightly to 6.8% as exports and investment lost pace, although consumption growth remained stable. Nevertheless, on a year-on-year basis, China is currently accelerating modestly rather than slowing down. Moreover, the near-term outlook remains firm: Oxford Economics forecasts real GDP growth of 6.4% for 2018, and points out that China only needs to grow by 6.3% per annum over in order to meet its ambitious goal of doubling 2010 GDP by Looking forward, Oxford Economics expects average real GDP growth in China to slow from 6.1% over the period to 4.9% over the period In order to avoid the risk of a financial crisis, the economy needs to wean itself off the traditional credit-fuelled and investment-led growth model. Moreover, with returns to investment now more modest, capital stock is likely to make a significantly lower contribution to growth in the future. The contribution from the labour supply will also be negligible given a declining working age population from On the other hand, China should move up the economic and technological value chain as it loses its competitive edge in labour-intensive sectors. Figure 2: Major Asian economies: estimated real GDP growth China 6.7% 6.8% 6.4% 6.0% 5.7% Japan 1.0% 1.7% 1.6% 0.9% 0.0% Hong Kong 2.0% 3.6% 2.5% 2.5% 2.4% Singapore 2.0% 3.0% 2.8% 2.8% 2.8% India 7.9% 6.5% 7.5% 7.1% 6.9% Source: Oxford Economics 1 Please see Country Economic Forecast, China, 24 October 2017, by Oxford Economics. See also the report of 18 September. 5 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

6 Hong Kong to record far faster growth for 2017 than in 2016 In Hong Kong, real GDP grew by 0.5% QOQ in Q3 2017, or by 3.6% YOY, driven in particular by very firm private consumption. Export growth was also robust, supported by vibrant regional trade and a recovery in inbound tourism, although net exports actually had a negative impact on growth due to a faster rise in imports. Hong Kong is now growing at the fastest rate since Following the strong Q3 outcome, Oxford Economics has raised its forecast for real GDP growth for 2017 as a whole from 3.5% to 3.6%. This represents a remarkable acceleration from 2.0% in For 2018, Oxford Economics expects real GDP growth to slow to 2.5%, partly because it anticipates that rising interest rates will exert pressure on the property market, acting as a drag on the economy.2. Improved business sentiment in Hong Kong has been reflected in results of Colliers' Hong Kong Occupiers Survey (published on 5 September 2017). The survey of 174 major occupiers showed that many are becoming more optimistic about their business prospects. In fact, a majority of respondents expect their businesses either to expand (44%) or remain the same (40%) over the next three years, with only 3% expecting a contraction. We believe that the Hong Kong office market will benefit from this expansionary cycle, especially for locations popular among mainland Chinese companies, notably the core CBD district in Central and Admiralty. In view of current low vacancy rates, we expect rent in the CBD and CBD fringe areas to rise further in coming years. Hong Kong interest rates are effectively tied to US interest rates by the territory's currency peg, and so will rise in tandem with US rates over the next few years. However, as discussed in greater detail later, we now believe that Hong Kong will enjoy negative real interest rates until early While persistent loose monetary conditions most obviously benefit residential property, the combination of very low interest rates, higher economic growth and the strength of the Hong Kong stock market - now at close to a ten-year high, and up by 63% from its recent low point in February should boost confidence among investment bank, asset manager and other financial sector occupiers, and large commercial tenants in general. Singapore economy on a roll, with occupier markets picking up In economic terms, Singapore has been on a roll since it started to accelerate in late 2016 after a couple of years of stagnation. Real GDP rose by 5.2% YOY in Q3 (and by a remarkable 8.8% QOQ on a seasonally adjusted annualised basis), as strong exports growth, notably in electronics, led to a surge in manufacturing. The strength of Q3 followed an already firm Q2, in which growth was underpinned not only by a solid contribution from net exports, but also by a pick-up in domestic demand outside of the household sector. Indeed, private residential investment rose for the first time in nearly two years in Q2. Against this firm background, Oxford Economics now expects GDP to grow by % this year, followed by a small drop to 2.8% in While the property investment market in Singapore has been very strong for most of the past year, until recently there were few signs in occupier markets that investors' evident optimism about Singapore was justified. However, Colliers' reports for Singapore for Q point to clear signs of recovery in many segments of the property market. We would highlight: > Office In Q3 2017, CBD Premium and Grade A office rents rose for the first time in nine quarters, up 0.4% QOQ, signalling a turnaround > Office Occupancy declined only slightly in Q3 under the weight of the final batch of new supply coming to market this year, reflecting healthy net demand > Retail Rental corrections appear to be tapering off in the prime Orchard belt, although the overall retail market recovery is more gradual. We expect the overall retail property market to stabilise in the next months > Industrial Industrial property has been more mixed, with new demand improving but rents mixed and occupancy slipping under the weight of heavy supply 2 Please see Data Insight, Hong Kong, 10 November 2017, by xford Economics 3 Please see "Data Insight, Singapore", 23 November 2017 and Country Economic Forecast, Singapore, 20 October 2017, by Oxford Economics 6 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

7 India: duller growth in 2017, but property market firm and long-run outlook strong The economic performance of India has been slightly disappointing compared to the rest of Asia: Oxford Economics recently cut its forecast for real GDP growth in 2017 from 6.9% to 6.5%, marking a significant slowdown from 7.5% in While on this basis India will remain one of the fastest-growing countries in the world, it will grow more slowly than China this year, although growth should rebound in an income greater than USD30,000 likely at least to double over the next decade > Competitiveness: India is competitive in international markets, with unit labour costs among the lowest of the BRIC economies > Slow improvement in infrastructure: inadequate infrastructure has prevented supply from increasing in line with demand So-called demonetisation in late 2016 (involving the withdrawal of high-value bank notes from the economy) and the introduction of a uniform Goods & Services Tax across India had only a limited adverse impact on growth, so the reasons for the slowdown are hard to pinpoint. Some observers have blamed slowing trade flows and other external factors, but such putative causes look inconsistent with generally firm global and Asian economic conditions. We suspect that many economists were simply too optimistic about India. However, disappointment about economic growth has not held back the Indian property market. Gross office take-up in India totalled 28.9 million sq ft (2.7 million sq metres) over the first nine months of Take-up in Q3 amounted to 10.0 million sq ft (0.9 sq metres), representing a 4% increase q-o-q. The technology sector continued to dominate the demand for office space across most cities, representing 39% of total absorption in Q3. Banking, Financial Services and Insurance (BFSI), healthcare and manufacturing also played a prominent role in overall leasing, accounting for 17% of absorption. In addition, coworking operators have started to make their presence felt in the market, representing 7% of total leasing volume in Q3. Representing 31% of total leasing volume in Q3, Bengaluru (Bangalore) continued to account for the greatest share of absorption. Bengaluru was followed by the National Capital Region on 25% Hyderabad and Chennai on 12% each, Mumbai on 10%, Pune on 8% and Kolkata on 2%. Looking forward, Oxford Economics expects average real GDP growth in India to slow from 6.9% over the period to 6.3% over the period This growth outlook reflects the following factors: > Leading position in service sectors: the middle class is set to expand, with the number of households with 4 Please see Country Economic Forecast, India, 13 October 2017 and 7 September 2017, by Oxford Economics 7 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

8 Capital markets in Asia remain firm Investment in completed properties still strong, but shift to undeveloped land continues Against the background of economic strength, continuing low interest rates and signs of improvement in occupier markets, investment property markets in Asia remained firm over the first nine months of As originally reported by Real Capital Analytics (RCA) on 7 November 2017, aggregate investment in income-producing properties in the Asia Pacific region over the first nine months of 2017 was USD101.9 billion, a rise of 4% YOY. The breakdown by market segment of aggregate Asia Pacific investment in income-producing properties of USD101.9 billion over the first nine months of 2017 is shown in Figure 3 below. Transactions involving office properties totalled USD46.9 billion, dropping by 5% YOY due principally to a shortage of assets to buy at reasonable prices. Industrial property transactions fell by 9% YOY, although RCA notes that 38 deals worth USD2.6 billion in aggregate currently await completion, so Q4 ought to be much stronger. The star of the show was the apartments sector, i.e. residential property, in which investment volume surged by 73% YOY. This reflected strength in China, Singapore and a large purchase of residential assets across Japan by China's Anbang Insurance for USD2.3 billion. Figure 3: Investment by property category in Asia Pacific region (first nine months of 2017, USD billion) Category 9M M 2017 YoY chg Office % Industrial % Retail % Apartment % Hotel % Aggregate incomeproducing properties % Development sites % Aggregate investment % Source: RCA (as reported in APAC Q report, 7 November 2017 As Figure 3 also makes clear, aggregate transactions involving development sites totalled USD526.3 billion over the first nine months of 2017, up by 31% YOY. Aggregate investment in undeveloped land was therefore more than five times greater than aggregate transactions of income-producing properties. Sales of land development sites have long been the largest segment of the overall property market in China. However, this segment has increased in popularity elsewhere in the region too, notably in Hong Kong, where purchases of residential development sites by mainland Chinese enterprises grew very sharply over the first half of 2017 before slowing down in Q3. Country investment markets: Hong Kong, Singapore and India shine First nine months of 2017 Looking at investment markets on a country basis, Japan retained its position at the top of the table of investment in income-producing properties over the first nine months of However, total transactions in Japan fell by 12% YOY to USD23.3 billion, and accordingly Japan ranked only just above China on USD22.3 billion (down 2% YOY). In third place was Australia, where total transactions dropped by 19% to USD15.2 billion. In contrast to the lacklustre performance in the top three markets, fourth-placed Hong Kong saw a 38% increase in transactions to USD14.7 billion. South Korea recorded a 33% increase in transactions, while deal volumes in Singapore surged by 83%, to USD8.7 billion. Also noteworthy was the 85% jump in deal volumes in India, to USD2.6 billion. Property investment in India remains modest in relation to the country's size and importance. However, this growth in activity may be a sign that India is at last starting to mature as an investment market. Figure 4: APAC transactions by country over first nine months of 2017 (USD million) Rank Market 9M M 2017 YOY chg. 1 Japan 26,537 23,261-12% 2 China 22,651 22,291-2% 3 Australia 18,695 15,178-19% 4 Hong Kong 10,652 14,732 38% 5 South Korea 7,018 9,331 33% 6 Singapore 4,778 8,748 83% 7 India 1,396 2,588 85% 8 Taiwan 1,901 1,686-11% 9 New Zealand 1,857 1,386-25% 10 Malaysia % - Other Asia Pacific 2,076 1,788-14% - APAC total 98, ,872 4% Source: RCA (as reported in APAC Q report, 7 Nov. 2017), with estimates by Colliers. Land development sites are excluded. 8 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

9 Figure 5: Hong Kong land sites acquired by mainland Chinese developers over the first nine months of 2017 Award Date District Use Site area (sq ft) GFA (sq ft) Price (HKD mn) AV (HKD/sf) Developer 25-Jan-17 Kai Tak Resi. R1 78, ,357 $5,530 $13,000 HNA Group 24-Feb-17 Ap Lei Chau Resi. R1 126, ,084 $16,856 $22,118 Logan Property, KWG Property 15-Mar-17 Kai Tak Resi. R1 102, ,133 $7,441 $13,500 HNA Group 16-May-17 Kai Tak Resi. R1 104, ,492 $7,230 $12,563 KWG Property, Longfor Properties 21-Jun-17 Tuen Mun Resi. R2 131, ,944 $3,169 $6,700 Road King Infrastructure, Shenzhen Investment 16-Aug-17 Lantau Island Source: Hong Kong Lands Department Resi R4 26,694 10,678 $210 $19,667 Country Garden Total (HKD) $40,435 To repeat the point, the USD14.7 billion of transactions shown for Hong Kong in Figure 4 includes only incomeproducing properties. Including land development sites, we believe that aggregate investment in the Hong Kong property market would have been at least USD6.0 billion higher over the first nine months of As shown in Figure 5 above, purchases of undeveloped land sites by mainland Chinese property developers alone in Hong Kong amounted to HKD40.4 billion or USD5.2 billion over the first nine months of the year*, although such purchases have slowed significantly so far in H2. * NB As noted, the source of the figures in Table 5 is the Hong Kong Lands Department. RCA would not treat all these land tenders as purchases by Chinese developers. The reason is that in some cases the Chinese developers purchased the land through Hong Kong-listed or registered companies. Table 5 is therefore not consistent with the RCA data cited in the rest of this section of our report. Third quarter of 2017 In Q3 2017, China remained ahead of Japan as the topranked investment market in the Asia Pacific region, despite recording a 20% decline in transactions of income-producing properties to USD7.6 billion. Japan registered a 67% decline in transactions in Q3, while deal volumes also decreased in Australia. In contrast, Hong Kong recorded a 77% increase in investment to USD4.9 billion, on which basis it ranked fourth in the region. In sixth place came Singapore, which recorded a remarkable 224% jump in transactions to USD2.9 billion. India recorded an even greater jump of 515%, to USD1.2 billion, albeit with a very low base for comparison. Full details are shown in Figure 6. Figure 6: Asia Pacific property transaction volumes by country over Q (USD million) Rank Market Q Q YOY chg. 1 China 9,516 7,578-20% 2 Japan 10,228 3,410-67% 3 Australia 7,073 5,472-23% 4 Hong Kong 2,777 4,903 77% 5 South Korea 3,448 3,315-4% 6 Singapore 907 2, % 7 India 191 1, % 8 Taiwan % 9 New Zealand % 10 Philippines % - Other APAC % - APAC total 36,126 30,787-15% Source: RCA (as reported in APAC Q report, 7 Nov. 2017), with estimates by Colliers. Land development sites are excluded. 9 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

10 Hong Kong set to surpass Tokyo as APAC's top urban investment centre this year First nine months of 2017 Hong Kong's increasing importance as an investment centre is underlined by the fact that it ranked as the top market for completed property transactions in Asia Pacific both over the first nine months of 2017 and for Q3. For the first nine months, transactions of incomeproducing properties in Hong Kong reached USD14.7 billion, up by 38% YOY (see Figure 7 below). On this basis Hong Kong now ranks ahead of Tokyo, which ranked second with a 36% YOY decline to USD9.6 billion. In third place came Singapore, with an 83% increase to USD8.7 billion. This meant that Singapore ranked above Shanghai, which came in fourth place with a 2% drop in transactions to USD8.2 billion. Figure 7: APAC property transaction volumes by urban centre over first nine months of 2017 (USD million) Rank Market 9M M 2017 YOY chg. 1 Hong Kong 10,652 14,732 38% 2 Tokyo 14,937 9,570-36% 3 Singapore 4,778 8,748 83% 4 Shanghai 8,295 8,156-2% 5 Seoul 6,174 5,984-3% 6 Sydney 8,126 5,947-27% 7 Melbourne 4,087 3,737-9% 8 Yokohama 744 3, % 9 Beijing 4,180 2,838-32% 10 Osaka 2,669 2,520-6% - Total for top ten markets 38,317 44,019 15% NB As of 7 November Based on closed deals of over USD10 million for apartment, hotel, industrial, office and retail property. Land development sites are excluded. Source: RCA, estimates by Colliers Third quarter of 2017 As shown in Figure 8, in Q Hong Kong recorded a 77% YOY increase in completed property transactions to USD4.9 billion, thus ranking as the top urban market in Asia Pacific. Shanghai ranked second on USD3.1 billion, representing a decrease of 26%. Third-placed Singapore was again a star performer, registering a 223% increase in transactions to USD2.9 billion. In contrast, Tokyo recorded a 69% decrease in transactions, to USD1.7 billion, while deal volumes in Sydney also showed a steep decline of 56%. Figure 8: APAC property transaction volumes by urban centre over Q (USD million) Rank Market Q Q YOY chg. 1 Hong Kong 2,777 4,903 77% 2 Shanghai 4,199 3,104-26% 3 Singapore 907 2, % 4 Melbourne 1,607 2,025 26% 5 Seoul 2,875 1,989-31% 6 Tokyo 5,470 1,702-69% 7 Sydney 3,550 1,559-56% 8 Nanjing 315 1, % 9 Brisbane % 10 Tianjin % - Total for top ten markets 22,803 20,556-10% As of 7 November Based on closed deals of over USD10 million for apartment, hotel, industrial, office and retail property. Land development sites are excluded. Source: RCA, estimates by Colliers Looking ahead: The Center deal will push Hong Kong up further Looking ahead, Hong Kong should remain strong, and will almost certainly pass Tokyo to be the top-ranked investment property market in Asia on a full-year basis for the first time in This outcome looks even more probable following the sale over Q4 by CK Asset Holdings of 75% of The Center building in Hong Kong Central for HKD40.2 billion (USD5.2 billion) to a consortium of local and mainland Chinese investors. The sale of The Center will be the biggest ever property transaction, not only in the Asia Pacific region but globally. It is substantially larger than the sale of Asia Square Tower 2 in Singapore for USD1.5 billion (HKD11.7 billion) in September 2017 and the sale of MassMutual Tower for HKD12.5 billion (USD1.6 billion) in November Since the price is for 75% of the building, the implied value of the whole building amounts to HKD53.6 billion (USD6.9 billion). Despite the large lump sum price, the price per square foot is roughly HKD33,000 (USD4,220), which is close to the Central district s average. The sale is a further sign of the remarkable strength of demand for Hong Kong investment property assets. 10 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

11 Chinese property investment capital seems to be shifting to Asia Figure 9: Outbound and inbound real estate investment in Asia (2008 to first nine months of 2017, USD billion, including undeveloped land) YTD 2017 Ex-Asia to Asia (yearly) Asia to Ex-Asia (yearly) Asia to Asia (yearly) Source: RCA as of 7 November 2017, with estimates by Colliers Earlier this year, we argued in a major report that Chinese investment in property markets outside Asia, especially the US, would start to moderate, and that the focus of Chinese interest would gradually shift to the rest of Asia 5. It is too early to be certain that our conclusion was correct, since according to RCA figures aggregate Asia-to-global property flows have remained high, at about USD41 billion including undeveloped land over the first nine months of 2017 (see Figure 9 above). In addition, anecdotal evidence suggests that Chinese interest in certain investment property markets, e.g. London, remains very firm. On the other hand, we were right to argue that intra- Asian investment activity would strengthen further. As Figure 9 also shows, aggregate intra-asian property capital flows amounted to about USD62 billion over the first nine months of the year, a figure 51% higher than aggregate Asia-to-global flows. performance, the biggest recipient of cross-border capital has been Japan, which according to RCA enjoyed USD7.0 billion of inbound property investment over the first nine months of 2017; this total includes the USD2.3 billion purchase of residential assets by China's Anbang Insurance mentioned earlier. However, as an urban centre Hong Kong again stands out as the biggest beneficiary of mainland Chinese investment capital. Over the first nine months of 2017, based on RCA data, Hong Kong enjoyed aggregate inflows of nearly USD6.0 billion from mainland China. As shown in Figure 10, this is well above both London and New York. On this basis Hong Kong will almost certainly end 2017 as the world's largest destination for outbound Chinese investment in property assets. Chinese capital has been the key constituent of this intra-asian investment, although Hong Kong and Singapore are also major sources of investment capital. Surprisingly, given the country's weak overall 5 Please refer to our report " the year in which Asian property capital flows reverse: Fact or Fantasy"? of 1 March Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

12 Figure 10: Key cities receiving Chinese outbound direct investment in property (USD millions) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Hong Kong Sydney Melbourne Vancouver Toronto NYC Metro London Metro Source: RCA as of 7 November Figures include undeveloped land. Figures for 2017 are for the first nine months. 12 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

13 Low real rates set to last in , driving investment markets Colliers' Hong Kong Investor Survey suggests strong conditions should persist We have seen that economic growth continues to accelerate in the majority of Asian countries. We have likewise seen that conditions in investment property markets remain generally very firm, albeit with areas of weakness. This is the background to our continuing optimism about Asian investment property markets. We believe that transaction volumes will probably rise again in 2018, and see short supply of high-quality assets as the chief obstacle to continued growth, rather than any significant moderation in demand. This is also the consensus opinion of the 35 investors and developers whose views we canvassed as part of our recent Hong Kong Investor Survey. These are companies actively seeking investment opportunities in Hong Kong which have a strong track record in both Hong Kong and other Asia Pacific cities. In addition to questionnaires, we conducted face-to-face meetings with a selected group of investors in order to collect their views on different subjects. Based on our survey, investors share a rather bullish view about Asia Pacific property markets in 2018 with more than 50% of the respondents considering themselves net buyers. For those respondents managing multi-asset portfolios, the share of real estate investment within the portfolio will probably increase further. According to our study, Greater China should remain the core Asia Pacific market in terms of expected increases in investment volume, led by Hong Kong, Shanghai and Beijing. Among the investors that we surveyed, 23% considered the economic outlook to be the most important factor in making investment decisions for 2018, while 22% cited interest rates as the most important factor. These two factors are, of course, very closely related. The consensus opinion from our survey was that low investment yields should persist since a loose monetary environment is likely to continue. To us, this conclusion implicitly assumes that the US Federal Reserve will raise interest rates and reduce its balance sheet only gradually over the next 12 months. Figure 11: Key findings of Colliers' Hong Kong Investor Survey (November 2017) Source: 13 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

14 Real interest rates set to stay low in key Asian countries We have considered prospects for continued economic growth in Asia in some detail, but have not yet discussed the outlook for interest rates in sufficient depth. Is the opinion that loose monetary conditions will persist for some time justifiable? We believe that it is. At this point we should state that besides nominal interest rates we try to pay attention to real or inflationadjusted interest rates. Whether nominal or real interest rates are more significant as determinants of economic activity is an important theoretical debate, but it would be far beyond the scope of this report to attempt to address the question fully. Here let it suffice to say that we have looked at a few academic studies which suggest that real interest rates may be more significant. For example, in an empirical study on the Hong Kong economy not long after the Asian Crisis of 1997 the Hong Kong Monetary Authority (HKMA) argued that prices of assets such as property, stocks, and capital goods depend on expectations of real interest rates over the longer term several years for capital goods and possibly decades for property 6. A more recent example of the importance of real interest rates comes from a short study of the economies of the Eurozone countries before and after the Global Financial Crisis of In the Eurozone, market forces and the benchmark rates set by the European Central Bank (ECB) work together to make nominal interest rates converge in normal times. However, it is real interest rates which ultimately matter for investment and consumption decisions. Since inflation rates differ across member states, their real interest rates are very different; and such divergence tends to amplify the business cycle. For example, in the aftermath of the GFC Spain s real interest rates were significantly above Germany s, crippling a recovery in Spain, whereas low real rates in Germany had the potential to stimulate its already robust economy further. While the HKMA study would suggest that we should focus on long-run real interest rates, in the opinion of this author these are less widely used and less understood in practice. If for simplicity we use short-term real interest rates, what can we say about their direction? The answer seems clear: they are very low in many Asian markets (and negative in Hong Kong), and likely to stay low for at least a couple of years. Figure 12: Real short-term interest rates for major Asian markets 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S % -4.0% -5.0% -6.0% China Hong Kong Japan India Singapore Note: 1. Central Statistics Office of India provides Consumer Price Index with base 2012= Short-term interest rate in China refers to SHIBOR 3-month. Source: CEIC. Calculated by 6 See HKMA (1999) Real Interest Rates in Hong Kong. HKMA Quarterly Bulletin. 7 Odendahl, Christian ( 2014) The Eurozone s Real Interest Rate Problem. Centre for European Reform Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

15 Using data from CEIC, Figure 12 above illustrates real short-term interest rates in leading Asia Pacific countries over the past ten years. The Asian countries mostly experienced falling real interest rates after the GFC, and in several cases real interest rates turned negative. The most extreme case is Hong Kong, where real interest rates have been negative almost ever since the GFC. This extremely loose monetary background is, of course, a key explanation of why Hong Kong residential property prices have increased by about 220% since the end of However, real short-term interest rates are currently also negative in Japan, while in Singapore they are below 1%. While real interest rates are significantly higher in India (at roughly 3% in Q3 2017), India unexpectedly lowered benchmark nominal interest rates over the summer of 2017; Indonesia did the same. In our view, the only major market in Asia where monetary conditions have become appreciably tighter so far in 2017 has been China, where the central bank allowed interbank rates to rise over H1 to contain leverage and risks in financial markets. Using data from Oxford Economics, the real short-term interest rate in China stood at 3.0% in Q3 2017, compared to 1.2% one year previously. with up to three more such hikes in However, such a pace of increase would be broadly in line with consensus expectations. A much faster pace of rate increases would probably be required to boost the US dollar significantly. So far as inflation is concerned, in most large Asian markets CPI (consumer price) inflation appears to be stable or trending moderately upwards. Both Japan and Singapore have recovered from consumer price deflation in Real interest rates are normally calculated as the nominal interest rate minus the percentage change in the CPI; they are not normally calculated with reference to PPI (producer price) inflation. However, it is worth noting that producer prices in China, Japan and Singapore have all recovered sharply after significant declines in Using data from Oxford Economics, Figure 13 below shows the outlook for real interest rates over the next four years for the four markets of greatest significance in this report: China, Hong Kong, Singapore and India. After the figure, we comment briefly on the four markets in turn. For real interest rates to rise sharply in Asia, we believe that one of two things needs to happen. The first condition is that US interest rates need to rise rapidly, driving up the US dollar. This outcome would pull up interest rates in markets such as Hong Kong with a US dollar peg, and it would potentially increase pressure on other countries to raise interest rates to support their currencies. The second condition is that inflation needs to fall significantly, with the result that real interest rates increase even if nominal interest rates stay flat. Neither condition seems likely. In the US, GDP growth seems stuck at well below 3%. As reported, real GDP grew by 3.0% YOY in Q3 2017, beating the consensus expectation of 2.6%. However, much of the strength came from changes in inventories; consumer spending growth moderated and growth in spending on services was lacklustre. Oxford Economics estimates the underlying pace of GDP growth at just 2.3% YOY in Q3 8. Moreover, core US inflation remains stubbornly low at about 1.3%. Despite below-target inflation, Andrew Nelson, Colliers' chief US economist, believes that the US Federal Reserve is almost certain to increase its target rate by another 25 basis points at its December 2017 meeting, 8 Please see Country Economic Forecast, United States, & November 2017, by Oxford Economics. 9 Please see "Market Insights October 25, 2017: The Expansion Continues, But Hopes For Faster Growth Fade" by Andrew Nelson of 15 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

16 Figure 13: Prospects for real interest rates, Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q China Hong Kong Singapore India Source: Oxford Economics China As noted earlier, over H the People's Bank of China allowed interbank interest rates to rise to contain leverage and risks in financial markets. Looking ahead, regulatory tightening and gradual increases in US interest rates should maintain upward pressure on interbank interest rates. However, Oxford Economics at least does not expect higher benchmark interest rates, given a subdued outlook for inflation 10. With CPI inflation nevertheless set to creep upwards over time, this means real interest rates should come down gradually over the next few years. We should state that certain other economic forecasters are significantly more cautious about China's debt levels, and believe the authorities will have to push up benchmark interest rates in order to control overall leverage in the financial system. Hong Kong In Hong Kong, interest rates are effectively tied to US interest rates by the territory's currency peg, and so will rise in tandem with rate increases by the US Federal Reserve. While real interest rates have been climbing steadily since 2012 (see Figure 12 above), they remain negative. We now believe that real interest rates in Hong Kong will stay negative until the start of With monetary conditions so loose and economic growth strong, we believe that property valuations in the territory can rise further in the near term. However, confidence in property markets in Hong Kong may be dented from 2020 onwards as real interest rates finally turn positive. Singapore Singapore saw deflation from late 2014 to late The country has decisively recovered from this experience, and CPI inflation is now steadily rising. Since inflation looks set to rise faster than nominal short-term interest rates, this means real interest rates in Singapore should fall towards zero by end-2018 according to Oxford Economics, and stay below 1% out to end Loose monetary conditions should continue to support capital values in what has been one of Asia's most active investment property markets in recent quarters. India India has higher benchmark interest rates than the other countries of focus in this report. Following the cut to the repo rate by the Reserve Bank of India over the summer, benchmark interest rates have fallen to about 6.4%. Most economic forecasters now expect the Reserve Bank of India to keep interest rates on hold for some time, although a few expect further rate cuts. Headline CPI inflation has been under control, reaching 3.3% YOY in September; however, certain core measures of inflation are significantly higher. Oxford Economics thus expects headline CPI inflation to move back above 5% in H1 2018, and to stay there 12. If so, then real interest rates should stay below about 1.6% over most of the next four years, compared to a range of about % over the first three quarters of This loosening of real monetary conditions ought to support capital values in this maturing investment property market. 11 Please see Country Economic Forecast, Singapore, 20 October 2017, by Oxford Economics 10 Please see Country Economic Forecast, China, 17 November 2017, by Oxford Economics 12 Please see Country Economic Forecast, India, 13 October 2017, by Oxford Economics 16 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

17 Yields remain low Yields low or still falling in most markets Prime grade office As shown in Figure 14 below, net yields for prime grade office properties across Asian gateway cities have declined steadily since the GFC. This has reflected generally easy monetary conditions and strong demand for investment property assets within the region, notwithstanding heavy outflows of investment capital from Asia to the rest of the world. Over Q3 2017, based on the findings of Colliers Research, prime grade office property yields in Asia have at least stayed flat, or in some cases fallen further. Among major Asian investment centres, average prime office net yields now range between about 2.6% for Hong Kong and 4.1% for Beijing. In India, which is not yet fully mature as an investment market, prime office property in Bangalore offers a higher yield of 8.6%. Figure 15 below shows a summary of prime grade office rent growth, vacancy and yield data for major Asia Pacific urban markets excluding Tokyo. The very lowest net yield is about 2.0% for Hong Kong Island (which we show in addition to the Hong Kong average of 2.6%). Benefiting from the short office supply in prime locations and high office investment demand by both Chinese and local investors, net yields have fallen further in Hong Kong than in China. However, since the ten-year government bond yield is significantly lower in Hong Kong than in China, office property in Hong Kong still offers a higher spread over bonds than the Tier 1 mainland Chinese cities. Figure 14: Net income yield of prime grade office property in key Asian urban centres (2009 to 2017) 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Tokyo Taipei Beijing Shanghai Shenzhen Hong Kong Singapore Source: Colliers Figure 15. Summary of prime grade APAC office property markets City Rent growth ( avg pa) City avg vacancy (end Q2 2017) City avg vacancy (end 2020E) Net income yld* 10 year bond yld Spread Hong Kong* 1.1% (2.5%) 4.5% (2.8%) 7.0% (4.8%) 2.6% (2.0%) 1.7% 0.9% (0.3%) Singapore¹ 1.7% 8.5% 5.8% 3.3%-4.0% 2.1% 1.2%-1.9% Shanghai² -2.1% 13.9% 11.3% 3.6% (4.0%) 3.9% -0.3% (0.1%) Beijing -0.5% 8.7% 16.6% 4.1% 3.9% 0.2% Shenzhen -0.4% 17.0% 19.0% 3.9% 3.9% 0.0% Taipei 0.3% 9.8% 10.5% 2.8% 0.9% 1.9% Bangalore 6.1% 7.8% 6.5% 8.6% 7.0% 1.6% Sydney 4.4% 6.2% 5.4% 5.4% 2.5% 2.9% Notes.* Average for all Hong Kong; figures in brackets are for Hong Kong Island. ¹ Singapore figures are for CBD. ² Shanghai: first yield is for CBD; yield in brackets is for DBD. Source: Research, Bloomberg, as of 15 November Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

18 Among the Asian cities shown in Figure 15, we would argue that Singapore still appears to be one of the most attractive in valuation terms. Prime grade office property in Singapore offers a net yield of %, which implies a spread of percentage points over Singapore government ten-year bonds. At the same time, rent growth in Singapore, while not spectacular, exceeds rent growth for most other Asian cities except Bangalore. Industrial and retail property Yields on retail and industrial property in Asia remain higher than for office property, but as a rule are also stable or falling. The tables below illustrate the cap rates (i.e. gross yields) currently used by Colliers' valuation teams in appraising office, retail and industrial properties across five major Asia Pacific cities. These figures are taken from our Global Cap Rates report for Q Figure 16: APAC region: cap rates used by Colliers' professional valuers and appraisers Office Low High Trend Hong Kong 2.50% 3.75% Shanghai 3.50% 4.50% Singapore 3.50% 4.00% Sydney 4.75% 5.25% Retail Tokyo 3.50% 4.50% Low High Trend Hong Kong 2.50% 3.50% Shanghai 4.00% 6.00% Singapore 4.50% 5.00% Sydney 4.25% 5.50% Tokyo 4.00% 5.00% Industrial Low High Trend Hong Kong 3.50% 4.50% Shanghai 5.75% 6.75% Singapore 6.00% 6.50% Sydney 5.25% 6.50% Tokyo 4.00% 5.50% Shanghai and Sydney. For retail property, the cap rates vary between 2.5% and 6.0%, and most markets are stable except Shanghai which is falling. For industrial property, the cap rates vary between 3.5% and 6.75%, and are stable in all markets except Shanghai and Tokyo, where they are also falling. We suspect that yields calculated from market transactions would generally be lower and show a slightly more consistent downward trend. Few clear catalysts for yields to rise As shown in Figure 15, the spread between the net yield on office property and ten-year bond yields has fallen to between 1.8 and -0.1 percentage points in the large Asian cities (excluding Sydney). Normally one might interpret such narrow spreads as a sign that investment property markets are peaking. However, it is hard to identify obvious catalysts for the direction of property yields to change. For a start, demand for investment property in Asia remains strong. One of the key drivers of investment demand in Asia this year has been mainland Chinese capital. The Chinese authorities imposed restrictions on outbound flows of capital in late 2016, and strengthened these controls in late August this year. However, these controls have not so far deterred heavy Chinese investment in Asia, especially in Hong Kong but also in Singapore and other South East Asian markets. Chinese demand for Asian property assets may moderate in the near term. However, the strong support from the Chinese government for investment in "Belt & Road" markets that we have discussed in previous research this year suggests that such a slowdown will not last for long. Furthermore, we expect investment demand to remain firm from non-chinese sources. We have noted that real interest rates will probably stay negative in Hong Kong until early 2020, while in Singapore real interest rates will probably decline over Monetary conditions remain loose in most other Asian countries. For this reason it is hard to point to catalysts for yields to rise. We assume therefore that property yields in Asia will probably stay flat on average over 2018, with further modest yield compression certainly possible. Source: Global Cap Rate Report Q Valuation & Advisory Services For office property, the cap rates vary between 2.50% and 5.25%, and show a declining trend in Hong Kong, 18 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

19 What could go wrong? Regarding Asia, we have argued that economic growth should stay wrong and that monetary conditions will probably become even looser in real terms. In such a benign environment, it is reasonable to expect capital values to continue to increase and yields to decline further even after several years of strength. However, precisely because the environment is so benign, it is important to discuss factors which could potentially go wrong. There are, of course, many such factors, and it is impossible to mention them all. In this section of the report, we shall focus only on those risks of low but material probability which in our opinion do not necessarily figure sufficiently in the collective consciousness of Asian property investors. We shall call risks "black swans" after the expression popularised by the statistician and finance expert Nassim Nicholas Taleb in his eponymous book of Strictly speaking, this term refers to low-probability events which have a devastating impact when they materialise. Global financial downturn The first such risk concerns asset prices. Property investors in Asia ought to be reasonably familiar with the risks posed by high commercial and residential property prices, especially residential prices in China and Hong Kong. They may be less familiar with the risks posed by high prices in other asset classes, notably equity markets. Equity markets in many markets have recovered very strongly since the GFC, and in some cases have gone far beyond previous peaks. This is especially true in the US, where the S&P 500 equity index stands at an alltime high and many valuation measures have reached multiyear peaks. In Asia, the star stock market of the past couple of years has been Hong Kong's Hang Seng index, which is at close to a ten-year high and has rallied by 63% from its recent low point in February The strength of the US market in particular owes much to surging growth in technology markets in recent years, notably smartphones, social media and mobile internet (in this last case, especially in China). This growth has driven a remarkable increase in the value of technology companies. For example, since the end of 2014, the combined stock market capitalisation of China's big three internet groups, Baidu, Alibaba and Tencent, has risen by over 130% from USD475 billion to USD1,107 billion (see Figure 17 below). This situation has resulted in a very high concentration of equity investment in the technology sector. Seven of the world's most valuable public companies are technology groups, with the US groups Apple, Alphabet and Microsoft at the top of the list but Tencent and Alibaba not far behind; see Figure 18 below for details. The valuation multiples enjoyed by technology companies have also expanded sharply, especially in the US. Figure 17: Market capitalisations of Baidu, Tencent and Alibaba (USD bn): progression over time /21/2017 Alibaba Baidu Tencent Source: Bloomberg 19 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

20 Figure 18: Ten most valuable public companies in the world Rank Company Domicile Market value (USD bn) 1 Apple US Alphabet US Microsoft US Amazon.com US Tencent China Facebook US Alibaba China Berkshire Hathaway US Johnson & Johnson US JP Morgan Chase US 343 Source: Wikipedia, Bloomberg. Values as of 21 November, This raises the question: what happens if technology stocks overvalued? Could the world have already entered a second TMT (technology, media and telecoms) bubble, similar to the first bubble of which burst in ? A major decline in TMT stocks could have a very significant negative impact on equity markets, especially in the US, Hong Kong and China. A sharp decline in equity markets could easily feed through to declines in bond markets. If bond prices and fall and yields rise, the yield attraction of investment property is reduced. We have seen that office property spreads over bonds are already narrow or even negative in Tier I Chinese cities. Another sector which may perhaps be overvalued is Chinese property developers. The acceleration of the overall Chinese economy and the stabilisation of the residential property market have resulted in dramatic increases in the market value of Chinese housebuilding companies, especially those traditionally regarded as more financially stretched. Indeed, after seeing its share price surge by about 450% over the past twelve months, China's Evergrande now ranks as the world's largest property developer by market value. in Asia. Our best estimate of the possibility of a major financial market correction in the next 12 months is 35%. Besides reducing the yield attraction of property assets, a major downturn in equity markets would upset the benign market conditions that large investment bank and asset manager occupiers have enjoyed in Asia over the past few years, notably in Hong Kong, Shanghai and Singapore. This would raise questions about the sustainability of rental cash flows in the core CBD areas of these cities, potentially resulting in a reappraisal of the valuation of office properties and an upward move in cap rates. We discuss another factor which could adversely affect financial sector occupiers below. Artificial intelligence causes disruption earlier than expected In recent months, Colliers has carried out extensive research into the impact of artificial intelligence (AI) on real estate. We believe that AI will replace many routine and replicable roles, and consider finance in particular, commercial banks and insurance companies as a sector likely to be significantly impacted. Over the medium to long term, we see AI principally as a tool for productivity enhancement which should complement human roles. AI should therefore help drive growth for enterprises and will not necessarily result in major replacement of staff. However, in the short term AI may well result in major disruption, with certain job categories potentially disappearing. For example, the jobs of taxi and train drivers may be threatened if progress towards driverless cars and trains continues; the US group Uber is reported to have just placed an order with Volvo for 24,000 driverless vehicles 13. In the finance world, the jobs of commodities traders and similar roles are increasingly under threat from AI. We do not currently anticipate a major correction in Chinese residential or commercial property prices. However, the increase in the share prices of Evergrande and Country Garden in particular in 2017 has been so dramatic that any disappointment in earnings could lead to a major correction. This would potentially affect confidence in equity and property markets in both Hong Kong and mainland China. In our opinion, a major correction in equity markets globally or perhaps regionally which reduces the yield attraction of property assets and reduces confidence generally is the greatest risk facing investors in property 13 Source: Financial Times, 20 November Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

21 Figure 19: Sectors and roles most affected by AI: those with routine, replicable tasks Source: ; The Economist In this regard, it is interesting to note how dependent Asia's major cities remain on the financial sector as a driver of demand for leased office space. Based on Colliers' estimates, in Hong Kong the financial sector accounts for 50% percent of office space in the core CBD, while in Singapore the figure is 45% percent. The corresponding figures for Shanghai and Beijing are 49% and 40%. The possibility that a rapid acceleration in AI leads to a swath of job reductions in the finance sector in the short term may seem limited. Arguably, right now the reverse is happening: strong expansion in the new fintech sector is supporting demand for conventional office space and helping drive demand for flexible working (coworking) space. Growth in flexible working space has been an important factor supporting office leasing markets in Singapore, Hong Kong and other Asian cities. However, it is far from impossible that a material acceleration in the rate of advances in AI creates substantial near-term disruption in the finance sector. Deutsche Bank is one major financial institution which recently suggested that thousands of jobs were vulnerable to replacement: in an interview with the Financial Times reported on 8 November, the CEO John Cryan suggested that he saw the potential to reduce the company's global headcount of 97,000 by perhaps onehalf. While this may reflect the opinion that Deutsche Bank is overmanned compared to its peers, Mr Cryan stated clearly that "there's a lot of machine learning and mechanisation that we can do." In our view, it is unlikely that any large multinational financial institution in Asia will implement a major staff reduction programme this year; market conditions generally seem too strong for that. However, it is certainly conceivable that two or three large institutions make announcements about large-scale adoption of AI which cause property investors conclude that future office space requirements in the CBDs of Asian gateway cities have been materially overestimated. This would lead to a reassessment of future rental cash flows from office buildings and hence of those buildings' capital values. We assign a 20% probability to this scenario. Conflicts in Asia Participants in financial markets, including physical real estate, tend to have a good understanding of economic risks. They tend to be less good at analysing geopolitical risks, perhaps because many of them studied economics or business studies at university rather than politics or history. As an example, prior to 2010 much analysis of risk in the Middle East by financial institutions and multinational companies focused on the implications of the overdependence on oil of leading regional economies such as Saudi Arabia. Analysis of political risk by such organisations (and, indeed, by western governments) tended to focus on relations between the Arab world and Israel, on relations between the Arab world and Iran, and on countries which were already unstable such as Iraq. Very few observers predicted the Arab Spring uprisings 21 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

22 of 2011 in countries like Tunisia and Egypt which had been perceived as stable autocracies for decades. Nor did many observers predict that chaos and civil war would follow the Arab Spring in a number of countries, most notably Syria and Yemen. In Asia, frequently cited geopolitical risks include the possibility of war on the Korean Peninsula and the outbreak of hostilities between China and other nations such as Vietnam, Taiwan or Japan over disputed islands in the South and East China Seas. A third possibility is conflict between China and India over disputed territories in the Himalayas. We are not alone in contemplating the possibility of major conflicts breaking out. Indeed, according to our survey of Hong Kong-based investors, geopolitical conflicts are the third greatest source of concern in Asia, after the economic outlook and prospects for interest rates. Among our respondents, 21% expressed concern about this risk. Figure 20: Asia: factors ranked as top concerns by APAC investors Japanese yen would probably appreciate in the event of a war between the two Koreas, despite Japan's proximity to the centre of events 14. However, it is conceivable that conflict would expand and draw in Japan and the US. In this case, it would be reasonable to expect significant pressure on financial markets and asset prices around East Asia. The possibility of conflict in the South or East China Seas has been less well studied, and in our opinion is potentially more dangerous. This is because such a war might draw in the US on the opposite side from China. This is one of the worst scenarios for Asian financial markets, and if it were to materialise it is fair to assume that most participants in property markets would have more urgent concerns on their minds than the outlook for yields and capital values. A war between China and India could have similar destructive implications. We should stress that China, India, Japan and the US all enjoy good working relationships with each other. None of these countries wants to be involved in a major conflict. However, wars can be sparked off almost by accident - as was the case with one of the worst conflicts in history, the First World War - and once they break out they tend to develop a life of their own. The probability of a major conflict in Asia is very hard to estimate. Our best estimate is that the probability is only about 10%. This suggests that we perceive the risk to be significantly smaller than our clients do, since according to our Hong Kong Investor survey 21% see geopolitical conflicts as a major concern. If we are right, then major conflict in Asia is the least likely black swan outcome. However, if a major conflict in the region were to materialise, the damage to financial markets and general economic confidence might be the greatest of all. Source: Colliers (from Hong Kong Investor Survey, November 2017) Among the three possible conflicts that we cited above (war on the Korean Peninsula, war in the South or East China Seas, and war in the Himalayas), the first is the possibility that has received the most attention. Many veteran Asia market watchers discount the possibility of a war between the two Koreas, arguing that the status quo of guarded peace has persisted ever since the 1950s. This argument is true, but it provides no guarantee that the situation will not change one day. If war were to break out between the two Koreas, any hostilities might be entirely contained within the peninsula. In this scenario, after an initial shock, financial markets elsewhere in Asia might be little affected. Indeed, Oxford Economics has argued that the 14 Please see What Would the Korean Conflict Mean for the Yen?, 16 October 2017, by Oxford Economics. 22 Of high growth, low real rates and black swans 29 November 2017 Property Research Asia

23 396 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 79 EMEA: 111 $2.6 billion in annual revenue Primary Authors: Andrew Haskins Executive Director Research Asia andrew.haskins@colliers.com Contributors: Terry Suen Senior Manager Research Asia terry.suen@colliers.com Shulin Zheng Analyst Research Asia shulin.zheng@colliers.com 2 billion square feet under management 15,000 professionals and staff About Group Inc. Group Inc. (NASDAQ and TSX: CIGI) is an industry-leading global real estate services company with 15,000 skilled professionals operating in 68 countries. With an enterprising culture and significant employee ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include strategic advice and execution for property sales, leasing and finance; global corporate solutions; property, facility and project management; workplace solutions; appraisal, valuation and tax consulting; customised research; and thought leadership consulting. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice that help clients accelerate their success. Colliers has been ranked among the top 100 global outsourcing firms by the International Association of Outsourcing Professionals for 12 consecutive years, more than any other real estate services firm. For the latest news from Colliers, visit Colliers.com/Asia or follow us on and LinkedIn. Copyright The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.