PROPERTY INSIGHTS. Malaysia Quarter 2, Market Overview. Executive summary

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PROPERTY INSIGHTS Malaysia Quarter 2, 2011 Market Overview Executive summary The Malaysian economy registered a slower growth of 4.6% year-on-year (YOY) in Q1 2011 following a growth of 4.

1 PROPERTY INSIGHTS Malaysia Quarter 2, 2011 Market Overview Executive summary The Malaysian economy registered a slower growth of 4.6% year-on-year (YOY) in Q following a growth of 4.8% YOY in Q The economic growth in Q could ease further with a lower level of exports and industrial production. Prime office rents moved upwards slightly in Q but continued to be under pressure with the anticipation of substantial supply in the pipeline (Figure 1). Figure 1 The retail market continues to be active but the increase in inflation could dampen consumer spending. Nevertheless, the sector remains optimistic with forecasted retail sale growth of 7% in Q after registering growth of 5.1% in Q1 2011, 50% lower than forecasted earlier. The residential sector is relatively quiet with selective new launches but affordable housing is a recurring theme for the Government to tackle. The investment market enjoyed an active quarter driven by REITdeals with a focus on retail properties and commercial properties.

2 Trends & Updates Economic overview The Malaysian economy registered a slower growth of 4.6% YOY in Q1 2011, after a 4.8% and 5.3% growth in Q4 and Q respectively (Figure 2). According to Bank Negara Malaysia (BNM), the growth in Q was driven by expansion in domestic demand while there was slower growth in external demand. Figure 2 In Q1 2011, most sectors maintained their positive growth with the services and manufacturing sectors continuing to provide the impetus, expanding by 5.9% and 5.4% YOY respectively. The construction sector expanded 3.8% on account of higher residential and non-residential activities. A smaller decline of 0.3% was registered in the agriculture sector, while the mining sector contracted 3.0% due to lower production of crude oil. Growth in Q is likely to slow down with lower export volume and a downturn in industrial production. Most analysts are beginning to revise downwards the GDP growth forecasts for the year but BNM continued to maintain a 5-6% economic growth forecast for 2011 whilst the Malaysian Institute of Economic Research (MIER) has projected a moderate growth of 5.2% for 2011 before rising upward to 5.5% in Following the recent reduction in subsidies for petrol and other essentials and hike in electricity tariff, inflation is likely to increase this year although the improving strength of the Ringgit will moderate prices of imported goods. The inflation rate in Malaysia in June 2011 was 3.5% YOY due to higher prices of food and non-alcoholic beverages and transport. Foreign Direct Investment (FDI) for 2011 is forecasted to exceed RM30bn compared to RM29.3bn in 2010, with the first quarter of 2011 recording a total FDI of RM11bn. The Overnight Policy Rate (OPR) was raised by 25 basis points to 3% in May after remaining constant at 2.75% since August Bank Negara will continue to pursue an accommodative monetary policy, with an intention toward interest normalisation that is appropriate and consistent with the assessment of growth and inflation prospects. Given external uncertainties, growth will be driven principally by the various domestic investments under the Economic Transformation Programme (ETP).

3 Offices There appeared to be an uptick in market activities in the office sector, as a result of the various Entry Point Projects under the ETP. In particular, we noted that the oil and gas sector was very active in the leasing market. The multi-billion Ringgit MRT project has also impacted office space demand in a positive way. Net absorption is estimated to be about 862,000 sq ft in Q2 2011, an increase of 69% QOQ (Figure 3). Figure 3 The average prime rent also strengthened marginally to about RM6.20 per sq ft, while overall occupancy rate remained stable at around 87% (Figure 4). Figure 4 Major leases signed in the review period included UOB for multiple floors in Vista Tower. Total stock increased by about 1.1 million sq ft with the completion of 4 buildings, namely Dijaya Plaza, Menara Worldwide, Menara Bank Islam and Southgate. A similar quantum is expected to be completed in the second half of the year. A few of these new buildings have strong precommitment, in particular Menara Bank Islam which is 36% pre-committed whilst Dijaya Plaza reported a 75% pre-commitment rate. It will be interesting to see how Southgate will fare given its location away from the main CBD area and surrounded by mainly industrial uses.

4 Capital value is stable, although prices of newly launched strata-titled space can be up to RM1,400 per sq ft at KL Sentral, which appeared to be very aggressive given a potential oversupply situation developing in the mid-term and upward trend in interest rate. There is no new en-bloc transaction noted for office buildings in the quarter, although Hap Seng Consolidated is reported to be willing to consider offers above RM1,000 per sq ft for their 50% share in Menara Citibank. Overall, market sentiment is more positive. However there is much uncertainty on the external front and a slowdown in the global major economies will affect Malaysia, being an open economy, although it is trying hard to reduce this dependency and raise domestic investment to a higher level. Rents are forecasted to trend lower up to 2013, as a substantial amount of space is expected to be completed next year (Figure 5). Figure 5 Retail The Consumer Sentiment Index dipped marginally to in Q compared to points in the previous quarter, reflecting concerns over rising prices and inflation resulting from the removal of government subsidies and a 7.2% hike in electricity tariff. The rapid rise in the inflation rate will have an adverse impact on household disposal income leading to declining purchasing power. The retail sales growth for the whole of 2011 is expected to be maintained at 6% due to concerns over high oil prices, declining purchasing power and continuous surges in prices of goods and cost of operation. The estimated retail sales growth for Q has been revised downward to 7% from the 12.6% projected earlier by the Malaysia Retailers Association (MRA), but it remained higher compared to the 5.1% in Q Promoting tourism through the abolishment of duties for 300 selected items in Budget 2011 is making an impact on tourist shopping expenditure. For Q1 2011, tourist shopping expenditure increased by 35%, exceeding the target of 29%. The occupancy rate of retail centres remained stable and high at an average of 90% in the city and 87% outside of Kuala Lumpur.

5 Viva Home, an integrated lifestyle, home and entertainment mall occupying 688,000 sq ft of NLA and originally scheduled to be ready at the end of 2010, finally opened in May 2011 (Table 1). Table 1 Upcoming retail centres in 2011 Name of development Est NLA (sq ft) Location 1 Shamelin 420,000 Cheras, KL Festival Mall 450,000 Setapak Solaris 2 300,000 Mont Kiara Suria KLCC (extension) 140,000 KLCC Viva Home 688,000 Jalan Loke Yew Citta Mall 424,000 Ara Damansara About 520,000 sq ft of new space was added in the quarter with the existing stock staying at around million in Klang Valley (Table 2 and Figure 6). Table 2 Existing retail stock (NLA) Q (sq ft) QOQ change (%) Kuala Lumpur 21,493,519 5% Outside Kuala Lumpur 20,680,988 2% Figure 6 The ETP has identified integrated health and wellness resort developments to boost retail expenditure through spa products and services and tourism, with an investment of RM3bn and potential 11,000 jobs. It was enhanced with the official launch of the Golden Horses Health Sanctuary by the Health Minister in February as reported in the sixth ETP progress update held in June ETP initiatives were unveiled in June, including launching The Unified Malaysia Sale for the first time from 15 June 2011 till 31 August With tourist arrivals still growing, visitors spending will cushion waning domestic consumption.

6 Residential The quarter saw the completion of Phase 1 of Seni Mont Kiara, Kiara 3, Twins@Damansara Heights and three projects in U-Thant area which included Gallery@U-Thant, 7@U-Thant and Identiti U-Thant. Another 2,847 units of condominiums are expected to be completed by the end of this year. Most of them are outside the city centre (Figure 7). Figure 7 In the city centre, the expected completions in the second half of 2011 include Crest@Sultan Ismail, Katana II, Brunsfield Embassyview, The Pearl and an unnamed project by Bandar Park at U-Thant (Table-3). Table 3 Upcoming high end condominiums in Kuala Lumpur city centre in 2011 Project Units Crest@Sultan Ismail 278 Katana II 40 Brunsfield Embassyview 283 The Pearl 177 Bandar Park project 12 KLCC area will see the launch of two more projects by the end of this year. Both are by Naza TTDI Sdn Bhd, one located at Platinum Park and the other along Jalan Tun Razak, next to the Singapore High Commission. A price indication of around RM1,600 per sq ft was reported. With ample supply of units in the area and being a tenant s market, this new supply would add downward pressure on rents.

7 Capital value increased marginally by 2% QOQ to an average of RM615 per sq ft vis-à-vis RM603 per sq ft in the preceding quarter, with KLCC properties averaging at RM907 per sq ft. Average rental value remained stable at RM3.55 per sq ft per month (Figure 8). Figure 8 Demand for affordable apartments bearing a price tag of between RM220,000 and RM300,000 per unit is expected to be boosted with the introduction of the government s new affordable housing scheme called PR1MA. Its objective is to give lower middle income Malaysians an option to own a house and is targeted at first-time house buyers with household income less than RM6,000 per month.

8 Investment There was a strong increase in investment deals dominated by the sale of four retail malls in the third tier cities, and several smaller offices in the secondary locations outside of Kuala Lumpur. Total investment value is estimated at about RM946m, 32% lower than the previous quarter (Figure 9). The malls involved are Ipoh Parade, Seremban Parade, Klang Parade and East Coast Mall, involving 2 million sq ft. These transactions indicated a growing trend by foreign investors to explore assets beyond the primary cities of Kuala Lumpur, Johor Bahru and Penang and increased confidence in the retail prospects linked to domestic household consumption in the smaller cities and towns. Figure 9 ARA Dragon Fund, an entity linked to Li Ka Shing of Hong Kong bought a portfolio of three malls whilst another Li Ka Shing-linked listed local entity, AM First REIT, was the buyer of two mid-sized offices, Prima 9 and Prima 10, in Cyberjaya. The Prima offices were sold at a blended price of RM630 per sq ft (Table 4). Table 4 Significant deals Property Purchaser Vendor Price East Coast Mall, Kuantan Amcorp Trade Centre, PJ CapitalMalls Malaysia Trust AmCorp Properties Sdn Bhd Astral Realty Sdn Bhd Melawangi RM310m RM75m Prima 9, Cyberjaya AM First REIT Prima Group RM72m Suria KLCC (extension) 140,000 KLCC KLCC Prima 10, Cyberjaya AM First REIT Prima Group RM61m CapitaMalls Malaysia Trust, a retail REIT, purchased the East Coast Mall at a price of RM310m, or RM702 per sq ft and with an entry yield of 6.7%. Other major retail transactions pending completion in Q include the related party transaction of The Gardens Mall at Mid Valley for RM820m via a sale of shares in the holding company, Mid Valley City Gardens Sdn Bhd, and the successful bid at a public auction for The Putra Place (which comprises a mixed development of retail, office and hotel) by Sunway REIT at RM513.95m. There was also an unannounced deal by MMC acquiring PJTC Block B in Petaling Jaya of 200,000 sq ft for owner occupation from Taiko for an undisclosed sum. MMC is part of a consortium which won the tender to manage the proposed RM54bn MRT project.

9 The other major news is the pending injection of Pavilion, an integrated development comprising a major prime retail mall of 1.3 million sq ft on Jalan Bukit Bintang, Kuala Lumpur and an office block of about 160,000 sq ft into a REIT. Overall, there had been strong participation from both domestic and foreign investors, in particular the local REITs which are supporting investment activities and market liquidity. The recent increase in interest rate and tightening in money market liquidity have so far not dampened investors sentiment, and this is positive for the market. Key statistics Table 5 Markets Q Q Q Q Q QOQ change (%) YOY change (%) Directional outlook Office Net absorption (000s sq ft) % 108.2% 34 Occupancy rate (%) % -1.4% 34 New supply (000s sq ft) - 1, ,346 N/A N/A 5 Prime rents (RM per sq ft per month) Residential (non-landed resale) Average capital value of prime condominiums (RM per sq ft) % 3.33% % 11.23% 34 Table 6 Leasing transactions Address Size (sq ft) Tenant Sector Vista Tower, KL - UOB Office Cap Square, KL 15,000 Tradewinds Office Menara Amcorp, PJ 3,000 Lembaga Totalisator Office Vista Tower, KL 1,400 GECI Office

Feature Story: Iskandar Malaysia - An Emerging Investment Destination Horizon Hill Leisure Farm Resort East Ledang General investment activities from a personal and individual perspective have been

In the last 2 years, however, the southern development corridor, rebranded as Iskander Malaysia in April 2008 is starting to emerge in the collective consciousness of the investing community.

critics are starting to pay attention, come 2012 when some of these projects open for business.

To date, some RM73 billion investments have been committed and another similar amount is targeted from now to 2015.

10 Feature Story: Iskandar Malaysia - An Emerging Investment Destination Horizon Hill Leisure Farm Resort East Ledang General investment activities from a personal and individual perspective have been Kuala Lumpur and Klang Valley centric for a long time, with the secondary cities being overshadowed by this strong predominant position of the capital city and its immediate hinterland. In the last 2 years, however, the southern development corridor, rebranded as Iskander Malaysia in April 2008 is starting to emerge in the collective consciousness of the investing community. With already many billions poured into infrastructure and key catalyst projects, and more to come, supported by a growing rapport with our neighbour, Singapore, even the skeptics and arm chair critics are starting to pay attention, come 2012 when some of these projects open for business. Some of these key projects have strong international partners such as Legoland, Johor Premium Outlet, Newcastle University, Marlborough School, the latest being the Petronas driven Oil and Gas hub. To date, some RM73 billion investments have been committed and another similar amount is targeted from now to The warmer relationship with Singapore can provide the critical catalyst that was previously missing, in driving business activities. Key issues such as immigration transfers, cross border rapid rail transport, and other Inter Governmental issues are all works in progress, but are moving in the right direction, thus removing political uncertainties for potential investors. The stakes have been upped with the involvement of 2 major GLC linked investment arms on both sides of the Causeway such as Khazanah and Temasik as joint venture partners in some of the key investments. Already Johor Bharu is showing signs of shedding its parochial image with more lifestyle choices in retail, leisure and housing options, and this is just the beginning. Real estate pricing is also showing strong growth in the last 12 months, with 15-30% increase in prices of properties. Commercial properties in the form of shop-offices are best performers with 15-20% increase and hot spot include Taman Nusa Bestari, as well as older established locations such as Taman Molek, Taman Pelangi, and Taman Century going from RM900k - RM1 mil to RM mil. Whilst the more established areas and neighborhoods have benefitted, newly emerging township within Nusajaya such as Medini will be the highlight of international quality developments that will be rolling out in the near future. Serviced apartments are also showing increases from RM250 per sq ft to currently RM per sq ft. Although these pricing levels are relatively low compared to Kuala Lumpur, the recent increases provide a sign of more exciting time to come. As the saying goes, the early birds catches the worm, so keep an eye, or ideally a pair of eyes on this emerging opportunity and location, so as not to be caught short when the good time start rolling. We certainly do not want foreign investors capturing all the actions on this side of the turf when values spill over from across the narrow Straits. This research report has been prepared by DTZ Research specially for distribution to Citibank customers.

11 GENERAL DISCLOSURE Disclaimer - DTZ Research 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 August 2011 Disclaimer - Citibank 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 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, 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 MALAYSIA 2011 CITIBANK CITIBANK IS A REGISTERED SERVICE MARK OF CITIGROUP INC. CITIBANK BERHAD. CO REG. NO M

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