China Report - January

Transcription

1 Hong Kong, 24 Jan 2013 China Report - January Introducing CityScreener Framework and China Scenarios This is the last PILOT report. How will the Chinese economy and real estate markets play out over the next 5 years? We are introducing our core Scenarios for Market Conditions in Real Estate Markets in China Which cities are best to invest in? We present our CityScreener framework, a toolkit for topdown city selection, with a sample analysis. December Data & Major Themes Highlights House prices continued mild rebound with the 7 th month of sequential increases in SouFun-CREIS 100 Cities Index, up in Dec 0.23% m-o-m, and just above zero at 0.03% y-o-y. It is less clear to what extent this rebound is simply a flow-through effect from mid-2012 monetary loosening and new stimulus actions or fundamental growth factors. Heze, Urumqi, and Nanchang saw biggest house price increases over the past 12 months; largest declines were in Wenzhou, Nanning, and Haikou. Market is becoming more segmented, number of cities with larger gains and larger losses both increased, with greater variations by tier and region. Sales volumes increased 2% y-o-y and 49% m-o-m in Dec, reaching cumulative 985 million sqm of floor space of residential buildings sold from Jan to Dec Despite inventories (based on floor space available for sale) clearing faster, concerns remain about the rising ratio of area under-construction to area sold. Land sales in Tier-1 cities fell y-o-y by around 20% in value and 30% in volume in Jan-Dec period, but increased signifcantly m-o-m in recent months. Average land prices, however, increased sharply in the same cities from May to Nov, and declined slightly in Dec. Chinese listed sector share prices soared in Dec and Jan, with smaller developers also rising sharply, but sector s high-leverage makes it fragile to changes in house price expectations. China Report by Real Estate Foresight is an independent and data-rich monthly analysis giving investors a comprehensive topdown picture of Chinese real estate markets, with a focal question What s going on and where are we headed? It includes a chart book with 100+ analytical charts, tables and data covering the direct property and land (residential-focused) markets, real estate equities, bonds and macroeconomic factors. FOR SUBSCRIPTIONS AND INFO ON OUR SERVICES, CONTACT US: sales@realestateforesight.com Tel Tel Tel. +44 (0) Nanning, Hefei and Changsha have seen substantial land purchases by Vanke in the past 3 months, compared to Suzhou, Guangzhou, and Wuhan buys by major state-controlled developers. Robert Ciemniak robert@realestateforesight.com Real estate corporate bonds continue the rally started in Oct 11 and new issuance. Q4 GDP growth pickup, Dec PMIs, exports, industrial profits data point at recovery from a deceleration trend of the past several months; Shanghai stock market index has surged by 17% since Dec 1 on revival in investor sentiment. Declines in FDI, bank lending (with surge in costly debt via trust loans), and recent revival s dependence on new infrastructure stimulus projects, pose questions on sustainability of growth acceleration in Q2 13 and beyond. There are some indications regulators might take time to expand property tax trials and soften some restrictions, but curbs on speculation remain firmly in place. Government s focus on fighting corruption may have triggered sell-off in parts of the luxury property sector, according to Chinese media reports. Lawrence Chou lawrence@realestateforesight.com.com Please note the Disclaimer on page

2 Table of Contents Major Themes 2 Introducing Scenarios Introducing CityScreener 9 CHART BOOK Residential 12 Land 19 Capital Markets 23 Macro Indicators 30 Retail & Office Indicators 34 Disclaimer 37 About Page 1 of 38

3 Major Themes House prices continue gradual rebound House prices continued mild rebound with the 7 th month of sequential increases in SouFun-CREIS 100 Cities Index, up in Dec 0.23% m-o-m, and just above zero at 0.03% y-o-y. This compares with +0.4% m- o-m and % y-o-y based on NBS 70 cities indices data aggregate as calculated by Thomson Reuters. The overall sentiment towards the market continues to improve and so far property seems to have have been more of a leading sign of recovery from economic deceleration trends. To what extent this is simply a flow-throgh effect from mid-2012 monetary loosening and new stimulus actions as opposed to fundamental factors, remains less clear. House prices continue rebound Biggest 2012 increases in Heze, Urumqi and Nanchang; declines in Wenzhou, Nanning, and Haikou Biggest 2012 increases in Soufun-CREIS 100 cities indicies were in Heze (15.6%), Urumqi (8.3%) and Nanchang (6.5%), declines in Wenzhou (-17.5%), Nanning (-9.6%) and Haikou (-9.3%). By tier, the average increase in Tier-1 cities was highest, compared to Tier-2 and Tier-3 and other cities, over the period of 12 months and 6 months. By region, Central and Northeast regions on average did better than Coastal and Western regions, but with larger variations within the regions. Indications that market is becoming more segmented In December, on m-o-m basis, the number of cities with larger gains (above +1.1%) and larger losses (-1.1%) both increased, suggesting increasing segmentation of the market. Prices rose in 57 cities and declined in 43 cities, compared to equivalent 60:38 ratio in November. Number of cities with larger increases rose from 18 to 24 and those with larger declines from 7 to 20 compared to November. Growing performance variation between cities/regions Property sales volumes keep rising, inventory clears faster Property sales volumes kept rising in Dec by aggregate of 49% m-o-m and 2% y-o-y, though also with variations across cities. Beijing saw 83% m-o-m and 43% y-o-y growth, Guangzhou 9% m-o-m and 10% y-o-y. Calculating month-to-clear (MTC) metrics is notoriously tricky in China due to data issues. With that in mind, our calculations indicate a consistent pattern of improvement in major cities in the recent months compared to longer term averages. Fore example, in Nanjing, the MTC was at around 14 (months) in 2011 on average, and came down to 8 in the past 6 months. Major data caveat: our MTC calculations don t fully account for properties that developers hold not for sale - decide not to bring to the market. Oversupply concerns remain Despite inventories (floor space available for sale) clearing faster, concerns remain about the rising ratio of area under-construction to area sold. Again, we face a major data challenge here. Simple calculation shows that the ratio has been rising consistently, implying growing volume of space inventory. And while the trend seems directionally correct, reportedly developers can show underconstruction status for land where there is no real construction happening other than to avoid penalties for hoarding land. In such case the actual under-construction figure would be smaller though land hoarding issue bigger. Questions on underconstruction statistics and oversupply Land sales down y-o-y but up m-o-m in recent months Land sales in Tier-1 cities fell y-o-y by around 20% in value and 30% in volume in Jan-Dec period, but increased signifcantly m-o-m in recent months. For example, Beijing registered 17% drop in value and and 41% drop in volume y-o-y but 73% increase in value and 0.2% in volume in Q4 compared to Q3. By region, only Central region showed positive y-o-y land sales growth, but all regions followed the m-om recovery trend since early Land sales fell on annual basis but rose in recent months But average land prices have been going up Average land prices, however, increased sharply in the same cities from May to Nov, and declined slightly in Dec. This is also reflected in increased land acquisitions activity by listed developers. Where are the leading players buying land? Cities like Nanning, Hefei and Changsha have seen substantial land purchases by Vanke in the past 3 months, compared to Suzhou, Guangzhou, and Wuhan buys by major state-controlled developers Page 2 of 38

4 Major Themes Listed developers share prices surged Chinese listed sector share prices soared in Dec and Jan by between 0.3% and 24.6% among the major companies, and FTSE EPRA NAREIT China Total Return Index was up 12% (Dec1-Jan18). Smaller cap developers also kept rising sharply reversing earlier trend of underperformance relative to the larger players. Share prices surge, bonds continue rally Real estate corporate bonds continued the rally and new issuance Corporate bond market of Chinese issuers continues to do very well with real estate a major driving sector. Prices of select China-related corporate real estate bonds we track rose in most cases further over the past month. Newly reported issues include Country Garden Holdings 10Y 7.5% coupon ($750M), Shimao Property Holdings 7Y 6.63% coupon ($800M) and Hopson Development Holdings 5Y 9.88% coupon ($300M). Developers delivered strong Dec sales Major listed developers Dec contract sales figures point at continued positive momentum, with sales rising for major 20 developers (by sales volume, see table in the chartbook for details) on average by 24% y-o-y and 22% m-o-m. Despite good sales results and share performance, the issue of significant leverage makes the sector very fragile to shifts in sentiment and property prices trends. Macro economic rebound from deceleration trend Q4 GDP confirmed pickup in growth pace (7.9% vs 7.4% in prior quarter) and Dec PMI indicators, exports and industrial profits data, point at early recovery from a deceleration trend of the past several months; Shanghai stock market index surged by 17% since Dec 1 on revival in investor sentiment, a significant move compared to smaller rises in other major global indices. Macro indicators point at recovery from slowdown Monetary and financing conditions for real estate eased slightly in Dec Official Dec inflation (CPI growth) at 2.5% level, up from 2% in Nov, and M2 money supply growth 13.6% slightly higher than 12.7% in Nov, show a slight improvement from a perspective of real estate asset values and support for the sector. Bank lending growth in RMB slowed in Dec but domestic lending to property developers was significantly up, although y-o-y growth slowed as well. At the same time, recent China s Central Economic and Work Conference pointed at prudent monetary policy and proactive fiscal policy as a direction to expect. Trust loans rise significantly in Dec Trust loans continued to rise to record CNY 264 billion in Dec, by comparison with RMB loans in Dec at CNY 454 billion. The previous all-time high for trust loans was CNY 204 billion in April Recent rapid increase started in July 2012, with close to CNY 1 trillion in trust loans reported since the middle of the year. How fundamentaly strong is the rebound? Declines in FDI and deficit in capital and financial account, reduction in bank lending (with surge in costly debt via trust loans), and recent revival s dependence on new infrastructure stimulus projects approved in recent months, plus ongoing concerns about property sector leverage, all point at risks to sustainability of growth acceleration in Q2 and beyond. US postponed facing the fiscal cliff issues, Eurozone has managed to hold together with Greek bonds generating significant returns. These two external risk factors might return though. but is that all on borrowed time with high fragility? Mainstream forecasts oscillate around auspicious 8% for GDP growth in 2013 Various polls of macro-analysts suggest mainstream consensus views on 2013 GDP growth at somewhere around 8%, a default expectation of stability / gradual growth pickup Page 3 of 38

5 Major Themes CNY up 1% in 2012 Spot CNY-USD rate gained 1% over the course of 2012 in nominal terms and was up 0.24% so far in 2013 (as of Jan 18). The Non Deliverable Forward Rates for 1 year remain at higher levels than the spot prices. Regulators target curbing speculative activity but may soteen some restrictions IMF estimate that real estate sector makes up 12% of China GDP directly. Adding related industries like transportation and taking into account a flow-through effects to other sectors like mining, would demonstrate an even more significant exposure of the China growth model to property industry. While policymakers continue signalling that limiting speculation in housing market is one of their objectives, in balancing the trade-off between that and sustaining economic growth, there are signs of greater support for the residents buying bigger homes (Bloomberg reporting on comments from the Ministry of Housing and Urban-Rural Development) and first time home buyers. Questions whether property tax reforms may take longer to play out Premier Wen Jiabao s comments at a meeting on Jan 15 at the Ministry of Finance (as reported by Xinhua) that government will gradually establish a property tax system that covers property transactions and ownership, and that reforms of the property tax system and tax policies are the two biggest tax-oriented reforms to be tackled in the medium- and long-term. The medium- and long-term point triggered a speculative question as to whether this could have implied delays to current trial property tax plans. Policymakers continue to face growth-stability trade-offs Will the property tax Introduction take longer than thought? Anti-corruption measures and luxury property Government s focus on fighting corruption may have direct impact on luxury property sector most recent theme in Chinese media triggered by reports of sell-off in luxury property sector by officials who want to avoid reporting ownership of the assets. Cities with such cases were said to include Nanjing, Shanghai, Hangzhou, Tianjin, Shenyang, Xiamen, Fuzhou, Jinan, Guangzhou, Shenzhen and Chengdu. No major changes seen in Office and Retail sectors in Q4, activity low While we have not compiled the Q4 data from sources yet, the RCA data for Dec and our early read of reports from real estate services /brokerage firms suggests overall low activity in investment transactions and no major movements in rents or capital values. No major developments in office or retail sector Scenarios - Market Conditions for Real Estate Markets Instead of we expect or our bet is and we forecast, on the following pages we present the outline of several alternative scenarios for what the market conditions for real estate might be like over the next 5 years. This is intended as a thought-provoking foresight development tool. See Scenarios on the following pages Note This summary of major themes is based on our independent analysis of the data sourced from our content partners, public and industry sources, an ongoing review and curation of available research and news articles, combined with private conversations and contributions from market participants Page 4 of 38

6 Scenarios SCENARIOS Conditions for Real Estate Markets in China We are introducing below the summary of our 5 core scenarios for the macro context and conditions for Chinese real estate markets over the next 5 years, from a perspective of a foreign investor. Note that scenarios are not forecasts they are tools that can improve robustness of your decisions and strategies, and they are work-in-progress. We will make our complete Scenario Book available to our subscribers in March. Scenarios are a toolkit for strategy and decision making process, NOT forecasts The objective of these scenarios is to help investors stress test their assumptions and follow the principle you can t predict but you can prepare in the investment process, and to monitor through signposts which scenario is unfolding. Scenarios are also intended to stimulate the strategic discussions and generation of ideas. Scenarios are about dealing with uncertainty. In China s case, there are two levels of uncertainty one regarding the what might happen and the other concerning what is the reality today given the limited reliable information on some key facts. You can t predict, but you can prepare Opportunities exist in any scenario on project-specific basis. Our goal here is to take a top-down view. In addition, there are trends and themes that can play out largely irrespective of our performanceoriented scenarios, such as rise of e-commerce with impact on real estate, aging population, health care needs and senior housing, or growth of the retail sector. In designing the scenarios, we have studied in hindsight various China-related scenarios published in the past, including some from 1995 and 2000, as well as most recent ones. It helped us identify the typical perception patterns in envisioning the future. We then designed our scenarios with the focus on the property sector and emphasis on performance expectations. How can you use these scenarios? Scenarios are useful in the context of a specific strategic judgment or decision you want to make. Ask yourself or your businesses the following questions: What decisions or judgments are you facing regarding China? From a business planning perspective, as a fund, investor or corporation what are your current assumptions as to which scenario will materialize? What does your company s official future scenario look like in comparison? Are you betting a house on one particular view? What if another scenario happens how would that affect your business or investment? Should you hedge an alternative? Are there things you could do that would serve you will under any of these scenarios? Is your strategy or investment fragile, robust, or more fashionably anti-fragile with respect to the uncertainties ahead? Use scenarios in strategic discussions internally and with your stakeholdkers Page 5 of 38

7 Scenarios SCENARIOS OUTLINE v1.0 SCENARIO 1: SMOOTH ADJUSTMENT Between 2010 and 2020, China s real GDP grows according to plans at CAGR of around 7%- 7.5%, while trading partners US and Europe recover well throughout the period and Japan gaining new momentum. Reliance on exports and investments gradually shifts to consumption as contributor to GDP growth. Structural reforms continue as planned but central government keeps things strictly in check to allow for the gradual economic adjustment. Debt concerns get resolved through a series of bailouts and measures similar to banking recapitalizations in the past, as well as consolidation in the property sector. Smooth Adjustment scenario is largely in line with government plans and consensus views The government persistently executes the plan to bring the house prices to reasonable levels, fighting overly speculative activity and supporting first time buyers. New leadership s policies on reducing income inequality, pushing urbanization and elimination of poverty, give a particular boost to lower-tier cities, compared to more restrictive policies sustained in tier 1 cities. Pollution and other environmental concerns get gradually addressed. Oversupply gets gradually cleared up through combination of fewer developments, obsolescence of past projects and growth in fundamental demand rooted in continued urbanization and income growth. In such managed economic adjustment, property prices at aggregate level grow between 1% and 7% per annum until 2018, on average in line with inflation rate at an annualized 3%-4% level. Contained price escalation gives time for the incomes rising at 10%-15% per annum to catch up with previous house price increases, thus improving affordability for the rising middle class with price-income ratios coming down to 4-6. Only then is subsequent cycle of accelerated house price growth triggered again. At macro-level, by 2018 China is richer, stronger and more balanced, but still with wealth in GDP per capita terms at a fraction of that in the US and other developed economies, and room for much further growth. China is step-by-step moving towards the 2012 vision of China SCENARIO 2: FRAGMENTED REALITY With sheer size and geographic spread of the country, China is not one market - and this notion comes to the fore in the Fragmented Reality scenario. After temporary pickup in 2013, economic slowdown and debt concerns strike again, as Europe and US only gradually recover and Japan staying stagnant. Slowdown in combination with conflicts of incentives between the central government and local governments and varying economic profiles of cities and provinces, all lead to political and economic fragmentation of the country. Headline China GDP growth of 6.5%-7.5% between 2010 and 2020 translates into a wider range of 0% to 20% for individual cities and regions. While in aggregate, progress is only somewhat weaker than in the Smooth Adjustment Scenario, the central efforts to steer coordinated growth and structural adjustments falter. Richer and more mature coastal tier 1 cities and poorer and more loosely regulated tier 3 inland regions compete on cost vs. uncertainty trade-off, with tier 2 cities as a middle-ground choice. Central government ends up giving local governments greater powers over local housing policies, including home purchase restrictions. In fragmented markets, different segments of the property market deliver radically different performance with some cities and district-level property prices falling 30%-60% and some rising 100% within a short period. The saying property is a local business gets particularly strongly reflected in this scenario. Fragmented Reality scenario is about greater divergence between regions, city-tiers and market segments Page 6 of 38

8 Scenarios SCENARIO 3: STIMULUS GAMES With CNY 4 trillion stimulus and end-2012 infrastructure investment boost effects wearing off, debts coming due and persistent debt problems in the US, Europe, stagnant Japan and rising domestic social concerns, China embarks on a range of stimulus actions, one after the other on the premise that its fiscal and currency reserves position gives it sufficient buffer to do so. Central planning allows for smooth implementation of such plans and these do work in the near term but they increase fragility. With US, Europe and Japan following similar strategies, big swings follow in markets - from stocks to property rising 100%, only to fall 50% soon after, and currency volatility follows. Same holds for China GDP growth hitting between 4% and 12% between 2013 and Balancing growth, rising debt, spiking inflation and social stability become increasingly difficult for the central government to control but the judgment day is delayed until well beyond Property prices get volatile and much less predictable and timing of investments becomes critical during the period. It is only in the 2020s that the world is faced with the ultimate debt crisis that cannot be resolved through new debt anymore. Until then, the new normal continues. Stimulus Games scenario represents ongoing stimulus and bailout actions delaying the day of reconciliation SCENARIO 4: BUST, DUST & HOPE With US, Europe and Japan in struggling-through mode, the China s over-investment in fixed assets, over-supply of buildings, home ownership already at 80-90% levels, over-leverage of developers and over-pricing of assets relative to fundamentals reach an unsustainable point by A trigger comes from a mix of predictable factors rise in global interest rates, shift in consumers mindset about property as a store of value, more radical policy move by the government, environmental crisis or external factors like exports or FDI fall-off. GDP growth hits official low of 4%, income and employment growth come down significantly. The chain reaction from property sector which makes up to 15% of economic growth directly and 40% indirectly, is hard to stop. Defending social stability, in 2015 the government introduces extensive range of market-controlling and stimulus measures. It succeeds on social front, avoiding any large-scale social unrest, but the markets implode. Bankruptcies spread among property developers; house prices drop 30% in one year and continue to decline in total by 60%, bottoming out towards Stimulus actions no longer work as they used to. The property and related markets are dead during the period, but the collapse clears way for the next wave of fast growth, with underlying fundamentals still holding well, as urbanization progresses and devalued RMB gives subsequent boost to exporters, labor cost reverse the prior inflationary trend and China manufacturing becomes much more competitive again. Bust, Dust & Hope scenario describes a hard to contain economic fallout from an asset bubble burst SCENARIO 5: NEW ENGINES ROAR Despite all the concerns about Chinese economy, the US and Europe, China surprises itself and powers through with real economic growth averaging 10% for after recovering from 2012 lows. Sheer size of the country and its China way economics have once again been underestimated. Dividends from strategic energy and resource policy plays in Africa and Latin America become visible, and combined with domestic technology progress, clean energy and productivity oriented reforms, and with the US economic revival, European debt resolution and revived growth in Japan, China is booming. New leadership, in place fully by 2013, is able to push through gradual but significant reforms. By 2018, the troubles of look like yet another cyclical adjustment. There are problems - the income inequality is still significant but the sheer absolute size and economic structure of the wealthy population sustains the growth momentum and gradually helps close the gap. New Engines Roar scenario is a future with surprising upside from sheer scale and successful third-way of China Page 7 of 38

9 Scenarios Property prices rise 8%-10% per annum on average between 2014 and 2018 across the board after the stagnant adjustment period. The greatest momentum is in lower tier cities, but across the board all cities reflect the new sense of optimism. The oversupply concern doesn t go away but the economic growth boosts demand from first time buyers, upgraders and large inflow of foreign investors, with relaxed foreign ownership regulations supporting the trend. As capital markets open up further, everyone wants to be in China play again. WILDCARDS In addition to the Scenarios above, there is another category of scenarios that we classify broadly as WILDCARDS these concern events or scenarios with high impact but of small and unpredictable probability. Wildcards are high-impact, radical, typically negative surprises but could also be positive WILDCARDS are not our focus here, though history suggests these happen more often than expected. The following deserve a mention: environmental disaster if/when the level of pollution and showing health issues reach unmanageable levels, leading to major economic and social disruption; natural catastrophes like earthquakes - longer history shows China experienced several such events with serious economic and political impact; military or political conflicts there is no lack of tension points, from territorial waters disputes especially with Japan and in South East Asia, questions on Taiwan, Tibet or tensions with North Korea; social unrest what if a modern-form revolution takes place, e-enabled by technology for half-a-billion China internet users, will the China close the door to the world? economic crisis wildcards what if Europe disassembles in disorderly way, while the US defaults on debt? can assist you in strategy development, scenario planning and foresight workshops customized to your specific business and issues at stake. Contact Robert Ciemniak at robert@realestateforesight.com There are economic boom wildcards too back in the early 1990s, the world s economic moods were bitter, but then came the technology, telecom and internet revolution, which combined with globalizing markets form a new growth engine what if we are on the edge of an equivalent for the next 10 years, for example in the fields of space exploration, genetics or nano-technology? Page 8 of 38

10 Expensive Relative Richness of Pricing Cheaper Scaled to 100=highest/most expensive Median China Report January 13 (Pilot) REF Cityscreener CityScreener FRAMEWORK Strategy Maps & Multi-Criteria Analysis for City Selection in China A tool for decisions support in city selection process and strategic discussion A top-down decision to invest in a particlular city or type of cities, business location decision for an expanding multinational, or retailer s decision on where to bring products to markets, are all multicriteria decisions. Our objective for CityScreener is to provide a framework for visually intuitive and simple and yet analytically rich strategy maps useful for supporting such decisions. We start with a generic description and then follow with a relevant example for assessing relative attractiveness of cities in China from perspective of investments in residential sector. GENERIC VIEW FOR ILLUSTRATION 0 The essence of the idea is simple overlay fundamentals and pricing, possibly risk CHEAP BUT WEAK VALUE PLAY Median BUBBLY GROWTH MOMENTUM City X position vs highest Scaled to 100=highest/strongest 100 Weaker Fundamental/Structural Attractiveness Stronger The X axis captures the relative fundamental or structural attractiveness of a city through single or multiple criteria. Many of the city rankings could be used along that dimension. The Y axis represents assessment of relative richness of pricing, such as affordability metrics. Both axes are set in a way that the highest scoring (highest not necessarily meaning the best) city is set to 100 and others are positioned in distance relative to the highest (and so to each other). Median lines are set for both axes to determine the four quadrants. Such construed quadrants carry intuitive interpretations: GROWTH MOMENTUM captures those cities that are relatively expensive but strong on fundamental factors. VALUE PLAY describes those also fundamentally strong but relatively cheaper most compelling from investment perspective. CHEAP BUT WEAK are cheap for a reason. Finally, BUBBLY are relatively expensive even though the fundamentals are relatively not so strong. Such defined map/framework of analysis allows for discussion on changes over time movements on the map. It can also be useful in explaining exposure or strategy of a PE fund or a listed developer to investors or generally reviewing city alternatives. Further extension would included a risk axis or ability to execute criterion. And, instead of relative scale, absolute benchmarks can be used. The emerging map is intuitive to interpret and discuss dynamic changes and can be modifed in many ways further Page 9 of 38

11 REF Cityscreener CHINA CITIES ILLUSTRATION NOTE: we use simple data set here subject to interpretation/data definitions and reliability issues nevertheless useful for illustrative purposes. We will publish our views on city attractiveness in CityScreener framework to subscribers. Application here for illustration only. Subscribers will receive our regular views and updates. Below, we apply the Cityscreener framework to a selection of cities in China. As a simplified proxy for fundamentals we took the 5-year nominal GDP CAGR at city level from 2006 to As a proxy for affordability, we calculated price-income ratios using official disposable income statistics and average house prices, as of 2011 (yes, here we use historical data only) with some assumptions. With all the caveats, we illustrate on specific figures from 2011 With all the caveats in mind (especially on affordability metrics), the map shows that cities like Shanghai, Beijing and Shenzhen stand out (2011 data) as relatively expensive and yet not growing so fast (or Bubbly ) category, in contrast to lower tier cities like Hefei, Jilin or Changsha with economies growing faster and with house prices much more affordable ( Value Play ). can assist you in applying and customizing CityScreener framework, with extensive data in the back-end, to your specific needs, whether for decision support or communication. Contact Robert Ciemniak directly at robert@realestateforesight.com Explanations can vary the simplest being that tier 1 cities attract rich Chinese from further away and have more disposable income than reported. Both factors would improve tier 1 cities position on the map but by how much? Such conversations can be greatly facilitated through the use CityScreener framework and iterative analysis with data adjustments Page 10 of 38

12 REF Chartbook Chart Book Page 11 of 38

13 Residential HOME PRICES CONTINUE GRADUAL REBOUND House prices continue mild rebound with the 7 th month of sequential increases in SouFun-CREIS 100 Cities Index, up in Dec 0.23% m-o-m, and just above zero at 0.03% y-o-y. This compares with +0.4% m-o-m and % y-o-y based on NBS 70 cities indices data aggregate as calculated by Thomson Reuters. The overall sentiment towards the market continues to improve and so far property seems to have have been more of a leading sign of recovery from economic deceleration trends. To what extent this is simply a flow-throgh effect from mid monetary loosening and new stimulus actions as opposed to fundamental factors, remains less clear. In December, on m-o-m basis, the number of cities with larger gains (above +1.1%) and larger losses (-1.1%) both increased, suggesting increasing segmentation of the market Page 12 of 38

14 Residential CHINA IS NOT ONE MARKET - PERFORMANCE CAN VARY SIGNIFICANTLY BY CITY (1/2) Cumulative Price Change ID City (CN) City (EN) Province 12M 6M 1M Jan-Dec millions sqm (*2) MoM Change (*3) YoY Change 1 菏泽 Heze Shandong 15.6% 13.5% -0.3% 2 乌鲁木齐 Urumqi Xinjiang 8.3% 7.5% 3.3% 3-43% -15% 3 南昌 Nanchang Jiangxi 6.5% 10.5% 1.4% 6 9% 37% 4 哈尔滨 Harbin Heilongjiang 6.0% 6.0% 3.7% % 17% 5 西宁 Xining Qinghai 5.8% 3.4% -0.1% 2-124% -34% 6 泰州 Taizhou Jiangsu 5.4% 3.4% -2.3% 7 重庆 Chongqing Chongqing 5.2% 4.4% 0.4% 41 27% 1% 8 株洲 Zhuzhou Hunan 5.1% 4.2% 1.4% 9 连云港 Lianyungang Jiangsu 5.0% 4.4% 3.0% 10 广州 Guangzhou Guangdong 4.9% 4.9% 1.6% 11 9% 10% 11 湛江 Zhanjiang Guangdong 4.1% -1.0% 1.3% 12 台州 Taizhou Zhejiang 3.6% 8.0% 3.4% 13 北京 Beijing Beijing 3.6% 3.0% 0.5% 15 83% 43% 14 银川 Yinchuan Ningxia 3.5% 1.1% -1.7% 4 333% 22% 15 厦门 Xiamen Fujian 3.4% 1.8% -2.0% 5 53% 82% 16 聊城 Liaocheng Shandong 3.3% 6.5% -1.2% 17 新乡 Xinxiang Henan 3.3% 0.6% -0.5% 18 太原 Taiyuan Shanxi 3.2% 5.3% 2.6% 3 62% 70% 19 赣州 Ganzhou Jiangxi 3.0% 4.7% 1.7% 20 衡水 Hengshui Hebei 2.8% 2.1% 0.3% 21 深圳 Shenzhen Guangdong 2.7% 2.3% 1.3% 5-24% 1% 22 长春 Changchun Jilin 2.7% 4.5% 1.0% 8-7% -1% 23 东营 Dongying Shandong 2.5% 4.1% 2.0% 24 南京 Nanjing Jiangsu 2.5% 2.6% 0.3% 9 29% 29% 25 吉林 JiLin Jilin 2.4% 4.7% 2.8% 26 吴江 / 盐城 Wujiang/Yancheng (*1) Jiangsu 2.3% 4.2% 0.2% 27 包头 Baotou Inner Mongolia 2.2% -1.4% -0.1% 28 江门 Jiangmen Guangdong 2.1% 3.7% 0.0% 29 洛阳 Luoyang Henan 2.1% 3.7% 0.4% 30 绵阳 Mianyang Sichuan 2.1% -0.3% 0.5% 31 日照 Rizhao Shandong 2.0% 1.9% 0.3% 32 郑州 Zhengzhou Henan 1.8% 3.7% 1.0% 12 42% -6% 33 保定 Baoding Hebei 1.8% 1.4% 1.4% 34 宜昌 Yichang Hubei 1.7% 2.5% 0.1% 35 苏州 Suzhou Jiangsu 1.6% 3.8% 0.0% 13 12% 34% 36 汕头 Shantou Guangdong 1.6% 4.9% 3.4% 37 宝鸡 Baoji Shanxi 1.3% 2.2% 0.6% 38 沈阳 Shenyang Liaoning 1.1% 1.7% 0.3% 22-2% 13% 39 成都 Chengdu Sichuan 1.1% 2.9% 0.9% 24-8% 4% 40 淮安 Huai an Jiangsu 1.1% 3.0% -0.7% 41 合肥 Hefei Anhui 1.0% 6.7% 3.7% 11 5% 5% 42 邯郸 Handan Hebei 0.9% 1.1% 0.5% 43 淄博 Zibo Shandong 0.8% -0.2% -0.4% 44 武汉 Wuhan Hubei 0.8% 2.5% -0.4% % 19% 45 宿迁 Suqian Jiangsu 0.7% 0.5% -0.3% 46 唐山 Tangshan Hebei 0.2% -1.6% -3.6% 47 扬州 Yangzhou Jiangsu 0.1% 1.0% 0.3% 48 威海 Weihai Shandong 0.1% 0.6% -0.9% 49 昆明 Kunming Yunnan 0.1% 1.7% 2.1% 9 17% -1% 50 中山 Zhongshan Guangdong -0.1% 0.1% -1.0% Gross Floor Area (sqm) Sold Biggest 2012 increases in Soufun-CREIS 100 cities indicies were in Heze (15.6%), Urumqi (8.3%) and Nanchang (6.5%), declines in Wenzhou (- 17.5%), Nanning (-9.6%) and Haikou (-9.3%). By tier, the average increase in Tier-1 cities was highest, compared to Tier-2 and Tier-3 and other cities, over the period of 12 months and 6 months. By region, Central and Northeast regions on average did better than Coastal and Western regions, but with larger variations within the regions. Property sales volumes kept rising in Dec by aggregate of 49% m-o-m and 2% y-o-y, though also with variations across cities. Beijing saw 83% m-o-m and 43% y-o-y growth, Guangzhou 9% m-o-m and 10% y-o-y Page 13 of 38

15 Residential CHINA IS NOT ONE MARKET-PERFORMANCE CAN VARY SIGNIFICANTLY BY CITY (2/2) Cumulative Price Change Gross Floor Area (sqm) Sold ID City (CN) City (EN) Province 12M 6M 1M Jan-Dec millions sqm (*2) MoM Change (*3) YoY Change 51 东莞 Dongguan Guangdong -0.4% -2.5% 0.3% 52 上海 Shanghai Shanghai -0.6% 0.7% 0.3% 16 44% 8% 53 宁波 Ningbo Zhejiang -0.6% -0.9% -0.7% 5 40% 3% 54 佛山 Foshan Guangdong -0.6% 0.3% -0.9% 55 桂林 Guilin Guangxi -0.8% 0.3% -2.2% 56 昆山 Kunshan Jiangsu -0.8% 1.2% -1.0% 57 徐州 Xuzhou Jiangsu -1.2% 0.7% 0.1% 58 芜湖 Wuhu Anhui -1.3% 3.4% 1.2% 59 常州 Changzhou Jiangsu -1.4% 1.6% -0.3% 60 潍坊 Weifang Shandong -1.4% 1.0% 0.2% 61 长沙 Changsha Hunan -1.5% 0.5% -0.3% 14 29% 0% 62 北海 Beihai Guangxi -1.5% -0.2% 0.8% 1 247% -17% 63 大连 Dalian Liaoning -1.5% -0.2% -0.5% 10-32% 16% 64 烟台 Yantai Shandong -1.6% -0.5% 1.1% 65 镇江 Zhenjiang Jiangsu -1.7% -0.2% 1.9% 66 杭州 Hangzhou Zhejiang -1.7% 2.4% 0.4% 9-5% 35% 67 青岛 Qingdao Shandong -1.8% -0.4% 0.3% 8 36% -8% 68 营口 Yingkou Liaoning -1.9% 1.0% -0.9% 69 福州 Fuzhou Fujian -1.9% 1.2% 0.7% 7 69% 37% 70 鄂尔多斯 Ordos Inner Mongolia -1.9% -2.2% -1.3% 71 金华 Jinhua Zhejiang -2.0% 1.0% 3.6% 72 济南 Jinan Shandong -2.0% -0.3% 0.8% 6-3% 4% 73 兰州 Lanzhou Gansu -2.2% -0.7% 0.5% 2 928% 8% 74 绍兴 Shaoxing Zhejiang -2.2% 1.1% 0.6% 75 天津 Tianjin Tianjin -2.4% 1.7% -0.4% % 4% 76 嘉兴 Jiaxing Zhejiang -2.7% -0.6% 0.7% 77 呼和浩特 Hohhot Inner Mongolia -2.7% -1.1% -0.9% 4 825% -19% 78 无锡 Wuxi Jiangsu -2.8% 0.3% -0.3% 8 44% 48% 79 秦皇岛 Qinghuangdao Hebei -3.2% -1.8% -3.2% 80 鞍山 Anshan Liaoning -3.3% 0.0% 0.2% 81 柳州 Liuzhou Guangxi -3.7% 2.4% 2.2% 82 德州 Dezhou Shandong -3.9% -4.8% 0.8% 83 泉州 Quanzhou Fujian -4.1% -0.5% 3.2% 84 湖州 Huzhou Zhejiang -4.1% 0.1% -0.5% 85 西安 Xi an Shaanxi -4.5% -2.0% -1.1% 14 46% -18% 86 石家庄 Shijiazhuang Hebei -4.7% -4.0% -4.0% 7-35% -9% 87 惠州 Huizhou Guangdong -4.8% -0.6% -2.4% 88 湘潭 Xiangtan Hunan -5.2% 0.0% -2.0% 89 廊坊 Langfang Hebei -5.5% 0.1% -0.1% 90 珠海 Zhuhai Guangdong -5.6% -1.3% 2.3% 91 马鞍山 Ma anshan Anhui -5.7% -2.5% -2.6% 92 贵阳 Guiyang Guizhou -5.7% -2.7% -2.6% 9 0% 29% 93 江阴 Jiangyin Jiangsu -5.9% -2.3% -2.6% 94 张家港 Zhangjiagang Jiangsu -7.0% -4.0% -2.3% 95 常熟 Changshu Jiangsu -7.4% -4.2% -3.8% 96 三亚 Sanya Hainan -7.7% -5.0% -3.7% 2-13% 10% 97 南通 Nantong Jiangsu -9.0% -1.3% -0.7% 98 海口 Haikou Hainan -9.3% -2.3% -4.4% 3 5% 28% 99 南宁 Nanning Guangxi -9.6% -4.8% -3.4% 6 19% -4% 100 温州 Wenzhou Zhejiang -17.5% -8.3% 3.3% 2 74% 59% Analysis by based on data from SouFun CREIS as of Jan Tier 1 and Tier 2 cities are represented in dark red and blue text respectively. The heat map indicates the relative performance in respective months. *(1) In December 2012, SouFun CREIS changed the house price calculation methodology to better reflect the market conditions. They excluded some smaller counties that would understate the price and dropped the city of Wujiang and replaced by Yancheng to better capture the price movement in that particular region. *(2) Volume data is the Gross Floor Area sold in a particular city on YTD basis (Jan-Dec 2012) and the YoY % is based on the latest YTD amount vs same period last year *(3) MoM % is based on change in monthly incremental Gross Floor Area sold in a particular city Page 14 of 38

16 Residential TIER 1 AND CENTRAL REGION CITIES SAW LARGER PRICE INCREASES ON AVERAGE By Region Average Range 6M 12M 6M 12M Central 3.20% 1.08% -2.5% to 10.5% -5.7% to 6.5% Coastal 0.79% -0.90% -8.3% to 13.5% -17.5% to 15.6% Northeast 2.51% 0.79% -0.2% to 6.0% -3.3% to 6.0% Western 0.47% -0.26% -4.8% to 7.5% -9.6% to 8.3% Analysis by By Region Average Range 6M 12M 6M 12M Tier % 2.65% 0.7% to 4.9% -0.6% to 4.9% Tier % -0.75% -8.3% to 10.5% -17.5% to 8.3% Tier 3 & Others 1.13% -0.35% -4.8% to 13.5% -9.0% to 15.6% Source: SouFun CREIS By tier, the average increase in Tier-1 cities was highest, compared to Tier-2 and Tier-3 and other cities, over the period of 12 months and 6 months. By region, Central and Northeast regions on average did better than Coastal and Western regions, but with larger variations within the regions. RESIDENTIAL RENTS SHOWED OPPOSITE MOVEMENT TO HOUSE PRICES IN 2012 Cumulative Change in Rent Index City 5Y CAGR Since Jan12 Since Jun12 Beijing 10.66% 8.99% -3.17% Shanghai 2.83% 5.35% -2.45% Tianjin 3.41% 7.20% -4.68% Chongqing 2.56% 1.27% -5.19% Shenzhen 6.35% 9.39% 0.55% Guangzhou 8.93% 6.68% 2.19% Chengdu 12.51% 7.97% -1.18% Residential rents according to SouFun CREIS Top 10 Cities Residential Rent Index, moved over the past 6 months in the opposite direction of recently rebounding house prices in the same cities, with declines in major cities since June However, on 12 months basis, rents still grew between 1.27% and 9.4% in these major cities. Analysis by Source: SouFun CREIS URUMQI, HARBIN AND HEFEI CONTRAST WITH HAIKOU, NANNING AND SANYA VISUALIZING THE DATA: CLICK HERE TO VIEW HOW THESE BUBBLES MOVED OVER THE PAST 18 MONTHS Based on SouFun-CREIS residential property indices for major cities, the chart summarizes information by overlaying 1M and 12M cumulative change data. Bubble size reflects relative volume of floor space sold by property developers in respective cities from January-December 2012 (12 months). Urumqi, Harbin, Hefei stand out in the quadrant with high recent and annual growth, contrasting with Haikou, Nanning, Sanya, Shijiazhuang which declined both in recent months and on 12 month basis Page 15 of 38

17 Residential CONCERNS GROW ON OVERSUPPLY BUT DATA IS HARD TO DECODE Despite inventories (units available for sale) clearing faster, concerns remain about the rising ratio of area under-construction to area sold. Again, we face a major data challenge here. Simple calculation shows that the ratio has been rising consistently, implying growing volume of space inventory. And while the trend seems directionally correct, reportedly developers can show under-construction status for land where there is no real construction happening other than to avoid penalties for hoarding land. In such case the actual under-construction figure would be smaller though land hoarding issue bigger. ON RELATIVE BASIS THOUGH SOME CITIES FACE GREATER CHALLENGES THAN OTHERS Ratio of sqm of residential properties under construction to sqm sold City (CN) City (EN) Province Tier Average 温州 Wenzhou Zhejiang Tier 兰州 Lanzhou Gansu Tier 太原 Taiyuan Shanxi Tier 北海 Beihai Guangxi Tier 呼和浩特 Hohhot Inner Mongolia Tier 宁波 Ningbo Zhejiang Tier 西宁 Xining Qinghai Tier 西安 Xi an Shaanxi Tier 福州 Fuzhou Fujian Tier 乌鲁木齐 Urumqi Xinjiang Tier 杭州 Hangzhou Zhejiang Tier 青岛 Qingdao Shandong Tier 银川 Yinchuan Ningxia Tier 石家庄 Shijiazhuang Hebei Tier 上海 Shanghai Shanghai Tier 海口 Haikou Hainan Tier 北京 Beijing Beijing Tier 大连 Dalian Liaoning Tier 无锡 Wuxi Jiangsu Tier 长春 Changchun Jilin Tier 南京 Nanjing Jiangsu Tier 济南 Jinan Shandong Tier 苏州 Suzhou Jiangsu Tier 南宁 Nanning Guangxi Tier 昆明 Kunming Yunnan Tier 天津 Tianjin Tianjin Tier 郑州 Zhengzhou Henan Tier 厦门 Xiamen Fujian Tier 三亚 Sanya Hainan Tier 广州 Guangzhou Guangdong Tier 深圳 Shenzhen Guangdong Tier 贵阳 Guiyang Guizhou Tier 重庆 Chongqing Chongqing Tier 成都 Chengdu Sichuan Tier 哈尔滨 Harbin Heilongjiang Tier 长沙 Changsha Hunan Tier 合肥 Hefei Anhui Tier 南昌 Nanchang Jiangxi Tier 沈阳 Shenyang Liaoning Tier 武汉 Wuhan Hubei Tier With the caveats on data issues mentioned above: The pattern of rising under-construction to sold ratio seems fairly consistent across the major cities, with increases from 2009 to For 2012, the highest ratios were in Wenzhou, Lanzhou, Taiyuan, Beihai and Hohhot, between 14.2 and 7.5. Wenzhou stands out with the highest ratio of 14.2, although improved on 19.8 in The lowest ratios were in Wuhan, Shenyang, Nanchang, Hefei and Changsha, between 3.6 and 3.8. Interestingly, cities with lowest ratios tended to record much higher house price growth in 2012, than cities with the highest ratios: +1.58% vs 4.13% on average for each of the respective group of the cities. Analysis by Source: SouFun CREIS, NBS Page 16 of 38

18 Residential INVENTORY CLEARING SEEMS TO BE IMPROVING CONSISTENTLY IN THE LAST 6M Number of Months to Clear (MTC) - Floor Area Available For Sale (sqm) to 3M Average of Floor Area (sqm) Sold ratio Number of Months to Clear (MTC) - Floor Area Available For Sale (sqm) to 6M Average of Floor Area (sqm) Sold ratio City Nov-12 Last 6M Avg M Avg 2011 Avg City Nov-12 Last 6M Avg M Avg 2011 Avg Beijing Shanghai Tianjin Chongqing * Shenzhen Guangzhou Hangzhou Nanjing Wuhan Analysis by Beijing Shanghai Tianjin Chongqing Shenzhen Guangzhou Hangzhou Nanjing Wuhan Source: SouFun CREIS Calculating month-to-clear (MTC) metrics is notoriously tricky in China due to data issues. With that in mind, our calculations indicate a consistent pattern of improvement in major cities in the recent months compared to longer term averages. Fore example, in Nanjing, the MTC was at around 14 (months) in 2011 on average, and the figure came down to 8 in the past 6 months. This means given the pace of sales at the 6M average level, the Nov-12 data on GFA available for sale would imply it would take 8 months to clear the inventory. Major data caveat: our MTC calculations don t fully account for properties that developers hold not for sale - decide not to bring to the market. Note: GFA available for sale includes both completed houses and houses under construction with the permission to sell (which would overestimate the inventory because some of the under construction buildings need 2 years to build but they are pre-sold in the market). ALTERNATIVE MEASURES SHOW DIFFERENT RESULTS Number of Months to Clear (MTC) - Floor Area Available For Sale (completed buildings in sqm) to Floor Area ( completed buildings in sqm) Sold ratio City Beijing Shanghai Tianjin Chongqing Shenzhen NA Guangzhou Hangzhou Nanjing Wuhan Chengdu Analysis by Source: SouFun CREIS, NBS Following further from the above, If we treat inventory as cumulative completed floor area in sqm and clear it by dividing by the floor area sold (of only completed homes), the ratios would be showing an increase. Caveat here this way of calculating does not take into account pre-sales Page 17 of 38

19 Residential AND 80% OF GROSS FLOOR AREA SALES ARE PRE-SALE Presale accounts for 78% of the sales. Development usually takes about 1.5 to 2 years from presale to completion. Some of the presold yet not delivered projects are recorded as stock held by developers, also the same in the case when a unit is completed but doesn t have certain types of land/property certificate and it can only be pre-sold. GOVERNMENT IS COMMITTED TO PROVISION OF AFFORDABLE HOUSING The government announced plans to complete 4.6 million housing units in 2013 and start construction of 6 million in the country. Continued urbanization as a major policy objective has been communicated by the new Premier and as part of the plan the government wants to build 36 million affordable housing units by As an example of differences between commercial residential and social / affordable housing markets, the charts show the case of Beijing where affordable units cost roughly 25% of the value of commercial residential units in RMB per sqm. The chart belowe shows further the pickup in floor space of affordable housing sold since Page 18 of 38

20 Land LAND SALES VALUES DECLINED Y-O-Y AND ROSE OVER RECENT MONTHS IN MOST CITIES Land sales in Tier-1 cities fell y-o-y by around 20% in value in Jan-Dec period, but increased signifcantly m-o-m in recent months. By region, only Central region showed positive y-o-y land sales growth, but all regions followed the m-o-m recovery trend since early Data as of Jan Coastal: Beijing, Fujian, Guangdong, Hainan, Hebei, Jiangsu, Shandong, Shanghai, Tianjin, and Zhejiang; Northeast: Heilongjiang, Jilin, and Liaoning; Central: Anhui, Henan, Hubei, Hunan, Jiangxi, and Shanxi; Western: Chongqing, Gansu, Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Xinjiang, and Yunnan Page 19 of 38

21 Land SIMILAR PATTERN HOLDS FOR LAND AREA SOLD Similar pattern held for the volume of sqm of land sold. Except Central region, y-o-y volumes declined, but picked up significantly in recent months and especially in December on m-o-m basis. Data as of Jan Coastal: Beijing, Fujian, Guangdong, Hainan, Hebei, Jiangsu, Shandong, Shanghai, Tianjin, and Zhejiang; Northeast: Heilongjiang, Jilin, and Liaoning; Central: Anhui, Henan, Hubei, Hunan, Jiangxi, and Shanxi; Western: Chongqing, Gansu, Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Xinjiang, and Yunnan Page 20 of 38

22 Land INCREASE IN AVERAGE LAND PRICES IS DRIVEN BY TIER 1-2 CITIES Average land prices increased y-o-y largely driven by Tier-1 and Tier-2 cities, with a clear m-o-m rising trend in Tier-1 cities and strong growth in Tier-2 cities. In by-region view, Coastal region noted the biggest increase y-o-y at close to 40%, while Western and Northeast regions showed a y-o-y decline. Data caveat: the prices refer to simple average prices (transactions value / transaction ssqm volume) and changes in composition of types of land sold (cheap vs expensive areas) sold impact the average figure. Data as of Jan Coastal: Beijing, Fujian, Guangdong, Hainan, Hebei, Jiangsu, Shandong, Shanghai, Tianjin, and Zhejiang; Northeast: Heilongjiang, Jilin, and Liaoning; Central: Anhui, Henan, Hubei, Hunan, Jiangxi, and Shanxi; Western: Chongqing, Gansu, Guangxi, Guizhou, Inner Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Xinjiang, and Yunnan Page 21 of 38

23 Land CHENGDU AND CHONGQING SEE BIGGER ACTIVITY THAN BEIJING AND SHANGHAI City Value in RMB billions Dec-12 12M Average Below 12M Avg Area in million sqm Dec-12 12M Averag e Below 12M Avg Beijing % % Shanghai % % Chengdu % % Chongqing % % At city level, Western cities of Chengdu and Chongqing registered much higher transactions value and area volume of land sold, in comparison to Beijing and Shanghai, with Beijing in December at levels lower than its 12-month average. Analysis by Source: SouFun CREIS MOST CITIES SUSTAIN RECENT LAND SALES MOMENTUM December land sales transaction values in comparison to respective 12-month averages were highest in cities of Haikou, Suzhou and Wuhan, and lowest in Beihai, Urumqi and Xiamen Page 22 of 38

24 Capital Markets CHINESE LISTED PROPERTY SECTOR ENJOYED A STRONG END TO 2012 Chinese listed sector share prices soared in Dec and Jan by between 0.3% and 24.6% among the major companies, and FTSE EPRA NAREIT China Index was up 12%, outperforming other regions. Globally, the FTSE EPRA NAREIT property indices are now (as of Jan 18) at levels just slightly below the 12-month high (between Jan and Dec 2012) and a bit further away from 5-year highs. % up/down Latest vs High of Latest vs Low of 12M 5Y 12M 5Y China -2% -9% 96% NA Hong Kong 0% 0% 48% 217% Singapore -2% -2% 54% 258% Australia 0% 0% 19% 280% US -1% -20% 31% 267% Japan -5% -8% 42% 143% Europe -2% -22% 32% 171% Analysis by Source: Thomson Reuters Datastream SMALLER LISTED DEVELOPERS CAPTURED NEW POSITIVE SENTIMENT IN LAST MONTHS While almost all listed companies on our sample showed strong positive last month and one-year price returns, what s noticable is smaller developers (here defined as between $100m and $1bn in market cap) kept rising sharply most recently and reversing earlier trend of underperformance relative to the larger players Page 23 of 38

25 Capital Markets MAJOR LISTED DEVELOPERS REPORTED STRONG SALES IN DEC Property Developers (CN) Property Developers (EN) 1Y Price Return Price Return Since Dec Dec Sales Area (million sqm) Average Achieved Price (RMB/SQM) Contract Sales (billion RMB) YoY % MoM % 万科 CHINA VANKE 35% 21% , % -18% 保利地产 POLY REAL ESTATE GROUP 69% 25% , % 12% 恒大地产 EVERGRANDE REAL ESTATE 18% 18% 1.2 6, % -35% 碧桂园 COUNTRY GARDEN 25% 21% NA NA % 22% 绿城中国 GREENTOWN CHINA 406% 66% , % -8% 华润置地 CHINA RESOURCES LAND 70% 28% NA NA % NA 雅居乐地产 AGILE PROPERTY 29% 19% , % 86% 融创中国 SUNAC CHINA 228% 68% , % 15% 中海地产 CHINA OVERSEAS LAND & INVESTMENT 73% 22% , % 8% 龙湖地产 LONGFOR PROPERTIES 55% 10% 0.4 9, % 9% 金地集团 GEMDALE 35% 34% , % 8% 世茂房地产 SHIMAO PROPERTY 119% 17% , % 25% 富力地产 GUANGZHOU R&F 103% 39% , % 9% 佳兆业 KAISA GROUP 87% 77% , % 9% 保利香港 POLY PROPERTY (HK) 65% 31% NA NA % 28% 首创置业 BEIJING CAPITAL LAND 139% 48% 0.3 8, % 160% 远洋地产 SINO-OCEAN LAND HOLDINGS 68% 25% NA NA % -18% 新城股份 JIANGSU FUTURE LAND 67% 44% 0.1 8, % 0% 建业地产 CENTRAL CHINA REAL ESTATE 89% 66% 0.2 5, % 40% 花样年 FANTASIA HOLDINGS 81% 70% 0.1 8, % -14% 恒盛地产 GLORIOUS PROPERTY 36% 40% 0.1 8, % 4% 越秀地产 YUEXIU PROPERTY 122% 20% 0.0 9, % 127% Analysis by Source: SouFun CREIS, Company Websites Major listed developers Dec contract sales figures point at continued positive momentum, with sales rising for major 20 developers by sales volume on average by 24% y-o-y and 22% m-o-m. Despite good sales results and share performance, the issue of significant leverage makes the sector very fragile to shifts in sentiment and property prices trends. WITH PICKUP IN VOLUMES AND AVERAGE ACHIEVED PRICES IN DEC Data for a selection of larger listed developers we analyzed shows that since July these developers have been registering a strong uptick in volume of floor space sold, while the median of their average achieved selling prices have been declining. In Nov and Dec, however, the price measure also increased. This suggest developers have been releasing inventory, likely in order to secure cash flow for the servicing and repayment of debts maturing in the second half of 2012, but regained some pricing power towards the year-end. Using data obtained from SouFun CREIS, we selected into the sample companies with more comprehensive data sets on sale price, sale area and sale transaction amounts. Companies in our sample are China Vanke, Poly Real Estate Group, Poly (HK) Investment Limited, China Overseas Land & Investment, Evergrande Real Estate Group, Gemdale Corporation, Greentown China Holdings, Agile Property Holidings, Country Garden Holdings, Longfor Properties, Beijing Capital Land, Shimao Property Holdings, and Yuxiu Property Page 24 of 38

26 Capital Markets WHILE PAYING MORE FOR LAND Data for select listed property companies shows that many of them achieved higher average sale prices in Dec compared to their respective YTD averages. At the same time, they paid higher prices for acquired land in Dec than the YTD average of their pror acquistions. This would be consistent with top-down city-level average land price estimates we showed in the Land section. However, the differences between individual companies can be significant in RMB per sqm terms. THE PROPERTY-PRICE VS LAND PRICE-SPREAD INCREASED IN DEC The higher median of average sale prices in Dec in the sample led to narrower spread between the property price and land price measure. What s important is a noticable downward trend in that spread over the past 18 months but a strong pickup since October. Using data obtained from SouFun CREIS, we selected into the sample companies with more comprehensive data sets on sale price, sale area and sale transaction amounts. Companies in our sample are China Vanke, Poly Real Estate Group, Poly (HK) Investment Limited, China Overseas Land & Investment, Evergrande Real Estate Group, Gemdale Corporation, Greentown China Holdings, Agile Property Holidings, Country Garden Holdings, Longfor Properties, Beijing Capital Land, Shimao Property Holdings, and Yuxiu Property Page 25 of 38

27 Capital Markets CORPORATE REAL ESTATE BONDS CONTINUE THE RALLY STARTING IN OCT 11 Corporate bond market of Chinese issuers continued to do very well with real estate a major driving sector of the overall corporate bond issuance. Some of the newly reported issues include Country Garden Holdings 10Y 7.5% coupon ($750M), Shimao Property Holdings 7Y 6.63% coupon ($800M) and Hopson Development Holdings 5Y 9.88% coupon ($300M). Prices of select China-related (not only Chinese issuers) corporate real estate bonds we track rose in most cases further over the past month. The rally started at the low point at the end of 2011 with major concerns at the time about the hard landing of the Chinese economy Page 26 of 38

28 Macro Indicators MACRO ECONOMIC INDICATORS SHOW EARLY SIGNS OF GROWTH REVIVAL Metric Latest Monthly YoY 6M Average 5Y Average Steel Production (*1) 15.2% 5.0% 8.2% Electricity Consumption (*1) 7.6% 4.8% 12.4% Rail Cargo (*1) 1.2% -3.7% 4.8% Industrial Profit (*1) 3.0% -1.1% 18.1% Retail Sales (*1) 14.9% 13.9% 18.6% Car Sales (*2) 6.9% 8.8% 22.8% 6M and 5Y Ave are averages of monthly y-o-y growth (*1) Nov 2012 as latest figures (*2) Dec 2012 as latest figures Analysis by Source: Thomson Reuters Datastream Q4 GDP confirmed pickup in growth pace (7.9% vs 7.4% in prior quarter) and Dec PMI indicators, exports and industrial profits data, point at early recovery from a deceleration trend of the past several months. Nevertheless, the growth rates in key indicators remain in deceleration trend vsisible since mid Various polls of macro-analysts suggest mainstream consensus views on 2013 GDP growth at somewhere around 8%, a default expectation of stability / gradual growth pickup Page 27 of 38

29 Macro Indicators CONSTRUCTION ACTIVITIES STILL AT LOW LEVELS Y-O-Y, CLOSE TO LEVELS FROM 2009 Average of monthly cumulative changes year-on-year Metric Jan-Dec M Average 5Y Average GFA Started -6.7% -8.0% 18.1% 17.7% 15.2% -4.7% 59.3% 23.3% -5.3% GFA Completed 11.4% 18.0% 18.0% 8.6% 15.9% 23.6% 12.1% 15.4% 23.6% GFA Sold 1.8% -3.9% 9.1% 21.8% -10.9% 32.0% 18.0% 11.0% -6.8% Analysis by Source: Thomson Reuters Datastream, NBS The recent 6-month average of the growth in new starts of commercial buildings is significantly below 5-year historical average, showing -8% decline vs 5-year 18.1% average growth. Similarly, GFA sold at -3.9% recent 6-month average, compared to 5-year 9.1%. Completions, however, remain at similar levels to longer-term trend at 18%. FIXED ASSET INVESTMENT GROWTH LEVEL STAYS AT STABLE LEVELS Growth in Fixed Asset Investment overall and in real estate, both remain at similar levels. Growth in FAI in RE, however, seems to continue the slight deceleration trend after stabilizing mid-2012, while overall FAI picked up in mid-2012 on new stimulus actions and monetary loosening (but came down slightly in Dec on y-o-y basis) Page 28 of 38

30 Macro Indicators RECENT GROWTH IN FAI COMES FROM LESS DEVELOPED PROVINCES Metric Latest Monthly YoY 6M Average 5YAverage Fixed Asset Investment (*1) 27.2% 25.3% 38.5% Fixed Asset Investment in Real Estate (*2) 25.1% 26.4% 29.2% (*1) Dec 2012 as latest figures (*2) Nov 2012 as latest figures Analysis by Source: Thomson Reuters Datastream, NBS Investment is a major driver of the Chinese GDP. Over-reliance on on investment for growth is a major economic concerns for China. Latest figures for Fixed Asset Investment overall and in Real Estate show the growth still at high 27.2% % levels but both lower than 5-year averages, but higher than 6-month average, presumably driven by recent increase in approvals of new projects that are intended to help boost economic growth. FAI varies by province and the chart above shows that recent growth (over the past 3M) tends to come from less developed regions (topright on the chart) vs Shanghai, Beijing and Guangdong (lower-left corner) Page 29 of 38

31 Macro Indicators FOREIGN DIRECT INVESTMENT FALLS Y-O-Y FDI and FDI into Real Estate both declined in 2012 by 3.5% and 8.1% respectively, in contrast to longer term average growth of 17% and 33.7% Average of cumulativemonthly changes year-on-year Metric 2012 (*3) Average (*4) Foreign Direct Investment (*1) -3.5% 17.0% Foreign Direct Investment in Real Estate (*2) -8.1% 33.7% Analysis by Source: Thomson Reuters Datastream, NBS EXPORTS TO THE US AND EUROPE PICKED UP IN DEC Average of monthly changes year-on-year Metric Average Exports Growth to US 9.3% 15.9% Exports Growth to EU -5.6% 20.9% Analysis by Source: Thomson Reuters Datastream, China Customs Exports growth to both US and EU picked up in December, although 2012 average monthly growth was much lower than the longer-term average and it was negative for exports to the EU, reflecting some positive developments in the US (fiscal cliffs aside) and ongoing European worries Page 30 of 38

32 Macro Indicators MONETARY CONDITIONS EASES SLIGHTLY FOR REAL ESTATE IN DEC VS NOV Average of monthly changes year-on-year Metric Average PPI -1.7% 3.4% Deposit Rate 3.3% 2.8% M2 13.5% 18.6% CPI 2.7% 3.1% Analysis by Source: Thomson Reuters Datastream, NBS, PBOC Official Dec inflation (CPI growth) at 2.5% level, up from 2% in Nov, and M2 money supply growth at 13.6%, slightly higher than 12.7% in Nov, show a slight m-o-m improvement from a perspective of real estate asset values. However, 2012 averages in comparison with average show decreasing inflationary trends, and negative PPI growth. Recent China s Central Economic and Work Conference pointed at prudent monetary policy and proactive fiscal policy as a direction to expect. Data caveat: there is a lot of debate about the accuracy of the Chinese inflation data (though this is not necessarily uniquely China issue). BANK LENDING DECLINES SEQUENTIALLY IN RECENT MONTHS Bank lending growth in RMB slowed in Dec but domestic lending to property developers was significantly up, although y-o-y growth slowed as well. 1-year interest rate swap rates stay above 3%, rising over the last several months, after declines following the policy loosening in mid The 7-day repo rate is seen as a measure of interbank funding availability. It s been oscillating around the same level since the middle of the year Page 31 of 38

33 Macro Indicators TOTAL SOCIAL FINANCING UP BUT RMB LOANS DECLINE Bank lending in RMB continued to decline sequentially in December in both absolute and relative terms to the Aggregate Social Financing figure which was overall up from Nov, boosted by Bank s Acceptance Bills and Trust Loans. Some analysts see decline in bank lending as sign of concern on viability of many projects which banks don t want to fund but alternative sources at higher rates would. BUT TRUST LOANS SURGE TO RECORD HIGH OVER THE PAST MONTHS Trust loans continued to rise with record CNY 264 billion of such loans in Dec, by comparison with RMB loans at CNY 454 billion. The previous all-time high for trust loans was CNY 204 billion in April Recent rapid increase in trust loans started in July 2012, with close to CNY 1 trillion in trust loans since the middle of the year Page 32 of 38

34 Macro Indicators CHINESE STOCK MARKETS INDICES SURGED IN DEC Shanghai stock market index surged by 17% since Dec 1 on revival in investor sentiment, a significant move compared to smaller rises in other major global indices. Shenzhen and Shanghai markets thus reversed the Jun- Nov trend in divergence between their performance and that of Hong Kong, US and world indices. Still, Shanghai Composite index is at levels around 60% off peak in 2007 and reported interim profts of its constituent companies are not rising. CURRENCY IMPACT AND STORIES OF 2012, CNY-USD SPOT RATE UP 1% Spot CNY-USD rate gained 1% over the course of 2012 in nominal terms and was up 0.24% so far in 2013 (as of Jan 18). The Non Deliverable Forward Rates for 1 year remain at higher levels than the spot prices. The table below shows a simplified illustration of an approximate impact of currency movements, under the following assumptions: Investor bought investment currency at average January 2012 spot exchange rate, then bought back the investor currency at average December 2012 rate, so that percentage change is expressed in investor currency after repatriation, as percentage increase/decrease on the original amount in his/her currency. What stands out is the movements in Japanese yen. For example, a USD investor putting money into JPY (under the above assumptions), would see a loss of 8% based purely on currency movements. A JPY investor into CNY would gain 10.4% over the same period. Analysis by Source: Thomson Reuters Datastream Page 33 of 38

35 Retail VALUE AND NUMBER OF MAJOR SHOPPING MALL DEALS DECLINED IN DEC M-O-M Data on major retail investment transactions (shopping malls/centers/strips) in December captured by Real Capital Analytics shows decline in number of major transactions, with value of deals at around average level of the past 6 months. Activity by foreign investors remains limited compared to end SELECT MAJOR RECENT-MONTHS SHOPPING MALL/CENTER INVESTMENT TRANSACTIONS PROPERTY Type Address Buyer Seller Price CNY (estimate) Unit price CNY/m2 (estimate) Jinqiao Life Hub Mall & Other Jinqiao Rd And Yanggao Rd, Shanghai - Morgan Stanley JV Chongbang Development Limited 3.5 billion 19,420 Qingdao Shopping Mall Mall & Other 195 Hong Kong East Rd, Shandong Parkson Retail Group Shanghai Industrial Dev 3.2 billion 14,892 Nanning Huarun Center Wanxiang City Mall & Other 136 Minzu Ave, Nanning China Resources Land China Resources 740 million 4,911 Hualian Plaza 1F-6F Mall & Other 55 Dongdu Rd, Ningbo Haishu Yintai Metro Land Corp 465 million 14,273 Junjiang International Shopping Center Mall & Other Junjiang Rd, Shanghai Shanghai Friendship Grp Shanghai Jintai Textile Technology Development Co Ltd 435 million 10,453 Guozhong Club (2B-2F) Mall & Other 1546 Dalian Rd Yagpu District, Shanghai Warburg Pincus Interchina Holdings 280 million 15,242 Data provided by Real Capital Analytics AGGREGATE ESTIMATES FOR RETAIL RENT VALUES (Q4 DATA NOT YET AVAILABLE) While we have not compiled the Q4 data yet from sources, our read of available property research for Q4 suggests in aggregate no change or slight increases in rents for major cities q-o-q. The argument remains as to whether the fast growing supply of retail space will be met with sufficient demand driven by rising consumerism and incomes. Q3 data sources: Based on research reports and data from CBRE, Jones Lang Laselle, Knight Frank, DTZ, Savills, Colliers, Centaline and Sounfun CREIS. Numbers in paranthesis beside city names denote number of datapoints Page 34 of 38

36 Office VALUE AND NUMBER OF REPORTED MAJOR OFFICE DEALS DECLINED IN DEC M-O-M Data on major office investment transactions in December captured by Real Capital Analytics shows decline in number of major transactions, with reportedly hardly any deals in Q4 other than strata sales. ACTIVITY REMAINED AT HISTORICALLY VERY LOW LEVELS The number of reported major investment deals was the lowest since Jan-10 and it was one of the lowest in terms of transaction values. SELECT RECENT-MONTHS MAJOR OFFICE INVESTMENT DEALS PROPERTY TYPE ADDRESS BUYER SELLER PRICE (CNY) (estimate) UNIT PRiCE (CNY/m 2 ) (estimate) The Place (6-16F) Block 4 Office - CBD 9 Guanghua Rd Chaoyang District, Beijing Sinomedia Beijing Aozhong Xingye Real Estate Dev Co Ltd 665 million 30,001 Nanning Huarun Center huarun Building Office - CBD 136 Minzu Ave, Nanning China Resources Land China Resources 648 million 4,911 Banghua Universal Plaza(18F-20F) Office - CBD 1 Jinsui Rd,Guangzhou Evergreen International Holdings Guangzhou Hong Sheng 242 million 42,345 Huangpu Zhongxin City Office - CBD 1600 Zhonghua Rd, Shanghai Shanghai Zhongjing Construction Agency SPG Land (Holdings) Ltd 95 million 10,182 Data provided by Real Capital Analytics Page 35 of 38

37 Office OFFICE CAPITAL VALUE ESTIMATES (Q4 DATA NOT YET AVAILABLE) While we have not compiled the Q4 data yet from sources, our read of available property research for Q4 suggests small or no increases in office capital values q-o-q. Q3 data sources: Based on research reports and data from CBRE, Jones Lang Laselle, Knight Frank, DTZ, Savills, Colliers, Centaline and Sounfun CREIS. Numbers in paranthesis beside city names denote number of datapoints. OFFICE RENTAL VALUE ESTIMATES (Q4 DATA NOT YET AVAILABLE) While we have not compiled the Q4 data yet from sources, our read of available property research for Q4 suggests no changes or minimal increases in office rental values in major cities q-o-q. In Q3, median of Beijing office rents estimates reported was more than 3 times that of Wuhan or Chongqing. Q3 data sources: Based on research reports and data from CBRE, Jones Lang Laselle, Knight Frank, DTZ, Savills, Colliers, Centaline and Sounfun CREIS. Numbers in paranthesis beside city names denote number of datapoints. OFFICE VACANCY RATES ESTIMATES (Q4 DATA NOT YET AVAILABLE) Office vacancy rates vary significantly between major cities and in Q3 Chengdu was estimated to have the highest vacancy rates across the major seven cities. While we have not compiled the Q4 data yet from sources, our read of available property research for Q4 suggests some increases in vacancy rates q-o-q. Q3 data sources: Based on research reports and data from CBRE, Jones Lang Laselle, Knight Frank, DTZ, Savills, Colliers, Centaline and Sounfun CREIS. Numbers in paranthesis beside city names denote number of datapoints Page 36 of 38

38 Disclaimer Limited is not authorised or regulated in Hong Kong S.A.R. by the Securities and Futures Commission or by any other regulator in any jurisdiction for the provision of investment advice. Specific professional financial and investment advice should be sought from your authorised professional adviser. This report provides general information. The analysis and information presented in this report and on realestateforesight.com by Limited is offered for members and visitors interest only. It is not to be used or considered as a recommendation to buy, hold or sell any securities or other financial instruments or real estate assets and funds and does not constitute an investment recommendation or investment advice. The information presented on realestateforesight.com and in this report comes from various public and industry sources that we believe to be reliable; no representation or warranty, expressed or implied is made by Limited, its affiliates or any other person as to the accuracy or completeness of the information. Limited is not responsible for any errors in or omissions to such information, or for any consequences that may result from the use of such information. Such information is provided with the expectation that it will be read as part of a wider investment analysis and realestateforesight.com or this report should not be relied upon on a stand-alone basis. Any opinions explicitly expressed by Limited in this report and on realestateforesight.com reflect the judgment of Limited as of the date hereof and are subject to change without notice. Past results are not guarantee of future performance. Limited does not invest in any securities although it is possible that one or more of Real Estate Foresight Limited s directors, officers, employees or consultants may at times be invested in the securities of a referenced company. Realestateforesight.com, this report and their contents are not an offer to sell or a solicitation of an offer to buy any real estate assets, funds or securities. To the fullest extent provided by law, neither Limited nor any of its affiliates, nor any other person accepts any liability whatsoever for any direct or consequential loss, including without limitation, lost profits arising from any use of this report, realestateforesight.com or the information contained in them Page 37 of 38

39 About Ltd. is an independent research, analytics and consulting business. To learn more, visit China Report by is an independent and data-rich monthly analysis giving investors a comprehensive top-down picture of Chinese real estate markets, with a focal question What s going on and where are we headed? It includes a chart book with 100+ analytical charts, tables and data covering the direct property and land (residential-focused) markets, real estate equities, bonds and macroeconomic factors. Data, Research and Knowledge Partners We are collaborating with the world's leading providers of real estate, financial, and economic data, research and analytics. Thomson Reuters Datastream is a powerful tool combining economic research and strategy with asset analysis to seamlessly bring together top down and bottom up in one single, integrated application. The Datastream platform provides a huge range of global financial data, Thomson Reuters unparalleled content, and powerful charting applications. All integrated into one comprehensive source for complete cross asset analysis. So it s easier to stay on top of global developments, identify risks, and target the right assets, sectors and countries to invest in. China Index Academy (CIA) is the largest independent property research organization with more than 15 offices nationwide. Since its set up in 1999, CIA has been aiming at providing comprehensive and accurate property/land data in a timely manner and generating key market insights for our valued customers. Currently, we have experienced research teams to cover real-time transaction data in 300 cities across China. Real Capital Analytics, Inc. is a global research and consulting firm with offices in New York City, San Jose and London. Started in 2000, our firm's proprietary research is focused exclusively on the investment market for commercial real estate. We are a private company held primarily by its employees. In addition to collecting transactional information for current property sales and financings, we analyze and interpret the data, providing valuable insight on commercial real estate investment. We publish the widely-read reports Global Capital Trends and US Capital Trends, which are quoted regularly in industry news. We also report regularly on trends involving distressed commercial property. The Asia Pacific Real Estate Association (APREA) is a non-profit industry association that represents and promotes the real estate asset class in the Asia Pacific region. It is the industry body for the suppliers and users of capital in the real estate sector. APREA embraces the four quadrants of real estate. For corporate subscriptions and information on our services, please contact us: sales@realestateforesight.com Hong Kong: US: UK: +44 (0) Page 38 of 38