PROPERTY INSIGHTS. Market Overview. Investors active amid improved market sentiment. Citigold Private Client. Hong Kong Quarter 4, 2013

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1 Citigold Private Client PROPERTY INSIGHTS Hong Kong Quarter 4, 213 Investors active amid improved market sentiment Market Overview This quarter, about 891, sq ft of new office space was completed, bringing total grade A office stock to reach 78,994,24 sq ft. Demand was mainly supported by the technology, media and telecommunications (TMT) and retail sectors. The overall rent decreased by 1.8% quarter-on-quarter (q-o-q) to be recorded at HK$59.7 (US$7.65) per sq ft per month due to rising vacancy and the persisting cautiousness of business sentiment. Tier 1 high street shops in prime retail districts remain popular amongst global brand names and jewellery retailers. Performance is divided amongst tier 2 and 3 street shops as there is strong expectation gap between landlords and tenants, which largely turn on the issue of the degree to which soaring rents from tier 1 high street shops diffuse to tier 2 and 3 premises. The volume of primary residential sales jumped this quarter as developers drove sales by offering incentives and rebates to prospective buyers. The emergence of competition between primary and secondary market led to drop in the overall residential price index by 2.6% q-o-q and 2.% year-on-year (y-o-y). Figure 1 DTZ ofice rental index (25-218F) Q1 26 = F 217F 216F 215F 214F Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui Total number of deals exceeding HK$mn remained at 3 this quarter but total consideration increased by 97.9% q-o-q to reach HK$15.38bn (US$1.97bn). The luxury residential sector rebounded significantly this quarter and hotel and site transactions continued to soar as investors see the opportunities arise from continued strong growth in tourist visitorship.

2 Trends & Updates Economic Overview Real GDP annual growth rate reached 2.9% in Q3 213, lower than the 3.2% annual growth recorded in Q2 213 (Table 1). Growth was supported by the financing and insurance sector and the information and communications sector, which saw net output increase by 7.1% and 4.4%, respectively, in real terms in Q However, the growth was offset by sluggish conditions in the wholesale and retail trade sector as uncertain conditions persist in the local and global economy. The value of total exports showed a y-o-y increase of 5.8% to reach HK$325.5bn in November 213 (Table 1). The increase in total exports to Asia was particularly significant. Both Vietnam (+2.5% y-o-y) and Korea (+17.9% y-o-y) recorded double-digit growth. Inflation slowed slightly in Q4. The overall composite CPI in November increased 4.3% y-o-y, lower than the 4.5% growth rate in August (Table 1). Table 1 Economic indicators Indicator Period Unit Value Change y-o-y (%) GDP at constant prices* Total exports Private consumption expenditure Unemployment rate (seasonally adjusted) Visitor arrivals Composite CPI Total retail sales value *in chained (211) dollars Q3 213 Nov 213 Q Nov 213 Nov 213 HK$bn HK$bn HK$bn % Million pts +8.6 Nov Nov 213 HK$bn Source : Census and Statistics Department, HKSAR, Hong Kong Tourism Board The seasonally adjusted unemployment rate stayed at 3.3% in tember November 213, reflecting the economy is at its full employment level. The unemployment rate is expected to remain low during the Christmas and New Year period (Table 1). Domestic private consumption expenditure rose by 5.6% y-o-y in Q3, accelerating from the 4.2% y-o-y growth in Q2 (Table 1). Total visitor arrivals in November climbed 8.6% y-o-y to reach 4,579,681. Mainland tourists continued to be the major driver in visitor arrivals, accounting for 73.1% of the total figure. Meanwhile, total retail sales in November 213 reached HK$39.67bn (US$5.78bn), an increase of 8.5% y-o-y (Table 1).

3 Residential The number of primary sales jumped this quarter as developers resumed sales by offering incentives and rebates to prospective buyers. As a result, sales of primary projects rebounded, increased from 135 S&Ps in June to 773 in October, and further to 1,151 in November. Developers incentives have obviously played an important role in boosting the buying sentiment and reducing the transaction cost amongst prospective buyers. Property owners who are in a strong financial position generally have no incentive to offer generous discounts. Strong holding power is also supported by the fact that the US Federal Reserve announced that the current low interest rate environment would be sustained for a considerable length of time. On the other hand, those who had to sell their properties immediately could only do so by offering larger discounts. As a result, the number of secondary sales remained low. Total transaction volume of buildings and land in the fourth quarter reached 16,217, a decrease of 51.2% compared with Q The total number of S&P agreements was recorded as 72,65 in 213, which is even lower than 88,268 in 23, the year of the SARS outbreak (Figure 2). As a considerable proportion of buying interest shifted to the primary market, prices in the secondary market came under pressure. The overall residential price index dropped by 2.6% from the previous quarter and was down by 2.% from a year ago. Under the influence of the earlier imposed government curbs, lower priced homes have been impacted less. As such, the mass residential price index decreased slightly by 2.2% q-o-q, and registered an increase of.5% y-o-y. With respect to the case of high end residential properties, the situation was different. This sector witnessed a larger downward price adjustment than did the low-priced homes, with its price index decreasing by 3.2% q-o-q, and 5.2% y-o-y (Figure 3). Figure 2 Transaction volume of S&P Agreements (Q1 25 Q4 213) Number of S&P Agreements 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Source : Land Registry Figure 3 Residential price index ( 25 Dec 213) 2 = Table 2 Mass residential Luxury residential Overall Primary residential market statistics TBU Mass Market Luxury Market Overall Total stock (no. of units) price index ( 2 = ) q-o-q change (%) 1,32, , y-o-y change (%) ,117, , Rating and Valuation Departement HKSAR

4 As at 3 November, there are 22 residential projects with a total of 1,23 units awaiting pre-sale consent approval, according to Lands Department. It is expected that the sales of primary projects will remain robust over the short term and that this will continue to support the number of S&Ps for residential units during the first half of 214. If developers continue to be aggressive in clearing their existing stock by providing tax rebates and special incentives to prospective buyers, prices of second-hand residential property will continue to face downward pressure. Office With 891, sq ft of new office space completed the total grade A office stock reached 78,994,24 sq ft. Demand for office space in Q4 was mainly supported by the technology, media and telecommunications (TMT) and retail sectors in areas outside of the Sheung Wan/Central/Admiralty prime office precincts. Overall net absorption reached -27,127 sq ft, and overall rent decreased by 1.8% q-o-q to reach HK$59.7 (US$7.65) per sq ft per month. Net absorption stayed negative overall and overall rent has similarly declined for two consecutive quarters (Table 3 and Figure 4). In the Central Financial District (CFD) of Sheung Wan/ Central/ Admiralty, the pre-lease of newly-completed Exchange Square The Forum by Standard Chartered Bank raised net absorption within this submarket to 111,164 sq ft. However, as a consequence of the softening of demand which has resulted from cost cutting by finance sector occupiers, the availability ratio increased to 6.3% in Q4 213 and rents in the CFD declined further by 2.9% q-o-q to HK$. (US$12.8) per sq ft per month (Table 3 and Figure 4). In Wanchai/ Causeway Bay, negative net absorption of -261,487 sq ft was recorded due to the demolition of Sunning Plaza, which also contributed the majority of overall negative net absorption this quarter. In Island East, the availability ratio increased for three consecutive quarters to reach 2.99%, but which is still the lowest among all sub-markets. This quarter, Table 3 Grade A office market statistics District Sheung Wan / Central / Admiralty Wanchai / Causeway Bay Island East Tsimshatsui Kowloon East Overall Figure 4 Total stock (million sq ft) Availability ratio (%) DTZ ofice rental index (25-218F) Q1 26 = Monthly Rent (HKD per sq ft) Change q-o-q (%) F 217F 216F 215F 214F Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui Facebook leased around 1, sq ft in One Island East, which is one of the first major leasing transactions from the TMT sector in this submarket (Table 3).

5 In Kowloon East, the newly completed YHC Tower, Rykadan Capital Tower and 181 Hoi Bun Road added a total of 755, sq ft office space to the market and as a result the availability ratio jumped from 6.29% in Q3 to 11.53% in Q4 (Table 3). Looking ahead, the picture of the overall office market is mixed. While there is some downward pressure on rental in Central Financial District (CFD), the situation is more optimistic in Kowloon East. Leasing demand from TMT and retail sector occupiers is expected to remain strong. Meanwhile, as Mainland enterprises continue their expansion in the Hong Kong market, take-up is also expected to be strong from firms with PRC profile. Figure 5 Grade A office supply, net absorption and availability ratio (25-215F) GFA sq ft million F 215F New supply Net absorption Availability ratio %

6 Map 1 Office availability by location The Government of the Hong Kong SAR Map reproduced with permission of the Director of Lands

7 Retail The growth of total visitor arrivals narrowed down in November, grew by 8.6% y-o-y to reach 4,579,681. Mainland Chinese visitors accounted for 73.1% of total arrivals and continued to be the major driver of growth in the tourism industry. Total sales grew by 8.5% y-o-y in November 213 to reach HK$39.67bn (US$5.78bn) (Figure 6). With respect to visitors spending pattern, the volume of sales of jewellery, watches and clocks, and valuable gifts increased significantly by 13.3% y-o-y in November, followed by sales of commodities in department stores at 9.7% and sales of medicines and cosmetics at 8.%. Such spending pattern is to a certain extent directly motivated by purchases by the Mainland Chinese visitors. The sameday visitor arrival from Mainland China increased 2.1% y-o-y to reach 21,347,981 in the period between uary and November. Supported by the purchase of mid range products near the border and in areas along the major railway routes, the New Territories retail rental index witnessed a q-o-q growth of 2.1% in Q4. On the other hand, both Hong Kong Island and Kowloon recorded rental decline in this quarter as rental growth began to drop from the peak (Table 4 and Figure 7). Leasing demand from multinational brands for tier 1 street shops remained strong and their rental level remained very stable. Take Tsimshatsui as an example, fashion brands and jewellery retailers continued to be the major demand drivers for tier 1 high street shops. Ports 1961 recently took up four floors (13,68 sq ft) at VIP Commercial Centre; Luk Fook Jewellery leased 2,428 sq ft in Star House. Tier 2 and 3 street shops performed differently as there exists a strong expectation gap between landlords and tenants with respect to whether or not strong rental growth can be expected to diffuse from tier 1 premise to tier 2 and 3 shop spaces. Pressure on rental growth is expected to take place for tier 2 and 3 street shops as vacancy in these locations begins to climb. Figure 6 Total retail sales ( 27 Nov 213) Value (HK$bn) Yearly growth (%) Source : Census and Statistics Department HKSAR Figure 7 Retail rental index (Q1 26 Q4 213) Q1 2 = Table Hong Kong Island Kowloon New Territories Source : Rating and Valuation Department HKSAR, DTZ Research Retail Sales Value Retail market statistics Retail Sales Growth Hong Kong Island Kowloon New Territories Rental Index (Q1 2 = ) q-o-q change (%) Source : Rating and Valuation Department HKSAR, DTZ Research 213 Looking ahead in 214, total visitor arrivals is expected to continue to follow its present rising trajectory and the sales performance during Christmas and Chinese New Year period is expected to be robust. As a result, growth in local retail sales should be sustainable. In the next 12 months, we expect to witness mild rental growth for first-tier street shops, while some downward pressure for the second and third tier street shops y-o-y change (%)

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