Asia Pacific Capital Markets Research Report Australia and non-core markets drive total APAC JV transaction volume up 4% y-o-y

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1 Joint Venture Deals Asia Pacific Capital Markets Research Report April 2015 Why Are Joint Venture Deals Rising in Asia Pacific? Investment Highlights APAC JV transaction volume rose 4% y-o-y to reach US$12.9 billion for 2014, driven by Australia and non-core markets, and remains above the 8-year mean value ANREV investment intention survey shows that large investors are going to dedicate more funds for JV and club deals in the next two years. Low interest rate environment in Japan and China favours debt financing activities, which would likely weigh on future JV transaction volume in these countries for the near-term. region. We also look at how the changes in long-term interest rates for the core markets would indirectly affect the number of JVs, and more importantly, its overall implication for the region. Australia and non-core markets drive total APAC JV transaction volume up 4% y-o-y The joint venture (JV) structure provides an alternative way for funding large projects while allowing an effective mean to incentivise operating partners. The opportunity for co-sharing in the risk and return of the project has recently seen some interesting trends evolving within the Asia Pacific (APAC) region. While arguably there are a myriad of economic, financial and unique factors that could swing the JV trend in either direction, our focus here is not to analyse all the factors, but to, through the analysis of selected historical quantitative data and forward-looking qualitative points, provide useful insights on the near-term JV trend for the APAC region. In this research paper, we performed a time-series analysis on the historical data and incorporate a forward-looking survey conducted by ANREV to pick out future JV trends around the JLL data shows that the total APAC JV transaction volume for 2014, was up 4% year-on-year (y-o-y) compared to A total of US$12.9 billion JV deals were completed for the year versus US$12.3 billion a year ago. The latest figure shows that the JV structure is still a popular method for structuring complex and large real estate deals for the region, as it remained above the 8-year average of US$9.1 billion. The increase y-o-y was mainly attributed to an increase in Australia and non-core markets JV transactions volume, offsetting a fall in China and Japan JV transaction volume.

2 3 out of 5 core markets saw a y-o-y increase in JV transaction volume as a percentage of total transaction volume in 2014 (> USD 100m) 100% 80% 60% 40% 20% 0% 13.8% 15.1% 25.3% 4.9% 7.8% 8.7% 20.9% 18.5% 30.0% Australia China Hong Kong Japan Singapore 2013 non-jv 2013 JV 2014 non-jv 2014 JV Among core markets Australia saw the biggest y-o-y net increase in JV transaction volume and deal count in 2014 In 2014, Australia saw the biggest increase in JV transaction volume which more than doubled to US$5.5 billion, and outpaced the overall Australia real estate investment market trend. The net increase in JV deals as a percentage of total transaction volume rose y-o-y by 8%. Australia s y-o-y increase in JV transaction volume was heavily scaled by a 25 office properties portfolio deal. The US$3.8 billion DEXUS/CPP Investments portfolio deal single-handedly boosted the number of JV deal counts for Australia in 2014 to 57 deals from 35 deals a year ago. On the other hand, Hong Kong recorded the largest relative increase in JV transaction volume which rose 3-fold to US$0.5 billion. This was boosted by Swire Properties and Yung s Enterprises Holdings JV for the purchase of an office building, DCH Commercial Centre, from CITIC Group for US$503 million. But, overall the Hong Kong JV market remains small as compared to other APAC core markets. Singapore s average JV deal size continues to increase in 2014 Among non-core markets South Korea saw the biggest y-o-y net increase in JV transaction volume and deal counts in 2014 Singapore s JV transaction volume held firm at US$1.5 billion in 2014, in spite of the overall Singapore real estate investment market contracting by 58% for the year. JV remained a strong preferred choice hence the net increase in JV percentage of total transaction volume rose y-o-y by 10%. This was sustained by larger JV deals completed for the year. The average JV deal size rose 21% to US$245 million as investors took advantage of the JV structure to access a tight investment supply market compounded by rising debt financing cost. Non-core markets such as South Korea, India, Malaysia and Indonesia also saw more JV transaction volume and deal count as investors move up the risk curve and enter into new markets. 2 Joint Venture Research Report

3 South Korea has interestingly become an attractive market for investors. In 2014, a total of 7 JV deals were completed totalling US$654 million, which was a substantial increase considering that no JV deals were done in the previous year and amid a backdrop of a 33%y-o-y decline in total transaction volume for the country. Expected change in investors APAC allocations over the next two years (equally weighted) In 2015, we expect a rise in whole market transaction volume as its middle-term borrowing cost benchmarked by the 5-year interest rate swaps (IRS) touched an all-time low of 194 basis points. This could in turn spur an uptrend in JVs. In the latest ANREV survey, South Korea s office sector ranked 6 th in the top 10 preferred destination/sector combinations. It is the only location outside of the core markets that appeared on the ranking. Top 10 Asian Emerging Markets JV deals in 2014 Source: ANREV In the recent 2015 ANREV investment intention survey, it is stated that non-listed real estate funds are still the favourite route to increase real estate allocation for a majority of investors in the APAC market, but on a weighted basis, the proportion of investors intending to increase allocation to nonlisted funds tend to fall highlighting large investor preference for JVs and club deals over the next two years. Expected change in investors APAC allocations over the next two years (weighted) Among the notable non-core markets JV deals transacted for 2014, K-Twin Tower office building in Seoul tops the chart at a market price of US$498 million. KKR and LIM Advisors partnered to purchase it from The Korean Teachers Credit Union. In Malaysia, GSH Group and TYJ group, both entities majority owned by a high net worth individual, jointly financed a deal for Sutera Harbour Resort from another undisclosed high net worth individual. Source: ANREV On a weighted basis, 41.4% of the respondents that are committed to JV or club deals are expected to increase allocation. This is in line with past survey trends, and demonstrates the growing importance of JVs and club deals in real estate allocations. 3 Joint Venture Research Report

4 Fund of funds managers and fund managers surveyed expect to increase their allocation in JVs and club deals over the two years emphasizing investors desire for greater control over their investment. JVs have lesser co-investors compared to non-listed real estate funds and different governance structure thus offering investors greater control over their investments. Contrastingly, JV transaction volume in the core North Asia markets declined partially due to loose monetary policy to keep key borrowing interest rates low thus providing abundance of debt financing liquidity to the real estate investment market. Japan s debt borrowing cost remains near all-time low with 5-year IRS at 0.3% % 8 China saw the biggest fall in JV transaction volume by 73.1% to US$0.7 billion in 2014, in line with the fall in deal count. Consequently, the average JV deal size fell to US$104 million from US$214 million in During the year, China saw only one mega office JV deal completed (>US$100 million) as compared to a year ago, when there were five mega JV deals. JV transaction volume fell more than the overall China investment market hence as a percentage of total transaction volume, the proportion of JV transaction volume fell 7% y-o-y, and now accounts for only 3.2% of the overall investment market. Trophy assets weigh substantially on past 5-year JV transaction volume in Japan Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q , Thomson Reuters CN 5-yr IRS AU 5-yr IRS SG 5-yr IRS HK 5-yr IRS JP 5-yr IRS Japanese 5-year IRS remains near its 10-year low at 0.3 percent in Q fuelled by Abenomics policies to end the country s two decade long economic deflation, which spells well for most asset classes including real assets. Along with the prospect of the 2020 Olympics and drastic devaluation of the Yen, Japan has become a popular investment destination and is likely to continue in In China, following a couple of years of tightening measures to curb a housing oversupply problem, the People s Bank of China has cut benchmark interest rate for the first time since 2012 pushing 5-year IRS back to a 2-year low of 3.6 percent in Q This has boosted liquidity in the market and favoured debt financing. Singapore and Hong Kong 5-year IRS swaps have notably spiked to 2.1% and 1.4% in Q as these markets which are closely linked to the US are starting to factor in expectations of an interest rate hike on improving US economic data. Hence, with a steepening yield curve, JV as a percentage of total transaction volume in Singapore and Hong Kong saw a 10% and 3% y-o-y increase in Similarly, Japan s JV transaction volume fell by 47.2% to US$2.7 billion though JV deal counts increased by two to 26 deals in The average JV deal size was much smaller at US$143 million compared to US$49 million for the preceding year. J-REITs and REOCs have been taking advantage of Japan s all-time low interest rate environment to purchase assets. In total, they have accounted for about 60.1% of the total US$14.5 billion JV transaction volume in Japan for the past five years. In our view, we anticipate the JV trend around the APAC region to hold steady in key markets in 2015, especially those that are going to see a spike in debt funding cost as benchmark interest rates rise. As for other markets that are seeing an inverted yield curve, we expect the growth in JV to be spurred by an increase in overall investment transaction volume. Within APAC - Australia, Japan and China, continue to rank as the top three investment destinations, according to ANREV. 4 Joint Venture Research Report

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