Asia Pacific Property Digest - JLL · 1 Jones Lang LaSalle • Asia Pacific Property Digest • Second Quarter 2008 Asia Pacific Property Digest Second Quarter 2008

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Jones Lang LaSalle • Asia Pacific Property D

igest • Second Quarter 2008

Asia Pacific Property DigestSecond Quarter 2008

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Jones Lang LaSalle Research – Asia PacificASIA PACIFICDr Jane Murray Head of Research – Asia Pacific+852 2846 [email protected]

GREATER CHINA

HONG KONGMarcos Chan Head of Research – Hong Kong and Macau +852 2846 [email protected]

MACAuAlvin Mak Assistant Manager+853 2871 [email protected]

SHANGHAIMichael Klibaner Head of Research – Shanghai+86 21 6133 [email protected]

bEIJINGDenis Ma Associate Director+86 10 5922 [email protected]

CHENGDuShelly Xie Senior Manager+86 28 8665 [email protected]

GuANGzHOuLily Li Head of Research – Guangzhou+86 20 3891 [email protected]

QINGDAOWinnie Ning Assistant Analyst+86 532 8579 5800 [email protected]

TIANJINStefanie zou Senior Analyst+86 22 8319 [email protected]

TAIPEIJeffrey Hurren Head of Research – Taiwan+886 2 8758 [email protected]

NORTH ASIA JAPANTakeshi Akagi Head of Research – Japan+81 3 5501 [email protected]

SOuTH KOREADarren Krakowiak Head of Research and Consulting – South Korea+82 2 3704 [email protected]

SOuTH EAST ASIA

SINGAPOREDr Chua Yang Liang Head of Research – South East Asia and Singapore+65 6474 [email protected]

INDONESIAAnton Sitorus Head of Research – Indonesia+62 21 515 [email protected]

THE PHILIPPINESKatherine Marcelo Research and Consulting Manager+63 2 751 [email protected]

THAILANDDan Tantisunthorn Head of Research – Thailand+66 2 679 [email protected]

VIETNAMbuu Le Manager – Research and Consulting+84 8 910 [email protected]

MALAYSIA (JONES LANG WOOTTON IN ASSOCIATION WITH JONES LANG LASALLE)Malathi Thevendran Executive Director – Researchtel +60 3 2161 [email protected]

WEST ASIA INDIA Abhishek Kiran Gupta Head of Operations – Research +91 22 6658 1000 [email protected]

AuSTRALASIA Kathryn Matthews Head of Research and Consulting – Australasia and Australia +61 2 9220 8511 [email protected]

NEW zEALAND Chris Dibble Research and Consulting Manager +64 9 366 1666 [email protected]

OCCuPIER RESEARCH Richard Pinkham Head of Occupier Research +65 6494 3793 [email protected]

INDuSTRIAL RESEARCH barnaby Martin Industrial Research Manager +86 21 6133 5442 [email protected]

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Asia Pacific Economy

and Property Market . . . . . . . . . . 4

Greater China . . . . . . . . . . . . . . . 10

North Asia . . . . . . . . . . . . . . . . . . 12

South East Asia . . . . . . . . . . . . . 14

West Asia . . . . . . . . . . . . . . . . . . 16

Australasia . . . . . . . . . . . . . . . . . 18

Industrial . . . . . . . . . . . . . . . . . . . 20

Office . . . . . . . . . . . . . . . . . . . . . . 22Hong Kong . . . . . . . . . . . . . . . 22Beijing . . . . . . . . . . . . . . . . . . . 23Guangzhou . . . . . . . . . . . . . . . 24Shanghai . . . . . . . . . . . . . . . . . 25Taipei . . . . . . . . . . . . . . . . . . . . 26Tokyo . . . . . . . . . . . . . . . . . . . . 27Seoul . . . . . . . . . . . . . . . . . . . . 28Singapore . . . . . . . . . . . . . . . . 29Bangkok . . . . . . . . . . . . . . . . . 30

Ho Chi Minh City . . . . . . . . . . 31Jakarta . . . . . . . . . . . . . . . . . . 32Manila . . . . . . . . . . . . . . . . . . . 33Kuala Lumpur . . . . . . . . . . . . . 34Delhi NCR . . . . . . . . . . . . . . . . 35Mumbai . . . . . . . . . . . . . . . . . . 36Bangalore . . . . . . . . . . . . . . . . 37Chennai . . . . . . . . . . . . . . . . . . 38Sydney . . . . . . . . . . . . . . . . . . . 39Melbourne . . . . . . . . . . . . . . . 40Auckland . . . . . . . . . . . . . . . . . 41

Retail . . . . . . . . . . . . . . . . . . . . . . 42Hong Kong . . . . . . . . . . . . . . . 42Macau . . . . . . . . . . . . . . . . . . . 43Beijing . . . . . . . . . . . . . . . . . . . 44Shanghai . . . . . . . . . . . . . . . . . 45Singapore . . . . . . . . . . . . . . . . 46Bangkok . . . . . . . . . . . . . . . . . 47Jakarta . . . . . . . . . . . . . . . . . . 48Kuala Lumpur . . . . . . . . . . . . . 49

Delhi NCR . . . . . . . . . . . . . . . . 50Mumbai . . . . . . . . . . . . . . . . . . 51Bangalore . . . . . . . . . . . . . . . . 52Australia . . . . . . . . . . . . . . . . . 53

Residential . . . . . . . . . . . . . . . . . 54Hong Kong . . . . . . . . . . . . . . . 54Macau . . . . . . . . . . . . . . . . . . . 55Singapore . . . . . . . . . . . . . . . . 56

Industrial . . . . . . . . . . . . . . . . . . . 57Hong Kong . . . . . . . . . . . . . . . 57Beijing . . . . . . . . . . . . . . . . . . . 58Guangzhou . . . . . . . . . . . . . . . 59Shanghai-Business Park . . . 60Shanghai-Logistics . . . . . . . . 61Taipei . . . . . . . . . . . . . . . . . . . . 62Tokyo . . . . . . . . . . . . . . . . . . . . 63Singapore . . . . . . . . . . . . . . . . 64Thailand. . . . . . . . . . . . . . . . . . 65Sydney . . . . . . . . . . . . . . . . . . . 66Melbourne . . . . . . . . . . . . . . . 67

TA b L E O F C O N T E N T S

4

Asia Pacific EconomyStrong Headwinds, But the Region Still Motoring AheadDr Jane Murray Head of Research - Asia Pacific

No decoupling from the global slowdown…The global economic environment has worsened in recent months as a further deterioration in financial market conditions has filtered through to real activity, particularly in advanced economies including the US, UK, Eurozone, Japan and Australia. Weakening in a number of key economic indicators, including housing market activity, employment and consumer confidence, is becoming increasingly evident in these and other countries. Asia Pacific growth is now slowing noticeably, providing evidence that the region has not ‘decoupled’ from the slowdown occurring in other parts of the world (Figure 1).

One of the major economic linkages between Asia Pacific and other regions is the international trade channel. During the current global slowdown, exports from East Asia will be most affected by reduced demand from the world’s advanced economies. Exports from commodity producers such as Australia and Indonesia will stay relatively buoyant due to continuing demand from emerging economies and high international prices. Small economies with high external dependency, Singapore being a notable example, are particularly vulnerable to the slowdown in international trade and FDI flows.

…though domestic demand offers some reliefStrong domestic demand in many of Asia’s rapidly emerging economies will help to offset the impact of the weaker external environment. Fixed-asset investment will remain on its solid growth path, particularly in China and India. These two countries are expected to outperform the rest of the region in 2008. China’s economic growth is moderating due to a raft of cooling measures by its government and slowing external demand. Real GDP grew 10.4% y-o-y in 1H08 compared with 11.5% in 1H07, and is expected to slow further to 9.8% this year, according to the Economist Intelligence Unit (EIU). India’s real GDP grew 9.0% in the fiscal year ending March 2008, but growth is expected to fall to 7.7% in 2008 due to tighter monetary policy and a widening merchandise trade deficit.

Japan’s real GDP contracted by 0.6% q-o-q in 2Q08 and growth is forecast to be a subdued 0.9% in 2008 on the back of continuing weak consumer sentiment and business conditions. In Australia, output growth is expected to weaken to 2.7% due largely to a slowdown in household spending. Real GDP growth for both Singapore and Hong Kong is forecast to decelerate to around 4.8%

this year due to the weaker global economy impacting on exports and a cyclical weakening in domestic demand.

Inflation is an ongoing challenge…

Inflation presents a more serious threat to the region than economic slowdown. Its rise across the region has been due to a range of factors including rapidly increasing prices of food and energy, as well as domestic wage and cost pressures stemming from tight labour markets and high capacity utilisation. Rising prices undermine real consumer expenditure, particularly discretionary spending outside of food and fuels. Inflation also affects lower-income groups disproportionately and has the

Figure 1: Real GDP Growth

Source: Economist Intelligence Unit, August 2008

y-o-

y (%

)

14

China

2007 2008F

4

2

0

India

Vietnam

Malaysia

Indonesia

Philippines

Singapore

Thailand

Hong KongKorea

Taiw

an

Australia

New ZealandJapan

10

6

12

2009-12F

Figure 2: Consumer Price Inflation


y-o-

y (%

)

30

Vietnam

2007 2008F

4

2

0

Indonesia

Thailand

Philippines

IndiaChina

Singapore

Malaysia

Hong Kong

Australia

Korea

Taiw

an

New ZealandJapan

2009-12F

6

8

12

10

24

8

5



potential to cause political instability in parts of emerging Asia.

In China, the consumer price index (CPI) rose 6.3% y-o-y in July, slowing from 7.1% y-o-y in June and a recent high of 8.7% y-o-y in February. Although inflation may trend down further in 2H08, the recent move to raise the prices of oil products has increased pressure on consumer prices. The annual rate of inflation in India, based on the wholesale price index, stood at 11.9% in July compared with 4.8% a year ago. Even Japan has not been immune to inflationary pressures, with consumer prices rising at their fastest pace in a decade in June as the CPI climbed 2.0% y-o-y. The most alarming growth in consumer prices, however, has been in Vietnam where the CPI soared 27.0% y-o-y in July.

The good news is that inflation across the region is expected to peak in 2008 and gradually subside in 2009. This should occur as the economic slowdown helps to reduce international commodity prices, as well as domestic wage and cost pressures (Figure 2).

…leading to a higher interest rate environmentCentral banks in Asia Pacific remain vigilant to inflation risks, leaning towards monetary tightening in many countries and more flexible exchange rates to curb inflation going forward. The People’s Bank of China has increased bank reserve ratios from 14.5% to 17.5% since January. Meanwhile, the Reserve Bank of India lifted its short-term repo rate by 100 basis points to 9% over June and July, and has also increased the cash reserve ratio of banks.

The current round of interest rate hikes appears to have come to an end in some countries. For example, in Australia there are clear signs that demand is now slowing, particularly in the residential sector, and the next interest rate movement is likely to be down. Similarly, the Bank of Japan is unlikely to raise interest rates in the near term given the deteriorating economic environment.

Regional outlook remains positive

Strong economic headwinds, including falling house prices and tighter credit in many of the world’s industrial countries, are likely to prolong the current period of weak global growth. According to the EIU, world economic growth will slow from 3.7% in 2007 to 2.7% in both 2008 and 2009, lower than the 2.8% and 3.0% rates projected three months ago. Regional growth ex Japan is expected to significantly outperform the world average, slowing from 8.3% in 2007 to 6.9% in 2008 and 6.5% in 2009. The outlook for the world economy has become more gloomy in recent months, and clearly Asia Pacific is not immune from these trends. Nevertheless, the region should still notch up solid growth over the next 12 to 18 months.

Key Performance Indicators


GDP (%) Prime Lending

Rate (%)

CPI (%) Employment

Growth (%)

Retail Sales

Growth (%)

Industrial

Production (%)

2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F 2008F 2009F

Hong Kong 4.7 4.4 5.7 6.4 5.3 4.3 1.9 1.2 3.5 2.1 0.4 -0.4

China 9.8 9.0 7.9 7.9 6.6 4.4 1.1 1.0 9.6 7.8 15.7 13.0

Taiwan 4.3 4.4 4.7 5.3 3.4 2.5 0.9 1.0 -0.9 0.9 5.0 5.1

Japan 0.9 1.2 1.9 2.2 1.8 1.4 -1.0 -0.8 -0.6 1.7 1.5 2.5

South Korea 4.4 4.2 6.5 6.2 4.2 3.4 0.5 0.5 3.7 2.0 5.9 5.2

Philippines 4.7 5.4 9.1 9.1 9.6 6.2 1.6 2.5 2.2 3.6 3.4 5.5

Singapore 4.8 4.9 5.3 5.4 6.0 2.6 2.1 1.2 2.3 5.7 5.0 5.3

Malaysia 6.0 5.8 6.3 6.4 5.4 4.8 2.0 2.0 0.7 1.0 4.0 3.5

Thailand 4.8 4.5 7.3 7.5 8.5 6.9 1.0 1.1 4.3 4.9 8.0 8.0

Indonesia 5.9 5.7 13.6 13.9 10.3 7.9 3.0 2.4 5.5 5.9 4.0 4.0

India 7.7 7.1 14.0 13.9 7.1 6.2 2.3 2.3 6.2 6.2 6.5 7.2

Australia 2.7 2.6 11.3 9.9 4.2 3.2 2.4 1.3 0.3 4.4 1.3 2.4

New Zealand 0.7 1.6 13.1 12.6 4.1 3.3 0.8 1.1 -1.1 2.5 0.2 1.5

Vietnam 6.2 6.0 21.3 19.0 24.2 13.9 2.2 2.0 -4.1 2.8 13.5 13.3

World 2.7 2.7 NA NA 5.2 3.9 1.6 1.3 1.0 1.7 NA NA

6

Asia Pacific Property MarketSlower Activity Levels, But Fundamentals Remain SoundActivity levels are now slowing in many of Asia Pacific’s property markets following the frenetic pace of the last few years. Nevertheless, regional performance remains stronger than that of the US and Western Europe. Aggregate investment volumes have held up relatively well to date. Occupational demand remains solid, with corporates adopting a wait-and-see approach to new hiring. Overall the regional markets have entered a period of heightened uncertainty and risk, but their long term potential remains compelling.

Capital markets - avoiding the worst of the storm so far In the first half of 2008, global real estate capital flows eased from their 2007 highs to be 42% lower in USD terms over the corresponding period last year. The fall in volumes was driven by global credit conditions which made debt both less available and more expensive. As a result, many purchasers are unwilling or unable to transact at prices seen in 2007, while vendors are unwilling to reduce expectations. This has caused a standoff between buyers and sellers, particularly for large lot sizes.

Asia Pacific remained robust in 1H08 with investment volumes at USD 52 billion (down 5% on 1H07). However, holding exchange rates unchanged between 1H07 and 1H08, volumes were down by 12%. Overall activity was supported by domestic investors as cross-border investment declined by 18% in 1H08. At USD 21 billion, cross-border activity accounted for 40% of total activity (down from 46% in 1H07).

Singapore saw a significant rise in investment with total volumes reaching USD 4.8 billion (up 20% from a year ago). China also registered an increase in dollar terms (up 3% in 1H08), although volumes were down 6% in local currency terms. In Japan, investment volumes fell by 2% in USD terms but by 14% in JPY terms with both deal size and the number of deals down under the impact of the credit crunch. In Australia, similar to the core European and US markets, rising borrowing costs led to an investor/vendor disconnect. As a result, volumes in 1H08 were down 51% in USD terms and 57% in local currency (Figure 3).

Occupier markets – becoming more tenant favourableThe occupier markets across the region remain fundamentally strong and are unlikely to see major swings in either direction over the short-term. Corporate headcount requirements are holding up, with few major

cutbacks, although it is evident that there is pressure to reduce office accommodation costs. Consumer spending and retail sales are showing signs of weakening, exacerbated by the recent acceleration in inflation. These are early signs that the occupational markets will become more tenant favourable over the next twelve months.

In the office sector, more companies are putting expansion plans on hold, contesting renewal rates and delaying previous plans to upgrade their facilities. Over the first quarter of this year, these trends were only starting to emerge, while over the second quarter they became more prevalent. Historically low vacancy rates and supply constraints in most markets will help to mitigate the impacts of a weakening in occupier demand. Potential oversupply is becoming an issue in some parts of the region, notably the Tier I cities in China and some of the Indian suburban micro-markets. Tokyo has been the first major office market to move to the downturn phase of the cycle, and others are expected to follow suit over the next 12 to 18 months.

The retail sector has continued to perform well over the first half of the year, with Hong Kong and Shanghai posting the highest rental growth in the region. However, the emergence of more difficult trading conditions, combined with new supply coming on line in a number of markets, is likely to result in more moderate rental growth going forward. The sector continues to see significant structural change, particularly in the rapidly emerging markets of China and India where malls are becoming a more prominent feature of the landscape and the expansion of high-end retailers continues apace.

Figure 3: Direct Commercial Investment Volumes

Source: Jones Lang LaSalle

0 5 10 15 20 25 30

China

Singapore

SouthKorea

Australia

Hong Kong

Malaysia

Taiwan

Thailand

US$ bn

1H08

1H07

NewZealand

Japan

7



AbOuT THE AuTHOR

Dr Jane Murray joined Jones

Lang LaSalle in 1998 and in April

2005 was appointed as Head

of Research - Asia Pacific. In

this role, Jane leads a team of

140 professional researchers

in the region, which forms part

of a network of around 300

researchers in 60 countries

around the globe.

The Asia Pacific Research team produces a range of outputs to

assist the clients of the Firm with their decision making, including

comprehensive market monitoring and analysis across major

institutional-grade real estate markets in the region; forecasts of

key real estate indicators; consultancy projects; thought leading

research papers on topical issues as well as regular publications.

economic growth prospects of the region will ensure that Asia Pacific continues to attract an increasing share of global real estate capital.

Over the short term, the industrial sector is also likely to see more muted rental growth as a result of slowing demand, which is being impacted by the economic slowdown and high energy costs. However, the underlying long term drivers of the sector remain in place, namely the increasing need for quality logistics facilities to support increasing trade and domestic consumption, as well as the growth of business parks as Asian countries move up the value chain.

Regional outlook – further slowdown in store but fundamentals remain strong

The Asia Pacific property markets are entering a correction phase that will continue over the next 12 months at least. The rapid run-up in rents and capital values seen in recent years has come to an end in most markets. Markets that will see slower occupational demand in conjunction with major new supply will move to the downturn phase more rapidly. In contrast to previous cycles, the extent of the downturn is expected to be moderate in most markets given the underlying fundamentals. The long term structural drivers and

Source: Jones Lang LaSalle, 2Q08 Note: the concentric circles represent the estimated length of the current property cycle in each of the respective markets.

IndustrialPrime Residential

Prime RetailGrade A Office

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* Refers to net rent except for Tokyo (gross rent), Singapore,Jakarta, Beijing, Chengdu and Ho Chi Minh City (effective rent), Melbourne, Sydney and Brisbane (gross effective rent), Hong Kong, Guangzhou (net effective rent on NFA), Tianjin and Shanghai (net rent on GFA), Taipei, Mumbai, Delhi, Bangalore, Chennai, Hyderabad and Kolkata (gross rent on GFA).** Capital values are quoted on NLA except for Beijing, Shanghai, Hong Kong, Chengdu, Tianjin, Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Kolkata (all quoted on GFA).+ Percentage changes are based on local currency of individual markets except Jakarta.++ The USD exchange rate as at end-Jun 2008.

Grade A Office Market Vacancy

Rate (%)RENTAL VALuES* CAPITAL VALuES Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm

pa++12-month outlook

q-o-q+

(%)y-o-y+

(%)USD

psm++12-month outlook

Tokyo CBD 4.0 -3.9 2.6 1,615 -6.1 1.7 34,638 3.3

Seoul CBD 0.2 0.0 4.8 563 -0.3 10.1 6,209 5.5

Beijing 19.0 2.8 26.5 452 -0.6 6.3 3,403 7.8 - 9.8

Shanghai (Central Puxi) 2.0 3.0 13.4 481 2.9 15.1 6,173 7.3 - 8.9

Guangzhou 22.7 -0.8 -0.2 293 0.3 7.2 3,585 7.8 - 9.4

Chengdu 32.3 2.7 17.4 179 2.9 15.9 1,713 9.5 - 12.0

Tianjin 25.7 -1.5 10.7 243 0.9 7.6 2,579 9.4

Taipei CBD 8.0 1.8 9.0 306 6.9 19.4 6,692 4.5

Hong Kong Central 1.3 5.7 38.6 1,893 1.3 40.6 22,346 4.1 - 6.6

Singapore 2.9 6.1 35.8 1,473 0.0 20.8 22,935 5.8 - 6.3

Kuala Lumpur CBD & GT 9.2 0.6 2.0 157 0.5 2.0 2,040 7.15 - 7.35

Makati CBD 5.5 1.8 12.0 195 0.8 6.1 1,737 10.4 - 10.8

Bangkok CBD 18.6 -1.1 -3.8 196 -2.2 -2.4 2,443 6.6 - 8.2

Jakarta CBD 21.0 0.3 6.0 114 0.0 3.4 1,385 - 8.0 - 8.2

Ho Chi Minh City CBD 0.0 26.0 94.0 951 - - - - -

Delhi CBD & SBD 3.8 0.0 11.0 876 0.0 11.0 7,615 11.5

Mumbai CBD & SBD 4.1 1.0 6.1 838 0.0 5.8 7,439 11.4

Bangalore CBD & SBD 1.1 1.0 11.8 176 1.5 11.8 1,615 10.9

Chennai CBD & SBD 3.43 1.7 4.1 171 0.0 4.1 1,533 11.2

Hyderabad CBD & SBD 1.8 6.3 39.0 184 5.0 54.6 1,747 10.5

Kolkata CBD & SBD 6.2 4.0 32.4 355 0.0 29.9 3,057 11.6

Sydney CBD 3.8 1.1 25.3 710 -4.8 6.8 10,616 5.75 - 6.25

Melbourne CBD 0.9 1.3 11.0 394 -4.2 2.5 6,643 6.25 - 7.00

Brisbane CBD 0.4 0.8 21.5 814 -3.1 14.8 10,119 6.00 - 6.50

Auckland CBD 0.2 0.0 3.6 313 0.0 0.0 4,244 6.75 - 8.00

* Rents are net prime rent except Beijing (net effective rent on NLA), Chengdu and Tianjin (net rent on GFA), Delhi, Mumbai, Bangalore, Chennai, Hyderabad and Kolkata (gross rent).** Capital values are quoted on NLA except for Beijing, Chengdu, Hong Kong, Macau (all quoted on GFA).+ Percentage changes are based on local currency of individual markets.++ The USD exchange rate as at end-Jun 2008.

Prime Retail RENTAL VALuES* CAPITAL VALuES Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Beijing 0.8 0.3 1,017 0.9 0.4 7,172 6.8 - 8.8

Shanghai 1.6 11.2 2,318 0.0 13.3 20,010 11.1

Guangzhou 3.4 15.5 1,008 - - - - -

Chengdu 1.5 5.6 672 3.1 21.6 8,904 7.5

Tianjin 6.7 23.6 687 2.5 14.2 7,513 9.1

Macau (Prime Street Shops) 2.2 14.1 1,893 3.5 17.5 31,975 5.9

Hong Kong (Prime Street Shops) 9.1 29.3 6,023 3.6 17.4 145,706 4.1

Hong Kong (Premium Prime Shopping Centres)

5.3 13.0 3,213 - - - - -

Hong Kong (Overall Prime Shopping Centres)

4.9 14.0 2,038 - - - - -

Singapore 0.9 2.6 3,395 0.7 11.7 64,932 5.3

Kuala Lumpur (City Centre) 6.4 19.2 1,010 6.4 22.4 10,399 7.0 - 10.0

Makati 0.9 5.3 417 0.4 2.8 3,523 11.3 - 11.7

Bangkok 0.0 3.4 627 0.0 4.3 5,088 11.4 - 12.4

Jakarta 0.9 1.9 489 0.9 0.7 3,183 15.0 - 15.5

Delhi 0.0 0.0 1,053 0.0 7.8 9,570 11.0

Mumbai 0.0 0.0 902 0.0 4.5 8,241 10.9

Bangalore 0.0 14.0 514 0.0 20.3 4,523 11.4

Chennai 6.6 12.5 244 0.6 7.5 2,168 11.2

Hyderabad 8.1 33.3 603 0.0 23.8 5,365 11.2

Kolkata 0.0 5.5 872 0.0 6.7 7,842 11.1

Sydney (Regional) 1.3 4.6 1,772 - - - - - 5.00 - 6.50

Sydney (Sub-regional) 1.1 4.2 880 - - - - - 5.75 - 7.25

Auckland 0.5 3.2 1,521 -4.7 -11.0 20,986 6.50 - 8.00

9



Luxury Residential

* Rents are net rent except for Shanghai (gross rent), Beijing (net effective rent) and Jakarta (effective rent).** Capital values are quoted on NLA except for Beijing, Shanghai, Hong Kong and Macau.+ Percentage changes are based on local currency of individual markets except Jakarta. ++ The USD exchange rate as at end-Jun 2008.

RENTAL VALuES* CAPITAL VALuES Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Beijing (Luxury Apt) 6.0 17.5 247 1.3 44.7 3,479 5.5 - 7.5

Shanghai (Luxury Apt) 0.2 0.0 378 1.7 11.7 5,123 5.1 - 7.2

Shanghai (High-end Apt) 0.8 0.0 205 1.7 11.0 3,428 4.5 - 8.0

Macau (Overall) 0.8 22.4 151 -1.0 34.5 4,644 3.3

Hong Kong (Overall) 4.3 22.7 721 2.5 28.5 23,667 3.0

Singapore -2.9 13.7 571 -4.9 9.0 20,523 2.8

Kuala Lumpur 0.0 1.0 148 0.2 3.7 1,917 7.5 - 8.0

Makati 1.7 8.2 142 4.0 17.8 2,098 6.6 - 7.0

Bangkok -0.3 -0.5 117 -0.2 -0.9 2,390 4.9 - 5.2

Jakarta 1.9 2.1 147 1.9 -0.4 1,340 10.8 - 11.2

BUSINESS PARKS RENTAL VALuES CAPITAL VALuES Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Taipei 0.0 10.0 177 0.0 19.5 3,087 5.1

Shanghai 7.3 19 197 2.6 13 1,801 10.5

Singapore 1.4 76.6 312 3.7 59.9 3,164 9.9 - 10.1

Beijing 9.0 75.5 194 - - - - -

Chengdu 5.6 22.2 49 2.8 14.2 679 7.2

Guangzhou 4.2 8.5 87 - - - - -

* Indicates newly covered markets.+ Percentage changes are based on local currency of individual markets.++ The USD exchange rate as at end-Jun 2008.^ Tokyo and Jakarta updates coverage twice per year. As such, the quarterly percentage change is based on half-yearly data.^^ Chengdu and Jakarta updates manufacturing coverage twice per year.

MANUFACTURING RENTAL VALuES CAPITAL VALuES Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Melbourne 1.4 15.2 81 -5.3 5.5 1,013 7.50 - 8.00

Brisbane 4.0 9.2 106 3.7 5.5 1,427 7.00 - 7.75

Singapore 1.4 38.7 128 3.7 59.4 2,349 5.4 - 5.7

Chengdu^^ - - - - - - - - -

Shanghai 0.0 4.0 38 0.0 28.3 451 8.4

Bangkok 0.0 -2.2 59 - - - - -

Jakarta^ 1.0 4.1 48 - - - - -

Industrial LOGISTICS RENTAL VALuES CAPITAL VALuES Yield (%)

q-o-q+

(%)y-o-y+

(%)USD psm


q-o-q+

(%)y-o-y+

(%)USD


Hong Kong 3.6 8.0 123 3.7 8.7 1,694 6.5 - 7.0

Sydney 0.0 0.0 100 -6.2 -8.0 1,336 7.50 - 8.00

Melbourne 0.0 1.3 65 - - - - 7.75 - 8.50

Brisbane 0.0 0.0 119 - - - - 7.25- 8.00

Shanghai 1.6 10.6 67 1.7 12.3 697 9.6

Tokyo (Bay Area)^ 0.0 5.9 246 0.0 10.3 4,136 4.7

Tokyo (Inland)^ -2.7 -1.4 123 2.6 7.5 1,767 5.5

Tianjin 0.0 3.0 48 1.2 6.9 531 9.0

Auckland 0.8 2.3 100 -2.3 0.8 1,236 7.50 - 8.75

10

Manufacturing Shift in Asia to Benefit Kaohsiung Logistics Sector?Jeffrey HurrenHead of Research – Taiwan

As a consequence of soaring production costs in China, a number of manufacturers are targeting other countries for expansion, with Vietnam serving as one of the most cost-effective locations. Although China remains as one of the most attractive locations to establish manufacturing facilities in Asia—and few manufacturers are abandoning it entirely—currency appreciation, inflation, rising wages and dwindling tax breaks for foreign entities are creating an environment that is not as financially favourable as it once was. Furthermore, employee retention challenges and energy shortages are exacerbating the problem, with manufacturers becoming cognisant of the fact that overdependence on one single country is dangerous.

Investor concerns regarding industrial investment in China:

Appreciation of the Yuan relative to USD; >

Inflation/price increases; >

Rapidly rising labour costs (close to 25% y-o-y in dollar terms >

for most industries);

Dwindling tax breaks for foreign investors; >

Employee retention challenges; and >

Energy shortages. >

Taiwanese manufacturers look to VietnamIn response to the aforementioned conditions, there are an increasing number of major Taiwanese companies planning to expand production facilities in Vietnam. Statistics provided by the Vietnamese government reveal that there are currently 1,800 Taiwanese companies that have invested in Vietnam, but the true number could be as high as 3,000 owing to the preference of many Taiwanese companies to not invest under their own name. The most recent announcements involving Taiwan industrial investment in Vietnam came from Formosa Plastics Corporation, TECO and Hon Hai Precision Industry Company, one of the largest Taiwanese investors in both Vietnam and China.

Some notable companies establishing or expanding manufacturing in Vietnam:

Canon – doubling its workforce to 8,000 in Vietnam; >

Nissan – expanding a vehicle engineering centre; >

Samsung – building a factory; >

Ever-Glory International – building a factory; >

Hanesbrands – building two new factories; and >

Texhong Textile group – constructing two new plants. >

Industrial giant Formosa Plastics Corporation is making a USD 7.8 billion investment to build what will be the largest steel mill in Vietnam. The massive project will make Formosa Vietnam’s top foreign investor. Furthermore, a Taiwanese consortium headed by TECO Group and Saigon Telecom will jointly invest USD 1.2 billion to build the largest software park in Vietnam. TECO is an MNC that operates the 10-ha Nangang Software Park in Taipei. The Vietnam project will include the development of seven 20-storey buildings with total floor space of some 500,000 sqm, housing 1,200 companies and 70,000 employees. The projected park aims to accommodate software, hardware, and manpower resource companies, mainly for producing export-oriented software and ASIC (application specific integrated circuit). It is also expected that the park will facilitate the cultivation of high-tech talent.

Kaohsiung Harbour poised to benefit from manufacturing relocation to Vietnam While much of the recent optimism regarding the outlook for the logistics sector in Taiwan has been focussed on impending direct transport links with China, rising production costs on the Mainland may actually provide more of an impetus, underpinned by the backing of some big Taiwanese companies. At the behest of Taiwan President Ma Ying-jeou, Hon Hai Group’s Chairman, Terry Gou, stated that his company would ship its US-bound products that were assembled in Vietnam through Kaohsiung Harbour. While not only serving to bolster southern Taiwan’s lacklustre economy, the transition would also reduce the time and cost involved in transhipment via Singapore or Hong Kong (Table 1). It is also worth noting that this disparity will only increase as the price of oil rises.

Any increase in shipping activity will be well received in Kaohsiung as it is in jeopardy of falling out of the top-ten ranking for the world’s busiest ports. As recently as 1999, the city’s harbour was the world’s busiest in terms of container throughput. However, over the last nine years its ranking has progressively fallen as a consequence of a lack of direct shipping links with the Mainland and the explosive growth of Chinese ports (Table 2).

The upshot is that other Taiwanese manufacturers—many of whom hail from southern and central Taiwan—are likely to start using Kaohsiung Harbour for transhipment to the US, should they have production facilities in

11



AbOuT THE AuTHOR

Jeffrey leads the Research

Department of Jones Lang

LaSalle’s Taipei office. He

is responsible for research

publications and research

projects primarily focusing on

commercial property. He is

actively involved in giving market

presentations for Jones Lang LaSalle’s clients and to various

other organisations with interests in the Taiwan property market.

Vietnam. When we take into account that there will also be an upswing in shipping activity to be realised from the establishment of direct shipping links, it makes a compelling story for logistics investment in Kaohsiung.

Other factors that will add weight to the growth of the sector are the relatively low price of logistics facilities in Kaohsiung and the growth of the Kaohsiung Software Park, which is one of Taiwan’s seven Export Processing Zones (EPZs) (Table 3). The major benefit to be derived from establishing operations in an EPZ is that companies can import machinery and raw materials duty-free, then export the finished goods which are exempt from sales and excise taxes. Furthermore, in an effort to promote the park, the government offers rental reductions on land for developers and space for occupiers.

Not surprisingly, Hon Hai Group has stated their intention to invest in Kaohsiung’s EPZ and we do not expect them to be the last Taiwanese manufacturer to invest in the city.

beginning Transit Destination Total Days Depart Transit Destination Total Days

Ho Chi Minh City (VICT)

4 Kaohsiung 4 Kaohsiung 11 Los Angeles 15

Ho Chi Minh City (Cat Lai)

2 Singapore 2 Singapore 14 Los Angeles 16

Ho Chi Minh City (VICT)

5 Hong Kong 5 Hong Kong 13 Los Angeles 18

City Volume(million TEus)

Growth Rate(y-o-y)

Shanghai 26.1 +20.3%

Hong Kong 24.5 +3.0%

Shenzhen 20.8 +12.6%

Kaohsiung 10.3 +4.9%

Qingdao 9.5 +22.9%

Ningbo 9.3 +31.5%

Guangzhou 8.9 +33.5%

Tianjin 7.1 +19.4%

Xiamen 4.6 +14.8%

Dalian 3.8 +18.8%

Table 2: Container throughput in twenty-foot equivalent unit’s (TEUs) for cities in Greater China in 2007

Table 3: Price to Acquire Logistics Facilities in Select Cities

Table 1: Shipping Times Source: APL Logistics

City Hong Kong Singapore Kaohsiung

Capital Value (USD psm)

1,686 2,248 447

Source: Containerisation International

Source: Jones Lang LaSalle, 2Q08

12

J-REIT: Go Overseas or Wait and See?Takeshi AkagiHead of Research - Japan

In May 2008, the Tokyo Stock Exchange (TSE) lifted the ban on J-REITs investing in overseas properties. Although there were no restrictions in overseas investment under the Investment Trust Law, the TSE, through its listing rules, previously prohibited overseas investment, citing the risk investors may face if it were permitted without the establishment of an appraisal framework. This is caused by the difficulties in the evaluation process as regulatory systems of overseas properties vary in different countries. Meanwhile, the rising trend of real estate globalisation led to a discussion on J-REITs’ acquisition of overseas properties. Upon the Ministry of Land, Infrastructure, Transport and Tourism’s (MLIT) public announcement of the guidelines on appraisal and evaluation of overseas real estate, the TSE lifted the ban as it is now confident that investors are able to make appropriate investment decisions.

Current J-REIT marketREIT is a product that should have a risk/return ratio between stocks and bonds, providing the stability of real estate income and liquidity from securitisation. However, the J-REIT market experienced overheating above and beyond the equity market on the back of a booming real

estate market that lasted until the end of 2007. The market then recoiled, pushing investment unit prices down with some still remaining below their net asset value. As a result, J-REITs that are finding it difficult to raise financing through the securities market are unable to expand their portfolio and are forced to make decisions unfavourable to existing unit holders, such as unit issuance at a price below the offering value. New listings continue to be postponed with the most recent being in October 2007, reflecting the difficulty in market financing.

The J-REIT index peaked in May 2007, but since then has slipped to a level that is half the previous high. A comparison with the TOPIX index illustrates a high volatility of J-REITs since the introduction of its index in 2003 (Figure 1). This was due to the difficulty faced by J-REITs in expanding and purchasing assets as there is fiercer competition in Japan for the acquisition of properties, resulting in lower cap rates. The volatility in the market was also due to the surge in investment unit prices from late-2006, which is in turn due to the inflow of investment capital in the J-REIT market, particularly from overseas. Following the credit crunch, the investment unit prices declined sharply due to withdrawal of overseas capital and the sale of investment units to cover for sub-prime related losses.

13



Figure 1: Index Comparison

Advantages and disadvantages of overseas investmentThe following is a summary of the advantages and disadvantages with the lifting of the ban on J-REIT overseas investment:

Advantages

There will be increased variety of products from the inclusion >

of real estate properties in different regions and sectors overseas. This will increase the appeal of J-REITs to a wider audience of investors, which will reduce market volatility.

The inclusion of properties from real estate markets with >

different cycles will allow risk diversification, providing stability to the investment trust.

As the acquisition of a property with attractive yields is >

difficult in Japan, where there is a persistently low-interest rate environment, the expansion of their portfolio with prime overseas properties which are able to produce high investment yields will improve performance.

Disadvantages

J-REITs will have to pay taxes in the country in which they >

invest. Foreign corporate income taxes paid by the J-REIT are deductible to the amount equivalent to the Japanese withholding tax imposed on dividends paid to investors. However, the investment yield falls as foreign corporate taxes are imposed on rental income and capital gains. In contrast, J-REITs that remain in Japan are exempted from the Japanese corporate income taxation, if more than 90% of taxable income is distributed as dividends.

As investment targets expand overseas, currency will become >

a risk factor. A profit may be recorded if overseas real estate is acquired in a period when the Japanese yen is relatively strong and its value declines thereafter and vice-versa. As a result, the REIT will become a high-risk/high-return product instead of a middle-risk/middle-return one.

AbOuT THE AuTHOR

Takeshi Akagi heads Jones Lang

LaSalle’s Research and Advisory

in Japan. He is responsible for

primary real estate research,

economic and investment

analysis, property forecasts, as

well as commentaries on the

Japan real estate market. As a

certified real estate appraiser, Takeshi also supervises valuation

work of all types of property for a wide variety of clientele,

including financial institutions, both domestic and foreign

multinational companies and government institutions.

OutlookConsidering the funding situation in the current sluggish market, J-REITs do not have the capacity to immediately purchase overseas real estate. Therefore, actual market expansion is expected to take time. Under these circumstances, a private fund may make the initial acquisition of overseas real estate and incorporate them into a J-REIT portfolio when the market recovers. Some J-REIT sponsors are currently undertaking this strategy.

Specific investment targets are likely to be in Asia, which remain relatively shielded from the impact of the sub-prime crisis, particularly in the established markets of Singapore and Hong Kong. Developed regions such as the US and Europe or countries with matured real estate markets, are also optimal for securing overseas investment. Emerging countries present higher economic growth, but such countries usually have low real estate market transparency and when coupled with volatile exchange rates will further increase the overall investment risk.

As direct real estate is a local investment, on-site scrutiny is necessary and thus requires a global network that can provide access to an understanding of overseas real estate and markets. The success or failure of J-REITs in the acquisition of foreign properties depends on their investment strategy which requires reliable and standardised criteria to compare the different systems across markets.

14

Still Crazy For KL Condos?David JarnellHead of Research - Malaysia

Strong Investor ActivityCondominium living is popular in Malaysia and many have bought such high rise residences because of the security and the amenities provided. In recent years, the Malaysian “high end” residential property market has witnessed very strong activity for various reasons. These include strong economic growth and relaxation of investment policies and guidelines (e.g. Real Property Gains Tax was exempted on April 1st 2007), which resulted in increasing wealth, high liquidity, greater affordability of home buyers and spurred strong investment activity, particularly from foreigners, in the Malaysian high end residential market.

Potential of Further Price Increases for The Right ProductForeign buyers have been attracted to Malaysia’s high-end condominiums, representing approximately 40% of total purchasers. They generally come from Singapore, Hong Kong, the Middle East, United States and Europe. Increasingly investors from China, Korea and Japan have also been eyeing the market.

Although there are currently no “measurable” indications

of any major let-up, a general slowing demand trend is expected in the short term. Condominiums in the vicinity of Kuala Lumpur City Centre (KLCC), a mixed use development which is home to the world renowned Petronas Twin Towers, are however expected to remain popular. This neighbourhood, with its stock of “new generation” condominiums incorporating the latest building technology and distinctive architectural designs, has become an internationally recognised address. The KLCC area, a prime city centre location, attracts astute Figure 1: Average Market Prices of High End Condominiums

15


igest • Second Quarter 2008AbOuT THE AuTHOR

With over twenty two years

of experience working in real

estate, David has a passion

and an appreciation of quality

property market research. In

1996, he relocated from London

and joined Jones Lang Wootton

(Kuala Lumpur), where he has

been responsible for providing strategic real estate investment

and development advice towards implementing commercial and

residential development projects in Malaysia and Asia.

investors who recognise the long term potential of Kuala Lumpur especially since condominiums are more competitively priced than many countries in the region.

New price records are expected to be achieved by two developments in 2008 and 2009. The prestigious Four Seasons Residence, within a mixed condominium/serviced apartment and hotel development project, located 150 metres from the Petronas Twin Towers, is anticipated to sell in excess of MYR 2,500 per square foot. The Binjai, which arguably has the best, uninterrupted views of the Petronas Twin Towers and the 50-acre KLCC Park, is expected to achieve similar price levels when it is launched in 2009.

special features in design, layout, facilities and amenities will have a definite edge over other generic developments.

Winds of CautionMalaysia is expected to continue offering good value for money as ownership regulations and access to funds are relatively simple compared with other countries in the region. Although more caution is creeping in, with an increase in supply, slowdown in demand and a potential short term correction in the market, the luxury residential sector in the KLCC locality will still be attractive.

Generally, the best units with views of the Twin Towers in the better developments will be the main drivers of any growth. However, the limited tenant demand, which is mainly from companies and expatriates, may lead to yield sensitive owners lowering their rental level expectations to remain competitive and secure tenants.

Having benefited from strong capital appreciation, some owners (particularly the short term speculators) are expected to offer their units for sale. Provided a plethora of units do not flood the market in the next twelve months and coming from a regionally lower price base, together with increasingly limited land stock in the KLCC area, urban population growth and a slowdown in condominium launches after 2009, the medium to long term investment prospects for high-end condominiums remain very good.

Figure 2: Market Price Trend of Select Condominium Developments in The KLCC locality

Figure 3: Existing and Future Supply Trend in The KLCC locality

Healthy Sales and Future Supply but Limited Tenant DemandMany of the deep-pocketed, high-end condominium purchasers are not yield sensitive and are buying purely for capital gain, not even considering renting out their units. Those seeking tenants, however, face some difficulty as there a limited pool of demand compared with supply. The eight and a half year period between 2000 and 2Q08 recorded the completion of 2,402 units in the KLCC locality and in just the next eighteen months, another 2,291 units are expected to be completed, 98% of which have already been sold.

In terms of occupancy rates, the average rate for high end KLCC condominiums is approximately 60%. This relatively low occupancy rate is generally due to owners not proactively marketing their units but holding them for capital appreciation instead. Others face constant challenges in attracting tenants due to on-going construction works on adjacent development sites.

With healthy supply in the pipeline, developers in Kuala Lumpur increasingly recognise the need to position and differentiate their developments from the competitors by creating more unique and exclusive designs and concepts. The standards and expectations of purchasers today have risen and projects with distinctive concepts incorporating

16

Industrial India – Identifying the Country’s Sunshine IndustriesAbhishek Kiran GuptaHead of Operations – Research, Jones Lang LaSalle Meghraj

In recent years, India’s GDP has grown at breakneck speed of 7–9%. In terms of the composition of GDP, the percentage share of various sectors has changed in the last 15 years (Figure 1). The percentage share of the agricultural sector has declined, while that of the services sector has risen, from 41% in 1990-1991 to 54% in 2005–2006. Meanwhile, contrary to common belief, the percentage share of the industrial sector has remained range bound over the same period. This implies that India’s industrial sector has witnessed growth in absolute terms along with growth in total GDP.

India’s industrial sector recorded y-o-y growth of 11 .6% during 2006–2007

India’s industrial sector has witnessed robust growth in the last 15 years. This has been led not only by the traditional manufacturing segments such as textiles, chemicals, sugar and automobiles, but also new manufacturing segments such as telecommunications, semiconductors, R&D and bio-technology.

The industrial sector contributed 9.1% to India’s GDP in FY07–08. The resurgence of Indian manufacturing was one of the notable features of the Tenth Five-Year Plan, which closed in FY07. The Index of Industrial Production (IIP) rose by 11.6% and 12.2% during 2006–2007 and 2007-08, respectively (Figure 2).

The IIP has multiplied more than 2.5 times since 1994–1995. One of the primary reasons for this strong growth has been government support in terms of liberal policies, privatisation and permitting foreign capital and technologies in the country. We foresee India’s industrial sector to continue this growth phase, led by growing foreign capital, improving infrastructure, government support, cost-effective real estate, skilled low-cost labour, abundant natural resources and growing domestic consumption.

India will see the rise of some new-age industries in select destinations

The Indian economy is predicted to become one of the world’s largest economies by 2050, with some forecasters predicting that it will rise to number two behind China. The manufacturing and service sectors are expected be major contributors to such an outcome.

Figure 1: Percentage Share of Various Sectors in India’s GDP

Source: Government of India, Budget 2007

Source: www.mospi.nic.in, Government of India

Figure 2: The India Industrial Production Index

Year 2005 - 06

Services54%

Agriculture20%

Industry26%

Services41%

Industry27%

Agriculture32%

Year 1990 - 91

17



AbOuT THE AuTHOR

Abhishek Kiran Gupta leads the

Jones Lang LaSalle Meghraj

Research team and is based in

Mumbai. He manages research

operations on a Pan-India

level and is responsible for

the team’s outputs including

research reports such as topical

white papers, property market

digests and tailored research

projects based on specific client

requirements. Prior to joining Jones Lang LaSalle, he had seven

years of experience in market research, business analysis and

market strategy consulting, servicing diversified industries

including pharmaceutical, software publishing and insurance.

Logistics & warehousing

bio tech & Pharma (R&D)

Semi-conductor Telecommunications Auto

Mumbai

NCR

Hyderabad

Chennai

bangalore

Pune

Kolkata

Figure 3: Sunshine Industries in the Top Seven Indian Real Estate Centres

We have identified some sunshine industries that are expected to have the largest contribution to the growth story of India in the future. These industries include logistics and warehousing, bio-tech/pharmaceuticals (R&D), semiconductors, telecommunications and automobiles.

Major industrial clusters in the top seven cities in India have been identified (Figure 3). Mumbai, Chennai and Kolkata outshine other cities for logistics and warehousing businesses because of their well-established seaports and airport connectivity. On the other hand, Hyderabad, Bangalore and Pune are emerging as the semiconductor, bio-technology and R&D hubs of India because of the availability of cost-effective real estate, skilled labour and well-established research centres in these areas.

but the India industrial growth engine will face some challengesInfrastructure – Lack of infrastructure is top of the agenda for corporate planners in India. One of the most significant infrastructure constraints for industrial development is the unreliability of power supply. Transport is also a constraint, and companies focus on the weakness of rail and road networks. However, new road investment is bringing significant improvements, and public-private partnerships are beginning to be struck in infrastructure development projects.

Human Resources – India has the significant advantage of a human resources pool that is large, highly skilled and cost effective. However it is observed that the country’s manufacturing sector is facing a labour crisis, with high attrition levels and insufficient manpower that has industrial training.

Political Environment – India is a federation of 29 states, and highly politicised. Investment decisions are often influenced by politics. Regulatory changes and infrastructure development are often undermined by competition between state and federal governments.

Prominent Industries in these regions Passive Industries in these regions Industries not present in these regions

Further details on the India industrial real estate market can be found in our quarterly publication - the Asia Pacific Property Digest, West Asia edition.

18

Australian CBD office markets to remain solid in uncertain timesAndrew ballantyneHead of Strategic Research

Occupier demand has held relatively firm in the first 6 months of 2008 despite economic and financial market uncertainties. CBD office vacancy rates have remained on a downward trajectory in 2008, and all markets are recording vacancy below historical averages.

The fundamentals of the Australian commercial market remain solid, although risks are evident in the market. At a national level, the recent Federal Budget projects a slowing of the Australian economy to 2.6% over the four quarters to June 2009 from 3.5% in the previous 12 months.

A recollection of previous slowdowns A slowdown in economic growth has resulted in a recollection of previous slowdowns, in particular 1991 and 2001. The recession of 1991 led to a drop in base office demand of 22,700 workers and ultimately reduced space requirements. In total, net absorption declined by 286,400 sqm in 1991 and 1992. The 1991 situation was compounded by the speculative construction cycle of the late 1980s, which caused a spike in vacancy rates.

More recently, the global slowdown of 2001 led to a downturn in the Australian commercial sector. The national office market showed a closer link with global than domestic conditions and negative net absorption of 181,700 sqm was recorded between 2001 and 2003.

Led by a slowdown in finance & insurance In 1991 and 2001, a decline in the finance & insurance sector employment was a significant contributing factor to negative net absorption. The finance & insurance sector accounts for between 20% and 25% of base office demand and has proven to be a useful barometer for national net absorption (Figure 2).

The finance & insurance industry grows with the stock market and there has been a reasonable correlation between employment growth and stock market performance. The Australian share market has been hit hard in 2008 with the benchmark ASX All Ordinaries down approximately 22%-23% from the end of 2007.

In the current environment of cost reduction and a declining share market, financial institutions are expected to remain in a ‘holding pattern’ over the next 12 -18 months. Therefore, it is likely there will be a hiatus in hiring activities with decisions over space requirements

taking longer to complete or be delayed. Unlike the situation in the US and Europe, there is not expected to be widespread job cuts in the Australian operations of multi-national financial institutions.

However, pent-up demand still to be satisfied

Occupiers are at capacity within existing space, as evident by negligible amounts of sub-lease vacancy currently being marketed, while workspace ratios are unlikely to experience further compression.

Although the number of new leasing requirements has slowed, there remains a healthy volume of enquiry and there is pent-up demand in Australian markets still to be satisfied. In Brisbane and Perth vacancy rates have been below 1% since Q4/2006 and with limited supply additions, net absorption has been muted. New projects

Figure 1: National CBD Office Markets Net Absorption

Figure 2: National Net Absorption & Finance & Insurance CBD White Collar Employment

19



AbOuT THE AuTHOR

Andrew is the Head of Strategic

Research in Australia. He is

responsible for the provision of

strategic research services to

the firm, delivering presentations

to colleagues, clients and

industry forums and publishing

strategic papers on behalf of

Jones Lang LaSalle.

will be delivered over the next three to four years and a high proportion of these developments contain a significant expansionary element.

Even in Melbourne, where net absorption has totaled 665,000 sqm over the four years to 2007, new developments slated for completion in 2008 to 2011 contain a substantial growth component.

And supply could be constrainedWith national vacancy rates close to 20 year lows, there was a concern an over-supply may occur in Brisbane, Perth and Melbourne. An escalation of construction costs was already impacting development feasibility models, however the global credit crunch appears to have curtailed the potential for any exuberant development activity.

The cost of capital has become a major hurdle for developers. Overall, it appears that the cost of capital has increased by between 200 and 300 basis points for most organisations relative to mid 2007. The rise is illustrated in the spread between corporate bonds and government backed bonds which have increased by 200 to 265 basis points for AAA to A rated bonds to the end of June. This increase would be even higher for lower rated bonds.

The rising cost of capital is one issue, but developers are also struggling with reduced access to debt. Financial institutions have adopted a risk adverse attitude to lending and tighter restrictions has resulted in developers requiring a higher level of pre-commitment to obtain funding. Over the past three to four years, Jones Lang LaSalle estimate the standard pre-commitment for a new development was 30%. In the current environment, the figure is estimated to be somewhere between 40% to 60%, and above in some instances.

Based on these factors, the level of new construction in Australian markets in the 2010 to 2012 period is expected to be less than was forecast in mid 2007. Recent projections indicate new construction could be 20% lower in the 2008 to 2012 timeframe than September 2007 forecasts, with the largest declines in Brisbane and Canberra.

Overall a riskier, but positive outlook

At a national level, the outlook remains positive, albeit with heightened risks in markets with greatest exposure to the finance & insurance sector – Sydney and Melbourne. The domestic economy may be slowing, but a 1991 or 2001 outcome for the Australian office markets is extremely unlikely. Expansionary pre-commitments to projects under construction will drive net absorption over the next

36 months, while the credit crunch and a requirement for higher pre-commitment levels is expected to delay development activity and shield any upward pressure on vacancy rates.

20

Logistics Hotspots: Following Retail Centresbarnaby MartinIndustrial Research Manager – Asia

The retail and logistics sectors are closely linked but the direct relationship between them is often not well understood. An advanced retail sector must be complemented by a sophisticated supply chain which in turn requires first-class logistics facilities. The three are mutually dependent and this is precisely the challenge facing many Asian countries – to effectively align all three at the same time.

The changing face of retailRetail consumption habits are changing in many markets as populations grow and wealth increases. Asian communities have had access to the latest technology for some time, but believe they are now entitled to ‘western’ lifestyles – comfortable furniture, the latest consumer goods, a private car, to name a few. Coupled with this change is the emergence of ‘new’ retail concepts such as ‘big box’ retailing in the form of IKEA or B&Q. At the same time, most countries in Asia have deregulated their retail industries, enabling foreign-owned, larger retailers to enter new markets such as Vietnam and China. To operate efficiently, these retailers are demanding western style supply chains. The newer foreign retail markets are therefore attracting third-party logistics (3PL)

operators, such as DHL and Schenker, which, in turn, need international-standard logistics facilities. The resulting increase in stock of high-quality warehouses is increasingly becoming a target for both existing logistics investors and other investors hungry for this ‘new’ asset class.

Investment in logistics across Asia has never been stronger as many foreign funds, developers and specialist investors look to take advantage of strong domestic demand by investing huge sums of money in this sector. For example, US warehouse developer ProLogis announced in October 2007 its plans to double investment in Asia to as much as USD 12 billion whilst AMB intends to launch a USD 1 billion industrial fund in Asia in 2009.

Logistics follows retail Given that the retail sector accounts for more than three quarters of logistics activity in Asia , the current and future location strategies of large foreign retailers and expanding domestic retailers provide a good idea of the future geography of logistics. Both domestic and foreign retailers are expanding aggressively across Asia. Carrefour, Wal-Mart and Tesco have been pioneers across many Asian countries. In Korea the potential is clear but

21



AbOuT THE AuTHOR

Barnaby joined Jones Lang

LaSalle in February 2007 and is

the lead researcher for industrial

markets in the Asia region. Based

out of Shanghai, he contributes

to and coordinates research

relating to industrial topics on

thought-leading papers as well

as regular publications. Having previously worked in a different

field for three years in London, Barnaby speaks Mandarin and

took a Master’s programme in Real Estate Finance in the UK

before joining the Firm..

retailers and their logistics providers must address the structural, legislative and cultural challenges. Although further deregulation is expected in India, currently Indian laws state that foreign retailers are restricted from owning a majority share in a chain selling multiple brands and thus domestic retailers are faced with a window of opportunity to consolidate their position in the market. Predictably we are seeing numerous joint ventures in the retail sector, such as Tesco partnering with Samsung in South Korea and Carrefour with Uni President Enterprises Corporation in Taiwan. Correspondingly on the logistics side, examples include DHL teaming with Blue Dart Aviation to expand coverage in India and ProLogis entering into a formal partnership with K Raheja Corp, a leading Indian developer, to hasten their penetration into this complex market.

Efficient transport = efficient logistics systemAdvanced supply chains are extremely dependent on a first-class transport system. In this regard, the more developed nations of Asia such as Japan, Korea and Singapore are fortunate to have established transport systems, whilst less mature nations are catching up. China is investing a huge amount of money in its infrastructure, and its supply chain, though highly fragmented, is rapidly improving. India and Vietnam are also investing heavily in infrastructure but their respective supply chains are several years away from seeing the benefits of this investment.

A bright futureGiven the direct link between retail and logistics and the strong drivers of consumer markets in Asia, the future is looking bright for 3PLs which provide the supply chain service to retailers, the developers who build the warehouses which retailers require and for investors who are looking to purchase this product.

22

DemandA surprisingly buoyant local economy continued to underpin demand for quality office space in the Hong Kong markets during 2Q08. However, with many larger tenants having already executed expansion plans over the past 12 months, there were fewer sizable expansion transactions.

Notwithstanding, in the largest leasing transaction in 2008 thus far, Deutsche Bank became the latest global investment bank to commit to Sun Hung Kai Properties’ International Commerce Centre (ICC) in West Kowloon, leasing 12 floors (420,000 sq ft (gross)) in Phase 2 of the building. Meanwhile, the leasing momentum in recently completed Grade A office buildings in the non-core area markets continued to gather traction, with office buildings such as 909 Cheung Sha Wan Road, Nina Tower and Hong Kong Science Park Phase 2 all attracting the interest of cost sensitive tenants.

Overall net take-up for 2Q08 slowed to about 157,600 sq ft (net), which was significantly less than the 1.9 million sq ft (net) achieved in 1Q08. Indeed, net take-up in 2Q08 was the lowest in a quarter since 3Q06.

The investment sales market was highlighted by the en bloc sale of Trade Square in Cheung Sha Wan for HKD 1.52 billion to Mirror Group and the completion of Champion REIT’s acquisition of the Langham Place Office Tower in Mongkok for about HKD 4.79 billion from its major unit holder Great Eagle; a deal that was initially announced in 1Q08.

SupplyTower 1 of Sun Hung Kai Properties’ Kwai Chung 215 was issued with an Occupation Permit in 2Q08. The first of two towers in this Grade A office development; Tower 2 is not scheduled to be completed until 2010.

The completion of Kwai Chung 215 helped lift vacancy in the overall market up to 4.5% at end-2Q08. Vacancy in some core-area markets edged up during the quarter on the back of the lease expiry of relocated tenants. However, these rises were offset by the influx of tenants into some of the non-core area markets over the same period.

Asset PerformanceAfter posting double-digit growth in 1Q08, rental growth moderated to 5.5% q-o-q in 2Q08, bringing aggregate growth for 1H08 up to 19.4%. Tight vacancy and sustained leasing demand saw rental growth in the core-area markets outperform the non-core area markets.

The investment market remerged in a period of consolidation in 2Q08. While sales activity remained sluggish, vendors were able to capitalise on rising rentals and hold firm on asking prices, with average capital values edging up across all the key office sub-markets. Average capital values in the overall market rose by 1.7% q-o-q in 2Q08, bringing the year-to-date growth for 1H08 up to 8.1%.

12-Month OutlookWith most of the larger banking and finance sector tenants having already executed their expansion plans over the past 18 months, we expect demand, particularly for large space in the core-area markets, to soften and in line with a slowing global economy in the coming 12 months. Notwithstanding, we expect the market to be largely dominated by the expansion and relocation activities of smaller sized tenants in the core-area markets and upgrading requirements of tenants from industrial premises in the non-core area markets.

Hong Kong: Grade A Office

* Rental values are based on NFA** Capital values are based on GFA

With most of the larger banking and finance sector tenants having already executed their expansion plans over the past 18 months, we expect demand, particularly for large space in the core-area markets, to soften and in line with a slowing global economy in the coming 12 months.

For 2008, take-up, completions and vacancy rate are YTD figures. Future supply is for the full year.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate (Overall)

4.5%

Net Effective Rent HKD 67.5 psf pm

Capital Value HKD 10,805 psf

Investment Yield 3.7%-6.6%

Growth Rental Value Capital Value

q-o-q 5.5% 1.7%

1 Year 36.5% 31.6%

3 Years 126.5% 54.6%

23



Activity in the prime Beijing office market slowed slightly in 2Q08 compared with the previous quarter, as some tenants delayed relocations and expansion until after the Olympic Games. Although rents remained stable, overall vacancy reached its highest level in eight years as over 350,000 sqm of new supply entered the market.

DemandIn 2Q08, the slowdown in leasing activity was driven partially by concerns regarding the possibility of doing fit out in the weeks building up to the Olympic Games. While activity slowed in the leasing market, there was substantial activity in the owner-occupied sector. Nokia vacated 19,000 sqm in Pacific Century Place and located several business lines into a 70,000-sqm facility in the BDA and Microsoft broke ground on a 150,000 sqm campus development in central Zhongguancun.

The CBD continues to be the most popular destination for MNC relocation and expansion with firms absorbing 50,024 sqm of new space in the submarket this quarter. Noticeable transactions in the CBD in 2Q08 include Johnson & Johnson committing to 19,000 sqm in China Central Place III, BP China leasing 2,170 sqm in Taikang International Center and Gezhouba leasing 5,000 sqm in Gemdale Center.

Nexus Centre – a new development along East Third Ring Road – is emerging as a popular option. Volvo and Volkswagen Financial Services both signed leases there this quarter, committing to 7,000 sqm and 2,500 sqm, respectively. Nexus Center is located between the Third Embassy Area and CBD, and will have quality connectivity with both areas when Subway Line 10 is completed in July.

Supply353,549 sqm of new supply was delivered to the market in 2Q08 with the completion of four new projects. Two of them are located in the Third Embassy Area – Nexus Center (126,000 sqm) and Shenyuan Center (40,600 sqm), which has been purchased by Hainan Airlines. In the CBD, Office Park (171,000 sqm) was completed, and in the Olympics Green Area, the completion Beichen Times Building (60,000 sqm) substantially increased the amount of quality space in this emerging submarket.

Asset PerformanceDespite a slowdown in leasing activity and rising vacancy rates in 2Q08, landlords in some more established buildings increased rentals this quarter. For example, Gateway Plaza, which has had sub-5% vacancy for over a year, increased rents just over 8% q-o-q. In the overall market, average rentals grew slightly, climbing 2.7% q-o-q to RMB 258 per sqm per month.

Overall capital value remained stable at RMB 23,325 per sqm, and recent transactions indicate a range of RMB 14,500 per sqm to RMB 31,000 per sqm depending on asset quality and location.

12-Month Outlook In 3Q08, several deals upwards of 25,000 sqm are expected for announcement and with the projected completion of an additional 1.2 million sqm of new space, the market will continue to be rife with expansion and relocation opportunities. Vacancy rates are, however, expected to peak in 4Q08, which will put downward pressure on overall rents as some building owners struggle with high vacancy and adjust rentals in an effort to build occupancy.

Beijing: Office

* Rental Value is based on NLA** Capital Value is based on GFA


While activity slowed in the leasing market, there was substantial activity in the owner-occupied sector. Nokia vacated 19,000 sqm in Pacific Century Place and located several business lines into a 70,000 sqm facility in the BDA and Microsoft broke ground on a 150,000 sqm campus development in central Zhongguancun.s.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 19.0%

Effective Rent RMB 258 psm pm

Capital Value RMB 23,325 psm



q-o-q 2.8% -0.6%

1 Year 26.5% 6.3%

3 Years 22.3% 17.9%

24

DemandIn 2Q08, weakening leasing activities from MNCs was witnessed in the Guangzhou Grade A office market. Affected by uncertainties in global economic growth and by tightening fiscal and monetary policies in China, a few multinational firms slowed their expansion plans during this quarter. However, the banking and financing segments remained active in the Guangzhou Grade A office market. In particular, JP Morgan has set up a 1,000-sqm office in International Finance Place (IFP) to become the first foreign investment bank in Guangzhou. Other notable leasing transactions during 2Q08 include Mercedes-Benz (1,000 sqm) in IFP and Societe Generale (2,153 sqm) in China Shine Plaza.

On the other hand, domestic occupiers contributed to the overall absorption of 90,811 sqm for the Grade A office market. For the broad industry base, domestic and local firms were keen to purchase Grade A office space for self-use. This helped increase the occupancy of new strata-titled buildings like China Shine Plaza, Victory Plaza and China International Center in this quarter.

SupplyNo new supply was completed in 2Q08. The completion of Sinopec Plaza in the Tianhe CBD will be delayed to 3Q08. The pre-commitment of the building has reached more than 50% due to Sinopec’s purchase of one tower for self-use. As such, overall vacancy rate dropped 4.4 percentage points to 22.7% arising from the absence of new completion in 2Q08. All sub-markets saw a falloff in vacancy levels in this quarter.

Asset PerformanceOverall rental levels in the Grade A office market remained stable due to the decline in overall vacancy rate. Nonetheless, amidst strong competition among new office premises in view of their relatively higher vacancy level, slight increasing rental-free period of these buildings was observed. As such, the overall net effective rentals in 2Q08 declined by 0.8% q-o-q.

Owing to tightening cash flow of local developers, capital value of newly launched, strata-titled Grade A offices decreased marginally during 2Q08. Consequently, the uptrend of capital value in the overall Grade A office market slowed, increasing by 0.32% q-o-q in 2Q08.

12-Month OutlookThe impact of a potential slower global economic growth, along with fastening monetary policy in the Guangzhou Grade A office market, is expected to continue in the short term. Correspondingly, these uncertainties imply a prospective project delays in the foreseeable future. This in turn will help ease the supply-demand imbalance over the next 12 months. Therefore, overall rental levels are projected to be stable.

Guangzhou: Grade A Office

*Rental and Capital Values are based on GFA


12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 22.7%

Net Effective Rent RMB 167 psm pm


Investment Yield 7.7% - 9.2%


q-o-q -0.8% 0.3%

1 Year -0.2% 7.2%

3 Years 4.3% 26.9%

25



Shanghai: Office

DemandPartly driven by existing tenants looking to expand, demand in the Shanghai market remained strong in 2Q08. Location and quality are still important factors for professional service companies looking for office space. This is evidenced by the high commitment rates for new office supply located in the core CBD. Park Place in Puxi has already leased out 83% of its office space, while Standard Chartered Tower in Pudong has a vacancy rate of only 7%.

SupplyThis quarter saw the completion of one office building in Puxi and none in Pudong. The long-awaited Park Place finally obtained its occupation permit, adding 88,000 sqm of premium Grade A office space to the market. A supply peak in Pudong will occur in 2H08, with the completion of five new projects. Shanghai World Financial Center (SWFC), Jasper Tower, Mirae Asset Tower, China Fortune Tower and Global Finance Tower will add a total of 466,729sqm to the market.

Asset PerformanceOverall rents in 2Q08 slightly rose by 2.4% q-o-q to an average rent of RMB 9.32 per sqm per day. Due to the scarcity of available space in Puxi premium Grade A buildings landlords are still aggressively asking for rents as high as RMB 18 per sqm per day. Meanwhile, across the Huangpu River on the Pudong side, landlords have become more reasonable in their asking rents as well as in negotiation. In regard to en bloc transactions, the recent sale of The Center for RMB 4.4 billion was the highlight of the quarter. In 2H08, financial pressure on developers combined with stable rental income and capital value appreciation for investors, will heat up the sales market for en bloc transactions.

12-Month OutlookEven with the limited space in Puxi and the relatively large available space in Pudong, occupiers in Puxi are not moving to Pudong. Vacancy rates in Pudong will rise in the next 12 months as a supply peak will hit the market. The additional supply will create competition among landlords and will have an impact on rents. The sub-prime mortgage crisis has shown limited effects on the Shanghai commercial real estate market, with the exception of a few financial services firms slowing their plans for expansion. Investors showed signs of interest in Tier II cities like Nanjing, Suzhou and Wuxi, as several co-operations between local developers and foreign investors occurred this quarter in the Yangtze River Delta region. This trend will run parallel with the appreciation of the renminbi as well as with investors’ continued overall confidence in the future of the property market.

* Rental and capital values are based on GFA

2Q08

Vacancy Rate 1.7%

Net Rent RMB 3,400 psm pa




q-o-q 2.4% 9.5%

1 Year 13.4% 24.1%

3 Years 43.2% 60.4%


12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

26

DemandOver 2Q08, Taipei’s Grade A vacancy rate trended down at a somewhat slower pace than the recent past, falling 40 basis points to 8%. Demand for space in Xinyi tapered off, which we attribute to the rapidly rising occupancy costs in the sub-market. Xinyi was the only area to see its vacancy rate increase during 2Q08, although that was a marginal rise of just 10 basis points. The other three sub-markets all registered a reduction in vacancy rates and, if assessed as a group, now have less than 5% of space available for lease.

Investor interest in Taipei office assets remained strong over 2Q08—particularly from foreign capital—but there remains a disparity between vendors’ asking prices and what most investors are willing to accept. As evidence of this, 1H08 witnessed a 35% contraction in commercial property transactions compared with that in the same period last year.

SupplyAs we have stated in the past, there is limited supply slated for the Grade A office market—particularly after stripping out those projects that are reserved for owners’ self-use. This is a situation that we do not expect to reverse until office capital values make up some lost ground on high-end residential prices.

Asset PerformanceWe lowered our investment yields by 20 basis points across all four sub-markets, although there were no Grade A properties that changed hands over 2Q08. We based the adjustment on what investors have disclosed to us, and we intend to leave yields at their current levels until we see concrete evidence to support a change.

One prominent institutional landlord raised rentals across its entire portfolio of Grade A properties. In keeping with the past, the majority of the overall rental growth came on the back of a sharp hike from Xinyi landlords.

12-Month OutlookSet against the backdrop of static supply, Taipei’s overall vacancy rate should continue its descent over the next 12 months and will likely test 5% before the next parcel of new supply for lease comes to the market in 2009. Assuming historical net absorption figures remain stable, demand has the potential to outstrip new supply over 2009 and 2010. However, this will be contingent on the construction progress of projects in the pipeline.

Tight supply is expected to underpin rental growth across all four office sub-markets that we track in Taipei City. This will be further reinforced by the fact that a large portion of the office market is dominated by a few large players, giving them a considerable amount of influence in setting rental levels.

Given that Taipei is one of the few markets in Asia Pacific that still affords investors a positive yield spread over debt—with a Loan-To-Value (LTV) ratio of 70–85%—we anticipate that interest will remain strong. This competition for assets may contribute to further yield compression as capital value growth outpaces the ability of landlords to raise rentals. The new administration’s ongoing deregulation of the property sector with respect to cross-strait issues is also expected to keep both rental figures and prices on an upward trajectory.

Taipei: Grade A Office



Set against the backdrop of static supply, Taipei’s overall vacancy rate should continue its descent over the next 12 months and will likely test 5% before the next parcel of new supply for lease comes to the market in 2009.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 1.8% 6.9%

1 Year 9.0% 19.4%

3 Years 15.8% 42.0%

2Q08

Vacancy Rate 8.0%

Gross Rent NTD 2,558 per ping pm

Capital Value NTD 671,332 per ping

Investment Yield 4.6%

27




DemandAmidst uncertainties about the global economic outlook including concerns over the slowdown in the US economy, few corporations are willing to engage in aggressive business expansion and tenants are adopting a ‘wait-and-see’ approach to their strategies.

Although not considered a Grade A office building, Nihombashi Front (GFA: about 19,000 sqm), which was completed in 2Q08 in the Nihonbashi area, opened with almost full occupancy. Tenant demand in the building mostly came from manufacturers and financial institutions. In addition, movements such as the acquisition for sole tenancy of Iidabashi Ekimae Building (GFA: about 16,000 sqm) and Heiwa-Higashi Nihonbashi Building (GFA: about 7,000 sqm) indicate that demand for relocation and office consolidation continue to exist, albeit at a lesser scale compared with that in recent quarters.

SupplyNo new Grade A office building was completed this quarter.

Since the economic recovery in 2003, many office building developments were seen in the CBD, resulting in the current difficulty in acquiring development sites in the area. As such, newly announced development projects are mostly located outside the CBD, such as in Shinjuku, Shinagawa and Koto wards.

Asset PerformanceAverage rentals for Tokyo CBD Grade A office buildings in 2Q08 declined by 3.9% q-o-q to JPY 47,508 per tsubo per month (JPY 172,454 per sqm per annum). This is the first time rentals witnessed a quarterly decline after 16 consecutively strong quarters since bottoming out in 1Q04. Owing to a lower expectation of further rental increases, investment yield rose slightly to 3.3%.

The vacancy rate rose to 4% in 2Q08 from 3% in 1Q08, nearing the frictional level of around 5%. The rise is mainly due to the longer time required for landlords to secure tenants due to weakening market conditions triggered by the sub-prime loan issues, which was also seen in 1Q08.

12-Month OutlookLeasing activity is expected to become increasingly evident between end-2008 and 2009, as lease renewals draw closer for tenants that executed long-term lease contracts in 2004. Therefore, it is quite possible for the leasing market to become active if the uncertainty for the economic outlook will be cleared as well.

The vigour of opportunistic investors has disappeared due to the effects of the credit crunch. These investors are being rapidly replaced by a rising number of ‘core fund’ players that aim for a long-term stable model. In particular, German core funds are aggressively investing outside the CBD area, with a fund managed by RREEF Alternative Investments (Deutsche Bank) acquiring Nikko Building (GFA: about 13,000 sqm) in Shinjuku Ward for about JPY 19 billion. Core funds are expected to continue investing into the Japan real estate market.

Tokyo: CBD Grade A Office

In 2Q08, rental values for the first time witnessed a decline after 16 consecutively strong quarters.

2Q08

Vacancy Rate 4.0%

Gross Rent JPY 172,454 psm pa

Capital Value JPY 3,707,486 psm



q-o-q -3.9% -6.1%

1 Year 2.6% 1.7%

3 Years 73.0% 167.5%

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

28

DemandDue to no new supply being added to the Seoul office market and the record low vacancy rate, net absorption was minimal in 2Q08. Overall, 5,673 sqm of take-up by occupiers was recorded this quarter, the lowest level recorded in three years. However, due to the large amount of net absorption observed in 1Q08, total take-up for 1H08 was a healthy 107,175 sqm.

The focus of leasing activity was in Gangnam (i.e. 9,501 sqm of take-up), where some opportunities for occupiers to secure space still exist. Conversely, take-up was marginally negative in the CBD (i.e. -2,311 sqm) and Yoido (-1,554 sqm).

The vacancy rate across the entire Seoul market continued to fall in 2Q08, reaching a new record low of just 0.5%. The vacancy rate was the lowest in the CBD and Yoido (both 0.2%), while the amount of vacant space available in Gangnam continued to fall (from 1.5% in 1Q08 to 1.0% in 2Q08).

SupplyThere were no new additions of prime and Grade A stock in the Seoul market in 2Q08. However, one new Grade B building – the 33,554 sqm Daehan Life Ins. Seocho Building – was completed in Gangnam.

Two new buildings – the Kumho Building in the CBD and the third and final instalment of towers to Samsung’s new headquarters in Gangnam – are slated to enter the market in 3Q08. However, both buildings are fully committed to by their respective anchor tenants and the move to these buildings will create limited backfill space opportunities in the most sought after office locations throughout Seoul.

Asset PerformanceFollowing the promising result of stronger rental growth observed in 1Q08, the Seoul office market has reverted to type in 2Q08, with minimal growth recorded across the three sub-markets. Rentals were stagnant in the CBD and Yoido as limited activity was recorded and vacancy rates are already near zero. The one bright spot was Gangnam, where prime rents grew by 2.6%, further closing the rental gap between Gangnam and the Seoul CBD.

Investment activity, on the other hand, gained momentum in 2Q08 with a number of significant transactions taking place. A total of KRW 1.124 trillion worth of sales across seven deals were recorded this quarter, bringing the 1H08 total up to KRW 1.654 trillion. If sales activity continues at this pace, 2008 activity will exceed the record-breaking result posted in 2007.

Despite the pick up in investment activity, yields across the three major markets once again remained stable (i.e. 5.5% for prime assets in the CBD and Gangnam, and 5.75% in Yoido). Yields have not shown any movement since 3Q07.

12-Month OutlookThe Korean economy is looking more unstable in 2Q08. The falling value of the Korean won is taking its toll, with inflation increasing at its fastest pace this decade and consumer confidence at its weakest level since the Asian Financial Crisis. However, the underlying fundamentals of the Seoul office market remain intact and economic growth, although slowing, is still forecast to exceed 4% in 2008 and 2009. Therefore, the outlook for the market over the next 12 months remains solid.

The Korean economy is looking more unstable, but the outlook for the Seoul office market remains sound.

Seoul: Prime and Grade A Office


q-o-q 1.1% 0.8%

1 Year 6.3% 11.5%

3 Years 10.6% 54.5%

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate (Overall)

0.5%

Net Effective Rent (Prime)

KRW 149,808 per pyung pm

Capital Value (Prime)

KRW 18,080,931 per pyung

Investment Yield (Prime)

5.6%

Rental Value Index Capital Value Index

IND

EX

80

400

1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09

120

160

200

240

280

320

360

Index base: Jan 2000 = 100Source: Jones Lang LaSalle


29



Rental values rose to a new high of SGD 2,005 per sqm per annum, marking a rental growth of 6.1% in 2Q08. Although this was a slowdown in growth from the 9.1% seen in 1Q08, the YTD rental growth of 15.8% at the half-year mark is remarkable, considering the current weaker global and domestic economic sentiments.

DemandAs the global economic slowdown due to the US housing downturn continues for another quarter, another problem—global inflation—emerged. While financial institutions in the US responded to the downturn by retrenching employees to contain cost, no major job cuts were reported among the financial institutions in Singapore. Nonetheless, international and local banks here are expected to review and streamline their headcount requirements and exhibit more caution in their expansion plans.

Additionally, new growth areas in the regional finance industry led to a few global financial players, such as Taiwan’s Polaris Group and US-based Cantor Fitzgerald to set up offices in Singapore in 2Q08. Both companies cited Singapore as a good platform for launching and marketing their financial products.

SupplyFollowing the relocation of some public agencies to outside the CBD area in 1Q08, the Ministry of Finance took a further step to relieve the supply crunch by issuing a directive to existing government agencies to reduce their office-space needs. Unlike previous events in 1Q08, wherein the Singapore Land Authority (SLA) and the Economic Development Board (EDB) moved to the Revenue House and Fusionopolis, respectively, the Urban Redevelopment Authority (URA) will stay in its present office but is looking to consolidate its office-space requirements by 2009–2010.

Asset PerformanceAverage net effective rental marked a q-o-q increase of 6.1% from SGD 1,889 per sqm per annum to SGD 2,005 per sqm per annum, down from the previous q-o-q growth of 8.4%. There is a general slow down in rental growth and last quarter’s increase in rental growth was only a temporary respite.

Few investment sales were witnessed in 2Q08 as business sentiments remained uncertain. A record unit sales price of SGD 33,650 per sqm was registered in 2Q08 when 71 Robinson Road was sold through the partnership of Lehman Brothers and Kajima Overseas Asia to Commerz Real. However, this transaction price must be viewed in the context that 71 Robinson Road is under construction and will not be completed until 2009.

12-Month OutlookThe lack of existing and upcoming office supply for the past few years resulted in pent-up demand. However, with more alternative office locations and upcoming supply in the near future, this demand should gradually ease. In the meantime spillover demand should see the rentals growth momentum maintaining at a moderate rate into the next twelve months.

Singapore: Office Market

Rentals rose to another high of SGD 2,005 per sqm per annum in 2Q08.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 2.9%

Net Effective Rent SGD 2,005 psm pa

Capital Value SGD 31,215 psm



q-o-q 6.1% 0.0%

1 Year 35.8% 20.8%

3 Years 318.4% 195.9%


30

Bangkok: CBD Office Market

There are heightened concerns surrounding the stability and performance of the current Thai government as well as the apparently higher risks in the global economy. Despite these, the Bangkok CBD office market proved resilient, with activity picking up in 2Q08. With certain leases expiring over the medium term, proactive tenants are focussing on longer-term occupancy requirements, taking advantage of the recent softer market conditions.

DemandNet absorption of Grade A office space in the CBD reached over 13,000 sqm in 2Q08, a strong recovery from the amount occupied in 2Q07. While certain multinational firms and financial institutions remain reluctant to expand in the near term, expectations for continued growth are pushing others to obtain new leases now.

Significant changes in tenancies include bigger offices for Adidas and Exxon Mobil at All Seasons Place and Q. House Lumpini, respectively. In other buildings, leasing transactions were mainly for renewals. Excluding new supply at Chamchuri Square, which recently became ready for occupancy, vacancy rate fell to 13.3% at end-2Q08 from 14.3% in 1Q08.

Via the purchase of nearly 100% of SG Land’s shares, SG Tower and Millenia Tower were sold to Thai Factory Development Plc and Schubert Holding, respectively. Publicly listed Nation Multimedia Group also disposed of its head office on the fringe of Bangkok to Chor Chana-Ananpanich.

SupplyBecoming physically ready for occupancy at end-2Q08, the 89,000 sqm of usable office space at Chamchuri Square raised the total stock to 1.47 million sqm. The construction of Asia Center continues to rapidly progress, and this prime-grade building along Sathorn Road should be ready for occupancy by year-end. While some sites within the CBD are being considered for office development in the future, the only other buildings already under construction include Sala @ Sathorn and Sathorn Square, which is scheduled to be completed in 2010.

Asset PerformanceGiven the subdued new demand for office space in the CBD during 2007, average rental for prime-grade office space continued to come under pressure, declining slightly by 1% to THB 679 per sqm* per month in 2Q08. There has yet to be any evidence of yield beginning to decompress, and the slight drop in the average capital value was primarily attributable to the decline in average rental.

12-Month OutlookThe potentially negative impact of the tight credit markets and the US economic slowdown on the global economy has kept the market generally conservative and cautious on near-term prospects. The completion of new supply and the conservative demand growth will keep conditions relatively soft. Nevertheless, the spike in construction costs is limiting the incentive for a new supply pipeline. As such, we do not expect a sharp fall in rentals, as proactive occupiers will take advantage of the currently favourable conditions and secure their longer-term occupancy strategies.

* New building in basket

Despite heightened concerns surrounding the stability and performance of the current Thai government as well as the apparently higher risks in the global economy, Bangkok’s CBD office market proved resilient, with activity picking up in 2Q08.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 18.6%

Net Rent THB 6,551 psm pa*

Capital Value THB 81,619 psm*

Investment Yield 6.6%–8.2%


q-o-q -1.1% -2.2%

1 Year -3.8% -2.4%

3 Years 10.9% 9.7%

31



Ho Chi Minh City: Grade A Office

DemandDespite the current slower economy and real estate market of Vietnam and Ho Chi Minh City (HCMC), demand for Grade A office space remained robust in 2Q08. This was due to the limited supply in the country’s largest economic hub. Similar to the previous quarter, all existing Grade A office buildings are currently achieving occupancy of close to 100%. Owing to limited supply and high rentals, potential tenants are only willing to commit to small space of less than 500 sqm.

Very few tenants in quality office buildings are local companies. Demand for Grade A office space for both renewals and new take-ups mainly came from foreign companies. The profile of tenants is mainly composed of companies from industries such as finance and insurance, IT and software, real estate, consumer goods and offshore sourcing.

As the supply of Grade A offices is extremely limited, very few leasing transactions were registered in 2Q08. One transaction took place in April 2008, involving 180 sqm of space in Diamond Plaza at a rental of USD 73 per sqm per month by Ho Tram Developer.

SupplySince the completion of Diamond Plaza in 1998, the stock of Grade A office space in HCMC has remained unchanged at 74,300 sqm (NLA). No new stocks were added in 2Q08. The situation of low availability of Grade A space continued to plague the market. Currently, supply is generated from expired leases of tenants that vacate space to move to less expensive buildings. For example, Sun Wah Tower currently has some small spaces available with asking price of approximately US$88 per sqm NLA, net of service charge and VAT.

The CBD expects no new stock of Grade A office buildings until 2010, when Centec Tower and Kumho Asiana Plaza are forecast to be completed. These buildings will provide a total of 57,423 sqm (NLA) of office space.

Asset PerformanceAs demand outstripped supply, net rentals of Grade A office space maintained an upward trend and reached a new high of USD 79.3 per sqm per month on average at end-2Q08. This represented an increase of 26% q-o-q and 94% y-o-y. Metropolitan Tower achieved the highest rental level in the city at USD 87.5 per sqm per month.

12-Month OutlookVietnam’s economy will continue to bear the impact of the government’s fiscal and monetary policies that aim to stabilise the economy and the Vietnam dong, resulting in slower growth rate. Despite slower growth, rentals will remain stable, as no new Grade A office buildings will enter the HCMC market. We believe that demand for Grade A office space in HCMC will continue its upward trend, albeit at a slower rate. In addition, about 119,000 sqm of new Grade B office space is expected to be completed in HCMC in the next 12 months, thereby offering potential tenants alternative options.

IND

EX

Index base: Jan 2000 = 100Source: Jones Lang LaSalle


q-o-q 26.0% NA

1 Year 94.0% NA

3 Years 217.0% NA

2Q08

Vacancy Rate 0.0%

Effective Rent USD 951 psm pa

Capital Value NA

Investment Yield NA

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

NA


32

Jakarta: Investment-Grade Office

After witnessing a rebound in 1Q08, demand for office space in Jakarta slipped to a slower pace in 2Q08. Market activity was dominated by existing tenants, while enquiries from new company establishments were very limited. Relocations and consolidations to achieve cost efficiency remained the key activity among these major existing tenants.

DemandLeasing transactions in 2Q08 were generally dominated by expansions and relocations of major banks, oil and gas, manufacturing and financial services companies. A number of major relocations, which were concentrated in new buildings in the Sudirman-Thamrin and Senayan areas, took place during the quarter. This include Manulife in Sampoerna Strategic Square and ANZ in Wisma Stanchart (now called ANZ Tower).

Net absorption in 2Q08 was estimated around 30,258 sqm, down 23% from that in 1Q08. Combined with the additional supply from the Menara BCA project, office vacancy rose from 19.7% to 21%.

SupplyThe total investment-grade office supply in 2Q08 rose to 1.69 million sqm with the completion of Menara BCA which added some 65,520 sqm.

Over the next three years, the supply of investment-grade office space in the CBD is projected to rise by around 540,000 sqm, which will come from ten anticipated developments in Jakarta. Meanwhile, following the completion of Menara BCA, Graha Energy and The City Tower are scheduled for completion this year. These projects will add some 103,000 sqm of new investment-grade supply to the market.

Asset PerformanceThe completion of new developments in the Jakarta market continued to put downward pressure on rentals.

As of 2Q08, net effective rent averaged around USD 114 per sqm per annum. Capital value remained stable at USD 1,385 per sqm. Similarly, the initial yield stood at 8–8.2%.

12-Month OutlookDespite the economic slowdown, the Jakarta CBD office market remains marginally affected. Major companies in oil and gas, mining and financial sectors, which dominated the demand over the last two years, are benefiting from organic growth and strategic acquisitions. However, the anticipated massive future supply is likely to exceed demand. Vacancy rate is forecasted to rise and rentals are likely to grow at a slower pace.

Relocations to newly completed buildings are likely to characterise the market as tenants seek better-quality buildings and strategic prime locations.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 21.0%

Effective Rent USD 114 psm pa

Capital Value USD 1,385 psm



q-o-q 0.3% 0.0%

1 Year 6.0% 3.4%

3 Years 20.3% 31.9%

33



With increasing demand and tightening supply, the Makati CBD office continues to witness an upward trend. The US recession did not affect the expansion of business process outsourcing (BPO) firms in the city.

DemandThe expansion of BPO companies, such as JP Morgan Chase (32,856 sqm) in Net Plaza, DKS (20,707 sqm) in Net Cube and NCO Corporation (6,010 sqm) in Total Corporate Center, is the major driver of demand for office space.

Net absorption in 2Q08 was recorded at 16,603 sqm.

SupplyTwo buildings in Fort Bonifacio were completed this quarter. These are Total Corporate Center and Two World Square, adding a NLA of 21,414 sqm and 19,235 sqm, respectively.

The additional space raised vacancy rate to 5.5% in 2Q08 from 3.5% in 1Q08.

Asset PerformanceRentals for this quarter were at PHP 8,744 per sqm per annum, up by 1.8% q-o-q and 12% y-o-y.

Average asking rental was recorded at PHP 1,000–1,300 sqm per month for all prime and Grade A office buildings. These include 6750 Building, GT Tower, Ayala Tower One, Philamlife Tower and The Enterprise Center.

Capital values in this quarter were registered at PHP 77,954 per sqm from PHP 77,350 per sqm in 1Q08.

Investment yield marginally improved to 10.4–10.8% in 2Q08.

12-Month OutlookBuilt-to-suit (BTS) facilities have been the best option for BPO companies. This building type offers higher efficiency and lower rental rates. In addition, interest in Fort Bonifacio and other emerging CBDs in and on the outskirts of Metro Manila has grown due to the high rental rate in the inner Makati CBD area. This provided companies leverage over newer facilities and a fresh labour pool.

Manila: Makati CBD Office

Emerging CBDs within and outside Metro Manila draw the interest of the BPO industry.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 5.5%

Net Rent PHP 8,744 psm pa

Capital Value PHP 77,954 psm

Investment Yield 10.4%–10.8 %


q-o-q 1.8% 0.8%

1 Year 12.0% 6.1%

3 Years 95.4% 72.0%

For 2008, take-up, completion and vacancy rate YTD figures. Future supply is for the full year.

34

Kuala Lumpur: Office

DemandStrong tenant demand in 2Q08 continued to be supported by various company expansions and relocations. Generally, demand in the KLC area was driven by the oil and gas, financial business services and government sectors where a positive net absorption of 28,973 sqm was recorded. This was partly contributed by the following:

OCBC Bank expanded by 5,355 sqm into Wisma Lee Rubber; >

Yayasan Pelajaran MARA relocated from its premises at UNISEL, Shah Alam to Wisma Goldhill >

occupying approximately 1,486 sqm;

The Nomad Group’s serviced office suites were established at Etiqa Twins, occupying approxi- >

mately 2,314 sqm;

Petronas Dagangan and Petronas Carigali expanded by 6,317 sqm at Menara Dayabumi; >

Various companies moved to Menara See Hoy Chan including: Global Process System Sdn Bhd >

which expanded by approximately 729 sqm; and

FPSO Ventures Sdn Bhd and Nadaprise Sdn Bhd relocated from Menara SPK to the newly >

completed Menara Perak, occupying approximately 3,613 sqm and 1,548 sqm respectively.

SupplyThe total prime office supply increased to 1.947 million sqm following the completion of Menara Perak (previously know as No 24, Jalan Perak) and Wisma Lee Rubber, collectively providing 30,142 sqm.

Menara Commerce, a prime office building of 8,529 sqm, is expected to be completed by the end of 2008.

Asset PerformanceThe average vacancy rate edged down to 9.2% from 9.3% in 1Q08 and the average net rent increased by 0.6% q-o-q and by 2.0% y-o-y.

In 2Q08, Wisma Angkasa Raya on Jalan Ampang was the only office building transacted in the KLC area. The building was sold to Sunrise Bhd by Reliance Pillar Sdn Bhd and Lembaran Segimaju Sdn Bhd for MYR 179 million or MYR 11,487 per sqm.

Driven by increasing rentals and continued strong interest from local and foreign investors, capital values increased by 0.5% q-o-q to MYR 6,665 per sqm.

Average investment yields remained stable at 7.25% in 2Q08.

12-Month OutlookThe higher fuel costs, increases in food prices and electricity will no doubt increase the cost of doing business in Malaysia and therefore indirectly affect the office sector. However, prime offices in the KLC area will still be demanded and rentals and capital values are expected to increase in the short term, albeit at a slower pace.

Investment yields in the KLC area are expected to compress marginally further supported by the further rental growth and strong investment sentiment.

Despite some slowing in the economy, demand for prime office space in the KLC will remain strong in the short term.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 0.6% 0.5%

1 Year 2.0% 2.0%

3 Years 9.6% 14.3%

2Q08

Vacancy Rate 9.2%

Net Rent MYR 514 psm pa

Capital Value MYR 6,665 psm

Investment Yield 7.15 - 7.35%


35



Delhi NCR: Grade A Office

The lack of Grade A space in CBD is driving a strong blue-chip tenant profile towards Grade B+ buildings in the area.

Demand The non-availability of Grade A space and high rentals in the CBD drove occupiers to lease and refurbish non-Grade A space as per their specifications. The CBD is currently facing serious space crunch as it continues to remain the preferred location for occupiers to establish their corporate offices. Vacancy for Grade A buildings in the CBD has been negligible, while that for Grade B+ buildings was recorded at 2.6%.

The SBD micro-market witnessed moderate activity in 2Q08, with most of it being concentrated in Jasola. This is driven by the lack of Grade A space in other parts of the SBD, affordable rentals in the Jasola precinct and good connectivity with NOIDA and South Delhi areas. Net absorption in the SBD was recorded at 261,896 sq ft (24,331 sqm). Vacancy rate in the SBD was recorded at 4.02% in 2Q08, marginally below the 5.4% recorded in 1Q08.

Key transactions in 2Q08 include:

Associated Press leasing 12,000 sq ft (1,115 sqm) in Statesman House in Connaught Place >(CBD); and

Finnacle Cap Advisors leasing 2,500 sq ft (232 sqm) in M6 Plaza in Jasola. >

SupplyIn 2Q08, activity on the supply front was observed only in the SBD. Copia, a Grade A building with a total built-up area of 230,000 sq ft (21,368 sqm) developed by the Realtech Group, was completed in Jasola. The total SBD stock stands at 3.12 million sq ft (290,509 sqm). By end-2008, another 1.6 million sq ft (148,645 sqm) of space is expected to be completed and added to the existing stock.

Prime projects slated for 2H08 completions include the following:

DLF Towers, two towers of 350,000 sq ft (32,516 sqm) each, located in Jasola; >

Salcon Aurum, with a built-up area of 100,000 sq ft (9,290 sqm) developed by Saluja >Constructions in Jasola; and

Corporate One, with a built-up area of 120,000 sq ft (11,148 sqm) developed by Baani >Developers in Jasola.

Asset PerformanceCurrent rentals for Grade A and B+ buildings in the CBD are at INR 350–600 per sq ft per month and INR 275–450 per sq ft per month, respectively. However, the quoted rent in prime Grade A buildings as of 2Q08 was recorded at INR 700 per sq ft per month. Given the paucity of Grade A space in the CBD, the differential between the quoted and transacted rates is not expected to be significant.

Average office rental in the SBD has remained stable at INR 280 per sq ft per month. The y-o-y growth in rentals in the SBD declined from 40% in 1Q08 to 2% in 2Q08.

12-Month OutlookIn the CBD, a continuous demand–supply imbalance is expected to prevail in the future. Although there are signs of occupiers considering the suburb of Gurgaon as an alternate to the CBD lead by high prices and non-availability, we foresee the perpetual demand for CBD space to keep the rental values firm. The SBD is anticipated to witness a supply of about 1.6 million sq ft (148,645 sqm) which is expected to drive the demand–supply equilibrium in the SBD micro-market.

* Rental and Capital values are based on GFA


2Q08

Vacancy Rate 4.9%

Gross Rent INR 37,625 psm pa

Capital Value INR 327,002 psm



q-o-q 6.8% 6.1%

1 Year 37.1% 31.1%

3 Years 137.9% 180.1%

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

36


Mumbai: Grade A Office

Demand The CBD, SBD Central and SBD North registered a total net absorption of about 1.15 million sq ft (106,838 sqm) in 2Q08. Most of this absorption was derived from demand in the previous quarters, i.e. pre-leases getting actualised, as and when the buildings got completed. The CBD is a saturated micro-market with constant stock and a structural vacancy of 1%. Meanwhile, the SBD Central and SBD North precincts are witnessing massive construction activities. The SBD Central serves as the alternative destination to the CBD for corporate front-end offices, whereas the SBD North has a mixed tenant profile of BFSI and IT/ITES front-end and back-end offices.

Vacancy across the CBD, SBD Central and SBD North rose to 4.11% in 2Q08 from last quarter’s 3.77%, owing to the good amount of supply added to SBD North’s existing stock in 2Q08.


Networth Stock Broking leasing 6,000 sq ft (557 sqm) in Mittal Towers, Nariman Point, CBD; >

GMR leasing 10,000 sq ft (929 sqm) in Naman Chambers, BKC, SBD North; >

Sampo Japan leasing 1,800 sq ft (167 sqm) in Trade Centre, BKC, SBD North; >

Titan Nomura Securities leasing 20,000 sq ft (1,858 sqm) in Maker Maxity, BKC, SBD North; >

Universal Sompo leasing 6,500 sq ft (603 sqm) in Crystal Plaza, Andheri, SBD North. >

SupplyThis quarter witnessed the completion of five buildings totalling about 1.25 million sq ft (116,129 sqm) in the SBD North. More than 75% of these developments have taken place in Bandra Kurla Complex (BKC), which is an established financial business district in the city. These developments have large floor plates in the range of 20,000–30,000 sq ft (1,858-2,787 sqm) and predominantly cater to banking, financial and insurance companies. The SBD North precinct comprising of BKC and Andheri sub-markets has a strong future supply pipeline of about 4.9 million sq ft (452,307 sqm) of space, which is expected to be completed by end-2008.

The SBD Central is also seeing robust construction activity, with about 11 projects in various phases of construction. We expect an addition of about 2.3 million sq ft (176,626 sqm) of office space in SBD Central by end-2008.

Some of the major projects under construction in the SBD Central are Jupiter Mills by Indiabulls, Raheja Chromium by K. Raheja Universal, Sheth Towers by Sheth Developers, and Bombay Textile Mills by DLF.

Asset PerformanceRental values in the CBD, SBD Central and SBD North remained stable this quarter. This is due to the large supply pipeline across the SBD Central and SBD North micro-markets. Yields across these precincts are stagnant at 11.4%.

12-Month OutlookFactors such as rising inflation, the impact of the sub-prime crisis on the global banking sector, slowing GDP growth, rising interest rates and the general scepticism in the business world are directing occupiers to re-strategise their expansion plans. This may lead to demand rationalisation over the next few quarters and may cause vacancy levels in these micro-markets to rise. Rental values will remain range bound for the next two quarters.

Rental values remained stable at 1Q08 levels across the CBD, SBD Central and SBD North. Vacancy rates to rise in the medium term in the SBD Central and North precincts


12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 1.0% 0.0%

1 Year 6.1% 5.8%

3 Years 111.1% 144.3%

2Q08

Vacancy Rate 4.1%




37




DemandIn 2Q08, vacancy levels in the CBD and SBD micro-markets were at 2.8 % and 0.7%, respectively. Vacancy in the Bangalore CBD rose from 0.8% to 2.8% due to the relocation of Symphony Services Corporation from the Embassy Heights along Magrath Road to its Build to Suit (BTS) development along Outer Ring Road.

Net absorption figures in the CBD and SBD micro markets were very low compared to last quarter. This can be attributed to few completions in the quarter.

In 2Q08, the CBD and SBD witnessed a total of 403,095 sq ft (37,449sqm) of transaction volumes. These transactions include relocations, renewals and new occupiers.


Reuters leasing 64,150 sq.ft (5,960sqm) in RMZ infinity, Old Madras Road,SBD; >

Edelweiss Capital leasing 10,000 sq.ft (929 sqm) in Salarpuria Windsor, Ulsoor Road,CBD; >

IBA Health leasing 45,000 sq.ft (4,181 sqm) in Salarpuria Softzone, Outer Ring road,SBD; >

Nokia Siemens leasing 57,000 sq.ft (5,295 sqm) in Embassy Icon, Infantry Road, CBD. >

SupplyIn 2Q08, two completions were witnessed in the CBD and SBD precinct. Prestige Libra with built-u p area of 62,361 sq ft (5,794 sqm) on Lalbagh Road, CBD and Vakil Square with built-up area of 128,427 sq ft (11,931 sqm) was completed on the Bannerghatta Road, SBD. The upcoming supply in the CBD and SBD micro-markets over the next two and half years (2008–2010) stands at 1 million sqm, majority of which will be in the SBD. A majority of these upcoming projects are IT Special Economic Zones (SEZs). The notable ones being Adarsh Tech Park by Adarsh Developers on the Outer Ring Road with built up area of 1,200,000 sq.ft (111,484 sqm), Vrindavan Tech Park by Mega Infrastructure on the Outer Ring Road with built up area of 1,650,000 sq.ft (153,290 sqm) and Pri Tech Park by Primal Developers on the Outer Ring Road with built up area of 1,740,000 sq ft (161,651sqm).

Asset PerformanceRental values in the CBD and the SBD are following an upward trend, owing to the lack of ready to occupy Grade A space and relentless demand. Rental values in the CBD and the SBD witnessed a y-o-y growth rate of 22.5 % and 11.6% in 2Q08 from 2Q07 respectively.

12-Month OutlookThe Grade A office market in the CBD and SBD remains buoyant in 2008. The CBD is expected to witness a rise in rentals due to the lack of available Grade A space and a premium being charged for improvement in quality of construction and amenities being offered by developers in projects such as UB city. Although rental values in the SBD witnessed some appreciation this quarter due to lack of ready built space, we foresee the same to remain range bound over the next 3-4 quarters due to increased competition.

Bangalore: Grade A Office

The shortage of ready-built supply in the CBD will continue to support rental growth this year.


12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 1.1%





q-o-q 1.0% 1.5%

1 Year 11.8% 11.8%

3 Years 52.2% 61.3%

38


The pace of pre-leasing in these precincts has slowed down considerably compared to same time last year indicating slowdown in IT/ITES demand. If this trend persists, we foresee the vacancy levels to rise further in the near term.

Chennai: Grade A Office

Demand The net absorption in both CBD and SBD rose by a whopping 117% and 414% respectively in 1H08 as compared to 1H07. On a quarterly basis, net absorption in these precincts (CBD and SBD) was recorded at 1.7 million sq ft (157,207 sqm) in 2Q08 as against 1.32 million sq ft (123,190 sqm) in 1Q08. Both the precincts witnessed a drop in vacancy during 2Q08 as against 1Q08. The vacancy was recorded at 1.63% in 2Q08 as against 8.20% in 1Q08. The high absorption figures indicate robust demand and high pre-leasing activity last year. However, the pace of pre-leasing in under construction projects during 1H08 has slowed down compared to last year.

2Q08 witnessed partial completion of the Kathipara flyover located in the SBD during April 2008. The remaining portion of the flyover is expected to be completed by end of 3Q08. This advancement in infrastructure support within the city will improve the accessibility of SBD sub-markets like Guindy and Mount Poonamallee Road with city centre.


IL&FS leased 16,000 sq ft (1,486 sqm) in Navin’s Presidium, SBD; >

Dassault Systems leased 13,500 sq ft (1,254 sqm) in ASV Ramana Towers, CBD; >

Keane leased 72,763 sq ft (6,760 sqm) in DLF IT Park, SBD; and >

Sony Ericsson leased 127,789 sq ft (11,872 sqm) in DLF IT Park, SBD. >

SupplyThe real estate sector in Chennai has been mainly driven by IT/ITES sector and 2Q08 is no exception. Five out of six Grade A buildings completed in CBD and SBD in 2Q08 were IT buildings. In 2Q08, a total of 672,000 sq ft (62,431 sqm) of Grade A office space comprising of 5 buildings was added to the existing stock, out of which only one project with built-up area of 130,000 sq ft (12,077 sqm) was non IT.

The only building that was completed in CBD during this quarter is ASV IT Park also known as ASV Ramana Towers with a built-up area of 140,000 sq ft (13,006 sqm). In SBD, a total of 532,000 sq.ft (49,424 sqm) of Grade A office space was completed. From a supply perspective, the future looks promising for both CBD and SBD with a total of 3.7 million sq ft (343,848 sqm) of Grade A office space under various stages of construction and expected to be delivered by end of 2008.

The vacancy levels in the CBD and SBD were recorded at 5.5% and 14.9% as compared to 0.8% and 9.9% in 1Q08 respectively.

Asset PerformanceThe weighted average rental values in these precincts (CBD and SBD) have gone up by 1.7% in 2Q08 as against 1Q08. The rise in the rental values this quarter is mainly due to the rise in rental values in CBD. The rental values in SBD have remained stable at INR 51 per sq ft as a result of large upcoming projects in the anvil. However the CBD rentals have moved up to INR 78 per sq ft in 2Q08 as against INR 74 per sq ft in 1Q08.

12-Month OutlookIn the future, upcoming SEZs are expected to cater to the IT/ITES demand in the market. The city has close to 7.2 million sq.ft (668,902 sqm) of IT SEZ space either proposed or under various stages of construction in the SBD and is likely to be completed in the next 2 to 3 years.



q-o-q 1.7% 0.0%

1 Year 4.1% 4.1%

3 Years 47.4% 59.3%

2Q08

Vacancy Rate 13.13%




12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

39



12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 1.1% -4.8%

1 Year 25.3% 6.8%

3 Years 53.9% 44.0%

2Q08

Vacancy Rate 6.5%

Gross Effective Rent AUD 738 psm pa

Capital Value AUD 11,028 psm


DemandRecent financial concerns, both global and local, have undeniably affected tenant demand within the Sydney CBD. However, demand remains relatively strong, albeit at lower levels than previously recorded, as the continued lack of available space remains a key driver in the current market conditions being witnessed, particularly at the upper end of the market. Despite this continued demand the overall vacancy rate in Sydney has marginally increased to 6.5%, up from 5.7% in 1Q08.

The addition of vacant stock to the market coupled with negative gross leasing activity and the withdrawal from stock of a building to be demolished for redevelopment, has lead to the first quarter of negative net absorption since 1Q04. Despite the recording of -13,000 sqm of net absorption in 2Q08, the year-to-date figure remains positive at just over 7,000 sqm.

SupplyThree projects reached completion throughout 2Q08, adding 34,900 sqm of new and refurbished stock to the market. This quarters completions included the redevelopment of SkyVue, 68 York Street (13,500 sqm) and the refurbished 77 King Street (12,400 sqm), which includes the much hyped Southern Hemisphere flagship Apple store as a major part of the buildings retail tenants.

There remains 86,800 sqm of new and refurbished stock in the supply pipeline for 2008/9, of which more 76,600 sqm is already under construction. This will continue to impact on the low-vacancy environment Sydney CBD, which is expected to continue in the short to medium term. Stock withdrawals, both recent and upcoming, will continue to add fuel to the fire.

Asset PerformanceFollowing on from the strong growth witnessed in 2007, prime gross effective rents have increased by 7.3% throughout the first half of 2008 to bring the average to AUD 738 per sqm per annum. This growth can be mainly attributed to the continued lack of available space at the top end of the market, as well as residual growth from 2007.

The slow start to the year for investments continued in 2Q08, with only one sale transacted throughout the quarter. Two undisclosed Asian investors purchased Albion Chambers, 541 Kent Street for AUD 12.6 million from Peak Property Holdings. The Grade B building changed hands on an initial yield of 6.92%. Current global turmoil coupled with domestic economic conditions has seen market sentiment cause a further softening of yields, with prime yields having softened by 50 basis points at the upper and by 25 basis points at the lower end to now range between 5.75%-6.25%.

12-Month OutlookOn current trends, low vacancy environment, continued demand and limited supply suggests Sydney CBD office will favour the landlord over the next two years, before a stronger supply pipeline starts to re-emerge. This in turn is expected to maintain upward pressure on rental values in the short to medium-term. However, recent unrest in global financial markets presents a risk of deteriorating demand from the finance and insurance sector in the second half of 2008.

Sydney: Office – CBD

Sydney has recorded negative net absorption for the first time since 1Q04.


220

200

40


q-o-q 1.3% -4.1%

1 Year 11.0% 2.6%

3 Years 29.2% 40.6%

2Q08

Vacancy Rate 3.3%

Gross Effective Rent AUD 409 psm pa

Capital Value AUD 6,901 psm


12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

DemandRecent economic indicators highlight deterioration in business confidence, but the Melbourne CBD office market continues to record strong demand. Net absorption was approximately 23,000 sqm for 2Q08 and 169,300 sqm for the past 12 months. With limited supply additions and positive net absorption, total market vacancy declined to 3.3%, well below the ten-year average of 8.6%. Affordable rental levels have enabled tenants to upgrade to prime space and the level of prime vacancy has remained below 1% for the second consecutive quarter.

SupplyIn the current environment of elevated borrowing costs and financial institutions requiring a higher level of pre-commitment to provide funding, the number of new developments starting construction is expected to slow in the next 6 to 12 months. There is currently 404,000 sqm of space under construction with a pre commitment rate of 72%.

In total, three projects reached practical completion in 2Q08, adding an additional 22,200 sqm of new stock to the market. The three projects were all in the Docklands precinct and included the Gauge (9,000 sqm) and 370 Docklands Drive (7,200 sqm). A number of large projects are slated for completion towards the end of 2008, including CBW Towers 1 and 2 (75,000 sqm combined).

Asset PerformanceA declining vacancy rate caused upward pressure on rents in 2Q08. Prime gross effective rents increased by 1.3% over the quarter to reach AUD 409 per sqm per annum, while secondary gross effective rents improved by 3.0% to AUD 296 per sqm per annum. In the past 12 months, rental growth has been strong with prime gross effective rents increasing by 11.0% and secondary gross effective rents by 18.3%.

Rising borrowing costs and negative investor sentiment has caused a disconnect between vendor and purchaser expectations. Two major sales were concluded in 2Q08 at firm prices, but are not considered representative of the overall investment climate. Credit Suisse purchased 505 Little Collins Street for AUD 83 million on an initial yield of 6.00%, while The Alley Building at 75-77 Flinders Lane was purchased by an undisclosed party for AUD 10.3 million, representing an initial yield of 6.60%.

A lack of transactional evidence and a number of failed campaigns has led to a softening of prime yields by 50 basis points at the lower end and 25 basis points at the upper end to range between 6.25%-7.00%.

12-Month OutlookThe recent Federal Budget projects a slowing of the Australian economy and there is nervousness amongst large corporate occupiers. Over the next 12 months, there is expected to be a hiatus in the expansionary activities from the finance and insurance as well as property and business services sectors. Net absorption will be driven by expansionary pre-commitments to new developments that will complete in the next 12 to 18 months. Vacancy rates are expected to increase, but to remain tight in comparison to historical averages.

Melbourne: Office – CBD

Net absorption remained strong in 2Q08 at 23,000 sqm, resulting in a reduction of the vacancy rate to 3.3%.


41



Auckland: Prime and Grade A Office

DemandAuckland CBD prime office tenants have been relatively insulated from the current slow down in the economy and financial uncertainty. The strength in tenant demand is evidenced by low vacancy rates and high net absorption for prime office space. The vacancy rate for Grade A office market is just 0.2% in June 2008, a decrease of 10 basis points from December 2007. The low vacancy rates have been a result of the high levels of net absorption, which increased significantly to 12,300 sqm in June 2008, compared to 2,500 sqm six months ago.

The paucity of available office stock and high pre-commitment to new office space has resulted in strong levels of construction projected for the forthcoming years. It is expected that the completion of new supply scheduled from 2008 through to 2013 will provide approximately 178,000 sqm of office space to the CBD total office stock.

SupplyA large proportion of new office developments in Auckland CBD have been design-build for large corporates and the banking sector, such as the BNZ and GE Money development (17,000 sqm) that has recently been completed in Quay Park, the Deloitte Tower (22,000 sqm) at 80 Queen Street, Westpac development (16,000 sqm) in Britomart and the four-building campus (30,000 sqm) for Telecom on the former NZ Post site. Completion of the latter four projects is not scheduled until 2011. In addition, the construction of AMP’s new Downtown House (15,500 sqm) is currently underway. High pre-commitment is expected for this development for its premier location in the CBD. Other potential major office development includes a large project at Albert Street and an office development on the site of the existing Westfield Downtown shopping centre. If these developments are commenced in the near future, it is estimated that the two projects would be completed in 2012 and 2013 respectively, providing approximately 96,000 sqm of new office space to the CBD.

Asset PerformanceThe latest Property Council of New Zealand’s (PCNZ) Performance Index illustrates that the New Zealand CBD office sector was, again, the best performing property sector, with a total return of 21.9% for the 12 months to March 2008. Tenant’s ability to pay increasing levels of rent as a result of the strong economic growth experienced over recent years has protected investors from the possible volatile situation as a consequence of the recent global liquidity issues. However, the increased cost of borrowing has caused investors to seek higher rental returns to compensate for their increased debt costs. Anticipated rental increases along with marginal capital value growth expected may result in a further softening of office yields.

12-Month OutlookA fall in mortgage rates was signaled in an Official Cash Rate announcement by the Reserve Bank of New Zealand (RBNZ) in early-June 2008. This sign of easing interest rates and progressively new supply coming online, along with the continuing inflow of funds into superannuation schemes both in New Zealand and Australia should help to maintain capital investment flows for the CBD office sector in the short to medium term.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 0.0% 0.0%

1 Year 3.6% 0.0%

3 Years 38.1% 54.4%

2Q08

Vacancy Rate 6.6%

Net Effective Rent NZD 435 psm pa

Capital Value NZD 5,894 psm


* Data are recorded every six months


42

Hong Kong: Retail

* Rental values of Shopping Centres are based on LFA** Rental and capital values of prime street shops are based on GFA.*** The index basket was re-audited in 1Q08.

DemandRetailers continued to expand and establish new stores in 2Q08 on the back of the sustained growth in local and tourist spending. Anecdotal evidence suggests that growth in private consumption expenditure in 2Q08, while likely to have slowed from the 7.9% y-o-y posted in 1Q08, has remained intact. These drivers combined to push total retail sales value through the first five months up to HKD 117 billion, an increase of 16.8% y-o-y.

Big-ticket item retailers, such as those trading in jewellery and watches, remained keen in bidding for premier street shops. Demand was also strong from fashion retailers who sought to establish sizeable flagship stores in core shopping districts as part of their effort to further promote brand image. The sustained demand from retailers saw vacancy rates further tighten in top-tier shopping centres and contributing to a relative increase in the outflow of retailers into high street shops.

The investment market rebounded noticeably in 2Q08. Robust sales of properties priced over HKD 100 million boosted the total market transacted value to over HKD 17.25 billion. The market was highlighted by the reported sale of KCP, a 640,000-sq ft (gross) shopping mall in Kowloon City, for HKD 1.48 billion to a local investor and the completion of Champion REIT’s acquisition of the shopping mall in Langham Place for HKD 7.4 billion, a deal that was announced in 1Q08.

Supply

The nine converted office-to-retail floors in ‘wtc more’ (the retail element within World Trade Centre) in Causeway Bay were the only new supply in 1H08. The conversion of these floors from office to retail use raised the retail portion of the building by 110,000 sq ft (gross).

Looking ahead, two projects in Tsimshatsui are scheduled for completion in the remainder of the year. 1881 Heritage, a 110,000-sq ft (gross) retail development on Canton Road, is expected to be completed in 3Q08 whilst the joint venture development between New World Development and the Urban Renewal Authority, K-11, on Hanoi Road is expected to be completed by end-2008.

Asset Performance

The sustained demand for quality retail space enabled landlords to continue raising rentals. Strengthening demand for street frontage shops helped lift average High Street Shop rentals by 9.1% q-o-q in 2Q08, bringing growth in 1H08 up to 18.2%. Meanwhile, average rentals for Premium Prime and Overall Prime Shopping Centres grew by 5.3% q-o-q and 4.9% q-o-q, respectively.

Average capital values for High Street Shops grew by 3.6% q-o-q in 2Q08, bringing growth in 1H08 up to 9.6%.

12-Month OutlookSolid consumption levels coupled with low vacancy and limited new supply in core shopping areas will continue to lend support to capital value and rental growth in the 12 months ahead. However, increasing uncertainties in the global financial markets may potentially curb the wealth gains of some individuals and lead to relatively slower consumption growth.

12-MONTH OuTLOOK

RENTAL VALuEPRIME STREET SHOPSPREMIUM PRIME SHOPPING CENTRESOVERALL PRIME SHOPPING CENTRES

CAPITAL VALuEPRIME STREET SHOPS

Growth q-o-q 1 Year 3 Years

Premium Prime Shopping Centres Rental Value

5.3% 13.0% 39.9%

Overall Prime Shopping Centres Rental Value

4.9% 14.0% 36.8%

Prime Street Shops Rental Value

9.1% 29.3% 44.2%

Prime Street Shops Capital Value

3.6% 17.4% 24.7%

2Q08 Rental Value

Capital Value

Yield

Premium Prime Shopping Centres

HKD 194.0 psf pm

NA NA

Overall Prime Shopping Centres

HKD 123.0 psf pm

NA NA

Prime Street Shops

HKD 363.6 psf pm

HKD 105,547 psf

4.1%

43



DemandMacau welcomed 14.9 million visitors in 1H08, up 18.1% y-o-y. While the total number of visitors from Mainland China continued to increase significantly by 27.1% y-o-y to 8.8 million, visitors from South East Asia also surged dramatically by 56.7% y-o-y to 0.8 million. In addition to the flourishing tourism market, the booming local economy and rising population in Macau continued to drive local consumption. The strong demand for retail consumption boosted Macau’s total retail sales by 46.4% y-o-y to MOP 4.5 billion in 1Q08, the highest on record. In particular, sales of big-ticket items like telecommunication equipment saw the strongest growth, up from 105.5% y-o-y, while sales of jewellery and watches grew by 99.5% y-o-y.

However, the decision by the Guangdong provincial government to tighten its Individual Traveller Scheme in May by restricting Guangdong residents from applying for visitor visas to Macau only once per month. Such restriction is likely to reduce the growth of visitors from Mainland China.

SupplyThe market saw no new completions in 2Q08. However, a number of new shops were opened in the Grand Canal Shoppes of the Venetian Macao. These shops include restaurants like NoSignboard Seafood and Kougetsu Tokyo Dining, as well as beauty and cosmetics shops like Marjorie Bertagne and Sa Sa Selective.

In terms of future supply, the opening of New Yaohan Department Store has been further delayed to August 2008. Meanwhile, The Shoppes at Four Seasons is expected to be launched in late July.

Asset PerformanceThe strong growth of retail consumption continues to boost retailers’ demand for prime retail space. Since the new supply of prime shopping malls is yet to be launched, leasing demand for high-street shops remained strong, with rental growing by 2.2% q-o-q in 2Q08. The strong demand for prime retail space was also reflected in higher capital values, which grew by 3.5% q-o-q.

12-Month OutlookAlthough the new restriction on the Individual Traveller Scheme in Guangdong Province may slow down the growth of visitor arrivals, visitors from Guangdong may possibly extend their length of stay, mitigating the negative impacts on tourist spending in Macau. Furthermore, the Macau government announced in April a one-off relief grant of MOP 5,000 to permanent residents and MOP 3,000 to non-permanent residents. These grants are expected to be delivered in July. The total sum of these grants, which amounts to about MOP 2.6 billion, or equivalent to about 8% of Macau’s total personal consumption expenditure in 2007, is likely to induce more local retail consumption. Nevertheless, on the back of the adequate supply of prime retail area in the pipeline, we expect capital values and rentals for high-street shops to remain relatively stable in the next 12 months.

Macau: Retail


Although the new restriction on the Individual Traveller Scheme in Guangdong Province may slow down the growth of visitor arrivals, visitors from Guangdong may possibly extend their length of stay, mitigating the negative impacts on tourist spending in Macau.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 2.2% 3.5%

1 Year 14.1% 17.5%

3 Years NA NA

2Q08

Vacancy Rate NA

Net Rent HKD 114.3 psf pm



MGM Grand Macau

44

Beijing: Prime Retail

Key economic indicators for the Beijing retail market demonstrated strong growth in 2Q08. Retail sales increased 20.5% y-o-y to RMB 108.4 billion and urban resident’s disposable income this quarter increased 10% y-o-y to RMB 6490 per capita.

DemandDemand for quality retail space remained dynamic through 2Q08, as evidenced by dynamic leasing activity in new projects. Overall market vacancy rate, however, climbed 2.4 percentage points q-o-q to 9.5% due to the completion of more than 260,000 sqm of new retail space.

Strong demand for space in new developments continued in 2Q08, driven by a combination of new set-ups and expansions. Versace and Canali opened stores in China Central Place Luxury Walk, joining more than 30 other international brands, such as Muji flagship store, Loro Piana and DSC, who have established a presence in this new project. Solana Life Park, located in the northwest corner of Chaoyang Park, opened 80% pre leased with a mix of mid-end fashion, F&B and a middle-end department store – Meridian. Also of note, Patek Philipp opened their first store in Beijing (second in China), leasing a 360 sqm standalone villa in the Legation Quarter – an exciting new development near Qianmen.

SupplyIn 2Q08, 261,730 sqm new retail space entered the market. This was less than previously anticipated as several properties were postponed due to construction delays. New projects include Solana Life Park (150,000 sqm), Focus Mall (45,000 sqm) in Wangjing, Legation Quarter (20,000 sqm) and Euro-plaza (46,730 sqm) in Shunyi.

Solana and the Legation Quarter are worth highlighting because they are introducing Beijing’s consumers to unique, new retail formats. Solana utilises a low-density, pedestrianised format to create large public areas and fully leverage the quality location adjacent to Chaoyang Park. Legation Quarter is a historical redevelopment project of the United States’ 1903 government legation area. It is a mix of top-end restaurants, theatres and galleries and private clubs. Both projects are clearly differentiated and will likely continue to perform well, even as competition in the Beijing market increases substantially in 2H08.

Asset PerformanceBoth overall rental value and capital value increased less than 1% q-o-q with net effective rent climbing to RMB 6,969 per sqm per month and capital value increasing to RMB 49,163 per sqm. The potential impact of strong retailer demand on rentals is being offset by the large amount of new space entering the market, leading to stability in rents and values.

12-Month OutlookWith an estimated 1.3 million sqm of new supply expected to enter the market by end-2008, the overall vacancy rate is poised to increase substantially. Additionally, leasing activity will likely slow in 2H08 due to the Olympics-related building moratorium and the fact that many retailers have already met their short-term expansion objectives in 1H08. By 2H09, however, it is anticipated that strong consumer demand will underpin further retail expansion, facilitating the market’s gradual return to more typical vacancy levels and stabilising rents.

* Rental Value is based on NLA** Capital Value is based on GFA

By 2H09, however, it is anticipated that strong consumer demand will underpin further retail expansion, facilitating the market’s gradual return to more typical vacancy levels and stabilising rents.


q-o-q 0.8% 0.9%

1 Year 0.3% 0.4%

3 Years 16.9% 62.0%

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 5.4%

Net Effective Rent RMB 6,969 psm pa



45



Shanghai: Retail

DemandIn 1Q08, total retail sales in Shanghai reached a record high of RMB 109.1 billion, up 16.9% y-o-y. Shanghai’s growing economy has been boosting retailers’ expansion plans thus increasing the demand for retail space.

In 1H08, fewer international brands entered the market compared with previous years. One reason for the decrease in the number of entrants is that lettable prime retail space is difficult to find. New market entrants prefer to set up their first stores in well-known retail projects. Therefore, potential newcomers hold off expansion plans and wait for the proper locations to open up. Another reason for the low amount of new entrants is that most major international brands have already created a presence in Shanghai. Currently, already-established retailers are taking steps toward expansion. Gucci is planning to open another two stores in Puxi, one of which will be in the Golden Eagle Department Store. However the Bund is still the preferred destination for luxury brands as evidenced by Louis Vuitton, Chanel and Prada all planning to open new stores in an upcoming high-end Bund hotel. Additionally, several well-known F&B retailers like Costa, Banana Leaf, and Latina secured space for new store openings around Shanghai.

SupplyIn 2Q08, the Shanghai retail market witnessed the completion of a new project—In Point. Easily accessible from the Nanjing West Road metro station and located along Wujiang Road, the project has changed the character of Wujiang Road with its emphasis on high-end F&B operations and fashion retailers. This project is a mid-sized shopping unit that will mainly serve local clientele who pass through the area. Plaza 353, a significant project slated for completion in 3Q08, is actively leasing with a majority of its units already leased. Originally a historic commercial building known as Donghai Mall, Plaza 353 is undergoing renovation to become a fashion-driven retail destination that targets tourists as well as the young and trendy Shanghainese market. The project’s major tenants include Zara, Mango, Guess and Toys ‘R’ Us.

Asset PerformanceIn 2Q08, average rents for floor space in retail locations rose to RMB 43.53 per sqm per day, up 1.6% q-o-q. Rental prices for prime high-quality retail locations have reached new highs at over RMB 60 per sqm per day. Meanwhile, a few projects have experienced a decrease in rents due to tenant mix and renovation. The average vacancy rate rose to 4%. This quarter also witnessed an investment transaction that involved Black Stone acquiring Changshou Commercial Plaza (currently known as The Trends) from VXL Capital Limited for RMB 1 billion. The project, located in Putuo district in Shanghai, is a six-storey retail podium with a GFA of 41,090 sqm. It is currently undergoing full-scale renovation, which is expected to be completed in August 2008. The project is currently vacant and will begin leasing upon completion.

12-Month OutlookIn the next 12 months, demand from international and domestic retailers will continue to be strong. This will be more evident with domestic retailers, which have already opened a large number of stores in other Chinese cities and are eager to enter the Shanghai market. Owing to the limited amount of developable space in the central downtown area, not much new supply is expected to enter the market. Instead, developers have turned to renovating and upgrading existing projects in order to obtain more rental income.


q-o-q 1.6% 0.0%

1 Year 11.2% 13.3%

3 Years 57.0% 74.0%

2Q08

Vacancy Rate 4.0%

Net Rent RMB 15,887 psm pa



12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

46

Singapore: Retail

On the back of the strong retail revenue achieved during the Great Singapore Sale (GSS), the Singapore retail market remained stable in 2Q08. Both rental and capital values continued to grow, with the former expanding at a faster pace.

DemandThe GSS in June helped boost retail revenue in 2Q08, resulting in positive retailers’ sentiment. According to MasterCard figures, total spending in the first month of GSS was SGD 497.5 million, 33% higher than in 2006. Visitors’ purchases made up 34.8% of the total spending. Due to the continuous effort by STB to attract more visitors, tourist arrivals from January to April grew 5% compared to the same period a year ago.

It is expected that 2H08 will be more bullish than 1H08, with the anticipation of the inaugural F1 Grand Prix night race further stimulating the demand for retail services (including F&B) in 3Q08. The event is expected to attract some 80,000 visitors to Singapore, hence the potential significant rise in spending during the five-day race. This will greatly boost retailers’ confidence, especially in the Orchard and Marina shopping areas.

SupplyIn 2Q08, the only new Orchard retail supply of 696 sqm came from VisionCrest On the other hand, both the Marina and suburban shopping areas witnessed no completions in 2Q08.

More retail supply will come into the market in 2H08. A total of 87,152 sqm will be added to the total retail stock in Orchard. In the Marina shopping area, about 11,400 sqm of retail space is expected from the completion of Iluma at Bugis and Citadines at Mount Sophia. Five suburban malls—Northpoint Shopping Centre, Jurong Point, West Coast Plaza, Sembawang Shopping Centre and Tiong Bahru—are undergoing renovation and will increase the total suburban retail space by about 55,580 sqm.

Asset PerformanceAlong Orchard Road, the average prime-level rental value for Grade A space grew from SGD 4,580 per sqm per annum in 1Q08 to SGD 4,621 per sqm per annum in 2Q08, a marked improvement of 0.9% compared with the 0.5% growth in the previous quarter. In the wake of a weakening and volatile economy, prime-level Grade A capital values in Orchard recorded a significant slowdown. It grew by 0.6% in 2Q08, a great contrast to the 2.8% growth recorded in 1Q08.

In May, CapitaMall Trust acquired the Atrium @ Orchard for SGD 839.8 million. It plans to synergise the property with the adjacent Plaza Singapura through physical integration and also decanting of the lower yielding areas which in the process, will increase the total NLA of the two retail assets to about 900,000 sq ft.

In the suburbs, the 99-year leasehold Katong Mall was sold to Tuan Sing Group on 30 June for SGD 219 million or SGD 865 per sq ft. It is likely to be redeveloped into either a full commercial or a mixed-use development comprising residential and commercial units.

12-Month OutlookThe weaker global economic outlook has not affected the retail market yet. It is generally growing albeit at a slower rate. The line-up of new attractions and events in the country, such as the two new Orchard malls and the F1 Grand Prix, however is likely to mitigate the impact of a weakened global economy and boost the retail market in the next 12 months as tourist arrivals are set to rise considerably.

Riding on the popularity of the F1 Grand Prix, Singapore’s tourism industry is set to boom and, in the process, boost the country’s retail market in the short term.

2Q08

Vacancy Rate 0.4%

Net Effective Rent SGD 4,621 psm pa




q-o-q 0.9% 0.7%

1 Year 2.6% 11.7%

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

47



Three factors continue to affect consumption and investment in Thailand—the weakening of the country’s domestic economy, the overhanging political instability and the rising inflation rate. Despite the uncertainty in political and economic environment, the retail sector continued to prove resilient. At present, most new development plans are located outside of Bangkok’s centre.

DemandThe concept of mixed development particularly between residential and retail, is gaining strong following among Bangkok developers. For example, Crystal at Ram-Indra is now operating in front of the Crystal Park residential project. Similarly, Sena Avenue, an upcoming prime retail centre, will be part of the Sena Master Plan project, which includes residential developments in addition to the retail area. Retailers within these types of projects are generally enjoying healthy sales revenue from local residents.

With the opening of three prime retail projects in Bangkok, more rental space was absorbed in 2Q08 than in 1Q08. Prime retail centre vacancy rate in central Bangkok contracted from 5.8% in 1Q08 to 5% in 2Q08.

SupplyTwo new neighbourhood malls were added to the total stock in 2Q08—the compound at Ram-Indra 109, with a total retail space of 2,691 sqm, and Carrefour at Suanluang, with a total retail space of 15,000 sqm. Chamchuri Square, a project that was delayed from 1Q08, was finally launched this quarter with a total rental space of about 22,000 sqm.

Other delayed projects, including Horizon (1,900 sqm), Eight Thonglor (5,400 sqm) and Bangkok Mediplex (5,000 sqm), have rescheduled their grand openings in 3Q08. Another four retail projects—Interchange 21 (10,000 sqm), Market Park Udomsuk (5,000 sqm), Major Avenue Ekamai (5,000 sqm) and Major Avenue Ratchayothin (15,000 sqm)—will start operations in 3Q08.

The development of a planned mixed-use retail/office project in the CBD area—Metro Sathorn—was cancelled, and the land on which the project was supposed to be built is now up for sale.

Asset PerformanceRetail space rentals remained unchanged from that in 1Q08 at THB 20,947 per sqm per annum. Capital value in 2Q08 stood at THB 169,996 per sqm. Investment yield for 2009 is expected to range between 11.9% and 12.3%.

12-Month OutlookUncertainty in the country’s politics could remain as no simple solution appears imminent in the near future. Inflation has continued to gain momentum, although the Thai central bank has not indicated that rising prices warrant a tightening of credit. While rising food and oil prices appear to be eating away disposable income, neighbourhood malls that cater to daily needs should continue to attract demand.

Bangkok: Retail Market

Retailers in neighbourhood malls continue to enjoy satisfactory sales revenue from local residents .

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 5.0%

Net Rent THB 20,947 psm pa

Capital Value THB 169,996 psm

Investment Yield 11.9%-12.3 %


q-o-q 0.0% 0.0%

1 Year 3.4% 4.3%

3 Years 9.2% 16.7%

48

This quarter, the Jakarta retail market is characterised by sustained demand as no new supply entered the market over the review period. Competition among landlords kept rents stable.

DemandDemand for retail space in upper-grade shopping malls in Jakarta grew at a moderate pace. Retailers, particularly international brands and F&B operators, continued to take up space in upper-class shopping malls. Steady occupancy in existing upper-class malls and rising occupancy in new malls resulted in a lower average vacancy across the city.

Although there were no new supply, net absorption rose to 20,000 sqm in 2Q08. Majority of this take-up was generated from leasing transactions in new and premium shopping centres located around the Sudirman and Senayan districts. The recently opened Mal Kelapa Gading 5 also recorded decent level of demand from middle-class to upper-class retailers.

SupplyWith no new project completion, the total retail supply in Jakarta declined to 1.13 million sqm as some space in Mega Mall Pluit was temporarily closed for renovation. This year, no new supply is expected to enter the market, except for the refurbishment of F/X Sudirman Place. Over the next three years, the investment-grade retail market is expected to receive a total of 258,000 sqm of additional supply from 5 new projects.

Asset PerformanceIn 2Q08, net effective rent in upper-class shopping malls averaged at IDR 4.52 million per sqm per annum, which is slightly higher than that in 1Q08. The strong competition in the market continued to influence owners in determining rental rates. Slower sales arising from weaker buying power due to inflation also caused retailers to delay their expansion plans. Consequentially, mall owners in their effort to attract tenants, kept their current rental rates and offered attractive rental packages.

Rental yield remained at 15–15.5% due to a slight rise in capital value.

12-Month OutlookVacancy rate is expected to decline as no new projects will enter the upper-grade retail market until end-2008. While retailers will have to continue leasing in existing malls, they will be more cautious on their expansion plans due to the high commodity prices and soaring inflation. Competition among landlords will continue to be stiff, causing rental rates to either remain stable or increase marginally due to higher service charges, over the next 12 months. We also anticipate full occupancy in recently completed malls, such as Grand Indonesia and Pacific Place, as all pre-committed tenants will be operating these stores .

Jakarta: Upper-Class Retail

Premium malls still attracted significant leasing interest resulting in higher occupancy rate in 2Q08. However, retailers’ expansion in the near future might be delayed due to slow sales.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

Growth Rental Value Price

q-o-q 0.9% 0.9%

1 Year 1.9% 0.7%

3 Years 11.3% 6.3%

2Q08

Vacancy Rate 13.5%

Net Rent IDR 4,524,087 psm pa

Capital Value IDR 29,473,945 psm


49



Increasing inflationary pressure has affected domestic consumption and with rising food, energy and oil prices, the consumer confidence level is relatively low. Growing concerns over inflation and political ‘instability’ due to uncertainties, which emanated from the results of the recent twelfth general election, will also limit or delay retailers’ expansion plans. With some local retailers focusing on expansion overseas, a slowdown in the general performance of the retail market is expected in 2H08.

DemandDespite some relocations and closures of retail outlets, there is still robust demand for prime retail space in Kuala Lumpur city centre. The vacancy rate decreased by 1.9 percentage points to 10.0% in 2Q08, due to absorption of space in the more recently completed prime retail centres i.e. Pavilion KL and CapSquare. Pavilion KL saw the opening of Gucci, Bulgari’s two-storey boutique store, Rainforest Sports Bar, Dragon-i Signature Restaurant, PlusIT and Dome, whilst Times Bookstore, Triumph, GNC LiveWell and the Four Seasons Restaurant opened in CapSquare. Despite LG’s first flagship concept store and the Arabian Oud (fragrance store) opening in Suria KLCC, the prime retail centre saw the closures of a number of retail outlets, namely Love Diamond Concept Boutique (relocated to Pavilion KL), Spade (relocated to Mid Valley Megamall). Tower Records closed down and the unit will be reoccupied by Maybank and the Times Bookstore unit is reoccupied by Toys R’ Us.

In the suburbs, Cold Storage stores opened in the Alamanda Shopping Centre in Putrajaya (1,858 sqm) and in SOHO KL @ Solaris Mont’ Kiara (2,323 sqm).

SupplyIn 2Q08, no new supply was recorded in the city centre.

Asset PerformanceIn 2Q08, city centre average effective rentals increased to MYR 3,301 per sqm per annum and investment yields ranged between 7.0% and 10.0%. Prime retail rents are poised to remain stable over the next six months, with some retailers asking for rental rebates or reductions in some of the retail centres where rentals are relatively high.

In 2Q08, CapitaLand acquired 61.9% of the total retail strata space in Sungei Wang Plaza, a prime and one of the most successful stratified retail centres in the city centre, for MYR 595 million through an asset securitisation structure.

12-Month OutlookWith hopes that higher living costs in Malaysia will be offset by the government’s efforts to boost disposable income, rentals for prime retail space are generally expected to remain stable over the next 12 months, with some potential for marginal increases in the retail centres which are fully occupied.

Kuala Lumpur: Retail

Consumer confidence is weakening and a general slowdown in the performance of the retail market during the second half of 2008 is expected.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 6.4% 6.4%

1 Year 19.2% 22.4%

3 Years 29.3% 40.2%

2Q08

Vacancy Rate 10.0%

Net Rent MYR 3,301 psm pa

Capital Value MYR 33,982 psm


50


Demand Similar to 1Q08, retailers remained cautious in 2Q08. Vacancy levels in Prime South malls in South Delhi remained flat at 3.2% in 2Q08. Micro-markets such as Prime Others and Suburbs registered a marginal rise in vacancy levels in 2Q08 compared with that in 1Q08. Vacancy levels in Prime Others and Suburbs this quarter stood at 16.2% and 10.8%, respectively.


Cannon leasing 3,500 sq ft (325 sqm) in Ambience Island Mall, Gurgaon; >

Esprit leasing 2,000 sq ft (186 sqm) in Metropolis, Gurgaon; >

Playlife leasing 2,500 sq ft (232 sqm) in West Gate Mall, prime others; >

Levis leasing 5,000 sq ft (464 sqm) in Sector 18, Noida, high street; and >

Woodland leasing 500 sq ft (46.4 sqm) in Khan Market, high street. >

SupplyThree new malls became operational in 2Q08 across all the micro-markets. DLF City Centre with a built up area of 250,000 sq ft (23,226 sqm) in Shalimar Bagh and Mahatta Towers Pvt Ltd’s Star City Mall with a built up area of 190,000 sq ft (17,652 sqm) in Mayur Vihar were the new malls in prime others. Meanwhile, Future Group’s Gurgaon Central with a built up area of 100,000 sq ft (9,290 sqm) was the only addition to the existing retail space in suburbs. Gurgaon Central, a single-store multi-brand concept mall, is the first of its kind in Gurgaon. The total mall space in prime south remained at 1,115,000 sq ft (103,587 sqm), while that in prime others and the suburbs, it rose to 2,476,989 sq ft (230,120 sqm) and 9,569,000 sq ft (888,990 sqm) respectively.

In the future, the NCR is expected to witness an additional retail space of about 5 million sq ft (464,516 sqm) in 2H08 and more than 4 million sq ft (371,612 sqm) in 2009.

Asset PerformanceRental values across the NCR market have remained stable since 4Q07. The weighted average rental in Prime South micro-market was at INR 375 per sq ft per month and ranges between INR 325 per sq ft per month and INR 600 per sq ft per month across five malls. Average rental values in Gurgaon and Noida malls were around INR 225–350 per sq ft per month, while that for malls based out of Prime Others micro-market, they were at INR 150–300 per sq ft per month.

High streets continue to command the highest rentals. The Connaught Place and South Extension markets are the most sought-after destinations by international retailers, where rentals range from INR 700 to INR 1,200 per sq ft per month. The Khan market, due to its customer profile that mostly consists of expatriates and foreign tourists, commands rental values as high as INR 1,200–1,400 per sq ft per month.

12-Month OutlookThe take-up of retail space in shopping malls has been slowing in most micro-markets. An expected addition of about 5 million sq ft (464,516 sqm) of new mall space over 2H08 will introduce good-quality options in the market but will apply pressure on rental values. The high streets of Connaught Place, South Extension and Greater Kailash are expected to maintain high rental levels due to the limited availability of space. They will also continue to be the popular choices among retailers and end-consumers.

Delhi NCR: Prime Retail

High street rentals are expected to hold strong due to lack of space and strong demand. However, the malls might face some pressure on rental values due to large future supply in the pipeline.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 0.0% 0.0%

1 Year 0.0% 7.8%

3 Years 72.4% 77.6%

2Q08

Vacancy Rate 11.5%




51



Mumbai: Prime Retail

Demand Mumbai has about 8.2 million sq ft (761,417 sqm) of prime retail space operational as of 2Q08. The total vacancy rate in Mumbai malls stood at 13.1% as of 2Q08, the highest since 2005. There are two prime reasons behind the increasing vacancy level: the huge supply released in the last three quarters and the slow take-up in certain malls. The slow take-up has culminated into vacancy rates as high as 30-50% in certain malls in the suburban micro-markets.

This quarter witnessed a net absorption of 1.23 million sq ft (114,572 sqm) as compared to 377,301 sq ft (35,052 sqm) same time last year indicating rise in demand.

Currently, Mumbai Prime South and Prime North locations are witnessing vacancy levels of 10.4% and 15%, respectively. Meanwhile, the suburbs have 13.2% of vacant mall space.


Samsonite leasing 1,675 sq ft (156 sqm) in the High Street Phoenix , Prime South; >

Carmicheal House leasing 1,376 sq ft (128 sqm) in Metro Junction Kalyan, Suburban area; and >

Prafful Sarees leasing 1,067 sq ft (100 sqm) in Metro Junction Kalyan, Suburban area. >

Supply This quarter, the suburbs of Mumbai witnessed completion of three malls— Evershine Mall with a built up area of 380,000 sq ft (35,303 sqm) in Malad, Oberoi Mall with a built up area of 500,000 sq ft (46,451 sqm) in Goregaon and Metro Junction with a built-up area of 720,000 sq ft (66,890 sqm) in Kalyan. About 14 more malls totalling 6.5 million sq ft (603,870 sqm) are expected to be completed by end-2008. About 85% of this future supply will be located across the various suburbs of the city to cater to the different residential zones. As the city is expanding geographically, the retail landscape of Mumbai is also spreading, and we are seeing a number of projects coming up in new suburban areas like Kharghar and Kalyan.

Inorbit Mall with a built up area of 650,000 sq ft (60,387 sqm) in Vashi, High Street Phoenix III with a built up area of 350,000 sq ft (32,516 sqm) in Lower Parel and R-city Center with a built up area of 800,000 sq ft (74,322 sqm) in Thane are the three major malls expected to be completed in the next two quarters.

Asset PerformanceIn 2Q08, the average rental value across Mumbai’s prime city malls and high streets remained stagnant at INR 350 per sq ft per month and INR 450 per sq ft per month, respectively. The yields remained unchanged at 11%.

12-Month OutlookThe second half of the year will witness a massive supply of about 6 million sq ft (557,419 sqm), providing more options to retailers. About 58% of the total upcoming mall space has been pre-leased indicating slow market conditions. We expect vacancy levels to rise in the near term, if the pre-leasing volumes do not increase in 3Q08.

Mumbai’s prime retail real estate is expected to quadruple to a total of 25 million sq ft by 2010.


12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 13.1%





q-o-q 0.0% 0.0%

1 Year 0.0% 4.5%

3 Years 36.4% 34.2%

52


DemandThe retail market in Bangalore continues to remain buoyant due to high absorption. The net absorption recorded in 2Q08 was 23,690 sqm which is about 50% of total net absorption last year. Rising incomes and better lifestyle aspirations is creating demand for luxury retail in Bangalore. The high streets witnessed more leasing activity in comparison to malls during 2Q08. This year continued to see retailers expanding to emerging high streets located in BEL Road, Bellary Road and Sanjay Nagar.


Reliance Web World leasing 2,000 sq ft (186 sqm) in Frazer Town, high street location; >

Spencers leasing 42,000 sq ft (3,902 sqm) on Sarjapur Road, high street location; >

Reliance Wellness leasing 7,000 sq ft (650 sqm) on Outer Ring Road, high street location; >

Dabur leasing 2,000sq ft (186sqm) on Brigade Road, high street location. >

SupplyIn Q2 2008, Bangalore witnessed completion of two malls: UB City mall with a built up area of 150,000 sq.ft (13,935 sqm) on Vittal Mallya Road and Total Mall by Jubliant Group with a built up area of 120,000 sq ft (11,148sqm) on Sarjapur Road. By the end of the 2008, additional supply of about 3.7 million sq ft (350,245 sqm) is likely to become operational. The future supply that is expected to be completed over 2008–2010 in Bangalore stands at 5.6 million sq ft (523,974 sqm). The notable projects being Mantri mall in Malleshwaram with built up area of 500,000 sq ft (46,452 sqm), Orion Mall by Brigade Group in Rajajinagar with built up area of 800,000 sq ft (74,323sqm) and Global Mall by Shoba developers in Rajajinagar with built up area of 1,000,000 sq ft (92,903 sqm). Over the next 2-3 years, Bangalore will witness a whole range of retail formats from discount stores to high-end luxury stores commence operations in the city driven by ambitious expansion plans.

Asset PerformanceThe rental values in prime malls rose by 10% y-o-y from 2Q07 to 2Q08. This was primarily due to slow additions to stock against persistent demand. The rental values in secondary malls appreciated 22% y-o-y from 2Q07 to 2Q08.

In 2008, rental values in prime city malls of Bangalore are likely to appreciate due to the limited future supply. Although we foresee the pre-leasing activity in upcoming secondary and suburban malls to remain remarkable over the next 12 months, the possibility of a rental upside in secondary and suburban malls is low.

12-Month Outlook Buoyant demand for high-street and mall space is expected to be remain firm during 2H08. With more than 3.5 million sq ft (325,161 sqm) of mall space expected to become operational in the next 2-3 quarters, we expect vacancy levels to inch upwards from current levels of 1.0%.

High streets are expected to command high rentals because of their popularity and low availability of ready mall space on offer in the market.

Bangalore: Retail Market

In 2008, retailers are expected to expand to emerging high street locations such as Bellary Road, BEL Road and Sanjay Nagar.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08

Vacancy Rate 1.3%





q-o-q 0.0% 0.0%

1 Year 14.0% 20.3%

3 Years 33.6% 27.1%

53




q-o-q 1.3% NA

1 Year 4.6% NA

3 Years 13.8% NA

2Q08

Vacancy Rate 0.6%

Gross Effective Rent AUD 1,840 psm pa

Capital Value NA


Australia: Regional Retail

DemandAfter two consecutive interest rate rises in the first quarter of 2008, official interest rates in the second quarter of 2008 remained stable, albeit high. Unfortunately, this, combined with surging petrol prices, has seen a weakening in the retail sector. Retail sales, seasonally adjusted, declined in the first quarter of 2008, with a further decline of 0.1% in April. In welcoming news, however, the latest release from the Australian Bureau of Statistics for May actually revealed positive growth in retail turnover for the May. This suggests that while demand has eased, a recovery may already have begun.

Whilst demand over the second quarter has weakened somewhat, the requirement for space within regional centres is still solid and the sector continues to suffer from a distinct lack of available space. The Jones Lang LaSalle vacancy survey for 2Q08 revealed that vacancy in Canberra’s Regional centres increased slightly to 2.5%, however, in the remaining markets vacancy remains below 1.0% with the national average is just 0.8%.

SupplyThe supply pipeline for Regional centres remains firm as owners continue to develop their existing centres, in view of the limitations around commencing new developments. Indeed, all projects in the current pipeline are either extensions or refurbishments. Of the 24 regional centre projects currently being monitored nationally, 12 are under construction, totalling 281,000 sqm.

Projects currently under construction include a 55,400 sqm extension of the Top Ryde Shopping Centre in Sydney, a 55,000 sqm extension of Westfield Doncaster in Melbourne and a 40,500 sqm extension of Chadstone shopping centre in Melbourne.

Asset PerformanceWith a distinct lack of space available in regional centres, rents continued to climb in the second quarter of 2008. Rental growth in regional centres varied from 0.6% in Melbourne to 2.2% in Perth, with the national average increasing 1.2% to AUD 1,499 per sqm per annum (weighted). This brings the annual weighted growth to 4.6% which is in line with the five-year average annual growth of 4.5%.

Investors in the second quarter of 2008 have remained on the sidelines due to the high cost of credit and volatility in financial markets. Notwithstanding this, regional centre assets are considered to be the highest quality retail assets in Australia and, with only a limited number nationally, remain tightly held. No sales over AUD 5 million were recorded in 2Q08. Consequently, this has helped minimise this category from the fallout impacting the retail property sector as a whole. Despite this, investment yields on retail assets are still softer than in 4Q07. Investment yields for Regional centres currently range from 5.00%-7.50%.

12-Month OutlookWith a decline in conditions already evident, the next 12 months is anticipated to see more modest, yet still positive outcomes for the Australian economy. Unemployment is anticipated to rise, but remain below longer-term averages, while retail turnover growth should remain positive. This should help to ensure the supply/demand fundamentals remain positive. However, from an investment perspective, the effects of the global credit crunch and volatility in financial markets should remain in the short to medium term.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

NA

* The above charts and table refer to the Sydney market only.

54


DemandThe quarter saw Hong Kong’s best lending rates (BLRs) remain unchanged at a range of 5.25-5.5%. However, some banks started to narrow spreads between prime and mortgage rates, leading to nominal mortgage rates edging up to an average of 2.6%. Along with the city’s mounting inflationary pressure, real mortgage rates and saving rates remained in negative territory.

The lack of significant positive drivers and the expectation gap between buyers and vendors saw sales activity remain slow, particularly in the mass residential market. The number of residential Sale and Purchase Agreements (ASPs) continued to contract, decreasing by 25.4% q-o-q to 27,533 units in 2Q08.

On the other hand, the sales market for luxury residential properties remained active and was highlighted by the successful launch of Celestial Heights in Homantin and The Palazzo in Shatin. More than 90% of the units launched in Celestial Heights Phase I were reportedly sold at an average price of HKD 13,500 per sq ft, while over 1,000 units (out of 1,375 units) in The Palazzo were reportedly sold at an average price of HKD 9,000 per sq ft.

Top-end properties, especially those considered rare, also remained highly sought after. A house in Severn 8 on The Peak, for example, was sold for HKD 56,000 per sq ft, a record high in Hong Kong. Meanwhile, a penthouse in Moon Tower in The Arch was sold at HKD 41,125 per sq ft, a record high for an apartment unit.

Leasing demand for luxury residential properties remained strong in 2Q08 with quality properties in traditional high-end areas remaining highly sought after. The market continued to be buoyed by demand from expatriates relocating to the city despite uncertainties in global financial markets.

SupplyAccording to the Rating and Valuation Department, a total of 1,452 residential units were completed in the first five months of 2008, of which 25 were deemed as being luxury units; Houses at 3-5 Plunkett’s Road on The Peak were among those luxury units completed in this quarter. Meanwhile, applications for pre-sale consents were lodged for 1,901 units in 2Q08, up by 130.4% q-o-q.

Asset PerformanceAfter growing by 10% q-o-q in 1Q08, average capital values of luxury residential properties grew at a relatively slower 2.5% q-o-q in 2Q08. On the other hand, mass residential capital values edged down by 0.6% q-o-q in 2Q08 but still grew by 7.2% in 1H08.

Average rents for luxury residential properties continued to rise, increasing by 4.3% q-o-q in 2Q08, bringing growth for 1H08 up to 10.4%.

12-Month Outlook

Despite growing concerns over the possibility of a rise in interest rates, Hong Kong’s property market and economic fundamentals remain healthy. The indicative affordability ratio also suggests that property prices are currently standing at quite comfortable levels. With global companies besotted on relocating top executives to Hong Kong, this will lend support to luxury residential leasing demand. As such, we remain firm in our view that both capital values and rents in the luxury residential property market will grow further in the coming 12 months.

Hong Kong: Luxury Residential

Despite growing concerns over the possibility of a rise in interest rates, Hong Kong’s property market and economic fundamentals remain healthy. The indicative affordability ratio also suggests that residential property prices are currently standing at quite comfortable levels.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08





q-o-q 4.3% 2.5%

1 Year 22.7% 28.5%

3 Years 45.4% 39.4%

55



Macau: High-End Residential

DemandThe second quarter saw a relatively slower sales market after the Macau government announced to cap the number of gaming licences and tables in the foreseeable future. Buyers were more cautious and became less aggressive in bidding for properties. In view of this, some landlords lowered their asking prices by a few percentage points during the quarter, while more aggressive discounts were offered for some uncompleted units that were previously priced aggressively.

Despite a subdued sales market, a number of notable investment transactions were concluded in 2Q08. Speymill Macau Property Company, a UK-listed property investment company, pre-committed to a total of 259 units of a high-end residential development in the inner harbour area on the southwest of Macau Peninsula for HKD 1.028 billion from Ho Chun, a local developer. The development consists of four towers and has over 500 units in total, with sizes ranging between 870 and 1,300 sq ft (gross). It is currently under construction and is expected to be completed by 2010. Meanwhile, Shun Tak Holdings purchased a site on the Nam Van Lake waterfront from Many Gain Investments Ltd for HKD 3.145 billion (with an accommodation value of HKD 1,943 per sq ft). The site has a maximum developable residential GFA of 1.6 million sq ft, subject to government approval.

Activity in the leasing market remained relatively brisk, buoyed by rising imported labour. We observed strong leasing demand from expatriates for some high-end apartments such as La Cite, Nova City and The Manhattan South.

SupplyThe quarter saw the completion of the 28-storey Grand Villa in Macau Peninsula, which comprises a total of 46 units. For the remainder of 2008, a further 2,600 new units are slated for completion.

Asset PerformanceA slower sales market in 2Q08 saw capital values ease down by 1% q-o-q. However, growing demand from expatriates continued in the leasing for high-end residential properties, saw rentals up by 0.8% q-o-q in 2Q08. The relatively stronger growth in rentals saw investment yield rise slightly to 3.3% by end-2Q08.

12-Month OutlookNew government measures to cap gaming developments have affected market sentiment to a certain extent. Nonetheless, all approved gaming projects that are under construction will be unaffected. As such, with the continuous influx of expatriates and on the back of the tight availability of quality leasing stock, the leasing market shall continue to perform and rents will remain on the rise. However, the capital values for high-end residential properties may experience a short-term consolidation due to the growing uncertainties in the global economy and the negative market sentiment stemming from the government’s intention to moderate the growth of the casino industry. * Rental and capital values are based on GFA

The capital values for high-end residential properties may experience a short-term consolidation due to the growing uncertainties in the global economy and the negative market sentiment stemming from the government’s intention to moderate the growth of the casino industry.

* Total private residential

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

2Q08





q-o-q 0.8% -1.0%

1 Year 22.4% 34.5%

3 Years 49.9% 50.6%

56

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

Bleaker global economic outlook arising from the US sub-prime debacle has affected sentiments in the Singapore residential market. This is especially evident in the fewer cases of collective sales and a decline in the launches and take-up rate of new prime projects over the past six months.

DemandDemand in prime districts remains low, with only 210 units sold in 2Q08, almost equal that in 1Q08. The euphoric market led prices in luxury prime segment to grow at unprecedented levels of 52% in just twelve months. With the projected slower domestic and US economic growths, buyers’ sentiments have turned cautionary. They have been seeking other affordable projects located in non-prime districts, particularly in the mass market where prices are comparatively lower. The demand in the mass market is stronger and looks more optimistic than that in the prime market. The number of foreign and corporate buyers has also significantly reduced as the uncertainty arising from the US sub-prime debacle and rising inflation weakened their investment appetite.

The lacklustre market performance led capital values for luxury and typical prime units in the resale market to decline q-o-q by 4.9% and 3.7% to SGD 27,932 per sqm and SGD 13,885 per sqm, respectively.

SupplyOnly two significant launches were recorded in prime districts—Nassim Park Residences and Vutton. These projects, together with other minor launches, brought the total new potential supply in 2Q08 to 210 units. Majority of this supply came from projects in the East Coast, which accounted for around 50% of the supply in the non-prime districts.

The physical completion of 653 units in the prime non-landed stock brought the total existing supply to 36,353 units. Projects completed in 2Q08 include Parc Emily, City Edge and The Grange.

Asset PerformanceRental values in prime districts weakened as the volume of lease renewals decreased, particularly for smaller units. Expatriates with smaller housing budgets have also began relocating to non-prime districts leading to a redistributive effect on the housing market. In 2Q08, rentals in luxury prime properties declined marginally by 2.9% to SGD 777 per sqm per annum, while those in typical prime properties decreased by 6.8% to SGD 498.92 per sqm per annum.

12-Month OutlookThe current market is in a binary phase wherein each stakeholder is uncertain of the other’s game plan. While developers are cautious over releasing too many units in an attempt to hold prices, buyers in general are unwilling to participate as they are anticipating prices to moderate further. This condition is further complicated by the latent demand in the market that is causing ebbs and flows in the general pricing on a month to month basis.

Singapore: Residential

The way supply will unfold in the next six months is pivotal on how the market will respond to developers’ project launches and vice versa.


q-o-q -2.9% -4.9%

1 Year 13.7% 9.0%

3 Years 95.1% 116.3%

Luxurious Apts / Condo

2Q08

Net Rent SGD 777 psm pa



57



DemandThe resilience of Hong Kong’s external merchandise trading sector and sustained growth in domestic retail sales continued to underpin demand for the city’s warehouse properties. For the first five months of 2008, Hong Kong’s aggregate trade value increased by 11.8% y-o-y, while total retail sales increased by 16.8% y-o-y over the same period.

Some of the more notable new lettings transacted during the quarter included:

a local logistics company leasing 33,000 sq ft (gross) in Shibusawa Building in Tsuen Wan; >

Dolphin Logistics Co. leasing 10,760 sq ft (gross) in Modern Terminals Warehouse Building in >

Kwai Chung;

a logistics company leasing 26,500 sq ft (gross) in Tins Plaza in Tuen Mun; and >

NNR Global Logistics (HK) leasing 31,145 sq ft (gross) in YKK Building Phase 2 in Tuen Mun. >

The tightening of credit markets globally, along with the growing uncertainties in the external trading sector, resulted in a significant slowdown in investment activity in 2Q08. In particular, the market saw a noticeable drop in the number of larger en bloc transactions. Two notable transactions reported in 2Q08 included: the en bloc sale of Lamex Warehouse in Fanling for HKD 71.3 million and a large portion of the warehouse facility at 24-26 Sze Shan Street in Yau Tong for HKD 98 million.

Supply

No new warehouses were completed in 2Q08.

New World Development won a government tender to develop a logistics facility on a 250,690-sq ft site in Kwai Chung for a premium of HKD 648.18 million. A facility with a total GFA of up to 694,271 sq ft may be erected on the site through a building covenant for the site requires construction to be completed by no later than June 2013.

Asset PerformanceThe sustained level of leasing demand saw average rentals for warehouse properties increase a further 3.6% q-o-q in 2Q08, bringing growth in 1H08 to 6.6%.

Growing rentals allowed vendors to remain firm on prices in spite of the relative lower transaction volumes. Indeed, average capital values increased by 3.7% q-o-q in 2Q08, lifting 1H08 growth to 6.9%.

12-Month OutlookA report released by the Asian Development Bank estimates that the growth of the Mainland’s domestic consumer markets will not be strong enough to fully offset the slowdown in Mainland China exports in the coming months. If this indeed is the case, then we expect rental growth to taper in the coming 12 months as demand eases. Notwithstanding this, current rental levels should be preserved, owing to the relatively low vacancy environment that currently persists across the market. On the other hand, weaker rental growth and rising interest rates may exert some pressure on capital values as investors seek relatively higher yields.

Hong Kong: Industrial – Warehouse


Current rental levels for warehouse properties should be preserved, owing to the relatively low vacancy environment that currently persists across the market.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 3.6% 3.7%

1 Year 8.0% 8.7%

3 Years 26.8% 42.8%

2Q08

Vacancy Rate NA




58

Beijing: Industrial

The forthcoming Olympic Games, in conjunction with continued government support, has pushed Beijing’s logistics market into an upward trend this quarter. Logistics companies are securing space outside of the Sixth Ring Road to counteract Olympics related traffic restrictions. This is impacting the supply-demand balance in many of these areas, as they are typically a focus for

manufacturers as opposed to logistics operators and distributors.

DemandDemand for logistics facilities remained strong in 2Q08. Key government initiatives for the Olympic Games include the halting of all cargo transport, and fit-out and construction of logistics facilities between July and September in urban Beijing. The resulting demand for temporary space outside of Sixth Ring Road has outstripped supply, resulting in a number of unmet large requirements in the market for distribution facilities.

Expansion of high-tech R&D facilities in Beijing drove strong demand for business park space. In this quarter, Nokia-Siemens rented 30,000 sqm of office space in Jiuxianqiao Electronics City and Sony-Ericsson took 36,000 sqm of space in Western Zone – Jiuxianqiao Electronics City. In contrast, manufacturing has experienced a slowdown in 2Q08. Some owners and occupiers in suburban Beijing have initiated sale of their properties or cancelled their leases due to much tougher market conditions for their products. This is largely attributed to an increase in cost, and government efforts, including reduced or withdrawn industry subsidies to force the relocation or closure of polluting or low value industries.

SupplyConstruction has slowed down in anticipation of Olympics-related building moratorium scheduled to take effect on 20 July. Construction at some very large-scale suburban projects such as Future Business Centre (eastern Beijing), however, have continued unabated. Looking at future supply, the land sale market was relatively active, indicating a variety of new projects in the pipeline. A plot of land within the Fourth Ring Road with a planned GFA of 67,000 sqm was bought by a domestic pharmaceutical firm for self-use and in April, there was an auction of five land plots within the Tianzhu EPZ. Building sites were bought by a mixture of owner occupiers and investors, including Mapletree, Phillips and SMC. In total, roughly 400,000 sqm of land was transacted at prices of around RMB 1000 per sqm.

Asset PerformanceRents for business park facilities increased sharply in 2Q08, climbing 12.2% q-o-q while capital values increased by 6.5% q-o-q. The logistics market also experienced an increase in rental values. Facility owners in the logistics sector continue to hold a positive outlook for the market and are therefore keeping a tight rein on their properties. This has created a relative lack of suitable en bloc investment opportunities, despite strong demand from purchasers.

12-Month OutlookGrowth in demand and rents for logistics facilities in the short tem will be driven by the upcoming Olympic Games. In the medium to long term, government plans to further develop Beijing’s role as a major logistics hub will support strong growth and activity. Business parks continue to emerge as the fastest growing sector in Beijing. Companies are relocating to decentralised areas in an effort to decrease costs and drive greater business synergies – decisions that are being facilitated by Beijing’s growing subway network.

The logistics market is expected to continue to be the key industrial sector as the government is supportive of low-impact developments and demand drivers are anticipated to further expand.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

Average Gross Rental (RMb per sqm per annum)

zone 2Q08

Logistics Sector 349

Manufacturing Sector 356

business Parks 1,346

59



DemandLatest statistics show that for 1Q08, GDP of Guangzhou Development District (GDD) was RMB 25.51 billion, up 17.63% over that in 1Q07. For the first five months of 2008, the total industry output for GDD expanded 19.93% to RMB 110.6 billion. Actual FDI for the same period reached USD 396 million, up 11.85%.

FDI in Guangzhou has been quite active in 2Q08. In order to cope with its limited production capability, Guangzhou Toyota Automobile announced its RMB 3-billion investment to construct its second plant in Nansha District several days after receiving approval for the project. Meanwhile, phase I of LG Display’s USD 1.1-billion investment in LCD display production in GDD was completed and has started operations in April 2008. The investment will bring a yearly sales income of about USD 7 billion when the project is completed by end-2010.

GDD was recognised as a ‘national environmental new material industry base’ in 2Q08 due to its achievement in the new material industry. This indicates that the area will receives policy and finance support from the national level. In order to improve public transportation in GDD, the local government decided to provide a subsidy of RMB 15 million for bus lines in 2008. This subsidy, which has tripled since 2007, will enhance the accessibility of industrial offices in GDD, thus attracting more demand.

SupplyIn 2Q08, there was no new office supply in business parks. Majority of available office space in business parks still came from the comprehensive research and incubator area of Guangzhou Science City. Designated for research and business incubator, office buildings in Groups B and C were put into operation in 2Q08 as scheduled. Meanwhile, the opening of Group A offices has been postponed to 4Q08 because of leasing difficulty in retail space.

Asset PerformanceOverall average rentals rose 4.19% to RMB 597 per sqm per year in 2Q08. Asking rentals for most office properties in our basket have risen, except for those in Haizhu and Panyu districts. Offices in Guangzhou Science City have been leading this rental rise, with a 9.65% increase over 1Q08. This rental rise was initiated by the supply from Group A in the comprehensive research and incubator area due to its positioning as a place for business offices. However, for Groups B and C, which have a total GFA of 234,500 sqm, rental is only RMB 25 per sqm per month, with leasing subject to government approval. Adjacent offices in Guangzhou Science City followed this trend and demanded higher rentals considering their high occupancy rates. Offices in Tianhe Software Park followed the move of Guangzhou Science City by registering a q-o-q growth of 4.09%, driven by strong demand in the urban area.

12-Month OutlookContrary to our former expectations, 2Q08 was dominated by rental rises in business parks, especially those in Guangzhou Science City. Since economic growth and FDI continued to be strong, we believe that rentals for the overall market will be stable in the following year.

Guangzhou: Industrial – Business Parks


q-o-q 4.2% NA

1 Year 8.5% NA

3 Years NA NA

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

NA

Average Effective Rental (RMb per sqm per annum)

zone 2Q08

Science City 375

Tianhe Software Park 794

Haizhu & Panyu Area 546

60

Shanghai: Industrial - Business Park

DemandOverall occupier demand for business park space remained strong, with vacancy rates declining from 10.1% in 1Q08 to 7.1% in 2Q08. A growing number of companies are moving their operations that do not require prime locations to business parks. MNCs are looking for high-quality space; however, convenience and access to mass transport remain the most important factors. In Caohejing, an American telecommunications company leased 20,000 sqm for its R&D operations, while Rockwell leased 10,000 sqm to consolidate various operations formerly located along Gubei Road in Hongqiao. Bank of East Asia leased 8,000 sqm in Bankcard BPO Phase II in Pudong to set up its back-office operations.

SupplyA total of 337,281 sqm of new supply entered the market in 2Q08. This represents a significant increase over the previous quarter, which witnessed 200,000 sqm of new space being completed. The majority of new construction was completed in Zhangjiang Hi-Tech Park. Built-to-suit space continue to be a trend as tenants that move their special operations (e.g. R&D laboratories and data centres) to business parks require features such as high ceilings, raised floors, and higher power provisions. One example of a built-to-suit space is a 20,000-sqm R&D project in Caohejing that is a standard bare-shell development. The tenant started negotiating with the landlord during construction and was able to make improvements to the building that met the tenant’s specification before the project was completed.

Asset PerformanceDue to a strong demand for space, average business park rents rose to RMB 3.70 per sqm per day in 2Q08. This represents a 2.7% q-o-q and 5.7% y-o-y increase. Compared with the average office rental rate of RMB 9.30 per sqm per day, business parks are an attractive option for companies seeking space for expansion or consolidation. ILOG, a French software company, consolidated all three of its Shanghai offices to Pudong Software Park in Zhangjiang Hi-Tech Park, which is located east of the Lujiazui CBD. Overall capital values rose to RMB 24,107 per sqm, a 2.6 % rise over the previous quarter. The rise was driven predominately by increases in prices for KIC Phase I and PIV Building I and the general growth across all real estate sectors. Although still a minor trend, some companies are showing interest in becoming owner-occupiers. Tencent Inc, a Chinese internet and mobile services provider, acquired 17,600 sqm of office space along Hongmei Road in Caohejing for RMB 335.3 million (RMB 19,049 per sqm).

12-Month OutlookDemand will continue to grow as cost-conscious MNCs are realising that Shanghai remains a comparatively economical location. Demand for a large space (10,000 sqm or more) from a single occupier is quite high compared with previous years. On the supply side, at least three projects will be completed by 4Q08, adding a total space of 78,000 sqm. Developers are increasingly addressing the needs of tenants, especially MNCs that seek high-quality space. American developer Tishman Speyer is developing plans for international-grade offices in New Jiangwan Town. The Leadership in Energy and Environmental Design (LEED) certification for sustainable construction will gain more importance in future projects due to increased concern for the environment and the Chinese minimum energy efficiency requirements. In addition, three subway lines will be completed in 2009, strengthening the infrastructure around business parks. These subways are Line 8, which will be connected to the Pujiang area; Line 10, which will be connected to KIC; and the extension of Line 2 to Zhangjiang all the way to Pudong International Airport.


zone 2Q08

Knowledge & Innovation Centres

2,190

IbP 1,643

zhangjiang 1,492

Caohejing 1,131

Shibei 1,075

zizhu 730

Average Capital Value (RMb per sqm)

zone 2Q08

IbP 17,500

Knowledge & Innovation Centres

10,000

Caohejing 25,100

zhangjiang 15,000

Shibei 14,000

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

61



Shanghai: Industrial - Logistics

DemandDemand for high-quality warehouses in Shanghai remained strong as space availability in the market is rare. Due to limited space and high rents in the traditional logistics areas of Shanghai, some end-users are relocating to surrounding areas as well as to neighbouring cities such as Kunshan and Ningbo. However, the majority of demand for the surrounding cities derives from industries that are based in these areas. Infrastructure improvement, including the completion of the Hangzhou Bay and Suzhou-Nantong bridges, is another driver behind the movement of logistics companies to neighbouring cities within the Yangtze River Delta region. Leasing transactions that occurred in 2Q08 included Shanghai CHIC Logistics taking 10,000 sqm of warehouse space in Songjiang Dongting and Hitachi Logistics leasing 11,000 sqm in Baowan Kunshan Phase I in Jiangsu Province. Rental levels in Baowan Kunshan Phase I are about 10% lower than those in the bordering Jiading area of Shanghai.

SupplyThis quarter saw the completion of two warehouses, one adding 35,436 sqm in ProLogis Lingang Logistics Park (Phase IV) and another adding 43,000 sqm in ProLogis’ Heqing project.

Asset PerformanceIn 2Q08, the average rent in Shanghai was at RMB 1.25 per sqm per day, up 1.5% q-o-q. Meanwhile, average capital value was at RMB 5,159 per sqm, up 1.7% q-o-q. In 2Q08, Mapletree announced the acquisition of a warehouse complex in Waigaoqiao Free Trade Zone from Integrated Shun Hing, a subsidiary of ISH Logistics Group. Mapletree paid a total of RMB 158.3 million for the 37,659-sqm property, comprising of a six-storey warehouse, a three-storey warehouse, and four auxiliary buildings. ISH Logistics Group owns five warehouses in Shenzhen and Shanghai.

12-Month OutlookA supply wave is scheduled to come between late-2008 and early 2009 from the districts of Songjiang, Fenxian and Jiading. However, the upcoming supply will not drive vacancy rates up as demand will remain strong. A moderate slowdown in rental growth occurred in the past quarters, but this trend is not expected to continue. Since the current market has very few buildings with large amounts of available space, landlords will be able to charge high rents for new projects with ample space. As a result, tenants that are sensitive to rental growth will move to neighbouring cities, while those that are willing to pay high rents will stay in Shanghai.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


zone 2Q08

Waigaoqiao 500

Lingang 402

baoshan 383

Songjiang 372

Pudong Airport 438

Northwest 442

Minhang 372

Average Capital Value (RMb per sqm)

zone 2Q08

Waigaoqiao 5,600

baoshan 4,000

Northwest 4,800

Songjiang 3,900

62

Taipei: Industrial – Business Parks (Neihu)

DemandNeihu Technology Park’s investment market slowed considerably over 2Q08, with just two industrial office properties traded during the period. The lack of activity strongly suggests that prices have become inflated to a level that is unappealing for a number of investors. On the other hand, Shin Kong Life—one of the island’s largest commercial property owners—recently announced that it was going to auction some prime residential land that it owns in favour of increased investment in Neihu.

Occupier demand for office space in Neihu was sluggish, although there are some big local companies considering the move, owing to the lack of large, contiguous parcels of vacant space available in the Grade A market.

NVIDIA was the latest company to relocate operations from the Taipei Grade A office market to Neihu. The company has leased all 6,000 ping (19,800 sqm) in Min Hu Building to accommodate the move. The current owner of the property is Shin Kong Life, which acquired the building from BenQ in 3Q07.

SupplyThe Taipei City government recently announced its decision to annex an additional 175 ha to the existing 150 ha that comprise Neihu Technology Park. Under the new guidelines, the park will extend southward to encompass 132.5 ha in Jiu Zhong and 42.3 ha in what is referred to as ‘Phase V of the Neihu reconsolidation (rezoning) district’ or the ‘Fifth reconsolidation zone’.

Asset PerformanceWhile capital value growth has accelerated sharply over the last six quarters, there has been very little rental growth to support yields. This has led to a situation where there is roughly a 50–60 basis point spread between the Taipei Grade A office market and Neihu Technology Park.

The latest en bloc transaction to take place in Neihu saw Shin Kong Life acquire ASEC Technology Building in a sale-and-leaseback arrangement. The deal will provide Shin Kong with an initial gross yield of about 4.5%, with the purchase price amounting to more than NTD 400,000 per office ping (NTD 121,000 per sqm).

12-Month OutlookWith the adjacent Songshan Airport now operating direct flights to China and an MRT (subway) line under construction, the long-term outlook for Neihu looks good. However, neither of these two stimuli is likely to seriously impact the market within the next 12 months.

With average yields for Neihu now providing very little premium over the Grade A market, we do not expect to see disproportionate yield compression in the former. Nonetheless, we see little impetus for strong rental growth over the next 12 months, owing to excessive supply, which may result in a 20–30 basis point slide in cap rates.

The Taipei City government recently announced its decision to annex an additional 175 ha to the existing 150 ha that comprise Neihu Technology Park.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

Average Asking Rental NTD per ping per month

zone 2Q08

Neihu Technology Park NTD 1,480

Average Capital Value NTD per ping

zone 2Q08

Neihu Technology Park NTD 309,687

63



DemandDuring 1H08, the effect of the sub-prime loan fallout on the logistics sector was limited compared to other sectors such as office. However, tenant demand slightly slowed as a result of fuel price increases.

The Tokyo central bay area continues to enjoy robust demand from transport and merchandising industries as the completion of the new runway in Haneda Airport in 2009 draws nearer. Demand continue to exceed supply as some existing tenants continue to seek space for expansion.

Vacancy in inland areas is likely to rise, with slight oversupply becoming evident in certain locations such as those near Kashiwa in Chiba Prefecture. The opening of Metropolitan Inter-City Expressway in June 2007 led to the direct connection of the Kanetsu and Chuo expressways. This boosted the active development of logistics bases near the intersection.

SupplyLogiport Kawasaki (GFA: about 160,000 sqm, about 21,000 sqm per floor) was completed during the quarter. Developed by LaSalle Investment Management, the project is a five-storey, multi-tenant facility with vehicular access to all floors. It provides superior accessibility to Haneda Airport, major ports and the local train station.

AMB Tsurumi Distribution Center (GFA: about 70,000 sqm, about 12,000 sqm per floor) was also completed in 2Q08. The project, developed by AMB Property Japan, is a five-storey, multi-tenant and high-function facility with truck berths on the first and third storeys.

As such, a series of quality modern distribution centres designed for multi-tenant use were completed in the quarter. With the completion of J-REP Logistation Mizue-cho (GFA: about 127,000 sqm) scheduled in 2H08, concerns over a slight oversupply is also evident in the Kawasaki area.

Asset PerformanceAverage rental and investment yield for the Tokyo central bay area in 2Q08 remained flat at JPY 7,200 per tsubo per month (JPY 26,136 per sqm per annum) and 4.7%, respectively. Average rental for inland areas dropped 2.7% q-o-q to JPY 3,600 per tsubo per month (JPY 13,068 per sqm per annum). Meanwhile, investment yield declined to 5.5%, which is relatively high compared with that in other sectors.

12-Month OutlookOverall, demand will remain strong for the latest types of distribution facilities, but vacancies will be evident in older-style warehouses. Owing to the relatively attractive investment yield, foreign investors will remain aggressive and are expected to continue their active investment in the sector.

On the other hand, fuel prices will continue to rise due to the surge in oil prices, making the market more difficult for the cost-conscious logistics industry. Sharp rises in fuel prices have begun to affect affordability, which is the largest concern for the sector.

Tokyo: Industrial – Logistics Sharp rises in fuel prices have begun to affect affordability.

2Q08

Vacancy Rate NA


Capital Value JPY 439,135 psm



6 months 0.0% 0.0%

1 Year 5.9% 10.3%

3 Years NA NA

2Q08

Vacancy Rate NA


Capital Value JPY 187,630 psm



6 months -2.7% 2.6%

1 Year -1.4% 7.5%

3 Years NA NA

Tokyo Bay Area

Inland Tokyo

12-MONTH OuTLOOK

RENTAL VALuE CAPITAL VALuETOKYO BAY AREA

TOKYO BAY AREA

INLANDTOKYO

INLANDTOKYO

64

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

Singapore: Industrial – Business Parks*

High-tech rentals continued to moderate in 2Q08 as market sentiments turned cautious. The previously landlord-favoured market had softened, causing landlords to become more willing to accept requests for lower rentals.

DemandThe construction of the eight-storey Internet Data Centre (IDC) in International Business Park, which will be developed by a joint venture between Japan Land and CS Technology, will start in September. At an estimated cost of SGD 250–300 million, the facility, which is expected to be ready by 4Q09, will include a server room of about 30,000 sqm.

SupplyBiopolis Phase III, a SGD 100 million project in one-north that is aimed at meeting the increasing demand for biomedical R&D space, began its construction during the quarter. Slated for completion in 4Q09, the project will yield 41,500 sqm of space. Developer Jurong Town Corporation (JTC) plans to further expand the Biopolis cluster and may launch phase IV at year-end to add another 30,000 sqm to the research park.

Fusionopolis Phase 2B, another project at the one-north business park, also had its groundbreaking ceremony during the quarter. The development, called Solaris, will provide space solutions to businesses in the R&D-based science, engineering, infocommunications and media industries. Due for completion by 1H10, the project will cover about 50,000 sqm (GFA) and will cost SGD 148 million.

Asset PerformanceNet effective rentals rose from SGD 412 per sqm per annum to SGD 424 per sqm per annum in 2Q08. Rental growth in the quarter continued to slow to 1% as market sentiments turned cautious. Yield remained stable in 2Q08 as the growth of capital values matched that of rental values.

12-Month OutlookDemand for high-tech space is expected to moderate as occupiers adopt a wait-and-see attitude to the market. However, Singapore’s strong economic fundamentals, coupled with tax incentives, should continue to support demand for high-tech space.

* Includes high-tech industrial buildings that are not zoned for business/science parks in the Master Plan.** Capital values and investment yields are based on 60-year leasehold properties.

High-tech rentals continued to moderate in 2Q08 as market players adopt a wait-and-see attitude due to market uncertainty. Potential occupiers are thus in better position to negotiate rentals with landlords.


q-o-q 1.4% 3.7%

1 Year 76.6% 59.9%

3 Years 218.6% 99.9%

2Q08

Vacancy Rate 11.3%

Effective Rent SGD 424 psm pa

Capital Value** SGD 4,306 psm

Investment Yield** 9.7% -10.1%

65



Despite an escalation of Thailand’s political woes during the previous quarter, industrial capacity utilisation in the country remained relatively high at 76.6% in 1Q08. Exports underscored the strength in manufacturing, and the value of Thailand’s automobile exports rose 30.3% y-o-y in May. Hard-drive production continued to be one of the most active industrial sectors, with the manufacturing production index averaging 791 over the first four months of 2008.

DemandAn estimated 1,060 rai (1.7 million sqm) of industrial estate land was sold during 2Q08, 220 rai (352,000 sqm) and 636 rai (1.02 million sqm) of which came from transactions in the industrial estates of Amata and Hemaraj, respectively.

During the first five months of 2008, net applications that were submitted for Board of Investment (BOI) privileges rose to 566 projects, comprising a total investment value of THB 189.8 billion. Although the number of projects represents a 6% increase over Q1, total investment was nearly equal in value terms with a rise of less than 0.1%.

Major demand was acquired from the industrial area Zone 2, which attracted 75% of the total investment value and 40% of the total number of projects. Similar with that in the last quarter, most of the investment is planned for the service/infrastructure sector, followed by the electronics/electrical and the chemical/plastic/paper sectors. It is noteworthy that the metal processing was the second largest sector last quarter, but represented the fourth largest sector this quarter.

During 2Q08, Khon Kaen Small Industrial Estate, a 40-rai (64,000 sqm) plot of land, was closed down as it had yet to attract any tenants. Meanwhile, Srithai Superware, one of Thailand’s largest plastic-product makers, will invest THB 1.4 billion to relocate its plastic-injection plant from the Suksawat area to Amata Nakorn Industrial Estate in Chonburi Province. The move aims to reduce operating costs and boost production capacity. Meanwhile, the company’s old factory will be shut down in July. Computer parts manufacturer Western Digital, which operates plants in Navanakorn Industrial Estate in Pathum Thani and Bang Pa-In Industrial Estate in Ayudhya, is undergoing a four-phase expansion plan worth THB 33.85 billion.

Thailand’s industrial-capacity utilisation slightly rose from 76.5% in 4Q07 to 76.6% in 1Q08.

SupplyIn 2Q08, the total supply of land in both industrial estates and parks reached 116,853 rai (186.96 million sqm), of which 26,357 rai (42.17 million sqm) was reportedly available for sale. During the same period, land in industrial estates comprised 70,446 rai (112.71 million sqm) or 60.3% of the overall supply, 15,643 rai (25.03 million sqm) of which was available for sale.

Asset PerformanceAs with the previous quarter, take-up during 2Q08 remained low, and factory rentals averaged THB 140-185 per sqm per month.

12-Month OutlookFurthering the ‘Thailand Investment Year’ campaign, the BOI reduced its approval process to 15 days for projects with investment under THB 40 million. However, construction costs continue to rise, and inflation reached a ten-year high of 7.6% y-o-y in May. The Central Bank’s Business Confidence Index has fallen to a five-year low of 44.1 as a result of inflation, rising fuel prices and political instability. As such, it is anticipated that activity in Thailand’s industrial and manufacturing sectors will be relatively quiet in the short term, and expected land sales may be delayed.

Thailand: Industrial – Manufacturing

It is anticipated that activity in Thailand’s industrial and manufacturing sectors will be relatively quiet in the short term, and expected land sales may be delayed.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

NA

Average Effective Rental (THb per sqm per annum)

zone 2Q08

Eastern 1,960

Northern 1,958

66

DemandTenant demand for industrial space in the Sydney industrial sector remains steady, although a little down on 2007. The Outer West markets continue to account for the majority of gross take-up in 2Q08. Total take-up for the Sydney precincts was 128,700 sqm, up on the first quarter of the year.

Anecdotally, demand for space in the 2,000 sqm to 4,000 sqm categories remains solid in the Outer West; however, enquiry for larger spaces has cooled.

SupplyThe Sydney industrial market continues to lead the country in new supply. In 2Q08 a healthy 174,000 sqm was completed, focused on the Outer West precincts. This is down a little on previous years and reflects the pull back of developers unable to secure financing and/or pre-lease deals. There is another 569,200 sqm of new supply under construction and due to complete in 2008. There has been a pick-up in existing vacancy as new speculative developments complete without commitments. There are clear signs that developers are scaling back their plans for new supply to be delivered in 2009 and pushing out projects due to begin construction this year as uncertainty prevails.

Asset PerformanceThere was negligible rental growth recorded in the Sydney industrial precincts during 2Q08. Some precincts recorded moderate declines in rent, mostly for secondary grade stock. The prevalence of new stock and the availability of development sites competing for occupiers will keep a lid on industrial rents in the Outer West markets. Growth is expected to remain positive in the South and North.

Negative investment market sentiment has restricted deal flow in the transactions market during the first half of 2008. There has been a distinct lack of buyers in the market – and those that are buying are seeking good value. Average prime investment yields in Sydney have eased 25 basis points to 50 basis points this quarter, with more considerable easing in secondary markets. Total transaction volume in 2Q08 was AUD 126.5 million, down considerably on 2007 volumes.

12-Month OutlookThe outlook is for tenant demand to remain uncertain until clearer signs of business conditions emerge. Supply will be very high overall in 2008 with many projects due to come online in the second half of the year. Pre-commitment deals are becoming harder to come by and speculative development in Sydney is expected to all but cease until conditions improve.

Rental growth is expected to remain broadly positive overall, with pockets of stronger growth in precincts with supply constraints. Investment market conditions are becoming clearer and there is expected to be a pick up in deal flow throughout the second half of 2008.

Sydney: Industrial

Pre-commitment deals are becoming harder to come by and speculative development in Sydney will all but cease until conditions improve.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE


q-o-q 0.0% -6.0%

1 Year 0.0% -8.0%

3 Years 4.0% 8.0%

Logistics Market Outer Central West

1Q08 2Q08

Net Rent (AuD psm pa)

104 104

Capital Value (AuD psm)

1,480 1,388

Investment Yield 7.00-7.50% 7.50 - 8.00%


* 4Q07 revised figures

67



Logistics West ManufacturingSouth East

1Q08 2Q08 1Q08 2Q08

Net Rent (AuD psm pa)

68 68 83 84

Capital Value (AuD psm)

NA NA 1,111 1,052

Investment Yield

6.75% - 7.5%

7.75% - 8.5%

7.0% - 8.0%

7.5% - 8.5%

Logistics West

Manufacturing South East

Growth Net Rents

Capital Values

Net Rents

Capital Values

q-o-q 0.0% NA 1.0% -5.0%

1 Year 1.0% NA 15% 6.0%

3 Years 11.0% NA 38% 37%

Melbourne: Industrial

DemandDemand for industrial space in the Melbourne industrial market was solid with 195,000 sqm of gross take-up recorded in 2Q08.

The South East once again recorded the highest level of take-up totalling 148,000 sqm in 2Q08. Included within this figure was the largest tenant move made by Aldi into a 55,000 sqm space at 75 Coleman Road, Dandenong South. In the North and West, take-up was dominated by the transport and logistics sector. Major tenant moves in these precincts included Toll Logistics which moved into a 12,500 sqm space at 83–89 Freight Drive, Somerton and Fort Knox Management into a 10,500 sqm space at 22-24 Salta Drive, Altona North.

SupplyIn 2Q08, approximately 161,000 sqm of space entered the market, predominantly in the South East and West precincts. Major completions included Park West Drive Industrial Estate (19,500 sqm) at 10 Parkwest Drive, Ardeer and Williamstown Road Warehouses at 435 Williamstown Road (10,600 sqm), Port Melbourne.

Looking ahead, a further 530,000 sqm of space is currently under construction and due for completion by the end of 2009 with a current pre-commitment rate of 38%. Although there are 147,000 sqm of plans approved and 107,000 sqm of plans submitted in the pipeline, development is unlikely to commence in the current environment of higher borrowing costs and softer tenant demand.

Asset PerformanceIn the 12 months to 2Q08, improved road infrastructure and availability of supply have been the main catalyst for significant growth in land values across all industrial precincts. Recent road infrastructure developments influencing land value growth include EastLink in the South East which completed in June 2008 and the Deer-Park bypass in the West which is expected to complete ahead of schedule in mid 2009.

Prime existing rents across all industrial precincts with the exception of the South East region remained static in 2Q08. In the South East, prime existing rents increased by 1.2% over the quarter to AUD 84 per sqm per annum. Moving forward, there is upside potential in rental growth as rising construction costs may be pushed through to the end users of industrial space.

Increased uncertainty in the economic and financial markets resulted in yields to softening further in 2Q08. In the South East, prime yields range from 7.50% to 8.50%. Three sales transactions totalling AUD 32.2 million occurred in 2Q08 including Multimint which sold 601 Victoria Street, Abbotsford to First Delta Group for AUD 22 million and Cliff Nominees and HJC Nominees which sold 491 Mountain Highway, Bayswater to Confoil for AUD 10.2 million on an initial yield of 6.60%.

12-Month OutlookThe slowdown in the Australian economy and increasing fuel costs pose significant risks to the industrial market, particularly the transport and logistics sector.

In the current environment, developers will be less likely to spec new projects which would result in fewer completions over the next twelve months.

12-MONTH OuTLOOK

RENTAL VALuE

CAPITAL VALuE

NA

A high level of tenant demand was evident in 2Q08. However, rising fuel costs and a slowdown in the Australian economy is expected to pose a risk to demand from the transport and logistics sector.


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Documents

Asia Pacific Property Digest - JLL · 1 Jones Lang LaSalle • Asia Pacific Property Digest • Second Quarter 2008 Asia Pacific Property Digest Second Quarter 2008