HVS Global Hospitality Services | Level 21 The Center, 99 Queen’s Road Central, Hong Kong

THE HVS QUARTERLY

HONG KONG, MACAU, CHINA AND TAIWAN UPDATE

2ND QUARTER 2012

Cathy Luo Associate Daniel J Voellm Managing Director

An HVS Quarterly Hotel Market Update — Hong Kong PAGE 2

An HVS Quarterly Hotel Market Update

Demand growth softened in the first quarter of 2012 after a phenomenal 2011, as global demand contracted amid the unresolved European debt crisis and the slowing of China’s economy. HONG KONG Hong Kong welcomed more than 11.2 million visitors in the first quarter of 2012, reflecting a 15.6% year-on-year (YOY) increase. Visitor arrivals from mainland China rose by 21.1% YOY and remain the key driving factor behind robust growth. Total visitor arrivals from China set a new record by topping 7.89 million, driven by the Chinese New Year holidays. In January 2012, Hong Kong implemented the e-Channel service for eligible frequent mainland travellers at certain border control points, shortening border crossing times. Apart from China, regional countries also contributed to visitor arrival growth. Visitor arrivals from South Korea grew by 17.2% YOY, driven by its strong economy and currency. Indonesia and the Philippines also recorded double-digit growth at 13.0% and 17.9%, respectively. Japan recovered from the Tōhoku earthquake and grew by a modest 5.3% YOY. Taiwan, the second-largest source market for Hong Kong, registered a 2.3% decline YOY, attributable to the presidential elections and a struggling economy that suppressed travel activities. The mature US market registered 1.7% growth YOY. The UK posted 10.1% growth YOY – the strongest in the first quarter among long-haul markets. This increase is partially attributable to

travel packages that featured the popular annual Rugby Sevens event.

Visitor arrivals to Hong Kong showed no signs of slowing in the first quarter of 2012, despite the slowdown in Hong Kong’s economy (0.4% GDP growth YOY). However, the lingering European debt crisis and the slowing of China’s economy cast doubts on Hong Kong’s tourism industry. To drive visitor arrivals, the Hong Kong Tourism Board (HKTB) will continue to focus on the vibrant Chinese market. The HKTB plans to spend 30% of its HK$182 million marketing budget on the Chinese market in 2012. The HKTB forecasts full-year visitor arrivals for 2012 to reach 44 million, representing a modest 5.5% growth.

In the first quarter of 2012, 49.5% of visitors to Hong Kong stayed overnight – a trend that is further declining as a result of increasing numbers of same-day visitor arrivals from China and a hotel market running at capacity. Notably, overnight visitor arrivals from China were at the lowest level in the first quarter, at 43.8% of total Chinese visitor arrivals (compared

HONG KONG VISITOR ARRIVALS

0%

5%

10%

15%

20%

25%

30%

35%

0

2

4

6

8

10

12

14

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Mill

ions

Others USA Taiwan Japan Mainland China South Korea YOY Change

Source: Hong Kong Tourism Board

HONG KONG OVERNIGHT VISITOR ARRIVALS

-14%

-7%

0%

7%

14%

21%

28%

35%

0

1

2

3

4

5

6

7

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Mill

ions

Others USA Taiwan Japan Mainland China South Korea YOY Change

Source: Hong Kong Tourism Board

PAGE 3 An HVS Quarterly Hotel Market Update — Macau

to 48.0% in 2011). Overnight visitor arrivals from South Korea and the Philippines registered the strongest YOY growth at 20.9% and 20.0%, respectively, in the first quarter. China, Indonesia and the UK also recorded above 10.0% YOY growth. Japan registered healthy growth of 6.5% YOY, while the US market remained resilient.

MACAU Macau recorded more than 6.9 million visitor arrivals in the first quarter of 2012, a 7.9% growth YOY. Approximately 61% (4.2 million) were mainland Chinese visitors. Strong visitor arrivals from mainland China were supported by increased capacity at gaming tables and the appreciation of the Renminbi. The mainland Chinese market is primarily driven by residents of Guangdong, Zhejiang and Fujian provinces.

HONG KONG HIGH-TARIFF A MARKET PERFORMANCE

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

0

500

1,000

1,500

2,000

2,500

3,000

Mar

-10

Apr-

10

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

HK$

Average Room Rate RevPAR Occupancy

Source: Hong Kong Tourism Board

RevPAR performance of the high-end hotel market in Hong Kong reached HK$2,023 in the first quarter of 2012, the best first-quarter RevPAR performance on record. The pricing strategies of high-end hotels in Hong Kong shifted from a relatively volume-focused strategy in 2011 to a price-driven strategy in 2012. Average occupancy for the first three months of 2012 was 81%, dropping two percentage points YOY. However, a strong occupancy level above the 80% mark allowed hoteliers to adopt aggressive yield strategies to drive average rate. For each of the first three months of 2012, the high-end hotel market achieved record-high average rates. March ended with a record-high average rate of HK$2,608, supported by the Rugby Sevens event that drew a large international crowd. Overall, the first-quarter average rate reached HK$2,487, a 13.6% increase YOY.

In 2012, an estimated 29 new hotels offering a total of 5,854 rooms are expected to enter the Hong Kong market. The outlook for occupancy levels remains positive, given the healthy demand from China. The slowing of China’s economy and a soft global economy will prevent rapid expansion in corporate travel budgets. Reliant on market compression, average rate growth in 2012 is anticipated to remain healthy but is likely to show resistance in the second quarter, when demand is generally softer, before regaining momentum during traditional peak seasons in the third and fourth quarters.

An HVS Quarterly Hotel Market Update — Macau PAGE 4

Demand from Japan continued to rebound in the first quarter, posting 8.7% YOY growth. The South Korea market registered strong growth in the first quarter, benefiting from a strong Korean won. Korean visitor arrivals expanded by 18.0% YOY. The Philippines also saw visitor arrivals increase by 15.7% YOY. Likewise, Indonesia and India saw healthy growth in visitor arrivals of 8.4% and 6.8%, respectively. However, travel demand from Singapore dropped 14.4% YOY and 47.0% quarter-on-quarter. This decline is attributable to favourable airfares from Singapore to other destinations such as Japan and Hong Kong, which lured Singapore visitors away from Macau.

Macau’s share of overnight visitor arrivals is relatively stable, ranging from 45% to 49%. In the first quarter of 2012, more than 45% of visitors sought hotel accommodation. Total overnight visitor arrivals increased by 8.5% YOY. This increase was

primarily driven by the mainland Chinese market, which contibuted to 60% of total overnight visitor arrivals. The Chinese market expanded by 14.2% YOY, topping 1.9 million. Japan recorded 12.2% overnight visitor arrival growth as the market recovered from the 2011 earthquake. Taiwan and South Korea also saw double-digit growth in overnight demand, driven by attractive package tours from the two destinations. Regional markets such as India, Indonesia and the Philippines also saw a healthy increase in overnight visitor arrivals.

The Macau Government Tourism Office is confident that total visitor arrivals will increase by 10% in 2012, fuelled by robust demand from China.

Gaming revenue for Macau totalled MOP7.4 billion in the first quarter of 2012, reflecting 26.8% growth YOY. While the first-quarter growth rate is significantly lower than 2010 and 2011 rates, the robust growth is nevertheless impressive, particularly as China’s economy is showing signs of a slowdown. Some analysts remain cautious about the gaming industry’s prospects, forecasting mere 10% growth in 2012 amid concerns about cooling demand from China. However, some analysts have switched to a bullish outlook, estimating 20% to 25% growth in gaming revenue for 2012.

MACAU VISITOR ARRIVALS

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

1

2

3

4

5

6

7

8

4Q09r 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Mill

ions

Taiwan Others Hong Kong Japan Mainland China South Korea YOY Change

Source: Macau Government Tourism Office

MACAU OVERNIGHT VISITOR ARRIVALS

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Milli

ons

Others Hong Kong Taiwan Japan South Korea Mainland China YOY Change

Source: Macau Government Tourism Office

MACAU GAMING REVENUE UNSTOPPABLE

0%

12%

24%

36%

48%

60%

72%

0

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009 2010 2011 2011 Q 1 2012 Q 1

Billio

ns

Revenue (MOP) Change Source: Macau Statistics and Census Service

PAGE 5 An HVS Quarterly Hotel Market Update — China

CHINA Momentum of total international visitor arrivals (excluding Hong Kong and Macau) to China picked up in the first quarter of 2012, with visitor arrivals growing 7.3% YOY, the fastest growth rate since the fourth quarter of 2010. Regional markets remain the main feeder markets to China. As Japan recovered from the 2011 earthquake, Japanese visitor arrivals to China increased by 13.1% in the first quarter. Taiwan posted 6.4% visitor arrivals growth, amid friendly cross-strait relationships after the election in January. Other nations in the region, such as the Philippines and Indonesia, also recorded double-digit growth in the first quarter. Momentum continued for Kazakhstan as the nation posted 31.6% YOY growth, attributable to the increased collaboration with China in the oil and gas industry. Sri Lanka, Nepal, Pakistan and North Korea also saw robust visitor arrivals growth, all starting from a low base. The Russian market remained flat in the first quarter, due to the Chinese New Year holidays and the rising costs of travel to popular destinations such as Sanya. All European markets recorded positive YOY growth in the first quarter, driven primarily by Germany, the UK and France. The Oceania region posted 11.9% growth YOY, supported by the Australian market and strong business relations. Visitor arrivals growth from the USA remained stable, at 6.4% YOY. Long-haul travellers are likely to be mainly corporate travellers. Western nations are likely to take shorter leisure trips given the soft global economy.

TAIWAN Taiwan recorded the strongest visitor arrival growth in the Greater China region, with 22.3% growth YOY in the first quarter of 2012. Among the top five source markets for Taiwan, apart from the USA, all posted double-digit growth rates YOY. Demand from mainland China surged by 50.2% YOY in the first quarter, driven by a simplified visa application process. Visitor arrivals from Hong Kong and Macau grew 21.5% YOY, facilitated by attractive package tours. Japan rebounded in the first quarter with 17.7% growth YOY. Malaysia, a key trade partner of Taiwan, recorded 14.0% growth YOY. The culture, nature and traditions of Taiwan are particularly appealing to the Malaysian-Chinese community. Efforts by the Taiwan Tourism Bureau to drive regional markets have paid off as regional markets posted strong visitor arrivals growth in the first quarter: Singapore, up by 19.0%; the Philippines, up by 12.7%; and Indonesia, up by 5.7%. Trade and tourism collaborations with Southeast Asian countries are expected to continue to drive demand to Taiwan. Demand from Europe grew by a modest 2.7% in the first quarter, mainly driven by Germany, France and the UK. The US market remained soft, with 0.3% growth YOY. The Oceania market expanded by 13.8% YOY, starting from a low base.

Taiwan continues to drive demand from mainland China with a number of favourable policies. At the end of April, the daily quota for individual mainland Chinese travellers was increased from 500 to 1,000. The individual traveller scheme was also expanded at the end of April, allowing residents of nine cities (previously three) to travel to Taiwan individually. The scheme

CHINA VISITOR ARRIVALS*

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

1

2

3

4

5

6

7

8

9

10

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Mill

ions

Others Japan Taiwan Russia USA South Korea YOY Change

Source: China National Tourism Administration * Excluding Hong Kong and Macau

TAIWAN VISITOR ARRIVALS

-5%

-1%

3%

7%

11%

15%

19%

23%

27%

31%

35%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Mill

ions

USA Others HK, Macau Malaysia Japan Mainland China YOY Change Source: Taiwan Tourism Bureau

An HVS Quarterly Hotel Market Update — Hotel Market Performance PAGE 6

is expected to include an additional four cities by the end of 2012. The outlook for Taiwan’s tourism industry is positive; favourable travel policies and arrangements, tourism promotional campaigns and increasing interest in Taiwan are expected to support strong visitor arrival growth.

HOTEL MARKET PERFORMANCE

Hong Kong, Macau and Taiwan

All five markets tracked in the area started positive in 2012. Hong Kong, Taichung and Macau recorded double-digit RevPAR growth YOY in the first quarter, benefiting from the Chinese source market.

MOMENTUM IN HONG KONG, MACAU AND TAIPEI SLOWED; KAOSHIUNG, TAICHUNG ACCELERATED

Market 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Hong Kong Occupancy (%) 76.1 87.6 84.9 84.0 85.9 91.6 87.8 87.7 89.6 91.9 87.3Average Room Rate (HK$) 937 1,102 1,108 1,106 1,091 1,360 1,302 1,286 1,281 1,558 1,483RevPa r (HK$) 714 966 940 929 937 1,246 1,143 1,127 1,147 1,432 1,295RevPAR YOY Change (%) -26.1 -13.3 11.0 38.7 31.4 29.0 21.6 21.3 22.4 14.9 13.3

Macau Occupancy (%) 78.3 84.6 83.8 83.5 83.5 87.3 85.2 87.6 90.0 90.8 87.3Average Room Rate (MOP) 1,006 1,091 1,129 1,120 1,168 1,276 1,304 1,291 1,336 1,516 1,472RevPa r (MOP) 788 922 946 936 975 1,114 1,110 1,131 1,202 1,377 1,285RevPAR YOY Change (%) 6.1 8.7 2.6 -1.1 23.8 20.8 17.3 20.9 23.3 23.6 15.7

Taipei Occupancy (%) 70.3 77.7 72.4 75.9 69.6 83.1 75.9 71.1 71.0 83.3 75.5Average Rate (TW$) 3,401 3,517 3,515 3,706 3,441 3,662 3,683 3,932 3,684 3,964 3,975RevPAR (TW$) 2,391 2,731 2,544 2,813 2,395 3,042 2,794 2,794 2,616 3,304 3,003RevPAR YOY Change (%) -5.7 -0.8 8.7 16.7 0.2 11.4 9.8 -0.7 9.2 8.6 7.5

Kaoshiung Occupancy (%) 60.4 67.3 63.0 70.5 66.6 73.6 60.9 65.7 64.7 74.7 61.3Average Rate (TW$) 2,380 2,194 2,506 2,170 2,276 2,226 2,497 2,307 2,487 2,328 2,721RevPAR (TW$) 1,437 1,478 1,579 1,531 1,516 1,639 1,520 1,515 1,609 1,738 1,669RevPAR YOY Change (%) -10.2 -1.3 4.8 -1.9 5.5 10.9 -3.8 -1.0 6.1 6.1 9.8

Taichung Occupancy (%) 57.1 68.9 62.9 69.3 67.4 79.6 67.4 72.3 66.1 80.7 71.9Average Rate (TW$) 2,220 2,173 2,390 2,178 2,240 2,249 2,423 2,269 2,354 2,406 2,603RevPAR (TW$) 1,268 1,497 1,504 1,509 1,509 1,790 1,633 1,641 1,555 1,942 1,871RevPAR YOY Change (%) -13.9 -6.6 14.0 19.8 19.0 19.5 8.6 8.7 3.1 8.5 14.6

Source: HKTB, MOT, MGOT

Taipei is and will remain the top destination in Taiwan, particularly for first-time visitors. Shopping, Taipei 101 and Shilin Night Market are the must-do attractions in Taiwan. However, seasonality remains to be a challenge for Taipei, where Leisure demand dominates. Occupancy level in the first quarter was flat YOY, while average rate grew by 7.9% to reach TW$3,905. The opening of a number of quality hotels in Taipei, including the W Taipei, Radium-Kagaya and Grand View Resort in Beitou, facilitated average rate growth. Beitou, a suburb of Taipei, is one of the most well-known hot spring destinations in Taiwan. Its proximity to Taipei city centre attracts increasing

FIT demand from regional markets such as Japan, Hong Kong and Malaysia. The Mandarin Oriental Taipei is slated to open by the end of 2012 and is expected to support average growth in the market. Other international branded hotels coming online include the Okura Taipei (2012) and Indigo (2014).

SEASONALITY CHALLENGE IN TAIPEI

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30%

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60%

70%

80%

90%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

TW$

Average Rate RevPAR Occupancy

Source: Taiwan Tourism Bureau

PAGE 7 An HVS Quarterly Hotel Market Update — Hotel Market Performance

China

The first quarter is typically a slow demand season for the China hotel market, as it coincides with the holiday season in Western nations and the Chinese New Year, which brings business activities to a standstill. However, this period is traditionally a peak season for Sanya, and the destination again topped the overall hotel market table in the first quarter of 2012. Occupancy level slipped by 1.9 percentage point YOY, with additional new supply entering the market and the airport operating at capacity. Average rate also dropped by 4.8% YOY, resulting in a 7.1% decline in RevPAR performance. The occupancy level in Shanghai increased by 3.6 percentage points, while average rate declined marginally by 2.6%. Demand for Shanghai is set to recover gradually from the World Expo. Hotel supply will continue to increase but is expected to be absorbed in the long-term. Hotel development in Shanghai is also expected to expand to the greater Shanghai area as the city expands. Xiamen climbed to third position in the first quarter of 2012; while posting a 4.1 percentage point decline in occupancy, Xiamen hotels increased their average rate by 11.2% YOY. Among the top ten markets, Changsha recorded the strongest growth on all metrics. Occupancy rose by 10.3 percentage points to 84%, while

average rate increased by 21.8% to RMB337. Notably, the robust average rate growth is attributable to the relatively low average rate level. The Changsha market features the lowest marketwide average rate among the top ten markets. The opening of more than ten high-end hotels between 2013 and 2016 is expected to provide uplift to average rate levels here. Beijing has the largest hotel market in China, and its hotel performance continues to improve, backed by a well-performing, developed economy. However, the city’s large hotel room inventory limits rapid marketwide occupancy growth. Beijing hotels recorded healthy average rate growth of 12.3% YOY in the first quarter of 2012. The Shenzhen and Guangzhou markets share similar characteristics. Both cities recorded 59% occupancy, with an average rate of roughly RMB440.

A mature manufacturing industry and a growing financial industry are expected to be beneficial for the hotel market in Shenzhen and Guangzhou. Chengdu, Nanjing and Fuzhou registered similar RevPAR performance. Fuzhou, the smallest market, recorded the highest occupancy rate among the three markets. The Chengdu market posted 10.2% average rate growth YOY in the first quarter of 2012, supported by the addition of some 1,000 business and upscale hotel rooms in 2011.

In the five-star hotel market, Sanya continued to excel. Marketwide average rate rose 6.0% to RMB1,790, setting a new record. Harbin has the second-strongest five-star hotel market due to limited supply (with only two five-star hotels). The average rate at Shanghai five-star hotels slipped by 9.8% YOY in the first quarter, attributable to the holiday season and decreased international demand as the global economy remains uncertain. Guangzhou and Chengdu are relatively mature markets and their five-star hotel markets are largely supported by the MICE industry and various trade shows. Occupancy at Fuzhou dropped 7.4% YOY, while average rate grew 20.9% YOY. The Shenzhen market is relatively mature. Wenzhou has a small five-star hotel market (two hotels) and hence showed healthy performance.

TOP 10 HOTEL MARKETS – Q1 2012

0%10%20%30%40%50%60%70%80%90%100%

0100200300400500600700800900

1,000

RMB

Average Room Rate RevPAR Occupancy

Source: China National Tourism Administration

TOP 10 FIVE-STAR HOTEL MARKETS – Q1 2012

0%10%20%30%40%50%60%70%80%90%100%

0200400600800

1,0001,2001,4001,6001,8002,000

RMB

Average Room Rate RevPAR Occupancy

Source: China National Tourism Administration

An HVS Quarterly Hotel Market Update — Hotel Market Performance PAGE 8

First-Quarter YOY RevPAR Change and Size of Overall Hotel Market in 50 Cities in China

TRADITIONALLY SOFT DEMAND IN THE FIRST QUARTER DUE TO CHINESE NEW YEAR

Located on the eastern coast facing Taiwan, Xiamen is one of the first economic zones in China established in the 1980s. Today, Xiamen has developed a comprehensive industrial sector (textile, food processing and high-tech), as well as a strong tertiary sector. The MICE industry has seen rapid growth in Xiamen over the past years, given Xiamen’s strategic location opposite Taiwan, improved cross-strait relations, government support and a favourable climate. In general, hotel demand was stronger in the second and fourth quarters, driven by business and MICE demand. Five-star hotel supply in Xiamen remained stable in the observed period, supporting an occupancy level above the 60% mark. Average rate reached a record high of RMB770 in the first quarter of 2012, with additional high-end hotels

entering the market. The opening of the Westin, Kempinski, Hotel Indigo and DoubleTree in the first half of 2012 is expected to continue to support average rate growth, while exerting downward pressure on marketwide occupancy.

Source: CNTA

RECORD-HIGH AVERAGE RATE IN XIAMEN

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

100

200

300

400

500

600

700

800

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

RMB

Average Rate RevPAR Occupancy

Source: Taiwan Tourism Bureau

PAGE 9 An HVS Quarterly Hotel Market Update — Hotel Market Performance

Marketwide Performance of 15 Key Markets in China

SURGING REVPAR IN TAIYUAN AND LUOYANG; SUPPLY GROWTH PRESSURE IN SANYA 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 1Q YOY Change

Bei jing Occupancy (%) 56.5 61.7 59.4 51.4 60.2 67.4 59.6 54.2 2.8 ppAverage Rate (RMB) 437 418 456 460 472 458 505 517 12.3%RevPAR (RMB) 247 258 271 237 284 308 301 280 18.4%

Chengdu Occupancy (%) 69.8 70.8 68.8 59.2 69.2 73.8 71.3 58.4 -0.8 ppAverage Rate (RMB) 325 344 389 386 411 370 414 426 10.2%RevPAR (RMB) 227 243 268 228 284 273 295 248 8.7%

Chongqing Occupancy (%) 57.3 58.1 62.4 55.7 63.0 61.8 65.1 54.6 -1.1 ppAverage Rate (RMB) 283 246 288 268 284 286 297 312 16.4%RevPAR (RMB) 162 143 180 149 179 177 193 170 14.2%

Guangzhou Occupancy (%) 63.9 62.1 66.1 59.9 65.0 64.5 68.6 58.9 -1.0 ppAverage Rate (RMB) 411 309 556 419 519 392 512 440 5.1%RevPAR (RMB) 262 192 367 251 337 253 351 259 3.4%

Sa nya Occupancy (%) 55.8 51.3 65.5 78.6 61.9 58.4 74.9 76.7 -1.9 ppAverage Rate (RMB) 547 423 666 917 538 497 670 873 -4.8%RevPAR (RMB) 305 217 436 720 333 290 502 670 -7.1%

Shanghai Occupancy (%) 73.4 77.9 59.5 47.4 57.8 57.1 58.8 51.0 3.6 ppAverage Rate (RMB) 688 684 709 634 640 595 629 617 -2.6%RevPAR (RMB) 505 533 422 300 370 340 370 315 4.7%

Shenzhe n Occupancy (%) 62.9 61.8 66.5 61.2 66.4 65.8 69.1 59.8 -1.4 ppAverage Rate (RMB) 393 389 400 414 419 412 441 441 6.5%RevPAR (RMB) 247 240 266 253 278 271 304 264 4.1%

Liji ang Occupancy (%) 38.5 52.6 53.0 40.5 69.1 70.0 55.9 39.2 -1.3 ppAverage Rate (RMB) 144 126 111 130 124 186 195 173 32.9%RevPAR (RMB) 55 66 59 53 85 130 109 68 28.7%

Kunming Occupancy (%) 63.9 70.5 67.2 59.5 68.3 69.0 63.3 54.9 -4.6 ppAverage Rate (RMB) 266 275 251 302 310 285 297 306 1.4%RevPAR (RMB) 170 194 168 180 212 197 188 168 -6.5%

Nanni ng Occupancy (%) 66.7 62.0 66.8 62.7 66.3 72.0 72.0 62.9 0.3 ppAverage Rate (RMB) 206 208 238 216 220 213 247 226 4.7%RevPAR (RMB) 138 129 159 135 146 153 178 142 5.1%

Guiya ng Occupancy (%) 54.7 66.9 62.6 53.7 72.7 76.8 64.5 49.6 -4.1 ppAverage Rate (RMB) 255 242 275 288 298 321 319 320 11.3%RevPAR (RMB) 140 162 172 154 217 247 206 159 2.9%

Xi 'an Occupancy (%) 67.1 66.4 73.7 63.5 69.3 70.2 71.6 59.4 -4.1 ppAverage Rate (RMB) 358 345 368 427 401 422 433 474 11.2%RevPAR (RMB) 240 229 271 271 278 296 310 282 4.0%

Ta iyua n Occupancy (%) 49.8 63.1 57.9 50.9 65.5 74.3 65.7 56.1 5.2 ppAverage Rate (RMB) 334 289 273 246 253 237 406 337 37.0%RevPAR (RMB) 166 182 158 125 166 176 266 189 51.1%

Shijia zhuang Occupancy (%) 53.1 61.7 53.8 41.7 67.3 63.9 63.6 52.3 10.6 ppAverage Rate (RMB) 199 180 268 277 281 266 324 275 -0.6%RevPAR (RMB) 106 111 144 116 189 170 206 144 24.5%

Luoya ng Occupancy (%) 57.1 53.3 51.3 44.4 57.8 58.1 54.3 50.5 6.1 ppAverage Rate (RMB) 235 204 196 178 263 212 234 211 18.7%RevPAR (RMB) 134 109 101 79 152 123 127 107 35.1%

Source: China National Tourism Administration

An HVS Quarterly Hotel Market Update — Hotel Investment Risk and Return PAGE 10

HOTEL INVESTMENT RISK AND RETURN When valuing or investing in hotel real estate, as in any kind of business, one has to be aware of the level of risk involved in the asset class. There are several types of risk that apply, and while some arise from the macro environment and apply to most assets in the region, others are very specific and unique. There are eight different kinds of risk.

Market or Business Risk

Is the risk that net operating income will be affected by changes in the market, such as shifts in supply, shifts in demand or both. Market risk is most specific to the property and influenced by the type and location of the property and its stage in the market cycle.

Financial Risk

Is the risk related to the use of debt to finance an investment, which can result in default, pre-payment, or contractual terms that do not allow for changes in the face of interest rate changes. This risk is influenced by the type and amount of debt. Certain investors prefer not to have any debt on their property in order to reduce their financial risk exposure. Financial risk is driven more by macro conditions rather than the individual property.

Capital Market Risk

Is the risk that market value will be affected by changes in capital markets, such as changes in equity yield rates, mortgage yield rates, overall yield rates (due to changes in mortgage or equity yield rates), or overall and terminal capitalization rates (due to changes in overall yield rates). Capital market risk is influenced by factors only indirectly related to the individual asset, and includes changes in availability of capital (both mortgage and equity), changes in the level of interest rates and the rate of return for alternative investment opportunities.

Liquidity (Marketability) Risk

Is the difficulty of converting a real estate investment into cash at market value in a reasonable amount of time. Liquidity risk is both driven by the specific property and the wider market, and reflects the inefficiency of the real estate market. Short-term, opportunistic and non-real estate investors are often concerned about the ‘exit’, a risk that promotes the creation of an investment in derivatives and real estate investment trusts (REITs).

Environmental Risk

Is the risk that the market value of a property will be affected by its physical environment. This risk is influenced by perceived health hazards (eg, SARS), the costs of dealing with potential environmental problems (land remediation) and acts of nature such as flooding, earthquakes and weather conditions.

Political and Legislative Risk

Is the risk that a potential change in the legal system or legal factors will affect the market value of a property. Political risk is less prevalent in stable and generally strong economies, but can be a factor in emerging markets. Asset seizures by the government would the worst-case scenario that arises from political risk. Legislative risk is influenced by the ability to navigate the permitting process, tax law changes, environmental regulation and

PAGE 11 An HVS Quarterly Hotel Market Update — Hotel Investment Risk and Return

changes in land use regulation (zoning). The latter not only applies to a specific property, but also to the neighbourhood and other/competing districts within the area.

Inflation (Purchasing Power Risk)

Is the risk that unexpected inflation will cause cash flow from operations and reversion to lose purchasing power. At the same time, inflation drives interest rates and the availability of capital. Proper lease provisions can partially provide protection on the revenue side; however, such provisions are difficult to implement in the day-to-day business of hotels.

Management Risk

Is the risk that management cannot ensure that the property meets defined goals; this risk defines in great part the owner−operator relationship. Management risk is influenced by the competence of management, the type of property (limited-service versus luxury resort) and the fit between the two (and the owner). When conducting operator searches for clients, this match is an important factor we consider in evaluating and selecting operators.

Risk and Return

By nature, the above risks are interlinked and not always controllable. For example, an environmental disaster can warrant new legislation that changes capital markets with knock-on effects in financial risk and market risk. How can investors manage the above risks when buying or developing hotels? Sufficient due diligence is critical for anyone to get a good sense of the risks involved. Hence, the definition of market value includes mention of a ‘knowledgeable buyer’.

These risks need to be quantified and cumulated. At the same time, risk relates to probability or standard deviation of potential future financial outcomes. A greater standard deviation or lower probability/certainty or higher risk calls for a higher return in order to make a compelling investment proposition.

In an efficient market, riskier classes of real estate should call for a higher expected return. Hotels have the highest risk given that leases are on a daily basis and operations are complex. As a result, hotel investors should require a return premium over other assets. An investor educated in hospitality can be confident and comfortable with the higher risk profile.

HIGHER RISK CALLS FOR A HIGHER RETURN

Apartment

Office

Hotel

An HVS Quarterly Hotel Market Update — Hotel Investment Risk and Return PAGE 12

This typical distribution shows the return probability for hotels to be least symmetric. Offering lower probabilities for higher maximum returns than other classes, hotels also have a higher probability to incur a negative return on investment.

The return is commonly referred to as Internal Rate of Return (IRR), Equity Yield or Discount Rate. Notably, the IRR derives from the cash flow generated by an investment, whereas the Equity Yield relates to the capital structure and requirements of the investing entity. If the IRR does not exceed the Equity Yield (as a hurdle), the

investment should not be made. Through a mortgage, an investor can assume financial risk and ideally obtain a higher (leveraged) return on his equity. In this case, the Discount Rate would be different from the Equity Yield (which is usually higher than interest rates).

More importantly, equity yields are unique to each investor and depends on a range of factors, including the type of business (fund, conglomerate, REIT), the geographic location of the company and its main business interests, its balance sheet, and shareholder/investor expectations. Based on our work in the industry, we have come across a range of return requirements, starting from

8.0% over 20 years for development projects to 30.0% in three years for an opportunistic investor.

To determine a market’s equity yield, surveys can be conducted. Alternatively, the return profile of investment alternatives, such as stock in corporations, REITs or investment in a fund, can be reviewed. If asked, can you quantify your company’s Equity Yield?

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RETURN AND PROBABILITY (MATURE MARKET)

www.hvs.com HVS Hong Kong | Level 21, The Centre, 99 Queen’s Road Central, Hong Kong

ABOUT HVS HVS is the world’s leading consulting and services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 1980 by President and CEO Steve Rushmore, MAI, FRICS, CHA, the company offers a comprehensive scope of services and specialized industry expertise to help you enhance the economic returns and value of your hospitality assets.

Over the past three decades, HVS has expanded both its range of services and its geographical boundaries. The company’s global reach, through a network of 30 offices staffed by 400 seasoned industry professionals, gives you access to an unparalleled range of complementary services for the hospitality industry. The company performs more than 2,000 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe.

In Asia-Pacific, HVS is represented by six offices in Hong Kong, Shanghai, Beijing, New Delhi, Mumbai and Singapore. HVS hosts two of the main annual industry events in the region, namely the China Hotel Investment Conference (CHIC) in Shanghai and Hotel Investment Conference South Asia (HICSA). HVS publishes a wide range of leading research, which can be found in our online library.

The Hong Kong team has worked on a wide range of projects that include economic studies, hotel valuations, operator search and management contract negotiation, development strategies for new brands, asset management, research reports and investment advisory for hotels, resorts, serviced residences and branded residential development projects. HVS Hong Kong’s clients include New World Development, The Wharf, Sun Hung Kai, Samsung, SK, Lotte, Taj Hotels and Resorts, Agile Property Holdings, Citibank, LaSalle Investment Management, amongst others.

Cathy Luo is an associate of HVS Hong Kong, working primarily on hotel consulting assignments, including market studies and feasibility studies in the Asia-Pacific region. Graduating with a Bachelor of Arts (Honours) degree in Hospitality Finance and Revenue Management from Glion Institute of Higher Education, Cathy has accumulated a number of working experiences in various hotel operation departments and has a

solid understanding of hotel operations. Her previous experience in revenue management with Marriott International further enhanced her knowledge of hotel strategy planning and management. With work experiences in Dubai, Hong Kong and China, Cathy brings a comprehensive knowledge of the hospitality industry to HVS.

For further information, please contact dvoellm@hvs.com.

To sign up for this or other HVS newsletters, please visit www.hvs.com/register/

Daniel J Voellm, Managing Director of HVS Hong Kong, has provided advice in major markets including China, South Korea, Hong Kong SAR, Taiwan, Thailand, Vietnam, Cambodia, Singapore, Indonesia and Maldives. Prior to heading the Hong Kong office, Daniel Voellm was Vice President at HVS’ global headquarters in New York conducting a wide range of appraisals, market studies and underwriting due diligence

services in 22 states as well as Canada. Daniel brings a strong understanding of the hospitality industry to HVS. His experience in hotel and food and beverage operations in Germany, Switzerland, England and the United States is complemented by an Honours Bachelor of Science degree from Ecole hôtelière de Lausanne in Switzerland. Daniel works closely with key institutional and private owners of hotel properties, financiers, developers and investors, and has gained a strong understanding of their investment requirements and approaches to assessing market values of investment properties. Daniel further advises on property and concept development and strategy.

NEWSLETTER 2ND QUARTER, 2012