Vous êtes sur la page 1sur 41

RESEARCH REPORT

Asia-Pacific Real Estate Strategic Outlook

March 2012

RREEF Real Estate


www.rreef.com

Prepared By:
Mark Roberts Global Head of Research mark-g.roberts@rreef.com Koichiro (Ko) Obu Director Head of Research, Japan & Korea koichiro.obu@rreef.com Leslie Chua Vice President Head of Research, Asia Pacific ex Japan & Korea leslie.chua@rreef.com Orie Endo Assistant Vice President orie.endo@rreef.com Edward Huong Assistant Vice President edward.huong@rreef.com Paul Keogh Chief Investment Officer, Asia Pacific paul.keogh@rreef.com

Table of Contents
Executive Summary ............................................................................. 1 The Economy ....................................................................................... 3 Real Estate Capital Flows .................................................................... 8 Regional Property Markets................................................................. 11 Conclusion ......................................................................................... 34 Important Notes.................................................................................. 38 Global Research Team ...................................................................... 39

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Executive Summary
External Environment
The Asia Pacific region continues to outperform the rest of the world even as the EU debt crisis and anaemic growth in the United States pose external challenges. After reporting stellar growth in 2010, expansion slowed in 2011 for many key exporting nations in the Asia Pacific region including China. The much anticipated structural changes that economists were forecasting for many Asian countries the transition from exports to a greater reliance on domestic consumptionhas been slow to occur despite rising incomes and a general improvement in the standard of living for many middle class residents. Renewed concerns of a potential banking crisis in Europe have also started to impact funding, with some analysts even predicting a repeat of the global financial crisis in 2012. Many Asia Pacific nations, however, have enough tools, including reserves and fiscal policies, to address these external disruptions. For most of 2011, the Asia Pacific real estate markets battled asset price inflation, particularly in the residential sector. Credit tightening measures included several rounds of hikes in interest rates and down payments. However, as the Eurozone debt crisis began to unfold in the second half of 2011, many central banks took a 180 degree turn with policy rates. Australia, Indonesia, and Thailand were among those to adopt more accommodative rate policies to support economic growth as manufacturing and exports started to slow.

Outlook for Real Estate Returns


Economic obstacles aside, commercial real estate in general outperformed for most of 2011. Markets in the Greater China region, including Beijing, Hong Kong, and Shanghai, reported strong take-up, higher rents, and low vacancies. Singapore, Sydney, and Melbourne witnessed a tightening of vacancies resulting in higher rents. Recovery in Tokyo has been pushed back due to lacklustre demand. In Seoul, supply concerns continued to impact rents. Both Tokyo and Seoul are expected to bottom out in 12 to 18 months Performance in the regions industrial and retail markets, especially those in Hong Kong and Shanghai, saw a sharp turnaround in fundamentals and a burst in rental growth as vacancies trended lower. Chinas growing middle class has not only benefited domestic retail sales in the key cities like Beijing and Shanghai, but also cross-border tourism to Hong Kong, Singapore, and even Thailand. E-commerce has also had a positive impact on modern distribution centres and warehousing in Japan, Korea, Australia, and Singapore, offsetting slower growth in manufacturing and exports. Given the more subdued economic environment in the latter half of 2011, real estate performance in the region will likely be moderate in the first half of 2012. Value growth will be subdued given the external environment and the trade links to the West. Fundamentally, RREEF Real Estate does not foresee any major corrections but more of a cooling off as returns revert to more sustainable levels. By 2013, the regions economies should be expanding again at or above trend, creating an environment for returns to begin rising.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Strategic Recommendations
Office: Demand for office space weakened in the latter half of 2011. Funding for development is still tight, suggesting that new supply will remain in check. The higher yields in Australia and typically longer leases will continue to attract core investors. Assets in Japan and Korea provide healthy yield spreads, suggesting relatively good risk-adjusted returns. Retail: Prime retail is more vulnerable to consumer sentiment and is expected to grow at below trend. We favour suburban retail with a strong residential catchment which is more localised and less dependent on non-discretionary spending. Industrial: This sector appears to be relatively resilient so far. The longer leases and typically higher yields have made this property type more appealing. The proliferation of e-commerce points to higher demand for modern distribution centres and warehousing. Residential: Decreasing transaction volumes point to price softening, especially in the luxury sector. The curbs imposed by the Chinese, Hong Kong, and Singaporean governments to tame inflated prices appear to be taking effect. We do not expect the mass market to be impacted by those measures given the higher urbanisation rates and steady income growth. Thus, opportunistic investors may wish to scout for niche opportunities. More Vulnerable Markets: A strong reliance on finance and trade in Hong Kong and Singapore should not steer investors towards overly pessimistic positions in these markets. These two office markets have previously posted fairly strong rebounds following major downturns: 1999 to 2000 (post-Asian Financial Crisis), 2004 to 2007 (post-Severe Acute Respiratory Syndrome) and 2009 to 2010 (post-global financial crisis). Competition is keen, so the window of opportunity may be fleeting. Investment Risk: These markets include China and Southeast Asia. Structuring

and tax issues remain a major hurdle to investing in some of these countries. Considering the higher investment risk of investing in emerging markets, these markets offer some of the better return potential given their growing importance to the region and the rest of the world. Indonesia is expected to be one of the fastest growing economies in Asia in 2012, helped by strong macro fundamentals and surging investment. Moodys Investor Service also restored the country to investment-level status for the first time since the Asian financial crisis.
Distressed Investing: In China, cash-starved developers are becoming desperate. Beijing has taken an array of measures to rein in the luxury residential property market. Residential property prices fell for the fifth consecutive month in January 2012. Chinese banks extended a total of RMB 1.26 trillion in new loans to property developers and home buyers in 2011, down 38 percent from 2010. The funding gap will create opportunities as growth and urbanisation will support residential demand especially for mass housing. Price corrections provide a good re-entry point.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

The Economy
Growth in the Asia Pacific region will slow in 2012 in response to the European debt crisis and the fragile expansion in the United States. For export-oriented or higher-beta economies -including Hong Kong, Singapore, and Taiwan - external disruptions will inevitably cut into headline growth.
Exhibit 1.1 Real GDP growth (%)
As of December 2011
16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Real GDP Growth

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f Japan 2010 2011e 2012f 2013f Taiwan

Singapore

Taiwan

China

Thailand

Philippines

Malaysia

Hong Kong

South Korea

Indonesia

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: DB Global Markets, Asia Economics Monthly

The good news is that Asian policy makers have sufficient tools, both fiscal and monetary, to partly offset any economic drags coming from the West. Domestic demand has also supported Asias post-global financial crisis rebound, especially in the larger emerging economies. Strong government, household, and corporate balance sheets will help ease the process of recovery if the region is hit by slower global growth. Many Asia Pacific governments are shifting their priorities toward supporting growth. Australia, Indonesia and Thailand have already introduced back-to-back interest rate cuts in recent months. Nevertheless, fears of contagion have continued to grip markets. The Eurozone debt woes have shaken confidence in the global recovery, with world financial markets taking a beating in the latter half of 2011 and with global economic forecasts being scaled back. As growth slows, inflationary pressures will abate. With inflationary pressure easing across the Asia Pacific region and with the external environment turning increasingly hostile, more central banks in the region could implement rate cuts in 2012. Having been slow to raise interest rates following the global financial crisis, most economies are now seeing falling real interest rates. Indeed, real policy rates are negative in China, Hong Kong, Singapore, South Korea, Thailand, and Vietnam.
Exhibit 1.2 Inflation and 10-year government bond rates
As of December 2011
12% 10% 8% 6% 4% 2% 0% -2% Inflation Long Term Interest Rate

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

Indonesia Philippines

China

Thailand

South Korea

Australia

Singapore Hong Kong Malaysia

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: DB Global Markets, Asia Economics Monthly

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

2010 2011e 2012f 2013f Japan

2010 2011e 2012f 2013f Australia

2010 2011e 2012f 2013f

Exports and manufacturingtwo key components of many Asian economieshave also witnessed a steady decline in the latter half of 2011, reflecting the troubles of Europe and the sluggish growth in the United States. But this has been offset by stronger intra-Asian trade. Despite layoffs in the financial services and manufacturing sectors, unemployment remains fairly low when compared to the United States and Europe.
Exhibit 1.3 Export and import growth of Asia Pacific countries
As of January 2012
50% 40% 30% 20% 10% 0%
2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f Vietnam
2010 2011e 2012f 2013f

Imports (YoY)

Exports (YoY)

Indonesia

China

Thailand

Malaysia South Korea Philippines

Japan

Singapore Hong Kong

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: IHS/Global Insight

Exhibit 1.4 Unemployment rates of Asia Pacific countries


As of January 2012
8% 7% 6% 5% 4% 3% 2% 1% 0%

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f


2010 2011e 2012f 2013f

2010 2011e 2012f 2013f

Philippines Indonesia

Australia

Taiwan

Japan

Hong Kong

China

Malaysia

Vietnam

Singapore Thailand

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: IHS/Global Insight

With risks to both growth and inflation weighted to the downside, Asian currencies have less room to climb. In fact, the Singapore government has acted to ease monetary policy by slowing the pace of appreciation of its currency. Likewise, with inflation below 5 percent in China, there will be less support for the renminbi to appreciate as an anti-inflationary policy. Also, with Chinas growth slowing, renminbi appreciation could be seen as counter-productive when the central government may be trying to provide some support to growth.
Exhibit 1.5 Asia Pacific currencies against the US dollar and the euro
As of January 2012
Appreciation against USD or EUR 25% 20% 15% 10% 5% Depreciation against USD or EUR 0% -5% -10%
2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f 2010 2011e 2012f 2013f

Exchange Rate vs USD

Exchange Rate vs EUR

Australia

Malaysia

Thailand

Singapore Philippines

Taiwan

Indonesia

China

South Korea

Hong Kong Vietnam

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: IHS/Global Insight

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

2010 2011e 2012f 2013f

2010 2011e 2012f 2013f Australia

-10%

Regional Overview
Japan: After two straight quarters of contraction following one of the worst earthquakes on record, gross domestic product (GDP) in Japan increased at an annualised rate of 5.6 percent in the three months ending September 2011. Threatened by slower global growth and a rising yen near post-war highs against the U.S. dollar, Prime Minister Yoshihiko Noda ordered a fourth supplementary budget worth around 2 trillion yen to shore up demand in the worlds third-largest economy. South Korea: Expansion has recently been fuelled by exports and has been broadly in line with expectations. The country reported an annual rate of export growth of 11.9 percent year-to-date (YTD) in the third quarter of 2011 while private consumption expanded at 2.7 percent and investment contracted by 1.7 percent from the previous period. China: The economy grew at its weakest pace in 2 years in the fourth quarter of 2011 at 8.9 percent. The latest GDP figure is a further indication that the economy is heading towards a soft landing, and that was followed by more subdued industrial output and retail sales figures. The slightly more modest fourth quarter expansion follows growth of 9.1 percent in third quarter of 2011 and 9.5 percent in second quarter of 2011. Full-year economic growth slowed to 9.2 percent from 10.4 percent in 2010. Hong Kong: After expanding by 5 percent in 2011, economic growth is forecast to cool to between 1 and 3 percent in 2012 reflecting concerns about the Eurozone and US economies. The Hong Kong economy grew 0.3 percent in the fourth quarter from the previous three months, or 3 percent year-on-year. Inflation may slow to 3.5 percent in 2012, compared to 5.3 percent in 2011. Hong Kong will spend nearly HK$80 billion, or US$10 billion to boost growth. The measures, which include tax benefits, are expected to boost GDP by 1.5 percentage points in 2012. Singapore: The island states economy shrank for the second time in three quarters, highlighting Asias vulnerability to the European debt crisis even as manufacturing strengthens in China. GDP fell an annualised 4.9 percent in the fourth quarter of 2011 from the previous three months, when it climbed a revised 1.5 percent. The economy grew 4.8 percent in 2011 and may expand between 1 and 3 percent in 2012 according to latest government forecast. Australia: The economy in Australia grew faster in 2011 on consumer spending and mining-driven investment. Australias economy is being stimulated by a resource bonanza as China increased demand for minerals and energy. GDP rose 1 percent in the three months ending September 2011, after growing a revised 1.4 percent the prior quarter, the fastest pace in four years. Compared with a year earlier, the economy expanded 2.5 percent in the third quarter.

Credit Conditions
Credit markets have remained volatile, due to on-going uncertainty surrounding the Eurozone debt crisis, a possible recession resulting from fiscal austerity measures, increased capital requirements for European banks, and the downgrade of sovereign debt of many member states. This contributed to a significant widening of Eurozone sovereign and bank credit default swap (CDS) spreadsin some instances, to levels wider than at the depth of the last crisisin 2007/2008. Thus, rather than being contained to one or two countries at the Eurozone periphery, fears of contagion have spread to the larger

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Eurozone economies of Italy and Spainand even to the heart of Europe, where France and Germany have also seen credit spreads widen significantly. What is occurring in Europe implies volatility in sentiment of risk on / risk off trade impacts in the Asia Pacific region. As a result of volatile sentiment, risk premiums are elevated. In certain markets, investors may be compensated for this risk through higher initial yields.
Exhibit 1.6 Policy rates in major economies
As of 9 February 2012
% 9 8 7 6 5 4 3 2 1 0 Jan 00 Jan 01 United States Japan United Kingdom Eurozone Australia Japan China South Korea

% 9 8 7 6 5 4 3 2 1 0 Jan 00 Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11
Nov 11

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Sources: Bloomberg; RREEF Real Estate

Exhibit 1.7 CDS spreads in the US and selected European economies, 2008 2012
As of 9 February 2012
bps 600 550 500 450 400 350 300 250 200 150 100 50 0 Germany France Spain United Kingdom Italy United States

Jan 12

Sep 10

Jul 10

Sep 08

Sep 09

Nov 10

May 10

May 09

May 11

Sep 11

Nov 08

Jul 09

Nov 09

Mar 10

Mar 09

Mar 11

Jan 10

Jan 11

Jul 11

Sources: Bloomberg; RREEF Real Estate

In short, there is no denying the vulnerability the Asia Pacific region faces from both a fundamental and a market standpoint. In China, there are concerns that the bursting of a property bubble could result in a hard landing, and that the high leverage of local government investment vehicles could result in a fresh wave of non-performing loans. Severe domestic liquidity pressures, particularly on highly geared Chinese property developers in the luxury residential space, have also contributed to market weakness. This has undermined market sentiment and led to a downgrade to 2012 growth forecasts.
Exhibit 1.8 Loan growth in selected Asia Pacific economies
As of 9 February 2012
Australia 60% 40% 20% 0% -20% Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Feb-11 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Nov-11 Hong Kong Indonesia Japan Singapore Taiwan Thailand

Note: Data through December 2011 (except Thailand) Sources: Datastream; RREEF Real Estate Research

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Jan 09

Jan 12

Jan 12

For issuers and investors alike, 2012 is likely to be a challenging year. Any resolution of the debt crisis is likely to be protracted. This overhang, combined with the still weak United States growth outlook and concerns about Chinas slowing growth, sets the tone for the Asian credit markets in 2012. Although Asia enjoys fairly strong balance sheets, from both a sovereign and a corporate standpoint, the region is not immune to developments in Europe and the United States. A withdrawal of European bank lending from Asia could also hurt the regions growth prospects, even though local and regional banks are expected to cover some of the shortfall. In Japan, however, major local banks maintain favourable credit conditions for borrowers. The Bank of Japans Diffusion Index (DI) for the lending attitudes of banks improved for ten consecutive quarters through the third quarter of 2011 and stabilised in the fourth quarter, with a stable outlook going forward.
Exhibit 1.9 Real estate lending attitudes by Japanese banks
As of January 2012
growth of lending to new real estate projects (yoy, LHS) lending attitude DI of banks to all industries (RHS) lending attitude DI of banks to Real Estate industries (RHS) 20% 20 Diffusion Index (DI)

0%

-20%

Great Tohoku Earthquake of March 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

-20

-40% 08 09 10 11

-40

Sources: RREEF Real Estate based on Bank of Japan

Exhibit 1.10 Key macroeconomic risks


As of December 2011 Key Risks Extended weakness of European economies (short-term recession possible) US growth remains anaemic Concern about sustainability of debt levels in Europe and the US result in higher risk premium in asset pricing Failure of Asian governments to stimulate domestic demand and be too reliant on exports Government imposed measures to cool overheated residential markets are not removed on time Country specific risks China Policy dilemma: Pause or pre-emptive strike
Source: RREEF Real Estate

Likelihood High Medium Medium Medium Medium Medium Low

Importance High High High Medium Medium Medium Medium

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Real Estate Capital Flows


The United Kingdom, the United States, and global funds were the most active sources of investment capital for most of 2011. Whilst the listed REITs and unlisted funds were net acquirers in 2011, equity market volatility and tougher fundraising conditions suggest these groups may not be as active going forward. In addition, REITs have returned to trading at a discount to net asset value given the recent equity market turmoil. Also, private equity fundraising became more difficult in the second half of 2011, with volume down considerably from the previous six months.
Exhibit 2.1 Office initial yields and long-term interest rates
12%

Long Term Interest Rates


10%

Initial Yield

8%

6%

4%

2%

0%

Australia Sydney CBD

Australia Melbourne CBD

Hong Kong Overall

Japan Tokyo

Japan Osaka

Korea Seoul (Prime)

China Beijing Overall

China Shanghai Overall

Malaysia Kuala Lumpur KLC

Philippines Manila

Singapore Raffles Place

Taiwan Taipei Overall

Thailand Bangkok

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Note: Forecast of long-term interest rates were not available beyond 2012 for the Philippines and Singapore. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Exhibit 2.2 Retail initial yields and long-term interest rates


14%

Long Term Interest Rates


12%

Initial Yield

10%

8%

6%

4%

2%

0%

Australia Sydney CBD

Australia Melbourne CBD

Hong Kong Overall

Japan Tokyo

Korea Seoul

China Beijing Core

China Shanghai Prime

Malaysia Kuala Lumpur KLCC

Singapore Prime

Taiwan Taipei Prime

Thailand Bangkok

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Note: Forecast of long-term interest rates were not available beyond 2012 for Singapore. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Exhibit 2.3 Industrial initial yields and long-term interest rates


12%

Long Term Interest Rates


10%

Initial Yield

8%

6%

4%

2%

0%

Australia Sydney South

Australia Melbourne South East

Hong Kong

Japan Tokyo

Korea Seoul

China Beijing

China Shanghai

Singapore High Tech

Taiwan Taipei

Thailand Bangkok

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Note: Forecast of long-term interest rates were not available beyond 2012 for Singapore. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

According to findings by Jones Lang LaSalle (JLL), of the top 10 most traded city markets, five Tokyo, Singapore, Hong Kong, Seoul, and Shanghaiwere in the Asia Pacific region in 2011. The other five were London, New York, Paris, Washington DC, and Los Angeles. Offices accounted for more than half of total volumes in 2011 and commercial properties (including industrial and retail) more than 70 percent of total transactions.
Exhibit 2.4 Asia Pacific commercial real estate investment 2003 2011
Total volume, 2003 2011 2011
USD billons

Transaction volume by markets in the AP region,

125 100 75 50 25 0 2003 2004 2005 2006 2007 2008 2009 2010 2011

50% 40% 30% 20% 10% 0%

Japan China Australia Hong Kong South Korea Singapore Taiwan Thailand India Malaysia Other 0 1.7 1.7 1.3 1.7 5 5.4 12.5 11.0 10.0 9.1

19.2 17.3

Domestic Cross-Border %

Cross-Border

10 15 20 USD billions

Note: Figures exclude transactions below USD5mil, land acquisitions, and developments Sources: Jones Lang LaSalle; RREEF Real Estate

Total direct real estate investment volume in the Asia Pacific region stood at US$91 billion in 2011 or 6 percent over 2010 levels. Japan, China, and Australia remained the largest investment markets across the region. Owner-occupiers, financial institutions, and REITs dominated acquisitions, accounting for nearly half the volume in 2011. In the final quarter of 2011, China posted a 68 percent quarterly increase in volume, while Australia recorded a 45 percent uptick. Cross-border investment drove deals in Australia, while acquisitions in markets such as Japan, China, Hong Kong, and Singapore were largely led by local investors. Asia Pacifics capital markets continue to attract all classes of investors looking to access the regions stability and growth in an uncertain global economy. Institutional investors remain interested in the region and, with consolidation in the funds industry, the churn should provide opportunities for both buyers and sellers in 2012. In addition, RREEF Real Estate expects real estate transaction volumes for secondary assets and smaller markets to fall due to increased risk aversion.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Exhibit 2.5 Cross-border acquisitions in selected Asia Pacific countries, 2007 2011*
As of January 2012
USD billions 8 6 4 2 0 Americas Acq Americas Acq Americas Acq Americas Acq Industrial Office AsiaPac Acq AsiaPac Acq AsiaPac Acq EMEA Acq EMEA Acq EMEA Acq Americas Acq AsiaPac Acq EMEA Acq Americas Acq AsiaPac Acq EMEA Acq AsiaPac Acq EMEA Acq Retail 2008 2009 2010 2011

Australia
*2011 through November

China

Hong Kong

Japan

Singapore

South Korea

Sources: Real Capital Analytics; RREEF Real Estate

Exhibit 2.6 Total transaction volume in selected Asia Pacific countries, 2007 2011*
As of January 2012
USD billions 25 20 15 10 5 0 Industrial Industrial Industrial Industrial Industrial Office Office Office Office Apartment Apartment Apartment Apartment Apartment Office Apartment Retail Retail Retail Retail Retail 2008 2009 2010 2011

Australia
*2011 through November

China

Hong Kong

Japan

Singapore

South Korea

Sources: Real Capital Analytics; RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

10

Regional Property Markets


Japan
The Great Tohoku Earthquake that struck Japan in March 2011 resulted in a short economic recession. This turn of events has delayed the recovery of Japans real estate market. The observed yield spread remains one of the highest among major global real estate markets, though they vary by property types and locations. Growth will be underpinned by planned reconstruction initiatives for 2012 and 2013 announced and budgeted by the government. The unemployment rate was 4.5 percent at the end of 2011, a recovery from 5.0 percent in 2010. It is expected to recover further to 4.3 percent by 2013. There are general concerns, however, over the countrys macroeconomic conditions. These include low growth rates, aging population, its strengthening currency, and weakening demand for exports to Europe and the United States. Corporate capital spending fell 0.4 percent from the second quarter of 2011, while private consumption showed a gain of 0.7 percent. The Japanese government ratified a third supplementary budget totalling 12.1 trillion yen in November to support rebuilding. Japanese companies reduced capital spending by 9.8 percent from a year earlier, the second quarter of reduction. Machinery orders, an indicator of future capital outlays, decreased 6.9 percent in October from the previous month. Exports declined 3.7 percent from a year earlier in October. A major concern is Japans growing public debt. The countrys ratio of public debt to GDP (213 percent) is the highest among major nations. RREEF Real Estate, however, does not expect this to cause any immediate problem in Japans macro economy. The stable and low yield of the government bonds, about 1 percent, and the persistent strength of the yen point to a level of confidence in the market. Office: Tokyo has one of the worlds largest office inventories and the volume of transactions is the largest in the Asia Pacific region. Amid a sluggish economy after the earthquake, the vacancy rate stood at 9 percent in Tokyo and 11 percent in Osaka at the end of 2011the highest levels in a decade for both cities. Office demand varies across building specifications. Newer, higher quality, quake-resistant, and energy efficient buildings are attracting more tenants. The overall vacancy rates are expected to remain high in 2012 because the supply is expected to increase in the year. Landlords will be challenged to increase rents, but prime rents in the CBD are still expected to bottom out in 2012 due to strong demand for better/newer quality buildings. Given the wider yield spreads and the expectation of prices bottoming, the market offers attractive buying opportunities and there is an increasing number of global investors looking at the country as an investment destination. In addition, some of the larger local lenders are still offering affordable finance to real estate. Therefore, cap rates are expected to compress gradually in 2012. The number of loan defaults is increasing but lenders do not tend to release the assets at discount prices, so distressed-property opportunities are limited, except for small-sized properties.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

11

Exhibits 3.1 Tokyo office market


Supply, net absorption, and vacancy, 2000 2016 As of December 2011
2.4 2.1 1.8 1.5 Sqm (mn NRA) 1.2 6% 0.9 5% 0.6 0.3 0.0 (0.3)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net effective rents, 2000 2016 As of December 2011

10% Gross Rent (JPY '000 / tsubo NRA pm) 9% 8% 7% Vacancy Rate

23 22 21 20 19 18 17 16 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

15% 10% 5% 0% -5% -10% -15% -20% -25% Year-on-Year Change % 7 6 5 4 3 2 1 0


2016f

4% 3% 2% 1%

(0.6)

Gross Rent (Tokyo Avg, Miki Shoji) Gross Rent (Tokyo Avg, RREEF) Gross Rent Growth (Tokyo Avg, YoY, Miki Shoji) Gross Rent Growth (Tokyo Avg, YoY, RREEF)

Net Supply (Miki Shoji / RREEF) Net Absorption (Miki Shoji / RREEF) Vacancy Rate (Miki Shoji) Vacancy Rate (RREEF)

Note: Forecasts of net supply by Miki Shoji are not available. e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate

Retail: The number of large-scale shopping malls is increasing in Japan, but the average sales turnover of each property is not growing because of over-supply. Retail sales in properties with large-scale formats softened amid the economic slowdown in the second half of 2011, but the immediate impact from the earthquake appears to be fading. Sales are expected to remain relatively weak in department stores and large-scale shopping centres in the short-to-medium term compared to speciality stores along high streets and direct channels (such as online shopping and television shopping). The number of shoppers along major high streets in Tokyo and Osaka bottomed out after the trough following the earthquake in March 2011. Recovery in the number of foreign tourists is also lagging due to the current strong yen. The average speciality stores asking rents for major high streets in Tokyo and Osaka show mixed results. Retail assets on high streets are popular with investors (including J-REITs). Yields for properties in these prime high street districts have compressed, but shopping malls in provincial cities are currently less liquid.
Exhibit 3.2 Tokyo rent growth and initial yield, 2010 2016
As of December 2011
% 8 6 4 2 0 -2 -4
2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2011e 2011e 2011e 2015f

Rent Growth (LHS)

Initial Yield (RHS)

-6

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

12

Industrial: The industrial property sector in Japan has gone through an evolutionary change in the past decade, including changes in (1) asset format (from an inventory of small, owner-occupied properties toward a stock of large-scale leasable and investible properties); (2) asset function (from a stock of mostly traditional warehouses towards one that also includes modern, technologically advanced logistics centres); and (3) asset players (with the emergence of third party logistics companies as key tenants and new types of asset owners, such as logistics funds and REITs). The volume of new supply was very limited in 2010 and 2011 (due to the credit crisis and financial difficulties in previous years), and this steered vacancy rates on a recovering trend. They fell to a healthy level of around 5 percent in both Greater Tokyo and Greater Osaka in the third quarter of 2011. The declining trend of logistics rents levelled off in Tokyo and Osaka, with a stable outlook expected in the near term in both markets. Industrial assets are becoming popular among domestic and foreign investors seeking higher yields when compared to other asset types in Japan.
Exhibits 3.3 Tokyo total returns for major property types
As of December 2011
% 15 10 5 0 -5 -10 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f Income Return Capital Return

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate

Exhibit 3.4 Japans key opportunities and risks by property sector


As of December 2011 Sector Office Opportunity Largest stock in Asia Pacific with good asset liquidity High yield spreads Favourable market cycle with recovery expectation Stable rental income backed by strong diversified tenant industries Positive currency impact Higher yields for regional assets Fixed income stream Positive currency impact Resilient income stream and higher yields Evolving and expanding sector Positive currency impact Risk Supply increase in 2012 in Tokyo and 2013 in Osaka Potential slowdown in recovery of tenant demand Competition with J-REITs, private funds and foreign capital

Retail

Industrial

Suburban type assets oversupplied Competition from private funds and JREITs Online retailing Still limited number of active buyers at exit Stable but not growing rents

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

13

South Korea
South Koreas GDP growth slowed in the second half of 2011 as domestic demand weakened. In the same period, export growth by manufacturers accelerated, but private consumption slowed in line with the deterioration in consumer sentiment. Looking forward, downside risks are mainly external, especially the widely expected recession in Europe which could have a significant impact on its export-led economy. Economists expect a below-trend growth rate for South Korea in 2012, followed by a rebound in 2013. Unemployment held at a three-year low at 3.1 percent in November, unchanged from October. South Koreas job market is showing resilience even as the deepening debt crisis in Europe and slowing global growth threaten to cool an economy that has grown for 11 straight quarters. Industrial production unexpectedly fell in October while department store sales also dropped. The central bank cut its growth forecast for 2012 to 3.7 percent from 4.6 percent. This compares with a 3.8 percent gain in 2011. The government similarly projected the same growth rate, with the finance minister hinting that a supplementary budget may be needed in case of a sharp economic disruption because of Europe. Because of the external uncertainty, weaker anticipated growth, and low inflation, the Bank of Korea is expected to maintain the current policy rate in 2012 and resume the normalisation of monetary policy thereafter. Historically, the Korean won tends to be vulnerable to the state of the global economy and its financial system. Office: Office rents in Seoul have been resilient throughout this economic cycle but are vulnerable to supply shocks. In 2011 prime rents in the Seoul CBD softened because of a supply increase within the submarket (Center 1 and Ferrum Tower). Elsewhere, rents were stable in the Yoido and Gangnam business districts where supply was limited. The notable new supply in 2012 will be limited to IFC Seoul Tower 2 in the Yoido submarket. As the average vacancy rate in Seoul falls, rents are expected to bottom out within the next 18 months and to create attractive opportunities for core investors. Cap rates are higher than most of the Asian cities and are expected to remain relatively steady in the foreseeable future given the stable interest rate forecasts. Due to the unfavourable market sentiment in the last two years, foreign capital was less active in South Korea and the real estate market was dominated by domestic companies. However, the low volatility of the market (with its resilient demand fundamentals) carries the prospect for steady income returns and a gradual re-entry of global investors.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

14

Exhibit 4.1 Seoul prime office market


Supply, net absorption, and vacancy, 2000 2016 As of December 2011
400 12%

Net effective rents, 2000 2016 As of December 2011


30 18% 15% 12% 9% 6% 3% 0% -3% -6% -9%

Net Effective Rent (KRW '000 psm GFA pm)

28 26 24 22 20 18 16

300

10%

Sqm ('000 NLA)

200

8%

100

6%

4%

(100)

2%

14 12

(200)

0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Supply (JLL) Net Absorption (JLL / RREEF) Vacancy Rate (JLL) Vacancy Rate (RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate, Jones Lang Lasalle

Retail: Unlike most western and many Asian countries, department stores are still regarded as more prestigious than other store formats in South Korea. However, some new trends have begun to emerge. In the past, global fashion brands needed to enter into a joint venture with local partnersmostly department stores which exert strong control whenever they entered the South Korean retail scene. Today these brands tend to enter the market on their own, with the ability to act independently from department stores. Among submarkets, high street retail rents in Gangnam are rapidly catching up to Myongdong. The fundamentals of Seouls shopping centre market look resilient, with flat to low single digit annual growth rates expected in 2012. Foreign investors, however, might find Seoul more challenging. The shopping centre stock tends to be either owner-occupied or controlled by conglomerates, and base rents closely track CPI. Cap rates stood at 6.5 percent in 2011 and they are expected to remain at that level.
Exhibit 4.2 Seoul rent growth and initial yield, 2010 2016
As of December 2011
% 5 4 3 2 1 0 -1 -2 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f Rent Growth (LHS) Initial Yield (RHS) % 7 6 5 4 3 2 1 0

Office

Retail

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Industrial: Like Japan, the Korean industrial sector has evolved in recent years. Largescale modern leasable stock has been added, some of which was developed and/or is

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Effective Rent (JLL) Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

Industrial

Year-on-Year Change

Vacancy Rate

15

owned by global logistics companies. The government provides incentives to these logistics-related foreign investments, including tax relief, financial support, and flexible labour regulations. Gyeonggi provincewhich completely surrounds Seoul and Incheonis the most popular investment destination. Third Party Logistics (3PLs) firms are now reported to be more than 60 percent of the tenant base in Gyeonggi district. However, the overall volume of leasable (as opposed to owner-occupied) stock is still limited in South Korea and the vacancy rate tends to be vulnerable to supply increases. Also the liquidity of these assets is not consistent. Because of the risky nature of the asset, the lack of liquidity and transparency, cap rates are relatively high at around 9 percent in 2011 and are expected to compress.
Exhibits 4.3 Seoul total returns for major property types
As of December 2011
%

Income Return

Capital Return

20 15 10 5 0 -5 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate

Exhibit 4.4 South Koreas key opportunities and risks by property sector
As of December 2011 Sector Office Opportunity Steady income backed by resilient space demand Favourable market cycle with recovery expectation Higher yields Fixed income stream Resilient income stream and higher yields Yield compression Risk Potential slowdown in recovery of tenant demand Supply overhang Lack of transparency Lack of asset liquidity Online retailing Lack of transparency Lack of asset liquidity Vulnerable to supply increase

Retail

Industrial

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

16

China
Income growth and urbanisation remain the key themes for secular growth in China. Despite weakness in many developed economies, China is expected to remain a key engine of growth for the global economy supported by its manufacturing role which makes the country a prominent trading partner to the rest of the world. Efforts by the central government to further modernise its manufacturing base towards higher value-add industries would in turn enhance income levels. Similarly, its large population offers a vast market for its manufactured goods as the country moves from being a key exporter to a consumer market that is less reliant on external demand. Other factors that favour the Chinese economy include: Urbanisation trend: Chinas urban population surpassed that of rural areas for the first time in the countrys history in 2011 after three decades of economic development. It had 691 million people living in urban areas at the end of 2011, compared with 657 million in the countryside. Urban population: The number of people residing in Chinas towns and cities (691 million) is now double the total US population, according to Chinas National Bureau of Statistics. Buying power: Per capita urban disposable income increased 8.4 percent in real terms in 2011 to 21,810 renminbi. By the same measure, per capita rural cash income increased 11.4 percent to 6,977 renminbi.

As the housing sector in China is underpinned by urbanisation and is a major driver of economic growth, any slowdown in this sector would quickly register on Chinese economic growth. China is also supporting demand in global markets for many key commodities and as such it has lot of influence on global commodity markets. Whilst the measures above have helped stimulate economic activity, it has also created challenges, including at least two intractable problems: persistent inflation and high property prices. To help cool inflation and public anger over housing costs, Beijing subsequently began a series of tightening measures including reduced lending, new property taxes, and even prohibited the purchase of more than one home in 46 cities (a policy known as home purchase restrictions, or HPR) to discourage speculation. Residential: Chinas home prices fell for the fourth consecutive month in December 2011 after the government reiterated plans to maintain curbs that include higher down-payment and mortgage requirements, according to SouFun Holdings Ltd. Housing values dropped in 60 out of 100 cities tracked by the nations biggest real estate website owner, including the 10 largest cities.
Exhibit 5.1 Property price index of newly constructed residential commodity units in China
As of December 2011
Annual Pct. Chg.

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% 7/2005 1/2006 4/2006 7/2006 1/2007 4/2007 7/2007 1/2008 4/2008 7/2008 1/2009 4/2009 7/2009 1/2010 4/2010 7/2010 1/2011 4/2011 10/2005 10/2006 10/2007 10/2008 10/2009 10/2010 7/2011 10/2011

Note: Chinas National Bureau of Statistics ceased publication of the National Average edition of its Property Price Index in January 2011. From January 2011 forward, an average of the annual changes of 70 cities across China is used as a proxy for the National Average index. Sources: (China) National Bureau of Statistics

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

17

The government reiterated at its annual economic planning meeting in November 2011 that it would not back away from real estate industry curbs that are dampening home sales and pulling down prices. Shanghai, the nations financial centre, and other Chinese cities have also indicated they will continue to impose the home purchase restrictions in 2012. Meanwhile, the government has said it will continue to increase the supply of social housing. It plans to start the construction of 7 million homes in 2012, compared with 10 million in 2011. The completion will at least keep pace with 2010s 5 million units. RREEF Real Estate is of the opinion that the rapid rate of urbanisation in China supported by steady economic growth can only bode well for the residential market on the whole. Like any other asset class, the real estate sector will experience cycles as the market matures. Whilst Beijing will try its best to engineer a soft landing, nothing can be guaranteed. China has comparatively conservative mortgage lending practices, particularly in contrast to those at the height of the United States housing bubble. Firsttime buyers are required by law to come up with down payments equal to 30 percent of a home's purchase price with many putting down more. The central government is very unlikely to repeat the stimulus package of 2009, and the current home purchase restrictions and other tightening measures will be selectively loosened so as to limit the impact on the wider economy. As such, we expect a price correction to a more sustainable level but no imminent crash. Office: Both Beijing and Shanghai have established themselves as Chinas major office markets. Beijing serves as an administrative centre and is the largest city in the northern provinces. Shanghai has evolved into a major financial hub for the country and for many of the central and southern provinces. Although the construction pipeline in both cities looks full in the longer term, demand has now outstripped supply in both cities in the short term. As a result, vacancies have fallen from the high teens to single digits as rents have risen to levels similar to other major financial centres in the region. Furthermore, demand from domestic banks and corporations are now on par withand in some instances greater thandemand from multinational companies (MNCs) and international banks. Because of Chinas growing importance on the global stage, investment demand is expected to remain strong in the medium term. While foreign investors have formed the bulk of the office property investments in recent years, domestic corporations (including some of Chinas largest insurance companies) are increasing their investments as well. In fact, domestic capital has now become a formidable force in the local commercial markets. Yields have compressed but total returns have held strong due to capital appreciation. Rents in the meantime are forecast to climb above inflation rates in the medium term.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

18

Exhibit 5.2 Beijing office market


Supply, net absorption, and vacancy, 2000 2016 As of December 2011
2.0 1.8 1.6 1.4
Sqm (mn NLA)

Net effective rents, 2000 2016 As of December 2011

30% 27% 24% 21% 18% 15% 12% 9% 6% 3%


Vacancy Rate

450

40%

Net Effective Rent (RMB psm GFA pm)

400

30%

1.2 1.0 0.8 0.6 0.4 0.2 0.0


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

300

10%

250

0%

200

-10%

150

-20%

100
0%

-30%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

Net Supply (JLL) Vacancy Rate (JLL)

Net Absorption (JLL / RREEF) Vacancy Rate (RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate, Jones Lang Lasalle

Exhibit 5.3 Shanghai office market


Supply, net absorption, and vacancy, 2000 2016 As of December 2011
1.6 35%

Net effective rents, 2000 2016 As of December 2011


10
Net Effective Rent (RMB psm NFA pd)

40%

1.2

30%

30%

Year-on-Year Change

350

20%

0.8
Sqm (mn NLA)

25%
Vacancy Rate

20%

0.4

20%

10%

0.0

15%

0%

(0.4)

10%

-10%

(0.8)

5%

-20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Supply (JLL) Net Absorption (JLL / RREEF) Vacancy Rate (JLL) Vacancy Rate (RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Note: The sharp drop of net supply in 2003 was mainly due to a withdrawal of stock of 1.3 million square metres. Sources: RREEF Real Estate, Jones Lang Lasalle

In the other key markets, including Dalian, Chengdu, Chongqing, Guangzhou, and Shenzhen, supply is expected to outstrip demand. In addition, the current stock is of a lower quality, so more volatility in total returns could occur as rents adjust to the new supply. Retail: Prospects for the retail market are supported by rising incomes and urbanisation. However, the growing sophistication of many Chinese shoppers has resulted in a polarisation in the retail scene on the mainland. Whilst the Tier 1 cities continue to witness

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

(1.2)

0%

-30%

Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

Year-on-Year Change

19

a proliferation of more high-end retail concepts including specialty shops, other cities are more reliant on traditional anchor/multi-tenanted shopping centres. Malls that are quick to adapt continue to outperform the rest of the market. Competition has been intense with only a handful of active local and foreign investors (Wanda, China Resources Land, COFCO, CapitaLand, Swire, Kerry, Hang Lung, SHKP) participating in the market and providing the capital investment and management expertise. International brands including high street and luxury brands continue to seek new opportunities in China as domestic business and leisure travel is growing at a rapid pace. Yields are tight, especially for high-end shopping malls, and this reflects the scarcity of quality assets.
Exhibit 5.4 Beijing rent growth and initial yield, 2010 2016
As of December 2011
% 35 30 25 20 15 10 5 0 2011e 2012f 2013f 2014f 2015f 2016f Rent Growth (LHS) Initial Yield (RHS) % 7 6 5 4 3 2 1 0 2013f 2014f 2015f 2016f % 8 6 4 2 0 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f

2011e

2011e

2012f

2013f

2014f

2015f

2016f

Office

Retail

2012f

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Exhibit 5.5 Shanghai rent growth and initial yield, 2010 2016
As of December 2011
% 16 14 12 10 8 6 4 2 0 Rent Growth (LHS) Initial Yield (RHS)

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Industrial: The industrial property market in China is a less mature and more fragmented market than the office and retail property markets, but industry consolidation could accelerate as global players such as GLP, ProLogis, and Goodman increase their investments. The industrial/logistics market presents new potential given the expansion of many key infrastructure links across railway, air, and shipping platforms. The migration of secondary industry from coastal to inland areas will result in more demand for logistics space. A moderating global economy and the subsequent drop in international trade could potentially be offset by the promotion of Chinas domestic consumption. In addition, the lack of quality stock is expected to support rental growth. Yields are expected to trend downward, reflecting the growing maturity of the market.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

20

Exhibits 5.6 Beijing total returns for major property types


As of December 2011
% 50 40 30 20 10 0 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2015f 2016f 2016f Income Return Capital Return

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate

Exhibits 5.7 Shanghai total returns for major property types


As of December 2011
% 20 15 10 5 0 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f Income Return Capital Return

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate

Exhibit 5.8 Chinas key opportunities and risks by property sector


As of December 2011 Sector Office Opportunity Stable rental income with potential capital value upside Introduction of REIT scheme which would increase investment demand Positive currency impact Risk Supply overhang created by plans to either relocate or expand traditional CBD Competition from domestic capital Lack of transparency Shallow investment market Shallow capital markets AEI risk Rare to find income producing assets Competition from domestic capital Threat from online retail Lack of local management expertise and critical mass for tenant management Lack of transparency Reduction or abolition of import tax on luxury goods Development Lack of suitable product Development Shallow investment market

Retail

Resilient income stream Introduction of REIT scheme which would increase investment demand Positive currency impact

Industrial

Resilient income stream and higher yields Positive currency impact

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

21

Hong Kong
Facing the headwinds of a slowing Chinese economy, weak growth in the United States, and debt problems in Europe, Hong Kong is once again at risk of recession. As exports are 208 percent of GDP, any fall in external demand will have an impact on headline growth. Chinese tourists play an important role in the economy but their ability to force a decoupling from external demand from the European Union and United States is unlikely, although they may cushion the blow significantly. Following months of solid growth, signs of softness have started to emerge in the territorys retail sector at the end of the third quarter of 2011. Retail sales volume slowed sharply in September, decelerating from growth of 20.7 percent year-on-year in August to 15.2 percent. About 75 percent of human resources managers in the Hong Kong financial services industry are concerned that the global economic uncertainty will affect the Asia Pacific region, according to a survey by recruitment agency Morgan McKinley. Finance, real estate, and professional sectors accounted for 27 percent of the citys GDP in 2010, according to government data. Office: In light of the disruptive external economic environment, tenants are slowing their expansion and relocation plans. Rents in the core financial districts of Sheung Wan, Central, and Admiralty are particularly sensitive to economic conditions. However, a shortage of space, a lack of new supply, and low vacancy rates have resulted in prime rents holding up, at least for now. Based on previous cycles in 1998, 2003 and 2008, RREEF Real Estate does not expect these fundamentals to hold. Despite low vacancy rates going into past cyclical disruptions, rents still turned south as demand dried up, and banks surrendered space due to the economic fallout. With occupational costs on the rise, a two-tier office market has emerged in Hong Kong, separating the tenant base in prime submarkets from the cost-sensitive tenants who seek affordable alternatives, especially non-core locations in Kowloon East. To this end, the Hong Kong government has also made it a priority to support a plentiful supply of Grade A office construction in the rapidly emerging Kowloon East district as a major non-core commercial hub. Along with the redeveloped Kai Tak Airport site scheduled to complete in 2015/2016, a total of 7 million square feet of office space will be added in a location immediately adjacent to Kowloon Bay and Kwun Tong, highlighting how Kowloon East is set to emerge as the largest commercial district in Hong Kong. Historical patterns show that the Hong Kong office market has previously posted fairly strong rebounds following major cyclical turning points. We suggest monitoring the market. Competition is keen and the window of opportunity for acquisitions will close quickly.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

22

Exhibit 6.1 Hong Kong Central office market


Supply, net absorption, and vacancy, 2000 2016 As of December 2011
200 12%
100 105% 90% 75%

Net effective rents, 2000 2016 As of December 2011

Net Effective Rent (HKD psf GFA pm)

150

10%

90 80 70 60 50 40 30 20

Sqm ('000 NLA)

100

8%

45% 30% 15% 0% -15% -30% -45%

50

6%

4%

(50)

2%
10 0

(100)

0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Supply (JLL) Net Absorption (JLL / RREEF) Vacancy Rate (JLL) Vacancy Rate (RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate, Jones Lang Lasalle

Retail: Despite economic uncertainties, the retail sector is somewhat cushioned, with many of the traditional retail sub-districts able to maintain rents and still attract tenants. Strong tourism numbers, especially from mainland China, support this trend. In August 2011, monthly total visitor arrivals climbed 17.7 percent year-on-year to 4.1 million, posting a new monthly record surpassing 4 million for the first time. Moreover, a total of 2.9 million mainland visitors were recorded in August or a 23 percent year-on-year increase. The labour market was also surprisingly strong. The seasonally adjusted unemployment rate held at 3.4 percent in September. According to government data, about 73 percent of companies reported increases in wages in June 2011 compared with a year ago. The wage index increased 6.9 percent year-on-year in nominal terms in June 2011. Against this backdrop, retail sales increased 23.1 percent year-on-year to HK$34.2 billion in October 2011 on the back of a buoyant local consumption demand and tourist spending. The purchasing power of mainland tourists is likely to continue supporting the local retail property market. In the major retail sub-districts of Causeway Bay and Tsim Sha Tsui, demand for quality locations will remain robust. Available retail space in these districts will be absorbed quickly.

Exhibit 6.2 Hong Kong rent growth and initial yield, 2010 2016
As of December 2011
% 15 10 5 0 -5 -10 -15 -20 -25 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f Rent Growth (LHS) Initial Yield (RHS) % 8 7 6 5 4 3 2 1 0

Office

Retail

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Effective Rent (JLL) Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

Industrial

Year-on-Year Change

60%

Vacancy Rate

23

Industrial: The Hong Kong Trade Development Council (HKTDC) forecasts a gloomy outlook for exports in 2012, a response to the uncertain economic outlook for many of its trading partners. The HKTDC estimated that Hong Kong exports in 2012 will see only 1 percent growth in value but a 3 percent decline in volume. The HKTDCs export index dropped to 40.6 in the fourth quarter of 2011, down 8.9 points from the third quarter of 2011, and the second consecutive quarter with a reading below the benchmark level of 50. A reading below 50 indicates a pessimistic sentiment during the quarter and signals contraction in Hong Kong exports over the short term. The recent downgrade in Hong Kongs economic outlook is expected to curtail demand. Slower export growth is already reflected in the leasing market, where export-oriented 3PL operators have put expansion plans on hold. This trend is, however, offset to some extent by growing demand from retailers and local distributors, who benefit from the strong performance of Hong Kongs retail market. Although rents are expected to climb to record highs in the near term because of tight vacancies, increasing vacancy pressure will likely lead to a correction in 2012. The buyer-seller standoff over pricing will keep investment volumes low. Investors will also demand higher yields to justify higher borrowing costs and negative rental growth.
Exhibits 6.3 Hong Kong total returns for major property types
As of December 2011
% 25 20 15 10 5 0 -5 -10 -15 -20 -25 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f Income Return Capital Return

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate

Exhibit 6.4 Hong Kongs key opportunities and risks by property sector
As of December 2011 Sector Office Opportunity Stable rental income with potential capital value upside Risk Timing of recovery Highly cyclical market Competition from domestic funds as well as Chinese capital AEI risk Rare to find income producing assets Competition from domestic funds as well as Chinese capital Rare to find income producing assets Development Competition from domestic funds as well as Chinese capital

Retail

Resilient income stream

Industrial

Resilient income stream and higher yields

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

24

Singapore
Singapores open economy and real estate markets have been quick to feel the impact of the economic headwinds in the United States and Europe. The central bank has tightened monetary policy at each of the three semi-annual reviews before its October 2011 decision to slow gains in the currency while continuing with a modest and gradual appreciation. It guides the local dollar (S$) against a basket of currencies within an undisclosed band, and adjusts the pace of appreciation or depreciation. Singapores growth will inevitably be affected this year in a difficult global economy, the nations Prime Minister said in a New Year message. Singapore, home to the worlds second busiest container port, has remained vulnerable to fluctuations in overseas demand for manufactured goods even as the government boosts the financial services and tourism industries to cut its reliance on exports. Manufacturing rose 6.5 percent from a year earlier in the three months ended December 2011, after climbing a revised 13.4 percent in the third quarter. The services industry grew 3.2 percent in the last quarter of 2011 from a year earlier, after gaining 3.7 percent in the previous three months. With economic uncertainty rising, investors have taken a more cautious approach. While there was no redemption by funds, concerns about the Eurozone crisis led some openended German funds to put their properties on the market given that office prices appeared to be peaking. In addition, there was also a noticeable shift in investor interest from residential into other asset classes, namely strata-titled 1 industrial and commercial properties. Developers have capitalised on this trend and are packaging industrial properties into lifestyle-centric business solutions. Office: Over three million square feet of new office space was delivered in 2011. This is the largest amount of completed office development the city-state has experienced over the past decade. Whilst the new supply helped to improve the overall quality of the office stock, the office market has since softened due to uncertainties and volatility arising from the debt crisis in the Eurozone. For the first time since the market bottomed out in late 2009, the average monthly net effective rents for Grade A office space tracked by JLL in the Raffles Place/New Downtown micro-market fell in the fourth quarter of 2011 by nearly 5 percent. As a result of the weakening demand, the vacancy rate rose marginally. This follows approximately 2.3 million square feet of new office stock in the core CBD alone in Raffles Place/New Downtown. The increase in office stock was not met with corresponding new occupier demand as many service-oriented firms, including big financial institutions, have turned cautious towards expansion plans. Office fundamentals have also been impacted by a trend of more office tenants relocating some of their operations outside the CBD, including regional functions and back offices. The availability of suburban offices and business park developments similar to Grade A office buildings within the CBD has made this trend possible. On the investment front, the largest deal of the past five years was K-Reit Asias S$2.01 billion purchase of parent company, Keppel Lands, entire stake (87.5 percent) in the 885,000 square feet Ocean Financial Centre (OFC) in Raffles Place in the third quarter of 2011. The price for OFC, S$2,600/square feet, represents a new high for an office investment deal in Singapore in the post-global financial crisis period. With vacancy rates rising, further pressure on rents is inevitable and will create a favourable tenants market. Looking ahead, the markets future supply of office space over the next five years from 2012 to 2016 is forecast at 11 million square
Strata titling is a form of multi-tenant property ownership available in some countries that is akin to condominium and cooperative legal structures.
1

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

25

feet, or an average 2.2 million square feet per annum. Though Singapores office rentals and capital values look likely to soften from current levels, the magnitude of decline is expected to be tamer compared to previous cycles. Rents are forecast to decline by about 10 to 15 percent in 2012. Similar to Hong Kong, competition is keen in this segment.
Exhibit 7.1 Singapore Raffles Place office market
Supply, net absorption, and vacancy, 2000 2016 As of December 2011
300 250 200 150
Sqm ('000 NLA)

Net effective rents, 2000 2016 As of December 2011

20%

14
Net Effective Rent (SGD psf NFA pm)

80%

18% 16% 14%


Vacancy Rate

12

60%

10

40%

100 50 0 (50) (100) (150) (200)


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

12% 10% 8% 6% 4%

20%

0%

-20%

2
2% 0%

-40%

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

-60%

Net Supply (JLL) Net Absorption (JLL / RREEF) Vacancy Rate (JLL) Vacancy Rate (RREEF)

Net Effective Rent (JLL) Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate, Jones Lang Lasalle

Retail: This sector continued to receive a boost from foreign visitors in the final quarter of 2011. October 2011 set an arrivals record for the 10th consecutive month, with 1.1 million visitors. In the first ten months of 2011, overall visitor numbers rose by 15.5 percent yearon-year to about 10.9 million. As of October, this total was on track to achieve the governments full-year target of 12 million visitors. Furthermore, spending by tourists and local residents kept the cash registers ringing, and in October the retail sales index (excluding motor vehicles) was boosted by 5.9 percent year-on-year. Close to 500,000 square feet of private retail space was completed in 2011 which is below the five-year average of 670,000 square feet. Scotts Square was the only new mall that opened along Orchard Road in 2011, and it contributed approximately 75,000 square feet of retail space to stock. Major suburban malls that opened in 2011 include Changi City Point, ARC, Greenwich V, and Rochester Mall. CBRE estimates that 795,000 square feet of retail space will come on stream in 2012, of which only 14 percent will be in Orchard Road. Development activity in 2012 will focus on suburban areas and malls such as JCube and Vista XChange. Reflecting the weaker economic outlook, average rents for prime Orchard Road and the Regional/Suburban submarkets were unchanged in the final quarter of 2011. Looking ahead, the uncertainties in the global economic arena, combined with inflationary pressures could dampen employment and tourism prospects. This would in turn impact spending by consumers and visitors. Just before the last downturn, new mall completions occurred along Orchard Road in 2009. The subsequent effects of the global financial crisis weakened rents for prime retail space in Singapores premier shopping belt by about 10 percent from the previous peak in the third quarter of 2008 and have kept generally unchanged since then. Prime retail rents in the Regional/Suburban market were

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

Year-on-Year Change

26

more resilient, as there is a ready catchment of resident consumers who will still patronise the malls for basic necessities and non-discretionary items.
Exhibit 7.2 Singapore rent growth and initial yield, 2010 2016
As of December 2011
% 15 10 5 0 -5 -10 -15 -20 2011e 2011e 2011e 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f Rent Growth (LHS) Initial Yield (RHS) % 7 6 5 4 3 2 1 0

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Industrial: Weakness in the electronics and biomedical clusters weighed on the manufacturing sector and this resulted in a softer second half of 2011. Anxieties over the prospects for the global economy hurt business confidence and dented demand. Consequently, many manufacturers adopted a wait-and-see attitude regarding their space needs. This, combined with the seasonal year-end lull, resulted in a relatively quiet leasing market, which in turn tempered rental growth. Sales activity slowed as well in the four quarter of 2011. According to Colliers, the volume of strata-titled sales totalled 340 transactions in the quarter, tapering from the 575 and 496 transactions in the second and third quarters of 2011, respectively. A subdued mood is expected to continue in the first half of 2012. This also appears to be the sentiment of developers judging from their less than enthusiastic bids for industrial development sites. Owing to Singapores externallyoriented economy and the manufacturing sectors vulnerability to further softening of global demand, take-up for factory space could stay tepid in 2012. Plant expansions are likely to be put on hold while consolidation activities may potentially take root if the major economies fall deeper into the rut. As well, the increase in consolidation activity may also give rise to shadow space as firms look to sublease excess space to supplement their income. This would put downward pressure on rents. Nonetheless, a moderation in the pipeline of factory space from an estimated annual average of 7.2 million square feet between 2002 and 2011 to some 4.7 million square feet per year for the period between 2012 and 2015, could provide some relief to downward pressure on rents. Likewise, so will positive economic growth, which is forecast at between 1 and 3 percent for 2012 for Singapore. Yields are forecast to remain between 6 and 7 percent.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

27

Exhibits 7.3 Singapore total returns for major property types


As of December 2011
% 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2011e 2011e 2011e 2016f Income Return Capital Return

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Source: RREEF Real Estate

Exhibit 7.4 Singapores key opportunities and risks by property sector


As of December 2011 Sector Office Opportunity Stable rental income with potential capital value upside Positive currency impact Risk Timing of Recovery Supply overhang Highly cyclical market Competition from S-REITs and Private funds AEI risk Rare to find income producing assets Competition from S-REITs Development Competition from S-REITs Development

Retail

Resilient income stream Positive currency impact

Industrial

Resilient income stream and higher yields Positive currency impact

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

28

Southeast Asia
Despite the challenges of 2011, global investors have looked to Australia to escape the storm of uncertainty elsewhere, attracted by higher levels of transparency, generally positive economic conditions and higher yields. Tenants continued to expand in most office markets while industrial rents stabilised and in some cities, started to increase. Welllocated retail assets remained in strong demand from investors, despite weak retail trade and concerns about online retailing. Poor performance in Europe and the United States is a positive for Australian property from this perspective. Household spending rose 1.2 percent in the third quarter of 2011, while non-dwelling construction jumped 24.4 percent. Resource-related investment projects valued at A$456 billion (US$468 billion) have cushioned the fall in manufacturing and services hit by a record currency and subdued consumer spending. However, headwinds are starting to impact employment opportunities. Job growth in November was one of the slowest in 15 years as payrolls gained just 44,700 through the first 11 months of 2011, on pace for the smallest growth since 1996 after a record 362,300 increase in 2010. The RBA cut its forecasts for Australian economic growth and inflation for 2011 and 2012 as turmoil abroad made domestic consumers wary about spending. Reflecting those expectations, the currency has fallen 7.0 percent since it reached $1.1081 on July 27, 2011, the highest level since it was freely floated in 1983.
Exhibit 8.1 Southeast Asian countries and cities
As of January 2012

Source: RREEF Real Estate

Exhibit 8.2 Economic & demographic overview of Southeast Asia


As of January 2012
Singapore 2010 201115 14.5 4.2 2.8 2.1 2.2 2.2 98.9 90.6 1.7 1.7 Malaysia 2010 201115 7.2 5.1 2.2 2.4 3.5 3.1 55.1 58.1 1.7 1.7 Thailand 2010 201115 7.8 4.5 3.3 2.3 1.4 1.4 45.5 45.2 1.0 1.0 Vietnam 2010 201115 6.8 7.2 8.9 5.8 5.0 5.0 52.7 51.0 1.2 1.2 Indonesia 2010 201115 6.1 6.7 5.1 4.7 7.5 6.6 26.7 24.5 1.3 1.3

GDP Growth (% p.a.) Inflation (% p.a.) Unemployment rate (%) Fiscal balance (% of GDP) Population growth (% p.a.)

2010 Population (millions) Median age (years) Urbanisation (%) 5.1 40.6 100.0

201115 5.6 43.4 100.0

2010 28.2 26.3 72.2

201115 30.7 28.0 75.7

2010 67.7 33.2 34.0

201115 71.1 34.7 36.2

2010 88.3 2.5 30.4

201115 93.7 30.2 33.6

2010 234.6 28.2 44.3

201115 250.2 30.1 46.0

Sources: IMF World Economic Outlook (WEO) Database; United Nations Population Division; Bloomberg

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

29

While Singapore offers high-value core / core-plus investments, Malaysia and Thailand offer a wider variety of investment opportunities across the risk-return spectrum. The commercial property sectors in Kuala Lumpur are poised to benefit from Malaysias progrowth economic restructuring, especially in Islamic finance. Thailands elections in 2011 promised a calmer political backdrop that has allowed investor interest to return. A Southeast Asian portfolio could be augmented by more opportunistic offerings in Vietnam and Indonesia. While Vietnam has been grappling with the balance between economic growth and inflationary pressures, its structural fundamentals remain intact. Likewise, Indonesias economic resilience and increased political stability has been acknowledged, and this has helped encourage a resurgence in foreign investment. With exports expected to remain subpar over the short term, RREEF Real Estate foresees Southeast Asian authorities hastening the push to increase domestic demand. Strong fiscal positions enable the economies to undertake economic restructuring to rebalance growth. Additionally, Southeast Asias longer term outlook is bolstered by favourable demographic patterns, including relatively youthful and faster-growing populations (that will fuel demand for goods and services as well as real estate) beyond the current recovery phase.
Exhibit 8.3 Opportunities in the Southeast Asian property markets
As of December 2011
Asset Class Office Recommendation Well-located buildings with enhancement/ repositioning potential International shopping formats (multi-tenanted) in key locations supported by affluent/large residential catchments/key transportation nodes Kuala Lumpur Bangkok Ho Chi Minh City Hanoi Jakarta

Retail

Source: RREEF Real Estate

Australia
Despite the challenges of 2011, global investors have looked to Australia to escape the storm of uncertainty elsewhere, attracted by higher levels of transparency, generally positive economic conditions and higher yields. Tenants continued to expand in most office markets while industrial rents stabilised and in some cities, started to increase. Welllocated retail assets remained in strong demand from investors, despite weak retail trade and concerns about online retailing. Household spending rose 1.2 percent in the third quarter, while non-dwelling construction jumped 24.4 percent. Resource-related investment projects valued at A$456 billion (US$468 billion) have cushioned the fall in manufacturing and services hit by a record currency and subdued consumer spending. But headwinds are starting to impact employment opportunities. Job growth in November was one of the slowest in 15 years, on pace for the smallest growth since 1996 after a record 362,300 increase in 2010. The RBA cut its forecasts for Australian economic growth and inflation for 2011 and 2012 as turmoil abroad made domestic consumers wary about spending. Office: The impact of a two speed economy in Australia is now particularly apparent in the commercial real estate markets with CBD office rents in the capital cities of resource rich states of both Queensland (Brisbane) and West Australia (Perth) outstripping those of the

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

30

traditional finance-and-trade-centred CBDs of Melbourne and Sydney. New supply for office accommodation is expected to be tight. This will likely offset potentially slower demand especially in the key financial services economies of Melbourne and Sydney. However, with mining continuing to contribute to a significant proportion of economic growth, the office markets are more likely to surprise on the upside rather than disappoint. Australian office property has been the most popular property type for overseas investors. The total volume of Australian office property acquired by offshore purchasers increased from A$644 million in 2008 to A$3 billion in 2011, a 365 percent increase. Asian and North American investors were the dominant purchasers. The likely sellers in 2012 are the AREITS, with some indicating that they plan to sell non-core assets.
Exhibit 9.1 Sydney CBD office market
Supply, net absorption, and vacancy, 2000 2016 As of December 2011
250 16%
Net Effective Rent (AUD psm NFA pa)

Net effective rents, 2000 2016 As of December 2011


900 800 700 600 500 400 300 200 100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

40% 30% 20% 10% 0% -10% -20% -30% -40%


Year-on-Year Change

200

14%

150

12%

100
Sqm ('000 NLA)

10%
Vacancy Rate

50

8%

6%

(50)

4%

(100)

2%

(150)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

0%

Net Supply (JLL) Net Absorption (JLL / RREEF) Vacancy Rate (JLL) Vacancy Rate (RREEF)

Net Effective Rent (JLL) Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate, Jones Lang Lasalle

Exhibit 9.2 Melbourne CBD office market


Supply, net absorption, and vacancy, 2000 2016 As of December 2011
200 12%
500
Net Effective Rent (AUD psm NFA pa)

Net effective rents, 2000 2016 As of December 2011


20%

150

10%

450

15%

100
Sqm ('000 NLA)

8%
Vacancy Rate

350

5%

50

6%

300

0%

4%

250

-5%

(50)

2%

200

-10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

Net Supply (JLL) Net Absorption (JLL / RREEF) Vacancy Rate (JLL) Vacancy Rate (RREEF)
Net Effective Rent (JLL) Net Effective Rent (RREEF) Net Effective Rent Growth (YoY, JLL) Net Effective Rent Growth (YoY, RREEF)

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate, Jones Lang Lasalle

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f

(100)

0%

150

-15%

Year-on-Year Change

400

10%

31

Retail: Growth in online shopping is expected to outstrip growth in total retail turnover during 2012, continuing a trend that has developed over the last few years. As online retailing continues to expand, some retail sectors will be more at risk including those that are non-food or discretionary. Key drivers of online shopping include a stronger currency and the proliferation of tablet devices as well as the role of social media in purchasing decisions. Whilst the shopping centre will always form part of the retail landscape, its role within the overall retail experience is rapidly changing. Despite the defensive nature of shopping centres as an asset class (low vacancies, minimal incentives and embedded rental growth leases) occupancy costs will remain under stress in the short term, particularly in average quality centres. In this environment, both domestic and international retailers are focusing on the most productive and profitable locations. This will further contribute to the polarisation of retail assets with solid performing centres getting stronger, as tenants pay a premium to be in high-traffic/highturnover centres.
Exhibit 9.3 Sydney rent growth and initial yield, 2010 2016
As of December 2011
% 14 12 10 8 6 4 2 0 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2011e 2012f 2011e 2011e 2016f % 7 6 5 4 3 2 1 0 2011e 2011e 2011e 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2012f 2016f Rent Growth (LHS) Initial Yield (RHS) % 7 6 5 4 3 2 1 0

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Exhibit 9.4 Melbourne rent growth and initial yield, 2010 2016
As of December 2011
% 8 7 6 5 4 3 2 1 0 Rent Growth (LHS) Initial Yield (RHS)

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Industrial: Once a less-favoured asset class, over the past decade, industrial properties have emerged as an institutional real estate asset class in Australia. With a shortfall of prime grade industrial space to meet current demand, rental pressures are set to intensify over the next 24 months. As a result, RREEF Real Estate forecasts a significant upside in the national industrial markets from 2012 as the impact of the available shortage becomes more pronounced. And with e-commerce booming, this will only exacerbate the shortage of product especially in the key population hubs of Sydney and Melbourne. The steady pattern seen in 2011 would also see prime grade yields compress and values rise in 2012.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

32

Meanwhile, the lack of prime grade stock on the market is leading many owner-operators to take a design-and-construct approach rather than waiting for a suitable opportunity. Firms that lack a ready land supplythe shortage of zoned industrial land is often blamed on land planning policieswill encounter difficulties if attempting to enter the development market. At the moment, logistics and retail firms are driving demand. Yields are averaging between 7 and 8 percent, with total returns in the low teens.
Exhibits 9.5 Sydney total returns for major property types
As of December 2011
% 30 25 20 15 10 5 0 2011e 2011e 2011e 2014f 2015f 2016f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2015f 2012f 2013f 2012f 2016f 2016f Income Return Capital Return

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate

Exhibits 9.6 Melbourne total returns for major property types


As of December 2011
% 20 15 10 5 0 -5 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2014f 2015f 2016f 2012f 2013f 2011e 2011e 2011e 2014f Income Return Capital Return

Office

Retail

Industrial

e = estimate; f = forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate

Exhibit 9.7 Australias key opportunities and risks by property sector


As of December 2011 Sector Office Opportunity Stable rental income with one of the highest office yields in AP markets A-REITs / wholesale funds looking to diversify portfolios Positive currency impact Low vacancy Supply constrained market Resilient income stream Positive currency impact Supply constrained market Resilient income stream and higher yields Positive currency impact Supply constrained market Risk Two-tier economy benefiting resource rich states/cities but not service-related state/cities, i.e. Melbourne & Sydney Compressed yields Potential slowdown in demand Competition from private funds and foreign capital in search of yields AEI risk Competition from private funds and foreign capital in search of yields Online retailing Competition from private funds and foreign capital in search of yields Development Lack of suitable product

Retail

Industrial

Sources: RREEF Real Estate Research

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

33

Conclusion
Opportunities & Challenges
Economy: Growth in the Asia Pacific region will remain one of the brighter spots in this challenging global environment. Exports, a key component for many Asian countries have been moderating since the fourth quarter of 2011 and this is expected to continue given the on-going economic strains in Europe and the slow growth in the United States. Supply chain disruptions brought about by the devastating earthquake in Japan and the floods of Thailand will take time to resolve. With moderating global growth weighing on the regional outlook, policy makers across the Asia Pacific region are now looking at ways to boost consumption and shore up domestic activity. China forecasts the pace of growth to ease. Elsewhere, growth in Malaysia and Indonesia will likely hold out due to stronger domestic consumption but in contrast Hong Kong and Singapore will likely lag the pace of the regions overall economic growth. Beijing has fired the first salvo by cutting banks reserve requirement ratios for the first time in three years and bank lending in December was higher than forecast suggesting further easing may be in the works. Nonetheless, rebuilding will likely result in a surprise uplift in Australia, Japan, and Thailand towards the second half of 2012. Office: For the office market, RREEF Real Estate expects rents to fall modestly in 2012 in some markets. Corporates could expect a respite from surging occupancy costs including rents that have characterised tight locations in Beijing and Hong Kong. In particular, landlords that are finance and trade dependent will witness more near term volatility with a strong bias to the downside as banks and finance-related industries rationalise headcounts; these markets include Hong Kong, Singapore, and to a lesser extent, Sydney and Tokyo. But not all is lost. Supply will be a key determinant as much as demand. As new supply will be limited in Seoul in 2012, RREEF Real Estate is forecasting a bottom in the office market followed by a turnaround in the latter part of the year. Both Bangkok and Brisbane could witness a resurgence in demand as both markets were hit by floods. In the medium term, the combination of economic clout, strong property fundamentals, and the availability of capital will continue to position the region favourably in this period of uncertainty and thus keep it a magnet for investor interest.
Exhibit 10.1 Projected total returns of Asia Pacific office markets, 2011 2016
As of December 2011
2011 2012 2013 2014 2015 2016 Beijing - Overall Manila Sydney - CBD Bangkok Shanghai - Puxi Melbourne - CBD Nagoya Shanghai - Pudong Tokyo Hong Kong - Overall Seoul Prime - CBD Osaka Yokohama Guangzhou Hong Kong - Central Kuala Lumpur Taipei - Overall Singapore -25% 25% 75% 125% 175%

Cumulative Return Based on 2010-YE Price Level

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

34

Retail: Consumer confidence will be the key determinant for the outlook of the retail sector for many Asia Pacific nations. With further jobs cuts looming, moderating economic growth, and limited wage increases, retail demand will likely take a hit. However, this could be offset by government stimulus as well as structural changes in many Asian economies that allow them to be less dependent on trade and focus more on boosting consumption. To this end, high street and prime retail formatsespecially those dependent on tourism and discretionary spendingcould experience more moderate growth rates. On the other hand, suburban retail will likely be more resilient although the threat from online retail will continue to cut into market share. Discount (or warehouse) retail often performs best during weaker periods and will likely outperform other retail segments as consumers become more budget conscious. Domestic consumption has increasingly become a key driver of Chinas growth. Chinese nominal retail sales have grown at a compound annual growth rate (CAGR) of 18.1 percent between 2005 and 2010, according to Chinas National Bureau of Statistics. Chinas domestic consumption will be further unleashed as per capita household income rises. Similarly, this phenomenon is also being witnessed in many emerging Asian economies including Indonesia, Malaysia, Thailand, and even Vietnam.
Exhibit 10.2 Projected total returns of Asia Pacific retail markets, 2011 2016
As of December 2011
2011 2012 2013 2014 2015 2016 Bangkok Beijing - Core Kuala Lumpur - KLCC Shanghai - Prime Seoul Hong Kong - Overall Melbourne - RC Singapore - Prime Sydney - RC Tokyo Taipei - Prime -20% 0% 20% 40% 60% 80% 100% 120% 140% 160%

Cumulative Return Based on 2010-YE Price Level


Source: RREEF Real Estate

Industrial: While most indicators point to more moderate economic growth, the industrial property market has remained fairly resilient supported by tenants seeking more cost effective alternatives to prime CBD offices. While the region continues to drive the global economic recovery, it is neither immune to the Eurozone woes nor to the lacklustre recovery in the US economy. As a result, the outlook for the Asia Pacific industrial property market has turned more cautious. The more open economies, like Hong Kong and Singapore, will likely witness a further deterioration in economic activity due to shrinkages in their manufacturing output. Similarly, manufacturers in Japan and Korea will also see moderating export growth. On the other hand, the manufacturing sectors of China and Indonesia remained buoyant albeit at a more sustainable pace increasingly bolstered by their strong domestic markets and investment inflows. In China, policy makers have identified the logistics industry as one of the sectors to be supported by the National Development and Reform Commission. This includes the Logistics Industry Revitalisation Plan released in 2009 and Chinas 12th Five-year Plan (2011-2015) which has placed emphasis on the logistics industry. To capture the growth in domestic consumption, companies are expanding their distribution and logistics network throughout China. Companies will continue to push for higher efficiency of their supply

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

35

chains, such as outsourcing logistics services to 3PL service providers and upgrading their logistics facilities. Similarly in Australia, the growing acceptance and popularity of online retail has spurred a resurgence in warehousing and 3PLs. Whilst in Japan and Korea, there is greater need for such modern facilities.
Exhibit 10.3 Projected total returns of Asia Pacific industrial markets, 2011 2016
As of December 2011
2011 2012 2013 2014 2015 2016 Beijing Shanghai Seoul Melbourne - South East Bangkok Sydney - South Singapore - High Tech Hong Kong Tokyo Taipei -20% 0% 20% 40% 60% 80% 100% 120% 140% 160%

Cumulative Return Based on 2010-YE Price Level

Source: RREEF Real Estate

Understanding cycles: While the short-term outlook of the real estate market in many respects appears uncertain, the region presents relative opportunities when compared to other parts of the global economy. All real estate markets go through cycles, though they vary significantly across geographies and property types. The inflation hedging capability of real estate stems from the positive relationship between growth and demand for real estate. As economies expand, the demand for real estate drives rents higher and this, in turn, translates into higher capital values. History has shown that there is a fairly strong correlation between economic growth and rental and capital value growth. With this in mind, RREEF Real Estates investment views for the Asia Pacific region are based on the following assumptions: Whilst RREEF Real Estate expects moderating economic growth in the near term, we also forecast the pace of growth to pick up again in the latter half of 2012. Corporates have turned cautious but since the region is one of the few bright spots in the global economy, we expect any rationalising in headcount to end by mid-year 2012. Despite a dip in the pace of growth for China, we do not see a full-scale recession for the region. In addition, we see a third engine of growth from Malaysia and Indonesia as domestic consumption has held up fairly well. Rebuilding in Australia, Japan, and Thailand is likely to give a much needed short-term boost to their economies. Australias commodity sector will continue to benefit from emerging Asian demand, which would help offset any sluggish domestic demand. RREEF Real Estates forecast suggests a lull in the growth of rents and capital valuesresulting in tempered returns. However, as real estate fundamentals remain generally firm, our longer-term forecast on returns shows growth at long-term trend levels. For example, we are forecasting a drop in rents in Hong Kong and Singapore for 2012 but we expect a turnaround from 2013 onwards. Growth will resume at a more sustainable pace. Similarly, policies to cool the red-hot residential markets in China, Hong Kong, and Singapore will likely ease as inflation abates. Supply has also been kept in check due to the more stringent lending rules. The cost of debt will continue to be low as policy makers want to stimulate their local economies. Whilst we may see a resumption in lending by some of the larger US banks, European banks will largely be absent as they try to shore up their capital

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

36

base. We also expect greater participation of Asian lenders as they are less constrained than their European and United States counterparts.

Recommendations
The Asia Pacific region is a diverse mix of national, subnational, and urban markets rather than a cohesive unit. Location, location, location may be the proverbial saying but in times of uncertainty, it holds very true. RREEF Real Estate is forecasting moderating total returns in the near term as rents consolidate and growth prospects fall below trend. In Japan and Korea, rents and prices are finding a bottom with a turnaround not too far away. This time around, industrial and to a lesser extent retail returns, will be the better performing sectors. The markets still face various risks. In Japan, deflation and the national debt level are ongoing concerns. Government policies in Asia to cool the residential markets run the risk of restraining lending. The debt crisis in Europe, contained for now, has the potential to evolve into a contagion. Lastly, weak growth in the West may not be sufficient to lift global growth and stimulate Asian exports. RREEF Real Estate anticipates the following opportunities for 2012 in the Asia Pacific region:
Exhibit 10.4 Summary of opportunities in the Asia Pacific Region in 2012
As of December 2011 Market Japan Core O: Well-located quality offices in Tokyo for core investors at prices with wider than normal spreads over debt costs R: Well-located high-street properties in Tokyo Korea O: Grade A properties in Seouls three core CBDs. O: Grade A properties in Tier 1 cities, plus selected Tier 2 cities of wealthier provinces. R: suburban properties I: newer properties R: Well-located retail formats (multi-tenanted or warehouse retail) with strong catchments. I: Development of warehouses that support Chinas growing appetite for consumption. H: Selective opportunistic residential developments in second- and third-tier cities focusing on developers with strong track records. A tight lending environment and market stress may create selected entry points for opportunistic investors. Value-Add R: suburban properties I: newer properties Opportunistic O / R / I: Development projects and portfolios of bulk assets.

China

Singapore

O: Rents did not rebound as strongly in the previous cycle, leaving more room for upswing this time. The window of opportunity here will be narrow. O: Existing properties in the key cities (Melbourne and Sydney) and the capital cities of the resource-rich states (Brisbane and Perth).
R: Retail I: Industrial

R: suburban properties I: newer properties

Australia

I: Modern logistics centres, especially in the more populated states of New South Wales and Victoria.

Key: O: Office

H: Residential

Source: RREEF Real Estate

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

37

Important Notes
2012. All rights reserved. RREEF Real Estate, part of RREEF Alternatives, the alternative investments business of Deutsche Asset Management, the asset management division of Deutsche Bank AG offers a range of real estate investment strategies, including: core and value-added and opportunistic real estate, real estate debt, and real estate and infrastructure securities. In the United States RREEF Real Estate relates to the asset management activities of RREEF America L.L.C., and Deutsche Investment Management Americas Inc.; in Germany: RREEF Investment GmbH, RREEF Management GmbH and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154) an Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for RREEF Real Estates direct real estate business), and Deutsche Asset Management (Hong Kong) Limited (for RREEF Real Estates real estate securities business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N); in the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited and Deutsche Asset Management (UK) Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Limited and Deutsche Alternative Asset Management (Global) Limited; in addition to other regional entities in the Deutsche Bank Group. Key RREEF Real Estate research personnel are voting members of various RREEF Real Estate investment committees. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF Real Estate and its affiliates. This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer. An investment in real estate involves a high degree of risk and is suitable only for sophisticated investors who can bear substantial investment losses. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance.

RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012

38

Office Locations:
Frankfurt Mainzer Landstrae 178-190 60327 Frankfurt am Main Germany Tel: +49 69 71704 0 Hong Kong Floor 58 International Commerce Center 1 Austin Road West, Kowloon Hong Kong Tel: +852 2203 8888 London 1 Appold Street London EC2A 2UU United Kingdom Tel: +44 20 754 58000 New York 345 Park Avenue 25th Floor New York NY10017-1270 United States Tel:+1 212 454 6260 Paris Floor 4 3 Avenue de Friedland Paris France Tel: +33 1 44 95 63 80 San Francisco 101 California Street 26th Floor San Francisco CA 94111 United States Tel:+1 415 781 3300 Singapore One Raffles Quay #15-00 South Tower Singapore 048583 Tel: +65 6423 8385 Tokyo Floor 17 Sanno Park Tower 2-11-1 Nagata-cho Chiyoda-Ku Tokyo Japan Tel:+81 3 5156 6000

Global Research Team


Global
Mark Roberts Global Head of Research mark-g.roberts@rreef.com Kurt W Roeloffs Global Chief Investment Officer kurt.w.roeloffs@rreef.com

Americas
Alan Billingsley Head of Research, Americas alan.billingsley@rreef.com Marc Feliciano Chief Investment Officer, Americas marc.feliciano@rreef.com Ross Adams Industrial Specialist ross.adams@rreef.com Bill Hersler Office Specialist bill.hersler@rreef.com Ana Leon Property Market Research ana.leon@rreef.com Andrew J. Nelson Retail Specialist andrewj.nelson@rreef.com Alex Symes Economic & Quantitative Analysis alex.symes@rreef.com Brooks Wells Apartment Specialist brooks.wells@rreef.com Stella Xu Property Market Research stella-yun.xu@rreef.com

Europe
Simon Durkin Head of Research, Europe simon.durkin@rreef.com Gianluca Muzzi Chief Investment Officer, Europe gianluca.muzzi@rreef.com Jaroslaw Morawski Property Market Research jaroslaw.morawski@rreef.com Nazanin Nobahar Property Market Research nazanin.nobahar@rreef.com Arezou Said Property Market Research arezou.said@rreef.com Maren Vaeth Property Market Research maren.vaeth@rreef.com Simon Wallace Property Market Research simon.wallace@rreef.com

Asia Pacific
Koichiro Obu Head of Research, Japan/Korea koichiro.obu@rreef.com Leslie Chua Head of Research, Asia Pacific exJapan/Korea leslie.chua@rreef.com Paul Keogh Chief Investment Officer, Asia Pacific paul.keogh@rreef.com Edward Huong Property Market Research edward.huong@rreef.com Orie Endo Property Market Research orie.endo@rreef.com

www.rreef.com 39
I-026493-1.1