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Office Market

OutlOOk 2014

GlObal

ReseaRch and cOnsultinG

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contents

executive summary

1

economic Outlook

2

Office Market Fundamentals

4

Office investment Market

12

key trends in 2014

16

Where are the hotspots?

18

country Overview

china

19

hong kong

21

taiwan

22

Japan

23

south korea

24

singapore

25

india

26

southeast asia

28

australia

31

new Zealand

33

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executive Summary

the global economic recovery is underway but growth expectations in asia Pacific are lower

• The Us is not expected to increase interest rates significantly this year • Tapering will be in sync with the economic recovery

• Markets in Asia Pacific are currently in different interest rate cycles

• The impact of tapering on the Asia Pacific property market will be limited this year but the risk of interest rate hikes will intensify beyond 2014

Office demand is set to rise

• Office net absorption in Asia Pacific is expected to increase by 10% this year

• Whilst we are positive on the growth plans, companies operations in Asia Pacific will have increased competition for cAPEX with those the Us and Europe, and a need to balance cost, growth, and efficiency

• Demand will not begin to pick up until the second half of the year

new supply pipeline is significant, mainly in emerging markets

• The expected recovery in demand will not be strong enough to absorb new supply, particularly in emerging markets

Moderate rental growth expected

• Office rents in Asia Pacific will grow 2.7% in 2014 – compared to flat growth over the past two years • Markets expected to see rental growth include singapore, Auckland, Tokyo and Jakarta.

• Markets expected to see a rental correction include Mumbai, sydney, Melbourne and shanghai • Turning points: Hyper growth period in Jakarta will end; singapore and Tokyo are bottoming out;

seoul will approach the bottom of the market

strong investment demand supported by excess liquidity

• The diverging performance between the investment and occupier markets has mainly been due to the excess liquidity in the market.

• However, the overflow of liquidity will gradually weaken in the medium term as the global economic recovery continues and central banks move away from loose monetary policies.

• Office capital values in Asia Pacific will grow in line / slower with rents and are expected to strengthen by 2.6% in 2014, slightly slower than the 2.8% growth in 2013

Yield decompression risk will increase

• Yields are at historic lows

• singapore, Hong Kong and Taipei are among the highest risk markets • Other markets may see greater risk of yield decompression in 2015-2018

stronger appetite for higher risk assets as investors look for better returns

investors will move up the risk curve in search of better returns. Areas of focus could include:

• decentralised office assets, to capture the narrowing rental gap with core locations • offices in regional cities for higher yields

• value-added opportunities in core areas • Build to core for long-term investors

Where are the investment hotspots?

• Japan is expected to see strong activity but foreign investors will continue to encounter strong competition from domestic buyers; there will be opportunities for foreign funds to offload assets • New Zealand is becoming more attractive to investors (offers high yields and decent rental growth)

but remains a small market

• singapore is expected to see strong occupier demand and rental growth but yield decompression risk will limit value growth

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economic Outlook

Global economic recovery is underway but

growth expectations in asia Pacific are lower

Global economic growth is recovering according to Oxford Economics, which has upgraded its 2014 global GDP forecast from 2.1% in 2013 to 2.8% in 2014. These assumptions are based on the bottoming out of the economy in the United states, the recovering Eurozone and continued expansion in Japan, and also incorporate the downgraded outlook for Asian markets such as china, india and indonesia. The outlook for other markets in the region such as Malaysia, south Korea, and Vietnam remains positive. However, Asia Pacific will continue to outperform other major economic regions in 2014.

As the global economy improves, central banks are expected to exit their loose monetary policies in the coming years. However, the United states federal Reserve will keep interest rates low until it sees a more solid improvement in the economy. Monetary policy in the Eurozone and Japan will likely remain loose through 2014.

in Asia Pacific, authorities in china are focused on reining in lending and dampening the impact of fast credit growth over the past two years. Lending conditions will therefore remain prudent in 2014. controls on over-leveraged business sectors suffering from overcapacity – particularly in the manufacturing sector - will likely be stepped up. At the same time, authorities are determined to support small and medium sized businesses (sMEs) in order to support healthy economic growth.

There is a strong likelihood of interest rate increases in Malaysia, Vietnam and the Philippines. inflationary pressure is growing in each of these markets and there are signs of acceleration in economic growth, particularly in Malaysia and Vietnam.

The monetary tightening cycle and inflation figures look to have peaked in both india and indonesia. interest rates are set for a gradual increase in indonesia in 2014 but remain relatively high in india. following elections in Q2 2014 new governments in these markets will look to boost growth.

The low borrowing cost and high liquidity will continue in 2014. However, banks will become more selective towards lending to reflect government cooling measures and soaring property prices. This trend will be particularly prominent in Australia, china, Hong Kong, singapore and Taiwan.

Figure 1: 2014 aPac GdP Growth expectations

4.6 4.5 4.4 4.3 4.2 4.1 4.0 Y-O -Y Q1 2013 Q2 2013 Q3 2013 Q4 2013 % 2014 fOREcAsT

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That said, loan-to-value (LTV) ratios for prime commercial real estate have improved, and currently range from 65% to 80% for core assets in mature markets. funding gaps also exist for development projects in china, Japan and Australia, where banks are being prudent and reluctant to aggressively lend. Non-bank lenders such as private equity funds and life insurance companies are stepping in to fill the gap.

effects of tapering may be limited

10-year Us government yields have already entered the upward cycle after the federal Reserve stated its intention in Q4 2013 to cut bond purchases. cBRE expects the pace of tapering will be gradual and in sync with the cautious economic recovery in the United states. As a result, tapering is not expected to have a significant negative impact on the investment market although volatility in the financial markets in emerging countries is unavoidable. Asia Pacific is also under the effect of monetary easing programmes such as Abenomics in Japan and rate cuts by the RBA in Australia that are keeping interest rates low. since countries in Asia Pacific are at a different stage of the economic cycle their interest rates will not be synchronised with those in the United states. That said, the current level of pricing may be an issue as many markets are at post-Gfc highs whilst rents remain static. further discussion will follow in later sections of this report.

Figure 2: us Fed Rate and 10 Year Government bond Yield

Us fED RATE

fOREcAsT

Us 10 YEAR GOVERNMENT BOND YiELD

Source: Oxford Economics (As of Feb 2014)

1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 2017 Q1 2017 Q4 2018 Q3 2019 Q2 2020 Q1 2020 Q4 10 8 6 4 2 0 % develOPed MaRket –

lendinG Rates ReMain Flat lendinG Rates Will incRease sliGhtlYeMeRGinG MaRket –

2013 2014

Source: Oxford Economics (As of Feb 2014)

PH iL iPP iNE s c H iNA MALA Ysi A iND iA si NGAPORE AU sTRAL iA s. KOREA HONG K ONG iNDONE si A JAP AN 14 12 10 8 6 4 2 0 %

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Office Market fundamentals

Demand is set to rise

Backed by the gradual improvement in the global and regional economy, cBRE expects demand for office space to improve in 2014. A quick correlation analysis between GDP growth and net absorption of office space in Asia over the past 10 years shows that there is a clear and strong correlation (0.7) between the two variables. However, net absorption tends to lag quarterly GDP growth by two quarters as a whole. Many markets are still seeing weak office demand and it may be a further six months before they see an uptick in demand. As a result, net absorption in Asia is expected to rebound by 10% from the low level of 29 million sq. ft. in 2013 to around 32 million sq. ft. in 2014. The majority of demand will come from the continued growth of multinationals and expansion by domestic firms. companies in the insurance, technology, media, and telecoms (TMT) and energy sectors will be particularly active.

Figure 4: asia GdP Growth versus asia Office net absorption

14000 10000 8000 6000 4000 2000 0 4-QU AR TER A VG . Asi AN N ET A Bs ORPT iON 2001 Q4 2002 Q2 2002 Q4 2003 Q2 2003 Q4 2004 Q2 2004 Q4 2005 Q2 2005 Q2 2006 Q2 2006 Q4 2007 Q2 2007 Q4 2008 Q2 2008 Q4 2009 Q2 2009 Q4 2010 Q2 2010 Q4 2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q4 2014 Q2 2014 Q4 ‘000s sQ. fT.NfA 10 6 4 2 0 -2 -4 %

AsiA NET ABsORPTiON, LAGGED 2 QUARTERs AsiA GDP Y/Y GROWTH (% RHs)

Source: IHS Global Insight, CBRE Research (As of Feb 2014)

12000 Asi A GDP GROWTH Y -O -Y 8

in terms of employment outlook, regional sentiment continues to be positive with six markets in Asia Pacific ranked in the top 10 globally. corporates continue to add new headcount albeit at a slower pace of growth, mainly due to weaker-than-expected expansion in the financial sector. New Zealand, Australia and Japan are comparatively upbeat compared to previous quarter.

2013 Q4 2014 Q1

Source: Manpower Group

HONG

KONG cHiNA AUsTRALiA PAcificAsiA siNGAPORE iNDiA TAiWAN NEW ZEALAND JAPAN 45 40 35 30 25 20 15 10 5 0

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Multinationals expanding in asia Pacific to

drive further growth

for most multinationals the period of business consolidation is now over. Around 40% of companies surveyed in January 2014 said that their current level of business operations in the region is not optimal. companies want to invest further in Asia Pacific to drive up the percentage of revenue contribution from the region by an average of 9% over the next five years to 2018 (see figure 6).

iT & TELEcOMs 16.426.3 MANUfAcTURiNG & ELEcTRONics 20.227 AUTOMOTiVE 21.328 TRANsPORT & LOGisTics 24.731.9 cHEMicALs 25.933 PROPERTY & cONsTRUcTiON 21.133.3 ENGiNEERiNG 24.433.9

cONsUMER & RETAiL 35.4

26.5 cOMMODiTiEs 34.443.6 fiNANciAL sERVicEs 10.418.2 HEALTHcARE & PHARMAcEUTicALs 16.925.4 PROfEssiONAL sERVicEs 19.830.1

Figure 6: expected Revenue contribution from aPac

Source: Economist Corporate Network, Asia Business Outlook Survey 2014 (As of Jan 2014)

% iNcOME iN 2018 % iNcOME iN 2013

The continued growth in investment and drive to increase the revenue contribution from operations in the region will translate to more demand for office space in Asia Pacific in 2014. Whilst we are positive on the growth plans, companies' operations in Asia Pacific will have increased competition for cAPEX from those in the Us and Europe, and a need to balance cost, growth, and efficiency. in singapore, overall demand is expected to improve across a fairly diverse range of sectors. Both domestic and multinationals in Japan began to turn more active in the leasing market towards the end of 2013, with space in large floor plate buildings highly sought after. in Hong Kong, demand remains weak overall and largely depends on a recovery in the business and finance services sector. iPO activity is expected to pick up in Hong Kong this year1 and could result in an uptick in leasing demand from the all-important financial sector. india and the Philippines will continue to see growing office demand from the back office functions of financial services and iT companies as multinationals look to ‘rightshore’ supporting operations via information technology enabled services (iTEs) and business process outsourcing (BPO). However, these requirements will not involve cBD Grade A office space.

for some larger multinationals in key markets, occupiers will look to purchase office space as part of longer-term strategies to reduce occupational costs in Asia Pacific. A good example of this was Manulife’s purchase of an en-bloc building in Hong Kong’s Kowloon East to house its new headquarters.

competition for office space is growing

The level of business competition is set to increase among domestic firms, Asian multinationals and global multinationals in 2014. This situation will translate into a more competitive environment in the office leasing market as companies strive to secure the best space.

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Domestic occupiers continue to account for the bulk of leasing activity in key markets as multinationals remained relatively quiet in 2013. in Japan domestic firms have been taking on multinationals for the best quality space - and winning – as foreign groups are a lot more cautious on relocation and expansion and take longer time to make decisions. cBRE expects domestic companies will continue to lead the wave of flight to quality and relocate to newer and higher quality buildings in Tokyo during 2014.

Despite improving employment sentiment, Australia is seeing weak demand for office space in key national markets. Moves by multinationals are protracted as it remains time-consuming to obtain approvals. in sydney overseas companies – particularly in the finance sector – are focused on consolidation and downsizing, whilst in Melbourne, domestic financial and professional services firms have accounted for the bulk of leasing deals, although overall demand remains weak in 2014.

chinese companies continue to explore overseas markets and many are using Hong Kong as a stepping stone for global expansion. Normally they prefer to lease high quality office space in prime locations. They are also steadily improving their corporate real estate expertise and are becoming more strategic about the space they take and how they use it.

in Hong Kong, chinese companies displayed steady demand for space in 2013 and have been looking to buy floors / buildings if possible. Mainland firms now account for a significant portion of leasing demand in the city – although overall demand is still weak – and are increasingly competing with multinational tenants for the best quality space. The big Hong Kong landlords are also more willing to accept chinese companies as tenants.

in Beijing and shanghai, domestic occupiers are narrowing the gap between their foreign counterparts when it comes to strategic planning and the implementation of Alternative Workplace strategies (AWs). More so than Japan, domestic occupiers in china are increasingly competing with MNcs for prime office space in core locations.

in singapore, Asian-based conglomerates were among the most active in the leasing market during 2013. Japanese companies across a variety of sectors continue to choose singapore as their second hub outside Tokyo. Many Asian finance, legal and electronics companies continue to expand and account for a sizable portion of demand in the city. firms from south Korea and Malaysia have also been active in 2013 and the trend will continue into 2014. international financial institutions continue to remain on the sidelines but activity from large western multinationals such as insurance, legal and fast moving consumer goods (fMcG) companies continue to pick up in 2014. Domestic firms continue to grow steadily in other parts of southeast Asia. There has been strong leasing demand from the energy sector in Kuala Lumpur and in a number of cities in indonesia.

in india, whilst domestic firms are more upbeat than multinationals, local companies only account for around 20-30% of leasing transactions. Therefore demand in india still largely rests on multinationals. However, the ongoing caution among occupiers coupled with a supply glut will result in downward rental pressure in a number of submarkets in major cities.

Figure 7: how is the level of competition changing in aPac?

AsiAN MULTiNATiONALs 3.9% 3.1% 3.5% 24.8% 26.2% 31.1% 71.3% 70.6% 65.4% LOcAL fRiMs GLOBAL MULTiNATiONALs

fALLiNG NO cHANGE RisiNG

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insurance, tMt and energy still active; legal

and finance remain sluggish

foreign and domestic companies in the TMT, insurance and energy sectors were among the most active in the regional office market in 2013 and will continue to lead demand over the course of 2014. Pharmaceuticals companies are also expected to be more active in Japan, Taiwan and india this year.

companies in these comparatively buoyant sectors have plans to expand their presence across the region and continue to look for office space in both core locations and decentralised areas especially in Tokyo, Hong Kong, southeast Asia and india.

in Japan, the TMT sector, particularly iT and gaming firms, as well as insurance sector, are taking large office space. TMT firms are also active in Hong Kong but approvals for cAPEX remain a major hurdle.

in india, New Delhi is expected to see more demand from media and pharmaceuticals companies but iT/ iTes services will continue to account for the bulk of activity. finance and legal firms continue to contract in Mumbai. some of the more active companies are looking to situate back office functions in emerging locations such as Lower Parel as newer high-spec buildings are mainly located in these secondary or emerging locations.

in southeast Asia, singapore continues to see insurance companies in expansion mode. Elsewhere, companies in the energy sector - particularly oil and gas - are expected to continue driving leasing activity in Kuala Lumpur and Jakarta. in these markets the lack of suitable options in the cBD is pushing occupiers to look for office space in fringe cBD or decentralised areas.

in the financial and legal sectors foreign companies are displaying weaker demand compared to their domestic counterparts. This trend is expected to continue in 2014.

High level of supply from (mainly)

emerging markets

The development pipeline in the region varies with the majority of supply expected to be delivered in emerging markets as part of upgrading stock and structural changes. china and india collectively account for two-thirds of total new supply.

100 80 60 40 20 0 % sTOcK

Figure 8: development Pipelines Remain high in some Markets

VA c AN c Y AND DEVEL OPMENT P iPEL iNE H ANO i sHENZHEN NEW D ELH i G U ANGZHOU M UMBA i BANGAL ORE sHANGHA i H c M c JAKAR TA TO KYO sEOUL KU ALA L UMPUR TA iPE i PER TH BR is BANE ADELA iDE sYDNEY BANGK OK cANBERRA M ELBOURNE AU c KLAND BEiJi NG si NGAPORE H ONG K ONG M AN iLA (M AKA Ti

Source: CBRE Research (As of Feb 2014)

VAcANcY RATE Q4 2013 NEW sUPPLY iN 2014-2015 As % Of sTOcK

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Over-supply will be an issue in india, china (ex-Beijing) and parts of southeast Asia (mainly Jakarta, Vietnam, and Kuala Lumpur over the next two years). This will provide occupiers with a window of opportunity to expand their presence in the region by taking advantage of decreasing rents or negotiating a better leasing package and incentives.

Among developed markets, Tokyo and sydney are both expected to see a wave of new supply although the outlook for both markets is different. in Tokyo rent for prime office space is expected to increase as pre-commitment ratios in newly completed buildings is strong (up to 80%) thanks to firm demand from domestic corporates. Overall leasing demand is also rising, especially for good quality assets. in sydney, the wave of new supply will come only after the first phase of Barangaroo is completed in 2015. However, rents will continue to trend down in 2014 as the market has over 1 million sq. ft. of shadow space. There is concern in the market over the potential risk of significant backfill space coming up in the cBD when occupiers begin to move to Barangaroo in 2015.

singapore is expected to see up to 10% rental growth in 2014 as economic growth gathers momentum and leasing demand recovers. Despite limited new supply, rental growth in other major cities such as Hong Kong and Beijing is expected to be muted. in Beijing, occupiers are concerned about rising occupancy costs in a city where Grade A rents have more than doubled over the last four years. As a result, occupiers may return spaces to landlords when their current leases expire. The table below looks at markets vulnerable to oversupply risks in 2014.

MaRket 10Y aveRaGe

net absORPtiOn ('000 nFa) 2 x aveRaGe 10Y net absORPtiOn ('000 nFa) diFFeRence suPPlY/ deMand ('000 nFa) 2014/15 nO. OF YeaRs RequiRed RankinG Risk OF OveR suPPlY Hanoi 229 458 1,997 10.7 High

Kuala Lumpur 484 967 3,809 9.9 High

Mumbai 1,090 2,181 8,064 9.4 High Bangalore 2,778 5,555 19,100 8.9 High shenzhen 2,863 5,726 18,917 8.6 Moderate/ High sydney 520 1,040 2,615 7.0 High seoul 1,123 2,245 4,166 5.7 High shanghai 4,446 8,893 14,802 5.3 High Jakarta 2,423 4,847 7,488 5.1 High

New Delhi 3,149 6,298 9,339 5.0 High

Perth 390 780 1,092 4.8 High Tokyo 2,204 4,409 3,714 3.7 Moderate/Low HcMc 170 340 232 3.4 Moderate Taipei 372 744 462 3.2 Moderate Adelaide 138 277 103 2.7 Moderate Guangzhou 3,528 7,055 2,311 2.7 Moderate Melbourne 1,039 2,077 314 2.3 Moderate Brisbane 358 717 75 2.2 Moderate canberra 173 346 -19 1.9 Low

Hong Kong 1,820 3,640 -599 1.7 Low

Auckland 220 439 -83 1.6 Low

singapore 1,510 3,021 -702 1.5 Low

Bangkok 624 1,247 -321 1.5 Low

Beijing 4,128 8,256 -3,071 1.3 Low

Manila (Makati) 354 709 -489 0.6 Low

Source: CBRE Research (As of Feb 2014)

table 1: supply-demand dynamics of aPac cities in 2014/15

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With a few exceptions, most cities classified as having a high risk of oversupply are emerging markets where most existing office stock does not fit multinationals’ requirements in terms of quality, floor plate size, overall facilities management and amenities. That said, infrastructure improvements in emerging markets should continue to gradually drive up office investment and leasing demand in these locations. As such, net absorption may not fully account for the expected strong upgrading demand (in terms of gross take-up) for new supply in some of these emerging markets.

Source: CBRE Research (As of Feb 2014)

HisTORic PEAK AND LOW PEAK

LOW

cURRENT LEVEL

LONG TERM AVERAGE LOW RisK Of OVERsUPPLY HiGH RisK Of OVERsUPPLY

JAKAR TA H ONG K ONG BE iJi NG sUNGAPORE BANGK OK sHENZHEN H c M c AU c KLAND TA iPE i G U ANGZHOU TO KYO sEOUL MELBOURNE sYDNEY PER TH c ANBERRA KU ALA L UMPUR ADELA iDE BR is BANE BANGAL ORE NEW DELH i MUMBA i HANO i M AN iLA (M AKA Ti) 40 30 20 10 0 %

Figure 9: vacancy Rate Movement

VA c AN c Y RA TE , Q4 2013 sHANGHA i

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Moderate rental growth expected

Office rents in Asia Pacific will grow 2.7% in 2014, after nine consecutive quarters of flat rental growth. Rental movements in 2014 are clearer when we divide cities in the region into two groups: markets with current vacancy below and above the 10-year historical average.

in markets with current vacancy below the average historical vacancy rate, with exception of shanghai, rents will grow. in shanghai, new supply in 2014 and 2015 will be 2.5 times that of 10-year average new supply. Despite having a vacancy rate close to its historical average, the low pre-commitment rate in new projects is prompting landlords in Puxi, especially those in older projects along Nanjing West Road and Huaihai Middle Road, to decrease rents in order to secure tenants.

in markets where vacancy rates are above the 10-year historical average, a rental correction is expected, although at varying degrees. Tokyo is an exception as rental growth is expected in prime assets driven by the combination of diminishing vacant space and firm demand.

Figure 10: asia Pacific Office Rental index

180 160 140 120 100 80 60 iNDEX Q1 2001=100 2001 Q1 2002 Q3 2004 Q1 2005 Q3 2007 Q1 2008 Q3 2010 Q1 2011 Q3 2013 Q1 2014 Q4 OfficE RENTAL sERiEs

Source: CBRE Research (As of Feb 2014)

fOREcAsT

LAGGARDs LEADERs

Source: CBRE Research (As of Feb 2014)

MUMBAi sHANGHAi sYDNEY MELBOURNE TAiPEi BEiJiNG NEW DELHi sEOUL HONG KONG KUALA LUMPUR MANiLA BANGKOK

TOKYO AUcKLAND siNGAPORE JAKARTA

HO cHi MiNH ciTY

-4 -2 0 2 4

fOREcAsT ANNUAL RENTAL GROWTH iN 2014 (%)

6 8 10 12 40 30 20 10 0 -10 -20 -30 %

Figure 11: annual Rental Growth in 2013 vs 2014

ANNU AL RENT AL GROWTH iN 2013

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Leaders

Tokyo and singapore are bottoming out of the current trough and are expected to record the strongest rental growth in 2014. Tokyo will continue to see rental growth on the back of strong demand from both domestic and foreign occupiers and tightening availability due to strong pre-commitments in new office buildings. in singapore, office rents are expected to recorded double digit growth in 2014 due to continued strong demand.

in the Pacific, Auckland will see much stronger rental growth this year as tenants demonstrate a healthy appetite for newly built, premium and Grade A premises and the construction pipeline remains limited. Although emerging southeast Asia has seen a strong outflow of funds in the financial market since it was announced that tapering would begin, major cities in the region will continue to see strong office demand from domestic firms as well as from multinationals continuing to ‘right-shore’ portions of their businesses into markets such as Manila via BPO. coupled with low vacancy and low existing office supply, the increase in multinationals’ presence and investment into southeast Asia should push up rents in some major cities such as Manila and Bangkok. With vacancy now under control, Ho chi Min city has started to see rental growth and rents are expected to stabilise as half of the upcoming supply will be owner-occupied.

Laggards

Despite reviving demand from occupiers in many parts of the region, supply and weaker economic growth still pose some levels of risks in many markets. Australian cities, shanghai and indian markets are all laggards in terms of the rental outlook for 2014.

Australia’s slow economic recovery combined with historically high vacancy and upcoming supply means that downward pressure on effective rents will continue this year nationwide.

shanghai will see downward pressure on rents due to the high availability of new supply amid an already strong build-up of new office stock over the past decade.

Mumbai is largely influenced by sluggish demand from the finance sector as well as a large supply pipeline, and is expected to see continued pressure on rents.

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Figure 12: asia Pacific Office Rental and capital value indices 200 180 160 160 140 140 120 100 80 60 iNDEX Q1 2001=100 2001 Q1 2002 Q3 2004 Q1 2005 Q3 2007 Q1 2008 Q3 2010 Q1 2011 Q3 2013 Q1 2014 Q4 RENT cAPiTAL VALUE

Source: CBRE Research (As of Feb 2014)

fOREcAsT

GROWth Rent caPital value 2013 0.4% 2.8% 2014 2.7% 2.6%

Money supply has outpaced economic growth in many markets in Asia Pacific. This suggests that there is a large amount of excess liquidity available for investing including real estate assets. The ample liquidity is also supporting a more active fund raising market, especially in the public markets (REiT iPOs) The global iPO market saw a strong increase in activity in Q4 2013 and is expected to see a significant improvement in 2014, according to Ernst & Young (EY) Global iPO Trends Q4 2013 report . The total proceeds generated from iPOs worldwide will reach around Us$35-45 billion in Q1 2014, up from Us$24 billion from a year ago. in Japan, J-REiTs have been encouraged by the Bank of Japan’s asset purchase programme to raise capital for new acquisitions whilst in singapore s-REiTs have been active in expanding their portfolios in both domestic and foreign markets as they access fresh capital from debt and equity fund raising.

in terms of real estate co-mingled funds, there was an increase in the number of Pan Asia-Pacific focused private equity vehicles launched in 2013. We will continue to see fund raising activity in 2014 although investors are showing concerns over real estate pricing issues. Japan and south Korea continue to see an active domestic private real estate fund market with capital largely sourced from local pension funds and insurance companies. interest for china RMB funds seem to have cooled, reflecting worries over slower economic growth in china and overall real estate fundamentals.

cash rich institutional investors have been active in expanding their property portfolios in recent years as institutional investors look to increase their proportion of alternative investments. Recent regulatory changes permitting insurance companies in china, south Korea and Taiwan to invest in offshore property will translate into additional potential inflows into the real estate investment market. Most of these cash-rich new institutional investors are currently focusing on mature markets such as London, New York, and sydney.

Office investment Market

Strong investment demand supported by

excess liquidity

commercial real estate transaction volume in Asia Pacific reached Us$90.4 billion in 2013, a rise of 24.2% y-o-y. The figure was the highest annual total recorded since 2007. The office sector alone recorded Us$49 billion of purchases, up 30% y-o-y, despite the stagnant office occupier market. Office capital values in Asia Pacific have increased by 34.6% from Q4 2009, well ahead of rents which have risen by 18.4% over the same period.

The diverging performance between the investment and occupier markets has mainly been due to the excess liquidity in the market. The low cost of borrowing in particular has fueled investment demand from Asian investors.

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Figure 13: broad Money Growth vs nominal GdP Growth; Past 5 Years vs next 5 Years 2008-2013 cHiNA ViETNAM iNDONEsiA iNDiA PHiLiPPiNEs AUsTRALiA TAiWAN siNGAPORE HONG KONGMALAYsiA

THAiLAND s. KOREA

NEW ZEALAND

JAPAN

Source: Oxford Economics (As of Feb 2014)

-5 0 5 10 15

NOMiNAL GDP GROWTH (%, 5-YEAR AVG) 20 20 15 10 5 0 BRO AD MONEY GROWTH (%, 5-YEAR A VG ) LiQUiDiTY GROWTH ahead Of GDP GROWTH LiQUiDiTY GROWTH behind GDP GROWTH 2013-2018 cHiNA ViETNAM iNDONEsiA iNDiA PHiLiPPiNEs AUsTRALiA TAiWAN siNGAPORE HONG KONG MALAYsiA THAiLAND s. KOREA NEW ZEALAND JAPAN -5 0 5 10 15

NOMiNAL GDP GROWTH (%, 5-YEAR AVG) 20 20 15 10 5 0 BRO AD MONEY GROWTH (%, 5-YEAR A VG ) LiQUiDiTY GROWTH ahead Of GDP GROWTH LiQUiDiTY GROWTH behind GDP GROWTH

Yields at historical lows

As prime office yields in most parts of Asia have already compressed to historical low levels and capital values have risen to historical highs, room for further yield compression is limited. Given that real estate fundamentals have been lagging behind capital value growth over the past few years, vendors are likely to become more realistic towards pricing, which could mean that property yields will gradually move up. However, given that the financing cost for owners is low and that the economic outlook has turned slightly more positive in recent quarters, the likelihood of a significant uptick in yields in 2014 is limited. stronger economic growth and improving real estate market fundamentals will reduce the level of investment risk in real estate and lower the risk of a property bubble. in addition, commercial real estate owners still enjoy a positive yield spread over government bonds, although the spread will narrow going forward.

Hong Kong and Taipei have the lowest prime yields in the region. Both markets have already witnessed a slowdown in investment activity and speculators have largely stepped out from the market. These two markets are expected to see a mild upward adjustment in yields as vendors will soften their stance towards asking prices. since the Taiwanese government has restricted real estate transactions by insurance companies since 2012 the possibility of yield de-compression is high.

singapore is seeing a recovery in office rents but investors will likely keep price expectations unchanged until they see stronger signs of sustained rental growth, suggesting that yields could move upwards in 2014. Hong Kong and singapore are the two markets influenced most strongly by the Us interest rate cycle and will therefore endure the biggest impact from the upward cycle in Us bond yields.

Yields for other markets will generally remain flat. in Australia, the high yield levels compared to other developed markets and reduction in the borrowing rate in 2013 drove down yields for sydney prime offices by 25 bps last year. However, as no further rate cut is expected in 2014 and the occupier market will remain weak, room for trimming yield requirements will be slim.

However, the overflow of liquidity will gradually weaken in the medium term as the global economic recovery continues and central banks move away from loose monetary policies. Money supply in many Asia Pacific markets, Japan and china being the exceptions, will grow either slower or in par with economic growth in the coming five years. While this tightening will take place in a slow and gradual way, investors will become more apprehensive towards the current aggressive levels of pricing, particularly if they leverage on the positive yield spread on the low lending rate. Office capital values in Asia Pacific will grow 2.6% in 2014, slower than the expected 2.7% rental growth.

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4.5

sHANGHA

i

MELBOURNE

6.7

Figure 14: Prime Office Yield vs 10-Year Government bond Yield

15 13 9 7 5 3 1 -1 -3 % 15 13 7 5 3 1 -1 -3 %

Source: CBRE Research, Oxford Economics, IHS Global Insight

11 11 9 M UMBA i 9 M AN iLA 8.9 N EW D ELH i 8 AU c KLAND 6.5 6.3 BANGK OK 6.1 sYDNEY 6 KU ALA LUMPUR 4.6 BE iJi NG 4.4 sEOUL 4 si NGAPORE TO KYO 3.3 2.9 HONG K ONG

fOREcAsT OfficE YiELD (2014) TEN YEAR HiGH

TEN YEAR LOW

YiELD sPREAD (2014)

2.2

TA

iPE

i

Limited capital value growth

The limitation on yield compression and stagnant rental growth means that growth in capital values will be very limited for core investments. We expect just four markets– Auckland, Jakarta and Tokyo – to see above 5% value growth in 2014. in addition, any major shocks in the global financial market could trigger an outflow of funds from emerging markets, which could swiftly change investor sentiment in countries such as indonesia and india.

Total returns for the coming year will therefore largely come from rental returns. Auckland, cities in Australia, several southeast Asian markets (Jakarta, Manila and Bangkok) and india all provide relatively higher yields. However, in emerging markets, the relatively small size of the office market, entry barriers for foreign investors and high borrowing rates mean that tapping the return potential is not easy. indonesia has enjoyed the strongest rental and capital value appreciation of any market in the region in recent years but this hyper growth phase is likely to have come to an end.

Japan and New Zealand are likely to be the exceptions to the trend. in Japan, yield compression is expected to become more prominent across all market segments and other property types in regional cities on the back of improving real estate fundamentals, strong investment sentiment and loose monetary policy. in New Zealand, following the strong firming of yields seen in 2013, the rate of strengthening is expected to ease off in 2014 due to the impact of interest rate rises as offshore groups continue to seek high-yield investments in Auckland.

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Yields tO cOMPRess Yields tO ReMain stable Yields tO de-cOMPRess

cAPiTAL VALUE GRADE A RENT

Source: CBRE Research (As of Feb 2014)

MELBOURNE NEW DELH i TA iPE i si NGAPORE MUMBA i sYDNEY KU ALA L UMPUR BANGK OK AU c KLAND TO KYO Y-O -Y MAN iLA BE iJi NG JAKAR TA sEOUL 14 12 10 8 6 4 2 0 -2 -4 HONG K ONG sHANGHA i

Figure 15: Office capital value and Rental Growth, 2014 Forecast

MaRket Rental chanGe caPital value

chanGe YeaR-end 2014Yield as at tOtal RetuRn OutlOOk

AUcKLAND 7.5 - 8.5% 12 - 13% 6.5% 18.5 - 20% JAKARTA 6 - 12% 8 - 10% 9% 17 - 19% TOKYO 5 - 7% 10 - 15% 3.3% 13.5 - 18.5% MANiLA 1 - 4% 2 - 5% 8.9% 11 - 14% BANGKOK 3 - 7% 3 - 7% 6.3% 9.3 - 13.3% KUALA LUMPUR 2 - 3% 2 - 3% 6% 8 - 9% NEW DELHi 0 - 1% 0 - 1% 8% 8 - 9% BEiJiNG 0 - 1% 2 - 5% 4.6% 7 - 10% sEOUL 0 - 1% 1 - 5% 4.4% 5.5 - 9.5% MUMBAi 2 - 4% 2 - 4% 9% 5 - 7% MELBOURNE 1 - 2% 1 - 2% 6.7% 4.7 - 5.7% siNGAPORE 10% 0 - 5% 4% 4 - 9% sYDNEY 2 - 3% 2 - 3% 6.1% 3.1 - 4.1% HONG KONG 0 - 3% 0% 2.9% 2.8% TAiPEi 0.3 - 0.6% 0 - 0.5% 2.2% 2.2 - 2.7% sHANGHAi 0 - 3% 0 - 3% 4.5% 1.5 - 4.5%

Source: CBRE Research (As of Feb 2014)

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key trends in 2014

Driving value out of real estate

Most occupiers looking to downsize and consolidate have now already done so and the focus has now shifted to cost reduction and space efficiency. Occupiers are placing an emphasis on the more intelligent and more efficient use of space and are putting more thought behind their corporate real estate portfolio strategy in the region. Many firms – both domestic and international – in china are evaluating occupancy costs and how to improve workplace efficiency. in india, a number of domestic firms are looking to expand but are wary of taking expansion space and are therefore being creative and restacking or improving efficiency in their existing space.

continued adoption of multi-base operations

Many markets will continue to see occupiers, and/or some business lines, move away from cBDs to decentralised areas in search of more cost-effective space. catalysts of this trend include improving infrastructure; lower rental costs; the high quality of new supply, particularly in business parks; and the development of new technology and software, which is improving connectivity. from a portfolio management perspective, tenants are not only relocating to decentralised areas within a market but also to decentralised cities surrounding the core market. Tenants which are non-traditional large occupiers in cBDs are also more willing to move to decentralised areas. This trend is most evident in Hong Kong where it has led to the convergence of office rents between primary and secondary locations and has made relocation to decentralised areas less cost-effective for firms.

improving space efficiency

improving space utilization through the implementation of alternative workplace strategies (AWs) is a trend that will continue to gain traction in 2014. Occupiers with large size requirements and with a preference to stay in prime locations may choose to adopt AWs as an alternative solution to not only offset high rents with improved efficiency but also to improve their working environment. AWs allows a buffer for growth without taking on more space and provides tenants with the opportunity to expand within their current premises before committing to additional space and higher real estate expenditure. Post the adoption of AWs, some companies have been able to decrease space usage by 30%, allowing for lower real estate costs and the more efficient use of current workspace. chinese firms are also adopting AWs, with a few select companies now more advanced in this respect than many of their western counterparts. Across key office markets in Australia, most large domestic space users are utilising AWs as they seek to improve office space efficiency and keep costs down. The trend to improve space efficiency will inevitably reduce the footprint size MNc occupiers. Therefore, depending on growth, may lead to overall reduction of space requirements of MNcs in APAc.

Stronger appetite for higher risk assets as

investors look for better returns

The low yield on core assets will spur stronger appetite for risk in 2014 as investors look to maintain their returns and gain access to a wider pool of investable assets. This could mean more investment interest and activity in:

• decentralised office assets, to capture the narrowing rental gap with core locations • offices in regional cities for higher yields

• value-added opportunities in core areas • Build to core for long-term investors

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The strong demand for decentralised office space witnessed in recent years has narrowed the rental gap between core and secondary locations. This has provided room for the price appreciation of office buildings in decentralised areas, a trend witnessed in Hong Kong, singapore, suburban transport hubs and business parks of china tier i cities and well-master-planned secondary business districts in india. However, the relative attractiveness of decentralised office assets will diminish as the rental gap narrows further over the course of the year. This is a risk that investors should take into consideration when looking into secondary locations. Domestic investors in Japan are usually able to outbid foreign buyers for core properties. This is encouraging foreign investors to look for opportunities in other cities offering higher yields, including Osaka and fukuoka. However, Tokyo remains the preferred market for office investment given its deep pool of assets for both core and value-added strategies, although the volume of new Grade A buildings to be delivered this year will counteract the upward pressure on rents and values.

investors in china are displaying a strong preference for tier i cities as there is real concern about oversupply in tier ii cities. Value-added opportunities are becoming sought after, with foreign investors purchase aging Grade B offices in core areas for renovation, but again the focus is on Beijing and shanghai.

investors are also recommended to look at value-added opportunities in core areas of sydney, Melbourne and singapore. in the latter, investors are focusing on smaller value-added deals by purchasing and upgrading Grade B assets in core locations. in Australia, investors are moving their focus to office assets in suburban areas of sydney and Melbourne as the availability and the asking price of office buildings for sale in core cBD locations is tight.

Acquiring existing core assets remains difficult and expensive. Build-to-core – developing and constructing a core office asset - could therefore be a viable strategy for investors with long-term investment horizons, as entering at the development stage may provide a higher rate of return and control of the end product. One recent example of this trend was the purchase of a commercial site in Kowloon East in Hong Kong by singapore-based Mapletree investments.

capital outflow is the major downside risk

Business sentiment and the global economic environment are expected to improve during 2014 and should provide a certain degree of support to the commercial property market in Asia Pacific. However, there are a number of downside risks. These include:

• Geopolitical risk such as elections and political gridlock in india, indonesia and Thailand • Volatility in the currency market especially in Australia, Japan and emerging southeast Asia

• cooling measures in a number of key markets, especially in Hong Kong, singapore, china, Malaysia and Taiwan

• Overpricing, which is the biggest concern among investors as prices in many markets have surged ahead of fundamentals

The price rally witnessed after the Gfc has largely been filled by the ample liquidity in the market. Once the federal Reserve begins pulling back money from the market, it will trigger a new round of global capital flows, which could impact a number of emerging markets in the region. india and indonesia have already suffered from a reversal of fund flows in their financial markets. However, the impact on their property sectors was quite limited, given the restrictions on foreign ownership in those two countries.

in contrast, markets such as Hong Kong and singapore which have no capital flow restrictions will be exposed to higher downward pressure on capital values. Both markets will be vulnerable to more yield decompression risks.

Lured by a recovery in the rental market, a number of Asian investors have shifted their focus to western markets for higher yields. cooling measures imposed in a number of markets in the region have also pushed investors to look `outside Asia Pacific. Asian countries will therefore likely experience different levels of capital outflows.

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Where are the Hotspots?

singapore is expected to see strong occupier demand and an increase in leasing enquiries from financial institutions for larger floor spaces, as well as some flight-to-quality relocation. Occupier demand in Tokyo remains strong on the back of the stimulus-led economic recovery. Tenant activity shows an increasing volume of relocations to larger spaces as well as expansions in existing buildings. Pre-leasing activity for new supply to be completed in 2014 is improving, with around 80% of new buildings expected to come on stream with full occupancy. stronger leasing activity coupled with the limited construction pipeline will also boost landlord confidence and support positive rental growth in auckland in 2014. Rental growth is expected to continue in most of key southeast Asian cities as multinationals are still keen to expand their business into new markets and right-shore operations in cost-effective locations.

in the investment market, Japan is again a clear leader and has strong potential for further upside in 2014. investment sentiment has been significantly boosted by Abenomics, particularly among domestic buyers. However, this market is beginning to see some disconnect between the amount that prices have improved in the investment market and underlying occupier fundamentals. This is creating opportunities for foreign property funds to offload their assets on the strength of the current strong sentiment.

Despite the relatively small size of its market, new Zealand is attracting investor interest, primarily in

auckland, backed by its solid economic recovery and net migration gains. cross-regional flows into

australia remain strong but this market’s relative attractiveness may gradually diminish as the lack of rental growth combined with the limited room for further interest rate cuts is likely to cause yield compression to halt.

Jakarta, Manila and bangkok are expected to see value appreciation and rental growth outperform the rest of the region. However, the presidential election in indonesia in July and ongoing political unrest in

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Office Market OutlOOk 2014 |

ASiA PAcific

Countr y o verview

china

Rents 0 - 1% 0 - 3%

deMand vacancY neW suPPlY caPital value

2 - 5% 0 - 3% Yield 10 - 20 bps beiJinG shanGhai 90 100 110 120 130 140 150 160 170 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

Shanghai Office – Supply, Vacancy, Net Absorption

Beijing Office – Supply, Vacancy, Net Absorption 0 5 10 15 20 25 30 0 2,000 4,000 6,000 8,000 10,000 12,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Shanghai office rent and capital value indices

Beijing office rent and capital value indices 80 100 120 140 160 180 200 220 240 260 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

0 3 6 9 12 15 18 21 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

CHINA

90 100 110 120 130 140 150 160 170 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

Shanghai Office – Supply, Vacancy, Net Absorption

Beijing Office – Supply, Vacancy, Net Absorption 0 5 10 15 20 25 30 0 2,000 4,000 6,000 8,000 10,000 12,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F NF A ( ‘000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Shanghai office rent and capital value indices

Beijing office rent and capital value indices 80 100 120 140 160 180 200 220 240 260 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

0 3 6 9 12 15 18 21 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F NF A ( ‘000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

beiJinG OFFice

rent and capital value indices

beiJinG OFFice

supply, vacancy, net absorption

Occupier Market

The china office market faces a major challenge in the form of abundant new supply, an issue that will acutely impact tier ii cities. Tier i cities such as Beijing and shanghai will be able to better manage the flow of new supply on the back of stronger economic fundamentals and solid demand from foreign and domestic occupiers. However, both cities recorded rental declines to varying degrees in 2013, a trend which is expected to continue in 2014.

High rents remain a major concern for multinational occupiers in Beijing whilst domestic occupiers have also turned less aggressive towards expansion in recent quarters. firms in the automotive sector continue to display expansionary demand but are opting to lease space in decentralised areas to save costs. Wangjing will continue to emerge as a popular destination for cost sensitive occupiers due to its pipeline of high quality new supply and attractive location. Beijing looks capable of absorbing the 453,000 sq. m. GfA (3.5 million sq. ft. NfA) of new supply scheduled for 2014 and should maintain a balanced supply demand dynamic in core locations, a trend that will support stable Grade A rents in 2014.

in shanghai, Grade A rents are expected to weaken by 0-3% in 2014 due to concern over the large volume of new supply in Puxi. Approximately 1.3 million sq. m. GfA (9.7 million sq. ft. NfA) of new supply will be completed in 2014, almost 80% of which will be located in Puxi. Occupiers in shanghai continue to adopt a wait and see attitude and are postponing expansion plans in order to obtain better leasing options and terms ahead of the supply peak in 2014 and 2015. Pre-commitment rates in new projects are low, with less than 20% of total space currently pre-let. Pudong will continue to see slight rental growth and outperform other submarkets owning to its limited new supply in 2014 and strong demand from financial institutions.

New supply

Vacancy Rate (%, RHs) Net Absorption Rent capital Value

country Overview

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Countr

y

o

verview

capital Market

The china investment market has remained robust in recent quarters with a steady flow of transactions from both foreign institutional investors and domestic buyers. However, office assets look expensive as prime yields have compressed to sub-5% in Beijing and shanghai and rental growth has slowed.

foreign investors usually appraise investment opportunities with regard to income and growth but domestic groups put more visionary value on real assets and are therefore more willing to pay current prices. Overseas buyers are now returning to tier i cities where the property market is more mature and there are less concerns about oversupply compared to tier ii cities.

The rental outlook remains gloomy but vendors are not expected to adjust prices. investors wanting to attain higher rates of return will have to look into value-added opportunities and build-to-core strategies.

Recent quarters have seen a number of value-added investments, with investors purchasing aging Grade B offices in core areas of Beijing and shanghai for renovation. investing in development projects could provide higher returns but foreign investors may find it challenging to find suitable local partners, whilst the availability of sites in core locations is limited.

Given the difficulty in acquiring direct assets and low yields, investors are increasingly looking into equity acquisitions with some debt features or return guarantee terms included in the financial structure.

CHINA

90 100 110 120 130 140 150 160 170 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

Shanghai Office – Supply, Vacancy, Net Absorption

Beijing Office – Supply, Vacancy, Net Absorption 0 5 10 15 20 25 30 0 2,000 4,000 6,000 8,000 10,000 12,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Shanghai office rent and capital value indices

Beijing office rent and capital value indices 80 100 120 140 160 180 200 220 240 260 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

0 3 6 9 12 15 18 21 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

CHINA

90 100 110 120 130 140 150 160 170 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

Shanghai Office – Supply, Vacancy, Net Absorption

Beijing Office – Supply, Vacancy, Net Absorption 0 5 10 15 20 25 30 0 2,000 4,000 6,000 8,000 10,000 12,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F NF A ( ‘000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Shanghai office rent and capital value indices

Beijing office rent and capital value indices 80 100 120 140 160 180 200 220 240 260 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

0 3 6 9 12 15 18 21 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F NF A ( ‘000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

shanGhai OFFice

rent and capital value indices

shanGhai OFFice

supply, vacancy, net absorption

New supply

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Countr y o verview

Hong kong

Occupier Market

Overall Grade A office rental growth will be relatively flat on Hong Kong island and Kowloon with some slight potential for upside should the domestic economy improve. selected buildings in central may be vulnerable to weaker rents due to some potentially large vacancy. Decentralised submarkets will continue to outperform and display fairly stable growth. The rental convergence between Hong Kong island and Kowloon is therefore likely to continue over the course of the year.

Tenant retention will be the key objective for landlords in 2014. Occupiers will continue to be cost-conscious and demand for cost effective space is expected to remain firm. Large occupiers will continue to renew in their current location due to the tight availability of large spaces. companies planning iPO listings in Hong Kong may help boost leasing momentum in core areas as they look to open new offices.

The development pipeline will remain thin with no large footplate single landlord buildings scheduled for completion on Hong Kong island until 2017. The limited leasing options will encourage companies to buy their own space.

capital Market

Most speculators have now stepped out from the investment market and activity remains generally quiet. The lending environment could tighten in H2 2014 due to potential capital outflows in the aftermath of QE tapering. capital values and rents are expected to be flat in 2014.

investment sentiment in Hong Kong will likely be more influenced by local cooling measures as opposed to QE tapering in the Us. The market remains exposed to policy risks since the local government began to actively intervene in commercial property transactions in early 2013.

End-users and long-term investors will remain the most active buyers in the market. foreign investors and funds will mainly focus on value-added or asset enhancement opportunities. some domestic buyers will opt to wait on the sidelines until optimal purchasing opportunities arise.

Given the high price of office properties and the generally low yield environment, investors will adopt a value-add angle when making their investment decisions. The conversion of old industrial buildings in decentralised business districts into offices will likely continue.

hOnG kOnG OFFice

rent and capital value indices

hOnG kOnG GRade a OFFice

supply, vacancy, net absorption

Rents 0 - 3%

deMand vacancY neW suPPlY caPital value 0%

Yield

10 bps hOnG

kOnG

HONG KONG

Hong Kong Grade A Office – Supply, Vacancy, Net Absorption

-3 0 3 6 9 12 15 -1,000 0 1,000 2,000 3,000 4,000 5,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F NF A ( ‘000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Hong Kong office rent and capital value indices

80 100 120 140 160 180 200 220 240 260 280 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

HONG KONG

Hong Kong Grade A Office – Supply, Vacancy, Net Absorption

-3 0 3 6 9 12 15 -1,000 0 1,000 2,000 3,000 4,000 5,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Hong Kong office rent and capital value indices

80 100 120 140 160 180 200 220 240 260 280 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

New supply

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Countr y o verview

taiwan

Occupier Market

Grade A rents in Taipei will continue to see very mild growth in 2014 on the back of steady demand and the improving economic outlook. Demand will continue to be dominated by requirements for small to medium sized units of around 200 to 400 ping. some expansionary demand will be seen from firms in the technology and pharmaceutical industries but larger occupiers, especially foreign financial institutions, will remain cautious towards relocation. some bigger tenants may consider relocating their back offices to non-cBD areas to reduce costs.

Just two small Grade A office buildings providing a total of 17,900 ping GfA (59,000 sq. m. GfA/386,600 sq. ft. NfA) will be completed in 2014, slightly pushing up vacancy. However market dynamics will shift noticeably in 2015 and exert an impact on rental growth as an estimated 34,200 ping GfA (113,000 sq. m. GfA/791,400 sq. ft. NfA) is slated for completion.

capital Market

The continued capital deployment of domestic insurance companies has seen prime office yields in Taipei stand at just 2.2% as of the end of 2013, the lowest in the region. The central Bank may raise benchmark interest rates in 2014 but the increase will be gradual and loan rates will remain relatively low.

insurance firms are expected to continue to be the major buying force and their preference will still be for office assets. However, the minimum 2.875% yield requirement imposed on onshore investment and the opening up of overseas investment means that they may reduce their investment activity in the domestic market. To pass the yield hurdle insurers are looking into sale-and-leaseback deals that boost gross initial yields whilst also investing in mixed-use development projects.

The appeal of core office assets is limited given the low yields and limited rental growth, a trend also witnessed in other sectors. investors are therefore focusing on value-added opportunities that can benefit from mainland tourist arrivals. A number of investors have already acquired old office buildings in central Taipei for conversion into hotels. The regulation governing plot ratios, revised in the 1990s, implies that redevelopment will reduce total floor space. some investors and developers will therefore be inclined towards conversion.

taiPei OFFice

rent and capital value indices

taiPei GRade a OFFice

supply, vacancy, net absorption

Rents 0.3 - 0.6%

deMand vacancY neW suPPlY caPital value 0 - 0.5% Yield 5 bps taiPei

TAIWAN

80 100 120 140 160 180 200 220 240 260 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

TP-Rent TP-Capital Value

Taipei Grade A Office – Supply, Vacancy, Net Absorption

-12 -6 0 6 12 18 24 30 -1,000 -500 0 500 1,000 1,500 2,000 2,500 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Taipei office rent and capital value indices

TAIWAN

80 100 120 140 160 180 200 220 240 260 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

TP-Rent TP-Capital Value

Taipei Grade A Office – Supply, Vacancy, Net Absorption

-12 -6 0 6 12 18 24 30 -1,000 -500 0 500 1,000 1,500 2,000 2,500 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Taipei office rent and capital value indices

New supply

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Countr y o verview

Japan

Occupier Market

Grade A rents in Tokyo bottomed out in late 2012 and picked up steadily in 2013. 2014 is expected to see accelerated Grade A rental growth of around 5-7% over the course of the year alongside the continued improvement in economic growth. Occupiers have clearly shifted focus from reducing costs to upgrading and expanding. Tenant activity in 2014 will include more expansion upon relocation and also in existing spaces. interest in buildings with larger floorplates offering efficient space usage will continue to grow. consolidation will involve occupiers reorganising multiple premises into a single office in more efficient location, as opposed to being purely a cost saving move.

The iT, computer/mobile gaming and consumer-related sectors such as apparel are expected to drive leasing demand. Activity is expected to be focused on The Roppongi/Akasaka and shibuya/Ebisu submarkets. New supply for 2014 encompasses six buildings with total leasable area of 102,000 tsubo (3.7 million sq. ft. NfA). All are due for completion in H1 2014 with 80% of the space estimated to be pre-let. New demand is expected to continue to outstrip new supply in 2014 and options for tenants will continue to decrease. Occupiers should act quickly to secure new space to pre-empt further increases in rents.

capital Market

Tokyo office remains the preferred sector for most local and foreign investors but despite the scale of the market there remains a comparative lack of institutional grade assets available for sale. capital values are expected to increase in 2014 along with another decline of approximately 30 bps in cap rates due to the expected growth in rents in the coming year, as well as investor appetite, the strength of the JREiT market and the liquid lending environment. Both listed and private JREiTs are expected to continue to be the most active domestic investors in 2014.

Market fundamentals suggest that the timing is right for Tokyo office value add investment. investors are increasingly willing to take lease-up or repositioning risk. However, vendors of these assets have typically priced in the upside. There is investment opportunity on the fringe of the central five wards providing there are good rail connections. Longer-term investors can also engage in redevelopment in prime submarkets. Value-add plays may therefore be in regional markets such as Osaka and fukuoka, but less established recovery implies more risk. The Bank of Japan has committed to continuing QE and the government will be implementing a further economic stimulus to counter the potential negative impact of the increase of the consumption tax in April 2014. However, the impact is unknown, and the risk is closely tied with sentiment.

tOkYO OFFice

rent and capital value indices

tOkYO GRade a OFFice

supply, vacancy, net absorption

Rents

5 - 7%

deMand vacancY neW suPPlY caPital value

10 - 15%

Yield

30 bps

tOkYO

JAPAN

Tokyo Grade A Office – Supply, Vacancy, Net Absorption

0 2 4 6 8 10 12 0 1,000 2,000 3,000 4,000 5,000 6,000 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Tokyo office rent and capital value indices

80 100 120 140 160 180 200 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

JAPAN

Tokyo Grade A Office – Supply, Vacancy, Net Absorption

0 2 4 6 8 10 12 0 1,000 2,000 3,000 4,000 5,000 6,000 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Tokyo office rent and capital value indices

80 100 120 140 160 180 200 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

(26)

Countr y o verview

South korea

Occupier Market

seoul will remain a tenants market in 2014. competition among landlords to secure tenants is expected to intensify until oversupply pressure eases in 2015, as much of this new stock could be delayed into 2016. 2014 will see slight downward pressure on overall effective rents as rent free periods of 2 to 4 months become the norm despite an expected 2-3% rise in face rents due to higher asking rents in new buildings. Among core submarkets, the cBD will suffer from the greatest downward rental pressure as it is where the bulk of new supply will be completed.

financial firms are expected to be active in the cBD as new supply comes on stream and some companies opt to relocate from the YBD. The YBD will also see some activity from this sector as the government plans to provide incentives for such firms to open new offices in the district. The GBD may see an outflow of iT and research tenants as well as government agencies to decentralised satellite cities such as Pangyo and Bundang.

Total new supply for 2014 will be around 385,000 sq. m. GfA (2.1 million sq. ft. NfA). Effective new office space will be 35% higher as the fully vacant Three ifc - which was completed in the YBD in 2012 – will likely begin leasing activity once Two ifc fills up its 40% vacant space by late 2014. The large supply pipeline will provide an opportunity for tenants to review their renewal and relocation options. The increased availability of quality space coupled with attractive rents is likely to spur tenant flight to quality over the course of the year.

capital Market

The investment market is expected to be active in 2014, backed by activity from domestic insurance, pension and asset management companies. Domestic groups have been looking for investment opportunities outside Korea and this trend is expected to intensify in 2014 following the rule change allowing insurers to invest abroad without approval. Whilst this could potentially result in more capital outflows there remains strong investment demand onshore.

This year will see the completion of a large volume of new office supply in seoul and landlords are trying to push up occupancy at the expense of lower effective rents. investors are displaying a stronger preference for fully let buildings with high quality tenants and / or sale and leaseback arrangements in order to secure income streams. Assets that meet these requirements usually command a higher price and lower yield compared to the rest of the market.

seOul OFFice

rent and capital value indices

seOul GRade a OFFice

supply, vacancy, net absorption

Rents

0 - 1%

deMand vacancY neW suPPlY caPital value

1 - 5%

Yield

10 - 20 bps

seOul

SOUTH KOREA

Seoul Grade A Office – Supply, Vacancy, Net Absorption

-4 -2 0 2 4 6 8 10 -2,000 -1,000 0 1,000 2,000 3,000 4,000 5,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Seoul office rent and capital value indices

80 100 120 140 160 180 200 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

SOUTH KOREA

Seoul Grade A Office – Supply, Vacancy, Net Absorption

-4 -2 0 2 4 6 8 10 -2,000 -1,000 0 1,000 2,000 3,000 4,000 5,000 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14F 20 15F N FA (‘ 000 s.f .)

New Supply Net Absorption Vacancy Rate (%, RHS)

Seoul office rent and capital value indices

80 100 120 140 160 180 200 20 05 Q 1 20 05 Q 4 20 06 Q 3 20 07 Q 2 20 08 Q 1 20 08 Q 4 20 09 Q 3 20 10 Q 2 20 11 Q 1 20 11 Q 4 20 12 Q 3 20 13 Q 2 20 14 Q 4 IN DE X ( 2005 Q 1 = 100)

Rent Capital Value

New supply

Vacancy Rate (%, RHs) Net Absorption Rent capital Value Note: Rental index is based on face rent Note: Face rent is expected to grow 2 to 3%

References

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