PROPERTY MARKET OVERVIEW

Transcription

1 APRIL 2007 PROPERTY MARKET OVERVIEW OFFICE SECTOR Thanks to the continued economic growth in the Mainland and other major economies in the world, and more importantly the buoyant finance industries, Grade A office rentals edged up 2.0% QoQ to HK$53.05 per sq ft per month as at February 2007 on an effective basis. Although the sub-market in Central is predicted to achieve positive rental growth, the current round of relocations from the traditional business areas on Hong Kong Island to Kowloon East might slow the rental growth of the total market to less than 5% over the next 12 months LUXURY RESIDENTIAL SECTOR Thanks to the wealth effect attributed to the buoyant stock market prices, the average luxury residential price increased 1.6% QoQ from HK$9,753 per sq ft in November 2006 to HK$9,910 per sq ft in February Given the positive buying sentiment, luxury residential prices are predicted to increase 16% in the next 12 months. Luxury rentals will rise further by another 9% during the same period in anticipation of the sustained leasing demand attributed to the financial sector. INDUSTRIAL SECTOR Buoyed by the sustained growth in the volume of re-exports, industrial property rentals increased across the board in 1Q Rentals in the factory sector grew 3.3% QoQ to HK$7.19 per sq ft per month as at the end of February In anticipation of a further growth of re-exports and the official opening of Western Corridor in mid 2007, rental and capital values are expected to increase 10-18% over the next 12 months. RETAIL SECTOR With expectation of promising growth of retail sales, the average retail rental in traditional shopping districts posted a strong growth of 8% QoQ from HK$320 per sq ft per month in November 2006 to HK$345 per sq ft per month as at the end of February In anticipation of the further growth in the local economy and the tourist industry, the average retail rentals and capital values are projected to edge up 7% and 18% respectively over the next 12 months. Offi ce MARKET TRENDS Luxury Industrial Residential Retail Suite 5701 Central Plaza 18 Harbour Road Wanchai Tel Fax Company Licence Number: C

2 EXECUTIVE SUMMARY EXECUTIVE SUMMARY ECONOMIC INDICATORS Indicator Measure GDP YoY % Change Population growth (mid-year) YoY % Change Average consumer prices Rate (%) Average unemployment rate Rate (%) Best lending rate Rate (%) Average real wage YoY % Change Source: The Economist Intelligent Unit; Hong Kong SAR Government; Colliers International (Hong Kong) Limited No signs of abating The pace of local economic growth showed no signs of abating in 4Q 2006 due to the sustained expansion in a number of major economies around globe and steady oil prices during the period. Amongst the various economic components, gross domestic fixed capital formation and the total exports of goods continued to represent the key drivers for the local economy in 4Q As a reflection of investor confidence against the backdrop of an expanding economy, gross domestic fixed capital formation staged a buoyant growth of 9.5% year-on-year ( YoY ) in 4Q 2006, further to a rise of 10.3% YoY registered in the preceding quarter. Meanwhile, the total exports of goods posted a distinct growth of 11.7% YoY during the period, thanks to the robust Mainland economy and the competitiveness gained from the weakening of the Hong Kong dollar along with the US dollar. All in all, local Gross Domestic Product ( GDP ) staged a further growth of 7.0% YoY in 4Q Meanwhile, local private consumption expenditure witnessed an accelerating growth of 5.8% YoY in 4Q 2006 the strongest growth in the last eight quarters thanks to the general rise in household income and the positive market sentiment infiltrated by the record-breaking Hang Seng Index. The prevailing bullish market sentiment also translated into a distinct increase in the total value of retail sales during the period between December 2006 and February Accounting for the effect of the gradual appreciation of the Renminbi ( RMB ), the local economy continued to experience a steady rise in consumer prices in the order of % YoY during the period. As far as the real estate sector is concerned, the prevailing trend of rising consumer prices continued to provide a favourable environment for the further growth of both property rental and capital values. Interest rate expectations Regarding interest rate expectations, the anticipated interest rate cut in the US will be the most likely scenario if there are further signs of weakness in the US housing market. There have been projections that the demand for housing is going to contract at a much faster than expected pace. As such, individual analysts anticipate the US Federal Reserve kick starting a relaxing cycle in 2Q 2007 as a preemptive measure to bring the housing market to a soft landing. If this is the case, most Hong Kong banks are expected to follow suit and cut their interest rates accordingly. On the local front, local banks remained competitive in offering their mortgage rates to their customers in 1Q Before making any reduction in prime rates, a number of leading banks in Hong Kong have cut mortgage rates during 1Q 2007, primarily because of the strong liquidity in the banking sector. Being the typical reference benchmark in the banking industry, the three-month inter-bank offer rates stayed low, and moved within a 50-basis point range between 3.90% and 4.40% during the period between December 2006 and February Amongst the various local banks in Hong Kong, HSBC took the lead again to offer their customers attractive mortgage rates. Instead of gauging its mortgage rates at Prime ( P ) minus 2.75% (or 5.00% per annum), the new effective mortgage rates are reduced to P minus 2.88% (or 4.87% per annum). In response to the new mortgage terms offered by HSBC, other banks such as the Bank of East Asia, Bank of China (Hong Kong), Citibank and Chong Hing Bank all followed suit to provide new mortgage plans to lure customers. Property investment market Similar to the situation in 2006, investors in the local property market continued to be challenged by a lack of investment-grade opportunities, and property investment yields compression due to plentiful liquidity in the marketplace chasing limited stock during the period between December 2006 and February The above situation was common across various property sectors ranging from commercial/retail to industrial. Industrial property assets, by virtue of their premium rental yields, continued to be sought after by the investment community in 1Q A spate of whole-block industrial buildings with 2 PROPERTY MARKET OVERVIEW - APRIL 2007

3 EXECUTIVE SUMMARY lump-sum price brackets between HK$40 million and HK$200 million were transacted during 1Q The two prominent ones in terms of scale were Wai Yuen Tong Medicine Building in Kowloon Bay and Prosperity Centre in Kwai Chung. The former, comprising about 129,000 sq ft of industrial floor area, was purchased by an investment fund for a total consideration of HK$188 million or an average unit price of HK$1,455 per sq ft. The latter was snapped up by a seasoned local investor for HK$208 million or an average of HK$862 per sq ft. Beside the popularity of industrial developments, the local property investment market featured a couple of major investment transactions of retail developments in Mong Kok, where the number of sizeable investment sales has been few. In January 2007, Mong Kok Computer Centre, located in one of the most popular streets in Mong Kok, was acquired by an investment fund for a total consideration of HK$750 million. Lately, a majority interest of over 90% at Golden Plaza, one of the themed shopping arcades in Mong Kok, was transacted for HK$530 million. Hong Kong property market sector On the leasing front, the local retail property sector was highlighted by a significant rental growth across various shopping districts in 1Q Further to a gain of 2% quarter-on-quarter (QoQ) in 4Q 2006, retail property rentals for ground-floor shops located in the four traditional retail districts surged by 8% QoQ, to an average of HK$345 per sq ft per month as at the end of February Essentially, asking rentals were raised by vendors in view of the positive market sentiment attributed to the record-breaking stock market prices and the positive consumption sentiment. Meanwhile, retailers were impressed by the stronger-than-expected business volume registered in late 2006, thus becoming even more aggressive in securing their outlets. Individual retailers were found to raise their rental offer for a shopping unit in the prime districts by as much as 40% in an attempt to outbid rivals during 1Q In the office market, occupational demand attributed to the finance industries remained buoyant in 1Q Despite the rental weakness in individual non-core sub-markets, the submarket in Central continued to forge ahead and represent the major pillar underpinning the whole Grade A office market in Hong Kong. In addition to the finance industries, the legal sector stood out as being one of the strongest spots during 1Q According to the quarterly survey undertaken by Hudson, a leading human resources consultants, the hiring expectations in the legal sector rose further by 2 percentage points to reach an all-time high of 73% during 1Q The results show that the bulk of the companies engaged in the sector were looking to take on more people, thus translating into a key source of occupational demand for Grade A office space. Overall, the average Grade A office rental edged up by 2.0% QoQ to HK$53.05 per sq ft per month as at the end of February In the luxury residential market, the wealth effect attributed to the increase in stock market prices not only created a positive market sentiment, but also created a boost to both asking and transacted prices in the luxury residential property market. As at the end of February 2007, the average luxury residential property price grew by 1.6% QoQ to HK$9,910 per sq ft. The number of sale transactions with the lump-sum consideration falling within the price bracket of HK$30 50 million staged the strongest growth of 26% QoQ during the three-month period between December 2006 and February Meanwhile, luxury residential rentals edged up further by 0.9% QoQ to HK$33.66 per sq ft per month as at the end of February 2007, thanks to the buoyant banking and finance industries. Occupational demand for prime quality apartments close to Central remained strong during 1Q In the industrial property market, rentals continued to benefit from the re-accelerating growth of re-exports during 1Q Factory rentals increased 3.3% QoQ to HK$7.19 per sq ft per month as at the end of February In anticipation of the official opening of the Western Corridor, the expressway connecting the northern part of New Territories to Shenzhen in China, at the beginning of July 2007, the sub-market of Tuen Mun, one of the industrial districts located close to entrance of the Western Corridor, remained the market focus. A number of industrial end-users, including the companies engaged in warehousing logistics between the Mainland and Hong Kong, have chosen Tuen Mun as their prime location for strategic expansion. Market outlook Looking forward, it is our view that the local property market could stage further growth given the solid economic growth and the genuine occupational demand for real estate across the board. Encouraged by the recent initiatives proposed by the Financial Secretary, Mr Henry Tang, on various tax measures in February 2007, and the bullish land auction prices for a number of residential development sites, the residential market, particularly the luxury sector, is expected to deliver exceptional performance over the next 12 months. PROPERTY MARKET OVERVIEW - APRIL

4 OFFICE SECTOR OFFICE SECTOR GRADE A OFFICE RENTS Face Rents (HK$ / sq ft / month) Effective Rents (HK$ / sq ft / month) Feb 06 Feb 07 Feb 08 (f) Feb 06 Feb 07 Feb 08 (f) Central Admiralty Wan Chai Causeway Bay North Point Quarry Bay Sheung Wan Tsim Sha Tsui GRADE A OFFICE CAPITAL VALUES AND YIELDS Capital Values (HK$ / sq ft) Yields Feb 06 Feb 07 Feb 08 (f) Feb 06 Feb 07 Feb 08 (f) Central 14,481 18,001 19, % 3.2% 3.1% Admiralty 11,393 12,921 14, % 3.7% 3.6% Wan Chai 11,018 12,437 13, % 3.7% 3.6% Tsim Sha Tsui 8,810 10,301 9, % 3.7% 3.7% On net floor area basis Buoyed by solid fundamentals Thanks to the continued economic growth in the Mainland and other major economies in the world, and more importantly the buoyant finance industries, the local Grade A office market made further advancement in 1Q Grade A office rentals edged up 2.0% QoQ to HK$53.05 per sq ft per month as at February 2007 on an effective basis. The sub-market in Central continued to represent the key pillar underpinning the whole Grade A office market in Hong Kong since the majority of tenants engaged in the finance industries determined to go for expansion in 1Q Headline rentals achieved in some of the benchmark buildings such as Two IFC and Chater House remained the market focus because of their record-breaking rental rates. For example, a global financial firm set up its first office in Asia by renting a 5,500 sq ft office unit on 67/F at Two IFC for a face rental of HK$150 per sq ft per month, representing the post-1997 high for Grade A office rentals in Central. In addition to the finance industries, the legal sector stood out to be one of the strongest spots during 1Q According to the quarterly survey undertaken by Hudson, a leading human resources consultant, the hiring expectations remained positive across all business sectors in Hong Kong. The results of the survey indicate that 54% of respondents will increase headcount in 1Q 2007 compared with 53% in 4Q The hiring expectations in Percentage Permanent Hiring Expectations in Hong Kong Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: The Hudson Report, Hong Kong, January-March 2007 the legal sector rose further by 2 percentage points to reach an all-time high of 73% during 1Q The results show that the bulk of the companies engaged in the legal sector were looking to take on more people, thus translating into a key source of occupational demand for Grade A office space. Slowing growth In the sub-market of Central, Grade A office rentals averaged at HK$78.75 per sq ft per month on an effective basis as at the end of February In terms of growth, Grade A office 4 PROPERTY MARKET OVERVIEW - APRIL 2007

5 OFFICE SECTOR rentals in Central continued to rise but at a slower rate of 4.0% QoQ in 1Q 2007 compared with 6.9% QoQ recorded in 4Q In fact, it was the slowest quarter since mid-2005 when the rentals in the sub-market were growing at an average rate of 24.3% QoQ. The prevailing trend of slowing growth can be explained by the fact that not every company currently located in Central is comfortable with the prevailing level of rentals. Individual non-finance companies who are going to see dramatic rental growth upon lease expiry in the next six months might be forced to downgrade themselves to inexpensive buildings either in the same district or other sub-markets. According to our research, the rental performance of office developments in Central has fallen into a wide range depending on the quality of individual office building. Although the average rental in Central was HK$78.75 per sq ft per month, the top-tier buildings could fetch close to HK$150 per sq ft per month while the less expensive premises can be about HK$50 per sq ft per month, representing 37% lower than the average in the sub-market. Meanwhile, the sub-market in Central was currently driven by a few benchmark buildings e.g. Two IFC. Out of the total 45 major Grade A office buildings in Central, the number of buildings that registered a positive growth was less than ten in 1Q 2007 compared with over 15 in 4Q Similar to the past quarters, all of the developments showing positive rental growth were on the top-tier of the market with prevailing rental rates fetching 50-90% premium above the average in the sub-market during 1Q Therefore, it is foreseeable that the pace of rental growth in Central will continue to taper off if the number of premium buildings driving the sub-market contracts. Growth discrepancy Despite the continued rental growth in Central, there were signs of weakness in individual sub-markets. For example, Island East, one of the major decentralised districts on Hong Kong Island, registered a rental decline of 2.1% QoQ during 1Q On the Kowloon side, Tsim Sha Tsui and Kwun Tong exhibited different degrees of rental decline during the period. The discrepancy of rental growth between Central and the fringe districts can be explained by the following reasons with reference to the current market trends. Firstly, rentals in Central continued to be buoyed by companies engaged in the finance and insurance industries. As discussed earlier, the bulk of these companies are prepared to go for further expansion and prefer to stay in Central amid a lack of new supply in the sub-market. Secondly, with the gradual completion of a number of new developments in Kowloon East comprising Kowloon Bay and Kwun Tong, a number of companies have been lured to consolidate their various offices under one roof and relocate to one of these non-traditional business districts. Meanwhile, the relocation exercise is justified financially by virtue of the significant rental difference between traditional business districts and non-traditional areas. As discussed in the last issue, the first stage of relocations comprising companies moving from Central to decentralised district on Island East has largely completed in The current round of relocations involves companies moving from the fringe business locations to the non-traditional areas such as Kowloon Bay and Kwun Tong where new developments are available for occupation. In 1Q 2007, Maersk, the logistics & shipping company, has consolidated their offices on Hong Kong Island and moved across the harbour to One Kowloon, the brand-new Grade A office development recently completed in Kowloon Bay. In addition, Ricoh Hong Kong has confirmed to relocate from Wan Chai to its new 80,000 sq ft office at One Kowloon. Meanwhile, a number of companies have taken the supply in non-traditional area as the opportunity to upgrade and consolidate their offices under one roof. For example, Sears, an international wholesale and distribution company based in the US, has committed to relocate from its existing offices located in The Gateway, Tsim Sha Tsui and United Centre in Admiralty to Langham Place in Mong Kok by taking up a total of 120,000 sq ft. Supply situation With the continued surge in office rentals, there was only a mild improvement in the supply situation across the whole Grade A office market in 1Q The availability of vacant space remained scarce during 1Q According to our research, the average vacancy rate in the whole Grade A office market increased mildly from 3.5% in 4Q 2006 to 4.1% in 1Q In Central, the vacancy rate edged up to 3.9% in 1Q 2007 after hitting a 15-year low of 2.8% in 4Q On the front of new supply, all of the four Grade A office developments scheduled for completion in 2007 are located in Kowloon. Essentially, there will be no new supply in Central in The situation will last for at least two more years until the anticipated completion of the Central Market Redevelopment by Similar situations of supply gap only happened twice in the last 20 years. The first one was in 2000 but the sub-market was filled with new supply during the subsequent years from 2001 to The second one dated back to the mid-1990s PROPERTY MARKET OVERVIEW - APRIL

6 OFFICE SECTOR when the sub-market in Central suffered from a lack of new supply for a consecutive two-year period between 1994 and As such, the current supply gap is unprecedented since there will be zero new supply for more than two years. If the completion schedule of the Central Market Redevelopment is to defer, the prevailing supply squeeze in Central will become even more severe. The case of a market consolidation Although it is a very likely scenario to have a sustained supply squeeze in Central, the whole office market is going to see a number of new developments due to complete in non-traditional business districts over the next couple of years. Therefore, there have been different opinions in the market talking about a potential consolidation if the new supply cycle starts in Before examining the possibility of a consolidation in 2008, it is worthwhile to take a quick review on the market in order to discover signs for being cautious. Firstly, office rentals in some business districts including Causeway Bay, Quarry Bay and Tsim Sha Tsui, have peaked in 3Q In the case of Causeway Bay, the average effective rental in the sub-market reached its recent peak at HK$39.00 per sq ft per month in August Rentals in Quarry Bay and Tsim Sha Tsui started to fall in 4Q 2006 after hitting their peaks at HK$29.50 per sq ft per month and HK$37.10 per sq ft per month respectively. On a quarterly measurement, the sub-market of Tsim Sha Tsui and Kowloon East posted a rental decline for two consecutive quarters in 4Q 2006 and 1Q Secondly, the rental growth of the whole Grade A office market continued to taper in 1Q 2007, indicating that the market might gradually run out of stream. Hypothetically, if there were no positive growth in Central, the whole Grade A office market would have entered into a zone of negative growth since 4Q Therefore, the next question to ask is therefore whether or not the forthcoming new supply will affect the sub-market of Central? The answer is no but the imminent threat is reckoned to be the gradual completion of International Commerce Centre in West Kowloon. The key unknown factor is that West Kowloon is a new district with no sufficient past evidence to show the area is either a success or a failure for being a key commercial zone. Taking a long-term view, West Kowloon can potentially develop itself into a successful business area if the district is efficiently linked by mass transportation links. The cautionary note Before the full completion of International Commerce Centre, the market continued to place its focus on Kowloon East (including Kwun Tong and Kowloon Bay) where a total of over 4 million sq ft new office space will be gradually completed during the period from 2007 to The volume size of the prospective supply is high compared with the total existing stock of about 5 million sq ft office space in Kowloon East. Meanwhile, the degree of competition amongst the various developers in the sub-market is going to intensify since the majority of the new developments will be completed in the second half of More aggressive marketing campaigns are expected to be launched by the respective vendors in the second half of 2007 in an attempt to secure their anchor tenants. In addition, there are two uncertain factors which might bring about a major consolidation in the market with reference to the experiences in the past office cycles. Firstly, the prospective rental growth in Central will be threatened if key Grade A development is to take away the existing tenants in Central. Although there will be no major new supply in Central over the next two years, the massive space at International Commerce Centre in West Kowloon should remain a major threat to Central. Secondly, the prospective growth of the finance industries will continue to be volatile by virtue of the nature of the industries. A major market consolidation could be triggered by a contraction of demand leading to a spate of surrender space surplus floor area being handed back by tenants to landlords. Taking a forward-looking view, the whole Grade A office market might potentially enter into a zone of negative growth if the pace of rental growth in Central tapers off further while the degree of rental fall in other sub-markets gets steeper over the coming months. Market outlook However, it is our view that the performance of the local Grade A office market should remain positive given the prevailing demand fundamentals. Despite the challenge of the supply cycle in 2008, the bulk of the new developments will largely locate in decentralised districts such that rentals in the core business areas could stay relatively firm. However, it should be noted that initial signs of consolidation have emerged in 1Q Although the sub-market in Central is predicted to achieve positive rental growth, the current round of relocations from the traditional business areas on Hong Kong Island to Kowloon East might slow the rental growth of the total market to less than 5% over the next 12 months. 6 PROPERTY MARKET OVERVIEW - APRIL 2007

7 OFFICE SECTOR GRADE A OFFICE SUPPLY IN NFA Building District (sq ft) Developer Status 2007 Millennium City Phase 6 Kwun Tong 313,560 Sun Hung Kai Properties Under construction KingÊs Road Quarry Bay 183,377 Shun Ho Resources Under construction Enterprise Square 5 Kwun Tong 305,967 Kerry Properties Under construction International Commerce Centre (Stage I) West Kowloon 695,400 Sun Hung Kai Properties Under construction Total 1,498, J/O Sheung Yee Road & Wang Tai Road Kowloon Bay 601,180 Manhattan Under construction (NKIL 6280) J/O Wang Tai Road/Sheung Yuet Road Kowloon Bay 517,662 Sino Land Under construction & Wang Chiu Road (NKIL 6310) Tai Lin Pai Road, Kwai Chung (Phase I) Kwai Chung 487,900 Sun Hung Kai Properties Under construction 102 How Ming Street Kwun Tong 875,500 Winsor Properties Under construction Wai Yip Street/39 King Yip Street Kwun Tong 895,979 Henderson Land Under construction One Island East, 18 Westlands Road Quarry Bay 1,383,572 Swire Properties Under construction Total 4,761, International Commerce Centre (Stage II) West Kowloon 430,920 Sun Hung Kai Properties Under construction Tai Lin Pai Road, Kwai Chung (Phase II) Kwai Chung 422,450 Sun Hung Kai Properties Under construction Total 853, & beyond 500 Hennessy Road Causeway Bay 606,684 Hysan Development Demolition Central Market Redevelopment Central 569,500 Hong Kong SAR Government Existing site International Commerce Centre (Stage III) West Kowloon 613,320 Sun Hung Kai Properties Under construction 4 Lai Yip Street/114 Wai Yip Street Kwun Tong 248,566 Sun Hung Kai Properties Under construction 1 Wang Kwong Road Kowloon Bay 456,424 Billion Development Demolition Cityplaza One (Phase II) Tai Koo Shing 379,191 Swire Properties On hold Total 2,873,685 PROPERTY MARKET OVERVIEW - APRIL

8 RESIDENTIAL SECTOR RESIDENTIAL SECTOR LUXURY RESIDENTIAL MARKET - KEY MARKET INDICATORS Rents (HK$ / sq ft / month) Capital Values (HK$ / sq ft) Yields Feb 06 Feb 07 Feb 08(f) Feb 06 Feb 07 Feb 08(f) Feb 06 Feb 07 Feb 08(f) Peak ,169 13,417 15, % 3.98% 3.78% South Side ,872 10,469 12, % 4.23% 3.94% Mid-levels ,136 8,462 9, % 4.24% 4.05% Happy Valley ,340 7,845 9, % 4.10% 3.86% North Point ,323 6,620 7, % 4.14% 3.92% Average ,293 9,910 11, % 4.08% 3.85% Wealth effect buoyed by stock market Despite the traditional holiday season during the period from December 2006 to February 2007, the luxury residential market registered a positive growth in its sales volume as well as the capital values. This could be attributed to the wealth effect of locals buoyed by the stock market, which saw a record-breaking performance in early In 1Q 2007, luxury residential units with a lump-sum transacted price between HK$30 million and HK$50 million saw a 26% QoQ growth in terms of the number of transactions. In the same period of time, the average luxury residential price also registered an increase of 1.6% QoQ from HK$9,753 per sq ft in November 2006 to HK$9,910 per sq ft in February Benchmark land auction of the Peak site In Hong Kong, the Peak is regarded as one the of most prime luxury residential locations because different part of it enjoys a panoramic view of either Victoria Harbour or South Side. As the sub-market is zoned for a low residence density, there are limited housing units. The long-term average new supply in the Peak was 37 units each year, representing only 7% of that in the three traditional luxury districts, including the Peak, South Side and Mid-levels. Therefore, the limited supply in the sub-market was the reason for the strong competition amongst local developers when the residential site at 12 Mount Kellett Road, the Peak was offered for sale in a government land auction in mid-december The site was triggered for auction after Manhattan, a Hong Kong property developer, submitted an application to the Lands Department of the Hong Kong SAR Government by offering a minimum bid price of HK$768 million. The site was finally sold to Sun Hung Kai Properties for a total consideration of HK$1.8 billion in the auction, representing 134% higher than the opening bid. The final bid was about 38-80% higher than the market expectation ranging from HK$1.0 billion to HK$1.3 billion. Based on the total developable area of about 42,658 sq ft, the net accommodation value is HK$42,196 per sq ft, setting a record-breaking land unit price per square feet in Hong Kong. The high final bid price and the strong competition for the site revealed developers interests and confidence in the residential market. Following this successful land auction, a total of four residential sites, including three in Tai Po and one in Cheung Chau, were successfully applied from the application list in February 2007 and scheduled for auction in March Initiatives for potential buyers Amid a buoyant sentiment after the record-setting auction, the Budget for the fiscal year announced at the end of February 2007 also involves several measures directly stimulating the property market. In the first two quarters of , rates will be waived, subject to a ceiling of HK$5,000 a quarter. This will provide a one-off reduction of occupancy costs in the year of Besides, stamp duty for the transactions of properties valued between HK$1 million and HK$2 million was reduced to a fixed amount of HK$100. Particularly, the reduction in stamp duty offers attractive initiatives for the individuals who set their purchase target at the mass residential properties valued at HK$2 million or below. In additional to the initiatives offered by the government in the property sector, the market is further stimulated by the mortgage rate cut amongst the banks. The latest mortgage rate cut was ignited by HSBC in late February 2007, which took the lead to reduce its mortgage rate to Prime rate (P) minus 2.88% i.e. an effective rate at 4.87% per annum with its P at 7.75% per annum. The other banks then followed suit and some even offered more competitive discounts, resulting in the effective rates from 4.82% to 4.85% per annum. Combining 8 PROPERTY MARKET OVERVIEW - APRIL 2007

9 RESIDENTIAL SECTOR MAJOR RESIDENTIAL SALE TRANSACTIONS Month Property District GFA Price Unit Price (sq ft) (HK$ m) (HK$ / sq ft) Dec Barker Road, House D The Peak 6, ,517 La Hacienda, Lower Townhouse 4 The Peak 3, ,572 Severn 8, House 26 The Peak 3, ,606 Watford Villa, House 22 The Peak 3, ,788 Wing On Villas, House G The Peak 2, ,000 Feb-07 Strawberry Hill, House 12B The Peak 3, ,000 Feb-07 Watford Villa, House 17 The Peak 4, ,583 Dec-06 Hong Kong Parkview, Tower 15, 19/F, Flat 83 South Side 2, ,651 Dec-06 Island Grove, House C South Side 5, ,358 Dec-06 Le Palais, House 3 South Side 3, ,097 Dec-06 Ming Wai Garden, 12/F, Flat B South Side 1, ,763 Hong Kong Parkview, Tower 15, 21/F, Flat 83 South Side 2, ,173 Hong Kong Parkview, Tower 9, 8/F, Flat 57 South Side 2, ,924 Manderly Garden, House 16 South Side 3, ,303 Redhill Peninsula, Cedar Drive, House 160 South Side 3, ,980 Regalia Bay, House B26 South Side 4, ,580 Feb Repulse Bay Road, House 9 South Side 3, ,163 Feb-07 Bluewater, 2/F, Flat A South Side 2, ,980 Feb-07 Grosvenor Place, 26/F South Side 2, ,000 Feb-07 Ming Wai Garden, 7/F, Flat A South Side 1, ,368 Feb-07 Pine Crest, 6/F, Flat B South Side 2, ,444 Feb-07 Repulse Bay Garden, Tower 9, 20/F South Side 2, ,019 Feb-07 Rosecliff, House 3 South Side 3, ,242 Dec-06 Century Tower, Tower 1, 31-32/F, Flat A Mid-levels 5, ,827 Dec-06 Clovelly Court, Tower 1, 34/F, Flat A Mid-levels 2, ,020 Dec-06 Garden Terrace, Tower 2, 36/F, Flat A Mid-levels 3, ,660 Dec-06 The Mayfair, 37/F, Flat B Mid-levels 2, ,799 Magazine Court, 8/F, Flat B Mid-levels 3, ,030 The Albany, 13-14/F, Duplex B Mid-levels 3, ,717 The Royal Court, 36-37/F, Flat B Mid-levels 2, ,946 Feb-07 Bowen Place, 17/F, Flat A Mid-levels 1, ,638 Feb-07 Garden Terrace, Tower 2, 23/F, Flat A Mid-levels 3, ,786 Feb-07 Regent on the Park, Tower 2, 15/F, Flat A Mid-levels 2, ,000 Feb-07 Tregunter, Tower 3, 43/F, Flat C Mid-levels 3, ,788 PROPERTY MARKET OVERVIEW - APRIL

10 RESIDENTIAL SECTOR MAJOR RESIDENTIAL LEASE TRANSACTIONS Month Property District GFA Rental Unit Rental (sq ft) (HK$ / (HK$ / sq ft / month) month) Dec-06 1 Garden Terrace The Peak 3,726 95, Strawberry Hill The Peak 2, , Dec Repulse Bay Road South Side 2, ,000 * Dec-06 De Ricou, The Repulse Bay South Side 2,185 78, Dec-06 Hong Kong Parkview South Side 2, , Dec-06 The Manhattan South Side 1,880 59, HoÊs Villa South Side 1,902 90, Residence Bel Air South Side 2,365 78, Feb-07 Redhill Peninsula South Side 3, , Feb-07 Repulse Bay Apartment South Side 4, ,000 * Feb-07 The Repulse Bay South Side 2,375 74, Dec-06 2 Park Road Mid-levels , Dec-06 Ovolo Mid-levels 1,200 49, Shama Soho Mid-levels , Feb Kennedy Road Mid-levels 1,237 50, Feb-07 Aigburth Mid-levels 3, , Feb-07 Fairlane Tower Mid-levels 1,700 70, Feb-07 Fairlane Tower Mid-levels 2, , Feb-07 Monmouth Villa Mid-levels 1,557 37, Feb-07 Peach Blossom Mid-levels , Feb-07 Shama Midlevels Mid-levels , Feb-07 Valverde Mid-levels 1,373 46, * Exclusive the initiatives offered by the government and the mortgage rate cut introduced by the banks, the overall market is fuelled by a number of stimulants. Although the initiatives directly benefit the mass residential market, the positive effect potentially spills over to the luxury market as the sentiment of the two sectors is in a complementary relationship. Sustained support for the leasing market During the period from December 2006 to February 2007, the luxury residential market continued to see solid support. This could be attributed to the demand by expatriates from multi-national companies, particularly those in legal services, and the banking and finance sector. They have strong demand for quality housing located close to Central, the core business district in Hong Kong. For example, Four Seasons Place, one of the benchmark serviced apartment developments in Central, is popular in the leasing market due to its proximity to the major office towers in the sub-market and convenient transportation to the airport by the express railway. According to a quarterly publication in 1Q 2007 by Sun Hung Kai Properties, the developer of Four Seasons Place, the serviced apartment tower consistently recorded an occupancy rate of 95%, out of which 50% of the guests are in the banking and finance sector and 30% of them are professionals such as lawyers, accountants and management consultants. Seeing the sustainable demand in the leasing market, the average residential rentals edged up 0.9% QoQ to HK$33.66 per sq ft per month as at the end of February The Peak As mentioned above, the government land auction of 12 Mount Kellett Road, the Peak, which was sold at a net accommodation value of HK$42,196 per sq ft, set a record. The higher-thanexpected land auction result did not only boost the developers interest in application for land auction, the buoyant investment sentiment also spilled over to individual investors. For example, House 26 of 8 Severn Road was sold for HK$101 million in January Based on a total floor area of 3,300 sq ft, the average unit price was HK$30,606 per sq ft. In 31 Barker Road, another luxury house development in the sub-market, 10 PROPERTY MARKET OVERVIEW - APRIL 2007

11 RESIDENTIAL SECTOR $25,000 Luxury Residential Prices - The Peak $50 Luxury Residential Rentals - The Peak $20,000 $40 HK$ / sq ft $15,000 $10,000 HK$ / sq ft / month $30 $20 $5,000 $10 $0 $0 Luxury Residential Prices - South Side Luxury Residential Rentals - South Side $25,000 $50 $20,000 $40 HK$ / sq ft $15,000 $10,000 $30 $5,000 $0 Jan-95 Jul-95 Jan-95 Jul-95 Jan-95 Jul-95 Jan-95 Jul-95 HK$ / sq ft / month $20 $10 $0 $25,000 Luxury Residential Prices - Mid-levels $50 Luxury Residential Rentals - Mid-levels $20,000 $40 HK$ / sq ft $15,000 $10,000 HK$ / sq ft / month $30 $20 $5,000 $10 $0 Jan-95 Jul-95 $0 Jan-95 Jul-95 PROPERTY MARKET OVERVIEW - APRIL

12 RESIDENTIAL SECTOR House D was sold for HK$176 million in late December With a total floor area of 6,396 sq ft, the average unit price was HK$27,517 per sq ft. Also, other traditional benchmark developments, including La Hacienda and Strawberry Hill, recorded transactions of houses. On average, luxury residential prices in the Peak increased 3.5% QoQ from HK$12,963 per sq ft in November 2006 to HK$13,417 per sq ft in February Meanwhile, the leasing market in the Peak also saw positive growth. In 1Q 2007, the average luxury residential rental edged up 1.7% QoQ from HK$43.80 per sq ft per month in November 2006 to HK$44.55 per sq ft per month in February South Side In South Side, the average luxury residential prices edged up 0.4% QoQ to HK$10,469 per sq ft as at the end of February During the three-month period between December 2006 and February 2007, benchmark developments continued to be favored in the sub-market. For example, in Hong Kong Parkview, one of the popular luxury residential developments in South Side, a low-floor unit comprising a floor area of 1,290 sq ft, in Tower 3 was sold for HK$10.08 million or an average unit price of HK$7,814 per sq ft in February Another mid-floor unit with similar orientation and a total floor area of 1,235 sq ft was sold for HK$10.4 million or an average unit price of HK$8,421 per sq ft in November After adjusting the floor difference between the two transacted units, the average unit price increased 0.6% QoQ from November 2006 to February Besides, in Grosvenor Place, another popular development in the sub-market, a high-floor unit was sold for HK$58.99 million. Based on a total floor area of 2,809 sq ft, the average unit price was HK$21,000 per sq ft, setting a new record for the development. Meanwhile, there was individual investment transaction in the sub-market. In December 2006, an investor paid about HK$325 million to purchase another seven houses, including Houses 1, 2, 7, 9, 10, 20 and 21, in 1-9 Shouson Hill Road East, after buying six houses in the same development in November Each transacted house comprises a total floor area ranging from 4,063 sq ft to 4,331 sq ft, and the average unit price fell in the range of between HK$10,890 per sq ft and HK$11,642 per sq ft. During the three-month period in 1Q 2007, the average luxury residential rentals adjusted upward 0.5% QoQ to HK$36.89 per sq ft per month as at the end of February Mid-levels In Mid-levels, the average luxury residential prices saw an upward growth of 0.8% QoQ from HK$8,395 per sq ft in November 2006 to HK$8,462 per sq ft in February In Tregunter, one of the benchmark luxury residential developments in the sub-market, a mid-floor unit in Tower 2 was sold for HK$23 million in February Based on the floor area of 3,050 sq ft, the average unit price was HK$7,541 per sq ft. In December 2006, a high-floor unit of the same size and similar orientation was sold for HK$24.38 million or an average unit price of HK$7,993 per sq ft. After adjusting the floor difference between the two units, the average price in Tregunter saw a growth of 1.4%. Also, in Robinson Place, another popular development in Mid-levels, a high-floor unit in Block 2 was sold for HK$10.5 million in February With a total floor area of 1,266 sq ft, the average unit price was HK$8,294 per sq ft. In November 2006, a low-floor unit with the same orientation and size in Block 2 was sold for HK$8.8 million or an average unit price of HK$6,951 per sq ft. After adjusting the floor difference between the two units, the average price of Robinson Place saw a positive growth of 1.4%. During the three-month period in 1Q 2007, the average unit rentals in Mid-levels edged up 0.9% QoQ from HK$29.63 per sq ft in November 2006 to HK$29.90 per sq ft in February Market outlook Looking forward, the luxury residential market is expected to see a positive growth. The overall residential market sentiment is buoyed by the incentives announced in the government s Budget and the competitive mortgage rates offered by different banks. The limited supply in the traditional luxury residential districts will act as a support to further drive the luxury residential capital values, which is expected to forge ahead 16% YoY in the next twelve months. In the leasing market, the strong hiring expectation in finance, banking and legal services sector continues to push the leasing demand. In the next twelve months, luxury residential rentals are expected to see a positive growth of 9% YoY. 12 PROPERTY MARKET OVERVIEW - APRIL 2007

13 RESIDENTIAL SECTOR PROSPECTIVE NEW SUPPLY OF SERVICED APARTMENTS Property Region District No. of Anticipated Developer / units completion Landlord Cheung Wing Road New Territories Kwai Chung 648 * 2007 Tung Chun URA (K11), Hanoi Road Tsim Sha Tsui Tsim Sha Tsui URA / New World MTR Kowloon Station (Package VI) Tsim Sha Tsui fringe Tsim Sha Tsui SHK Properties / MTRC * Estimated figures PROPERTY MARKET OVERVIEW - APRIL

14 RESIDENTIAL SECTOR CONSENT TO SELL RESIDENTIAL UNITS District Development No. of Estimated Developer units completion December 2006 TCTL 5 Caribbean Coast Phase IV (Towers 15 & 16) Apr-07 MTR Corporation Limited DD 104 Lot 4781 RP Meister House Apr-07 Poly Talent Investment Limited January 2007 Nil February 2007 IL 8969 sb Bel-Air No. 8, Bel-Air On The Peak, Sep-08 Hong Kong Cyberport Island South (Phase VI) (Ancillary Development) Limited Source: Lands Department, HKSAR Government 14 PROPERTY MARKET OVERVIEW - APRIL 2007

15 RESIDENTIAL SECTOR PROJECTED NEW SUPPLY OF LUXURY RESIDENTIAL UNITS IN 2007 Development * House * Apartment Developer / Owner No. of Status units Peak 3-5 PlunkettÊs Road 4-s - Tai Cheung Properties Holdings Ltd 6 Under Construction 10, 12, 16 & 18 PollockÊs Path 4-s - The SunÊs Group Limited 4 Under Construction 30 Peak Road 3-s - HoÊs Investment 1 Under Construction 46 Plantation Road 3-s - Park Talent Development Ltd 4 Completed South Side 68 Mount Davis Road - 13-s Y.K. PaoÊs Fund 10 Completed 77 Deep Water Bay Road 3-s - Chojung Co Ltd 1 Completed 120 Pok Fu Lam Road - 23-s Shun Tak Holdings Limited 10 Completed 216 Victoria Road - 4-s Lo & Son Land Invest Co Ltd 28 Under Construction Cyberport Road Telegraph Bay, 4-s - PCCW, HKSAR Government 29 Under Construction Pokfulam (Stages 10-12) Mid-levels 12 Tung Shan Terrace - 7-s Emperor Group 18 Under Construction 31 Robinson Road - 30-s Kowloon Development 84 Under Construction 39 Conduit Road - 45-s Henderson Land 65 Under Construction Note: * No. of No. of storey PROPERTY MARKET OVERVIEW - APRIL

16 INDUSTRIAL SECTOR INDUSTRIAL MARKET INDUSTRIAL MARKET - KEY MARKET INDICATORS Rents (HK$/sq ft/month) Capital Values (HK$/sq ft) Yields Feb 06 Feb 07 Feb 08 (f) Feb 06 Feb 07 Feb 08 (f) Feb 06 Feb 07 Feb 08 (f) Factory ,155 1, % 7.5% 7.2% Warehouse ,026 1, % 7.9% 7.9% I-O Building ,935 2,205 2, % 6.7% 6.6% IMPORTS AND EXPORTS Date Imports YoY Domestic Exports YoY Re-exports YoY (HK$m) Change (HK$ m) Change (HK$ m) Change Aug , % 34, % 499, % Nov , % 34, % 515, % Feb , % 27, % 459, % May , % 25, % 508, % Aug , % 36, % 557, % Nov , % 44, % 579, % Feb , % 36, % 495, % May , % 32, % 543, % Aug , % 38, % 609, % Nov , % 32, % 647, % Feb , % 23, % 570, % End of 3-month period Source: HKSAR Government Sustained growth in re-exports The total throughput volume of Hong Kong re-exports continued to benefit from the sustained economic growth in the Mainland and buoyant demand for imports in a number of overseas markets during the period from December 2006 to February The volume of re-exports grew 15.0% year-onyear (YoY) to HK$570 billion during the three-month period between December 2006 and February Steady rental growth During 1Q 2007, the rental growth in the factory sector has accelerated. Rentals in the factory sector increased 3.3% quarteron-quarter (QoQ) to HK$7.19 per sq ft per month as at the end of February In the case of the warehousing sector, rentals increased marginally by 0.6% QoQ to HK$6.75 per sq ft per month during the same period. Meanwhile, rentals in the industrial-office buildings (I-O) sector increased 1.6% QoQ to HK$12.39 per sq ft per month. 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Re-export trades year-on-year growth Capital values trending upwards In addition, sustained buying interests for strata-title industrial units continued to support further price growth of industrial properties. In the factory sector, average capital value increased 4.9% QoQ to HK$1,155 per sq ft as at the end of February In the warehousing sector, average prices rose 3.7% QoQ to HK$1,026 per sq ft while average prices in the I-O sector increased 2.5% QoQ to HK$2,205 per sq ft as at the end of February % -15.0% -20.0% Source: Census and Statistics Department, HKSAR Government 16 PROPERTY MARKET OVERVIEW - APRIL 2007

17 INDUSTRIAL SECTOR MAJOR EN-BLOCK INDUSTRIAL TRANSACTIONS (DECEMBER FEBRUARY 2007) District Property Price Average Price Purchaser (HK$ million) (HK$ / sq ft) Kowloon Bay Wai Yuen Tong Medicine Building 188 1,455 Overseas Fund Kwai Chung Prosperity Centre 208 N/A Tai Hung Fai Enterprise Co Ltd Kwai Chung Yoo Hoo Tower 163 1,228 Tai Hung Fai Enterprise Co Ltd Tsuen Wan QPL Industrial Building 178 N/A Texaco Invs No.1 Ltd Fanling Kader Industrial Centre Lok Yip Invs No.1 Ltd No. of Transactions 2,000 1,750 1,500 1,250 1, Q 2003 Industrial transactions pricing above HK$1 million 4,000 3,500 3,000 2,500 2,000 1,500 1, Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2007 Turnover ($) No. of Transactions Source: EPRC Turnover (HK$ million) been motivated to renovate their developments in an attempt to achieve better rental income, and thus capital value enhancement. During 1Q 2007, there was a notable increase in the number of vendors who were found to go ahead with their renovations plan to upgrade the lobbies and external walls of their industrial developments. In financial terms, the average renovation cost involved is estimated to be about HK$20 to HK$50 per sq ft. However, the prospective return could be quite promising. In general, the rentals of the whole industrial premises would be raised by as much as 20% to 30%. Volume of sale transactions During the three-month period ending in February 2007, the number of sales transactions decreased 5.7% to 1,560 while the total value of sales transactions decreased 9.7% to HK$3,239 million. The breakdown of the total number of sales transactions shows that the weighting of transactions with lump sum consideration of above HK$1 million edged up 2.4 percentage point to 55.9%. Investment transactions The number of whole-block sales transactions remained buoyant during 1Q 2007 thanks to sustained buying activities amongst long-term investors. For example, an overseas fund bought the entire development of Wai Yuen Tong Medicine Building for HK$188 million, or an average unit price of HK$1,455 per sq ft, based on a total floor area of 129,167 sq ft. Meanwhile, Tai Hung Fai Enterprise Co Ltd acquired 98% of the undivided shares of the 241,000 sq ft Prosperity Centre in Kwai Chung for a total consideration of HK$208 million. The same company also bought Yoo Hoo Tower for HK$163 million during the period. Building renovation Amid the current trend of growing occupational and investment demand for industrial properties, a number of vendors have Western Corridor to open in July 2007 On the level of sub-market, the ongoing development of infrastructure has been playing an important role in fostering rental growth. The sub-market in Tuen Mun is one of the latest examples showing exceptional rental growth in the recent quarters. According to our research, factory rentals in Tuen Mun outperformed the sector to rise 4.4% QoQ during 1Q In anticipation of the official opening of the Western Corridor in July 2007, the new expressway connecting the northern part of New Territories to Shenzhen, China. Tuen Mun being located in close proximity to the entry of the Corridor is expected to be the key beneficiary. As such, a number of industrial end-users have picked Tuen Mun as one of their key points for strategic expansion. Principal end-users included logistics companies and firms engaged in the logistics business between China and Hong Kong. The new airfreight logistics facility In addition to the new infrastructure link, Asia Airfreight Terminal 2, a brand-new airfreight logistics facility in the airport, was officially opened in March The new Terminal features a sizeable logistics warehouse comprising a total of 1.4 million sq ft floor area. It is designed to increase the current handling capacity by two-fold to 1.5 million tonnes per annum. PROPERTY MARKET OVERVIEW - APRIL

18 INDUSTRIAL SECTOR KAI TAK - PRELIMINARY OUTLINE DEVELOPMENT PLAN Source: HKSAR Government, Colliers International (Hong Kong) Limited In 2006, Hong Kong International Airport (HKIA) handled over 3.5 million tonnes of air cargo, accounting for 34% of Hong Kong s external trade in value terms. The facility was built in order to cope with the growing demand for airfreight logistics warehousing, and provide an efficient channel for cargo distribution. Kowloon East With the gradual completion of Grade A office developments in Kwun Tong and Kowloon Bay, the whole area of Kowloon East has emerged as one of the most popular property alternatives for companies to accommodate their expanding divisions and back-office functions. The success of the opening of APM a decentralized shopping mall in Kowloon East demonstrates that Kowloon East has been going through the process of transformation from a traditional industrial district into a decentralized commercial hub. With the Government s initiative to redevelop the ex-airport site in Kowloon East, the pace of transformation of Kowloon East is expected to pick up further. According to the Government s development plan, a new cruise terminal and tourism-related facilities at the southern end of the former runway will be built. The facility will comprise hotel, office, retail and conference facilities. If the tender is awarded in 2Q 2008, the first berth of the new cruise terminal is expected to be completed in The Kai Tak development plan is expected to be finalised in the second half of Being the biggest site in the urban area, the new projects in the Kai Tak area are expected to stimulate the pace of redevelopment of its adjacent areas such as Kwun Tong, Kowloon Bay and San Po Kong. For example, more supporting facilities will be developed particularly when a number of new Grade A office developments are completed over the coming years. Regarding the impact to the industrial property market, the office developments in Kowloon East are expected to bring in a much wider range of office tenants. The existing industrial and I-O buildings in Kowloon East will thus benefit from a prospective increase in occupational demand. Market outlook Looking ahead, the performance of the local industrial property market is expected to be supported by the continued growth of re-exports throughput in As such, the warehousing sector will be the key beneficiary and the buoyant demand for logistics facilities is expected to boost rental and capital values by 15% over the next 12 months. Meanwhile, rental and capital values of I-O premises will rise 10% and 12% respectively during the period if the traditional office market continues to see further growth. Factory rentals and capital values are reckoned to rise 13% and 18% respectively over the next 12 months. 18 PROPERTY MARKET OVERVIEW - APRIL 2007

19 INDUSTRIAL SECTOR 250 Factory Rental Index 16.00% Factory Rental Yield 14.00% % Index Yield 10.00% 8.00% 6.00% % 2.00% % Jan-2000 = I-O Building Rental Index 16.00% I-O Building Rental Yield 14.00% % Index Yield 10.00% 8.00% 6.00% % 2.00% % Jan-2000 = Warehouse Rental Index 16.00% Warehouse Rental Yield 14.00% % Index 150 Yield 10.00% 8.00% % 4.00% % % Jan-2000 = 100 PROPERTY MARKET OVERVIEW - APRIL

20 RETAIL SECTOR RETAIL SECTOR Improving fundamentals Retail sales in Hong Kong recorded an encouraging performance in They increased 7.3% YoY to over HK$219 billion, which was higher than the long-term average annual growth of 6.5% YoY. One of the driving forces for the positive growth was the consumption by the growing number of visitors. In 2006, the total visitor arrivals increased 8.1% YoY to over 25.2 million. In terms of the contribution to the economy by tourism, a growth of visitor spending was also observed. According to the Hong Kong Tourism Board ( HKTB ), the total expenditure associated with inbound tourism was HK$ billion in 2006, registering a growth of 12.7% YoY. Per capita spending by same-day, in-town visitors in 2006 saw a significant growth of 25.3% YoY from HK$810 per capita in 2005 to HK$1,015 in The key contributor for the strong same-day, in-town visitor spending was the above-average spending by Mainland China visitors, recording a per-capita spending of HK$1,537 in HKTB expected the visitor arrivals to continue to see a steady growth of 4.6% YoY to 26.4 million in In other words, the driving force of consumption by visitors kept on growing this year. YoY Change Number of Arrivals (millions) 40% 30% 20% 10% % -10% -20% -30% 0 Visitor Arrivals from China Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Total Arrivals Total Retail Sales May-96 Sep-96 May-97 Sep-97 May-98 Sep-98 May-99 Sep-99 May-00 Sep-00 May-01 Sep-01 May-02 Sep-02 May-03 Sep-03 May-04 Sep-04 May-05 Sep-05 May-06 Sep-06 Source: Census and Statistics Department, HKSAR Government Arrivals from China (% of total) 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Arrivals from China (% of Total) Source: Hong Kong Tourism Board The second driving force for the retail sales was attributed to the local consumption expenditure. Seeing the continuous economy improvement over the past year, the local household income also followed an upward trend in general. According to the Census and Statistics Department of the Hong Kong SAR Government, the median monthly domestic household income rose 5.6% YoY to HK$16,900 in 4Q Thanks to the tax reduction measures proposed in the government budget speech by Mr. Henry Tang in late February 2007, local consumption expenditure is likely to be further enhanced. The budget proposed that 50% of salaries tax and tax under personal assessment assessed for be waived, subject to a ceiling of HK$15,000. Besides, increasing job security also pushed locals confidence to spend. The unemployment rate during the three-month period between December 2006 and February 2007 further dropped to 4.3%, achieving the lowest level since mid Provided there is steady growth in economic fundamentals and increasing visitors, retail sales are expected to see firm support. Return of investment interests The positive expectation of economic fundamentals and tourism drew investors attention to the retail market. After showing less interest in the retail property market in 2006 due to rental consolidation, investment funds took actual purchase of retail premises in Mong Kok, one of the key shopping areas in Hong Kong, to indicate their vote of confidence in the market. In February 2007, a Singaporean fund bought Mong Kok Computer Centre from a local investor for HK$750 million. Based on the total floor area of approximately 26,000 sq ft, the average unit price was HK$28,846 per sq ft. The three-storey shopping centre with a ground-floor entrance, located at 8-8A Nelson Street, Mong Kok, is in proximity to an entrance of the MTR station and busy streets in the sub-market, benefiting from the high shopper flow. Another benchmark sales transaction in the same sub-market was the sale of Golden Plaza, a shopping centre in Mong Kok comprising shops related to wedding services, in February A US-based investment bank paid HK$515 million to buy over 90% of shares of the 45,860 sq-ft shopping centre and its exterior wall. Based on the current monthly rental of about HK$2.5 million per month, the initial yield was about 5.8% per annum. Although investment demand has been buoyant, the availability of stock in core retail areas for investment remains limited since the bulk of them are controlled by large-scale 20 PROPERTY MARKET OVERVIEW - APRIL 2007

21 RETAIL SECTOR developers for long-term investment. Therefore, interested investors have to compete for a few stocks made available for sale by individual owners. Magnified upside factors Meanwhile, the retail leasing market also saw active transactions in 1Q During the seasonal peak shopping period in Christmas in December 2006 and Chinese Lunar New Year in February 2007, shopping centres in traditional retail areas and decentralized locations recorded encouraging sales income in their retail shops. Therefore, the buoyant sentiment of both retail premises owners and retailers pushed the rentals to a surging trend. For example, some retailers were willing to raise their rental offer by 30% to 40% between the end of 2006 and February 2007 in order to maintain competitiveness in securing their interested retail spaces at prime locations. Those aggressive retailers had their businesses in luxury products, jewelry, watches, etc. They targeted at the visitors, especially those cash-rich visitors from the Mainland China, who are willing to spend a lot on luxury goods and branded products. Their eagerness to rent shops at prime locations is due to their high optimism about tourism growth. Despite the strong retail sales performance in the latest seasonal peak period, market players have to be aware if the market has been expected to grow at a too fast pace. The improving economy, increasing employment, rising salaries and growing number of visitors are driving the retail market. However, the critical point is whether the positive effect resulting from these improving fundamentals are strong enough to support retailers rental costs to rise suddenly and at such a significant rate. Currently, consumption in the market has kept positive growth, with the retail sales edging up year by year. However, as the economy recovers, and tourism growth gradually enters a more mature stage, their driving force for the retail market growth is likely to adjust to a more stable rate instead of the accelerated pace during the boom period in 2004 and 2005, i.e. after the trough during the SARS period in Sub-market analysis The average retail rentals in key shopping areas continued to edge up in 1Q 2007 after turning to positive growth in 4Q 2006, demonstrating a solid proof for the cease of rental consolidation. The average retail rental in traditional shopping districts increased 8% QoQ from HK$320 per sq ft per month in November 2006 to HK$345 per sq ft per month as at the end of February In Mong Kok, the average retail rentals in the major streets increased 7% QoQ to HK$315 per sq ft per month as at the end of February Mong Kok is a traditional shopping area for both locals and visitors, attracted by the various shopping centres and clusters of ground-floor shops. Sai Yeung Choi Street South, acting as the centre of the sub-market, sees especially high shopper flow. Part of the street is so busy that it is restricted for pedestrians only at the daytime during weekends. Due to the high popularity of Sai Yeung Choi Street, retailers are willing to pay a premium for prime retail units there. In January 2007, a retailer engaged in telecommunication business paid a rental of HK$150,000 per month for a ground-level shop at 1A Sai Yeung Choi Street South. With a total shop area of 273 sq ft, the average unit rental reached HK$549 per sq ft per month. Besides, some retailers were no longer only interested in securing a retail space in the street, they were looking for opportunity to expand their shop in order to increase their exposure in the sub-market. Some of the existing retailers in the street, occupying only a ground-level unit in the past, have extended their shop to the basement levels. Lately, a local fashion chain store has also taken an expansion move. It has been occupying the ground-level shop at 6-12 Sai Yeung Choi Street South for years. In early 2007, they rented additional retail space on 1st to 3rd floors of the same building, costing a rental of about HK$900,000 per month. The shop size was expanded by over 11,000 sq ft, compared with the previous size of 2,200 sq ft for the ground-level unit only. In Tsim Sha Tsui, the average retail rentals edged up 8% QoQ from HK$294 per sq ft per month in November 2006 to HK$318 per sq ft per month as at the end of February One of the popular shopping areas in the sub-market is Granville Road, along where individual local shops are located. The retailers in the street mainly include cosmetics, fashion and accessories shops. In January 2007, a ground-level shop at 56-56A Granville Road, Tsim Sha Tsui was rented for a rental of HK$116,000 per month. Based on a total floor area of 599 sq ft, the average unit rental was HK$194 per sq ft per month. In Causeway Bay, the average retail rentals increased 8% QoQ from HK$346 per sq ft per month in November 2006 to HK$372 per sq ft per month in February In 1Q 2007, benchmark leasing transactions were found in Russell Street which is a popular location in the sub-market. The street s region directly facing Times Square, one of the popular shopping arcades in Hong Kong, is especially favored by retailers due to the attraction PROPERTY MARKET OVERVIEW - APRIL

22 RETAIL SECTOR Retail Property Index month. With a shop size of around 1,000 sq ft, the average unit rental was about HK$550 per sq ft per month Rental Value Capital Value In Central, the average retail rentals rose 8% QoQ from HK$353 per sq ft per month in November 2006 to HK$383 as at the end of February The sub-market is positioned as a high-end shopping area and many international brands have opened their shops there. In 1Q 2007, a local retailer distributing fashion products of different international labels opened a new shop in the sub-market. The retailer paid a rental of HK$650,000 per month for a shop on the ground floor and G1 level at 2-8 Wellington Street, comprising around 9,200 sq ft in size. Source: Rating and Valuation Department, HKSAR Government created by its neighboring arcades. Retailers are willing to pay a premium rental to secure the prime units at this region. There were two examples in 1Q In January 2007, an international cosmetics brand rented a ground-level shop at 52 Russell Street for a rental of approximately HK$520,000 per month. With a total floor area of about 1,000 sq ft, the average unit rental was HK$520 per sq ft per month. Another shop close to the retail unit mentioned above was also leased out in February A local optical shop rented the ground-level retail unit at Russell Street for a rental of about HK$550,000 per Market outlook Fundamentally, the local retail market is supported by the improving economy and growing visitor arrivals. The salary level of locals is observed to have an upward adjustment after passing the traditional salary review period at the end of a year. In addition, salary tax reduction proposed in the government budget further enhances local consumption power. Amid an optimistic expectation of the tourism performance and local economy, it is expected the retail market will see positive growth this year. In the next twelve months, the average retail rentals and capital values are projected to edge up 7% YoY and 18% YoY respectively. 22 PROPERTY MARKET OVERVIEW - APRIL 2007

23 RETAIL SECTOR INDICATIVE RETAIL RENTALS BY MAJOR DISTRICTS Street Name Section of Street Retail Rentals Retail Rentals (HK$ per sq ft) (HK$ per sq ft) Nov-06 Feb-07 Mongkok Nathan Road (northern section) From Mongkok Road to Prince Edward Road Nathan Road (southern section) From Dundas Street to Mongkok Road Sai Yeung Choi Street (northern section) From Mongkok Road to Prince Edward Road Sai Yeung Choi Street (southern section) From Dundas Street to Mongkok Road Average % Change (QoQ) 2% 7% Central QueenÊs Road Central From Garden Road to Pottinger Street Des Voeux Road Central From Garden Road to Pottinger Street DÊAguilar Street N/A Average % Change (QoQ) 3% 8% Tsim Sha Tsui Nathan Road From Salisbury Road to Austin Road Cameron Road N/A Peking Road N/A Haiphong Road N/A Granville Road N/A Average % Change (QoQ) 1% 8% Causeway Bay Hennessy Road From Canal Road to Yee Wo Street Yee Woo Street N/A Lockhart Road From Canal Road to East Point Road Russell Street N/A Percival Street N/A Average % Change (QoQ) 2% 8% Overall % Change (QoQ) 2% 8% N/A = Not Applicable PROPERTY MARKET OVERVIEW - APRIL

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