market A Rebound in research & forecast report colliers international HONG KONG 3Q 2012 market overview

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1 3Q 2012 market overview research & forecast report hong kong OFFICE market colliers international HONG KONG A Rebound in 2013 Despite the soft leasing demand during the quarter with overall net take-up dropping 80% QoQ to 111,000 sq ft in 3Q 2012, market sentiment was generally positive across all submarkets. Companies such as hedge funds, recruitment firms and legal firms were the key source of demand on Hong Kong Island. Newcomers were mainly finance-related companies who looked for office premises with areas of about 3,000 sq ft. Meanwhile, legal firms were still expanding in Central but the pace has slowed down in 3Q 2012 compared to the previous two quarters. In Tsim Sha Tsui and Kowloon East, tenant demand came from relocation and consolidation as well as upgrading. market indicators ForEcast overall performance New supply Tenant Demand Incentives rents capital values yields The overall Grade A office rent rebounded in 3Q 2012 after falling for three consecutive months, rising a solid 1.5% QoQ. The average Grade A office rent in Central / Admiralty showed its first quarterly gain since 3Q 2011, rising 0.8% QoQ in 3Q 2012 to HK$98.8 per sq ft per month. The rent rise as well as the stalled overall vacancy were driven by the sustained demand from new set-ups and expansionary demand from the legal sector, albeit at a slower pace compared to the previous quarter. Without a clearer economic outlook, landlords were unwilling to further reduce their asking rents, particular for buildings with low vacancy. In the investment sales market, the average yield of Hong Kong Grade A offices compressed 20 basis points, from 3.3% in April 2012 to 3.1% in July. Investment sentiment in the office market weakened during 3Q The total value of investment sales transactions for a lump sum consideration of more than HK$30 million each contracted 41% QoQ to HK$6.9 billion in 3Q After falling 13% since mid-2011, Central / Admiralty rent showed signs of stabilising during 3Q In fact, compared to the western part of the world, Hong Kong s sound economic fundamentals will offer a brighter business prospect and continue to attract companies from all over the world. For those who want to do business in mainland China and across the region, Hong Kong is well placed to be the base for these companies. Therefore, we expect rents to rebound in 2013 on the back of scarce supply and positive demand. Considering more lease expiry cases next year and a brighter economic outlook, market activity is expected to pick up and the overall Grade A office rent is projected to climb 6% over the next 12 months.

2 Employment Trends HONG KONG PMI HIGHEST IN FIVE MONTHS With marginal overall growth momentum, the Hong Kong Purchasing Managers Index signalled further expansion in Hong Kong s private business sector activities. The HSBC Hong Kong PMI edged up 0.2 points to 50.5 in August 2012 from 50.3 in July. The increase was supported by the rise in output and continuous wage growth, and that underpinned domestic demand. HIRING EXPECTATIONS WEAKENED To the contrary, hiring expectations weakened in 3Q 2012, as 37.7% of the 432 executives surveyed in the Hudson Report planned to increase hiring, down 3.3 percentage points from 41% in 2Q In addition, 7.6% of the respondents expected to reduce headcounts in 3Q 2012, up from 6% in the previous quarter. Across five key business sectors, the IT & T sector still showed the highest hiring expectations, with 49.6% of the respondents saying that they will increase headcounts. Meanwhile, executives in the Banking & Financial Services sector remained cautious in recruiting staff, as 36.7% of them plan to recruit additional staff in 3Q Meanwhile, the proportion of Banking & Financial Services executives forecasting reduction in headcounts rose slightly from 10% in 2Q 2012 to 10.5% in 3Q. JOB VACANCIES IN THE FIRE SECTOR DECLINED According to the latest figures released by the Census and Statistics Department, the employment market of the Finance, Insurance and Real Estate ( FIRE ) sector weakened in 2Q The number of job vacancies in the FIRE sector contracted 9.3% YoY in 2Q 2012, after seeing a positive 10.7% YoY growth in 1Q GRADE A OFFICE RENT vs JOB VACANCY IN FIRE SECTOR 140% 120% Last Rally 100% 80% % change year-on-year 60% 40% 20% 0% -20% Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16-40% -60% -80% -100% FIRE Job Vacancy Grade A Office Rent Note: FIRE = Financing, Insurance and Real Estate Source: Census & Statistics Department, HKSAR Government; Colliers p. 2 Colliers International

3 Tenant Demand WEAK NET TAKE-UP Leasing demand was soft in the city s Grade A office market. In view of the uncertain economic outlook, individual large tenants downsized their premises but still preferred to stay in the same district. The slowdown in leasing activity has been reflected in the market, with the overall net take-up falling 80% QoQ to 111,000 sq ft in 3Q 2012, mainly due to the drop in net-take up in Central / Admiralty. SUBMARKETS PERFORMANCE Due to weaker demand for Grade A office premises amidst global financial turbulence during the quarter, net take-up slowed in all submarkets. Moreover, the limited stock available for lease in the marketplace during the quarter was another reason for the decline in net take-up. In Central / Admiralty, occupied stock showed another contraction over three quarters, releasing 70,000 sq ft of Grade A office stock following a positive net take-up of 126,000 sq ft in 2Q Although demand has softened for top-tier buildings in Central, leasing enquiries from small to medium-size companies with areas between 2,000 and 6,000 sq ft, picked up. In contrast, positive net-take up was seen in the Wanchai / Causeway Bay, Island East, Tsim Sha Tsui and Kowloon East areas. SOURCE OF DEMAND Companies such as hedge funds, recruitment firms and legal firms were the key source of demand on Hong Kong Island. Newcomers were mainly finance-related companies who looked for office premises with areas of about 3,000 sq ft. Meanwhile, legal firms were still expanding in Central but the pace has slowed in 3Q 2012 compared to the previous two quarters. In Tsim Sha Tsui and Kowloon East, tenant demand came from relocation and consolidation as well as upgrading. Among different tenants, sourcing and insurance companies were the main drivers for the uptake of Grade A office space in 3Q 2012, requiring office units with large floor plate size in general. GRADE A OFFICE NET TAKE-UP 1,400,000 1,200,000 1,000, ,000 Net Floor Area (sq ft) 600, , , ,000 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q , , ,000 Colliers International p. 3

4 Supply Conditions TWO BUILDINGS COMPLETED IN 3Q 2012 Completed in July 2012, 28 Hennessy Road in Wan Chai, developed by Swire Properties, added a total of 102,240 sq ft of net floor area to Hong Kong Island s Grade A office market. Moreover, the occupation permit for Elite Centre in Kwun Tong was issued in August 2012, adding about 184,340 sq ft of net floor area to the market. For 2012 as a whole, 1.13 million sq ft of Grade A office stock will be provided. By the end of 2012, the scheduled completion of CCB Tower in Central and One Pacific Centre in Kwun Tong will provide a total net floor area of about 373,570 sq ft. NO SUPPLY ON HONG KONG ISLAND IN 2013 Looking into 2013, there will be no new supply on Hong Kong Island. The coming new supply will focus on four new developments in Kowloon East, one in Cheung Sha Wan and another in Kwai Chung, totalling 1.48 million sq ft of net floor area. The scarce supply of Grade A office premises will continue in 2014; only three new office developments of 570,000 sq ft of net floor area are expected to be completed GRADE A OFFICE SUPPLY TREND Floor Area (million sq ft) Long-term Average Annual Supply 2.2 million sq ft F 2013F 2014F Source: Rating and Valuation Department ( ); Colliers ( ) p. 4 Colliers International

5 Grade A Office Supply ( and Beyond) building District nfa (sq ft) developer status 2012 New Supply Hysan Place Causeway Bay 241,500 Hysan Development Completed King Palace Plaza Kwun Tong 231,333 Billion Development Completed 28 Hennessy Road Wan Chai 102,240 Swire Completed Elite Centre (20-24 Hung To Road) Kwun Tong 172,052 Sun Hung Kai Properties Completed CCB Tower Central 170,000 Lai Sun/China Construction Bank Under construction One Pacific Centre Kwun Tong 203,570 HK Pacific Investment Under construction 2012 Total 1,120, New Supply Kowloon Commerce Centre - Tower B Kwai Chung 414,800 Sun Hung Kai Properties Under construction 181 Hoi Bun Road Kwun Tong 262,650 Sun Hung Kai Properties / Under construction Wong's International Hoi Bun Road Kwun Tong 189,765 Sundart Int'l Holdings Under construction 10 Shing Yip Street Kwun Tong 209,368 Billion Development Under construction 6 Wang Kwong Road Kowloon Bay 224,900 Billion Development Under construction 2013 Total 1,301, New Supply 10 Cheung Yue Street Cheung Sha Wan 176,581 Billion Development Under construction Tsun Yip Street Kwun Tong 305,989 Billion Development Under construction Chong Yip Street Kwun Tong 226,480 Billion Development Demolition 8 Connaught Place Central 40,700 Hongkong Land Under construction 2014 Total 749, & Beyond New Supply 10 Harcourt Road Central 419,468 Hutchison Under planning (Existing Hutchison House) 70 Queen's Road Central Central 156,641 Wheelock Under planning (Existing Crawford House) Queen's Road Central Central 167,292 New World Development Under planning (Existing Manning House and Loke Yew Building) 10 Chater Road Central 514,342 Hongkong Land Under planning (Existing Prince's Building) 979 King's Road, Taikoo Place Taikoo Place 1,712,743 Swire Properties Under planning (Existing Warwick House, Somerset House, Cornwall House) 180 Wai Yip Street (KTIL 174) Kwun Tong 407,324 Sun Hung Kai Properties / Wong's International Under planning (Existing Wong's Industrial Centre) NKIL 6269 Kwun Tong 741,297 Wheelock Under Planning 98 How Ming Street (KTIL 240) Kwun Tong 972,243 Transport International Holdings / Under planning (Existing Bus Depot) Sun Hung Kai Properties 123 Hoi Bun Road Kwun Tong 506,782 Wheelock Under planning (Existing Wharf T & T Square) 14 Wang Tai Road Kowloon Bay 193,749 First Group Under planning (Existing Niche Centre) NKIL 6314 Kowloon Bay 681,890 Goldin Under Planning 2 Ng Fong Street San Po Kong 267,082 Billion Development Under planning (Existing Unimix Industrial Centre) KIL Hung Hom 471,997 Wheelock Under Planning SttL 463 Shek Mun 344,000 Billion Development Under Planning 2015 & Beyond Total 7,556,850 Note: Demolition: Demolition work is actively undergoing Under construction: Construction activity, including either foundation or superstructure, are undergoing on site Under planning (Existing Building): Building plan for a site, currently occupied by a tenanted building, is approved by the Government Under planning (Vacant Building): Building plan for a site, currently occupied by an empty building, is approved by the Government Under planning (Bare Site): Building plan for a bare site is approved by the Government Completed: Construction is completed and an occupation permit is issued by the Government Colliers International p. 5

6 Vacancy grade a office vacancy rates (by sub-markets) District Total Stock (million sq ft) 3Q 11 4Q 11 1Q 12 2Q Q 2012 Central / Admiralty % 3.8% 5.7% 5.1% 5.5% Wan Chai / Causeway Bay % 2.4% 1.6% 3.1% 3.8% Island East % 3.9% 4.2% 2.9% 2.6% Sheung Wan % 4.0% 3.6% 1.5% 1.7% Tsim Sha Tsui % 1.9% 2.9% 1.7% 0.9% Kowloon East % 12.5% 10.3% 10.9% 9.6% Overall % 4.6% 5.0% 4.7% 4.7% Note: Floor area on net basis OVERALL VACANCY STALLED The overall vacancy rate was virtually stalled in 3Q 2012, due to the sustained demand from new, finance services-related start-ups and moderate expansion demand from the legal sector on the back of tight supply of available stock for lease. However, the vacancy rates for submarkets on Hong Kong Island generally trended downwards, while relocation of cost-sensitive tenants pushed down vacancy rates in Tsim Sha Tsui and Kowloon East. SUB-MARKET PERFORMANCE The falling rent affordability of Central Grade A office tenants and subsequent softening of demand for Grade A office space caused the vacancy rate to rise 40 basis points from 5.1% to 5.5%. Meanwhile, the completion of 28 Hennessy Road in Wan Chai added about 102,240 sq ft of net floor area to Wan Chai / Causeway Bay district. The Grade A office vacancy rate in the district increased 70 basis points to 3.8% during the quarter. On the contrary, Tsim Sha Tsui and Kowloon East performed well, with vacancy rates falling 80 and 100 basis points, respectively, thanks to the relocation of tenants for various reasons: downsizing, consolidation and/or upgrading. VACANCY FORECAST Due to the limited supply of Grade A office buildings for lease for the rest of 2012, the vacancy rate on Hong Kong Island will remain low, with the exception of Central / Admiralty, where falling demand for top-tier office premises is anticipated to cause the vacancy rate to edge up further during the next few months. Overall, the average vacancy rate is projected to hover at around its historical average of 5.0% by the end of GRADE A OFFICE VACANCY RATE TREND 9.0% 8.0% 7.0% 6.0% Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Vacancy Rate Dec-11 Mar-12 Jun % 4.0% 3.0% 2.0% 1.0% 0.0% p. 6 Colliers International

7 Rent Trend grade a office rentals (by sub-markets) District 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 3Q 2012 (% QoQ) Central / Admiralty $113.5 $111.8 $109.9 $100.1 $98.1 $ % Wan Chai / Causeway Bay $58.1 $59.3 $59.7 $58.0 $58.8 $ % Island East $39.2 $40.6 $41.1 $39.5 $40.0 $ % Sheung Wan $54.7 $54.7 $54.8 $54.7 $54.3 $ % Tsim Sha Tsui $42.7 $44.8 $44.9 $45.6 $46.5 $ % Kowloon East $28.8 $29.8 $31.3 $31.4 $32.2 $ % Overall $67.9 $67.9 $67.6 $63.9 $63.4 $ % RENTS REBOUNDED AFTER FALLING FOR THREE QUARTERS Despite fewer leasing transactions being concluded during the quarter, market sentiment was generally positive across all submarkets. The overall Grade A office rent rebounded in 3Q 2012 after falling for three consecutive months, rising a solid 1.5% QoQ. CENTRAL MARKET PICKED UP The average Grade A office rent in Central / Admiralty showed its first quarterly gain since 3Q 2011, rising 0.8% QoQ in 3Q 2012 to HK$98.8 per sq ft per month. The rise was driven by demand from new set-ups and expansionary demand from the legal sector, albeit at a slower pace compared to the previous quarter. Without a clearer economic outlook, landlords were unwilling to further reduce their asking rents, particular for buildings with low vacancy. Meanwhile, Central / Admiralty tenants prefer to stay in the same district upon lease renewal or downsizing due to the limited available stock for lease in other locations and unjustified relocation costs. Knowing that, the market saw less relocation movement from Central / Admiralty to other submarkets during the quarter. TSIM SHA TSUI OUTPERFORMED Among all submarkets, rents in Tsim Sha Tsui showed the strongest growth at 5.4% QoQ in 3Q On the back of its extremely low vacancy, any prominent leasing deals concluded in the market would push up rents in the Tsim Sha Tsui Grade A office market. For instance, an insurance company from Island East and a sourcing company from Kwun Tong relocated to Tsim Sha Tsui, taking up 40,000 to 50,000 sq ft each. Moreover, landlords in Kowloon East raised their asking rents for large floor size units in view of the strong demand and tight supply imbalance. In contrast, Grade A office rents for units that are less than 10,000 sq ft in Kowloon East were still competitive. Effective Rents (HK$ / sq ft / Month (Net Floor Area)) GRADE A OFFICE RENTAL TREND $80 $70 $60 $50 $40 $30 $20 $10 $ Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul RENT FORECAST In the wake of positive signs from the Central Grade A office market, the overall Grade A office rent is bottoming out. Although individual companies are reducing staff in light of a deteriorating business environment, there was no major headcount reduction. Clouded by the uncertain economic outlook, Central / Admiralty rents are expected to stay flat for the rest of the year, taking into account the falling rent affordability of top-tier buildings and the rising vacancy rate. However, the other submarkets should remain resilient and Tsim Sha Tsui is expected to outperform other submarkets due to high demand from relocation tenants coupled with limited stock available for lease in the district. For the whole year of 2012, the overall Grade A office rent is projected to undergo only a mild downward adjustment of 3%. Colliers International p. 7

8 Investment Market MARKET VOLUME With the external uncertainties and tightening of mortgage lending criteria, investment sentiment in the office market weakened during 3Q The total value of investment sales transactions for a lump sum consideration of more than HK$30 million each contracted 41% QoQ to HK$6.9 billion in 3Q INVESTMENT RATIONALE The most significant en bloc transaction during the review period was the sale of Tung Shun Hing Commercial Centre in Tsim Sha Tsui to a local investor for HK$1,088 million. Based on a total gross floor area of 51,980 sq ft, the average price was HK$20,931 per sq ft. The buyer plans to redevelop the existing building into a Ginza-type commercial building mainly for retail use. Based on the current rental income, the initial yield is below 2% per annum. The rental yield is expected to increase to 3.1% per annum after redevelopment. Another major en bloc transaction was the sale of Tsuen Wan Hoover Plaza, a 15-storey commercial building in Tsuen Wan to a local investor for HK$515 million. Based on a total gross floor area of 88,425 sq ft, the average price was HK$5,818 per sq ft. The buyer plans to convert the existing building into a Ginza-type commercial building. After repositioning, the rental yield is expected to increase to 3.7% per annum from the current level of less than 2% per annum. Regarding strata-title sales, the Kowloon Commerce Centre Tower B in Kwai Chung by Sun Hung Kai Properties recorded six transactions involving 13 floors in total. The average prices of these transactions were in the range of HK$6,000-7,300 per sq ft. The average prices of brand new office buildings in Kowloon East are mostly above HK$8,000 per sq ft. The relatively low price in the Kowloon Commerce Centre attracted a group of buyers acquiring the premises for investment or owner-occupation purposes. For example, The Open University of Hong Kong acquired five floors in Kowloon Commerce Centre Tower B for about HK$ million. Based on a total floor area of 124,353 sq ft, the average price was about HK$6,087 per sq ft. OFFICE YIELD According to the Rating and Valuation Department, the average yield of Hong Kong Grade A offices compressed 20 basis points, from 3.3% in April to 3.1% in July The decrease in Grade A office yield reflected that the demand for Grade A office premises from investors remained strong during the quarter. HONG KONG OFFICE INVESTMENT YIELDS HONG KONG OFFICE INVESTMENT SALES TRANSACTIONS 10% 16 Yield (% per annum) 9% 8% 7% 6% 5% 4% 3% 2% Total Turnover (HK$ billion) Historical Average: HK$5.8 billion 1% 0% Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Grade A Grade B 2 0 1Q 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 Q Q Q Q Q Q Q Q Q 2012 Source: Rating and Valuation Department, HKSAR Government Note: Investment sales transactions with lump sums of HK$30 million or above Source: EPRC p. 8 Colliers International

9 Market Outlook The current market performance is consistent with our prediction that the prevailing consolidation period for Grade A office rents will be shorter, due to the positive market sentiment and increased leasing enquiries. However, tenants remained cost-cautious due to the headwinds from a contracting European economy and the sluggish US economic growth. After falling 13% since mid-2011, Central / Admiralty rents showed signs of stabilising during 3Q In fact, compared to western economies, Hong Kong s sound economic fundamentals will offer a brighter business prospect and continue to attract companies from across the globe. For those who want to do business in mainland China and across the region, Hong Kong is well placed to be the base for these companies. Therefore, we expect rents to rebound in 2013 on the back of scarce supply and positive demand. Considering an increased level of lease expiry cases next year and a brighter economic outlook, market activity is expected to pick up and overall Grade A office rent is projected to climb 6% over the next 12 months. GRADE A OFFICE RENTAL TREND $ Effective Rents (HK$ / sq ft / Month (Net Floor Area)) $70 $60 $50 $40 $30 $20 $10 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul $0 Colliers International p. 9

10 522 offices in 62 countries on 6 continents United States: 147 Canada: 37 Latin America: 19 Asia Pacific: 201 EMEA: 118 $1.8 billion in annual revenue in ,250 million square feet under management Over 12,300 professionals Colliers International (Hong Kong) Limited Suite 5701 Central Plaza 18 Harbour Road Wanchai Hong Kong tel FAX Company Licence No: C Richard Kirke Managing Director Hong Kong tel FAX richard.kirke@colliers.com Individual Licence: E Simon Lo Executive Director Research & Advisory Asia tel FAX simon.lo@colliers.com Copyright 2012 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. You are receiving this collateral because you either subscribed for it or expressed your interest to receive it at some point to Colliers International. If you do not wish to receive future communications from us, please contact Colliers International by at unsubscribe.hongkong@colliers.com with your name and item to unsubscribe Accelerating success.