Hong Kong. October 2007 THE ECONOMY. October 2007

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1 October 27 October 27 Hong Kong Selective Buy for office Hold Retail and residential to benefit from rental adjustments Buyer/Tenant Quadrant -5 Seller/Tenant Quadrant Hong Kong Economic Snapshot GDP Growth (y-o-y) Unemploym ent Rate CPI (%chg y-o-y) Echange Rate (HK$:US$1. ) Long Term Government Bond Yield 2) Alpha Matrix Hong Kong SPACE C A P I T A L M A R K E T +5 28(F) 27(F) 3Q7 1) % 5.8% 5.7% 6.9% 4.2% 4.2% 4.2% 4.8% 3.1% 1.9% 1.3% 2.1% n.a n.a 4.48% 3.73% Cost of 5.3% 5.4% 5.86% 5.3% Borrowing Source: Bloomberg, Census and Statistics Department; Consensus Forecast 1) as at August 27 2) 1-year Government Bond Yield -5 MARKET Buyer/Landlord Quadrant +5 Seller/Landlord Quadrant Office (2, -1) Retail (2,-2) Residential (.5,-.5) THE ECONOMY Hong Kong GDP grew by 5.7% y-o-y in 3Q 27 compared to 6.9% y-o-y recorded in the preceding quarter. According to the Consensus Forecast, the country s GDP is projected to grow at 5.8% y-o-y by the end of 27. Seasonally adjusted unemployment rate went down to 4.2% in 2Q 27, the lowest level recorded since mid Consumer prices was up by 1.6% y-o-y in 3Q 27 compared to 1.3% y-o-y recorded in 2Q 27. The slowdown in inflation was mainly due to the one-off waiver for public housing rents which was announced in the 27/8 budget. As a result, consumer prices is projected at 1.9% for 27 before edging up to 3.1% in 28, when the impact of the rent-waiver would have worn off. In the recent annual policy speech for 28-9, the Hong Kong government had announced that it will reduce salary taxes to 15% from the current 16% while profits tax will be reduced to 16.5% from the current 17.5%. The tax cuts which will take effect in the fiscal year beginning April 1 st are expected to boost corporate earnings and will help to stimulate consumer spending. According to the recent survey conducted by Hudson, hiring expectations in the legal sector rose further to 68% in 3Q 27, up from 6% in 2Q 27. The report also highlighted strong hiring expectations particularly in the area of Sales, Banking, Accounting and Finance, thus translating into increased demand for Grade A office space. Permanent Employment Expectations in Hong Kong P ermanent Employment Expectations in Hong Kong All Industries M edia/pr/advertising Manufacturing Legal IT&T Consumer Banking & Financial Services 49% 5% 34% 66% 45% 54% 68% 32% 35% 63% 36% 62% 57% 41% 1% 1% 2% 2% % 2% 4% 6% 8% 1% Increase Steady Decrease 1% Source: Hudson Report 3Q 27 Page 1 of 8

2 October 27 Going forward, private consumption will continue to be the main driver of growth coupled with rapid employment growth rate and government incentives such as tax rebates and publichousing rent waivers. Hong Kong GDP, CPI and Unemployment Rate Trend 14.% % 1.% 11 8.% 15 6.% 4.% 1 2.%.% 95-2.% 9 2Q4 21Q4 22Q4 23Q4 24Q4 25Q4 26Q4 29 Real GDP Growth Composite Price Index Unemployment Rate Source: Bloomberg, HK Census and Statistics Department OFFICE SECTOR (SELECTIVE BUY) Space Market Review Strong regional economies as well as buoyant demand from the banking and finance sector continued to support rental growth rate for Grade A office space. Though located in Kowloon West, outside the Central area, the recent International Commerce Centre (ICC) that is being developed by Sun Hung Kai Properties is expected to cater to the pent-up demand in Central. The recent move by Morgan Stanley to lease 35, sq.ft of office space in ICC will likely encourage other financial houses who had previously only considered Hong Kong Island locations. A total of 4.4 million sq.ft of Grade A office space will be injected in 28. Of which, approximately 6% of the new supply will be concentrated in the Kowloon East area. Hong Kong Office Supply, Net Absorption and Vacancy Rate (Central) sq.m. % 2, 12.% Forecast 15, 1, 5, -5, % 8.% 6.% 4.% 2.%.% Supply (Sq.m.) Net Absoprtion (sq.m.) Vacancy Rate (%) Source: Jones Lang LaSalle As demand continues to outstrip supply, vacancy rate in Central dipped to 3.4% in 2Q 27, the lowest vacancy level since Wanchai also saw vacancy rate declining to 3.1% in 2Q 27 due to tenants relocating from Central. The projected net absorption of 77, 29 sq.ft for 2H 27 is likely to be met in areas such as Hong Kong East and Kowloon East largely due to the large floor spaces available and relatively lower rentals Q1 93 Q1 94 Q1 95 Hong Kong Office Effective Rent Q1 96 Q1 97 Q1 98 Q1 99 Q1 Central Wanchai Tsimshatsui Hong Kong East Kowloon East In 2Q7, effective rent at Central hit a 13-year high to reach HK$82.28 psf pm. In contrast, rents in Wanchai softened during the quarter as cost sensitive non-financial tenant relocated to Hong Kong East and Kowloon East. Effective rent in Wanchai dropped 2.78% q-o-q to HK$35 psf pm. Looking forward, even though positive rental growth is expected for Central office space, the current outflow of tenants towards Kowloon East is expected to slow down the rental growth rate of the overall Hong Kong office market in 28. Leasing Transactions in Central & Wanchai 2Q 27 Office Building District Size (sqft) Q1 1 Q1 2 Q1 3 Rent (HK$/sqft) Q1 4 Q1 5 Q1 6 Q1 7 Lessee The Center Central 9,15 est 48 Cantor Fitzgerald Bank of Wheelock Central 9,28 54 Communicati House ons The Center Central 25,59 42 Maples & Calder The Center Central 11,64 4 Instinet Pacific Man Yee Building Central 11,46 5 ING Financial Hopewell Centre Wanchai 15,71 25 AIA Dah Sing Orient Financial Wanchai 1,53 37 Securities Centre Leasing activities in the Central have remained firm, driven by expansion requirements from banks, financial institution and other professional Page 2 of 8

3 October 27 firm. A total of 46,245 sq.ft. at The Center were taken up by three tenants in 2Q 27 namely Cantor and Fitzgerald, Maples & Calder and Instinet Pacific. Capital Market Review HK$/square feet 2, 15, 1, 5, 1987 Hong Kong Office Capital Values and Initial Yields Q27 Initial Yield Overall Initial Yield Central Initial Yield Kowloon East Overall Central Wan Chai Kowloon East Hong Kong East Tsim Sha Tsui 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Average capital value for prime Central office in 2Q27 had reached a 1 year high at HK$15,314psf. Similar situation was also witnessed in the non-core areas of Wanchai and Tsimshatsui. Capital value for Wanchai stood at HK$1,23 psf, an increase of 7.4% y- o-y while Tsimshatsui registered HK$9,587 psf or 3.7% y-o-y. Selected Hong Kong Office Investment Transactions 1H 27 Office Property Area Price HK$mn HK$/psf Buyer Mohan's Building Tsimshatsui ,557 Plan View Crocodile House 1 & 2 Canton Road /F Bank of America Tower Units 3-9 & 1-15, 6/F Wing On Plaza 45/F Far East Finance Centre 8/F Bank of America Tower 25/F Harbour Centre Matheson Centre Central 1,7. 8,229 Tsimshatsui 31. 1,299 Central ,38 Tsimshatsui ,885 Admiralty ,591 Central ,7 Wanchai , ,294 2/F Worldwide Central ,285 House Source: Jones Lang Lasalle and AIP Citigroup Property Investors Win Pacific Holdings Top Dragon Enterprises Ferrin Enterprises Chalco Holdings Rich Article Enterprises Instant Gain Management Din Tung Co Glory Faith Holdings The robust demand for premium office space especially from the financial institutions and professional services firm have continued to attract strong interest from investors. Notable investment transactions include Crocodile House 1&2 which was sold to Citigroup Property Investors in February for redevelopment at HK$1.7 billion or HK$8,229 psf. In the sub-market, Metheson Centre at with gross floor area of 34, sq. ft was sold to Din Tung Co at HK$35 million, reflecting HK$ 1,294 psf. Investment Yield (Central) 4% Carry (Yield less borrowing cost) -1.9% Risk Premium (Yield less risk-free -.78% rate) Recommendation Central Office Sector is in the Seller/Landlord Quadrant at (2, -1) and over the next half year is expected to move eastward with moderate rental growth. Meanwhile, capital values have skyrocketed since 26 and hence it would be a challenge to buy good quality office properties in Central as most landlords are asking for prices that are over discounting future rental growth. Accordingly, we recommend selective buy at the right price. RETAIL SECTOR (HOLD) Space Market Review Hong Kong retail sector continued to thrive in 2Q 27 on the back of strong retail sales and a steady growth rate in the tourism sector. Visitor arrivals in June this year reached 2.3 million, an increase of 7.7% y-o-y. The cumulative figure for January till June 27 amounted to more than 13 million, up by 6.8% compared with the same period a year ago. The launch of the Venetian Macao recently is expected to increase the amount of tourists transiting though Hong Kong, further boosting retail sales activities in the core tourist districts. Tourist Arrival and Hotel Occupancy in Hong Kong (Jan 26-June 27) 2,5, 2,, 1,5, 1,, 5, Tourist Arrivals Jan-6 Feb-6 Mar-6 Apr-6 May-6 Jun-6 Jul-6 Aug-6 Sep-6 Oct-6 Nov-6 Dec-6 Jan-7 Feb-7 Mar-7 Apr-7 May-7 Jun-7 Tourist Arrivals 11% 9% 7% 5% 3% 1% Average Hotel Occupancy Rate Source: Hong Kong Tourism Board and AIP % Page 3 of 8

4 October 27 25, 2, 15, 1, 5, HK$m n Hong Kong Retail Sales %chg y-o-y HK$mn %chg y-o-y Retail Rental in Prime and Decentralized District HK$ psf pm Decentralized Effective Rent HK$ psf pm Prime Effective Rent HK$ psf pm Forecast Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Source: HK Census and Statistics Department -3.. In 2Q 27, a total of 1.16 million sq.ft. of retail space were injected in the decentralized area. Of which, 77% of the supply came from Hopewell s Hong Kong Trade & Exhibition Centre which was converted to E-Max in Kowloon. 9, 8, 7, 6, 5, 4, 3, 2, 1, sq.m 22 Hong Kong Retail Space Market (Prime) Supply (Sq.m.) Vacancy Rate (%) Forecast % 6.% 5.% 4.% 3.% 2.% 1.%.% Net Absoprtion (sq.m.) Over the next two years, new supply of retail space will mostly be concentrated in the decentralized locations while prime areas will witness limited new supply. According to Jones Lang LaSalle, approximately 1,825 sq.ft and 19,454 sq.ft will be injected in the prime and decentralized market respectively in 28-29, representing 7% of the current total stock. Vacancy rate at prime retail areas remained low at 1.6% owing to the increase in the number of flagship stores setup by international brand retailers. In 2Q27, prime retail rent in Central witnessed the strongest growth rate, increasing by 15.89% y-o-y to reach HK$31 psf pm. Elsewhere, registered a modest rental increase of 2.8% q-o-q. Notable Leasing Transactions in 1H 27 Address Russell Street 22 G/F 7 Percival Street Russell Street 59-61, B5 Russell Street 59-61, B4 Unit B, G/F, Yun Ping Road 42 Shop 4A on G/F Tak Shing House 2 Des Voeux Rd Location Size (sqft) Rent (HK$/psf) 1, Lessee Sun Glasses Hut 1,2 5 Rado 1, Fashion Retailer Gome 1, Swarovski Central 1,1 364 Venilla Suite Shop 14 IFC Central Silvercord G/F(Cross of Haiphong Rd and Canton Rd) Park Lane Shopper's Boulevard 18 unit D G/f, 1/F Canton Road 86-98, Unit 1&2 Shop C-D on G/f NO. 2 Canton Road Sai Yeung Choi Street South 34 Leather Shop Tsimshatsui 8, 313 Nike Tsimshatsui 1, GEOX Tsimshatsui 2, 35 Sa Sa Tsimshatsui Mongkok Sun Glasses Hut Fashion Retailer Buoyed by strong domestic spending and firm tourism growth, both local and international retailers are looking to expand their business in the prime district. Notable leasing transaction includes Sa Sa s lease of 2,sq.ft on Canton Road at HK$35 psf pm and Nike s lease of 8, sq.ft on Tsimshatsui HK$313 psf pm. Page 4 of 8

5 October 27 Looking forward, AIP expects prime retail district rents to increase by an average of 1% per annum over the next two years, riding on the back of the 28 Beijing Olympics as well as the upcoming events and exhibition in Macau. Capital Market Review 7, 6, 5, 4, 3, 2, 1, 1Q 1 Hong Kong Retail Capital Value(Prime and Decentralised Areas) 3Q 1 Prime Capital Value(HK$psf) Decentralised Capital Value(HK$psf) 1Q 2 3Q 2 1Q 3 3Q 3 1Q 4 In 2Q7, capital values of prime floor level strata retail units in Central grew 15.9% y-o-y to HK$65,561 psf. This growth is in tandem with the rental growth pattern. The investment market has also witnessed increased participation from foreign institutional funds. Merrill Lynch acquired Golden Plaza in Mongkok for HK$515 million earlier this year. In June 27, the same fund has acquired two other retail property including Silver Fortune Plaza and Pakpolee Commercial Centre for HK$5 million and HK$4 million respectively. Notable Retail Investment Transactions in 1H 27 Property/District Golden Plaza Nathan Road Mongkok Computer Centre (Grandview Blding) Nelson Street 8-8A Location 3Q 4 1Q 5 Price HK$mn 3Q 5 1Q 6 3Q 6 1Q 7 Unit Price HK$psf Mongkok ,23 Mongkok 75 28,846 Retail Sector is in the Seller/Landlord Quadrant at (2,-2) and is expected to move southeast over the next 6-12 months amid the tight supply and low vacancies. In the near future, strong domestic demand and emerging new retail concept stores will greatly enhance rental growth potential of retail space. RESIDENTIAL SECTOR (HOLD) Space Market Review The Hong Kong residential market in the past five months has been characterized by high profile launches in prime, exclusive districts and a series of residential land site auctions. Net supply of luxury apartments for 27 is estimated at 139, below the average of 323 units recorded in the past 1 years. The supply situation is expected to be tighter in 28 with only 89 units made available. Vacancy rate for luxury apartments in Hong Kong dipped to 9.3% in 2Q 27 compared to 9.5% registered in 4Q 26. Luxury Residential Rental Index Source: Savills Research & Consultancy The increase in expatriate housing demand and tight supply has contributed to significantly higher rental rates for luxury apartments in Hong Kong. The first half of 27 saw rents for luxury apartment units in Hong Kong Island edging up 9.4%. On a y-o-y basis, rents for luxury apartment units rose 28.8%. Service Apartment Rental Index Silver Fortune Plaza Central 5 n.a Pakpolee Com Mongkok 4 n.a Centre Source: Jones Lang Lasalle and AIP Investment Yield(Prime) 4.5% Carry -1.4% Risk Premium -.28% Recommendation Source: Savills Research & Consultancy Page 5 of 8

6 October 27 Buoyed by the strong demand from expatriates looking for a short to medium-stay in Hong Kong, hotel-like service apartment also saw rents surging by 11% in the first half of 27. According to Savills, occupancy rates at prime location such as Four Seasons Place, the Atrium and Parkside are near 1%. 4 Notable Leasing Transactions in 1H 27 Property Location Size (sqft) Penthouse in Four Season Place Penthouse B, Block 2 Plantation Road House in Residence Bel- Air House in Casa Del Sol Monthy Gross Rent (HK$/psf) Central 2, The Peak 2, Pokfulam 4, Stanley 3, Source: Jones Lang Lasalle, Savills and AIP On the leasing front, demand for top end properties was largely driven by expatriate families. Some notable leasing transactions include a penthouse in Four Season place and a penthouse at The Peak that were leased at HK$368, per month and HK$19, per month respectively. Moving forward, the leasing market for luxury apartment is expected to see positive growth on the back of strong hiring expectations in finance, banking and legal services sector. Capital Market Review In the 1H of 27, luxury apartments prices increased by 9.4% to HK$17,78 psf. Prices at The Peak and Southside also continued to record strong growth rising 9.1% and 8.9% respectively. Among all the submarkets, strong capital growth rate were witnessed for luxury apartments in Kowloon and New Territories registering 12.2% and 11.6% increase respectively in 1H 27. The increase was mostly due to the overwhelming response from new project launches such as St Andrew s Place, The Royal Oaks and The Vineyard. 18, 16, 14, 12, 1, 8, 6, 4, 2, Hong Kong Large and Luxury Residential Capital Values and Yields HK$ psf % 1Q 2Q 3Q 4Q 1Q 1 2Q 1 3Q 1 4Q 1 1Q 2 2Q 2 3Q 2 4Q 2 1Q 3 2Q 3 3Q 3 4Q 3 1Q 4 2Q 4 3Q 4 4Q 4 1Q 5 2Q 5 3Q 5 4Q 5 1Q 6 2Q 6 3Q 6 4Q 6 1Q 7 2Q 7 Source: Jones Lang Lasalle and AIP Capital Value HK$ psf Yield % 5.% 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% On the investment front, a number of en bloc acquisitions were seen during the first half of the year. Some of the notable transactions include Hacienda at Repulse which was sold to Cheung Kong Holdings for HK$1 billion or HK$11,7 psf. Notable en bloc transactions 1H 27 Property Description Hacienda, Repulse Amount HK$ 1billion Buyer Cheung Kong Lodge on the Park 1billion Cheung Kong Henredon Court, Shouson Hill De La Salle, Stanley Beach Road 184 Wellington Road 2-28 Tai Po Road, Sham Shui Po Source: Jones Lang Lasalle 81 million 525 million 4 million 33 million Sun Hung Kai China Overseas Manhattan Garments Lai Sun Development Increased activity in government land auctions were also seen in 1H 27. In particular, the three larger sites (3, sq.ft and above) were purchased by a consortium of developers. The largest site at Pak Shek Kok with an area of 749, 788 sq.ft. was acquired by Sino Land, Nan Fung and K. Wah at HK$3.5 billion. 4) 9 February 27. The Standard Newspaper Publishing Limited Page 6 of 8

7 October 27 Government Land Auction Results (Jan-Jul 27) Buyer Sino Land/Nan Fung/K. Wah Sino Land/Nan Fung/K. Wah/Chinese Estate Sino Land/Nan Fung Kerry Properties Sun Hung Kai Location Pak Shek Kok, Site C Hoi Wang Road Pak Shek Kok, Site A Chun Yan Street, Wong Tai Sin Hoi Fai Road West Kowloon Closing Bid (HK$million) GFA(sq ft) Average Land Cost HK$ psf 3,5 749,788 4,668 4, 65,684 6,147 2,11 345,46 6,19 3,98 92,58 4,324 5,56 916,515 6,66 Source: Lands Department, Savills Research & Consultancy Recommendation Prime residential Sector is in the Seller/Landlord Quadrant at (.5,-.5) and over the next half year is expected to shift eastward. Prime residential capital values are expected to continue rising, mainly due to tight supply in Central. Leasing demand is likely to see positive growth on the back of firm hiring expectations in the finance, banking and legal sector. Though fundamentals are attractive, it has largely been priced in. We recommend a hold to benefit from rising rent adjustments. Sale of luxury villas have not shown signs of slowing down as illustrated by the recent transaction whereby a local investor purchased a house in Severn 8 for HK$21 million or a unit price of HK$4,944 psf. Notable Residential Sale Transactions (1H 27) Property/District House 5, Severn 8 House D, 31 Barker Road Location Price HK$mn Unit price HK$psf The Peak ,499 The Peak ,517 House 3A, Gough Hill The Peak 17 3,3 Residences 11 Coombe Road The Peak 61 38,125 House 1, Severn 8 The Peak 21 4,944 House 17, Residence Bel- Air Pokfulam 85 16,323 Source: Jones Lang Lasalle AIP expects rental for luxury apartments to increase by 5% on average for the next two years on the back of robust economic growth, sustained leasing demand and limited new supply in traditional luxury area. Investment Yield(Prime) 3.5% Carry -2.4% Risk Premium -2.4% Page 7 of 8

8 October 27 This report was produced by: Alpha Investment Partners Limited 23 Victoria Street #15-3/4 Bugis Junction Towers Singapore Tel: Fax: This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas as a result of using different assumptions and criteria. Alpha Investment Partners Limited ( AIP ) is under no obligation to update or keep current the information contained herein. AIP and/or its directors, officers and employees or clients may have or have had interests or long or short positions in, and may at any time make purchases and/or sales as principal or agent. In addition, AIP may act or have acted as market-maker in the relevant securities or related financial instruments discussed in this report. Furthermore, AIP may have or have had a relationship with or may provide or has provided investment banking, capital markets and/ or other financial services to the relevant companies. Employees of AIP may serve or have served as officers or directors of the relevant companies. AIP may rely on information barriers, such as Chinese Walls, to control the flow of information contained in one or more areas within AIP. Page 8 of 8