The Link Real Estate Investment Trust

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this Circular or as to the action to be taken, you should consult your licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all of your units in The Link Real Estate Investment Trust ( The Link REIT ), you should at once hand this Circular, together with the accompanying proxy form, to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. The Securities and Futures Commission of Hong Kong, Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this Circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Circular. This Circular is for information purposes only and does not constitute an offer or invitation to subscribe for or purchase any securities, nor is it calculated to invite any such offer or invitation. The Link Real Estate Investment Trust (a collective investment scheme authorised under section 104 of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)) (stock code: 823) CIRCULAR TO UNITHOLDERS IN RELATION TO (1) PROPOSED EXPANSION OF THE GEOGRAPHICAL SCOPE OF THE LINK REIT S INVESTMENT STRATEGY, (2) OTHER PROPOSED AMENDMENTS TO THE TRUST DEED, AND (3) NOTICE OF EXTRAORDINARY GENERAL MEETING A notice convening the extraordinary general meeting of the unitholders of The Link REIT to be held at Salon 5 and 6, JW Marriott Ballroom, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Tuesday, 18 February 2014 at 10:00 a.m. is set out on pages N-1 to N-5 of this Circular. Whether or not you are able to attend the aforesaid extraordinary general meeting in person, you are requested to complete the accompanying proxy form in accordance with the instructions printed thereon and return it to the unit registrar of The Link REIT, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the extraordinary general meeting or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the extraordinary general meeting or any adjournment thereof should you so wish. 17 January 2014

2 TABLE OF CONTENTS Page DEFINITIONS... 1 LETTER FROM THE BOARD TO UNITHOLDERS SECTION A. INTRODUCTION... 5 SECTION B. SECTION C. PROPOSED EXPANSION OF THE GEOGRAPHICAL SCOPE OF THE LINK REIT S INVESTMENT STRATEGY... 6 PROPOSED INVESTMENT SCOPE TRUST DEED AMENDMENTS SECTION D. OTHER PROPOSED AMENDMENTS TO THE TRUST DEED SECTION E. EXTRAORDINARY GENERAL MEETING SECTION F. RESPONSIBILITY STATEMENT SECTION G. MISCELLANEOUS APPENDIX I. TRUST DEED AMENDMENTS... I-1 II. PRC RISK FACTORS... II-1 III. OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG... III-1 IV. PRC TAXATION.... IV-1 V. SAVILLS RESEARCH REPORT... V-1 NOTICE OF EXTRAORDINARY GENERAL MEETING.... N-1 i

3 DEFINITIONS In this Circular, unless otherwise stated, the following definitions have the following meanings: 2012 Circular the circular dated 25 June 2012 issued by The Link REIT to Unitholders in relation to, among other things, the proposed expansion of the asset class of The Link REIT s investment strategy Board Business Day CAGR Connected Person Directors EGM EGM Notice board of Directors has the meaning ascribed to it under the Trust Deed compound annual growth rate has the meaning ascribed to it under the REIT Code directors of the Manager the extraordinary general meeting of Unitholders convened to be held at Salon 5 and 6, JW Marriott Ballroom, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Tuesday, 18 February 2014 at 10:00 a.m. the notice convening the EGM as set out on pages N-1 to N-5 of this Circular Excluded Associate means any person or entity who/which is an associate of the relevant Connected Person solely by virtue of the operation of paragraphs (b), (c), and/or (k) (in the case of paragraph (k), other than a related corporation covered under paragraph (a) of the definition of related corporation in Schedule 1 to the SFO) of the definition of associate in Schedule 1 to the SFO Expanded Geographical Investment Scope the proposed expansion of the geographical scope of The Link REIT s investment strategy beyond Hong Kong (so that The Link REIT shall have the flexibility to invest in all classes of sustainable-income producing non-residential properties including but not limited to stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments in Hong Kong and other overseas jurisdictions, but in all cases excluding hotels and serviced apartments) which is to be considered, and if thought fit, approved by Unitholders by the proposed Special Resolution No. 1 set out in the EGM Notice 1

4 DEFINITIONS GDP HK$ or Hong Kong Dollars Hong Kong Hong Kong Stock Exchange Investment Scope Trust Deed Amendments Latest Practicable Date Listing Rules gross domestic product Hong Kong dollars, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the People s Republic of China The Stock Exchange of Hong Kong Limited the proposed amendments to the Trust Deed in connection with the Expanded Geographical Investment Scope, the details of which are set out in Part A of Appendix I to this Circular, which are to be considered, and if thought fit, approved by Unitholders by the proposed Special Resolution No. 2 set out in the EGM Notice 13 January 2014, being the latest practicable date prior to the printing of this Circular for the purpose of ascertaining certain information contained in this Circular Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited Manager The Link Management Limited, a company incorporated under the laws of Hong Kong, which is the manager of The Link REIT Matters Requiring Approval the Expanded Geographical Investment Scope and the Trust Deed Amendments NBS National Bureau of Statistics of the People s Republic of China Other Trust Deed Amendments PRC other proposed amendments to the Trust Deed, the details of which are set out in Part B to Part F of Appendix I to this Circular, which are to be considered, and if thought fit, approved by Unitholders by the proposed Special Resolutions Nos. 3, 4, 5, 6 and 7 set out in the EGM Notice The People s Republic of China excluding, for the purposes of this Circular only, Hong Kong, the Macau Special Administrative Region of The People s Republic of China and Taiwan 2

5 DEFINITIONS PRD the Pearl River Delta area, as further described in paragraph B.V(d) of section B of this Circular REIT Code the Code on Real Estate Investment Trusts published by the SFC as amended, supplemented or otherwise modified for the time being REIT(s) RMB real estate investment trust(s) Renminbi, the lawful currency of the PRC Savills Savills Property Services (Shanghai) Company Limited Savills Research Report SFC Retail Research Report prepared by Savills and commissioned by the Manager to provide an independent review of the PRC retail property market, the full text and sources of which are set out in Appendix V to this Circular the Securities and Futures Commission of Hong Kong SFO the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified for the time being Special Purpose Vehicle a special purpose vehicle that is owned and controlled by The Link REIT in accordance with the REIT Code, which is defined in Clause 1.1 of the Trust Deed Special Resolution The Link REIT a resolution of Unitholders passed by a majority consisting of 75% or more of the votes of those present and entitled to vote, whether in person or by proxy, at a general meeting of Unitholders, where the votes shall be taken by way of poll but with a quorum of two or more Unitholders holding not less than 25% of the Units in issue The Link Real Estate Investment Trust, a collective investment scheme authorised under section 104 of the SFO, whose Units are listed on the Main Board of the Hong Kong Stock Exchange (stock code: 823), and where the context requires, includes companies and/or Special Purpose Vehicles owned and/or controlled by it 3

6 DEFINITIONS Trust Deed the trust deed dated 6 September 2005 between the Trustee and the Manager constituting The Link REIT, as amended and supplemented by nine supplemental deeds dated 4 November 2005, 8 November 2005, 16 January 2006, 21 November 2006, 13 July 2007, 23 July 2007, 5 October 2009, 23 July 2010 and 25 July 2012, respectively Trust Deed Amendments collectively, the Investment Scope Trust Deed Amendments and the Other Trust Deed Amendments Trustee Unit(s) Unitholder(s) HSBC Institutional Trust Services (Asia) Limited, in its capacity as the trustee of The Link REIT, or any successor thereof as the trustee of The Link REIT, as the context requires unit(s) of The Link REIT holder(s) of Unit(s) % or per cent. per centum or percentage Words importing the singular shall, where applicable, include the plural and vice versa and words importing the masculine gender shall, where applicable, include the feminine and neuter genders. References to persons shall include corporations. Any reference in this Circular to any enactment is a reference to that enactment for the time being amended or re-enacted. Any reference to a time of day in this Circular shall be a reference to Hong Kong time unless otherwise stated. 4

7 LETTER FROM THE BOARD TO UNITHOLDERS The Link Real Estate Investment Trust (a collective investment scheme authorised under section 104 of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)) (stock code: 823) Directors of the Manager: Chairman (also an Independent Non-Executive Director) Nicholas Robert SALLNOW-SMITH Executive Directors George Kwok Lung HONGCHOY (Chief Executive Officer) Andy CHEUNG Lee Ming (Chief Financial Officer) Registered Office: 33/F., AXA Tower, Landmark East, 100 How Ming Street, Kwun Tong, Kowloon, Hong Kong Non-Executive Director Ian Keith GRIFFITHS Independent Non-Executive Directors William CHAN Chak Cheung Anthony CHOW Wing Kin Patrick FUNG Yuk Bun Stanley KO Kam Chuen May Siew Boi TAN David Charles WATT Richard WONG Yue Chim Elaine Carole YOUNG To: Unitholders of The Link REIT 17 January 2014 Dear Sir or Madam, CIRCULAR TO UNITHOLDERS IN RELATION TO (1) PROPOSED EXPANSION OF THE GEOGRAPHICAL SCOPE OF THE LINK REIT S INVESTMENT STRATEGY, (2) OTHER PROPOSED AMENDMENTS TO THE TRUST DEED, AND (3) NOTICE OF EXTRAORDINARY GENERAL MEETING SECTION A. INTRODUCTION Reference is made to the announcement dated 10 January 2014 of The Link REIT in relation to, among other things, the Matters Requiring Approval (being the Expanded Geographical Investment Scope and the Trust Deed Amendments). The purpose of 5

8 LETTER FROM THE BOARD TO UNITHOLDERS this Circular is to provide you with the EGM Notice and further information on the Special Resolutions to be proposed at the EGM regarding the Matters Requiring Approval. Section B of this Circular sets out the Manager s proposal to expand the geographical scope of The Link REIT s investment strategy beyond Hong Kong, so that The Link REIT shall have the flexibility to invest in all classes of sustainable-income producing non-residential properties (including but not limited to stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments) in Hong Kong and other overseas jurisdictions, but in all cases excluding hotels and serviced apartments, for the reasons described herein. In accordance with the REIT Code, the Manager is seeking Unitholders approval for this proposal, which if obtained, requires certain consequential amendments to the Trust Deed (as set out in Section C of this Circular). Section D of this Circular sets out other proposed amendments to the Trust Deed, which do not relate to the proposed expansion of The Link REIT s geographical investment scope. Instead, such other amendments are intended to update the Trust Deed so that it reflects the latest developments in the Hong Kong REIT market, or in other cases, to mirror updates to the Listing Rules so that such updates will apply to The Link REIT. These include, among other things, the proposed amendments to the Trust Deed to: (a) allow voting by way of a show of hands in limited circumstances; and (b) facilitate placing and top-up subscription transactions. SECTION B. PROPOSED EXPANSION OF THE GEOGRAPHICAL SCOPE OF THE LINK REIT S INVESTMENT STRATEGY I. Background At the time of the initial authorisation of The Link REIT under section 104 of the SFO, The Link REIT s property portfolio only comprised properties situated in Hong Kong. Accordingly, the objective and the scope of The Link REIT s investment strategy had been initially limited to sustainable-income producing properties in Hong Kong which were substantially used for retail and car-park purposes. In its effort to expand the investment strategy of The Link REIT for long-term growth, the Manager sought and obtained approval of the Unitholders at the annual general meeting of The Link REIT held on 25 July 2012, for the expansion of the investment strategy of The Link REIT to encompass investments in all classes of sustainable-income producing non-residential properties, including but not limited to, stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments in Hong Kong, but in all cases excluding hotels and serviced apartments. In line with such investment strategy, The Link REIT s property portfolio is entirely situated in Hong Kong. 6

9 LETTER FROM THE BOARD TO UNITHOLDERS II. The Expanded Geographical Investment Scope The Manager considers that an over-concentration of property investment in a market within a single city is not conducive to the long-term development and sustainable growth of The Link REIT. As the Hong Kong real estate market is limited in scale and dominated by a number of major developers and established landlords, expansion outside Hong Kong (like many other REITs in Asia that invest in more than one city) is important for The Link REIT s long-term and sustainable growth. Accordingly, the Manager proposes to expand the geographical scope of The Link REIT s investment strategy beyond Hong Kong so that The Link REIT shall have the flexibility to invest in all classes of sustainable-income producing non-residential properties (including but not limited to stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments in Hong Kong and other overseas jurisdictions, but in all cases excluding hotels and serviced apartments). The Manager is of the view that the Expanded Geographical Investment Scope is fair and reasonable and in the interests of the Unitholders as a whole. (a) Reasons for the Expanded Geographical Investment Scope The reasons for the Expanded Geographical Investment Scope are as follows: Greater investment opportunities. A geographically diverse investment strategy will provide The Link REIT with more investment opportunities which could bring attractive yields and/or greater capital appreciation potential than in Hong Kong. The ability to capture investment opportunities in fast-growing economies, such as the PRC, will also provide The Link REIT with long-term growth potential. To facilitate this, The Link REIT would require the flexibility to opportunistically invest in markets outside Hong Kong. Enhancement of stability in rental revenue level and ability to make stable distributions. As real estate markets in different jurisdictions experience different vacancy rates and rental growth cycles, a geographically diverse portfolio will provide The Link REIT with a more stable rental revenue level and this, in turn, will enhance The Link REIT s ability to make stable and sustainable distributions to Unitholders. A geographically diverse portfolio will also be less susceptible to any adverse changes which may occur due to the political and economic conditions in any particular market. Flexibility to maximise returns. Generally, a geographically diverse investment strategy would allow The Link REIT to tap the domestic capital market in which the real estate is located for favourable funding while capitalisation rates in those overseas real estate markets may be 7

10 LETTER FROM THE BOARD TO UNITHOLDERS higher than those in Hong Kong. The flexibility for the Manager to select appropriate markets and leverage on different funding costs and yields will enable The Link REIT to enhance financial returns on its investments and Unitholders returns in the long term. The trend for cross-border investments. The Manager notes that it is also a common and growing market trend in the other regional REIT markets for REITs to have investments in more than one geographical location. Many REITs listed in Hong Kong have geographically diverse investment strategies which facilitate cross-border investments in other countries, such as the PRC. There are more opportunities for growth if the REIT has flexibility to invest beyond a single city. Investor expectations. The Manager has received feedback from existing investors that REITs with geographically diverse portfolios are preferred so that the REIT s portfolio is not tied to one economic cycle in a single jurisdiction. The Link REIT s portfolio can benefit from the different growth rate of different markets and at the same time, market risks are spread and minimised if the portfolio (being illiquid investment such as real estate) is exposed to different economic cycles. Enhancement of Unitholders base. By enabling the Manager to capitalise on investment opportunities outside Hong Kong, The Link REIT will have a greater opportunity to attract investors with different investment appetites thereby enlarging the universe of investors investing in The Link REIT. (b) General Considerations when Investing in Real Estate Assets outside Hong Kong In selecting appropriate investments in overseas jurisdictions, the Manager will proceed in a disciplined manner with considerations primarily being given to the management team s expertise and experience, resources and capability in the relevant jurisdiction. General external factors which the Manager will also consider (without limitation) include: Investor confidence in the market. The Manager will consider investing in overseas markets in which investor confidence is strong as ownership of properties in such markets is likely to make an investment in the Units of The Link REIT more attractive and enhance its Unitholders base. Stability of the market. The Manager will assess the economic, political and social conditions of a potential overseas market to assess the risks related to such conditions and evaluate the feasibility of an investment in such a market. 8

11 LETTER FROM THE BOARD TO UNITHOLDERS Maturity and development of the market. The Manager will consider whether a particular country of investment has a well planned and developed infrastructure network along with high accessibility for commercial properties, as such factors enhance the value of the properties located in that country. The legislative and regulatory regime impacting on the legal structure of an investment include, without limitation, the certainty of interpretation of the relevant legislation and regulations in that overseas country, and the ease of enforcement of judgements in that country will also be considered. Growth potential of the market. The Manager will assess the growth potential of an overseas market, including consideration of whether there is a high and rising demand for the type of properties which The Link REIT intends to invest in and whether such demand is offset by an excessive supply or rising costs and expenses related to property management. Availability of reliable market information and reputable service providers. The Manager will consider investing in overseas markets in which there are reputable service providers and reliable market information for the assessment of investment opportunities, implementation of the investment and management of the properties. Laws and taxation. The Manager will consider the relevant laws and regulations of a potential overseas market (particularly in respect of property ownership), as well as its taxation regime, in evaluating the feasibility of an investment in such a market. III. Compliance with Laws and Regulations In considering any investment opportunity, the Manager will have regard to, and comply with, all applicable legal and regulatory requirements, including but not limited to the requirements prescribed under the REIT Code. With regard to investment opportunities in the PRC and other overseas jurisdictions, the Manager will further have regard to, and comply with, the Practice Note on Overseas Investments by SFC-authorised REITs contained in the REIT Code. IV. Approvals Required The Manager notes that in a circular to management companies of SFC-authorised REITs dated 12 October 2007, the SFC has, among other things, clarified that in acquiring overseas or new types of properties, REIT managers do not have to seek re-approval of their licences or re-authorisation of the relevant REIT by the SFC before proceeding to make such acquisitions. Nevertheless, in making acquisition decisions, it is the Manager s obligation to satisfy itself that it has sufficient and appropriate skills and processes in place to manage the new properties, and more generally, to have regard to its fiduciary duties to the Unitholders. 9

12 LETTER FROM THE BOARD TO UNITHOLDERS Pursuant to Clause of the Trust Deed, the Manager shall ensure that the Unitholders are given sufficient prior notice, and where applicable, right to vote, with respect to any material change to The Link REIT, including without limitation, changes in its investment objectives. Also, pursuant to paragraph 10.7 of the REIT Code, a circular shall be issued by the Manager where there is a change in the general character or nature of The Link REIT, such as its investment objective and/or policy. Accordingly, the Manager proposes to seek Unitholders approval of Special Resolution No. 1 as set out in the EGM Notice approving the Expanded Geographical Investment Scope. Such Special Resolution will be decided on a poll at the EGM pursuant to the Trust Deed. V. The Initial Focus of the Expanded Geographical Investment Scope Hong Kong is considered part of the Greater China Region by asset allocators in the global investment communities. Given the geographic proximity, close economic co-operation, linguistic and cultural affinity between Hong Kong and the PRC, the Manager considers an expansion into the PRC to be a logical extension of the business of The Link REIT. Initially, the Manager intends to focus on appropriate investment opportunities in the province of Guangdong and the PRD, particularly in the urban mid-market retail sector given the growth of the middle class consumers in the area. Such strategy will be reviewed from time to time by the Manager and may be adjusted depending on market conditions, in which case the Manager shall publish a further announcement in compliance with the REIT Code, as appropriate. While expanding the geographical scope of its investment strategy, the Manager intends to invest in the same asset classes as stated in the 2012 Circular, namely, all classes of substantial-income producing non-residential properties, including but not limited to, stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments, but in all cases excluding hotels and serviced apartments. The Manager will ensure that it has the resources and experienced personnel to oversee and monitor the asset investment and asset management strategies for its plan to expand into the PRC. Investment into the PRC may involve certain risks in relation to financial aspects and operational matters. For further details of these risks, please refer to paragraph B.VII of this Circular. 10

13 LETTER FROM THE BOARD TO UNITHOLDERS (a) Prospect of the PRC Economy and the PRC Retail Market The discussions in paragraphs B.V(a), (b) and (d) below are primarily based on the information and data provided in the Savills Research Report. Savills was commissioned by the Manager to conduct a study to provide an independent review of the PRC retail property market. The full text and sources of the Savills Research Report are set out in Appendix V to this Circular. Fast GDP growth The PRC is the second largest and one of the fastest growing economies in the world. The PRC recorded strong economic growth, recording an average annual real GDP growth rate of 14.3% from 2007 to 2012, which was achieved amidst the global economic slowdown. According to the NBS, the GDP of the PRC in 2012 stood at RMB51,894 billion (representing a real growth rate of 7.7%), and for the first three quarters of 2013, its real GDP reached RMB38,676.2 billion (representing a 7.7% increase from the corresponding period in 2012). PRC GDP growth rate and forecast, F 16,000 GDP (Left Hand Side) US dollars (billion) GDP growth rate (Right Hand Side) YoY 16% 14,000 14% 12,000 12% 10,000 10% 8,000 8% 6,000 6% 4,000 4% 2,000 2% 0 0% Source: Focus Economics, Savills Research Report According to the statistics released by the World Bank, the projected GDP growth rates of the PRC in 2013 and 2014 will still place the country ahead of other major economies in the world. 11

14 LETTER FROM THE BOARD TO UNITHOLDERS International GDP growth rates and forecast, E 20% Brazil PRC India Japan Russia United Kingdom United States YoY 15% 10% 12.7% 11.3% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.2% 8.5% 8.5% 8.5% 8.5% 5% 0% -5% -10% E 2014E 2015E 2016E 2017E 2018E Source: World Bank, Savills Research Report Rapid urbanisation The rapid development of the country s transportation infrastructure has stimulated the pace of urbanisation in the PRC. According to the report released by the NBS on 22 February 2013, the urbanisation rate has accelerated, as evidenced by the forecast 52.6% of urban residents at the end of This represents an increase of approximately 1.3% as compared with the end of The interconnectedness of the country and its cities has consolidated the importance of key (or first-tier) cities. The development of intra-city infrastructure (such as roads, bridges and metro networks) has extended the boundaries of the cities. The displacement of the population and the development of transport infrastructure have created substantial opportunities for new shopping clusters and regional shopping precincts. Urban wealth and the emergence of the middle class The wealth of urban residents has also grown rapidly. According to data of the NBS, since 1990 the urban disposable income per capita in the PRC has grown at a 13.5% CAGR. Larger cities such as Shanghai and Beijing and affluent coastal provinces such as Guangdong have high per capita income. The average disposable income of urban residents in 2012 stood at RMB24,565 per capita, an increase of 12.7% year-on-year. 12

15 LETTER FROM THE BOARD TO UNITHOLDERS A study by McKinsey Global Institute ( McKinsey ) published in 2012 suggested that the PRC households might be broadly classified by income as the affluent, the new mainstream, the value, and the poor. By 2020, it is estimated that the new mainstream segment will account for approximately half of the total population in the PRC. This new mainstream segment comprised approximately 13.6 million households in the PRC in 2010, and is expected by McKinsey to increase to approximately million households by 2020, representing a CAGR of 26.6%. Number of urban households by annual households income, E Poor (less than RMB37,000) Value (RMB37,000 to RMB106,000) New Mainstream (RMB106,000 to RMB229,000) Affluent (more than RMB229,000) Million households, % 100% = % % CAGR E, % % 70% 60% % 82 40% 30% 20% 10% 0% E Source: McKinsey Report Meet the 2020 Chinese Consumer Continuing strong growth in the size and diversity of the middle class will create new market opportunities for both domestic and international retailers, which in turn drives and shapes the development and the landscape of the retail property sector of the PRC. According to the NBS, retail sales have grown between 10% and 20% per annum since Urbanisation and the rising income of the middle class support the growth of retail sales in the PRC, which according to the information published by the CEIC Data, have increased from RMB3.9 trillion in 2000 to RMB21.0 trillion in The Manager anticipates that the retail market and the real estate sector will continue to grow in the PRC. 13

16 LETTER FROM THE BOARD TO UNITHOLDERS Retail sales and nominal growth, Jan 1994-Oct 2013 Retail sales value (Left Hand Side) Retail sales growth rate (Right Hand Side) 2,500 RMB (billion) YoY 45% 40% 2,000 35% 30% 1,500 25% 1,000 20% 15% % 5% 0 0 Source: NBS, Savills Research Report Retail sales growth has also trickled down to smaller cities. Retailers established in key mainland markets have looked to expand their footprint in new areas. Businesses also decentralise away from coastal cities to lower-tier cities, generating new jobs and boosting local income levels. 14

17 LETTER FROM THE BOARD TO UNITHOLDERS Retail sales per capita by tier city, ,000 RMB Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Source: NBS, Savills Research Report (b) The Evolution of Retail Formats in the PRC A growing middle class, on-going infrastructure development creating more retail clusters for shoppers, and the PRC government s policy of encouraging more domestic consumption have supported the current growth in retail sales. These factors present increasing opportunities for shopping mall developers and owners. Retail development in PRC cities has evolved from the initial phase of predominantly street shops and department stores in the central business district area to the increasing appearance of hypermarkets and shopping malls. Shopping malls will eventually become the dominant retail format. Macquarie Capital Securities Limited in its equity research paper Battle For Successful Malls in China, 2013 states that over the past decade, the shopping mall space in the 20 major PRC cities has grown significantly from virtually nothing to 56% of prime retail space. The report further states that prime retail space in the 20 major PRC cities is expected to grow by 57% between the end of 2012 and the end of 2014, and that the shopping mall format will be a major contributor of the growth. The new retail formats will first appear in first-tier cities such as Shanghai, Beijing, Guangzhou and Shenzhen before gradually extending into secondor third-tier cities, as consumers in first-tier cities are often more willing adopters of new concepts compared with consumers in lower-tier cities. 15

18 LETTER FROM THE BOARD TO UNITHOLDERS Table for major retail formats in the PRC Format Characteristics Emergence High-street retail Department store Retail podium Shopping mall Outlet State-owned or individual landlords; typically low profile although retailers are now making more use of the high visibility. Primarily state-owned or domestic, although international (Asian) operators are making inroads into the market. Part of mixed-use developments, typically of office towers in downtown locations but increasingly in residential developments in suburban locations. Similar to retail podiums although larger in scale and held by one landlord; typically fully enclosed but there are some semi-open shopping malls in some cities. A relatively new concept; not as developed as in the US, outlet stores are slowly emerging as car ownership continues to rise and consumers place value and quality on an even footing. First-tier: 1950s (early) First-tier: 1980s (early) Second-tier: 1980s (early) First-tier: 1990s (early) Second-tier: 1990s (late) First-tier: 2000s (early) Second-tier: 2000s (late) First-tier: 2000s (late) Second-tier: 2000s (late) Source: Savills Research Report (c) The PRC mid-market retail sector as the initial focus of the Manager The Manager believes that the PRC high-end luxury retail sector is crowded with established operators and real estate developers. At the other end of the spectrum, the Manager believes that the PRC low-end retail sector is fragmented and dominated by street shops which have neither scalability nor replicability to fit the growth model of The Link REIT. Therefore, the Manager considers that the PRC mid-market retail sector will provide attractive investment opportunities, which (given its extensive experience in asset enhancement and asset management in the Hong Kong retail sector) the Manager believes it is well positioned to exploit. Shift in retail consumption pattern. As income rises, retail sales volume rises and there is a shift in retail consumption of the urban middle class when higher-dollar-value spending on lifestyle items such as personal care, better food and beverage and services will occupy a relatively higher proportion over spending on low-dollar-value items like daily necessities. This favours the new retail format of theme-focused shopping at shopping malls. 16

19 LETTER FROM THE BOARD TO UNITHOLDERS Higher awareness of mid-market brands. The urban middle class group is typically characterised by high education level and an outward (or Westernised) outlook. In terms of consumer spending, the urban middle class is conscious of the concept of smart (or value-for-money) spending, and is willing to try new mid-market brands over conventional brands. New brands from Europe, North America, Korea and Japan are positioning to capture such opportunities in the PRC and many of them will target mid- and upper-mid-market shopping malls to open their chain stores. Relatively less competition. The mid-market retail sector of the PRC is not yet dominated by established real estate developers or big commercial landlords. Small or mid-size real estate developers tend to focus on residential sales for cash-flow and turnover, and have less incentive to hold commercial retail assets. Many of these small or mid-size developers lack the expertise to operate commercial retail assets; rather, they may have more incentive to either dispose of the commercial retail assets to The Link REIT, or co-invest with The Link REIT to leverage on the retail property expertise of the Manager. Relation with existing retail tenants. Most of the major Hong Kong retailers already have their operations in the PRC, particularly in the PRD. The consumer segment of many of these Hong Kong retailers coincides with the same urban middle class as now being targeted by the Manager. Many of these Hong Kong retailers have on-going relationships with the Manager and are familiar with and value the asset management strategies of The Link REIT. Their brands are popular in large cities in the PRD and are anchors for attracting other PRC retailers to the assets which The Link REIT may acquire in such area. The Rise of Community Retail. The market for large-scale regional shopping malls located in prime locations is now well developed in the PRC, while that of community shopping malls has fallen behind. With improvement in inter-city and intra-city transport infrastructure networks, the urban population is migrating to non-core locations where property prices are lower. This group of households has more disposable income to enjoy a better quality of living. In addition, many newly distributed housing units given as compensation for those lost in the government-led urban transformation programme are located in decentralised locations, or in the suburban areas. There is significant demand for day-to-day convenience shopping and weekend/holiday recreation facilities from this group of decentralised population. The lack of community shopping malls which can provide one-stop shopping facilities from daily necessities-supermarket shopping to recreation and family-oriented elements presents attractive shopping malls opportunities which fit The Link REIT s business strategy and asset management capability. 17

20 LETTER FROM THE BOARD TO UNITHOLDERS (d) Geographically, the Manager plans to first examine investment opportunities in Guangdong and the PRD Overview of Guangdong Province Guangdong Province is a province in southern China with a total area of approximately 180,000 sq km. The province comprises two sub-provincial cities and 19 prefecture-level cities, including Guangzhou (the provincial capital) and Shenzhen (a special economic zone), two of the economically significant and populous cities in the PRC. Since 2005, Guangdong Province has been the most populous province in the PRC and the largest province by GDP, which stood at approximately RMB5,700 billion in 2012, contributing one-eighth of the nation s total GDP. The economy is dominated by the manufacturing and tertiary industries, contributing 48% and 46% of the total output of Guangdong Province in 2012, respectively. Guangdong Province is also the most affluent province in the PRC. The GDP per capita of Guangdong Province was RMB54,000 in 2012, which was significantly higher than the national average of RMB38,354. With a large and wealthy population, private consumption is high and the retail market is prosperous. Guangdong Province s retail sales contributed to more than 10% of the nation s total retail sales in The transportation network is well developed in Guangdong Province, including eight airports (one international airport, two regional airports and several smaller airports), 12 main railway lines, six high-speed train lines (one still under construction), metro systems in operation in four cities and several intra-city and inter-city light rail lines, in addition to well developed road network. 18

21 LETTER FROM THE BOARD TO UNITHOLDERS Map: Guangdong Province Shaoguan Shanwei Yangjiang Zhanjiang Source: Savills Research Report Overview of the PRD The PRD is the main growth driver of the Guangdong Province. With a total area of approximately 41,700 sq km, the PRD is one of the most economically dynamic regions. Major cities in the PRD include Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing. Of the three economic zones established since the 1980 s, two are in the PRD (being Shenzhen and Zhuhai). Over 80% of Guangzhou Province s GDP was generated from the PRD, at RMB4,789.7 billion in The PRD has transformed from an agriculture-oriented economy to a manufacturing platform of global importance. The area is now the leading producer of electrical and electronic goods and components, watches and clocks, plastic products, garments and textiles, and a range of other products. The PRD s 2012 GDP per capita reached RMB84,563, which was 56% higher than that of Guangdong Province and approximately 2.2 times the PRC national average. These circumstances are also supported by 19

22 LETTER FROM THE BOARD TO UNITHOLDERS the PRD s retail sales figures, which stood at RMB1.7 trillion in 2012, accounting for 74.1% of Guangzhou Province s total retail sales and 8.0% of the national figure. As an export-oriented and foreign-investment-driven economy, the PRD contributed to approximately 9% of the PRC s total GDP output in 2012, despite the fact that the area only accounts for 0.4% of the total land area and 4% of the total population. Aside from foreign investments, private-owned enterprises have also been playing an increasingly significant role in the economy of the PRD, and Shenzhen, Dongguan and Foshan have been at the forefront of the private-sector development in the PRC. With the completion of the transport infrastructure networks running from city centres to decentralised areas of Guangdong Province and the PRD, shopping mall development is likely to shift from prime to non-prime locations or to decentralised locations, supporting the growth of the second-tier and lower-tier cities in the PRD and the entire South China region. These lower-tier cities also present opportunities for The Link REIT to expand its business in the future. Source: Hong Kong Highways Department Target Completion Infrastructure Project Guangzhou-Shenzhen-Hong Kong Express Rail Link 2015(1) 廣深港高速鐵路 Hong Kong-Zhuhai-Macao Bridge 港珠澳大橋 ( HZMB ) Liantang/Heung Yuen Wai Boundary Control Point 2016(2) 2018(3) 蓮塘/香園圍口岸 Shen-Guan Intercity Line 深莞城際線 Shen-Hui Intercity Line 深穗城際線 Hui-Guan-Shen Intercity Line 穗莞深城際線 20 Before 2020(4) Before 2020(4) Before 2020(4)

23 LETTER FROM THE BOARD TO UNITHOLDERS Sources: (1) (2) (3) (4) MTR, Express Rail Link Project Information, retrieved from website: December 2013 Hong Kong Highways Department, HZMB Project Overview, retrieved from website: December 2013 Hong Kong Planning Department, boundary control point (BCP) information, retrieved from website: December 2013, retrieved from website: December 2013 (e) Further opportunities Given the ever changing market conditions, the Manager acting in the interests of the Unitholders should from time to time review to determine whether the initial focus on the mid-market retail sector of Guangdong and the PRD is appropriate, and may adjust such focus to capitalise on investment opportunities in other major cities or other economic zones of the PRC outside the PRD. The Manager will make further announcement(s) about its investments in the PRC in accordance with the REIT Code. (f) Business Strategy of the Manager Asset enhancement, asset management, and asset acquisition remain the core business strategies of the Manager in the drive to add value to The Link REIT s portfolio of assets and enhance the returns to Unitholders. The Manager intends to invest in the same asset classes as stated in the 2012 Circular that is, investing in all classes of sustainable-income producing non-residential properties, including but not limited to, stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments (but in all cases excluding hotels and serviced apartments) while (subject to approval of Unitholders) expanding the geographical scope of its investment strategy beyond Hong Kong. The Manager will also follow the same acquisition strategy as stated in the 2012 Circular to focus on the following key considerations in evaluating acquisition opportunities: Long-term investment. The Manager will seek to invest in properties for the long term. Sustainable-income producing properties. The Manager will focus on sustainable-income producing properties with potential for long-term income and capital growth. Yield accretion. The Manager will seek to acquire properties with the potential to provide long-term yield-accretion to Unitholders. 21

24 LETTER FROM THE BOARD TO UNITHOLDERS Acquisition price. The Manager will seek to acquire properties with an attractive acquisition price vis-à-vis their cash flows, current performance and sustainable future potential. Economic conditions. The Manager will consider economic conditions and market outlook, for example, in the context of financing for acquisitions. Complement the existing portfolio. The Manager will seek to acquire properties which complement the existing portfolio and strengthen The Link REIT s market share vis-à-vis competition in the relevant area. Value-adding opportunities. The Manager will seek to acquire properties with enhancement opportunities to increase investment returns and create value. In the context of investment opportunities in the PRC, these acquisition disciplines will be refined to include: Location of target investment. As noted in paragraphs B.V(d) and (e) above, the Manager will first consider strategic commercial or retail locations in Guangdong and the PRD. Asset type. As noted in paragraphs B.V(c) and (e) above, the Manager s primary focus will be on mid-market retail sector which is income-producing. Asset class. The Manager will focus on REIT-compliant assets, and those which are either capable of creating operational synergies by consolidating, expanding and leveraging on regional tenants and shopper network, or have demonstrable upside potential after asset enhancement. (g) Execution of the business strategy of the Manager Vigorous investment process The Manager has already in place well-recognised high standards of corporate governance. Investments by The Link REIT in Hong Kong or any other jurisdictions will be subject to the same level of scrutiny and oversight by the Board. The executive Directors, as well as several non-executive and independent non-executive Directors, have experience on PRC investments. To maintain appropriate checks and balances on management actions, matters which have a critical bearing on The Link REIT are specifically reserved for consideration by the full Board, including the approval of any acquisition of properties. A specifically-tasked Board committee the Finance and Investment 22

25 LETTER FROM THE BOARD TO UNITHOLDERS Committee of the Manager will first evaluate each investment opportunity proposed by the management and make recommendations to the Board for approval. In approaching PRC investment opportunities, management will adopt the same prudent approach as in evaluation of any other investments. Factors from macro perspectives such as economic trends and change of government policies to project-specific details on building and town planning, area competitive analysis, local culture and retail trends, in addition to financial return evaluation and capital management, will all be critically examined in formulating proposals. External advice and expertise will also be sought. Strategic co-operation with PRC partners To support its investment process, the Manager may from time to time and where desirable, seek to co-operate with reputable and established PRC developers. In line with this execution strategy, on 19 December 2013, the Manager entered into a non-binding memorandum of understanding with (China Vanke Co., Ltd.) ( China Vanke ) pursuant to which, and subject to Unitholders approving the Expanded Geographical Investment Scope, the Manager and China Vanke agreed to jointly explore the feasibility of various options of strategic co-operation in the PRC. Consistent with the initial retail focus described in paragraph B.V(c) above, the strategic co-operation options will focus on retail property investment opportunities in the PRC which ideally: (i) are located in densely populated communities in the PRC with important transportation networks; and (ii) can provide a one-stop shopping experience to residents in the surrounding catchment area. For further details regarding the memorandum of understanding and China Vanke, please refer to The Link REIT s announcement dated 19 December Key management personnel of the PRC operations Under the supervision of the Board, a dedicated team responsible for the PRC operations of the Manager, led by the Manager s Chief Executive Officer (who is an executive Director and a responsible officer of the Manager for the purpose of the SFO), will implement the PRC business strategy of The Link REIT as agreed with the Board. The team has substantial investment and asset management experience in the PRC. They will be supported by PRC locally-recruited managerial staff who will be responsible for the day-to-day operations. Key members of the team responsible for supervising the PRC operations of the Manager are as follows: 23

26 LETTER FROM THE BOARD TO UNITHOLDERS Ms. Christine CHAN Suk Han Director (Investment) Ms. Chan oversees the asset investment of The Link REIT, including acquisition, new market development, and the market study and research function. She has over 16 years of experience in the real estate and fund management industry. Before joining the Manager in May 2013, Ms. Chan was the Director - Investment & Acquisition at Harvest Capital Partners Limited, a subsidiary of the China Resources Group, leading asset and structured debt and equity investment, divestment, business development, and the setting up of private equity real estate fund. Ms. Chan has extensive experience in the PRC and worked on landmark investment projects in cities such as Shanghai, Suzhou and Chongqing in addition to Hong Kong, with a gross asset value of approximately US dollars 2.60 billion. Ms. Chan also held managerial positions in ARA Asset Management (Prosperity) Limited and Hutchison Whampoa Properties Limited in earlier years. While with Hutchison Whampoa Properties Limited, Ms. Chan was responsible for asset management in Shanghai and investment evaluation in first-tier and lower-tier cities of the PRC including Shanghai, Shenzhen, Tianjin, Xian, and Changsha. Mr. Dick LEUNG Yuen Dick Director (Project & Asset Development) Mr. Leung oversees The Link REIT s asset enhancement initiatives, asset planning/development opportunities and explores business development potential. He joined the Manager in August 2012 and has over 20 years of experience in major property development projects in Hong Kong and the PRC. Mr. Leung has extensive experience in large scale mall renovations, property development of mixed residential/ commercial projects as well as corporate strategy, development and implementation. Before joining the Manager, Mr. Leung was the Project Director of Sun Hung Kai Properties Limited, and was the Principal Consultant (Property Development) to its former Chairman. He also advised on the PRC strategy of the corporate during his service as such Principal Consultant. During his 15 years of service at Sun Hung Kai Properties Limited, he was the company s representative in the PRC exploring acquisition and business development opportunities and executed acquisition and co-operation agreements in first- and second-tier cities including Guangzhou, Beijing, Shanghai, and Chengdu. Mr. Leung managed investments portfolio of approximately RMB25 billion in value across the PRC, overseeing business development, infrastructure planning, master planning, building design, leasing and sales strategies, property management and setting up of local offices. 24

27 LETTER FROM THE BOARD TO UNITHOLDERS Mr. Gordon WU Chi Ping Director (Property Management & Operations) Mr. Wu oversees the property, facility and car park management and operations of the asset portfolio of The Link REIT. He joined the Manager in September Mr. Wu has over 24 years of experience in property management in both Hong Kong and the PRC, running a group of management companies and training academies. Prior to joining the Manager, he was an associate director of the Sino Group and managed more than 180 properties with a workforce over 2,000 staff. Mr. Wu has had extensive experience in real estate industry in the PRC since late 1990s. Overseeing the leasing and property management functions, he was the operations director for a 1.2 million square feet commercial complex development project of the Lai Sun Group in Shanghai. During his last employment with the Sino Group, he set up property management teams in Guangzhou, Xiamen and Fuzhou to provide management services for a portfolio of residential properties and commercial complexes in the PRC. Ms. Amy HO Shui Yung Head of Asset Planning & Development Ms. Ho is responsible for the development and execution of asset plans of The Link REIT and coordinates the asset enhancement activities. Ms. Ho joined the Manager in December Prior to joining the Manager, she had 20 years of real estate industry experience with major investment and asset management companies in both Hong Kong and the PRC including InfraRed NF Investment Advisers Limited, Grosvenor Limited and Hutchison Whampoa Properties Limited. Ms. Ho specialized in the asset management of retail shopping malls in the PRC, including several Tesco Living Mall joint venture projects across China. Mr. Francis LEE Koon Yum Head of Risk Management Mr. Lee oversees The Link REIT s risk management and operational compliance matters. He joined the Manager in August 2013 and has 20 years of global and local experience in risk management, audit, finance and internal control. Before joining the Manager, he worked for John Swire & Sons (H.K.) Limited as the Deputy Head of Group Internal Audit Department and was the in-charge of the operational audit projects of Swire Properties in both the PRC (Beijing, Shanghai and Guangzhou) and Hong Kong. He had 4 years full-time secondment in Shanghai, Guangzhou and Shenzhen. In addition, he also travelled extensively in the PRC on audits, finance and tax related matters. 25

28 LETTER FROM THE BOARD TO UNITHOLDERS Mr. Keith NG Man Keung Head of Capital Markets Mr. Ng is responsible for capital management aspects of The Link REIT including financing strategy, arrangement of borrowings, financial risk management, cash management and insurance matters. He also assists in investor relation matters. Mr. Ng joined the Manager in June 2009 and has over 20 years of experience in corporate treasury, accounting, finance and banking. Prior to joining the Manager, Mr. Ng held a senior treasury role in Hutchison Whampoa Properties Limited where he oversaw all treasury and cash management matters for about 50 property investment projects in the PRC. Prior to that, he held various senior treasury and finance roles in the Hongkong Land Group, where he played an active finance role in its first property development project in the PRC, Central Park Beijing. Mr. Eric YAU Siu Kei General Manager, Investment & Corporate Finance Mr. Yau is one of the responsible officers of the Manager for the purpose of the SFO. He is also responsible for identifying and developing merger and acquisition initiatives for The Link REIT as well as assisting in the formulation of corporate finance and development strategies. Mr. Yau has over 14 years experience in investment banking and business development in Hong Kong and the PRC, with particular focus on real estate and utilities. Prior to joining The Link REIT, Mr. Yau worked as an investment banker at various financial institutions including DBS Asia Capital, UBS Investment Bank and Jardine Fleming. He executed capital markets and advisory transactions for clients in Greater China, including the listing of two real estate investment trusts in Hong Kong, establishment of a private real estate fund with PRC assets, and disposal of real estate portfolios in the PRC. Mr. Yau also worked at the CLP Group where he played an active role in the development of corporate strategic initiatives and investments. VI. Differences in Relevant Laws and Regulations between the PRC and Hong Kong and Certain Key Features of the PRC Taxation Unitholders should note that the taxation and property laws in the PRC and in particular, the laws relevant to the rights of foreign investors (which may apply to The Link REIT) and the entities through which they may invest in the PRC are different from those in Hong Kong. Unitholders should carefully read and consider the overview of the relevant laws and regulations in the PRC and comparison of certain aspects of the PRC property laws with the laws of Hong Kong, as more fully described in Appendix III to this Circular. Also, for a summary of the PRC taxation which may be relevant to The Link REIT should it invest in the PRC, please refer to Appendix IV to this Circular. Notwithstanding the information provided in Appendix III and Appendix IV, Unitholders should seek advice from 26

29 LETTER FROM THE BOARD TO UNITHOLDERS their own professional adviser on the accuracy of description on the difference in laws and regulations between the PRC and Hong Kong and on the PRC taxation, and assess any impact such difference and/or such PRC taxation has on the individual circumstances as relevant to them. VII. Risks Relating to Investments in the PRC Property Market Investment into the PRC may involve, without limitation, the following characteristics and risks in relation to the financial aspects and operational matters, which are more fully described in Appendix II to this Circular. (a) (b) (c) (d) (e) (f) (g) (h) RMB is not freely convertible. If The Link REIT invests in the PRC property market, the revenue generated from those investments would likely be in RMB, which is subject to foreign exchange controls and is currently not freely convertible into foreign currencies. Fluctuations in the exchange rate of RMB may increase finance costs and have a material adverse impact on the level of distributions to Unitholders. The Link REIT may engage in hedging transactions, which will limit gains and increase exposure to losses, and not offer full protection against interest rate and exchange rate fluctuations. The ability of The Link REIT s PRC-incorporated companies to declare dividends is limited by the availability of retained earnings, which may result in trapped cash in the PRC. The Link REIT may be subject to extensive PRC regulatory controls on foreign investment in the real estate sector. The taxation and property laws and, in particular, the laws relevant to the rights of foreign investors and the entities through which they may invest are often unclear in the PRC. Furthermore, the PRC is geographically large and divided into various provinces and municipalities and as such, different laws, rules, regulations and policies apply in different provinces and they may have different and varying applications and interpretations in different parts of the PRC. The PRC property market is volatile and may experience oversupply and property price fluctuations. The central and local governments of the PRC adjust monetary and other economic policies from time to time to prevent and curtail the overheating of the PRC and local economies, and such adjustments may affect the property market in the PRC. The PRC government has the power to resume compulsorily any land in the PRC pursuant to the provisions of applicable legislation. If The Link REIT acquires any PRC properties which are subsequently resumed by the PRC 27

30 LETTER FROM THE BOARD TO UNITHOLDERS government, the level of compensation that may be paid to The Link REIT pursuant to this basis of calculation may be less than the price which The Link REIT would have paid for such properties. To safeguard against and mitigate the risks associated with investment in the PRC property market, the Manager will pursue vigorous internal control and risk management standards which call for: The setting and periodic review of The Link REIT s PRC business strategy by the Board to ensure that it is in accordance with the requirements of the applicable laws, the REIT Code, and the Trust Deed and that it is in the interests of the Unitholders as a whole. Overseeing the implementation of such strategy by the Finance and Investment Committee of the Manager to ensure that a particular investment opportunity fits the financial criteria (for example, the gearing ratio as permitted under the REIT Code) and the initial investment criteria as set forth above. Overseeing and monitoring of compliance issues (including connected party transactions, if arising out of any PRC investment) and internal control and risk management issues by the Audit Committee of the Manager, with the support of the internal audit function of the Manager. The Board, the Finance and Investment Committee and the Audit Committee of the Manager are all chaired by independent non-executive Directors, and are entitled to advice and assistance from external professional advisers. Making of all investment decisions, the setting of capital expenditure and operating budgets only at the corporate, and not PRC regional, level of the Manager. Strict compliance by regional operations staff with the specific guidelines set by corporate level management and the various policy and procedures set by the risk management function of the Manager on key operational areas such as human resources, accounting and financial reporting, treasury and capital management, use and custody of chops that are capable of producing legally binding effect on The Link REIT, insurance of assets, bank account operation, legal document custody and record keeping to ensure full compliance with applicable law, the requirements of the REIT Code, the Trust Deed and the Manager s compliance manual. The establishment of written contingency procedures to aid in the early detection and management of certain contingency events identified by the head of the Manager s risk management function from time to time. 28

31 LETTER FROM THE BOARD TO UNITHOLDERS Updating of the compliance manual of the Manager to comply with the requirements of the Practice Note on Overseas Investments by SFC-authorised REITs. VIII. Recommendation The Board considers that the Expanded Geographical Investment Scope is in the interests of The Link REIT and the Unitholders as a whole and accordingly recommends Unitholders to vote in favour of Special Resolution No. 1 to be proposed at the EGM. The Trustee has no objection to the Manager taking the Expanded Geographical Investment Scope for Unitholders approval. SECTION C. PROPOSED INVESTMENT SCOPE TRUST DEED AMENDMENTS I. Investment Scope Trust Deed Amendments To facilitate the acquisition and holding of properties by The Link REIT outside Hong Kong, in accordance with and subject to Unitholders approval of the Expanded Geographical Investment Scope, the Manager proposes the following consequential amendments to the Trust Deed: (a) (b) Investment Policy. The Manager proposes to amend Clause of the Trust Deed to specify that the investment policy of the Manager shall include investing in real estate for the long term, focusing on sustainable-income producing properties with the potential for long-term income and capital growth and maintaining a large and diversified portfolio of non-residential real estate including but not limited to, stand-alone assets and comprehensive mixed-use (predominantly retail-based) developments in Hong Kong and other overseas jurisdictions, but in all cases excluding hotels and serviced apartments. Definition of Manager Subsidiaries and Consequential Amendments. The Manager proposes to insert a new definition of Manager Subsidiaries into Clause 1.1 of the Trust Deed to refer to the subsidiaries that are allowed to be established or acquired by the Manager under Clause A of the Trust Deed. Such subsidiaries may be set up or acquired by the Manager in the future to manage The Link REIT s investments in the PRC and/or other overseas jurisdictions. As it is the Manager s duty to properly monitor and ensure proper performance by the Manager Subsidiaries, the Manager shall be responsible for appointing and removing the directors of the Manager Subsidiaries subject to the oversight of the Trustee. Consequential amendments are also proposed to be made throughout the Trust Deed, including but not limited to amendments which: (i) clarify that the current definition of Special Purpose Vehicle does not include the Manager and Manager Subsidiaries; and (ii) ensure certain provisions also apply to Manager Subsidiaries where applicable, including without limitation, the 29

32 LETTER FROM THE BOARD TO UNITHOLDERS Manager s responsibility to monitor the actions of the directors of any Manager Subsidiary, and its power to remove the directors of such Manager Subsidiary subject to the oversight of the Trustee. (c) (d) Cash held outside Hong Kong. The Manager proposes that Clause 19.1 of the Trust Deed be amended to allow Cash (as defined in the Trust Deed) constituting the Deposited Property (as defined in the Trust Deed), where necessary, or where such Cash is derived directly or indirectly from real estate outside Hong Kong, to be held in an account in the name of a Special Purpose Vehicle outside Hong Kong and operated by the Trustee or the Manager (or Manager Subsidiary) provided that the Trustee shall exercise due powers of oversight with regard to the same. Records and Accounts. The Manager proposes to amend Clause 10.1 of the Trust Deed to clarify that records and accounts for Special Purpose Vehicles and Manager Subsidiaries incorporated or registered in jurisdictions outside Hong Kong may be maintained in currencies other than Hong Kong Dollars. (e) Transactions in Currencies. The Manager proposes to amend Clause 10.2 of the Trust Deed to clarify that the Manager may accept payments for Units and payments made out of The Link REIT (including distributions of income) in a currency other than Hong Kong Dollars. (f) (g) (h) Profits of Special Purpose Vehicle. The Manager proposes to insert a new Clause 13.7A into the Trust Deed to clarify that the amount of profits of a Special Purpose Vehicle which is available for distribution will be governed by applicable laws and regulations in the jurisdiction in which such Special Purpose Vehicle is incorporated or registered. Definition of Tax. The Manager proposes to amend the definition of Tax in Clause 1.1 of the Trust Deed to clarify that the term encompasses Tax (as defined in the Trust Deed) imposed in any jurisdiction. Additional Adjustment to the Calculation of Total Distributable Income. Clause 13.5 of the Trust Deed currently provides that the Total Distributable Income (as defined in the Trust Deed) of The Link REIT for a financial year is the amount calculated by the Manager as representing the consolidated audited profit after tax attributable to Unitholders of The Link REIT and its subsidiaries for that financial year, as adjusted for accounting purposes to eliminate the effects of Adjustments (as having the meaning ascribed to it under Clause 13.6 of the Trust Deed) which have been recorded in the profit and loss account for that financial year. The Manager proposes to amend Clause 13.6 of the Trust Deed to expand the meaning of Adjustments to include any adjustments in accordance with the generally accepted accounting principles in Hong Kong which increase the amount recorded under the generally accepted accounting principles in 30

33 LETTER FROM THE BOARD TO UNITHOLDERS the jurisdiction of the Special Purpose Vehicle, on which the cash available for distribution is based. Based on and in sole reliance upon the information and assurances provided by the Manager and the auditor of The Link REIT, and having regard to the minimum distribution entitlement expressed in paragraph 7.12 of the REIT Code, the Trustee s duties under the REIT Code and the Trustee s fiduciary duties, the Trustee has no objection to the proposed amended definition of Adjustments. (i) Remuneration of the Trustee. Clause 16.2 of the Trust Deed currently provides that the remuneration of the Trustee shall be such amount as shall be agreed by the Manager and the Trustee and, for real estate situated in Hong Kong, shall not be less than such amount as shall be equal to per cent. per annum, and shall not be more than such amount as shall be equal to 0.02 per cent. per annum, of the value of such real estate of The Link REIT, as determined in the latest annual valuation report produced by the Approved Valuer (as defined in the Trust Deed). As requested by the Trustee, the Manager proposes to amend the remuneration threshold stated in Clause 16.2 of the Trust Deed in respect of real estate situated outside Hong Kong, so that the amount of remuneration payable to the Trustee in the case of real estate situated outside Hong Kong shall be such amount as shall be agreed by the Manager and the Trustee, being not less than 0.03 per cent. per annum, and not more than 0.06 per cent. per annum, of the value of such real estate of The Link REIT, as determined in the latest annual valuation report produced by the Approved Valuer. In addition, as requested by the Trustee, the Manager proposes that Clause 16.2 of the Trust Deed be amended to the effect that where the Trustee is required by the Manager to undertake duties of an exceptional nature or otherwise outside the scope of the Trustee s normal duties in the ordinary and normal course of business of The Link REIT, the remuneration of the Trustee shall include such additional amount as shall be agreed by the Manager and the Trustee (the Trustee s Additional Fees ), provided that, unless otherwise approved by the Unitholders by way of an ordinary resolution: (i) the aggregate amount of the Trustee s Additional Fees that may be charged by the Trustee in relation to each transaction to be entered into by The Link REIT shall not exceed 0.05 per cent. of (a) the acquisition price (in the case of an acquisition of any real estate whether directly or indirectly to be held by The Link REIT) or (b) the sale price (in the case of a sale or disposal of any real estate whether directly or indirectly held by The Link REIT); and (ii) the aggregate amount of the Trustee s Additional Fees that is not related to any specific transaction described in (i) above that may be charged by the Trustee for each Financial Year (as defined in the Trust Deed) shall not exceed an amount equal to 20 per cent. of the Trustee s remuneration for that Financial Year calculated by reference to the latest annual valuation report produced by the Approved Valuer. 31

34 LETTER FROM THE BOARD TO UNITHOLDERS The Manager is of the view that the Investment Scope Trust Deed Amendments are fair and reasonable, will provide greater procedural and administrative clarity to administer the Expanded Geographical Investment Scope, and other than amendments in relation to Manager Subsidiaries (which is a concept unique to The Link REIT given its internalised management structure) and the investment scope of The Link REIT, are in line with the practice of other SFC-authorised REITs. In relation to the remuneration of the Trustee, the Manager is of the view that the higher fee range in respect of real estate outside Hong Kong is reasonable and reflects the additional administrative work which is required to be undertaken with respect to real estate outside Hong Kong and is also in line with other SFC-authorised REITs which invest in real estate outside Hong Kong. II. Approvals Required Clause 25.1 of the Trust Deed provides that, save for certain limited exceptions as certified by the Trustee in writing, the Manager and the Trustee are only entitled to modify, alter or add to the provisions of the Trust Deed by a supplemental deed with the approval of the Unitholders by way of a Special Resolution and, if so required, the prior approval of the SFC. Accordingly, the Manager proposes to seek Unitholders approval of Special Resolution No. 2 as set out in the EGM Notice approving the Investment Scope Trust Deed Amendments. Such Special Resolution will be decided on a poll at the EGM pursuant to the Trust Deed. III. Recommendation The Board considers that the Investment Scope Trust Deed Amendments are in the interests of The Link REIT and the Unitholders as a whole and accordingly recommends Unitholders to vote in favour of Special Resolution No. 2 to be proposed at the EGM. The Trustee has no objection to the Manager taking the Investment Scope Trust Deed Amendments for Unitholder s approval. SECTION D. OTHER PROPOSED AMENDMENTS TO THE TRUST DEED I. Voting by Show of Hands Paragraph 8 of the First Schedule to the Trust Deed currently provides that a resolution put to a meeting of Unitholders shall be decided on a poll and the result of the poll shall be deemed to be the resolution of the meeting. To provide the chairman of a meeting of Unitholders with flexibility to cater for any exceptional circumstances that may arise during a meeting of Unitholders, the Manager proposes to amend paragraph 8 of the First Schedule to the Trust Deed 32

35 LETTER FROM THE BOARD TO UNITHOLDERS such that the chairman of a meeting of Unitholders may, in good faith, decide to allow a resolution which relates purely to a procedural or administrative matter to be decided by way of a show of hands. For such purposes, procedural or administrative matters are those that: (i) are not on the agenda of the meeting or in any supplementary circular to Unitholders; and (ii) relate to the chairman s duties to maintain the orderly conduct of the meeting and/or allow the business of the meeting to be properly and effectively dealt with, whilst allowing all Unitholders a reasonable opportunity to express their views. This is in line with the provisions of the Listing Rules in relation to voting by a show of hands by listed companies in Hong Kong. The Manager has applied to the SFC for a waiver from strict compliance with paragraphs 2.16, 2.23 and 9.9(h) of the REIT Code so as to allow, where the chairman of a meeting of Unitholders can, when he considers it to be in good faith, decide to allow a resolution which relates purely to the above-mentioned procedural or administrative matters to be decided by a show of hands. Such waiver is expected to be conditional upon: (a) due approval by Unitholders of Special Resolution No. 6 (as set out in the EGM Notice) at the EGM; and (b) the resolutions to be determined by a show of hands are only in respect of the procedural or administrative matters referred to in (i) and (ii) in the preceding paragraph. II. Authorised Investments As set out in the Trust Deed, The Link REIT is only allowed to invest in Authorised Investments (as defined in the Trust Deed) which includes, without limitation, shares in the issued share capital of any Special Purpose Vehicle. In line with market practice, the Manager proposes to amend and expand the definition of Authorised Investments to include: (i) real estate related assets; (ii) loans to any Special Purpose Vehicle and any goodwill and other intangible assets acquired in relation to the acquisition of a Special Purpose Vehicle; (iii) any other assets or investments as permitted by the REIT Code from time to time; and (iv) investments in relation to arrangements for the purposes of enhancing the return on, or reducing the risks associated with, the Authorised Investments (or in respect of The Link REIT generally), including investments in the form of derivatives instruments for hedging purposes. A new definition of Real Estate Related Assets is also proposed to be introduced into Clause 1.1 of the Trust Deed in connection with the above proposed amendments. Further, pursuant to the REIT Code, a REIT may acquire uncompleted units in a building which is unoccupied and non-income producing or in the course of substantial development, redevelopment or refurbishment, provided that the aggregate contract value of such real estate shall not exceed 10% of the total net asset value of the REIT at the time of acquisition. Accordingly, the Manager proposes to: (i) insert a new Clause A into the Trust Deed to clarify that The Link REIT may undertake such activities, subject to the same limitations stated in the REIT Code, or any such waiver from compliance with the REIT Code and/or 33

36 LETTER FROM THE BOARD TO UNITHOLDERS such other approval as may from time to time be granted by the SFC; and (ii) expand the definition of Authorised Investments to additionally include any improvement or extension of or addition to or reconstruction or renovation or other development of any real estate. In light of the amendments to the definition of Authorised Investments, consequential changes have also been made to Clause 9.1 of the Trust Deed to specify how the additional categories of Authorised Investments are to be valued. III. Issue of Units and/or Convertible Instruments to Connected Person and Other Matters Relating to Issue of Units (a) Amendments to facilitate Placing and Top-up Subscription Transactions In line with market practice, the Manager proposes to amend Clause 8.1.4B of the Trust Deed to introduce additional circumstances where Units and/or Convertible Instruments (as defined in the Trust Deed) can be issued, granted or offered to a Connected Person, without requiring the Manager to obtain Unitholders approval. Such circumstances arise when: (i) Units and/or Convertible Instruments are issued to a Connected Person within 14 days after such Connected Person has executed an agreement to reduce its holding in the same class of Units and/or Convertible Instruments by placing such Units and/or Convertible Instruments to or with any person(s) who is/ are not such Connected Person s associate(s) (other than any Excluded Associate); (ii) the new Units and/or Convertible Instruments are issued at a price not less than the placing price (which may be adjusted for the expenses of the placing); and (iii) the number of Units and/or Convertible Instruments issued to the Connected Person must not exceed the number of Units and/or Convertible Instruments placed by it, provided that: (a) an announcement is issued in accordance with paragraphs 10.3 and 10.4(k) of the REIT Code containing details of the placing and top-up subscription of Units and/or Convertible Instruments by the Connected Person; and (b) issuance of such Units and/or Convertible Instruments is sufficiently covered under the general mandate permitted under Clause 8.1.4A of the Trust Deed and no specific Unitholders approval would otherwise have to be sought. The Manager is of the view that such a provision is in line with the corresponding practice in relation to placing and top-up subscription transactions adopted by listed companies in Hong Kong under the Listing Rules; and the limited scope under which it may operate affords sufficient protection to the Unitholders. As a result of the proposed amendment to Clause 8.1.4B of the Trust Deed, the Manager also proposes to include the new definition of Excluded Associate in Clause 1.1 of the Trust Deed. The Manager has applied to the SFC for a waiver from strict compliance with paragraph 6.2, Chapter 8, paragraph 10.7(b)(iv) and paragraph 12.2 of the REIT Code so as to allow the Manager to issue, grant or offer new Units and/or Convertible Instruments to a Connected Person, without the need for 34

37 LETTER FROM THE BOARD TO UNITHOLDERS compliance with any reporting, announcement, disclosure or unitholders approval requirements under Chapter 8, paragraph 10.7(b)(iv) and/or paragraph 12.2 of the REIT Code, or any valuation requirement under paragraph 6.2 of the REIT Code, in the circumstances where the issuance complies with the terms of the proposed revisions to Clause 8.1.4B of the Trust Deed above. The Manager shall, notwithstanding such waiver, issue announcement(s) at the relevant time(s) in relation to a placing and top-up subscription transaction pursuant to paragraph 10.4 of the REIT Code. (b) Pricing of New Units Currently, the Issue Price (as defined in the Trust Deed) of new Units issued by the Manager is determined in accordance with Clause 8.2 of the Trust Deed. Clause of the Trust Deed sets the pricing basis of new Units by reference to the Market Price, as determined in accordance with Clause 8.2.2A of the Trust Deed. Although Unitholders may approve an issue of new Units at a discount greater than 20% to the Market Price, there is no discretion for Unitholders to approve an issuance of new Units on a different pricing basis. In line with the practice of other SFC-authorised REITs, the Manager proposes to amend Clause of the Trust Deed so as to allow the Manager to issue, or agree to be issued, new Units at a discount of 20 per cent. or more to the Market Price, subject to an ordinary resolution duly approved by Unitholders, and in accordance with the pricing basis as authorised in such ordinary resolution. Such amendment will give the Manager greater flexibility in determining the pricing of such new Units to accommodate commercial needs. (c) Offer of Units pursuant to Rights Issue In line with market practice, the Manager proposes to insert a new Clause into the Trust Deed so as to provide the Manager with the discretion not to extend an offer of Units pursuant to a rights issue to those Unitholders with a registered address outside Hong Kong provided that the directors of the Manager consider such exclusion to be necessary or expedient on account either of the legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place. In such event, the rights or entitlement to the Units of such Unitholders with a registered address outside Hong Kong will be offered for sale by the Manager as the nominee and authorised agent of each such relevant Unitholder and at such price as the Manager may determine, and the Manager will comply with all relevant provisions of the Listing Rules (as if applicable to The Link REIT), to the extent not inconsistent with all applicable rules and guidance issued by the SFC. Where necessary, the Trustee shall have the discretion to impose such other terms and conditions in connection with such sale. The net proceeds of any such sale, if successful, after payment of the costs of sale, will be paid to the relevant Unitholders. 35

38 LETTER FROM THE BOARD TO UNITHOLDERS In line with market practice, the Manager also proposes to insert a new Clause 8.1.4C into the Trust Deed to clarify that an offer of Units and/or Convertible Instruments shall be considered and deemed to be made on a pro rata basis notwithstanding certain situations, including but not limited to: (a) where the Manager exercises its discretion pursuant to Clause of the Trust Deed above and/or (b) where and to the extent that Unitholders do not accept any offer of Units and/or Convertible Instruments within the applicable period for acceptance (as determined by the Manager), such Units and/or Convertible Instruments may be offered or made available to, and taken up by, other persons as determined by the Manager, subject to compliance with all applicable laws, the REIT Code and the Listing Rules (as if applicable to The Link REIT). In respect of (b), in accordance with the relevant Listing Rules (as if applicable to The Link REIT), the Manager must make arrangements to: (i) dispose of the Units and/or Convertible Instruments not subscribed by allottees under provisional letters of allotment or their renouncees by means of excess application forms, in which case such Units and/or Convertible Instruments must be available for subscription by all Unitholders and allocated on a fair basis; or (ii) dispose of Units and/or Convertible Instruments not subscribed by allottees under provisional letters of allotment in the market, if possible, for the benefit of the persons to whom they were offered by way of rights issue. Further, in line with market practice, the Manager proposes to amend the Trust Deed so as to: (i) ensure that Clause of the Trust Deed applies to Convertible Instruments as well as Units; and (ii) clarify that the threshold in terms of number of Units that may be issued, other than on a pro rata basis to all existing Unitholders, without the approval of the Unitholders, shall be proportionally adjusted in the event of a consolidation, sub-division or re-designation of Units. IV. Manager May Request Trustee to and the Manager itself May Borrow or Raise Money In line with market practice, the Manager proposes to amend Clauses and of the Trust Deed so as to: (i) allow borrowings when the Manager considers it beneficial to The Link REIT including for the purposes of paying distributions to Unitholders (under the current provisions, such borrowings are only allowed where they are considered necessary); (ii) clarify that such borrowings may be effected through a borrowing by a Special Purpose Vehicle; (iii) clarify that the Trustee may guarantee such borrowings if instructed; (iv) whenever the Manager considers it necessary or beneficial to The Link REIT and subject to compliance with all applicable laws and regulations including the REIT Code, allow the Manager to secure the repayment of such moneys and interest costs and other charges and expenses and accord such priority or subordination in such a manner and upon such terms and conditions in all respects as it may think fit and in particular by charging or mortgaging all or any of the Investments (as defined in The Trust Deed) provided that such security interests granted by the Trustee shall not contain any restriction on the payment of distributions prior 36

39 LETTER FROM THE BOARD TO UNITHOLDERS to any default under the borrowing in respect of the obligations secured by the security; and (v) make consistent the Trustee s borrowing and the Manager s borrowing provisions. The Manager also proposes to make an amendment to Clause of the Trust Deed so as to clarify that the Manager may also invest in any Authorised Investments for efficient portfolio management purposes subject to compliance with the requirements under the REIT Code in order to enhance the performance of The Link REIT. V. Other Miscellaneous Amendments (a) Liability in respect of Distribution of Entitlement The Manager proposes to amend Clause of the Trust Deed so as to clarify that the Manager shall deduct from each Unitholder s Distribution Entitlement (as defined in the Trust Deed) all amounts which, amongst others, are required to be deducted by law or by the Trust Deed, provided that neither the Manager nor the Trustee shall be liable to account to any Unitholder for any such payment made or suffered by the Manager or the Trustee (as the case may be) in good faith and in the absence of fraud, negligence, wilful default, a breach of the Trust Deed or a breach of trust (in the case of the Trustee) notwithstanding that any such payments ought not to be, or need not have been, made or suffered. (b) Timing of Despatch of Circular As set out in the Trust Deed, the Manager is required to serve on the Unitholders a circular convening an extraordinary general meeting within 21 Business Days of the announcement in relation to the termination or the merger of The Link REIT. The Manager proposes to amend Clauses 23.2 and 24.2 of the Trust Deed so that the circular will be served within 21 days (instead of 21 Business Days) of the announcement. The Manager also proposes to amend Clause 31.5 of the Trust Deed to clarify that Unitholders are informed of the voting results of any general meeting by way of an announcement. Also, in view of the current practice of the unit registrar of The Link REIT, the Manager proposes to amend paragraph 4 of the First Schedule to the Trust Deed such that the Unitholders on which notice of an extraordinary general meeting is served are Unitholders on such latest practicable date before the notice is sent as reasonably and practicably determined by the unit registrar of The Link REIT. (c) Maximum Number of Proxies Currently, the Trust Deed does not set out the maximum number of proxies which may be appointed by a Unitholder. For meeting administrative reasons, the Manager proposes to insert a new paragraph 11A into the First Schedule to the Trust Deed such that a Unitholder may have the right to 37

40 LETTER FROM THE BOARD TO UNITHOLDERS appoint separate proxies to represent respectively such number of the Units held by him as may be specified in his instrument(s) of proxy, provided that the number of proxies so appointed to attend on the same occasion shall not exceed two. For the avoidance of doubt, the new paragraph 11A further clarifies that where a Unitholder is a recognised clearing house within the meaning of the SFO, it may authorise such person or persons as it thinks fit to act as its representative (or representatives) at any meeting of Unitholders provided that, if more than one person is so authorised, the authorisation must specify the number of Units each such person is so authorised. (d) REIT Code/waiver and the Trust Deed To enhance the clarity of the Trust Deed and to be in line with the practice of other SFC-authorised REITs, the Manager proposes to amend Clause 27 of the Trust Deed such that the Manager and the Trustee shall (in the performance of their respective duties under the Trust Deed) at all times comply with applicable provisions of the REIT Code, subject to compliance with any applicable waivers or exemptions given by the SFC in respect of the REIT Code. The amended Clause 27 shall also state that in the event of any conflict or inconsistency between the provisions of the REIT Code and any such waivers or exemptions, and the provisions of the Trust Deed, then to the extent of such conflict or inconsistency, the provisions of the REIT Code and any such waivers or exemptions shall prevail. (e) Other Minor Drafting Amendments To enhance the clarity and consistency of the Trust Deed, the Manager proposes to: (i) amend the definition of Holder in Clause 1.1 of the Trust Deed; (ii) insert a customary definition of Law into Clause 1.1 of the Trust Deed; and (iii) amend Clause of the Trust Deed so as to clarify that a circular in respect of changing of the level of fees and charges of The Link REIT is only required if such alteration requires the approval of Unitholders or is otherwise required under paragraph 10.6 of the REIT Code. VI. Approvals Required Reference is made to section C. II above for approval requirements for amendments to the Trust Deed. Accordingly, the Manager proposes to seek Unitholders approval of each of the proposed Special Resolutions Nos. 3, 4, 5, 6 and 7 as set out in the EGM Notice approving, respectively, the above categories of the Other Trust Deed Amendments. Each of such Special Resolutions will be decided on a poll at the EGM pursuant to the Trust Deed. 38

41 LETTER FROM THE BOARD TO UNITHOLDERS VII. Recommendation The Board considers that each of the above categories of the Other Trust Deed Amendments is in the interests of The Link REIT and the Unitholders as a whole and accordingly recommends Unitholders to vote in favour of each of the Special Resolutions Nos. 3 to 7 to be proposed at the EGM. The Trustee has no objection to the Other Trust Deed Amendments proposed by the Manager and subject to Unitholders and the SFC s prior approval, a supplemental deed will be entered into between the Manager and the Trustee to effect the Other Trust Deed Amendments. SECTION E. EXTRAORDINARY GENERAL MEETING The EGM will be held at Salon 5 and 6, JW Marriott Ballroom, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Tuesday, 18 February 2014 at 10:00 a.m. for the purposes of considering and, if thought fit, passing with or without modifications, the Special Resolutions set out in the EGM Notice, which is set out on pages N-1 to N-5 of this Circular. For the purpose of ascertaining Unitholders right to attend the EGM, the register of Unitholders will be closed from Thursday, 13 February 2014 to Tuesday, 18 February 2014, both days inclusive, during which period no transfer of Units will be registered. In order to be eligible to attend and vote at the EGM, all transfer documents accompanied by the relevant unit certificates must be lodged with the unit registrar of The Link REIT, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong for registration not later than 4:30 p.m. on Wednesday, 12 February With respect to each of the Special Resolutions to be proposed at the EGM, any Unitholder who has a material interest in such resolution and that interest is different from that of all other Unitholders, shall abstain from voting in respect of such resolution. As at the date of this Circular, to the best of the Manager s knowledge, information and belief, after having made resonable enquiries, the Manager takes the view that no Unitholder is required to abstain from voting on any of the Special Resolutions to be proposed at the EGM in respect of the Matters Requiring Approval. The voting on all the proposed Special Resolutions at the EGM will be taken by poll. SECTION F. RESPONSIBILITY STATEMENT The Manager and the Directors, collectively and individually, accept full responsibility for the accuracy of the information given in this Circular and confirm, having made all reasonable enquiries that, to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in this Circular misleading. 39

42 LETTER FROM THE BOARD TO UNITHOLDERS SECTION G. MISCELLANEOUS A copy of the Trust Deed is available for inspection at the registered office of the Manager at all times from 9:00 a.m. to 5:00 p.m. on Business Days in accordance with the provisions of the Trust Deed. A copy of the proposed draft form of the supplemental deed to effect the Investment Scope Trust Deed Amendments and the Other Trust Deed Amendments will be available for inspection at the registered office of the Manager from 9:00 a.m. to 5:00 p.m. on Business Days from the date of this Circular up to and including the date of the EGM. Yours faithfully, By order of the board of directors of The Link Management Limited (as manager of The Link Real Estate Investment Trust) Nicholas Robert SALLNOW-SMITH Chairman 40

43 APPENDIX I TRUST DEED AMENDMENTS The Manager proposes to seek Unitholders approval to make the amendments to the Trust Deed of which the full text or extract of the relevant clauses are reproduced in this Appendix I, with the proposed insertions and deletions indicated by, respectively, the underlined text and the strike-through text below. All capitalised terms under Part A to Part F of this Appendix I are terms defined in the Trust Deed and have the corresponding meanings ascribed to them in the Trust Deed. Where one or more Special Resolution(s) is not approved by the Unitholders, consequential amendments may be made to the provisions below if required (for example, if the introduction of a defined term is not approved by the Unitholders in one Special Resolution, but is used in the context of another Special Resolution that is approved by Unitholders): PART A. EXPANSION OF THE GEOGRAPHICAL SCOPE OF THE LINK REIT S INVESTMENT STRATEGY (Please refer to Special Resolution No. 2) 1. The definition of Auditors in Clause 1.1 of the Trust Deed be amended as follows: Auditors means the accountant or accountants for the time being appointed as auditors of the Trust by the Manager, and where the context permits or requires, include such auditor of each Manager Subsidiary or Special Purpose Vehicle; 2. The definition of Incentive Scheme in Clause 1.1 of the Trust Deed be amended as follows: Incentive Scheme means any scheme which may be adopted by the Manager from time to time pursuant to Clause for the purpose of providing equity or equity-linked incentives to certain management, executives and/or employees of the Manager or its subsidiary(ies)any Manager Subsidiary(ies) or any Special Purpose Vehicle (provided that such Special Purpose Vehicle is wholly-owned by the Trustee) or to other specified participants, whether such incentives are in the form of options over Units or otherwise; 3. The definition of Liabilities in Clause 1.1 of the Trust Deed be amended as follows: Liabilities means all the liabilities of the Trust whether incurred directly by the Trustee or by the Manager or its subsidiary(ies)a Manager Subsidiary or indirectly through a Special Purpose Vehicle (including, in each case, liabilities accrued but not yet paid) determined by the Trustee or the Manager in consultation with the Auditors and any provision which the Trustee or the Manager decides in consultation with the Auditors should be taken into account in determining the liabilities of the Trust; I-1

44 APPENDIX I TRUST DEED AMENDMENTS 4. A new definition of Manager Subsidiaries be inserted in alphabetical order under Clause 1.1 of the Trust Deed as follows: Manager Subsidiaries shall have the meaning ascribed to it in Clause A and, individually a Manager Subsidiary ; 5. The definition of Special Purpose Vehicle in Clause 1.1 of the Trust Deed be amended as follows: Special Purpose Vehicle shall mean a special purpose vehicle that is owned and controlled by the Trust in accordance with the REIT Code which for the avoidance of doubt, shall not include the Manager or the Manager Subsidiaries; 6. The definition of Tax in Clause 1.1 of the Trust Deed be amended as follows: Tax means any profits tax, property tax, income tax and any other taxes, duties, levies, imposts, deductions and charges and any interest, penalties or fines imposed in connection with any of them in any jurisdiction; 7. Clause 10.1 of the Trust Deed be amended as follows: 10.1 The Trust and its records and accounts shall be maintained in Hong Kong Dollars, unless and until the Manager and the Trustee agree that such currency is not suitable because it is not in the interests of the Holders and decide that another currency shall be used. For the avoidance of doubt, records and accounts for Special Purpose Vehicles and Manager Subsidiaries incorporated or registered in jurisdictions outside Hong Kong may be maintained in other currencies. 8. Clause 10.2 of the Trust Deed be amended as follows: 10.2 So long as the Trust and its records and accounts are maintained in Hong Kong Dollars, payments for Units and payments out of the Trust will be made in Hong Kong Dollars provided that the Manager may accept payments for Units and payments may be made out of the Trust (including distributions of income) in a currency other than Hong Kong Dollars and in such event, the equivalent amount in Hong Kong Dollars of any sum paid in such other currency shall be calculated at such rate (whether official or otherwise) which the Manager shall deem appropriate in the circumstances having regard to any premium or discount which may be relevant and to the cost of exchange. I-2

45 APPENDIX I TRUST DEED AMENDMENTS 9. Clause 12.1 of the Trust Deed be amended as follows: 12.1 Subject to the provisions of Clause 13, Clause 19.1 and Clause A, all Cash and other Investments which ought in accordance with the provisions of this Deed to form part of the Deposited Property shall be paid or transferred to the Trustee or any Special Purpose Vehicle forthwith upon receipt by the Manager or the Manager Subsidiaries Clause of the Trust Deed be amended as follows: The Manager, on behalf of the Trust, directly or indirectly through Special Purpose Vehicles, may only invest in Real Estate and other Authorised Investments. Such Real Estate shall be generally income-producing. The investment policy of the Trust shall be determined by the Manager in its absolute discretion and shall include investing in Real Estate for the long term, focusing on sustainable income producing properties with the potential for long term income and capital growth and maintaining a large and diversified portfolio of non-residential Real Estate including but not limited to, stand-alone assets, and comprehensive mixed-use (predominantly retail-based) developments in Hong Kong and other overseas jurisdictions, but in all cases excluding hotels and serviced apartments. 11. Clause of the Trust Deed be amended as follows: The Manager shall have responsibility for the management of, and shall manage (either directly or through the Manager Subsidiaries), the assets held by any such Special Purpose Vehicle, including as provided in Clause and the Trustee shall, in accordance with the Manager s written instructions, exercise its powers of control as shareholder as provided in Clause The Manager shall direct the Trustee to appoint and remove the directors of any Special Purpose Vehicle and the Trustee, subject in all cases to Clause , shall only act in accordance with such instruction. The Trustee shall exercise its rights as a shareholder of any Special Purpose Vehicle as directed by the Manager. The reasonable costs and expenses of establishing, managing and maintaining and administering such any Manager Subsidiary or Special Purpose Vehicle, whether incurred by the Manager or by the Trustee shall be paid from the Deposited Property. 12. Clause of the Trust Deed be amended as follows: Notwithstanding any other provisions in this Deed, the Trustee shall, directly or indirectly, only upon written instruction by the Manager but subject in all cases to Clause exercise any rights as a shareholder to control such Special Purpose Vehicle (including, without limitation, the obligation to provide powers of attorneys or proxies as provided in Clause 15.1, the obligation to appoint directors of such I-3

46 APPENDIX I TRUST DEED AMENDMENTS Special Purpose Vehicle to the extent it is entitled to appoint such directors and to ensure that the auditor and accounting principles and policies of any Special Purpose Vehicle are identical to those of the Trust). The Manager shall insofar as possible monitor the actions of the directors of any Manager Subsidiary and Special Purpose Vehicle and, where such actions are not consistent with the provisions of this Deed shall direct the Trustee to remove the directors (or any of them) of the Special Purpose Vehicle. 13. Clause 13.6 of the Trust Deed be amended as follows: 13.6 For the purposes of this Clause 13, Adjustments means the effects of: (i) unrealised property revaluation gains, including reversals of impairment provisions; (ii) negative goodwill (credited); (iii) realised gains on the disposal of properties; (iv) fair value gains on financial instruments; (v) deferred tax charges/credits in respect of property revaluation movements; and (vi) other material non-cash gains, in each case as recorded in the profit and loss account for the relevant Financial Year; and (vii) any adjustments in accordance with the generally accepted accounting principles in Hong Kong which increase the amount recorded under the generally accepted accounting principles in the jurisdiction of the Special Purpose Vehicle, on which the cash available for distribution is based. 14. A new Clause 13.7A be inserted immediately after Clause 13.7 of the Trust Deed as follows: 13.7A The amount of profits of a Special Purpose Vehicle which is available for distribution will be governed by applicable Laws and regulations in the jurisdiction in which such Special Purpose Vehicle is incorporated or registered. 15. Clause 16.1 of the Trust Deed be amended as follows: 16.1 Upon the authorisation of the Trust by the SFC pursuant to Section 104 of the Securities and Futures Ordinance, the Manager shall be entitled to receive out of the Deposited Property the reimbursement of its costs and expenses reasonably incurred by the Manager (or delegate of the Manager or the Manager Subsidiaries) in managing the Trust subject to a minimum of HK$15 million per calendar month (or such other amount as may be agreed between the Trustee and the Manager) payable in advance on the first day of the relevant calendar month with the remaining balance (if any) payable within 7 calendar days of the accrual of such costs and expenses subject always to the condition that any excess of the remuneration paid to the Manager over the costs and expenses actually incurred by the Manager (or delegate of the Manager or the Manager Subsidiaries) in any Financial Year (or part thereof in respect of a broken period) shall be included in the Trust s consolidated I-4

47 APPENDIX I TRUST DEED AMENDMENTS profit and loss accounts for the purposes of calculating Total Distributable Income. The remuneration of the Manager for a broken period shall be pro-rated on a time basis. 16. Clause 16.1A of the Trust Deed be amended as follows: 16.1A The costs and expenses reasonably incurred by the Manager (or delegate of the Manager or the Manager Subsidiaries) in managing the Trust which the Manager shall be entitled to be reimbursed under Clause 16.1 include the expenses incurred by the Manager (or delegate of the Manager or the Manager Subsidiaries) in relation to any Incentive Scheme including but not limited to any and all costs associated with the issue of new Units pursuant to such Incentive Scheme. 17. Clause 16.2 of the Trust Deed be deleted in its entirety and be substituted therefor the following as the new Clause 16.2: 16.2 Remuneration of Trustee Upon the authorisation of the Trust by the SFC pursuant to Section 104 of the Securities and Futures Ordinance, the Trustee shall be entitled to receive for its own account out of the Deposited Property, within 30 days of the last day of every calendar month, the amount of the remuneration of the Trustee accrued to it and remaining unpaid. The remuneration of the Trustee shall be such amount as shall be agreed by the Manager and the Trustee and (a) (in the case of Real Estate situated in Hong Kong) shall not be less than such amount as shall be equal to per cent. per annum, and shall not be more than such amount as shall be equal to 0.02 per cent. per annum; and (b) (in the case of Real Estate situated outside Hong Kong) shall not be less than such amount as shall be equal to 0.03 per cent. per annum, and shall not be more than such amount as shall be equal to 0.06 per cent. per annum, in each case of the Property Values of the relevant Real Estate as determined in the latest annual valuation report produced by the Approved Valuer. The remuneration of the Trustee shall be calculated monthly and shall be subject to a minimum amount of HK$150,000 per month (or such other lower amount as may be agreed between the Trustee and the Manager) and shall be payable out of the Deposited Property monthly in arrear. The remuneration payable to the Trustee for a broken period shall be pro-rated on a time basis. In the event that the Manager and the Trustee agree to increase the remuneration of the Trustee by increasing such minimum percentage rate, such increase may only take effect upon the expiry of not less than three months notice to Holders. Any increase in the maximum percentage rate or any change to the structure of the Trustee s fee (other than the Trustee s Additional Fees as described below) may only be permitted by Special Resolution at a Holders meeting convened in accordance with the First Schedule. Where the Trustee is required by the Manager to undertake I-5

48 APPENDIX I TRUST DEED AMENDMENTS duties of an exceptional nature or otherwise outside the scope of the Trustee s normal duties in the ordinary and normal course of business of the Trust, the Trustee is entitled to receive out of the Deposited Property such additional amount as shall be agreed with the Manager from time to time (the Trustee s Additional Fees ), provided that, unless otherwise approved by the Holders by way of an Ordinary Resolution: (i) (ii) the aggregate amount of the Trustee s Additional Fees that may be charged by the Trustee in relation to each transaction to be entered into by the Trust shall not exceed 0.05 per cent. of: (a) the acquisition price (in the case of an acquisition of any Real Estate whether directly or indirectly to be held by the Trust); or (b) the sale price (in the case of a sale or disposal of any Real Estate whether directly or indirectly held by the Trust); and the aggregate amount of the Trustee s Additional Fees that is not related to any specific transaction described in (i) above that may be charged by the Trustee for each Financial Year shall not exceed an amount equal to 20 per cent. of the Trustee s remuneration for that Financial Year, calculated by reference to the latest annual valuation report produced by the Approved Valuer, pursuant to Clause 16.2(a) and (b). 18. Clause 19.1 of the Trust Deed be amended as follows: 19.1 The Trustee shall be responsible for the safe custody of the Deposited Property held by it directly or of the Real Estate held through any Special Purpose Vehicle. Any Authorised Investments forming part of the Deposited Property shall be paid or transferred to, or to the order of, the Trustee or a Special Purpose Vehicle forthwith on receipt by the Manager and be dealt with as the Trustee may think proper for the purpose of providing for the safe custody thereof. For the avoidance of doubt, Cash constituting the Deposited Property may, where necessary or where such Cash is derived directly or indirectly from Real Estate outside Hong Kong, be held in an account in the name of a Special Purpose Vehicle outside Hong Kong and operated by the Trustee, or with the approval of the Trustee, operated by the Manager (or Manager Subsidiary), with due powers of oversight by the Trustee, and such safeguards, to ensure compliance with its obligations under the REIT Code, and on such terms including indemnities, as may be required by the Trustee. The Trustee may act as custodian... I-6

49 APPENDIX I TRUST DEED AMENDMENTS 19. Clause 19.8 of the Trust Deed be amended as follows: 19.8 The Trustee shall have no liability for any act or omission of the Manager, the Registrar, any Approved Valuer, any Manager Subsidiary or any Special Purpose Vehicle or any directors of the foregoing. 20. Clause of the Trust Deed be amended as follows: maintain or cause to be maintained proper books and accounts and records of the Trust (including the books and accounts and records of the Manager and as well as of all Manager Subsidiaries, Special Purpose Vehicles and joint ownership arrangements) in Hong Kong in which shall be entered all transactions effected by the Manger Manager for the account of the Trust and shall permit the Trustee from time to time on demand to examine and take copies of or extracts from any such books Clause A of the Trust Deed be amended as follows: A establish or otherwise acquire subsidiaries in or outside Hong Kong (collectively, the Manager Subsidiaries ) for the limited purpose of exercising such powers, discretions and carrying out such duties and obligations of the Manager under this Deed as the Manager may determine from time to time subject to compliance with all applicable Laws and regulations including the REIT Code which, for the avoidance of doubt, shall not include holding Deposited Property; provided that the Manager shall be liable for all acts or omissions of any such subsidiarymanager Subsidiary as if such acts or omissions were its own acts or omissions, and shall be solely responsible for appointment or removal of directors of the Manager Subsidiaries (and for the avoidance of doubt, where such Manager Subsidiaries are not wholly-owned by the Manager, appointment or removal of directors which the Manager is entitled to nominate) subject to the oversight of the Trustee the remuneration, costs and expenses of such subsidiary. For the avoidance of doubt, notwithstanding anything contrary in this Deed, any subsidiary Manager Subsidiary referred to in this Clause A may be held directly or indirectly by the Manager.; I-7

50 APPENDIX I TRUST DEED AMENDMENTS 22. Clause of the Trust Deed be amended as follows: On retirement, the Trustee shall vest the Deposited Property in the new trustee, and give the new trustee all books, documents, records and any other property held by or on behalf of the Trustee relating to the Trust (other than all books, documents, records and other property held by the Manager, the Manager Subsidiaries and the Special Purpose Vehicles if any). 23. Clause 28 of the Trust Deed be amended as follows: 28 The provisions set out in the Third Schedule relating to Holders and directors, senior and chief executives or officers of the Manager and the Special Purpose Vehicles shall have effect as if the same were included herein. I-8

51 APPENDIX I TRUST DEED AMENDMENTS PART B. AUTHORISED INVESTMENTS AND RELATED ACTIVITIES (Please refer to Special Resolution No. 3) 1. The definition of Authorised Investments under Clause 1.1 of the Trust Deed be amended as follows: Authorised Investments means: (i) (ii) (iii) (ii) (iv) (iii) (v) (iv) (vi) (vii) (viii) Real Estate as permitted under the REIT Code; any improvement or extension of or addition to or reconstruction or renovation or other development of any Real Estate; Real Estate Related Assets; Cash and Cash Equivalent Items; shares in the issued share capital of the Manager and all Manager Subsidiariesits subsidiary(ies); and shares in the issued share capital of, and loans to, any Special Purpose Vehicle and any goodwill and other intangible assets acquired in relation to the acquisition of Special Purpose Vehicles any Special Purpose Vehicle established or to be established by the Manager pursuant to Clause 12.4,; any other assets or investments as permitted by the REIT Code from time to time; and investments in relation to arrangements for the purposes of enhancing the return on, or reducing the risks associated with, the Authorised Investments contemplated by paragraphs (i), (ii), (iii), (iv), (v), (vi) and (vii) of this definition, or of other Investments, or in respect of the Trust generally, including investments in the form of derivative instruments for hedging purposes, in each case whether held by the Trustee directly or indirectly through a Special Purpose Vehicle pursuant to this Deed provided that there shall be no crossholdings between: (a) the Manager and the Manager Subsidiaries; and (b) any Special Purpose Vehicle; I-9

52 APPENDIX I TRUST DEED AMENDMENTS 2. A new definition of Real Estate Related Assets be inserted in alphabetical order under Clause 1.1 of the Trust Deed, as follows: Real Estate Related Assets means assets incidental to the ownership of Real Estate, including without limitation, furniture, carpets, furnishings, machinery and plant and equipment installed or used or to be installed or used in or in association with any Real Estate; 3. Clause 9.1 of the Trust Deed be amended as follows: 9.1 The Manager shall ensure that the Value of an Authorised Investment at any given date means: (in the case of Investments falling within any paragraph of the definition of Authorised Investment which are in the nature of shares in the issued share capital of the Manager and its subsidiary(ies) the Manager Subsidiaries (if any)) after consultation with the Trustee, such Investments shall be valued in accordance with the most recent audited financial statements of the Manager (on a consolidated basis, where applicable); and ,; (in the case of Investments falling within any paragraph of the definition of Authorised Investment which is in the nature of a derivative instrument), the Value of such an Investment shall be determined by the Manager, and shall be calculated as follows: (i) all calculations of investments quoted, listed, traded or dealt on any stock exchange, commodities exchange, futures exchange or over-the-counter market shall be made by reference to the last traded price on the principal stock exchange for such investments as at the close of business in such place on the day as of which such calculation is to be made; and (ii) where there is no stock exchange, commodities exchange, futures exchange or over-the-counter market, all calculations based on the value of investments quoted by any person, firm or institution making a market in such investments (and if there is more than one such market maker, then such market maker as the Manager shall designate) shall be conducted in accordance with the prevailing generally accepted accounting principles in Hong Kong; and I-10

53 APPENDIX I TRUST DEED AMENDMENTS (in the case of Investments falling within any paragraph of the definition of Authorised Investment which is not in the nature of a particular piece of Real Estate or subject to Clauses to 9.1.5) in accordance with the generally accepted accounting principles as promulgated by the Hong Kong Institute of Certified Public Accountants as are applicable in the relevant Financial Year, A new Clause A be inserted immediately after Clause of the Trust Deed as follows: A The Manager may acquire Real Estate in the form of uncompleted units in or portions of a building which is unoccupied and non-income producing or in the course of substantial development, redevelopment or refurbishment, provided that the aggregate contract value of such Real Estate shall not exceed 10% of the total Net Asset Value of the Deposited Property (or such other limit as provided in the REIT Code) at the time of acquisition. I-11

54 APPENDIX I TRUST DEED AMENDMENTS PART C. ISSUE OF UNITS AND/OR CONVERTIBLE INSTRUMENTS TO A CONNECTED PERSON AND OTHER MATTERS RELATING TO ISSUE OF UNITS (Please refer to Special Resolution No. 4) 1. A new definition of Excluded Associate be inserted in alphabetical order under Clause 1.1 of the Trust Deed as follows: Excluded Associate means any person or entity who/which is an associate of the relevant Connected Person solely by virtue of the operation of paragraphs (b), (c), and/or (k) (in the case of paragraph (k), other than a related corporation covered under paragraph (a) of the definition of related corporation in Schedule 1 to the Securities and Futures Ordinance) of the definition of associate in Schedule 1 to the Securities and Futures Ordinance; 2. Clause of the Trust Deed be amended as follows: After the Listing Date, nnew Units and/or Convertible Instruments may be offered on a pro rata basis to all existing Holders without the prior approval of Holders other than where any such issue increases the market capitalisation of the Trust by more than 50 per cent. in which case such issue shall require the prior approval of Holders by Ordinary Resolution at a meeting to be convened by the Manager in accordance with the First Schedule. I-12

55 APPENDIX I TRUST DEED AMENDMENTS 3. Clause 8.1.4A of the Trust Deed be amended as follows: 8.1.4A (i) Subject to Clause 8.1.4B, Units may be issued, or agreed (conditionally or unconditionally) to be issued, in any Financial Year (whether directly or pursuant to any Convertible Instruments), otherwise than on a pro rata basis to all existing Holders, without the approval of Holders, if: (a)... PLUS (b)... does not increase the number of Units that were outstanding at the end of the previous Financial Year by more than 20 per cent. (or such other percentage of outstanding Units as may, from time to time, be prescribed by the SFC) provided that such threshold in terms of number of Units shall in the event of any consolidation or sub-division or re-designation of Units during that Financial Year be proportionally adjusted to give effect to such consolidation, sub-division or re-designation of Units.... (iii) For the purposes of thisthese Clauses 8.1.4A, 8.1.4B and 8.1.4C and Clauses and 8.2.2A: Clause 8.1.4B of the Trust Deed be amended as follows: 8.1.4B Except pursuant to the Initial Public Offering or any Incentive Scheme, or a rights issue or as otherwise stated in Clause 17, an issue, grant or offer of new Units or Convertible Instruments to a Connected Person (other than as part of an offer made to all Holders on a pro rata basis or an offer made pursuant to a reinvestment of distributions in accordance with Clause 8.5) shall require specific prior approval of Holders by Ordinary Resolution at a meeting to be convened by the Manager in accordance with the First Schedule., unless: (i) Units and/or Convertible Instruments are issued to a Connected Person within 14 days after such Connected Person has executed an agreement to reduce its holding in the same class of Units and/or Convertible Instruments by placing such Units and/or Convertible Instruments to or with any person(s) who is/are not such Connected Person s associate(s) (other than any Excluded Associate); I-13

56 APPENDIX I TRUST DEED AMENDMENTS (ii) (iii) the new Units and/or Convertible Instruments are issued at a price not less than the placing price to be determined in accordance with Clause of this Deed (which may be adjusted for the expenses of the placing); and the number of Units and/or Convertible Instruments issued to the Connected Person must not exceed the number of Units and/or Convertible Instruments placed by such Connected Person, provided that: (a) an announcement shall be issued in accordance with paragraphs 10.3 and 10.4(k) of the REIT Code containing details of the placing and top-up subscription of Units and/or Convertible Instruments by the Connected Person; and (b) issuance of such Units and/or Convertible Instruments is sufficiently covered under the general mandate permitted under Clause 8.1.4A of this Deed and no specific Holders approval would otherwise have to be sought. 5. A new Clause 8.1.4C be inserted immediately after Clause 8.1.4B of the Trust Deed as follows: 8.1.4C An offer of Units and/or Convertible Instruments shall be considered and deemed to be made on a pro rata basis notwithstanding that (i) the Manager may, after making due enquiry regarding the Law of the applicable jurisdiction, determine that Units and/or Convertible Instruments are not to be offered to Holders with a registered address outside Hong Kong, and/or offer the Units and/or Convertible Instruments on a basis, or contain such other terms, providing for any such other exclusions or adjustments determined by the Manager, if the Manager considers such exclusions or adjustments to be necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the Laws, or under the requirements of any recognised regulatory body or stock exchange, of any territory or jurisdiction outside Hong Kong; and/or (ii) where and to the extent that Holders do not accept any offer of Units and/or Convertible Instruments within the applicable period for acceptance (as determined by the Manager), such Units and/or Convertible Instruments may be offered or made available to, and taken up by, other persons as determined by the Manager, subject to compliance with all applicable Laws, the REIT Code and the Listing Rules (as if applicable to the Trust). I-14

57 APPENDIX I TRUST DEED AMENDMENTS 6. Clause of the Trust Deed be amended as follows: After the Listing Date, and for so long as the Units are admitted for trading on the SEHK, the Manager may, subject to Clauses 8.1.4, 8.1.4A and 8.2.1, effect or agree to effect the issue of Units on behalf of the Trust (whether directly, or pursuant to any Convertible Instruments (as defined in Clause 8.1.4A(iii))) on any Business Day at an Issue Price per Unit that is equal to the Market Price (as defined in Clause 8.2.2A) or, in its discretion, at a discount of no more than 20 per cent. to the Market Price (other than (i) a rights issue; (ii) a placing of Units for cash consideration where the Manager can satisfy the SFC that the Trust is in a serious financial position and that the only way it can be saved is by an urgent rescue operation which involves an issue of Units at a discount of more than 20 per cent. to the Market Price or there are other exceptional circumstances; and (iii) a capitalisation issue) or at a premium to the Market Price or, where approval by way of an Ordinary Resolution is obtained as set out below in this Clause 8.2.2, on the pricing basis as authorised in such Ordinary Resolution. For the avoidance of doubt, the Issue Price shall, in the case of any Convertible Instruments, mean the initial price per Unit at which Units are to be issued pursuant to the exercise of any conversion, exchange or subscription or similar rights under such Convertible Instruments, before any adjustments which may apply thereunder (the Initial Issue Price ). An issue of, or agreement (whether conditional or unconditional) to issue, new Units at an Issue Price or Initial Issue Price (as the case may be) that is at a discount of more than 20 per cent. or more to the Market Price (other than in situations (i), (ii) and (iii) of this Clause specified above) will require specific prior approval of Holders by Ordinary Resolution at a meeting to be convened by the Manager in accordance with the First Schedule, and such approval may be subject to such conditions as the Holders may approve, including without limitation stating the basis of pricing, or authorising the Manager to determine the pricing basis on such terms as are authorised under that Ordinary Resolution. 7. A new Clause be inserted immediately after Clause of the Trust Deed as follows: In relation to any rights issue, the Manager may, in its discretion, elect not to extend the rights issue to those Holders with a registered address outside Hong Kong provided that the directors of the Manager consider such exclusion to be necessary or expedient on account either of the legal restrictions under the Laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place. In such event, the rights or entitlement to the Units of such Holders with a registered address outside Hong Kong will be offered for sale by the Manager as the nominee and authorised agent of each such relevant Holder and at such price as the Manager may determine, and I-15

58 APPENDIX I TRUST DEED AMENDMENTS the Manager shall comply with the relevant provisions of the Listing Rules (as if applicable to the Trust), to the extent not inconsistent with all applicable rules and guidance issued by the SFC. Where necessary, the Trustee shall have the discretion to impose such other terms and conditions in connection with such sale. The net proceeds of any such sale, if successful, after payment of the costs of sale, will be paid to the relevant Holders. I-16

59 APPENDIX I TRUST DEED AMENDMENTS PART D. MANAGER MAY REQUEST TRUSTEE TO, AND THE MANAGER ITSELF MAY, BORROW OR RAISE MONEY (Please refer to Special Resolution No. 5) 1. Clause (Trustee s borrowing) of the Trust Deed be amended as follows: Subject to Clause and compliance with all applicable Laws and regulations including the REIT Code, the Manager may, whenever it the Manager considers it necessary or beneficial to the Trust (including for the purposes of paying distributions to Unitholders) that moneys be borrowed or raised for the purposes of the Trust,: (a) instruct the Trustee in writing to guarantee or borrow or raise moneys on behalf of the Trust by the Trustee either directly or through Special Purpose Vehicles (upon such terms and conditions as the Manager thinks fit and in particular by charging or mortgaging all or any of the Investments); and/or (b) secure the repayment of such moneys and interest costs and other charges and expenses and accord such priority or subordination for the payment obligations in such manner and upon such terms and conditions in all respects as the Manager may think fit and in particular by charging or mortgaging all or any of the Investments. Thethe Trustee shall give effect to such written instruction, provided that the Trustee shall not execute any guarantee, instrument, lien, charge, pledge, hypothecation, mortgage or agreement in respect of the borrowing or raising of moneys which (in the opinion of the Trustee) would render the Trustee s liability to exceed the Deposited Property and that such security interests granted by the Trustee shall not contain any restriction on the payment of distributions prior to any default under the borrowing in respect of the obligations secured by the security. 2. Clause (Manager s borrowing) of the Trust Deed be amended as follows: Subject to Clause and compliance with all applicable Laws and regulations including the REIT Code, the Manager may, whenever itthe Manager considers it necessary or beneficial to the Trust (including for the purposes of paying distributions to Unitholders) and desirable in the interests of Holders to do so or considers it necessary to enable the Trust to meet any liabilities as aforesaid,: (a) raise or borrow any sum or sums of money on behalf of the Trust either directly or through Special Purpose Vehicles (upon such terms and conditions as the Manager thinks fit); (including, without limitation, the issue of securities in respect of any borrowing or any liability and the encumbering of any Investment) for the Trust and/or may(b) secure the repayment of such moneys and interest costs and other charges and expenses and accord such priority or subordination for the payment obligations in such manner and upon such terms and conditions in all respects as the Manager may think fit and in particular by charging or mortgaging all or any of the Investments provided that such security interests granted by the Trustee shall not I-17

60 APPENDIX I TRUST DEED AMENDMENTS contain any restriction on the payment of distributions prior to any default under the borrowing in respect of the obligations secured by the security. 3. Clause of the Trust Deed be amended as follows: In order to enhance the performance of the Trust, the Manager may invest in Cash Equivalent Items or other Authorised Investments for efficient portfolio management purposes and to ensure that any Cash held by the Trust is managed efficiently in the best interests of Unitholders... I-18

61 APPENDIX I TRUST DEED AMENDMENTS PART E. VOTING BY SHOW OF HANDS (Please refer to Special Resolution No. 6) 1. Paragraph 8 of the First Schedule to the Trust Deed be amended as follows: 8 At any general meeting of Holders, a resolution put to the meeting shall be decided on a poll (except where the chairman, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be decided by a show of hands) and the result of the poll (or a show of hands in the circumstances above) shall be deemed to be the resolution of the meeting. For the purposes of this paragraph 8, procedural or administrative matters are those that: (a) are not on the agenda of the general meeting or in any supplementary circular to Holders; and (b) relate to the chairman s duties to maintain the orderly conduct of the meeting and/or allow the business of the meeting to be properly and effectively dealt with, whilst allowing all Holders a reasonable opportunity to express their views. PART F. OTHER MISCELLANEOUS AMENDMENTS (Please refer to Special Resolution No. 7) 1. Liability in respect of Distribution Entitlement (a) Clause of the Trust Deed be amended as follows: The Manager shall deduct from each Holder s Distribution Entitlement all amounts which: (i) (ii) (iii) are necessary to avoid distributing a fraction of a cent; are required to be deducted by lawlaw or this Deed, provided that neither the Manager nor the Trustee shall be liable to account to any Holder for any such payment made or suffered by the Manager or the Trustee (as the case may be) in good faith and in the absence of fraud, negligence, wilful default, a breach of this Deed or a breach of trust (in the case of the Trustee) to any duly empowered fiscal authority of Hong Kong or elsewhere for Taxes or other charges in any way arising out of or relating to any transaction or whatsoever nature under this Deed notwithstanding that any such payments ought not to be, or need not have been, made or suffered; or are payable by the Holder in respect of the Trust, to the Trustee or the Manager. I-19

62 APPENDIX I TRUST DEED AMENDMENTS 2. Timing of Despatch of Circular (a) Clause 23.2 of the Trust Deed be amended as follows: 23.2 The Manager shall serve on the Holders, within 21 Business Ddays of the announcement referred to in Clause 23.1, a circular convening an extraordinary general meeting containing the following information... (b) Clause 24.2 of the Trust Deed be amended as follows: 24.2 The Manager shall serve on the Holders within 21 Business Ddays of the announcement referred to in Clause 24.1, a circular convening an extraordinary general meeting containing the following information... (c) Clause 31.5 of the Trust Deed be amended as follows: Holders shall be informed of the results of any Holders voting at such general meeting by way of a notice or an announcement. (d) Paragraph 4 of the First Schedule to the Trust Deed be amended as follows:... In this paragraph 4, Holders means the persons who were Holders on the date seven days such latest practicable date before the notice under this paragraph 34 was sent as reasonably determined by the Registrar, but excluding any persons who are known not to be Holders at the time of the meeting or at any other relevant time Maximum Number of Proxies (a) New paragraph 11A be inserted into the First Schedule to the Trust Deed as follows: 11A Any Holder s right to appoint a proxy shall include the right to appoint separate proxies to represent respectively such number of Units held by him/her/it as may be specified in his/her/its instrument(s) of proxy but the number of proxies so appointed by any Holder to attend on the same occasion shall not exceed two. Without prejudice and in addition to the foregoing, where a Holder is a recognised clearing house within the meaning of the Securities and Futures Ordinance, it may authorise such person or persons as it thinks fit to act as its representative (or representatives) at any meeting of Unitholders provided that, if more than one person is so authorised, the authorisation must specify the number of Units each such person is so authorised. The person so authorised will be entitled to exercise the same powers on behalf of the recognised clearing house as that clearing house (or its nominees) could exercise if it were a Holder. I-20

63 APPENDIX I TRUST DEED AMENDMENTS 4. REIT Code/waiver and the Trust Deed (a) Clause 27 of the Trust Deed be amended as follows: In the event that the Trust is authorised by the SFC pursuant to Section 104 of the Securities and Futures Ordinance, the Manager and the Trustee shall (in the performance of their respective duties under this Deed with respect to the Trust) at all times comply with applicable provisions of the REIT Code as if the same were set out in this Deed and in so far as such provisions respectively relate to them, subject to compliance with any applicable waivers or exemptions given by the SFC in respect of the REIT Code. In the event of any conflict or inconsistency between the provisions of the REIT Code and any such waivers or exemptions, and the provisions of this Deed in relation to the Trust, then to the extent of such conflict or inconsistency, the provisions of the REIT Code and any such waivers or exemptions shall prevail. In the event that the Units are listed on the SEHK, the Manager shall at all times comply with applicable provisions of the Listing Rules (as if applicable to the Trust). 5. Other Minor Drafting Amendments (a) The definition of Holder under Clause 1.1 of the Trust Deed be amended as follows: Holder or Unitholder means the person for the time being entered on the Register as the holder of a Unit and (where the context so permits) persons jointly so entered; (b) A new definition of Law be inserted in alphabetical order under Clause 1.1 of the Trust Deed as follows: Law means any law, statute, ordinance, code, rule, regulation, judgement, decree, order, writ, award, injunction or determination of any authority (whether with the force of law or not), including the REIT Code and any conditions imposed by the SFC on the authorisation of the Trust and the licence of the Manager under the Securities and Futures Ordinance; I-21

64 APPENDIX I TRUST DEED AMENDMENTS (c) Clause of the Trust Deed be amended as follows: 31.3 The Manager shall issue a circular to Holders in respect of transactions that pursuant to the REIT Code (or in the reasonable opinion of the Trustee or the Manager), require Holders approval, including, without limitation: changing the level of fees and charges of the Trust only if such alteration requires the approval of Holders or is otherwise required under paragraph 10.6 of the REIT Code; I-22

65 APPENDIX II PRC RISK FACTORS Investment into the PRC may involve, without limitation, the following characteristics and risks in relation to the financial aspects and operational matters. Unitholders should consider carefully, together with all other information contained in this Circular, the risk factors described below before deciding to vote on the Matters Requiring Approval. (a) RMB is not freely convertible If The Link REIT invests in the PRC property market, the revenue generated from those investments would likely be in RMB, which is subject to foreign exchange controls and is currently not freely convertible into foreign currencies. The State Administration of Foreign Exchange of the PRC (the SAFE ), under the authority of the People s Bank of China (the PBOC ), is empowered with the functions of administering all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations. Transactions involving conversion between foreign currencies and RMB are subject to significant foreign exchange controls and the approval of the SAFE. The PRC government continues to regulate conversion between RMB and foreign currencies, including Hong Kong Dollars, despite the significant reduction over the years by the PRC government in controlling routine foreign exchange transactions on the current account. There is no assurance that the current policies regarding conversion of RMB into foreign currencies will not be subject to tighter controls or restrictions in the future. In this regard, in the event that The Link REIT invests in the PRC property market, any changes to the foreign exchange regulations of the PRC may result in foreign exchange losses to The Link REIT and subsequently reduce the distribution payable to Unitholders. In addition, there is no assurance that the PRC government will continue to gradually liberalise the level of control over cross-border remittances in the future or that new PRC regulations which have the effect of restricting the remittance into or out of the PRC will not be promulgated. The Link REIT s results of operations and the amount distributable to Unitholders would be adversely affected by any changes to the foreign exchange and cross-border remittance regulations in the PRC if it invests in the PRC property market. (b) Fluctuations in the exchange rate of RMB The Link REIT may be subject to exchange rate risk if it invests in the PRC property market in the future. The income and profit of The Link REIT from its assets in the PRC are to be denominated in RMB. The value of RMB against foreign currencies fluctuates and is affected by changes in the PRC and international political and economic conditions and by many other factors. Fluctuations in the exchange rate of RMB against foreign currencies may therefore increase finance costs and have a material adverse impact on the level of distributions to Unitholders. II-1

66 APPENDIX II PRC RISK FACTORS (c) The Link REIT may engage in hedging transactions, which can limit gains and increase exposure to losses, and not offer full protection against interest rate and exchange rate fluctuations In the event that the Manager decides to invest in the PRC property market, The Link REIT may enter into hedging transactions to protect itself from the effects of interest rate fluctuations on floating rate debt and exchange rate fluctuations. Hedging transactions may include entering into hedging instruments, purchasing or selling futures contracts, purchasing put and call options or entering into forward agreements. However, hedging activities may not always have the desired beneficial effect on the results of operations or financial condition of The Link REIT. No hedging activity can completely insulate The Link REIT from risks associated with changes in interest rates and exchange rates. Moreover, hedging could fail to protect or adversely affect The Link REIT because, among other things: the available hedging may not correspond directly with the risk for which protection is sought; the duration or nominal amount of the hedge may not match the duration or nominal amount of the related liability; the party owing money in the hedging transaction may default on its obligation to pay; the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the ability of The Link REIT to sell or assign its side of the hedging transaction; and the value of the derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments and the significant loss in value of hedging instruments due to a write down to fair value would reduce the net asset value of The Link REIT. Hedging involves risks and typically involves costs, including transaction costs, which may reduce overall returns. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distributions to Unitholders. (d) The ability of The Link REIT s PRC-incorporated companies to declare dividends is limited by the availability of retained earnings, which may result in trapped cash in the PRC Under PRC law, a PRC enterprise is only permitted to declare and repatriate dividends on earnings after tax and deducting mandated reserves. These reserves, if set aside discretionally by the board of directors of a Sino-foreign joint II-2

67 APPENDIX II PRC RISK FACTORS venture or mandatorily by law, cannot be repatriated even if an enterprise has no losses or likely prospect of losses or these reserves are not needed for their prescribed purpose. Additionally, dividends may only be paid from earnings after tax and after taking into account depreciation expense, which is a non-cash charge. These reserves and depreciation expense potentially create a significant pool of trapped cash that cannot be used to pay dividends. If there are not enough retained earnings for these reserves, the amount of dividends that can be declared by The Link REIT s PRC-incorporated companies will be limited, thereby potentially reducing the amount of cash that can be used for distribution to Unitholders. (e) The Link REIT may be subject to extensive PRC regulatory controls on foreign investment in the real estate sector Pursuant to the Circular on Strengthening Administration of Approval and Filing of Foreign Investment in Real Estate Industry, real estate enterprises funded by foreign capital are not permitted to seek profit by purchasing and reselling real estate property in the PRC that is either completed or under construction. The regulation is believed to be aimed at controlling inflow of foreign capital by curtailing the practice of reselling properties for profit adopted by some foreign investors. The promulgation of the regulation is an indication that the PRC government has been imposing stricter policies on foreign investment in the real estate industry. There can be no assurance that the PRC government will not deem any transaction of real estate property or any transfer of equity interest in real estate companies as making profit through transaction of real estate. There is also no assurance that the PRC government will not implement additional restrictions on foreign investment in the real estate industry and sale and purchase of real estate property by foreign investors. Such measures may adversely affect The Link REIT s future investments in the PRC as it may experience difficulty in remitting profits generated from the onshore property companies or residual income from liquidation of the onshore property companies to overseas. In addition, in accordance with the laws and regulations of the PRC, any onshore property companies to be established by The Link REIT for the purposes of holding the PRC properties are required to obtain and maintain valid various licenses, permits, or satisfy filing requirements in order to commence and operate their business including, without limitation, certificate of approval, business license, property management qualification certificate, and filing with the Ministry of Commerce of the PRC as a foreign invested real estate company. These onshore property companies are required to comply with applicable laws, regulations and standards and are subject to regular and random inspections for compliance by the relevant PRC authorities. Failure to pass these inspections, or the loss of or failure to obtain or renew any licenses and permits, could disrupt the operations and business of these onshore property companies and the business, financial condition and results of operations of The Link REIT could also be materially and adversely affected. II-3

68 APPENDIX II PRC RISK FACTORS (f) Uncertainties in the PRC legal system The taxation and real estate laws and in particular, the laws relevant to the rights of foreign investors and the entities through which they may invest are often unclear in the PRC. The PRC legal system is based on written statutes and prior court decisions can only be cited as reference. Since 1979, the PRC government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organisation and governance, commerce, taxation and trade, with a view to developing a comprehensive system of commercial law. However, as these laws and regulations are continually evolving in response to changing economic and other conditions, and because of the limited volume of published cases and their non-binding nature, any particular interpretation of PRC laws and regulations may not be definitive. The PRC may not accord equivalent rights (or protection for such rights) to those rights investors might expect in countries with more sophisticated real estate laws and regulations. Furthermore, the PRC is geographically large and divided into various provinces and municipalities and as such, different laws, rules, regulations and policies apply in different provinces and they may have different and varying applications and interpretations in different parts of the PRC. Legislation or regulations, particularly for local applications, may be enacted without proper prior notice or announcement to the public. Accordingly, the Manager may not be aware of the existence of new legislation or regulations if The Link REIT invests in the PRC property market in the future. There is at present also no integrated system in the PRC from which information can be obtained in respect of legal actions, arbitrations or administrative actions. Even if an individual court-by-court search were performed, each court may refuse to make the documentation which it holds available for inspection. Accordingly, there is a risk that the PRC entities being acquired by The Link REIT in the future may be subject to proceedings which may not have been disclosed. Agreements which are governed under PRC laws may be more difficult to enforce by legal or arbitral proceedings in the PRC than in countries with more mature legal systems. Even if the agreements generally provide for arbitral proceedings for disputes arising out of the agreements to be in another jurisdiction, it may be difficult for The Link REIT to obtain effective enforcement in the PRC of an arbitral award obtained in that jurisdiction. (g) The PRC property market is volatile The PRC property market is volatile and may experience oversupply and property price fluctuations. The central and local governments adjust monetary and other economic policies from time to time to prevent and curtail the overheating of the PRC and local economies, and such adjustments may affect the property market in the PRC. The central and local governments also make policy adjustments and adopt new regulatory measures from time to time in a direct effort to control the II-4

69 APPENDIX II PRC RISK FACTORS over-development of the property market in the PRC. Such policies may lead to changes in market conditions, including price instability and imbalance of supply and demand. There is also no assurance that the PRC property sector in the future will not be over-developed. Any future over-development in the property sector in the PRC may result in an oversupply of properties, including commercial properties, and a fall of property prices as well as rental rates. All these would affect the business and financial conditions and the results of operations of The Link REIT if the Manager decides to invest in the PRC property market. (h) Properties in the PRC may be resumed compulsorily The PRC government has the power to resume compulsorily any land in the PRC pursuant to the provisions of applicable legislation. In the event of any compulsory resumption of property in the PRC, the amount of compensation to be awarded is based on the open market value of a property and is assessed on the basis prescribed in the relevant law. If The Link REIT acquires any PRC properties which are subsequently resumed by the PRC government, the level of compensation that may be paid to The Link REIT pursuant to this basis of calculation may be less than the price which The Link REIT would have paid for such properties. II-5

70 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG Investors should note that the following statements are based on advice received by the Manager regarding the relevant laws, regulations and practice in the PRC in force as at the date of this Circular and may be subject to change. REGULATIONS OF FOREIGN INVESTMENT INTO THE REAL ESTATE MARKET On 11 July 2006, the PBOC, SAFE and other authorities jointly promulgated the Opinions on Regulating the Access to and Administration of Foreign Investment in the Real Estate Market, which states that: (i) an overseas entity or individual investing in real estate in China other than for self-use, shall apply for the establishment of a foreign invested real estate enterprise in accordance with applicable PRC laws and shall only conduct operations within the authorised business scope after obtaining the relevant approvals from and registering with the relevant governmental authorities; (ii) the registered capital of a foreign invested real estate enterprise with a total investment of US$10 million or more shall not be less than 50% of its total investment amount, whereas for foreign invested real estate enterprise with a total investment of less than US$10 million, the current rules on registered capital shall apply; (iii) a newly established foreign invested real estate enterprise will first obtain an approval certificate and business license which are valid for one year. The formal approval certificate and business license can be obtained by submitting the land use right certificate to the relevant government departments after the land grant premium for the land has been paid; (iv) an equity transfer of a foreign invested real estate enterprise or the transfer of its projects, as well as the acquisition of a domestic real estate enterprise by foreign investors, must first be approved by the Ministry of Commerce or its local counterparty. The investor shall submit a letter of guarantee to the Ministry of Commerce or its local counterparty confirming that it will abide with the land grant contract, the construction land planning permit and the construction works planning permit. In addition, the investor shall also submit the land use right certificate, the evidence of alteration filing by construction authorities and evidence from the tax authorities confirming the tax payment situation; (v) foreign investors acquiring a domestic real estate enterprise through an equity transfer, acquiring the Chinese investors equity interest in an equity joint venture or through any other methods shall pay the purchase funds in a lump sum and with its own capital and shall ensure the proper treatment for enterprise s employees and bank loans in accordance with applicable PRC laws; (vi) if the registered capital of a foreign invested real estate enterprise is not fully paid up, its land use right certificate has not been obtained or the capital-fund in respect of the development project is less than 35% of the total investment amount of the project, the foreign invested real estate enterprise is prohibited from borrowing from any domestic or foreign lenders and SAFE shall not approve the settlement of any foreign loans; (vii) neither the domestic investors nor the foreign investors in a foreign invested real estate enterprise shall in any manner stipulate a fixed return clause or equivalent clause in contract, articles of association, equity transfer agreement or in any other documents; (viii) a branch or representative office established by a foreign investor in China (other than a foreign invested real estate enterprise approved to be established), or a foreign individual working or studying in the PRC for more than one year, is permitted to purchase commodity III-1

71 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG residential properties located in the PRC only for the purpose of self residence. Residents of Hong Kong, Macau and Taiwan and overseas Chinese may purchase commodity residential properties of a stipulated floor area based on their living requirements in the PRC for self-residence purpose. On 23 May 2007, the Ministry of Commerce and SAFE jointly issued the Notice of the Ministry of Commerce and the State Administration of Foreign Exchange on Further Strengthening and Regulating the Examination, Approval and Supervision of Foreign Direct Investment in Real Estate Industry, which requires all locally-approved foreign invested real estate enterprises to be filed with the Ministry of Commerce for recordal. No capital injection or conversion of injected capital into RMB may take place before this recordal procedure is completed. The Ministry of Commerce has been publishing the names of the foreign invested real estate enterprises that have completed the recordal procedures on its website. On 12 October 2011, the Ministry of Commerce issued the Notice of the Ministry of Commerce on Issues concerning Cross-border Direct Investment in RMB, under which, if a foreign investor intends to make investment in the PRC real estate market with its RMB proceeds through settlement of cross-border trades, profits or other returns from investments in the PRC or obtained lawfully through other means outside the PRC, it shall be subject to the same regulations that govern the approval and recordal of foreign invested real estate enterprises. However, the relevant provincial commerce authority shall report any investment of RMB300 million or more to the Ministry of Commerce for its consent. Only with the consent of the Ministry of Commerce may the provincial commerce authority process with the relevant approval procedures for such investment. On 26 February 2013, the General Office of the State Council issued the Circular of the General Office of the State Council on Continuing the Regulation of Real Estate Market (Guo Ban Fa [2013] No.17) [2013]17, requiring certain related cities to fine-tune the existing house purchase restrictions on the basis of strict compliance with the Circular of the General Office of the State Council on Issues Concerning Further Property Regulating and Controlling the Real Estate Market (Guo Ban Fa [2011] No. 1) [2011]1, which includes, among others: (i) if a city is subject to purchase restrictions, the restrictions shall apply to all administrative regions of such city, and the types of houses subject to purchase restrictions shall include all newly-constructed commodity housing and second-hand housing. The house purchase eligibility shall be examined before the conclusion of a house purchase contract (or a letter of intent). A family without local household registration that already owns one or more houses, or a family without local household registration that is unable to provide proofs for a certain number of consecutive years of local tax payment or social insurance contribution, is not eligible for purchasing more houses in a city where there are purchase restrictions; (ii) with regard to cities with soaring housing prices, the local branches of the PBOC III-2

72 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG may further raise the percentage of the minimum down payment (which shall not be lower than 60 per cent.) and the interest rates on loans for second houses (which shall not be lower than 1.1 times of the benchmark interest rate), according to policy requirements and the price control targets determined by the local governments for newly-constructed commodity housing ; and (iii) tax authorities shall levy individual income tax on the sales of houses at 20 per cent. of the transfer gain in strict accordance with the law if the original value of the houses sold can be verified through historical information, such as information from tax collection and administration and house registration. THE LAND AND PROPERTY SYSTEM OF THE PRC The Land System All land in the PRC (also the State ) is either state-owned or collectively-owned, depending on the location of the land. All land in the urban areas is state-owned, and all land in the rural or suburban areas including land for houses and private plots in fields and on hillsides are, unless otherwise prescribed by the state, collectively-owned. The State has the right to expropriate or take over land in accordance with law if required for the benefit of the public. Although all land in the PRC is owned by the State or by collectives, private individuals, enterprises and other organisations are permitted to hold and develop land for which they are granted or allocated land use rights. Furthermore, those who obtain the State-owned land use rights by means of grant or assignment can lease the aforementioned land use rights to a third party. In April 1988, the Constitution of the PRC (the Constitution ) was amended by the PRC National People s Congress to allow for the transfer of land use rights for value. In December 1988, the Land Administration Law of the PRC was amended to permit the transfer of land use rights for value. Under the Provisional Regulations of the PRC Concerning the Grant and Assignment of the Right to Use State-owned Land in Urban Areas (the Urban Land Regulations ) promulgated in May 1990, local governments at or above county level have the power to grant land use rights for specific purposes and for a definite period to a land user pursuant to a contract for the grant of land use rights upon payment of a land grant premium. Under the Urban Land Regulations, there are different maximum periods of grant for different uses of land. They are generally as follows: Use of land Maximum period (in years) Commercial, tourism, entertainment 40 Residential 70 Industrial 50 Education, scientific, cultural, public health and sports 50 Comprehensive utilisation or Others 50 III-3

73 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG Under the Urban Land Regulations, all local and foreign enterprises are permitted to acquire land use rights unless the law provides otherwise. The State may not expropriate possession of lawfully granted land use rights prior to expiration of the term of grant. If public interest requires the expropriation of possession by the State under special circumstances during the term of grant, compensation must be paid by the State. A land user may lawfully assign, mortgage or lease its land use rights to a third party, and such assignment, mortgage or lease will not extend the remainder of the term of grant. Upon expiration of the term of grant, renewal is possible subject to the execution of a new contract for the grant of land use rights and payment of a premium. If the term of the grant is not renewed, the land use rights and ownership of any buildings thereon will revert to the State without compensation. The National People s Congress adopted the PRC Property Law (the Property Law ) in March 2007, which became effective on 1 October According to the Property Law, when the term of the right to use construction land for residential (but not other) property purposes expires, it will be renewed automatically. Grant of Land Use Rights PRC law distinguishes between the ownership of land and the right to use land. Land use rights can be granted by the State to a person to entitle him to the exclusive use of a piece of land for a specified purpose within a specified term and on such other terms and conditions as may be prescribed. A land grant premium is payable on the grant of land use rights. The maximum term that can be granted for the right to use a piece of land depends on the purpose for which the land is used. As described above, the maximum limits specified in the relevant regulations vary from 40 to 70 years depending on the purpose for which the land is used. Under the Urban Land Regulations, there are three methods by which land use rights may be granted, namely by agreement, tender or auction. On 11 June 2003, the Ministry of Land and Resources promulgated the Regulation on Grant of State-owned Land Use Rights by Agreement, which became effective on 1 August According to such regulation, if there is only one intended user on a piece of land, the land use rights (excluding land use rights used for business purposes, such as commercial, tourism, entertainment and commodity residential properties) may be granted by way of agreement. The local land bureau at municipal or county level, together with other relevant government departments including the urban planning authority, will formulate the plan on grant of state-owned land use rights by agreement concerning issues including the specific location, boundary, purpose of use, area, term of grant, conditions of use, conditions for planning and designing, time of supply, and submit such plan as well as the proposed minimum price of land grant premium, which is designated by the group decision based on the valuation result, to the relevant government for approval. The III-4

74 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG local land bureau at municipal or county level and the intended user will negotiate the land grant premium which shall not be lower than the minimum price approved by the relevant government and enter into the land grant contract based on such plan. If two or more entities are interested in the land use rights proposed to be granted, such land use rights shall be granted by way of tender, auction or listing-for-sale. Furthermore, according to the Rules Regarding the Grant of State-owned Land Use Rights by Way of Tender, Auction and Listing-for-sale (the Land Use Grant Rules ) which are effective from 1 July 2002, land use rights for properties for commercial use, tourism, entertainment and commodity residential purposes can only be granted through tender, auction and listing-for-sale. Where land use rights are granted by way of tender, invitations to tender will be issued by the local land bureau at municipal or county level. The invitation will set out the terms and conditions upon which the land use rights are proposed to be granted. A committee will be established by the relevant local land bureau to evaluate the tenders which have been submitted. The successful bidder will then be asked to sign the grant contract with the local land bureau at municipal or county level and pay the relevant land grant premium within a prescribed period. The land bureau will consider the following factors: the successful bidder shall be either the bidder who can satisfy the comprehensive evaluation criteria of the tender, or who can satisfy the substantial requirements of the tender and also offer the highest bid. Where land use rights are granted by way of auction, a public auction will be held by the relevant local land bureau at municipal or county level. The land use rights are granted to the bidder with the highest bid. The successful bidder will be asked to enter into a land grant contract with the local land bureau. Where land use rights are granted by way of listing-for-sale, a public notice will be issued by the local land bureau at municipal or county level to specify the location, area and purpose of use of land and the initial bidding price, period for receiving bids and terms and conditions upon which the land use rights are proposed to be granted. The land use rights are granted to the bidder with the highest bid and which satisfies the terms and conditions. The successful bidder will then enter into a grant contract with the local land bureau. Upon signing of the contract for the grant of land use rights, the grantee is required to pay the land grant premium pursuant to the terms of the contract, and the contract will later be submitted to the relevant local land bureau for the issue of the land use right certificate. Upon expiration of the term of grant, the grantee may apply for renewal of the term. Upon approval by the relevant local land bureau, a new contract shall be entered for renewing the grant, and a land grant premium shall be paid. In September 2007, the Ministry of Land and Resources further promulgated the Regulations on the Grant of State-owned Construction Land Use Rights Through Tender, Auction and Listing-for-sale to require that land for industrial use, except land for mining, must also be granted by tender, III-5

75 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG auction or listing-for-sale. Only after the grantee has paid the land grant premium in full under the land grant contract, can the grantee apply for the land registration and obtain the land use right certificates. Furthermore, land use right certificates may not be issued in proportion to the land grant premium paid under the land grant contract. The Ministry of Land and Resources promulgated Notice on Problems Regarding Strengthening the Supply and Regulation of Land Used for Real Estates Supply (the Notice ) on 8 March According to the Notice, the land provision for affordable housing, redevelopment of shanty towns and small/medium residential units for self-residence purpose should be no less than 70% of total land supply, and the land supply for large residential units will be strictly controlled and land supply for villa projects will be banned. The Notice also requires that the lowest land grant premium shall be no less than 70% of the basic land grant premium in which the granted land is located and the real estate developers bid deposit shall be no less than 20% of the lowest grant premium. The land grant contract must be executed within 10 working days after the land transaction is confirmed. The minimum down payment of the land grant premium shall be 50% and must be paid within one month after the execution of the land grant contract. The remaining land grant premium shall be paid in accordance with the contract, but no later than one year. If the land grant contract is not executed in accordance with the requirement above, the land shall not be handed over and the deposit will not be returned. If no land grant premium is paid after the execution of the contract, the land will be taken back. In September 2010, the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development jointly issued the Notice On Further Strengthening the Administration and Control of the Land-use and Construction of Real Estates, which stipulates, among other things, that the planning and construction conditions and land use standards shall be specified when a parcel of land is to be granted, and the restrictions on the area of one parcel of land granted for commodity residential properties shall be strictly implemented. The development and construction of large low-density residential properties shall be strictly restricted, and the floor area ratio for residential land is required to be more than 1. In addition, a property developer and its shareholders will be prohibited from participating in land bidding before any illegal behaviours in which it engages, such as land idle for more than one year on its own reasons, have been completely rectified. Transfer of Land Use Rights After land use rights relating to a particular area of land have been granted by the State, unless any additional restriction is imposed, the party to whom such land use rights are granted may transfer, lease or mortgage such land use rights after certain statutory conditions are met. The difference between a transfer and a lease is that a transfer involves the vesting of the land use rights by the transferor in the transferee during the term for which such land use rights are vested in the transferor. A lease, on the other hand, does not involve a transfer of such land use rights by the lessor to the III-6

76 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG lessee. Furthermore, a lease, unlike a transfer, does not usually involve the payment of a transfer price. Instead, a rent is payable during the term of the lease. Land use rights cannot be transferred, leased or mortgaged if the provisions of the grant contract, with respect to the prescribed period and conditions of investment, development and use of the land, have not been complied with. In addition, different areas in the PRC have different conditions which must be fulfilled before the respective land use rights can be transferred, leased or mortgaged. All transfers, mortgages and leases of land use rights must be evidenced by a written contract between the parties which must be registered with the relevant local land bureau at municipal or county level. Upon a transfer of land use rights, all rights and obligations contained in the contract pursuant to which the land use rights were originally granted by the State are assigned to the transferee automatically. Under the Administration Law of Urban Real Property of the PRC (2007 revision) 2007 (the Urban Real Property Law ), real property that has not been registered and of which a title certificate has not been obtained in accordance with the law may not be assigned. Also, under the Urban Real Property Law, if land use rights are acquired by means of grant, the real property shall not be assigned before the following conditions have been met: (i) the land grant premium for the grant of land use rights must have been paid in full in accordance with the land grant contract and a land use right certificate must have been obtained; (ii) investment or development must have been made or carried out in accordance with terms of the land grant contract; (iii) where the investment or development involves housing construction projects, more than 25% of the total amount of investment or development must have been made or completed; (iv) where the investment or development involves a large tract of land, conditions for use of the land for industrial or other construction purposes must have been satisfied; (v) where the real property is assigned with a completed building, the building ownership certificate is needed as well. Documents of Title In the PRC, there are two registers for property interests. Land registration is achieved by the issue of a land use right certificate by the relevant authority to the land user. It is the evidence that the land user has obtained land use rights which can be assigned, mortgaged or leased. The building registration is the issue of a building ownership certificate or a real estate ownership certificate to the owner. It is the evidence that the owner has obtained building ownership rights in respect of the building erected on a piece of land. According to the Land Registration Regulations (the Registration Regulations ) promulgated by the State Land Administration Bureau, the predecessor of the Ministry of Land and Resources, on 28 December 1995 and implemented on 1 February 1996, the Land Registration Measures promulgated by the Ministry of Land and Resources on 30 December 2007 and effective on 1 February 2008, and the Building Registration Measures promulgated by the Ministry of Construction, the III-7

77 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG predecessor of the Ministry of Housing and Urban-Rural Development on 15 February 2008 and effective on 1 July 2008, all land use rights and building ownership rights which are duly registered are protected by the law. In connection with these registration systems, real estate and land registries have been established in the PRC. In most cities in the PRC, the above systems are separate systems. However, in Shenzhen, Shanghai, Guangzhou and some other major cities, the two systems have been consolidated and a single composite real estate ownership certificate will be issued evidencing both the land use rights and the ownership of building erected on the land. Mortgage The grant of mortgage in the PRC is governed by the Security Law of the PRC (the Security Law ) promulgated by the Standing Committee of the National People s Congress in June 1995, the Measures for Administration of Mortgages of Urban Real Estate promulgated by the Ministry of Construction in May 1997, as amended in August 2001, the PRC Property Rights Law and relevant laws regulating real estates. Under the Security Law, any mortgage contract must be in writing and must contain specified provisions including (i) the type and amount of the principal indebtedness secured; (ii) the term of the obligation by the debtor; (iii) the name, quantity, quality, state, location, ownership of or the right to use of the mortgaged property; and (iv) the scope of the mortgage. For mortgages of urban real properties, new buildings on a piece of land constructed after a mortgage contract has been entered into will not be subject to the mortgage. The validity of a mortgage depends on the validity of the mortgage contract, possession of the real estate certificate and/or land use right certificate of the mortgagor and registration of the mortgage with authorities. If the loan in respect of which the mortgage was given is not duly repaid, the mortgagee may sell the property to settle the outstanding amount and return the balance of the proceeds from the sale or auction of the mortgaged property to the mortgagor. If the proceeds from the sale of such property are not sufficient to cover the outstanding amount, the mortgagee may bring proceedings before a competent court or arbitration tribunal (where there is an agreement to recover the amount outstanding through arbitration) in the PRC. The Security Law also contains comprehensive provisions dealing with guarantees. Under the Security Law, guarantees may be in two forms: (i) guarantees whereby the guarantor bears the liability when the debtor fails to perform the payment obligation; and (ii) guarantees with joint and several liability whereby the guarantor and debtor are jointly and severally liable for the payment obligation. A guarantee contract must be in writing and unless agreed otherwise, the term of a guarantee shall be six months from the due date of the principal obligation. III-8

78 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG The Security Law further provides that where indebtedness is secured by a guarantee and mortgaged property, the guarantor s liability shall be limited to the extent of the indebtedness that is not secured by the mortgaged property. Lease Both the Urban Land Regulations and the Urban Real Property Law permit leasing of granted land use rights and buildings thereon. However, leasing of land use rights obtained by allocation and of buildings on such allocated land is regulated by the Urban Land Regulations. Leasing of urban real properties is also governed by the Administrative Measures for Leasing of Commodity Housing issued by the Ministry of Housing and Urban-Rural Development in December 2010, which became effective on February 1, According to the Administrative Measures for Leasing of Commodity Housing, landlords and tenants are required to enter into lease contracts which must contain specified provisions, the floor area per tenant may not be less than the minimum living space stipulated by the local government where the building is located, no kitchens, lavatories, balconies or basement storerooms should be rented out as residence, and the lease contract should be registered with the relevant construction or property authorities at municipal or county level within 30 days after its conclusion. If the lease contract is extended or terminated or if there is any change to the registered items, the landlord and the tenant are required to effect alteration registration, extension of registration or deregistration with the relevant construction or property authorities within 30 days after the occurrence of the alteration, extension or termination. The Contract Law of the People s Republic of China promulgated by the National People s Congress in March 1999 and effective from October 1999 provides among others, that the lease contract shall be in writing if its term is over six months, and the term of any lease contract shall not exceed twenty years. During the lease term, any change in the ownership of the leased property does not affect the validity of the lease contract. The tenant may sub-let the leased property if it is agreed by the landlord and the lease contract between the landlord and the tenant is still valid and binding. When the landlord is to sell a leased property under a lease contract, it shall give the tenant a reasonable advance notice before the sale, and the tenant has the priority right to buy such leased property on equal conditions. The tenant can waive such rights in the lease agreement. The tenant must pay rent on time in accordance with the lease contract. In the event of default of rental payment without reasonable cause, the landlord may ask the tenant to pay within a reasonable period of time and may terminate the lease contract if the defaulted tenant fails to pay by the prescribed time limit. III-9

79 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG Except as mentioned below or unless otherwise specified in the lease contract, if the landlord wishes to terminate the lease before its expiry date, prior consent shall be obtained from the tenants who are entitled to be indemnified for any resulting loss. The landlord has the right to terminate the lease contract if the tenant sub-lets the property without prior consent from the landlord, or causes loss to the leased properties resulting from using the property not in compliance with the usage as stipulated in the lease contract, or defaults in rental payment and fails to rectify such default after a reasonable period as required by the landlord, or other circumstances occur allowing the landlord to terminate the lease contract under relevant PRC laws and regulations. Sale and Transfer of Property Under the Administrative Measures for the Sale of Commodity Buildings, commodity buildings may be put to post-completion sale only when the following preconditions have been satisfied: (a) the property development enterprise shall have a business license and a qualification certificate of a property development enterprise; (b) the enterprise shall obtain a land use right certificate or other approval documents for land use; (c) the enterprise shall have the construction works planning permit and construction works commencement permit; (d) the building shall have been completed, inspected and accepted as qualified; (e) the relocation of the original residents shall have been completed; (f) the provision of essential facilities for supplying water, electricity, heating, gas, communication, etc. shall have been made ready for use, and other essential utilities and public facilities shall have been made ready for use, or a date for their construction and delivery shall have been specified; and (g) the property management plan shall have been completed. Before the post-completion sale of a commodity building, a property development enterprise shall submit the property development project manual and other documents evidencing the satisfaction of preconditions for post-completion sale to the property development authority. According to the Urban Real Estate Law and the Provisions on Administration of Transfer of Urban Real Estate promulgated by the Ministry of Construction in August 1995, as amended in August 2001, a real estate owner may sell, bequeath or otherwise legally transfer real estate to another person or legal entity. When transferring a building, the ownership of the building and the land use rights to the site on which the building is situated are transferred together. The parties to transfer must enter into a real estate transfer contract in writing and register the transfer with the real estate administration authority having jurisdiction over the location of the real estate within 90 days of the execution of the transfer contract. III-10

80 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG Where the land use rights were originally obtained by grant, the real property may only be transferred on the condition that: the land grant premium has been paid in full for the grant of the land use rights as provided by the land grant contract and a land use right certificate has been properly obtained; in the case of a project in which buildings are being developed, development representing more than 25% of the total investment has been completed; in case of a development of a large tract of land, conditions for using such land for industrial or other purposes have been satisfied; and in case of where completed building is involved, the building ownership certificate in respect of such building has been obtained. If the land use rights were originally obtained by grant, the term of the land use rights after transfer of the real estate will be the remaining portion of the original term provided for in the land grant contract after deducting the time that has been used by the former land users. In the event that the assignee intends to change the use of the land provided for in the original grant contract, consent must first be obtained from the original land use rights grantor and the planning administration authority at the relevant city or county level and an agreement to amend the land grant contract or a new land grant contract must be signed in order to, inter alia, change the use of the land and adjust the land grant premium accordingly. If the land use rights were originally obtained by allocation, such allocated land use rights may be changed to granted land use rights if approved by the government vested with the necessary approval power as required by the State Council. After the government authorities vested with the necessary approval power approved such change, the grantee must complete the formalities for the grant of the land use rights and pay the land grant premium according to the relevant statutes. Land for industry (including warehouse land, but excluding mining land), commercial use, tourism, entertainment and commodity housing development must be granted by tender, auction or listing-for-sale under the current PRC laws and regulations. Property Management Rules in the PRC According to the Regulation on Property Management enacted by the State Council on 8 June 2003 and enforced on 1 September 2003, as amended on 26 August 2007 and effective on 1 October 2007, the State implements a qualification scheme system in monitoring the property management enterprises and enterprises engaging in property management shall obtain relevant qualifications from competent authorities. According to the Measures for Administration of Qualifications of Property Service Enterprises enacted by the Ministry of Housing and Urban-Rural Development on 17 March 2004, as amended on 30 October 2007, a III-11

81 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG property service enterprise shall be classified as either class one, class two or class three. The relevant authorities will issue the qualification certificates for property service enterprises according to relevant criteria, including but not limited to, the registered capital, the numbers of relevant technical personnel, the property service experience and the service administration systems of the property service enterprise. According to the Regulation on Property Management, owners may engage or dismiss a property management company with the consent of more than half of the owners who in the aggregate hold more than 50% of the total non-communal area of the building. If the developer is to employ a property management enterprise before the formal employment of a property management enterprise by the owners after the formation of the owners meeting, it shall enter into a preparation stage property management services contract in writing with such property management enterprise. COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG The following is a general comparison of the legal protection of proprietary rights over real estate conferred by the legal systems of PRC and Hong Kong: PRC General Under the Urban Real Property Law, the legitimate rights and interests of the owners over real estate shall be protected by PRC law, on which no person may unlawfully infringe. In general, the legitimate rights and interests of the owners over real estate in PRC are protected under PRC law. Hong Kong General Following Hong Kong s reunification with the PRC on 1 July 1997, the Basic Law of Hong Kong Special Administrative Region becomes the constitution of Hong Kong. Article 6 of the Basic Law provides that the Hong Kong Special Administrative Region shall protect the right of private ownership of property in accordance with the law. Under the concept of one country, two systems, Hong Kong enjoys a high degree of autonomy and its legal system is separate from that of the PRC. The proprietary rights of land owners over landed properties in Hong Kong are protected under Hong Kong law, which consists of the English common law principles as well as the Hong Kong legislations. III-12

82 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong Land System in the PRC PRC law distinguishes between the ownership of land and the right to use land. According to the Constitution, all land in the cities is owned by the State while land in the rural or suburban areas, unless otherwise specified by law, is owned by collectives. Houses sites, privately farmed crop land and hilly land are also owned by collectives. The State may expropriate or take over land and pay compensation in accordance with law if such land is required for public interest. Under the Urban Land Regulations, a system for the grant and transfer of stateowned land in urban areas was implemented. Pursuant to this system, all local and foreign companies, enterprises and other organisations and individuals, unless the law provides otherwise, are permitted to acquire land use rights and to develop and operate properties in accordance with PRC law. System of Land Holding in Hong Kong Land tenure in Hong Kong is essentially leasehold. Title to a landed property is derived from Government lease or agreements and conditions of grant (as the case may be) granted by the Hong Kong Government. Owners of landed properties in Hong Kong are effectively long leaseholders. Due to historical reasons, the terms of the Government leases vary from short term leases to leases of up to 999 years. Article 120 of the Basic Law essentially provides that all Government leases of land granted, decided upon or renewed before the establishment of the Hong Kong Special Administrative Region which extended beyond 30 June 1997, and all rights in relation to such Government leases, shall continue to be recognised and protected under the law of Hong Kong. Article 121 of the Basic Law provides that as regards all Government leases of land granted or renewed where the original Government leases contain no right of renewal, during the period from 27 May 1985 to 30 June 1997, which extend beyond 30 June, 1997 and expire not later than 30 June 2047, the Government lessee is not required to pay any additional premium as from 1 July 1997, but an annual rent equivalent to 3% of the rateable value of the landed property concerned is payable to the Hong Kong Government. III-13

83 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong Under the Urban Land Regulations, local governments at or above county level have the power to grant land use rights for specific purposes and for a definite period to a land user pursuant to a contract for the grant of land use rights upon payment of a land grant premium. There are different maximum periods of grant for different uses of land. They are generally as follows: up to 70 years for residential use; up to 50 years for industrial use or for public use; up to 40 years for commercial, tourism and entertainment uses; and up to 50 years for all other uses. Upon expiration of the term of grant, it is possible for a land user to renew such term subject to the execution of a new land grant contract and payment of a land grant premium. If the term of the grant is not renewed, the land use rights of the land and ownership of any building thereon will revert to the State without compensation. According to the Property Law, when the term of the right to use construction land for residential (but not other) property purposes expires, it will be renewed automatically. In general, the terms of the earlier Government leases are less restrictive. As society has become more sophisticated, extensive development requirements, obligations and restrictions are found in recent Government grants. Very often, the Government will provide a restriction on alienation in the Government lease the grantee is required to comply with all the positive obligations in the Government lease, such compliance being evidenced by the issuance of a certificate of compliance by the Lands Department, before the grantee is in a position to sell/assign any individual unit of the development. If no such compliance has been issued, the grantee can only sell/assign the units unless it shall have obtained the relevant prior written consent from the Lands Department. Any non-compliance of the terms of the Government grant may render the Government exercising its rights of re-entry of the land. Certain Government leases and certain legislations in Hong Kong contain Government s right of resumption of the land or any part thereof for public purposes before expiry of the terms granted. Compensation may be made payable to the affected owners. III-14

84 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong Under the Urban Land Regulations, there are three methods by which land use rights may be granted, namely by agreement, tender or auction. According to the Land Use Grant Rules which are effective from 1 July 2002, land use rights for properties for commercial use, tourism, entertainment and commodity residential purposes can only be granted through tender, auction and listing-for-sale. On 11 June 2003, the Ministry of Land and Resources promulgated the Regulation on Transfer of State-owned Land Use Rights by Agreement. According to this regulation, land use rights may be granted by way of agreement if it is not required under applicable laws and regulations that the land be granted by tender, auction and listing-for-sale. Upon signing of the contract for the grant of land use rights, the grantee is required to pay the land grant premium in accordance with the terms of the contract. Once the land grant premium is paid in full, the contract may be submitted to the relevant local bureau for the issue of a land use right certificate evidencing the grant of land use rights. Any individual or corporate legal entity, whether local or overseas, may own landed property in Hong Kong. Property transactions in Hong Kong attract payment of ad valorem stamp duty (the AVD ) in accordance with the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong). On 26 October 2012, the Financial Secretary made an announcement to adjust the rates of the special stamp duty on disposal of residential properties and to extend the holding period of the properties in relation to special stamp duty. Any residential property acquired on or after 27 October 2012, either by an individual or a company (regardless of its place of incorporation), and resold within 36 months will be subject to payment of special stamp duty at the adjusted rates (up to 20% of the stated consideration or market value) for different holding periods (up to 36 months) of such property on top of the current ad valorem stamp duty. The Financial Secretary also announced that a buyer s stamp duty at 15% of the stated consideration or market value is payable on top of the current AVD if a residential property is acquired after 27 October 2012 by any person (including limited company), except where he/she is a Hong Kong permanent resident or other exemptions apply. On 22 February 2013, the Financial Secretary made further announcement that the Government would amend the Stamp III-15

85 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong In September 2007, the Ministry of Land and Resources further promulgated the Regulations on the Grant of State-owned Construction Land Use Rights Through Tender, Auction and Listing-for-sale to require that land for industrial use, except land for mining, must also be granted by tender, auction and listing-for-sale. Only after the grantee has paid the land grant premium in full under the land grant contract, can the grantee apply for the land registration and obtain the land use right certificates. Furthermore, land use right certificates may not be issued in proportion to the land grant premium paid under the land grant contract. Duty Ordinance to adjust the AVD rates and to advance the charging of AVD on non-residential property transactions from the conveyance on sale to the agreement for sale. Any residential property (except that acquired by a Hong Kong Permanent Resident who does not own any other residential property in Hong Kong at the time of acquisition) and non-residential property acquired on or after 23 February 2013, either by an individual or a company, will be subject to the new rates of AVD. The implementation of the new measures is subject to the enactment of the proposed legislative amendments. Subject to any restrictions imposed, the party to which the land use rights is granted may transfer such land use rights. The transfer may be by way of sale, exchange or gift. The term of land use rights for the transferred land is the original term granted under the grant contract less the term which has already been enjoyed by the original grantee. A transfer of land use rights must be evidenced by a written contract. Upon such transfer, all rights and obligations contained in the original contract for the grant of land use rights by the State are deemed to be simultaneously transferred to the transferee, together with any buildings and other fixtures on the land. The transfer must be duly registered at the relevant local land bureau and a new land use right certificate will be issued and the original land use right certificate will be suspended. III-16

86 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong Under the Urban Real Property Law, in relation to a transfer of land for which land use rights were acquired by way of grant, the following conditions must be met: the land grant premium must have been paid in full in accordance with the land grant contract and a land use right certificate must have been obtained; investment in or development of such land must have been made or carried out in accordance with the terms of the land grant contract; if the investment or development involves the construction of building on the land, more than 25% of the total amount of investment or development must have been made or completed; and where the investment or development involves a large tract of land, conditions for the use of the land for industrial or other construction purposes must have been met. III-17

87 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong Property Owners Committee According to the Regulation on Property Management, owners may engage or dismiss a property management company with the consent of more than half of the owners who in the aggregate hold more than 50% of the total non-communal area of the building. If the developer is to employ a property management enterprise before the formal employment of a property management enterprise by the owners after the formation of the owners meeting, it shall enter into a preparation stage property management services contract in writing with such real estate management enterprise. Strata Title Ownership Strata-title ownership is commonly found in Hong Kong s multi-storey buildings. The structure is derived from the concept that all owners of the units are holding the land and the development jointly as co-owners. Such piece of land and the development built thereon are notionally divided into a number of undivided shares. An owner of each unit holds a certain number of the allocated undivided shares, together with the exclusive right to hold use occupy and enjoy his unit. All owners of the development then share the use of such common part and common facilities of the development which are intended for common use. The allocation of the undivided shares is usually made by the authorised person of the development with reference to the gross floor area of each unit. Immediately after the first unit of a development is assigned, the developer, the first purchaser of a unit and the building manager of the development will enter into a document known as the Deed of Mutual Covenant and Management Agreement (the DMC ), which sets out the rights and obligations of the parties vis-à-vis each other relating to the co-ownership and management of the development. The system of building management in Hong Kong is mainly based upon private contractual arrangements between the owners of units in the development by virtue of a DMC. The governing legislation for building management is the Building Management Ordinance (Chapter 344 of the Laws of Hong Kong), which also plays an important role in III-18

88 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong guarding against drafting in of unfair terms by the developer in the DMC and in setting out the framework for the mandatory terms to be contained in a DMC, to the intent that the rights and obligations of the owners and the building manager of the development are regulated for the purpose of co-ownership and management of the development. The DMC is usually prepared in accordance with the guidelines laid down by the Government and the rules laid down by The Law Society of Hong Kong. It is commonly found in the newer Government leases that the terms of the DMC have to be approved by the Lands Department. Documents of Title There are two types of title registrations in the PRC, namely land registration and building registration. Land registration is effected by the issue of land use right certificate by the relevant authority to the land user evidencing that the land user has obtained land use rights which can be assigned, mortgaged or leased. The building registration is the issue of a building ownership certificate or a real estate ownership certificate to the owner evidencing that the owner has obtained building ownership rights in respect of the building. According to the Registration Regulations, the Land Registration Measures and the Building Registration Measures, all land use rights and building ownership rights which are duly registered are protected by law. Land Registration The present land registration system in Hong Kong is a deeds registration system. The governing legislation is the Land Registration Ordinance (Chapter 128 of the Laws of Hong Kong). Documents affecting landed properties in Hong Kong are lodged with the Land Registry for registration. The Land Registry maintains a public land register for recording interests in the landed property in Hong Kong. Registration does not serve as a proof that a person registered as the owner has good title to the property. The deeds registration system simply confers priority on registered documents and any registered document will become a public record. Legal advice on title checking should be sought if one would like to ascertain whether a person has good and marketable title to a particular property. III-19

89 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong The two different systems are commonly maintained separately in many cities in the PRC. However, in Shenzhen, Guangzhou, Shanghai and some other major cities, the two system have been consolidated and a single composite real estate ownership certificate will be issued to evidence both the land use rights and the ownership of buildings erected on the land. Hong Kong has enacted the Land Titles Ordinance (Chapter 585 of the Laws of Hong Kong) in The new title registration system will transform the present system of deeds registration into a system of title registration. Under the new system, the title register will be conclusive evidence of title to the property. However, the date on which the new system will be implemented is yet to be ascertained. Proving Title to Property Before the title registration comes into actual operation, title of a property has to be proved by investigation of the original title deeds (if they relate exclusively to a particular property) or certified copies of the title deeds in order to ascertain the owner s title is properly derived from his predecessors in title and is not encumbered. The Conveyancing and Property Ordinance (Chapter 219 of the Laws of Hong Kong) is the governing legislation of the conveyance of landed property in Hong Kong. It was enacted in It has been adopted from the relevant English statutes and codified various common law principles in real estate conveyance aspects. Apart from this ordinance, the rulings in the judgments of the court cases play an important part in determining whether the title to a property is in order. III-20

90 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong Leases/Tenancies in PRC Both the Urban Land Regulations and the Urban Real Property Law permit leasing of granted land use rights and buildings thereon. Leasing of urban real properties is also governed by the Administrative Measures for Leasing of Commodity House issued by the Ministry of Housing and Urban-Rural Development in December 2010, which became effective on February 1, According to the Administrative Measures for Leasing of Commodity Housing, landlords and tenants are required to enter into lease contracts which must contain specified provisions, the floor area per tenant may not be less than the minimum living space stipulated by the local government where the building is located, no kitchens, lavatories, balconies or basement storerooms should be rented out as residence, and the lease contract should be registered with the relevant construction or property authorities at municipal or county level within 30 days after its conclusion. If the lease contract is extended or terminated or if there is any change to the registered items, the landlord and the tenant are required to effect alteration registration, extension of registration or deregistration with the relevant construction or property authorities within 30 days after the occurrence of the alteration, extension, or termination. Leases/Tenancies in Hong Kong The governing legislation of leasing and letting of landed property in Hong Kong is the Landlord and Tenant (Consolidation) Ordinance (Chapter 7 of the Laws of Hong Kong) (the LTCO ). Under the former regime before the amendment is made to the LTCO in 2004, a domestic tenant is entitled to statutory renewal of tenancy provided he is willing to pay the prevailing market rent. Only on certain statutory grounds of opposition stated in the pre-amended LTCO, namely self-occupation by the landlord, rebuilding by the landlord, use of property for an illegal purpose or illegal subletting etc, could the landlord refuse to renew the tenancy. This regime has been abolished by the Landlord and Tenant (Consolidation) (Amendment) Ordinance 2004 (the Amendment Ordinance ) which came into effect on July 9, Further, under the Amendment Ordinance, the fixed term non-domestic tenancy will end upon the expiration of its contractual term and the landlord is no longer required to give any statutory notice to the tenant to end the tenancy, unless expressly required by the tenancy. III-21

91 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG PRC Hong Kong The Contract Law of the People s Republic of China provides among others, that the lease contract shall be in writing if its term is over six months, and the term of any lease contract shall not exceed twenty years. During the lease term, any change in the ownership of the leased property does not affect the validity of the lease contract. The tenant may sub-let the leased property if it is agreed by the landlord and the lease contract between the landlord and the tenant is still valid and binding. When the landlord is to sell a leased property under a lease contract, it shall give the tenant a reasonable advance notice before the sale, and the tenant has the priority right to buy such leased property on equal conditions. The tenant must pay rent on time in accordance with the lease contract. In the event of default of rental payment without reasonable cause, the landlord may ask the tenant to pay within a reasonable period of time, and may terminate the lease contract if the defaulted tenant fails to pay by the prescribed time limit. After the implementation of the Amendment Ordinance, in general, the landlord and the tenant enjoy more freedom in their negotiation on the terms of the letting. It is common practice in Hong Kong for landlords, especially those who own the whole commercial developments or residential blocks to impose extensive obligations on the tenants, such as the covenants to pay rent, management fees and rates, and sometimes promotion levy (particularly for large shopping arcades), to maintain the leased premises in a good condition, not to underlet, to comply with DMC, the land grant, ordinances and other governmental regulations. The landlord s obligations are usually confined to the giving of quiet enjoyment (in brief it means the non-interference with the tenant s rights under the tenancy agreement), payment of government rent and the obligation to repair the structural part of the premises. The landlord or the tenant may institute legal proceedings to enforce their rights under the tenancy. A lease with a term exceeding three years should be in a deed or it may not be effective. A lease for longer than three years should also be registered in the Land Registry, otherwise it is likely to be defeated by successors in title of the landlord. Further, if an option to renew the tenancy is granted to the tenant, common law cases laid down the ruling that the tenant should submit the tenancy agreement for registration in the Land Registry in order to obtain priority against third party interest even though the original term or the option term does not exceed three years. III-22

92 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG FOREIGN EXCHANGE CONTROLS The lawful currency of the PRC is the RMB, which is subject to foreign exchange controls and is not freely convertible into foreign exchange at this time. SAFE, under the authority of the PBOC, is empowered with the functions of administering all matters relating to foreign exchange, including the enforcement of foreign exchange control regulations. On 29 January 1996, the State Council promulgated the PRC Foreign Currency Administration Rules (the Foreign Currency Administration Rules ) which became effective from 1 April The Foreign Currency Administration Rules classifies all international payments and transfers into current account items and capital account items. Current account items are no longer subject to SAFE approval while capital account items still are. The Foreign Currency Administration Rules was subsequently amended on 14 January 1997 and on 5 August Such amendment affirms that the State shall not restrict international current account payments and transfers. The Foreign Currency Administration Rules was amended by the State Council on 1 August 2008 and came effective on 5 August Under the revised Foreign Currency Administration Rules, the compulsory settlement of foreign exchange is dropped. As long as the capital inflow and outflow under the current accounts are based upon real and legal transactions, individuals and entities may keep their income in foreign currencies inside or outside China according to the provisions and terms to be set forth by the SAFE. The foreign exchange income generated from current account transactions may be retained or sold to financial institutions engaging in the settlement and sale of foreign exchange. Whether to retain or sell the foreign exchange income generated from capital account transactions to financial institutions is subject to approvals from the SAFE or its branches, except for otherwise stipulated by the State. Foreign exchange or settled fund of foreign exchange of capital account must be used in the way as approved by the competent authorities and SAFE or its branches, and the SAFE or its branches are empowered to supervise the utilization of the foreign exchange or settled fund of foreign exchange of capital account and the alterations of the capital accounts. The RMB follows a managed floating exchange rate system in line with the market demand and supply. A domestic individual or entity who conducts the overseas direct investment or overseas issue and transaction of negotiable securities and derivative financial products shall undergo registration formalities with foreign exchange administrative authorities of the State. Furthermore, such individual or entity shall apply for the approval from or filing on such investment, issue or transaction with relevant authorities prior to the approval or filing if otherwise required by relevant PRC laws and regulations. On 20 June 1996, PBOC promulgated the Administrative Regulation on Foreign Exchange Settlement, Sale and Payment (the Settlement Regulations ) which became effective on 1 July The Settlement Regulations superseded the Provisional Regulations for the Administration of Settlement, Sale and III-23

93 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG Payment of Foreign Exchange and abolished the remaining restrictions on convertibility of foreign exchange in respect of current account items while retaining the existing restrictions on foreign exchange transactions in respect of capital account items. On the basis of the Settlement Regulations, the PBOC published the Announcement on the Implementation of Settlement and Sale of Foreign Exchange by Banks among Foreign Invested Enterprises. The announcement permits foreign invested enterprises to open, on the basis of their needs, foreign exchange settlement accounts for current account receipts and payments of foreign exchange, and specialized accounts for capital account receipts and payments at designated foreign exchange banks. In January and April 2005, SAFE issued two regulations that require PRC residents to register with and receive approvals from SAFE in connection with their offshore investment activities. SAFE also announced that the purpose of these regulations is to achieve the proper balance of foreign exchange and the standardization of all cross-border flows of funds. On 21 October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Equity Finance and Return Investment Activities by Domestic Residents through Offshore Special Purpose Vehicles ( Circular 75 ) which became effective as of 1 November The notice replaced the two regulations issued by SAFE in January and April 2005 mentioned above. According to the notice, special purpose vehicle refers to the offshore company established or indirectly controlled by the PRC residents (both PRC domestic legal person and natural person) for the special purpose of carrying out equity financing with their assets or interest in PRC domestic enterprise. Prior to the establishing or assuming control of such special purpose company, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established or acquired control of such offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by 31 March If the PRC residents fail to comply with Circular 75 and the relevant SAFE rules, the PRC subsidiary of the offshore special purpose vehicle may be prohibited from distributing its profits and proceeds arising from any reduction in capital, share transfer or liquidation to its offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under the relevant PRC laws for evasion of foreign exchange restrictions. Furthermore, according to a notice issued by SAFE on 11 May 2013, any foreign invested enterprise should disclose to SAFE upon its foreign exchange registration as to whether its foreign investor is directly or indirectly owned or controlled by PRC residents, and non-compliance with the registration requirement under Circular 75 will III-24

94 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG prevent a foreign invested enterprise from completing its foreign exchange registration if its foreign investor is directly or indirectly owned or controlled by PRC residents until such non-compliance has been remedied. On 1 September 2006, the Ministry of Construction and SAFE promulgated the Circular on the Issues Concerning the Regulation of Foreign Exchange Administration of the Real Estate Market. This circular states that: (i) where foreign exchange is remitted for a real estate purchase, the foreign purchaser shall be subject to examination by the designated foreign exchange bank. The remitted funds shall be directly remitted by the bank to the RMB account of the real estate development enterprise and no payment remitted from abroad by the purchasers shall be kept in the foreign exchange account of current account of the real estate development enterprises; (ii) where the commercial house transaction fails to complete and the foreign purchaser intends to remit the purchase funds in RMB back to foreign currencies, the foreign purchaser shall be subject to examination by the designated foreign exchange bank; (iii) when selling real estates in China and the purchase price received in RMB is remitted to foreign currencies, the foreign purchaser shall be subject to examination by the local branch of SAFE; and (iv) if the registered capital of a foreign invested real estate enterprise is not fully paid up, its land use right certificate has not been obtained or the capital-fund in respect of development project is less than 35% of the total investment amount of the project, the foreign invested real estate enterprise is prohibited from borrowing from any foreign lenders and SAFE shall not process the foreign debt registration or examination and approval regarding the settlement of foreign debt. In July 2007, SAFE issued a Notice on the Distribution of the List of the First Group of Foreign Invested Real Estate Projects Filed with the Ministry of Commerce. The notice stipulates, among other things, (i) that SAFE or its branches will no longer process foreign debt registrations for foreign invested real estate enterprises which obtain approval certificates from the Ministry of Commerce or its local counterparty and complete the recordal procedure with the Ministry of Commerce on or after 1 June 2007 and (ii) that SAFE or its branches will no longer process foreign exchange registrations for foreign invested real estate enterprises which obtain approval certificates from local commerce authorities but do not complete the recordal procedures with the Ministry of Commerce on or after 1 June Although this notice was repealed on 10 May 2013, the above requirements are still valid as they were repeated in two current regulations promulgated by SAFE, namely the Operation Guidelines for Administration of Registration of Foreign Debts issued on 28 April 2013 and the Operational Guidelines for Domestic Direct Investment Business issued on 10 May The Operation Guidelines for Administration of Registration of Foreign Debts also clarifies that any foreign invested real estate enterprise established before 1 June 2007 may borrow from foreign lender for an amount not larger than the difference between its total investment amount and registered capital. III-25

95 APPENDIX III OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN THE PRC AND COMPARISON OF CERTAIN ASPECTS OF THE PRC PROPERTY LAWS WITH THE LAWS OF HONG KONG On 29 August 2008, the General Affairs Department of SAFE issued a Notice Relating to the Improvement of Business Operations with Respect to the Administration of Foreign Exchange Capital Payment and Settlement of Foreign Invested Enterprises. This notice further regulates the administration of foreign exchange capital payment and settlement of foreign invested enterprises within the PRC. According to the notice, prior to applying for settlement of foreign exchange capital with designated banks, foreign invested enterprises must undergo capital verification by an accounting firm. The designated banks should not engage in settlement of foreign exchange capital for foreign invested enterprises that have not completed the process of capital verification. Furthermore, the total amount of foreign exchange settled by a designated bank for a foreign invested enterprise should not exceed the total capital audited. The designated banks must comply with the SAFE administration rules regulating payment and settlement when engaging in foreign exchange capital payment and settlement with foreign invested enterprises. Funds in RMB obtained by foreign invested enterprises through foreign exchange capital settlement may only be used within the business scope approved by the government authorities. Furthermore, such funds shall not be used for equity investments within the PRC unless otherwise stipulated. Except for foreign invested real estate enterprises, foreign invested enterprises may not use funds in RMB obtained through foreign exchange capital settlement to purchase real estate for any purposes other than its own occupancy. Should a foreign invested enterprise wish to use funds in RMB obtained through foreign exchange capital settlement to purchase securities, it must act in compliance with the relevant PRC regulations. Any transfer of capital funds for the sake of equity investment in the PRC by foreign invested enterprises approved by the Ministry of Commerce or its local counterparty must first undergo examination and approval by the SAFE. The receipt and settlement in respect of profits obtained by PRC entities or individuals through the sale of shares or interests in PRC enterprises to foreign investors must be conducted through a foreign exchange account exclusively for assets realization. The opening of such account, and any related transferal of funds, must undergo examination and approval by the local branches of SAFE as provided by the relevant regulations. On 13 May 2013, the SAFE issued the Provisions on the Administration of Foreign Exchange in Domestic Direct Investments by Foreign Investors (the Provisions ) and the relevant supporting documents, further regulating and clarifying the administration of foreign exchange in foreign direct investments. Pursuant to the Provisions, the SAFE will process foreign exchange registrations for foreign direct investments, any enterprises or individuals who engage in foreign direct investments activities must undergo registration formalities with the SAFE and its local branches, and banks shall use information registered with the SAFE in handling businesses related to foreign direct investment. III-26

96 APPENDIX IV PRC TAXATION The following statements are by way of a general guide to investors only and do not constitute tax advice. Investors are therefore advised to consult their professional advisors concerning possible taxation or other consequences of purchase, holding, selling or otherwise disposing of the Units under the laws of their country of incorporation, establishment, citizenship, residence or domicile. Investors should note that the following statements are based on advice received by the Manager regarding taxation law, regulation and practice in force as at the date of this Circular and may be subject to change. PRC TAXATION Enterprise Income Tax ( EIT ) Under the PRC Enterprise Income Tax Law ( EIT Law ) and its implementation rules that became effective on 1 January 2008, foreign-invested enterprises ( FIEs ) and PRC domestic companies are subject to a uniform income tax rate of 25%. The EIT Law provides a five-year transition period for certain preferential tax treatment which were available under the old foreign-invested enterprise income tax regime, e.g., the two-year tax exemption followed by 50% reduction of three years ( 2+3 tax holiday ) for manufacturing FIEs set up before 16 March In addition, under EIT Law, an enterprise established outside the PRC with its de facto management body within the PRC is considered a resident enterprise for PRC EIT purposes and will be subject to the PRC EIT at the rate of 25% on its worldwide income. The de facto management body is defined as the organisational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret such a broad definition and whether The Link REIT will be deemed to be a PRC tax resident enterprise ( TRE ). According to the EIT Law, dividends declared after 1 January 2008 paid by the PRC FIEs to their non-prc parent companies will be subject to PRC withholding tax of 10% unless there is a tax treaty between the PRC and the jurisdiction in which the overseas parent company is incorporated, which specifically reduces such withholding tax, and such tax reduction is approved by the relevant PRC tax authorities. Pursuant to an avoidance of double taxation arrangement between Hong Kong and the PRC, if the non-prc parent company is a Hong Kong resident and directly holds a 25% or more interest in the PRC enterprise, such tax rate may be lowered to 5%, subject to approvals by relevant PRC tax authorities. In addition, the PRC State Administration of Taxation promulgated rules ( Circular 601, Bulletin 30 and Circular 165 ) concerning the determination of an applicant s beneficial owner status under tax treaties. These rules provide that tax treaty benefits will be denied to conduit or shell companies without business substance, and a IV-1

97 APPENDIX IV PRC TAXATION beneficial ownership analysis will be made based on a totality of facts of each case and the substance-over-form principle to determine whether or not to grant tax treaty benefits. Business Tax Business tax is applicable to taxpayers that provide certain services (for example, construction, financing, entertainment, catering and telecommunication services) and transfer immovable assets at a rate ranging from 3% to 20%, for instance, 3% on income from telecommunications and construction services, up to 20% on entertainment services and 5% on the remaining services and transfer of immovable assets. In addition, business tax is payable on the gross amount of all billings with respect to services rendered within the PRC unless specific rules stipulate the use of a net amount. An Urban Construction and Maintenance Tax together with an Education Surcharge are payable at a rate ranging from 6.0% to 12.0% of the business tax payable. Value-added Tax ( VAT ) The Provisional Regulations of the PRC Concerning VAT promulgated by the State Council came into effect on 1 January Under these regulations and the Implementing Rules of the Provisional Regulations of the People s Republic of China Concerning VAT, VAT is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC. A VAT rate of 17% is applicable on taxable items encompassing the sale of most tangible goods and the provision of certain labour in respect of processing goods, repair and replacement services undertaken in the PRC. Started on 1 August 2013, a VAT Pilot Program came into force across the country. Transportation and modern services now fall into the scope of the VAT Pilot Program, and are now subject to VAT instead of business tax. The VAT rate for transportation service and postal service is 11%, while it becomes 6% for certain in-scope modern services. Income from leasing tangible goods is now subject to VAT at 17%. An Urban Construction and Maintenance Tax together with Education Surcharge are payable at a rate, in aggregate, ranging from 6.0% to 12.0% of the VAT. Real Estate Tax ( RET ) Properties owned by an enterprise will be subject to RET at variable rates depending on locality. In certain localities, RET is applicable at a rate of 1.2% of the original value of the building less a standard deduction which ranges from 10% to 30% of the original value or 12% of the rental income. IV-2

98 APPENDIX IV PRC TAXATION Circular 698 On 10 December 2009, the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer ( Circular 698 ) was issued by the State Administration of Taxation, which stipulates the PRC tax treatment and reporting obligations on indirect equity transfers undertaken by non-resident enterprises ( offshore investors ). Under certain circumstances, specified documentation should be provided to the PRC tax authorities in charge of the PRC enterprise whose equity interests have been indirectly transferred (within 30 days from the date of signing the share transfer agreement). Circular 698 also introduced anti-abuse and anti-avoidance rules where the dominant purpose of using the offshore entities is to avoid, reduce or defer PRC tax. In such a case, the PRC tax authorities can adopt a look-through approach and disregard the interposed offshore entities, and consequently apply a 10% withholding tax on capital gains derived by the offshore investor on the indirect transfer of PRC enterprises. However, Circular 698 does not provide for clear guidance on various issues, for instance, the tax basis, the allocation of transfer price to various PRC enterprises and timeline for the formal binding decision of the tax authorities on a reported Circular 698 transaction. It is expected that the State Administration of Taxation may issue newly drafted indirect equity transfer rules to clarify or replace Circular 698, which may address the above issues. Land Appreciation Tax ( LAT ) According to the PRC Interim Regulation on LAT implemented in January 1994 and its implementation rules of 1995, the LAT applies to both domestic and foreign investors in real estate properties in the PRC. The tax is payable by a taxpayer on the capital gains from the transfer of land use rights, buildings or other facilities on such land, after deducting deductible items that include the following: payments made to acquire land use rights; costs and charges incurred in connection with land development; construction costs and charges in the case of newly constructed buildings and facilities; assessed value in the case of old buildings and facilities; taxes paid or payable in connection with the transfer of the land use rights, buildings or other facilities on such land; and other items allowed by the Ministry of Finance. IV-3

99 APPENDIX IV PRC TAXATION Where the taxpayer is developing a project, the applicable tax is payable on provisional basis. At the end of the project or upon satisfaction of other statutory conditions, taxpayers should file LAT clearance return for the whole project. The tax rate is progressive and ranges from 30% to 60% of the gain, as follows: Appreciation Value Tax Rate Portion not exceeding 50% of deductible items 30% Portion over 50% but not more than 100% of deductible items 40% Portion over 100% but not more than 200% of deductible items 50% Portion over 200% of deductible items 60% Urban Land Use Tax According to the PRC Interim Regulations on Land Use Tax in respect of Urban Land promulgated by the State Council in September 1988, the land use tax in respect of urban land is levied according to the area of relevant land. The annual tax on urban land was previously between RMB0.2 and RMB10 per square metre. An amendment by the State Council in December 2006 changed the annual tax rate to between RMB0.6 and RMB30 per square metre of urban land. Deed Tax Deed tax is levied on the transfer of real property. The transferee/assignee is the taxpayer. Generally, the rates range from 3% to 5% on the transfer price, depending upon the locality where the transferred real property is located. Stamp Duty According to the PRC Interim Regulations on Stamp Duty promulgated by the State Council in August 1988, property transfer instruments, including those in respect of property ownership transfers, are subject to stamp duty at a rate of 0.05% of the amount stated therein. Municipal Maintenance Tax According to the PRC Interim Regulations on Municipal Maintenance Tax promulgated by the State Council in 1985, a taxpayer of product tax, value-added tax or business tax is required to pay a municipal maintenance tax calculated on the basis of product tax, value-added tax and business tax. The tax rate is 7% for a taxpayer in an urban area, 5% in a county or a town, and 1% for a taxpayer not in any urban area or county or town. IV-4

100 APPENDIX IV PRC TAXATION Education Surcharge According to the Interim Provisions on Imposition of Education Surcharge promulgated by the State Council in April 1986 and amended in 1990 and in August 2005, any taxpayer of value-added tax, business tax or consumption tax is liable for an education surcharge, unless such taxpayer is required to pay a rural area education surcharge as provided by the Notice of the State Council on Raising Funds for Schools in Rural Areas. The Education Surcharge rate is 3% calculated on the basis of consumption tax, value-added tax and business tax. In addition, on 7 November 2010, the Ministry of Finance published Notice on Issues Concerning Policies on Unifying Local Education Surcharge (Circular 98) which provides a uniform rate of 2% for the local education surcharge on the basis of value-added tax, business tax or consumption tax. IV-5

101 APPENDIX V SAVILLS RESEARCH REPORT The Manager believes that the sources of certain information in this Savills Research Report are appropriate sources for such information and has taken reasonable care in extracting and reproducing such information. The Manager has no reason to believe that such information is false or misleading or there is omission of any other information which will render the information below to be false or misleading. The information has not been independently verified by the Manager, the Trustee, or any other party (except for Savills as appropriate in respect of the relevant parts of their research report) and no representation is given as to its accuracy. 13 January 2014 The Board of Directors The Link Management Limited (For itself as manager of The Link Real Estate Investment Trust and for and on behalf of The Link REIT) 33/F, AXA Tower, Landmark East 100 How Ming Street Kwun Tong, Kowloon Hong Kong Trustee HSBC Institutional Trust Services (Asia) Limited 1 Queen s Road Central Hong Kong Dear Sir, Savills Property Services (Shanghai) Company Limited 20/F Shanghai Central Plaza 381 Huaihai Middle Road Luwan District Shanghai China T: savills.com.cn As requested we have prepared a Retail Market Overview for The Link Management Limited, in its capacity as manager of The Link Real Estate Investment Trust ( The Link REIT ). The report includes a China macro economic summary and retail market overview, as well as overviews of the retail sectors in Guangdong Province, the Pearl River Delta and the selected cities of Guangzhou, Shenzhen and Foshan. V-1

102 APPENDIX V SAVILLS RESEARCH REPORT Contents 1) China market overview... V-3 1) Macro economic summary... V-3 a) Background... V-3 b) GDP trends and forecasts... V-6 c) Infrastructure and transport development trends... V-8 d) Population trends.... V-11 e) Retail sales... V-14 f) Income growth, urbanisation and the Chinese middle class... V-17 2) China retail property market overview... V-20 1) Typical retail formats in China: From department stores to shopping malls... V-21 a) Department stores... V-22 b) Shopping malls... V-24 2) Consumer spending patterns and trends... V-25 3) International retail brand evolution in China... V-26 4) Key retailers and national players... V-26 a) Selected F&B stores... V-26 b) Selected fast-fashion brands... V-28 c) Selected hypermarkets... V-29 5) Future development trends and potential opportunities for retail markets... V-31 6) Future outlook... V-33 3) Overview of Guangdong Province, the PRD and selected cities... V-33 1) Guangdong Province... V-33 2) PRD... V-35 3) Guangzhou.... V-36 a) Overview of the city economy... V-36 b) Overview of the retail property market... V-42 4) Shenzhen... V-49 a) Overview of the city economy... V-49 b) Overview of the retail property market... V-57 5) Foshan... V-62 a) Overview of the city economy... V-62 b) Overview of the retail property market... V-68 Limitations on the report... V-74 V-2

103 APPENDIX V SAVILLS RESEARCH REPORT 1) China market overview 1) Macro economic summary a) Background China, the world s most populous country with a population of over 1.35 billion, is the world s fastest growing major economy, having become the world s second largest economy in The economy has been supported by cheap labour, intensive investment and the aggressive development of its manufacturing base. In the early 2010s, China s economic growth rate began to slow amid domestic credit troubles, weakening international demand for Chinese exports and global economic turmoil. China s central government, aware that the old growth model is becoming unsustainable given both domestic and international factors, has in recent years promulgated the idea of shifting the economic focus from investment- and export-led to an internal-domestic-consumptionled model. The most recent indication of this has been the third plenary session held in Beijing in early November 2013, in which senior government officials, including Xi Jinping, President of the People s Republic of China, outlined bold reforms which if properly implemented will allow for the market to play a more decisive role in the economy. While many obstacles remain, with the backing of the government it looks like the next decade of the Xi Jinping/Li Keqiang leadership will be associated with a period of reform comparable to that which was last seen under the leadership of Deng Xiaoping when China began to open up to the rest of the world. V-3

104 APPENDIX V SAVILLS RESEARCH REPORT Table 1: Key statistics, Unit GDP RMB bil 1,867 6,079 9,921 18,494 40,151 47,310 51,894 GDP index PY= GDP per capita RMB 1,644 5,046 7,858 14,185 30,015 35,198 38,420 Population Person mil 1,143 1,211 1,267 1,308 1,341 1,347 1,354 Population (urban) Person mil Population (rural) Person mil Urbanisation % Population (household) Unit th 276,912 3, , , , , ,000 Disposable income per capita (urban) RMB 1,510 4,283 6,280 10,493 19,109 21,810 24,565 Consumption expenditure per capita (urban) RMB 1,279 3,538 4,998 7,943 13,471 15,161 16,674 Net income per capita (rural) RMB 686 1,578 2,253 3,255 5,919 6,977 7,917 Expenditure per capita (rural) RMB 903 2,138 2,652 4,127 6,992 8,642 9,606 Consumption expenditure per capita (rural) RMB 585 1,310 1,670 2,555 4,382 5,221 5,908 Real estate investment (REI) RMB bil , , , ,180.4 Fixed asset investment (FAI) RMB bil , , , , , ,469.5 Retail sales of consumer goods RMB bil 830 2,361 3,911 6,835 15,700 18,392 21,031 Source: CEIC GDP Figure 1: China GDP growth rate and forecast, F 16,000 GDP (Left Hand Side) US dollars (billion) GDP growth rate (Right Hand Side) YoY 16% 14,000 14% 12,000 12% 10,000 10% 8,000 8% 6,000 6% 4,000 4% 2,000 2% 0 0% Source: Focus Economics, Savills Research China has maintained strong growth over recent years, recording an average annual real GDP growth rate of 14.3% from 2007 to 2012, despite the global economic slowdown. GDP in 2012 stood at RMB51,894 billion, according to the National Bureau of Statistics (NBS), V-4

105 APPENDIX V SAVILLS RESEARCH REPORT representing a real growth rate of 7.7% from the previous year. In the first three quarters of 2013, real GDP reached RMB38,676.2 billion, representing a 7.7% increase from the corresponding period in Urbanisation and incomes According to a report released by the NBS on 22 February 2013, the urbanisation rate has accelerated, evidenced by the forecast 52.6% of urban residents at the end of 2013, up 1.3 percentage points (ppts) compared with the end of The wealth of urban residents has also grown rapidly, underpinned by the robust state of the national economy. The average disposable income of urban residents in 2012 stood at RMB24,565 per capita, an increase of 12.7% year-on-year (YoY). Figure 2: China s urbanisation levels, E Urban (Left Hand Side) Rural (Left Hand Side) Urbanisation rate (Right Hand Side) Million persons 1,600 90% 1,400 1,200 1, % 70% 60% 50% 40% 30% 20% 10% 0% Source: UN Population Division, Savills Research Retail sales and inflation Boosted by the rising per capita disposable incomes of China s sizeable population, the domestic market has expanded. Retail sales volume in 2012 stood at RMB21,031 billion, reflecting strong underlying purchasing power. In the first three quarters of 2013, the retail sales volume reached RMB16,881.7 billion, representing a 12.9% increase from the corresponding period in The inflation rate remained under control in 2012, with the yearly growth in CPI slowing to 2.6%, 2.7 V-5

106 APPENDIX V SAVILLS RESEARCH REPORT ppts below that of Experts at the National Development and Reform Commission predict that CPI growth will rise to about 3.5% in 2013, on the back of healthy economic growth. Fixed asset investment (FAI) FAI has maintained strong momentum, increasing at a six-year compound annual growth rate (CAGR) of 22.2% per annum from 2007 to To maintain a balance between facilitating investment and stabilising price levels, the central bank has been carefully adjusting the benchmark one-year lending rate. The rate recorded a generally rising trend from 2009 to 2011 in order to prevent overheating in the investment market, after a sharp cut in rates in mid-2008 to tackle the negative effects of the global financial crisis. The rate fell marginally in 2012, again to speed up economic growth, given a rise in CPI of just 2.6%. In the first three quarters of 2013, FAI reached RMB30,920.8 billion, representing a 20.2% increase from the corresponding period in Real estate investment (REI) China s economic growth has fuelled the development of the real estate industry. Total investment in real estate has increased substantially, registering RMB7,180.4 billion in 2012 and representing a CAGR of 23.2% over the six years from Over the same period, a rapidly increasing trend has been recorded in both GFA under construction and area completed. Property demand generated by economic developments, urbanisation and rising resident spending power has played a key role in the growth of the real estate industry, as well as the increase in property values in China. In the first three quarters of 2013, REI reached RMB6,112.0 billion, representing a 19.7% increase from the corresponding period in b) GDP trends and forecasts China s economic growth since 1978 has been sustained by a number of factors: Demographic gains: a larger percentage of the population has reached the working age Urbanisation: movement of the less productive rural workforce into urban centres and more productive jobs Large capital investment in infrastructure and labour-intensive industries Accession to the World Trade Organization V-6

107 APPENDIX V SAVILLS RESEARCH REPORT Globalisation and the exponential growth in global trade An undervalued currency, making Chinese exports very competitive on pricing. Many of these factors which have previously driven the growth of the Chinese economy have diminished in importance over the past five years. China is starting to age, the number of individuals moving from rural areas to urban is starting to slow, the manufacturing sector has overcapacity, especially in sectors where state-owned enterprises are dominant, the volume of global trade growth has become more unstable and the Chinese renminbi is no longer widely believed to be undervalued. Figure 3: GDP per capita, E 500 Brazil China India Japan Russia United Kingdom United States Germany France 2000 = Source: World Bank, Savills Research The Chinese government is therefore looking for new ways to stimulate growth in other sectors of the economy, and over the last five years, a key theme has been the growth of domestic consumption as a driver of the overall economy. Achieving this may be difficult, but the government is looking to improve social security spending, strengthen property ownership rights and pay adequate compensation for land expropriation, among other initiatives, encourage individuals to spend more rather than save. V-7

108 APPENDIX V SAVILLS RESEARCH REPORT Figure 4: International GDP growth rates and forecast, E 20% Brazil PRC India Japan Russia United Kingdom United States YoY 15% 10% 12.7% 11.3% 14.2% 9.6% 9.2% 10.4% 9.3% 7.8% 8.0% 8.2% 8.5% 8.5% 8.5% 8.5% 5% 0% -5% -10% E 2014E 2015E 2016E 2017E 2018E Source: World Bank, Savills Research According to the statistics released by the World Bank, the projected GDP growth rates of the PRC in 2013 and 2014 will still place the country ahead of other major economies in the world. In recent years, especially with Xi Jinping and Li Keqiang leading the country, there is a greater expectation of further economic reforms to stimulate the economy, business activity and wealth generation. Notable announcements from the third plenary session in Beijing in November 2013 included Hukou reform for lower tier cities, the loosening of the one-child policy, a unified urban-rural land market, speeding up property tax roll outs, allowing the market to play a more decisive role in resource allocation and pricing, and a rebalancing of government finances. These have all been celebrated as positive steps on the continuing reform programme which are expected to be implemented over the new leadership s term in office and hopefully beyond. c) Infrastructure and transport development trends The continuing development of the country s transport network, including airports, expressways and railways, has stimulated the pace of urbanisation and the inter-connectedness of the country and its cities. This has helped to consolidate the importance of key cities while also stimulating economic growth and allowing the expansion of businesses into lower tier cities. V-8

109 APPENDIX V SAVILLS RESEARCH REPORT At the same time, the development of intra-city infrastructure, such as roads, bridges and metro networks, has extended the boundaries of the cities. Additionally, residential property prices have risen significantly in the last decade, displacing low- to mid-income households to more suburban locations. Land scarcity for residential development in downtown areas has also forced developers to move to more suburban locations in order to get access to developable land plots. These three factors, among others, are transforming the landscape of cities in China to one more recognised in developed countries such as the US. The displacement of the population and the development of transport infrastructure have created substantial opportunities for new shopping clusters and regional shopping precincts with good connections to tap into new markets, predominately driven by residential catchment areas and commuter flow. FAI According to the 2012 Economy and Operation of Transportation Status released by the Ministry of Transport, FAI in logistics-related transport mainly road, rail and water transportation is expected to remain high, at RMB1.43 trillion in Railway network Figure 5: FAI in the railway network, Fixed asset investment in railway (Left Hand Side) Growth rate (Right Hand Side) 900 RMB (billion) YoY 90% % % % % % % % % 0 0% % % % Source: MOR, Savills Research V-9

110 APPENDIX V SAVILLS RESEARCH REPORT The Ministry of Railways (MOR) plans to build 25,000 km of high-speed railways, the major lines of which are expected to be completed by As the centrepiece of the MOR s expansion plans, a new national-speed rail grid comprising eight high-speed rail corridors four running north to south and four from east to west will be constructed over the existing railway network. Two north to south corridors (Beijing-Harbin and Beijing-Shanghai) have been completed so far, while the remaining projects are expected to start operation before Metro networks Metro networks have also been planned and built in several cities across China. The opening of metro systems in most first-tier cities 1 started in the late 1990s, followed by networks in second-tier Yangtze River Delta (YRD) cities (Hangzhou, Nanjing and Suzhou), and from the late 2000s onwards, networks in second-tier Pearl River Delta (PRD) cities (Zhuhai, Foshan, Zhongshan and Dongguan). With the completion of networks running from city centres to decentralised areas, shopping mall developments followed, moving from prime to non-prime and decentralised locations over the last decade. Meanwhile, shopping malls, the current dominant retail format, have been presented with greater potential in second-tier and lower tier cities, as the degree of competition in first-tier cities intensifies. This is supported by the higher GDP growth, retail sales and disposable incomes recorded in lower tier cities in recent years. Car ownership While a growing metro network has improved accessibility to more remote locations for commuters and lower income households, the development of the road network and increasing incomes have resulted in an explosion of car ownership. In the early 2000s, there were less than 10 million passenger cars in China, and by 2012 this figure had risen to close to 90 million vehicles, the equivalent of 65 vehicles per 1,000 persons. This has tremendous implications for how people move within and between cities, and how they shop. Malls outside congested regions with adequate car parking facilities are likely to benefit most from this trend. 1 Tier is used to classify Chinese cities, based primarily on economic indicators such as GDP, income, political and economic importance, and so on. First-tier cities: Beijing, Shanghai, Guangzhou and Shenzhen. Second-tier cities: Most provincial capital and some selected sub-provincial cities such as Chengdu, Chongqing, Hangzhou, Suzhou, Ningbo, Xiamen, Xian and Shenyang. Third-tier cities: Other provincial cities and some economically important cities such as Changchun, Changsha, Dongguan, Foshan, Harbin, Hefei, Nanning and Zhuhai. The above definition of tier is used throughout this report. V-10

111 APPENDIX V SAVILLS RESEARCH REPORT Figure 6: Car ownership levels, Car ownership (Left Hand Side) Cars per thousand population (Right Hand Side) 90 Million passenger vehicles Vehicles per thousand population Source: CEIC, Savills Research d) Population trends China has recorded more moderate population growth since 2006, with the total population standing at 1.35 billion in With the change in population structure, consumer behaviour is changing, leading to new market trends. China is becoming an aged society, with the median age rising from 34 to 37 years over the coming decade. Nevertheless, different regions will have different age structures; the coastal regions where job opportunities are most plentiful attract young workers, often leaving their elderly parents and child dependents back in their home town. V-11

112 APPENDIX V SAVILLS RESEARCH REPORT Figure 7: Population growth, E Age 0-14 (Left Hand Side) Age 64 and over (Left Hand Side) Age (Left Hand Side) 5-year growth rate (Right Hand Side) 1,600 Million persons 16% 1,400 14% 1,200 12% 1,000 10% 800 8% 600 6% 400 4% 200 2% 0 0% % Source: UN Population Division, Savills Research Many economically active city clusters will have a significantly younger population than the national average. This is particularly true in cities such as Shenzhen, where the population has grown rapidly in the last decade on the back of domestic migration, rather than natural population growth. Figure 8: China s age structure, 2010 Figure 9: China s age structure, 2050E Male Female Male Female Million persons Million persons Source: UN Population Division, Savills Research In the March 2012 report, Meet the 2020 Chinese Consumer by McKinsey, it was estimated that 20% of the total population in YRD cities will be over 65 years old by 2020, while the majority of the population will be below 34 years in Guangzhou and Shenzhen. There V-12

113 APPENDIX V SAVILLS RESEARCH REPORT is also a tendency to postpone life stages, as indicated by McKinsey. Young people are inclined to marry and have a family comparatively later in life, in order to pursue more advanced education and secure better jobs, implying that more time is spent on entertainment, recreation and travel by this segment of the population. China is not yet a double-income-no-kids (DINK) society, which applies to an increasing portion of the western world, but the movement towards a DINK society is likely to continue. Generation 2, who were born after 1985 at the beginning of a new era of economic reform led by Deng Xiaoping, defined by McKinsey in the June 2013 article Mapping China s Middle Class, are becoming more influential. These young consumers are inclined to assert their independent nature through their consumption patterns, which are more westernised, favouring non-mainstream brands which provide a strong identity. They are also heavy internet users who either shop online or read customer reviews of products online, and thus, are dominant drivers of the e-tailing business. Figure 10: Chinese consumers in their teens and early 20s 70 Upper-middle-class urban generation 2 members* Total urban population % of respondents Upper-middle-class urban population** Confident about personal income growth Loyal to brands Willing to trade up Often early adopter of new products / services Seek feedback / comments on internet before buying Source: 2012 McKinsey survey of 10,000 Chinese consumers * People born after the mid-1980s and raised in a period of relative abundance. ** Annual household incomes of RMB106,000 to RMB229,000. As city centres become more densely populated, property prices are skyrocketing due to the stronger demand, while quality of life suffers and space shrinks. The expansion of transportation networks has allowed people the middle class in particular to easily access the V-13

114 APPENDIX V SAVILLS RESEARCH REPORT city centre while enjoying a better quality of life and more space in the suburbs. Many shopping mall developers have identified this consumer demand for daily necessities, as evidenced by the higher number of future projects located in suburban areas than in core and prime locations. Recent announcements at the third plenary session in Beijing indicated that the one-child policy will be relaxed to allow couples where only one of the parents is an only child, to have two children. The previous policy was that only a couple where both parents were only children could have two children. While there have been no indications that this may be relaxed further, there is the belief that the one-child policy will be reviewed again in the future and further reform steps may be taken. e) Retail sales Although China was known as the factory of the world at the start of the new millennium, this perception has quickly changed. China has since emerged as the world s largest auto market, retailers register record sales growth in the country and Chinese tourists swamp luxury goods stores in Paris, London and New York. Retail sales have grown between 10% and 20% per annum since 2004, and during the global financial crisis, China was one of the fastest growing markets in the world. Figure 11: Retail sales and nominal growth, Jan 1994-Oct 2013 Retail sales value (Left Hand Side) Retail sales growth rate (Right Hand Side) 2,500 RMB (billion) YoY 45% 40% 2,000 35% 30% 1,500 25% 1,000 20% 15% % 5% 0 0 Source: NBS, Savills Research V-14

115 APPENDIX V SAVILLS RESEARCH REPORT Retail sales growth has also trickled down to smaller cities; retailers already established in key mainland markets have looked to expand their footprint in new areas, while businesses looking to save costs have relocated away from coastal cities to lower tier cities, generating new jobs and boosting income levels. As incomes have risen, China has not only seen an increase in terms of expenditure levels and retail sales volumes, but also a shift in the type of consumption. As disposable incomes have risen, expenditure on non-essentials has increased, in particular on household facility, article & services 2, transport & communications, and clothing. Table 2: Urban household consumption expenditure per capita, (RMB) CAGR Medicine & medical services , % Residence ,332 1,405 1, % Recreation, education & cultural services ,097 1,628 1,852 2, % Food 884 1,772 1,971 2,914 4,805 5,506 6, % Clothing ,444 1,675 1, % Miscellaneous % Transport & communications ,984 2,150 2, % Household facility, article & services ,023 1, % Total 1,672 3,538 4,998 7,943 13,471 15,161 16, % Source: CEIC, Savills Research 2 Includes home decoration/material, furniture, home appliances and housing services. V-15

116 APPENDIX V SAVILLS RESEARCH REPORT Figure 12: Retail sales per capita by tier city, ,000 RMB Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Source: NBS, Savills Research Figure 13: Urban household consumption expenditure per capita, % 90% 80% 70% 60% 50% 40% 30% 20% 10% Food Household facility, article & services Transport & communications Residence Clothing Medicine & medical services Recreation, education & cultural services Miscellaneous 0% Source: CEIC, Savills Research V-16

117 APPENDIX V SAVILLS RESEARCH REPORT f) Income growth, urbanisation and the Chinese middle class The emerging Chinese middle class is accumulating wealth at an impressive pace. According to the article, Meet the 2020 Chinese Consumer, published by McKinsey in 2012, China households might be broadly classified by income as the affluent, the new mainstream, the value and the poor. Currently, more than four-fifths of China s urban population consists of value consumers, whose household incomes, ranging from RMB37,000 to RMB106,000 per annum, give them just enough to cover basic needs. However, by the start of the next decade, it is estimated that the new mainstream segment will represent approximately 51% of the total population in China. Many value consumers will become new mainstream consumers, with annual incomes of between RMB106,000 and RMB229,000 the level at which family cars and other luxuries become affordable. This new mainstream segment comprised approximately 13.6 million households in China in 2010, and is expected by McKinsey to increase to approximately million households by 2020, representing a CAGR of 26.6%. Figure 14: Number of urban households by annual household income, E Poor (less than RMB37,000) Value (RMB37,000 to RMB106,000) New Mainstream (RMB106,000 to RMB229,000) Affluent (more than RMB229,000) Million households, % 100% = % % CAGR E, % % 70% 60% % 82 40% 30% 20% 10% 0% E Source: McKinsey Report Meet the 2020 Chinese Consumer V-17

118 APPENDIX V SAVILLS RESEARCH REPORT Figure 15: Disposable income, expenditure and savings rates, ,000 Disposable income per capita in urban households (Left Hand Side) Consumption expenditure in urban households (Left Hand Side) RMB Savings rate in urban households (Right Hand Side) 35% 25,000 20,000 15,000 10,000 5,000 30% 25% 20% 15% 10% 5% 0 0% Source: NBS, Savills Research The global influence of the Chinese economy is also rising; from 1990 to 2010, household consumption grew 4.8 fold (inflation adjusted) from RMB871 billion to RMB14.0 trillion, with the country representing more than 4.5% of global household consumption. Rising incomes are partially driven by the continuing urbanisation process. Heavy investment in infrastructure has led to the fast expansion of the transportation network, resulting in larger urban areas. The development of these areas boosts the local economy and thus increases the urban household income, generating new consumption demand. China will be the world s largest growth market for many years to come; the top 225 Chinese cities, by our estimates, will contribute 29% of global GDP growth from 2007 to V-18

119 APPENDIX V SAVILLS RESEARCH REPORT Figure 16: China s contribution to global household consumption, % 5% 4% 3% 2% 1% 0% Source: NBS, Savills Research Figure 17: Urban vs rural consumer expenditure levels, ,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Urban household consumption expenditure per capita (Left Hand Side) RMB Rural household consumption expenditure per capita (Left Hand Side) Ratio of urban household to rural household (Right Hand Side) 400% 350% 300% 250% 200% 150% 100% 50% % Source: NBS, Savills Research V-19

120 APPENDIX V SAVILLS RESEARCH REPORT In general, the country has been gradually transformed by the magnitude of the middle class. The middle class now plays a more prominent role in almost every city. Nevertheless, there is a disparity in middle class growth between the higher and lower tier cities. The middle class will be present in larger numbers in lower tier cities compared with first-tier cities. In 2002, 40% of China s relatively small urban middle class lived in first-tier cities, such as Beijing, Shanghai, Guangzhou and Shenzhen. By 2022, the middle class in first-tier cities will likely fall to about 16% of the total middle class population, as growth shifts to lower tier cities, especially those in the north and west. For third-tier cities, the proportion of upper-middle-class households should reach more than 30% by 2022, up from 15% of the total middle class population in Image 1: Market drivers of consumer demand Source: Savills Research Continued strong growth in the size and diversity of the middle class is expected to create new market opportunities for both domestic and international retailers, which will in turn stimulate retail development. 2) China retail property market overview The shopping mall is a relatively new concept in China. Up until the late 1980s, there were hardly any shopping malls in the country, with department stores being the dominant retail format at the time. However, according to Deloitte and CCFA in the Report on Cooperative Development Between Shopping Centres and Chain Brand Merchants in China, 2013, at the end of 2011, China had a total of 2,812 shopping malls representing an aggregate total retail floor area of 177 million sq m. It is estimated that China s shopping centres will increase at a rate of 300 per annum, and the total number of shopping malls is therefore expected to reach 4,000 by The shopping mall currently is, and will continue to be, V-20

121 APPENDIX V SAVILLS RESEARCH REPORT the dominant retail format in China. It is therefore important to gain an insight into how this format has evolved, the key players and competitors, future development trends and the outlook for the sector. 1) Typical retail formats in China: From department stores to shopping malls Retail development in each city follows a very similar evolution, with a strong initial emphasis on street shops and department stores in the CBD, followed by the gradual appearance of hypermarkets and shopping malls, the latter eventually becoming the dominant retail format. Macquarie s equity research paper, Battle For Successful Malls in China, 2013, states that shopping mall space in the 20 major China cities has grown significantly from nearly nothing to 56% of prime retail space... prime retail space in the 20 major China cities is expected to grow by 57% to 75 million sq m between the end of 2012 and the end of 2014, and the shopping mall format will be a major contributor of the growth. Table 3: Major retail formats in China Format Characteristics Emergence High-street retail Department store Retail podium Shopping mall Outlet State-owned or individual landlords; typically low profile although retailers are now making more use of the high visibility. Primarily state-owned or domestic, although international (Asian) operators are making inroads into the market. Part of mixed-use developments, typically of office towers in downtown locations but increasingly in residential developments in suburban locations. Similar to retail podiums although larger in scale and held by one landlord; typically fully enclosed but there are some semi-open shopping malls in some cities. A relatively new concept; not as developed as in the US, outlet stores are slowly emerging as car ownership continues to rise and consumers place value and quality on an even footing. First-tier: 1950s (early) First-tier: 1980s (early) Second-tier: 1980s (early) First-tier: 1990s (early) Second-tier: 1990s (late) First-tier: 2000s (early) Second-tier: 2000s (late) First-tier: 2000s (late) Second-tier: 2000s (late) Source: Savills Research The timing of retail development in each first-, second- or lower-tier city may not be exactly the same but they all fall within a similar pattern. Specifically, new retail formats will first appear in first-tier cities such as Shanghai, Beijing, Guangzhou and Shenzhen before gradually disbursing into secondor third-tier cities, as consumers in first-tier cities are often more willing adopters of new concepts compared with their counterparts in lower tier cities. V-21

122 APPENDIX V SAVILLS RESEARCH REPORT a) Department stores The department store was the primary format for large-scale retail in the early 1980s. This retail format remains fragmented without dominant operators in the market. Most local operators tend to focus on a particular region, although they are increasingly looking for national coverage to match the expansion of some international operators. Figure 18: Main department store operators by major city, Q4/ Inzone Parkson New World Dashang Group Van's Intime Golden Eagle Wangfujing MOI Bailian Pacific Number of stores Source: Savills Research Each region typically has one dominant player with an established long-term presence in prime locations and which attracts strong recognition from customers. V-22

123 APPENDIX V SAVILLS RESEARCH REPORT Figure 19: Main department store operators and number of stores, Q4/2011 Inzone Parkson New World Dashang Group Van's Intime Golden Eagle Wangfujing MOI Balian Pacific Source: Savills Research Table 4: Selected department store operators Department store operator Region City level No. of stores Headquarters Positioning Inzone YRD Second to third tier 60 Jinan Mid-high Parkson National First to second tier 47 Kuala Lumpur Mid HK New World National First to second tier 36 Hong Kong Mid-high Dashang Group North Second to third tier 34 Dalian Mid Van s National First to third tier 31 Dalian Mid Intime YRD Second to third tier 26 Hangzhou Mid-high Golden Eagle National First to third tier 22 Nanjing Mid-high Wangfujing National First to second tier 21 Beijing Mid-high MOI National First to third tier 20 Shenzhen Mid Bailian YRD First to second tier 18 Shanghai Mid Pacific National First to second tier 13 Taipei Mid Source: Savills Research V-23

124 APPENDIX V SAVILLS RESEARCH REPORT b) Shopping malls Shopping malls did not appear until the late 1990s in China, and there are primarily two types of mall currently in operation: Shopping malls operated by overseas/hong Kong developers and often positioned at the high end The first international shopping mall in Shanghai was Westgate mall, developed by the Hong Kong-based Hutchison Whampoa and located on Nanjing West Road, a primary retail precinct in Shanghai. The mall is anchored by Isetan Department Store, a cinema and a supermarket, and it has successfully attracted brands such as Burberry, Salvatore Ferragamo and Versace, making it one of the highest end shopping malls upon opening. The success of Westgate mall led to the entry of more developers, including Hang Lung, Sun Hung Kai and Capitaland, facilitating and enhancing overall retail development in the city. Following Westgate, the opening of CITIC Square (in 2000) and Plaza 66 (in 2001) resulted in Nanjing West Road becoming one of the most high-end retail areas in the city. In Beijing, the first international shopping mall was World Trade Center phase I (WTC), located in Chaoyang district and operated by Kerry Group. The project, positioned as a high-end shopping mall, opened in 1990 with just 20,000 sq m of retail space. Similar to Westgate mall in Shanghai, WTC also led to the development of Chaoyang district as Beijing s first CBD. Shopping malls operated by local developers and mostly positioned in the mid market TeeMall is considered to be the first shopping mall in Guangzhou. The project was developed by Guangdong Tianhe Cheng Group, a local developer, and opened in 1996 with approximately 100,000 sq m of retail GFA. At its launch, the TeeMall was a department store. In Shanghai, the first shopping mall built by local developers was Nanfang Babaiban, owned and operated by Brilliance Group. Again, it was originally a department store when built and was slowly converted into a shopping mall in 2000, and was subsequently anchored by a hypermarket, Carrefour. These malls mainly target the mass market and are frequently anchored by a popular department store. V-24

125 APPENDIX V SAVILLS RESEARCH REPORT 2) Consumer spending patterns and trends A successful shopping mall must address consumers needs, and it is therefore important for all developers and landlords to understand the shifts in consumer preferences and identify the changes in spending patterns which have taken place over recent years. Consumers are now spending more of their income on discretionary goods such as electronic products, household decoration, cosmetics, personal care products and cars, primarily as a result of rising income levels and changing spending patterns. The rising importance of discretionary spending over the past ten years across the country has not only aided in the development of shopping malls but has also driven trade mix changes within shopping malls, widening the choice of trade categories and brands offered, such as cafés, restaurants, lifestyle brands (eg, Muji and Hola), child pre-education facilities (eg, Gymboree, Fantastic Kids and English First) and interactive entertainment venues, including cinemas, karaoke bars and ice skating rinks. Moreover, higher incomes and the growing middle class have stimulated a move from unbranded to branded goods, with consumers seeking more value-added brands within a product or service category. Instead of merely fulfilling their basic needs, consumers are becoming more concerned with design and quality, and in addition to price, comfort and practicality, people are increasingly looking for individuality in what they buy and wear. Another important future spending trend will be that of trading up ; consumers will move away from the conventional demand for daily necessities towards higher quality products. This will result in many existing brands re-designing their products or opening new lines of business offering more premium products to accommodate various consumer needs. A classic example of this, is the emergence of gourmet supermarkets in prime areas of first-tier cities, as consumers opt for higher quality food items. This trend will also attract more international retail brands with a greater variety of price ranges and trade categories to China. While incomes are expected to rise across China as a whole, some cities and regions are already significantly wealthier than others. This variation in economic profiles of different cities and different retail areas within the same city will lead to differences in consumer spending patterns and spending power. These geographic disparities in spending across various retail areas will remain significant over the next ten years, resulting in notably different trade mixes in shopping malls in different cities and different retail areas within the same city. V-25

126 APPENDIX V SAVILLS RESEARCH REPORT 3) International retail brand evolution in China Image 2: The evolution of retail brands in China Source: Savills Research Fast-food chains, such as KFC and McDonald s, opened their first stores in the early 1990s. Overseas fashion brands, particularly low- to mid-end fashion brands from Hong Kong, Taiwan and Southeast Asia, also started to enter China in the early 1990s, followed by international hypermarket chains in the mid-1990s. Mid- to high-end fashion brands and mid-end F&B outlets, mainly from the US, entered the market after Retailers who previously only manufactured products in the country also started to view China as a market in itself by the mid-2000s. High-street and fast-fashion retailers made a decisive push into the China market after This trend is expected to continue to gain pace in the coming years. Today, we find that most categories of retailers are now present. The one thing lacking is a strong domestic brand presence which can compete at the same level as the international brands. In the future, an expansion of operations and a broadening of product and service selection, as well as the consolidation of smaller stores into larger flagship stores are expected. 4) Key retailers and national players a) Selected F&B stores A survey of the leading international fast-food chains in China undertaken by Savills Research in 2012 sought to gauge the market penetration of overseas F&B brands and market size. KFC, McDonald s V-26

127 APPENDIX V SAVILLS RESEARCH REPORT and Pizza Hut together had approximately 430 stores in total in Shanghai and Beijing at the end of 2012, far more than any other city in China. Store numbers were 260 in Shenzhen, 190 in Guangzhou and between 50 and 150 in other second-tier cities, except Kunming. Figure 20: Number of selected F&B outlets by city, 2013 Costa Starbucks KFC Tai Hing Waipojia Café de Coral Tao Heung 350 Number of stores Source: Savills Research Shanghai and Beijing have significantly more chain stores (both international and local brands) compared with Guangzhou and Shenzhen. International chain stores, especially fast-food and coffee chains, will accelerate their expansion plans in second-tier and certain lower tier cities over the next few years. The presence of chain restaurants is limited in third-tier or lower tier cities in the PRD, reflecting the difference in taste preferences in the area, with consumers tending to prefer local food brands. Fast-food brands which are popular in Hong Kong, Guangzhou and Shenzhen can more easily penetrate lower tier cities in the PRD, eg, Café de Coral. V-27

128 APPENDIX V SAVILLS RESEARCH REPORT Fast-food stores are widely accepted by Chinese consumers and operators are now focusing on maintaining the performance of existing stores in response to increased competition from new entrants and competing F&B formats. Future opportunities for operators primarily lie in lower tier cities and suburban developments in leading cities. b) Selected fast-fashion brands For many retailers entering the mainland market, it makes sense to start in Shanghai and Beijing, as both cities have a large population base, relatively high average disposable incomes, and some of the best developed and managed retail premises. As Shanghai and Beijing are the key entry points and two of the most mature markets in China, with some of the highest expenditures per capita, business travel and tourism figures, it is unsurprising that retailer store counts in these markets are significantly higher than in second-tier cities. On average, the luxury retailers surveyed had four to five stores in Shanghai and Beijing, while mid- to high-end fashion retailers had ten to 11 and fast-fashion brands had nine to ten. Many established retailers are now looking for the next market to meet their expansion needs. Leading luxury brands have already established a presence in most first- and second-tier cities and are continuing to expand aggressively. Mid- to high-end brands favour the second-tier cities of Hangzhou and Chengdu. Fast-fashion retailers, although late entrants to the China market, have been the most aggressive in establishing market share before the full benefit of the emerging middle class is felt. V-28

129 APPENDIX V SAVILLS RESEARCH REPORT Figure 21: Number of stores by city, Number of stores H&M Zara Uniqlo Mango MUJI Source: Savills Research Fast-fashion retailers have expanded quickly in all first- and second-tier cities in the last few years and will gradually move into certain third- or lower tier cities over the next three years. Among the first-tier cities, international fast-fashion brands have been most aggressive in expanding and have opened more stores in Shanghai and Beijing, compared with Guangzhou and Shenzhen, as Guangdong Province is a cloth manufacturing hub where consumers are more accustomed to individual brands. Among all the lower tier cities in the PRD region, international fast-fashion retailers are more likely to expand in Foshan and Zhongshan due to the presence of experienced developers with projects in those cities. c) Selected hypermarkets As Chinese consumers look for higher food quality at lower prices, hypermarkets are emerging as dominant players and setting market standards. The larger their operations, the stronger their bargaining position with suppliers, and hence, the lower the costs. They also have better supply-chain management and quality control checks in place to ensure the quality of their products. V-29

130 APPENDIX V SAVILLS RESEARCH REPORT Hypermarkets in leading cities are generally located in decentralised areas and in close proximity to residential communities, as they are in many western countries, in order to lower overheads. Downtown locations in top-tier cities are occupied by domestic incumbents and smaller supermarkets. In lower tier cities, however, hypermarkets such as Carrefour and Jusco are able to anchor centrally located stores, as the projects are typically larger, with cheaper rents and more welcoming landlords looking to stimulate footfall. In the last few years, it has also been noted that a few gourmet supermarkets, both international and domestic, have entered first-tier cities, and are slowly moving into second-tier cities, adopting a cautious approach to selecting sites. Figure 22: Number of international hypermarkets by city, Number of stores Carrefour Wal-mart Tesco Metro Vanguard Source: Savills Research Hypermarkets have the highest penetration rate in all first-tier cities and are gradually moving into second- or lower tier cities. Dominant hypermarket players vary by region or city Carrefour in Shanghai, and most cities in Jiangsu and Zhejiang provinces, Vanguard in Guangzhou and Wal-mart in Shenzhen. V-30

131 APPENDIX V SAVILLS RESEARCH REPORT 5) Future development trends and potential opportunities for retail markets The development of shopping malls in first-tier cities started in the late 1990s, and from the early 2000s in second-tier YRD and PRD cities. The market for large-scale regional shopping malls located in prime locations is now well developed, while that of community shopping malls has fallen behind. However, following the expansion of transport systems, allowing easier access to the cities, urban populations have shifted to non-core locations for the higher quality of life and lower property prices. Housing distribution policy is another factor causing the spillover effect; newly distributed units given as compensation for those lost in the government-led transformation of an area in the city tend to be in decentralised locations. This decentralised population represents significant demand for day-to-day convenience shopping and weekend recreation facilities. The lack of community shopping malls, comprising supermarkets, F&B outlets and family-oriented elements, presents attractive development opportunities. Taking Shanghai as an example, in 2000, only two metro lines were completed and the majority of malls were concentrated in core areas. By 2012, 12 metro lines and one maglev line had been completed and retail clusters have developed along with the expansion of the railway network. Currently, several large-scale (over 80,000 sq m) shopping malls can be found at the endpoints of several metro lines, serving the day-to-day grocery and necessity needs of regional consumers, as well as their leisure and entertainment requirements. V-31

132 APPENDIX V SAVILLS RESEARCH REPORT Map 1: Shanghai shopping malls, 2000 Map 2: Shanghai shopping malls, 2012 GFA < 50,000 GFA < 50,000 50,000 < GFA < 80,000 50,000 < GFA < 80,000 GFA > 80,000 GFA > 80,000 Prime Secondary Wujiaochang Prime Secondary Wujiaochang Emerging Emerging N. Sichuan Road N. Sichuan Road Changfeng / Middle Ring Road W. Nanjing Road E. Nanjing Road Lujiazui Changfeng / Middle Ring Road W. Nanjing Road vv E. Nanjing Road Lujiazui Hongqiao / Zhongshan Park Middle Huaihai Road Huamu Hongqiao / Zhongshan Park Middle Huaihai Road Huamu Xujiahui Xujiahui Xinzhuang 2 Xinzhuang Source: Savills Research Currently, there is a tendency for shopping malls to favour flagship stores, adding F&B and entertainment elements to foster a more attractive retail atmosphere and extend shoppers time spent in the mall. It is anticipated that the proportion of entertainment and F&B will increase over time and in some cases, become a dominant trade attracting consumers. A good example of this is the F&B and gourmet market in Shanghai Kerry Parkside. Meanwhile, interactive elements, such as Apple stores, Samsung stores, Kidzinias and Snoopy Theme Parks, will become increasingly common in future retail formats to enhance a project s point of difference. The application of technology will be another emphasis in shopping mall developments and is particularly important to mall operators. Applying state-of-of-the-art communication and information exchange capabilities will grant mall operators a competitive advantage in attracting younger shoppers who are the most enthusiastic consumers of technology. Mixed-use projects, which usually include residential, office and hotel components, will be the dominant retail format of shopping centres for the foreseeable future. As new developments gradually move into lower tier locations, more redevelopment as well as infill opportunities for prime locations in first-tier cities will be present to adapt to competition from new retail supply. While old shopping malls are repositioned to cater to the changing retail environment, new ones will attempt to provide better shopping experiences through improved designs, configurations, leasing strategies, and other factors. The recent remodelling along Huaihai Middle V-32

133 APPENDIX V SAVILLS RESEARCH REPORT Road in Shanghai is a good example, where Parkson and Printemps China Department Store have been upgraded to better compete with the newly opened shopping mall, iapm, developed by Sun Hung Kai Group. The recent presence of upscale community malls catering to expat workers and families has attracted attention in the market. These malls tend to be mid-scale, with total floor space of approximately 40,000 sq m to 60,000 sq m, for example, Kerry Parkside in Huamu area, Pudong, Shanghai. At the same time, the rise of community malls in newly developed areas, such as Dreamport Living Mall located close to Zhongguancun in Beijing, is occurring in higher tier cities, with sizes ranging between 90,000 sq m and 120,000 sq m or more. The larger mass guarantees a better trade mix and a greater brand variety, encouraging shoppers to prolong their trips. 6) Future outlook In conclusion, it is believed that there is still considerable market potential in mid-end shopping mall developments. Despite the fact that e-tailing has had more of an effect on mass-market products, which are relatively dominant in mid-end malls, and particularly in first-tier cities, mid-end malls still enjoy three advantages over luxury or low-end malls: 1) greater consumption demand from the middle class as a result of urbanisation; 2) less competition from existing projects in decentralised areas compared with those in city centres; and 3) market opportunities from the gap between luxury and low-end malls through accurate differentiation strategies. 3) Overview of Guangdong Province, the PRD and selected cities 1) Guangdong Province Guangdong Province is a province in southern China with a total area of 179,800 sq km. The province comprises two sub-provincial cities and 19 prefecture-level cities, including the provincial capital, Guangzhou, and the economic hub, Shenzhen, two of the most important and populous cities in China. Since 2005, Guangdong Province has been the most populated province in China and the largest province by GDP, which stood at RMB5,706.8 billion in 2012, contributing one-eighth of the nation s total GDP. The economy is dominated by the manufacturing and tertiary industries, contributing 48% and 46% of total output in 2012 respectively. V-33

134 APPENDIX V SAVILLS RESEARCH REPORT Map 3: Guangdong Province Shaoguan Shanwei Yangjiang Zhanjiang Source: Savills Research Guangdong Province is also the most affluent province in China on a GDP per capita basis, at RMB54,000 in 2012, which is significantly higher than the national average of RMB38,354. With a large and wealthy population, the retail market is supported by strong consumption demand. Guangdong Province s retail sales contributed more than 10% of the nation s total retail sales in The province s proximity to Hong Kong means that consumers adopt international tastes earlier than elsewhere in the country, making the region one of the trend-setters of China. A reform programme was implemented in Guangdong Province in 1979, allowing the establishment of three economic zones, including two in the PRD (Shenzhen and Zhuhai), while several preferential policies encouraged overseas investment and boosted exports. This early market experience means that the area enjoys greater autonomy in terms of fiscal and economic direction, commerce and distribution, international trade and investment, and labour and prices, compared with other jurisdictions in China. V-34

135 APPENDIX V SAVILLS RESEARCH REPORT The transportation network is highly developed in Guangdong Province, and includes eight airports (one international airport, two regional airports and several smaller ones), 12 main railway lines, six high-speed train lines (one still under construction), four cities with metro systems in operation, several intra-city and inter-city light rail lines, and a well-developed road network. 2) PRD The PRD is the main growth driver of Guangdong Province, and is one of the most economically dynamic regions of China, since the launch of the reform programme in The zone comprises nine cities, including Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing, and a total area of approximately 41,700 sq km. Over 80% of Guangdong Province s GDP is generated from the PRD, which stood at RMB4,789.7 billion in Since the reform, the PRD has transformed from an agriculture-oriented economy to a manufacturing platform of global importance. The area is now the leading producer of electrical and electronic goods and components, watches and clocks, plastic products, garments and textiles, and a range of others products. As an export-oriented and foreign-investment-driven economy, the PRD contributed to approximately 9% of China s 2012 GDP output, despite the fact that the area only encompasses 0.4% of the total land area and 4% of the total population. These figures show how impressive the economic development has been in the PRD so far. Moreover, the internationalisation of the Chinese economy largely arose within the PRD during the first reforms. Aside from foreign investments, private-owned enterprises are now playing an ever-growing role in boosting the region s economy. Of all the cities in the PRD, Shenzhen, Dongguan and Foshan in particular have been at the forefront of private sector development. Cities such as Shenzhen and Guangzhou are among the most affluent in the Chinese mainland. In general, their consumption potential is considerably greater than either Guangdong Province or China as a whole when measured by GDP per capita. The PRD s 2012 GDP per capita reached RMB84,563, 56% higher than that of Guangdong Province and approximately 2.2 times that of China overall. These circumstances are also supported by the PRD s retail sales figures, which stood at RMB1.7 trillion in 2012, accounting for 74.1% of Guangdong Province s total retail sales and 8.0% of the national figure. V-35

136 APPENDIX V SAVILLS RESEARCH REPORT 3) Guangzhou a) Overview of the city economy Map 4: Guangzhou s administrative divisions, district population and GDP contribution District 2012 permanent 2012 GDP population contribution ( 000) (%) 1 Yuexiu District 1, Liwan District Haizhu District 1, Tianhe District 1, Baiyun District 2, Huangpu District Panyu District 1, Huadu District Nansha District Luogang District Zhengcheng County 1, Conghua County Source: CEIC, Savills Research Background Guangzhou is a city with more than 2,000 years of history. As one of the earliest trading ports in China, Guangzhou was one of the origins of the Maritime Silk Road. With a land area of 7,434.4 sq km, Guangzhou is the capital city of Guangdong Province and serves as a political, economic, technological, educational and cultural centre. Located in the southeast of Guangdong Province, Guangzhou is also the regional and transportation hub of southern China, as well as the economic centre of the PRD, driven by its commercial and manufacturing industries. The city is the third largest in China by area and total GDP after Beijing and Shanghai. Macro economics Following a long history as one of China s leading commercial ports, the city s economic development has resumed, particularly after the implementation of the opening-up policy in the early 1990s. It has now become a city with a strong secondary industry, primarily supported by an advanced manufacturing industry, as well as a developed tertiary sector, including the finance, logistics and services industries. V-36

137 APPENDIX V SAVILLS RESEARCH REPORT In 2012, Guangzhou s GDP stood at RMB1,355 billion, up by 10.5% from the previous year. As a result of industrial structural changes (from textile, food and building materials to IT, new materials, new energy and healthcare/pharmaceuticals) and rising labour costs, GDP started to slow but still recorded 10.5% growth in Guangzhou s economic growth rate is expected to exceed the national average over the next decade as traditional economic hubs continue to move up the value chain. The city s forecast CAGR for 2011 to 2021 of 7.6% is just below the forecast provincial growth rate of 7.7%. Guangzhou s proximity and close integration with Hong Kong and the rest of the PRD will continue to count in its favour. Figure 23: Guangzhou s GDP, ,600 GDP (Left Hand Side) RMB (billion) Real GDP Growth (Right Hand Side) YoY 18% 1,400 16% 1,200 14% 1,000 12% % 8% 600 6% 400 4% 200 2% % Source: CEIC, Savills Research Meanwhile, Guangzhou s 2012 GDP per capita, which stood at RMB105,909, was one of the highest nationally, surpassing that of both Shanghai and Beijing. V-37

138 APPENDIX V SAVILLS RESEARCH REPORT Figure 24: Guangzhou s GDP per capita, ,000 GDP per Capita (Left Hand Side) RMB GDP per Capita Growth (Right Hand Side) YoY 20% 100,000 15% 80,000 10% 60,000 5% 40,000 0% 20,000-5% % Source: CEIC, Savills Research Guangzhou s population increased to 12.8 million people in 2012 having grown from 9.5 million in The population increase has been driven by people moving to the city from elsewhere in the province. In comparing the fifth (2000) and sixth (2010) censuses, the proportion of external population to total floating population increased from 33.3% to 37.5%. The population growth rate slowed rapidly in 2011 and 2012 compared with previous years. The reason for this slowing is unknown. It is presumed to have resulted from a slowdown in the export and manufacturing sectors due to slower global economic growth and overcapacity, as well as automation and increasing competition from other Asian countries. This would have led to less demand for low-skilled workers, who would start seeking job opportunities in other cities, lowering the external population of Guangzhou. V-38

139 APPENDIX V SAVILLS RESEARCH REPORT Figure 25: Guangzhou s permanent population, Permanent Population (Left Hand Side) Population Growth (Right Hand Side) 16,000 Thousand persons YoY 8% 14,000 7% 12,000 6% 10,000 5% 8,000 4% 6,000 3% 4,000 2% 2,000 1% % Source: CEIC, Savills Research Disposable incomes have followed GDP per capita relatively closely over the last decade. Guangzhou s disposable income increased to RMB38,053 per annum by 2012 up 10.5% YoY. Future growth rates are expected to remain on a par with the national average over the next decade, with Guangzhou continuing to attract talent from lower tier cities in its hinterland. V-39

140 APPENDIX V SAVILLS RESEARCH REPORT Figure 26: Guangzhou s disposable income per capita, Disposable Income per Capita (Left Hand Side) RMB 40,000 Disposable Income Growth (Right Hand Side) YoY 15% 35,000 30,000 25,000 20,000 15,000 10,000 5,000 14% 13% 12% 11% 10% 9% 8% 7% % Source: CEIC, Savills Research Retail sales in Guangzhou reached RMB597.8 billion in 2012, ranking third among the four first-tier cities. As a result of the city s strong economy and fast rate of growth, expenditure patterns are now entering into a period of change, with more emphasis placed on entertainment and leisure, instead of only on necessities. The more laid-back lifestyle of Guangzhou is believed to be one of the more significant contributing factors to the predominance of leisure and F&B venues in the city. Guangzhou s economy is still heavily reliant on international trade for employment, and with the uncertainty in the global trade environment, recent income growth rates have been more volatile than in some other cities, whose economies are more focused on the domestic market. Retail sales are expected to grow at slightly above the national average at a real CAGR of 8.1% from 2011 to V-40

141 APPENDIX V SAVILLS RESEARCH REPORT Figure 27: Guangzhou s retail sales, Retail sales value (Left Hand Side) Retail sales growth rate (Right Hand Side) 700 RMB (billion) YoY 30% % % % % 100 5% % Source: CEIC, Savills Research Infrastructure and transportation Baiyun International Airport, the second busiest by traffic movement in China, replaced the old airport to meet fast-growing air traffic demand in The first metro line in Guangzhou started operation in Currently, eight metro lines have been completed, including six metro lines, the Guangzhou-Foshan Line (also called the Guangfo Line) and the Zhujiang New Town APM Line, a total length of 236 km. By 2020, the system will expand to over 500 km with a total of 15 lines in operation. V-41

142 APPENDIX V SAVILLS RESEARCH REPORT Map 5: Guangzhou s metro network by 2013 Airport South 5 Jiaokou Financial Hi-Tech Zone Zumiao Chao an Pujunbei Lu Guicheng Tongji Lu Jihua Park Kuiqi Lu Guangfo Line Tanwei Xicun Xichang Zhongshanba Chen Clan Acedemy Changshou Lu Huangsha Fangcun Huadiwan Kengkou Jushu Longxi Qiandenghu Lake Leigang Nangui Lu Source: Jianghe wanggang Huangbian Jiangxia Xiao-gang Baiyun Cultural Square Baiyun Park Feixiang Park Guangzhou Sanyuanli Railway Station Xiaobei Taojin YuexiuPark Sun Yat-sen Memorial Hall Ximenkou Gongyuanqian Haizhu Square Fenhuang Xincun Xilang Shayuan Baogang Dadao Renhe Longgui Peasant Movement Institute Dongshankou Yangji The 2 nd Workers Cultural Palace Jiangnan Xi Xiaogang Changgang Jiangtai Lu Dongxiaonan Nanzhou Luoxi Nanpu Huijiang Shibi Martyrs Park Sun Yat-sen University Guangzhou South Railway Station Baiyundadaobei Yongtai Tonghe Jingxi Nanfang Hospital Meihuayuan Guangzhou East Yantang Railway Station 1 Ouzhuang Tianhe Coach Terminal TianheSports Linhexi Center Wushan Zoo Tianhe Sports Center South Tianhenan South China Normaxl University Huangpu Dadao Gangding Women & Children Medical Center Huangcun TiyuXilu Huacheng Dadao Shipaiqiao Opera House Chebei Haixinsha Tancun Keyun Lu Wuyangcun Chebeinan Zhujiang New Liede Yuancun Dongpu Town Sanxi Chigang Pegoda Yuzhu Dashadong Lujiang Modiesha Pazhou Wanshengwei Dashandi Wenchong Kecun Chigang Xingangdong 8 APM Line 2 Savills Research Datang Lijiao Xiajiao Dashi Hanxi Changlong Shiqiao 3 Panyu Square Guanzhou Higher Education Mega Center N. Higher Education Mega Center S. Xinzao Shiji Haibang Dichong Dongchong Huangge Auto Town Huangge Jiaomen Jinzhou 4 Guangzhou also plays a prominent role in the national railway network, as a gateway to the PRD through the Jingguang railway (Beijing-Guangzhou), the Guangshen railway (Guangzhou-Shenzhen), the Guangmao railway (Guangzhou-Maoming), the Guangmeishan railway (Guangzhou-Meizhou-Shantou), the Wuhan-Guangzhou high-speed railway and the Guangzhou-Zhuhai Intercity Railway. The city also offers easy access to Hong Kong, which is only two hours away via the Guangzhou-Kowloon through train. Outlook In 2012, Guangzhou s disposable income per capita was 95% of Shanghai s, while expenditure per capita was 16% higher than that of Shanghai, implying that the retail market is relatively mature compared with other second-tier cities in the PRD. With the continuing growth in disposable incomes and retail sales, there remain opportunities for retail development, provided that there is comprehensive planning and accurate positioning strategies. b) Overview of the retail property market Thanks to the proximity of Hong Kong and Macau, Guangzhou quickly developed into the business and trade centre of southern China after the reforms which took place in A wide range of retail formats, such as shopping malls, department stores, commercial streets, underground malls and specialised markets, are all present in the city today. V-42

143 APPENDIX V SAVILLS RESEARCH REPORT Major retail areas There are four prime3 and four secondary4 retail areas: prime areas Shang Xia Jiu, Beijing Road, Huanshi Dong and Tianhe Bei; secondary areas Jiangnan Xi, Zhujiang New Town, Panyu New Town and Baiyun New Town. Map 6: Major retail areas in Guangzhou Source: Savills Research Shang Xia Jiu mainly comprises low-end retail stores and specialty stores which cater primarily to local youths and tourists. Projects here include Shang Xia Jiu Shopping Street, Liwan Plaza, Hengbao Plaza and Metropolitan Plaza. Beijing Road is a popular traditional shopping destination with a wide range of retail offerings, from mid-low to mid-high. A cluster of famous older department stores operated by domestic developers attract both international and domestic shoppers. Beijing Road Shopping Street, Grandbuy Department Store, Xin Da Xin Department Store and TeeMall (Beijing Road Branch) are the most well known projects in the area. 3 4 Target catchment coverage is city-wide. Target catchment coverage is regional. V-43

144 APPENDIX V SAVILLS RESEARCH REPORT Huanshi Dong started to become more popular as Guangzhou s first cluster of five-star hotels and Grade A offices were developed. With its business ambience, the area caters especially to affluent Chinese, expats and senior management staff. Huangshi Dong, as a result, is the most high-end retail area in Guangzhou, with luxury specialty shopping destinations such as La Perle Square, Guangzhou Friendship Store and Poly Central Plaza. Tianhe Bei is the most mature retail catchment in the city and several large-scale shopping malls and department stores catering to nearby white-collar workers are located in the area. Many international retailers have shown a preference for this area when establishing their first store or a flagship store to cater to the mid- to high-income consumer demand. TeeMall (Tianhe Bei Branch), Zhengjia Plaza, Grandbuy (Zhongyi Store), Victoria Plaza and Taigu Hui are the most influential projects here. Jiangnan Xi is dominated by mid- and low-end shopping streets, retail stores and specialty stores which primarily cater to local youths. Leading projects in the area include Jiangnan Sunday Mall and Grandbuy Sunny Mall. Zhujiang New Town is in the CBD area. Many future mid- to high-end shopping malls are scheduled to open in this emerging area, targeting white-collar workers as well as both international and domestic tourists. Existing projects such as Seasons Mall Spring and Mall of the World are the current leading players in the area. Panyu New Town is a newly developed retail area in the south of the city. Mid- to high-income local residents in the town are the main target catchment of the shopping malls. A significant amount of future supply of 1.3 million sq m will be launched in the area by Well known projects include Highsun Panyu Mall and Auyuan Plaza. Baiyun New Town is in the north of the city and is a sub-cbd in Guangzhou. Mid- and high-end shopping malls, such as Baiyun Wanda Plaza and G5 Mall, aim to serve demand from northern Guangzhou consumers. Existing stock According to our research, total retail stock stood at 3.0 million sq m as at the end of 2012 and was primarily located in Tianhe Bei (approximately 1.0 million sq m). A considerable amount of retail stock is also present in emerging areas, with Zhujiang New Town and Panyu New Town contributing the most, reaching approximately 350,000 sq m in each zone. Shopping malls remain the dominant retail format in Guangzhou, accounting for more than 95% of the total stock. V-44

145 APPENDIX V SAVILLS RESEARCH REPORT A number of international retailers have entered the Guangzhou market, including fashion brands (Uniqlo, H&M and Zara) and smaller fashion retailers (BAUHAUS, Diesel and Charles & Keith). A majority of retailers choose Tianhe Bei as their first destination in the city, with a few fashion retailers expanding their presence to secondary areas. Gourmet supermarkets, such as Ole, are also exploring the market at this stage. Figure 28: Guangzhou s existing retail stock by major retail area, ,200 Sq m thousand 1, Shang Xia Jiu Beijing Road Huanshi Dong Tianhe Bei Jiangnan Xi Zhujiang Panyu New Baiyun New Town Town New Town Source: Savills Research Note: Retail projects (shopping malls and department stores) of more than 8,000 sq m are included in our calculation. Historical retail supply has been relatively stable, and is concentrated in prime areas such as Tianhe Bei, Beijing Road and Shang Xia Jiu. Supply then increased considerably in emerging areas, especially Zhujiang New Town and Baiyun New Town. Good quality retail projects, such as Baiyun Wanda Plaza and G5 Mall among others, have enhanced not only the various individual retail areas but also the overall Guangzhou retail market. V-45

146 APPENDIX V SAVILLS RESEARCH REPORT Figure 29: Retail supply and stock in Guangzhou, E 1,000 Sq m thousand Supply (Left Hand Side) Stock (Right Hand Side) Sq m million E 2014E 2015E 2016E 0.0 Source: Savills Research Note: Retail projects (shopping malls and department stores) of more than 8,000 sq m are included in our calculation. Market performance The strong growth in consumption demand has supported the retail market. In Q2/2013, Guangzhou s average first-floor shopping mall rent for a fashion retailer with a store of 100 to 150 sq m was RMB42 per sq m per day, a quarter-on-quarter growth of 0.4%. Nevertheless, due to increased competition from the completion of several projects both within the city as well as in Hong Kong, falling rents have been recorded in the market since Q4/2012. Tenants pay the highest rents on Beijing Road, where the average first-floor rent at a shopping mall in a prime location can range between RMB50 and RMB100 per sq m per day. Shang Xia Jiu s rents are the second highest at between RMB40 and RMB85 per sq m per day. Rents in Huanshi Dong and Tianhe Bei reach RMB35 to RMB40 per sq m per day. A significant disparity in rents between primary and secondary areas is present. Average first-floor rents in all four emerging areas are below RMB15 per sq m per day, while higher rents have been recorded in projects in Zhujiang New Town. V-46

147 APPENDIX V SAVILLS RESEARCH REPORT Figure 30: Guangzhou s average first-floor shopping mall rent, Q1/2009-Q2/ RMB per sq m per day Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: Savills Research Note: First-floor rent in shopping malls is defined as rent paid by a fashion retailer with a store of between 100 and 150 sq m. Note: Several new projects with lower rents were added to the basket in Q4/2012, lowering the average rent. The Chinese market as a whole continues to see a compression in yields in most property sectors and Guangzhou s market is no different. Sustained overseas investment, as well as a significant new wave of capital from domestic investors, has resulted in a large weight of capital chasing too few investment opportunities. This has led to rising capital values and falling yields. Yields in the retail market tend to be slightly higher than in the office market, as the retail market requires specialised asset management teams to extract the most value from investment opportunities, something which most local investors currently lack. Consequently, foreign investors and asset managers still tend to dominate the retail investment market, and the smaller pool of investors has allowed yields to remain a little higher than in the office market. V-47

148 APPENDIX V SAVILLS RESEARCH REPORT Future supply and outlook From 2013 onward, more than 1.9 million sq m of new supply will enter the market in the next four years, mostly in secondary areas, in particular, Zhujiang New Town and Panyu New Town. A mix of overseas developers, large domestic developers as well as local developers will have a presence in the future Guangzhou retail market. Due to greater competition among existing projects in central areas, it is expected that future development opportunities will be in secondary areas. As urbanisation continues to drive more footfall to secondary areas, we expect to see stronger consumption demand from mid- to high-income shoppers, which will encourage the take-up of retail space and stimulate rental growth. Despite the considerable future supply and the mixed signals from various macro indicators, investment potential is still believed to be present in certain areas. At a district level, Huanshi Dong and Tianhe Bei remain the most mature zones for high-end consumption among the prime locations, attracting international retailers, both luxury and fast-fashion. Rents are expected to remain fairly stable in the future, with potential for a modest upswing. Among the secondary areas, Zhujiang New Town and Panyu New Town are recommended for midand mid- to high-end retail projects. Adjacent to Guangzhou s CBD area, Zhujiang New Town has developed rapidly compared with other secondary areas and greater potential in rental growth is expected, supported by demand from the large number of white-collar workers and residents in the surrounding areas. Panyu New Town, on the other hand, enjoys much greater consumption potential as it is the major residential cluster in southern Guangzhou. V-48

149 APPENDIX V SAVILLS RESEARCH REPORT Table 5: Known future retail projects in Guangzhou, Retail area Project name (CN) Project name (EN) Completion date Retail GFA (sq m) Zhujiang New Town Mall of the World Phase III ,000 Panyu New Town Aeon Mall ,000 Panyu New Town Panyu Wanda Plaza ,000 Panyu New Town Lee Garden Mall Phase I ,000 Zhujiang New Town V Poly V ,000 Zhujiang New Town Gold Tak Landmark Project ,000 (Phases 3 and 4) Panyu New Town Saint Fortune Shopping Mall ,000 Panyu New Town MALL Clifford Mall ,000 Panyu New Town Hanxi Mall ,000 Panyu New Town Saint Fortune Shopping Mall ,000 (Phase II) Tianhe Bei Hong Cheng Plaza ,000 Zhujiang New Town Sun Hung Kai Liede Project ,000 Zhujiang New Town Hopewell Liede Project ,000 Panyu New Town Lee Garden Mall ,000 Zhujiang New Town East Tower retail podium ,000 Panyu New Town Haiboyuan International New Town ,000 4) Shenzhen a) Overview of the city economy Map 7: Shenzhen s administrative divisions, district population and GDP contribution District 2012 permanent 2012 GDP population contribution ( 000) (%) 1 Futian District 1, Luohu District Nanshan District 1, Bao an District 4, Longgang District 2, Yantian District Guangming New District Pingshan New District Source: CEIC, Savills Research V-49

150 APPENDIX V SAVILLS RESEARCH REPORT Background Shenzhen is located on the southern tip of the Chinese mainland and on the eastern bank of the Pearl River, neighbouring Hong Kong. As the first special economic zone (SEZ) at the forefront of reform in China, Shenzhen is one of China s most important gateways to the world. The SEZ was extended to include the entire city on 1 July 2010, increasing the land area from sq km to 1,952.8 sq km, and helping to ease the pressure on land usage. Shenzhen, while typically associated with large-scale manufacturing for export, has evolved its industrial base to include IT, media and finance as some of its most important growth industries, putting the city on a good footing to continue to grow in a changing economic environment. The city is home to one of China s two key stock exchanges. The population, mostly migrants, is very young with the lowest average age in the whole of China, at roughly 30 years old. Shenzhen, with its strong links with Hong Kong, is expected to benefit from continued integration, and both domestic and overseas investment in Qianhai SEZ in the west of the city, which is expected to attract a number of Hong Kong companies. Macro economics The city is the high-tech and manufacturing hub of southern China, home to the world s fourth busiest container port and the fourth busiest airport on the Chinese mainland. The high-tech, manufacturing, financial services, modern logistics and cultural industries are mainstays of the city. Some of China s most successful high-tech companies, such as BYD, Hasee, Huawei, Tencent and ZTE, locate a major portion of their business in Shenzhen. Currently, new industries of strategic importance and modern service industries are quickly becoming drivers of the city s economic growth. Shenzhen s GDP has grown over the past few years, with five-year average growth of 11.0%, ranking fourth among all cities in China. This growth has been one of the most important factors in the development of the retail market, driving demand from a growing and increasingly wealthy citizen base. By 2012, the city s GDP reached RMB1,295 billion, YoY growth of 10%. The decreasing growth rate is primarily the result of a slowing global economy and the recent upgrade of the overall industrial structure. As Shenzhen restructures its economy towards more finance and IT related sectors and develops closer ties with Hong Kong, it is rapidly moving the focus of economic growth (especially in the tertiary sector) away from Guangzhou. V-50

151 APPENDIX V SAVILLS RESEARCH REPORT Figure 31: Shenzhen s GDP, ,400 GDP (Left Hand Side) RMB (billion) Real GDP Growth (Right Hand Side) YoY 25% 1,200 20% 1, % % % % Source: CEIC, Savills Research Shenzhen s worst year in terms of GDP per capita growth was 2009, with growth rates slowing to below 2% from their mid-term average of over 10%. Growth rates slowed as a result of the global financial crisis and a lack of a significant reduction in population growth. Despite slowing trade and manufacturing in recent years, the concurrent slowdown in population growth (primarily resulting from migration) has meant that GDP per capita has continued to grow at healthy rates. V-51

152 APPENDIX V SAVILLS RESEARCH REPORT Figure 32: Shenzhen s GDP per capita, ,000 GDP per Capita (Left Hand Side) RMB GDP per Capita Growth (Right Hand Side) YoY 18% 120,000 16% 100,000 14% 12% 80,000 10% 60,000 8% 40,000 6% 4% 20,000 2% % Source: CEIC, Savills Research Shenzhen is known as a migrant city with a young demographic. Covering 1,991 sq km, the city has a total population of 10.5 million, with 72.7% of people being non-registered hukou in According to Forbes China in 2011, Shenzhen was voted the most innovative city in mainland China. Following the upgrade of the industrial structure, the low-skilled labour force may have moved to other cities for job opportunities, which likely explains the decreasing population growth in recent years, as this growth tends to be driven by the external population. Shenzhen s population has grown rapidly since its formation, reaching 10.5 million people by the end of 2012, while growth rates at the start of the century were recorded in the region of 3% to 5% per annum. Growth rates, as they did in Guangzhou, have slowed markedly in the last two years. As trade and manufacturing sectors have slowed, population growth is now closer to 1% per annum. V-52

153 APPENDIX V SAVILLS RESEARCH REPORT Figure 33: Shenzhen s permanent population, ,000 Permanent Population (Left Hand Side) Thousand persons Population Growth (Right Hand Side) YoY 6% 10,000 5% 8,000 4% 6,000 3% 4,000 2% 2,000 1% % Source: CEIC, Savills Research With the exception of 2009, disposable income per capita growth rates have averaged close to 10% over the past few years. The fall in disposable incomes was a result of changes in the calculation method and not in fact a marked slowdown in growth rates. In recent years, there has been a campaign to boost wages (especially minimum wages) in Shenzhen as the cost of living has risen and the demand for skilled versus semi-skilled labour continues to increase. V-53

154 APPENDIX V SAVILLS RESEARCH REPORT Figure 34: Shenzhen s disposable income per capita, ,000 RMB Disposable Income per Capita (Left Hand Side) Disposable Income Growth (Right Hand Side) YoY 14% 40,000 13% 35,000 12% 30,000 25,000 20,000 15,000 11% 10% 9% 8% 7% 10,000 6% 5,000 5% % Source: Shenzhen Statistics Bureau, Savills Research Note: Data prior to 2005 is not available as the Shenzhen Statistics Bureau changed the calculation method in Aside from a spike in 2005, resulting from a recalculation of retail sales by the Statistics Bureau, retail sales have grown at a relatively steady rate over the last seven years with a minimum and maximum annual growth rate of 12.8% and 17.9% respectively, and a CAGR (2005 to 2012) of 15.7%. It is reasonable to conclude that the migrant population has driven a majority of total sales over the past decade. However, because the overall migrant population is composed primarily of low-skilled and low-income workers who tend to spend only on day-to-day necessities, it is likely that there is less potential for mid- to high-end consumption, such as spending on quality F&B and entertainment. Retail sales growth rates over the next decade are expected to grow at similar rates to that of the province and slightly higher than its peer Guangzhou. Sales are primarily driven by local consumers rather than those from the surrounding areas and hence future growth in retail sales will be dependent upon an increasing population, worker productivity and rising incomes. Retail sales will continue to be dominated by the mass to mid end of the market which is supported by local consumers. V-54

155 APPENDIX V SAVILLS RESEARCH REPORT Figure 35: Shenzhen s retail sales, Retail sales value (Left Hand Side) RMB (billion) Retail sales growth rate (Right Hand Side) YoY 70% % % % % % 50 10% % Source: CEIC, Savills Research Infrastructure and transportation Shenzhen now has five metro lines with a total length of 177 km and an average passenger volume of 2.7 million passenger trips. The city is expected to have an extra five lines by the end of 2016 and a total of 20 lines in the long term, covering emerging areas such as Qianhai. The city also boasts convenient access to Hong Kong with six land crossing points on the border between Shenzhen and Hong Kong: Shenzhen Bay Huanggang Futian Luohu Shenzhen Rail Station Shatoujiao V-55

156 APPENDIX V SAVILLS RESEARCH REPORT Map 8: Shenzhen s current metro network Longhua Line Luobao Line Shekou Line Huanzhong Line Longgang Line Longhua Line Qinghu Henggang He au Yonghu Dayun Ailian Longcheng Square Shuanglong Jixiang Nanlian Longgang Line Longhua Tangkeng Liuyue Longsheng Danzhutou Shangtang Airport East Dafen Hongshan Hourui Gushu Honglang North Xingdong Liuxiandong Xili University Town Changlingpi Tanglang Baishilong Minzhi Bantian Shangshuijing Changlong Shenzhen Wuhe Yangmei Xiashuijing North Railway Caopu Station Mumianwan Buji Huanzhong Line Xixiang Lingzhi Minle Shuibei Tianbei Baigelong Pingzhou Fanshen Shangmeilin Cuizhu Buxin Baoti Lianhua North Children s Palace Shaibu Lianhuacun Huaxin Tongxinling Hongling Laojie Tai an Bao an Center Antuoshan Xiangmi Jingtian Futian Civic Center Hubei Yijing Xinxiu Linhai Baohua Liyumen Gaoxingyuan Daxin Taoyuan Shenda Baishizhou Qianhaiwan Hongshuwan Shenkang Qiaoxiang Xiangmei Lianhua North West OCT Zhuzilin Xiangmihu Window of Qiaocheng Chegongmiao Shopping the World East Park Gangxia North Gangxia Convention & Exhibition Center Huaqiang North Huaqiang Rd Yannan Science Museum Grand Theater Guomao Huangbeiling Shekou Line Keyuan Houhai Luohu Dengliang Haiyue Wanxia Yitian Futian Checkpoint Luobao Line Dongjiaotou Shuiwan Sea World Shekou Port Chiwan Source: Savills Research Outlook Shenzhen s proximity to Hong Kong and support from the central government means that further integration with Hong Kong is likely. Relevant policies such as the development of the Lok Ma Chau Loop have already been included in the city s blueprint for the period up to On 3 July 2012, the State Council unveiled policies for the development of Qianhai as a pilot area for closer cooperation and the integration of Guangdong Province and Hong Kong. The policies cover finance, tax, law, talent, education, healthcare and telecommunications. According to the policies, Qianhai is allowed to explore widened offshore renminbi flow-back channels and cross-border loans, support Qianhai enterprises to issue renminbi bonds in Hong Kong and allow the establishment of funds of funds (FOF). Full development of the area is planned for V-56

157 APPENDIX V b) SAVILLS RESEARCH REPORT Overview of the retail property market Major retail areas Luohu Caiwuwei, Futian CBD and Nanshan CBD, along with OCT and Mangrove Bay are the four primary retail areas in Shenzhen. Map 9: Major retail areas in Shenzhen Source: Savills Research Luohu Caiwuwei is the most expensive retail area in Shenzhen in terms of average shopping mall and street shop rents. International and domestic tourists as well as high-income consumers are the main shoppers in the area, where a cluster of fast-fashion brands and mid- to high-end malls, street shops and department stores can be found. The leading projects are KK Mall and The Mixc. Futian CBD has a considerable number of Grade A office buildings. Mid-end shopping malls are the area s main retail format, catering primarily to white-collar workers through a wide range of F&B outlets. Raising the retail positioning with an emphasis on new fast-fashion brands is a recent trend. COCO Park and Central Walk are the leading projects in the area. Nanshan CBD is a regional retail hub which caters primarily to Nanshan district residents. The existing stock in the area totals almost 500,000 sq m, with another 27,000 sq m expected to be added to the market by Consumers can find a diverse range of brands and trades in shopping malls and department stores here, the more well known ones being Coastal City and All City. V-57

158 APPENDIX V SAVILLS RESEARCH REPORT OCT and Mangrove Bay primarily attract footfall from more affluent local and expat residents, as well as some international and domestic tourists. Mid- to high-end street shops, department stores and shopping malls are the main retail formats in the area, such as Yitian Holiday Plaza and O Plaza. Existing stock The total stock of existing projects as at the end of 2012 was approximately 1.7 million sq m, primarily located in Luohu Caiwuwei, Futian CBD and Nanshan CBD, with relatively little stock in OCT and Mangrove Bay. A small amount of retail stock is also present in Longgang, a decentralised area. Mid-end and mid- to high-end shopping malls remain the dominant retail format in the city. Following their entry in Beijing and Shanghai, international retailers have gradually looked to Shenzhen s market. Luxury brands favour prime locations, particularly Luohu Caiwuwei, while fast-fashion brands have a presence in all prime locations and a small presence in decentralised areas. Similarly, hypermarket retailers are now placing more emphasis on Shenzhen based on the consumption potential. Figure 36: Shenzhen s existing retail stock by major retail area, Sq m thousand Futian CBD OCT and Mangrove Bay Luohu Caiwuwei Nanshan CBD Longgang Center Source: Savills Research Note: Known retail projects (both shopping malls and department stores) of more than 20,000 sq m are included in our calculation. V-58

159 APPENDIX V SAVILLS RESEARCH REPORT Retail supply in Shenzhen has differed significantly from year to year. In 2012, retail supply started to pick up again when two mid- to large-scale shopping malls entered the market. Figure 37: Retail supply and stock in Shenzhen, E 400 Sq m thousand Supply (Left Hand Side) Stock (Right Hand Side) Sq m million E 2014E 2015E 2016E 0.0 Source: Savills Research Note: Known retail projects (both shopping malls and department stores) of more than 20,000 sq m are included in our calculation. Market performance Historically, Shenzhen s rents ranked third among all first-tier cities, and in Q2/2013, the city s average first-floor rents reached RMB39.1 per sq m per day. Rents have now entered into a stable growth stage due to the supply expected in the city, the diversification of consumption demand, as well as stabilising economic growth. Therefore, growth in rents will be relatively modest in the near future. The highest rents are seen in Luohu Caiwuwei, at RMB62.5 per sq m per day on average, which is 2.5 to 3 times higher than that in Futian CBD, OCT and Mangrove Bay, and Nanshan CBD. Tenants in decentralised areas, such as Bao an Center and Longgang Center, on the other hand, pay very low rents of only RMB5 to RMB8 per sq m per day, reflecting the relatively early stage of development of these markets. V-59

160 APPENDIX V SAVILLS RESEARCH REPORT Figure 38: Shenzhen s average first-floor shopping mall rent, Q1/2009-Q2/ RMB per sq m per day Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: Savills Research Note: First-floor rent in shopping malls is defined as rent paid by a fashion retailer with a store of between 100 and 150 sq m. Average rents and estimated capital values have remained stable since Q1/2012. The average estimated capital value per sq m was recorded at RMB123,080 in Q2/2013. Gross yields have fallen since Q2/2009 to 7.08% in Q2/2013. This trend implies that the city s retail market has begun to enter a more mature phase of development. Future supply and outlook From 2013 onward, total known future supply of more than 1.0 million sq m will enter the Shenzhen market in the following four years. This future supply will be located in both primary areas (Nanshan CBD and Futian CBD) and decentralised areas (Longgang Centre and Bao an Centre). Most of the future projects are shopping malls with total floor space of between 78,000 sq m and 185,000 sq m, primarily positioned as mid- to high-end malls catering to more affluent consumers. Local developers will have more presence in the future Shenzhen retail market, with a small presence from domestic and international players. Although future retail supply is significant and greater competition among existing stock is anticipated, certain areas still have positive investment prospects. As the most recently developed area, Nanshan CBD s current rents remain lower than the market average, owing to the fact that the majority of the existing stock is mid end and the projects cater primarily to local residents day-to-day demands. However, rents V-60

161 APPENDIX V SAVILLS RESEARCH REPORT are expected to experience a significant growth in the long run, due to the completion of several office towers in Houhai area, the maturity of surrounding high-end residential developments and the positive influence from the enhancement of Qianhai area. Futian CBD, similar to Nanshan CBD, features mid-end malls. Significant occupancy by fast-fashion retailers and F&B trades compressed the growth of rents as they tend to pay turnover rents without base rents in projects located in prime locations. The future prospects for Futian CBD are not driven by growing demand from local residents but from the future completion of the Futian Railway Station, the transport hub along the Shenzhen-Hong Kong high-speed railway, in Footfall brought by the transportation hub will boost consumption demand further. OCT and Mangrove Bay remains another attractive investment target for different reasons. With several well-known tourist attractions, a cluster of high-end residential projects and the future completion of metro line 9, the area will see a higher rental growth in retail projects which are positioned at the mid- to high-end and catering to both high-income shoppers and visitors. Table 6: Known future retail projects in Shenzhen, Retail area Project name (CN) Project name (EN) Completion date Retail GFA (sq m) Bao an Center Haiya Mega Mall ,000 OCT and Mangrove Bay O Plaza ,000 Longgang Center V-Mall ,000 Futian CBD IA Mall ,800 Futian CBD CATIC Center ,000 Nanshan CBD Raffles City ,000 Nanshan CBD 1979 Shuiwan ,550 Bao an Center Cofco-property ,000 Futian CBD Shenzhen Center ,000 V-61

162 APPENDIX V SAVILLS RESEARCH REPORT 5) Foshan a) Overview of the city economy Map 10: Foshan s administrative divisions, district population and GDP contribution District 2012 permanent population 2012 GDP contribution ( 000) (%) 1 Chancheng District 1, Nanhai District 2, Shunde District 2, Sanshui District Gaoming District Source: CEIC, Savills Research Background Situated in the heart of the PRD, Foshan benefits from its location and plays a role as a transportation hub in both the PRD and Guangzhou-Foshan economic circle. Manufacturing is the dominant industry, contributing more than 60% of the city s total GDP. However, the dominating role of the manufacturing industry also constrains the development of tertiary industry. Following the government s plans to integrate all PRD cities, especially ties between Guangzhou and Foshan, an upgrade of the city s industrial structure is forthcoming. While previously dominated by inefficient state-owned enterprises, Foshan has seen a flourishing of private enterprises in recent years. The Foshan government wants to solidify its position as one of the leading manufacturing bases in Guangdong and plans to invest heavily in infrastructure such as transportation and energy. Macro economics Foshan is one of the most competitive cities in China due to the manufacturing industry s prominent role in the economy. The city shares Guangzhou s infrastructure and industry resources, such as IT, resulting in a strong growth momentum in GDP output. Meanwhile, emphasis on the appliances, F&B, textiles, metal materials and fine chemistry industries is another major economic driver. V-62

163 APPENDIX V SAVILLS RESEARCH REPORT In 2012, Foshan s GDP reached RMB670.9 billion, YoY growth of 8.2%, and its GDP per capita was RMB92,388, considerably higher than the PRD average and ranking in fourth place among its PRD peers. As the local economy matures, GDP growth has entered a stable growth period, with double-digit growth unlikely in the future. Foshan, while unlikely to continue generating the same pace of growth recorded at the start of the century, should still be able to record fairly steady growth rates. Many companies and individuals are increasingly looking at second-tier cities for opportunities. For companies, these cities present opportunities in terms of lower overheads and less competition for staff. For individuals, they present greater opportunities for growth and increasing responsibilities as well as potentially gainful employment closer to their families. Many of the senior staff in these bigger companies are likely to be employees who have worked in first-tier cities but are originally from the second-tier cities in question and would like to work closer to home, with local relationships and market knowledge. Figure 39: Foshan s GDP, GDP (Left Hand Side) RMB (billion) Real GDP Growth (Right Hand Side) YoY 25% % % % 200 5% % Source: CEIC, Savills Research Again, apart from a drop in GDP per capita in 2005 as a result of changes in the calculation methods, growth rates have remained fairly healthy. The highest growth rate in recent years was recorded in 2006 when GDP per capita grew at a nominal rate of 19.4%, while the slowest growth was in 2009 at a nominal rate of 5.4%. The CAGR for 2005 to V-63

164 APPENDIX V SAVILLS RESEARCH REPORT 2012 was 11.7%. Continued gains in productivity and new business inflows should help to push GDP per capita to new heights in coming years. Figure 40: Foshan s GDP per capita, ,000 RMB GDP per Capita (Left Hand Side) GDP per Capita Growth (Right Hand Side) YoY 25% 90,000 20% 80,000 70,000 15% 60,000 10% 50,000 5% 40,000 0% 30,000 20,000-5% 10,000-10% % Source: CEIC, Savills Research The city s permanent population by 2012 was 7.3 million, over 50% of which has moved from elsewhere in the country. More than 800,000 people are from Hong Kong and Macau. Similar to other PRD peers, the population growth reduction in recent years is primarily due to industrial structural changes, which have reallocated low-skilled workers to inland cities and further west in the country. Similar to Guangzhou, the precise reasons for the slower population growth rate in 2011 remain unknown. In common with Guangzhou, the decrease may be a consequence of a slowdown in the exports and manufacturing sectors, resulting from slower global economic growth and overcapacity, as well as automation and increasing competition from other Asian countries. V-64

165 APPENDIX V SAVILLS RESEARCH REPORT Figure 41: Foshan s permanent population, Permanent Population (Left Hand Side) Population Growth (Right Hand Side) 8,000 Thousand persons YoY 5.0% 7, % 6, % 3.5% 5, % 4, % 3, % 2, % 1.0% 1, % % Source: CEIC, Savills Research With gains in productivity and an increasingly employee-dominated labour market in recent years compared with the 1990s, disposable incomes have continued to rise. Disposable incomes increased at a nominal rate of 12.6% to RMB34,580 per annum in 2012, representing a nominal CAGR from 2005 to 2012 of 10.1%. V-65

166 APPENDIX V SAVILLS RESEARCH REPORT Figure 42: Foshan s disposable income per capita, ,000 RMB Disposable Income per Capita (Left Hand Side) Disposable Income Growth (Right Hand Side) YoY 14% 35,000 13% 30,000 12% 25,000 11% 20,000 10% 15,000 9% 10,000 8% 5,000 7% % Source: CEIC, Savills Research Not until 2011 did the growth in retail sales experience a significant slowdown. Retail sales in 2012 reached approximately RMB202 billion, YoY nominal growth of only 5% from the previous year, considerably lower than the nominal CAGR from 2005 to 2012 of 17.6%. The relatively weak growth momentum is due to the slowing domestic economy and possibly the higher inflation rate in 2011 of 5.5%. Despite a slowdown in sales in the last couple of years, retail sales are expected to pick up in the short term given the stabilising economic growth story, continued migration and substantial rises in disposable incomes over the last two years. Retail sales are anticipated to follow a similar trajectory to that of Guangdong Province, and slightly higher than the national average. Local shoppers consuming mass- to mid-end products will be the dominant driver of sales. V-66

167 APPENDIX V SAVILLS RESEARCH REPORT Figure 43: Foshan s retail sales, Retail sales value (Left Hand Side) RMB (billion) Retail sales growth rate (Right Hand Side) YoY 30% % % % % 40 5% % Source: CEIC, Savills Research Infrastructure and transportation There is no international airport in Foshan but the city is one hour away from Guangzhou Baiyun International Airport. Foshan is the connection point between the Guangzhou-Zhanjiang railway and the national railway network, as well as the Jingguang railway (Beijing-Guangzhou) and Jingjiu railway (Beijing-Kowloon). The city is also a stop on the Guangfo railway and the PRD Ring Expressway. At present, only one metro line, completed in 2010, is in operation between Guangzhou and Foshan. By 2020, there will be eight metro lines connecting Guangzhou and Foshan in the east and the west of the city, with a total length of over 250 km. Foshan has also invested RMB36 billion to construct an expressway network, including five expressways running north to south, nine running west to east and two ring roads. By 2012, the total length of the road system was 5,010 km. V-67

168 APPENDIX V SAVILLS RESEARCH REPORT Map 11: Foshan s current metro network Longhua Line Luobao Line Shekou Line Huanzhong Line Guangfo Line Kuiqi Rd Source: Savills Research Outlook Guangfo City Planning is the pilot programme for the integration of the whole PRD region, where Guangzhou and Foshan together are given a central role as one of the core cities. Foshan is therefore expected to undergo a period of rapid and significant economic development, making the city more vibrant and competitive. b) Overview of the retail property market A decade after the first landmark retail project was completed, Foshan s retail market development is now accelerating and becoming more diversified: older projects are being remodelled to adapt to the new retail environment, while new projects are very ambitious and are V-68

169 APPENDIX V SAVILLS RESEARCH REPORT targeting similar trade mixes and brands to those of first-tier cities. The combination of renovated older developments and new projects has created a very competitive environment. Main retail areas In Foshan, Zumiao, Jihua Road and Guicheng are the primary retail areas, while Chengnan is the emerging area located in the south of the city. Map 12: Major retail areas in Foshan Source: Savills Research Zhumiao is the traditional commercial city centre catering to local residents in Foshan, as well as tourists from Lingnan and Zhumiao, with mid- to high-end retail formats, including street shops, hypermarkets, department stores, shopping malls and shopping streets. Dongfang Plaza and Baihua Plaza are the leading projects in the area. The recent development of Lingnan Xintiandi will shift the target catchment from tourists to local consumers. V-69