HONG KONG MONTHLY RESEARCH NOVEMBER 2016 REVIEW AND COMMENTARY ON HONG KONG'S PROPERTY MARKET

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RESEARCH NOVEMBER 2016 HONG KONG MONTHLY REVIEW AND COMMENTARY ON HONG KONG'S PROPERTY MARKET Office Mega en-bloc office sales transaction recorded in Kowloon Residential Prices to remain stable despite raised Double Stamp Duty rate Retail Fashion brands downsizing in prime streets

MARKET HIGHLIGHTS Grade-A office leasing was slow in October, both on Hong Kong Island due to limited availablity and in Kowloon due to seasonal factors towards the year end. The sales market, however, remained active with another en-bloc deal recorded. The rise in the Double Stamp Duty rate is expected to drag down the number of residential sales transactions, but prices should remain steady due to strong end-user demand and a robust primary market. Further signs of stabilisation were witnessed in the local retail market, indicated by improved retail sales figures. If this trend continues, we expect the market to reach the bottom in the first half of 2017. TABLE 1 Economic indicators Economic indicator Period Latest reading 2013 2014 2015 GDP growth Q2 2016 +1.7%# +2.9% +2.3% +2.4% Inflation rate Sep 2016 +2.7% +4.3% +4.4% +3.0% Unemployment Jul-Sep 2016 3.4%# 3.3% 3.2% 3.3% Prime lending rate Current 5 5.25% 5%* 5%* 5%* Source: EIU CountryData / Census & Statistics Department / Knight Frank Research # Provisional * HSBC prime lending rate FIGURE 1 Grade-A office prices and rents Jan 2007 = 100 300 250 200 150 100 PRICE INDEX RENTAL INDEX 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Prime Office The Grade-A office leasing market remained quiet on Hong Kong Island, as leasing activities were limited by the lack of availability. Despite the low take-up, the Central vacancy rate remained at the very low level of 1.6%. There were not many large-scale leasing transactions in Kowloon last month, with companies slowing down their relocation or consolidation plans towards the year end. Given abundant office supply, landlords continued to increase their rental discounts and started offering more non-financial incentives to attract tenants. In the sales market, another mega en-bloc transaction was recorded in October. Swire Properties announced the sale of its Kowloon Bay project, now under construction, for HK$6.528 billion or HK$11,761 per sq ft, beating the previous record high set by One HarbourGate, which sold for HK$5.85 billion, becoming the largest office transaction ever in Kowloon. Looking ahead, we expect office rents in core business areas to remain high in the next few months, with vacancy rates staying low in most major business districts. Tight availability on Hong Kong Island is expected to linger until 2018, when major projects such as One Taikoo Place in Island East are completed. 2

HONG KONG MONTHLY RESEARCH FIGURE 2 Luxury residential prices and rents Jan 2007 = 100 190 PRICE INDEX 170 150 130 110. 90 70 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FIGURE 3 Retail property prices and rents Jan 2007 = 100 400 PRICE INDEX 350 300 250 200 150 100 RENTAL INDEX RENTAL INDEX Residential In October, Hong Kong s residential market remained active, with sales volume reaching 6,601 units, doubling the level of a year ago, according to the Land Registry. Home prices rose for the sixth consecutive month, representing cumulative growth of 8.9% from April to October, according to Rating and Valuation Department. The primary sector continued to dominate, with several new developments oversubscribed in October. Alto Residences in Tseung Kwan O, for instance, sold over 98% of its 363 units in the first batch of sales, while 2gether in Tuen Mun sold over 74% of its 222 units on the first day of launch. The super-luxury sector remained strong, with a high-floor unit in Mount Nicholson on the Peak selling for HK$749 million, or HK$85,000 per sq ft, making it the most expensive flat in the project. Mainland developers remained active in Hong Kong s land sales market. One acquired a residential site in Kai Tak last month for an accommodation value of as high as HK$13,500 per sq ft, nearly doubling the market evaluation. To reign in rises in home prices, the government raised the Double Stamp Duty rate to 15% in early November. The policy is expected to push investors into non-domestic sectors and homebuyers to the primary market, with developers offering various sweeteners to compensate for the tax payment. This, combined with seasonal effects, is expected to slow down residential sales in November and December. Home prices, however, look to remain stable until the end of the year. Retail Retail sales value in Hong Kong fell only 4.1% in September, the smallest drop since October last year. The sales value of clothing, footwear and allied products actually increased by 1.5% year on year (YoY), the largest growth since March 2015. The sales value of jewellery, watches and clocks, and valuable gifts decreased 12.3% YoY, improving from a 26.5% slump in August. Retailers continued with their downsizing plan, however, with fashion brands continuing to downsize or close their prime street stores. For instance, US fast-fashion retailer Forever 21 has joined other fashion labels, such as Coach and GAP, in closing its prime street, multi-storey flagship store in Capitol Centre, Causeway Bay, next August when its lease expires. The store will reportedly be taken up by Victoria Secret, an American lingerie retailer, at a monthly rental of HK$7 million, about a 50% discount from the current rent. Looking ahead, fashion and hard luxury brands are expected to continue downsizing in prime streets amid fewer visitor arrivals. Restaurant operators and retailers of consumables are set to continue absorbing the space, taking advantage of falling prime street shop rents. However, if the recent signs of stabilisation in inbound tourism and retail sales prove sustainable, prime street shop rents should reach the bottom in the first half of 2017. 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Rating and Valuation Department / Knight Frank Research Note: Provisional figures from May to Oct 2016 3

SNAPSHOT PRIME OFFICE A number of major office sales transactions were registered in Wan Chai last month. A lingerie company leased 20,000 sq ft of office space in Goldin Financial Global Centre in Kowloon Bay in October. TABLE 2 Selected office sales transactions District Building Zone Sheung Wan Wan Chai Shun Tak Centre Bank of East Asia Harbour View Centre Gross floor area (sq ft) Price (HK$ million) Price (HK$ per sq ft) Mid 2,559 $73 $28,527 Mid 7,857 $147.8 $18,814 Wan Chai Tesbury Centre Mid 4,109 $71.5 $17,401 Tsim Sha Tsui New Mandarin Plaza Tower A Mid 3,396 $33 $9,717 Source: Economic Property Research Centre TABLE 3 Selected office leasing transactions District Building Zone Floor area (sq ft) Kowloon Bay Goldin Financial Global Centre Mid 20,000 (G) Wan Chai Three Pacific Place Mid 10,891 (L) Tsim Sha Tsui Miramar Tower High 10,424 (G) Central Cheung Kong Center Low 10,220 (L) G: Gross; L: Lettable 4

HONG KONG MONTHLY RESEARCH SNAPSHOT Grade-A office rents increased or remained stable in most major districts last month. TABLE 4 Month-on-month movement in Grade-A office rents (Oct 2016) Central / Admiralty Wan Chai / Causeway Bay North Point / Quarry Bay Tsim Sha Tsui Kowloon East Grade-A office prices increased in all major business districts in October. TABLE 5 Prime office market indicators (Oct 2016) Net effective rent Price (Gross) District Premium Central Traditional Central Overall Central HK$ psf / mth M-o-M Q-o-Q Y-o-Y HK$ psf M-o-M Q-o-Q Y-o-Y $175.6 0.4% 1.2% 7.1% n/a n/a n/a n/a $124.1 1.1% 1.6% 8.8% n/a n/a n/a n/a $141.9 0.8% 1.5% 8.1% $29,902 2.2% 6.2% 10.4% Admiralty $100.0 0.0% 0.6% 8.0% $25,475 2.0% 9.1% 13.0% Sheung Wan $75.5 0.0% 0.1% 0.5% $22,035 3.1% 6.8% 9.1% Wan Chai $69.3 0.7% 0.4% 1.8% $22,322 2.1% 8.7% 12.9% Causeway Bay $77.0 0.1% 0.0% 2.6% $22,479 1.0% 1.0% 10.8% North Point $49.4 0.0% 0.0% 0.1% n/a n/a n/a n/a Quarry Bay $56.0 0.0% 0.0% 0.0% n/a n/a n/a n/a Tsim Sha Tsui Cheung Sha Wan $62.7-1.0% -1.9% -0.3% $13,526 0.9% 2.6% 5.2% $29.1 1.7% 1.7% 0.3% n/a n/a n/a n/a Hung Hom $32.3 3.6% 3.6% 1.3% n/a n/a n/a n/a Kowloon East Mong Kok / Yau Ma Tei $33.8 0.3% -1.1% -1.5% $12,019 0.8% 5.3% 7.8% $52.7 0.5% 1.1% 1.4% n/a n/a n/a n/a Note: Rents and prices are subject to revision. 5

SNAPSHOT RESIDENTIAL A number of major luxury residential sales transactions were recorded in Mid-Levels West last month. A number of large units were leased in traditional luxury residential districts in October. TABLE 6 Selected residential sales transactions District Building Floor / unit Island South Shouson Peak The Peak Mount Nicholson Phrase 2, Tower A 17th floor / unit G Saleable area (sq ft) Price (HK$ million) Price (HK$ per sq ft) 2,931 $228.42 $77,932 8th floor 4,566 $350.4 $76,739 Mid-Levels West Cluny Park 10th floor / unit B 2,201 $96.3 $43,736 Mid-Levels West Alassio 48th floor 2,851 $117.8 $41,319 Source: Economic Property Research Centre TABLE 7 Selected residential leasing transactions District Building Tower / floor / unit Saleable area (sq ft) Monthly rent (HK$) Monthly rent (HK$ per sq ft) The Peak King s Court House 3,165 205,000 $64.8 Happy Valley Island South Island South Mid-Levels The Altitude Repulse Bay Garden Redhill Peninsula Garden Terrace High floor / unit B 1,450 75,000 $51.7 High floor 1,513 70,000 $46.3 Tower 2 / high floor / unit B Tower 2 / high floor / unit B 1,401 55,000 $39.3 2,580 90,000 $34.9 6

HONG KONG MONTHLY RESEARCH SNAPSHOT In September, rents remained stable in all major luxury residential districts. TABLE 8 Month-on-month s in luxury residential rents (Oct 2016) The Peak Island South Mid-Levels Jardine s Lookout / Happy Valley Pokfulam Island South led the market in luxury home price growth last month. TABLE 9 Luxury residential market indicators (Oct 2016) Rent Price District HK$ psf / mth M-o-M Q-o-Q Y-o-Y HK$ psf M-o-M Q-o-Q Y-o-Y The Peak $60.4 0.0% -0.1% -8.4% $40,091 0.0% 2.7% -1.6% Island South Mid- Levels Jardine s Lookout / Happy Valley $49.6-0.3% 0.3% -4.2% $30,941 4.6% 10.2% 8.7% $51.8 0.0% 0.0% -0.1% $27,060 2.2% 7.2% 2.2% $48.3 0.0% 0.0% -0.1% $25,369 0.7% 2.3% -3.7% Pokfulam $36.8 0.0% 0.0% -0.1% $22,967 0.9% 5.7% -5.8% Note: Rents and prices are based on saleable area and are subject to revision. 7

SNAPSHOT RETAIL The retail property sales market was active in October. A number of street shops were leased in prime streets last month. TABLE 10 Selected retail sales transactions District Building Floor / unit Yuen Long Yuccie Square shopping arcade Ground floor / units 10-19 Saleable floor area (sq ft) Price (HK$ million) Price (HK$ per sq ft) N/A $500 N/A Causeway Bay 87 Percival Street Ground floor N/A $250 N/A Wan Chai Zenith shopping arcade Units B1-B3 and B5 N/A $321.16 N/A Wan Chai Zenith shopping arcade Units A1-A3 and A5-A6 N/A $186.62 N/A Source: Economic Property Research Centre TABLE 11 Selected retail leasing transactions District Building Floor / unit Saleable floor area (sq ft) Monthly rent (HK$) Monthly rent (HK$ per sq ft) Causeway Bay Central Mong Kok Mong Kok Po Hon Building Yip Fung Building Yau Shing Commercial Centre Grancastle Commercial Centre Ground floor / unit B Ground floor / unit 14 Ground floor / units C-D 705 $288,000 408.5 1,583 $320,000 $202.1 N/A $900,000 N/A Ground floor N/A $760,000 N/A Source: Economic Property Research Centre G: Gross 8

HONG KONG MONTHLY RESEARCH SNAPSHOT Prime street shop rents fell in all major retail districts in October. TABLE 12 Month-on-month movement in prime street shop rents (Oct 2016) Central Causeway Bay Tsim Sha Tsui Mong Kok Total retail sales value decreased 4.1% year on year to HK$33.8 billion in September. TABLE 13 Retail sales by outlet type (Sep 2016) Outlet Value (HK$ billion) Share of total % M-o-M Q-o-Q Y-o-Y Jewellery, watches and clocks, and valuable gifts Clothing, footwear and allied products $5.2 15.5% -9.1% -4.2% -12.3% $3.9 11.7% -6.0% -12.6% 1.5% Department stores $3.5 10.2% -2.0% 4.4% -2.4% Fuel $0.8 2.3% 1.8% -2.3% 0.4% Food, alcoholic drinks and tobacco (excluding supermarkets) Consumer durable goods $4.0 11.7% 14.7% 36.6% -3.1% $5.9 17.6% 23.7% 17.2% -9.3% Supermarkets $4.4 12.9% -2.3% 1.1% -0.4% Others $6.1 18.0% -12.6% -16.9% 1.2% All retail outlets $33.8 100.0% -0.5% 0.2% -4.1% Source: Census and Statistics Department / Knight Frank Research 9

RESEARCH & CONSULTANCY David Ji Director Head of Research & Consultancy Greater China +852 2846 9552 david.ji@hk.knightfrank.com Pamela Tsui Senior Manager Research & Consultancy Greater China +852 2846 4843 pamela.tsui@hk.knightfrank.com CONTACTS Alan Child Chairman +852 2846 9522 alan.child@hk.knightfrank.com Piers Brunner Chief Executive Officer Greater China +852 2846 4848 piers.brunner@hk.knightfrank.com Paul Hart Executive Director Greater China +852 2846 9537 paul.hart@hk.knightfrank.com Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide, including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs. RECENT MARKET-LEADING RESEARCH PUBLICATIONS Alnwick Chan Executive Director +852 2846 9551 alnwick.chan@hk.knightfrank.com CHINA VALUATION Clement Leung Executive Director +852 2846 9593 clement.leung@hk.knightfrank.com COMMERCIAL AGENCY Ross Criddle Senior Director +852 2846 9527 ross.criddle@hk.knightfrank.com RESIDENTIAL AGENCY Renu Budhrani Executive Director +852 2846 9550 renu.budhrani@hk.knightfrank.com Prime Global Cities Index Q2 2016 Global Cities 2017 The Wealth Report Chinese Outbound report Knight Frank Research Reports are available at KnightFrank.com/Research RETAIL SERVICES Helen Mak Senior Director Head of Retail Services +852 2846 9543 helen.mak@hk.knightfrank.com Knight Frank 萊坊 2016 Knight Frank Petty Limited Knight Frank Hong Kong Limited Disclaimer This document and the material contained in it is general information only and is subject to without notice. All images are for illustration only. No representations or warranties of any nature whatsoever are given, intended or implied. Knight Frank will not be liable for negligence, or for any direct or indirect consequential losses or damages arising from the use of this information. You should satisfy yourself about the completeness or accuracy of any information or materials. Copyright This document and the material contained in it is the property of Knight Frank and is given to you on the understanding that such material and the ideas, concepts and proposals expressed in it are the intellectual property of Knight Frank and protected by copyright. It is understood that you may not use this material or any part of it for any reason other than the evaluation of the document unless we have entered into a further agreement for its use. This document is provided to you in confidence on the understanding it is not disclosed to anyone other than to your employees who need to evaluate it. 10