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Think Tank of Deutsche Bank GroupDr. Tobias Just

Berlin, June 5, 2008

Real Estate Investments in China

and India: Big returns in bigcountries?

ULI Germany

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Dr. Tobias Just June 5, 2008 Page 2

Contents

Development of residential property22

11Macroeconomic environment

Commercial real estate33

Be aware of the specific risks44

Concluding remarks55

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China and India: The giants have awoken

Relative shares (2007)

of world population

CN 19.8%

IN: 16.6%

Euroland: 4.9%

of nominal GDP CN: 6.9%

IN: 2.4%

Euroland: 22%

of world trade

CN 7% IN: 1.4%

Euroland: 22%

11 Macroeconomic environment

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China and India: Economic outperformers

Both China and India benefit

from globalisation (more trade,more capital imports andsignificant knowledge transfers)which has been pushing upgrowth rates

Though it is unlikely that double-digit growth rates will besustained in the future, bothcountries will continue to posteconomic expansion

11

0

2

4

6

8

10

12

96 98 00 02 04 06 08 10

China India Euroland

Slightly lower growth aheadReal GDP, % yoy

Sources: National statistical offices, DB Research

Macroeconomic environment

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Globalisation is a key driver of growth

11

0 100 200 300 400

Taiwan

Hong Kong

Philippines

Thailand

Singapore

Indonesia

Malaysia

Korea

India

China

Asia-10

World trade Trade with Germany

More trade...Exports + Imports, 2000-2007, %

Sources: IMF, Nat. statistics, DB Research

Macroeconomic environment

53

47

5560

6974

3 2 4 6 78

0

10

20

30

40

50

60

70

80

02 03 04 05 06 07

China India

and more capital flowsAnnual net FDI flows, USD billion

Source: DB Research

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Good long-term prospects

True, both China and India are

still running short of highly-skilledemployees

But, this implies a strong leveleffect in the future: OECDexpects strong rise in average

education in India and China and good education is the basefor sustainable long-term growth


0

2

46

8

10

12

14

16

India

China

S.

Africa

Thailand

Spain

S.

Korea

France

Germany

USA

0

5

1015

20

25

30

35

40

45

Average years of education in 2005 (left)

Change in years of education 2005-2020, % (right)

Sources: OECD, DB Research

Differing education standards

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Favourable demographics are important driver

50

55

60

65

70

75

1970 80 90 00 10 20 30 40 2050

India China

Working age population to peaksoon in China - but not in IndiaPopulation 15-65 yrs, as % of total

Source: UN Population Division

22 Development of residential property

0

300

600

900

1200

1500

1800

1970 80 90 00 10 20 30 40 2050

India China

The two giants continue growingPopulation (million)


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China and India: Economic outperformers

Share of urban population is set

to rise from 40% today to morethan 70% in China (in 2050) andfrom less than 30% today toroughly 55% in India (in 2050)

According to UN statistics there

are currently already nearly 100Chinese cities with more than 1million inhabitants and 40 citieswith more than 1 millioninhabitants in India

Each year the number of urbanresidents in India rises byroughly 15 million (in China, too,the ranks of urban residentsswell by 15 million every year)

0

200

400

600

800

1000

1200

1950 1975 2000 2025 2050

China rural China urban

India rural India urban


Cities expandPopulation (million)


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More dwellings needed urgently


0 50 100 150

India

China

Constant household size Declining household size

Number of households countsNumber of additional households,

2005-2025, (million)

Sources: National Statistical offices, Global Insight

2.7

2

1.2

6.9

2.8

2.8

1

0 2 4 6 8 10

Population

growth

Replacement

demand

Shortage of

supply

Smaller

households

Total

Demand for new housing in India

Source: DB Research

New housing units 2005-2025, (million p.a.)

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Strong price increases

Average house price growth of

10% in Beijing, 13% in Shanghaiand almost 16% in Mumbai

Note: Ireland and Spain haveseen similar increases for anumber of years with significantly

lower pent-up demand and lowereconomic growth

But, interest rates have gone up(particularly in India), whileaffordability has deteriorated

RBI has repeatedly warnedabout asset inflation and someagents have even reported pricecuts in some submarkets


0

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007

Shanghai Beijing Mumbai

House prices soarHouse prices, 2001=100, local currency

Sources: JLL, KnightFrank

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Second largest real estate market in Asia

Source: RREEF Research

Scale of Key Asian Real Estate Markets, USD billion

33 Commercial real estate

0

200

400

600

800

1000

1200

1400

1600

Japan

China

Australia

SouthKorea

Taiwan

India

HongKong

Singapore

Thailand

Malaysia

0%10%

20%

30%

40%

50%60%

70%

80%

90%

100%Investible Stock (LHS) Owner-Occupation Ratio (RHS)

USD

billio

n

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Wuhan

Tianjin

SuzhouHangzhou

Wuxi

Chongqing

Qingdao

Chengdu

Dalian

Nanjing

Dalian

-Port, trade, industry and tourism city-IT hub and emerging BPO-Attractive to Japanese investors

Wuhan

-Economic center of Hubei Province-Transportation/distribution hub in centralChina linking the east and west China-Biggest steel industry, expansion intohigh-tech

Tianjin-Tianjin Bin Hai New District (similar toPudong in Shanghai) economic centre inNorth China (free trade zone)

-Ground for new financial products-Manufacturing and freight hub-Improving linkages with Beijing

Qingdao-Port, electrical and chemical industry,and tourism city

-Attractive to Korean investors

Nanjing-Capital of Jiangsu Province-Key R&D and industrial city in YRD

-Large supply of skilled workers

Wuxi-Manufacturing hub in YRD-Key industries: electronics & IT,chemical, bioengineering and

pharmaceuticals

Suzhou-Major high-tech and manufacturing hubin YRD-Proximity to Shanghai-Favoured FDI destination

Chongqing-Target city of Go West Policy-Heavy industry base in southern China-Large population base and freight center

Hangzhou-Economic and political center ofZhejiang Province

-Improving linkages with Shanghai-Tourism and IT city in YRD

Chengdu-Target city of Go West Policy-Commercial and economic hub of southwest China

-IT, R&D and high-tech industry hub

Source: RREEF Research

Growth drivers for Tier-2 Cities

New economic centres developing (example China)


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Offices are becoming scarce

0

100

200

300

400

500

600

700

800

900

1000

2000 2001 2002 2003 2004 2005 2006 2007


Rents rising - esp. in MumbaiPrime office rents, USD psm p.a.

Sources: JLL, RREEF


4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007


Yield compression in ChinaPrime office yields, %

Sources: JLL, RREEF

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Strong income growth = strong retail sales growth

Strong economic growth creating

a new middle class India is considered the most

interesting retail target market(AT Kearney)

Institutional retail will gain in

India, China has already reachedhigh level

Pent-up demand especially inTier-2 cities

Only a few locations are sufferingfrom oversupply

0 500 1000 1500 2000 2500

Chennai

Bangalore

Beijing

Mumbai

Delhi

Shanghai

2007

2006

Retail space becoming expensivePrime retail space, USD psm p.a.

Source: JLL


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It may take time to start and to get justice

0

20

40

60

SG HK KR DE MY TH IN CN TW VT PH ID

Days Numbers of procedures

105

Starting a new business

Source: World Bank Doing Business Indicators 2008

44 Be aware of specific risks

0

20

40

60

SG HK KR VT DE CN TH TW ID MY PH IN

Months Number of procedures

Enforcing contracts

Source: World Bank Doing Business Indicators 2008

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Data? What data?

Though it is much easier to get

good data on Chinese and Indianreal estate markets, the qualityand stability of the data cannotbe compared to US or Europeanstandards

Even for some Tier-1 cities it isdifficult to find reliableinformation on vacancy rates,rents, yields, transaction volumesetc.

44

3.23.43.63.84

India

China

2006

2004

Transparency improvedJLL real estate transparency index

Source: JonesLangLasalle

Lower values indicate a more transparent market.

Values between 3 and 4 show a semi to low transparency level.

x-axis is inverted.

Be aware of specific risks

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Six assertions

Investment volumes are still very low. This willInvestment volumes are still very low. This will

change rapidly in the next few yearschange rapidly in the next few years

All commercial real estate segments continueAll commercial real estate segments continue

to boomto boom TierTier--2 cities will gain particularly2 cities will gain particularly

Strong residential demand growth expectedStrong residential demand growth expected

dangerous exaggerations can occurdangerous exaggerations can occur

LongLong--term growth prospects remain very goodterm growth prospects remain very good

An international real estate investor MUSTAn international real estate investor MUST

have an opinion on China and Indiahave an opinion on China and India

Mind the specific risks: Low levels of liquidityMind the specific risks: Low levels of liquidity

and transparency command higher riskand transparency command higher risk premiapremia


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Further information (selection) www.dbresearch.com

1) Housing portfolios in Germany: Scene set for further divestment (2005)2) Building up India: Outlook for Indias real estate markets (2006)3) German retail property: Opportunities despite oversupply (2006)4) US house prices declining: Is Europe next? (2006)

5) What can Europe learn from US REITs. Lessons from the ivory towers (2006)6) German office markets Cyclical upswing, structural differences (2007)

7) Property derivatives marching across Europe (2007)8) Housing finance in Germany: Four major trends (2007)9) The real estate sector in relation to monetary policy (2007)10) 450 bn reasons to invest in Indias infrastructure (2008)11) Megacities: Boundless growth? (2008)12) Stadtrendite: wirklich von Nutzen? (2008, German only)

55 Concluding remarks

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Copyright 2008. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please citeDeutsche Bank Research.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of theauthor, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change withoutnotice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The aboveinformation is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty orrepresentation is made as to the correctness, completeness and accuracy of the information given or the assessments made.

In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt fr Finanz-dienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member ofthe London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information isdistributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by DeutscheBank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. InAustralia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this reportand consider the PDS before making any decision about whether to acquire the product.

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