Research Asia Pacific Real Estate Strategic Outlook March 2012

7/30/2019 Research Asia Pacific Real Estate Strategic Outlook March 2012

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RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012 i

Table of Contents

Executive Summary ............................................................................. 1 The Economy ....................................................................................... 3 Real Estate Capital Flows .................................................................... 8 Regional Property Markets ................................................................. 11 Conclusion ......................................................................................... 34 Important Notes .................................................................................. 38 Global Research Team ...................................................................... 39

Prepared By:

Mark Roberts

Global Head of Research

[email protected]

Koichiro (Ko) Obu

DirectorHead of Research, J apan & [email protected]

Leslie ChuaVice PresidentHead of Research, Asia Pacific ex Japan& [email protected]

Orie EndoAssistant Vice [email protected]

Edward HuongAssistant Vice President

[email protected]

Paul KeoghChief Investment Officer, Asia [email protected]

mailto:[email protected]




RREEF REAL ESTATE Asia-Pacific Real Estate Strategic Outlook | March 2012 1

Executive Summary

External Environment

The Asia Pacific region continues to outperform the rest of the world even as the EU debt

crisis and anaemic growth in the United States pose external challenges. After reporting

stellar growth in 2010, expansion slowed in 2011 for many key exporting nations in the

Asia Pacific region including China. The much anticipated structural changes that

economists were forecasting for many Asian countries —the transition from exports to a

greater reliance on domestic consumption—has been slow to occur despite rising

incomes and a general improvement in the standard of living for many middle class

residents. Renewed concerns of a potential banking crisis in Europe have also started to

impact funding, with some analysts even predicting a repeat of the global financial crisis in

2012. Many Asia Pacific nations, however, have enough tools, including reserves and

fiscal policies, to address these external disruptions.

For most of 2011, the Asia Pacific real estate markets battled asset price inflation,

particularly in the residential sector. Credit tightening measures included several rounds of

hikes in interest rates and down payments. However, as the Eurozone debt crisis began

to unfold in the second half of 2011, many central banks took a 180 degree turn with

policy rates. Australia, Indonesia, and Thailand were among those to adopt more

accommodative rate policies to support economic growth as manufacturing and exports

started to slow.

Outlook for Real Estate Returns

Economic obstacles aside, commercial real estate in general outperformed for most of

2011. Markets in the Greater China region, including Beijing, Hong Kong, and Shanghai,

reported strong take-up, higher rents, and low vacancies. Singapore, Sydney, and

Melbourne witnessed a tightening of vacancies resulting in higher rents. Recovery in Tokyo has been pushed back due to lacklustre demand. In Seoul, supply concerns

continued to impact rents. Both Tokyo and Seoul are expected to bottom out in 12 to 18

months

Performance in the region’s industrial and retail markets, especially those in Hong Kong

and Shanghai, saw a sharp turnaround in fundamentals and a burst in rental growth as

vacancies trended lower. China’s growing middle class has not only benefited domestic

retail sales in the key cities like Beijing and Shanghai, but also cross-border tourism to

Hong Kong, Singapore, and even Thailand. E-commerce has also had a positive impact

on modern distribution centres and warehousing in J apan, Korea, Australia, and

Singapore, offsetting slower growth in manufacturing and exports.

Given the more subdued economic environment in the latter half of 2011, real estate

performance in the region will likely be moderate in the first half of 2012. Value growth will

be subdued given the external environment and the trade links to the West.

Fundamentally, RREEF Real Estate does not foresee any major corrections but more of a

cooling off as returns revert to more sustainable levels. By 2013, the region’s economies

should be expanding again at or above trend, creating an environment for returns to begin

rising.




Strategic Recommendations

▪ Office: Demand for office space weakened in the latter half of 2011. Funding for

development is still tight, suggesting that new supply will remain in check. The higher

yields in Australia and typically longer leases will continue to attract core investors.

Assets in J apan and Korea provide healthy yield spreads, suggesting relatively good

risk-adjusted returns.▪ Retail: Prime retail is more vulnerable to consumer sentiment and is expected to

grow at below trend. We favour suburban retail with a strong residential catchment

which is more localised and less dependent on non-discretionary spending.

▪ Industrial: This sector appears to be relatively resilient so far. The longer leases and

typically higher yields have made this property type more appealing. The proliferation

of e-commerce points to higher demand for modern distribution centres and

warehousing.

▪ Residential: Decreasing transaction volumes point to price softening, especially in

the luxury sector. The curbs imposed by the Chinese, Hong Kong, and Singaporean

governments to tame inflated prices appear to be taking effect. We do not expect the

mass market to be impacted by those measures given the higher urbanisation ratesand steady income growth. Thus, opportunistic investors may wish to scout for niche

opportunities.

▪ More Vulnerable Markets: A strong reliance on finance and trade in Hong Kong and

Singapore should not steer investors towards overly pessimistic positions in these

markets. These two office markets have previously posted fairly strong rebounds

following major downturns: 1999 to 2000 (post-Asian Financial Crisis), 2004 to 2007

(post-Severe Acute Respiratory Syndrome) and 2009 to 2010 (post-global financial

crisis). Competition is keen, so the window of opportunity may be fleeting.

▪ Investment Risk: These markets include China and Southeast Asia. Structuring

and tax issues remain a major hurdle to investing in some of these countries.

Considering the higher investment risk of investing in emerging markets, these

markets offer some of the better return potential given their growing importance to

the region and the rest of the world. Indonesia is expected to be one of the fastest

growing economies in Asia in 2012, helped by strong macro fundamentals and

surging investment. Moody’s Investor Service also restored the country to

investment-level status for the first time since the Asian financial crisis.

▪ Distressed Investing: In China, cash-starved developers are becoming desperate.

Beijing has taken an array of measures to rein in the luxury residential property

market. Residential property prices fell for the fifth consecutive month in J anuary

2012. Chinese banks extended a total of RMB 1.26 trillion in new loans to property

developers and home buyers in 2011, down 38 percent from 2010. The funding gapwill create opportunities as growth and urbanisation will support residential demand

especially for mass housing. Price corrections provide a good re-entry point.




The EconomyGrowth in the Asia Pacific region will slow in 2012 in response to the European debt crisis

and the fragile expansion in the United States. For export-oriented or higher-beta

economies -including Hong Kong, Singapore, and Taiwan - external disruptions will

inevitably cut into headline growth.

Exhibi t 1.1 — Real GDP growth (%)

As of December 2011

e =estimate; f =forecast. There is no guarantee the forecast returns shown will materialise.

Sources: DB Global Markets, Asia Economics Monthly

The good news is that Asian policy makers have sufficient tools, both fiscal and monetary,

to partly offset any economic drags coming from the West. Domestic demand has also

supported Asia’s post-global financial crisis rebound, especially in the larger emerging

economies. Strong government, household, and corporate balance sheets will help ease

the process of recovery if the region is hit by slower global growth. Many Asia Pacific

governments are shifting their priorities toward supporting growth. Australia, Indonesia

and Thailand have already introduced back-to-back interest rate cuts in recent months.

Nevertheless, fears of contagion have continued to grip markets. The Eurozone debt

woes have shaken confidence in the global recovery, with world financial markets taking a

beating in the latter half of 2011 and with global economic forecasts being scaled back. As

growth slows, inflationary pressures will abate. With inflationary pressure easing across

the Asia Pacific region and with the external environment turning increasingly hostile,

more central banks in the region could implement rate cuts in 2012. Having been slow to

raise interest rates following the global financial crisis, most economies are now seeing

falling real interest rates. Indeed, real policy rates are negative in China, Hong Kong,

Singapore, South Korea, Thailand, and Vietnam.

Exhibit 1.2 — Inflation and 10-year government bond rates

As of December 2011


Sources: DB Global Markets, Asia Economics Monthly

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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Singapore Taiwan China Thailand Philippines Malaysia Hong Kong SouthKorea

Indonesia J apan Australia

Real GDP Growth

-2%

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6%

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12%

2 0 1 0

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2 0 1 3 f

2 0 1 0

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2 0 1 3 f

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

Indonesia Philippines China Thailand SouthKorea

Australia Singapore Hong Kong Malaysia Taiwan J apan

Inflation Long Term Interest Rate




Exports and manufacturing—two key components of many Asian economies—have also

witnessed a steady decline in the latter half of 2011, reflecting the troubles of Europe and

the sluggish growth in the United States. But this has been offset by stronger intra-Asian

trade. Despite layoffs in the financial services and manufacturing sectors, unemployment

remains fairly low when compared to the United States and Europe.

Exhibit 1.3 — Export and import growth of Asia Pacific countries

As of J anuary 2012

e =estimate; f =forecast. There is no guarantee the forecast returns shown will materialise.Sources: IHS/Global Insight

Exhibit 1.4 — Unemployment rates of Asia Pacific countries

As of J anuary 2012


Sources: IHS/Global Insight

With risks to both growth and inflation weighted to the downside, Asian currencies have

less room to climb. In fact, the Singapore government has acted to ease monetary policy

by slowing the pace of appreciation of its currency. Likewise, with inflation below 5 percent

in China, there will be less support for the renminbi to appreciate as an anti-inflationary

policy. Also, with China’s growth slowing, renminbi appreciation could be seen as

counter-productive when the central government may be trying to provide some support to

growth.

Exhibit 1.5 — Asia Pacific currencies against the US dollar and the euro

As of J anuary 2012


Sources: IHS/Global Insight

-10%

0%

10%

20%

30%

40%

50%

2 0 1 0

2 0 1 1 e

2 0 1 2 f

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2 0 1 3 f

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2 0 1 2 f

2 0 1 3 f

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

Indonesia China Thailand Malaysia South Korea Philippines J apan Singapore Hong Kong Australia Vietnam

Imports (YoY) Exports (YoY)

0%1%2%3%4%5%6%7%8%

2

0 1 0

2 0

1 1 e

2 0 1 2 f

2 0 1 3 f

2

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0 1 0

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2 0 1 3 f

2

0 1 0

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1 1 e

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2 0 1 3 f

Philippines Indonesia Australia Taiwan J apan Hong Kong China Malaysia Vietnam Singapore Thailand

-10%

-5%

0%

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15%

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25%

2 0 1 0

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2 0 1 3 f

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

Australia Malaysia Thailand Singapore Philippines Taiwan Indonesia China SouthKorea

Hong Kong Vietnam

Exchange Rate vs USD Exchange Rate vs EURAppreciationagainst USD

or EUR

Depreciationagainst USD

or EUR




Regional Overview

Japan: After two straight quarters of contraction following one of the worst earthquakes

on record, gross domestic product (GDP) in J apan increased at an annualised rate of 5.6

percent in the three months ending September 2011. Threatened by slower global growth

and a rising yen near post-war highs against the U.S. dollar, Prime Minister Yoshihiko

Noda ordered a fourth supplementary budget worth around 2 trillion yen to shore updemand in the world’s third-largest economy.

South Korea: Expansion has recently been fuelled by exports and has been broadly in

line with expectations. The country reported an annual rate of export growth of 11.9

percent year-to-date (YTD) in the third quarter of 2011 while private consumption

expanded at 2.7 percent and investment contracted by 1.7 percent from the previous

period.

China: The economy grew at its weakest pace in 2½ years in the fourth quarter of 2011

at 8.9 percent. The latest GDP figure is a further indication that the economy is heading

towards a soft landing, and that was followed by more subdued industrial output and retail

sales figures. The slightly more modest fourth quarter expansion follows growth of 9.1

percent in third quarter of 2011 and 9.5 percent in second quarter of 2011. Full-year

economic growth slowed to 9.2 percent from 10.4 percent in 2010.

Hong Kong: After expanding by 5 percent in 2011, economic growth is forecast to cool to

between 1 and 3 percent in 2012 reflecting concerns about the Eurozone and US

economies. The Hong Kong economy grew 0.3 percent in the fourth quarter from the

previous three months, or 3 percent year-on-year. Inflation may slow to 3.5 percent in

2012, compared to 5.3 percent in 2011. Hong Kong will spend nearly HK$80 billion, or

US$10 billion to boost growth. The measures, which include tax benefits, are expected to

boost GDP by 1.5 percentage points in 2012.

Singapore: The island state’s economy shrank for the second time in three quarters,

highlighting Asia’s vulnerability to the European debt crisis even as manufacturing

strengthens in China. GDP fell an annualised 4.9 percent in the fourth quarter of 2011

from the previous three months, when it climbed a revised 1.5 percent. The economy

grew 4.8 percent in 2011 and may expand between 1 and 3 percent in 2012 according to

latest government forecast.

Aust ral ia: The economy in Australia grew faster in 2011 on consumer spending and

mining-driven investment. Australia’s economy is being stimulated by a resource bonanza

as China increased demand for minerals and energy. GDP rose 1 percent in the three

months ending September 2011, after growing a revised 1.4 percent the prior quarter, the

fastest pace in four years. Compared with a year earlier, the economy expanded 2.5

percent in the third quarter.

Credit Conditions

Credit markets have remained volatile, due to on-going uncertainty surrounding the

Eurozone debt crisis, a possible recession resulting from fiscal austerity measures,

increased capital requirements for European banks, and the downgrade of sovereign debt

of many member states. This contributed to a significant widening of Eurozone sovereign

and bank credit default swap (CDS) spreads—in some instances, to levels wider than at

the depth of the last crisis—in 2007/2008. Thus, rather than being contained to one or twocountries at the Eurozone periphery, fears of contagion have spread to the larger




Eurozone economies of Italy and Spain—and even to the heart of Europe, where France

and Germany have also seen credit spreads widen significantly. What is occurring in

Europe implies volatility in sentiment of risk on / risk off trade impacts in the Asia Pacific

region. As a result of volatile sentiment, risk premiums are elevated. In certain markets,

investors may be compensated for this risk through higher initial yields.

Exhibit 1.6 — Policy rates in major economies

As of 9 February 2012

Sources: Bloomberg; RREEF Real Estate

Exhibi t 1.7 — CDS spreads in the US and selected European economies, 2008 – 2012


Sources: Bloomberg; RREEF Real Estate

In short, there is no denying the vulnerability the Asia Pacific region faces from both a

fundamental and a market standpoint. In China, there are concerns that the bursting of a

property bubble could result in a hard landing, and that the high leverage of local

government investment vehicles could result in a fresh wave of non-performing loans.

Severe domestic liquidity pressures, particularly on highly geared Chinese property

developers in the luxury residential space, have also contributed to market weakness.

This has undermined market sentiment and led to a downgrade to 2012 growth forecasts.

Exhibit 1.8 — Loan growth in selected Asia Pacific economies


Note: Data through December 2011 (except Thailand)

Sources: Datastream; RREEF Real Estate Research

0123456789

J a n 0 0

J a n 0 1

J a n 0 2

J a n 0 3

J a n 0 4

J a n 0 5

J a n 0 6

J a n 0 7

J a n 0 8

J a n 0 9

J a n 1 0

J a n 1 1

J a n 1 2

%

United States United Kingdom J apan Eurozone

0123456789

J a n 0 0

J a n 0 1

J a n 0 2

J a n 0 3

J a n 0 4

J a n 0 5

J a n 0 6

J a n 0 7

J a n 0 8

J a n 0 9

J a n 1 0

J a n 1 1

J a n 1 2

%

Australia China J apan South Korea

0

50100150200250300350400450500550600

S e p 0 8

N o v 0 8

J a n 0 9

M a r 0 9

M a y 0 9

J u l 0 9

S e p 0 9

N o v 0 9

J a n 1 0

M a r 1 0

M a y 1 0

J u l 1 0

S e p 1 0

N o v 1 0

J a n 1 1

M a r 1 1

M a y 1 1

J u l 1 1

S e p 1 1

N o v 1 1

J a n 1 2

bps Germany France Spain United Kingdom Italy United States

-20%

0%

20%

40%

60%

M a y - 0

5

A u g - 0

5

N o v - 0

5

F e b - 0

6

M a y - 0

6

A u g - 0

6

N o v - 0

6

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1

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1

Australia Hong Kong Indonesia J apan Singapore Taiwan Thailand




For issuers and investors alike, 2012 is likely to be a challenging year. Any resolution of

the debt crisis is likely to be protracted. This overhang, combined with the still weak

United States growth outlook and concerns about China’s slowing growth, sets the tone

for the Asian credit markets in 2012. Although Asia enjoys fairly strong balance sheets,

from both a sovereign and a corporate standpoint, the region is not immune to

developments in Europe and the United States. A withdrawal of European bank lending

from Asia could also hurt the region’s growth prospects, even though local and regional

banks are expected to cover some of the shortfall. In J apan, however, major local banks

maintain favourable credit conditions for borrowers. The Bank of J apan’s Diffusion Index

(DI) for the lending attitudes of banks improved for ten consecutive quarters through the

third quarter of 2011 and stabilised in the fourth quarter, with a stable outlook going

forward.

Exhibi t 1.9 — Real estate lending atti tudes by Japanese banks

As of J anuary 2012

Sources: RREEF Real Estate based on Bank of J apan

Exhibit 1.10 — Key macroeconomic risks

As of December 2011

Key Risks Likelihood Importance

Extended weakness of European economies (short-term recessionpossible)

▲ High ▲High

US growth remains anaemic ◄► Medium ▲High

Concern about sustainability of debt levels in Europe and the US result inhigher risk premium in asset pricing

◄► Medium ▲High

Failure of Asian governments to stimulate domestic demand and be too

reliant on exports◄► Medium ◄► Medium

Government imposed measures to cool overheated residential marketsare not removed on time

◄► Medium ◄► Medium

Country specific risks – China ◄► Medium ◄► Medium

Policy dilemma: Pause or pre-emptive strike ▼ Low ◄► Medium

Source: RREEF Real Estate

-40

-20

0

20

-40%

-20%

0%

20%

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

08 09 10 11

growth of lending to new real estate projects (yoy, LHS)lending attitude DI of banks to all industries (RHS)

lending attitude DI of banks to Real Estate industries (RHS)

Di f f u s i onI n d ex ( DI )

Great TohokuEarthquake of

March 2011




Real Estate Capital Flows

The United Kingdom, the United States, and global funds were the most active sources of

investment capital for most of 2011. Whilst the listed REITs and unlisted funds were net

acquirers in 2011, equity market volatility and tougher fundraising conditions suggest

these groups may not be as active going forward. In addition, REITs have returned to

trading at a discount to net asset value given the recent equity market turmoil. Also,

private equity fundraising became more difficult in the second half of 2011, with volume

down considerably from the previous six months.

Exhibit 2.1 — Office initial yields and long-term interest rates


Note: Forecast of long-term interest rates were not available beyond 2012 for the Philippines and Singapore.

Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

Exhibit 2.2 — Retail initial yields and long-term interest rates


Note: Forecast of long-term interest rates were not available beyond 2012 for Singapore.


Exhibit 2.3 — Industrial i nitial yields and long-term interest rates


Note: Forecast of long-term interest rates were not available beyond 2012 for Singapore.


0%

2%

4%

6%

8%

10%

12%

AustraliaSydneyCBD

AustraliaMelbourne

CBD

HongKongOverall

Japan Tokyo

JapanOsaka

KoreaSeoul

(Prime)

ChinaBeijingOverall

ChinaShanghaiOverall

alaysiaKuala Lumpur

KLC

PhilippinesManila

SingaporeRaffles Place

Taiwan TaipeiOverall

ThailandBangkok

Long Term Interest Rates Initial Yield

0%

2%

4%

6%

8%

10%

12%

14%

AustraliaSydneyCBD

AustraliaMelbourne

CBD

HongKongOverall

Japan Tokyo

KoreaSeoul

ChinaBeijingCore

ChinaShanghai

Prime

alaysiaKuala Lumpur

KLCC

SingaporePrime

Taiwan TaipeiPrime

ThailandBangkok


0%

2%

4%

6%

8%

10%

12%

AustraliaSydneySouth

AustraliaMelbourneSouthEast

HongKong J apan Tokyo

KoreaSeoul

ChinaBeijing

ChinaShanghai

SingaporeHighTech

Taiwan Taipei

ThailandBangkok





According to findings by J ones Lang LaSalle (J LL), of the top 10 most traded city markets,

five —Tokyo, Singapore, Hong Kong, Seoul, and Shanghai—were in the Asia Pacific

region in 2011. The other five were London, New York, Paris, Washington DC, and Los

Angeles. Offices accounted for more than half of total volumes in 2011 and commercial

properties (including industrial and retail) more than 70 percent of total transactions.

Exhibi t 2.4 — Asia Pacifi c commercial real estate investment 2003 – 2011

Total volume, 2003 – 2011 Transaction volume by markets in the AP region,

2011

Note: Figures exclude transactions below USD5mil, land acquisitions, and developments

Sources: J ones Lang LaSalle; RREEF Real Estate

Total direct real estate investment volume in the Asia Pacific region stood at US$91 billion

in 2011 or 6 percent over 2010 levels. J apan, China, and Australia remained the largest

investment markets across the region. Owner-occupiers, financial institutions, and REITs

dominated acquisitions, accounting for nearly half the volume in 2011. In the final quarterof 2011, China posted a 68 percent quarterly increase in volume, while Australia recorded

a 45 percent uptick. Cross-border investment drove deals in Australia, while acquisitions

in markets such as J apan, China, Hong Kong, and Singapore were largely led by local

investors.

Asia Pacific’s capital markets continue to attract all classes of investors looking to access

the region’s stability and growth in an uncertain global economy. Institutional investors

remain interested in the region and, with consolidation in the funds industry, the churn

should provide opportunities for both buyers and sellers in 2012. In addition, RREEF Real

Estate expects real estate transaction volumes for secondary assets and smaller markets

to fall due to increased risk aversion.

0%

10%

20%

30%

40%

50%

0

25

50

75

100

125

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

USDbillons

Domestic Cross-Border

Cross-Border %

1.7

1.3

1.7

1.7

5.4

9.1

10.0

11.0

12.5

17.3

19.2

0 5 10 15 20

Other

Malaysia

India

Thailand

Taiwan

Singapore

South Korea

Hong Kong

Australia

China

J apan

USD billions




Exhibi t 2.5 — Cross-border acquisitions in selected Asia Pacific countries, 2007 – 2011*

As of J anuary 2012

*2011 through November

Sources: Real Capital Analytics; RREEF Real Estate

Exhibi t 2.6 — Total transaction volume in selected As ia Pacific countr ies, 2007 – 2011*

As of J anuary 2012

*2011 through November

Sources: Real Capital Analytics; RREEF Real Estate

0

2

4

6

8

A s i a P a c A c q

A m e r i c a s A c q

E M E A A c q

A s i a P a c A c q


E M E A A c q

A s i a P a c A c q


E M E A A c q

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E M E A A c q

A s i a P a c A c q


E M E A A c q

A s i a P a c A c q


E M E A A c q

Australia China Hong Kong J apan Singapore South Korea

USD billions 2008 2009 2010 2011

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a r t m e n t

I n d u s t r i a l

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a r t m e n t

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a r t m e n t

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a r t m e n t

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a r t m e n t

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Australia China Hon Kon a an Sin a ore South Korea

USD billions 2008 2009 2010 2011




Regional Property Markets

Japan

The Great Tohoku Earthquake that struck J apan in March 2011 resulted in a short

economic recession. This turn of events has delayed the recovery of J apan’s real estate

market. The observed yield spread remains one of the highest among major global real

estate markets, though they vary by property types and locations.

Growth will be underpinned by planned reconstruction initiatives for 2012 and 2013

announced and budgeted by the government. The unemployment rate was 4.5 percent at

the end of 2011, a recovery from 5.0 percent in 2010. It is expected to recover further to

4.3 percent by 2013. There are general concerns, however, over the country’s

macroeconomic conditions. These include low growth rates, aging population, its

strengthening currency, and weakening demand for exports to Europe and the United

States.

Corporate capital spending fell 0.4 percent from the second quarter of 2011, while private

consumption showed a gain of 0.7 percent. The J apanese government ratified a third

supplementary budget totalling 12.1 trillion yen in November to support rebuilding.

J apanese companies reduced capital spending by 9.8 percent from a year earlier, the

second quarter of reduction. Machinery orders, an indicator of future capital outlays,

decreased 6.9 percent in October from the previous month. Exports declined 3.7 percent

from a year earlier in October.

A major concern is J apan’s growing public debt. The country’s ratio of public debt to GDP

(213 percent) is the highest among major nations. RREEF Real Estate, however, does not

expect this to cause any immediate problem in J apan’s macro economy. The stable and

low yield of the government bonds, about 1 percent, and the persistent strength of the yen

point to a level of confidence in the market.

Office: Tokyo has one of the world’s largest office inventories and the volume of

transactions is the largest in the Asia Pacific region. Amid a sluggish economy after the

earthquake, the vacancy rate stood at 9 percent in Tokyo and 11 percent in Osaka at the

end of 2011—the highest levels in a decade for both cities. Office demand varies across

building specifications. Newer, higher quality, quake-resistant, and energy efficient

buildings are attracting more tenants. The overall vacancy rates are expected to remain

high in 2012 because the supply is expected to increase in the year. Landlords will be

challenged to increase rents, but prime rents in the CBD are still expected to bottom out in

2012 due to strong demand for better/newer quality buildings.

Given the wider yield spreads and the expectation of prices bottoming, the market offers

attractive buying opportunities and there is an increasing number of global investors

looking at the country as an investment destination. In addition, some of the larger local

lenders are still offering affordable finance to real estate. Therefore, cap rates are

expected to compress gradually in 2012. The number of loan defaults is increasing but

lenders do not tend to release the assets at discount prices, so distressed-property

opportunities are limited, except for small-sized properties.




Exhibi ts 3.1 — Tokyo of fice market

Supply, net absorption, and vacancy, 2000 – 2016 Net effective rents, 2000 – 2016

As of December 2011 As of December 2011

Note: Forecasts of net supply by Miki Shoji are not available.


Sources: RREEF Real Estate

Retail: The number of large-scale shopping malls is increasing in J apan, but the average

sales turnover of each property is not growing because of over-supply. Retail sales in

properties with large-scale formats softened amid the economic slowdown in the second

half of 2011, but the immediate impact from the earthquake appears to be fading. Sales

are expected to remain relatively weak in department stores and large-scale shopping

centres in the short-to-medium term compared to speciality stores along high streets and

direct channels (such as online shopping and television shopping).

The number of shoppers along major high streets in Tokyo and Osaka bottomed out after

the trough following the earthquake in March 2011. Recovery in the number of foreign

tourists is also lagging due to the current strong yen. The average speciality stores’ asking

rents for major high streets in Tokyo and Osaka show mixed results. Retail assets on high

streets are popular with investors (including J -REITs). Yields for properties in these prime

high street districts have compressed, but shopping malls in provincial cities are currently

less liquid.

Exhibi t 3.2 — Tokyo rent g rowth and in itial y ield, 2010 – 2016

As of December 2011



1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

(0.6)

(0.3)

0.0

0.3

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0.9

1.2

1.5

1.8

2.1

2.4

2 0 0 0

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2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

V a c a n c y R a t e

S q m ( m n N R A )

Net Supply (Miki Shoji / RREEF)Net Absorption (Miki Shoji / RREEF)Vacancy Rate (Miki Shoji)Vacancy Rate (RREEF)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

15

16

17

18

19

20

21

22

23

2 0 0 0

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2 0 0 2

2 0 0 3

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2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

Y e a r - o n - Y e a r C h a n g e

G r o s s R e n t ( J P Y ' 0 0 0 / t s u b o N R A p

m )

Gross Rent (Tokyo Avg, Miki Shoji)

Gross Rent (Tokyo Avg, RREEF)

Gross Rent Growth (Tokyo Avg, YoY, Miki Shoji)

Gross Rent Growth (Tokyo Avg, YoY, RREEF)

0

1

2

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7

-6

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-2

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2 0 1 1 e

2 0 1 2 f

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2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

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2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

Office Retail Industrial

%%Rent Growth (LHS) Initial Yield (RHS)




Industrial: The industrial property sector in J apan has gone through an evolutionary

change in the past decade, including changes in (1) asset format (from an inventory of

small, owner-occupied properties toward a stock of large-scale leasable and investible

properties); (2) asset function (from a stock of mostly traditional warehouses towards one

that also includes modern, technologically advanced logistics centres); and (3) asset

players (with the emergence of third party logistics companies as key tenants and new

types of asset owners, such as logistics funds and REITs).

The volume of new supply was very limited in 2010 and 2011 (due to the credit crisis and

financial difficulties in previous years), and this steered vacancy rates on a recovering

trend. They fell to a healthy level of around 5 percent in both Greater Tokyo and Greater

Osaka in the third quarter of 2011. The declining trend of logistics rents levelled off in

Tokyo and Osaka, with a stable outlook expected in the near term in both markets.

Industrial assets are becoming popular among domestic and foreign investors seeking

higher yields when compared to other asset types in J apan.

Exhibits 3.3 — Tokyo total returns for major property types

As of December 2011



Exhibit 3.4 — Japan’s key oppor tunities and risks by property sector

As of December 2011

Sector Opportunity Risk

Office • Largest stock in Asia Pacific with goodasset liquidity

• High yield spreads• Favourable market cycle with recovery

expectation• Stable rental income backed by strong

diversified tenant industries• Positive currency impact

• Supply increase in 2012 in Tokyo and2013 in Osaka

• Potential slowdown in recovery of tenantdemand

• Competition with J -REITs, private fundsand foreign capital

Retail • Higher yields for regional assets• Fixed income stream• Positive currency impact

• Suburban type assets oversupplied• Competition from private funds and J -

REITs• Online retailing

Industrial • Resilient income stream and higher yields• Evolving and expanding sector• Positive currency impact

• Still limited number of active buyers at exit• Stable but not growing rents


-10

-5

0

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15

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


% Income Return Capital Return




South Korea

South Korea’s GDP growth slowed in the second half of 2011 as domestic demand

weakened. In the same period, export growth by manufacturers accelerated, but private

consumption slowed in line with the deterioration in consumer sentiment. Looking forward,

downside risks are mainly external, especially the widely expected recession in Europe

which could have a significant impact on its export-led economy. Economists expect abelow-trend growth rate for South Korea in 2012, followed by a rebound in 2013.

Unemployment held at a three-year low at 3.1 percent in November, unchanged from

October. South Korea’s job market is showing resilience even as the deepening debt

crisis in Europe and slowing global growth threaten to cool an economy that has grown for

11 straight quarters. Industrial production unexpectedly fell in October while department

store sales also dropped. The central bank cut its growth forecast for 2012 to 3.7 percent

from 4.6 percent. This compares with a 3.8 percent gain in 2011. The government

similarly projected the same growth rate, with the finance minister hinting that a

supplementary budget may be needed in case of a sharp economic disruption because of

Europe.

Because of the external uncertainty, weaker anticipated growth, and low inflation, the

Bank of Korea is expected to maintain the current policy rate in 2012 and resume the

normalisation of monetary policy thereafter. Historically, the Korean won tends to be

vulnerable to the state of the global economy and its financial system.

Office: Office rents in Seoul have been resilient throughout this economic cycle but are

vulnerable to supply shocks. In 2011 prime rents in the Seoul CBD softened because of a

supply increase within the submarket (Center 1 and Ferrum Tower). Elsewhere, rents

were stable in the Yoido and Gangnam business districts where supply was limited. The

notable new supply in 2012 will be limited to IFC Seoul Tower 2 in the Yoido submarket.

As the average vacancy rate in Seoul falls, rents are expected to bottom out within the

next 18 months and to create attractive opportunities for core investors. Cap rates are

higher than most of the Asian cities and are expected to remain relatively steady in the

foreseeable future given the stable interest rate forecasts.

Due to the unfavourable market sentiment in the last two years, foreign capital was less

active in South Korea and the real estate market was dominated by domestic companies.

However, the low volatility of the market (with its resilient demand fundamentals) carries

the prospect for steady income returns and a gradual re-entry of global investors.




Exhibi t 4.1 — Seoul pr ime office market




Source: RREEF Real Estate, J ones Lang Lasalle

Retail: Unlike most western and many Asian countries, department stores are still

regarded as more prestigious than other store formats in South Korea. However, some

new trends have begun to emerge. In the past, global fashion brands needed to enter into

a joint venture with local partners—mostly department stores which exert strong control—

whenever they entered the South Korean retail scene. Today these brands tend to enter

the market on their own, with the ability to act independently from department stores.

Among submarkets, high street retail rents in Gangnam are rapidly catching up to

Myongdong.

The fundamentals of Seoul’s shopping centre market look resilient, with flat to low single

digit annual growth rates expected in 2012. Foreign investors, however, might find Seoul

more challenging. The shopping centre stock tends to be either owner-occupied or

controlled by conglomerates, and base rents closely track CPI. Cap rates stood at 6.5

percent in 2011 and they are expected to remain at that level.

Exhibi t 4.2 — Seoul rent growth and in itial yield, 2010 – 2016

As of December 2011



Industrial: Like J apan, the Korean industrial sector has evolved in recent years. Large-scale modern leasable stock has been added, some of which was developed and/or is

0%

2%

4%

6%

8%

10%

12%

(200)

(100)

0

100

200

300

400

2 0 0 0

2 0 0 1

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2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


S q m ( ' 0 0 0 N L A )

Net Supply (J LL)Net Absorption (JLL / RREEF)Vacancy Rate (JLL)Vacancy Rate (RREEF)

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

12

14

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18

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2 0 0 0

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2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


N e t E f f e c t i v e R e n t ( K R W ' 0 0 0

p s m G F A p m )

Net Effective Rent (JLL)Net Effective Rent (RREEF)Net Effective Rent Growth (YoY, J LL)Net Effective Rent Growth (YoY, RREEF)

0

1

2

3

4

5

6

7

-2

-1

0

1

2

3

4

5

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


%% Rent Growth (LHS) Initial Yield (RHS)




owned by global logistics companies. The government provides incentives to these

logistics-related foreign investments, including tax relief, financial support, and flexible

labour regulations. Gyeonggi province—which completely surrounds Seoul and

Incheon—is the most popular investment destination. Third Party Logistics (3PLs) firms

are now reported to be more than 60 percent of the tenant base in Gyeonggi district.

However, the overall volume of leasable (as opposed to owner-occupied) stock is still

limited in South Korea and the vacancy rate tends to be vulnerable to supply increases.

Also the liquidity of these assets is not consistent. Because of the risky nature of the

asset, the lack of liquidity and transparency, cap rates are relatively high at around 9

percent in 2011 and are expected to compress.

Exhibits 4.3 — Seoul total returns for major property types

As of December 2011



Exhibit 4.4 — South Korea’s key opportunities and ri sks by property sector

As of December 2011


Office • Steady income backed by resilient spacedemand

• Favourable market cycle with recoveryexpectation

• Potential slowdown in recovery of tenant demand

• Supply overhang

Retail • Higher yields• Fixed income stream

• Lack of transparency• Lack of asset liquidity• Online retailing

Industrial • Resilient income stream and higheryields

• Yield compression

• Lack of transparency• Lack of asset liquidity• Vulnerable to supply increase


-5

0

5

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15

20

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

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2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f






China

Income growth and urbanisation remain the key themes for secular growth in China.

Despite weakness in many developed economies, China is expected to remain a key

engine of growth for the global economy supported by its manufacturing role which makes

the country a prominent trading partner to the rest of the world. Efforts by the central

government to further modernise its manufacturing base towards higher value-addindustries would in turn enhance income levels. Similarly, its large population offers a vast

market for its manufactured goods as the country moves from being a key exporter to a

consumer market that is less reliant on external demand. Other factors that favour the

Chinese economy include:

▪ Urbanisation trend: China’s urban population surpassed that of rural areas for the

first time in the country’s history in 2011 after three decades of economic

development. It had 691 million people living in urban areas at the end of 2011,

compared with 657 million in the countryside.

▪ Urban population: The number of people residing in China’s towns and cities (691

million) is now double the total US population, according to China’s National Bureauof Statistics.

▪ Buying power: Per capita urban disposable income increased 8.4 percent in real

terms in 2011 to 21,810 renminbi. By the same measure, per capita rural cash income

increased 11.4 percent to 6,977 renminbi.

As the housing sector in China is underpinned by urbanisation and is a major driver of

economic growth, any slowdown in this sector would quickly register on Chinese

economic growth. China is also supporting demand in global markets for many key

commodities and as such it has lot of influence on global commodity markets. Whilst the

measures above have helped stimulate economic activity, it has also created challenges,

including at least two intractable problems: persistent inflation and high property prices. Tohelp cool inflation and public anger over housing costs, Beijing subsequently began a

series of tightening measures including reduced lending, new property taxes, and even

prohibited the purchase of more than one home in 46 cities (a policy known as home

purchase restrictions, or HPR) to discourage speculation.

Residential: China’s home prices fell for the fourth consecutive month in December 2011

after the government reiterated plans to maintain curbs that include higher down-payment

and mortgage requirements, according to SouFun Holdings Ltd. Housing values dropped

in 60 out of 100 cities tracked by the nation’s biggest real estate website owner, including

the 10 largest cities.

Exhibi t 5.1 — Property price index of newly constructed residential commodity units i n China

As of December 2011

Note: China’s National Bureau of Statistics ceased publication of the ‘National Average’ edition of its Property Price Index in January 2011. From J anuary 2011forward, an average of the annual changes of 70 cities across China is used as a proxy for the ‘National Average’ index.

Sources: (China) National Bureau of Statistics

-2%0%2%4%6%8%

10%12%14%16%

7 / 2 0 0 5

1 0 / 2 0 0 5

1 / 2 0 0 6

4 / 2 0 0 6

7 / 2 0 0 6

1 0 / 2 0 0 6

1 / 2 0 0 7

4 / 2 0 0 7

7 / 2 0 0 7

1 0 / 2 0 0 7

1 / 2 0 0 8

4 / 2 0 0 8

7 / 2 0 0 8

1 0 / 2 0 0 8

1 / 2 0 0 9

4 / 2 0 0 9

7 / 2 0 0 9

1 0 / 2 0 0 9

1 / 2 0 1 0

4 / 2 0 1 0

7 / 2 0 1 0

1 0 / 2 0 1 0

1 / 2 0 1 1

4 / 2 0 1 1

7 / 2 0 1 1

1 0 / 2 0 1 1

AnnualPct.

Chg.




The government reiterated at its annual economic planning meeting in November 2011

that it would not back away from real estate industry curbs that are dampening home

sales and pulling down prices. Shanghai, the nation’s financial centre, and other Chinese

cities have also indicated they will continue to impose the home purchase restrictions in

2012. Meanwhile, the government has said it will continue to increase the supply of social

housing. It plans to start the construction of 7 million homes in 2012, compared with 10

million in 2011. The completion will at least keep pace with 2010’s 5 million units.

RREEF Real Estate is of the opinion that the rapid rate of urbanisation in China supported

by steady economic growth can only bode well for the residential market on the whole.

Like any other asset class, the real estate sector will experience cycles as the market

matures. Whilst Beijing will try its best to engineer a soft landing, nothing can be

guaranteed. China has comparatively conservative mortgage lending practices,

particularly in contrast to those at the height of the United States housing bubble. First-

time buyers are required by law to come up with down payments equal to 30 percent of a

home's purchase price with many putting down more. The central government is very

unlikely to repeat the stimulus package of 2009, and the current home purchase

restrictions and other tightening measures will be selectively loosened so as to limit the

impact on the wider economy. As such, we expect a price correction to a more

sustainable level but no imminent crash.

Office: Both Beijing and Shanghai have established themselves as China’s major office

markets. Beijing serves as an administrative centre and is the largest city in the northern

provinces. Shanghai has evolved into a major financial hub for the country and for many

of the central and southern provinces. Although the construction pipeline in both cities

looks full in the longer term, demand has now outstripped supply in both cities in the short

term. As a result, vacancies have fallen from the high teens to single digits as rents have

risen to levels similar to other major financial centres in the region. Furthermore, demandfrom domestic banks and corporations are now on par with—and in some instances

greater than—demand from multinational companies (MNCs) and international banks.

Because of China’s growing importance on the global stage, investment demand is

expected to remain strong in the medium term. While foreign investors have formed the

bulk of the office property investments in recent years, domestic corporations (including

some of China’s largest insurance companies) are increasing their investments as well. In

fact, domestic capital has now become a formidable force in the local commercial

markets. Yields have compressed but total returns have held strong due to capital

appreciation. Rents in the meantime are forecast to climb above inflation rates in the

medium term.




Exhibit 5.2— Beijing office market




Sources: RREEF Real Estate, Jones Lang Lasalle

Exhibi t 5.3 — Shanghai of fice market




Note: The sharp drop of net supply in 2003 was mainly due to a withdrawal of stock of 1.3 million square metres.


In the other key markets, including Dalian, Chengdu, Chongqing, Guangzhou, and

Shenzhen, supply is expected to outstrip demand. In addition, the current stock is of a

lower quality, so more volatility in total returns could occur as rents adjust to the new

supply.

Retail: Prospects for the retail market are supported by rising incomes and urbanisation.

However, the growing sophistication of many Chinese shoppers has resulted in apolarisation in the retail scene on the mainland. Whilst the Tier 1 cities continue to witness

0%

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6%

9%

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18%

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30%

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S q m ( m n N L A )

Net Supply (J LL) Net Absorption (J LL / RREEF)

Vacancy Rate (J LL) Vacancy R ate (R REEF)

-30%

-20%

-10%

0%

10%

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40%

100

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2 0 1 6 f


N e t E f f e c t i v e R e n t ( R M B p s m G F A

p m )

Net Effective Rent (RREEF)

Net Effective Rent Growth (YoY, J LL)

Net Effective Rent Growth (YoY, RREEF)

0%

5%

10%

15%

20%

25%

30%

35%

(1.2)

(0.8)

(0.4)

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2 0 1 5 f

2 0 1 6 f


S q m ( m n N L A )

Net Supply (J LL)

Net Absorption (J LL / RREEF)

Vacancy Rate (JLL)

Vacancy Rate (RREEF)

-30%

-20%

-10%

0%

10%

20%

30%

40%

3

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7

8

9

10

2 0 0 0

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2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


N e t E f f e c t i v e R e n t ( R M B p s m

N F A p d )







a proliferation of more high-end retail concepts including specialty shops, other cities are

more reliant on traditional anchor/multi-tenanted shopping centres. Malls that are quick to

adapt continue to outperform the rest of the market. Competition has been intense with

only a handful of active local and foreign investors (Wanda, China Resources Land,

COFCO, CapitaLand, Swire, Kerry, Hang Lung, SHKP) participating in the market and

providing the capital investment and management expertise. International brands

including high street and luxury brands continue to seek new opportunities in China as

domestic business and leisure travel is growing at a rapid pace. Yields are tight, especially

for high-end shopping malls, and this reflects the scarcity of quality assets.

Exhibi t 5.4 — Beijing rent g rowth and ini tial yield , 2010 – 2016

As of December 2011



Exhibi t 5.5 — Shanghai rent growth and in itial yield, 2010 – 2016

As of December 2011



Industrial: The industrial property market in China is a less mature and more fragmented

market than the office and retail property markets, but industry consolidation could

accelerate as global players such as GLP, ProLogis, and Goodman increase their

investments. The industrial/logistics market presents new potential given the expansion of

many key infrastructure links across railway, air, and shipping platforms. The migration of

secondary industry from coastal to inland areas will result in more demand for logistics

space. A moderating global economy and the subsequent drop in international trade could

potentially be offset by the promotion of China’s domestic consumption. In addition, the

lack of quality stock is expected to support rental growth. Yields are expected to trend

downward, reflecting the growing maturity of the market.

0

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2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f



0

2

4

6

8

02468

101214

16

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f








Hong Kong

Facing the headwinds of a slowing Chinese economy, weak growth in the United States,

and debt problems in Europe, Hong Kong is once again at risk of recession. As exports

are 208 percent of GDP, any fall in external demand will have an impact on headline

growth. Chinese tourists play an important role in the economy but their ability to force a

“decoupling” from external demand from the European Union and United States isunlikely, although they may cushion the blow significantly. Following months of solid

growth, signs of softness have started to emerge in the territory’s retail sector at the end

of the third quarter of 2011. Retail sales volume slowed sharply in September,

decelerating from growth of 20.7 percent year-on-year in August to 15.2 percent. About

75 percent of human resources managers in the Hong Kong financial services industry

are concerned that the global economic uncertainty will affect the Asia Pacific region,

according to a survey by recruitment agency Morgan McKinley. Finance, real estate, and

professional sectors accounted for 27 percent of the city’s GDP in 2010, according to

government data.

Office: In light of the disruptive external economic environment, tenants are slowing theirexpansion and relocation plans. Rents in the core financial districts of Sheung Wan,

Central, and Admiralty are particularly sensitive to economic conditions. However, a

shortage of space, a lack of new supply, and low vacancy rates have resulted in prime

rents holding up, at least for now. Based on previous cycles in 1998, 2003 and 2008,

RREEF Real Estate does not expect these fundamentals to hold. Despite low vacancy

rates going into past cyclical disruptions, rents still turned south as demand dried up, and

banks surrendered space due to the economic fallout. With occupational costs on the rise,

a two-tier office market has emerged in Hong Kong, separating the tenant base in prime

submarkets from the cost-sensitive tenants who seek affordable alternatives, especially

non-core locations in Kowloon East. To this end, the Hong Kong government has also

made it a priority to support a plentiful supply of Grade A office construction in the rapidlyemerging Kowloon East district as a major non-core commercial hub. Along with the

redeveloped Kai Tak Airport site scheduled to complete in 2015/2016, a total of 7 million

square feet of office space will be added in a location immediately adjacent to Kowloon

Bay and Kwun Tong, highlighting how Kowloon East is set to emerge as the largest

commercial district in Hong Kong. Historical patterns show that the Hong Kong office

market has previously posted fairly strong rebounds following major cyclical turning points.

We suggest monitoring the market. Competition is keen and the window of opportunity for

acquisitions will close quickly.




Exhibi t 6.1 — Hong Kong Central off ice market




Source: RREEF Real Estate, J ones Lang Lasalle

Retail: Despite economic uncertainties, the retail sector is somewhat cushioned, with

many of the traditional retail sub-districts able to maintain rents and still attract tenants.

Strong tourism numbers, especially from mainland China, support this trend. In August

2011, monthly total visitor arrivals climbed 17.7 percent year-on-year to 4.1 million,

posting a new monthly record surpassing 4 million for the first time. Moreover, a total of

2.9 million mainland visitors were recorded in August or a 23 percent year-on-year

increase. The labour market was also surprisingly strong. The seasonally adjusted

unemployment rate held at 3.4 percent in September. According to government data,

about 73 percent of companies reported increases in wages in J une 2011 compared witha year ago. The wage index increased 6.9 percent year-on-year in nominal terms in J une

2011. Against this backdrop, retail sales increased 23.1 percent year-on-year to HK$34.2

billion in October 2011 on the back of a buoyant local consumption demand and tourist

spending. The purchasing power of mainland tourists is likely to continue supporting the

local retail property market. In the major retail sub-districts of Causeway Bay and Tsim

Sha Tsui, demand for quality locations will remain robust. Available retail space in these

districts will be absorbed quickly.

Exhibit 6.2 — Hong Kong rent growth and initial yield, 2010 – 2016

As of December 2011

e =estimate; f =forecast. There is no guarantee the forecast returns shown will materialise. Sources: RREEF Real Estate; DB Global Markets, Asia Economics Monthly

0%

2%

4%

6%

8%

10%

12%

(100)

(50)

0

50

100

150

200

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


S q m ( ' 0 0 0 N L A )

Net Supply (J LL)Net Absorption (JLL / RREEF)Vacancy Rate (J LL)


-45%

-30%

-15%

0%

15%

30%

45%

60%

75%

90%

105%

0

10

20

30

40

50

60

70

80

90

100

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


N e t E f f e c t i v e R e n t ( H K D p s f G F A

p m )

Net Effective Rent (J LL)




0

1

2

3

4

5

6

7

8

-25

-20

-15

-10

-5

0

5

10

15

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f






Industrial: The Hong Kong Trade Development Council (HKTDC) forecasts a gloomy

outlook for exports in 2012, a response to the uncertain economic outlook for many of its

trading partners. The HKTDC estimated that Hong Kong exports in 2012 will see only 1

percent growth in value but a 3 percent decline in volume. The HKTDC’s export index

dropped to 40.6 in the fourth quarter of 2011, down 8.9 points from the third quarter of

2011, and the second consecutive quarter with a reading below the benchmark level of

50. A reading below 50 indicates a pessimistic sentiment during the quarter and signals

contraction in Hong Kong exports over the short term. The recent downgrade in Hong

Kong’s economic outlook is expected to curtail demand. Slower export growth is already

reflected in the leasing market, where export-oriented 3PL operators have put expansion

plans on hold. This trend is, however, offset to some extent by growing demand from

retailers and local distributors, who benefit from the strong performance of Hong Kong’s

retail market. Although rents are expected to climb to record highs in the near term

because of tight vacancies, increasing vacancy pressure will likely lead to a correction in

2012. The buyer-seller standoff over pricing will keep investment volumes low. Investors

will also demand higher yields to justify higher borrowing costs and negative rental growth.

Exhibits 6.3 — Hong Kong to tal returns for major property types

As of December 2011



Exhibit 6.4 — Hong Kong’s key opportunities and ri sks by property sector

As of December 2011


Office • Stable rental income with potential capital

value upside

• Timing of recovery• Highly cyclical market• Competition from domestic funds as

well as Chinese capital

Retail • Resilient income stream • AEI risk• Rare to find income producing

assets• Competition from domestic funds as



• Rare to find income producingassets

• Development• Competition from domestic funds as



-25

-20

-15

-10

-5

0

5

10

15

20

25

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


%Income Return Capital Return




Singapore

Singapore’s open economy and real estate markets have been quick to feel the impact of

the economic headwinds in the United States and Europe. The central bank has tightened

monetary policy at each of the three semi-annual reviews before its October 2011

decision to slow gains in the currency while continuing with a modest and gradual

appreciation. It guides the local dollar (S$) against a basket of currencies within anundisclosed band, and adjusts the pace of appreciation or depreciation. Singapore’s

growth will “inevitably be affected” this year in a “difficult” global economy, the nation’s

Prime Minister said in a New Year message.

Singapore, home to the world’s second busiest container port, has remained vulnerable to

fluctuations in overseas demand for manufactured goods even as the government boosts

the financial services and tourism industries to cut its reliance on exports. Manufacturing

rose 6.5 percent from a year earlier in the three months ended December 2011, after

climbing a revised 13.4 percent in the third quarter. The services industry grew 3.2

percent in the last quarter of 2011 from a year earlier, after gaining 3.7 percent in the

previous three months.

With economic uncertainty rising, investors have taken a more cautious approach. While

there was no redemption by funds, concerns about the Eurozone crisis led some open-

ended German funds to put their properties on the market given that office prices

appeared to be peaking. In addition, there was also a noticeable shift in investor interest

from residential into other asset classes, namely strata-titled1

Office: Over three million square feet of new office space was delivered in 2011. This is

the largest amount of completed office development the city-state has experienced over

the past decade. Whilst the new supply helped to improve the overall quality of the office

stock, the office market has since softened due to uncertainties and volatility arising from

the debt crisis in the Eurozone. For the first time since the market bottomed out in late

2009, the average monthly net effective rents for Grade A office space tracked by J LL in

the Raffles Place/New Downtown micro-market fell in the fourth quarter of 2011 by nearly

5 percent. As a result of the weakening demand, the vacancy rate rose marginally. This

follows approximately 2.3 million square feet of new office stock in the core CBD alone in

Raffles Place/New Downtown. The increase in office stock was not met with

corresponding new occupier demand as many service-oriented firms, including big

financial institutions, have turned cautious towards expansion plans. Office fundamentals

have also been impacted by a trend of more office tenants relocating some of theiroperations outside the CBD, including regional functions and back offices. The availability

of suburban offices and business park developments similar to Grade A office buildings

within the CBD has made this trend possible. On the investment front, the largest deal of

the past five years was K-Reit Asia’s S$2.01 billion purchase of parent company, Keppel

Land’s, entire stake (87.5 percent) in the 885,000 square feet Ocean Financial Centre

(OFC) in Raffles Place in the third quarter of 2011. The price for OFC, S$2,600/square

feet, represents a new high for an office investment deal in Singapore in the post-global

financial crisis period. With vacancy rates rising, further pressure on rents is inevitable and

will create a favourable tenants’ market. Looking ahead, the market’s future supply of

office space over the next five years from 2012 to 2016 is forecast at 11 million square

industrial and commercial

properties. Developers have capitalised on this trend and are packaging industrial

properties into lifestyle-centric business solutions.

1Strata titling is a form of multi-tenant property ownership available in some countries that is akin to

condominium and cooperative legal structures.




feet, or an average 2.2 million square feet per annum. Though Singapore’s office rentals

and capital values look likely to soften from current levels, the magnitude of decline is

expected to be tamer compared to previous cycles. Rents are forecast to decline by about

10 to 15 percent in 2012. Similar to Hong Kong, competition is keen in this segment.

Exhibi t 7.1 — Singapore Raffles Place offi ce market





Retail: This sector continued to receive a boost from foreign visitors in the final quarter of

2011. October 2011 set an arrivals record for the 10th consecutive month, with 1.1 million

visitors. In the first ten months of 2011, overall visitor numbers rose by 15.5 percent year-

on-year to about 10.9 million. As of October, this total was on track to achieve the

government’s full-year target of 12 million visitors. Furthermore, spending by tourists and

local residents kept the cash registers ringing, and in October the retail sales index

(excluding motor vehicles) was boosted by 5.9 percent year-on-year. Close to 500,000

square feet of private retail space was completed in 2011 which is below the five-year

average of 670,000 square feet. Scotts Square was the only new mall that opened along

Orchard Road in 2011, and it contributed approximately 75,000 square feet of retail space

to stock. Major suburban malls that opened in 2011 include Changi City Point, ARC,

Greenwich V, and Rochester Mall. CBRE estimates that 795,000 square feet of retailspace will come on stream in 2012, of which only 14 percent will be in Orchard Road.

Development activity in 2012 will focus on suburban areas and malls such as J Cube and

Vista XChange. Reflecting the weaker economic outlook, average rents for prime Orchard

Road and the Regional/Suburban submarkets were unchanged in the final quarter of

2011. Looking ahead, the uncertainties in the global economic arena, combined with

inflationary pressures could dampen employment and tourism prospects. This would in

turn impact spending by consumers and visitors. J ust before the last downturn, new mall

completions occurred along Orchard Road in 2009. The subsequent effects of the global

financial crisis weakened rents for prime retail space in Singapore’s premier shopping belt

by about 10 percent from the previous peak in the third quarter of 2008 and have kept

generally unchanged since then. Prime retail rents in the Regional/Suburban market were

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

(200)

(150)

(100)

(50)

0

50

100

150

200

250

300

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


S q m ( ' 0 0 0 N L A )

Net Supply (J LL)

Net Absorption (JLL / RREEF)

Vacancy Rate (JLL)


-60%

-40%

-20%

0%

20%

40%

60%

80%

0

2

4

6

8

10

12

14

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


N e t E f f e c t i v e R e n t ( S G D p s f N F A p m )

Net Effective Rent (JLL)







more resilient, as there is a ready catchment of resident consumers who will still patronise

the malls for basic necessities and non-discretionary items.

Exhibi t 7.2 — Singapore rent growth and in itial yield, 2010 – 2016

As of December 2011



Industrial: Weakness in the electronics and biomedical clusters weighed on the

manufacturing sector and this resulted in a softer second half of 2011. Anxieties over the

prospects for the global economy hurt business confidence and dented demand.

Consequently, many manufacturers adopted a wait-and-see attitude regarding their space

needs. This, combined with the seasonal year-end lull, resulted in a relatively quiet leasing

market, which in turn tempered rental growth. Sales activity slowed as well in the four

quarter of 2011. According to Colliers, the volume of strata-titled sales totalled 340

transactions in the quarter, tapering from the 575 and 496 transactions in the second and

third quarters of 2011, respectively. A subdued mood is expected to continue in the firsthalf of 2012. This also appears to be the sentiment of developers judging from their less

than enthusiastic bids for industrial development sites. Owing to Singapore’s externally-

oriented economy and the manufacturing sector’s vulnerability to further softening of

global demand, take-up for factory space could stay tepid in 2012. Plant expansions are

likely to be put on hold while consolidation activities may potentially take root if the major

economies fall deeper into the rut. As well, the increase in consolidation activity may also

give rise to shadow space as firms look to sublease excess space to supplement their

income. This would put downward pressure on rents. Nonetheless, a moderation in the

pipeline of factory space from an estimated annual average of 7.2 million square feet

between 2002 and 2011 to some 4.7 million square feet per year for the period between

2012 and 2015, could provide some relief to downward pressure on rents. Likewise, so

will positive economic growth, which is forecast at between 1 and 3 percent for 2012 for

Singapore. Yields are forecast to remain between 6 and 7 percent.

0

1

2

3

4

5

6

7

-20

-15

-10

-5

0

5

10

15

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


%%

Rent Growth (LHS) Initial Yield (RHS)




Exhibits 7.3 — Singapore total returns for major property types

As of December 2011



Exhibit 7.4 — Singapore’s key opportunities and risks by property sector

As of December 2011


Office • Stable rental income with potential capitalvalue upside

• Positive currency impact

• Timing of Recovery• Supply overhang• Highly cyclical market• Competition from S-REITs and

Private funds

Retail • Resilient income stream• Positive currency impact

• AEI risk• Rare to find income producing

assets

• Competition from S-REITs• Development


• Positive currency impact

• Competition from S-REITs• Development


-25

-20

-15

-10

-5

0

5

1015

20

25

30

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f






Southeast Asia

Despite the challenges of 2011, global investors have looked to Australia to escape the

storm of uncertainty elsewhere, attracted by higher levels of transparency, generally

positive economic conditions and higher yields. Tenants continued to expand in most

office markets while industrial rents stabilised and in some cities, started to increase. Well-

located retail assets remained in strong demand from investors, despite weak retail tradeand concerns about online retailing. Poor performance in Europe and the United States is

a positive for Australian property from this perspective.

Household spending rose 1.2 percent in the third quarter of 2011, while non-dwelling

construction jumped 24.4 percent. Resource-related investment projects valued at A$456

billion (US$468 billion) have cushioned the fall in manufacturing and services hit by a

record currency and subdued consumer spending. However, headwinds are starting to

impact employment opportunities. J ob growth in November was one of the slowest in 15

years as payrolls gained just 44,700 through the first 11 months of 2011, on pace for the

smallest growth since 1996 after a record 362,300 increase in 2010. The RBA cut its

forecasts for Australian economic growth and inflation for 2011 and 2012 as turmoilabroad made domestic consumers wary about spending. Reflecting those expectations,

the currency has fallen 7.0 percent since it reached $1.1081 on July 27, 2011, the highest

level since it was freely floated in 1983.

Exhibit 8.1 — Southeast Asian countries and cities

As of J anuary 2012


Exhibit 8.2 — Economic & demographic overview of Southeast Asia

As of J anuary 2012

Singapore Malaysia Thailand Vietnam Indonesia2010 2011-

15

2010 2011-

15

2010 2011-

15

2010 2011-

15

2010 2011-

15GDP Growth (% p.a.) 14.5 4.2 7.2 5.1 7.8 4.5 6.8 7.2 6.1 6.7Inflation (% p.a.) 2.8 2.1 2.2 2.4 3.3 2.3 8.9 5.8 5.1 4.7Unemployment rate (%) 2.2 2.2 3.5 3.1 1.4 1.4 5.0 5.0 7.5 6.6Fiscal balance (% of GDP)

98.9 90.6 55.1 58.1 45.5 45.2 52.7 51.0 26.7 24.5

Population growth (%p.a.)

1.7 1.7 1.7 1.7 1.0 1.0 1.2 1.2 1.3 1.3

2010 2011-15

2010 2011-15

2010 2011-15

2010 2011-15

2010 2011-15

Population (millions) 5.1 5.6 28.2 30.7 67.7 71.1 88.3 93.7 234.6 250.2Median age (years) 40.6 43.4 26.3 28.0 33.2 34.7 2.5 30.2 28.2 30.1Urbanisation (%) 100.0 100.0 72.2 75.7 34.0 36.2 30.4 33.6 44.3 46.0

Sources: IMF World Economic Outlook (WEO) Database; United Nations Population Division; Bloomberg




While Singapore offers high-value core / core-plus investments, Malaysia and Thailand

offer a wider variety of investment opportunities across the risk-return spectrum. The

commercial property sectors in Kuala Lumpur are poised to benefit from Malaysia’s pro-

growth economic restructuring, especially in Islamic finance. Thailand’s elections in 2011

promised a calmer political backdrop that has allowed investor interest to return. A

Southeast Asian portfolio could be augmented by more opportunistic offerings in Vietnam

and Indonesia. While Vietnam has been grappling with the balance between economic

growth and inflationary pressures, its structural fundamentals remain intact. Likewise,

Indonesia’s economic resilience and increased political stability has been acknowledged,

and this has helped encourage a resurgence in foreign investment.

With exports expected to remain subpar over the short term, RREEF Real Estate foresees

Southeast Asian authorities hastening the push to increase domestic demand. Strong

fiscal positions enable the economies to undertake economic restructuring to rebalance

growth. Additionally, Southeast Asia’s longer term outlook is bolstered by favourable

demographic patterns, including relatively youthful and faster-growing populations (that

will fuel demand for goods and services as well as real estate) beyond the current

recovery phase.

Exhibit 8.3 — Opportuni ties in the Southeast Asian p roperty markets

As of December 2011

AssetClass Recommendation

KualaLumpur Bangkok

Ho ChiMinh City Hanoi Jakarta

OfficeWell-located buildingswith enhancement/repositioning potential

Retail

International shoppingformats (multi-tenanted)in key locationssupported byaffluent/large residential

catchments/keytransportation nodes


Austral ia

Despite the challenges of 2011, global investors have looked to Australia to escape the

storm of uncertainty elsewhere, attracted by higher levels of transparency, generally

positive economic conditions and higher yields. Tenants continued to expand in most

office markets while industrial rents stabilised and in some cities, started to increase. Well-

located retail assets remained in strong demand from investors, despite weak retail trade

and concerns about online retailing. Household spending rose 1.2 percent in the third

quarter, while non-dwelling construction jumped 24.4 percent. Resource-related

investment projects valued at A$456 billion (US$468 billion) have cushioned the fall in

manufacturing and services hit by a record currency and subdued consumer spending.

But headwinds are starting to impact employment opportunities. J ob growth in November

was one of the slowest in 15 years, on pace for the smallest growth since 1996 after a

record 362,300 increase in 2010. The RBA cut its forecasts for Australian economic

growth and inflation for 2011 and 2012 as turmoil abroad made domestic consumers wary

about spending.

Office: The impact of a two speed economy in Australia is now particularly apparent in the

commercial real estate markets with CBD office rents in the capital cities of resource rich

states of both Queensland (Brisbane) and West Australia (Perth) outstripping those of the




traditional finance-and-trade-centred CBDs of Melbourne and Sydney. New supply for

office accommodation is expected to be tight. This will likely offset potentially slower

demand especially in the key financial services economies of Melbourne and Sydney.

However, with mining continuing to contribute to a significant proportion of economic

growth, the office markets are more likely to surprise on the upside rather than disappoint.

Australian office property has been the most popular property type for overseas investors.

The total volume of Australian office property acquired by offshore purchasers increased

from A$644 million in 2008 to A$3 billion in 2011, a 365 percent increase. Asian and North

American investors were the dominant purchasers. The likely sellers in 2012 are the A-

REITS, with some indicating that they plan to sell non-core assets.

Exhibi t 9.1 — Sydney CBD off ice market





Exhibi t 9.2 — Melbourne CBD office market





0%

2%

4%

6%

8%

10%

12%

14%

16%

(150)

(100)

(50)

0

50

100

150

200

250

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


S q m ( ' 0 0 0 N L A )

Net Supply (J LL)

Net Absorption (J LL / RREEF)

Vacancy Rate (J LL)


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

100

200

300

400

500

600

700

800

900

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


N e t E f f e c t i v e R e n t ( A U D p s m N F

A p a )




Net Effective Rent Growth (YoY, RRE EF)

0%

2%

4%

6%

8%

10%

12%

(100)

(50)

0

50

100

150

200

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


S q m ( ' 0

0 0 N L A )

Net Supply (JLL)

Net Absorption (JLL / RREEF)

Vacancy Rate (J LL)


-15%

-10%

-5%

0%

5%

10%

15%

20%

150

200

250

300

350

400

450

500

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


N e t E f f e c t i v e R e n t ( A U D p s m N F A p a )








Retail: Growth in online shopping is expected to outstrip growth in total retail turnover

during 2012, continuing a trend that has developed over the last few years. As online

retailing continues to expand, some retail sectors will be more at risk including those that

are non-food or discretionary. Key drivers of online shopping include a stronger currency

and the proliferation of tablet devices as well as the role of social media in purchasing

decisions. Whilst the shopping centre will always form part of the retail landscape, its role

within the overall retail experience is rapidly changing.

Despite the defensive nature of shopping centres as an asset class (low vacancies,

minimal incentives and embedded rental growth leases) occupancy costs will remain

under stress in the short term, particularly in average quality centres. In this environment,

both domestic and international retailers are focusing on the most productive and

profitable locations. This will further contribute to the polarisation of retail assets with solid

performing centres getting stronger, as tenants pay a premium to be in high-traffic/high-

turnover centres.

Exhibi t 9.3 — Sydney rent growth and ini tial yield, 2010 – 2016

As of December 2011



Exhibit 9.4 — Melbourne rent growth and ini tial yield, 2010 – 2016

As of December 2011



Industrial: Once a less-favoured asset class, over the past decade, industrial properties

have emerged as an institutional real estate asset class in Australia. With a shortfall of

prime grade industrial space to meet current demand, rental pressures are set to intensify

over the next 24 months. As a result, RREEF Real Estate forecasts a significant upside in

the national industrial markets from 2012 as the impact of the available shortage becomes

more pronounced. And with e-commerce booming, this will only exacerbate the shortage

of product especially in the key population hubs of Sydney and Melbourne. The steady

pattern seen in 2011 would also see prime grade yields compress and values rise in 2012.

0

1

2

3

4

5

6

7

0

2

4

6

8

10

12

14

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f


0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

8

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f






Meanwhile, the lack of prime grade stock on the market is leading many owner-operators

to take a design-and-construct approach rather than waiting for a suitable opportunity.

Firms that lack a ready land supply—the shortage of zoned industrial land is often blamed

on land planning policies—will encounter difficulties if attempting to enter the development

market. At the moment, logistics and retail firms are driving demand. Yields are averaging

between 7 and 8 percent, with total returns in the low teens.

Exhibits 9.5 — Sydney total returns for major property types

As of December 2011

e =estimate; f =forecast. There is no guarantee the forecast returns shown will materialise.Sources: RREEF Real Estate

Exhibits 9.6 — Melbourne total returns for major property types

As of December 2011

e =estimate; f =forecast. There is no guarantee the forecast returns shown will materialise.Sources: RREEF Real Estate

Exhibit 9.7 — Australia’s key opportunit ies and risks by p roperty sector

As of December 2011


Office • Stable rental income with one of thehighest office yields in AP markets

• A-REITs / wholesale funds looking todiversify portfolios

• Positive currency impact• Low vacancy• Supply constrained market

• Two-tier economy benefitingresource rich states/cities but notservice-related state/cities, i.e.Melbourne & Sydney

• Compressed yields• Potential slowdown in demand• Competition from private funds and

foreign capital in search of yields

Retail • Resilient income stream• Positive currency impact• Supply constrained market

• AEI risk• Competition from private funds and

foreign capital in search of yields• Online retailing


• Positive currency impact• Supply constrained market

• Competition from private funds andforeign capital in search of yields

• Development• Lack of suitable product

Sources: RREEF Real Estate Research

0

5

10

15

20

25

30

2 0 1 1 e

2 0

1 2 f

2 0

1 3 f

2 0

1 4 f

2 0

1 5 f

2 0

1 6 f

2 0 1 1 e

2 0

1 2 f

2 0

1 3 f

2 0

1 4 f

2 0

1 5 f

2 0

1 6 f

2 0 1 1 e

2 0

1 2 f

2 0

1 3 f

2 0

1 4 f

2 0

1 5 f

2 0

1 6 f



-5

0

5

10

15

20

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f

2 0 1 1 e

2 0 1 2 f

2 0 1 3 f

2 0 1 4 f

2 0 1 5 f

2 0 1 6 f






Conclusion

Opportunities & Challenges

Economy: Growth in the Asia Pacific region will remain one of the brighter spots in this

challenging global environment. Exports, a key component for many Asian countries have

been moderating since the fourth quarter of 2011 and this is expected to continue given

the on-going economic strains in Europe and the slow growth in the United States. Supply

chain disruptions brought about by the devastating earthquake in J apan and the floods of

Thailand will take time to resolve.

With moderating global growth weighing on the regional outlook, policy makers across the

Asia Pacific region are now looking at ways to boost consumption and shore up domestic

activity. China forecasts the pace of growth to ease. Elsewhere, growth in Malaysia and

Indonesia will likely hold out due to stronger domestic consumption but in contrast Hong

Kong and Singapore will likely lag the pace of the region’s overall economic growth.

Beijing has fired the first salvo by cutting banks’ reserve requirement ratios for the first

time in three years and bank lending in December was higher than forecast suggesting

further easing may be in the works. Nonetheless, rebuilding will likely result in a surprise

uplift in Australia, J apan, and Thailand towards the second half of 2012.

Office: For the office market, RREEF Real Estate expects rents to fall modestly in 2012 in

some markets. Corporates could expect a respite from surging occupancy costs including

rents that have characterised tight locations in Beijing and Hong Kong. In particular,

landlords that are finance and trade dependent will witness more near term volatility with a

strong bias to the downside as banks and finance-related industries rationalise

headcounts; these markets include Hong Kong, Singapore, and to a lesser extent, Sydney

and Tokyo.

But not all is lost. Supply will be a key determinant as much as demand. As new supply

will be limited in Seoul in 2012, RREEF Real Estate is forecasting a bottom in the office

market followed by a turnaround in the latter part of the year. Both Bangkok and Brisbane

could witness a resurgence in demand as both markets were hit by floods. In the medium

term, the combination of economic clout, strong property fundamentals, and the

availability of capital will continue to position the region favourably in this period of

uncertainty and thus keep it a magnet for investor interest.

Exhibi t 10.1 — Projected total returns o f Asia Pacific o ffice markets, 2011 – 2016

As of December 2011


-25% 25% 75% 125% 175%

Beijing - OverallManilaSydney - CBDBangkokShanghai - PuxiMelbourne - CBDNagoyaShanghai - Pudong

TokyoHong Kong - OverallSeoul Prime - CBDOsaka

YokohamaGuangzhouHong Kong - CentralKuala Lumpur Taipei - OverallSingapore

Cumulative Return Based on 2010-YE P rice Level

2011 2012 2013 2014 2015 2016




Retail: Consumer confidence will be the key determinant for the outlook of the retail

sector for many Asia Pacific nations. With further jobs cuts looming, moderating economic

growth, and limited wage increases, retail demand will likely take a hit. However, this

could be offset by government stimulus as well as structural changes in many Asian

economies that allow them to be less dependent on trade and focus more on boosting

consumption. To this end, high street and prime retail formats—especially those

dependent on tourism and discretionary spending—could experience more moderate

growth rates.

On the other hand, suburban retail will likely be more resilient although the threat from

online retail will continue to cut into market share. Discount (or warehouse) retail often

performs best during weaker periods and will likely outperform other retail segments as

consumers become more budget conscious. Domestic consumption has increasingly

become a key driver of China’s growth. Chinese nominal retail sales have grown at a

compound annual growth rate (CAGR) of 18.1 percent between 2005 and 2010, according

to China’s National Bureau of Statistics. China’s domestic consumption will be further

unleashed as per capita household income rises. Similarly, this phenomenon is also being

witnessed in many emerging Asian economies including Indonesia, Malaysia, Thailand,

and even Vietnam.

Exhibi t 10.2 — Projected total returns of Asia Pacific retail markets, 2011 – 2016

As of December 2011


Industrial: While most indicators point to more moderate economic growth, the industrial

property market has remained fairly resilient supported by tenants seeking more cost

effective alternatives to prime CBD offices. While the region continues to drive the global

economic recovery, it is neither immune to the Eurozone woes nor to the lacklustre

recovery in the US economy. As a result, the outlook for the Asia Pacific industrial

property market has turned more cautious. The more open economies, like Hong Kongand Singapore, will likely witness a further deterioration in economic activity due to

shrinkages in their manufacturing output. Similarly, manufacturers in J apan and Korea will

also see moderating export growth. On the other hand, the manufacturing sectors of

China and Indonesia remained buoyant albeit at a more sustainable pace increasingly

bolstered by their strong domestic markets and investment inflows.

In China, policy makers have identified the logistics industry as one of the sectors to be

supported by the National Development and Reform Commission. This includes the

Logistics Industry Revitalisation Plan released in 2009 and China’s 12th Five-year Plan

(2011-2015) which has placed emphasis on the logistics industry. To capture the growth

in domestic consumption, companies are expanding their distribution and logistics networkthroughout China. Companies will continue to push for higher efficiency of their supply

-20% 0% 20% 40% 60% 80% 100% 120% 140% 160%

Bangkok

Beijing - Core

Kuala Lumpur - KLCC

Shanghai - Prime

Seoul

Hong Kong - Overall

Melbourne - RC

Singapore - Prime

Sydney - RC

Tokyo

Taipei - Prime

Cumulative Return Based on 2010-YE Price Level

2011 2012 2013 2014 2015 2016




chains, such as outsourcing logistics services to 3PL service providers and upgrading

their logistics facilities. Similarly in Australia, the growing acceptance and popularity of

online retail has spurred a resurgence in warehousing and 3PLs. Whilst in J apan and

Korea, there is greater need for such modern facilities.

Exhibi t 10.3 — Projected total returns o f Asia Pacific industrial markets, 2011 – 2016

As of December 2011


Understanding cycles: While the short-term outlook of the real estate market in many

respects appears uncertain, the region presents relative opportunities when compared to

other parts of the global economy. All real estate markets go through cycles, though they

vary significantly across geographies and property types. The inflation hedging capability

of real estate stems from the positive relationship between growth and demand for real

estate. As economies expand, the demand for real estate drives rents higher and this, in

turn, translates into higher capital values.

History has shown that there is a fairly strong correlation between economic growth and

rental and capital value growth. With this in mind, RREEF Real Estate’s investment views

for the Asia Pacific region are based on the following assumptions:

▪ Whilst RREEF Real Estate expects moderating economic growth in the near term, we

also forecast the pace of growth to pick up again in the latter half of 2012. Corporates

have turned cautious but since the region is one of the few bright spots in the global

economy, we expect any rationalising in headcount to end by mid-year 2012. Despite

a dip in the pace of growth for China, we do not see a full-scale recession for the

region. In addition, we see a third engine of growth from Malaysia and Indonesia as

domestic consumption has held up fairly well. Rebuilding in Australia, J apan, and

Thailand is likely to give a much needed short-term boost to their economies.

Australia’s commodity sector will continue to benefit from emerging Asian demand,

which would help offset any sluggish domestic demand.

▪ RREEF Real Estate’s forecast suggests a lull in the growth of rents and capital

values—resulting in tempered returns. However, as real estate fundamentals remain

generally firm, our longer-term forecast on returns shows growth at long-term trend

levels. For example, we are forecasting a drop in rents in Hong Kong and Singapore

for 2012 but we expect a turnaround from 2013 onwards. Growth will resume at a

more sustainable pace. Similarly, policies to cool the red-hot residential markets in

China, Hong Kong, and Singapore will likely ease as inflation abates. Supply has also

been kept in check due to the more stringent lending rules.

▪ The cost of debt will continue to be low as policy makers want to stimulate their local

economies. Whilst we may see a resumption in lending by some of the larger USbanks, European banks will largely be absent as they try to shore up their capital

-20% 0% 20% 40% 60% 80% 100% 120% 140% 160%

Beijing

Shanghai

Seoul

Melbourne - South East

Bangkok

Sydney - South

Singapore - High Tech

Hong Kong

Tokyo

Taipei

Cumulative Return Based on 2010-YE P rice Level

2011 2012 2013 2014 2015 2016




base. We also expect greater participation of Asian lenders as they are less

constrained than their European and United States counterparts.

Recommendations

The Asia Pacific region is a diverse mix of national, subnational, and urban markets rather

than a cohesive unit. “Location, location, location” may be the proverbial saying but in

times of uncertainty, it holds very true. RREEF Real Estate is forecasting moderating total

returns in the near term as rents consolidate and growth prospects fall below trend. In

J apan and Korea, rents and prices are finding a bottom with a turnaround not too far

away. This time around, industrial and to a lesser extent retail returns, will be the better

performing sectors.

The markets still face various risks. In J apan, deflation and the national debt level are on-

going concerns. Government policies in Asia to cool the residential markets run the risk of

restraining lending. The debt crisis in Europe, contained for now, has the potential to

evolve into a contagion. Lastly, weak growth in the West may not be sufficient to lift global

growth and stimulate Asian exports.

RREEF Real Estate anticipates the following opportunities for 2012 in the Asia Pacific

region:

Exhibit 10.4 — Summary of opportunities in the Asia Pacific Region in 2012

As of December 2011

Market Core Value-Add Opportuni stic

Japan O: Well-located qualityoffices in Tokyo for coreinvestors at prices with widerthan normal spreads overdebt costs

R: Well-located high-streetproperties in Tokyo

R: suburban properties

I: newer properties

O / R / I: Developmentprojects and portfoliosof bulk assets.

Korea O: Grade A properties inSeoul’s three core CBDs.


I: newer properties

China O: Grade A properties in Tier 1 cities, plus selected Tier 2 cities of wealthierprovinces.

R: Well-located retailformats (multi-tenanted orwarehouse retail) with strongcatchments.

I: Development of warehouses that supportChina’s growing appetite forconsumption.

H: Selectiveopportunistic residentialdevelopments insecond- and third-tiercities focusing ondevelopers with strongtrack records. A tightlending environmentand market stress maycreate selected entry

points for opportunisticinvestors.

Singapore O: Rents did not rebound asstrongly in the previouscycle, leaving more room forupswing this time. Thewindow of opportunity herewill be narrow.


I: newer properties

Aust ral ia O: Existing properties in thekey cities (Melbourne andSydney) and the capital citiesof the resource-rich states(Brisbane and Perth).

I: Modern logistics centres,especially in the morepopulated states of NewSouth Wales and Victoria.

Key: O: Office R: Retail I: Industrial H: Residential





Important Notes©2012. All rights reserved. RREEF Real Estate, part of RREEF Alternatives, the alternative investments

business of Deutsche Asset Management, the asset management division of Deutsche Bank AG offers a

range of real estate investment strategies, including: core and value-added and opportunistic real estate,

real estate debt, and real estate and infrastructure securities. In the United States RREEF Real Estate

relates to the asset management activities of RREEF America L.L.C., and Deutsche Investment

Management Americas Inc.; in Germany: RREEF Investment GmbH, RREEF Management GmbH andRREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN 63 116

232 154) an Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI,

financial advisory (not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank

Aktiengesellschaft, Hong Kong Branch (for RREEF Real Estate’s direct real estate business), and

Deutsche Asset Management (Hong Kong) Limited (for RREEF Real Estate’s real estate securities

business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N); in

the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset

Management (Global) Limited and Deutsche Asset Management (UK) Limited; in Italy: RREEF

Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset

Management (UK) Limited and Deutsche Alternative Asset Management (Global) Limited; in addition to

other regional entities in the Deutsche Bank Group.

Key RREEF Real Estate research personnel are voting members of various RREEF Real Estate

investment committees. Members of the investment committees vote with respect to underlyinginvestments and/or transactions and certain other matters subjected to a vote of such investment

committee. Additionally, research personnel receive, and may in the future receive incentive compensation

based on the performance of a certain investment accounts and investment vehicles managed by RREEF

Real Estate and its affiliates.

This material is intended for informational purposes only and it is not intended that it be relied on to make

any investment decision. It does not constitute investment advice or a recommendation or an offer or

solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for

Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of

any information contained herein. Neither Deutsche Bank AG nor any of its affiliates gives any warranty as

to the accuracy, reliability or completeness of information which is contained in this document. Except

insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the

Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort

or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage

whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other

person.

The views expressed in this document constitute Deutsche Bank AG or its affiliates’ judgment at the time of

issue and are subject to change. This document is only for professional investors. This document was

prepared without regard to the specific objectives, financial situation or needs of any particular person who

may receive it. No further distribution is allowed without prior written consent of the Issuer.

An investment in real estate involves a high degree of risk and is suitable only for sophisticated investors

who can bear substantial investment losses. The value of shares/units and their derived income may fall

as well as rise. Past performance or any prediction or forecast is not indicative of future results.

The forecasts provided are based upon our opinion of the market as at this date and are subject to change,

dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock

market, bond market or the economic trends of the markets is not necessarily indicative of the future or

likely performance.



Global Research Team

Global

Mark Roberts

Global Head of Research

[email protected]

Kurt W Roeloffs

Global Chief Investment Officer

[email protected]

Americas

Alan Billingsley

Head of Research, Americas

[email protected]

Marc Feliciano

Chief Investment Officer, Americas

[email protected]

Ross Adams

Industrial [email protected]

Bill Hersler

Office Specialist

[email protected]

Ana Leon

Property Market Research

[email protected]

Andrew J . Nelson

Retail Specialist

[email protected]

Alex Symes

Economic & Quantitative Analysis

[email protected]

Brooks Wells

Apartment [email protected]

Stella Xu


[email protected]

Europe

Simon DurkinHead of Research, Europe

[email protected]

Gianluca Muzzi

Chief Investment Officer, Europe

[email protected]

J aroslaw Morawski


[email protected]

Nazanin Nobahar


[email protected]

Arezou SaidProperty Market Research

[email protected]

Maren Vaeth


[email protected]

Simon Wallace


[email protected]

Asia Pacif ic

Koichiro Obu

Head of Research, J apan/Korea

[email protected]

Leslie Chua

Head of Research, Asia Pacific ex-

J apan/Korea

[email protected]

Paul Keogh

Chief Investment Officer, Asia

Pacific

[email protected]

Edward Huong


[email protected]

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Documents

Research Asia Pacific Real Estate Strategic Outlook March 2012