Asset management

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Asia Pacific Real Estate Market

UBS Global Asset Management, Global Real Estate March 2013

Returning cyclicality growing opportunities

Asia Pacific Real Estate Market Outlook 2013 March 2013

Dear reader,
We are pleased to share our thoughts on the Asia Pacific (APAC) region for the coming year in our ‘APAC Real
Estate Outlook 2013’. This report is an annual update to Global Real Estate’s Research & Strategy thinking on the
region, focusing on the economic conditions, capital markets and key real estate sectors. Consistent with our past
reports, the views expressed herein, includes participation from each of our business area: Portfolio Management,
Business Development and Research & Strategy.

Building on to the theme of growing real estate fund flows within the region; demand for investment opportunity
has driven up the value of real estate invested stock in APAC. In many aspects, whilst the scale of the APAC
invested universe is now broadly comparable to that of the other regions; the rate of growth in accessible stock has
yet to meaningfully catch up vis-à-vis economic expansion. Parallel to this, we believe the rise of Asian pension
capital may herald a new era and has the potential to change real estate pricing expectations in APAC. This is an
emerging theme which will continue to evolve over the next few years.

Over the nearer term, we have observed increased market cyclicality in cities like Singapore, Hong Kong and Seoul.
Office rents in these cities have seen significant corrections since early 2012 and may soon provide yield starved
investors with some return upsides as rental prospects improve. In terms of yields, investors continue to benefit
from a wide yield spread in part due to a still competitive debt market. Similar to 2012, investors’ preference
remains core focused though there is growing evidence that investors are gradually opening up to value add
strategies. From a broad perspective, discounts outside the core segment have widened and currently offer good
relative value for investors seeking enhanced returns, after risk considerations. Finally, as part of our strategy
review, we offer the markets and sectors in which we believe the best opportunities may lie in 2013 and beyond.
This is presented in our strategy section.

UBS Global Asset Management, Global Real Estate actively manages real estate investments globally and regionally
within Asia, Europe, Switzerland and the US, across the major real estate sectors. Its capabilities are focused on
core and value-added strategies but also include other strategies across the risk/return spectrum. It offers direct and
indirect investment, multi-manager. Global Real Estate has USD 64.2 billion under management as end 2012. The
firm’s global experience in real estate securities management, private real estate investment, commercial mortgage
financing and securitization, and risk management is invaluable to our market understanding.

Our goal with this Outlook document is to provide you with information that should prove useful when making
investment decisions. We value your thoughts and comments on the analysis presented within this report.

Sincerely,

Joe Kwan, PhD

Director of Global Real Estate Research – Asia Pacific
UBS Global Asset Management
joe.kwan@ubs.com
Asia Pacific Real Estate Market Outlook 2013 March 2013

Contents
Section Page

Capital Markets 1
Economy 4
Real estate outlook – China 7
Office 7
Retail 9
Residential 10
Real estate outlook – Japan 12
Office 12
Logistics 14
Real estate outlook – Australia 15
Office 15
Logistics 17
Real estate outlook – Singapore 18
Office 18
Retail 20
Residential 21
Real estate outlook – Hong Kong 22
Office 22
Retail 23
Real estate outlook – Korea 24
Office 24
Strategy 25
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Capital markets
An important real estate theme that has developed
since the aftermath of the recent financial turmoil is the
rapid growth of APAC’s invested stock, which by
definition and according to DTZ refers to the value of
commercial real estate held by investors. These stocks
are typically of good quality and are attractive as an
income generating asset. Given Asia remains in a better
shape economically and with the relative stability of its
financial markets, invested stock grew by 13% in US
dollar terms as compared to 8% in Europe and 0% in
North America. This is shown in exhibit 1.
Within Asia, China unsurprisingly leads this expansion
as its invested stock reached USD 1.3 trillion in 2011,
not far behind Japan’s USD 1.4 trillion which remains
APAC largest market, home to circa 36% of the
region’s total invested stock as represented in exhibit 2.
Based on current pace of growth, China should by
2013, become Asia’s largest invested market despite a
vast majority of existing investment capital still
domestically sourced. The potential for further stock
growth is clear as China has yet to truly access the
queue of capital for its domestic market. On the other
hand, this easing of capital flow restriction (in bound as
well as out bound) may potentially redirect some of the
domestic capital across the region with the gateway
cities; e.g. Singapore, Hong Kong and Sydney likely to
be the immediate beneficiaries. Over the medium term,
this should bring overall invested stock in the region
closer aligned with absolute GDP size (within APAC).
That said, the immediate question on investors’ minds,
particularly from a portfolio allocation viewpoint, should
be how to gain access to China.
Access (to China) currently comes at a premium, and it
remains to be seen if early movers will be adequately
rewarded should entry barriers gradually come down.
In terms of investment flows, the APAC region has
registered USD 260 billion in significant transactions
(above USD 10 million per transaction) in 2012 through
the third quarter. Despite a decline of circa USD 47
billion in absolute amount, the APAC region remains
dominant in its share of global real estate investment. In
that, the APAC region accounts for 47% of the total
global transaction volume against Europe’s 22% and
31% in the US. This is represented in exhibit 3.
At the same time, there are emerging signs that
transaction activities in APAC’s gateway cities are
gaining momentum. One reason for this could be the
expectation of stimulus related capital inflows from
Europe and the US. Despite the current lack of evidence
of this inflow, no less the extent to which how this
capital may be directed into real estate, growing level of
anticipation is driving domestic players back into the
market ahead of this perceived asset inflationary cycle.
The growing presence of Asian sovereign wealth and
pension funds will likely also feature in this pursuit for
hard assets. Given the chase for security remains very
much the theme for these capital, it is hard to see any
reversal in the growth of transactions across the core
APAC markets, for 2013 at least.

Exhibit 1 – Global invested stock

Exhibit 2 – Share of APAC invested stock
USD trillions
14
USD trillions
4.0
12
3.5
10 2.6 2.8 3.9
3 3.4 3.0
2.2
8
1.9 2.5
1.8 4.1 4
3.7 3.7
6 1.6 3.9 3.7 2.0
1.5
3.5
4 3.1
2.9 1.5
2.6
4.6 4.8 4.2 4.5 1.0
2 3.7 4.1
2.7 3
1.8 2.3
0.5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0.0
Europe North America Asia Pacific 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: DTZ Research as at May 2012 Japan China Australia Rest of APAC

Source: DTZ Research as at May 2012

1
Asia Pacific Real Estate Market Outlook 2013 March 2013

3%, providing a meaningful yield accretion over

commercial real estate. Loan-to-valuation (LTV) remains
broadly unchanged for much of 2012 and this is not
expected to diverge in 2013. Lending conditions
improved in Australia following two reductions in the
official cash rate (in 2012) though on-going concerns
on over-exposure to real estate means banks have yet
to pass on the full discount to borrowers.

Exhibit 3 – Commercial real estate debt holdings

USD billions
160
140

120
100
If there is a need for another overarching reason to
80
further rationalize our optimism for the continued flow
60
of real estate investment, it has to be the relative ease
of debt availability in the region. It may be that 40

compared to the more advanced European and US 20

financial markets, funding in the region lacks the 0
breadth provided through the use of alternative 2007 2008 2009 2010 2011 2012
financing like CMBS, mezzanine and private equity Americas APAC EMEA
structures. Nonetheless, the depth of bank financing Source: Real Capital Analytics as at 3Q 2012
has been hugely encouraging highlighted by the mild
loosening of loan underwriting requirements in Japan
and Singapore. Even in China, where the government
has since 2010 imposed upon itself a lending embargo,
domestic banks were subsequently allowed to resume
their credit expansion towards the middle of 2012.

Across Asia, domestic banks remain relatively well

positioned to administer further credit support to real
estate as their balance sheets have largely been
quarantined from recent financial upheavals. Australian
banks probably sit near to the periphory on this given
their long-standing reliance on foreign debt to fund
borrowing demand. That said, other than for
development projects, bank debt is still available for the
best borrowers/projects in Australia. As a whole, it is
also fair to add that regional banks are not under
pressure to push out the non-performing loans and
according to a recent Urban Land Institute (ULI) survey, Capital raising in the Real Estate Investment Trust (REIT)
a vast majority of lenders favor a loan extension market bounced back strongly in 2012 as yield seeking
strategy hence explaining the lack of distress investors, particularly those with a liquidity requirement,
opportunities for investors. Part of this forebearance is piled in on the attractive available yields. As a result,
also in part due to current low interest environment as share prices have risen and yields have compressed
well as hopes of a recovery in valuations. noticeably in most markets. Many REITs that traded at
steep discounts are now either on par or are trading at
In terms of borrowing costs, Japan offers the most a premium to Net Asset Value (NAV). This would
attractive debt spread followed by Singapore, Hong suggest REITs are now more competitive than before
Kong and Taiwan. Exhibit 4 indicates current bank debt given yield accretion hurdles have come down. In Japan
cost for the region as well as our expectations on debt where share prices have been supported by a mix of
accessibility for 2013. All-in costs continue to be under foreign institutional buying and government monetary

2
 Asia Pacific Real Estate Market Outlook 2013 March 2013

easing, total J-REIT (Japan Real Estate Investment Trusts)
spending is expected to improve from the USD 8.9
billion spent in 2012 with most of the new investments
likely to be domestically focused.
Despite the JREIT rule change in 2008 that allows
overseas acquisitions, there remain a strong domestic
bias due to control concern. This is unlikely to change
any time soon. Elsewhere, strong performance in the
Singapore REIT market will likely trigger further asset
purchases though competition in a crowded market is
likely to push capital offshore, with China, Japan and
selected emerging markets amongst the popular
destinations.

Exhibit 4 – Typical Commercial Market Real Estate Lending Terms

10-year LTV Reference rate Typical debt Typical all in debt Accessibility in
government spread cost for prime 2013 vs. 2012
bond yield borrower
Australia 3.11% 50-70% Official Cash Rate: 150-250bps 5.0% Improve
3.00%
China 3.60% 50-60% 3-5 years base 100 –200bps 7.0% Same
lending: 6.4%
Hong Kong 0.61% 50-60% 3M HIBOR: 0.4% 200-300bps 2.5% Improve
Japan 0.76% 50-70% 3M TIBOR: 0.31% 60-200bps 1.5% Same
Singapore 1.30% 50-70% 3M SIBOR: 0.38% 150-250bps 2.5% Improve
South Korea 3.03% 60% 3M CD: 2.88% 150-200bps 4.5% Same
Taiwan 1.14% 60-70% 1-year deposit: 100-200bps 2.5% Improve
1.36%
Source: CBRE, Oxford Economies, UBS Research and Strategy estimates as at December 31, 2012

3
Asia Pacific Real Estate Market Outlook 2013
Economy
Against a backdrop of relative calm, Asia’s economies
opened the year on a better note with risks receding
and growth heading back towards trend. Positive
effects from diminishing risk themes such as ‘Chinese
hard landing’ as well as credit default risk in the
European Union (EU) was particularly evident as 4Q
2012 data across the region showed significant
improvements. Sentiment was also aided by the
improvements in US data, which have re-introduced
meaningful growth momentum to Asia particularly as
the world exhibited some level of confidence around
Washington’s solution towards the fiscal cliff. Whilst it
is accepted that the Eurozone remains far from healthy,
the situation does appear to be better managed now
than at any point since the start of the crisis. In
particular, comments like Draghi’s speech on ‘doing
whatever it takes’ to save the Euro have helped boost
market sentiments.
Given Asia continues to rely heavily on the
manufacturing and export trade, the ‘lift-off’ in export
demand signaled the start of an improved export
manufacturing cycle. The Purchasing Manager Indices
(PMI) across major APAC economies are showing a
steady uptrend with around half of the economies
recording readings above 50, indicating a
manufacturing expansion. See exhibit 5. Importantly,
Chinese’ PMI readings are increasing at an accelerating
rate and this augurs well for Asia’s economic
improvements given it is also a gauge of the global
manufacturing demand.
Exhibit 5 – Purchasing Managers’ Index (PMI)
comparison
January 2013 PMI1
Australia 40.2
China 52.3
Hong Kong 52.5
India 53.2
Japan 47.7
Singapore 52.2
South Korea 49.9
Taiwan 51.5
Source: Bloomberg, Moody’s Analytics 1Reading above 50 indicates an expansion in
manufacturing activity likewise reading below 50 signals a contraction
March 2013
At the same time and as a direct response to slowing
growth, Asian central banks were very active in
reviewing their monetary policies in 2012. Interest rates
were cut in Australia, China, India, Indonesia and
Korea, to name but a few. The Reserve Bank of
Australia was amongst the most pro-active, cutting
rates six times over a 13-month period in a bid to
reignite domestic demand. China too, exhibited its
determination to keep economic expansion at a level
that is sufficient to protect jobs. The central
government had been active in extending credit lines
and introduced selective lowering of corporate debt
costs on more than a few occasions. As a result,
regional real estate has benefited strongly from these
credit expansions.
As the economic cycle turns up, so too does the risk of
inflation and eventually interest rates. Central bankers
may increasingly be tempted to tighten ahead of the
cycle and better contain any potential spillover effects
from stimulus programs such as the QEIII. Nonetheless,
any eventual monetary tightening will likely be slow and
gradual, different from that which followed the 2008-
2009 response. At that time, rapid growth recovery
following the global recession pushed up inflation and
required a decisive response. Today, the situation across
Asia is less pressing with inflation contained by lower
commodity pricing amid a significantly weaker demand
cycle.
The economic cycle has brought about a growing
divergence in APAC’s real estate performance and
investors’ investment approaches are observed to have
shifted. Investors are noted to be increasingly drawn
4Q12 average PMI towards a single market, single sector strategy as
46.7 opposed to a regional approach, which may be prone
to dilution effects. Real estate investors who are looking
50.5
for a shorter-term trading strategy may look to position
51.5 themselves in countries with a higher relative near-term
53.8 GDP rebound (from 2013). On the same note, investors
with a longer-term market perspective will likely
46.1
continue to rationalize between countries offering the
48.6 best level of macro clarity and fundamental growth
48.6 impetus. We offer our macro indicators’ forecast of the
48.6
key economies as a means of comparison in exhibit 6.
This is followed by our assessment of macro themes
and risks within APAC’s key economies as shown in
exhibit 7.
4
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Exhibit 6 – Economic indicators summary

YoY GDP CPI Unemployment Government Cash Rate (end 10-year bond
(%) Growth Rate Debt (% of period) yield (%
GDP) average)
Australia 2012 3.6 1.8 5.2 18.0 3.0 3.4
2013 3.0 2.5 5.5 18.4 3.0 3.5
2014 3.3 2.5 5.3 17.8 3.5 4.1
China 2012 7.6 2.7 4.1 17.3 3.3 -
2013 8.0 3.5 4.1 17.4 3.5 -
2014 8.0 4.0 4.1 - 3.5 -
Hong Kong 2012 1.4 4.0 3.5 - 0.4 0.6
2013 4.0 4.0 3.5 - 0.4 0.6
2014 4.1 4.1 3.5 - 0.4 0.6
India 2012 5.5 7.4 - 49.4 8.9 8.2
2013 6.5 6.8 - 48.5 7.4 8.2
2014 7.0 7.0 - 47.7 7.9 8.5
Japan 2012 2.1 0.0 4.4 202.3 0 1.1
2013 1.3 0.3 4.1 206.4 0 1.4
2014 1.8 2.3 4.0 210.5 0 1.6
Singapore 2012 1.3 4.3 2.2 111.3 0.4 1.5
2013 3.0 3.5 2.2 112.7 0.4 3.0
2014 4.5 2.8 2.2 112.6 0.4 3.0
South Korea 2012 2.2 2.2 3.3 - 2.9 3.0
2013 2.9 2.1 3.4 - 2.7 3.0
2014 3.5 2.5 3.4 - 3.4 3.5
Taiwan 2012 1.2 2.0 4.5 - 0.8 1.2
2013 3.7 1.5 4.3 - 1.0 1.5
2014 4.2 1.5 4.3 - 1.3 1.9
Source: UBS Investment Bank as at January 2013

5
Asia Pacific Real Estate Market Outlook 2013
Exhibit 7– Assessment of macro themes and risks
Themes
Australia - Post-anticipated mining peak in mid-2013,
economy requires other drivers to keep
growth on course.
- Loose monetary conditions play important
role in lifting non-mining sectors.
- Policy makers have further scope to offset
any downside weakness.
China - Economy on cyclical upswing with clear
positive effects until mid-year.
- Growth expected to decelerate in 2H13
alongside tighter monetary control to
manage house pricing and inflationary
concerns.
- Government reforms will focus on reducing
investment spendings, narrowing income
inequality and improving social safety nets.
Hong - Economy to benefit from China upswing
Kong though growth pace will be slow.
- Upswing may be bumpy through 1H13 due
to external volatility and reliance.
- Negative output gap suggests limited
inflationary concern.
India - Looser monetary policy will provide support
for growth though stubbornly high inflation
and a large fiscal deficit limit the scope for
further easing.
- Recent reforms will help reduce key risks
facing the economy and may gradually
translate into stronger business confidence.
Japan - Positive sentiments to slowly fade driving
some degree of currency volatility alongside
increased uncertainties.
- Open-ended quantitative easing to remain
supportive of credit market.
- Increased inflows into equity markets on the
back of eroding bond sentiments. Weaker
currency also supporting Japanese earnings
growth and trade competitiveness.
Singapore - End of weak economic cycle as export
recovers, albeit at a slow rate.
- Efforts to shift to a more service-based
economy to continue. Any recovery in
financial markets may drive outperformance.
- Monetary policy to gradually tighten towards
the end of 2013 in view of asset inflationary
concerns.
South - Slow and steady growth for 2013.
Korea - Low inflation means policymakers are
allowed to focus on growth in 1H13 moving
towards price stability in the second half.
- Korean Won likely to weaken alongside
Japanese Yen in bid to preserve trade
competitiveness.
March 2013
Key Risks
- External demand risks persist; e.g. China and the US.
- Climate-related drag on output; e.g. flooding in Queensland.
- Rapid house price correction will erode consumption and business
confidence.
- Elevated AUD despite falling terms of trade via lower commodity
prices also a risk for Austalian corporate sector’s expansionary
plans.
- Rising income inequality may lead to risk of social unrest which will
derail growth and increase risk of policy errors.
- Potential re-inflation of the housing bubble resulting in loss of
business confidence.
- Geopolitical dispute with Japan will result in trade drag.
- Risks of lending through the shadow banking sector
- Housing bubble-linked risks.
- Policy error risk due to house price concerns. resulting in output
limiting policy move.
- Weakening labor market impact consumers’ sentiment thereby
dampening domestic spending.
- Fragility of government coalition may precipitate a government
collapse and trigger early elections.
- Currency weakness due to confidence loss will quickly turn into an
economic drag.
- Growing social discontentment due to pro-foreign investment
reformative move.
- Once bond holders start to price in inflation, yields could rise and
government debt burden will quickly become unsustainable.
- Heightened geopolitical risk due to current nationalistic leadership.
Further escalation of dispute with China can destabilize region.
- Currency war in which trading nations compete to weaken
respective currencies. Potentially high fiscal cost.
- Open economy highly exposed to external conditions.
- Returning inflation may pre-maturely curtail expansive monetary
stance.
- High level of household debt.
- Excessive household deleverage weighing in on consumption.
- Disproportionate strength of Korean Won to dampen export.
6
 Asia Pacific Real Estate Market Outlook 2013
Real estate outlook – China
Exhibit 8
Sector Summary
Office Rental growth will slow in Shanghai and
Beijing given moderation in new
demand. Leasing activity will remain
dominated by domestic corporations.
We argue against any meaningful
downtrends in both markets though
they may register one or two quarters of
flat growth.
Retail The retail outlook continues to remain
stable though rental growth
expectations will have to be rationally
managed. Within the core markets in
Shanghai and Beijing, outperformance
remains confined to prime locations.
Further out, there appears to be relative
good value in mass retail in Tier 3 and 4
cities. The latter may be better placed in
the up cycle.
Residential Price recovery will continue to be a
feature through to the third quarter
before a new wave of targeted policy
controls start to re-surface. This time
round, we do not expect the policy curb
to be excessive and should remain
accommodative to first time buyers.
Policy is expected to be more targeted
with Tier 3 and 4 cities in the Central
region to enjoy some level of policy slack
compared to anywhere else.
Office
Themes
 Vacancy rates remained flat in both Beijing and
Shanghai prime office markets despite a period of
low supply. New leasing demand for large
corporate space is subdued and may remain so
given the level of forward expansion in 2011/12.
 It is difficult to assess current level shadow vacancy
as these are not reported and domestic
corporations are known to horde space in order to
circumvent ownership restriction through owner-
occupancy.
 It appears that prime rents in Beijing will not be
making the same growth headlines in 2012 as
larger occupiers begin to examine options in
decentralized locations. Extent of rental growth will
7
March 2013
Risk Outlook 2013 2013 2012
Macro-economy weakness remains
central to our risk consideration though
our discomfort with the actual level of
unreported ‘shadow space’ is slowly
showing up. This will be even more of a
feature if net absorptions turn negative. – +
Other than recent unfamiliar concerns
on the sustainability of income growth,
the key structural risk must be the
emergence of e-commerce retail. If
properly executed, goods sold through
the internet post a significant price – +
advantage over traditional retail
channels and will erode retailers’
competitiveness and ability to pay rents.
Higher than anticipated level of
economic rebound may bring forward
policy actions with higher
severity/impact given the perceived need
to pre-empt asset inflationary concerns. – +
Excessive policy tightening may impair
housing supply and that will leave the
country vulnerable to social unrest
which in itself represents a major
concern.
be increasingly correlated to level of economic
improvement going forward.
 Shanghai faces relatively greater level of downward
rental pressure due to higher starting vacancy.
Tenant demand from multinationals is expected to
remain tepid over the immediate term or until
uncertainties on growth clears. Real corporate
profitability, not growth potential is now the pre-
requisite for expansion.
 Lease renewal negotiations will likely be
significantly harder given the level of rental markup
from 2010/11. This is exacerbated by the economic
slowdown and a lack of replacement demand.
Asia Pacific Real Estate Market Outlook 2013 March 2013

 Investment demand for core stock remains keen Exhibit 9 – Prime office supply as a % of existing
though the lack of transactional activity provided stock
further evidence of accessibility and pricing issues. 18

Strong cash positions and the lack of alternative 16

investment avenues are two key barriers as 14
domestic asset holders shun asset sales.
12

 Strata titled office transactions volume has surged 10

as retail investors remained locked out of residential 8

investment. These transactions typically involve 6

poorer quality assets in peripheral locations. 4

2
 Yields remain of little relevance as domestic 0
investors continue to focus on exit value rather 2000-2009 2010 2011 2012 2013 2014 2015 2016

than on-going income. This makes it difficult for Beijing Shanghai

foreign investors to underwrite any investment Source: Property Market Analysis as at 3Q12
unless they adopt an exit value approach or
downgrade their risk premium requirements in their
underwriting.

Strengths
 Following the macro slowdown, Beijing and
Shanghai will see the lowest level of new supply in
2013 and that should help mitigate against any
potential sector downturn.

 Business confidence is at a cyclical low and should

start to strengthen alongside positive macro news
flow. Appetite for space expansion should be more
obvious towards the middle of the year when the
economy is expected to peak.

 Existing barriers to entry for domestic pension and

insurance capital indicate significant capital growth
headroom for office asset capital growth.
Currently, only insurance capital is allowed to have
a small, circa 10% allocation to real estate
investment. State-owned companies are not
allowed to invest in real estate other than those
they occupy.

Weaknesses/risks
 Existing shadow space may delay rental growth
momentum particularly as current high rents may
entice more landlords to release such space.

 Larger pipeline supply in Shanghai between 2014

and 2015 may act to dampen rental prospects
particularly on the back of a weaker than
anticipated macro rebound. See exhibit 9.

8
 Asia Pacific Real Estate Market Outlook 2013
Retail
Themes
 Retail sales growth climbed back to trend growth in
4Q12 after two consecutive quarters of
underperformance. Consumption sentiments
appear to be rejuvenated by improving macro news
flow.
 Retail fundamentals look to be further
strengthened under the new government
leadership whose immediate priorities include
narrowing social inequalities through accelerating
real wage increase.
 Household balance sheets remain in very good
shape given the high saving ratio. The propensity to
start directing part of this income to consumption is
at an early stage and has significant headroom to
grow (though this would likely require significant
reforms to social safety networks). In addition, the
level of household indebtedness remains extremely
low by any measure.
 Tier 1 and 2 cities are more likely to capture the
initial benefits from the expansion in consumer
credit i.e. credit cards as compared to the lower
tiered cities. Luxury item spending is on the rise and
an increasing proportion of such sales are financed
by credit.
 Core markets in Shanghai and Beijing have done
exceptionally well to adsorb the large retail supply
over the past decade. Nonetheless, with retail space
per capita ratio hitting the levels of mature markets
like Sydney and Osaka, it is likely that vacancy rate
will slowly pick up if the supply pipeline does not
slow down.
9
March 2013
Strengths
 Favorable demographical factors continue to define
this market and importantly, these will continue to
be relevant for next ten to fifteen years, at the very
least.
 High-level governmental push to increase domestic
consumption will drive policy and legislation
decisions, which are anticipated to remain
supportive of retail over the longer term. The
eventual deregulation of the consumer credit
market will add further support.
Weaknesses/risks
 The fast expanding e-commerce market may
redirect retail volume away from traditional retail
channels like shopping malls and high street shops.
Rising internet penetration and improving
sophistication of e-commerce marketing mean
retail sales volume transacted over the internet will
continue to grow.
 Over the past few years, retailers’ profitability has
narrowed considerably due to surging operating
cost driven by high rents and increasing unit labour
costs as real wages climb higher.
 Recent slowdown in new demand may be an
indication that retailers are increasingly more
atuned to profitability and market saturation issues.
Growth assumptions may need to be adjusted
downwards pointing to some moderation in rental
growth.
Asia Pacific Real Estate Market Outlook 2013
Residential
Themes
 As shown in exhibit 10, nationwide house prices
registered a seventh consecutive positive month in
December, up 0.23% Month-on-Month (MOM). It
is unclear if this is simply a flow-through effect
from the monetary loosening in mid-2012 or due
to fundamental growth factors.
 Secondary locations (tier 3 and 4 cities) registered
both the largest price increases and declines with
these markets becoming more segmented over the
past twelve months. Cities which were neglected in
the last run-up saw the greatest increase; the
reverse is true with Wenzhou leading the decline in
this cycle.
 Land premium for Tier 1 cities registered a
noticeable rebound towards the end of 2012 as
developers built on current sale momentum to
expand pipeline. See exhibit 11. Credit access for
developers has improved over the course of the
year though there are emerging signs that
underwriting standards are beginning to tighten on
the back of growing policy uncertainties; e.g.
capital gains tax etc.
 An increase in land prices was evident in the
Central region given prices did not see the same
level of run-up as in some of the coastal cities. This
trend is expected to continue given current political
push to develop this region. This would suggest any
policy pull back might be a little more considered in
these cities.
 Whilst inventories are clearing quickly, concerns
remain on the rising ratio of ‘area under
construction’. However, on investigation, it appears
more likely to be a cause of land hoarding with
developers claiming starts on development to avoid
hoarding penalties. Supply is expected to be more
measured than the previous few years given recent
policy scares.
March 2013
 There appears to be a significant price premium
placed on branded developers on the perception of
quality. This price stickiness has been observed
through periods of downturns notably in early
2012. As a result, capital expenditure (capex) costs
have increased as more developers begin to
prioritize quality. On the back of growing costs,
narrowing margins may accelerate pricing growth.
Potential increases in raw material pricing; e.g. steel
and copper, may also add to this price pressure if
prices start to turn from their current low levels.
 The incremental pricing growth over the second
half of 2012 is beginning to attract policy attention
with the core Tier I cities like Shanghai and Beijing
most at risk. Any implementations are likely to be
tiered though with conditions for first time buyers
are expected to remain relatively favorable.
Exhibit 10 – Aggregate average selling price of
housing in 100 Chinese cities
10,000
9,800
9,600
9,400
9,200
9,000
8,800
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
Average selling price of 100 Chinese cities
Source: CREIS as at January 2013
10
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Strengths
Exhibit 11 – Land price premiums in China  Outside the housing restrictions, demand
fundamentals in China continue to be supported by
160% strong demographics factors. Real end-user
140%
demand will continue to drive development trends
with mass residential projects favored over the near
120%
term.
100%

80%
 The pause in housing price growth over 2012 has
enhanced affordability given household income
60%
grew by approximately 13%. Reduced policy
40% pressure has allowed the new leadership the space
20% to better formulate future policy response thus
reducing policy error risks.
0%
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Tier 1 Tier 2 Tier 3/4 Weakness/risk
Source: CREIS as at January 2013  Whilst a weak macro performance is often cited as
a potential risk to sector performance. In this case,
the reverse probably posts a greater risk. A stronger
than anticipated macro performance may bring
forward the timing of any policy tightening. The
implementation of property taxation in March 2013
represents such a risk though the longer term
impact in this case is thought to be relatively mild.

11
Asia Pacific Real Estate Market Outlook 2013
Real estate outlook – Japan
Exhibit 12
Sector Summary
Office We remain cautiously optimistic on the
rental outlook in Tokyo Central 5 Wards
(C5W). The market appears set for a
cyclical rebound though recovery is
expected to be long and gradual. We
should point out that the typical lease
structure in Japan does not allow for rapid
rental adjustments and any expectation for
a swift recovery is therefore flawed. In
contrast, given the clear preference for
quality and location, we fully stand by our
expectations that secondary assets will
continue to be priced down both in terms
of rents and price.
Logistics Prospects for Tokyo and Osaka logistics
markets continue to be positive on the
back of stable demand. Growing supply
pipeline will hinder rent negotiations
though owners of well located assets
should still be able to drive terms.
Aggregate rental profile for 2013 will likely
remain flat.
Office
Themes
 Strong preference for well-located, well-appointed
office space in Tokyo means that the C5W
outperformed the broader market in 2012 (partly
due to earthquake resistant features). This also
indicates the growing polarization in market
performance across the major Japanese office
markets given new demand in Osaka and Tokyo
sub-markets was tepid at best.
 The vacancy rate in Tokyo C5W dropped below 9%
for the first time in 10 months during September.
This is despite having to negotiate through record
level of pipeline supply over the first half of the
year. Relocation demand plays a significant role
though such impact is expected to slowly taper off
in 2013.
 On the supply-side, below trend new completions
between 2013 and 2016 should be supportive of
rental recovery. See exhibit 13.
March 2013
Risk
Current business confidence rally is due
largely to growing expectation that
business profitability will return alongside a
depreciating yen. Any fiscal error will
likewise have a meaningful impact on
confidence and this has the potential to – +
derail recovery momentum in Tokyo C5W.
The doubling of consumption tax when
implemented in 2014 will likely be
detrimental to consumption sentiments
though near term forward purchase will
likely see inflated retail sale. In addition,
the weakness in Yen may act to restrict – +
e-commerce growth given the increased
cost in imports.
 Office demand should be closely tied to economic
performance. Given the sizeable manufacturing
representation in the tenant makeup, it may be the
case that any currency depreciation may be a better
forward indicator than say high frequency GDP
indicators. In simple terms, a cheaper Yen means
higher corporate profitability as offshore profits are
brought back into Japan which usually equates to
higher office demand, even in a year of tepid
economic growth.
 Prime rents within the C5W should continue to
register a mild recovery given vacancy rates are
expected to continue to decline. Conditions at the
top end of the market will remain a lot tighter than
the overall market given current low rents and
preference for prime.
12
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Tenants are increasingly aware of the benefits of better Strength

space efficiency hence driving price premium for prime
office. This increases the downward pressure on
secondary quality stock.
 Investment interests for prime Tokyo office are
growing alongside improvements within the
Japanese capital markets. Domestic bank lending
attitude towards real estate is recovery quickly
whilst overseas institutions are re-entering both the
debt and equity markets. J-REITs which have been
outperforming the wider stock market have also
been net purchasers of office assets.
 Competition for the best office assets in the best
locations in Tokyo should point to some level of
yield compression led primarily by inward yield
movements. Rental negotiations in Japan are
typically extremely sticky due in part to its lease
structure. It usually takes a longer time for any
rental adjustments to feed through. Conversely,
slow rental adjustment has its benefits in a down
cycle.
 Prime office supply within the C5W is beyond the
cycle peak and with office employment showing
mild growth, net absorptions should continue to be
positive driving down vacancy rates lending to
some mild rental growth.
 Government’s drive to stimulate the economy
through aggressive credit expansion and yen
depreciation will in general be a supportive of
businesses. Increased corporate profitability will be
supportive of a recovering office market.
Weakness/risk
 Key risks remain external driven. The global
demand cycle, which is highly correlated with
Japanese corporate performance, will be the one to
watch. The ability for the government to make
good its promise to depreciate the yen will be seen
as an important confidence barometer. Failure to
do so may lead to political destabilization and may
delay the current recovery.

Exhibit 13 – Tokyo C5W prime office supply as a

% of existing stock

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2010 2011 2012 2013 2014 2015 2016 2017
New completion as a % of stock 10 yr historical average supply

Source: Property Market Analysis as at 3Q12

13
Asia Pacific Real Estate Market Outlook 2013
Logistics
Themes
 A combination of a limited supply and a healthy
demand for prime logistic space has driven down
vacancy rates in Greater Tokyo and Greater Osaka.
 The supply-demand imbalance will be quickly
restored in 2013 as developers react swiftly to this
surge in demand, which started in 2011. The pace
of which stock can be added continues to act as a
deflator weighing in on rental negotiations just
when it is about to gain some upwards traction.
 Recent rebound in retail sales has boosted
inventory flow and retailers are beginning to
consider investment spending on strengthening
their logistics networks. Ongoing debate regarding
the use of third party logistics operators has yet to
produce any meaningful results and we may still be
some way off the much promoted structural shift.
 Nonetheless, the proportion of new lease taken up
by third party logistics operators grew steadily
through 2012. This will likely be replicated in 2013.
 Internet retailing continues to gain pace led by
relatively new international entrants like Amazon
and Yahoo (Japan). Today, the market size is
believed to be larger than that of the convenience
store market of circa 8 trillion (USD 75 billion),
according to a Ministry of Economy, Trade and
Industry Survey.
March 2013
 Prime logistic yields in Tokyo and Osaka have
registered significant yield shifts due to growing
investors’ demand. Prime yields registered an
inward shift of circa 30 basis points (bps) over a 12-
month period. The relatively small number of
tradeable assets should continue to trigger mild
levels of inward yield shift in 2013. Prime logistic
assets will continue to attract a widening premium
over secondary assets given current demand focus.
Strength
 The revival in internet retailing is driving the
demand for prime logistics space. Surprisingly,
e-commerce has not yet taken off in Japan despite
an excellent infrastructure; e.g. internet penetration
and connectivity. A recent surge in e-commerce
growth suggests this segment may finally be ready
to grow, and this will drive the use of modern
logistics space.
Weakness/risk
 Other than obvious macro concerns in Japan, the
standout risk is probably the quick turnaround time
of modern logistics units. With investors’ demand
at an all time high, the risk of oversupply is
heightened, particularly during a period where debt
for logistics development is highly accessible.
14
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Real estate outlook – Australia

Exhibit 14
Sector Summary Risk

Office The lack of demand drivers will continue to
curtail any suggestions of market
recoveries in Melbourne and Sydney. Big
domestic financial institutions remain
cautious about making headcount
commitments and this is unlikely to change
in the next 12 months.
Government’s monetary stance will be in
strong focus given its strong relevance to
consumption patterns. Consumer
confidence is currently at the most fragile
compared to anytime in recent history. Any
reversal in rates without sufficient – +
economic compensation will hit
consumption and eventually business
confidence.

Logistics Outlook for the logistics sector is slowly The risk is very similar to that of the office
picking up due to the confluence of space and should continue to revolve
positive factors. Whilst this may put a floor around interest rate related risks.
under any further rental declines, the
momentum does not appear to be
significant enough to drive an outright – +
sector recovery.

Office

Themes
 New leasing demand in Sydney and Melbourne
reduced over the course of 2012 as a result of
softer business conditions, particularly within the
business and financial sector. Rationalisation of
space was a key theme across the largest banking
institutions in 2012 and this is set to continue into
2013.
generally more pronounced in the secondary
segment. Given that business conditions should
gradually improve on the back of declining interest
costs, prime office demand should improve,
although it may not yet be sufficient enough to
trigger recovery.

 Leasing demand is firmer in Perth and Brisbane Exhibit 15 – Sydney prime office supply as a % of
with more stock now available. Nonetheless, the stock
pace of leasing take-up was not sufficient to keep
vacancy rates from rising, although new supply is 4.0

forecast to decline meaningfully in both markets. 3.5


3.0
Prime rents remained relatively flat in Sydney whilst
Melbourne experienced some level of moderate 2.5

correction given that there is still a good level of 2.0

supply coming through in 2013. In Sydney,
1.5
concerns on the impending large supply in 2016
(Barangaroo) has yet to materially depress rents; 1.0

however, these may increase should corporate 0.5

demand not pick up. See Exhibit 15 for supply 0.0

projections. 2010 2011 2012 2013 2014 2015 2016 2017
Sydney office supply as % of stock 10 yr historical average supply

 As with the demand profile, downward rental Source: Property Market Analysis as at 3Q12
adjustments in both Central Business District (CBD)
office markets are

15
Asia Pacific Real Estate Market Outlook 2013
 In contrast, prime office yields are beginning to firm
moderately ahead of occupancy demand as
investors take advantage of the lower all-in debt
cost. Foreign investors as well as domestic A-REIT
[investors] lead this asset chase.
 In addition, considering prime office yields are still
close to the cyclical highs posted during the
financial crisis, investors will continue to be drawn
to this available yield spread against long bonds.
 Currently, the transaction market is only limited by
the lack of available institutional-grade asset for
sale. The transaction market should slowly loosen
up as Australian institutions and superannuation
funds begin their divestment process to lock in
gains and proceed with diversification.
March 2013
Strength
 The broad economic picture in Australia appears
more positive when compared with other
developed markets.. Stronger growth in the
Chinese economy may present a quicker than
anticipated restoration of business confidence in
Australia, while limited downside risk to the
economy suggests a relative stable outlook.
Weakness/risks
 With interest rates nearing a decade low, any
unexpected reversal will quickly increase the cost of
debt and ease of financing. Both of which dampen
business confidence and investment sentiments.
The possibility of rate normalization will increase as
the economic outlook improves. Investors who
overpay for yields may be exposed to the
consequence of the reversal in real estate
investment.
16
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Logistics

Themes
 The strong Australian dollar has added vital import
volume into its ports, and this has translated into a
slow increase in demand for logistics space across
all major locations.
 The Australian industrial sector has experienced a
mixed last couple of years, with domestic activity
slowing amid high mortgage rates and general
unease over the broader global economy.
 Conditions for the logistics sector improved
noticeably towards the end of 2012 with rate cuts,
 The attraction of the high yield spread is all the
more obvious in the logistics sector. Not unlike the
office sector, logistic yields in Sydney and
Melbourne had on average compressed by
approximately 50 bps over the past two years. The
pace of yield compression has since slowed with
prime yields in Sydney and Melbourne currently at
circa 7.5% and 8% respectively.
Exhibit 16 – Australia’s policy rate trend
8

returning housing activity and strengthening

household spending all important contributors. This 7

convergence of positive factors should support 6

rents and price recovery in 2013. See exhibit 16 for
policy rate trend. 5

4
 Period of above-trend supply had dampened the
rental outlook in Sydney and Melbourne with prime 3

rents moving sideways for much of the past two

years. Positive demand-side drivers may finally 2
Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar-
position these markets for some moderate level of 07 07 08 08 09 09 10 10 11 11 12 12 13
recovery. Australia policy rate

Source: Australian Bureau of Statistics as at March 2013

 There have been tangible signs of returning
demand in Sydney and Melbourne, with Strength
strengthening enquiries for completed prime space.
 Fundamental demand drivers for logistics space
Forward demand for new logistics facilities though
appear to be in place. Given the recovery in
are more uneven with modest drop in commitment
housing activities and an early stage in the
recorded over the same period. Tenants may need
domestic spending recovery, sector upsides may be
to gain more comfort on the sustainability of this
considerable.
recovery before making any forward commitments.
 In-pace rents remain linked to CPI growth and have
 Improvement in the housing market, an important
been rising through recent cyclical weakness. With
demand driver for logistic space, in particular
the average lease length longer than anywhere else
should help encourage construction though the
in the APAC region – on average in excess of five
lack of lease pre-commitment makes it very difficult
years – the case for investment remains strong.
to secure debt funding. This is a relief for current
asset holders, given that Sydney still has to work
through a sizeable supply pipeline from 2014. Weakness/risk
 In view that much of the improvements can be
 The supply situation in Melbourne is significantly attributed to the monetary loosening, any reversal
more subdued; however, any recovery may be held will be equally detrimental
back by the relatively weak economy in the state of
Victoria. The southeastern state has a significant
exposure to manufacturing, which has been
negatively impacted by the strength of the AUD.

17
Asia Pacific Real Estate Market Outlook 2013
Real estate outlook – Singapore
Exhibit 17
Sector Summary
Office Outlook for prime Singapore office space
looks better than last year. Yields are
expected to contract ahead of underlying
asset performance. Income recovery should
be more obvious closer to the end of
2013. The intensity of this rebound will
rely heavily on the conditions around the
banking sector.
Retail Growth prospects in the retail space look
limited given decelerating spending
growth and uncompetitive business costs.
Sector performance will likely trend
sideway over the immediate term.
Residential The restrictive housing measures are
probably near their policy peak and scope
for further tightening appears limited.
Whilst strong underlying demand will
cushion any pricing weakness, policy
fatigue may eventually point to a mild
price moderation in the mass segment.
Price adjustments will be a lot more
measured in the luxury space given the
higher level of correction over the past two
years.
Office
Themes
 Ongoing flight to quality has supported net
absorption in the CBD although cost conscious
occupiers means rents will continue to face
moderate level of downward pressure until existing
prime space is gradually absorbed.
 The large prime supply that came online between
2010 and 2012 is gradually been taken up and
vacancy peak may have passed. The next big supply
wave will happen only in 2017, suggesting room
for the further vacancy tightening. As such rental
outlook should progressively improve over the next
few years. See Exhibit 18.
 Office employment has over the past year been
supported by growth in the non-financial segment,
taking up the demand slack from financial
March 2013
Risk
Uncertainties around the financial sectors
continue to dominate our risk assessments.
Net negative job creation in this sector can
easily push back growth by another year.
On the other hand, excessive asset
inflation as a result of further monetary – +
stimulus in developed markets may
position the office sector for a difficult few
years beyond 2013.
This sector faces emerging structural issues
in the provision of labor and its
accompanying cost. Retailers’ profitability
is impacted and may ultimately have to
take its expansion plan out of Singapore.
– +
Any sudden pull back in interest rates may
bring about significant stress in the market
given that almost 25% of all housing stock
in Singapore was financed by the unusually
low rates over the last four years. In
addition, as credit access reduces, it could – +
lead to downward price pressure.
institutions. The level of actual job loss within the
financial sector is less pronounced than first
expected, with domestic banks continuing to record
good profitability. Employment outlook for 2013
should improve from last year with business
consolidation exercises nearing completion.
 Large amounts of secondary space left behind in
the flight to quality will continue to depress rents of
secondary assets. On the other hand, this may be
cushioned by secondary stock being taken out due
to asset enhancement initiatives, as seen in the last
down cycle.
18
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Investment demand for office products have firmed up Weakness/risk

in recent months. Expectation of capital recovery is high  Setbacks in the global economic environment have
given the historically short length of cycles. Office the potential to quickly wipe out any market
transactions have picked up since late last year with improvements.
domestic investors leading the way. Foreign
participation (intra and inter-regional) is expected to
pick up towards the end of the year driving capital
growth.

Exhibit 18 – Singapore prime office supply

makeup

3.5

2.5
million sq ft

1.5

0.5

0
2010 2011 2012 2013F 2014F 2015F 2016F 2017F
CBD Strata CBD Decentralised

Source: URA, UBS estimates as at February 2013

Strength
 Office rents have overcorrected in this cycle with
office occupancy costs well below that of regional
peers. Improving economic conditions will be
supportive of business growth and eventually rents.

 Highly accessible gateway city to Asia. Ranked third

most favored real estate investment destination in
the region according to a PWC ULI’s Investment
Trends investors’ survey for 2013.

19
Asia Pacific Real Estate Market Outlook 2013 March 2013

Retail

Themes
 Despite the tight vacancy, landlords are facing
growing difficulties to attract new tenants due to
elevated business costs and constraints on labour.
 Aslowdown in tourist spending has impacted retail
performance with retail sale growth slowing to 3%
YOY in January, from circa 6% during the same
period in 2012. The forecast for retail sale growth
remains modest yet positive. The widening range of
tourist attractions should add some level of growth
impetus.
 Following two years of under-trend supply, the
market will see a pick up in new supply hitting circa
150,000 square meters (sqm) in 2013,
approximately 25% above trend levels with much
of thislocated in suburban locations.
 Retail rental growth will likely take on a flattish
profile with very mild growth over the immediate
future. The absence of meaningful domestic drivers
will cap rental expectations.
Strength
 Strong longer term demographic drivers –
population to grow another 12% by 2020, strong
income growth and rising tourist arrivals and
spending – are all supportive of the retail sector.
 Singapore has one of the lowest real consumption
to GDP ratio due to its high saving rates. See
exhibit 19. This implies a significant spending
upside.
 Tightly controlled regulatory and planning
environment to help manage supply.
 Improving social net should help encourage higher
consumption.
Exhibit 19 – Comparison of real consumption/GDP
ratio
80%
70%

60%

 Asset level performance continues to be polarized 50%

with well-managed institutional assets significantly 40%

outperforming. Higher premiums are now being
30%
placed on asset management capability,
highlighting potential opportunity to execute a 20%

value-add strategy. 10%

0%
 Core-like income characteristics of prime retail United States Hong Kong United Japan Australia China Singapore
Kingdom
assets in Singapore continue to appeal to investors,
particularly pension funds and insurers’ capital. Source: Oxford economics as at 2012

Liquidity is constricted by a lack of available stock.

 Nonetheless, prime yields in the best locations are
currently trading at approximately 3.0% to 3.25%.
This leaves very little room for yield compression
with any capital value growth limited by the lack of
income expansion.
Weakness/risk
 Lack of retail-trained labor force may constrict
sector growth. In addition, rapid increase in
retailers’ business cost due to rising taxation for
foreign workers in the service sector may conspire
to deter retailers’ plan for expansion.

20
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Residential

Themes
 Sale volume of residential units weakened on the  House pricing diverges notably between the luxury
back of the latest round of government tightening and mass markets. At an aggregate level, net
policy. The seventh round of tightening further pricing of luxury housing corrected [itself?] by
increased the entry barriers for purchasers, in approximately 15% over past two years whilst
particular for foreigners and domestic owners with pricing at the mass end increased by the same
multiple homes. See exhibit 20 for schedule of amount during that period.
policy moves and the schematic impact on pricing.
 Current pricing gap between mass and luxury
 The debt side of the equation was swiftly tightened residential is at its narrowest and should point to
by the policy-makers to minimize future instability better relative value at the luxury end. We now
caused by any interest rate hike. The tightening of expect the pricing gap to slowly widen with mass
lending standards now makes it tougher to qualify pricing expected to see some mild correction.
for a home mortgage with the exception of first
time buyers. Strength
 Near-term demand will continue to be underpinned
 Foreign demand for luxury homes nearly halved in by strong demographic factors, which include
2012 due to discriminatory stamp duties. Demand strong population and income growth. Shrinking
in the luxury space is expected to remain tepid as household size will also be supportive of overall
we don't expect significant policy shift in 2013. housing demand.

Exhibit 20 – Comparison of real consumption/GDP Weakness/risk

ratio  Much of the recent housing boom is built on the
back of cheap credit. Any quick pull back in interest
rates may precipitate a larger than expected decline
Buyers' market Sellers' market in house pricing.
Policy loosening
Policy tightening
Pricing growth
Perceived policy tightness

flattening
Latest policy
introduced on
11th Jan 2013

Pricing decline
flattening

0
00

02

03

04

05

06

07

08

09
01

10

12

13
11
20

20

20

20

20

20

20

20

20
20

20

20

20
20

Source: URA, UBS Strategy and Research as at [date] 2013

21
Asia Pacific Real Estate Market Outlook 2013
Real estate outlook – Hong Kong
Exhibit 21
Sector Summary
Office Prime office rents will likely see further
moderation in the first half of 2013 before
seeing mild recovery towards the end of
the year. Prime rent should grow slightly
given the level of correction in 2012. The
lack of meaningful leasing demand and
the intensity of current cost cutting drive
will limit the scope for this rental recovery
as and when it happens.
Retail The growth landscape has shifted slightly
in the retail space. Expectations of
continued retail growth are unsustainable
and would have to be managed. Rents
should continue to trend upwards in view
of past momentum. Any increase will likely
be a lot more hard fought from the
landlord’s perspective.
Office
Themes
 Demand for prime office space remains weighed
down by global uncertainties as office employment
growth slowed. New office population is now
spreading to locations outside of the CBD due to
growing cost sensitivity.
 Rents continue to edge higher in selected
decentralized locations, a theme that was pointed
out in our 2012 outlook. This will continue to play
out as rental differentials narrow, while relocation
cost will come into play and support CBD
occupancy.
 For the whole of 2012, rents in the CBD were
down 11.1% as compared to a 3.6% decline in the
overall market. As such, rents in all other
decentralized locations posted positive growth.
 Capital inflows saw strong pickup in investment
volumes and unlike previous cycles, there is
significantly more demand for assets in
decentralized locations buoyed by the positive
performance. Stock availability is also another
driver as stock in the CBD continues to be tightly
held by very dominant domestic developers.
March 2013
Risk
The sector’s reliance on the financial sector
remains the key risk. Any shock to the
system can result in another round of rapid
job loss. Decentralisation of office space
may present longer term risk as tenants
find alternatives that was not available say – +
five years ago. Such availability may
present a pricing cap to CBD assets.
Further slowdown in mainland tourist
volume will impact retailers’ bottom line
and depress retail rents. This presents a
real risk for retail in Hong Kong given
ongoing push to lower consumption tax in
China. – +
Strength
 Positive longer-term prospects given its close
proximity to China. Key RMB trading centre.
 One of the few gateway cities of APAC. Strong
institutional demand for real estate due to its pro-
business environment and strong market
transparency.
Weakness/risk
 Market is susceptible to external market shocks and
given its exposure to the banking sector, may be
positioned for further weakness before any
recovery can come through.
 Growing decentralization momentum presents an
increasingly real structural threat to CBD assets.
 Current high-level of rents – Hong Kong is the most
expensive office location in the world – exposes its
vulnerability to external shocks.
22
 Asia Pacific Real Estate Market Outlook 2013 March 2013

Retail

Themes
 Retail sale growth expectations continue to
moderate on the back of weaker domestic and
tourists’ spend. This ‘new reality’ may progressively
influence rental outlooks and eventually asset
pricing.
 The lack of growth headroom in prime retail space
is apparent with much of recent retail growth
derived from growing demand in secondary
locations.
 Taking a step back, the retail sector looks fully
priced notwithstanding the weakening in market
fundamental drivers. The lack of available core
stock has in previous cycles led to exceptional price
surges. Recent moderation in growth expectations
will likely dampen this pricing growth. As it is, with
initial yields at approximately 2%, it leaves very
little room, if any, for risk premiums.
Strength
 Consumption drivers tied to China’s growth story.
Weakness/risk
 As taxation on retail goods reduces in China, the
attractiveness of Hong Kong as a retail destination
will gradually fade.
 As with our 2012 outlook, the current weakness of
the HKD means any normalization of interest rates
will likely bring about the appreciation of the
currency, which will serve to depress retail sale
growth. See Exhibit 22 for RMB vs. HKD.
Exhibit 22 – Hong Kong Dollars (HKD) post-crisis
depreciation
1.25
1.2
1.15
1.1
1.05

 Land locked prime retail implies limited longer-term 1

prime retail supply. Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
HKD vs. RMB

Source: National source via DataStream, as at February 2013

23
Asia Pacific Real Estate Market Outlook 2013 March 2013

Real estate outlook – Republic of Korea

Exhibit 23
Sector Summary Risk

Office Office prospects have improved slightly
from 2012. Concerns on supply have
eased a little given recent absorption and
that pipeline is now more evenly
distributed. Whilst talks of a recovery may
be too early, the market is on the right
path and should see further improvements
over the next year or so.
Overreliance on the technology sector
highlights significant concentration
concerns. This sector is highly volatile and
extreme swings will lead to price volatility.
– +

Office

Themes
 Ongoing office supply glut will continue to depress
the rental outlook, although the situation has been
partly mitigated by some stock delays.
 Nonetheless, there are pockets of outperformance
given tenant’s specific preference; e.g. Gangnam.
This level of outperformance will be less obvious
going forward given the rising level of cost
consciousness.
 The level of market nuance remains unproductive
to foreign leasing demand.
Strength
 Prime stock still under-represented by the size of
economy.
 Global headquarters to some of the world’s largest
technology conglomerates.
Weakness/risk
 Strong tenant concentration risk given much of the
tenant base remains domestic and somewhat tied
to IT manufacturing. A slowdown in global demand
for technology will have a real impact on the office
market.

 Investment interest is picking up though the

breadth of investors has yet to meaningfully
expand. These investors remain largely domestic or
consist of a small group of foreign players who
have been active in the last cycle. The lack of a
diversified investors’ base remains a concern.

24
 Asia Pacific Real Estate Market Outlook 2013
Strategy
It is very difficult to generalize any real estate trend in
the Asia Pacific region, given the level of diversity and
often unsynchronized cyclicality. The closest
commonality will probably be the fact that pricing
remains largely stable over the course of the cycle
supported by the inflow of real estate capital seeking
safety. The resolve to ‘seek safety almost at all cost’ was
eventually tested as demand drivers have since late
2011 start to fade and recorded incomes; e.g. rents,
falling below expectations.
Investment demand has yet to be materially impacted
given the current weight of capital and the promise of
excess premium (against other asset classes such as
bonds) from gaining such exposure. This is of course
not exclusive to the region, and it is replicated with
varying intensities across global markets.
We remain consistent in our belief that investors will
continue to place a premium on income; however, the
current price premium has highlighted the opportunity
around the peripherals. The price gap between core
and the secondary space is now at a level that could
attract some interests for value-add strategies. Risk
appetites has increased progressively through this cycle,
and selective opportunities may start to become an
option for investors looking for that ‘extra’ return. In
our opinion, this still forms a small portion of the
investor universe but may become more of a feature as
investors become more comfortable with the wider
recovery.
In terms of where values can be found, it can be tricky
given its broad definition and how the word ‘value’ can
mean different things to different sets of investors
(particularly Asian investors). In our mind, value can be
achieved when there is a mismatch in pricings and
valuations, considered in the context of underlying
market fundamentals and future trends. On that and
with reference to our earlier market discussions, we
believe the following are amongst the best
opportunities in the region for 2013.
25
March 2013
Tactical (short hold of less than three
years)
 Tokyo C5W office: We first highlighted this
opportunity in our 2012 outlook. The benefit of
investing early in the cycle is evident as pricing
firmed up meaningfully towards the end of the
year. Market conditions such as demand and rents,
in the prime space turned positive for the first time
in more than 48 quarters in late 2012, and this has
further fueled investor demand. Current prime
initial yield remains relatively firm, and this should
continue to reward investors with a historically high
yield spread (to what is available on risk-free
bonds). Importantly, valuations remain at
approximately 60% of their 2007 level and are only
about to adjust upwards. All things being equal, we
are of the opinion that the investors will be able to
harness the greatest value in the coming few years.
 Singapore office: Prime rents are nearing the end
of a sharp correction cycle and may look to regain
some losses towards the end of the year. Whilst
current capital valuations are only approximately
10% off the 2011 peak, there are strong
suggestions that investors are willing to push the
boundary, and capital values may hit a new high as
a result. Singapore and Hong Kong are two highly
volatile markets with short and sharp price cycles.
Investors will be well informed of this and with
values hard to come by in the rest of the APAC
region, there may be added motivation to take
advantage of the market cyclicality. Yields will
continue to contract as pricing will happen ahead
of income recovery. The ability to execute will
remain critical given the usual short window of
opportunity.
Asia Pacific Real Estate Market Outlook 2013 March 2013

 Singapore residential (high end): Singapore

residential made it to our list of recommended
markets for the first time in 2013. This market has
seen seven previous rounds of policy tightening and
in our opinion, may be near to the policy peak.
Fundamental demand remains strong, and pent up
demand continues to support pricing at the mass
segment. In contrast, the luxury segment has seen
significant pricing weakness given the policy’s
restrictive nature on foreign ownership. If one is of
the view that policy will gradually have to unwind
over the next couple of years, the luxury segment
looks well positioned to outperform. That said,
pricing correction may take another year to play
out.

Strategic (longer-term hold)

 Tokyo/Osaka modern logistics: Ongoing

preference for modern logistics in Japan is well
documented. Given that modern logistics represent
only 2% of the entire logistic stock in the country,
the growth potential is obvious. The longer-term
prospect of a structural shift towards the use of
modern logistic facilities remains valid and should
progressively be more obvious over time. Investors
with a longer-term hold would likely reap the
benefit of a growing market characterized by its
stable income.

 Chinese residential: Despite recent policy

pressure, the longer-term fundamentals of this
market remain undeniable. We have learnt over
previous rounds of policy tightening that the
government’s focus remain fixed on managing the
supply-demand interplay, one that would
eventually ensure access to housing for all
segments of the population. Investors who are able
to adjust their strategy and best align/compliment
the government’s longer-term thrust should
continue to be rewarded.

26
 Asia Pacific Real Estate Market Outlook 2013 March 2013

For more information please contact Joe Kwan, PhD

One Raffles Quay Director of Global
#50-01, North Tower,
Real Estate Research
Singapore 048583
Tel. +65 6495 8000 – Asia Pacific
Fax +65 6495 5456
www.ubs.com/realestate

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Asia Pacific Real Estate Market Outlook 2013 March 2013
Asia Pacific Real Estate Market Outlook 2013 March 2013

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