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Property Markets in Mainland China and Hong Kong Nicholas Brooke.

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Presentation on theme: "Property Markets in Mainland China and Hong Kong Nicholas Brooke."— Presentation transcript:

1 Property Markets in Mainland China and Hong Kong Nicholas Brooke

2 © 2008 Gerson Lehrman Group Inc., All Rights Reserved Council Member Biography Nicholas Brooke is the Chairman of Professional Property Services Limited in Hong Kong. Professional Property Services is a real estate consultancy providing to clients a selected range of advisory services across the Asia Pacific Region. Mr. Brooke has over 40 years of experience within the property industry, of which the last 25 years has been in the Asia Pacific region. He is a recognised market commentator, particularly in respect of the property markets of Hong Kong, Mainland China and Vietnam and an authority on land administration, land use planning and housing policy matters. Additionally, Mr. Brooke has been involved with the Vietnam property market which he first entered in 1993. Mr. Brooke is currently working with VinaCapital and Vina Land which is a pure estate fund and has over 30 ongoing development projects across Vietnam and is a major investor in the hospitality sector in Vietnam. Mr. Brooke has been involved in many IPOs, including the partial privatisation of the Mass Transit Railway Corporation, the launch of the Link REIT and the successful listing of a number of Chinese developers in Hong Kong. He is currently involved in several city planning exercises in China, large mixed use projects across the Middle East, and the further development of Vietnams first property development fund. Previously, as Deputy Managing Director, Mr. Brooke played a key role in the redevelopment of Swire Properties portfolio in Hong Kong.

3 © 2008 Gerson Lehrman Group Inc., All Rights Reserved Topics Market drivers overview and regulatory and investment environment Markets in the principal cities, the second tier cities and Hong Kong Opportunities, challenges and risks going forward Forecast for the year ahead

4 Chinas Real Estate Markets – Drivers, Policies and Controls Nicholas Brooke, FRICS FHKIS Chairman, Professional Property Services March 2008 March 2008

5 PPSPPS China Property Market Drivers Continued strong economic performance and rising personal incomes Overseas investment focus unabated Continuing demand for all types of real estate Good opportunities in many secondary and tertiary cities Liquidity in end user market and individual investment market (stock market gains, etc)

6 PPSPPS Is there a Residential Bubble? Dependent upon city, location and type of development Controls on future supply aimed at deflating any existing pressure Some over supply in luxury units in cities such as Shenzhen, Chengdu, Hangzhou Many markets short of quality, modern supply and demand still strong e.g. Dalian, Nanjing, Xian

7 PPSPPS Current investment environment Principal cities (Beijing, Shanghai, Guangzhou and Shenzhen) already subjects of marked price corrections and reduced sales volumes Attention being focused on 2 nd tier cities as coming from lower base, greater unsatisfied demand and easier to measure market potential

8 PPSPPS Which are the target cities? Some 14 or so major cities which exclude Beijing, Shanghai and Guangzhou Account for 8% of population but over 50% of imports Chengdu, Wuhan and Chongqing seen as engines of growth for next decade – 50 million people – more than Australia and Canada combined

9 Chongqing

10 PPSPPS The Major Targets – Where are they? HarbinDalianQingdaoTianjinXianWuhanNingboChongqingKunmingZhuhaiXiamenChengduHangzhou

11 Chengdu

12 PPSPPS Key Drivers Leadership – mayor who will champion the city and its core competencies Emergence of vibrant business community and resilient middle class Lower cost base – land, labour and energy Less saturated markets – less and identifiable competition Commitment to hard and soft infrastructure provision

13 PPSPPS Major Pluses Projects can be delivered more quickly as less complex bureaucracy Ability and wish to differentiate and create distinct identity Moved away from the large, the iconic and the exotic Diversifying into service sector Keen to promote improved environmental standards

14 Ningbo

15 PPSPPS Issues Coming off low base Limited experience of international investors Inconsistent interpretation of laws and regulations Depth of local spending power

16 PPSPPS Future Land Sales New regulations dictate that development land should be sold by public auction, public listing or tender; development timeframe specified Lead to increased land prices due to greater competition as closed deals no longer permitted Can still buy into existing projects or acquire interest in companies holding existing land banks

17 Qingdao

18 PPSPPS Land Banks Companies with existing land banks now a focus of interest for M&A activities Particularly the case if land purchased at historic prices Some companies being tempted to sell land outright as facing difficulties in raising development loans but Others need to develop to establish credibility and branding

19 PPSPPS Macro Control Policies/Measures Series of measures introduced by Central Government to control supply and demand and price levels to ensure sustainable growth in property markets across China Intended to change property market conditions through controlling land supply and type/size of residential developments Measures implemented by provincial and city authorities – some inconsistencies

20 PPSPPS Rationale for Measures Despite strong economic growth/rising incomes, housing prices in some cities had become unaffordable to sections of the population Some 70% of households own their home but the other 30% becoming marginalised, especially given the real reduction in welfare housing provision since 1998 Too many large units being built for investment, too few for low income families

21 Summary of Policies/Measures May 2003 Restrictions on loans by banks to weaker developers Higher mortgage rates for high end residential 2004 Development land only to be transferred via public auction, public listing or tender 2005 Eight Regulations

22 Summary continued 2006 Six Point Measures/15 Implementing Regulations Circular 171 2007 Land Appreciation Tax Circular 50 (23 May) Circular 130 (10 July) Tightening of Mortgage Lending Rate (15 September) Series of Interest Rate Increases

23 PPSPPS Eight Regulations Local governments responsible for stabilising own housing prices Low to medium housing should account for majority of units Halt to villa development –Regulations generally had little impact although villa development did slow in some cities, hence further controls introduced

24 PPSPPS Six Point Measures and Related Implementing Regulations 70% of future residential supply in each municipality to comprise units of 90sm or less – to increase supply of affordable units Leveraging on taxation, credit and land policies – to suppress speculation Rationalise scale and pace of housing redevelopment – to reduce passive demand Increase production of low-rent and affordable housing

25 PPSPPS Circular 171 Tightening of restrictions on foreign investment in property sector including Central Government project approvals Foreign investors required to set up foreign investment enterprises to hold their investment properties in China Restrictions on payments and sales proceeds transfers and on property investments for branches, rep offices and foreign individuals –Dispensation for overseas Chinese individuals, long term foreign residents

26 PPSPPS Land Appreciation Tax LAT payable since 1994 on gain realised on transfer of land, buildings and associated structures and on taxable gains derived by companies and individuals from transfer of real property Circular 187 on 1 February 2007 mandated collection Payable when construction complete and property fully sold or transfer of entire project during construction Rate of 30% - 60% depending on level of gain pro rata to fixed items eligible for deduction

27 PPSPPS Circular 50 Follow up to Circular 171 Strict control of foreign investment in the high end residential sector Prohibits foreign entities from obtaining a fixed/guaranteed return under a JV agreement Reiterates requirement for foreign invested enterprises and the securing of project approvals from Central Government

28 PPSPPS Tightening of Mortgage Rates Minimum down payment levels now: –20% for unit of 90sm or less –30% for unit of over 90sm –40% if second home buyer (or investor) –50% if commercial premises plus loan limits Mortgage rate for second buyer raised to 1.1% above benchmark rate No loans to developers with self equity of less than 35% or without project permits

29 PPSPPS Other Recent Measures Circular 130 – first batch of approvals of real estate foreign investment enterprises; such entities require approval to engage in foreign currency registration and related capital account settlements Benchmark interest rate raised from 7.02% to 7.29% on September 15 to 7.83% at the current time

30 Xiamen

31 PPSPPS Challenges of 2008 Foreign investors being held accountable for overheating Difficult to channel funds into China except as equity and even then not easy Approval requirements favour existing players Beijing likely to police enforcement of various circulars

32 Harbin

33 PPSPPS Market Sentiment in 2008 Cumulative impact of regulatory enforcement likely to bite City interpretation and selective enforcement no longer acceptable to Beijing City by city price adjustments in residential values Commercial sector largely unaffected and will follow pattern of supply and demand

34 Thank you Professional Property Services Limited

35 The Hong Kong Property Market: Steady As She Goes Nicholas Brooke, FRICS FHKIS Chairman, Professional Property Services Ltd March 2008

36 PPSPPS 2007 / 2008 Policy Address A new direction for Hong Kong 10 new infrastructure projects 3 new development areas in New Territories Range of heritage initiatives Review of building densities Asset management of Government portfolio

37 PPSPPS Influence of Government Leasehold land tenure system Principal generator of land supply –Disposals – application list system –Lease modifications –Agencies – URA / MTRC / KCRC Dependence on land revenues Major owner and continued provider of social housing

38 PPSPPS Market Overview – Residential Ultimate barometer of Hong Kongs well being Three markets within a market Potential issues relating to supply Major beneficiary of interest rate reductions Speculation is prevalent at the top Emphasis on life style and quality of life issues

39 PPSPPS Total Stock of Private Residential Units by Class in Hong Kong (2007) Classification of Residential Units by Class : Class A - saleable area less than 40m² Class B - saleable area of 40m² to 69.9m² Class C - saleable area of 70m² to 99.9m² Class D - saleable area of 100m² to 159.9m² Class E - saleable area of 160m² and above Class B (519,498 units) Class A (350,455 units) Class D (54,778 units) Class C (121,404 units) Class E (22,763 units) Sources: Rating and Valuation Department

40 PPSPPS Hong Kong Residential Market (Overall) Supply, Take-up & Vacancy Hong Kong Residential Market (Overall) Supply, Take-up & Vacancy Sources: Rating and Valuation Department

41 PPSPPS Current Situation Noticeable improvement in sales volumes in 2007 – over 145,000 transactions of which only 19,000 involved primary sales Land auctions in 2007 for luxury residential sites have been well contested – Welfare Road, Aberdeen set new benchmark Rents and prices risen in luxury sector but mixed signals from mass residential market Volatile stock market conditions reflected in renewed interest in real estate, particularly residential Investor profile now includes ME, SE Asia, Mainland China as well as domestic players

42 PPSPPS Rents and Prices – Luxury Market Luxury prices on Hong Kong Island averaged HK$11,000 psf during 2007 Flat prices on the Peak averaged HK$14,500 psf whilst a penthouse in The Legend sold for HK$33,000 psf Luxury house prices averaged HK$20,000 psf on Hong Kong Island Rents on the Island averaged HK$45.00 psf per month with Peak averaging HK$55.00 psf

43 PPSPPS Source : CB Richard Ellis Ltd

44 PPSPPS Rents and Prices – Luxury Market Very low vacancy rate - below 2.0% Leasing market expected to remain strong – 20% uplift forecast for 2008 Luxury prices on Hong Kong Island rose by as much as 50% in 2007, Kowloon 30% and New Territories 25% Further increases in the sales prices expected during 2008 – up to 30-40%

45 PPSPPS Source : CB Richard Ellis Ltd



48 PPSPPS The Leighton Hill, Happy Valley

49 PPSPPS The Bel-Air, Pofulam


51 PPSPPS The Arch, West Kowloon

52 PPSPPS Rents and Prices – Mass Residential Market Prices averaged HK$4,700 – 5,000psf across Hong Kong during 2007 New projects being released a few units at a time Although economic conditions continue to improve, this sector is affected by major changes in Hong Kong demographics Population hollowing out Dependent on newly weds and upgraders

53 PPSPPS Tin Shui Wai, Yuen Long

54 PPSPPS Ma On Shan, Shatin

55 PPSPPS Future Supply Debate as to adequacy of future supply Predicted to be of the order 15,000 p.a. in future – c/f 30-35,000 when Hong Kong in growth mode Government control of land supply should underpin prices as evidenced by latest Application List release Strong growth anticipated in 2008

56 PPSPPS Company Land Bank (sq.m) Company New World Development 17.5 million Cheung Kong + Cheung Kong + Hutchison Whampoa Hutchison Whampoa 14.4 million Wharf Group 2.7 million Hang Lung Hang Lung2.6 million Henderson Land 2.4 million Sun Hung Kai Sun Hung Kai Properties Properties 1.9 million Kerry Properties 1.7 million Sino Group Sino Group1 million Swire Properties 0.5 million Hongkong Land Hongkong Land0.4 million China Overseas 14 million China Resources China Resources Land Land 9.6 million Source: Public Information (As of end 2006) Some of the developers have nationwide business exposure: e.g. New World (17 cities), Cheung Kong & Hutchison Whampoa (15), China Overseas (14) and China Resources Land (9) Most of other HK developers currently invest in selected cities only Hong Kong Developers in China

57 PPSPPS Hong Kong – CBD

58 PPSPPS Office Sector Growth in economy continues –2006 – GDP 6.9% –2007 – GDP 6.3% Little new supply in short term except in decentralised areas Central rents continue strong; secondary districts less so

59 PPSPPS Market Overview – Office Few choices in CBD Decentralisation – yet again! Demand from both new entrants and expansion but some impact from sub- prime issues anticipated IFC2 : HK$168 psf Exchange Square : HK$138 psf Exchange Square : HK$138 psf

60 PPSPPS Sources: CB Richard Ellis Ltd


62 PPSPPS Source : CB Richard Ellis Ltd

63 PPSPPS Office Sector Renewed emphasis will be on decentralisation due to high Central rents Weight of institutional funds will maintain high value regime Disconnect between yields and capital values Opportunities for small investors in decentralised areas

64 PPSPPS Market Overview – Retail In good health, largely sustained by Mainland visitors Traditional areas of Causeway Bay & Tsim Sha Tsui much in demand Re-emergence of strata title investors Re-configuration of 1 st and 2 nd floor podium space to retail use Emergence of Big Box and other formats

65 PPSPPS Market Overview – Other Sectors Interest in 2/3 star hotels, fuelled by Mainland tour groups – 10 sites included on Application List Hotel occupancies and room rates up Conversion of industrial sites to hotel and guest house use Previous initiatives to revitalise industrial buildings unsuccessful e.g. I/O, general business zoning, but likely to see renewed efforts in 2008

66 PPSPPS Ongoing Challenges Continued and potentially increased Government involvement Trading mentality still prevails Quality of life issues –Harbour –Heritage –Sustainability –Urban Renewal –Air Pollution Community engagement

67 PPSPPS Extract from Wanchai & Adjoining Areas Public Engagement Kit

68 S.W. Kowloon – Aerial View

69 PPSPPS S.E. Kowloon – The Existing Platform

70 PPSPPS New Central Waterfront

71 Thank you! Professional Property Services Limited

72 © 2008 Gerson Lehrman Group Inc., All Rights Reserved About GLG Institute GLG Institute (GLGi SM ) is a professional organization focused on educating business and investment professionals through in-person meetings. It is designed to revolutionize the professional education market by putting the power of programming into the hands of the GLG community. GLGi hosts hundreds of Seminars worldwide each year. GLGi clients receive two seats to all Seminars in all Practice Areas. GLGis website enables clients to: Propose Seminar topics, agenda items and locations View and RSVP to scheduled and proposed Seminars Receive a daily briefing with new posts on your favorite tickers, subject areas and from trusted Council Members Share Seminar details with colleagues or friends

73 © 2008 Gerson Lehrman Group Inc., All Rights Reserved Gerson Lehrman Group Contacts Accounting & Financials Analysis (AFA) Andrew Gordon Senior Vice President Accounting & Financial Analysis (AFA) Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-984-3693 Aaron Liberman Managing Director, Sales and Marketing Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-984-3684 Carly Pisarri Market and Product Development Manager, Events Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-750-1435

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