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CBRE Capital Markets Research ReviewH1 2015

OUTBOUND INVESTMENTAsian buyers continue to step up investment in global real estate

INVESTOR INTENTIONS SURVEYMost investors plan to increase purchases this year

FUND RAISING ACTIVITY Increase in activity set to boost investment market

REAL ESTATE DEBT The rise of non-bank lenders

CURRENCY VOLATILITYRisks for real estate investors

CHINESE CAPITAL IN AUSTRALIAIs it here to stay?

HONG KONG FUTURE FUNDNew fund set to invest in global real estate

ASIA PACIFIC INVESTMENT MARKETActivity picks up but stock for sale remains limited

>1CBRE Capital Markets Research Review

FOREWORDWelcome to the H1 2015 CBRE Capital Markets Research Review, a joint publication by CBRE’s Capital Markets and Research teams in Asia Pacific.

This new publication showcases the best of CBRE Research’s special reports, viewpoints and other capital markets research from the first half of the year.

In this edition we look at Asian outbound investment in real estate, which continued to gather pace in H1 2015. CBRE data showed that outbound investment from the region grew by 8.9% q-o-q in Q2 2015 to US$10 billion, bringing overall Asian outbound investment in H1 2015 to US$19 billion.

We also highlight CBRE’s 2015 investor intentions survey. The survey found a majority of respondents plan to increase their purchases this year, although intentions have moderated from last year’s survey.

The real estate debt market is another key focus of this edition. CBRE believes that there is more room for real estate debt fund structures to develop in Asia Pacific and ample opportunities for the pool of lenders to deepen further.

Currency volatility in Asia Pacific is expected to continue over the course of 2015 as major economies enact significant changes to monetary policy. We look at how currency risks will take on greater importance for real estate investors.

In addition, we examine the reasons why Australia’s commercial property markets are attracting more capital from China, and take a look at the new Hong Kong Future Fund.

This edition also includes a review of Asia Pacific investment market activity and trends from the first six month of the year.

We thank you for your ongoing support and hope you enjoy this edition of the CBRE Capital Markets Research Review.

Yours sincerely

RICHARD KIRKEManaging DirectorCapital Markets Asia Pacific

The fund raising environment in Asia Pacific remained positive in 2014 and the period saw improved activity. We look at how this is having a positive impact on the direct real estate investment market over the course of this year.

Yours sincerely

HENRY CHIN, PH.D.Head of Research, Asia Pacific

01Foreword

08Asian Outbound

Investment

18Currency

Volatility and Risks for Real

Estate Investors

02Asia Pacific Investment

Market

10Increase in Fund Raising Activity

set to Boost Investment Market

22Chinese Capital in Australia: is it

here to stay?

34Contacts

04Asia Pacific

Investor Intentions Survey 2015

14Opportunities in the Asia Pacific

Real Estate Debt Market

28Hong Kong Future Fund

CONTENTS

2 >> 3CBRE Capital Markets Research Review CBRE Capital Markets Research Review

ASIA PACIFIC INVESTMENT MARKET

The Asia Pacific real estate investment market turned more active in Q2 2015, with transaction volume increasing by 14% q-o-q to US$21 billion, although this marked a decline of 20% on the same period last year. Deal flow continued to be restrained by the lack of stock for sale and landlords’ unwillingness to reduce asking prices amid the low interest rate environment.

China saw investment sentiment improve further, although this was confined to tier I cities. Activity in Japan and Australia remained upbeat whilst several large international investors also displayed a stronger interest in India this quarter supported by the better economic outlook.

Cross-border investment rose by 7.0% in H1 2015 compared to H1 2014 and totalled US$13.2 billion in Q2 2015, driven by the completion of several major transactions by institutional investors. Noteworthy deals included the Abu Dhabi Investment Authority (ADIA) completing its first ever real estate acquisition in Hong Kong by acquiring a 50% stake in a hotel portfolio comprising the Grand Hyatt, the Renaissance Harbour View and the Hyatt Regency from Hong Kong-listed New World Development for US$2.4 billion.

Singaporean investors were the biggest cross-border investors from within the region in Q2 2015 as opportunities in their domestic market remained limited. Australia and China are their main markets of interest. Asian investors were very active in Australia with Singaporean and Chinese investors accounting for 60% of transactions by foreign groups. Investors from the United States also remained very active, particularly in Japan.

Fund raising activity intensified this quarter following a slow start to the year. Several major funds saw their final closes exceed their original targets as investors from Europe and the United States, particularly insurance and pension funds, continued to allocate capital to the region. The lack of investable stock in the region is encouraging some real estate funds to engage in more structured debt deals as an alternative way to invest in the real estate market.

Developers in China and India continue to seek alternative sources of funding. Indian groups are sourcing overseas capital to finance development projects, whilst in China developers are securing capital from domestic insurance companies.

The Asia Pacific real estate investment market turned more active in Q2 2015, with transaction volume increasing by 14% q-o-q to US$21 billion.

ACTIVITY PICKS UP BUT STOCK FOR SALE REMAINS LIMITED

MARKETVIEW

Key Themes

•  Strong activity in Sydney and Melbourne, but other cities quiet •  International investors, particularly Asian groups, remain active

•  Deal flow limited by pricing and intense competition for core product •  All asset classes experiencing yield compression

•  Transaction volume skewed by one major deal •  Diminishing interest in retail sector due to weaker fundamentals

•  Investor confidence boosted by further monetary easing measures •  Tier 1 cities, particularly Shanghai, report an increase in enquiries

•  MERS outbreak not a concern for real estate investment market •  Domestic institutional investors continue to add to portfolios

•  Activity remains muted due to mismatch between buyers and sellers •  More local investors are looking to deploy capital offshore

•  Steady economic growth driving office leasing activity in major cities •  Increased activity from selected international investors

•  Activity continues to focus on Auckland •  Wellington seeing interest from investors looking for higher yields

•  Capital gains tax reform prompts more caution among investors •  End-users most active this quarter

•  Stronger interest in luxury residential sector in Thailand and Vietnam •  Continued interest from foreign investors to form joint ventures

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*Other SE Asia

Taiwan

New Zealand

India

Singapore

South Korea

China

Hong Kong

Japan

Australia

(US$ billion)

Q2 2015 Q1 2015

Activity picks up but stock for sale remains limited

Asia Pacific Investment, Q2 2015

Q2 2015 CBRE Research © CBRE Ltd. 2015 1

Total Turnover 14% q-o-q

Cross Border Turnover 42% q-o-q

To toggle between the font styles use the indent/increase List Level button. This is a list of styles available on text pages. Heading styles are built into Cover Page Master pages. Be aware on older versions of PowerPoint the levels available are limited to 5 instead of 9. Level 1 – Body Text LEVEL 2 – HEADING (with space after use CAPS)

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•  Level 5 – Bullet Level 6 – Chart Title Level 7 – Chart Source Level 8 – Contact Role (use Arnhem bold for name) Level 9 – Disclaimer Please stick to these styles only.

Capital Values All Sectors 1.1% q-o-q

Rental Values All Sectors 0.6% q-o-q

Note: * Other SE Asia include Malaysia, Indonesia, the Philippines, Thailand and Vietnam. Transactions include deals above US$10 million in the Office, Retail, Mixed, Industrial, Hotel and Other sectors. Source: CBRE Research, RCA , Q2 2015.

Chart 1: Total acquisitions by market

Not clear Q4,2014

Guideline of tickers: Max 5 Evenly distributed From bar below: 0.2 h

Guideline of chart on front page: In line with head line Really shows something The size of the chart is adjustable Use “figure” other than “chart”

July is not expected to negatively impact real estate market fundamentals. Activity in Japan and Australia remained upbeat whilst several large international investors also displayed a stronger interest in India this quarter supported by the better economic outlook. International institutional investors displayed a strong appetite for big ticket deals but there continued to be a lack of assets for sale. Investment turnover is expected to display steady growth in H2 2015.

Need to update

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SE Asia - Others

India

Taiwan

New Zealand

Singapore

Hong Kong

China

South Korea

Australia

Japan

(US$ billion)

4q rollin to Q1 2015 4q rollin to Q1 2014

Need to update

The Asia Pacific real estate investment market turned more active in Q2 2015, with transaction volume increasing by 14% q-o-q to US$21 billion, although this marked a decline of 20% on the same period last year. Deal flow continued to be restrained by the lack of stock for sale and landlords’ unwillingness to reduce asking prices amid the low interest rate environment. China saw investment sentiment improve further, although this was confined to tier I cities. Shanghai recorded an uptick in enquiries and an increase in transactions. The volatility in the Chinese stock market witnessed in June and

Should we say SE Asia ex Singapore? [Done]


Source: CBRE Research, RCA , Q2 2015; Transactions include deals above US$10 million in the Office, Retail, Mixed, Industrial, Hotel and Other sectors. Note: * Other SE Asia include Malaysia, Indonesia, the Philippines, Thailand and Vietnam.

This article is a summary of the Q2 2015 Asia Pacific Investment Marketview and Q2 2015 Investment Trends published by CBRE Asia Pacific Research.


ASIA PACIFIC INVESTOR INTENTIONS SURVEY 2015The CBRE Asia Pacific Investor Intentions Survey 2015 found a majority of respondents plan to increase their purchases this year.

The CBRE Asia Pacific Investor Intentions Survey 2015 was conducted in January 2015. It was based on more than 300 responses from across the region and provides an insight into investors’ concerns, priorities and strategies for the coming year. Key findings of the survey included:

A majority of respondents (54%) plan to increase their purchases in 2015. However, intentions have moderated from last year’s survey, when 64% indicated they intend to buy more.

A significant majority of all respondents (67%) said that they expect their purchases to exceed their sales in 2015. The result suggests that investment liquidity in the regional real estate market will continue to increase this year.

The risk appetite for prime core assets is rising significantly, reflecting investors’ more cautious mood amid the uncertain global economic recovery. 43% of respondents preferred this asset type in this year’s survey, up from 29% in 2014.

The strong demand for prime core assets is being led by institutional investors and REITs seeking wealth preservation and long-term value growth on the back of urbanisation and wealth escalation in the region.

Respondents identified asset pricing as the biggest obstacle to acquisitions (31%) and the greatest threat to the region (21%) for the second consecutive year.

Investors also voiced concerns about the economic outlook, particularly over whether China will have a hard landing (16%). The threat of market oversupply (16%) was another issue identified by respondents.

The survey found much less concern over US tapering, interest rate hikes and/or inflation, with the percentage of respondents viewing this as a threat falling from 17% in 2014 to 9% this year.

Recent rate cuts in major economies in the region including China and Australia, as well as the sustained quantitative easing programme in Japan, will ensure the low interest rate environment continues in 2015. The recent significant drop in global energy prices has reduced the likelihood of inflation emerging as a major issue.

Against this backdrop, investors are adjusting their investment strategies in the following ways:

Focusing on large/mature markets – China, Japan and Australia remain the top investment destinations. The survey also found a noticeable increase in interest in other mature markets such as Hong Kong, Singapore, New Zealand and South Korea, at the expense of interest in emerging markets such as India and Indonesia.

Tapping into sectors that benefit from long-term structural trends – There continues to be strong interest in logistics, with 22% of respondents preferring this sector. Demand is being underpinned by the boom in the e-commerce industry and consumption growth. The hotel sector is also attracting more attention, with investor preferences increasing from just 1% in 2014 to 12% in 2015 on the back of the growth of regional tourism, a trend most evident in Japan.

Extending interest to alternative sectors – 56% of respondents indicated they have already invested in alternative sectors, either directly or indirectly, with real estate debt the most invested vehicle (31%). The findings suggest that investors see the most potential in healthcare and senior housing as the population ages in a number of major markets. 10% of respondents have already invested in this sector but 20% said they are interested in investing.

Looking for opportunities outside the region – The survey found respondents retain a strong interest in outbound investment, with 32% of Asia Pacific investors wanting to invest cross-regionally. South Korean investors (69%) are the keenest to invest globally. Investors’ geographical focus is shifting from Western Europe to North America.

SURVEY METHODOLOGY AND RESPONDENTS

The survey was conducted online from 8 January to 30 January 2015. It attracted 317 respondents this year compared to 122 in 2014. The increase in responses came from Asia-based investors from markets including Japan (17%), Hong Kong (10%), China (9%) and South Korea (8%). Fund/asset managers accounted for 29% of respondents, followed by property companies (23%) and investors (18%).

This article is a summary of the 2015 Asia Pacific Investor Intentions Survey published by CBRE Asia Pacific Research.


Note: Investors include insurance, pension, sovereign wealth funds and private individual investors / family offices; property companies include listed and private property companies; others include property consulting firms, legal firms, aged care, civil construction, hotel operators, logistics firms and retailers

Source: CBRE Asia Pacific Investor Intentions Survey 2015

Figure 1: Respondents by nationality and type of organisation

ASIA PACIFIC INVESTOR INTENTIONS SURVEY 2015

8> CBRE Capital Markets Research Review >9CBRE Brokerage | Research Review | Office Services Asia

1

ASIAN OUTBOUND INVESTMENT CONTINUES ITS STEADY MOMENTUM TO OVER US$ 19 BN

AMERICAS

US$6.2 bn up 20%,

compared to H1 2014

EMEA

US$6.6 bn Up 26%,

compared to H1 2014

Asia

Cross–border investment by Asian investors in H1 2015

Top two destinations (US) New York $3.7 bn Washington $0.5 bn

PACIFIC

US$3.6 bn Up 63%,

compared to H1 2014

Top two destinations (EMEA) London $4.3 bn Paris * $0.7 bn

Top two destinations Sydney $1.0 bn Melbourne $0.5 bn

Data update

Note: all the figures are based on standing investments which include, but not limited to office, retail, industrial hotel, mixed-‐use and other proper<es Source: Real Capital Analy<cs, CBRE Research, August 2015

Within Asia

US$2.8 bn Down 40%,

compared to H1 2014

ASIAN OUTBOUND INVESTMENT Asian buyers continued to step up investment in the global real estate market in H1 2015, with CBRE data showing that outboundinvestment from the region grew by 8.9% q-o-q in Q2 2015 to US$10 billion. This brought overall Asian outbound investment in H1 2015 to US$19 billion.

THE ACCELERATION AND EVOLUTION OF ASIAN OUTBOUND INVESTMENT

Asian buyers continued to step up investment in the global real estate market in H1 2015, with CBRE data showing that outbound investment from the region grew by 8.9% q-o-q in Q2 2015 to US$10 billion. This brought overall Asian outbound investment in H1 2015 to US$19 billion. International flows outside Asia increased by 13% y-o-y in H1 2015 but intra-regional flows within Asia fell 40% y-o-y, reflecting more challenging conditions due to limited product availability and reduced liquidity. Asian outbound investment in 2014 totalled US$40 billion, an increase of 23% from 2013.

China maintained its lead as the largest source of Asian capital, investing US$6.6 billion in global real estate in H1 2015, followed by Singapore with US$4.4 billion and Hong Kong with US$2.2 billion. The United States replaced the United Kingdom as the top country for investment for Asian investors, attracting US$6.1 billion of deals in H1 2015, as opposed to US$4.4 billion for the UK. While most headlines have focused on a number of trophy sales in New York, about 40% of the capital invested in the U.S. so far this year has flowed into Boston, Washington, Seattle and Los Angeles, all markets with positive fundamentals and ample opportunities.

London remains the preferred city for Asian investors, receiving inflows of US$3.8 billion in H1 2015, followed by New York (US$3.7 billion) and Sydney (US$2.2 billion). London has attracted around 85% of all investment in the UK so far this year. Investors are increasingly taking advantage of positive sentiment in the leasing and capital markets by looking at value enhancement strategies and development. Core investors have also been active across

Germany, particularly in the office and logistics sectors.

Cross-border investment within Asia fell by 40% during H1 2015 but there has been continued and robust outbound growth, with international capital allocation increasing by 30%. Many Asian buyers, particularly Taiwanese groups, continue to see the benefits of overseas diversification, Total volume invested by Taiwanese buyers in H1 2015 amounted to US$1.8 billion, a figure which has already eclipsed the annual total of US$1.3 billion recorded in 2014. Low yields in their domestic market mean Taiwanese insurers are unable to meet required investment returns, meaning they will continue to hunt for offshore opportunities. This year has seen a surge in Asian capital flows into the Pacific, with growth of 63% compared to the same period last year. Sydney and Melbourne ranked third and sixth, respectively, in terms of the most preferred destinations globally. Many overseas investors consider commercial real estate in these and other global hotspots as attractive investments with limited downside risk, due in part to the relative affordability of stable income producing assets compared to available domestic stock. As more Asian investors look abroad to diversify a growing pool of domestic wealth, overseas market dynamics such as stable fundamentals, regulatory support and market transparency will continue to drive them to pursue offshore opportunities.

The first half of this year saw a strong notable increase in hotel investments, which accounted for US$5.8 billion or 30% of total Asian investment globally during the period. This was driven by a number of major acquisitions by Chinese insurance firms, including the US$1.95 billion purchase of the Waldorf Hotel in New York by Anbang Insurance Group.

This article is a summary of a press release on Asian outbound investment published by CBRE Asia Pacific Research. Note: all the figures are based on standing investments which include, but not limited to office, retail, industrial hotel, mixed-use and other propertiesSource: Real Capital Analytics, CBRE Research, August 2015

Figure 1: Cross–border investment by Asian investors in H1 2015


INCREASE IN FUND RAISING ACTIVITY SET TO BOOST INVESTMENT MARKETThe real estate private equity fund raising environment in Asia Pacific continued to improve in 2014, with a total of US$14 billion raised by 42 private equity real estate funds.

2014 A POSITIVE YEAR FOR FUND RAISING

The real estate private equity fund raising environment in Asia Pacific continued to improve in 2014, with a total of US$14 billion raised by 42 private equity real estate funds. Whilst this figure is still well below the peak of around US$28 billion recorded in 2007, it marks the highest total since the Global Financial Crisis (GFC).

Asia Pacific remains a major focus for international investors, with an increasing number of new groups looking at the region for the purposes of portfolio diversification and long-term investment. However, it remains challenging for cross-regional investors to invest directly in Asia Pacific due to the lack of transparency in many markets and their lack of experience in the region. Investors are therefore channeling their capital to these newly formed funds.

RENEWED INTEREST FROM EUROPEAN AND AMERICAN INVESTORS

In recent years, the gradual recovery of the global economy and excess liquidity in the market has resulted in a steady increase in real estate investment transactions. Confidence among investors from the United States and Europe has recovered and many groups have resumed allocating capital to regions outside their home countries, including Asia Pacific.

Investment strategy differs according to investors’ experience. First time investors in the region seem to prefer investing in funds with a pan-Asia Pacific strategy. In contrast, experienced investors, particularly those from Europe, are looking to invest in country-specific or sector-specific real estate funds, or engage in co-investment and direct investment.

VIEWPOINT

Asia Pacific remains a major focus for international investors, with an increasing number of new groups looking at the region for the purposes of portfolio diversification and long-term investment. However, it remains challenging for cross-regional investors to invest directly in Asia Pacific due to the lack of transparency in many markets and their lack of experience in the region. Investors are therefore channeling their capital to these newly formed funds.

April 2015 CBRE Research © CBRE Ltd. 2015 | 2

Source: CBRE Research, Preqin, ANREV, April 2015. Note: Data presented in this article is based on all fund raising activity including the final close, interim close by close-ended real estate funds and open-ended funds.

Chart 1: Total Capital Raised by Private Equity Real Estate Funds in Asia Pacific

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Renewed interest from European and American investors Prior to the GFC, groups from Europe and North America were active investors in Asia Pacific through private equity real estate funds. However, many investors halted their activity following the onset of the crisis. In recent years, the gradual recovery of the global economy and excess liquidity in the market has resulted in a steady increase in real estate investment transactions2. Confidence among investors from the United States and Europe has recovered and many groups have resumed allocating capital to regions outside their home countries, including Asia Pacific. Investment strategy differs according to investors’ experience. First time investors in the region seem to prefer investing in funds with a pan-Asia Pacific strategy. In contrast, experienced investors, particularly those from Europe, are looking to invest in country-specific or sector-specific real estate funds, or engage in co-investment and direct investment.

2 According to CBRE, capital flows into global real estate rose to US$835 billion in 2014, a figure almost four times greater than US$232 billion recorded in 2009

Chart 1: Total Capital Raised by Private Equity Real Estate Funds in Asia Pacific

Source: CBRE Research, Preqin, ANREV, April 2015.

Note: Data presented in this article is based on all fund raising activity including the final close, interim close by close-ended real estate funds and open-ended funds

This article is a summary of a ViewPoint entitled “Private Equity Real Estate Funds: Increase in Fund Raising Activity Set to Boost Investment Market” published by CBRE Asia Pacific Research.

Total amount raised (LHS) Total number of funds (RHS)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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VIEWPOINT

Newer funds display lower appetite for risk The proportion of opportunistic funds declined from over 90% in 2013 to 57% in 2014. Traditionally, investors in Asia Pacific have required a risk premium, which resulted in a wave of opportunistic funds raised prior to the GFC. However, investors are increasingly focusing on capital preservation, long-term value appreciation and the construction of a diversified global portfolio. Excess returns are no longer their primary motivation for investing in Asia Pacific, a trend which is translating to less interest in opportunistic funds. More funds with core and core-plus strategies raised capital in 2014 (Chart 2). However, the significant yield compression and keen competition for core assets is luring new real estate funds to adopt value-added strategies to enhance their returns.


Chart 2: Total Capital Raised by Primary Fund Strategies

Opportunistic 93%

Value-added

3%

Core 4%

2013

Opportunistic 93%

Opportunistic 57%

Value-added 28%

Core 12%

Core-plus 3%

2014

Opportunistic 57%


Increase in Single Sector and Single Country-Focused Funds 22 newly raised funds in 2014 were single sector and single country funds, a significant increase on the eight funds of this type formed in 2013. On a sector basis, logistics-focused funds have attracted the most capital (US$2.0 billion), followed by office and residential-focused funds. Logistics remains the hot sector for investors in Asia Pacific due to increasing occupier demand resulting from the growth of e-commerce, combined with the lack of modern logistics facilities across the region.

VIEWPOINT

Japan-focused funds attracted significant capital in 2014 as investors look to capitalise on the economic recovery, robust real estate fundamentals and low cost of financing. In India, there continues to be concern over the lack of market transparency and foreign ownership restrictions, but many investors are now looking at this market due to its improving economic outlook, increased optimism following the election of the Modi government and the potential launch of the domestic REIT market. The total capital raised by India-focused funds more than doubled last year, rising from US$420 million in 2013 to around US$1.2 billion in 2014. Most India-focused funds are looking at the residential sector. In spite of the increase in single sector and single country-focused funds, pan Asia-Pacific funds continue to account for the bulk of newly raised capital as investors seek exposure to multiple markets across the region. Total capital raised by regional funds in 2014 was US$8.2 billion, accounting for 60% of total fund raising. There is steady interest from investors looking to commit capital in regional funds ranging from core open-ended to opportunistic. Australia, China and Japan are the major markets being targeted by pan-regional funds but the coming years are expected to see them push into other mature Asia Pacific markets as they look to assemble more balanced portfolios.


Chart 3: Total Capital Raised by Target Country and Target Sector


Multi country -

multi sector 59%

Single country -

multi sector 22%

Single country -

single sector 19%

2013 Multi country -

multi sector 59%

Single country -

multi sector 11%

Single country -

single sector 30%

2014

VIEWPOINT

Japan-focused funds attracted significant capital in 2014 as investors look to capitalise on the economic recovery, robust real estate fundamentals and low cost of financing. In India, there continues to be concern over the lack of market transparency and foreign ownership restrictions, but many investors are now looking at this market due to its improving economic outlook, increased optimism following the election of the Modi government and the potential launch of the domestic REIT market. The total capital raised by India-focused funds more than doubled last year, rising from US$420 million in 2013 to around US$1.2 billion in 2014. Most India-focused funds are looking at the residential sector. In spite of the increase in single sector and single country-focused funds, pan Asia-Pacific funds continue to account for the bulk of newly raised capital as investors seek exposure to multiple markets across the region. Total capital raised by regional funds in 2014 was US$8.2 billion, accounting for 60% of total fund raising. There is steady interest from investors looking to commit capital in regional funds ranging from core open-ended to opportunistic. Australia, China and Japan are the major markets being targeted by pan-regional funds but the coming years are expected to see them push into other mature Asia Pacific markets as they look to assemble more balanced portfolios.


Chart 3: Total Capital Raised by Target Country and Target Sector


Multi country -

multi sector 59%

Single country -

multi sector 22%

Single country -

single sector 19%

2013 Multi country -

multi sector 59%

Single country -

multi sector 11%

Single country -

single sector 30%

2014

VIEWPOINT

Newer funds display lower appetite for risk The proportion of opportunistic funds declined from over 90% in 2013 to 57% in 2014. Traditionally, investors in Asia Pacific have required a risk premium, which resulted in a wave of opportunistic funds raised prior to the GFC. However, investors are increasingly focusing on capital preservation, long-term value appreciation and the construction of a diversified global portfolio. Excess returns are no longer their primary motivation for investing in Asia Pacific, a trend which is translating to less interest in opportunistic funds. More funds with core and core-plus strategies raised capital in 2014 (Chart 2). However, the significant yield compression and keen competition for core assets is luring new real estate funds to adopt value-added strategies to enhance their returns.


Chart 2: Total Capital Raised by Primary Fund Strategies

Opportunistic 93%

Value-added

3%

Core 4%

2013

Opportunistic 93%

Opportunistic 57%

Value-added 28%

Core 12%

Core-plus 3%

2014

Opportunistic 57%


Increase in Single Sector and Single Country-Focused Funds 22 newly raised funds in 2014 were single sector and single country funds, a significant increase on the eight funds of this type formed in 2013. On a sector basis, logistics-focused funds have attracted the most capital (US$2.0 billion), followed by office and residential-focused funds. Logistics remains the hot sector for investors in Asia Pacific due to increasing occupier demand resulting from the growth of e-commerce, combined with the lack of modern logistics facilities across the region.

Source: CBRE Research, March 2015.

NEWER FUNDS DISPLAY LOWER APPETITE FOR RISK

The proportion of opportunistic funds declined from over 90% in 2013 to 57% in 2014. Traditionally, investors in Asia Pacific have required a risk premium, which resulted in a wave of opportunistic funds raised prior to the GFC. However, investors are increasingly focusing on capital preservation, long-term value appreciation and the construction of a diversified global portfolio. Excess returns are no longer their primary motivation for investing in Asia Pacific, a trend which is translating to less interest in opportunistic funds.

INCREASE IN SINGLE SECTOR AND SINGLE COUNTRY-FOCUSED FUNDS

22 newly raised funds in 2014 were single sector and single country funds, a significant increase on the eight funds of this type formed in 2013. On a sector basis, logistics-focused funds have attracted the most capital (US$2.0 billion), followed by office and residential-focused funds.

On a country basis, Japan-focused funds attracted significant capital in 2014 as investors look to capitalise on the economic recovery, robust real estate fundamentals and low cost of financing. In India, there continues to be concern over the lack of market transparency and foreign ownership restrictions, but many investors are now looking at this market due to its improving economic outlook and the potential launch of the domestic REIT market.

In spite of the increase in single sector and single country-focused funds, pan Asia-Pacific funds continue to account for the bulk of newly raised capital as investors seek exposure to multiple markets across the region. Australia, China and Japan are the major markets being targeted by pan-regional funds but the coming years are expected to see them push into other mature Asia Pacific markets as they look to assemble more balanced portfolios.

OUTLOOK FOR 2015

CBRE believes that the improved fund raising activity in 2014 will have a positive impact on the direct real estate investment market in the coming year. Newly raised private equity real estate funds completed a number of acquisitions in H2 2014 and are expected to continue to deploy more capital in the Asia Pacific real estate market over the next two years. At the same time, however, fund expiration will peak in 2015 and

Chart 2: Total Capital Raised by Primary Fund Strategies Chart 3: Total Capital Raised by Target Country and Target Sector

Source: CBRE Research, Preqin, ANREV, April 2015. Source: CBRE Research, Preqin, ANREV, April 2015.

2016, meaning that disposal activity by real estate funds will continue. The fund raising environment will remain positive in 2015, although CBRE does not expect further significant growth in total fund raising following two very active years. Regional fund managers will continue to emerge in the coming year and pose more competition for established global managers. Investors have learned valuable lessons from their investments before the GFC and are imposing more rigorous requirements when selecting fund managers, including: • Greater scrutiny of track records - Investors are increasingly looking for fund managers with sustainable and strong track records. Managers with a solid performance record will therefore be better placed to raise new capital.

• More focus on ability to source deals-The intense competition for quality assets and aggressive pricing from vendors has made it more challenging for investors in Asia Pacific. Fund managers with in-house local teams or local partners helping them to source deals will have a competitive advantage over those which do not.

• Increased emphasis on specialist expertise - Investors are displaying a stronger interest in working with fund managers specialising in a particular market or sector so as to leverage on their local knowledge and experience.

• Desire for greater control over their investment - Investors are becoming more proactive and are demanding more information from fund managers as they seek better control over their investments. Investors have displayed a stronger appetite for separate accounts with around US$12 billion being committed to separate accounts in Asia Pacific between 2011 and 2014 according to Preqin data. Investors are also becoming more open to the secondary trading of real estate funds, a relatively new trend in Asia Pacific but one which is being facilitated by fund managers and consultants. Secondary trading provides opportunities for investors to trade their positions before fund termination and enhances market transparency and liquidity. Investors will be more comfortable investing in real estate funds with more flexible exit options. CBRE believes secondary trading activity will continue to increase and complement the longer term development of the private equity real estate fund industry in Asia Pacific.


OPPORTUNITIES IN THE ASIA PACIFIC REAL ESTATE DEBT MARKETCBRE believes there is more room for regional real estate debt fund structures to develop and ample opportunities for the pool of lenders to deepen further.

OPPORTUNITIES IN THE ASIA PACIFIC REAL ESTATE DEBT MARKET

In the years following the onset of the Global Financial Crisis (GFC) in 2008, banks in Asia Pacific became more prudent towards real estate lending as they sought to keep their balance sheets in shape. At the same time, financial institutions in the region have become subject to stricter regulations covering capital requirements such as Basel III, along with a series of government-led real estate cooling measures in residential and commercial sectors.

Bank lending for real estate in Asia Pacific, including residential investment and development, has therefore slowed from 15% per annum in the period between 2005 and 2008 to just 7% between 2011 and 2014 (Chart 1). This reflects the shift in real estate financing away from the traditional bank lending model and the fact that banks have turned very selective and prudent towards real estate lending. As a result, many borrowers have attempted to diversify their sources of funding due to more stringent loan underwriting from banks.

Chart 1: Average annual growth of bank lending for real estate in Asia Pacific

Source: CBRE Research, CEIC, various central banks, June 2015.

GROWING APPETITE FOR PUBLIC BONDS

Recent years have seen a rapid increase in real estate bond issuance by listed real estate groups including developers and REITs. The total size of bond issuance by listed real estate companies in Asia Pacific increased four-fold from 2011 to 2014, bringing the total issuance to US$33.9 billion in 2014 (Chart 2).

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THE ASIA PACIFIC REAL ESTATE DEBT MARKET 8 © CBRE Ltd. 2015 CBRE GLOBAL RESEARCH

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Recent years have seen a rapid increase in real estate bond issuance by listed real estate groups including developers and REITs. The total size of bond issuance by listed real estate companies in Asia Pacific increased four-fold from 2011 to 2014, bringing the total issuance to US$33.9 billion in 2014 (Chart 3). The growth in real estate bond issuance by listed real estate companies has mainly taken place in China (70%) and Southeast Asia excluding Singapore (14%) during 2011 and 2014. Proceeds raised from bond issuance to date have mainly been used to finance development projects in listed real estate companies’ home countries. The rapid growth of the real estate bond market has also been supported by international financial investors’ stronger appetite for high-yield bonds. The size of bond issuance in mature markets such as Japan, Singapore and Hong Kong has been relatively stable. Although bond yields in emerging Asian markets are high at over 6% or more, they are still relatively cheaper than utilising onshore bank loans. Using Chinese real estate companies as an example, coupon yields at issuance for companies with an investment grade credit rating in 2014 stood in the range of 4% to 6%. In contrast, yields at issuance for companies with a non-investment grade credit rating were much higher, at between 6.35% and 12.75%. However, the cost of capital from public markets has been lower than the borrowing costs for non-listed companies from private loan and mezzanine finance, ranging from 15% to 20% or even higher. The situation is similar among Indian developers.

Public debt market – Growing appetite for public bonds

Corporate bonds

Source: CBRE Research, Bloomberg, June 2015.

Chart 3: Total Size of Bond Issuance by Listed Real Estate Companies in Asia Pacific

The growth in real estate bond issuance by listed real estate companies has mainly taken place in China (70%) and Southeast Asia excluding Singapore (14%) during 2011 and 2014. Proceeds raised from bond issuance to date have mainly been used to finance development projects in listed real estate companies’ home countries. The rapid growth of the real estate bond market has also been supported by international financial investors’ stronger appetite for high-yield bonds. The size of bond issuance in mature markets such as Japan, Singapore and Hong Kong has been relatively stable.

Chart 2: Total size of bond issuance by listed real estate companies in Asia Pacific

Source: CBRE Research, Bloomberg, June 2015.This article of a summary of a Special Report entitled “The Asia Pacific Real Estate Debt Market: Tighter Regulation Brings Opportunities” published by CBRE Asia Pacific Research.


Chart 3: Breakdown of Investors Indicating they have invested in Real Estate Debt

Source: CBRE Asia Pacific Investor Intentions Survey 2015, March 2015

Note: Institutional investors include insurance companies, pension funds and sovereign wealth funds

THE RISE OF NON-BANK LENDERS

The public bond market is generally only available for large listed property groups, meaning that non-listed small- to medium sized (SME) property companies are unable to utilise this funding channel. The funding gap in non-listed groups remains under-served. Banks are reluctant to lend money for development projects and for lower quality assets. This has fueled the growth of non-bank lending in the region. Non-bank lenders have already embedded themselves into the region’s private real estate debt market, with investment real estate funds and institutional investors accounting for over 60% of survey respondents which had invested in debt as of the beginning of 2015 according to CBRE’s 2015 Investor Intentions Survey (Chart 3).

Activities by these new lending sources have redefined the traditional layers of the capital debt structure in response to financing and liquidity demands of both development projects and standing investments across different Asia Pacific markets. Institutional investors provide long term senior lending with terms competitive to banks for commercial asset acquisitions. They meet borrowers’ growing requirements for long maturity loans. Private equity real estate funds offer structured debt financing to development projects which provide greater flexibility to borrowers.

GROWING APPETITE FOR PUBLIC BONDSOPPORTUNITIES FOR NON-BANK LENDERS

Mature markets: long-term lending

Borrowers in mature markets are increasingly keen to secure long-term loans ahead of an anticipated increase in interest rates, with the US Federal Reserve hinting at a possible rate hike in the near future. This is providing opportunities for non-bank lenders to step in and engage senior loans on stabilised properties, given that banks’ maximum lending terms are typically up to five years.

Despite the dominance of domestic banks limiting the accessibility of non-bank lenders in mature markets like Japan, Singapore and Hong Kong, institutional investors are seeing increased demand from property syndicates in Australia to lock down long-term, low-interest loans. Returns from such debt investments mirror those of core assets. The long-term nature is good match for insurance companies’ and pension funds’ liabilities. Real estate debt investment provides an alternative way for investors to seek real estate exposure amid the limited availability of core assets for sale.

Meanwhile, real estate funds have also managed to carve a niche in providing mezzanine financing to Australian developers to fill the capital stack, as banks, which have increased lending growth in commercial development over the last year, may be less willing to take on further growth as supply increases.

Emerging markets: gaps in development funding

Private real estate funds looking to take advantage of the development funding gap will find more opportunities in emerging Asia, particularly China and India due to the strong pipeline of development activity, combined with tight credit lines from domestic banks on project financing and developers being more proactive in searching for funding from overseas. Despite improvements in China and India’s housing market after the central banks cut interest rates three times in 2015, domestic banks remain way of overexposure and default risks. Preferred equity and mezzanine financing are the usual format of such project financing as they provide higher yields and flexibility for equity conversion.

BE OF AWARE CHALLENGES IN NON-BANK LENDING

Despite the increase in non-bank lending in Asia Pacific, the stage of development of the real estate debt market varies across the region. Investors should be aware of a number of challenges in navigating, managing execution and administrative and regulatory issues.

Execution – One major challenge for investors is how to source non-bank lending opportunities, particularly when the transparency of the debt market in Asia Pacific can often be very opaque.

Licensing and regulatory – non-bank lenders still have to fulfill licensing requirements for lending although they are not subject to banking regulations. Regulatory and licensing requirements vary by country.

Administrative – Providers of mezzanine debt need to obtain approval from senior lenders as well as set up tripartite agreements. This lengthens the underwriting process of mezzanine financing.

REAL ESTATE DEBT MARKET CONTINUES TO EVOLVE

With full implementation of Basel III in 2019 expected to induce further tightening, and the low level of saturation of the Asia Pacific debt market relative to the US and Europe, CBRE believes that there is more room for the region’s real estate debt fund structures to develop and ample opportunities for the pool of lenders to deepen further.


VIEWPOINT

Figure 4: Composition of annualised capital value return (Q1 2012 to Q1 2015)

Source: CBRE Research, May 2015. Currency volatility is also an issue for listed real estate. The devaluation of currencies in the region dragged down the performance of the TR/GPR/APREA Asia Pacific Real Estate Composite Index by a total of 17% in the three years to 2014 (Figure 5). For 2014 alone, the index rose 8.5% in local currency terms but just 1.8% in US dollar terms. That said, volatility in the overall stock market is a more critical factor determining the pricing of listed real estate. The currency effect also balances out in the longer term, making it a less important component of the return profile for long-term investors. Figure 5: TR/GPR/APREA Asia Pacific Real Estate Composite Index Source: APREA, CBRE Research, May 2015.

June 2015 CBRE Research © CBRE Ltd. 2015 | 5

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VIEWPOINT

Source: CBRE Research, May 2015 Exchange rates in Asia Pacific have fluctuated in recent years as the US dollar strengthens and euro weakens (Figure 3), a trend exacerbated by drastic interest rate differentials and looser monetary policy. Of the 14 major economies in the region, 10 have seen their currency devalued against the US dollar since 2012, while five have weakened against the Euro. The diverse performance of regional currencies has also reshuffled the relative pricing of each market, which has in turn induced capital flows within the region. Over the past three years the Japanese yen has weakened significantly, falling 56% against the US dollar on the back of negligible interest rates and ample supply of the yen under the Quantitative and Qualitative Easing (QQE) package introduced by the government in April 2013. Australia has also experienced devaluation as authorities seek to balance the negative impact of the sharp decline in commodity exports. Figure 3: Currency movements in Asia Pacific (2012-2014)

Source: CBRE Research, Macrobond, April 2015

June 2015 CBRE Research [Market specific-copyright] | 2

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Figure 2: Components of real estate total return for cross border investments

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CURRENCY VOLATILITY AND RISKS FOR REAL ESTATE INVESTORSManaging currency risks is taking on greater importance for real estate investors in Asia Pacific as they expand and diversify their portfolios to more overseas markets.

CURRENCY VOLATILITY AND RISKS FOR REAL ESTATE INVESTORS

Cross-border real estate capital flows in Asia Pacific have been growing in recent years amid renewed interest from western investors and the rise of Asian institutional investors and fund managers in the aftermath of the Global Financial Crisis (GFC). Cross-border real estate turnover in Asia Pacific amounted to US$26 billion in 2014, representing around 23% of the entire real estate investment market (Figure 1).

Cross-border real estate investors’ return profile is not only confined to property-related factors such as rental income and capital value changes but is also subject to exchange rate fluctuations between foreign and local currencies (Figure 2). The emergence of new investors in the regional property market and the surge of Asian outbound investment in recent years are additional factors ensuring that exchange rate movements are now becoming one of key considerations for real estate investors in Asia Pacific.

Exchange rates in Asia Pacific have fluctuated in recent years as the US dollar strengthens and euro weakens (Figure 3), a trend exacerbated by drastic interest rate differentials and looser monetary policy. Of the 14 major economies in the region, 10 have seen their currency devalued against the US dollar since 2012, while five have weakened against the Euro. The diverse performance of regional currencies has also reshuffled the relative pricing of each market, which has in turn induced capital flows within the region.

Over the past three years the Japanese yen has weakened significantly, falling 56% against the US dollar on the back of negligible interest rates and ample supply of the yen under the Quantitative and Qualitative Easing (QQE) package introduced by the government in April 2013. Australia has also experienced devaluation as authorities seek to balance the negative impact of the sharp decline in commodity exports.

IMPACT ON EXISTING INVESTORS

For existing investors in Asia Pacific, the main impact of currency volatility is the erosion of returns in their domestic currency, particularly for US dollar-denominated investors but less so for euro-denominated investors. Of the 15 major regional office markets tracked by CBRE, 14 recorded capital value appreciation in the three years up to Q1 2015 but only nine managed to see gains after translating the value growth into US dollars (Figure 3).

Figure 1: Cross-border real estate investment volume in Asia Pacific

Figure 2: Currency movements in Asia Pacific (2012-2014)

Figure 3: Composition of annualised capital value return (Q1 2012 to Q1 2015)

Source: CBRE Research, May 2015

Source: CBRE Research, Macrobond, April 2015

VIEWPOINT

Figure 1: Cross-border real estate investment volume in Asia Pacific Source: CBRE Research, May 2015

Ada Choi CFA Senior Director, Asia Pacific Research

Currency volatility: Risks for real estate investors


Cross-border real estate capital flows in Asia Pacific have been growing in recent years amid renewed interest from western investors and the rise of Asian institutional investors and fund managers in the aftermath of the Global Financial Crisis (GFC). Cross-border real estate turnover in Asia Pacific amounted to US$26 billion in 2014, representing around 23% of the entire real estate investment market (Figure 1). Cross-border real estate investors’ return profile is not only confined to property-related factors such as rental income and capital value changes but is also subject to exchange rate fluctuations between foreign and local currencies (Figure 2). The emergence of new investors in the regional property market and the surge of Asian outbound investment in recent years are additional factors ensuring that exchange rate movements are now becoming one of key considerations for real estate investors in Asia Pacific.

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Leo Chung, CFA Manager Asia Pacific Research

Ada Choi, CFA Senior Director, Asia Pacific Research Leo Chung, CFA Manager, Asia Pacific Research Karie Kwan Manager, Asia Pacific Research

This article is a summary of a ViewPoint entitled “Currency Volatility: Risks for Real Estate Investors” published by CBRE Asia Pacific Research.


This trend is most relevant for investors in Japan and Australia. In Tokyo, although office capital values recorded a Compound Annual Growth Rate (CARG) of 3.6% in the three years up to Q1 2015, the devaluation of the yen during the same period dragged down capital values by 8.6% in US dollar terms. While the recent recovery in occupier demand and yield compression is buoying capital values, foreign investors have still has to endure a mark-down in the value of their real estate holdings in the country. In Australia, office capital values in Sydney enjoyed a CAGR of 8% during the same period but the fall in the Australian dollar translated resulted in a capital value decline of 2.4% in US dollar terms. Other markets which have seen currency volatility dragging returns into losses include Melbourne, New Delhi, Kuala Lumpur and Taipei. Only China and South Korea have seen a marginal improvement in returns after converting into US dollars.

Currency volatility is also an issue for listed real estate. The devaluation of currencies in the region dragged down the performance of the TR/GPR/APREA Asia Pacific Real Estate Composite Index by a total of 17% in the three years to 2014 (Figure 5). For 2014 alone, the index rose 8.5% in local currency terms but just 1.8% in US dollar terms. That said, volatility in the overall stock market is a more critical factor determining the pricing of listed real estate. The currency effect also balances out in the longer term, making it a less important component of the return profile for long-term investors.

IMPACT ON POTENTIAL INVESTORS

Currency devaluation has had a negative effect for existing investors but can provide opportunities for potential international investors as it enables them to invest in countries with lower exchange rates and at a cheaper price. For example, in Japan, the depreciation of the yen has stimulated stronger buying activity by foreign investors from markets with stronger currencies.

Table 1: Currency outlook and impact on real estate investment

COUNTRY CURRENCY OUTLOOK IMPACT ON REAL ESTATE INVESTMENT

Japan • The clear interest-rate differential will exert downward pressure on the yen

• However, slower depreciation is expected

• The weaker yen will support real estate sectors tied to exports and tourism

• Investors should prepare for currency losses on their investment

South Korea • The won will be subject to devaluation as the government seeks to buoy the export sector in the short term

• The currency factor will remain low on the agenda for real estate investors

Australia • The dollar is now 25-30% below its peak of early 2013• The outlook for the next three years is more stable

• The lower dollar is supporting business and exports as well as related occupier demand

• There will be less concern about the impact of currency on investment returns

India • More turbulence is expected in 2015• However, the improved trade deficit should help stabilise

the Rupee

• Investors should prepare for some volatility, particularly around the time of a rate hike in the US

• However, faster GDP growth and market reform are more important factors supporting the real estate market

Singapore • Authorities recently lowered the gradient of the bank within which the SGD can trade

• Further devaluation is possible but volatility is expected to be relatively mild (<5%)

• Singapore will remain expensive compared to other regional markets but currency risks are low

SE Asia (ex SG)

• Currencies in emerging Southeast Asia are expected to experience more moderate volatility

• The Philippine Peso is the exception, with room for appreciation

• The worst appears to have already passed but investors will still have to factor in the devaluation issue

China • The RMB is no longer a one-way bet and has weaken against the US dollar by about 3%.

• While further devaluation is possible, China will control the shock to the market

• Currency volatility will be of an issue for real estate investors

• Lower interest rate will support real estate investment

Hong Kong • The HK dollar will continue to follow the strong US dollar under the dollar peg regime

• Hong Kong will remain expensive compared to other markets but currency risks are low

• The retail and hospitality sector is affected by the strong HK dollar

In 2014, cross-border investment in Japan surged by 245% y-o-y compared to 50% y-o-y growth in the overall market. Buoyed by the stronger dollar, US investors were the major driver, accounting for almost half of cross-border investment in Japan in 2014. Increased activity has also been recorded by investors from Hong Kong, Singapore and China, which collectively accounted for 47% of cross-border capital flows in Asia Pacific in 2014, a significant increase on the 29% recorded in 2013.

Many Asia Pacific currencies have been devalued significantly in recent years but less volatility is expected in the short to medium term. Oxford Economics forecasts that six of the 14 major economies in the region will see their currency further devalue against the US dollar in the next three years (2015-2017). In comparison, 10 markets recorded a decline in 2012-2014.

CURRENCY MANAGEMENT FOR CROSS-BORDER REAL ESTATE INVESTORS

The currency volatility witnessed in Asia Pacific in recent years has prompted many real estate investors to include currency hedging costs when underwriting acquisition assumptions. However, investors should seek external financial advice when formulating their hedging strategy. By doing so, investors can focus on making investment decisions based on real estate fundamentals. Different types of investors will utilise different types of hedging strategies or may not require one at all. For example:

• Opportunistic investors with a short to medium term investment horizon will tend to have a greater need for currency hedging as short-term currency movements can have a significant impact on their returns.

• Long-term investors will be less reliant on currency hedging as their returns are largely sourced from rental income streams over time. The mean-reverting nature of exchange rates under the purchasing power parity relationship should ensure the effect of exchange rate fluctuations balance out during the investment period. In any case, the market currently lacks long-term hedging tools.

• International investors holding geographically diversified portfolios will have a lower need to hedge currency risks. The movement of denominated currencies under their portfolios should offset each other and result in a natural hedge on currency changes.

Investors can deploy a range of tactics to protect their overseas real estate investment positions against short-term currency volatility and country-specific event risks. For example, investors can consider partial hedging by only hedging the equity portion of their real estate asset. For the debt portion of their asset, investors can obtain local currency financing so they can service the debt repayment with rental income in the same currency. Investors can also use short-term hedging tools to protect against one-off policy or event risks such as presidential elections.

Economists expect the rate of devaluation of many Asia Pacific currencies to slow in the next three years. However, the currency market will remain volatile as major economies are expected to enact significant changes to monetary policy in the short term. Managing currency risks will therefore take on greater importance for real estate investors as they expand and diversify their portfolios to more overseas markets. CBRE advises investors to seek external financial advice when formulating their currency hedging tactics and ensure these match with their overall investment objectives and strategy.


CHINESE CAPITAL IN AUSTRALIA: IS IT HERE TO STAY? Rising investment in Australia by Chinese investors is part of a global trend as China’s people and capital seek diversification and opportunity in other markets. Australia’s commercial property markets are receiving a relatively large share of this emerging capital source.

CHINESE CAPITAL – IS IT HERE TO STAY?

Rising investment in Australia by Chinese investors is part of a global trend as China’s people and capital seek diversification and opportunity in other markets. Australia’s commercial property markets are receiving a relatively large share of this emerging capital source - close to 15% in 2014 and over one-quarter of the flow in Q1 2015. Capital flows from China to Australia are complimented by growing numbers of Chinese tourists, students, settlers and an increased bi-lateral trade relationship. Australia competes for capital with other markets globally, although the latter factors appear to provide a longer-term underpinning for the capital flow now being experienced.

CHINESE INVESTMENT INTO COMMERCIAL REAL ESTATE IS RISING

In the year to March, Chinese direct investors were the second largest purchaser of commercial property in Australia, after Singapore and ahead of the US. Chinese investors have accounted for one-third of the AUD9b of foreign commercial property purchases since the start of 2014, close to AUD3b. This trend is unsurprising when one considers the growth in capital from China into global markets (chart 1).

In 2014 Chinese capital flows to global real estate rose to USD10.5b from USD1b in 2010. Australia attracted 15% of this capital outflow in 2014 and over one-quarter in Q1 2015, both high weightings relative to the size of Australia’s economy (under 2% of the global GDP).

Flows from China into global markets are expected to remain firm, with potential upside, as regulatory changes over the last three years have allowed a higher investment allocation into real estate for life insurers (rising from 10% to 30%) and offshore investment to a limit of 15% across all assets classes.

INNER CITY DEVELOPMENT SITES ARE A MAJOR DESTINATION FOR CHINESE CAPITAL

Sites incorporating development opportunity have risen in prominence over the last two years. Of the 116 inner city (within 5km of CBD) property assets sold across Sydney, Melbourne and Brisbane in the 12 months to April, 36 were acquired by Chinese investors (31% of all transactions in these markets).

Chart 1: Chinese Capital Flows into Global Real Estate Markets

Chart 2: Inner City* Site Sales – Sydney, Melbourne, Brisbane – year to April

Source: CBRE Research, March 2015; includes standing investments only

Domestic economic and residential market risks in China have led investors and developers to diversify interests offshore into relatively safer markets. Furthermore, the economics of residential development in some Australian cities (particularly Sydney and Melbourne) have improved with residential values rising relative to those for commercial use. This has made the acquisition of office assets in good locations profitable for residential use - e.g. Goldfields House, Sydney, purchased by Dalian Wanda, 175 Liverpool Street purchased by Shimao Group and 130 Elizabeth Street purchased by Aoyuan. Obsolete sites close to the CBD in Melbourne, such as the former Carlton & United Brewery, have also been purchased with potential for conversion to residential use.

Sydney and Melbourne dominate the demand for Australian assets – of the 36 Chinese-purchaser inner city deals recorded in the 12 months to April, 16 were in Sydney, 15 in Melbourne and 5 in Brisbane.

Inner city acquisitions

2015 45% Offshore

-31% China

2012 13% Offshore

-11% China

This article is a summary of a ViewPoint entitled “Chinese Capital in Australia – Is it Here to Stay?” published by CBRE Australia Research.


The average purchase price in Sydney was close to AUD120m, significantly higher than Brisbane/Melbourne (AUD20-25m), as productive not obsolete (or at best less productive) assets were acquired in Sydney.

Locations sought by Chinese investors/developers are often similar to those preferred by Chinese occupiers; proximity and access to employment opportunities, transport and education facilities. The latter explains why some non-CBD and suburban locations such as Parramatta and the North Shore in New South Wales and St Kilda Rd and South Melbourne in Victoria are also attracting Chinese developers and investors.

We expect the undersupply of housing to sustain the healthy flow of development related capital into Sydney over the next 1-2 years, while other markets, in which the market fundamentals are more skewed to oversupply (e.g. Melbourne), may see a relative slowing in overall activity. This is not to say Chinese capital will necessarily be redundant, just that there will be less opportunity for both local and international development in markets in which activity slows. Countering this, rising demand for urban renewal and related mixed-use projects provides a future area of development opportunity for investors. In relation to existing office, retail and industrial assets Chinese interest is modest but starting to increase.

Selected Major Deals – Chinese Purchasers (2014 & 2015)

Chart 3: Australia’s export and import mix by country

Chart 3: Chinese tertiary students in Australia

CHINA EMERGING ACROSS AUSTRALIA’S KEY SECTORS

Australia has growing trade and migration flows with China, as outlined in this section. We think these add a longer-term characteristic to Chinese capital in Australia and support the focus on development.

BI-LATERAL TRADE LINKAGE GROWS

Bi-lateral trade linkages with China have grown significantly. China now accounts for 34% of Australia’s merchandise exports mostly comprising bulk commodities, compared to less than 5% twenty years ago. While commodities dominate the top 3 exports to China (iron ore $51b p.a, coal $8b, Gold $7b), education represents the fourth largest export to China ($4b).

Australia has a significant trade surplus with China, although this is largely concentrated in Western Australia – only 10-15% of NSW and Victoria’s exports go to China, compared to 50% for WA. Australia’s imports are from more diversified sources globally, but at just over 20%, China is the largest source, closely followed by the ASEAN group of countries. Imports from China are dominated by consumer goods - the four largest being: telecommunication equipment ($5.6b), clothing ($5b), computers ($5b) and furniture, mattresses and cushions ($2.3b). China does face increased competition from other Southern and South East Asian locations in some of these import categories.

EDUCATION – FOREIGN STUDENT NUMBERS GROWING AGAIN

Education is Australia’s third largest export and fourth largest to China after commodity exports. Chinese higher education students represent close to 35% of higher education students in Australia. The number grew rapidly up until 2009 but the higher AUD saw the rate of growth of international student numbers taper. We have started to see this increase once again with the AUD down by 30% from its peak. There are currently over 50,000 visas granted to Chinese students per annum.

While Sydney attracts the largest number of Chinese students, Melbourne has significantly closed the gap in the last decade. A large proportion of foreign students are evident in Melbourne which has the highest proportion of foreign students in the country (40-45% of enrolment in Victoria’s key universities are foreign students).

Date Property Location State Purchaser Price (AUD m)

Sydney

Q1 15 1 Alfred Street Sydney NSW Dalian Wanda 415Q4 14 175 Liverpool Street Sydney NSW Shimao Group 392Q4 14 Former Metters Factory, 165-175 Mitchell Road Erskineville NSW Golden Horse Nine Dragon 380Q2 15 8 Darling Island Road Pyrmont NSW Aqualand 180Q3 14 Former CSIRO site, Julius Ave North Ryde NSW Aqualand 170Q1 15 168 Walker Street North Sydney NSW Aqualand 158Q3 14 Melrose Park, Victoria Rd & Wharf Rd Melrose Park NSW Aqualand 135Q1 15 130-134 Elizabeth Street Sydney NSW Aoyuan 121Q4 14 73 Miller St North Sydney NSW Fosun International 118Q4 14 Frmr Cambridge Office Park, 20-28 Cambridge Street Epping NSW China Poly Group 110Q4 14 338 Pitt Street Sydney CBD NSW Visionary Investment Group 102Q1 14 52 Alfred Street North Sydney NSW Bridge Hill Group 80Q4 14 75 Elizabeth Street Sydney CBD NSW Kingold 67Q1 14 229 Pacific Highway North Sydney NSW Greenland Group 58Q2 15 The Compass Centre, 85-89 North Terrace Bankstown NSW Ganghui Pty Ltd 45

Melbourne

Q3 14 Former Carlton & United Brewery site Melbourne VIC Private Investor 60Q2 14 448 Epsom Road Flemington VIC Greenland Group 45Q1 14 424 St Kilda Road Melbourne VIC Dongguan Huajin Property Investment 43Q4 14 58-66 Dorcas St South Melbourne VIC Xiang Xing Group 35Q3 14 51-65 Clarke Street Southbank VIC Brilliland Group 30

Brisbane/Gold Coast

Q4 14 Old Burleigh Rd Surfers Paradise QLD Dalian Wanda 104Q4 14 1 Cordelia Street South Brisbane QLD R&F Properties 46Q1 14 60 Marine Pde Southport QLD Huixin 24Q3 14 67 Cairns Street Kangaroo Point QLD R&F Properties 19Q4 14 20 Walsh Street Milton QLD Golden Horse Nine Dragon 11

Source: Real Capital Analytics, CBRE Research, May 2015

Source: ABS, CBRE Research, March 2015

Chinese Higher Education Student Numbers

Chinese Tertiary Student Numbers by State (% represents 10 year CARG)

7.8% 10.6% 12.2% 15.7% 8.4%


SOME INVESTMENT BARRIERS REMOVED – CHINA-AUSTRALIA FREE TRADE AGREEMENT

The China-Australia Free Trade Agreement was signed on 17 June 2015 with the terms expected to be in place by end-2015. The agreement removes one administrative barrier to Chinese investment by lifting the Foreign Investment Review Board (FIRB) screening threshold for private investment in commercial real estate from AUD55m to AUD1.094b. The higher threshold also applies to private investors from the US, NZ, Chile, Korea and Japan. Under such arrangements, private Chinese investors will not need to notify or apply to FIRB for commercial property transactions below the threshold (this exemption is not in place for State-owned investors).

FIRB APPLICATION FEES – NOT A LIKELY DETERRENT

The Federal Government introduced application fees for FIRB applications in the 2015/16 Federal Budget. Fees are to be levied on all foreign investment applications. For residential properties valued at $1 million or less, foreign investors will pay a fee of AUD5,000. Higher fees apply to more expensive residential properties and commercial real estate applications (the latter being AUD25,000). The aim of the fees is to fund greater compliance activity in terms of foreign acquisition

TOURISM – CHINA NOW THE SECOND LARGEST SOURCE OF TOURISTS TO AUSTRALIA

While New Zealand remains the largest source of inbound tourism to Australia, the composition and mix has shifted significantly over the last eight years. Tourist arrivals from China have more than doubled since 2006, last year totalling over 700,000.

The growth in Chinese visitors has more than replaced a large reduction in Japanese tourists over this period and China recently moved ahead of the UK to now be the second highest source of tourism arrivals.

PERMANENT MIGRATION RISING

There are around 450,000 Chinese-born residents in Australia, still just 2% of the population, although the number has doubled in the last decade, with China now the second largest source of migrants after India. In 2013-14 there were 26,776 migrants from China (over 10% of migrant intake), compared with 39,000 from India out of a total targeted intake of 190,000 per annum.

Chart 4: Cumulative growth in tourism arrivals – last 5 years

Source: TRA, CBRE Research, March 2015

SIGNIFICANT INVESTOR SCHEME APPEALS TO HIGH NET WORTH BUT PLACES LIMITED

While (anecdotally) a growing number of migrants (including Chinese) are coming to Australia on the Significant Investor Visa scheme, the number issued last year was relatively low at 6,160 (with a target of 7,200 for 2014/15) and represented less than 5% of overall visas issued. This said, there does appear to be strong demand for this visa category with applications rising by 125% in 2013/14. Recent changes to the Significant Investor Visa schemes become effective in July 2015. These schemes offer high net worth individuals opportunity to receive permanent visas after:

a four year provisional visa period for people who invest at least AUD5million into complying investments in Australia which are generally managed funds or listed investment companies

a 12 month provisional visa for individuals meeting an AUD15m investment threshold in complying investments under the Premium Investor Visa scheme, subject to invitation by Austrade. An element of real property investment may be allowed under this scheme (excluding direct residential investment).

of property assets in Australia. We don’t expect far reaching consequences for foreign investment in property as the changes are relatively small compared to the overall decision points for making an investment including the direction of market fundamentals; also because of the low cost of the proposed application fees for foreign investment compared to measures in place globally. For residential, the application fee represents 0.8% of the median unit price in Sydney, rising to around 1.0% in Brisbane.

IMPLICATION – CHINA HERE TO STAY ?

So what does all this mean ? The longer-term development of the China - Australia relationship suggests a degree of stability in the capital already in Australia. Furthermore, China is in the early process of diversifying capital allocation to global markets. Australia does compete with other markets globally for capital and while we have been attracting an overweight share of Chinese capital, it is not unreasonable to assume that the inflow would slow in the longer term as capital flows normalise to other global markets and as domestic fundamentals (e.g. residential market balance) plays a hand in adjusting capital allocation decisions. This said, the risk for capital retrenchment from Australia appears to be fairly low, in the absence of a significantly adverse economic environment emerging in Australia or abroad.


HONG KONG FUTURE FUND The new Hong Kong Future Fund is set to make a sizeable investment in global real estate but will take time to deploy capital.

In March 2014 the Working Group on Long-Term Fiscal Planning recommended the launch of a ‘Future Fund’ to provide Hong Kong with a platform to invest and save for future generations as a hedge against the city’s ageing population. In his FY2015-2016 budget speech, Financial Secretary John Tsang endorsed the setting up of the Future Fund by the end of 2015.

AIMS TO GENERATE HIGHER RETURNS TO MITIGATE RISK OF A STRUCTURAL FISCAL DEFICITThe government projects public expenditure will grow faster than revenue over the next three decades. This is because the percentage of the population aged 65 and above will increase from 15% in 2014 to about 30% in 2041, resulting in a shrinking workforce and increasing need for elderly care, while the city’s GDP growth will moderate to sub-3%.1 To reduce the risk of a structural deficit and to ensure sound fiscal reserves for future generations, the government has decided to set aside a portion of fiscal reserves and the annual surplus to generate higher returns through long-term investment via the Future Fund.

INITIAL SIZE OF HK$220 BILLIONThe core of the Future Fund will be formed by the HK$220 1 Source: Report of the Working Group on Long-Term Fiscal Planning (Phase Two)

Chart 1: Consolidated surplus of Hong Kong

Source: Hong Kong Government, March 2015.

billion (US$28 billion) Land Fund, which is a reserve fund that held revenues from land sales before the handover in 1997, and currently has a 30% share in the Government’s Fiscal Reserves.

ANNUAL TOP-UP OF 25%-33% FROM THE BUDGET SURPLUS The balance of the Future Fund will come from a percentage share of the surplus in the Operating/Capital Account or the Consolidated Account. Depending on the financial performance for each financial year, the Working Group suggests a top-up range of 25%-33% of the annual budget surplus. The government reported a budget surplus of HK$63.8 billion (US$8.2 billion) for FY2014-15. Based on the five-year average surplus and the projected HK$36.7 billion surplus for FY2015-16, the size of the Future Fund is expected to grow at a rate of 5-7% per annum.

LONG-TERM INVESTMENT ONLYThe Future Fund will have a recommended minimum investment horizon of ten years under the management of the Exchange Fund Advisory Committee.

VIEWPOINT

Annual top-up of 25%-33% from the budget surplus

Long-term investment only

March 2015 CBRE Research © CBRE Ltd. 2015 | 2

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

201

0-11

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1-12

201

2-13

201

3-14

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4-15

201

5-16

F

201

0-20

16

Ave

rage

HK$

mill

ion

Source: Hong Kong Government, March 2015.

Chart 1: Consolidated surplus of Hong Kong

Annual top-up: 25-33% of average consolidated surplus

This article is a summary of a ViewPoint entitled “Hong Kong Future Fund Set to Make Sizeable Investment in Global Real Estate But Will Take Time to Deploy Capital” published by CBRE Hong Kong Research and CBRE Asia Pacific Research.


investments, Asian capital has been diversifying and investing in a broader selection of cities and countries. However, their main focus remains on mature markets with sound legal systems.

• Hold assets for the long-term: Asian SWFs usually hold real estate assets under their long-term investment portfolios with an investment horizon of 10 years or longer. Their investment philosophy tends to be visionary and is designed to benefit future generations instead of focusing on short-term gains and immediate income returns. They are therefore more flexible in undertaking development projects.

VIEWPOINT

•

•

•


Chart 3: Real estate investment by Asian SWFs (2013-2014)

Office 65%

Retail 14%

Hotel 11%

Mixed 8%

Industrial 1%

Others 1%

by sector

EMEA 43%

Americas 22%

Asia 24%

Pacific 11%

by destination

Source: Real Capital Analytics, CBRE Research, March 2015.

VIEWPOINT

•

•

•



Office 65%

Retail 14%

Hotel 11%

Mixed 8%

Industrial 1%

Others 1%

by sector

EMEA 43%

Americas 22%

Asia 24%

Pacific 11%

by destination


by destination

by sector

Following the formation of the Future Fund, an additional HK$110 billion will potentially be injected into the LTGP, bringing the size of the LTGP to HK$225 billion (US$29 billion). This estimated size is subject to a decision to increase allocations to the LTGP from the Exchange Fund and the Future Fund.

Under the current LTGP, about 70% is invested in private equities. Real estate holdings account for around 30%, according to the HKMA. The LTGP began direct real estate investment in 2011 and grew rapidly, holding HK$34.7 billion (US$4.5 billion) in global real estate by the end of 2014 (Table 1). Its outbound portfolio comprises assets in the United States, the United Kingdom and France. All of the LTGP’s acquisitions to date have been office properties. Investments have generally been made via joint ventures or via a fund manager. The average asset size is well above US$200 million.

VIEWPOINT

2014 2000 Avenue Of

The Stars Los Angeles, United States

JV (47.5%) 300

2014 Century Plaza Los Angeles, United States

JV (47.5%) 786

2013 Hanover Square

Estate London, England

JV (50%) 165

2012 101 California

(92% stake) San Francisco, United States

JV GIC 910

2012 Hoche 52 Paris, France

Acquired via fund manager

212

2012 Avant Seine Paris, France


445

2011 10 Aldermanbury London, England


434


Table 1: Real estate acquisitions by HKMA LTGP

Source: Real Capital Analytics, CBRE Research, March 2015

Exchange FundHK$3,152 bn**

~1.1% (HK$115 bn) Long-term Growth Portfolio (LTGP)(only private equity and real estate)

Expanded LTGPHK$225 bn

Future FundHK$220 bn*

Remainder is invested in bonds, equities and other long-term investments

~50% (HK$110 bn) Alternatives via LTGP

Remainder is invested in bonds, equities and other long-term investments; mainly US Dollar denominated assets

Table 1: Real estate acquisitions by HKMA LTGP


Chart 2: Potential fund size of the Long-term Growth Portfolio (LTGP)

Source: Real Capital Analytics, CBRE Research, March 2015

Source: HKMA, Hong Kong Government, CBRE Research * Seed fund of HK$220 billion from Land Fund; 25-33% annual top-up from fiscal surplus.** End-2014; fund size could reach one-third of the Accumulated Surplus of the Exchange Fund, which stood at HK$635.5 billion as of the end of 2014


If the Future Fund were to invest a similar proportion following its injection into the LTGP, its real estate holdings could gradually increase to HK$67.7 billion (US$8.8 billion). However, the pace of investment will be subject to the establishment of the fund and formation of the management team. Investments will also be made over a period of several years in order to diversify risk.

HOW THE FUTURE FUND CAN LEARN FROM THE EXPERIENCE OF OTHER ASIAN SOVEREIGN WEALTH FUNDS

Asian SWFs are largely backed by government reserves. The rapid development of the export sector in recent years has ensured Asian countries’ foreign exchange reserves have grown rapidly. There has also been an increase in the current account surplus since the Asian Financial Crisis in 1997. As of the end of 2014, foreign exchange reserves held by Asian countries totalled US$7.2 trillion, representing roughly half of the global total. 3

The growth in foreign exchange reserves coupled with the challenge of population ageing have prompted several countries in Asia to turn more active in launching SWFs. These include the China Investment Corporation (CIC) formed in 2007 and the Korea Investment Corporation (KIC) formed in 2005. Elsewhere, Australia and New Zealand have established superannuation funds to achieve higher returns as their population ages. At the same time, existing SWFs such as the Government of Singapore Investment Corporation (GIC) and Temasek have been strengthening their global investment platforms. Asian SWFs are adopting active reserve management and are increasing their exposure to real estate in their long-term investment portfolios. The Future Fund has an initial pool of US$28 billion of AUM and is relatively small compared to other Asian SWFs. However, the government has indicated that it is prepared to make an allocation of up to 50% to alternatives, meaning there is considerable room for the Future Fund to assemble a sizable real estate portfolio. The experience and strategies adopted by other Asian SWFs can serve as a reference point for the Future Fund. Common characteristics include:

• Diversify globally: To date, Asian SWFs have mainly invested in real estate overseas, particularly in global gateway cities in Europe and America. However, as they become more experienced and sophisticated in making cross-border

HALF OF THE FUTURE FUND WILL BE INVESTED IN ALTERNATIVES, INCLUDING REAL ESTATE

The Working Group recommends assigning no less than half of the Future Fund (i.e. HK$110 billion, US$14 billion) into the Long Term Growth Portfolio (LTGP) of the Exchange Fund, which only invests in private equities and real estate assets. The other half of the Future Fund will be invested in bonds, equities or other long-term investment products.

The LTGP under the Exchange Fund is Hong Kong’s only government-run investment portfolio with global real estate holdings and is run by the Hong Kong Monetary Authority (HKMA), the quasi-central bank of the SAR. As of end-2014, the LTGP’s total asset value stood at HK$115 billion (US$14 billion).

The LTGP was launched in 2008 after the HKMA recognised the need for the government to seek higher returns and invest in private equity and real estate, an approach similar to other sovereign wealth funds. The annualised return of the LTGP since its inception till end-2014 is 13.5% (IRR), far higher than the 3.7% 10-year average investment return of the Exchange Fund.

In spite of its rapid growth, the LTGP’s allocation to real estate accounted for just 1.1% of the entire Exchange Fund portfolio.2 As the Exchange Fund is mainly aimed at ensuring monetary and financial stability as well as backing up the entire Monetary Base for the Hong Kong Dollar, it mainly invests in highly liquid USD denominated assets and therefore has limited capacity to invest in alternatives.


SCOPE OF SERVICESINVESTMENT PROPERTIES

Acquisition – Our acquisition service includes identifying and securing on- and off-market opportunities, negotiating key commercial terms and implementing strategic asset management initiatives to create value and facilitate ongoing asset performance.

Disposal – Our disposal service includes formulating bespoke marketing strategies, accessing the most active capital to drive pricing and minimize transaction risk. Financial analysis and a full due diligence service is provided with every single transaction.

Sale and leasebacks – In order to structure complex sale and leaseback transactions our investment teams work closely with CBRE’s Global Corporate Ser vices team, who specialize in full-service real estate solutions. By working together, we provide integrated advice on the most appropriate lease structure for the tenant, which also helps maximize sales proceeds and in offering a liquid product to the market.

Joint venture – We offer advice on asset-based joint venture transactions and can work closely with you to ensure a successful transaction structure is implemented. We also offer advice on tax, asset/ corporate structure issues and the due diligence process.

Advisory services – In addition, our capital markets platform offers clients access to our full range of real estate services including real estate finance, valuation, building consultancy, leasing, asset and property management.

We work particularly closely with CBRE Capital Advisors Asia Pacific business to support our clients in the more complex areas of capital raising, both debt and equity, for assets, portfolios and funds, investment advisory as well as loan origination and servicing.

CBRE HOTELS

With over 220 hospitality professionals located in key markets worldwide, CBRE Hotels leverages an unparalleled global platform to drive results. When it comes to hotel real estate, CBRE Hotels has the presence, resources, people and network to deliver the best solutions. Our global network enables us to access a broad range of buyers, sellers and financial resources to offer unmatched industry intelligence.

Whether you are buying, selling or financing, our combination of local market knowledge, proven transaction process and available capital resources provides first-class results anytime, anywhere.

CBRE IS THE PREMIER GLOBAL COMMERCIAL REAL ESTATE SERVICES AND INVESTMENT FIRM

OUR STRATEGY IS TO PRODUCE DISTINCT ADVANTAGES FOR OUR CLIENTS, EMPLOYEES AND SHAREHOLDERS BY CREATING REAL ESTATE SOLUTIONS THAT DRIVE VALUE AND GROWTH

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Global investors are increasingly diversifying across geographies, asset classes and the risk spectrum. Our global Capital Markets professionals make complex, cross-border deals happen.

We have unrivaled experience in:• Strategically advising the world’s

most sophisticated investors• Understanding and accessing global

capital• Leveraging personal relationships

with key capital sources• Connecting clients with opportunities• Providing creative solutions that

uncover value and drive returns

We do this by:• Engaging industry-leading market

knowledge and unmatched expertise• Understanding buyers’ values and

motivations• Nurturing long-term partnerships

with investors worldwide• Pre-qualifying opportunities for

active investors• Prioritizing deals with decision

makers• Maintaining trust and reliability• Accessing the expertise of CBRE’s

52,000 professionals around the world

CAPITAL ADVISORS

Working alongside our Capital Markets colleagues, our 450+ Capital Advisors and Debt & Structured Finance professionals bring together a diverse range of skills to offer the broadest possible service around real estate finance:

• Financing options• Deployment of capital• The management, structuring or

restructuring of investments in real estate

• Strategic advisory, including mergers & acquisitions, corporate valuation, and reviews of strategic and financial alternatives

• Access to capital in all its forms – raising equity, debt, structured finance, direct or indirect investment

We work in partnership with clients to identify the optimum solution and the best method of obtaining a successful outcome. Each opportunity is individually resourced to ensure the right deal team is put in place for the transaction in question, and it’s this approach that ensures our clients remain in control, at the centre of the project, at all times.


CBRE CAPITAL MARKETS & RESEARCH

PROPERTY SALES CBRE HOTELSCBRE RESEARCH CAPITAL ADVISORS

GLOBAL AND ASIA PACIFIC LEADERSHIP

ASIA

Japan

Yukihiro OgasawaraExecutive ManagingDirector

Tom MoffatSenior Director

Greater China & Korea

Greg PennManaging Director

China

Johnny ShaoExecutive Director

Hong Kong

Kam-Hung YuSenior ManagingDirector

John DaviesExecutive Director

Korea

Don LimSenior Director

Taiwan

Andrew LinDirector

India

Gaurav KumarCo-head ofCapital Markets

Nikhil BhatiaCo-head ofCapital Markets

Singapore

Jeremy LakeExecutive Director

Thailand

Kulwadee SawangsriExecutive Director

Vietnam

Marc TownsendManaging Director

Philippines

Calvin JaviniarDirector

Cambodia

Sothida AnnAssociate Director

PACIFIC

Mark GranterExecutive ManagingDirector,Capital Markets

InternationalInvestmentsRichard ButlerSenior ManagingDirector

InstitutionalInvestmentsJosh CullenNational Director

MetropolitanInvestmentsScott Gray-SpencerExecutive ManagingDirector

ASIA PACIFIC

Robert McIntoshExecutive Director

Oscar WesterlundDirector

PACIFIC

Ken SmithRegional Director

Wayne BunzSenior Director

Rob CrossSenior Director

ASIA PACIFIC

Nick CrockettExecutive Director

ASIA

China

Canon YauDirector

Sharon LawDirector

Japan

Junichiro MutoSenior Director

Korea

Thomas CollinsExecutive Director

Chris ChiangSenior Director

PACIFIC

Martin PriestleySenior Director

Matt LawrenceSenior Director

Stephen O’KeefeFund Manager

APAC RESEARCH Ada Choi, CFASenior Director

Jonathan HillsDirector

Leo Chung, CFAManager

CHINAFrank Chen, CFA

HONG KONG, TAIWAN AND MACAU Marcos Chan

JAPANHiroshi Okubo

SOUTH KOREAInsub Park

SOUTH EAST ASIADesmond Sim

INDIA Abhinav Joshi

AUSTRALIA Stephen McNabb

NEW ZEALAND Zoltan Moricz

STEVEN SWERDLOWCEO Asia Pacific

ROB BLAINExecutive ChairmanAsia Pacific

RICHARD KIRKEManaging DirectorCapital Markets Asia Pacific

HENRY CHIN, PH.D.Head of ResearchAsia Pacific

GLOBAL CAPITAL MARKET

Marc GiuffridaExecutive Director

Nick Axford, PH.D.Global Head of Research

Richard Barkham, PH.D., MRICSGlobal Chief Economist

Neil Blake, PH.D.Head of Research, UK and EMEA

Spencer LevyHead of ResearchAmericas

Henry Chin, PH.D.Head of ResearchAsia Pacific

GLOBAL RESEARCHNATIONAL RESEARCH HEADS

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© CBRE Ltd. 2015

CBRE GLOBAL RESEARCH This report was prepared by CBRE Asia Pacific Research team, which forms part of CBRE Global Research—a network of preeminent researchers and consultants who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe.

All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication. Agency Licence No.: L3002163I

RECENT REPORTS BY CBRE RESEARCH

Q2 2015 Asia Pacific Investment

Market View

Asia Pacific Investor Intentions Survey 2015

Australia ViewPoint: Chinese Capital - Is it

here to Stay?

H1 2015 Four Quadrants

Private Equity Real Estate Funds: Increase in Fund Raising Activity

Set to Boost

Q2 2015 Asia Pacific Investment Trends

The Asia Pacific Real Estate Debt Market:

Tighter Regulation Brings Opportunities

Hong Kong ViewPoint: The Future Fund

Q2 2015 Asia Pacific Hotel Trends

Currency Volatility: Risks for Real Estate

Investors

MARKETVIEW

Key Themes

•  Strong activity in Sydney and Melbourne, but other cities quiet •  International investors, particularly Asian groups, remain active

•  Deal flow limited by pricing and intense competition for core product •  All asset classes experiencing yield compression

•  Transaction volume skewed by one major deal •  Diminishing interest in retail sector due to weaker fundamentals

•  Investor confidence boosted by further monetary easing measures •  Tier 1 cities, particularly Shanghai, report an increase in enquiries

•  MERS outbreak not a concern for real estate investment market •  Domestic institutional investors continue to add to portfolios

•  Activity remains muted due to mismatch between buyers and sellers •  More local investors are looking to deploy capital offshore

•  Steady economic growth driving office leasing activity in major cities •  Increased activity from selected international investors

•  Activity continues to focus on Auckland •  Wellington seeing interest from investors looking for higher yields

•  Capital gains tax reform prompts more caution among investors •  End-users most active this quarter

•  Stronger interest in luxury residential sector in Thailand and Vietnam •  Continued interest from foreign investors to form joint ventures

0 2 4 6 8 10

*Other SE Asia

Taiwan

New Zealand

India

Singapore

South Korea

China

Hong Kong

Japan

Australia

(US$ billion)

Q2 2015 Q1 2015

Activity picks up but stock for sale remains limited

Asia Pacific Investment, Q2 2015

Q2 2015 CBRE Research © CBRE Ltd. 2015 1

Total Turnover 14% q-o-q

Cross Border Turnover 42% q-o-q

To toggle between the font styles use the indent/increase List Level button. This is a list of styles available on text pages. Heading styles are built into Cover Page Master pages. Be aware on older versions of PowerPoint the levels available are limited to 5 instead of 9. Level 1 – Body Text LEVEL 2 – HEADING (with space after use CAPS)

LEVEL 3 – HEADING (no space after use CAPS)

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•  Level 5 – Bullet Level 6 – Chart Title Level 7 – Chart Source Level 8 – Contact Role (use Arnhem bold for name) Level 9 – Disclaimer Please stick to these styles only.

Capital Values All Sectors 1.1% q-o-q

Rental Values All Sectors 0.6% q-o-q

Note: * Other SE Asia include Malaysia, Indonesia, the Philippines, Thailand and Vietnam. Transactions include deals above US$10 million in the Office, Retail, Mixed, Industrial, Hotel and Other sectors. Source: CBRE Research, RCA , Q2 2015.


Not clear Q4,2014

Guideline of tickers: Max 5 Evenly distributed From bar below: 0.2 h

Guideline of chart on front page: In line with head line Really shows something The size of the chart is adjustable Use “figure” other than “chart”

July is not expected to negatively impact real estate market fundamentals. Activity in Japan and Australia remained upbeat whilst several large international investors also displayed a stronger interest in India this quarter supported by the better economic outlook. International institutional investors displayed a strong appetite for big ticket deals but there continued to be a lack of assets for sale. Investment turnover is expected to display steady growth in H2 2015.

Need to update

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SE Asia - Others

India

Taiwan

New Zealand

Singapore

Hong Kong

China

South Korea

Australia

Japan

(US$ billion)

4q rollin to Q1 2015 4q rollin to Q1 2014

Need to update

The Asia Pacific real estate investment market turned more active in Q2 2015, with transaction volume increasing by 14% q-o-q to US$21 billion, although this marked a decline of 20% on the same period last year. Deal flow continued to be restrained by the lack of stock for sale and landlords’ unwillingness to reduce asking prices amid the low interest rate environment. China saw investment sentiment improve further, although this was confined to tier I cities. Shanghai recorded an uptick in enquiries and an increase in transactions. The volatility in the Chinese stock market witnessed in June and

Should we say SE Asia ex Singapore? [Done]

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INVESTOR INTENTIONS SURVEY 2015

Asia Pacific

CBRE GLOBAL RESEARCH

v

v

VIEWPOINT

China and Australia

JUNE 2015 CBRE Research 1

Rising investment in Australia by Chinese investors is part of a global trend as China’s people and capital seek diversification and opportunity in other markets. Australia’s commercial property markets are receiving a relatively large share of this emerging capital source - close to 15% in 2014 and over one-quarter of the flow in Q1 2015. Capital flows from China to Australia are complimented by growing numbers of Chinese tourists, students, settlers and an increased bi-lateral trade relationship. Australia competes for capital with other markets globally, although the latter factors appear to provide a longer-term underpinning for the capital flow now being experienced.

Chinese capital – is it here to stay ?

Stephen McNabb

Head of Research, Australia

CHINESE INVESTMENT INTO COMMERCIAL REAL ESTATE IS RISING

0%

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30%

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2008 2009 2010 2011 2012 2013 2014 2015 Q1

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Chinese Capital to Australia Chinese Capital to Rest of World % to Australia

Chart 1: Chinese Capital Flows into Global Real Estate Markets

Source: CBRE Research, March 2015; includes standing investments only

© CBRE (AUS) Pty Ltd

FOUR

QUADRANTS

PRIVATE EQUITY More funds closed in Q2 2015 PRIVATE DEBT Conservative bank lending creates opportunities for non-bank lenders PUBLIC EQUITY New regulatory changes drive REIT development PUBLIC DEBT Real estate bond issuance still active

ASIA PACIFIC H1 2015

VIEWPOINT

Henry Chin, Ph.D Head of Research Asia Pacific

Increase in fund raising activity set to boost investment market

Private Equity Real Estate Funds


2014 a positive year for fund raising The real estate private equity fund raising environment in Asia Pacific continued to improve in 20141, with a total of US$14 billion raised by 42 private equity real estate funds. Whilst this figure is still well below the peak of around US$28 billion recorded in 2007, it marks the highest total since the Global Financial Crisis (GFC). The steep decline in interest rates globally along with compressed yields in global bond markets has lowered investors’ expected returns. This has pushed investors to increase their exposure to real estate in search of higher bond-type returns providing steady income streams, and is resulting in stronger capital flows into the private equity real estate sector. Investors are also attracted to Asia Pacific due to its promising medium to long-term growth. China remains one of the fastest growing economies in the world, in spite of its recent slowdown. Emerging Asia, which includes India and ASEAN, are expected to deliver average GDP growth of 6% over the next five years.

1 CBRE Database covers investment transaction activities and fund raising activities in Asia Pacific


Activity picks up but stock for sale remains limited Expectation gap between buyers and sellers persists Japan and Australia record strong activity Growing interest in India Sentiment improves in China Several major office assets transacted Investors turn more cautious towards retail Market outlook remains stable

INVESTMENT TRENDS

ASIA PACIFIC Q2 2015

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TIGHTER REGULATION BRINGS OPPORTUNITIES

The Asia Pacific Real Estate Debt Market

CBRE GLOBAL RESEARCH

VIEWPOINT


Hong Kong Future Fund


Aims to generate higher returns to mitigate risk of a structural fiscal deficit

Initial size of HK$220 billion

Marcos Chan Head of Research, Hong Kong, Macau & Taiwan

1 Source: Report of the Working Group on Long-Term Fiscal Planning (Phase Two)

Investor demand remains solid New capital looks at Asia Pacific Tourism arrivals record steady growth ADIA completes major deal in Hong Kong Solid activity in Australia continues Other active markets led by Japan Outlook remains positive More activity in regional cities expected

HOTEL TRENDS

ASIA PACIFIC Q2 2015

VIEWPOINT

Figure 1: Cross-border real estate investment volume in Asia Pacific Source: CBRE Research, May 2015


Currency volatility: Risks for real estate investors


Cross-border real estate capital flows in Asia Pacific have been growing in recent years amid renewed interest from western investors and the rise of Asian institutional investors and fund managers in the aftermath of the Global Financial Crisis (GFC). Cross-border real estate turnover in Asia Pacific amounted to US$26 billion in 2014, representing around 23% of the entire real estate investment market (Figure 1). Cross-border real estate investors’ return profile is not only confined to property-related factors such as rental income and capital value changes but is also subject to exchange rate fluctuations between foreign and local currencies (Figure 2). The emergence of new investors in the regional property market and the surge of Asian outbound investment in recent years are additional factors ensuring that exchange rate movements are now becoming one of key considerations for real estate investors in Asia Pacific.

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Ada Choi, CFA Senior Director, Asia Pacific Research Leo Chung, CFA Manager, Asia Pacific Research Karie Kwan Manager, Asia Pacific Research

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