Will the Contagion Spread to Asian Real Estate?

Peter ChurchouseJuly 2008

Some Random Thoughts from the Trenches

2

A fashionable notion a year ago

- Domestic consumption vs exports Absolute or relative terms Wishful thinking - Naive!

“ You can’t have it both ways”

De-Coupling - what do we mean?

3

Easy Credit The Greenspan

Put

The Global Credit Merry Go Round

Anatomy of a Modern Credit Cycle

Housing bubble Consumer spending

Corporate leverage

Sub prime Near Prime Prime

Commercial

Consumer

Credit card

Auto

Corporate Bonds

Credit Defaultswaps

4

Risk Aversion on the Rise

10 Year BBB US Industrials – spread over US Treasuries

5

ITRAXX Asia High Yield Index

6

The hole gets very much deeper

$400bn becomes more like $1.5 trillion

Huge credit contraction will crimp global growth

Inflationary pressures gathering steam

Central banks - rocks and hard places!

Stagflation - not a good environment for financial assets

A Credit Problem Becomes a Global Economic Problem

7

- The positive spin - Little supply driven concerns

- dearth of cranes on horizons Vacancy rates low Unemployment low Affordability good Consumer debt low Low real / nominal rates Corporate balance sheets O.K.

Asian Real Estate

8

Credit availability is tightening Stock markets dull sentiment Inflation rising, rates rising Rising costs of essentials Cap rates rising Construction costs escalating sharply

- The bear case -

Asian Real Estate

9

• Modest supply increase = slightly higher vacancies• Services job growth slows • Tenant resistance • Rentals flatten or roll over in 2009 • Cap rates rise / price fall 10% - 20%

Hong Kong – What Next?

A (hopefully) Educated Guess

10

( July 1997 = 100 )

Hong Kong – What Next? A (hopefully) Educated Guess

Hitting the wall

Credit availability ok Prices flat / down approx 10% to mid 2009 Recovery H2 2009

Supply least ever Middle high end demand

will soften Rates rise, not hugely

Some Distress but Hardly an Some Distress but Hardly an ImplosionImplosion

Nicholas BrookeNicholas BrookeChairman, Professional Chairman, Professional

Property ServicesProperty Services

PPPPSS

1212

BackgroundBackground

Not de-coupled but regional economies more Not de-coupled but regional economies more robust than in 1997robust than in 1997

Greater dependence on institutional Greater dependence on institutional investment and longer term debtinvestment and longer term debt

Less dependence on exports given stronger Less dependence on exports given stronger domestic consumptiondomestic consumption

Impact of any downturn likely to be on market Impact of any downturn likely to be on market specific basisspecific basis

1313

Hong Kong OfficesHong Kong Offices

Increased office supply in decentralised Increased office supply in decentralised locations will lead to softening in prices and locations will lead to softening in prices and rentsrents– But strong loyalty to Central remainsBut strong loyalty to Central remains

Reliance on redevelopment options and, in Reliance on redevelopment options and, in due course, sites on Central Reclamationdue course, sites on Central Reclamation

Possible creation of Government enclave on Possible creation of Government enclave on Kai TakKai Tak

1414

1515

Site 1

Site 2

Site 3

Site 5

1616

Hong Kong ResidentialHong Kong Residential

Two markets within a marketTwo markets within a market– Traders versus upgradersTraders versus upgraders

Average sales price in 2007 less than HK$3 Average sales price in 2007 less than HK$3 million and average unit area was 53smmillion and average unit area was 53sm

Despite dip, volumes relatively healthy at Despite dip, volumes relatively healthy at 64,450 units in first 6 months of 2008 i.e. an 64,450 units in first 6 months of 2008 i.e. an average of 10,740 per monthaverage of 10,740 per month

1717

33%

49%

11%5% 2%

Total Stock of Private Residential Units by Class in Hong Kong (2007)

Total Stock of Private Residential Units by Class in Hong Kong (2007)

Classification of Residential Units by Class :

Class A - saleable area less than 40m²

Class B - saleable area of 40m² to 69.9m²

Class C - saleable area of 70m² to 99.9m²

Class D - saleable area of 100m² to 159.9m²

Class E - saleable area of 160m² and above

Class B (519,498 units)

Class A (350,455 units)

Class D (54,778 units)

Class C (121,404 units)

Class E (22,763 units)

Sources: Rating and Valuation Department

1818

Hong Kong ResidentialHong Kong Residential

Investment demand centred on MTR Investment demand centred on MTR proposalsproposals

Government seriously considering more Government seriously considering more flexibility in industrial conversions – starter flexibility in industrial conversions – starter homes, elderly housinghomes, elderly housing

Impact of new Town Planning Board imposed Impact of new Town Planning Board imposed height limitsheight limits

1919

Investors’ View on AsiaInvestors’ View on Asia

Japan – standing investmentsJapan – standing investmentsMacau – luxury residentialMacau – luxury residentialMalaysia – villas and high end apartments Malaysia – villas and high end apartments China – second tier citiesChina – second tier citiesSingapore – wait, as prices will fallSingapore – wait, as prices will fallVietnam – prices fallen, some good buysVietnam – prices fallen, some good buysIndia – opportunities in the hotel sectorIndia – opportunities in the hotel sectorMiddle East – Abu Dhabi, QatarMiddle East – Abu Dhabi, Qatar

UBS Investment Research

British Chamber of Commerce:China Pty – bull market correction

Jul 2008

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 96

UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

This material has been prepared by UBS Securities Asia Ltd, an affiliate of UBS AG (UBS).

Eric WongCo-head of Asia Property Research

Eric Wong

+852 2971 6430

eric.wong@ubs.com

21

Easy come, easy go… price rebound unlikely in Q3

Source: Hopefluent

Price (Rmb psm)

2008200720062005 Time

22

Policies targeted developers, buyers less affected

818 846 887 914 1,200 1,300 1,380 1,410 1,600 1,700 1,760 1,800 1,800

1,6821,754

1,7931,856

2,000 2,100 2,220 2,2702,410

2,600 2,8603,000

3,100

1,000

2,000

3,000

4,000

5,000

6,000

Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08

0%

10%

20%

30%

40%

50%

60%

Developers loan balanceConsumer mortgage loan balance YoY Growth of developers' loan

YoY Growth of mortgage loan

Source: CEIC

23

Metrics the regulators monitor…all exceeded

Source: CEIC

0%1%2%3%4%5%6%7%8%9%

10%

Jan

07

Mar

07

May

07

Jul 0

7

Sep

07

Nov

07

Jan

08

Mar

08

May

08

0%2%4%6%8%10%12%14%16%18% CPI (LHS) (red: exceed target)

Interest rate (RHS)

Deposit reserve rate (RHS)

0500

1,0001,5002,0002,5003,0003,5004,000

Jan

07

Mar

07

May

07

Jul 0

7

Sep

07

Nov

07

Jan

08

Mar

08

May

08

RMB bn

10%12%14%16%18%20%22%24%26%28%

New Loans (LHS) M2 supply (RHS) Urban fixed asset inv (RHS)

Gov Target

24

Govt’s supply side objectives – increase supply— More funds allocated to public housing: target Rmb50bn (now: Rmb 3bn) investment a year— More price-capped supply: 7,000 units (priced at 30% below market average) in Guangzhou in 2008— More 90/70 products: 50% of supply in GZ, SH in 2008— More confiscation of and penalty on idled land— More investigation of illegal practices— Protect farm land (see 100-day campaign)— Turn land supply into housing supply — Promote first-time home ownership

25

Govt’s demand side objectives – curb bubble forming— More mortgage rate hikes

— Increase upfront payment ratio— Introduction of property holding taxes— Enforcement of LAT— Foreign purchase restriction— More investment channels

Source: CEIC

1Y Lending >5Y Lending 1Y Deposit 5Y Deposit

Mar 6.39 7.11 2.79 4.41

May 6.57 7.20 3.06 4.95

Jul 7.02 7.38 3.33 5.22

Aug 7.20 7.56 3.60 5.49

Sep 7.47 7.83 3.87 5.76

Dec 7.56 4.14 5.85

7.83

26

Govt favours first-time buyers— 6.7% and 20-30% upfront payment for 1st purchase— 8.6% and 40% or higher upfront for 2nd purchase— Last rate hike kept mortgage rate unchanged— Further mortgage tightening may target speculators— Proposed property holding taxes may target large and luxurious units— Transaction taxes may not be so successful as sellers transfer burden to buyers

27

When will the market recover?

28

-VE real rates still supports prices

Source: CEIC

InflationRequired reserve ratio Lending rate > 5 years

Deposit rate 3 months

-4-202468

10121416

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

29

Indications of a market recovery — Price cuts followed by stable growth afterwards— Significant bounce in volume— Tightening focuses more on developers’ loans— No new policy implementation in next 6 months— Balanced mix of private and public units