Briefi ng Sales & investment July 2015

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1 Savills World Research Hong Kong Briefi ng Sales & investment SUMMARY Both the residential and offi ce sectors showed signs of renewed activity during /215. Image: Central Investment sentiment continued to rebound in both the residential and office sectors with more record deals done. The residential market continued to be driven largely by primary market sales in /215. Suburban retail premises should post a stronger performance than core locations, in an otherwise subdued retail investment sector. Industrial investment sentiment revived with a few en-bloc deals done. We expect the office sector to continue its rally over the second half of 215, with renewed demand drivers and little supply in core areas. The residential market may lose some steam, however, if the stock market uncertainty continues. The retail and warehouse sectors may face further headwinds with dwindling demand as a result of slowing growth and the anticorruption measures in China. "Both the residential and offi ce segments recorded an increasing number of signifi cant deals. The retail sector looks set to lag this year, while the industrial sector also slowed in the face of lower logistics demand and increasing availability." Simon Smith, Savills Research savills.com.hk/research 1

2 Market commentary Capital values made some minor headway across most sectors in the second quarter, with the exception of prime street shops which recorded a 2.5% decline. Luxury apartments in particular posted a spectacular performance as values increased by 6.2% on the back of buoyant stock markets in both Hong Kong and mainland China. We doubt this rate of growth will be repeated in the second half, however, given recent uncertainties. The industrial market, and warehouses in particular, managed to hold on to price gains but after a long bull run, it may be time to see some slowing of price growth. Luxury residential deals again made the headlines this quarter. Nineteen units at The Oasis (8-12 Peak Road) GRAPH 1 Savills price growth comparison, /215 vs Q1/215 7% 6% 5% 4% 3% 2% 1% % -1% -2% -3% 6.2% 4.1% 3.4% 2.4% were sold to CSI Properties for HK$1.825 billion, making this the largest investment deal of /215. In fact, sentiment in the luxury residential sector continued to revive, with a couple of record deals closed, and luxury apartment prices recorded a 6% growth over the quarter, the largest quarter-on-quarter (QoQ) price increase since 211. Elsewhere, industrial investment sentiment revived, with two industrial buildings in Kwai Chung sold for HK$933 million and HK$78 million to an end-user and investor respectively, showing en-bloc buildings in core industrial locations are still in demand. Meanwhile an en-bloc serviced office in Sheung Wan was sold for HK$75 million, reflecting the existence of a niche market for a unique office product. -2.5% Luxury apartments Townhouses Flatted factories Warehouses Grade A offices Prime street shops TABLE 1 Major investment transactions, Apr Jun 215 Property Location Price Buyer Usage 19 units and carparks in The Oasis Source: EPRC, Savills Research & Consultancy 1.% The Peak HK$1,825 mil/us$235 mil CSI Properties Residential Wilson Logistics Centre Kwai Chung HK$933 mil/us$12 mil The Mother Superior of the Soeurs de Saint Paul de Chartres (Hong Kong) Industrial Gold Peak Building Kwai Chung HK$78 mil/us$11 mil An investment fund Industrial Ovest Sheung Wan HK$75 mil/us$97 mil TBC Offi ce 17/F, Worldwide House Central HK$59 mil/us$66 mil Circle Property Offi ce No retail premises of over HK$5 million were transacted over the quarter, reflecting the lacklustre nature of the retail sector. Early indications of volumes in the second quarter suggest that activity levels were low even though the stock market volatility only began towards the end of. It was only the last two weeks in June which saw moderate selling pressure on the mainland bourses, with little impact on Hong Kong s property markets, while early July saw more rapid adjustments in equities with possible ramifications for real estate here, depending on how long the uncertainty lasts. A look at HK$5 million plus deals during the second quarter reveals a focus on residential, industrial and office assets. A broader look at deals above HK$1 million saw overall volume (18 deals) remain stable when compared with the first quarter (17 transactions), but there was a marked increase in residential transactions (from 39 deals in Q1 to 56 deals in ) at the expensive of office, retail and industrial. Luxury residential market Hong Kong Island The primary sales value reached an historical high in /215 partly thanks to the sale of a duplex unit in Opus Hong Kong. The wild stock market ride in Hong Kong and China during Q1/215 not only benefited investors but also played a role in affecting the luxury apartment market both in terms of transaction volumes as well as pricing. Luxury apartment prices rebounded by around 6% in /215. Some major deals this quarter included the sale of Unit A on G-1/F (5,188 per sq ft saleable) with private garden and double car parking spaces of Opus Hong Kong for HK$497.9 million (HK$95,971 per sq ft saleable), and 2/F (5,146 sq ft saleable) of the same development with double car parking spaces for HK$ million (HK$71,636 per sq ft saleable) and unit B on 43/F (3,918 sq ft saleable) of 39 savills.com.hk/research 2

3 Conduit Road in Mid-levels for HK$ million (HK$75,851 per sq ft saleable). The townhouse market followed a similar trend to the luxury apartment sector, with prices rising by around 4% in /215, although transactions volumes remained weak. Notable transactions this quarter included the sale of House 1 (5,154 sq ft saleable) of Scape in Chung Hom Kok for HK$45 million (HK$87,311 per sq ft saleable), House 3 (4,198 sq ft saleable) of 2 Cape Drive, also in Chung Hom Kok for HK$ million (HK$72,16 per sq ft saleable) and House 17 (3,736 sq ft saleable) of Villa Rosa in Tai Tam for HK$15 million (HK$4,15 per sq ft saleable). GRAPH 2 Grade A office price index by district, Q1/23-/215 Q1/23 = Central Wanchai/Causeway Bay Island East Tsim Sha Tsui Kowloon East Kowloon West Q1 15 Q1 14 Q1 13 Q1 12 Q1 11 Q1 1 Q1 9 Q1 8 Q1 7 Q1 6 Q1 5 Q1 4 Q1 3 Kowloon and the New Territories The luxury residential market in Kowloon and the New Territories was generally more stable than the Island market in /215 but some strong gains were recorded. Prices in Kowloon Station and Ho Man Tin rose by 4.1% and.5% respectively. The launch of the Ultima, Ho Man Tin drew a strong response from the market, with demand seen from both end users and investors. Some significant transactions in included the sale of unit C on 26/F (1,581 sq ft saleable) of Tower 7, Ultima Phase 1 for HK$ million (HK$39,352 per sq ft saleable) and unit A on 1/F (1,875 sq ft saleable) of Tower 7, One Mayfair in Kowloon Tong for HK$ million (HK$43,613 per sq ft saleable). Office market Hong Kong Island Office investment momentum picked up in /215, with a few record deals closed mostly long-term holdings selling at premium prices to investors. There were a number of investors looking for premises for long-term investment given office rents, particularly in Central, have already bottomed out and are now beginning to register faster levels of increase (5.2% for overall and 6.1% for Central respectively) over the first half of 215. The most significant stratified transaction was the sale of 17/F of Worldwide House in Central by Hong Kong Exchange for HK$59 million (HK$3,5 per sq ft) to Circle Property for investment purposes. 33/F of 9 Queen s Road Central was sold for HK$48 million (HK$34,9 per sq ft) to a Mainland end-user, while 2/F of the same building was sold for HK$412 million (HK$3,) to a Mainland investor. In Island East, 5/F of Citicorp Centre was sold for HK$175 million (HK$1,7 per sq ft) to an investor with a 3% yield, while a unit on 23/F of Island Place Tower was sold for HK$63.8 million (HK$1,6 per sq ft) to a local investor. While investors were the prime movers in the office market, endusers were kept on the sidelines by the record transaction prices. Many of them negotiated reasonable lease terms and rental packages at the beginning of this year, and thus have no urgency to seek buying options to stabilise occupation costs until two to three years from now when their current deals are up. Kowloon Across the harbour, investment activity was concentrated in Tsim Sha Tsui and Kowloon West. Tsim Sha Tsui saw transactions in both Wing On Plaza (HK$18, per sq ft) and Lippo Sun Plaza (HK$17, per sq ft) breaking previous records, albeit with smaller lump sums (HK$2 million and HK$55 million respectively). Many of the premises being transacted over the quarter were of a higher quality or with better views and vacant possession, thus they attracted tremendous interest from end-users relocating within the same district who may have been looking for suitable prime premises for some time. In Kwai Chung, four floors of the Kowloon Commerce Centre were sold in two separate deals: 15-16/F (49,918 sq ft in total) were sold for HK$44 million (HK$8,1 per sq ft) while 28-29/F (52,584 sq ft in total) were sold for HK$515 million (HK$9,8 per sq ft). Both were reported to have been sold to investors with good returns (around 3.5%) as the area has a more promising leasing market outlook than Kowloon East, which will see over 3 million sq ft net of office space completed over the next three years. Retail market The prime retail market was hit by anti-corruption measures in China as well as recent stock market turbulence in both Hong Kong and China. Both prime street shop prices and rents saw a continued slide of 2.5% and 5.5% respectively over /215. Although investment sentiment was dampened in core areas, there were still a few significant deals being done over the quarter, including the sale of savills.com.hk/research 3

4 shops A&B at the Tung Hing Building in Wanchai for HK$4 million (HK$31, per sq ft), and the sale of G/F and B/F at Electric Street in Wanchai (11,2 sq ft) for HK$26 million (HK$23, per sq ft). The suburban retail market saw much more investment interest as sales performances in these areas were well-insulated from weakened tourist spending and stock market uncertainties. The retail podium of i-uniq Residence in Shau Kei Wan was sold for HK$3 million (HK$19,7 per sq ft), while the retail podium of Royal Terrace in North Point was sold for HK$282 million (HK$29,5 per sq ft). Both premises were reported to have been sold to investors eyeing the resilience of the suburban retail market with steady rental increments, as well as repositioning potential for further rental uplift. Industrial market Fourteen major transactions of over HK$3 million were concluded in /215. While volume fell by 13% QoQ the total consideration rebounded by 64% QoQ to reach HK$3.5 billion. GRAPH 3 Major industrial transaction (>HK$3 million) volumes and values, Q1/27 /215 No. of transactions Q1 7 Q1 8 Q1 9 Q1 1 Investment sentiment revived in the second quarter of 215, with 11 transactions of over HK$1 million completed, mainly by end users. The most significant deal was the sale of Wilson Logistics Centre to St. Paul s Hospital in Kwai Chung for HK$933.8 million. Gold Peak Building, which is also location in Kwai Chung, was Q1 11 Q1 12 Volume (LHS) Q1 13 Q1 14 sold for HK$78 million to a fund intending to revitalise the building. Elsewhere in Tuen Mun, Gemmy Development Industrial Building, which is now operated as private storage, was sold to an investor for HK$45 million. Consideration (RHS) Q1 15 7, 6, 5, 4, 3, 2, 1, HK$ million OUTLOOK The prospects for the market Luxury residential We expect the luxury apartment market to see slower price growth in the region of % to +5% over the remainder of the year. However, in the short term, the unpredictable stock markets may have a negative impact on transaction volumes, increasing uncertainty both in Hong Kong and China. Both local and mainland investors can be expected to become a bit more circumspect until current volatility eases. Grade A office The reviving office leasing market, with renewed demand from Stock Connect schemes and closer economic integration with Mainland China, looks set to support the office sales market, in particular on Hong Kong Island, over the next few months, with yield-driven investors most likely to strike more deals over the remainder of the year. After years of tremendous price growth and an investment focus on the Kowloon East submarket, attention may well shift back to Tsim Sha Tsui with the price gap narrowing, attracting end-users to look for prime office premises. Kowloon West may also see more investors with higher average yields (3.5%) than are on offer in Kowloon East (sub-3%), which may face a period of consolidation given the substantial supply pipeline. Prime retail The receding of luxury retail sales has been well-documented and with Mainland big spenders not likely to be back in town any time soon, prime street shop rents and prices may drift further in the second half of 215. Nevertheless, suburban retail may prevail with sales firmly supported by local spending, and a few areas in the New Territories with a high concentration of future housing estates, such as Yuen Long and Tuen Mun, should benefit from this trend. Industrial The prolonged rally in the warehouse leasing market seems to be finally coming to a close with slowing savills.com.hk/research 4

5 OUTLOOK The prospects for the market demand, escalating vacancy and more new supply coming on stream in the near term. All these factors point to only one direction for rents, and inevitably warehouse landlords, who for many years have had the upper hand in negotiations, may face increasing pressure in the short run to make rental adjustments. Investment sentiment rebounded in the second quarter thanks to end users who have been looking for long term accommodation options for some time and are prepared to pay asking prices when suitable premises become available. Nevertheless, while the possible softening of rents may put investors off, especially if they are also facing tighter credit conditions from banks, the lack of available stock may also make end users lives harder in finding suitable premises. We expect volumes to shrink with prices probably remaining stable over the next six months. Please contact us for further information Savills Investment Savills Research Raymond Lee CEO Greater China Peter Yuen Deputy Managing Director Head of Investment & Sales Simon Smith Senior Director Asia Pacific Jack Tong Director Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 6 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. savills.com.hk/research 5