Using DiPasquale and Wheaton?s 4 quadrant model of the property market as a framework and your knowledge of property cycles, discuss your understanding of the current real estate markets in ONE developed country. In your viewwhere do your consider the markets might be in terms of the cycle and why? (1500 words)

Ans: I am evaluating Hong Kong office market.I think there is a positive outlook for the market, but with so many factors, I find it difficult to present the analysis using the framework. As for where the market is at in the property cycle, it seems that the growth is kind slowing down but it is not yet close to a price/rent downturn and I do not think this will happen to such a mature market like Hong Kong.

Ps. I have attached some information and research I have found.

MARKETVIEW Hong Kong Grade A Office, Q3 2015 Office demand remains robust in the face of stock market volatility Overall HK Rents +3.0% q-o-q HK Island Rents +2.8% q-o-q Occupiers found it increasingly challenging to secure office space in Central this quarter. Most buildings there are fully-let and therefore the bulk of leasing activity occurred in other districts. Vacancy continued to compress across major submarkets in Q3 2015. On Hong Kong Island, vacancy stood at just 2.0% as of the end of the quarter, the lowest figure recorded since Q2 2008. No submarket on Hong Kong Island contained more than 200,000 sq. ft.* of physical vacant space . Pre-leasing involving future secondary space consequently recorded an increase in activity. The insurance sector remained a key driver of demand. AIA, AXA and XL Insurance all taken spaces during the quarter involving a total of 54,100 sq. ft.* across four buildings. In a notable transaction outside of the Grade A market, China Huarong Asset Management leased 60 Gloucester Road en-bloc, a Grade B building (70,500 sq. ft.*) in Wan Chai. There were several en-bloc transactions involving Grade B office buildings this quarter as owners sold assets to end-users and investors seeking value-add opportunities to cater for Grade A occupiers' requirements. Kowloon Rents +3.7% q-o-q New Territories Rents +1.1% q-o-q Office demand in Hong Kong remained robust in Q3 2015 but occupiers have taken caution to recent stock market volatility. However, overall net absorption fell to 383,000 sq. ft.*, a contrast to the 1.4 million sq. ft.* recorded in Q2 2015, although the latter figure was supported by the completion of One Bay East (694,00 sq. ft.*) for owner-occupation in May. Net absorption this quarter was the lowest to date in 2015 but still surpassed any such period in 2013 and 2014. The decline in net absorption this quarter came as no surprise as the continued fall in vacancy prevented solid demand from translating into actual lettings. This situation became more acute over the course of Q3 2015 as overall vacancy fell from 3.6% to 3.2%, the lowest figure recorded since Q4 2012. This quarter saw more leasing transactions completed outside of Central on Hong Kong Island and Kowloon as vacant space in and around the CBD remained extremely limited. In contrast, new letting activity in H1 2015 was mostly concentrated in Central. Tower 535 in Causeway Bay received its Occupation Permit in September. The project has 183,000 sq. ft.*, of which 128,000 sq. ft.* is suitable for office use. 14% of its office space (about 18,000 sq. ft.*) was pre-leased as of the end of this quarter. The completion of this project lifted vacancy rate in the district from 2.5% to 5.0%. (*) NFA Q3 2015 CBRE Research 2015 CBRE, Inc. | 1 M A R K E T V I E W HONG KONG GRADE A OFFICE Q3 2015 CBRE Research -200 2015 2014 2013 2012 2011 -400 Source: CBRE Research, Q3 2015. Figure 2: Hong Kong Island Vacancy Rate 2014 2012 8% 7% 6% 5% 4% 3% 2% 1% 0% ADM/SW HK East 2013 Central WC/CWB 2015 Vacancy (%) Source: CBRE Research, Q3 2015. Figure 3: Hong Kong Island Rental Growth Q-o-Q % change Central WC/CWB 15% ADM/SW HK East 10% 5% 0% -5% 2015 2014 2013 -10% 2012 Average vacancy on Hong Kong Island fell 0.6 percentage point q-o-q to 2.0% as of the end of Q3 2015. Vacancy in Central declined from 1.7% to just 1.0%, the lowest since Q2 2008. Positive rental growth was recorded in all Hong Kong Island submarkets in Q3 2015. Central was again the strongest performer, recording a 3.6% q-o-q rise, which brought year-to-date growth to 12.2%. HK East 0 2011 Outside of Central, Wan Chai and Hong Kong East were very active in Q3. Wan Chai recorded net absorption of 95,500 sq. ft.*, the highest quarterly total since Q4 2009. Highlights included law firm Lipman Karas taking a whole floor in Three Pacific Place and Kookmin Bank taking 8,900 sq. ft.* in Central Plaza to relocate and expand from Central. In Hong Kong East, leasing activity was focused on the pre-leasing of Citi's returning space in Dorset House, which will become physically available in 2016. A total of four floors have been pre-leased to date, of which three floors were taken by two tenants that will relocate from nearby Warwick House. WC/CWB 200 2011 Demand in Central continued to be driven by mainland Chinese firms. A whole floor in Citibank Tower of Citibank Plaza was taken by Bank of Shanghai as part of an in-house expansion, while another floor in AIA Central was leased to China Everbright Investment. HNA Group took up 5,680 sq. ft.* in Two ifc. ADM/SW 400 2010 Leasing activity in Q3 2015 was distributed across various districts on Hong Kong Island, in contrast to H1 2015 when transactions were focused in Central. New lettings in Central declined this quarter as most existing and future vacant spaces were leased during the first half of the year and also some occupiers adopted a waitand-see approach following stock market volatility. Thousand sq. ft. Central 600 2010 Hong Kong Island recorded another solid quarter in Q3 2015. Following a strong Q2 2015, when net absorption registered 508,600 sq. ft.*, this quarter recorded net absorption of 360,000 sq. ft.*. Total take-up recorded in the past two quarters was higher than net absorption over the whole of 2012, 2013 and 2014 combined. Figure 1: Hong Kong Island Net Absorption 2010 HONG KONG ISLAND Source: CBRE Research, Q3 2015. (*) NFA 2015 CBRE, Inc. | 2 M A R K E T V I E W HONG KONG GRADE A OFFICE Q3 2015 CBRE Research Kowloon East New Territories 600 200 2015 2014 2013 2012 2011 -200 Source: CBRE Research, Q3 2015. Figure 5: Kowloon & New Territories Vacancy Rate Vacancy (%) Greater Tsim Sha Tsui Kowloon Others 25% Kowloon East New Territories 20% 15% 10% 5% 2015 2014 2013 2012 2011 0% Source: CBRE Research, Q3 2015. Figure 6: Kowloon & New Territories Rental Growth Q-o-Q % change Greater Tsim Sha Tsui Kowloon Others 20% Kowloon East New Territories 15% 10% 5% 0% 2015 2014 2013 -5% 2012 Rents in Kowloon rose 3.7% q-o-q in Q3 2015, marking the highest quarterly growth since Q1 1995. Growth in Tsim Sha Tsui was the strongest, with rents rising 7.5% q-o-q to reach a record high, driven mainly by soaring rents in ICC and The Gateway. In Kowloon East, average rents increased by 2.0% q-o-q, the strongest quarterly growth since Q4 2012. Growth was higher in single-owned buildings at 2.3% q-o-q while strata-title buildings witnessed a comparatively more modest 1.2% q-o-q rise. 1,000 2011 The vacancy rate in Kowloon remained flat at 4.2%. Vacancy increased in San Po Kong but space availability in ICC and 8 Observatory Road declined, vacancy in Tsim Sha Tsui fell by 1.1 percentage points q-o-q to 2.2%. Vacancy in Kowloon East also remained stable at 6.6%, with single-owned portfolio buildings running at 1.3% but stratified buildings running at 15.6%. In the New Territories, vacancy dropped 1.1 percentage points q-o-q to 10.0% on the back of space taken up in The Octagon. Greater Tsim Sha Tsui Kowloon Others 2010 The bulk of leasing activity in Kowloon this quarter was in Tsim Sha Tsui and Kowloon East. Kwai Chung & Tsuen Wan contributed the majority of transactions in the New Territories. In Tsim Sha Tsui, activity was focused on International Commerce Centre (ICC) where vacancy dropped from 140,000 sq. ft.* to 57,000 sq. ft.*. Noteworthy lettings in ICC in Q3 2015 included a Chinese construction firm taking 10,700 sq. ft.* and recruitment firm Hays leasing 10,000 sq. ft.*. The biggest deal in Kowloon East occurred in One Kowloon, where a single floor was leased to Oxford University Press, which will be relocating out of Warwick House in Hong Kong East. Elsewhere, The Octagon in Tsuen Wan, which was completed at the end of 2014, saw an uptick in activity, with several floors let during the period. Thousand sq. ft. 2010 The return of 75,000 sq. ft.* of secondary space in two buildings in San Po Kong resulted in Kowloon registering negative net absorption of 12,000 sq. ft.* in Q3 2015. Net absorption in Kowloon and the New Territories combined stood at 23,200 sq. ft.*. Figure 4: Kowloon & New Territories Net Absorption 2010 KOWLOON & NEW TERRITORIES Source: CBRE Research, Q3 2015. (*) NFA 2015 CBRE, Inc. | 3 M A R K E T V I E W HONG KONG GRADE A OFFICE Outlook The stock market volatility witnessed in Q3 2015 had only a temporary impact on office market sentiment and overall demand remained resilient. Corporate real estate strategies are generally implemented for at least the mid-run and are not usually seriously affected by shortterm market volatility. While some decisionmaking processes could be delayed, innovative financial market policies will ensure financial sector firms continue to view Hong Kong as a location for long-term business growth. Should the Chinese stock market become more volatile and result in greater intervention from the mainland government, Chinese companies will become more likely to opt to list in Hong Kong in the long-term. CBRE expects that demand for office space in the CBD will continue to be driven by mainland Chinese firms. However, with vacancy in Central falling to just 1.0% this quarter and upcoming secondary space very limited, finding space will remain the main challenge for occupiers. Companies already established in Hong Kong will adopt a more sensible approach by seeking expansion opportunities in second-tier buildings or in the fringe of Central where availability and rents might be slightly more appealing. New market entrants will continue to seek lettings in the most prestigious buildings but will have to pay an even higher premium because of the scarcity of this type of space. Outside of the CBD, occupiers will continue to seek consolidation opportunities. CBRE expects to see more pre-leasing activity involving both new and secondary space from companies seeking large contiguous space. The insurance sector will likely remain a key demand driver as the asset management industry expands. The impact of the weaker retail market on office demand should not be considerable as many retailers' offices in Hong Kong house purchasing and management functions for the Greater China and/or Asia Pacific region. The forthcoming demolition of Warwick House in Hong Kong East will continue to generate relocation demand. New supply scheduled for completion in 2016 is mostly small in scale except for one large new building in Kowloon East. Low vacancy will ensure landlords remain in a strong position before supply rebounds in 2017-2018. Rents will continue to climb over the remainder of 2015 and into 2016. However, rental growth is expected to be frontloaded before the pre-leasing of new supply scheduled to be completed in 2017 becomes more active towards end of 2016. Rental growth momentum next year should also decelerate from 2015 due to the higher base of comparison and current economic uncertainty that could persist into 2016. Central will continue to outperform, with rental growth for full year 2015 projected at 15%, and a further 5%10% growth expected in 2016. Figure 7: Selected upcoming new supply Property District Shanghai Commercial Bank Tower Central Vertical Sq Size (sq ft NFA) Expected completion date 81,400 Q4 2015 Wong Chuk Hang 137,480 Q4 2015 One HarbourGate Hung Hom 458,550 Q4 2015 1 On Kwan Street Shek Mun 215,460 Q4 2015 3 On Kwan Street Shek Mun 170,280 Q4 2015 Chinachem Central I & II Central Goldin Financial Global Centre Kowloon East 639,280 Q1 2016 38 Southside Wong Chuk Hang 138,800 Q1 2016 36,210 & 67,600 Q3 & Q4 2016 Source: CBRE Research, Q3 2015. Q3 2015 CBRE Research 2015 CBRE, Inc. | 4 M A R K E T V I E W HONG KONG GRADE A OFFICE Hong Kong Island C E N TRA L ; A D M I R AL TY & S H E UN G W A N ; W A N C H A I & C A U S E WAY B A Y ; H O N G K O N G E A S T - NORTH POINT, QUARRY BAY; WONG CHUK HANG Figure 8: Selected leasing transactions in Q3 2015 Property District Size (sq ft NFA) Dorset House Quarry Bay 24,140 ISS Facility Services 633 King's Road North Point 22,600 AIA Citibank Plaza Central 15,140 Bank of Shanghai Three Pacific Place Wan Chai 14,660 Lipman Karas Times Square, Tower 2 Causeway Bay 14,630 AXA Two Pacific Place Admiralty 12,600 E-Kong Group AIA Central Central 13,560 China Everbright Investment Central Plaza Wan Chai 9,410 Tenant XL Insurance Source: CBRE Research, Q3 2015. Figure 9: Key sub-market statistics District Q3 2015 net absorption (sq ft NFA) Vacancy rates Q-o-Q change (% pt) Rents (HK$/sq ft/mth) Q-o-Q change Y-T-D change Hong Kong Island 360,100 2.0% -0.6 78.6 +2.8% +9.1% Central 109,130 1.0% -0.7 110.7 +3.6% +12.2% Admiralty & Sheung Wan 27,760 1.7% -0.4 73.7 +2.0% +6.9% Wan Chai & Causeway Bay 143.650 3.1% -0.2 64.3 +2.6% +6.9% Hong Kong East 37,730 1.0% -0.5 47.6 +1.2% +4.4% Wong Chuk Hang 41,830 13.6% -3.3 27.2 Flat -4.6% Source: CBRE Research, Q3 2015. Q3 2015 CBRE Research 2015 CBRE, Inc. | 5 M A R K E T V I E W HONG KONG GRADE A OFFICE Kowloon & New Territories G R E A T ER T S I M S H A T S U I - T S I M S H A T S U I , T S I M S H A T S U I E A S T ; K O W L OON E A S T - K O W L O O N B A Y , K W U N T O N G ; K O W L OON O T H ERS - J O R D AN , M O N G K O K , H U N G H O M , C H E U N G S H A W A N , S A N P O K O N G , K O W L O O N T O N G ; N E W T E R R I TOR I ES - K W A I C H U N G , T S U E N W A N , S H A T I N , S H E UN G S H U I , TUNG CHUNG Figure 10: Selected leasing transactions in Q3 2015 Property District Size (sq ft NFA) Tenant One Kowloon Kowloon East 18,640 Oxford University Press Manhattan Place Kowloon East 16,940 MTR Corporation Skyline Tower Kowloon East 13,750 Supertex Ltd AIA Kowloon Tower, Landmark East Kowloon East 12,470 Suning Ocean Centre Tsim Sha Tsui 12,230 Dolce & Gabbana International Commerce Centre Tsim Sha Tsui 10,660 Hong Kong Skyman International Commerce Centre Tsim Sha Tsui 9,950 Hays HK Ltd YHC Tower Kowloon East 8,570 Warner Music Source: CBRE Research, Q3 2015. Figure 11: Key sub-market statistics District Q3 2015 net absorption (sq ft NFA) Kowloon -12,090 4.2% Flat 42.4 +3.7% +5.2% New Territories 35,320 10.0% -1.1 33.7 +1.1% +2.3% 212,120 1.9% -0.6 53.6 +6.0% +9.5% -7,190 6.6% +0.1 34.0 +2.0% +3.7% -72,100 2.8% +1.5 39.1 +0.7% +1.5% Greater Tsim Sha Tsui Kowloon East Kowloon Others Vacancy rates Q-o-Q change (% pt) Rents (HK$/sq ft/mth) Q-o-Q change Y-T-D change Source: CBRE Research, Q3 2015. Q3 2015 CBRE Research 2015 CBRE, Inc. | 6 M A R K E T V I E W HONG KONG GRADE A OFFICE C O N TAC TS CBRE HONG KONG OFFICES Rhodri James Executive Director, Hong Kong Office Services +852 2820 2883 rhodri.james@cbre.com.hk Hong Kong Office Suite 1204-06, 3/F & 4/F, Three Exchange Square 8 Connaught Place Central, Hong Kong Oliver Rigg Director, Hong Kong Office Services +852 2820 8193 oliver.rigg@cbre.com.hk Kowloon Office Suites 1201-03 & 14, 12/F, Tower 6, The Gateway 9 Canton Road, Tsim Sha Tsui Kowloon, Hong Kong Marcos Chan Head of Research, Hong Kong, Macau & Taiwan +852 2820 2886 marcos.chan@cbre.com.hk Rosanna Tang Associate Director, Hong Kong, Macau & Taiwan +852 2820 2806 rosanna.tang@cbre.com.hk Roy Ng Manager, Hong Kong, Macau & Taiwan +852 2820 1524 roy.ng@cbre.com.hk Jerry Ng Assistant Manager, Hong Kong, Macau & Taiwan +852 2820 1517 jerry.ng@cbre.com.hk To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE. \fHong Kong Property Market Monitor Research Report November 2015 Grade A Office Buoyed by take-up in Wanchai/Causeway Bay (36,500 sq ft) and Kowloon East (58,200 sq ft), the overall vacancy rate dropped to 2.8% in October, the lowest level since 2000. Central recorded its first net withdrawal, albeit marginal, for the year owing to a handful of sizable lease expiries returning space to the market. Leasing demand arose from smaller office requirements, including those from the hedge fund/private equity sector. Billion Development's 3 On Kwan Street in Shek Mun was issued with its Occupation Permit in October. Over 95% of the units at the 161,000-sq ft building had been pre-sold, contributing to roughly half the net take-up recorded in the overall market (289,900 sq ft). Led by growth at the top end of the market, Central rentals grew by 1.1% m-o-m in October. Despite robust leasing demand, rents in Kowloon East remained largely unchanged as most landlords were cautious in raising rents given stiff competition with new supply. With investors shifting their interest to Central as rents recover, the primary sales market in Kowloon East remained quiet, prompting Billion Developmenta developer usually focused on strata-titled salesto lease unsold units at their newly completed office buildings. The Church of God in Hong Kong, for example, took up 18,500 sq ft (gross) at Billion Development's Montery Plaza in Kwun Tong. In the land sale market, the government awarded a business site in Shek Mun (STTL 617) to Sun Hung Kai Properties for a total consideration of HKD 675.5 million. The A.V. of HKD 3,886 per sq ft fell within the range of market expectations but was still double the amount Billion Development paid in 2011 for two adjacent business sites. The site has a maximum buildable GFA of 173,800 sq ft. The Buildings Department has approved the building plan submission from a consortium comprising Billion Development, CSI Properties and Sino Land to develop two 27-storey office towers (total GFA of 490,800 sq ft) in Kowloon Bay (NKIL 6313). Grade A Office Vacancy Rates (end-October) Overall Central Wanchai/ Hong Kong Tsimshatsui Kowloon Causeway Bay East East 2.8% 1.2% 1.9% 0.7% 1.5% 5.7% Residential October data show home sales slumping to a 19-month low in September, down 22.6% m-o-m and 46.7% y-o-y to 3,300 transactions. Mass residential capital values declined for the first time in 18 months, down 1.0% m-o-m in October. In the primary sales market, Henderson Land's 448-unit residential project, Eltanin Square Mile in Mongkok, has cumulatively sold over 80% of the 280 units launched in mid-October. Illustrating sustained demand for ultraluxury properties, the last two remaining houses for sale (out of seven) at Cheung Kong Property's 28 Barker Road on The Peak were snatched up for a combined HKD 1.24 billion. The government withdrew the land sale tender for a development site in Tsing Yi (TYTL 190), due to the reserve price not being met by all nine bids received. Retail Latest government data show a 7.2% yo-y decrease in per capita Mainland visitor shopping spending in 1H15 to HKD 3,807, dragged down by a 7.0% yo-y drop in overnight visitor spending to HKD 5,895 per capita. Retail sales continued to fall in September, led by a 22.9% y-o-y decline in sales of jewellery and watches. Yet, restaurant receipts still rose 4.5% y-o-y. A 1,300-sq ft shop on the G/F & CL/F at 59 Percival Street in Causeway Bay was sold for HKD 92.8 million (HKD 71,385 per sq ft). The shop had been vacant for over two years, and according to market sources, the sale price was about 30% lower than the previous asking price. A local bank leased a 6,350-sq ft shop at 2-6 Yee Wo Street in Causeway Bay for HKD 800,000 per month, 33% less than the previous rent paid by telecommunications provider, One2Free. Key Economic Indicators Real GDP Growth 2.8% (2Q15, y-o-y) Unemployment 3.3% (Jul-Sep 15) Consumer Price Index 2.0% (Sep 15, y-o-y) Retail Sales Value -6.4% (Sep 15, y-o-y) Visitor Arrivals -4.0% (Sep 15, y-o-y) Aggregate Trade -6.2% (Sep 15, y-o-y) Hang Seng Index 22,640 pts (end-Oct 15) HSBC Best Lending 5.0% Rate (end-Oct 15) Source: Census and Statistics Dept., Hong Kong Tourism Board, HSI Company Limited Property Transactions (Oct) Total S&P (Volume) 4,491 Total S&P (Value) HKD 35.9 b Residential S&P 3,300 (Volume) Residential S&P HKD 22.5 b (Value) Source: The Land Registry Industrial Weakness in global trade markets saw the value of exports and imports fall 4.6% y-o-y and 7.6% y-o-y, respectively, in September, according to data released in October. Airfreight cargo rebounded 1.1% y-o-y following six months of contraction, while container throughput continued to retreat, down 6.7% y-o-y, in September. US 3PL operator JSI Logistics leased two floors at Goodman Shatin Logistics Centre in Shatin to facilitate expansion plans. E-commerce operator Baozun expanded in-house, leasing an additional floor at Kerry Warehouse (Shatin). A local investor reportedly acquired the whole of Kader Industrial Centre in Fanling for HKD 715.0 million (HKD 3,533 per sq ft), the highest unit price for industrial buildings in North New Territories. For more information, please contact: Denis Ma Head of Research Hong Kong denis.ma@ap.jll.com +852 2846 5135 www.jll.com.hk COPYRIGHT 2015 Jones Lang LaSalle IP, Inc. All rights reserved. For further details or to unsubscribe, please email Research.HK@ap.jll.com. The items in this publication have been compiled from the various sources acknowledged. The information is from sources we deem reliable; however no representative or warranty is made to the accuracy thereof. Hong Kong Property Market Monitor Research Report December 2015 Grade A Office Subdued leasing activity coupled with the return of several large tracts of vacated stock contributed to a net withdrawal of 27,200 sq ft in the overall market in November, marking the first instance of negative net take-up in a month this year. After recording a slight dip in the previous month, net take-up in Central amounted to 10,900 sq ft in November, driven by smaller tenants with expansion and relocation requirements. Meanwhile, a handful of sizable transactions from the manufacturing/sourcing and shipping/logistic sectors led the Kowloon East occupier market to grow by 25,100 sq ft. Investment activity saw no signs of abating, as Chinese corporates snapped up Grade A office buildings. In a HKD 12.5 billion deal, Evergrande Real Estate Group purchased Mass Mutual Tower in Wanchai from Chinese Estates Holdings via equity transfer. The unit price of HKD 36,187 per sq ft set a new high in the city, exceeding the previous record achieved at 9 Queen's Road Central (HKD 34,861 per sq ft) in Central in May 2015. In the largest transaction recorded in Kowloon, China Life Insurance acquired the West Tower of One HarbourGate in Hunghom from Wheelock and Company for HKD 5.85 billion (HKD 14,885 per sq ft) to serve as its headquarters in Hong Kong. The government approved proposals to rezone the Murray Road Multi-storey Car Park (MRMCP) and Queensway Plaza (QP) for commercial use. MRMCP has the potential to yield 448,900 sq ft (GFA) of commercial space, though no timeline has been given for the release of the site. A 1.0 million-sq ft Grade A office building has been proposed at the QP site; the land could be made available for sale as early as 2017. Data released by the Development Bureau shed light on the earliest availability of the New Central Harbourfront sites. Situated in front of CITIC Tower, Site 5, designated for commercial development, and Site 3, earmarked for comprehensive development involving office and retail will be available for sale no earlier than mid-2017. Grade A Office Vacancy Rates (end-November) Overall Central Wanchai/ Hong Kong Tsimshatsui Kowloon Causeway Bay East East 2.9% 1.2% 2.0% 0.8% 1.6% 5.5% Residential Home sales in November, largely reflective of market activity in October, fell a further 14.4% m-o-m to 2,826 units, its lowest level on record (since 1996). Mass residential capital values trended lower for the second consecutive month, down 1.1% m-o-m in November. New launches in November were met with mixed response. Over 85% of the 428 units at Capri in Tseung Kwan O were snapped, whilst about 30% of the 1,100 units at The Bloomsway in Tuen Mun had been sold by the end of November. In the ultra-luxury segment, a house at 39E Shouson Hill Road was reportedly sold for HKD 280.0 million or HKD 95,335 per sq ft, SA, a record high in Shouson Hill in terms of unit price. The public land sale tender of a residential site (TPTL 221) in Tai Po was postponed to a closing date in February 2016 due to an injunction order imposed on the sale. Retail Mainland visitor arrivals in October dropped 4.2% y-o-y, with Individual Visit Scheme (IVS) tourists decreasing 15.0% y-o-y. Same-day mainland visitors slid 8.7% y-o-y, while overnight arrivals picked up 3.0% y-o-y over the same period, for the first time since February. Retail sales fell for the eighth consecutive month in October, led by a 17.1% y-o-y decline in jewellery & watch sales. Riviera Plaza in Tsuen Wan, a 242,689sq ft shopping centre with 137 car park spaces, was sold to a local buyer for HKD 823 million via equity transfer, netting owner Wang On Group a gain of about HKD 293.6 million. A luxury watch brand leased a 1,654-sq ft space at Aon China Building in Central for a rumoured HKD 1.8 million per month, about 36% less than the amount Italian luxury brand Baldinini paid before surrendering its lease last summer. Key Economic Indicators Real GDP Growth 2.3% (3Q15, y-o-y) Unemployment 3.3% (Aug-Oct 15) Consumer Price Index 2.4% (Oct 15, y-o-y) Retail Sales Value -3.0% Oct 15, y-o-y) Visitor Arrivals -2.7% (Oct 15, y-o-y) Aggregate Trade -6.2% (Oct 15, y-o-y) Hang Seng Index 21,996 pts (end-Nov 15) HSBC Best Lending 5.0% Rate (end-Nov 15) Source: Census and Statistics Dept., Hong Kong Tourism Board, HSI Company Limited Property Transactions (Nov) Total S&P (Volume) 4,736 Total S&P (Value) HKD 29.8 b Residential S&P 2,826 (Volume) Residential S&P HKD 20.8 b (Value) Source: The Land Registry Industrial Weak demand from all major trading partners saw the value of exports and imports fall 3.7% y-o-y and 8.5% y-o-y, respectively, in October, according to data released in November. Airfreight cargo continued to recover, up 2.1% y-o-y in October, though container throughput retreated for the 16th consecutive month, down 12.8% y-o-y. Freight forwarders Janco Logistics and Pantos Logistics, together leased over 100,000 sq ft at SF Centre in Tsing Yi, relocating from premises in Kwai Chung and Tsuen Wan, respectively. Automotive dealer Jardine Motors acquired the whole of Chivas Godown in Chai Wan for HKD 1.55 billion (HKD 3,523 per sq ft), reportedly for self-use. The deal includes a one-floor leaseback agreement with the vendor, Safety Godown, for a maximum of two years. For more information, please contact: Denis Ma Head of Research Hong Kong denis.ma@ap.jll.com +852 2846 5135 www.jll.com.hk COPYRIGHT 2015 Jones Lang LaSalle IP, Inc. All rights reserved. For further details or to unsubscribe, please email Research.HK@ap.jll.com. The items in this publication have been compiled from the various sources acknowledged. The information is from sources we deem reliable; however no representative or warranty is made to the accuracy thereof. A Space Odyssey: Will increasing new supply lead Hong Kong's Grade A office growth over the next 10 years? Causeway Bay and Tsim Sha Tsuinot to mention the challenges involved in acquiring and amalgamating smaller sites to create the larger floor plates sought by today's large office occupiers. Although Grade A office rents in Hong Kong have retreated from their record highs in recent years, they remain as some of the most expensive in the world. One of the reasons why rents have been able to climb to such high levels has been the lack of space available in the market. The vacancy rate in many of the city's traditional core area office markets has sat largely at or below frictional levelsi.e. less than 5%for much of the past decade with some segments of the market even dipping below 1% in recent years. Together, these factors contributed to the supply of Grade A offices halving from an annual average of 3.3M sq ft from 1985-1999 to just 1.6M sq ft from 2000-2014. With long-term demand (annual net take-up from 1995-2014) averaging at around 2M sq ft per annum, it's easy to see how vacancy rates have ended up at the lows they are at today. So why are vacancy rates so low? The low vacancy rate environment the city has endured over the past The drought: Grade A office supply, NFA (sq ft, mil) The drought: Grade A office supply, NFA (sq ft, mil) The drought: Grade A office supply, NFA (sq ft, mil) 10 years is largely a reflection of the ad-hoc government land sale 8 programme that was in effect from 1999-2013 and high land premiums 8 8 sought by the government for the redevelopment of older industrial 6 buildings. 6 6 1985-1999: 3.3M 41985-1999: 3.3M 1985-1999: 3.3M 4 Space jam: Grade A office vacancy rate, % Space jam: Space jam: Grade A office vacancy rate, % Grade A office vacancy rate, % 4 2 2 15 15 15 2 10 0 10 10 '85 0 0 '85 '85 '90 2000-2014: 1.6M '95 '90 '90 '00 '95 '95 5 0 0 '85 0 '85 '85 '90 '00 '00 '10 '05 '05 Source: JLL 5 5 '05 '90 '95 '00 '05 '10 '90 '95 '95 '00 '00 '05 '05 '10 '10 HK Overall HK Overall HK Overall Core Core Core Source: JLL Source: JLL Source: JLL Moreover, the surge in asset prices in recent years has made it much more difficult for developers to acquire and redevelop older buildings in the city's traditional core area marketsi.e. Central, Wanchai/ 2000-2014: 1.6M 2000-2014: 1.6M '10 '10 Source: JLL Source: JLL The next 10 years will look nothing like the past 10 years... In 2011, the government released a blueprint for the development of another commercial district (CBD2) to be built in Kowloon East, an emerging office node that covers the districts of Kowloon Bay, Kwun Tong, San Po Kong and Kai Tak. To help advance the growth of Kowloon East, the government has earmarked over 20 parcels of land for office development. Those yet to be sold have the potential to yield at least 12.0M sq ft of Grade A office floor space. While some of these A Space Odyssey: Will increasing new supply lead Hong Kong's Grade A office growth over the next 10 years? 1 sites have already been sold, the bulk located in Kai Takthe city's former international airporthave yet to be tendered. However, with the Shatin-Central Rail Link scheduled for completion by 2021, it is reasonable to assume that most if not all of these sites will be sold and developed in the coming 10 years. Kowloon East, however, is only part of the city's broader supply landscape. The government is also expected to release land for development in Central, Wanchai and West Kowloon. Reclamation and the reprovisioning of government buildings and car parks have the potential to yield up around 4.8M sq ft of commercial office supply in Central and Wanchai. Moreover, it would be the first time since 1995 that the government has released land in Central for commercial office development. Across the harbour in West Kowloon, the development of the West Kowloon Cultural District and the completion of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (\"XRL\") terminus will provide a further 2.9M sq ft of supply. potentially supplying the market with up to 4.7M sq ft of alternate office accommodation over the short-medium term. This unprecedented push by the government to drive supply and the development of the city's commercial office market alone could lift annual supply back close to long-term demand levels. Anchoring the delivery of land supply will be the return to regular government land sales (since mid-2013) which will bring a degree of certainty back to the market. The Government's hand Potential office supply sourced from government land, NFA (sq ft, mil) Kowloon East (12.0) Kowloon West (2.9) Implications for occupiers and investors Central (2.9) Wan Chai (1.9) Government land supply will also be supplemented by the redevelopment of older buildings by the private sector. The issue of premiums payable for lease modifications and land development between the government and developers has been a bottleneck to the redevelopment of older industrial buildings into modern Grade A offices. To help streamline the resolution of land premium disputes, the Lands Department has introduced a \"Pilot Scheme for Arbitration on Land Premiums\". The successful implementation of this new arbitration scheme should help improve the delivery of new office developments in the city's old industrial areas. Short-term supply will also be further boosted by private sector office developmentsincluding seven planned new Grade A offices on Hong Kong Island in locations east of Central expected to receive Occupation Permits between 2017 and 2020, along with the new offices being built in Kowloon Eastand the government's revitalisation policies for industrial buildings. While technically not considered as being Grade A offices, buildings refurbished under the scheme often have the look and feel of contemporary office buildings and provide occupiers with quality accommodation at affordable rates. To date, over 47 special waiver applications citing office use as a conversion option have been executed, The dramatic changes in the supply landscape for the city's office market have a wide range of implications for both occupiers and investors. For occupiers, increased supply offers a myriad of opportunities to secure cost effective offices to accommodate expansion and consolidation requirements. While these opportunities will initially present in decentralised locations such as Kowloon East, where the bulk of new supply will be concentrated, the steady decentralisation of tenants will eventually also open up opportunities in the city's traditional core-area markets. Larger occupiers will also need to reassess their long-term real estate plans. The decision to purchase or lease and whether to consolidate or adopt split office configurations will need to be considered. The new supply along the New Central Harbourfront will be an enticing proposition for PRC companies who yearn for modernand iconic offices with full harbour views in the heart of Central. For investors, the playing field is about to get a whole lot bigger! Despite being one of the more mature office markets in Asia, less than 30% of the city's Grade A office stock is traded on a regular basis. Trophy assets rarely, if ever, change hands. The growth of the market will for the first time provide investors the opportunity to acquire high quality assets in both core and emerging office locations. With the emergence A Space Odyssey: Will increasing new supply lead Hong Kong's Grade A office growth over the next 10 years? 2 Demand: The other side of the equation Hong Kong's economy is nearing a critical juncture. According to forecasts from the Census and Statistics Department, an ageing population and low birth rate will see Hong Kong's labour force peak at 3.7M in 2018 before steadily declining to 3.5M by 2035. Filling all the new Grade A office buildings in the future will require more than just the creation of additional highskilled \"office based\" jobs. That simply won't be enough. While the government has acknowledged the labour supply issuemost recently in its 2015 Policy Addressand has a dedicated steering committee to formulate appropriate policy to tackle the problem, without adequate response, the structural change in the labour force will not only affect the city's long-term economic growth prospects but also demand for commercial office space, especially for Grade A offices. Despite the challenges, we remain optimistic that the city's long-term labour supply issues will be resolved, providing the necessary manpower required for Hong Kong-based services sector operationswhich will increasingly be fuelled by greater demand from companies originating from mainland Chinato continue to grow. of Kowloon East, rental markets will need to adjust accordingly. The days of HKD 200 per sq ft monthly rentals in Central are unlikely to be coming back anytime soon. With non-core locations gaining wider acceptance amongst occupiers, rents will steadily converge and a 'new normal' will be set for rental benchmarks across the market. It is important to also note that not all sites in Kowloon East will be equal. Investors, and especially those looking to develop, will need to consider whether there are sufficient services and amenities to support tenant needs and create points of differentiation. In short, the growth of new non-core office markets will require investors to review investment strategies. What's next? Construction on the next supply cycle is now already underway with the government having steadily ramped up land supply in Kowloon East since 2011. Although a detailed development timeline for Kai Tak has yet to be released, it is reasonable to assume that the first of these sites will come onto the market within the next few years ahead of the opening of the Shatin-Central Rail Link. On Hong Kong Island, the New Central Harbourfront sites will likely be made available once the Central-Wanchai Bypass is completed in 2017. Alternatively, with a significant proportion of the 185M sq ft of Flatted Factories in Hong Kong currently being used for office purposes, drawing demand out of industrial buildings could be one possibility to ensure the healthy long-term growth of the city's Grade A office market. But to achieve this, the government will need to resolve the rental mismatch between industrial-based occupiers and Grade A office offerings. The end of an era Labour force (Aged 15+), Number of persons (mil) 4.0 3.5 3.0 2.5 2.0 '85 '90 '95 '00 '05 '10 '15 '20 '25 '30 '35 '40 Source: Census & Statistics Department The current Murray Road and Rumsey Street car parks along with the Sheung Wan Bus Terminus and Queensway Plaza sites will come later and the release of the government offices in Wanchaii.e. Immigration Tower, Wanchai Tower and Revenue Towerwill likely be yet further down the road. The delay of the XRL project will push the release of government land supply atop of the new terminus until after 2017. Meanwhile the additional supply included as part of the West Kowloon Cultural District (WKCD) will unlikely come to market before 2020. Conclusion Hong Kong's Grade A office market is about to embark on an unprecedented growth spurt over the coming 10-years. As it is today, we estimate that there is provision for at least 20M sq ft of Grade A office supply to be delivered between 2015 and 2024 with a little over half of this supply coming from government land sales. At the end of this growth spurt, the market will look and behave fundamentally different from how it is today. The changes that lie ahead will provide immense opportunities for both occupiers and investors, alike. A Space Odyssey: Will increasing new supply lead Hong Kong's Grade A office growth over the next 10 years? 3 ABOUT THE AUTHORS Gavin Morgan Chief Operating Officer and Head of Leasing, Hong Kong gavin.morgan@ap.jll.com +852 2846 5139 Gavin oversees JLL's operations in Hong Kong and is chair of the firm's Global Office Leasing Group. With over 19 years of experience in the commercial real estate industry, he has worked on behalf of many of the world's largest corporations including KPMG, WPP, AIA, Citibank, Baker & McKenzie and DLA Piper. His extensive background in project leasing includes working on a broad range of commercial projects such as the leasing of specialty retail space, leisure podiums, campus office parks and some of the world's largest tower office buildings. Adrian Tang Head of Kowloon Markets, Hong Kong adrian.tang@ap.jll.com +852 2926 3704 With 13 years of experience in commercial leasing in Hong Kong, Adrian specialises in open market transactions. He is responsible for general agency and sole agency projects as well as advising and negotiating on behalf of both landlords and tenants in the Kowloon commercial property market. Adrian works with a number of high-profile tenants including AXA, AIA, Johnson & Johnson and Estee Lauder, and has gained extensive sole agency experience through projects with KITEC, Pioneer Place, KC100 and more. Denis Ma Head of Research, Hong Kong denis.ma@ap.jll.com +852 2846 5135 Denis leads a team of researchers providing in-depth intelligence of the Hong Kong real estate market. Since joining JLL in 2005, he has worked on a variety of research publications and consultancy assignments across China and the broader Asia Pacific region. As a designated spokesperson for the firm, he is a regular commentator on the Greater China property sector at investor conferences, in print and on television. His clients include investment banks, property developers, quasi-government agencies, retailers, institutional investors and more. A Space Odyssey: Will increasing new supply lead Hong Kong's Grade A office growth over the next 10 years? 4 The Office Index Third Quarter 2015 Net absorption levels mixed across the region; strongest in India and China Asia Pacific leasing activity improved substantially in 3Q15 with gross leasing volumes up 27% year-on-year. Quarterly net take-up volumes were down marginally by 0.8% y-o-y following strong takeup recorded in 2Q15. However performance was mixed and some markets, notably Shanghai and Bangalore, continued to record very healthy absorption levels. Meanwhile net absorption was negative in only three markets across the region. Pre-commitments at new completions and expansions drove net absorption in Bangalore which recorded the strongest net take-up in 3Q15. Technology and technology-related firms remain the most active occupier category in Bangalore and the other tier one Indian markets. Expansions and new setups from Mainland Chinese financials bolstered healthy take-up volumes in several Greater China markets. India and China combined accounted for 75% of Asia Pacific take-up in 3Q15. Consolidations from large manufacturers led to modest negative net absorption in Tokyo while Osaka take-up was buoyant for the fifth consecutive quarter. Weakness in the oil and gas sector continued to limit net absorption in Jakarta and Kuala Lumpur while strong demand from BPO services firms contributed to a sharp increase in net take-up in Manila. Broad-based demand supported take-up in Sydney and Melbourne while take-up levels were more subdued across the rest of Australia, in large part due to a slowing resources sector. Asia Pacific rental growth decelerates modestly In Asia Pacific, net effective rents increased in half of all markets in Q3; however, quarterly rental growth decelerated modestly to 0.5% as rental increases in larger markets such as Tokyo (+0.2%) slowed. Sydney (+3.9%) and Hong Kong (+3.5%) registered the strongest Asia Pacific Office Rental Values, 3Q15 Hong Kong (Central) Beijing (CBD) Shanghai (CBD Overall) Tokyo (CBD 5-kus) Singapore (CBD Overall) Mumbai (SBD BKC) Taipei (Xinyi) Seoul (CBD) Ho Chi Minh City (CBD) Guangzhou (Overall) Delhi (SBD) Sydney (CBD) Jakarta (CBD) Hanoi (Overall) Osaka (CBD 2-kus) Auckland (CBD) Perth (CBD) Manila (Makati CBD) Wellington (CBD) Bangkok (CBD) Brisbane (CBD) Melbourne (CBD) Canberra (CBD) Adelaide (CBD) Bangalore (SBD) Kuala Lumpur (City Centre) Chennai (SBD) 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Net Effective Rents (USD psm pa) Source: JLL (Real Estate Intelligence Service) quarterly rent increases with moderate uplifts of 2-2.5% recorded in Shanghai, Beijing and Bangalore. Several other markets recorded modest increases (1-1.5%) including Auckland, Chennai and Osaka. Rents fell furthest (by 3.5-5% quarter-on-quarter) in Singapore, Ho Chi Minh City and Perth where recent or upcoming completions have created tenant favourable conditions and put downward pressure on rents. In other markets, rents were mostly flat or changed only marginally. Over the twelve months to end-3Q15, average rents in aggregate were up 2.1%. Of the major markets, Hong Kong was the Asia Pacific standout with annual rental growth of 11.1%, followed by Shanghai and Sydney which both recorded rental growth of 8.2%. Bangalore, Bangkok and Tokyo recorded rental growth of 5-7%. Supply pressure and industry consolidation continues to weigh on Singapore rents which have declined 7.9% over the past year. Rents in Australia continued diverging with rental uplifts recorded in Sydney and Melbourne while rental growth in Brisbane, Adelaide and Perth remains entrenched in negative territory. Capital value growth moderates in line with rental growth Asia Pacific quarterly capital value growth moderated to 1.5% in aggregate in 3Q15; however, growth in capital values continues to outpace rents. Quarterly capital value growth was strongest in Osaka (+6.4%) and Sydney (+6.3%) with Melbourne, Brisbane, Auckland and Adelaide all recording growth of 3-5%. Jakarta capital values declined the most (-2.3%) followed by Singapore (-1.3%). On an annual basis, capital values were up 7.8%, with Osaka (+25.4%) continuing to lead the way followed by Sydney, Tokyo and Melbourne which all recorded growth of 14-17%. Most other markets saw annual capital value growth slow to single digit territory. Asia Pacific Office Capital Values, 3Q15 Hong Kong (Central) Tokyo (CBD 5-kus) Singapore (CBD Overall) Taipei (Xinyi) Beijing (CBD) Shanghai (CBD Overall) Seoul (CBD) Sydney (CBD) Guangzhou (Overall) Osaka (CBD 2-kus) Perth (CBD) Melbourne (CBD) Brisbane (CBD) Mumbai (SBD BKC) Ho Chi Minh City (CBD) Jakarta (CBD) Auckland (CBD) Delhi (SBD) Adelaide (CBD) Canberra (CBD) Hanoi (Overall) Bangkok (CBD) Wellington (CBD) Manila (Makati CBD) Chennai (SBD) Kuala Lumpur (City Centre) Bangalore (SBD) 0 10,000 20,000 30,000 40,000 50,000 60,000 Capital Values (USD psm) Source: JLL (Real Estate Intelligence Service) Asia Pacific Office Rental and Capital Value Indexes, 4Q05 -3Q15 240 220 4Q05 = 100 200 180 160 140 120 100 4Q 05 2Q 06 4Q 06 2Q 07 4Q 07 2Q 08 4Q 08 2Q 09 4Q 09 2Q 10 4Q 10 2Q 11 4Q 11 2Q 12 4Q 12 2Q 13 4Q 13 2Q 14 4Q 14 3Q 15 80 Rental Index Capital Value Index Source: JLL (Real Estate Intelligence Service) Note: The Indexes are stock-weighted averages of rental and capital value movements across Asia Pacific Further growth expected for rents and capital values Asia Pacific gross leasing volumes are expected to carry momentum into 2016, growing 5-10% y-o-y, and support an increase in Asia Pacific rents. Meanwhile capital value growth is likely to slow next year. Capital values are expected to grow fastest in Tokyo and Osaka due to strong investor appetite and low borrowing costs in Japan where the spread between yields and interest rates is likely to remain quite favourable despite further compression. The low cost of capital and high liquidity in conjunction with investor appetite for office assets are set to sustain investment activity. We expect to see capital values continue increasing, but at a more modest pace of 3-4% in aggregate in 2015. Yields are forecast to compress marginally in most markets around the region with a few exceptions including Hong Kong, Kuala Lumpur and Jakarta. 3Q15 Average Grade A Rent (USD psm pa) Hong Kong (Central) Beijing (CBD) Shanghai (CBD Overall) Tokyo (CBD 5-kus) Singapore (CBD Overall) Mumbai (SBD BKC) Taipei (Xinyi) Seoul (CBD) Ho Chi Minh City (CBD) Guangzhou (Overall) Delhi (SBD) Sydney (CBD) Jakarta (CBD) Hanoi (Overall) Osaka (CBD 2-kus) Auckland (CBD) Perth (CBD) Manila (Makati CBD) Wellington (CBD) Bangkok (CBD) Brisbane (CBD) Melbourne (CBD) Canberra (CBD) Adelaide (CBD) Bangalore (SBD) Kuala Lumpur (City Centre) Chennai (SBD) Source: Notes: Quarterly Change 3Q15 vs 2Q15 (Local Currency) Yearly Change 3Q15 vs 3Q14 (Local Currency) 3Q15 Average Grade A Capital Value (USD psm) Quarterly Change 3Q15 vs 2Q15 (Local Currency) Yearly Change 3Q15 vs 3Q14 (Local Currency) 1,667 1,023 853 730 698 508 499 496 453 432 345 335 305 277 275 275 234 230 223 200 194 193 160 138 130 127 124 3.5% 1.9% 2.4% 0.2% -5.2% 0.0% 0.0% -0.1% -3.5% 1.2% 0.7% 3.9% -1.7% -2.4% 1.3% 1.4% -4.4% 0.2% 0.0% 0.5% -0.8% 0.6% -0.3% 0.7% 1.9% -1.1% 1.0% 11.1% 2.7% 8.2% 5.0% -7.9% -4.7% 1.7% 0.3% -3.5% 2.4% 0.7% 8.2% -2.6% -7.3% 4.5% 7.1% -21.6% 3.5% 7.6% 5.5% -6.8% 2.1% -0.8% -11.1% 7.1% -3.0% 3.1% 52,943 16,105 14,507 23,548 18,262 5,094 16,636 10,632 5,033 8,486 3,881 9,673 3,937 3,075 6,881 3,924 6,853 2,494 2,766 2,934 5,385 6,592 3,273 3,578 1,268 1,872 1,951 1.2% 1.8% 2.7% 0.2% -1.3% 0.0% 0.0% 0.8% N/A 0.6% 0.9% 6.3% -2.3% N/A 6.4% 3.2% 1.3% 0.1% 0.0% 0.5% 3.6% 4.6% -0.5% 3.2% 2.7% -1.1% 0.8% 3.0% 2.6% 9.0% 15.2% -1.3% -3.3% 6.8% 7.4% N/A 0.7% 1.4% 16.7% -2.6% N/A 25.4% 10.9% -0.5% 7.9% 12.6% 8.6% 5.3% 14.6% 0.3% 9.0% 8.4% 1.3% 2.0% JLL (Real Estate Intelligence Service) All rents are net effective. Rents and capital values are on a net lettable area basis psm pa - per square metre per annum CBD - Central Business District; SBD - Secondary Business District Jones Lang LaSalle 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. www.jll.com