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Cushman & Wakefield Research

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City and market analytical reports covering emerging markets in the Asia Pacific region by global real estate solution provider Cushman & Wakefield
 

Asia Pacific Office Forecast 2012 - 2013

Jan 12, 2012
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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013
ASIA PACIFIC: SLOW GROWTH AHEAD BUT NO RECESSION
FORECAST SUMMARY: SLOW GROWTH, RECESSION IN CHECK
The Asia-Pacific economy's dynamism remains one of the bright spots in this challenging global environment. Steady GDP growth continued throughout 2011 on the back of healthy domestic consumption and investments and is expected to reach 6.2% in 2012. Even so, the region is not impervious to shocks. Export growth has been moderating from ongoing global economic strains and widespread floods in Thailand have caused serious supply-chain disruptions. Nonetheless, at Cushman & Wakefield, we believe that the opportunity for sustained growth in Asia Pacific is much higher than the other regions and its forward momentum should be a sufficient brace against any continuing headwinds. While a relatively healthy regional economy should remain a catalyst of leasing activity, sustained global tension could undermine confidence and push consumers and companies to the sidelines again, moderating demand for commercial properties. For the office market, this suggests that occupiers could expect a brief respite from surging occupancies and rents that have characterized ultra-tight locations such as Beijing and Hong Kong. Even so, occupancies will generally remain high except in markets with teeming construction pipelines and the pace tends to pick up as signs of a global turnaround emerge. Expect rents to generally remain flat or rise modestly through next year; in most cases three-year leases up for renewal will still command rates that are significantly higher than those in 2009. On the investment front, most markets will continue to present significant opportunities. The combination of growing economic clout, still-sturdy property market fundamentals and the abundance of capital will continue to position the Asia Pacific favorably in this period of economic uncertainty and thus remain a magnet of investor interest.

REGIONAL STRENGTHS OUTWEIGH WEAKNESSES

Several factors affirm our relatively sanguine economic forecast. Though an economic slowdown will be inevitable in all countries in the region, none is projected to return to recession, barring any financial implosion in Europe. Asia-Pacific's GDP growth is forecast to average 6% in 2011 after a rapid recovery of 8% in 2010, then rise slightly to 6.2% in 2012. Such growth will remain supportive of employment and income gains and fuel healthy domestic demand and promote intra-regional trade and tourism. Emerging Asia, led by China, India and Indonesia will remain the region's nexus of growth in the next two years. While concerns have been raised on its massive infrastructure investments funded by debt, China remains poised for a still-solid GDP growth of 8% to 9% through to next year. Meanwhile, robust private and public consumption will be vital to the economic strength of India and Indonesia, which are set to grow by 6% to 7% next year (Figure 1). Reconstruction investment in Japan and Thailand will also be key drivers of stronger activity in the near term. In November, Japan's lower house of parliament passed a ¥12.1 trillion (US$156 billion) supplementary budget for post-quake reconstruction. In Thailand, the government pledged THB200 billion (US$6.5 billion) as an initial investment to boost flood defenses and provide soft loans to help key businesses get back on their feet. This rehabilitation package should stoke domestic demand next year and keep growth above 4%.

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

The expansion of trade initiatives will also boost regional trade performance. The most tangible sign of progress was the agreed framework for the Trans-Pacific Partnership (TPP) free trade agreement launched in 2006 by Singapore, New Zealand, Chile and Brunei. Discussions have been under way since March 2010 to also include five other countries - Australia, Malaysia, Peru, the US and Vietnam. Japan announced in November that it will formally join the TPP negotiations. The talks are significant as they could potentially lead to a future free-trade area with Asian and Pacific nations. Regional governments have the ability to aggressively deploy the needed policy support until there is a durable reduction in risk. Thus far, most Central Banks have been quick to pause the tightening cycle even as inflation has remained elevated. Nonetheless, measures will continue to be taken to ensure that inflationary pressures are in check. Inflation in the region is projected to average 5% in 2011 before receding to 3.7% in 2012, assuming commodity prices remain stable. However, risks around inflation will remain highest for India and Vietnam. In Japan, prices are expected to remain broadly flat, with little or no inflation (Figure 2). The deepening European crisis and sluggish US recovery pose a threat related to trade and financial links. Still, exports to the US and Europe make up only about 10% of the US$20 trillion Asia-Pacific economy and their share of that export total has shrunk from more than one third in 2000 to 28% today as intra-regional trade increased. Notably, the share of trade within the region now accounts for close to 60% compared to over 40% in 2000 (Figure 3). Of course, that is not to say a downshift in exports to the West would not be felt. Any weakening would certainly weigh on economic growth particularly for small open economies such as Hong Kong, Singapore, Malaysia and Taiwan, as well as (to a lesser extent) South Korea, Thailand and the Philippines. The region's exposure to European sovereign debt is also low, at 0.03% of GDP, so the impact of the crisis may be minimal. We believe that current challenges are related to slowing global growth for Asian banks, rather than direct balance-sheet threats.

FORECAST FOR SELECT COUNTRIES AUSTRALIA: Mixed bag
Mining exports and investment will dominate Australia's economic growth, estimated at 2% to 3% through to next year. The office market landscape for 2012 is a mixed bag. In Sydney, demand will remain patchy as it feels the effects of the global economic uncertainty while new projects come on stream. In Brisbane, mining and ancillary industry companies will fuel demand but a surge in new supply will push up vacancies. Meanwhile, strong absorption trends in Melbourne from all sectors will keep vacancies low even with the addition of more than 1.2 million square feet (112,000 square meters) of space in 2012. Similarly, office vacancy rates in Perth should remain stable while rents continue to increase due to strong mining and related industry sectors.

CHINA: Significant opportunities
China's economy is set for a soft landing in 2012. GDP growth will slow to 8.3% next year from 9.1% in 2011, converging on the government's 7% to 8% target rate between 2011 and 2015. The impact from any decline in demand from the US and Europe will be modest as exports to both markets account for just 11% of GDP. Investment will continue to underpin growth, but a growing middle class should help China move towards a more balanced model based on private consumption. A recent survey conducted by PricewaterhouseCoopers revealed that over 40% of the CEOs' planned investments, both by Chinese and non-Chinese companies, were targeted on China as they focused on growing consumer demand. Hence, China will continue to offer significant opportunities for the office sector. Both Beijing and Shanghai have evolved as international gateway cities, seen as increasingly preferred cluster locations for financial and pharmaceutical firms, as well as regional headquarter locations. Case in point: foreign exchange giant Bank of China will soon establish its first-ever Shanghai headquarters, bringing Shanghai another step closer to its goal of ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013 2

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

becoming a global financial center by 2020. While global uncertainty has fostered caution among multinationals headquartered in both markets, domestic companies are still expected to expand. Furthermore, the relatively low new office supply in central submarkets should sustain low vacancies and catalyze rental growth. Shenzhen should see stable vacancies while other major cities like Guangzhou, Chengdu and Hangzhou, Changsha and Shenyang will face a significant amount of new supply, causing vacancy increases next year.

is expected to wind down. Robust office development in several cities like Mumbai and Hyderabad is likely to exert upward pressure on vacancies and in light of moderate demand, may slow down or get deferred. While most markets are expected to see a stable rental trend in the short term, rates could slide in some cities in the Hyderabad market due to increasing vacancies.

INDONESIA: Buoyed demand
Indonesia should cope with the expected slowdown in global growth as exports account for a relatively small portion of GDP. Recent interest rate cuts should support private consumption and investments and in turn, GDP, which is expected to stabilize around 6.0% through to 2012. This backdrop should help buoy demand for office space in Jakarta, particularly from banking, insurance, oil and mining companies. However, the expected completion of several office projects will hold back occupancy increases. Rents still remain on an upward trajectory in 2012 with utility rates expected to rise.

HONG KONG: Exposed to uncertainty
Hong Kong remains highly susceptible to a downturn in overseas demand given its export-oriented economy. A tight labor market is supporting private consumption and will bolster GDP growth while exports remain lackluster. GDP growth is anticipated to soften to 3.3% in 2012 after achieving growth of 4.7% in 2011. The revised near-term outlook is not likely to yield any significant demand growth drivers and is casting a pall on the office market. Consequently, rent increases are likely to stall and reverse course after a sharp run-up since 2010. The dearth of new supply in the near term should help temper any rent correction in 2012. However, 2012 rents will still command a significant premium relative to their lows in 2009.

JAPAN: Uptick in demand
Tokyo is a megalopolis with a stable economy. Ongoing reconstruction in the Tohoku Region will be felt most in 2012, pushing Japan's GDP growth to 2.2% from -0.7% in 2011. This would be sufficient to bring about a modest uptick in demand for space in Tokyo's office market next year. In the longer term, a decreasing production aged population (15 to 64 years old) could weigh on overall demand. With the completion of several buildings next year, there will likely be gradual increases in office vacancies, particularly in less competitive buildings. Expect rents to stabilize or eke out moderate increases particularly for newer buildings equipped with updated antiearthquake capabilities.

INDIA: Strong consumption, inflation risks
Economic expansion is expected to stabilize around 7% to 8% against a backdrop of weaker global growth. Consumption will largely drive economic activity while investment is expected to remain sluggish. Inflation will remain a key policy challenge although the Reserve Bank of India's aggressive tightening cycle should help engineer a deceleration. The global economic slowdown might result in a realignment of expansion plans of major international firms. However, the demand for special economic zone (SEZ) spaces could witness an uptick as information technology and business-process outsourcing continues to lure Western firms to India, although the construction of non-SEZ developments

SOUTH KOREA: Growing service sector
South Korean economic growth, estimated at 3.6% in 2011 and 3.4% in 2012, is driven largely by consumption and external demand. Although its external financial vulnerability has improved since 2008, it remains quite susceptible to volatility in the global ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013 3

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

financial markets. Nonetheless, steady economic gains will pave the way for healthy demand for office space in Seoul, especially as employment expands from its traditional manufacturing base into service sectors such as IT and finance. Significant opportunities await occupiers next year, as robust development will present a multitude of options in the Central Business District at attractive rates.

SINGAPORE: Dampened but still strong
Singapore is among the most vulnerable to shrinking Western demand. Nonetheless, economic growth should remain respectable at 3.2% in 2012 from 4.1% in 2011. Employment is expected to continue its uptrend particularly in the services sector, and thus help maintain the positive momentum for the real estate sector. For the office market, this should allow absorption of new supply resulting in relatively low vacancies through to 2015. Furthermore, Singapore will continue to benefit from its reputation as a premier financial center and top regional headquarters hub. Grade A rents are expected to level through the first half of 2012 and resume their moderate uptrend through to 2015.

VIETNAM: Struggles ahead
A global growth slowdown, combined with high inflation cutting into consumption and investments, will inhibit GDP growth to around 6% until 2012. Moreover, its dwindling foreign reserves, a chronic current account deficit, high external debt and a weak currency put Vietnam in a precarious position. As such, the office market in Hanoi and Ho Chi Minh City is likely to be bereft of dominant demand drivers through to next year. However, the limited offerings in Hanoi should sustain modest rental gains.With substantial office completions slated in Ho Chi Minh City, vacancies will remain in double-digits and continue to cause landlords to be increasingly flexible during lease negotiations in these uncertain times. Meanwhile, credit growth restrictions that are unique to Vietnam have almost eliminated any available capital for development or even for critical expansion and infrastructure works, adding further doubt to any recovery soon.

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

2012 TO 2013 GDP GROWTH

10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
Note: Bubbles are based on estimated 2013 nominal GDP in US$ billion Source: Roubini Global Economics, Cushman & Wakefield Figure 1

China India Indonesia Malaysia Hong Kong Australia Vietnam
Regional GDP: 6.0%

Philippines Taiwan

Thailand Singapore New Zealand South Korea Japan

2012 TO 2013 AVERAGE INFLATION
9.0% Vietnam 7.5% 6.0% 4.5% 3.0% 1.5% 0.0% -1.5% Japan India Indonesia China Australia Hong Kong Malaysia Taiwan Philippines Singapore

Thailand

Regional Inflation: 3.7%

South Korea

Source: Roubini Global Economics, Cushman & Wakefield

Figure 2

REGIONAL EXPORT ACTIVITY
40.0% Hong Kong 35.0% Exports to US/EU as Percent of GDP Singapore 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% China Japan NZ Indonesia Korea Taiwan
Low Risk

Vietnam

Thailand

Malaysia

Medium Risk High Risk

India Australia 0%

40%

80%

120%

160%

200%

240%

Source: Cushman & Wakefield
1

Share of Exports to GDP

Figure 3

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

ASIA-PACIFIC: MAJOR OFFICE MARKETS FORECAST

CBD GRADE A VACANCY 2012 % SOUTHEAST ASIA PACIFIC Singapore SGD/SqF/Mo Taipei NT$/Ping/Mo Manila PHP/SqM/Mo Kuala Lumpur MYR/SqFt/Mo Jakarta Rp/SqM/Mo Ho Chi Minh US$/SqM/Mo Bangkok THB/SqM/Mo Melbourne AUD/SqM/Yr Sydney AUD/SqM/Yr EAST ASIA Guangzhou RMB/SqM/Mo Hong Kong HK$/SqF/Mo Shanghai RMB/SqM/Mo Beijing RMB/SqM/Mo Shenzhen RMB/SqM/Mo Tokyo JPY/Tsubo/Mo Seoul KRW/SqM/Mo INDIA Bangalore INR/SqFt/Mo Hyderabad INR/SqFt/Mo NCR INR/SqFt/Mo Mumbai INR/SqFt/Mo
Source: Cushman & Wakefield

GRADE A PRIME RENTS 2012 Local Currency US$ (/sf/yr) 2013 Local Currency US$ (/sf/yr)

YIELDS 2012 % 2013 %

2013 %

9.6 10.1 4.9 17.4 8.5 38.3 26.6 4.1 9.1

7.4 9.8 3.8 18.2 8.3 44.1 26.1 5.8 9.3

10.74 3,882.60 881.52 6.48 282,136.41 36.59 717.67 606.78 1,037.44

99.41 43.28 22.64 24.59 34.87 40.79 26.45 56.68 96.90

11.03 3,897.21 905.36 6.54 293,787.28 32.34 719.12 616.14 1,052.51

102.09 43.44 23.25 24.82 36.31 36.05 26.50 57.55 98.31

4.0 1.9 11.0 6.4 8.0 12.0 7.0-8.0 7.8 7.3

4.0 1.9 13.0 6.4 8.0 11.5 7.0-8.0 7.5 7.0

31.5 4.5 5.0 2.6 11.8 8.4 14.1

23.9 2.5 6.4 5.8 10.7 9.0 15.6

221.21 106.74 508.39 572.45 244.62 30,097.78 39,163.57

38.80 164.49 89.18 92.53 42.91 131.99 38.34

226.69 101.07 557.51 599.75 256.93 30,140.08 38,372.23

39.76 155.75 97.80 97.32 45.07 132.18 37.56

6.8 3.3 4.7 5.9 4.5 4.2-4.5 6.0-6.5

6.6 3.8 4.8 6.0 4.4 4.2-4.5 6.0-6.5

6.5 12.7 13.0 24.4

4.5 12.5 12.7 24.0

109.03 59.87 284.95 339.11

25.48 13.99 66.60 79.26

119.03 61.87 286.95 344.11

27.82 14.46 67.07 80.43

12.0 10.0 7.5 11.0

12.5 10.5 8.0 11.5
Table 1

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

SELECT CITIES' SUMMARY
SYDNEY
ECONOMY Australia has experienced a quarter of conflicting economic indicators which highlights the existence of a two-tiered economy. The trade performance of the economy is starting to see the effects of a considerable slowdown in Europe and commodity prices have generally declined over recent months but are still at high levels. The European situation is likely to impact the market for some time yet as it has affected confidence. The Reserve Bank suggests the Australian economy will experience moderate growth. The unemployment rate is stable at about 5%. Inflation is likely to be consistent with the 2 to 3% target in 2012 and 2013. PROPERTY MARKET There has been volatility in Sydney's absorption figures since the US subprime debacle in 2008. Sydney feels the effects of the global economic uncertainty more strongly than other cities and the patchy demand will remain whilst there is instability in other continents. Many international companies and banks have their Australian headquarters in Sydney. We expect vacancies and rents to be stable in 2012. There is very little new supply and demand will be muted due to cautious tenants.Vacancy in A grade as at July 2011 was the highest since 2005 so we expect incentives will remain generous until vacancy falls. CAPITAL MARKETS The traditional buyers of Sydney's investment grade offices, the A-REITs, have been very quiet and foreign investors have dominated 2011. We expect foreign investors, particularly those seeking core, stabilized real estate investments to continue dominating the market in 2012. Investment capital is expected to flow from Asian and European investors, institutional and private, as was the trend in 2011.The prime yield in Sydney is about 6.25% to 6.75%.The yield spread has widened since the subprime debacle and we expect this to reflect that value in quality properties still exist even though the market may be experiencing volatility.

MELBOURNE

ECONOMY Financial and professional services form a core contributor to the city's economy, generating more than half of its GDP. As such, it remains vulnerable to any weakness in the global financial environment. However, the city's innate attractiveness has always made it a top draw for foreign capital, particularly from Southeast Asia and China. Any weakness in the domestic currency against the greenback should also boost property investments in the city. PROPERTY MARKET The Melbourne market has performed impressively over the past 8 years, averaging 125,000 square meters (sq.m.) absorption per annum. There is 112,000 sq.m. of space to be added in 2012. Leasing inquiries have fallen at the end of 2011 but if the global markets stabilize, we can expect it to pick up again. CAPITAL MARKETS Historically, private investors have been the major players in Melbourne. However, in 2010 they were net disposers of office buildings and in 2011, only accounted for 16% of transaction volume. The AREITS were also quiet in 2011, only accounting for 13% of transaction volume in 2011. As has been the trend across Australia, cross-border investors have stepped up investments, making up 52% of the volume in 2011. The prime yield in Melbourne is about 6.75% to 7.25%.

BEIJING

ECONOMY According to official data released by the central government, China's GDP growth rate was marginally lower at 9.6% in the second quarter of 2011, as compared to the first.The latest consumer price index in June reached 6.4% at national level. Policies clamping down on bank lending and speculation in the residential sector are still in place.Total new bank loans saw a decline in the third quarter of 2011. Some major cities reported a decrease in housing prices. ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013 7

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

PROPERTY MARKET With unchanged demand fundamentals but limited supply, we expect rents to maintain an upward trajectory but the pace of increase will slow in tandem with the new supply introduced in 2012 and 2013. Rental growth rates will also be restrained by tenants, who, faced with untenable rental rates, are likely to decentralize and relocate the bulk of their offices to the more reasonably priced suburban areas. CAPITAL MARKETS 2011's investment market maintained its robust activity from 2010. Beijing saw significant growth in strata-titled commercial property transactions this year; despite substantial rental growth, yield for commercial properties remain at a stable low level. The total investment volume and the proportion of foreign investments dipped significantly in Beijing. Large State-owned Enterprises with capital raising strength became key buyers for self-use office buildings in the market. Beijing's commercial property market is expected to remain active next year; more projects may enter the market for sale amid the tight financial raising environment.

2011's new supply, 2012 is likely to be another year of record high rental growth. CAPITAL MARKETS In 2012, we expect the attraction to Tier 1 cities to continue, but a growing trend is seen for lower tiered cities, where growth is higher. Specifically, retail in these locales is attractive, as brands look to proliferate and as a rising middle class gains access to disposable income. Many investment funds have been raised to target Tier II and III city's retail properties in prime locations. We do not expect to see a dramatic fall in transaction volume in 2012. Rather, a continued or slightly slower pace is more likely as investors focus on top quality assets.

GUANGZHOU

SHANGHAI

ECONOMY Shanghai's economy, whose growth rate over the last 5 years is closely correlated to national GDP, will likely moderate in tandem with the overall economy. It is also set to undergo a significant transition over the next five years as the local government will introduce more incentives and place emphasis on creating more industrial parks and R&D centers to spur innovation. PROPERTY MARKET The local government has set long term goals to reduce Shanghai's reliance on the real estate sector. In the short term however, it will be hard to stop Shanghai's office real estate markets. Shanghai's office real estate markets will face a shortage of supply in the CBD area in 2012. 2011, which saw over 1.3 million sq.m. of new supply will see office rents climb by 20%. With demand fundamentals likely to remain unchanged but with just over half of

ECONOMY Guangzhou's economic transformation has seen its tertiary sector continue to power the city's growth. The total value of fixed asset investment grew 5.8% year-on-year in the first three quarters of 2011 while the value of real estate development and investment surged 40% As the city's urban renewal projects gather pace, coupled with the successful implementation of new business promotion projects in Guangzhou, fixed asset investment is expected to accelerate in the future, leading to elevated growth rates and continued expansion. PROPERTY MARKET About 1.6 million sq.m. of grade A offices is expected to enter the office market from the fourth quarter of 2011 to 2012, of which 87% will be in the Pearl River New City submarket. Absorption rates are likely to lag supply. We expect citywide vacancy rates to rise while growth in office rents will moderate in 2012. Still, the city, as well as Shenzhen, is well positioned to benefit from its proximity to Hong Kong as companies located there are likely to use Guangzhou and Shenzhen as a springboard to enter the Chinese market. CAPITAL MARKETS While transaction volume of new offices has trended down in recent months, this is expected to reverse in the next six months. Investors are keeping

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

a close watch on the commercial real estate market as restrictions in the residential market is likely to be kept stringent in 2012. The office investment market will continue to heat up with selling prices growing steadily.

HONG KONG

SHENZHEN

ECONOMY Shenzhen's economy continued to grow steadily at the end of 2011. Real estate investments rose 21.7% to RMB 35.34 billion, in spite of continued market controls. We predict fixed asset investment growth to slow as the central government continues to tighten monetary policy at the beginning of 2012. In the long term however, Shenzhen's local government policy support for industrial transformation and upgrading will greatly improve economic efficiency. It is estimated that the city's GDP will reach RMB1.5 trillion by 2015 with an annual growth rate of over 10%. PROPERTY MARKET Office leasing has been active due to the growing economy, mainly from the technology and services sectors. Citywide net effective rent of grade A offices in the third quarter has climbed about 30% year-on-year. About 0.24 million sq.m. of new Grade A supply will come on stream in 2012 in the Futian district. The new supply of high quality office space will help alleviate growing demand. We expect vacancy rates to decline and rents to continue to grow steadily in 2012. However, a huge amount of supply of approximately over 1 million sq.m. of GFA after 2013 could soften rental growth. CAPITAL MARKETS Commercial property continued to draw investors' attention due to the continued market controls in the residential market. However, limited supply of good quality offices due to reluctance of landlords to sell is expected to push prices up. From 2012, we expect prices of good quality offices to be on an upward trend as increasingly most offices will only be developed for the leasing market.

ECONOMY Hong Kong's economy has seen a gradual decline in GDP growth as the year has progressed, narrowly escaping a technical recession in the third quarter of 2011. It is currently projected that year-end growth will register 4.7% with growth in 2012 expected to soften to 3.3%. Stagnating growth among Western economies has impacted the financial and trade sectors ­ pillars of the local economy. Instability in the sovereign debt situation in the EU, sustained layoffs in the banking industry and a sharp contraction in export growth have contributed to the weakening growth in Hong Kong. PROPERTY MARKET Despite expectations that recent softening demand for space in core areas such as Central will continue in 2012, limited new supply in the short term will allow vacancy to remain low. The local government will continue to firm up plans for establishing a new CBD in Kowloon East and also the redevelopment of a select few sites in Hong Kong Island. Given the recent shift in the global economic outlook, the market is expected to see more decentralization of office space. The financial sector from an occupier perspective will remain cautious, but likely reluctant to reduce their space requirements just yet. CAPITAL MARKETS The market is expected to see investment in office property among both end-users and investors to remain suppressed in 2012. Credit conditions are expected to remain tight and some investors will wait for a better indication of the market's direction in the near to mid-term. Although the market outlook has shifted recently and rents have begun to decline in Central, the prospect of limited supply in core areas still make investment opportunities highly attractive. Expectation of another future CBD in Kowloon East will continue to make the area a prime investment target despite the revised outlook for 2012.

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

SEOUL

ECONOMY Economic growth rate has slowed as the Eurozone and the US grapple with their debt problems. Exports are currently driving economic growth. However, export activity will lose steam due to the sluggish global economy and face further headwinds in 2012. The free trade agreement between Korea and the US will play a significant role in 2012. Still, the outlook for the economy remains positive and relatively stable for 2011 to 2015, with GDP growth to average 3.9% from 2011 to 2015. PROPERTY MARKET Approximately 1.3 million sq.m. of new Prime and Grade A offices will be added to the market in 2012 and 2013. Most of these new office spaces are located in the CBD and Yeonido, which should drive vacancies up in these areas. Gangnam is expected to be stable due to the lack of available prime space. In 2011, many local major firms took advantage of a tenants' market in office space and moved its corporate headquarters to newly completed buildings in the CBD area. Absorption is expected to lag supply until 2013, making Seoul a tenants' market for the next few years. CAPITAL MARKETS Investors are likely to wait for a couple of years until market uncertainty clears. It is hard to expect active transactions as long as financing conditions remain difficult due to high borrowing costs. However, there are a number of real estate funds that will mature and good quality assets for sale on the market that will likely increase in 2012. Small or medium office buildings in Gangnam are expected to be alternative investment targets. Local buyers are expected to dominate. The 2012 yield rate is expected to be similar to 2011's at 6% to 6.5%.

of export-dependent manufacturing enterprises and its related industries to developing countries. Although Japan's GDP is expected to grow in the short term, mainly due to growth in demand relating to reconstruction activities in the affected prefectures, the ongoing challenge is to manage the demographic changes that will impact its economy in the long run. PROPERTY MARKET Buildings that satisfy changing requirements including broader disaster-resistant capabilities continue to be attractive. However, vacant space of lesspopular buildings will be apparent when relocations occur. Nevertheless, overall demand for office space in Tokyo is large and stable albeit without much growth due to an ageing demography. Depending on tenants' financial position at the end of the fiscal year, some may shrink their office space to reduce cost. CAPITAL MARKETS The outlook is uncertain due to the socio-economic turmoil in Europe and continuous downward trend of office rents in Tokyo. Tenants prefer office buildings with better disaster-resistant capabilities; other factors such as location in disaster-prone areas will also be vital. Retail and logistics facilities would be the focus, as investors can expect stable cash flow based on long-term tenancy. Investors are likely to comprise domestic private funds, CMBS servicers, foreign banks, J-REITs, developers and core funds including private REITs; foreign opportunity funds are the likely sellers.

BANGALORE

TOKYO

ECONOMY The demographic change presents Tokyo's new normal with an ageing population. The uncertainties adding to the strong Yen may accelerate relocation

ECONOMY Despite economic uncertainties and competition from other cities, Bangalore is all set to enjoy its position as the top IT/ITeS (Information Technology Enabled Services) destination in India for the next 3 to 4 years at least. The metro rail project, rolled out in November, is expected to strengthen the investment climate and fuel growth along its east-west and north-south corridors, and help maintain the

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

`green city' tag. Several top IT players such as CTS, Accenture and TCS have initiated their expansions in 2011; major banking and manufacturers such as Goldman Sachs, Wells Fargo, Samsung, Bosch, Ericsson and Honeywell and are also expanding. PROPERTY MARKET Considering the expansions in IT/ITeS and Banking, Financial Services and Insurance (BFSI) sectors and positive economic and employment outlook, demand is likely to remain stable and hover around 8 to 10 million square feet a year over the next 2 to 3 years. As a result, office space supply, which seems constrained in 2012, is expected to grow in accordance with the continued demand. Given the large scale availability of second generation space, Grade A rentals are likely to remain stable in the short term. Nonetheless, rentals are likely to go up by 10% to 15% by 2013 given the scarcity of options and lesser availability of space. CAPITAL MARKETS During the first half of 2011, Bangalore has attracted more private equity funding and higher quantum of investments as compared to Mumbai and NCR. Office real estate with the majority of investments in leased assets has recorded highest fund flow during 2011. The capital values in the IT corridors of Electronics City and Whitefield have appreciated in 2011. Bangalore's yields look to have stabilized post crisis. Despite the global uncertainties, we can expect the investment climate to remain optimistic in the short-medium term taking into account the positive economic and employment outlook over the next 2 to 3 years.

turing and services sectors, employment outlook in Hyderabad is likely to remain positive over the next few years. PROPERTY MARKET The overall demand-supply fundamentals in Hyderabad remain balanced. Continued demand for Grade A space has resulted in healthy precommitments and near zero vacancy rates in SEZ developments in the suburban market. A majority of the upcoming SEZ developments are pre-committed and is expected to remain the same way at least for the next couple of years. Sustained demand and scarcity of options are likely to push Grade A rentals upwards by 10% to 15% by the end of 2013. The current vacancy rate is less than 14% in the city and is likely to be stable over the next 2 to 3 years. CAPITAL MARKETS The capital and rental values in the prime office locations of Madhapur and Gachibowli have mostly remained stable during 2011. Prospects for these suburban locations remain encouraging given the continued demand from IT/ITeS sector for Grade A space and the scarcity of options for the next 1 to 2 years. Rental values in this micro market are expected to appreciate steadily at 5% to 7% for the next 2 to 3 years. Considering the positive economic and employment outlook, low rental and capital values and the abundant supply of skilled man power, the city is likely to continue its position as an appropriate alternative to Bangalore, offering diversification options.

MUMBAI

HYDERABAD

ECONOMY The city accommodates several top IT/ITeS players in the world; BFSI majors such as JPMC and Wells Fargo have moved into the city. To expedite growth in the IT/ITeS sector, the state has adopted the information and communication technology policy. The upcoming metro rail project is likely to bolster the city's growth momentum. Being one of the top destinations for investments in India and with growing demand and opportunities in the manufac-

ECONOMY The state government has recently decided to modernize the city and take up several infrastructure projects, to boost the local economy. The upcoming international airport and Hirco SEZ at Navi Mumbai could attract some investments into the city in the coming years. Mumbai accommodates several major players in BFSI, IT/ITeS, logistics and healthcare sectors. In recent times, several companies have scaled up their operations against a backdrop of economic resurgence, and this could continue although at a lower magnitude in the short term.

ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

PROPERTY MARKET Consolidation and scale up of operations in the BFSI sector in the inner city locations and growing absorption from logistics, healthcare and automobile sectors are notable recently. Major commodity markets have begun moving from the heart of Mumbai city to the suburbs. Several IT/ITeS companies specializing in the financial sector are occupying significant spaces in the suburban/peripheral locations and this would continue over the next couple of years owing to the cost arbitrage. The existing oversupply situation in the city is likely to last at least for the next 2 to 3 years thereby exercising a competitive pressure on the rentals. CAPITAL MARKETS Mumbai's downward trend in demand is likely to continue in the short term due to prevailing economic uncertainties in the western world and the due impact on the BFSI sector. As the current oversupply situation is resulting in a downward pressure on rentals in select pockets of the city, the upcoming supply in 2012 is expected to add additional weight. Amidst such market conditions, capital values across the city are also likely to remain stable over the next 2 to 3 years. During this period, the investment climate may not be positive under the competitive pressures from other cities such as Pune, Bangalore and Hyderabad.

PROPERTY MARKET NCR's office has become more diverse with growing interest seen from other sectors apart from the IT/ITeS. Recent pre-commitments are also indicating steady absorption for the next 1 to 2 years. As the demand for SEZ options is likely to be stable in the short term, the pace of construction of non-SEZ developments is expected to slow, reducing the overall supply in 2012. As a result, vacancy rate could drop gradually from 2012 onwards. Rentals in CBD are expected to increase in 2012 but Noida and Gurgaon are likely to be stable due to the higher vacancy rate and an abundant pipeline supply. CAPITAL MARKETS Capital values in the region are expected to remain stable in 2012 and grow moderately in 2013 in Delhi. The investment market in NCR which is dominated by owner occupiers and private investors has seen more numbers of private equity deals as compared to other cities in 2011. Also in terms of land transactions, Noida has outweighed other Indian cities. Markets such as Gurgaon and Noida are expected to remain stable in terms of rental and capital values due to the abundance of space options; leasing and investment demand are also likely to remain moderate until 2013.

JAKARTA

NCR

ECONOMY There has been considerable improvement in terms of infrastructure and the local economy is set to grow significantly in the next 4 to 5 years. The manufacturing hub and knowledge processing parks announced by the government are expected to attract huge investments and generate large scale employment in the region. Sizeable pre-commitments were witnessed in 2011 adding an impetus to the upcoming SEZ developments. Major players such as Ericsson, Metlife and Cognizant have expanded recently. Several others in the IT/ITeS sector are likely to follow the trend in the near term so as to reap the fiscal benefits from SEZ operations.

ECONOMY Indonesia's economy is targeted to grow between 6.3% and 6.7% in 2012 - the highest amongst the Southeast Asian states. In 2012, both government spending and public consumption will remain as major contributors to the country's economic growth, followed by local and foreign direct investment. Despite an expected slowing of growth in export activities, the government still forecasts exports to rise by 14.9% to 15.3%, while imports are predicted to rise by between 18.4% to 18.8% in 2012. Natural resources-based businesses will likely continue to enjoy further growth. Indonesian-based financial institutions are also expecting positive business improvements. PROPERTY MARKET Higher net office take-up is expected to occur in 2012, with growing demand from the booming sec-

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ASIA PACIFIC OFFICE FORECAST 2012 ­ 2013

tors of oil and mining, banking, and insurance, driven by office expansions, relocations and consolidations. Demand is projected to reach over 300,000 sq.m. in 2012, surpassing the last peak in 1997. On the supply side, more than 400,000 sq.m. of new space, including 7 Grade A office projects, will enter the CBD Jakarta office market. The occupancy rate is expected to remain at around 90.0% by end 2012 while average rental rates are expected to rise between 5% to 10% in line with stronger demand and rising building operational costs. CAPITAL MARKETS As at the end of 2011, the sales rate of existing and future projects are projected to have reached 94% and 80% respectively. In 2012 sales volumes are forecast to remain strong. The average sale price for offices in Jakarta's CBD is expected to be around US$2,100 per sq.m. by the end of December 2011, an increase of almost 20% during the year. Sales prices are expected to increase further as the remaining space availability in active projects becomes increasingly limited.

the 2.1 million square feet of new office space that will spring up in 2012 to 2013 in the CBD are still available.Vacancies are expected to trend up in 2012 with higher incidence of subleased space. Decentralization of non-core functions will continue due to the new supply of suburban hi-tech space available in the next two years. CAPITAL MARKETS Commercial investment sales are dominated by local investors and increasingly, by REITs, whose acquisitions are usually injections from the trust's sponsors. This trend is expected to continue as major developers, CapitaLand and Keppel Land, holds majority stakes in REITs. Asset values in the investment market have remained intact as local/regional investors remained confident of the island's longterm prospects. As in 2011, the market is expected to be dominated by intra-APAC investors in 2012 while yields could increase to reflect higher funding costs.

SINGAPORE

ECONOMY The export dependent economy is not expected to escape the effects of stagnating growth in the US and Europe. Quarter-on-quarter GDP growth in the island-state has decelerated dramatically - from 27.9% in the first quarter of 2011 to just 1.9% in the third quarter; growth in 2012 could fall below the long term average of 3.5%. Without a huge consumption base, the economy will increasingly look to Asia to drive growth. Its branding as one of Asia's gateway cities should give it some clout. The monetary authorities are expected to be more accommodative to the currency's exchange rate while some fiscal stimulus can be expected from next year's budget. PROPERTY MARKET Office demand on the island is dependent on the performance of the financial and professional services sector and employment within the sector. With the uncertain economic outlook, job growth in these sectors is likely to be weak. About 60% of

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For further details please contact: Sigrid Zialcita Managing Director, Research, Asia Pacific Email: sigrid.zialcita@ap.cushwake.com Address: 3 Church Street #09-03 Samsung Hub Singapore 049483 Tel: 65 6535 3232 Lai Wyai Kay Manager, Research Services, Asia Pacific Email: wyaikay.lai@ap.cushwake.com Address: 3 Church Street #09-03 Samsung Hub Singapore 049483 Tel: 65 6232 0864

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2011