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Asia Pacific Real Estate Market

UBS Global Asset Management, Global Real Estate September 2013
Asia Pacific Real Estate Market mid-year review September 2013

Dear reader,
We are pleased to present our mid-year review for Asia Pacific (APAC) real estate. This report analyses the strategic views put
forward in our 2013 Outlook published earlier this year and re-examines our original market hypothesis based on an ever
changing set of political, fiscal and monetary variables. By analysing market cycles, capital flows and geo-political developments,
we hope the findings articulated in this report will assist investors in establishing a robust framework with which to meet their
specific investment objectives.

A key theme in the 2013 Outlook is the rapid increase in real estate fund flows. In the first six months of 2013, total direct
commercial real estate activity in APAC grew 21% year-on-year (YOY) according to Jones Lang LaSalle. APAC leads regional
transactions by a good distance aided by the transaction renaissance in Japan. This momentum should hold for the rest of 2013
and very possibly well into 2014. Despite the anemic income growth in most markets, the lack of more suitable investment
alternatives has seen capital flow into markets promising the lowest risk of market correction. As such, there is currently a
strong case for the Tokyo prime office space. Other markets appear to be set on a similar course, with the Singapore and Hong
Kong office markets seeing growing investment interest. Australia is another market that has attracted significant capital
interest, although investment underwriting standards are likely to indicate a growing preference for secure yields, and there may
not necessarily be sufficient downside protection on future income. Separately, value-added investment strategies are likely to
offer growing attraction to investors due to the widening yield spread, although pricings of selected peripherial assets are
already beginning to firm up.

UBS Global Asset Management, Global Real Estate has USD 64 billion under management1, with direct property investments in
continental Europe, Asia Pacific, the UK and US and in publicly traded real estate securities worldwide. The firms global
experience in private real estate investment, commercial mortgage financing and risk management is invaluable to our market
understanding.

We very much look forward to your comments on the analysis in this report and how we may make future editions of this
document more relevant to your requirements.

Yours faithfully,

Joe Kwan, PhD

Director of Global Real Estate Research Asia Pacific
UBS Global Asset Management
joe.kwan@ubs.com

1AuM stated on gross asset value basis, reflecting property values as at June 30, 2013, where available. Includes assets managed by our joint
venture with Mitsubishi Corporation, Japan.

1
Asia Pacific Real Estate Market mid-year review
China real estate market review
Exhibit 1 Economic summary
YoY (%) GDP
2013E 2014E
As of January 2013 8.0 8.0
As of July 2013 7.5 7.8
Source: UBS Investment Bank. Past performance and forecasts are not reliable indicators for future earnings. Possibility of loss exists.
Exhibit 2 Sector review
Sector Start of year expectations for 2013
Office Rental growth to slow in Shanghai and
Beijing given moderation in new demand.
Leasing activity to remain dominated by
domestic corporations. We argue against
any meaningful downtrends in both
markets although they may register one or
two quarters of flat growth.
Retail Outlook on the retail sector to remain
stable although rental growth expectations
will have to be managed. Within the core
markets in Shanghai and Beijing,
outperformance will remain confined to
prime locations. Further out, there appears
to be relatively good value in mass retail in
Tier-3 and 4 cities. The latter may be better
placed in the up cycle.
Residential Price recovery to continue to be a feature
through to 3Q13 before a new wave of
targeted policy controls start to be
introduced. This time round, we do not
expect the policy curb to be excessive and
should remain accommodative to first-time
buyers. Policy is expected to be more
targeted with Tier-3 cities in the central
region to enjoy some level of policy slack
compared to anywhere else.
Theme
Rationalization within the office sector will start to dictate
rental negotiations although it is likely to be countered by
muted development pipelines in Beijing and Shanghai.
Prime rents should continue to show relative resilience
due to ongoing premium for core locations.
Opportunity
Tight credit environment will eventually impact small-to-
medium scale developers. Market consolidation appears
September 2013
CPI Unemployment rate Industrial production
2013E 2014E 2013E 2014E 2013E 2014E
3.5 4.0 4.1 4.1 10.4 10.5
2.7 3.5 4.1 4.1 10.2 10.3
6 months on Views - 2013 2012 current
The pace of rental growth slowed in
Beijing over 1H13 as rental growth flattens
out. Office demand has moderated
meaningfully in part, as past demand has
been forward looking in nature. Likewise
in Shanghai, poor demand has led to two +
quarters of flat growth although a flat
development cycle should mitigate any
major downside risk.
Despite weakening macro prospects,
demand for well-located, well-managed
retail space in Shanghai and Beijing held
up well. Strong takeup from high street
retailers has offset the demand slowdown
in the luxury segment with this trend +
extending to Tier-2 and 3 cities. Well-
managed malls with the right tenant mix
continue to outperform peers in similar
sites. We continue to see better growth
potential in non-discretionary retail.
Transaction volumes remain stable at an
aggregate level although sales in Tier-1
cities are noticeably weaker than emerging
cities. As expected, policy reforms continue
to be measured and accommodative to +
first-time buyers. Pricing growth is more
restrained with some cities recording
marginal increases. With income growth
preserved, improving affordability should
help mitigate potential policy error risks.
Mass housing products have the strongest
alignment to current policies, presenting
the best outlook.
more probable than before, opening up opportunities for
good quality risk-adjusted investments/projects. Prime
picks are for mass residential and mid-end retail in
selected lower-tiered cities.
Risk
Mismanagement of current economic reforms could
potentially result in social unrest. The significance of such
a threat may have a destabilizing effect and potentially
expose the economy to further policy error risks.
2
Asia Pacific Real Estate Market mid-year review
Japan real estate market review
Exhibit 3 Economic summary
YoY (%) GDP
2013E 2014E
As of January 2013 1.3 1.8
As of July 2013 1.6 1.6
Source: UBS Investment Bank. Past performance and forecasts are not reliable indicators for future earnings. Possibility of loss exists.
Exhibit 4 Sector review
Sector Start of year expectations for 2013
Office We remain cautiously optimistic on the
rental outlook in Tokyo Central 5 Wards
(C5W). The market appears set for a
cyclical rebound although the recovery is
expected to be long and gradual. We
should point out that the typical lease
structure in Japan does not allow for rapid
rental adjustments and any expectation for
a swift recovery is therefore flawed. In
contrast, given the clear preference for
quality and location, we fully stand by our
expectations that secondary assets will
continue to be priced down both in terms
of rents and price.
Industrial Prospects for both Tokyo and Osaka
logistics markets remain positive on the
back of stable demand. A growing supply
pipeline will hinder rent negotiations
although owners of well-located assets
should still be able to drive terms. The
aggregate rental profile for 2013 will likely
remain flat.
Themes
Fast recovering corporate sentiment, last seen post-
2007 as indicated by the recent Tankan surveys, will
continue to drive Tokyos occupier market and lead to
a quicker than expected recovery in the prime office
space. Given the low cost of debt/equity, competition
for prime assets will likely lead to a spillover towards
secondary assets in peripheral locations. Investors may
need to take on higher risk to gain office exposure.
Investment demand for logistics assets will continue to
drive construction starts, at least in the foreseeable
term. Near-term supply/demand inbalances should be
countered by improvements to store and online
retailing volumes; however vacancy rates beyond 2013
are still expected to trend upwards. The abundance of
capital should continue to induce further level of
inward yield movements, albeit moderately.
September 2013
CPI Unemployment rate Industrial production
2013E 2014E 2013E 2014E 2013E 2014E
0.3 2.3 4.1 4.0 1.1 4.3
0 1.9 - - -0.1 3.8
6 months on Views - 2013 2012 current
The impact of Abenomics has had a
stronger than expected impact on business
sentiment with demand for Tokyo office
picking up, albeit from a low base. Pre-
commitment levels for prime supply are at
a recent high as corporates growth +
expectations strengthen. Prime rents are
observing steady increases leading to
growing expectations that a wider
recovery; e.g. secondary stock, is not far
off. Within the capital market, chase for
transactable assets within Tokyo C5W
intensified as yield hurdles in the listed
market (JREITs) fall. Cap rates for
accessible stock (largely Grade B) will start
to compress especially as income prospects
improve and pressure to transact increases.
As expected, strong levels of new
construction starts have flattened rental
profiles. Nonetheless, the rebound in
Japan trade output has improved logistic
prospects, and if the supply pipeline does
not extend significantly beyond current +
levels, prime rents in Tokyo and Osaka
should start to register positive gains.
Opportunity
We remain optimistic about the near-term prospects for
Japan and see the Tokyo C5W office market as a strong
proxy of such growth. Whilst asset valuations are
beginning to recover, it is still nowhere near the level
seen prior to the GFC. That said, with accessibility fast
becoming a hurdle for most investors, secondary assets
within the C5W may well present strong risk-adjusted
return opportunities
Risk
With inflation a real near-term outcome, any re-pricing of
government bonds could well destabilize the financial
markets and derail the current macro momentum. Much
will depend on how PM Shinzo Abe is able to galvanize
his political forces and execute the much talked about
and needed structural reforms.
3
Asia Pacific Real Estate Market mid-year review
Australia real estate market review
Exhibit 5 Economic summary
YoY (%) GDP
2013E 2014E
As of January 2013 3.0
As of July 2013 2.8
Source: UBS Investment Bank Past performance and forecasts are not reliable indicators for future earnings. Possibility of loss exists.
Exhibit 6 Sector review
Sector Start of year expectations for 2013
Office The lack of demand drivers will continue to
curtail any suggestions of market
recoveries in Melbourne and Sydney. Large
domestic financial institutions remain
cautious about making headcount
commitments and this is unlikely to change
in the next 12 months.
Logistics Outlook for the logistics sector is slowly
picking up due to the confluence of
positive factors. Whilst this may put a floor
under any further rental declines, the
momentum does not appear to be
significant enough to drive an outright
sector recovery.
Theme
The strong disjoint between the office capital market and
market fundamentals is expected to remain a strong
feature as yield spreads narrow from a record high.
Premiums will continue to be paid for core assets due to
stronger income profiles, although the opposite is also
true, with secondary assets poised for a deeper
correction. Sydney and Melbourne should lead the
recovery cycle as the macro picture improves.
Opportunity
Despite the macro headwinds, current pricing of
core office yields does offer strong strategic
opportunities.
September 2013
CPI Unemployment rate Industrial production
2013E 2014E 2013E 2014E 2013E 2014E
3.3 2.5 2.5 5.5 5.3 -78.1 2.0
2.0 2.3 2.4 5.7 5.6 2.8 2.0
6 months on Views - 2013 2012 current
Lingering concerns about the economic
cycle have affected occupier demand as
businesses hold back on expansion. Recent
office benchmarks continue to point to
areas of weakness, although there is a
growing consensus that net effective rents +
will start to bottom out in 2014. Any
pickup thereafter will likely have to
coincide with recovery elsewhere; e.g.
global trade. As with Tokyo, Sydney and
Melbourne are seeing a strong influx of
investment capital, and cap rates within
these core markets are starting to firm up
ahead of fundamentals. Elsewhere,
unfolding difficulties in the commodity
sector should start to impact markets like
Perth and Brisbane, particularly after
recent upswings. These markets currently
represent the clearest risks.
A moderating pipeline supply has
positioned the sector well for rental
recovery, although this has been affected
by a rebalancing away from mining.
However, as the cash rate is cut further,
the attractiveness of this sector will +
become apparent given the domestic
dependence on residential construction
and retail spending. As with the rest of the
commercial sector, patchy occupier
demand has yet to deter investment
demand and cap rates are compressing
meaningfully in some core markets.
Long-hold strategies should be well placed to deliver
value, particularly if Australia is to return to trend growth.
For new market entrants, the ability to price in current
market weakness appears imperative
Risk
Concerns continue to revolve around Australias ability to
transition from a mining-dependent economy to a
consumer-led economy. The lack of political cohesion
could, however, prove a potential stumbling block which
could impair business confidence in the recovery and
push back the cyclical demand upswing within the real
estate space
4
Asia Pacific Real Estate Market mid-year review
Singapore real estate market review
Exhibit 7 Economic summary
YoY (%) GDP
2013E 2014E
As of January 2013 3.0 4.5
As of July 2013 3.0 4.5
Source: UBS Investment Bank Past performance and forecasts are not reliable indicators for future earnings. Possibility of loss exists.
Exhibit 8 Sector review
Sector Start of year expectations for 2013
Office The outlook for prime Singapore office
space is for an improvement on the
previous year. Yields are expected to
contract ahead of underlying asset
performance whereas income recovery
should be more apparent closer to the end
of 2013. The intensity of this rebound will
rely heavily on the conditions around the
banking sector.
Retail Growth prospects in the retail space look
limited given a slow down in spending
growth and uncompetitive business costs.
Sector performance will likely trend
sideway over the immediate term.
Residential The restrictive housing measures may be
peaking, while scope for further tightening
appears limited. Whilst strong underlying
demand will cushion any pricing weakness,
policy fatigue may eventually point to a
mild price moderation in the mass
segment. Price adjustments will moderate
in the luxury space given the higher level of
correction over the past two years.
Theme
Investment demand for prime office assets has firmed up
as investors look to capitalize on a cyclical rebound.
However, the favorable cash position of asset holders
combined with a lack of alternative capital deployment
strategy means transaction liquidity will likely be
constricted. Projected income trajectory may struggle to
justify the current asking price but there will be some
investors who overpay.
September 2013
CPI Unemployment rate Industrial production
2013E 2014E 2013E 2014E 2013E 2014E
3.5 2.8 2.2 2.2 3.0 5.6
3.6 2.8 2.2 2.2 -1.5 3.8
6 months on Views - 2013 2012 current
Corporate confidence continues to trend
upwards with more companies looking to
hire relative to the start of the year. Whilst
leasing activity remains tepid, vacancy
rates across the CBD edged lower due to
the lack of new supply. Prime rents grew
for the first time in seven quarters
suggesting the market is probably past the
worse. A rebound in capital values has
been ahead of income recovery, and
values have risen circa 5% since the start
of the year. As expected, yields have
contracted ahead of a more sustained
rebound in income.
Retail rents continue their flat trajectory on
the back of a soft economic outlook and
ongoing service labor constraints. There
are however signs of return to ing
occupancy demand evidenced by the
strong pre-commitment level at Orchard +
Gateway, part of a limited prime supply
pipeline in 2013. Clearly retailers are still
willing to take up additional space in the
best locations. The rental gap between the
prime and secondary stock should widen
for the rest of the year.
As expected, no new direct housing policy
has been introduced since our March
report, although conditions around home
financing continue to tighten. Pre-emptive
moves to anticipate interest rate rises
futher restrict market liquidity. Alongside +
increasing holding costs, we continue to
call for a moderate price correction within
the residential space.
Opportunity
Appetite for peripheral office stock may pick up on the
back of a very tight prime market. Potential to pick up
good risk-adjusted returns.
Risk
Macro weakness continues to dominate our thoughts on
risk, although the economy appears to be in a better
position compared to March.
5
Asia Pacific Real Estate Market mid-year review
Hong Kong real estate market review
Exhibit 9 Economic summary
YoY (%) GDP
2013E 2014E
As of January 2013 4.0 4.5
As of July 2013 3.0 4.0
Past performance and forecasts are not reliable indicators for future earnings. Possibility of loss exists.
Exhibit 10 Sector review
Sector Start of year expectations for 2013
Office Prime office rents will likely see further
moderation in the first half of 2013 before
seeing mild recovery towards the end of
the year. Prime rent should grow slightly
given the level of correction in 2012. The
lack of meaningful leasing demand and the
intensity of th ecurrent cost cutting drive
will limit the scope for this rental recovery
as and when it happens.
Retail The growth landscape has shifted slightly
in the retail space. Expectations of
continued retail growth are unsustainable
and would have to be managed. Rents
should continue to trend upwards in view
of past momentum. Any increase will likely
be a lot more hard fought from the
landlords perspective.
Theme
Decentralization of the core office cluster will continue to
play out, suggesting pace of rental increases in off-core
locations will continue to outpace that in the tradition
CBD. This could trigger a series of redevelopment
initiatives within Central which would at the very least be
supportive of the current moderate rental rebound.
September 2013
CPI Unemployment rate Industrial production
2013E 2014E 2013E 2014E 2013E 2014E
4.0 4.1 3.5 3.5 2.0 4.4
3.9 4.1 3.5 3.5 2.0 4.4
6 months on Views - 2013 2012 current
Leasing sentiments rebounded towards
the end of 1H13 albeit from a low base.
As vacancies tighten up across all sub-
markets, prime rents in Central registered
positive quarterly growth for the first time
since 3Q11. As expected, the current +
recovery continues to be weighed down by
macro headwinds as well as cheaper
alternatives outside the core CBD. Impact
from the latter may progressively be more
muted as rental gaps continue to narrow.
The confluence of negative business
factors will continue to cap current
recovery, leading to modest growth at
best. To a good extent, this will limit
investors willingness to pay for any asset
beyond what current income can support.
Corrections in gold prices spiked retail
receipts in 2Q13 and have in part masked
ongoing macro challenges. Retail rents
grew circa 2% in 2Q13, reaching a new
historic high. Important to be mindful that
mainland tourist growth has slowed and +
will likely continue to do so as domestic
GDP growth moderates and tax arbitrage
narrows. In addition, if interest rates do
move upwards, the HKD which tracks the
USD should strengthen, and the net effect
could well work against retail spending. As
such, we remain bearish on the longevity
and pace of rental growth in Hong Kong.
This has been picked up by investors and
capital values are beginning to better
reflect this reality.
Opportunity
This continues to skew towards off-prime assets in
decentralized locations. As the weight of new leases
shifts towards these peripheral locations, there remain
good value investment propositions for early movers. This
is particularly relevant for off-shore investors looking to
gain exposure in a highly competitive market
Risk
We continue to view office decentralization as an
important structural shift. Investors with ongoing
exposure should be informed of the potential re-
pricing risk within the traditional core in Central.
6
Asia Pacific Real Estate Market mid-year review September 2013

Joe Kwan, PhD For more information please contact

Research and Strategy APAC UBS Global Asset Management (UK) Ltd
One Raffles Quay
#50-01, North Tower,
Singapore 048583
Tel. +65 6495 8000
Fax +65 6495 5456
www.ubs.com/realestate

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