CB Richard Ellis Reports that First Half 2007 Sees Buoyant Real Estate Investment Conditions in Asia

Strong buying interest was witnessed in Japan and Singapore in the first half of 2007, with the collective investment amount in large-lot deals in the two countries accounting for over half of the regional total. The buying spree by international institutions and REITs continued as they remained active throughout the region. The combined value of the quarter´s ten largest investment deals amounted to US$6.9 billion, with the acquisition of a portfolio of industrial properties by Secured Capital Japan and DLJ Real Estate Capital Partners at a price over JPY 160 billion topping the list.

Japan has recorded nine consecutive quarters of economic expansion, and recorded an annualized real growth rate of 3.3 per cent during the first quarter of 2007, with the major boost coming from robust corporate capital investment. Investors remained overwhelmingly positive regarding the Japanese real estate market and most real estate indicators point to a continued upbeat market. J-REITs remained the dominant players as they added to their portfolios not only in Tokyo but throughout the country. Nevertheless, with the financial markets pricing a further interest rate increase, the 10-year JGB yield increased from a 1.6 per cent average in April to a 1.9 per cent average in June, shrinking the positive spread of NOI yields.

In Singapore, investment transactions totalling S$24.63 billion were recorded in the first half of 2007, a 70 per cent increase year on year. The robust momentum was largely driven by acquisitions of development sites. The office investment market remained brisk, with both the number and value of transactions by overseas investors increasing as private equity groups and foreign funds displayed keen interest in office properties. In the most significant office transaction in the first half of 2007, MCP Raffle, a unit of Macquarie Global Property Advisors, purchased Temasek Tower for S$1.04 billion.

Investors remained confident in the Hong Kong property market on the back of the city´s continued economic growth and upbeat economic outlook. Investment activities were particularly robust in the luxury residential and office sectors, with premium properties highly sought after by both investors and end-users. Notable transactions included the en bloc acquisition of Lodge on the Park in Mid-Levels for HK$1.0 billion by a local developer and Citigroup Property Investors´ purchase of two Central buildings, Crocodile House and the adjacent Ananda Tower, for a combined HK$1.5 billion.

Strong demand in Seoul´s office sector continued to drive positive investment momentum during the first half of 2007, with the steady increase in capital values of prime office buildings attracting both domestic and foreign investors. MAPs Investment Management was particularly aggressive, settling a forward transaction by purchasing Glostar Square Garden, due to be completed in 2010 in the CBD, for KRW 843 billion. Another active domestic investor, KORAMCO, will close the acquisition of Seoul City Tower in July, adding the CBD property to the portfolio of its KOCREF NPS 1 K-REIT.

The Chinese government continued to step up efforts to control real estate investment in the first half of 2007 in order to maintain market stability and avoid overheating in the economy. Between January and June the People´s Bank of China raised the bank deposit reserve ratio five times, from 9 to 11.5 per cent, effectively removing liquidity from the market. The Bank also twice increased the benchmark rates of bank loans and deposits.

Control over foreign investment in the real estate sector was further tightened. In May, the Ministry of Commerce and State Administration of Foreign Exchange (SAFE) released Circular 50, or the "Circular on Further Enhancing the Monitoring and Approval of Foreign Direct Investment in the Real Estate Industry", as a follow-up to Circular 171 released in 2006. Circular 50 stipulates that the acquisition of land use rights or property title is a prerequisite for establishing foreign-owned onshore real estate entities, and seeks tighter control of foreign investment in high-end properties. Complex approval processes make it more difficult for new entrants to obtain development rights in the open market or purchase income- generating properties from local partners. Moreover, in order to control overseas investment in real estate via offshore equity transfers, the Circular requires strict regulation of so-called "return investment" - in this case, referring to local property companies setting up offshore firms to reinvest in China´s property market.

However, the macroeconomic measures aimed at curbing the overheating investment market have not led to a reduction in interest among overseas investors and institutional investors are still keen on acquiring quality properties, particularly in the office and retail sectors.

Both local and overseas developers continued to display a strong appetite for development projects in China. The review period saw Hopson Development´s acquisition stakes in a luxury residential development in Beijing for HK$6 billion stake acquisition registered as the largest investment transaction in China during the first half of 2007. Shanghai remained the leading destination for foreign institutional capital, with JP Morgan making its first foray in the city by partnering with the domestic giant China Overseas Land & Investment to develop a Grade A office building in Puxi. In Guangzhou, the land sales market remained buoyant, with both the office and residential sectors registering record high accommodation values in recent land auctions. Meanwhile, 15 industrial sites were auctioned at the opening bids prior to the release of municipal-level implementation details regarding public sales of industrial land.

The Taipei investment market remained active in the first half of 2007, recording several major transactions. Sinyi Realty bought the Yageo Corporation Building for about US$150.5 million in order to relocate its headquarters to Xinyi-Jilong, while Cathay Life Insurance purchased several floors of the CEC Dunnan Building, located in the Minsheng-Dunhua area, for approximately US$116.5 million. As the flow of projects in the construction pipeline thins, office rentals are expected to trend upward, thus enhancing yields in the office sector.

Following the escalation of interest rates and imposition of a service tax on rental income in the first quarter, real estate investment activity in India was nearly static during the second quarter, characterised by investor caution in anticipation of a correction in prices in certain segments. Market sentiment is tending towards a correction, and higher interest rates and increased prices have also dampened investor and end-user appetite for significant asset purchases.

Office space proved an exception to the rule, seeing a reasonable amount of investment activity due to the scarcity of investment-grade assets. Demand continued to outweigh supply, resulting in continued tight office vacancy rates and rental growth in the National Capital Region. Developers expressed keen interest in warehousing and logistics during the quarter and are looking for financial and operational partnerships with international warehousing and logistics companies.

Turning to Southeast Asia, REITs and institutional investors dominated activity in Kuala Lumpur´s investment market during the period under review. The office sector saw the bulk of notable transactions, in a trend largely attributable to the increasing rentals arising from tight supply. In Thailand, local and overseas investors focused on downtown Bangkok and major tourist destinations such as Phuket in the second quarter of 2007. Business process outsourcing (BPO) in the Philippines is showing clear indications of strong and steady growth, attracting much interest from developers and overseas investors. The investment market in Indonesia has continued to improve following the enactment of the 2007 Investment Law providing for equal treatment of local and overseas investors. In the second quarter President Yudhoyono signed a regulation regarding Special Economic Zones, which is also expected to spur investment.