Property Markets

1. Property Markets HONG KONG

2. Hong Kong Property Market Influence of Government – • Leasehold land tenure system • Principal generator of land supply • Disposals – application list system • Lease modifications • Agencies – URA, MTRC, KCRC • Dependence on land revenues • Major owner and until recently provider of social housing

3. A More Predictable Property Market? • Shift from trading to investment mentality • More comprehensive long term approach to planning and land use • Land supply driven policy • Non intervention by Administration • Re-think of housing policy • Market largely driven by fundamentals

4. Market Overview - Residential • Ultimate barometer of Hong Kong’s well being • In recovery mode but is it sustainable? • Three markets within a market plus public housing sector • Potential issues relating to supply in 2006-2007 • Vulnerability to increases in interest rates • Speculation at top end

5. Hong Kong :Home Ownership – private sector • Traditionally builds 25,000 – 35,000 units per annum • Land obtained through purchase / lease modification • In lead up to 1997 prices driven by speculative attitude and opportunity to make quick profit, not aspiration to own one’s home • Post 1997 market collapse – values fell by some 65%. Most families in negative equity • Correction lasted for best part of 6 years, now seeing market revival driven by fundamentals

6. Total Stock of Private Residential Units by Class in Hong Kong Class D (53,646 units) Class E (24,112 units) Class C (110,624 units) Class A (361,243)units) Class B (501,137 units) Classification of Residential Units by Class : Class A - saleable area less than 40m² Class B - saleable area of 40m² to 69.9m² Class C - saleable area of 70m² to 99.9m² Class D - saleable area of 100m² to 159.9m² Class E - saleable area of 160m² and above Sources: Rating and Valuation Department

7. Hong Kong Residential Market (Overall) Supply, Take-up & Vacancy Sources: Rating and Valuation Department, HKSAR & Insignia Brooke

8. Hong Kong Residential Market Annual Price Indices (1999 = 100) Sources: Rating and Valuation Department, HKSAR & Insignia Brooke

9. Hong Kong Residential Market Annual Rental Indices (1999 = 100) Sources: Rating and Valuation Department, HKSAR & Insignia Brooke

10. The Leighton Hill, Happy Valley

11. Housing the Community • The role of Government • Stabilising society • Facilitation • Financial support • Social need • The role of the private sector • Responding to market demand • Assisting Government with physical provision

12. Hong Kong : Home Ownership – Public Sector • HA provided 649,000 pr flats for 2,019,000 persons representing 30% of Hong Kong’s population • Sold 405,500 flats through various subsidised home ownership schemes • Provided over 100,000 loans for flat purchasers • Built 2.26M sq m of commercial/retail space and 100,000 car parking spaces

13. Hong Kong – Government Housing in 1970

14. Hong Kong : Wind of Change (I) • HA supply intended to complement / augment private sector but at times of high unaffordable prices HA became prime producer and competitor of private sector • Up to 100,000 units per annum at peak. Sold at discount from market value, quality good • Collapse of property market. Private sector now affordable. Rebellion by private sector producers

15. Hong Kong :Wind of Change (II) • Government now exited subsidised purchase provision and focus is to facilitate cost effective provision of quality public rental housing • Also move away from physical provision to financial assistance and entrusting private sector developers with building units which are then allocated to nominated Government buyers / tenants. Voucher system rather than physical provision under serious consideration

16. Modern Public Housing

17. Market Overview - Office • Relatively weak demand continues • Wide range of choice • Move back to Central • Few new entrants to market • Grey space disappeared but essentially a case of musical offices • Main rental movement restricted to Grade A and Central

18. Supply, Demand & Vacancy in Prime Areas New Supply & Take-up (net sq ft) Vacancy Rate (%) * As of September 04 Source : CB Richard Ellis Limited

19. Hong Kong

20. Market Overview - Retail • Strongest market sector, fuelled by Mainland visitors • Traditional areas of Causeway Bay & Tsim Sha Tsui in demand • Re-emergence of strata title investors • Re-configuration of 1st and 2nd floor podium space to retail use • HA REIT initiative

21. The Arcade, Cyberport

22. New Retail Property REIT • Link REIT to be launched in Hong Kong in mid-December • First Hong Kong REIT and one of biggest launches this year • 151 Housing Authority shopping centres and 79,000 carparks valued at US$4 billion

23. Market Overview – Other Sectors • Interest in 2/3 star hotels, fuelled by Mainland tour groups • Hotel occupancies up, but room rates still not back to pre SARS level • Conversion of industrial sites to hotel and guest house use. • General business zoning failed to rekindle interest in industrial stock • Loft experiment also unsuccessful

24. Market Prices and Yields • Residential 1. Mass Market US$6,500 per sq.m. 2.Luxury US$13,000 per sq.m. Yield 3-4% net • Office (Grade A) US$9,000 per sq.m. Yield 5% net • Retail (Zone A) US$50,000 per sq. Yield 6% net

25. Market prices and yields (continued) • Industrial US$1,500 per sq.m. Yield 8-9% net • Hotel (3/4 star) US$500,000 per room Yield 7%

26. The Market Players • Those for whom real estate is a significant part of their business • Property Developers • Property Investment companies and funds • Banks – funders of and lenders to real estate sector • Service providers • Contractors • Government

27. Health Warnings (I) • Continued Government involvement • Lack of meaningful institutional investor pool • Trading mentality still prevails • Lack of sophisticated asset management expertise • Failure to resolve long term policy/strategy issues • Harbour • Heritage • Sustainability • Urban Renewal

28. Health Warnings (II) • Absence of successful P/P model • Potential volatility of supply • Lack of joined up thinking • Need for strategic planning authority • No account yet taken of intangible returns

29. S.W. Kowloon – Aerial View

30. S.E. Kowloon – The Existing Platform

31. MTRC Mission To develop and manage a world class railway together with property and other related businesses, to enhance the quality of life in Hong Kong. We are a company that builds and operates railways and designs and builds communities.

32. Facts & Figures • Total route length : 88 km • Total no. of stations : 49 • Daily hours of operation : 19 hours • Total no. of passengers in 2003: 842M Average daily patronage : 2.3M (with a record high of 3.1M onChristmas Eve 2002)

33. MTRC Portfolio by Railway Lines Urban Lines 234,898 sq m 299,363 sq m 31,366 flats Development Total GFA:2.6 million sq. m. Management 28,729 flats 126,490 sq m 130,367 sq m Airport Railway 611,968 sq m 307,880 sq m 28,896 flats 294,072 sq m Development Total GFA:3.5 million sq. m. Management 254,190 sq m 46,170 sq m 13,345 flats Legend Office Retail Residential Hotel/Service Apt Tseung Kwan O Line Total GFA:2.3 million sq. m. Development 103,130 sq m 132,014 sq m 28,800 flats

34. Kowloon Airport Station - MTRC

35. Brown v/and Green Debate • Challenge of multiple ownership in urban areas • Attraction of green field approach • Ever growing demand for city living • Rural to urban migration • Absence of, and a reluctance to use, compulsory mechanisms • Growing attention to quality of life capital • Reducing pressure on existing infrastructure

36. Urban Regeneration Area

37. Ma On Shan, Shatin

38. Allocation of Development Gains • Differentiation between capital gain attributable to market forces and a direct increase in land value attributable to an administrative decision • No taxation of capital gain • Increases in value arising from planning decision or lease modification are shared, but reasonable allowance made for developer’s profit and for the before value of the asset • Payable at time of decision in full. Focuses the mind, but subsequent increases in value accrue to the developer only

39. Tuen Man New Town South

40. Historical Background – New Towns • Shortage of suitable building land in urban areas. • Challenge of multiple ownership • Areas of flat farming land in the New Territories • Influx of 2 million refugees from Mainland China • October 1972, Governor approved major housing programme to provide homes for 1.8 million people by mid-1980’s

41. Historical Background – New Towns (continued) • More than half of these were planned to be in New Towns • Adoption of long term comprehensive land use-transport-environmental framework • First generation New Towns – Concept of balanced development and self containment

42. Lessons Learnt – New Towns • Importance of early provision of infrastructure, schools, etc • Need for public housing / Government office decentralisation to act as catalyst and anchor • Private sector will follow but will not lead

43. Lessons Learnt – New Towns (continued) • Policy of self containment difficult to achieve in practice • Attraction/pull of bright lights and higher salaries in urban areas • High densities defeated green and other environmental priorities

44. Johnston Road Shophouses (1)

45. History of Urban Renewal Authority (URA) • Established May 2001 to set new direction for urban renewal in Hong Kong • Previous LDC constrained by requirement that each scheme should satisfy commercial viability criteria • Mission is to revitalise run down areas through redevelopment, revitalisation and rehabilitation

46. History of URA – Cont’d • At same time preserve culture and heritage and buildings with historical value • Endowed with compulsory purchase powers and ability to offer cash compensation and/or rehousing arrangements to affected parties • Tasked to implement 225 projects in 20 years, and 43 in first five years

47. Lessons Learnt – Urban Renewal • Social content renders most schemes commercially non-viable • Need for acceptance that social element is a cost to the community at large • Redevelopment should be a matter of last resort and focus should be on regeneration and revitalisation • Social impact and the people factor are key issues to be addressed and reality is that soft is often more important than hard

48. Johnston Road Shophouses after preservation

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