Property MarketsProperty Markets

HONG KONGHONG KONG

PPPPSS

Hong Kong Property MarketHong Kong Property Market

Influence of Government –Influence of Government –Leasehold land tenure systemLeasehold land tenure systemPrincipal generator of land supplyPrincipal generator of land supply– Disposals – application list systemDisposals – application list system– Lease modificationsLease modifications– Agencies – URA, MTRC, KCRCAgencies – URA, MTRC, KCRC

Dependence on land revenuesDependence on land revenuesMajor owner and until recently provider of Major owner and until recently provider of social housingsocial housing

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A More Predictable Property Market?A More Predictable Property Market?

Shift from trading to investment mentalityShift from trading to investment mentality

More comprehensive long term approach More comprehensive long term approach to planning and land useto planning and land use

Land supply driven policyLand supply driven policy

Non intervention by AdministrationNon intervention by Administration

Re-think of housing policyRe-think of housing policy

Market largely driven by fundamentalsMarket largely driven by fundamentals

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Market Overview - ResidentialMarket Overview - Residential

Ultimate barometer of Hong Kong’s well Ultimate barometer of Hong Kong’s well beingbeingIn recovery mode but is it sustainable?In recovery mode but is it sustainable?Three markets within a market plus public Three markets within a market plus public housing sectorhousing sectorPotential issues relating to supply in 2006-Potential issues relating to supply in 2006-20072007Vulnerability to increases in interest rates Vulnerability to increases in interest rates Speculation at top endSpeculation at top end

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Hong KongHong Kong : :Home Ownership – private sectorHome Ownership – private sectorTraditionally builds 25,000 – 35,000 units per Traditionally builds 25,000 – 35,000 units per annumannumLand obtained through purchase / lease Land obtained through purchase / lease modificationmodificationIn lead up to 1997 prices driven by speculative In lead up to 1997 prices driven by speculative attitude and opportunity to make quick profit, not attitude and opportunity to make quick profit, not aspiration to own one’s homeaspiration to own one’s homePost 1997 market collapse – values fell by some Post 1997 market collapse – values fell by some 65%. Most families in negative equity65%. Most families in negative equityCorrection lasted for best part of 6 years, now Correction lasted for best part of 6 years, now seeing market revival driven by fundamentalsseeing market revival driven by fundamentals

Total Stock of Private Residential Units by Class in Hong Kong

Total Stock of Private Residential Units by Class in Hong Kong

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

34%

48%

11%5% 2%

Class B (501,137 units)

Class A (361,243)units)

Class D (53,646 units)

Class C (110,624 units)

Class E (24,112 units)

Sources: Rating and Valuation DepartmentPPPPSS

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Supply and Take-Up (units)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Vacancy (%)

Supply 29,400 33,380 26,222 27,673 34,173 22,621 19,875 18,202 22,278 35,322 25,790 26,262 29,428 34,329 22,288 21,281 18,736

Take-up 30,675 23,348 22,683 27,316 23,245 24,715 20,476 15,090 13,044 19,560 29,180 19,318 20,000 23,000 24,000 23,000 26,000

Vacancy Rate 3.5 4.2 4.2 3.9 4.7 4.1 3.7 3.8 4.5 5.9 5.4 5.7 6.3 7.0 6.6 6.2 5.4

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F 2005F 2006F

Hong Kong Residential Market (Overall) Supply,

Take-up & Vacancy

Hong Kong Residential Market (Overall) Supply,

Take-up & Vacancy

Sources: Rating and Valuation Department, HKSAR & Insignia BrookePPPPSS

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

Price Index (1999=100)

Indices (Overall) 61.1 85.2 93.0 114.9 107.3 116.9 163.1 117.1 100.0 89.6 78.7 71.5 70.8 74.3 81.7 89.9

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F 2005F 2006F

Hong Kong Residential Market

Annual Price Indices (1999 = 100)

Hong Kong Residential Market

Annual Price Indices (1999 = 100)

Sources: Rating and Valuation Department, HKSAR & Insignia BrookePPPPSS

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

Rental Index (1999=100)

Indices (Overall) 82.4 90.4 97.4 118.1 120.7 119.0 134.5 112.6 100.0 98.1 95.4 85.4 81.1 86.8 95.5 105

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F 2005F 2006F

Hong Kong Residential Market

Annual Rental Indices (1999 = 100)

Hong Kong Residential Market

Annual Rental Indices (1999 = 100)

Sources: Rating and Valuation Department, HKSAR & Insignia BrookePPPPSS

The Leighton Hill, Happy Valley

PPPPSS

Housing the CommunityHousing the Community

The role of GovernmentThe role of Government– Stabilising society Stabilising society – Facilitation Facilitation – Financial supportFinancial support– Social needSocial need

The role of the private sectorThe role of the private sector– Responding to market demandResponding to market demand– Assisting Government with physical provisionAssisting Government with physical provision

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Hong Kong : Hong Kong : Home Ownership – Public SectorHome Ownership – Public SectorHA provided 649,000 pr flats for 2,019,000 HA provided 649,000 pr flats for 2,019,000 persons representing 30% of Hong Kong’s persons representing 30% of Hong Kong’s populationpopulationSold 405,500 flats through various subsidised Sold 405,500 flats through various subsidised home ownership schemeshome ownership schemesProvided over 100,000 loans for flat Provided over 100,000 loans for flat purchaserspurchasersBuilt 2.26M sq m of commercial/retail space Built 2.26M sq m of commercial/retail space and 100,000 car parking spacesand 100,000 car parking spaces

Hong Kong – Government Housing in 1970

PPPPSS

Hong Kong : Hong Kong : Wind of Change (I)Wind of Change (I)

HA supply intended to complement / augment HA supply intended to complement / augment private sector but at times of high private sector but at times of high unaffordable prices HA became prime unaffordable prices HA became prime producer and competitor of private sectorproducer and competitor of private sector

Up to 100,000 units per annum at peak. Sold Up to 100,000 units per annum at peak. Sold at discount from market value, quality goodat discount from market value, quality good

Collapse of property market. Private sector Collapse of property market. Private sector now affordable. Rebellion by private sector now affordable. Rebellion by private sector producersproducers

PPPPSS

Hong Kong :Hong Kong :Wind of Change (II)Wind of Change (II)

Government now exited subsidised purchase Government now exited subsidised purchase provision and focus is to facilitate cost provision and focus is to facilitate cost effective provision of quality public rental effective provision of quality public rental housinghousingAlso move away from physical provision to Also move away from physical provision to financial assistance and entrusting private financial assistance and entrusting private sector developers with building units which sector developers with building units which are then allocated to nominated Government are then allocated to nominated Government buyers / tenants. Voucher system rather than buyers / tenants. Voucher system rather than physical provision under serious physical provision under serious considerationconsideration

Modern Public HousingModern Public Housing

PPPPSS

Market Overview - OfficeMarket Overview - Office

Relatively weak demand continuesRelatively weak demand continues

Wide range of choiceWide range of choice

Move back to CentralMove back to Central

Few new entrants to marketFew new entrants to market

Grey space disappeared but essentially a Grey space disappeared but essentially a case of musical officescase of musical offices

Main rental movement restricted to Grade Main rental movement restricted to Grade A and CentralA and Central

Supply, Demand & Vacancy in Prime AreasSupply, Demand & Vacancy in Prime Areas

New Supply & Take-up (net sq ft)

Vacancy Rate (%)

-1,000,000

0

1,000,000

2,000,000

3,000,000

4,000,0001990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004*

-4

0

4

8

12

16

Supply Take-up Vacancy Rate

* As of September 04 Source : CB Richard Ellis Limited

Hong Kong

PPPPSS

Market Overview - RetailMarket Overview - Retail

Strongest market sector, fuelled by Strongest market sector, fuelled by Mainland visitorsMainland visitors

Traditional areas of Causeway Bay & Tsim Traditional areas of Causeway Bay & Tsim Sha Tsui in demandSha Tsui in demand

Re-emergence of strata title investorsRe-emergence of strata title investors

Re-configuration of 1Re-configuration of 1stst and 2 and 2ndnd floor podium floor podium space to retail usespace to retail use

HA REIT initiative HA REIT initiative

The Arcade, CyberportThe Arcade, Cyberport

PPPPSS

New Retail Property REITNew Retail Property REIT

Link REIT to be launched in Hong Kong in Link REIT to be launched in Hong Kong in mid-December mid-December

First Hong Kong REIT and one of biggest First Hong Kong REIT and one of biggest launches this yearlaunches this year

151 Housing Authority shopping centres 151 Housing Authority shopping centres and 79,000 carparks valued at US$4 and 79,000 carparks valued at US$4 billionbillion

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Market Overview – Other SectorsMarket Overview – Other Sectors

Interest in 2/3 star hotels, fuelled by Interest in 2/3 star hotels, fuelled by Mainland tour groupsMainland tour groupsHotel occupancies up, but room rates still Hotel occupancies up, but room rates still not back to pre SARS levelnot back to pre SARS levelConversion of industrial sites to hotel and Conversion of industrial sites to hotel and guest house use.guest house use.General business zoning failed to rekindle General business zoning failed to rekindle interest in industrial stockinterest in industrial stockLoft experiment also unsuccessful Loft experiment also unsuccessful

PPPPSS

Market Prices and YieldsMarket Prices and Yields

ResidentialResidential1.1.Mass MarketMass Market US$6,500 per sq.m.US$6,500 per sq.m.2.Luxury2.Luxury US$13,000 per sq.m.US$13,000 per sq.m.YieldYield 3-4% net3-4% net

Office (Grade A)Office (Grade A) US$9,000 per sq.m.US$9,000 per sq.m.YieldYield 5% net5% net

Retail (Zone A)Retail (Zone A)US$50,000 per sq.US$50,000 per sq.YieldYield 6% net6% net

PPPPSS

Market prices and yields Market prices and yields (continued)(continued)

IndustrialIndustrial US$1,500 per sq.m.US$1,500 per sq.m.

YieldYield 8-9% net8-9% net

Hotel (3/4 star)Hotel (3/4 star) US$500,000 per roomUS$500,000 per room

YieldYield 7%7%

PPPPSS

The Market PlayersThe Market Players

Those for whom real estate is a significant Those for whom real estate is a significant part of their businesspart of their business– Property DevelopersProperty Developers– Property Investment companies and fundsProperty Investment companies and funds– Banks – funders of and lenders to real estate Banks – funders of and lenders to real estate

sectorsector– Service providersService providers– ContractorsContractors– GovernmentGovernment

PPPPSS

Health Warnings (I)Health Warnings (I)

Continued Government involvement Continued Government involvement Lack of meaningful institutional investor poolLack of meaningful institutional investor poolTrading mentality still prevailsTrading mentality still prevailsLack of sophisticated asset management Lack of sophisticated asset management expertise expertise Failure to resolve long term policy/strategy issuesFailure to resolve long term policy/strategy issues– HarbourHarbour– HeritageHeritage– SustainabilitySustainability– Urban RenewalUrban Renewal

PPPPSS

Health Warnings (II)Health Warnings (II)

Absence of successful P/P modelAbsence of successful P/P model

Potential volatility of supplyPotential volatility of supply

Lack of joined up thinkingLack of joined up thinking

Need for strategic planning authority Need for strategic planning authority

No account yet taken of intangible returns No account yet taken of intangible returns

S.W. Kowloon – Aerial ViewS.W. Kowloon – Aerial View

S.E. Kowloon – The Existing PlatformS.E. Kowloon – The Existing Platform

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To develop and manage a world class To develop and manage a world class railway together with property and other railway together with property and other related businesses, to enhance the related businesses, to enhance the quality of life in Hong Kong.quality of life in Hong Kong.

We are a company that builds and operates raWe are a company that builds and operates railways ilways andand designs and builds communities. designs and builds communities.

MTRC MissionMTRC Mission

Average daily patronage : Average daily patronage : 2.3M2.3M(with a record high of 3.1M on(with a record high of 3.1M onChristmas Eve 2002)Christmas Eve 2002)

Total route length : Total route length : 88 km88 km

Total no. of stations : Total no. of stations : 4949

Daily hours of operation : Daily hours of operation : 19 hours19 hours

Total no. of passengers in 2003: Total no. of passengers in 2003: 842M842M

Facts & Figures

Legend

Office

Retail

Residential

Hotel/Service Apt

TotalTotal GFA GFA: : 2.6 million s2.6 million sq. m.q. m.

TotalTotal GFA GFA: : 33.5 .5 million smillion sq. m.q. m.

TotalTotal GFA GFA: : 2.3 million s2.3 million sq. m.q. m. Tseung Kwan O LineTseung Kwan O Line

UUrban Linesrban Lines

Airport RailwayAirport Railway

DevelopmentDevelopment

ManagementManagement

103,130 sq m 132,014 sq m 28,800 flats

254,190 sq m

307,880 sq m 28,896 flats 294,072 sq m

46,170 sq m 13,345 flats

611,968 sq m

126,490 sq m 130,367 sq m

28,729 flats

299,363 sq m 31,366 flats234,898 sq m

DevelopmentDevelopment

ManagementManagement

DevelopmentDevelopment

MTRC Portfolio by Railway LinesMTRC Portfolio by Railway Lines

Kowloon Airport Station - MTRCKowloon Airport Station - MTRC

PPPPSS

Brown v/and Green DebateBrown v/and Green Debate

Challenge of multiple ownership in urban areasChallenge of multiple ownership in urban areas

Attraction of green field approachAttraction of green field approach

Ever growing demand for city livingEver growing demand for city living

Rural to urban migrationRural to urban migration

Absence of, and a reluctance to use, compulsory Absence of, and a reluctance to use, compulsory mechanismsmechanisms

Growing attention to quality of life capitalGrowing attention to quality of life capital

Reducing pressure on existing infrastructureReducing pressure on existing infrastructure

Urban Regeneration AreaUrban Regeneration Area

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Ma On Shan, ShatinMa On Shan, Shatin

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Allocation of Development GainsAllocation of Development Gains

Differentiation between capital gain attributable Differentiation between capital gain attributable to market forces and a direct increase in land to market forces and a direct increase in land value attributable to an administrative decisionvalue attributable to an administrative decisionNo taxation of capital gainNo taxation of capital gainIncreases in value arising from planning decision Increases in value arising from planning decision or lease modification are shared, but reasonable or lease modification are shared, but reasonable allowance made for developer’s profit and for the allowance made for developer’s profit and for the before value of the assetbefore value of the assetPayable at time of decision in full. Focuses the Payable at time of decision in full. Focuses the mind, but subsequent increases in value accrue mind, but subsequent increases in value accrue to the developer only to the developer only

Tuen Man New Town SouthTuen Man New Town South

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Historical Background – New Historical Background – New TownsTowns

Shortage of suitable building land in urban Shortage of suitable building land in urban areas.areas.

Challenge of multiple ownershipChallenge of multiple ownership

Areas of flat farming land in the New Areas of flat farming land in the New TerritoriesTerritories

Influx of 2 million refugees from Mainland Influx of 2 million refugees from Mainland ChinaChina

October 1972, Governor approved major October 1972, Governor approved major housing programme to provide homes for housing programme to provide homes for 1.8 million people by mid-1980’s1.8 million people by mid-1980’s

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Historical Background – New Historical Background – New Towns Towns (continued)(continued)

More than half of these were planned to More than half of these were planned to be in New Townsbe in New Towns

Adoption of long term comprehensive landAdoption of long term comprehensive land

use-transport-environmental frameworkuse-transport-environmental framework

First generation New Towns – Concept of First generation New Towns – Concept of balanced development and self balanced development and self containmentcontainment

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Lessons Learnt – New TownsLessons Learnt – New Towns

Importance of early provision of Importance of early provision of infrastructure, schools, etcinfrastructure, schools, etc

Need for public housing / Government Need for public housing / Government office decentralisation to act as catalyst office decentralisation to act as catalyst and anchorand anchor

Private sector will follow but will not leadPrivate sector will follow but will not lead

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Lessons Learnt – New Towns Lessons Learnt – New Towns (continued)(continued)

Policy of self containment difficult to Policy of self containment difficult to achieve in practiceachieve in practice

Attraction/pull of bright lights and higher Attraction/pull of bright lights and higher salaries in urban areassalaries in urban areas

High densities defeated green and other High densities defeated green and other environmental prioritiesenvironmental priorities

Johnston Road Shophouses Johnston Road Shophouses (1)(1)

PPPPSS

History of Urban Renewal Authority History of Urban Renewal Authority (URA)(URA)

Established May 2001 to set new direction Established May 2001 to set new direction for urban renewal in Hong Kongfor urban renewal in Hong Kong

Previous LDC constrained by requirement Previous LDC constrained by requirement that each scheme should satisfy that each scheme should satisfy commercial viability criteriacommercial viability criteria

Mission is to revitalise run down areas Mission is to revitalise run down areas through redevelopment, revitalisation and through redevelopment, revitalisation and rehabilitationrehabilitation

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History of URA – Cont’dHistory of URA – Cont’d

At same time preserve culture and At same time preserve culture and heritage and buildings with historical valueheritage and buildings with historical value

Endowed with compulsory purchase Endowed with compulsory purchase powers and ability to offer cash powers and ability to offer cash compensation and/or rehousingcompensation and/or rehousing

arrangements to affected partiesarrangements to affected parties

Tasked to implement 225 projects in 20 Tasked to implement 225 projects in 20 years, and 43 in first five yearsyears, and 43 in first five years

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Lessons Learnt – Urban RenewalLessons Learnt – Urban Renewal

Social content renders most schemes Social content renders most schemes commercially non-viablecommercially non-viable

Need for acceptance that social element is a Need for acceptance that social element is a cost to the community at largecost to the community at large

Redevelopment should be a matter of last resort Redevelopment should be a matter of last resort and focus should be on regeneration and and focus should be on regeneration and revitalisationrevitalisation

Social impact and the people factor are key Social impact and the people factor are key issues to be addressed and reality is that soft is issues to be addressed and reality is that soft is often more important than hardoften more important than hard

Johnston Road Shophouses Johnston Road Shophouses after preservationafter preservation

Professional Professional Property Services Property Services

LimitedLimited

PPPPSS Thank You!Thank You!