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Asian real estate investment markets recover strongly in 2H2009

Asian real estate investment markets recovered strongly in 2H2009 after enduring a difficult start to the year. Investment turnover bottomed out in 1Q but improved thereafter as investor confidence returned, underpinned by low financing costs, the recapitalisation of private and public real estate funds/investors and the stabilisation of prices across key markets. Direct real estate investment in the region jumped 56% y-o-y in 2H2009 to an estimated US$25 billion (RM..). The rising value of investment transactions in 2Q, 3Q and 4Q2009, indicating the emergence of a consistent trend as opposed to a one-off improvement. Despite the relatively high turnover in the second half, the overall transaction volume of US$38 billion for 2009 was still 22% lower than that recorded in the previous year.

The period saw almost every Asian market record an increase in investment activity on a half-yearly basis. Renewed activity by domestic investors ensured Hong Kong was the most active market, accounting for US$7.3 billion or 29% of the regional total in 2H. China, Japan and Singapore also witnessed a strong rebound in investment activity, accounting for 22%, 17% and 10% of the total volume respectively.

Easier access to local lending facilities and leverage provided domestic real estate funds and investors with a competitive edge, allowing them to dominate the Asian investment market in 2H2009. Domestic and intraregional investors accounted for 83% and 15% of total volume respectively during the review period. The amount of interregional cross border investment activity accounted for just 2% of the total investment volume, down from the 4.5% recorded in 1H2009 and significantly behind the usual 16% to 30% of total investment activity recorded in recent years.

Brisk activity in Greater China

Property markets in Greater China were at the forefront of the recovery in 2H with China, Hong Kong and Taiwan accounting for 60% of total investment turnover. The US$15 billion worth of transactions completed in Greater China during the review period was 169% higher than the amount recorded in the corresponding period of 2008.

China witnessed buoyant investment market conditions with US$5.5 billion worth of deals completed in 2H2009, a figure 146% greater than that recorded in the first six months of the year. However, the period also saw the Chinese government aggressively shift policy settings related to the property market. Policy risk remained a major concern to developers, lenders and end-users but the new measures are expected to be effective and should ensure the long-term sustainable growth of the mainland real estate market.

The Taiwanese real estate investment market was upbeat during 2H2009 as evidenced by the 100% y-o-y growth in total investment turnover of commercial properties, which hit a record high of US$2.5 billion. Investment sentiment was largely driven by the signing of cross-strait financial MOUs during 4Q, and transactions were recorded across a wide range of sectors and locations. While office and mixed-use industrial and office buildings in Taipei remained a much sought-after investment product, vacant sites situated outside Taipei City with strong development potential also attracted interest from local developers.

The brisk investment activity, which prevailed in Hong Kong throughout 3Q continued into 4Q, accounting for 29% of total regional investment turnover in 2H. Acquisitions by local high-net-worth investors accounted for 80% of all deals recorded in the territory.

REITS recapitalise in Japan and South Korea

J-REITs were largely absent from the market during the second half as they focused on M&A, refinancing maturing loans and sponsorship issues, although they did make a number of acquisitions towards the end of the year. Investment turnover in Japan accounted for just 17% of the regional total 2H, in contrast to the average of 30% recorded before the financial crisis. Nevertheless, Tokyo remained an attractive investment destination for core international investment funds, Japanese REITs and large cash-rich domestic institutional investors.

In South Korea, the government’s decision to extend tax benefits given to real estate investment vehicles mitigated concerns over the deterioration of returns on project financing. Sentiment subsequently improved and investors were encouraged to return to the market. The review period saw K-REITs dominate acquisition activity while REFs upon maturity were major sellers. Transaction volume improved substantially as the year drew to an end, climbing by 85% y-o-y in the second half to US$1.9 billion.

Malaysia outperforms, Singapore firms up

The Malaysian real estate investment market ended 2009 on a strong note with a surge in activity in the final two months of the year. Klang Valley witnessed 24 major investment deals involving prime office buildings, shopping centres, warehousing facilities and development sites, accounting for over US$1.2 billion or 5% of total regional turnover.

The rise in activity was attributed partly to the reinstatement of the Real Property Gains Tax (RPGT), which will be applicable to the transfer of property within five years of its purchase. The reinstatement was announced in October and came into effect on Jan 1, 2010, and was cited as a major factor behind the spike in property investment activity in November and December as investors looked to make the most of tax benefits by transferring property before the reinstatement of the RPGT. Total investment sales in Singapore for 2H2009 stood at US$2.3 billion, an 8% increase on the US$2.1 billion recorded in the same period of 2008 and a big improvement on the US$880 million recorded in 1H2009. Investors in Singapore are expected to be actively looking for opportunities in 2010 but the challenge will be the limited deal flow. The collective sales market may continue to lag behind as property owners remain reluctant to reduce asking prices in view of the ongoing property market recovery.

Solid recovery underway in office sector

Investor demand in the office sector remained focused on prime assets offering stable income returns generated from existing anchor tenants and growth over the longer term as rents recover from the downturn.

The office sector attracted US$13 billion of investment in 2H, 41% of the total flow of capital in US dollar terms, and accounted for eight of the 10 largest transactions, including mixed-use office properties. Deals involving prime office properties were most prevalent in Japan and China, which both accounted for 28% of total investment in the region.

According to the CBRE Asian Office Yield Index, which reflects the changes in prime office yields in major Asian cities, overall quoted average prime office yields fell for the third consecutive quarter by 120 bps to 5.32%. The yield compression was due to the solid rebound in price levels of prime office properties across key markets, which, to a certain extent, offset the rental decline.

Cautious optimism in luxury residential sector

The luxury residential sector saw an encouraging end to the year as investor confidence solidified. Prices for luxury homes in Beijing, Shanghai, Guangzhou and Hong Kong rose by increments ranging from 6% to 10% q-o-q, while prices in other markets remained largely stable.

Deals totalling US$5 billion or 20% of the total regional transaction turnover by sector were concluded in the luxury and high-end residential sector during 2H2009. Total transaction volume for 2009 reached US$6.7 billion, 23% higher than the US$5.4 billion recorded in 2008. Hong Kong accounted for US$2.8 billion worth of deals, over 50% of the total volume, while China and Singapore were responsible for 19% and 17% respectively. Looking ahead, the somewhat volatile equity market conditions witnessed in January and the uncertainty over policy settings could exert a restraining effect on sales activity in key Asian residential markets as 2010 progresses.

Retail sector upbeat but hospitality lags behind

Activity in the Asian retail property investment market picked up considerably in the latter half of 2009, underpinned by the improved business sentiment in the retail sector and stronger-than-expected economic recovery. Investment turnover in 2H improved 75% y-o-y to reach US$4.2 billion. Overall transaction volume in the retail sector for 2009 grew by 27% y-o-y to reach an estimated US$6.35 billion.

Despite the relatively low transaction volume in the hospitality sector, a total of seven hotel transactions worth a combined total of US$380 million were concluded during 2H2009, surpassing the US$270 million worth of deals recorded in 1H.

Industrial sector witnesses signs of recovery

The value of industrial output continued to grow in the major Asian economies in the fourth quarter in line with the gradual recovery of the export sector and continued expansion of domestic demand. The industrial property sector in Tokyo, Beijing, Shanghai and Chengdu began to see increased demand from domestic companies and foreign firms looking to relocate. Transactions involving industrial property rebounded strongly in 2H2009, climbing 155% compared to 1H, accounting for a combined total of US$1.8 billion or 7% of total investment turnover.

A total of 60 transactions involving industrial assets were concluded in 2H2009, surpassing the 24 deals recorded in 1H. However, total investment sales in the industrial sector in 2009 amounted to just US$2.6 billion, 60% lower than the US$6.4 billion worth of transactions recorded in 2008.

Investment market outlook

Selected core international institutional investors are gradually returning to Asian real estate markets. Meanwhile, private equity players and REITs that recapitalised after the financial crisis, along with those that were able to raise money during 2H2009, are beginning to scout for attractive investment objects.

Investment activity in China, Hong Kong, Japan and Singapore will continue to firm up in 1H2010. These markets are traditional centres for investment activity and account for the largest proportion of capital inflow into the region over the past few years. The biggest challenge they will face will be the limited availability of prime and yield-accretive investment properties and slowing deal flow, which has resulted as property owners have remained generally reluctant to reduce their asking prices in light of the ongoing market recovery.

Looking ahead, policy and macro risks in the property sector will likely persist in 1H2010, particularly in markets where property prices have rebounded substantially.

However, Asia is expected to be less affected by these macro risks as compared to other global regions as its regional economic fundamentals are relatively stronger and have left it positioned to experience a more solid recovery.

Beijing witnessed a buoyant property investment market in 4Q2009 with transaction volume rising significantly. Domestic investors were most active while foreign companies continued to dispose of assets. In a move to curb the soaring property market, the government issued several measures and policies during the review period. Measures included reducing the time to land transfer instalment to no more than one year in principle and requiring that the first payment should not be less than 50% of the land transfer price if the developer intends to acquire a certain plot. The policy change also stipulated that the sale of residential property within the last five years shall be levied on full turnover (Business) tax, as the government moved to clamp down on speculative activity.

The capital and rental value of prime office space in Beijing rebounded during the review period as investment interest in office buildings remained strong. Major deals included two unnamed domestic enterprises purchasing the 463,000 sq ft Power Land office building located in Gongzhufen, Haidian District for RMB1.12 billion (RM529 million) and the 420,000 sq ft North Ring International Center located in Madianqiao, Xicheng District for RMB700 million. Elsewhere, SOHO China continued to follow its preferred strategy of converting en-bloc buildings to strata-title ownership with its purchase of Nexus Centre located in East Third Ring Road, Chaoyang District from KaiLong REI for RMB2.34 billion. The building is situated close to the CBD and has a total floor area of 1.1 million sq ft.

Serviced apartments were much sought after by investors during the review period as many property owners took advantage of the positive market conditions and disposed of their assets at a gain. Despite the fact that rents and leasing activity for service apartments softened, 4Q saw the completion of two transactions in this sector, namely the disposal of the 174-unit Embassy House located in Dongzhimen, Dongcheng District, which was acquired by GAW Capital for RMB1.35 billion. The other transaction involved 202 units, which were acquired by Shimao Group from Colony company for RMB810 million.

The Beijing real estate investment market should continue to strengthen in 2010 with demand increasing and rents recovering, although performance will vary across the various property classes. The mood in the residential market is bullish due to the rising trend in market demand and prices, while non-performing assets are also increasingly attracting the attention of investors. A number of projects in prime areas such as the CBD and surrounding areas have failed to complete on schedule or have been left unfinished for various reasons. These projects are located in prime locations and have great potential for up-valuation. If purchased at a lower price, they will produce considerable returns in the future.

Greater China, Shanghai

The residential and office sectors saw brisk activity in the final months of 2009 as the Shanghai property investment market enjoyed a busy 4Q. Capital values continued to rise with the average price of luxury apartments and prime offices increasing by 10% and 4.8% q-o-q respectively. The period saw the State Council move to curb speculation in the property market by restoring the five-year minimum holding period for the exemption of business tax on the sale of residential properties, which was followed shortly afterwards by further cooling measures implemented by the Shanghai municipal government.

Major domestic investors continued to look for gross yields of 6% to 7% while overseas institutional investors demanded higher returns in view of the various costs involved with respect to property acquisitions. Consequently mainland and Hong Kong investors continued to account for the bulk of investment activity while overseas institutions were generally quiet. The review period also saw activity from buyers from the manufacturing and trading sectors seeking to acquire premises for their own self-occupation, further demonstrating the abundant liquidity in the market and the prevailing upbeat mood.

In October, Chousha Building, an office block located in Zhabei District, was sold at auction for RMB131.23 million. The building has a total GFA of 102,000 sq ft and was bought by a local company whose name was not disclosed. Elsewhere, the state-owned Shanghai Jiushi Group purchased Xing Li Pu Building via auction for RMB2.52 billion. Situated at a prime location within Huangpu District, the mixed-use office and retail building has a total GFA of 808,000 sq ft and comprises 19 floors above ground and three floors below.

Another major transaction completed during the quarter was HNA Property’s acquisition of Development Mansion in Lujiazui CBD through its purchase of the entire equity and creditor’s rights of Shanghai Development Mansion Real Estate Co Ltd, which held 500,000 sq ft of space in the building. The total consideration of the deal was RMB1.475 billion. Meanwhile, Embry Holdings Limited, a Hong Kong listed manufacturing company, announced that it had signed an agreement to purchase Block B of North America Plaza, an office building in Yangpu District. The 14-storey building provides a total GFA of123,000 sq ft and was reportedly sold for a consideration of RMB380.638 million, equivalent to an accommodation value of approximately RMB33,300 psm. Another significant deal completed during the fourth quarter was Zhejiang Honglou Group’s acquisition of Infiniti from Morgan Stanley.

Infiniti is the 438,000 sf GFA retail podium of Shanghai Square and cost a total of RMB1.42 billion. The deal marked Honglou Group’s second acquisition in Shanghai following its purchase of Fudu Building in September.

While short-term uncertainties will continue to arise in the residential sector with the government continuing to implement its cooling policies and credit control, the outlook for commercial property investment remains more promising. The growth in commercial property prices has not been as rapid compared with the residential sector, but the stabilisation and recovery of commercial property rents across China’s larger financial centre is expected to improve yields and sustain capital value growth.

Greater China, Guangzhou

The Guangzhou real estate investment market witnessed a busy fourth quarter with the completion of nine major deals amounting to RMB7.74 billion. Local and Hong Kong investors dominated investment activity, while the period also witnessed the government implement a number of tightening policies regarding idle land and development sites. Developers were increasingly willing to acquire second-hand plots considering the relatively high bidding prices for development sites in the primary market.

A large proportion of investment transactions recorded during 2H involved undeveloped bare sites and half-developed projects.

Major deals completed during 4Q included Vanke’s acquisition of the St Prado Villa project in Huadu via an equity transfer. The project covers a site area of 2.26

million sq ft and will have 111 detached villas and 60 low-rise duplex units upon completion.

In November, Zhuguang Group acquired a development project in Nansha District for RMB62.86 million. The project consists of a 375,660 sq ft undeveloped site, two suspended development projects and four partially sold buildings. The same month saw New World China Land (NWCL) spend RMB465 million to purchase the remaining 25% interest in a residential project known as Guangzhou Covent Garden located in Liwan District, Phase I and Phase II of the project have been completed and were nearly sold out. Phase III is currently under construction with a total gross floor area of approximately 3.1 million sq ft and is expected to be completed by November 2011.

Prime office properties remained one of the most sought-after asset classes and the quarter witnessed the sale of two forthcoming prime office developments in Pearl River New City (PRNC). Kaisa Plaza, a 1.29 million sq ft Grade A office tower scheduled to be completed in 2010, was sold to an independent party by Kaisa Group for RMB2.75 billion. Meanwhile, Hopefluent Group announced the acquisition of an office site for a consideration of HK$88.2 million (US$ 11.4 million). The development provides a total GFA of 784,000 sq ft, of which 75,000 sf will be reserved for self-occupation.

December saw Guangzhou R&F Properties Co, Agile Property Holdings Ltd, and Country Garden Holdings Co jointly set a new national land sale record by lodging the RMB 25.5 billion (US$3.74 billion) winning bid for the 28 million sf Guangzhou Asian Games City land package. The three companies’ proportionate interests in the venture are 34%, 33% and 33% respectively. The package comprises 14 undeveloped land plots with a buildable GFA of 35 million sf, the majority of which is designated for residential development.

Greater China, Hong Kong

Transaction activity in the Hong Kong real estate investment market remained fairly moderate during the fourth quarter. The largest transaction recorded during the review period saw Morgan Stanley dispose of its Shama serviced apartment portfolio comprising four separate properties for approximately HK$1.3 billion (US$168 million). Prior to the government’s moves to cool the market in mid-October, the sale of a luxury duplex apartment on Conduit Road in Mid Levels West earlier that month for a new world record price of HK$71,280 psf (US$9,200 psf) on gross floor area and a total cost of HK$439 million led many market observers to question whether the luxury residential market was peaking. Luxury residential apartment prices on Hong Kong Island increased 6.5% over the fourth quarter and rose a total of 48% y-o-y.

Investment activity in the office sector softened with only two en-bloc transactions completed during the fourth quarter. They involved Fee Tat Commercial Centre in Mong Kok and The Pemberton in Sheung Wan, which were sold for HK$558 million (US$72 million) and HK$344 million (RM6.77 million), respectively. Office price levels gradually hardened during the review period as vendors considered the potential appreciation of future rental reversion or changes in land use. Transaction volume in this sector remained low.

December was notable for the largest government land auction of the year. Domestic developers Sino Land and K. Wah International jointly purchased two waterfront residentialsites in Tai Po in the New Territories for HK$10.4 billion, or about HK$7,200 psf on accommodation value. Since the land plots adjoining the sites were already owned by consortiums led by Sino Land, other developers were less aggressive in bidding up the price as they would have had to compete with rival projects on adjacent sites already under construction.

The retail sector continued to benefit from the increase in tourist arrivals from Mainland China. One prime street shop located in Tsim Sha Tsui was reportedly acquired by Emperor International Holdings (EIH) for a record unit price of HK$695,544 psf , or HK$843 million. The shop, on Canton Road, provides a total GFA of 1,212 sa ft and has been leased to a EIH sister company, Emperor Watch & Jewelry, for a monthly rental of HK$1.4 million.

The Hong Kong investment market is expected to turn more active in 1Q2010 with capital values remaining largely stable. Although banks are expected to maintain a low interest rate policy with respect to commercial property lending, they have turned more conservative towards lending for speculative purposes. The market is likely to see more properties being made available for sale as vendors are less keen on chasing larger capital gains and are thus more willing to dispose of their assets at current price levels. Potential buyers will continue to be lured by low interest costs and will have a strong appetite for income-producing commercial properties with yields averaging around 4%.

Greater China, Taiwan

Investment sentiment in the Taiwanese property market was robust in 4Q2009 as investor confidence improved on the back of the gradual recovery in the local economy and enhanced cross-strait relations following the signing of financial MOUs between Taiwan and China in November. Both domestic and overseas investors showed increasing interest in a wide range of property types during the quarter and transaction turnover of investment commercial properties reached a new high of NT$43.3 billion (RM4.39 billion), representing a q-o-q increase of 43% and growth of approximately 14% from the peak recorded in the fourth quarter of 2007.

4Q saw a number of local developers actively bid for land located in prime locations while others, which had previously focused on development sites within Taipei City began to eye properties outside the region. In one example of the latter trend, Fubon Land Development bought its first residential site in Taichung City for NT$2.1 billion. Land acquisition activity outside Taipei City largely took place in Taipei County and Taichung City, with transactions recorded in these two areas accounting for 44% of total land sales in 4Q. Given the fact that Taipei County and Taichung City will be upgraded to municipalities following a local government reorganisation to be carried out in late 2010, developers have moved quickly to expand their land banks in these locations.

The industrial/office market in Taipei’s Neihu area continued to attract local buyers during 4Q. Shin Kong Life Insurance acquired Asia Plaza, a prime I/O property in Neihu, for NT$11.5 billion in October, and followed it up with the purchase of 550 Rui-guang Road for nearly NT$3 billion in November.

Investment transactions were also recorded in the retail and hospitality sectors. Cathay Life Insurance bought the Cashbox SOGO building for NT$2.99 billion while L’Hotel de Chine Group acquired a hotel property for NT$845 million.

The Cashbox SOGO building is located in the prime shopping area along Zhongxiao East Road. Its current tenant, the largest karaoke operator in Taiwan, will continue to occupy the entire building. L’Hotel de Chine Group’s purchase of a 230,000 sq ft hotel in Taoyuan City reflected the stronger investor interest witnessed in the hotel market following a good year for the local tourism industry, which reported a y-o-y increase of 14.3% in visitor arrivals despite the global economic downturn. The local hotel group also plans to renovate its existing hotels and open new ones over the next couple of years.

The market also witnessed the return of foreign investors during 4Q.

In December, Tokyo-based Asia Pacific Land acquired a portfolio consisting of three properties from Capmark for approximately NT$5 billion. As local investors aggressively purchased properties, investment yields for almost all types of assets experienced moderate compression during the review period. In view of the limited choice of investment vehicles, cash-rich life insurance companies are likely to continue chasing prime properties in the near future. Properties that can provide a yield of around 3.5% to 4% will remain popular among institutional investors and are very attractive, compared to the 0.9% one-year deposit rate and 1.5% 10-year government bond rate.

Japan, Topyo

The Tokyo real estate investment market looked to be close to bottoming out 4Q as domestic investors concluded a number of landmark transactions. December saw Secured Capital Japan acquire the Pacific Century Place Marunouchi in Chiyodaku,Tokyo for ¥140 billion (RM4.78 billion) the debtors of daVinci Holdings, making the largest investment deal of 2009. daVinci Holdings purchased the property in 2006 for ¥200 billion but relinquished it in September 2009 after failing to agree terms for maturing its debt. The complex completed in 2001, comprises a 32-storey office tower with a five-star hotel occupying its lower floors. The transaction involved the acquisition of the office component, which provides a total floor area NLA of approximately 407,000 sq ft, or equivalent of a unit price of approximately ¥11.8 million per tsubo with an estimated NOI cap rate of 3.2% on today’s market rent.

December also saw a SPC of Mitsubishi Estates acquire a 27% stake in the Resona Marunouchi Building from Tokyu REIT for ¥42 billion. The building, completed in 1978, provides a GFA of 800,630 sq ft over 25 storeys above ground and two storeys below.

Mitsubishi Estates previously acquired a 73% interest in the property in April 2008 and is expected to redevelop the building as the sole owner. Tokyu REIT acquired its stake in the building in December 2003 for ¥23.3 billion, representing a gain in absolute terms.

J-REITs were largely absent from the market during 3Q as they focused on M&A, refinancing maturing loans and sponsorship issues. However, 4Q saw them step up their acquisitional activity. In October, Japan Real Estate acquired a 30% stake in the Shiodome Building in Minato-ku, Tokyo for ¥54.6 billion. The property was completed in 2007 and was developed by a consortium comprising Mitsubishi Estate, Mitsui Fudosan, Tokyu Land & Heiwa Real Estate. It provides a NLA of 1.2 million sq ft over 24-storeys above ground and two storeys below, with an estimated NOI cap rate of 5.5% on passing rents.

Other major deals completed during the quarter saw Top REIT acquire the Sumitomo Shoji Nishikicho Building in Chiyoda-ku, Tokyo from Sumitomo Corporation. The building, completed in 1973, provides a NLA of 86,390 sq ft over nine-storeys above ground and two basement levels. The purchase price of ¥12.7 billion represented an equivalent unit price of ¥5.2 million per tsubo.

Overseas investors remained comparatively inactive during the review period with most continuing to monitor economic fundamentals ahead of a possible return to acquisition activity in 1Q2010 or later. Major deals completed during the review period involving foreign investors included SEB acquiring portions of Aeon Chiba New Town Shopping Center in Inzai City, Chiba prefecture to the east of Tokyo for ¥11.8 billion.

Whilst the quarter saw continued demand for good quality, well-located assets in Tokyo, there remained little appetite for buildings in cities elsewhere in Japan. The exceptions were more opportunistic transactions in which investors were able to take advantage of market conditions to secure essentially sound assets at attractive prices. This situation is expected to remain unchanged in the short-to-medium term.

South Korea, Seoul

4Q has traditionally been a quiet period for investment activity in the Seoul real estate market but the brisk investment activity, which prevailed throughout 3Q continued. K-REITs dominated acquisition activity while a number of REFs having reached maturity were the major sellers during the review period. Local end-users continued to display a strong appetite for quality office properties. Despite the brisk investment activity witnessed during the review period, the rebound in capital values faltered and capitalisation rates stabilised at between 6% and 7% across the major business districts. The slowdown in the strong bounce back witnessed in 2Q and 3Q providing evidence that some buyers were becoming more cautious as values for quality commercial properties climbed back to less attractive levels.

The period saw the South Korean government decide to extend tax benefits given to real estate investment vehicles including K-REITs, REFs (Real Estate Funds), ABSs (Asset Backed Securities) and PFVs (Project Finance vehicles). The tax benefits, which were previously scheduled to end by 2009, will be extended to 2012. ABSs and PFVs will continue to receive a 50% deduction on their acquisition tax and registration tax with regards to real estate acquisitions, but tax deductions for K-REITs and REFs have decreased from 50% to 30%. Nevertheless, K-REITs saw brisk investment activity across all sectors during the review period, thanks to the optimistic economic forecast for 2010.

Major deals completed within the three major business districts during the review period involved one Grade A building and two Grade B buildings. Dohwa Consulting Engineer, a local enterprise, acquired the Pacific Tower (Grade A, GFA 311,061 sq ft) in the GBD from MAPS Frontier REF 4 & 6 for KRW151 billion (RM434 million). Elsewhere, KTB’s Asia Number One Korea First REF disposed of the Asia One building (Grade B, GFA 268,128 sq ft) in the YBD to US-based Pramerica Real Estate Investors for KRW 88 billion. Daelim Industrial currently occupies over 95% of the Asia One building under a long-term lease contract. Meanwhile, KOCREF 15, a CR-REIT established by KORAMCO, acquired Insong building (Grade B, GFA 336,616 sq ft) from D&DS for KRW115 billion. The property currently records 98% occupancy. One other major deal was concluded outside the three main business hubs. MAPS Frontier REF 5 disposed of MAPS Songpa Tower (Grade B, GFA 250,589 sf) in southeast Seoul to a local firm, Hansol Textile, for KRW67 billion with a cap rate of 6%.

The review period saw Korea’s National Pension Service become very active overseas, investing a total of KRW2 trillion. The NPS was established in 1988 and is Korea’s largest and the world’s fifth largest pension fund with US$232 billion of fund reserves. In 4Q the fund acquired 88 Wood Street and half ownership of 40 Grosvenor Place in London, spending a total of US$300 million for the two prime office properties. The NPS also purchased the 45-storey landmark HSBC headquarters in London for US$1.29 billion and completed a notable transaction in Sydney, acquiring the 44-storey Aurora Place office tower for US$644 million. Looking ahead, a number of institutional investors are expected to follow the NPS in seeking investment opportunities overseas.

India, Mumbai

Sentiment in the Mumbai real estate investment market turned more optimistic during the fourth quarter with steady demand being witnessed in both the residential and commercial segments. This resulted in the firming up of capital and rental values in certain micromarkets and improved end-user confidence. Investors exhibited a clear preference for rationally priced residential developments and commercial developments in established business districts with good infrastructure. However, overall investors still remained cautious and only completed deals when a substantial discount was offered.

The revival in the residential segment was primarily driven by latent demand and the improved availability of credit. The downward adjustment in prices witnessed in 1H2009 eased in 2H with some micromarkets registering a minor rebound.

The launch of Indiabulls Sky by Indiabulls Real Estate and Orchid Crown by DB Realty in Lower Parel received a positive response from the market. Nevertheless, selected large developers were observed to be pruning their portfolios to divest land parcels, which do not fit in their overall long-term strategy. Notable transactions completed during 4Q included DB Realty’s acquisition of seven acres of land in Crown Mills in Prabhadevi for approximately US$129 million (RM416.38 million) and Vijay Wadhwa Associate’s purchase of Hindustan Composite Mills in Ghatkopar (Eastern Mumbai) for US$123 million. Elsewhere, SBI Life Insurance bought an office building in Andheri East from Rustomjee for US$45 million, and an unlisted pharmaceutical chemical company bought 15,000 sq ft of space in Crescenzo, a standalone corporate building at Bandra Kurla Complex.

2H saw a steady flow of domestic developers line up for IPO listings on the back of improved market sentiment in the capital market. Developers raised around US$2.96 billion by issuing shares through the Qualified Institutional Placement (QIP) during 2H, effectively mitigating their debt obligations. Developers who have not yet tapped the equity markets such as DB Realty, Lodha Developers and Oberoi Constructions also announced IPOs to raise funds for expansion.

Following a series of relaxations of monetary policy in the form of allowing loan restructurings, ECB in townships and lower provisioning norms, the directive to increase standard provisioning norms on loans to commercial real estate from 0.4% to 1% was interpreted as a signal from the Reserve Bank of India that it will gradually withdraw the policy support it initiated to fuel the revival of the sector. Developers will therefore be focusing on execution and maintaining rationalised pricing in 1H2010 in order to ensure their cashflow is sufficient to service their high levels of debt.

India, New Delhi

The New Delhi property investment market picked up in 4Q2009, largely driven by improved demand in the residential sector. The period saw prices continue to correct to more realistic levels and institutional investors become more active in the market, although most focused solely on New Delhi and other Tier-1 cities. Developers continued to stall speculative projects in order to concentrate on completing projects for which clear end user demand exists.

4Q saw a marked increase in the launching of new projects to the market.

The majority of the new supply in the residential segment was in the affordable housing segment, where the price and size of units is smaller than in the projects more commonly seen in 2007 and early 2008. Sales in the mid-segment residential market were also encouraging in 4Q as the softening of home loan interest rates, reduction in prices and improvement in economic sentiment helped to draw buyers back to the market.

While both the commercial and IT market segments were hit hard during 2008 and most of 2009, the commercial segment began to pick up during 2H2009, as evidenced by the marked increase in the number of enquiries for leasing office space.

This pick up in leasing activity was a major factor contributing to the continued  popularity of commercial real estate projects, with many institutional investors now eyeing this asset class as capital values continued to stabilise.

Most developers have managed to sustain themselves since the onset of the global economic crisis either through internal accruals in ongoing projects, primarily in the residential sector, through debt re-structuring or the QIP (Qualified Institutional Placement) route. Developers such as Unitech, Parsvnath, Sobha Developers, HDIL, Puravankara, Anantraj Industries, Akruti City and Orbit Corp raised additional long-term funds through the sale of shares in the second half, mostly through QIPs, to both domestic and international funds and financial institutions.

Private equity investment witnessed a sharp decline in 2009. However, with improving liquidity conditions, a number of international private equity funds returned to the country in 4Q. In one instance of such a return to market activity, Sun-Apollo signed an agreement with Delhi based realty firm Parsvnath Developers Ltd to invest US$16 million in a premium luxury residential project being developed by Parsvnath in Gurgaon. The fund will acquire a 50% stake in the project SPV, which will develop Parsvnath Exotica Part II in the same city.

Singapore

The Singapore real estate investment market enjoyed a solid 4Q with total investment sales for the period standing at S$10.21 billion (RM23.56 billion), 43.1% less than the S$17.939 billion recorded in the corresponding period of 2008, but much improved on the S$1.35 billion initially estimated at the beginning of 2009.

Total residential investment sales including Good Class Bungalow’s (GCBs) accounted for S$2,549 million of transacted value, or 66.1% of the quarter’s total investment sales. This was 17.2% lower from the S$3,039.15 million in residential investment sales recorded in the previous quarter as the residential market entered a cooling phase following the strong pace of sales in previous months.

The review period witnessed the first collective sale of 2009. Dragon Mansion at Spottiswoode Park was sold to RL Developments Pte Ltd (a unit of Roxy-Pacific Holdings) for S$101.2 million, reflecting a unit price of S$863 psf/plot ratio. Dragon Mansion consists of a land area of 41,874 sq ft with a maximum buildable GFA of about 117,248 sq ft, or 120 apartments of 1,000 sq ft each.

The most significant investment transactions of the quarter took place in the retail sector with the sale of Katong Mall by Tuan Sing Holdings for S$247.6 million to a consortium of investors. The property will reportedly be refurbished and its lettable area increased by about 20% to over 206,000 sq ft with an investment of approximately S$55 million. Another major retail transaction during the review period involved a shopping mall being developed in Clementi Town Centre by the Housing & Development Board (HDB). A consortium comprising Times Properties, a subsidiary of Singapore Press Holdings (SPH), NTUC FairPrice Co-op and NTUC Income Insurance Co-op acquired the property with a winning bid of S$541.898 million. Clementi Town Centre is a 5-storey 193,750 sq ft retail complex with two basement levels. The purchase price represented an equivalent unit price of S$2,797 psf on maximum allowable retail net floor area or S$3,055 psf on an estimated fitting-out cost of about S$50 million.

The period also saw a major acquisition in the industrial sector with MacarthurCook Industrial REIT’s acquisition of four industrial properties from AMP Capital Properties for a combined total of S$68.6 million.

The luxury residential market is expected to perform well in 2010 in anticipation of the return of economic growth and the opening of the Integrated Resorts. The office leasing market will continue to pick up gradually and rents should bottom out during the course of the year. Office property prices have already bottomed. The suburban retail sector will continue to be resilient and could easily trend upwards when the economy returns to growth. More investors should proactively look for investment opportunities in Singapore in 2010 but the challenge will be the limited deal flow. Total investment sales for 2010 are estimated to reach S$15 billion, similar to 2005 levels. The collective sales market may continue to lag behind as property owners remain reluctant to reduce their asking prices in view of the ongoing property market recovery.

Indonesia, Jakarta

The Indonesian real estate investment market witnessed greater activity in 2H2009 as local developers continued to pursue new development projects in view of the persistence of the low interest rate environment and stronger-than-expected economic recovery. The period saw Bank Indonesia keep the interest rate unchanged at 6.5%.

The launching of one mixed-use development project was announced 4Q.

Cimandala City is located in Bogor-West Java and is to be developed by The Megapolitan Group. The proposed development will consist of an office building, shopping centre and residential apartments on a 17ha site. The project cost is estimated at around IDR3.6 trillion (RM1.23 billion) and the development is expected to become a landmark building in Bogor city upon completion.

The office sale market witnessed a local financial consultant acquire a small building consisting 10 floors with a total lettable area of 145,000 sq ft for an estimated transaction price of IDR45 billion. Yield levels for office property ranged from 9.5% to 10.25%.

The luxury residential market continued to firm up in the fourth quarter and demand for high end residential property posted a strong recovery. Capital values edged up to IDR 13.53 million psm while rental values softened to IDR133,100 psm. Two major new home projects came on stream in 4Q with the handover of The St Regis located in Jl. Setiabudi (Sudirman area) and Keraton Residence located in Jl. MH. Thamrin (Thamrin area).

No major investment transactions were completed in the retail sector although the period did witness the launch of a number of new malls including Central Park, Pavilion Mall PX St Moritz, Seasons City and Pusat Grosir Senen Jaya. The new additions brought a total of 1.15 million sq ft of new retail space to the market. Yield levels for the retail sector ranged from 10.5% to 13.5%.

The Indonesian industrial sector continued to lag behind other sectors, with PT. Kreasi Pratama’s acquisition of a 43,056 sq ft site in Cibitung-West Java, being the only transaction completed in 4Q. The company plans to construct a distribution facility on the site, which it expects to complete by the end of 1Q2010. Yield levels for industrial property ranged from 8.5% to 10.25%.

Investor confidence in the Indonesian real estate investment market and its long-term prospects is expected to remain quite solid in view of the stronger-than-expected economic recovery underpinned by the relatively low level of inflation, falling unemployment rate and rising consumer confidence. Domestic developers should continue to display a strong interest in the development of mixed-used projects in both the CBD and secondary areas.

Malaysia, Kuala Lumpur

The Malaysian real estate investment market ended 2009 on a strong note with a surge in activity in the final two months of the year. At least 24 major investment deals were reported in the Klang Valley alone, involving prime office buildings, shopping centres and warehousing facilities in addition to nine development sites. Elsewhere, three significant sales involving a warehouse facility and two development sites were completed in Penang and Johor. The big players were mostly domestic investors comprising developers, M-REITs, funds and other real estate related companies. The rise in activity was attributed partly to the reinstatement of the Real Property Gains Tax (RPGT), which will be applicable to the transfer of property within five years of purchase. The reinstatement was announced in October and came into effect on Jan 1, 2010, and was clearly a major factor behind the spike in property investment activity in November and December. Major transactions reported during 4Q included Genting Malaysia’s acquisition of Oakwood, which owns Wisma Genting, a 24-storey office building, for RM213 million, representing 100% of Oakwood’s NAV. Elsewhere, CIMB Group Holdings Bhd entered into a related-party sale and leaseback agreement with the Employees Provident Fund with respect to 65 nationwide properties owned by the group. The sale of the group’s banking offices totaled RM302.45 million with an initial leaseback period of 15 years, yielding returns in excess of 7% per annum.

Other notable news during 4Q included the termination of the off-plan sale of three office buildings to Kuwait Finance House, which were originally signed in 2007 and 2008, namely Menara YNH, The Icon @ Tun Razak East Wing and The Icon @ Mont’Kiara. The Icon @ Tun Razak East Wing was later resold for RM814 psf reflecting a 16% decline on the RM969 psf price tag agreed in the 2007 off-plan sale. Elsewhere in the decentralised Kuala Lumpur area, Glomac Bhd sold its third en-bloc office building this year with the off-plan sale of Tower D at Glomac Damansara to Lembaga Tabung Haji, the Pilgrim Fund Board of Malaysia, at RM170.73 million (RM670 psf).

Foreign investors made three significant acquisitions during the review period. A Taiwanese investor paid RM63.1 million for Apex Tower, an office-retail tower at Southgate, while a Hong Kong-based firm acquired a condominium tower at Wing C, Block B, Armanee Terrace for RM180 million. The Singapore listed Starhill Global REIT acquired Lot 10 Shopping Centre at RM401 million (RM1,561 psf) and Starhill Gallery at RM629 million (RM2,115 psf).

Axis REIT was also active during the review period with the purchase of two warehouses from the existing occupants at Shah Alam in Selangor (RM71.75 million) and Seberang Perai in Penang (RM24.25 million). The deals came with 15-year leaseback agreements at a yield of 8.3% Looking ahead, market sentiment is likely to remain relatively bullish on the back of the perceived improvement in the economy. The investment market is expected to remain active in 1H2010 as capital and rental values stabilise further.

The Philippines, Manila

The Manila real estate investment market remained relatively stable in 2H2009 with a steady flow of transactions in the residential, retail and hospitality sectors.

Local developers took advantage of the quiet period to purchase development sites for use when the downturn eases and demand picks up. Perhaps the most significant piece of news during the period was the passage of the new REIT Law. Pending the release of the Implementing Rules and Regulations, the REIT Law should strengthen the real estate sector by opening the market to smaller investors.

One of the most notable investment deals completed during 2H was SM Development Corporation’s acquisition of a six hectare residential development for a total cost of PHP2.4 billion (RM167 million). The SM Group made a series of additional investments across several other market segments during the period, reflecting the high level of optimism it has in the local real estate market. It also commenced the development of Two-ECom Center, the second office building in its Mall of Asia Complex. The PHP2.7 billion project aims to recruit tenants from technology-based companies and business process outsourcing companies.

4Q saw the sale of the Hyatt Regency Hotel, a 265-room hotel in Manila, to Sunwest Group, a local company. Sunwest owns the Misibis Bay Raintree luxury resort in Cagraray Island, Albay. The hotel is scheduled to reopen by April 2010 and will be rebranded as the Midas Hotel and Casino, managed by Genesis Hotels and Resorts.

The transaction cost was not disclosed but was understood to be somewhere near PHP1 billion. The sale was through the acquisition of shares of the holding company Hotel Enterprises of the Philippines Inc, which owned the said hotel. Market conditions 1H2010 are expected to remain favourable as the economy continues to improve. The passage of the REIT Law and its implementation is seen as particularly significant. The resulting infusion of capital into the market through the sale of shares in REITs will provide a solid source of funding for future real estate projects. Properties in REIT portfolios will also need to improve the maintenance and management of their facilities in order to ensure their continued profitability.

Thailand, Bangkok

The Bangkok real estate investment market remained fairly quiet in 4Q with only a few isolated medium-size deals concluded. However, condominium sales in the mid- to high-end segments picked up during the review period, especially in downtown areas or areas in close proximity to mass transit routes. The period also saw development companies LPN and Supalai sell over 4,000 units in four condominium projects in a single weekend, highlighting the persistence of real market demand for condominium units in Bangkok. Along with the market recovery, property developers including Preuksa Real Estate, Land & Houses, Sansiri, LPN Development, Noble Development and Asian Property Development continued to strengthen their cash reserves for the purpose of land acquisition and future development.

Prices for luxury residential property remained largely static for unsold units in projects launched before 2009. Resale prices in some recently completed condominium projects increased in buildings such as Park Chidlom and Athenee Residence. Developers of new condominium projects focused on building smaller units and keeping prices at affordable levels. Other trends saw developers offer fully furnished units in areas with high levels of demand for “buy to rent” investors.

One of the highlights in the retail sector was the announcement by Robinson Department Store Plc that it would speed up its expansion plan across the country by investing THB3 billion (RM298.8 million) to THB4 billion to open eight new stores over the next three years. The quarter also saw the opening of the Central Plaza Khon Kaen by Central Pattana (CPN) providing a total lettable area of 574,000 sq ft. The occupancy rate of the mall stood at over 80% at its opening and is expected to reach 90% by end-2010.

The only office transaction to occur in 4Q was the disposal of the 12,700 sq m CIMB Thai Bank Plc-Sathorn Building on North Sathorn Road by CIMB Thai Bank for approximately THB1 billion.

As the overall investment market gradually improved, activity in the property funds sector turned more active. Four new property funds were listed during 2H2009, three of which are industrial REITs and one which focuses on office properties. The most notable addition to the T-REIT market during the review period was TLOGIS, which was listed on the Stock Exchange of Thailand during 4Q. The fund, with a market capitalisation at IPO of THB 1.53 billion, has invested in 15 warehouses with a usable area of 761,300 sq ft. The properties are located at the TICON Logistics Park Wangnoi, Ayudhya Province and TICON Logistics Park Bangna, Chacheongsao Province. The fund will offer a minimum guaranteed return of 7% for seven years. -- CBRE Research Asia

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