Hotels, restaurants & leisure / 7 September 2012

Overseas Union Enterprise Target price: S$3.10 Up/downside: +26.6% OUE SP Share price (6 Sep): S$2.45

Initiation: undervalued property play in all the right places

 Coverage initiated with a Buy (1) rating and target price of S$3.10  OUE has high exposure to Singapore office and hotels, negligible exposure to Singapore residential, none to overseas residential  Awaiting next major acquisition, preferably in the office, hotel or retail segments

How do we justify our view?

asset value) and retail-property (8%)  How we differ sectors, which we believe offer Whereas some brokers have started to positive medium-term prospects. 4) favour residential names, we are still OUE’s valuations look attractive, very cautious on the sector; we prefer

trading at significant discounts to its undervalued landlords in office, hotel, David Lum, CFA BVPS of S$4.63 including the and retail property. OUE is an ideal fit (65) 6329 2102 [email protected] disclosed hotel valuation surplus, its and our top Singapore property pick. BVPS of S$3.44, our estimated NAV per share of S$3.75, and our target Share price performance  What's new price of S$3.10. 5) OUE is trading at (S$) (%) This initiation report offers our the low end of its PBR range since 2.9 130 Lippo took control of it in mid-2006. 2.6 120 positive take on Overseas Union 2.3 110 Enterprise (OUE), a diversified real- Also, it does not hold any listed 2.0 100 estate owner, operator and developer, entities (unlike the corporate 1.7 90 controlled by Indonesia’s Lippo Group structures of many larger peers). Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Overseas Union Enterprise (LHS) (68% shareholder). Relative to FSSTI (RHS)  What we recommend  What's the impact We initiate coverage with a Buy (1) 12-month range 1.93-2.56 We believe OUE offers the following rating. In our view, OUE represents Market cap (US$bn) 1.79 compelling investment merits. 1) OUE deep value and has fairly low Average daily turnover (US$m) 2.59 has relatively high exposure to the execution risk as it operates mostly as Shares outstanding (m) 910 Singapore office sector (50% of its a Singapore landlord. Our six-month Major shareholder Lippo, Stephen Riady (68.0%) revalued asset value, on our target price of S$3.10 is pegged to our estimates), and we are still positive on NAV of S$3.75, to which we ascribe a Financial summary (S$) Year to 31 Dec 12E 13E 14E this sector on a risk-reward basis. 2) 20% asset-value discount to OUE’s Singapore office properties (below the Revenue (m) 400 431 565 OUE has negligible exposure (1% of Operating profit (m) 178 184 223 revalued asset value) to the high-risk current 10% implied asset-value discount for office S-REITs, to reflect Net profit (m) 103 101 142 (in our view) residential sector (and Core EPS 0.113 0.111 0.156 no overseas residential exposure). We different payout policies, financial EPS change (%) (67.1) (2.1) 40.8 remain negative on Singapore’s transparency and tax treatment). Daiwa vs Cons. EPS (%) 2 (12) 4 residential market and property Risks to our call would include a PER (x) 21.7 22.1 15.7 developers as we believe the risks of major acquisition or capital Dividend yield (%) 2.4 2.9 3.7 rising imbalances of unsold inventory commitment in Singapore DPS 0.060 0.070 0.090 and increased vacancies in the rental residential, or the emergence of PBR (x) 0.8 0.8 0.7 market are higher than ever. 3) OUE some unforeseen corporate EV/EBITDA (x) 17.5 16.8 13.3 has moderate exposure to the governance overhang. ROE (%) 3.5 3.4 4.7 Singapore hotel (28% of revalued Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report. Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Table of contents

An undervalued property play in all the right places ...... 6 A Singapore landlord with almost no residential exposure ...... 6 Valuation: basis for target price ...... 7 Core assets – office ...... 8 Residential exposure is negligible ...... 9 Recent activity in land tenders ...... 9 Core assets – Singapore hotels ...... 10 Overseas hotels ...... 11 Core assets – retail ...... 11 At the lower end of the PBR range ...... 11 Balance sheet ...... 12 Dividend policy ...... 12 Lippo’s history at OUE ...... 12 Acquisitions – Lippo’s Singapore property vehicle ...... 13 Recent history: hits and misses ...... 13 Risks ...... 14 Appendix A ...... 15 Office: rental weakness, resilient capital values ...... 15 Appendix B ...... 18 Residential: mounting risks and imbalances ...... 18 Unsold inventory still at elevated levels ...... 19 Rental market could blink first ...... 20 Daiwa price and rental forecasts ...... 21 Appendix C ...... 24 Hotels: Singapore well-positioned to be a global destination leader ...... 24 Appendix D ...... 26 Retail: suburban supply in 2013 should be manageable ...... 26

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How do we justify our view?

 Growth outlook  Valuation  Earnings revisions

 Growth outlook  OUE: forecasts for revenue, EBITDA and EPS Even assuming no further acquisitions or corporate (S$m) (S$) activity, OUE has already established a platform of 600 565 0.16 sustainable EBITDA growth through its exposure to the 0.14 500 431 underlying recovery of the Singapore office sector and 400 0.12 400 the stable-to-mildly-positive prospects we see for the 332 0.10 hotel and retail-property sectors, complemented by 300 244 0.08 199 205 targeted asset enhancements (OUE Shenton Mall and 0.06 200 159 the extension of Crowne Plaza Changi Airport 0.04 100 Singapore). 0.02 0 0.00 For the 2011-14 period we forecast CAGRs of 19% for 2011 2012E 2013E 2014E gross revenue, 15% for EBITDA, and 18% for EPS Gross revenue (LHS) EBITDA (LHS) EPS ex reval (RHS)

(excluding revaluations). Source: Company, Daiwa forecasts

 Valuation  OUE: Daiwa NAV, target price and book values (S$)

OUE trades currently at a wide discount both to its 5.00 BVPS of S$3.44 (as at end-June 2012) and its BVPS of 4.50 S$4.63 inclusive of the valuation surplus of over 4.00 1.19 S$1.08bn (S$1.19/share). The latter represents the 3.50 0.65 difference between the company’s independent 3.00 valuations for Mandarin Orchard Singapore and Crowne 2.50 Plaza Changi Airport Singapore and their carry values. 2.00 3.44 1.50 3.10 Our estimated NAV per share for OUE is S$3.75, with 1.00 the major assets valued on a 10-year DCF. We have 0.50 applied a 20% asset-value discount for the office assets 0.00 Daiwa target/ NAV Book/disclosed revaluation surplus (explained later this report) to derive our six-month target price of S$3.10. Source: Company, Daiwa estimates Note: in the first bar, the sum of the two values (ie, S$3.75) represents our NAV, while S$3.10 corresponds to our target price.

 Earnings revisions  OUE: Daiwa forecasts relative to Bloomberg consensus Our EBITDA forecasts for OUE are higher than those of 10% 7% the Bloomberg consensus by 4% for 2012 and 6% for 6% 6% 4% 4% 2014, suggesting to us that the market could be 5% 2% underestimating the operating performance of OUE’s commercial-property portfolio. However, our 2013 0% EBITDA forecast is 2% lower than that of the consensus (5%) -2% as we expect a lower YoY contribution from DBS Towers One and Two after the departure of the anchor tenant. (10%) -11% Overall, we forecast EBITDA growth for OUE of 2.9% (15%) -12% YoY for 2013 then a rebound to 19.4% YoY growth for 2012E 2013E 2014E 2014. EBITDA PBT EPS

Source: Bloomberg, Daiwa forecasts

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Financial summary

 Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Hospitality EBITDA margin (%) 44.3 46.1 37.4 47.2 46.9 45.0 45.7 44.4 Property investments EBITDA margin 55.4 (28.6) (2.2) 73.8 67.6 72.4 71.5 74.6 (%) Property development EBITDA margin (166.7) (195.3) (132.3) (286.7) (43.0) (1.1) (1.1) (1.1) (%) Overall EBITDA margin (%) 40.9 38.6 27.9 45.2 47.8 49.7 47.4 43.3

 Profit and loss (S$m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Hospitality 155 149 131 174 216 238 247 297 Property investments 9 1 1 38 108 144 146 168 Others 6 4 5 3 8 18 39 99 Total revenue 170 153 138 216 332 400 431 565 Other income 0 2 3 8 1 0 0 0 COGS (87) (71) (74) (89) (129) (156) (173) (232) SG&A (16) (23) (21) (22) (31) (35) (36) (38) Other op. expenses (22) (25) (25) (35) (34) (30) (39) (72) Operating profit 44 37 21 78 140 178 184 223 Net-interest inc./(exp.) 13 (5) 2 (8) (50) (79) (79) (79) Assoc/forex/extraord./others 671 13 (120) 835 305 35 31 40 Pre-tax profit 728 45 (98) 905 395 134 136 184 Tax (83) (4) 5 (127) (57) (30) (34) (41) Min. int./pref. div./others 0 0 (1) (5) (2) (1) (1) (1) Net profit (reported) 646 41 (95) 772 336 103 101 142 Net profit (adjusted) 646 41 (95) 772 336 103 101 142 EPS (reported) (S$) 0.658 0.042 (0.096) 0.787 0.344 0.113 0.111 0.156 EPS (adjusted) (S$) 0.658 0.042 (0.096) 0.787 0.344 0.113 0.111 0.156 EPS (adjusted fully-diluted) (S$) 0.658 0.042 (0.096) 0.787 0.344 0.113 0.111 0.156 DPS (S$) 0.024 0.032 0.000 0.040 0.130 0.060 0.070 0.090 EBIT 44 37 21 78 140 178 184 223 EBITDA 343 174 (38) 158 199 213 225 269

 Cash flow (S$m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 728 45 (98) 905 395 134 136 184 Depreciation and amortisation 25 22 18 17 20 20 21 21 Tax paid (7) (13) (12) (12) (18) (30) (34) (41) Change in working capital (350) (579) (11) (71) 0 (93) (10) 200 Other operational CF items (619) (9) 117 (829) (256) (171) 91 41 Cash flow from operations (222) (535) 14 10 141 (139) 204 405 Capex (3) (5) (18) (7) (15) (20) (61) (21) Net (acquisitions)/disposals 45 (109) 43 (972) (334) (35) (85) (55) Other investing CF items 24 19 4 10 6 27 28 29 Cash flow from investing 65 (95) 29 (969) (343) (28) (117) (47) Change in debt 164 366 8 1,040 534 438 (25) (200) Net share issues/(repurchases) 0 0 0 0 (83) (73) 0 0 Dividends paid (24) (31) 0 (20) (39) (127) (55) (73) Other financing CF items (7) (15) (36) (33) (70) (96) (95) (86) Cash flow from financing 134 320 (28) 988 343 142 (174) (359) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (23) (310) 15 28 141 (26) (88) (1) Free cash flow (225) (540) (4) 3 126 (159) 143 384

Source: Company, Daiwa forecasts

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Financial summary continued …

 Balance sheet (S$m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 493 183 198 226 368 342 254 253 Inventory 242 831 571 716 744 832 842 642 Accounts receivable 13 11 9 27 25 25 25 25 Other current assets 56 5 10 7 15 11 11 11 Total current assets 804 1,030 788 976 1,152 1,210 1,132 931 Fixed assets 230 220 213 243 508 491 491 531 Goodwill & intangibles 0 0 0 0 43 43 43 0 Other non-current assets 1,433 1,627 1,772 3,502 3,830 3,881 3,981 4,055 Total assets 2,466 2,876 2,772 4,721 5,533 5,625 5,647 5,517 Short-term debt 23 15 115 481 56 56 56 56 Accounts payable 34 58 59 70 103 90 90 90 Other current liabilities 29 24 18 25 23 27 27 27 Total current liabilities 87 97 192 577 182 173 173 173 Long-term debt 175 550 458 1,115 2,066 2,504 2,479 2,279 Other non-current liabilities 94 103 92 227 258 30 30 30 Total liabilities 356 749 743 1,919 2,505 2,707 2,682 2,482 Share capital 693 693 693 693 693 693 693 693 Reserves/R.E./others 1,423 1,440 1,342 2,112 2,334 2,224 2,272 2,342 Shareholders' equity 2,116 2,133 2,036 2,805 3,028 2,918 2,965 3,035 Minority interests (6) (6) (7) (2) 0 1 1 1 Total equity & liabilities 2,466 2,876 2,772 4,721 5,533 5,625 5,647 5,517 EV 1,512 2,088 2,161 3,102 3,357 3,729 3,787 3,584 Net debt/(cash) (294) 382 375 1,370 1,753 2,217 2,280 2,081 BVPS (S$) 2.156 2.173 2.074 2.857 3.211 3.207 3.259 3.336

 Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) (2.3) (9.8) (10.3) 56.8 54.2 20.2 7.9 31.0 EBITDA (YoY) (1.8) (49.3) n.a. n.a. 25.9 7.2 5.5 19.6 Operating profit (YoY) (85.7) (16.1) (44.4) 276.4 79.2 27.8 3.2 21.3 Net profit (YoY) 95.2 (93.7) n.a. n.a. (56.5) (69.3) (2.2) 40.8 EPS (YoY) 95.2 (93.7) n.a. n.a. (56.3) (67.1) (2.1) 40.8 Gross-profit margin 48.5 53.7 46.4 58.8 61.2 61.0 60.0 59.0 EBITDA margin n.m. n.m. n.a. 73.3 59.8 53.3 52.1 47.6 Operating-profit margin 26.1 24.3 15.0 36.1 42.0 44.6 42.7 39.5 ROAE 35.5 1.9 n.a. 31.9 11.5 3.5 3.4 4.7 ROAA 31.6 1.5 n.a. 20.6 6.5 1.8 1.8 2.5 ROCE 2.3 1.5 0.8 2.2 2.9 3.4 3.4 4.1 ROIC 2.8 1.6 0.8 2.0 2.7 2.8 2.6 3.3 Net debt to equity net cash 17.9 18.4 48.8 57.9 76.0 76.9 68.6 Effective tax rate 11.4 8.5 n.a. 14.1 14.6 22.4 25.2 22.3 Accounts receivable (days) 30.4 28.5 25.9 30.0 28.5 22.9 21.2 16.2 Payables (days) 71.4 109.1 154.4 109.0 94.8 88.3 76.6 58.5 Net interest cover (x) n.a. 7.1 n.a. 9.9 2.8 2.3 2.3 2.8 Net dividend payout 3.6 76.8 n.a. 5.1 37.8 53.0 63.2 57.7 Source: Company, Daiwa forecasts

 Company profile Overseas Union Enterprise (OUE) is a diversified real estate owner, operator and developer, with a portfolio of properties, by 2011 revenue, in hospitality (65%), investment property (office and retail: 32%), property development (2%) and others (1%). Its geographical exposure by assets as at end-2011 was 96% in Singapore, 3% in China, and 1% unallocated assets. 

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BVPS of S$3.44 (excluding the revaluation surplus), our NAV of S$3.75, and our target price of S$3.10.

5) OUE is trading currently at the low end of its PBR range since Lippo took control of the company in mid- 2006. Although many other Singapore property An undervalued companies are also trading at the lower end of their historical PBR ranges, OUE has negligible exposure to property play in all the Singapore residential, no exposure to overseas residential, and does not hold any listed entities, unlike right places the corporate structures of many of its larger peers.

Established landlord in Singapore office, Core operations in Singapore commercial hotel and retail sectors; negligible OUE’s largest exposures are Singapore office, hotels, and retail, which we estimate in aggregate make up exposure to residential is a positive 86% of its revalued assets. OUE has negligible exposure (1% of revalued assets, included under A Singapore landlord with almost ‘Others’ in the following chart) to residential property. no residential exposure  OUE: Daiwa revalued asset breakdown

We initiate coverage of OUE with a Buy (1) rating and a Others Cash Singapore retail 3.7% 8.5% six-month target price of S$3.10. Our target price is 8.4% pegged to our estimated NAV, to which we have ascribed Other hotels an asset-value discount (to what we consider as our 2.2% cautious asset valuations) of 20% for its Singapore office assets and no discounts for its hotel and retail assets. Singapore hotels In the current market, we believe OUE offers several 27.5% compelling investment merits: Singapore office 49.7%

1) OUE has relatively high exposure to the Singapore office sector (50% of its revalued asset value, on our Source: Daiwa estimates estimates), and we remain positive on this sector on a risk-reward basis.  OUE: Daiwa NAV valuation Value (S$m) Share of value Cash and equivalents 472 8.5% 2) OUE has negligible exposure (1% of its revalued Hotels asset value) to the high-risk (in our opinion) residential Mandarin Orchard Singapore 1,072 19.3% sector. We remain negative on the Singapore Crown Plaza Changi Airport 352 6.3% residential market and Singapore property developers, Meritus Mandarin Haikou 58 1.1% because we believe the risks of rising imbalances of Meritus Shantou China 61 1.1% Total value of hotel assets 1,544 27.8% unsold inventory and increased vacancies in the rental Available-for-sale financial assets 128 2.3% market are higher than ever. (For details, see our sector Stake in OUB Centre (One ) 619 11.1% update on the Singapore Property Developers, Rising Stake in Marina Mandarin 104 1.9% risks and imbalances point to multi-year market Investment properties OUE Bayfront 981 17.7% decline, published on 23 August 2012). Mandarin Gallery 469 8.4% DBS Building 1,162 20.9% 3) OUE has moderate exposure to the Singapore hotel Total investment properties 2,611 47.0% (28% of its revalued asset value) and retail-property Present value of development property 75 1.3% (8%) sectors, which we believe offer favourable Total revalued assets 5,554 100.0% Adjusted borrowings (2,052) prospects in the medium term. Other liabilities (91) Total liabilities (2,143) 4) Its valuations look attractive to us. OUE is trading Net asset value 3,411 currently at significant discounts to its BVPS of S$4.63 Shares outstanding (m) 909.9 inclusive of a disclosed hotel valuation surplus, its NAV per share (S$) 3.75 Source: Daiwa estimates

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Valuation: basis for target price

10-year DCF to determine asset values We start off by valuing each of OUE’s major assets on a 10-year DCF basis (illustrated in the table below). That is, we discount the after-tax net profit (effectively, the unleveraged funds from operations) over 10 years, including a terminal-value assumption (a finite-life Gordon Growth Model) in year 10, based on the remaining leasehold tenure for the asset, which varies from 43.9 years to 94.3 years.

 OUE: Daiwa asset valuations vs. appraised values Long-term Effective Discount growth cap Residual Daiwa Daiwa Appraised Appraised rate rate rate leasehold value value value value Variance (%) (%) (%) years (S$m) (S$/sq ft) (S$m) (S$/sq ft) (%) Office OUE Bayfront 5.50 1.50 4.00 94.3 981 2,398 1,073 2,623 (9) DBS Towers 6.25 1.50 4.75 53.9 1,111 1,269 1,400 1,600 (21) OUE Shenton Mall* 7.00 1.50 5.50 53.9 51 n.a One Raffles Place (office) 5.75 1.50 4.25 72.2 1,749 2,301 n.a One Raffles Place (retail) 7.00 1.50 5.50 72.2 200 2,000 n.a One Raffles Place (blended) 2,266 2,056 2,390 (5) Retail Mandarin Gallery 6.50 1.50 5.00 43.9 469 2,809 520 3,116 (10) Hotel S$/room S$/room Mandarin Orchard 8.50 1.50 7.00 43.9 1,072 1,019,940 1,180 1,122,740 (9) Crowne Plaza Changi ** 8.50 1.50 7.00 71.3 392 754,175 269 840,000 (10) Marina Mandarin n.a n.a n.a 67.1 435 756,522 435 756,522 0 Total value (S$m) 6,409 6,932 (8) Source: OUE, Daiwa estimates Note: *Daiwa’s estimate of NPV of development, ** Daiwa’s value assumes completion of extension

About 8% lower than appraised value Compared with the 10% discount that the market is Our valuations of OUE’s assets are more conservative currently pricing in for office S-REITs, we have applied than its appraised valuations, as we have found that a discount of 20% to our estimated asset values for all our 10-year DCF valuations are, on average, about 8% of OUE’s Singapore office properties, to reflect the lower than the aggregate independent valuations (as at differing payout policies, financial transparency, and December 2011) provided by OUE. tax treatments between S-REITs and property companies. For Marina Mandarin Singapore, in which OUE has an effective interest of 30%, in the absence of operating Although the market is more bullish on Singapore hotel data, we use the company’s appraised value of S$435m and retail assets at present (relative to their December (S$756,522 per room), which appears reasonable to us. 2011 valuations and current book values), for the sake of prudence, we have chosen not to ascribe asset After incorporating our 10-year DCF valuations for its premiums to our valuations for OUE’s hotel and retail major assets, our NAV per share for OUE comes to assets even though our 10-year DCF valuations are S$3.75. discernibly lower than the company’s appraised values for these assets. Asset-value discount of 20% for office We recognise that OUE is mainly a property landlord As a final step in setting our target price, we ascribe an (in the office, hotel and retail segments) and not a asset-value discount to OUE’s commercial-property REIT. However, we would argue, as discussed in our exposures in view of the market’s current valuations for sector report of 4 July 2012 (Pan-Asia REITs: A new pure-play office, hospitality, and retail S-REITs. spin on valuing REITs), that their business activities are similar, and arguably, even identical. Therefore, the Currently, office S-REITs are trading at a weighted- market’s implied valuations for the office assets of average implied-asset discount of 10%, while retail and CapitaCommercial Trust (CCT SP, S$1.41, Buy [1]) and hospitality S-REITs are trading at implied-asset Suntec REIT (SUN SP, S$1.45, Buy [1]) should not premiums of 10% and 7%, respectively, based on our differ significantly from their valuations of OUE’s office estimates. assets. Moreover, the market’s valuations for office S- - 7 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

REITs should reflect not only their yields but also other OUE Bayfront is a redevelopment of Overseas Union factors, including the directional outlook of their House (OUH), one of the company’s legacy assets. The underlying asset values, and these factors are just as S$250m redevelopment, completed in January 2011, relevant for OUE’s office assets, in our view. also comprises retail and F&B space through OUE Tower (the former Change Alley Aerial Tower) with a  OUE: Daiwa NAV vs. target-price valuation breakdown net lettable area (NLA) of 11,900 sq ft and OUE Link NAV Valuation for target (the former Change Alley Linkbridge), a dual-passage (S$m) price (S$m) overhead link with an NLA of 2,854 sq ft. Cash and equivalents 472 472 Hotels Mandarin Orchard Singapore 1,072 1,072 OUE Bayfront’s committed occupancy was 82.3% as at Crown Plaza Changi Airport 352 352 the end of December 2011. At the end of 2Q12, the Meritus Mandarin Haikou 58 58 occupancy rate was about 86%, while the weighted Meritus Shantou China 61 61 Total value of hotel assets 1,544 1,544 average rent was S$10.40/sq ft, compared with asking Available-for-sale financial assets 128 128 rents of S$12-14/sq ft for the remaining unlet space, Stake in OUB Centre 619 460 according to management. Stake in Marina Mandarin 104 104 Investment properties OUE Bayfront was valued at S$1,073m (S$2,623/sq ft) OUE Bayfront 981 785 Mandarin Gallery 469 469 as at the end of December 2011. DBS Building 1,162 929 Total investment properties 2,611 2,183 DBS Building Towers One and Two Present value of development property 75 75 Total assets 5,554 4,966 DBS Building Towers One and Two (DBS Building) is Adjusted borrowings (2,052) (2,052) an office development on Shenton Way with over Other liabilities (91) (91) 870,000 sq ft of NLA and a GFA of 1.24m sq ft. The Total liabilities (2,143) (2,143) property’s remaining lease tenure is about 54 years. Net-asset value 3,411 2,823 Shares outstanding (m) 909.9 909.9 NAV/ target value per share (S$) 3.75 3.10 OUE plans to redevelop (for about S$140m) the Source: Daiwa estimates podium of the property, currently occupied by the DBS banking hall to a retail mall. The asset enhancement initiative (AEI) is scheduled to start from the end of Core assets – office 2012 when DBS’s lease expires. DBS occupies about 55% of the property and has been paying S$4.90/sq ft. We present our view of the Singapore office sector in The passing rental for the property at the end of 2Q12, Appendix A – Office: rental weakness, resilient capital according to management, was about S$5.70, implying values. We note that although office rents have been that the other tenants were paying an average of trending down for several quarters, the decline as S$6.70/sq ft. stabilised in 2Q12, suggesting that they might bottom out in 2H12. In contrast, capital values have remained Management also disclosed that the occupancy rate at resilient (flat QoQ since 3Q11) and might not decline the property was 95% at the end of 2Q12 and that its much during 2H12. (monthly) asking rents were S$6-7/sq ft.

OUE’s exposure to the Singapore office sector consists The valuation for DBS Building, as reflected on the of three properties: OUE Bayfront, DBS Building balance sheet, is S$1.4bn (S$1,600/sq ft assuming an Towers One and Two, and a 40.8% effective stake in NLA of 875,000 sq ft). One Raffles Place. Given our view that rents in the sector are set to stabilise by 1H13, we believe these In an astute move, OUE acquired the property for exposures are positive. S$870.5m (S$995/sq ft) in 3Q10.

OUE Bayfront One Raffles Place (formerly OUB Centre) OUE Bayfront, the company’s flagship commercial OUE owns an effective stake of 40.8% in One Raffles property, is an 18-storey prime grade-A office Place, an integrated development featuring two grade- development along Marina Bay, with a total gross floor A office towers (the 62-storey One Raffles Place Tower area (GFA) of 503,502 sq ft and a remaining leasehold 1 and the 38-storey One Raffles Place Tower 2) and a of 94 years. The office tower features column-free floor five-storey retail podium with one basement level. OUE plates of 26,000-30,000 sq ft. holds a 50% stake in OUB Centre Limited, which in turn, owns 81.54% of One Raffles Place. One Raffles Place Tower 2 was completed in 4Q11-1Q12. - 8 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

At the end of 2Q12, Tower 2 was 60% occupied while 30 June 2012) and less the secured bank loan of Tower 1 was 80% occupied following the departure of S$365m on the development, for a total NPV of about ANZ to (OFC). Management S$75m. said that it was signing new tenants for both towers at monthly rents of over S$9.50/sq ft. The retail mall, the Negligible for now largest shopping space in Raffles Place, was about 85% We note that OUE has been active recently in several occupied and the owners plan a modest redevelopment residential government land tenders through its (S$40-50m) to reposition it as a higher-end mall. wholly-owned residential development unit, OUE Reef Development. One Raffles Place’s approximate GFA was 1.28m sq ft, while the valuation attributed to OUB Centre was Fortunately, it has not topped any tender, which S$1,676.1m, according to its 2001 annual report, indicates a combination of bad luck (its bid for the implying a value of S$2,056m (S$2,390/sq ft, based on Pheng Gheck Avenue site was just 1% below the top bid) NLA of 860,000 sq ft) on a 100% basis, based on our and, more importantly, a bidding strategy that has calculations. been disciplined so far.

The development sits on an 841-year and 99-year lease One major risk would be overbidding and winning a from 1 November 1985 and a 99-year lease from 26 future government land tender, after missing out on so May 1983. many so far this year.

Residential exposure is negligible Recent activity in land tenders

Compared with its peers, OUE has negligible exposure Tanah Merah Kechil Road to the Singapore residential sector. We regard this as highly positive, in view of our negative rating for the OUE participated in the tender for the Tanah Merah sector. We present our view in Appendix B – Singapore Kechil Road site, which attracted 13 bids and closed on residential: Mounting risks and imbalances. 31 July 2012. OUE made the 12th-highest bid of S$223.1m, or S$528.8/sq ft per plot ratio. Twin Peaks Pheng Gheck Avenue OUE’s sole residential exposure now is its development of Twin Peaks, a 462-unit, a prime 99-year leasehold The company was the under-bidder (by just 1%) for the property on Leonie Hill, a short walk from Orchard Pheng Gheck Avenue (parcel B) site near the Potong Road. In August 2007, it acquired the former The Pasir mass rapid transit (MRT) station, which attracted Grangeford in an en-bloc sale from its strata-titled 13 bids and closed on 28 June 2012. OUE made a bid of owners for S$625m (S$1,810/sq ft per plot ratio), the S$113.75m, or S$622.5/sq ft per plot ratio. highest en-bloc sale price for a 99-year leasehold property in Singapore. We estimate a breakeven sales Pasir Ris Drive 3 price of S$2,350/sq ft. OUE rented the property The company participated in the tender for the Pasir temporarily during the global financial crisis. Twin Ris Drive 3 site, which attracted five bids and closed on Peaks was launched in 3Q10 with 48 units sold to date 5 June 2012. OUE made the third-highest bid of at an ASP of S$2,831/sq ft, according to URA’s Realis S$198.1m, or S$392.7/sq ft per plot ratio. database. We have assumed that the company can clear the remaining units over several years at a 20% Sengkang Square/Compassvale Drive discount, or an overall ASP of S$2,324/sq ft, so the The company participated in the tender for the contribution to GAAP earnings would be negligible. Sengkang Square/Compassvale Drive site, which

attracted five bids and closed on 31 May 2012. OUE We estimate an NPV of S$75m made the third-highest bid of S$340.1m, or S$468.1/sq As for what Twin Peaks is actually worth to OUE ft per plot ratio. shareholders today, we have excluded all acquisition and development costs (including capitalised interest) Boon Lay Way up to 30 June 2012, as they are sunk costs. Instead, we OUE participated in the tender for the Boon Lay Way assume that the value of the project is simply the (Jurong Gateway) site, which attracted 12 bids and present value of the remaining revenue streams (at an closed on 29 May 2012. OUE made the eighth-highest ASP assumption of S$2,324/sq ft) less additional bid of S$310.5m, or S$592.7/sq ft per plot ratio. property development commitments of S$161m (as at - 9 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Elias Road/Pasir Ris Drive 3 Crowne Plaza Changi Airport Singapore OUE was the under bidder (by 16%) for the Elias Opened in 2008, Crowne Plaza Changi Airport Road/Pasir Ris Drive 3 site, which attracted nine bids Singapore is a 320-room hotel located within and closed on 11 April 2012. OUE made a bid of Singapore’s Changi Airport with a direct link to S$139.0m, or S$395.5/sq ft per plot ratio. Terminal 3.

Punggol Central EC OUE announced the acquisition of Crowne Plaza OUE participated in the tender for the Punggol Central Changi Airport Singapore on 15 April 2011 for S$250m executive-condominium (EC) site, which attracted ten in addition to an adjacent plot of land for S$43m, on bids and closed on 29 March 2012. OUE made the which OUE plans to develop a further 200 rooms for seventh-highest bid of S$117m, or S$273.6/sq ft per S$37m. The acquisition cost works out at S$781,000 plot ratio. per room for the existing 320-rooom hotel and S$635,000 per room after the completion of the additional development. The hotel was acquired on 25 Core assets – Singapore hotels July 2011.

We present our view of the Singapore hotel sector in Crowne Plaza Changi Airport Singapore’s AOR for 2011 Appendix C - Hotels: Singapore well-positioned to be a was 90.3%, the highest among OUE’s hotels. For 2Q12, global destination leader. Although the relative the hotel achieved an ADR of S$272, an AOR of 85%, weakness of revenue per available room (RevPAR) and RevPAR of S$232. growth (excluding the integrated resort [IR] hotels) for 1H12 should be a source of concern, as well as the Crowne Plaza Changi Airport Singapore has a uncertainty in 2H12, we believe the medium-term remaining leasehold tenure of about 71 years (a 77-year prospects are still positive. lease running from 12 December 2006).

OUE’s exposure to Singapore hotels consists of its Crowne Plaza Changi Airport Singapore was valued at 100% ownership in Mandarin Orchard Singapore, and S$268.8m by independent valuers as at December 2011, Crowne Plaza Changi Airport Singapore and 30% compared with OUE’s carrying value of S$244.9m, effective interest in Marina Mandarin Singapore. implying an unrecognised revaluation surplus of S$23.8m. Mandarin Orchard Singapore Marina Mandarin Singapore Located on Orchard Link, directly opposite and Takashimaya Shopping Centre on Orchard OUE owns an effective stake of 30% in Marina Road, Mandarin Orchard Singapore is a 1,051-room Mandarin Singapore, a 21-storey 575-room hotel on hotel consisting of a 37-storey main tower and a 39- Raffles Boulevard, within the complex storey Orchard Wing. The hotel’s main attraction is its and opposite and the Pan Pacific Hotel prime Orchard Road location which has a strong Singapore. It also boasts a strategic location for the following from visitors from Southeast Asia. annual Formula 1 Singapore Grand Prix.

For 2011, Mandarin Orchard Singapore’s average daily Its fair value, according to independent valuations, was room rate (ADR) was S$277.3. For 2Q12, the hotel S$435m (S$668,000 per room). achieved an ADR of S$283, an average occupancy rate (AOR) of 87% and RevPAR of S$245. Marina Mandarin Singapore has a remaining leasehold tenure of about 67 years (a 99-year lease running from The remaining leasehold tenure for Mandarin Orchard 9 September 1980). Singapore is about 44 years (with a 99-year lease from 1 July 1957).

Mandarin Orchard Singapore, based on an independent valuation, was valued at S$1,180m (S$1.12m per room) as at December 2011. Classified as property, plant, and equipment, the hotel’s carrying value on OUE’s balance sheet was only S$119.3m, implying an unrecognised revaluation surplus of S$1.06bn.

- 10 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

fully occupied) with a passing monthly rent of S$22/sq Overseas hotels ft, according to management. Prime, first floor rents are in the range of S$45-55/sq ft, while fourth floor We regard OUE’s overseas hotels as non-core assets, rents are in the range of S$10-15/sq ft. for their relatively small size and minor contribution to the company’s overall net profit. However, they do The valuation for Mandarin Gallery, as reflected on the complement OUE’s Meritus Hotels & Resorts brand, balance sheet, was S$520m (S$3,116/sq ft assuming comprising three properties outside of Singapore. NLA of 166,886 sq ft) as at December 2011.

Meritus Mandarin Haikou Meritus Mandarin Haikou is a 23-storey hotel with 318 rooms in Haikou City, China. At the lower end of the PBR range

Its fair value, according to independent valuations, was Since Lippo, OUE’s current controlling shareholder, Rmb298 as at December 2011. It has a remaining took control of OUE from United Overseas Bank (UOB) leasehold tenure of about 47 years (a 70-year lease in late May 2006, its shares have traded at an average running from 31 March 1989). PBR of 1.10x and a standard deviation (SD) of 0.33. The shares are now trading near the low end of their Meritus Shantou China valuation range since June 2006, and more than 1SD below their mean. Meritus Shantou China is a 21-storey hotel with 318 rooms in the financial district of Shantou, Guangdong,  OUE: PBR trend (x) China. 2.0

Its fair value, according to independent valuations, was 1.5 Rmb313m as at December 2011. It has a remaining leasehold tenure of about 35 years (a 50-year lease 1.0 running from 24 September 1997).

Meritus Pelangi Beach Resort & Spa, 0.5 Langkawi, Malaysia 0.0 OUE manages the 331-room Meritus Pelangi Beach Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Resort & Spa. The resort is situated on 35 acres along a PBR (x) Mean (1.10x) +1 Std -1 Std 1km stretch of Langkawi’s Cenang Beach. Source: Bloomberg

One reason that OUE shares have traded (on average) Core assets – retail above their book value since June-2006 is that the company’s core hotel property assets are carried on the We present our view on the Singapore retail sector in balance sheet as property, plant and equipment. They Appendix D – Retail: suburban supply in 2013 should are not revalued annually (unless there is an be manageable. OUE’s exposure to the retail sector is impairment charge), unlike the accounting treatment mainly through its Mandarin Gallery on Orchard Road. for office and retail properties. Its stake in One Raffles Place includes an exposure to its retail mall. Moreover, OUE plans to add a retail mall Trading at the low end of its PBR range is not unique to within the podium of DBS Towers One and Two. OUE and appears to be a trend in the Singapore property sector. However, we reiterate that OUE’s Mandarin Gallery current discount might not be deserved since, compared with its peers, it has negligible exposure to Mandarin Gallery is a 196,337 sq ft GFA retail podium Singapore residential and also to overseas residential on Orchard Road consisting of four levels and six (in ASEAN and China). Moreover, OUE is not a holding duplexes catering to 103 shops offering luxury, fashion, company (it does not own any listed entity), unlike the and lifestyle brands. corporate structures of many of its larger peers, so it does not warrant a holding-company discount. Its Mandarin Galley has a remaining leasehold tenure of stated dividend policy of a 50% payout is also more about 44 years (99-year lease from 1 July 1957). At the generous compared with its peers. end of 2Q12, the occupancy rate was 99.5% (effectively - 11 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

 PBR trend of major Singapore property companies (x)  OUE: gearing trend (x) 0.7 5 0.61 0.59 0.56 0.6 0.55 0.54 4 0.48 0.5 0.46 0.45 3 0.4 0.27 2 0.25 0.3 0.22 0.18 0.18 0.18 1 0.2 0.1 0 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 0.0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 CAPL SP Equity CIT SP Equity KPLD SP Equity OUE SP Equity Net debt to equity Net debt to assets

Source: Bloomberg Source: Company, Daiwa  The OUE stock has generally underperformed its peers over six-month and one-year periods, as the next table Dividend policy shows. OUE’s dividend policy (announced on 7 June 2010) is  Singapore-listed property companies: share-price performances to pay annual dividends of at least 50% of its profit Share price Mkt cap (S$m) 1-Month 3-Month 6-Month 1-Year after tax, after adjusting for fair-value gains and taking Bloomberg 31-Aug-12 31-Aug-12 % % % % into account the group’s capital requirements, HKL SP US$ 6.1 14,318 1.7% 8.9% 10.3% 5.2% expansion plans and other funding requirements. CAPL SP S$ 3.01 12,794 0.3% 18.5% -2.3% 14.9% Based on our DPS forecasts of S$0.06-0.09 for 2012-14 CIT SP S$ 11.52 10,475 -1.5% 15.8% 3.5% 14.3% GLP SP S$ 2.37 10,894 5.3% 13.9% 8.7% 41.9% and OUE’s share price of 6 September 2012, the CMA SP S$ 1.655 6,434 1.5% 17.4% 7.5% 21.7% projected dividend yield is 2.4-3.7%. UIC SP S$ 2.61 3,597 -1.5% 3.6% -6.1% -3.3% KPLD SP S$ 3.39 5,235 -1.5% 18.5% -0.9% 9.7% UOL SP S$ 5.27 4,052 1.7% 19.8% 12.4% 15.3% Lippo’s history at OUE SL SP S$ 6.01 2,479 1.0% 10.3% 5.3% -9.5% YLLG SP S$ 1.165 2,270 -4.1% 13.7% -15.6% 28.7% OUE SP S$ 2.5 2,275 -2.0% 17.4% 0.4% 5.9% In late May 2006, Lippo and Malaysian billionaire GUOL SP S$ 1.7 2,012 2.1% 8.6% -11.5% -18.3% Ananda Krishnan teamed up in a 60/40 joint venture WP SP S$ 1.81 2,166 -0.3% 9.4% 10.4% 6.5% to buy a 55% stake in OUE from UOB, shortly ahead of BS SP S$ 4.85 1,256 3.2% 5.4% 6.6% 20.0% FRAG SP S$ 0.545 1,831 9.0% 17.2% 47.3% 70.3% the 17 July 2006 deadline imposed by the Monetary HOBEE SP S$ 1.285 902 3.2% 14.7% -4.1% -5.5% Authority of Singapore for Singapore banks to divest WINGT SP S$ 1.53 1,196 8.5% 18.6% 20.0% 12.5% their non-core assets. UOB had acquired OUE when it YINGLI SP S$ 0.32 692 4.9% 23.1% -14.7% 4.9% succeeded in the takeover of OUE’s former parent, the OHL SP S$ 0.395 588 0.0% 9.7% 25.4% 19.7% SCGD SP S$ 0.985 409 1.5% 0.0% -7.1% -19.9% former Overseas Union Bank, in late 2001. FSSTI 3025.46 -0.4% 9.1% 1.0% 4.9% FSTREI 725.13 2.7% 13.3% 16.0% 12.7% In retrospect, we believe the timing of the acquisition Source: Bloomberg was highly favourable for Lippo, as it was secured during a reasonably attractive phase of the Singapore property cycle. Lippo also read correctly the potential Balance sheet for the IRs to drive the Singapore hospitality market to the next level. Lippo also bought OUE from what most As at 30 June 2012, OUE’s net-debt to (total) equity observers would regard as an astute Singapore real- was 0.61x, while its ratio of net debt to total assets was estate player, UOB (in particular, its chairman Wee 0.34x. Its gearing might appear on the high side Cho Yaw), although UOB faced a deadline to relative to other Singapore property companies, but its considerably pare down its stake in OUE. total equity value does not include the valuation surplus of its hotels (of about S$1bn, based on their In March 2010, Lippo bought out Ananda Krishnan’s December 2011 valuations). Including this surplus, we stake for S$957m (valuing OUE at the time at S$11 per estimate that the net-debt-to-equity ratio would be share), raising its effective stake in OUE to 88.5%. 0.45x, which for a property landlord would be a Lippo said that it intended to retain OUE’s listing on comfortable level, in our opinion. The increase in the Singapore Exchange. gearing in 3Q10 was due to borrowings incurred for the acquisition of DBS Towers. - 12 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Acquisitions – Lippo’s Singapore Recent history: hits and misses property vehicle Placing out vendor shares According to its chairman, Stephen Riady, the son of The company announced on 15 June 2010 that it would Mochtar Riady, who controls the Indonesian not proceed with a proposed convertible note issue, but conglomerate, Lippo Group, OUE has been planning at that its controlling shareholder, Golden Concord Asia least one investment a year in Singapore to boost its Limited (GCAL) would place out 18m vendor shares at property portfolio. These investments include office a price of S$11.50 per vendor share, reducing its stake towers, hotels, malls, and residential developments. to 79.35%.

Value creation for investment-property On 16 June 2010, OUE shareholders at the portfolio extraordinary general meeting (EGM) unanimously approved a five-for-one subdivision of the company’s Since Lippo’s acquisition there has been clear evidence ordinary shares. of value creation within OUE’s portfolio, helped in part by the property cycle. The redevelopments of OUE GCAL announced on 7 October 2010 that it would place Bayfront (for S$460m) and Mandarin Gallery (for out 120.5m vendor shares at S$2.80 per vendor share, S$200m) were timely moves to upgrade, modernise reducing its stake in OUE from 79.35% to 67.07%. The and augment its investment properties, in our view, transaction was settled on 10 October 2010. while OUE’s acquisition of DBS Towers One and Two for S$870.5m, or about S$995/sq ft (announced on 11 August 2010) looks prescient now despite anchor The ‘financing’ transaction and its tenant DBS’s withdrawal. overhang GCAL entered into a financing transaction in January Residential has been a drag 2011, whereby it delivered 53.3m OUE shares (5.43% of OUE was not as fortunate in the luxury residential issued capital) to Credit Suisse with a right of return. market. It is still saddled with Twin Peaks, acquired at Economically, this was an attractive financing an en-bloc sale in August 2007 for S$625m transaction from Golden Concord Asia’s perspective. (S$1,810/sq ft per plot ratio), the highest en-bloc sale However, when Credit Suisse disposed of 42.6m OUE price for a 99-year leasehold property in Singapore. shares in a block trade, it confused many OUE investors, Fortunately, it was nimble enough to offload another and probably created an overhang for OUE’s share price. luxury development, a freehold site at Anguilia Park, to GCAL subsequently announced on 23 August 2011 that China Sonangol Land for S$283m in October 2009. it had decided to unwind the transaction (receiving 13m OUE acquired the site (the former The Parisian) in shares back but relinquishing the right of return for the December 2006 for S$228.1m to reduce its high-end remaining shares). residential exposure. Comes through on share buybacks We reiterate that one acquisition-related risk would be On 28 September 2011, the shareholders at the EGM to overpay for any future residential government land unanimously approved a share buyback mandate, tender, since OUE has been relatively active in tenders allowing buybacks of up to 10% of issued shares. so far this year. OUE promptly began share buybacks on 30 September 2011. By the end of 2011, it had purchased 38.5m shares at an average price of S$2.15/share. The share buyback continued into 2012 (mostly in 1Q12), with the company buying back 33.2m shares year-to-date at an average price of S$2.21/share.

- 13 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Risks

Returning to residential Given our negative view on the Singapore residential market and negative stock ratings for the property developers we cover, we believe acquiring a residential site for development now, at the peak of the market (and we expect a multi-year correction of 20-23% in prices), would be likely to destroy value.

If OUE decides to make a major investment in the residential market, it would probably be in the mass- market, where the company has been active in recent government land tenders. Even in this segment, we would still be extremely wary of any move since OUE has not established a track record of fast turnarounds, a critical skill over the next 6-9 months, in our opinion, in the mass-market.

Lippo and corporate governance We believe OUE will be Lippo’s preferred vehicle to expand in the Singapore property market and that Mr. Stephen Riady is committed to raising OUE’s profile in a transparent manner through strategic acquisitions and asset enhancements. OUE has clearly gained traction in the hotel and office space since Lippo took over. For all of the positive developments, however, there have been setbacks related to the controlling shareholder from time to time, including the placement of vendor shares and the GCAL ‘financing’ transaction in 1H11. Although the risk appears to be receding, we believe any negative corporate governance (or perceived corporate governance) issue in the future could lead to underperformance of the shares.

- 14 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

So far, we see no reason to expect prime grade-A office rents to breach the global-financial-crisis trough level of S$7.75/sq ft.

 Prime grade-A office monthly rentals (S$/sq ft) 20 18.40 Appendix A 18 16 14 10.20 Office: rental weakness, resilient 12 capital values 10 8 7.75 8.50 6 Not a bad place to hide 4 We believe the Singapore office sector is not a bad 2 place to hide amid the current global uncertainties. 0 Although office rents are still on a downtrend, they 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 appear to be stabilising. According to Jones Lang Source: JLL, Daiwa forecasts (from 3Q12) LaSalle, prime grade-A office rentals declined by 4.4% QoQ for 4Q11, 4.6% QoQ for 1Q12, and 1.1% QoQ for Demand should catch up from 2013 2Q12. We believe the current market correction will be Annual net demand (net take-up of office space) was relatively mild in relation to the collapse in rents that extremely robust in 2010 and 2011 compared with occurred during the global financial crisis. Moreover, previous years, but it was outpaced by the sheer volume the most-recent peak of S$10.20/sq ft in 3Q11 was not of new supply. The annual increase in new office space particularly high, at about where office rent levels were for 2009-11 was probably the highest ever over a three- in late 2006. year period in Singapore.

We believe it was fortunate, in retrospect, that the  : annual supply and demand (m sq ft) record supply of new office space from 2009-11 (mostly in the new-downtown, Marina Bay area) kept rents 2.5 from appreciating too rapidly during the post-global 2.0 financial crisis recovery period, when Singapore’s GDP 1.5 growth rebounded to 14.8% YoY for 2010 and 4.9% 1.0 YoY for 2011. We regard current core Central Business 0.5 District (CBD) rents as undemanding. 0.0 -0.5 We see 17% downside risk for rents from -1.0 3Q11 to 1H13 -1.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Nevertheless, we expect the combination of weak 2012E 2013E 2014E 2015E Supply Demand economic growth (for 2012), renewed Eurozone concerns, and still-elevated overall vacancy levels in the Source: URA, Daiwa forecasts CBD to continue to exert negative pressure on rents until 1H13. Even today, the supply overhang has not  Singapore office market: vacancy rates (%) been removed completely, with overall vacancy rates 25 (13.2% for the downtown core, according to URA data, 19.6 20 and 7.7% for the CBD core, according to JLL data) at 16.8 17.6 14.0 13.9 14.0 the end of June 2012, above their long-term average 15 13.4 13.3 13.5 13.1 levels. 11.4 11.5 10.2 9.8 10 8.6 7.9 7.5 7.8 7.0 We assume that office rents will continue to decline 4.9 5.4 5.4 3.6 4.1 3.7 gradually and bottom out at S$8.50/sq ft in 1H13, 5 2.7 representing a peak-to-trough decline of 17% from 0 S$10.20/sq ft in 3Q11. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E URA downtown core (%) JLL CBD core (%)

Source: URA, JLL, Daiwa forecasts

- 15 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

We expect supply to outstrip demand again in 2012 Asset values more resilient now before take-up exceeds the new supply additions over Compared with our office-rent forecasts, we expect 2013-14. By then, we expect the vacancy rate to asset values during the downward phase of the current improve gradually. office cycle to be more resilient. We note that since the global financial crisis, Singapore office capital values, More new office space scheduled from compared with rentals, have declined less during 2015 market corrections and appreciated more during Following the likely lull in 2013-14, there will be no recoveries. shortage of new office space available in the downtown core, with several schemes scheduled for completion in We expect this trend to continue in the current low- 2015, sites available on the reserve list, as well as a interest-rate and high-liquidity environment. Moreover, choice of white sites with considerable office-space the increasing investment restrictions in the private- content (Rochor/Orphir and Marina South) that will residential market have made commercial properties, eventually be released for development by the as an asset class, even more attractive to investors. Temasek/Khazanah joint venture. This newfound demand can be seen from the rapid Over the longer term, we expect these new additions to convergence of strata-titled office values and en-bloc be paced broadly with demand from tenants, economic office values. Hence, although we forecast a peak-to- growth, and the state of the office market. While short- trough decline of about 17% for office rents, we do not term supply-demand imbalances can most probably expect capital values to decline by more than 5% (from never be eliminated, we believe it is premature to be peak to trough) during the current office-market overly concerned about the state of the office market in downturn. Currently, office capital values are flat 2015. compared with their 3Q11 levels, and our forecast for even a 5% capital-value decline could prove too bearish. The office sector in the CBD will also face a structural change, from the availability of new and decentralised  Prime grade-A office capital values (S$/sq ft) office space in targeted suburban regional centres, such 3,500 as the Jurong Gateway, one-North, and the Tampines 2,900 3,000 Regional Centre, which includes Changi Business Park. 2,430 2,500  Core CBD: scheduled new-office supply Scheduled Development NLA 2,000 2,315 Completion (sq ft) 1,500 1,700 2012 1 Raffles Place Tower 2 334,783 MBFC Tower 3 1,304,585 1,000 2012 subtotal 1,639,368 2013 Tower 2 775,100 500 2013 subtotal 775,100

2014 CapitaGreen 700,000 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 2014 subtotal 700,000 2015 PS100 (SOHO) 50,000 Source: JLL, Daiwa forecasts (from 1Q12) V on Shenton 270,000 South Beach Development* 502,000 2015 subtotal 822,000 2016 and after Peck Seah St/ Choon Guan St 800,000 Robinson Square 35,355 Oxley Tower (The Corporate Office) 111,713 Int'l Factors & Robinson Towers 215,283 EON Shenton 103,021 (M+S) 1,830,000 Ophir-Rochor (M+S) 580,000 Marina View/Union Street 764,022 2016 and after subtotal 4,439,394 Source: JLL, Daiwa Note: *South Beach is not within the core CBD, but would certainly compete for CBD tenants, in our view

- 16 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Negatives look priced in Although these uncertainties are still relevant and Since the sharp sell-down in 3Q11, we believe the stock cannot be ignored, we believe the Singapore office market has fully discounted the negative consequences market is on a better footing compared with for the listed office plays (office S-REITs as well as expectations 9-12 months ago, following a relatively property companies with high office exposure, such as resilient operational performance from the office S- OUE and Keppel Land [Not rated]), of a local office- REITs in 1H12. With share prices still discounting what market downturn and the eventual fallout from a bad we believe to be an unrealistically bleak scenario, we outcome in Europe. believe the risk is now firmly on the upside, and any positive data over the coming quarters (such as better- than-expected office rent trajectories or stronger-than- expected take-up rates) could trigger a sector rerating.   Singapore office market: core assumptions Singapore office Unit 2007 2008 2009 2010 2011 2012E 2013E 2014E Comment Supply (private downtown core) m sq ft (0.60) 0.08 1.08 1.69 2.20 1.44 0.58 0.50 Some respite likely in 2013-14 Demand (private downtown core) m sq ft 1.23 (0.62) (0.68) 1.41 1.77 1.21 0.81 0.99 Underlying demand appears resilient Vacancy URA downtown core (yr end) % 4.9 7.5 13.3 13.5 13.9 14.0 13.1 11.5 Still structurally higher after the additions in 2009-12 Vacancy JLL CBD core avg. (yr end) % 2.7 4.1 10.2 5.4 7.8 7.9 7.0 5.4 Rents (Q4) Prime grade-A office (JLL) S$/sq ft/mth 16.00 14.95 7.80 9.35 9.75 8.75 8.84 9.67 We expect this cycle to bottom in 1H13 YoY change % 66.7 (6.6) (47.8) 19.9 4.3 (10.3) 1.1 9.3 Capital values (end of year) Prime grade-A office (JLL) S$/sq ft 2,900 2,480 1,700 2,200 2,430 2,349 2,315 2,409 Capital values could be resilient due to liquidity YoY change % 70.6 (14.5) (31.5) 29.4 10.5 (3.3) (1.5) 4.1 Yield (JLL core CBD) (end of quarter) % 4.00 4.70 4.50 3.75 3.80 3.65 3.64 3.71 We expect yield compression in 2012 Source: Singapore URA, Jones Lang LaSalle, Daiwa forecasts

- 17 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Given the strong YTD pace of launches, home sales and government land sales (GLS) programme, we have recently revised up our 2012-15 annual launch assumptions by 20-31% and our annual home sales assumptions by 22-46%. In both cases, the greatest revisions occur for 2012. Appendix B  Singapore residential: annual units launched and sold by developers Residential: mounting risks and 25,000 imbalances 20,000

The following is an excerpt from our 23 August 2012 15,000 report, Rising risks and imbalances point to a multi- year market decline. We reiterate our negative stance 10,000 on the Singapore residential property market, as all the 5,000 reasons to remain wary, as detailed in our 16 November 2011 report, Singapore Residential 0

Property - Heading for a prolonged downturn remain 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 intact. After incorporating the YTD resilience of the 2012E 2013E 2014E 2015E Units launched Units sold property market (stable prices and record sales volume) since our 16 November 2011 report, and since the Source: Singapore URA, Daiwa forecasts imposition of the fifth round of property cooling measures, announced on 7 December 2011, our core  Units launched and sold by developers Launched Sold % sold assumptions have not changed much. 1996 11,520 9,565 83.0 1997 9,869 5,520 55.9  Singapore residential: monthly developer launches and sales 1998 5,324 6,096 114.5 3,000 1999 5,087 8,815 173.3 2000 8,143 5,406 66.4 2,500 2001 8,357 7,189 86.0 2002 9,507 9,485 99.8 2,000 2003 5,216 5,156 98.8 1,500 2004 5,881 5,785 98.4 2005 8,201 8,955 109.2 1,000 2006 11,069 11,147 100.7 2007 14,016 14,811 105.7 500 2008 6,107 4,264 69.8 0 2009 14,103 14,688 104.1 2010 16,575 16,292 98.3 Jul-11 Jul-12 Oct-11 Apr-12 Jun-12 Jan-12 2011 17,710 15,904 89.8 Mar-12 Feb-12 Aug-11 Sep-11 Nov-11 Dec-11 May-12 2012E 21,989 20,890 95.0 Units launched Units sold 2013E 18,743 16,868 90.0 Source: Singapore URA 2014E 17,495 15,746 90.0 2015E 16,248 14,623 90.0 Strong, record take-up, so far Source: Singapore URA, Daiwa forecasts

Despite the cumulative impact of five rounds of However, the pace of home sales and take-up in the property cooling measures, 2012 is shaping up to be a future is highly uncertain, in our opinion. It requires a record year for home sales, helped partly by the big leap of faith to assume that the sustainability of proliferation of ‘shoebox units’ (units of less than YTD home sales – driven by factors such as the 50 sq m accounted for 27% of home sales in 1Q12 and absolute affordability of shoebox units, the appeal of 19% in 4Q11) and the popularity of affordable units suburban projects with proximity to mass rapid transit (42% of sales in 1Q12 and 27% in 2Q12 were for (MRT) stations or with a significant retail component, properties worth less than S$750,000). YTD (January- the apparently voracious local appetite for investment- July) home sales by developers (excluding executive property assets, and low interest rates – will last condominiums) totalled 14,185, compared with 15,904 indefinitely. units for the entire year of 2011. The YTD take-up rate was also a healthy 95%.

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Moreover, we believe the risk of a system-wide build- Unsold units in the pipeline still a concern up of inventory to unprecedented levels will only A broader gauge of unsold inventory would be the increase if the take-up rates for launches over the next number of unsold units out of all units of projects in several months weaken considerably. the pipeline. There were 38,175 unsold units at the end of 2Q12, an increase from 36,552 unsold units at the The strong home sales have not improved the end of 1Q12, but still below the peak at the end of 4Q08 imminent build-up of two major supply-related of 43,414 units. (The URA data of unsold units is only imbalances: 1) unsold inventory, and 2) vacant units in available from 3Q06.) the rental market, the principal sources of our concerns. No doubt the strong home sales so far in 2012 have stabilised the level of unsold units. However, the number of unsold units only declined by 1,009 units Unsold inventory still at elevated from the end of 4Q11 to the end of 2Q12, when home levels sales for 1H12 reached a record of 11,928 units, suggesting that the overall pipeline of units continues Slight QoQ improvement in unsold to build up. inventory This build-up is evident in the total units of Our current tally of unsold inventory* is 13,080 units uncompleted properties ‘in the pipeline’ (those under at the end of 2Q12. Although it has declined slightly construction and with written or provisional- QoQ, it is still at an elevated level, exceeding the global permission approvals), which were at an all-time high financial crisis peak of 11,288 units at the end of 1Q09. of 82,251 units at the end of 2Q12, surpassing the pre-

global financial crisis and pre-Asian financial crisis * This is the sum of: 1) the unsold units in completed developments, 2) unsold units that have been launched for sale for uncompleted developments, and 3) the remaining un- peaks. launched units in uncompleted developments, which have been partially launched.  Singapore residential: units in pipeline and unsold units (no.  Singapore private residential: inventory of units) (Units) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Unsold completed units 1,006 1,292 1,279 1,246 1,218 1,233 90,000 Launched and unsold units 4,179 4,603 5,044 5,584 6,024 6,762 80,000 Launch ready and unsold units 5,943 5,759 5,712 6,003 5,925 5,085 70,000 Total unsold inventory (units) 11,128 11,654 12,035 12,833 13,167 13,080 60,000 YoY increase in inventory (units) 1,700 1,958 2,088 1,692 2,039 1,426 50,000 YoY increase in inventory (%) 18.0 20.2 21.0 15.2 18.3 12.2 40,000 QoQ increase in inventory (units) (13) 526 381 798 334 (87) QoQ% increase in inventory (0.1) 4.7 3.3 6.6 2.6 (0.7) 30,000 Source: Singapore URA, Daiwa 20,000 10,000  Unsold inventory of residential units (no. of units) 0 14,000 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 Units in pipeline Unsold pipeline 12,000 10,000 Source: Singapore URA 8,000 6,000 Since 1990, the (unit) pipeline of private residential supply has been highly correlated with property prices, 4,000 a reflection of the government’s consistent supply- 2,000 driven policy to address rising property prices. 0 Although the sharp declines in property prices from

2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 their peaks have been caused by external factors, we Unsold completed units Launched and unsold units believe it is no coincidence that peak levels of supply Launch ready and unsold units have been highly correlated with peak prices. Source: Singapore URA, Daiwa It is possible that the low interest-rate environment could foster a prolonged plateau in prices (we have ruled out further price increases because they would be met promptly with more government cooling measures, in our opinion), we do not regard the current situation as stable and believe the risk for home prices is clearly on the downside.

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 Singapore residential: price index and units in pipeline 250 90,000 Rental market could blink first 80,000 200 The other aspect of a rising pipeline of new supply is its 70,000 impact on the rental market. We forecast 13,213- 60,000 150 18,000 completed units annually over 2012-16 50,000 (peaking at 18,000 units in 2014 and 2015), compared 40,000 100 with the previous peak of over 14,000 units in both 30,000 1997 and 1998.

50 20,000  Completions and future pipeline (no. of units) 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 20,000

Residential price index (LHS) Units in pipeline (RHS) 18,000 18,000

15,000 Source: Singapore URA 14,582 14,038 13,766 15,000 13,213 GLS supply-driven policy stays aggressive 10,000 We believe the government will continue to inject a generous number of units into the overall supply 5,000 pipeline to address the perceived ‘imbalances’ in the residential market. Since 1H11, each semi-annual GLS 0 has exceeded 14,000 units, consisting of projects from 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 both the confirmed and reserved lists. 2012E 2013E 2014E 2015E 2016E Completions Daiwa forecast

So far, injecting new sites has had a limited impact on Source: Singapore URA, Daiwa forecasts from 2012E dampening private-home prices, given the time lag from when a site is available for auction to when the Developers, specifically of private sector projects, have winning bidder actually launches new units for sale in some leeway in deferring the completions of their the project. The immediate consequence of injecting projects, so our forecast completions for 2014-16 is 9- new sites for sale is a relentless build-up of the supply 33% lower than the URA’s total pipeline tally, which pipeline. includes all development projects under construction and those with planning (written or provisional  GLS programme: reserved and confirmed list permission) approvals. Confirmed Reserved Total 2H05 0 3,685 3,685  Residential supply pipeline (units) 1H06 0 4,320 4,320 Daiwa forecast URA total Under construction With approvals 2H06 0 4,670 4,670 2012E 13,213 13,213 8,292 0 1H07 3,014 5,020 8,034 2013E 13,766 13,782 13,766 16 2H07 2,579 4,505 7,084 2014E 18,000 19,813 16,366 3,465 1H08 2,839 4,990 4,990 2015E 18,000 26,843 15,266 11,577 2H08 1,122 6,840 7,829 2016E 15,000 20,570 2,736 17,834 1H09 0 7,962 7,962 Source: Singapore URA, Daiwa forecasts 2H09 0 8,655 8,655 Note: *as at 2Q12; approvals refer to projects with written or provisional permission 1H10 2,925 7,625 7,625 2H10 8,135 5,770 10,550 1H11 8,125 6,185 14,310 Vacancies look set to rise 2H11 8,115 6,080 14,195 We forecast the vacant stock to rise steadily from 1H12 7,020 7,120 14,140 12,388 units at the end of 2009, and surpass the 2H12 7,060 7,125 14,185 previous all-time high of 19,276 units (at end-2005) by Source: URA 2013, when we expect over 20,200 vacant units. From More launches ahead 5.9% as at end-2Q12, we forecast the vacancy rate to rise steadily to 8.0% by 2016. We expect private-residential launches to continue at a rapid pace (16,250-22,000 annually for 2012-15 compared with an annual average of 9,793 units for 1996-2011), with unit launches a product of ‘forced supply’ as a consequence of the GLS.

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 Singapore residential: vacancy build-up 30,000 10 Daiwa price and rental forecasts

25,000 8 We have toned down our forecasts for private home- 20,000 6 price declines slightly, but still forecast mass-market 15,000 home prices to decline by 20% (from 22% previously) 4 from the end of 2011 to the end of 2014. For the high- 10,000 end segment, we project a decline over the same period 5,000 2 of 23% (from 26% previously).

0 0 We still see negative pressures on rents and capital 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E values from the current lingering global economic Vacant units (LHS) Vacany rate (%) (RHS) uncertainty and below-potential GDP growth for Source: Singapore URA, Daiwa forecasts (from 2012E) Singapore for 2012 and possibly 2013. Over the medium term (2013-16), we see rising imbalances in  Private residential: supply and demand (units) unsold inventory and vacant units in the rental market Chg in stock Completions Demolitions* Chg in occupied stock keeping prices (and rents) in check, though these 1997 12,159 14,582 (2,423) 6,954 1998 12,300 14,038 (1,738) 11,155 negative factors should be tempered by the current 1999 9,978 11,079 (1,101) 10,880 capacity for Singapore home buyers to service 2000 9,477 10,811 (1,334) 10,846 mortgages, given the low level of unemployment and 2001 5,326 6,817 (1,491) 2,460 historically low interest rates. 2002 6,843 7,730 (887) 5,596 2003 5,737 6,619 (882) 6,852  Singapore: private-residential capital values (S$/sq ft) 2004 10,969 11,799 (830) 9,392 2005 7,453 8,697 (1,244) 6,093 Outside central Chg Core central Chg 2006 4,008 6,520 (2,512) 9,027 End of year region (OCR) YoY (%) region (CCR) YoY (%) 2007 1,448 6,513 (5,065) 2,571 2004 461 842 2008 6,392 10,122 (3,730) 4,903 2005 466 1.0 892 6.0 2009 8,285 10,488 (2,203) 10,520 2006 485 4.3 1,043 16.9 2010 8,754 10,399 (1,645) 8,259 2007 613 26.4 1,384 32.7 2011 10,525 12,469 (1,944) 7,428 2008 596 (2.9) 1,306 (5.6) 2012E 11,574 13,213 (1,639) 9,403 2009 666 11.8 1,282 (1.8) 2013E 11,766 13,766 (2,000) 9,684 2010 765 15.0 1,465 14.2 2014E 16,000 18,000 (2,000) 13,672 2011 824 7.7 1,523 4.0 2015E 16,000 18,000 (2,000) 13,672 2012E 821 (0.4) 1,477 (3.0) 2016E 13,000 15,000 (2,000) 10,846 2013E 727 (11.5) 1,308 (11.5) 2014E 663 (8.7) 1,170 (10.6) Source: Singapore URA, Daiwa forecasts 2015E 663 0.0 1,170 0.0 * Note: implied from completions and change in stock

Chg end 2011-15E (19.5) (23.2) Supply likely to exceed demand in 2H12 Source: URA, Daiwa forecasts We believe the strong completion pipeline could have a negative impact on the overall vacancy rate as early as Gradual, multi-year declines 2H12. According to the URA’s most recent tally (as at We do not envisage sharp declines (in excess of 20%) in end-2Q12), there are 8,292 units under construction rents or capital values in any one year. Instead, we scheduled for completion in 2H12 (compared with expect a subdued residential-property market to persist 4,921 units actually completed in 1H12). for several consecutive years.

In view of the net demand (the overall increase in Multi-year declines in prices and rents are nothing new occupied units) of only 4,147 units in 1H12, we expect in Singapore, which experienced half a decade of the overall vacancy rate to increase from 5.9% as at gradual declines in the early 2000s, due to a major end-2Q12 to 6.5% as at end-4Q12 (assuming net supply-demand imbalance (pre-Asian financial crisis demand of 5,256 units for 2H12 and assuming overbuilding followed shortly by extremely weak demolitions of 500 units each quarter). The rapid pace demand in 2000-04). We believe the sector could see a of completions is likely to add a considerable number repeat of a multi-year property-market downturn in of units in the rental market, and this could exert 2012-14. negative pressure on rents.

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 Singapore private residential: boom and bust periods The high-end segment has been more subdued year-to- Magnitude* date, with prices in the core central regional flat from Period URA (%) JLL (%) end-2011 to end-2Q12, compared with a 2.6% increase 4Q90-2Q96 Tiger-economy rise fuelled by FDIs 222 186^ 2Q96-4Q98 Asian financial crisis (45) (33) in the outside central region. Foreigners’ share of 4Q98-2Q00 Post AFC rebound 40 25 private home purchases has fallen from 20% in 2011 to 2Q00-1Q04 Dotcom bust, 9-11, SARs (20) (22) 7% for 1H12, according to National Development 1Q04-2Q08 Pre GFC recovery 58 132 Minister Khaw Boon Wan. Although demand for high- 2Q08-2Q09 GFC (25) (36) 2Q09-4Q11 Post GFC recovery 54 39 end properties could return as foreign buyers begin to Source: URA, Jones Lange LaSalle, Daiwa gradually accept the 10% additional buyer’s stamp duty Note:*From trough to peak (or peak to trough) (ABSD), we believe other issues such as a strict ^Data from 1Q91 – 2Q96 regulatory application of the Residential Property Act – which requires foreign developers and those with We project a 20-23% decline in private qualifying certificates (QCs) to complete their home prices residential developments within the stipulated project We forecast an overall decline in capital values of about completion period (and sell all units within two years of 20% from the end of 2011 to the end of 2014 for the obtaining temporary occupancy permit [TOP]) or face outside central region (a proxy for the private mass- prohibitive extension charges – could disrupt the residential market), and 23% over the same period for market and cause some developers to lower prices on the core central region (a broad proxy for the high-end their unsold completed inventory. residential market). The wildcard: government intervention We believe mass residential prices will hold up slightly The resilience of transaction volumes in the primary better than the high-end segment because mass- market and property prices so far in 2012 have not residential demand should be better underpinned, to entirely diminished the risk of another set of property some extent, by affordability and public (HDB) resale cooling measures, directed possibly at financing. prices, though we suspect that the resilience of the resale market in several years’ time would depend on We believe policy risk cannot be ignored unless the immigration and the overall rate of population growth. price trajectories of all segments of the market are consistent with the government’s desire for a ‘soft The government’s injection of new supply in the public, landing’. However, with all government rule changes, HDB, market could eventually moderate the resale the risk is that the next property measures, which market and affect demand for private units, but the would have to be more severe than the previous resale market could still remain tight for several years, measures to have the intended effect, could finally as homeowners of newly-built HDB flats would have to trigger a severe property market downturn given the fulfil their minimum occupation requirement of five rising levels of unsold inventory and vacant units in the years before they can put their unit up for sale. system.

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 Singapore private residential market: core assumptions Singapore residential 2007 2008 2009 2010 2011 2012E 2013E 2014E Comment Core assumptions

Private (excluding ECs) Units launched by developers units 14,016 6,107 14,103 16,575 17,710 21,989 18,743 17,495 Elevated launch schedules to continue Units sold by developers units 14,811 4,264 14,688 16,292 15,904 20,890 16,868 15,746 Sales should hold, but unlikely to outpace launches Take-up rate of launches % 105.7 69.8 104.1 98.3 89.8 95.0 90.0 90.0 Supply creates demand, but only to a certain extent

Private housing stock Net supply units 1,448 6,392 8,285 8,754 10,525 11,574 11,766 16,000 Record home sales imply record completions Net demand units 2,571 4,903 10,520 8,259 7,428 9,403 9,684 13,672 Rental prospects of new units highly uncertain Vacancy rate % 5.6 6.1 5.0 5.0 5.9 6.5 6.9 7.3 Vacancy rate to creep up steadily

Rents (annual average) Median rental non-landed core central S$/sq ft/mth 3.43 4.06 3.32 3.69 3.95 3.92 3.58 3.24 Record completions, uncertain population picture YoY change % 37.0 18.3 (18.1) 11.0 7.2 (0.7) (8.8) (9.3) Median rental non-landed outside central S$/sq ft/mth 1.76 2.15 1.82 1.99 2.17 2.19 2.02 1.87 Record completions, uncertain population picture YoY change % 32.7 22.0 (15.4) 9.5 9.3 0.7 (7.7) (7.2)

Capital values (end of year) Median price non-landed core central S$/sq ft 1,384 1,306 1,282 1,465 1,523 1,477 1,308 1,170 We expect a multi-year correction YoY change % 32.7 (5.6) (1.8) 14.2 4.0 (3.0) (11.5) (10.6) Median price non-landed outside central S$/sq ft 613 596 666 765 824 821 727 663 We expect a multi-year correction YoY change % 26.4 (2.9) 11.8 15.0 7.7 (0.4) (11.5) (8.7)

Yield, non-landed core central (end of quarter) % 3.35 3.57 3.06 3.17 3.13 3.09 3.16 3.22 Rentals more resilient, but yields still low Yield, non-landed outside central (end of quarter) % 3.94 4.14 3.18 3.30 3.20 3.13 3.21 3.33 Source: Singapore URA, Daiwa forecasts

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 Singapore visitor arrivals for January-May 2012 % of % Country Visitors total YoY chg Indonesia 1,112,527 18.8 14.5 PR China 855,577 14.4 30.7 Malaysia 481,878 8.1 11.0 India 384,805 6.5 7.0 Appendix C Australia 384,341 6.5 1.2 Philippines 299,366 5.1 (0.2) Japan 292,181 4.9 18.3 Hotels: Singapore well-positioned UK 204,569 3.5 (0.7) Thailand 203,924 3.4 (2.9) to be a global destination leader USA 198,514 3.4 8.1 South Korea 189,672 3.2 12.1 Hong Kong 184,802 3.1 (3.0) We have observed that most medium-term forecasts Others 1,132,223 19.1 for the Singapore hotel sector are predicated on Total 5,924,379 12.3 attaining the Singapore Tourism Board’s (STB) Source: STB medium-term target of attracting 17m visitors annually to Singapore by 2015. To reach the target would imply In general, the YoY growth rates for 2012 have been a CAGR in visitor arrivals of 6.6% over 2012-15. One stronger from the Asian markets, particularly from the possible trajectory is our base-case forecast, which top-three markets, so the medium-term prospects for assumes annual growth of 6% for 2012, 6.5% for 2013, the sector still appear encouraging. and 7.0% for 2014 and 2015. Industry drivers We believe this growth trajectory is attainable Visitor arrivals and the broader tourism and hotel considering that the 10-year CAGR up to 2011 (a period sector rely on several trends for growth, including, at which captures two major negative shocks [SARS and the macro level, Singapore’s economic growth, foreign the global financial crisis] as well as the direct investments, its location, and trade and business transformational benefit from the opening of the two connectivity with the rest of the world. IRs) was 5.8%. As long as global economic growth recovers in a sustainable fashion from 2013, we see a More recent developments in the sector include the reasonable chance of reaching or coming close to the rapid growth of the meetings, incentives, conventions, STB’s 17m annual target by 2015. and exhibitions (MICE) events (with over 6,000 business events, Singapore is the top global MICE city  Singapore annual visitor arrivals (m) in several surveys), the rise of medical tourism 18 17.0 15.9 (according to the STB, 725,264 visitors came to 16 14.9 14.0 Singapore for medical-related reasons in 2010, a 30% 13.2 14 11.6 increase from 2007), the proliferation of low-cost 12 10.3 9.8 10.1 9.7 carriers (LCCs) (the market share of LCCs at Changi 8.9 10 8.3 7.6 Airport rose from 5.6% of total passenger traffic in 8 6.1 2005 to 25.6% in 2011), the successful hosting of major 6 events including the Formula 1 Singapore Grand Prix, 4 the Singapore Biennale, and the Singapore Food 2 Festival, and the opening of several attractions 0 including the two IRs (and the drawing power of their

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 casinos and unique offerings including Universal 2012E 2013E 2014E 2015E Studios at Sentosa), new retail additions on Orchard Source: JLL, Daiwa forecasts (from 2012) Road, the Gardens by the Bay, and The River Safari (2H12). Asian-based visitors For January-May 2012, about 76% of the 5.9m visitors Visitor arrivals to underpin RevPAR to Singapore came from Asia, with the top-five markets The overall RevPAR for the Singapore hotel industry being: Indonesia, China, Malaysia, India, and Australia. has been highly correlated with Singapore visitor The total year-to-date growth has been 12.3%, though it arrivals. We forecast annual RevPAR growth of 4.6- slowed to 8.8% YoY for May 2012. 6.8% for 2012-14 compared with 6-7% over the same period for visitor arrivals.

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 Singapore visitor arrivals (m) and hotel RevPAR (S$/day)  Singapore annual hotel supply, demand and AOR* Available Gross lettings AOR* 300 20 room nights (m) YoY chg room nights (m) YoY chg (%) 250 18 2001 10.38 (%) 7.92 (%) 76.3 16 2002 10.44 0.6 7.77 (1.9) 74.4 200 2003 9.57 (8.3) 6.44 (17.2) 67.2 14 2004 10.25 7.1 8.26 28.3 80.6 150 12 2005 10.42 1.6 8.73 5.7 83.8 100 2006 10.51 0.9 8.96 2.6 85.2 10 2007 10.51 0.0 9.15 2.1 87.0 RevPaR S$/day 50 8 Visitor arrivals (m) 2008 10.45 (0.6) 8.46 (7.5) 81.0 2009 10.83 3.7 8.21 (3.0) 75.8 0 6 2010 10.99 1.5 9.36 13.9 85.1 2011 12.24 11.4 10.58 13.1 86.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2012E 12.76 4.3 11.04 4.3 86.5 Industry RevPAR (S$) Visitor arrivals (m) 2013E 13.53 6.0 11.77 6.6 87.0 Source: Singapore Tourism Board, Daiwa forecasts 2014E 14.03 3.7 12.21 3.7 87.0 Source: STB, Daiwa forecasts  Table of annual visitor arrivals and RevPAR *average occupancy rate Visitor arrivals YoY chg RevPAR YoY chg (m) (%) (S$/day) (%) Based on our forecasts, we believe a 3.7-6.6% YoY 2001 7.5 (2.2) 102 (6.0) increase in demand (gross lettings) for 2012-14 would 2002 7.6 0.6 94 (7.8) 2003 6.1 (19.0) 78 (17.2) be consistent with RevPAR growth of 4.6-6.8% YoY 2004 8.3 35.9 98 26.4 over the same period. 2005 8.9 7.4 115 16.9 2006 9.8 9.0 140 22.0 2007 10.3 5.5 176 25.3 One of a few major players 2008 10.1 (1.6) 199 13.5 2009 9.7 (4.3) 144 (27.9) In Singapore, internationally branded hotels dominate 2010 11.6 20.2 185 28.5 the market. According to CBRE Hotels (as disclosed in 2011 13.2 13.1 212 14.8 the Far East Hospitality Trusts Prospectus dated 16 2012E 14.0 6.0 226 6.8 2013E 14.9 6.5 237 4.6 August 2012) OUE is the fourth-largest hotel owner in 2014E 15.9 7.0 251 6.0 Singapore, with 1,946 rooms. CBRE Hotels also ranked 2015E 17.0 7.0 266 6.0 Meritus Hotels & Resorts as the eighth-largest hotel Source: STB, Daiwa forecasts operator in Singapore with 1,626 rooms.

Supply increase of 3.7-6% for 2012-14E  Largest hotel operators in Singapore (no. of rooms) According to CBRE Hotels, the number of gazetted hotels increased by 10 to 149 in 2001, while the number Resorts World Sentosa 1,538 of (net) rooms increased by 4.9% to 41,687. Including IHG 1,553 160 non-gazetted hotels, total rooms in Singapore Meritus Hotels and Resorts 1,626 increased by 5.1% to 49,719 for 2011. Accor 1,735 Shangri-La Hotels and Resorts 1,750 Pan Pacific Hotels and Resorts For our room-supply forecasts for 2012-14, we have 1,861 Millennium and Copthorne 2,310 assumed increases of 4.3% YoY for 2012, 6.0% YoY for Far East Organisation 2,391 2013, and 3.7% YoY for 2014. These assumptions are Las Vegas Sands 2,561 the simple average of the room supply forecasts Fairmont Raffles Hotels International 2,609 provided by two independent consultants, CBRE 0 1,000 2,000 3,000 Hotels and Horwath HTL, for 2012-14. We have also assumed that the AOR will stabilise at 87% for 2013-14, Source: CBRE Hotels (16 August 2012) the upper end of its annual range since 2001.   Singapore hotel market: core assumptions Singapore hotel Unit 2007 2008 2009 2010 2011 2012E 2013E 2014E Comment Available room nights m 10.51 10.45 10.83 10.99 12.24 12.76 13.53 14.03 Moderate supply coming through YoY change % 0.0 (0.6) 3.7 1.5 11.4 4.3 6.0 3.7 Gross lettings (room nights) m 9.15 8.46 8.21 9.36 10.58 11.04 11.77 12.21 Supported by Singapore's growing attractions YoY change % 2.1 (7.5) (3.0) 13.9 13.1 4.3 6.6 3.7 Average occupancy rate % 87.0 81.0 75.8 85.1 86.5 86.5 87.0 87.0 Average daily rate S$/day 202 246 190 217 245 262 272 289 Some scope for hotels to raise rates YoY change % 22.7 21.9 (22.9) 14.5 12.9 6.8 4.0 6.0 RevPAR S$/day 176 199 144 185 212 226 237 251 Medium-term outlook is positive YoY change % 25.3 13.5 (27.9) 28.5 14.8 6.8 4.6 6.0 Visitor arrivals m 10.28 10.12 9.68 11.64 13.17 13.96 14.87 15.91 On target for 17m by 2015 5.5 (1.6) (4.3) 20.2 13.1 6.0 6.5 7.0 Source: STB, Daiwa forecasts - 25 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

Stable outlook for retail rents Given the uncertain economic outlook, we expect discretionary, high-end spending and possibly tourist- related spending to be more vulnerable than non- discretionary, suburban-mall spending. Appendix D  Grade-A retail rents, prime-level shops (S$/sq ft/month) 45

Retail: suburban supply in 2013 40 should be manageable 35

We believe the retail-property sector is still supported 30 by positive fundamentals, although the short-term economic uncertainty could moderate rental growth for 25 2012. 20

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 A soft economic outlook for 2012 3Q12E 1Q13E 3Q13E 1Q14E 3Q14E Primary Suburban For 2011, Singapore’s real GDP grew by 4.9% YoY, compared with 14.8% YoY for 2010. It appears that Source: JLL, Daiwa forecasts (from 3Q12) economic growth for 2012 will be positive, but extremely weak. Daiwa forecasts 2012 GDP growth of For the primary shopping area (Orchard Road), we 2.3% YoY, while the Singapore Government’s current forecast rents to decline by 0.6% YoY for 2012 and real GDP growth forecast range is 1.5-2.5% YoY. 0.3% YoY for 2013 before increasing by 1.9% YoY for 2014. Since considerable new supply was added on Entering a downturn with strong Orchard Road in 2009, the rental market has been stable but soft for several years, due possibly to natural momentum tenant volatility arising from the new supply. Even with the muted GDP-growth outlook, most signs suggest that the underlying fundamentals of the For suburban rents, we forecast almost no change for Singapore retail sector remain highly favourable. 2012 and 2013, before appreciating by 1.7% YoY for 2014. Our stable but flat (for 2012-13) outlook for retail The country’s unemployment rate for June 2012 was rentals is underpinned by what we believe will be 2.0%, a 14-year low. Barring a severe and prolonged healthy tenant demand, offset by a considerable recession, we do not expect a sharp rise in the amount of new supply in the Jurong Gateway area in unemployment rate, which peaked at 3.3% during the 2014. global financial crisis.  Annual average (monthly) rents for prime retail space in Retail sales remain resilient, though subdued, affected Grade-A centres to some extent by the lingering global uncertainty. For Table Primary* YoY chg Suburban YoY chg June 2012, retail sales (excluding motor vehicles) S$/sq ft % S$/sq ft % 2003 36.84 0.1 25.03 0.1 increased by 2.3% YoY, and 1.9% QoQ. 2004 37.10 0.7 25.30 1.1 2005 37.44 0.9 25.94 2.5 The growth in footfall (-3% YoY) and tenant sales 2006 39.05 4.3 26.82 3.4 (+1.5% YoY) for 1H12 at CapitaMall Trust (CT SP, 2007 40.34 3.3 28.02 4.5 S$1.975, Hold [3]), Singapore’s largest shopping mall 2008 41.16 2.0 28.43 1.4 2009 38.71 (6.0) 27.64 (2.8) REIT, is consistent with the retail sales trend. 2010 38.10 (1.6) 27.28 (1.3) 2011 37.80 (0.8) 28.15 3.2 Visitor arrivals from January-May 2012 of 5.92m 2012E 37.57 (0.6) 28.17 0.1 continued to show growth momentum, up 12.3% YoY, 2013E 37.46 (0.3) 28.18 0.0 2014E 38.17 1.9 28.65 1.7 although we expect some moderation for the remainder 2015E 38.94 2.0 29.42 2.7 of the year. Tourists in Singapore typically shop in the Source: Jones Lang LaSalle, Daiwa forecasts; * primary shopping area (Orchard Road) primary, Orchard Road, shopping area.

- 26 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

A manageable, well-paced pipeline  Orchard Road: annual supply, demand (m sq ft) and occupancy rate (%) For new retail space on Orchard Road, we regard 1.20 97.0 97.5 96.7 96.7 projects such as The Atrium @ Orchard extension 96.5 97.0 1.00 (integrated with ) and Orchard 96.5 Gateway as relatively modest additions, which could be 0.80 95.6 96.0 95.0 easily absorbed by existing (or a few new) retail 0.60 95.0 95.5 94.6 94.6 concepts. These malls also appear to complement (and 94.3 95.0 0.40 94.2 94.5 not cannibalise) the major retail malls in their vicinity 0.20 94.0 and along the rest of Orchard Road. 93.5 0.00 93.0  Singapore retail pipeline -0.20 92.5 Project Location NLA (sq ft) 2004 2005 2006 2007 2008 2009 2010 2011

2012 Supply 2012E 2013E 2014E A The Atrium @ Orchard Extension Dhoby Ghaut 126,982 Net supply (LHS) Net demand (LHS) Occupancy (RHS) B Marina Bay Link Mall Tower 3 Marina Bay 82,200 B Bugis+ Bugis Road 194,306 Source: Singapore URA, Daiwa forecasts B 100AM (Amara Shopping Centre) Tanjong Pagar Road 127,000 B One Raffles Place addition Raffles Place 12,282 Suburban supply concentrated in regional C JCube Jurong East 204,000 C Thomson V Two Sin Ming Road 23,680 centres C Alexis Alexandra Road 27,986 For new suburban retail space, there will be a clear C UE Bizhub East Changi Business Park 41,366 concentration in 2013 in Jurong Gateway, an up-and- C Star Vista One-North 163,000 Sub-total 1,002,802 coming commercial hub in western Singapore next to 2013 Supply the Jurong East MRT station. Jurong Gateway is one of A Orchard Road 144,000 three regional centres under the Urban Redevelopment A The Heeren Orchard Road 165,075 Authority’s (URA) concept plan and decentralisation B New Bridge Road 205,000 B Asia Square Tower 2 - retail Marina View 27,000 strategy. With the government targeting the B Suntec City - phase 1 Temasek Boulevard 187,000 development of this regional centre, which includes C JEM by Land Lease Boon Lay Way 572,600 new homes, parks, and recreational areas, and proven C Big Box Boon Lay Way 258,334 developers and mall operators such as Lend Lease (Not C Westgate Boon Lay Way 402,272 rated) and CapitaMalls Asia (Not rated) leasing the C Light industrial/commercial Kallang Bahru 43,099 C Shopping development Lavender Street 96,746 new projects, we do not see any major vacancy risk C Connexion Parrer Park Station Rd 9,343 over the medium-to-long term. C Hotel/office/shopping Balestier Road 46,941 Sub-total 2,157,410  Suburbs: annual supply, demand (m sq ft) and occupancy rate 2014 Supply (%) A 268 Orchard Orchard Road 103,226 2.00 95 B DBS Building - retail Shenton Way 160,000 93.9 93.6 B Capitol site - retail Stamford Road 109,000 93.1 93.2 94 1.50 92.9 92.9 C Shopping at Sports Hub Stadium Boulevard 370,000 93 C Office/shopping development Benoi Road 74,820 92.0 1.00 91.6 91.4 C Bedok Town Centre 262,683 91.0 92 C One KM Tanjong Katong Road 210,000 0.50 90.2 91 C Paya Lebar Square Paya Lebar Road 95,000 90 Sub-total 1,384,729 0.00 2015 Supply 89 A Tangs - additional retail Orchard Road 7,000 -0.50 88 B South Beach - retail Beach Road 110,610

C Punggol Central 365,020 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E C CentroPod @ Changi Changi Road 12,809 Net supply (LHS) Net demand (LHS) Occupancy (RHS) C The Promenade @ Pelikat Jalan Pelikat 58,394

C The Springside Sembawang Road 26,070 Source: Singapore URA, Daiwa forecasts Sub-total 579,903 2012-15 total 5,124,844 On an aggregate level, the amount of private shop Source: Jones Lang LaSalle, Daiwa estimates Note: A= Orchard Road, B = downtown core, C = rest of island (suburbs) space under construction (4.67m sq ft) at the end of 2Q12 appears to be returning to previous peaks in 2008 and 1994, but the new supply will be concentrated in the regional centres and not on Orchard Road.

- 27 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

 Private shop space under construction (m sq ft) Singapore’s total private retail space (25.1m sq ft as at 7 30 June 2012) consists of Orchard Road (the primary 6 shopping area), the downtown core, and everything else (suburbs). 5

4  Singapore: breakdown of retail-space stock 3 Downtown core 2 12.5%

1

0 Orchard 19.8% 1991Q2 1992Q2 1993Q2 1994Q2 1995Q2 1996Q2 1997Q2 1998Q2 1999Q2 2000Q2 2001Q2 2002Q2 2003Q2 2004Q2 2005Q2 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2012Q2

Source: Singapore URA

Suburbs Stable occupancy rates, with a positive 67.7% medium-term bias We expect demand and new supply to be fairly balanced for 2012-14 and believe there will be modest Source: Singapore URA increases (of less than 50bps from the end of 2011 to the end of 2014) in occupancy rates for both Orchard A few major players Road and the suburbs. All in, we forecast the overall In Singapore, the top-10 owners (assuming that CMT island-wide (private-sector) occupancy rate to rise from and CMA are one entity) of the major shopping centres 93.7% at the end of 2011 to 94.2% at the end of 2014. (those over 100,000 sq ft) account for less than 60% of the market. After CMT/CMA, the scale of the Some secular potential remaining large owners drops off considerably. Relative to its competitors, CMT/CMA’s network of Compared with the major developed economies and malls should provide it with superior economies of the major economies in Asia, Singapore still appears to scale and market information. However, despite be under-shopped on a retail space per-capita basis. CMT/CMA's advantages, the other major malls, with Although this might not be evident to visitors on few exceptions, also appear to be thriving. We expect a Orchard Road (or even many expatriate residents), we long-term trend of industry consolidation, but judging believe the country’s retail potential lies in its most by recent third-party acquisitions, such as CMT's populous towns, dominated by public housing (HDB) acquisition of Iluma, single-asset owners will probably estates, which could probably support many more require hefty premiums to market values for them to malls. However, the viability of suburban malls is no sell their assets. longer a secret to developers or investors, judging by the aggressive bids in recent government land tenders  Shares of major shopping-centre floor space (%) and the high asking prices of suburban-mall owners. 45.0 42.2 40.0  Total retail floor space per capita (sq ft) 35.0 30.0 US (2010) 50.5 25.0 16.6 20.0 15.0 6.6 6.9 4.0 4.4 5.6 Australia (2010) 23.7 10.0 1.5 2.7 2.7 3.1 3.7 5.0 0.0 Japan (2009) 16.6

South Korea (2010) 14.4 Others Mapletree Pramerica Holdings Lend Lease Trust Holdings Suntec REIT

China (2010) 11.8 Marina Centre CapitaMall Trust Singapore Press CapitaMalls Asia Las Vegas Sands Frasers Centrepoint

Hong Kong (2009) 11.8 Far East Organisation

Singapore (2011) 10.8 Source: Urbis (from CMT 2011 annual report) Note: for malls greater than 100,000 sq ft NLA as at end of 2011 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Source: Urbis (from CMT 2011 annual report)

- 28 - Hotels, restaurants & leisure / Singapore OUE SP 7 September 2012

 Singapore retail market: core assumptions Singapore retail 2007 2008 2009 2010 2011 2012E 2013E 2014E Comment Core assumptions Supply (private islandwide) m sq ft (0.42) 0.20 1.70 0.80 0.28 1.00 2.16 1.38 Jurong Gateway regional centre represents bulk of 2013E supply Demand (private islandwide) m sq ft (0.27) 0.30 1.59 0.89 0.19 0.96 1.97 1.47 Vacancy (end of year) % 7.2 6.7 6.7 6.1 6.3 6.3 6.4 5.8 Barring a severe recession, we expect stable vacancy rates Rents (4Q) Prime grade-A Orchard S$/sq ft/mth 40.70 41.20 37.90 38.10 37.80 37.32 37.70 38.46 Stable outlook for retail rents, with modest recovery likely in 2013-14 YoY change % 2.9 1.2 (8.0) 0.5 (0.8) (1.3) 1.0 2.0 Prime grade-A suburban S$/sq ft/mth 28.25 28.45 27.00 27.60 28.20 28.14 28.28 28.91 … with suburban rents slightly more resilient than Orchard YoY change % 2.8 0.7 (5.1) 2.2 2.2 (0.2) 0.5 2.2 Capital values (end of year) 1st storey Orchard S$/sq ft 3,555 3,660 3,345 3,450 3,700 3,658 3,695 3,769 YoY change % 14.3 3.0 (8.6) 3.1 7.2 (1.1) 1.0 2.0 1st storey suburban S$/sq ft 1,185 1,230 1,130 1,185 1,350 1,347 1,354 1,384 New supply should help moderate suburban capital-value growth YoY change % 16.2 3.8 (8.1) 4.9 13.9 (0.2) 0.5 2.2 Yield (Orchard) (end of quarter) % 5.3 5.6 5.5 5.0 4.9 5.0 4.9 4.9 Source: Singapore URA, Jones Lang LaSalle, Daiwa forecasts

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Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Nagahisa MIYABE (852) 2848 4971 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking/Finance John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Head of Product Management Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Pranab Kumar SARMAH (852) 2848 4441 [email protected] Shipbuilding; Steel Regional Head of Research Promotion Anderson CHA (82) 2 787 9185 [email protected] Mingchun SUN (852) 2773 8751 [email protected] Banking/Finance Head of China Research; Chief Economist (Regional) Mike OH (82) 2 787 9179 [email protected] Dave DAI (852) 2848 4068 [email protected] Capital Goods (Construction and Machinery) Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean Sang Hee PARK (82) 2 787 9165 [email protected] Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Consumer/Retail Kevin LAI (852) 2848 4926 [email protected] Jae H LEE (82) 2 787 9173 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional) IT/Electronics (Tech Hardware and Memory Chips) Chi SUN (852) 2848 4427 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Macro Economics (China) Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Jonas KAN (852) 2848 4439 [email protected] Shannen PARK (82) 2 787 9184 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Custom Products Group Property Coordinator; Property Developers (Hong Kong) Jeff CHUNG (852) 2773 8783 [email protected] TAIWAN Automobiles and Components (China) Mark CHANG (886) 2 8758 6245 [email protected] Grace WU (852) 2532 4383 [email protected] Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Head of Greater China FIG; Banking (Hong Kong, China) Yoshihiko KAWASHIMA (886) 2 8758 6247 [email protected] Jerry YANG (852) 2773 8842 [email protected] Consumer/Retail Banking/Diversified Financials (Taiwan) Birdy LU (886) 2 8758 6248 [email protected] Joseph HO (852) 2848 4443 [email protected] IT/Technology Hardware (Handsets and Components) Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Christine WANG (886) 2 8758 6249 [email protected] Bing ZHOU (852) 2773 8782 [email protected] IT/Technology Hardware (PC Hardware) Consumer/Retail (Hong Kong, China) Chris LIN (886) 2 8758 6251 [email protected] Hongxia ZHU (852) 2848 4460 [email protected] IT/Technology Hardware (Panels) Consumer, Pharmaceuticals and Healthcare (China) Eric CHEN (852) 2773 8702 [email protected] INDIA Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Felix LAM (852) 2532 4341 [email protected] Head of Research; Strategy; Banking/Finance Head of Materials (Hong Kong, China) – Cement and Building Materials (China and Navin MATTA (91) 22 6622 8411 [email protected] Taiwan); China Property Automobiles and Components John CHOI (852) 2773 8730 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional); Capital Goods; Utilities Internet (China) Mihir SHAH (91) 22 6622 1020 [email protected] Kelvin LAU (852) 2848 4467 [email protected] FMCG/Consumer Head of Transportation (Hong Kong, China); Hong Kong and China Research Deepak PODDAR (91) 22 6622 1016 [email protected] Coordinator; Transportation (Regional) Materials Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities Thomas HO (852) 2773 8716 [email protected] Custom Products Group SINGAPORE Tony DARWELL (65) 6321 3050 [email protected] PHILIPPINES Head of Singapore Research, Pan-Asia Head of Property Rommel RODRIGO (63) 2 813 7344 [email protected] ext 302 Srikanth VADLAMANI (65) 6499 6570 [email protected] Head of Philippines Research; Strategy; Capital Goods; Materials Banking (ASEAN) Danielo PICACHE (63) 2 813 7344 [email protected] Adrian LOH (65) 6499 6548 [email protected] ext 293 Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Property; Banking; Transportation – Port David LUM (65) 6329 2102 [email protected] Property and REITs Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)

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Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association

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