DTZ Research

PROPERTY TIMES Office buildings converted into hotels Q2 2015

 This quarter, grade A office rental remained stable in most projects, but new buildings nudged the citywide average rent up to NT$2,490 (US$83) per ping per month. The completion of Union Recreation Building raised the vacancy rate by 0.9 17 July 2015 percentage points to 9.8%. Due to strong demand from tourism, many old office buildings are being converted into hotels. Contents  In the industrial sector, because of limited new supply and easy access by public Economic overview 2 transport, vacancy rate in the Xihu Section held steady at a low level. Tenants Office 3 requiring large areas or whole buildings for headquarters purposes had to search in Wende and Jiuzhong sections. Rental is expected to continue to rise in Xihu Retail 4 Section, but will remain flat in Wende and Jiuzhong. Industrial 5  The outflows of real estate investment by insurance companies and property tax Investment 6 reforms kept the market on edge. The investment volume in Q2, excluding land transactions, had a steep dip to the third lowest point since the financial crisis of 2008. The market slowdown is expected to have an impact on the already low transaction volume later this year.

Figure 1 DTZ office index (2006 – 2016F)

Author 250 Wendy Hsueh 200 Head of Taipei Research +886 2 8788 3288 150 [email protected] 100

Contacts 50

Andrew Ness 2015F

0 2016F

2005 2007 2008 2009 2010 2012 2013 2006 2011 2014 Head of Greater China Research +852 2507 0779 [email protected] Office Rent Index Office Price Index

F=Forecast Fergus Hicks Source: DTZ Research Global Head of Forecasting +44 (0)20 3296 2307 [email protected]

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Taipei Q2 2015

Economic overview Table 1 's GDP in Q1 2015 increased by 3.37% year-on-year (y- Economic indicators o-y) to NT$4,131.39 billion (US$130.8bn) (Table 1). Owing to a Indicator Period Unit Value Y-o-y weakening global economic recovery and a slowdown in the change growth of emerging markets, the GDP annual growth rate was (%) revised down to 3.28% from the previous forecast. GDP Q1 2015 NT$ million 4,131,391 3.37 Aggregate export figures in May 2015 increased 9.1% month- Total import May on-month (m-o-m) but decreased 5.7% y-o-y, to NT$785.90 NT$ million 619,600 -14.70 billion (US$25.63bn). Electronics, machinery and transportation value 2015 equipment exports showed mild growth, while mineral products Total export January and chemicals declined. Aggregate imports in May 2015 NT$ million 785,900 -5.70 value 2015 decreased 14.7% y-o-y (Table 1), narrowing the gap between exports and imports. Unemployment April % 3.63% -0.28 pts rate 2015 The unemployment rate in April 2015 declined 0.28 of a percentage point y-o-y to 3.63%, a 15-year low. The number of Consumer price May -- 103.14 -0.66 unemployed was down 10,000 m-o-m due to the decrease in index 2015 business downsizing and closures (Table 1). April Visitor arrivals thousand 888.01 -0.43 With the continued rise in oil prices and the termination of the 2015 electricity bill refund plan, the CPI reached 103.14 in May 2015 April (Table 1), up 0.24% m-o-m but down 0.66% y-o-y. The decline Building units units 23,377 -17.02 in the price of eggs, fruit and meat offset the increase. 2015 Source: DGBAS of Executive Yuan In April 2015, the number of total visitor arrivals was 888,011, a y-o-y decline of 0.43%. Most of the visitors were from China, accounting for 40.40% of the total at 358,798. The number of inbound Chinese visitors was down 4.88% y-o-y as a result of the imposition of a daily quota for Chinese tourists (Table 1). As a result of the global economic recovery in Q1 2015 being weaker than expected, this month’s total indicator score from the Council for Economic Planning Development on the overall economic outlook decreased from the 22 points in the previous month to 16 points. However, with the improvement in consumer spending and employment performance, Taiwan’s economic prospects are for mild growth. Market sentiment remained conservative in Q2 and the total building transaction volume in Taiwan in April was 23,377 units, a decrease of 17.02% y-o-y and an increase of 6.03% m- o-m. Compared with the previous month, Taipei City and City showed a decline in transaction volume of 8.99% and 5.76% respectively. The transaction volume in other major cities also saw a downward trend, except for , where it increased sharply by 16.75%.

Now that the property tax reform has been passed by the legislature, the uncertainty looming over the market is gone and end users in the residential segment are expected to return to the market. The market may turn active later this year if the gap between buyer and seller expectations closes. Nevertheless, in non-prime areas there will be downward pressure on property prices due to oversupply.

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Taipei Q2 2015

Office Table 2 This quarter, grade A office rental remained basically stable in Grade A office market statistics most buildings, but new supply nudged the citywide average Vacancy Rental Rental q-o-q rent up to NT$2,490 (US$83) per ping per month. The District rate (%) (NT$/ping/month) change (%) absorption of grade A office space was steady despite the new supply, but the completion of Union Recreation Building raised Western 2.8 2,120 0.0 the vacancy rate by 0.9 percentage points to 9.8%. The highest take-up in the quarter was 2,000 ping in Dunbei Minsheng Nanjing / District (Table 2, Figures 2 and 3). Songjiang 21.9 2,100 6.3 The average size per leasing transaction was about 150-200 Dunbei / ping, with tenants coming from securities, finance, Minsheng 13.3 2,290 0.0 network technology and professional consulting service companies. A large lease was taken out in Dunbei Minsheng Dunnan 4.3 2,390 2.4 District, while E. Sun Securities leased about 1,200 ping in Hung Tai Financial Plaza. CTBC Bank exited 3,000 ping in Uni- Xinyi 9.4 2,930 -0.2 President International Building and moved to its Nangang Overall 9.8 2,490 0.4 headquarters. Next quarter, a German software firm will take up two storeys in Hua Nan Bank Headquarters and the Regus Source: DTZ Research Business Center will further expand in Xinyi District, at the Building. These activities will be reflected in Figure 2 the absorption in Xinyi District in the coming quarter. DTZ office index (2006 – 2016F) Banks continued to adjust the use of their real estate assets into higher value purposes. Hua Nan Bank, which moved its headquarters to Xinyi District, is transforming its KaiFeng and 250 Zhongshan Buildings into hotels. Both are eight storeys, and 200 they have areas of 1,692 ping and 1,248 ping respectively. Meanwhile, the bank is also leasing its original headquarters in 150 Chongqing South Road. Due to strong demand from tourism, many old office buildings are being converted into hotels. For 100 example, the entire 12-floor Xihua Building, owned by the Lungyeng Group, was leased to a mainland Chinese firm for 50 hotel purposes.

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016F Later this year, new supply of grade A office space, including 2015F Taiwan Cooperative Bank Headquarters Building, Fubon Life Dunnan Building and Cathay Landmark Building, will come on stream and provide 52,000 ping of space. These new buildings Office Rent Index Office Price Index are expected to attract tenants from older premises and, Source: DTZ Research because of their high quality, rent is expected to increase slightly. Figure 3 Grade A office supply (ping), net absorption (ping) and vacancy (%) (2006-2016F)

90,000 16 14 70,000 12 50,000 10 30,000 8

6 10,000 4

-10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016F 2015F 2

-30,000 0

New Supply Net Absorption Vacancy Rate

Source: DTZ Research

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Taipei Q2 2015

Retail Figure 4 Retail sales from January to April 2015 reached NT$366.4 Sales of general merchandise (NT$bn) (2006 – Apr. 2015) billion (US$12.17bn), a y-o-y increase of 4.7% (Figure 4). With (NT$bn) the changes in modern lifestyles and shopping habits, supermarkets are actively opening new branches in different neighbourhoods. Pxmart and Simple Mart, two supermarket 12,000 chains in Taiwan, have cooperated with banks to issue credit 10,000 cards with certain privileges, and this marketing strategy has 8,000 built strong customer relationships. This was reflected in the turnover figures, which from January to April 2015 reached 6,000 NT$55.7 billion (US$1.85bn), a y-o-y increase of 7.5%. 4,000 2,000 This quarter, rent in the Zhongxiao retail hub remained high,

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 and vacancy rate increased to 4.8% q-o-q (Table 3). Landlords 2015* would rather leave their properties vacant to wait for a higher offer than lease space at lower rents. The former Entie Bank, on Section 4, Zhongxiao East Road, was divided into two *Data as of Apr. 2015 shops, sold separately in October last year. One of these Source: Department of Statistics, Ministry of Economic Affairs shops, No. 231-1, has now been taken up by Kingsign Watch. Other major retailers such as SPAO, MIXXO and Forever 21 will open new premises nearby in July. The market is now Table 3 waiting to see whether rent will increase in this area. Retail market statistics

Vacancy rate Rental range In Xinyi District, fast-fashion retailer Forever 21 opened its first District store this quarter. It has approximately 560 ping of space at (%) (NT$/ping/month) ATT 4 FUN on Songshou Road. Market momentum will Zhongxiao 8.2 19,000-26,000 continue with the opening of Spanish fashion retailer Bershka in July. ATT 4 FUN will then feature five fast-fashion retailers – Taipei Railway 4.1 10,000-16,000 Gap, Pull & Bear, GU, Forever 21 and Bershka – and it is Station anticipated to have record turnover this year. Zhongshan/ 4.5 10,000-14,000 Nanjing Looking at new supply this quarter, Syntrend Creative Park, selling 3C electronic products, opened in Zhongzheng District Ximen 1.4 14,000-21,000 and iFG U-Town Mall opened in Xizhi District. Syntrend Note: Only street front shops are taken into account. All data is based Creative Park, with a business area of nearly 20,000 ping, is in on gross floor area unless otherwise specified. Rental exclusive of the Bade retail hub. The premises is different from its existing management fees and other outgoings. 1 ping = 35.58 sq ft = 3.3 sq m store at Guang Hua Digital Plaza, with themes related to Source: DTZ Research telecommunications, digital and videos equipment with generous exhibition space. Table 4 iFG U-Town Mall, with a business area of approximately Major new supply this quarter 30,000 ping, is on Xintai 5th Road in Xizhi District. Its major District Project name GFA (ping) Opening date customers are employees from the nearby office parks and Syntrend local residents. It features many theme restaurants and a Zhongzheng 20,000 Q2 2015 Carrefour Concept Store which claims to be the largest single- Creative Park storey retailer in Taiwan. The mall will eventually feature 250 Xizhi iFG U-Town Mall 31,570 Q2 2015 retailers and become the largest shopping mall in Xizhi District. City Link Nangang at Nangang Train Station and Mall in China Source: DTZ Research Trust Bank Headquarters, which opened last year, are commercial complexes that combine mall and office space. As Table 5 the offices get taken up and become established, real estate and retail activities are expected to shift eastward in Greater Major new supply in the future Taipei. District Project name GFA (ping) Opening date 42,500 Linkou MITSUI Outlet Park Q3 2015 (total area)

Xinyi Breeze Xinyi 10,000 Q4 2015 Source: DTZ Research

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Taipei Q2 2015

Industrial Table 6 There was no new supply in Neihu Technology Park (NHTP) NHTP industrial market statistics this quarter. Xihu Section’s overall vacancy rate rose to 2.2% Rental due to corporate relocation. Thanks to take-up by the Vacancy rate Rental q-o-q Section (NT$/ping/ electronics and electronic games sectors, the Jiuzong (%) change (%) Section’s overall vacancy rate declined to 18.3% (Table 6). month) Rent in Wende and Jiuzhong sections was stable at NT$1,000 Xihu 2.2 1,250 1.62 (US$32.0) and NT$930 (US$29.7) per ping respectively, and in Xihu Section rent increased slightly to NT$1,250 (US$40.0) Wende 12.4 1,000 0.00 (Figure 5). Transacted prices in Xihu, Wende and Jiuzhong sections were NT$500,000-600,000 (US$17,000-20,000) per Jiuzong 18.3 930 0.00 ping, NT$380,000-450,000 (US$13,000-15,000) per ping and Source: DTZ Research NT$350,000-430,000 (US$12,000-14,000) per ping respectively (Figure 6). Figure 5 Due to the government’s new transaction tax policy, finalized in NHTP industrial office rental (2005 – Q2 2015) June, and the restrictions on the return rate for insurance companies, market momentum has largely been confined to (NT$/ping/month) owner occupation. Major transactions came from Win Win Global Strategy Marketing, which acquired 3,663 ping (a whole 1,600 building) in Wende Section for NT$2,200 million, and 1,400 Siltrontech, which acquired 346 ping in Xihu Section for 1,200 NT$180 million. 1,000 800 Tenant demand in Neihu Technology Park is mainly related to 600 relocation. Because of limited new supply and easy access by 400

public transport, the vacancy rate in Xihu Section held steady 200

2015Q2

2006 2007 2008 2009 2010 2011 2012 2013 2014 0 2005 at a low level. Tenants requiring large areas or whole buildings for headquarters had to search in Wende and Jiuzhong sections. Rent is expected to continue to rise in Xihu Section, Xihu Section Wende Section but remain flat in Wende and Jiuzhong. Meantime, some office owners in the Xihu Section considered selling their properties Source: DTZ Research in order to move to emerging industry office areas such as Xizhi, in the hope of profiting from soaring prices while enjoying Figure 6 more modern and convenient space. NHTP industrial office price (2005 – Q2 2015) (NT$/ping)

600,000 500,000 400,000 300,000 200,000

100,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 2015Q2

Xihu Section Wende Section

Source: DTZ Research

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Taipei Q2 2015

Investment resulting in a lessening in inbound foreign investment. As current property prices have reached their peak, an The outflows of real estate investment by insurance companies expectation gap between buyers and sellers remains. Also, and property tax reforms kept the market on edge. The uncertainty in the market is increasing with the approaching investment volume in Q2, excluding land transactions, had a presidential election and the possibilities of an interest rate rise. steep dip to NT$8.62 billion (US$286.43mn), the third lowest Thus, the market slowdown is expected to have an impact on point since the financial crisis of 2008, plunging 16.88% from the already low transaction volume in the later part of this year. the previous quarter and 63.32% y-o-y (Table 8). The market was dominated by tech companies and manufacturers, mainly looking for industrial property for owner- Table 7 occupancy. Other major transactions involved industrial office. Total number of major deals There were only two office building acquisitions this quarter (Tables 7, 8, 9). 2014 Q2 2015 Q1 2015 Q2 Demand deriving from manufacturing company expansion and Office 9 1 2 integration drove deals in well-developed industrial areas. The Retail 3 1 2 significant deal was by ASE Group, which secured factories in I/O 8 5 3 Nantze Export Processing Zone in Kaohsiung City for NT$2.47 billion (US$81.91mn). Industrial 6 9 7 The acquisition by China Life of office space in Nankang Hotel 3 1 0 Software Park (Phase II) in Taipei City was the only investment Other 0 0 0 deal this quarter. The 1,000-ping property was transacted at a Total 29 17 14 total price of NT$0.46 billion (US$15.28mn) and leased back by its former owner, Protech Pharmaservices. Source: DTZ Research

In the land development sector, Taiwan Tea Corporation purchased a 760-hectare plot of agricultural land in Neipu Table 8 Township, Pingtung County for NT$3.93 billion Total consideration of major deals (NT$ million) (US$130.54mn). The site was originally orchards owned by Typhone Group and is now planned to be developed into the 2014 Q2 2015 Q1 2015 Q2 largest organic tea plantation in Taiwan. Office 4,468 162 637 The superficies rights sector was active in central Taiwan. A Retail 4,338 308 659 70-year lease for a well-located 400-ping plot in North District, I/O 5,119 3,252 983 City was transacted for NT$0.69 billion (US$22.88mn) for residential/office building development. Industrial 2,736 5,752 6,344 Hotel 6,848 900 0 The legislature passed amendments to the Income Tax Act to integrate taxes on building and land sales in June. As far as Other 0 0 0 commercial property investment is concerned, foreign-based Total 23,509 10,374 8,623 enterprises will be the most affected by the new policies. With sales levies increasing to 35-45%, capital gains will shrink, Source: DTZ Research

Table 9 Significant Deals

Property Sector Purchaser Location Price(NT$bn) Factory in Nantze Export Industrial ASE Group Nantze District, Kaohsiung City 2.47 Processing Zone Nankang Software Park (Phase II) I/O China Life Nankang District, Taipei City 0.46 Office Building in Neihu Office Xin Chio Global Neihu District, Taipei City 0.39 Zhangxin Commercial Building Office Toho Travel Service Zhongshan District, Taipei City 0.25 Source: DTZ Research

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Business Contacts

Edward Cheung Billy Yen Billy Yen Wendy Hsueh Chief Executive, Greater China Agency Occupier Service Group Consulting and Research +86 21 2208 0088 +886 2 8788 3288 +886 2 8788 3288 +886 2 8788 3288 [email protected] [email protected] [email protected] [email protected]

Charlie Yang Valuation & Advisory Services +886 2 8788 3288 [email protected]

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