The Rise of : an Opportunity or a Challenge? Contents Qianhai is on Track 4

Policies Designed to Encourage Innovation 6

What’s Next 7

Qianhai’s Position within the Pearl River Delta 8

Looking beyond the Pearl River Delta 9

Collaboration: the Key to Success 9

Appendix I 10

Appendix II 11

2 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International “ Located in , Qianhai Qianhai Shenzhen- Modern Service Industry Cooperation Zone, known as Qianhai, is characterised by its adjoins Hong Kong and is massive infrastructure and preferential Central Government- considered a ‘special zone’, leading supported incentives and policies. Located in Shenzhen, to the question of how Qianhai Qianhai adjoins Hong Kong and is considered a ‘special zone’, leading to the question of how Qianhai should be positioned in should be positioned in order to order to distinguish it from Hong Kong and other areas, such as distinguish it from Hong Kong and the Shanghai Free-Trade Zone (SHFTZ). In an effort to explore the opportunities and challenges Qianhai poses, Colliers will other areas, such as the Shanghai comment on the latest development stage and policies such Free-Trade Zone (SHFTZ). ” as the newly announced 15% corporate tax and its subject beneficiaries, analyse the wide disparity in past land sale prices, and discuss Qianhai’s development influence in and beyond the Pearl River Delta region.

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3 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Qianhai is on Track

Qianhai, seeking to transform itself into Asia’s ‘Manhattan’ by 2020, is intended as a test field for Renminbi (RMB) internationalisation and financial reforms. The development scope was outlined in the Overall Development Plan for Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Area (The Plan), approved by the State Council in August 2010, and was included in ’s 12th Five-Year Plan released in March 2011. The government is set to inject RMB390 billion (USD63 billion) over The Plan’s duration, and aims to achieve RMB150 billion (USD24 billion) of Gross Domestic Product (GDP) by the end of 2020. Qianhai

GUANGZHOU Huizhou

zhongshan Shenzhen

zHUHAI Hong Kong sar

MACAU sar

Source: Colliers

According to The Plan, Qianhai’s development is Colliers View designed to take place in three stages: Though it seemed aggressive four years ago, Qianhai’s ambitious concept has proven successful. During the last 2016 - 2020 decade, several infrastructure developments have been Stage (World-class modern service industry completed or are currently under construction. The Hong III cooperation zone) Kong-Shenzhen Western Corridor, connecting Tuen Mun Modern service cooperation zone established; and Shekou, was completed in October 2006 and has been GDP projected to achieve RMB150 billion in use since July 2007. The building of the (USD24 billion) by 2020 (Luobao Line), connecting Luohu and Airport East, commenced in 2004 and was completed in June 2011. (Huanzhong Line), connecting Qianhaiwan and Huangbeiling, was also completed in June, 2011, and the 2013 - 2015 Shenzhen Metro (Meilin Line), which will connect Stage (Basic infrastructure) II Infrastructure construction completed; Hongshuwan and Wenjin, commenced in August of 2012 Sound business environment developed and is scheduled for completion in 2016. There will be three stations on the line through Qianhai; Shenzhen Metro , which connects the Central Business District (CBD) of Futian, Nanshan and Qianhai to Shenzhen Bao’an International Airport and further extends to Fuyong, Shajing 2010 - 2012 and Songgang suburban areas, is still under construction Stage (Land formation) Infrastructure construction; and is due to completion in late 2015. Most of Qianhai’s I Formation of policies and regulations to infrastructure is in the final stage of construction, making the create a sound business environment completion of stage two very promising.

4 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International DONGGUAN

HK-SZ Western HUIZHOU Express Line Line 5 - Huanzhong Line

Line 1 - LUOBAO LINE Line 11 - AIRPORT LINE Line 9

HONG KONG

Source: Colliers; the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone

In addition, Excellence Group’s commercial development - One Excellence (前海壹號) – was the first land plot auctioned off for office use, and will be launched for sale by the end of 2014 and ready for occupation by mid-2016. Though short development cycles are common in China, the fact that this project started construction only three short months after the auction and is scheduled for completion in roughly three years has amazed the people in Hong Kong.

Since the overall infrastructure construction process is progressing well, the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (the Authority) has further detailed the infrastructure investment plan from an annual to quarterly-basis breakdown, and introduced an incentive-based supervision mechanism. Colliers is optimistic that the target of RMB4 billion (USD642 million) for basic infrastructure in 2014 will be met. The total budget for infrastructure over the three stages is RMB68.2 billion (USD11 billion).

5 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Policies Designed Colliers View Colliers View: As the Central Government continues to transform its structure, risk-takers seem to be benefiting to Encourage the most. The concept of Qianhai has been supported by the government and The Plan has, for the most part, been Innovation followed. Whether the finance industry has been singled out appears doubtful. In fact, the sector has benefitted from a variety of ‘innovation incentives’ which were released at the The policy-making process in Qianhai has proven to be an beginning of 2014. It is believed that the finance industry’s ongoing endeavor for the Authority. Seventeen out of twenty- exclusion from the tax benefit is intended to encourage the two pilot policies have been implemented since The Plan formation of an alliance between the finance industry and was first published. It remains a challenge, however, for most other sectors, such as I.T. If such a mechanism works, the overseas enterprises - including Hong Kong-based firms - to 15% corporate tax rate would benefit the finance industry operate in China due to policy risks. For example, details of indirectly. the tax rate incentive, which is an essential item of the twenty- two pilot policies, were recently announced, revealing that In January 2014, China issued the first batch of private the finance industry won’t be allowed to benefit from the 15% banking licenses. Tencent, the largest Internet service corporate tax rate, despite the fact that up to 60% of the 6,000 company listed on the Hong Kong Stock Exchange, was one registered firms in Qianhai are finance-related. of the enterprises approved for the license. The company is expected to combine its current popular app ‘WeChat’ and its online payment system to provide clients with easier and faster transactions. So far, this model is experimental, Information Technology but it indicates the government’s intention of encouraging Services Industry Services Industry corporate innovation.

Modern Cultural and Logistics Creative industry Industries 15% corporate tax rate Additionally, the fact that the finance industry was not mentioned at all when Qianhai released the list of industries entitled to the preferential corporate income tax, may imply that the Authority could introduce more preferential policies for the sector at a later stage. Colliers believes more government incentives are certain to follow as the Central Government works to bolster this pillar industry and develop Government a channel allowing RMB to easily flow to and from on-and offshore markets.

6 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International What’s Next Colliers View Colliers have identified two factors that led to the price Following the sale of six commercial land plots in July 2013, differential. Firstly, a building’s location is key. Secondly, the another four commercial plots were auctioned off on 22 May restrictions on applicants regarding their asset value and the 2014. The sale prices for the first six plots span a wide range future use of the properties built indicated that the Authority from RMB16,000 (USD2,600) psm by Excellence Group to an was creating a ‘branding’ effect by selecting big name brands astonishingly high RMB28,000 (USD4,500) psm by the joint with deep pockets. venture of Silverstein Properties and Qianhai International Energy Financial Center (QIEFC). However, the transacted prices Building’s for four recently sold plots dropped to a record-low, plummeting 1 location to a range of RMB8,077 (USD1,298) to 13,935 (2,240) psm. What led to this significant price gap? What potential do investors see Restrictions for active participation in the auctions? 2 on applicants

Land Plots in Guiwan It is believed that Silverstein Properties, a privately-held real estate management firm based in New York, has acquired the premium plot in the designated business centre, Guiwan, thus driving the rocket-high bidding price. Tencent succeeded in acquiring a plot at a reserve price of RMB8,138 (USD1,308) psm mainly due to the stringent conditions. For example, bidders had to be internet companies with Nan Ping Expressway operating revenue of not less than RMB40 billion (USD6.4 5 billion) in 2012 and 2013. This limited the prospective bidding pool to Tencent alone, thus providing them with a competition-free bidding environment. (Note: The detailed 4 location of the land plots and conditions are in Appendix I & II.) Transportation Hub Investors bet on higher-than-average yields. According 3 to Colliers, the first low-rise office project developed by China Vanke, namely the Enterprise Dream Park, adopted 2 1 a build-operate-transfer (BOT) investment model and achieved full lease-out with an average rental of RMB260-

6 Ave Liangwan Yue 7 280 (USD42-45) psm per month. The Park will provide a Haibin Highway gross floor area of 60,000 sq m for 46 low rise office buildings which are expected to be ready for occupation by December 2014. An average rental of RMB260-280 psm per month (representing the lower end of office rental prices in Qianhai) and an estimated sale price of RMB65,000 (USD10,400) psm (representing the higher end of the price range for Grade A office space in the traditional CBD Futian, next to Nanshan), 1. T201-0075 translate into a conservative indicative yield of around 5% which is still higher than an average yield of 4% in Futian. 2. T201-0077 3. T201-0078 “ Colliers believes that this figure 4. T201-0080 is supported by the rent and price potential in Qianhai and will 5. T201-0081 attract investors aiming for long- 6. T201-0082 term rental income and strong 7. T201-0083 capital gains.”

Source: Colliers; the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone

7 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Qianhai’s Position Colliers View According to Colliers, based on the 26 million sq m of total floor area to be developed in Qianhai, approximately 16 within the Pearl million sq m is planned for office use, reflecting an amount almost three times the size of Hong Kong’s existing Grade A River Delta office market today (approximately 7 million sq m). Colliers believes this additional office supply could alleviate the severe shortage in Hong Kong and complement the city in > Hong Kong terms of land resources. In addition, Hong Kong will benefit from the rise of RMB businesses with the establishment Qianhai benefits from its proximity to the major international of Qianhai as a test field for RMB internationalisation. financial centre of Hong Kong. By 2015, when construction of Essentially, instead of a posing a potential threat, Qianhai the Express Rail Link is completed, it will take only 14 minutes provides Hong Kong with an exceptional opportunity in an to travel from West Kowloon to Futian. By the time Qianhai environment where strong collaboration is key. reaches its completion stage, a massive office space supply will have entered the pipeline, eliminating the obstacle (lack of space) that has hindered development in Hong Kong’s commercial real estate market. At the same time, Grade A average office rent in the is about RMB204 > Shenzhen (USD33) psm per month, less than one-fourth of the cost of central Hong Kong’s Grade A office rent, and lower than the Qianhai will become a major supplier of offices in Shenzhen average rent in Hong Kong’s Kowloon East area. over the next few years, thus increasing the overall vacancy rate and driving down average rents. According to Colliers, With lower costs and the convenience of Shenzhen’s annual office supply is expected to rise by 200% to 1.06 million sq m per year by 2015. The average vacancy rate in traveling in the Pearl River Delta region, Shenzhen is anticipated to rise as well, but vacancy levels in the where will companies and talent be going? order of 10-15% are considered healthy in the context of supply- and-demand dynamics in Shenzhen. Floor Usage Planning (sq m)

Office Grade A office Vacancy Rate Comparison - 4Q 2013 16m 61% Luohu 4.9% Central-HK 5.0%

Futian 11.9%

Nanshan 18.7% Residential Source: Colliers Others 3.8m 2.6m The major distribution of office stock will be allocated in 15% Qianhai (16 million sq m), Nanshan (0.8 million sq m in 10% addition to the stock in Qianhai), Futian (2 million sq m) and 9% Luohu (0.6 million sq m) in the near future. 5% Colliers View Commercial Government A positive spill-over effect is expected over the next few 2.3m years in Futian’s high-quality office sector before Qianhai is 1.3m completed. There are a number of new tenants - representing a variety of backgrounds - who need space at least 1,000 sq m Source: Colliers; the Authority of Qianhai Shenzhen-Hong Kong Modern Service or larger. Industry Cooperation Zone

8 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Looking beyond the Colliers View Competition is inevitable, but the target customers are notably different. Whilst serving as a financial innovation Pearl River Delta free-trade zone like Shanghai, Qianhai will focus more on the Pearl River Delta region and serve the needs of local state- Shanghai officially launched its Pilot Free-Trade Zone at the owned enterprises (SOEs) and Hong Kong-based companies. end of September 2013 and is the first Hong Kong-like free- While China’s economic growth remains the most robust trade area in Mainland China. Together with at least two other in the world, tertiary industry (finance as the major part) special zones in the Pearl River Delta - namely Nansha in contributed 45% of the approximate RMB52 trillion (USD8 Guangzhou and Hengqin in Zhuhai - it has been hotly debated trillion) GDP in 2012. Colliers believes that as the second as to whether the other free-trade zones in China would largest economy in the world, China is capable of allocating underplay the role of Qianhai in regards to attracting foreign resources amongst various free-trade zones. companies.

As Qianhai continues its rise, Colliers Collaboration: believes collaboration between Qianhai, Hong Kong, and Shanghai is the Key to Success vital for their mutual success.

Qianhai has attracted wide attention for its strategic location Despite its similar position as a financial centre, Qianhai and its mission of internationalising Renminbi. presents an opportunity for Hong Kong’s future development, as it alleviates the office space shortage and makes increased In view of Qianhai’s current progress, Colliers observes that tenant flow possible. Preferential policies, such as a 15% despite the factor of uncertainty regarding the policy details, the corporate tax for various sectors in the zone have been Authority is endeavouring to promote innovation and is leaning devised to benefit and cater to both local and Hong Kong- on a reinforced and transparent legal system to provide a sound based enterprises, while Shanghai targets more international business environment for state-owned and Hong Kong-based enterprises. With different roles and associated functions, the enterprises. special zones will achieve synergy through close collaboration and continued self-development.

9 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Appendix I

Silverstein and QIEFC (T201-0080) Tencent Holdings Limited gUIWAN (T201-0081) Excellence Group - One Excellence (T201-0075 / T201-0077) Hony Capital Management Limited China Resources Land Limited (T201-0082) (T201-0078)

Shenzhen Qianhai Hengchang (T102-0253)

QIANWAN Minsheng E-commerce (T201-0083)

Heung Kong MAWAN Group Limited (T102-0245) Shimao Property Holdings (T102-0244)

PLANNING FUNCTION

Site area: 2.95 million sq m Guiwan Gross floor area: 9.515 million sq m Finance, information, trading, accounting, law service (Central Business Centre) Average plot ratio: 3.23

Site area: 3.1 million sq m Qianwan Connecting Central Business Centre and Bonded Port Area, Comprehensive Gross floor area : 5.861 million sq m (IT/Cultural development) Development Area Average plot ratio: 1.92

Mawan Site area: 6.2 million sq m (Bonded Port Area) Gross floor area : 10.369 million sq m Logistic, shipping, supply chain management, financial innovation service Average plot ratio : 1.67

Source: Colliers International, Shenzhen Land and Real Estate Exchange Centre, The Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone

10 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Appendix II

Reserve Auction Site Developable Accommodation Successful Price Price CRITICAL LAND Date Plot No. Area Area VALUE Bidders (RMB (RMB SALES CONDITIONS (SQ M) (SQ M) (RMB / SQ M) MILLION) MILLION)

• 22% of GFA to surrender to the Authority Jul-2013 T201-0075 Excellence Group 57,481 450,200 4,700 7,180 15,948 • Total assets and revenue no less than RMB10 billion in 2012

• 16% of GFA to surrender to the Authority Jul-2013 T201-0077 Excellence Group 49,152 320,400 3,500 5,189 16,195 • Total assets and revenue no less than RMB10 billion in 2012

• 34% of GFA for self-use for no less than 10 years • Hong Kong-listed China Resources Aug-2013 T201-0078 61,831 503,000 6,720 10,900 21,670 • Market value no less than HK$40 Land Limited billion as of June 24, 2013 • Revenue no less than RMB20 billion in 2012

• 70% self-use for no less than 10 Shimao Property years Nov-2013 T102-0244 12,746 150,000 2,423 2,433 16,220 Holdings • Registered in Qianhai with business in supply chain management, commodity exhibition and exchange, product design and development, and related trades • With parent companies (or Heung Kong Nov-2013 T102-0245 4,223 64,000 998 1,630 25,469 controlling parties) incorporated Group Limited in Hong Kong • Total assets or revenue of no less than RMB5 billion in 2012

• 40% of office area for self-use for no less than 10 years • Tax revenue to the Qianhai government no less than RMB1 Silverstein and Jan-2014 T201-0080 51,416 477,000 - 13,410 28,113 billion after the second year of the QIEFC completion of property • No company shares transfer within 3 years after the completion of the property

• Self-use • Tax revenue to the Qianhai government no less than RMB500 million after the second year of Tencent Holdings May-2014 T201-0081 24,948 190,000 1,546 1,546 8,138 the completion of property for no Limited less than 10 years • Listed Internet companies; • Revenue no less than RMB40 billion in 2012 or 2013

• 60% Self-use • Headquarter to move in within Hony Capital one year of completion May-2014 T201-0082 Management 15,063 80,000 646 646 8,077 • Total assets no less than RMB500 Limited billion for ten years after the completion of the property

• Self-use • Tax revenue to the Qianhai Minsheng government no less than RMB500 May-2014 T201-0083 24,317 172,000 1,574 1,574 9,151 E-commerce million after the second year of the completion of property for no less than 10 years

• Self-use • Tax revenue to the Qianhai Shenzhen Qianhai government no less than RMB500 May-2014 T102-0253 9,985 140,000 1,950 1,951 13,935 Hengchang million after the second year of the completion of property for no less than 10 years

Source: Colliers International, Shenzhen Land and Real Estate Exchange Centre

11 The Rise of Qianhai : an Opportunity or a Challenge | August 2014 | Colliers International Primary Authors: Piers Brunner 485 offices in Chief Executive Officer | Asia +852 2822 0727 [email protected] 63 countries on Individual Licence No.: E-183614

Ken Kan 6 continents Director Agency | Shenzhen United States: 146 +86 755 8831 8648 Canada: 44 [email protected] Latin America: 25 Simon Lo Asia Pacific:186 Executive Director EMEA: Research and Advisory | Asia 84 +852 2822 0511 [email protected]

Contributors: $2.1 Jessy Chung billion in Analyst annual revenue Research and Advisory | Asia Zac Tang Assistant Analyst 1.46 Research and Advisory | Asia billion square feet Viola Zhao under management Assistant Surveyor Valuation and Advisory Services | Asia 15,800 Colliers International (Hong Kong) Limited professionals Suite 5701 Central Plaza and staff 18 Harbour Road, Wanchai Hong Kong

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