DTZ Research

PROPERTY TIMES Investors displayed a wait-and-see attitude Q1 2015

 On the back of new supply, the vacancy rate for grade A office increased 1.6 percentage points to 8.9%. The citywide average rent was steady at NT$2,460 (US$79) per ping per month. Completion of several new buildings prompted 24 April 2015 occupiers to relocate from older premises to new properties in prime locations and with higher specifications. Contents  Following the government’s introduction of a new property tax policy and proposed Economic overview 2 changes to transaction costs, the investment market in Neihu Technology Park Office 3 properties displayed a wait-and-see attitude. However, the main new supply in NHTP is in the Jiuzhong Section, which may put downward pressure on rental due Retail 4 to the large supply. Industrial 5  Investment market was slow in Q1 2015 with only one office building transaction Investment 6 recorded this quarter. Domestic policies on housing tax and the FSC’s control measures on real estate investment for insurance companies have cooled down the investment market significantly.

Author Figure 1 Wendy Hsueh DTZ office index (2006 – 2017F) Head of Taipei Research +886 2 8788 3288 250 [email protected] 200 Contacts 150 Andrew Ness Head of Greater China Research 100 +852 2507 0779 [email protected] 50

2016F

0 2017F

2006 2008 2009 2010 2011 2013 2014 2012 2015 Fergus Hicks 2007 Global Head of Forecasting +44 (0)20 3296 2307 Office Rent Index Office Price Index [email protected]

F=Forecast

Source: DTZ Research www.dtz.com Property Times 1

Taipei Q1 2015

Economic overview Table 1 's GDP in Q4 2014 increased by 3.35% y-o-y, reaching Economic indicators NT$4,226.07 bn (US$135.3bn) due to growth in domestic Indicator Period Unit Value Y-o-y demand (Table 1). The GDP growth rate is projected to be change 3.78% in 2015, and key factors to watch for the next quarter (%) include the time frame for any interest rate increases by the FED and changes in commodity prices. GDP Q4 2014 NT$ million 4,226,067 3.35 Total import January Aggregate export figures in January 2015 decreased by 2.1% NT$ million 646,000 0.90 month-on-month (m-o-m) and increased by 9.6% y-o-y, value 2015 reaching NT$798.50 bn (US$25.57bn). Electronics, machinery Total export January NT$ million 798,500 9.60 and optical products accounted for most of the increase, while value 2015 the decline in minerals and chemicals offset the growth. The Unemployment January aggregate import value also rose, by 0.90% y-o-y (Table 1). % 3.71% -0.31 pts rate 2015 The unemployment rate in January 2015 declined 0.31 of a percentage point y-o-y to 3.71%. The number of unemployed Consumer price January -- 102.29 -1.24 was down by 9,000 m-o-m due to the decrease in the number index 2015 of first-time job seekers (Table 1). January Visitor arrivals thousand 752.27 12.74 In January 2015, the CPI reached 102.29, declining by 1.24% 2015 m-o-m and by 0.94% y-o-y. Items showing the most significant January drop in price included oil, electricity, vegetables and clothing on Building units units 25,225 -23.20 promotional sale. However, eggs, fruit and natural gas saw 2015 increases, which offset the decrease (Table 1). Source: DGBAS of Executive Yuan

In January 2015, total visitor arrivals reached 752,271, a y-o-y rise of 12.74%. Visitors from China made a strong contribution to the increase, accounting for 42.73% of the total and reaching 321,458, a y-o-y increase of 19.56% (Table 1). This month’s total indicator score for the Council for Economic Planning Development’s overall economic outlook increased from the 22 points of the previous month to 23. This was the positive result of empowered consumer spending due to the improvement in employment and a significant drop in oil prices. The overall market showed mild growth. Total property transaction volume in Taiwan reached 25,225 units in January 2015, decreasing by 16.31% m-o-m and 23.20% y-o-y. However, tax reform regarding residential property increased uncertainty in the market and several financial institutions’ risk control measures also kept the market on edge. Both of these factors caused a significant decline in transaction volume compared to the previous year. The m-o-m downward change was a result of the higher base period at the end of last year, when there was strong demand for trading up in housing. With northern Taiwan affected by the changing property tax policy, Taipei City and showed a decrease in transaction volume of 19.87% and 17.60% m-o-m respectively. The transaction volume in City and City was also down, by 10.25% and 18.62%.

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Taipei Q1 2015

Office Table 2 This quarter, grade A office rents remained stable in most Grade A office market statistics districts and the citywide average rent was flat at NT$2,460 Change (US$79) per ping per month (Table 2). Vacancy Rent District q-o-q rate (%) (NT$/ping/month) Absorption of grade A office was steady despite new supply, (%) including Hua Nan Bank Headquarters Building and Hung- Sheng IFC Building, completion of which acted to raise the Western 2.8 2,120 0.0 vacancy rate by 1.6 percentage points to 8.9%. The highest Nanjing / take-up was 14,500 ping in Xinyi District, Hua Nan Bank taking Songjiang 1.3 1,980 0.0 occupancy of its self owned portion of Hua Nan Bank Headquarters Building with 13,600 ping accounted for much of Dunbei / the activity. Minsheng 14.5 2,290 1.3

To take advantage of the geographical advantage which office Dunnan 4.5 2,330 1.0 buildings derive from being situated close to metro stations, MRT is developing several office projects atop MRT stations, Xinyi 8.9 2,930 0.3 including Hung-Sheng IFC Building in MRT Nanjing Fuxing Station and Union Recreation Building in Xingtian Temple Overall 8.9 2,460 0.2 Station. As these projects have been well received by the Source: DTZ Research market, this is expected to lead to a lot of relocation in the short term. Figure 2 Restrictions on return rate for insurance companies have DTZ office index (2006 – 2017F) prompted some capital outflow abroad. Meanwhile, market momentum has largely been confined to owner occupation, limiting investment activities in the market. 250 Looking at the coming nine months, new supply of grade A 200 office space, including the Taiwan Cooperative Bank Headquarters Building, Fubon Life Dunnan Building and the 150 Cathay Landmark Building, will amount to 52,000 ping. These new buildings are expected to attract tenants from older 100 premises. Because of the high quality of these new properties, rent is expected to increase. 50

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2017F 2016F

Office Rent Index Office Price Index

Source: DTZ Research

Figure 3 Grade A office supply (ping), net absorption (ping) and vacancy (%) (2006-2017F)

90,000 16 70,000 14 12 50,000 10 30,000 8 6 10,000 4

-10,000 2

2006 2007 2008 2009 2010 2011 2012 2013 2014

2016F 2017F 2015F -30,000 0

New Supply Net Absorption Vacancy Rate

Source: DTZ Research

www.dtz.com Property Times 3

Taipei Q1 2015

Retail Figure 4 Retail sales in 2014 reached NT$1,106.5 bn (US$35.44bn), a Sales of general merchandise (NT$bn) (2006 – Jan 2015) y-o-y increase of 5.1% (Figure 4). Among all categories, sales (NT$bn) from department stores and shopping malls showed a great increase of 6.1% y-o-y, 3.5% better than in 2013. The growth was slightly behind retail sales in non-specialised stores from 1,200 the others category, which was recorded at 6.8% y-o-y. The growth in department store sales is due to the fact that coping 1,000 with competition from shopping malls and e-commerce has led department stores to adjust their retail strategies accordingly. 800 Strategies adopted include the introduction of more fast 600 fashion, restaurants and entertainment facilities. 400 This quarter, rental in all Taipei's major retail hubs remained 200 flat as compared with Q4 2014. Among the four major retail

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2006 2007 2008 2009 2010 2011 2012 2013 2014 hubs, vacancy rate in the Zhongshan/Nanjing retail hub 2015* increased 3 percentage points quarter-on-quarter (q-o-q) (Table 3). This reflects the gap between landlord expectation and what tenants can afford. The operation of MRT Songshan Line stimulated business activity along Nanjing W. Rd. near the *Data as of Jan. 2015 MRT station. However, the gap between landlords’ and Source: Department of Statistics, Ministry of Economic Affairs tenants’ rental expectations has led to vacancies on Nanjing W. Rd. Table 3 H&M’s first store in Breeze Songgao, with approximately 1,000 Retail market statistics ping, has drawn great attention. It opened this quarter and its Vacancy rate Rental range popularity has spread to other major retail hubs. H&M plans to District (%) (NT$/ping/month) open its next branch in the Taipei Railway Station retail hub. Korean fast fashion brand SPAO and MIXXO will open a new Zhongxiao 3.4 19,000-26,000 store in Breeze Zhongxiao. This location is near MRT Taipei Railway 4.1 10,000-16,000 Zhongxiao Dunhua Station, where other fast fashion brands Station such as Uniqlo and GU occupy space in Mingyao Department Zhongshan/ 5.5 10,000-14,000 Store while Zara has a position in Tongling Mall. In the future, Nanjing Forever 21 will open its first store in this area. The Zhongxiao Ximen 1.4 13,000-21,000 retail hub is transforming into the centre of global fast fashion Note: Only street front shops are taken into account. All data is based in Taipei. on gross floor area unless otherwise specified. Rent exclusive of management fees and other outgoings. 1 ping = 35.58 sq ft = 3.3 sq m With bright prospects for the greater Taipei retail market, new Source: DTZ Research retail supply with floor area of over 95,000 ping is being readied to come on stream in northern Taiwan. Among these new project, the greater participation of Japanese retailers will Table 4 act to reshape the character of the retail market in greater Major new supply in the future Taipei. District Project name GFA (ping) Opening date Syntrend Zhongzheng 7,900 Q2 2015 Creative Park Xizhi IFG U-Town Mall 35,170 Q2 2015 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 Q1 2015

Industrial Table 5 Thanks to take-up by the electronics, electronic games and NHTP industrial market statistics medical equipment sectors, in NHTP, the Xihu and Wende Vacancy rate Rent (NT$/ping/ Rent q-o-q sections’ overall vacancy rate declined. On the other hand, the Section (%) month) change (%) Jiuzong Section of NHTP witnessed the completion of a new property this quarter, Crystal Diamond Factories Headquarters Xihu 1.7 1,230 0.00 with 5,200 ping, which pushed up the overall vacancy rate to the level of to 20.6% (Table 5). Wende 12.3 1,000 0.20 Rents in the Xihu, Wende and Jiuzhong sections were stable at NT$1,230 (US$39.4), NT$1,000 (US$32.0) and NT$930 Jiuzong 20.6 930 0.30 (US$29.7) per ping respectively (Figure 5). Transacted prices Source: DTZ Research in Xihu, Wende and Jiuzhong sections were NT$500,000- 600,000 (US$17,000-20,000) per ping, NT$380,000-450,000 (US$13,000-15,000) per ping and NT$350,000-430,000 Figure 5 (US$12,000-14,000) per ping respectively (Figure 6). NHTP industrial office rental (2005 – Q1 2015) Following the government’s introduction of a new property tax policy and proposed changes to transaction costs, the 1,600 investment market in Neihu Technology Park properties 1,400 displayed a wait-and-see attitude and demand was mainly for 1,200 acquiring premises for owner-occupation. Major transactions 1,000 came from Gamania Digital Entertainment, which acquired 800 5,948 ping (a whole building) in the Wende Section of NHTP 600 for NT$2,388 mn. 400

Looking ahead, the overall market for the Xihu Section will 200

2015Q1

2006 2007 2008 2009 2010 2011 2012 2013 2014 remain positive due to its advantages of accessibility and 0 2005 public facilities. In addition, Xihu Section, the earliest developed area in NHTP, will not be affected by the new Xihu Section Wende Section property tax policy and there will be continued take-up and a rise in rental and transacted price. However, the main new supply in NHTP is in the Jiuzhong Section, which may put (NT$/ping/month) downward pressure on rental due to the large supply.

Source: DTZ Research

Figure 6 NHTP industrial office price (2005 – Q1 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 2015Q1

Xihu Section Wende Section

Source: DTZ Research

www.dtz.com Property Times 5

Taipei Q1 2015

Investment easing by the European Central Bank, China and Japan, and the uncertain time frame for an interest rate increases by the Investment volume (excluding land transactions) totalled FED. However the impact of domestic policy on the market NT$10.37 billion (US$332.23mn) in Q1 2015, plunging 46.52% remains. Taipei City Government decided this quarter to from the previous quarter yet up 38.60% y-o-y. Only one office increase the housing tax and this may result in a higher holding building transaction was recorded this quarter, while cost and a lower rate of return, which is expected to influence opportunities related to tourism and logistics continued to investors’ willingness to invest in properties in Taipei City. appeal to investors. Technology companies and other corporations were major buyers of industrial office buildings Also, the Financial Supervisory Commission's control and other industrial properties for owner occupation (Tables 6, measures of life insurance companies’ rental yield left fewer 7, 8). investment options for life insurance companies. The investment market is expected to remain slow this year. The most significant deal took place in Neihu District, Taipei City, where Gamania Digital Entertainment acquired Rui-Hu Building en bloc for NT$2.38 billion (US$76.22mn) for its Table 6 headquarters. The floor area was 5,947 ping with an average unit price above ground level of NT$450,000 (US$14,400) per Total number of major deals ping. The property was once one of the 13 properties owned by 2014 Q1 2014 Q4 2015 Q1 Shin Kong Life Insurance in the Neihu District, but the company sold it in an attempt to reduce concentration risk. Office 4 6 1 Retail 0 5 1 With continued growth in tourism, the tourism sector turned strong, with robust demand for hotel acquisition in the I/O 7 9 4 metropolitan and in tourist hot spots. The tourism prospects in Industrial 2 7 10 Kenting attracted Kenting Resort Company to invest NT$0.90 billion (US$28.82mn) to acquire the 6,053 ping Leofoo Resort Hotel 1 0 1 Kenting. The resort will be re-positioned to join the FX Hotels Other 0 0 0 franchise. Total 14 27 17 In the land development segment, most of the transactions Source: DTZ Research took place in central and southern Taiwan. The largest deal was done by Central Motor in Longjing District, Taichung, which acquired 15,999 ping of industrial and residential land for Table 7 the development of a pre-delivery inspection centre. Total consideration of major deals (NT$ million)

In the superficies rights sector, due to the robust growth of e- 2014 Q1 2014 Q4 2015 Q1 commerce and the rising demand for logistic properties, Office 3,394 7,698 162 Cathay Life Insurance secured a 30-year land lease for a 11,209 ping plot in Wuri District, Taichung City and its Retail 0 3,644 308 development and management rights for NT$0.57 billion I/O 2,798 4,339 872 (US$18.37mn). It is a BOT project. The property neighbours Taiwan High Speed Rail Station and with a partnership Industrial 1,084 3,716 8,132 between Cathay Life Insurance and Ally Logistic Property, the Hotel 209 0 900 site is slated for the development of an e-commerce industry Other 0 0 0 park. Total 7,485 19,397 10,374 Since the end of last year, several indications suggest that the possibility of interest rates rising in 2015 has decreased, Source: DTZ Research including the global drop in oil price, the start of quantitative

Table 8 Significant Deals Property Sector Purchaser Location Price (NT$ bn) Rui-Hu Building I/O Gamania Digital Entertainment Neihu District, Taipei City 2.38 Leofoo Resort Kenting Hotel Kenting Resort Company Checheng Township, Pingtung County 0.90 Source: DTZ Research

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Business Contacts

Edward Cheung Billy Yen Billy Yen Wendy Hsueh Chairman, Asia Pacific Board Agency Occupier Service Group Consulting and Research Chief Executive, Greater China +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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