Colliers Flash TAIWAN | INVESTMENT 23 August 2018

Transaction value of CRE Investment increased due to owner-occupier opportunity in purchases In 2017, the transaction value of CRE reached NTD54.6 Taiwan CRE billion (USD1,790 million) based on our statistics, the lowest level in the past ten years. In H1 2018, the market transaction value of CRE increased 117% YoY and 7% HoH to NTD39 billion (USD1,279 million).

Paul Lee Director | Research | Taipei Owner-occupiers were active in acquiring industrial offices, underpinning the transaction value of the CRE In H1 2018, the transaction value of commercial real market in recent years. The largest transaction in H1 2018 estate (CRE) in Taiwan increased to NTD39.0 billion was a consortium of four companies including Formosa (USD1,279 million). Nevertheless, the traditionally Plastics Co., Nan Ya Plastics Co., the Formosa active finance and insurance industries bought Chemicals and Firbe Co. and the Formosa Petrochemical relatively few properties owing to government Co., spending NTD18.7 billion (USD613 million) to intervention and their desire for higher returns. We acquire 30,731 ping (101,412 sq m) at the T CBD building. recommend buyers keep an eye on properties in This was the largest industrial office transaction in Jiuzong section and Tanmei section in Neihu district Taiwanese history. due to the benefit brought by the planned MRT East Ring Line. In H1 2018, CRE investment from the manufacturing industry amounted to NTD26.8 billion (USD78 million) while the proportion of that invested in industrial offices was NTD29.9 billion (USD980 million), due in large part to the T CBD building transaction. Figure 1: Historical transaction value of Taiwan commercial real estate

NTD100 million

1,400 1,277

1,200 1,106 1,095 1,072 955 1,000 840 817 551 714 800 648 706 925 703 731 617 546 600 469 562 269 445 390 400 598 366 544 458 434 200 338 351 341 371 390 261 255 115 180 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1H 2H Annual transaction value

Source: Colliers

It is worth mentioning that O Bank REIT No. 1 successfully Historical buyers' composition in CRE market completed the first REIT initial public offering in the past 100% ten years in 1H 2018 and bought Focus Square in Tainan 90% for NTD1.8 billion (USD58 million) and Panhsin Bank 80% Tower in New Taipei City for NTD1.2 billion (USD39 70% 60% million). 50% 40% CRE transaction value by buyers' 30% industry in 1H 2018 20% 4.8 10.4 10% 0% 2011 2012 2013 2014 2015 2016 2017 2018 Manufactoring Finance and insurance Other Other Individual Manufactoring 107.0 267.8 Construction and development Foreigner Construction and development Source: Colliers Finance and insurance

Reasons why the finance and insurance industry are currently cautious regarding CRE investment include:

Source: Colliers > The government is encouraging insurance companies to invest more funds in the stock market; CRE transaction value by asset type in 1H 2018 > Insurance companies investing in property are still regulated by the FSC Eight Rules cooling measures; 29.9 Industrial office 29.7 > CRE rental yields are currently at the lowest level in Other 31.8 history. With the US Federal Reserve raising interest 298.9 Office rates and the Taiwan Central Bank likely doing the same in 2018, insurance companies lift their required Retail rate of return in investing CRE. Historical Taipei office rental yield and interest rate of 10-year governmrnt bond Source: Colliers 6.0 5.0

4.0 3.0 The finance and insurance industry 2.0 1.0 are cautious on CRE investment 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Within the finance and insurance sector, only the Cathay Aug Rental yield of Premium Grade and Grade A office Life Insurance Co. spent NTD480 million (USD15.7 million) interest rate of 10-yeat government bond for one street shop in Keelung City in H1 2018. This will Source: Central Bank and Colliers be owner occupied. As a result, the transaction value of the finance and insurance sector accounted for merely 1.2% of the total transaction value, much lower than in the As a result, although the spread between Taipei office past when this sector accounted for at least 18% of rental yields and 10-year government bond yields ranks in transaction value. the top three among major Asian cities, insurance companies are not currently investing heavily in CRE.

2 Colliers Flash | 23 August 2018 | TAIWAN | INVESTMENT | Colliers International

Office rental yield and its spread over 10-year construction of the East Ring Line, we estimate the government bond in major Asian cities difference may shrink to within 15%. 9.0 8.0 Historical top five CRE transaction areas 7.0 6.0 600 5.0 4.0 3.0 500 2.0 1.0 400 0.0

300

200 Office rental yield Spread over 10-year government bond 100 Note: Except Taipei, office rental yield means NOI yield

Source: Colliers and Bloomberg 0 2014 2015 2016 2017 2018

Neihu Xinyi Songshan Daan Nangang Xizhi Qianjin Zhonghe Taoyuan Zhongli Taiwan’s GDP growth may be adversely affected by the West Luye West Central trade dispute between the US and China, which may deter Source: Colliers the Taiwan Central Bank from raising interest rates by the end of 2018. This sentiment has also pushed the 10-year government bond yield below 0.9%, the lowest value since October 2016. On the other hand, the central bank may be pressured to raise interest rates in H2 2018 if inflation rises above 2% due to a weak Taiwan dollar and high oil prices. Higher interest rates make CRE investment less attractive. The planned MRT East Ring Line should benefit properties in Jiuzong and Tanmei sections In April 2018, the Taipei City government announced the execution of a feasibility study for the MRT East Ring Line. The line is planned to connect to existing routes including the Wenhu, Songshan, Banqiao & Nangang and Xinyi lines. It is also planned to connect with the North and South ring lines in the future. This is positive news for the Neihu district as it has ranked in top five submarkets for CRE transactions every year since 2014, with many of the transacted properties in the Neihu Technology Park.

Neihu Technology Park is divided into Xihu, Wende, Jiuzong and Tanmei sections. At present, the unit transaction price and rental rates of properties in Jiuzong and Tanmei sections are 30% below the uint transaction price and rental rates of properties in Xihu section due mainly to a lack of mass transport in the area. After

3 Colliers Flash | 23 August 2018 | TAIWAN | INVESTMENT | Colliers International

Table 1: Top 10 CRE transactions in 1H 2018 Gross Transaction Building name Buyer Location floor area value (sq m) (USD million) T CBD Building Formosa Plastics Co., Nan Ya Taipei City 101,412 613.1 Plastics Co., Formosa Chemicals and Firbe Co. and Formosa Petrochemical Co. London Technology Uli Enterprise Co. Taipei City 23,443 90.8 Building Chii Lih Resort Hualien Cable Television Co. Taitung County 28,522 78.7 Lihpao Neihu Building Transcend Information Co. Taipei City 23,872 77.7 Focus Square O Bank REIT No. 1 Tainan City 32,809 57.9 Panhsin Bank Tower O Bank REIT No. 1 New Taipei City 12,863 38.5 NEO ONE J.Adams & Associates Co. Taipei City 7,016 31.7 Times Square Taipei iSee Taiwan Foundation Taipei City 2,983 30.5 TaiDoc Building Atma Champ Enterprise Co. New Taipei City 9,735 26.9 Industrial office in Luzhu Eris Technology Co. Taoyuan City 15,876 25.4

Source: Colliers

資料來源：高力國際

For more information: Andrew Liu Derek Huang Paul Lee Managing Director | Taiwan Executive Director | Capital Markets Director | Research [email protected] and Investment Services [email protected] [email protected]

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The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting 4 onColliers any of the Flash material | contained23 August in this 2018 report. | TAIWAN | INVESTMENT | Colliers International