Real Estate Investments in China

and India: Big returns in big

countries?

ULI Germany

Dr. Tobias Just Think Tank of Deutsche Bank Group

Berlin, June 5, 2008
Contents

1 Macroeconomic environment

2 Development of residential property

3 Commercial real estate

4 Be aware of the specific risks

5 Concluding remarks

Dr. Tobias Just · June 5, 2008 Page 2

 1 Macroeconomic environment

China and India: The giants have awoken

Relative shares (2007)…

„ …of world population
– CN 19.8%
– IN: 16.6%
– Euroland: 4.9%
„ …of nominal GDP
– CN: 6.9%
– IN: 2.4%
– Euroland: 22%
„ …of world trade
– CN 7%
– IN: 1.4%
– Euroland: 22%

Dr. Tobias Just · June 5, 2008 Page 3

 1 Macroeconomic environment

China and India: Economic outperformers

Slightly lower growth ahead

Real GDP, % yoy
„ Both China and India benefit
from globalisation (more trade,
China India Euroland more capital imports and
12
significant knowledge transfers)
10 which has been pushing up
growth rates
8
„ Though it is unlikely that double-
6 digit growth rates will be
sustained in the future, both
4 countries will continue to post
economic expansion
2

0
96 98 00 02 04 06 08 10

Sources: National statistical offices, DB Research

Dr. Tobias Just · June 5, 2008 Page 4

 1 Macroeconomic environment

Globalisation is a key driver of growth

More trade... …and more capital flows

Exports + Imports, 2000-2007, % Annual net FDI flows, USD billion

World trade Trade with Germany China India

Asia-10 80 74
China 69
70
India 60
60 55
Korea 53
Malaysia 50 47
Indonesia
40
Singapore
30
Thailand
Philippines 20
Hong Kong 6 7 8
10 3 4
Taiwan 2
0
0 100 200 300 400 02 03 04 05 06 07
Sources: IMF, Nat. statistics, DB Research Source: DB Research

Dr. Tobias Just · June 5, 2008 Page 5

 1 Macroeconomic environment

Good long-term prospects

Differing education standards

„ True, both China and India are
still running short of highly-skilled
16 45
40
employees
14
12 35 „ But, this implies a strong level
30
10 effect in the future: OECD
25
8
20 expects strong rise in average
6 education in India and China –
15
4 10 and good education is the base
2 5 for sustainable long-term growth
0 0
Germany
India

USA
China

Spain

S. Korea

France
S. Africa

Thailand

Average years of education in 2005 (left)

Change in years of education 2005-2020, % (right)

Sources: OECD, DB Research

Dr. Tobias Just · June 5, 2008 Page 6

 1 Macroeconomic environment

2 Development of residential property

3 Commercial real estate

4 Be aware of the specific risks

5 Concluding remarks

Dr. Tobias Just · June 5, 2008 Page 7

 2 Development of residential property

Favourable demographics are important driver

The two giants continue growing Working age population to peak

Population (million) soon in China - but not in India
Population 15-65 yrs, as % of total
India China
1800 India China
75

1500
70
1200
65
900

60
600

300 55

0 50
1970 80 90 00 10 20 30 40 2050 1970 80 90 00 10 20 30 40 2050
Source: UN Population Division
Source: UN Population Division

Dr. Tobias Just · June 5, 2008 Page 8

 2 Development of residential property

China and India: Economic outperformers

Cities expand „ Share of urban population is set

Population (million)
to rise from 40% today to more
China rural China urban
than 70% in China (in 2050) and
India rural India urban
from less than 30% today to
1200
roughly 55% in India (in 2050)
1000
„ According to UN statistics there
800 are currently already nearly 100
Chinese cities with more than 1
600 million inhabitants and 40 cities
400
with more than 1 million
inhabitants in India
200
„ Each year the number of urban
0 residents in India rises by
1950 1975 2000 2025 2050 roughly 15 million (in China, too,
Source: UN Population Division the ranks of urban residents
swell by 15 million every year)

Dr. Tobias Just · June 5, 2008 Page 9

 2 Development of residential property

More dwellings needed urgently

Number of households counts Demand for new housing in India

Number of additional households, New housing units 2005-2025, (million p.a.)
2005-2025, (million)

Constant household size Declining household size

Total 6.9 2.8

Smaller
1.2 2.8
households
China
Shortage of
1
supply

Replacement
2
demand
India
Population
2.7
growth

0 50 100 150 0 2 4 6 8 10

Sources: National Statistical offices, Global Insight Source: DB Research

Dr. Tobias Just · June 5, 2008 Page 10

 2 Development of residential property

Strong price increases

House prices soar

House prices, 2001=100, local currency
„ Average house price growth of
10% in Beijing, 13% in Shanghai
Shanghai Beijing Mumbai
and almost 16% in Mumbai
250
„ Note: Ireland and Spain have
200 seen similar increases for a
number of years with significantly
150 lower pent-up demand and lower
economic growth
100 „ But, interest rates have gone up
(particularly in India), while
50 affordability has deteriorated

0 „ RBI has repeatedly warned

2001 2002 2003 2004 2005 2006 2007 about asset inflation and some
agents have even reported price
Sources: JLL, KnightFrank
cuts in some submarkets

Dr. Tobias Just · June 5, 2008 Page 11

 1 Macroeconomic environment

2 Development of residential property

3 Commercial real estate

4 Be aware of the specific risks

5 Concluding remarks

Dr. Tobias Just · June 5, 2008 Page 12

 3 Commercial real estate

Second largest real estate market in Asia

Scale of Key Asian Real Estate Markets, USD billion

Investible Stock (LHS) Owner-Occupation Ratio (RHS)

1600 100%

1400 90%
80%
1200
70%
1000
USD billion

60%
800 50%

600 40%
30%
400
20%
200 10%
0 0%

Thailand
Taiwan

Hong Kong

Singapore
India
Japan

South Korea
China

Australia

Malaysia
Source: RREEF Research
Dr. Tobias Just · June 5, 2008 Page 13
 3 Commercial real estate
New economic centres developing (example China)
Growth drivers for Tier-2 Cities
Chengdu
-Target city of Go West Policy
-Commercial and economic hub of south
west China
-IT, R&D and high-tech industry hub
Chongqing
-Target city of Go West Policy
-Heavy industry base in southern China
-Large population base and freight center
Wuhan
-Economic center of Hubei Province
-Transportation/distribution hub in central
China – linking the east and west China
-Biggest steel industry, expansion into
high-tech
Source: RREEF Research
Tianjin Dalian
-Tianjin Bin Hai New District (similar to -Port, trade, industry and tourism city
Pudong in Shanghai) – economic centre in -IT hub and emerging BPO
North China (free trade zone) -Attractive to Japanese investors
-Ground for new financial products
-Manufacturing and freight hub
Qingdao
-Improving linkages with Beijing -Port, electrical and chemical industry,
and tourism city
-Attractive to Korean investors
Dalian
Tianjin
Qingdao Nanjing
-Capital of Jiangsu Province
Nanjing -Key R&D and industrial city in YRD
Wuxi -Large supply of skilled workers
Suzhou
Hangzhou Wuxi
Chengdu Wuhan -Manufacturing hub in YRD
Chongqing -Key industries: electronics & IT,
chemical, bioengineering and
pharmaceuticals
Suzhou
Hangzhou -Major high-tech and manufacturing hub
-Economic and political center of in YRD
Zhejiang Province -Proximity to Shanghai
-Improving linkages with Shanghai -Favoured FDI destination
-Tourism and IT city in YRD
 3 Commercial real estate

Offices are becoming scarce

Rents rising - esp. in Mumbai Yield compression in China

Prime office rents, USD psm p.a. Prime office yields, %
Shanghai Beijing Mumbai Shanghai Beijing Mumbai
1000 16
900
800 14

700
12
600
500 10
400
300 8
200
6
100
0 4
2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007
Sources: JLL, RREEF Sources: JLL, RREEF

Dr. Tobias Just · June 5, 2008 Page 15

 3 Commercial real estate

Strong income growth = strong retail sales growth

Retail space becoming expensive

Prime retail space, USD psm p.a.
„ Strong economic growth creating
a new middle class
Shanghai „ India is considered the most
interesting retail target market
Delhi (AT Kearney)
„ Institutional retail will gain in
Mumbai
India, China has already reached
Beijing
high level
2007
„ Pent-up demand especially in
2006
Bangalore Tier-2 cities

Chennai „ Only a few locations are suffering

from oversupply
0 500 1000 1500 2000 2500
Source: JLL

Dr. Tobias Just · June 5, 2008 Page 16

 1 Macroeconomic environment

2 Development of residential property

3 Commercial real estate

4 Be aware of the specific risks

5 Concluding remarks

Dr. Tobias Just · June 5, 2008 Page 17

 4 Be aware of specific risks

It may take time to start and to get justice

Starting a new business Enforcing contracts

60 60
105

40 40

20 20

0 0
SG HK KR DE MY TH IN CN TW VT PH ID SG HK KR VT DE CN TH TW ID MY PH IN

Months Number of procedures

Days Numbers of procedures
Source: World Bank Doing Business Indicators 2008
Source: World Bank Doing Business Indicators 2008

Dr. Tobias Just · June 5, 2008 Page 18

 4 Be aware of specific risks

Data? What data?

Transparency improved
JLL real estate transparency index
„ Though it is much easier to get
good data on Chinese and Indian
real estate markets, the quality
and stability of the data cannot
China
be compared to US or European
standards
2006
„ Even for some Tier-1 cities it is
2004
difficult to find reliable
India information on vacancy rates,
rents, yields, transaction volumes
etc.
4 3.8 3.6 3.4 3.2
Lower values indicate a more transparent market.
Values between 3 and 4 show a semi to low transparency level.
x-axis is inverted.

Source: JonesLangLasalle

Dr. Tobias Just · June 5, 2008 Page 19

 1 Macroeconomic environment

2 Development of residential property

3 Commercial real estate

4 Be aware of the specific risks

5 Concluding remarks

Dr. Tobias Just · June 5, 2008 Page 20

 5 Concluding remarks

Six assertions
An international real estate investor MUST
have an opinion on China and India

Long-term growth prospects remain very good

Strong residential demand growth expected –

dangerous exaggerations can occur

All commercial real estate segments continue

to boom – Tier-2 cities will gain particularly

Investment volumes are still very low. This will

change rapidly in the next few years

Mind the specific risks: Low levels of liquidity

and transparency command higher risk premia

Dr. Tobias Just · June 5, 2008 Page 21

 5 Concluding remarks

Further information (selection) www.dbresearch.com

1) Housing portfolios in Germany: Scene set for further divestment (2005)

2) Building up India: Outlook for India’s real estate markets (2006)
3) German retail property: Opportunities despite oversupply (2006)
4) US house prices declining: Is Europe next? (2006)
5) What can Europe learn from US REITs. Lessons from the ivory towers (2006)
6) German office markets Cyclical upswing, structural differences (2007)
7) Property derivatives marching across Europe (2007)
8) Housing finance in Germany: Four major trends (2007)
9) The real estate sector in relation to monetary policy (2007)
10) 450 bn reasons to invest in India’s infrastructure (2008)
11) Megacities: Boundless growth? (2008)
12) Stadtrendite: wirklich von Nutzen? (2008, German only)
Dr. Tobias Just · June 5, 2008 Page 22
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Dr. Tobias Just · June 5, 2008 Page 23