1. China’s Residential Market – Potential Profit or Pure Hype? Nicholas Brooke, FRICS FHKIS Chairman, Professional Property Services Ltd 25 May 2007

3. PPSPPS The Reality Yes, it’s about profit Yes, it’s about market momentum BUT Much more to the equation than this

4. PPSPPS The Reality Linked to: The stage that China has reached in its economic development Wealth now accruing to many who have never had it before –Aspirations to own –Aspiration to invest (few outlets previously) Complicated by Government attempts to cool the market by constraining demand

6. PPSPPS Profit / Supply Side of the Equation Narrowing margins due to higher land costs/compression of returns Shift in funding profile/more difficult to raise finance Small/medium developers being squeezed out/industry rationalisation Shift from margin to volume game Land appreciation tax and other levies

8. PPSPPS Hype / Demand Side of the Equation Restrictions on foreign investors / purchasers Property tax – capital gains Mixed picture –City by city but still strong underlying fundamentals

10. PPSPPS Other Elements of the Equation Government’s wish to avoid further overheating and to cool the market New Property Law Stock market boom/bubble –Alternative and easier form of investment taking a lot speculative liquidity out of property market

11. PPSPPS Other Elements of the Equation New investment rules not uniformly interpreted or enforced –Small units, market mix, banned “luxury” development in certain circumstances Potential further taxation (personal and corporate) Imposition of restrictions on lending at project and individual (mortgage) levels

12. PPSPPS Other Elements of the Equation Imposition of requirements/conditions on foreign lenders Government selling land for affordable housing with maximum unit sales price Many Hong Kong developers entered the market, particularly land banking Still immature/imperfect secondary market Potential knock-on impact of stock market correction

14. PPSPPS Outcomes Continuation of high land price policy – competition and control reasons Local and Hong Kong developers competing for projects Potential for corporate activity (JV / acquisition) particularly in case of those companies with historic land banks

15. PPSPPS

16. PPSPPS Outcomes Some withdrawals form the market (e.g. SOHO) because of uncertainties surrounding Government intervention Further industry rationalisation – big will get bigger More innovative mortgage products possible

18. PPSPPS Outcomes Even less local funding sources –Greater opportunities for involvement of foreign lenders on project and pool basis –But not all will take risk of further Government restrictions Potential for correction/stock market / property market “bubble” crisis –Challenge for Government to manage a major correction –Negative equity situation –Banks could end up owning many residential units

20. PPSPPS Outcomes Demand for greater market transparency from those in the market for the long term Exit strategies impacted by secondary market fragility

22. PPSPPS Overall Conclusions Jury is still out but –Certainly most of hype now gone –Profits really being earned Shanghai perceived by many as most vulnerable but strong GDP performance and growing services industry

24. PPSPPS Overall Conclusions Second/third tier cities could be more as risk –Not under the microscope as in Beijing/Shanghai –Perhaps greater likelihood of irregularities

25. Thank you Professional Property Services Limited