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Think Tank of Deutsche Bank GroupDr. Tobias Just
Berlin, June 5, 2008
Real Estate Investments in China
and India: Big returns in bigcountries?
ULI Germany
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Dr. Tobias Just June 5, 2008 Page 2
Contents
Development of residential property22
11Macroeconomic environment
Commercial real estate33
Be aware of the specific risks44
Concluding remarks55
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Dr. Tobias Just June 5, 2008 Page 3
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%
11 Macroeconomic environment
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Dr. Tobias Just June 5, 2008 Page 4
China and India: Economic outperformers
Both China and India benefit
from globalisation (more trade,more capital imports andsignificant knowledge transfers)which has been pushing upgrowth rates
Though it is unlikely that double-digit growth rates will besustained in the future, bothcountries will continue to posteconomic expansion
11
0
2
4
6
8
10
12
96 98 00 02 04 06 08 10
China India Euroland
Slightly lower growth aheadReal GDP, % yoy
Sources: National statistical offices, DB Research
Macroeconomic environment
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Globalisation is a key driver of growth
11
0 100 200 300 400
Taiwan
Hong Kong
Philippines
Thailand
Singapore
Indonesia
Malaysia
Korea
India
China
Asia-10
World trade Trade with Germany
More trade...Exports + Imports, 2000-2007, %
Sources: IMF, Nat. statistics, DB Research
Macroeconomic environment
53
47
5560
6974
3 2 4 6 78
0
10
20
30
40
50
60
70
80
02 03 04 05 06 07
China India
and more capital flowsAnnual net FDI flows, USD billion
Source: DB Research
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Good long-term prospects
True, both China and India are
still running short of highly-skilledemployees
But, this implies a strong leveleffect in the future: OECDexpects strong rise in average
education in India and China and good education is the basefor sustainable long-term growth
11 Macroeconomic environment
0
2
46
8
10
12
14
16
India
China
S.
Africa
Thailand
Spain
S.
Korea
France
Germany
USA
0
5
1015
20
25
30
35
40
45
Average years of education in 2005 (left)
Change in years of education 2005-2020, % (right)
Sources: OECD, DB Research
Differing education standards
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Development of residential property22
11 Macroeconomic environment
Commercial real estate33
Be aware of the specific risks44
Concluding remarks55
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Favourable demographics are important driver
50
55
60
65
70
75
1970 80 90 00 10 20 30 40 2050
India China
Working age population to peaksoon in China - but not in IndiaPopulation 15-65 yrs, as % of total
Source: UN Population Division
22 Development of residential property
0
300
600
900
1200
1500
1800
1970 80 90 00 10 20 30 40 2050
India China
The two giants continue growingPopulation (million)
Source: UN Population Division
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China and India: Economic outperformers
Share of urban population is set
to rise from 40% today to morethan 70% in China (in 2050) andfrom less than 30% today toroughly 55% in India (in 2050)
According to UN statistics there
are currently already nearly 100Chinese cities with more than 1million inhabitants and 40 citieswith more than 1 millioninhabitants in India
Each year the number of urbanresidents in India rises byroughly 15 million (in China, too,the ranks of urban residentsswell by 15 million every year)
0
200
400
600
800
1000
1200
1950 1975 2000 2025 2050
China rural China urban
India rural India urban
Source: UN Population Division
Cities expandPopulation (million)
22 Development of residential property
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More dwellings needed urgently
22 Development of residential property
0 50 100 150
India
China
Constant household size Declining household size
Number of households countsNumber of additional households,
2005-2025, (million)
Sources: National Statistical offices, Global Insight
2.7
2
1.2
6.9
2.8
2.8
1
0 2 4 6 8 10
Population
growth
Replacement
demand
Shortage of
supply
Smaller
households
Total
Demand for new housing in India
Source: DB Research
New housing units 2005-2025, (million p.a.)
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Strong price increases
Average house price growth of
10% in Beijing, 13% in Shanghaiand almost 16% in Mumbai
Note: Ireland and Spain haveseen similar increases for anumber of years with significantly
lower pent-up demand and lowereconomic growth
But, interest rates have gone up(particularly in India), whileaffordability has deteriorated
RBI has repeatedly warnedabout asset inflation and someagents have even reported pricecuts in some submarkets
22 Development of residential property
0
50
100
150
200
250
2001 2002 2003 2004 2005 2006 2007
Shanghai Beijing Mumbai
House prices soarHouse prices, 2001=100, local currency
Sources: JLL, KnightFrank
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Development of residential property22
11 Macroeconomic environment
Commercial real estate33
Be aware of the specific risks44
Concluding remarks55
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Second largest real estate market in Asia
Source: RREEF Research
Scale of Key Asian Real Estate Markets, USD billion
33 Commercial real estate
0
200
400
600
800
1000
1200
1400
1600
Japan
China
Australia
SouthKorea
Taiwan
India
HongKong
Singapore
Thailand
Malaysia
0%10%
20%
30%
40%
50%60%
70%
80%
90%
100%Investible Stock (LHS) Owner-Occupation Ratio (RHS)
USD
billio
n
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Wuhan
Tianjin
SuzhouHangzhou
Wuxi
Chongqing
Qingdao
Chengdu
Dalian
Nanjing
Dalian
-Port, trade, industry and tourism city-IT hub and emerging BPO-Attractive to Japanese investors
Wuhan
-Economic center of Hubei Province-Transportation/distribution hub in centralChina linking the east and west China-Biggest steel industry, expansion intohigh-tech
Tianjin-Tianjin Bin Hai New District (similar toPudong in Shanghai) economic centre inNorth China (free trade zone)
-Ground for new financial products-Manufacturing and freight hub-Improving linkages with Beijing
Qingdao-Port, electrical and chemical industry,and tourism city
-Attractive to Korean investors
Nanjing-Capital of Jiangsu Province-Key R&D and industrial city in YRD
-Large supply of skilled workers
Wuxi-Manufacturing hub in YRD-Key industries: electronics & IT,chemical, bioengineering and
pharmaceuticals
Suzhou-Major high-tech and manufacturing hubin YRD-Proximity to Shanghai-Favoured FDI destination
Chongqing-Target city of Go West Policy-Heavy industry base in southern China-Large population base and freight center
Hangzhou-Economic and political center ofZhejiang Province
-Improving linkages with Shanghai-Tourism and IT city in YRD
Chengdu-Target city of Go West Policy-Commercial and economic hub of southwest China
-IT, R&D and high-tech industry hub
Source: RREEF Research
Growth drivers for Tier-2 Cities
New economic centres developing (example China)
33 Commercial real estate
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Offices are becoming scarce
0
100
200
300
400
500
600
700
800
900
1000
2000 2001 2002 2003 2004 2005 2006 2007
Shanghai Beijing Mumbai
Rents rising - esp. in MumbaiPrime office rents, USD psm p.a.
Sources: JLL, RREEF
33 Commercial real estate
4
6
8
10
12
14
16
2000 2001 2002 2003 2004 2005 2006 2007
Shanghai Beijing Mumbai
Yield compression in ChinaPrime office yields, %
Sources: JLL, RREEF
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Strong income growth = strong retail sales growth
Strong economic growth creating
a new middle class India is considered the most
interesting retail target market(AT Kearney)
Institutional retail will gain in
India, China has already reachedhigh level
Pent-up demand especially inTier-2 cities
Only a few locations are sufferingfrom oversupply
0 500 1000 1500 2000 2500
Chennai
Bangalore
Beijing
Mumbai
Delhi
Shanghai
2007
2006
Retail space becoming expensivePrime retail space, USD psm p.a.
Source: JLL
33 Commercial real estate
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Development of residential property22
11 Macroeconomic environment
Commercial real estate33
Be aware of the specific risks44
Concluding remarks55
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It may take time to start and to get justice
0
20
40
60
SG HK KR DE MY TH IN CN TW VT PH ID
Days Numbers of procedures
105
Starting a new business
Source: World Bank Doing Business Indicators 2008
44 Be aware of specific risks
0
20
40
60
SG HK KR VT DE CN TH TW ID MY PH IN
Months Number of procedures
Enforcing contracts
Source: World Bank Doing Business Indicators 2008
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Data? What data?
Though it is much easier to get
good data on Chinese and Indianreal estate markets, the qualityand stability of the data cannotbe compared to US or Europeanstandards
Even for some Tier-1 cities it isdifficult to find reliableinformation on vacancy rates,rents, yields, transaction volumesetc.
44
3.23.43.63.84
India
China
2006
2004
Transparency improvedJLL real estate transparency index
Source: JonesLangLasalle
Lower values indicate a more transparent market.
Values between 3 and 4 show a semi to low transparency level.
x-axis is inverted.
Be aware of specific risks
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Development of residential property22
11 Macroeconomic environment
Commercial real estate33
Be aware of the specific risks44
Concluding remarks55
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Six assertions
Investment volumes are still very low. This willInvestment volumes are still very low. This will
change rapidly in the next few yearschange rapidly in the next few years
All commercial real estate segments continueAll commercial real estate segments continue
to boomto boom TierTier--2 cities will gain particularly2 cities will gain particularly
Strong residential demand growth expectedStrong residential demand growth expected
dangerous exaggerations can occurdangerous exaggerations can occur
LongLong--term growth prospects remain very goodterm growth prospects remain very good
An international real estate investor MUSTAn international real estate investor MUST
have an opinion on China and Indiahave an opinion on China and India
Mind the specific risks: Low levels of liquidityMind the specific risks: Low levels of liquidity
and transparency command higher riskand transparency command higher risk premiapremia
Concluding remarks55
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Further information (selection) www.dbresearch.com
1) Housing portfolios in Germany: Scene set for further divestment (2005)2) Building up India: Outlook for Indias 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 Indias infrastructure (2008)11) Megacities: Boundless growth? (2008)12) Stadtrendite: wirklich von Nutzen? (2008, German only)
55 Concluding remarks
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Copyright 2008. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please citeDeutsche Bank Research.
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