Welcome to Keppel Land Report to Shareholders 2002

The Singapore economy grew 2.2% in 2002, reversing the 2.4% contraction in 2001. Economic growth was driven by strong external demand and higher growth in the manufacturing, wholesale and retail trade as well as the transport and communications sectors. External demand grew by 4% in 2002, as compared to -7.3% in the previous year.

The construction sector shrank substantially by 10.8% in 2002, deteriorating further from the 3.2% contraction in the previous year, as public and private construction activities continued to languish. The financial services sector also reversed sharply from a 3.7% growth in 2001 to contract 4.8% in 2002. On a positive note, however, the pace of decline in the financial services sector had begun moderating from -8.2% in the second quarter to -5.5% and -4.9% in the third and fourth quarters respectively.

ASIAN PROPERTY MARKETS 2002
Office Markets Come Under Pressure

The lacklustre global climate continued to take its toll on office rentals and capital values in many Asian cities. Office space demand in Singapore contracted by 0.93 million sf in 2002, as a result of downsizing and consolidation by companies. This, coupled with a huge supply of newly completed office developments, led vacancy rates to rise to 15.7%, as compared to 11.3% in the previous year. Rentals faced downward pressure, with prime rentals sliding 17% during the year to about $5.45 psf.

Similarly, office rentals in Hong Kong Central fell for seven consecutive quarters, while average vacancy rates rose 11.5% by the end of 2002, compared with 8.4% in 2001. Even in Beijing where demand was strong and existing companies continued to expand, increased new supply and keen competition for tenants drove rentals down. Grade A rents in the CBD fell by 13% year-on-year to US$26 psm per month.

The residential markets in Asia were also not spared by the global economic slowdown. Capital values for the luxury residential segment in Hong Kong Island, Kuala Lumpur, Manila and Jakarta fell. Hong Kong's residential property prices, which have already tumbled nearly 65% in the past five years, is expected to remain under pressure amid fears of rising unemployment, possible interest rates hikes and ample new supply.

Bucking the Trend in Bangkok and Shanghai

Nevertheless, some Asian markets managed to buck the trend. The office and residential markets in Bangkok showed signs of turning around. Net absorption of office space held steady during the year, while rentals also rose for the first time in two years. At the same time, the residential market received a boost with lower interest rates as major banks reduced their minimum lending rates to 6.75%. Government incentives such as the reduction in the Special Business Tax from 3.3% to 0.11% and the Transfer Fee from 2% to 0.01% for property transactions, were also extended to 2003. In addition, personal income tax was waived for the first Baht 80,000 of net income, resulting in higher disposable income.

Shanghai's residential market also remained buoyant, as demand for luxury residential properties continued to grow in line with the rising number of expatriates working in the city. As a result of strong take-up, the overall vacancy rate fell to 18% while rentals for luxury residential properties rose 0.1% to US$14.80 psm per month.

In Singapore, total take-up of new homes rose by 32% to 9,485 units. This was 30% higher than the 10-year average annual demand of 7,300 units. Demand was driven by the relaxation of CPF savings for the initial downpayment, competitive mortgage rates, deferred payment scheme and the launch of projects targeted at the mass market. Home prices also stabilised in 2002, with the price index declining by only 1.8% compared with the 11.7% drop in 2001.

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