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1H 2006 DPU Outperformed Forecast by 6.7%

2006-08-17

Prosperity Real Estate Investment Trust 1H 2006 DPU Outperformed Forecast by 6.7%

[Press Release]

Highlights

• Distribution per unit of HK$0.0577 3 for 1H 2006, 6.7% above IPO forecast

• Annualized distribution yield of 6.97% (Note 1)

• Occupancy rate rose to 96.0% (Note 2), up 4.1% from end of 2005

• Average rental reversion rate of 59.2% (Note 3)

• Gearing ratio at 34.3% (Note 2), reduced by 10.4% from end of 2005

• Net asset value of HK$2.40 per unit (Note 2), up 6.2% from end of 2005

Note 1: Based on the distribution for the six months ended 30 June 2006 and the closing market price as at 30 June 2006.
Note 2: As at the end of 30 June 2006. Note 3: For the six months ended 30 June 2006.

For the six-month period from 1 January 2006 to 30 June 2006, the unaudited distributable income of Prosperity Real Estate Investment Trust (“Prosperity REIT”) was HK$72,636,000. It represented distribution per unit (“DPU”) of HK$0.0577, which was 6.7% above the forecast in the initial public offering circular of Prosperity REIT dated 5 December 2005. Together with the distributable income of HK$29,039,000 (DPU of HK$0.0231) carried forward from 2005, the aggregate DPU was HK$0.0808. Net Asset Value for the same time rose to HK$2.40 per unit, up 6.2% as compared with the end of last year. This result is in line with the key objective of ARA Asset Management (Prosperity) Limited, as the Manager of Prosperity REIT, to provide unitholders with stable and sustainable distribution, as well as long term growth in net asset value per unit.

Operation Review

The interim result of Prosperity REIT outperformed forecast because the Manager's effective leasing strategies have achieved strong rental reversion with sustainable high occupancy rate. Additional income has been generated from maximizing utilization of space and operating cost has been controlled by effective measures.

In the first half of 2006, the fundamentals of the Hong Kong economy remained solid. Demand continued to significantly outstrip supply in the Grade A office sector, pushing up rents and occupancy rates in both the prime and decentralized commercial districts, including Hong Kong Island East, Kowloon East and Hunghom – locations where Prosperity REIT properties are located. Strong average rental reversion rate of 59.2% was recorded in the Prosperity REIT properties in the first half of 2006. This has been complemented by a high tenant retention rate of 76.4%. The average unit rental rate of the portfolio increased by 12.4% to $11.33 per sq. ft. and the occupancy rate rose to 96.0%. The Manager’s focused operations enhancement strategies have resulted in improved cost efficiency. Cost ratio dropped to 22.6% from our forecast of 25.0%.

Through prudent financial management, the gearing ratio has been lowered from 38.3% to 34.3% resulting in savings in interest cost. On the other hand, given interest rate expense has already been fixed until 16 December 2010 under the interest rate swap agreement entered into by the finance company of Prosperity REIT, interest rate movement had little impact on Prosperity REIT in terms of distribution to unitholders.

As a result of overall rental increment in the property portfolio and sustainable high occupancy rate, Prosperity REIT’s property valuation rose by 5.9% to HK$4,815 million.

Market Outlook

In the first half of 2006, the real estate investment trust market in Hong Kong experienced a mixed period of expansion and consolidation. With the outlook on global interest rates stabilizing, the Manager believes that the REIT market in Asia will continue to mature and grow. Real estate securitization is gaining weight in the business strategies among Asian property developers. At the same time, global institutional investors, who are seeking to prosper from the reviving and emerging Asian property markets, are moving into the REIT sector. The Manager is confident that the relatively stable yield and high distribution payout ratio offered by REITs will continue to attract investors. Currently, after the recent market consolidation, the distribution yield of Prosperity REIT has reached such high level that is sufficient to generate interest amongst the investor community.

Looking ahead, the Manager remains very optimistic about the office property sector in Hong Kong. The benefits from the implementation of the Closer Economic Partnership Arrangement with the Mainland are expected to continue. The Manager expects to see increasing capital investment in the industrial and manufacturing sectors, fuelling the steady demand of the industrial/office and industrial property markets in the territory. On the other hand, as the financial sector is also benefited from being the Mainland’s preferred cross-border capital market, and is expanding for China-related business, demand for quality office space is expected to be further strengthened.

Focus Strategy

For the remainder of 2006, a number of asset enhancement programmes have been put into place. At the same time, the Manager will continue to actively pursue yield-accretive acquisitions to further strengthen Prosperity REIT portfolio. Capitalizing on the sound economic fundamentals in Hong Kong at large and the strong demand for quality office space in particular, the Manager is fully confident to deliver attractive distribution to unitholders.
Hong Kong, 17 August 2006