REGAL REAL ESTATE INVESTMENT TRUST

If you are in any doubt as to any aspect of this Circular or as to the action to be taken, you should consult your licensed securities dealer or registeredinstitution licensed to deal in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your units in Regal REIT, you should at once hand this Circular, together with the accompanying form of proxy,to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmissionto the purchaser or transferee.

The Securities and Futures Commission of Hong Kong, Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited andHong Kong Securities Clearing Company Limited take no responsibility for the contents of this Circular, make no representation as to its accuracy orcompleteness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of thecontents of this Circular.

REGAL REAL ESTATE INVESTMENT TRUST(a Hong Kong collective investment scheme authorised under section 104 of

the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong))(Stock Code: 1881)

Managed by

Independent Financial Adviser to the Independent Board Committee,the Independent Unitholders and the Trustee in relation to the Transaction Matters Requiring Approval

CIRCULAR TO UNITHOLDERS IN RELATION TO

(1) CONNECTED PARTY TRANSACTIONS IN RELATION TOTHE SHARE PURCHASE AGREEMENT TO ACQUIRE THE NEW HOTEL;

(2) CONTINUING CONNECTED PARTY TRANSACTIONS; AND

(3) EXTRAORDINARY GENERAL MEETING ANDCLOSURE OF REGISTER OF UNITHOLDERS

A letter to the Unitholders is set out on pages 16 to 58 of this Circular.

A notice convening the EGM of Regal REIT to be held at Regal Hongkong Hotel, 88 Yee Wo Street, Causeway Bay, Hong Kong on Thursday, 20 July2017 at 11:00 a.m. is set out on pages N-1 to N-3 of this Circular. Whether or not you are able to attend and vote at the EGM in person, please completeand return the accompanying form of proxy to the Unit Registrar of Regal REIT, Computershare Hong Kong Investor Services Limited of 17M Floor,Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong in accordance with the instructions printed thereon as soon as possible and in anyevent not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form ofproxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

30 June 2017

This overview section is qualified in its entirety by, and should be read in conjunction with the full text ofthis Circular. Words and expressions not defined herein shall have the same meaning as in the main bodyof this Circular unless otherwise stated. Meanings of defined terms may be found in the “Definitions”section of this Circular.

ICLUB MA TAU WAI HOTEL

Regal REIT proposes to acquire from P&R (a connected person of Regal REIT) the iclub Ma Tau Wai Hotel,which obtained its occupation permit in November 2016 and its hotel licence in May 2017. The New Hotelis still in its soft-opening phase (which commenced on 23 May 2017) operating under the “iclub by Regal(富薈酒店)” brand.

iclub by Regal (富薈酒店)

• Positioned as an upscale select-service hotel brand (typically with around 100 to 350 hotel guestrooms),complementing the “Regal” brand’s full service offering.

• Predominately located in the world’s gateway cities and close to the financial centres, regional businesscentres, convention and exhibition venues, shopping and entertainment hubs, or popular tourist spotswith sights and attractions, and conveniently accessed by efficient transport infrastructure.

• Designed according to international quality hotel standards and feature contemporary, chic, trendy,stylish and modern décor and design; with plenty of glass to balance indoor lighting and natural daylight,furnished with comfortable furniture and bedding and equipped with tech-savvy facilities such as LCDTV, iPod speaker, free internet and free WiFi, which are customised for international multi-taskingexecutives and leisure travellers.

• Offers discerning tech-savvy business and leisure travellers a relaxed life-style, with built-in expresscheck-in and check-out system for time conscious travellers, selective refreshments and beveragesserving at a cozy lounge, and purposeful facilities (such as, a computer area and fitness area) withintimate, friendly and tasteful ambience.

• Targets international business and leisure travellers who seek good value for money lodging and aims tooffer a smart, dynamic, efficient, functional, convenient and pleasant travelling experience that meets theneeds of contemporary international business travellers. The symbol “i” stands for “interactiveexperience”, “intelligent design” and “innovative services”.

OVERVIEW

2

The table below sets out selected information regarding the New Hotel:

Location: No. 8 Ha Heung Road (formerly known as Nos. 8, 8A, 10,10A, 12 and 12A Ha Heung Road), Kowloon, Hong Kong

Number of Guestrooms: 340 guestroomsNumber of Storeys: 22 storeys (including basement and ground floor)Gross Floor Area: Approximately 6,298 sqmCovered Floor Area: Approximately 9,490 sqmAppraised Value as at 23 June 2017: HK$1,400 million

OVERVIEW

3

Share Purchase Agreement in respect of the New Hotel

The Trustee entered into the Share Purchase Agreement dated 29 June 2017, pursuant to which P&R agreedto sell to the Trustee (or its nominee) the Target Company Shares, representing 100% of the issued sharecapital of the Target Company, and assign to the Trustee (or its nominee) the Shareholder Loan. The tablebelow sets out a summary of the selected key terms.

Consideration: HK$1,360 million, plus an adjustment for the aggregate of all receivablesand all refundable utility and other deposits placed with relevant authoritiesor suppliers of the Target Group as at completion of the Transaction cappedat HK$2 million. The Hotel Purchase Price represents a 2.9% discount tothe Appraised Value.

Deposit: the Deposit of HK$200 million is payable by the Trustee to P&R within oneBusiness Day from the signing of the Share Purchase Agreement and isrefundable (without accrued interest, if any) in limited circumstances(including but not limited to where Independent Unitholders’ approval isnot obtained) in accordance with the terms of the Share PurchaseAgreement.

P&R and the Guarantors will at completion of the Transaction, enter into the Deed of Tax Indemnity pursuantto which P&R and the Guarantors (on a several basis in equal proportions between the Guarantors) willcovenant, undertake and agree to indemnify on demand the Trustee and the Target Group in respect of, amongother things, any liability for taxation resulting from or by reference to any event occurring on or beforecompletion of the Transaction or (as the case may be) completion of the Transaction or in respect of anyincome, profits or gains earned, accrued or received by any of the Target Group on or before completion ofthe Transaction.

Please refer to sections 3.1 & 3.2 of the Letter to the Unitholders headed “Key Documentation — SharePurchase Agreement” and “Key Documentation — Deed of Tax Indemnity” for further details of the Depositand the Share Purchase Agreement (including, without limitation, the conditions precedent thereunder), andthe Deed of Tax Indemnity respectively.

New Lease Agreement, New Lease Guarantee and New Hotel Management Agreement

Upon completion of the Transaction, Regal REIT (through the Property Company) will enter into a leaseagreement with the Lessee in respect of the entire New Hotel (being the New Lease Agreement). The leasewill be for a five-year term commencing from the date of the New Lease Agreement, and may be extendedat the sole discretion of the Property Company for a further term commencing from the date immediatelyfollowing the date of expiration of the initial lease term in 2022 and ending on 31 December 2027. The rentreceivable by the Property Company in respect of each Lease Year during the initial lease term shall be 4.0%,4.25%, 4.5%, 4.75% and 5.0% per annum respectively, of the Hotel Purchase Price. If extended, the rentreceivable in respect of each Lease Year of such extension of the original lease is to be determined based onan annual market rental review performed by an independent professional property valuer jointly appointedby the Lessee and the Property Company.

Regal Hotels will, at the same time as entering into the New Lease Agreement, enter into the New LeaseGuarantee pursuant to which Regal Hotels will guarantee: (a) the Lessee’s obligations to pay all amountsowing or payable to the Lessor under the New Lease Agreement; and (b) the due observance and performanceof the New Lease Agreement on the part of the Lessee.

OVERVIEW

4

It is also intended that the New Hotel Management Agreement will be entered into between the PropertyCompany, the Lessee, Regal Hotels and the Hotel Manager concurrently with the signing of the New LeaseAgreement, pursuant to which the Hotel Manager will be engaged to act as the exclusive operator and managerof the New Hotel to supervise, direct and control the management, operation and promotion of the businessof the New Hotel during the 10-year operating term of the New Hotel Management Agreement.

Please refer to sections 3.3 & 3.4 of the Letter to the Unitholders headed “Key Documentation — New LeaseAgreement and New Lease Guarantee” and “Key Documentation — New Hotel Management Agreement” forfurther details of the New Lease Agreement, the New Lease Guarantee and the New Hotel ManagementAgreement.

REASONS FOR, AND BENEFITS OF THE TRANSACTION

• Operating the New Hotel under the “iclub by Regal (富薈酒店)” brand will enhance the brandrecognition of “iclub by Regal (富薈酒店)”.

• Regal REIT’s number of guestrooms will increase by 7.4% (from 4,569 guestrooms and suites as at 31December 2016 to approximately 4,909 guestrooms and suites) and the gross floor area of Regal REIT’sproperty portfolio will increase by 2.7% (from approximately 230,465 sqm as at 31 December 2016 toapproximately 236,763 sqm).

• The New Lease Agreement will enable Regal REIT to mitigate its exposure to start-up risk associatedwith the operation of the New Hotel, and ensure that Regal REIT receives a base level of income duringthe term of the New Lease Agreement.

FINANCING

It is expected that the Deposit and the remainder of the Hotel Purchase Price (i.e. excluding the Deposit), theCurrent Assets Adjustments, as well as the Manager Acquisition Fees, Trustee Additional Fees and AdditionalCosts for the Transaction will be financed by: (a) Regal REIT’s existing bank facilities; (b) new bank facilitiessecured against the New Hotel and/or other assets held by Regal REIT; and/or (c) Regal REIT’s internalresources.

Please refer to section 7 of the Letter to the Unitholders headed “Financial Effects of the Transaction on RegalREIT” for the pro forma financial effects of completion of the Transaction. The pro forma financial effectspresented therein are strictly for illustrative purposes only and were prepared based on the assumptions setout therein.

ENLARGED PORTFOLIO

The table below sets out a summary of selected information of the existing portfolio and the enlargedportfolio:

Description Gross FloorArea (sqm)

Approx. CoveredFloor Area (sqm)

No. ofGuestroomsand Suites

Valuation(HK$ million)

(1) Existing Hotel Properties ofRegal REIT(1)

230,465 279,830 4,569 22,222(3)

(2) New Hotel(2) 6,298 9,490 340 1,400(4)

Total Enlarged Portfolio 236,763 289,320 4,909 23,622

Notes:

(1) The existing hotel properties of Regal REIT are Regal Airport Hotel, Regal Hongkong Hotel, Regal Kowloon Hotel, Regal OrientalHotel, Regal Riverside Hotel, iclub Wan Chai Hotel, iclub Sheung Wan Hotel and iclub Fortress Hill Hotel.

(2) Based on the specifications set out in the Share Purchase Agreement.

(3) Valuation as at 31 December 2016.

(4) Valuation as at 23 June 2017.

OVERVIEW

5

RISK FACTORS

This section only provides a brief description of the risk factors in relation to the acquisition of theNew Hotel. Unitholders should read and consider carefully the risk factors as more fully described insection 8 of the Letter to the Unitholders headed “Risk Factors” before deciding to vote on the EGMResolutions.

• Regal REIT may not be able to renew the New Lease Agreement and New Hotel Management Agreementin the future on similar terms after the initial term (and for the New Lease Agreement, the extended term)has expired.

• The due diligence survey on the New Hotel prior to completion of the Transaction may not haveidentified all material defects, breaches of laws and regulations and other deficiencies.

• Regal REIT is not fully insulated from the risks associated with the hotel industry despite the structureof the New Lease Agreement.

• The Manager’s ability to effectively monitor the obligations of the Hotel Manager under the New HotelManagement Agreement in respect of the New Hotel and to actively manage the New Hotel is limited.

• The New Hotel is still in its soft-opening phase (which commenced on 23 May 2017) and there may bea start-up risk associated with the New Hotel.

• There are risks to leveraging and limitations on Regal REIT’s ability to leverage.

• Failure by P&R, the Guarantors and/or other counterparties to fulfill their obligations under theTransaction Documents, such as any failure to refund the Deposit, may have a material adverse effecton Regal REIT’s operations.

IMPLICATIONS OF THE TRANSACTION UNDER THE REIT CODE AND THE TRUST DEED

As the Hotel Purchase Price, plus the Current Assets Adjustment (capped at HK$2 million), exceeds 5.0% ofthe latest net asset value of Regal REIT (as disclosed in its latest published audited accounts, and adjustedfor any distribution paid by Regal REIT since the publication of such accounts), pursuant to paragraph 8.11of the REIT Code and clause 15.1 of the Trust Deed, the consummation by Regal REIT of the Transactioncontemplated under the Share Purchase Agreement and other transactions contemplated under, associated withand/or related to the Transaction, including but not limited to the execution of and consummation of thetransactions under the Deed of Tax Indemnity, require Independent Unitholders’ approval by way of OrdinaryResolutions at the EGM.

In addition, as: (a) the Hotel Purchase Price, plus the Current Assets Adjustment (capped at HK$2 million),represents 18.21% of the total market capitalisation of Regal REIT, based on the average closing price of theUnits traded on the Stock Exchange for the last five Business Days immediately preceding the LatestPracticable Date; and (b) the Appraised Value of the Target Company represents 6.26% of the total assets ofRegal REIT as at 31 December 2016, the Transaction constitutes a discloseable transaction for Regal REITunder the Listing Rules (as if the Listing Rules were applicable to Regal REIT).

The Manager will also seek approval of the Independent Unitholders at the EGM for the consummation byRegal REIT of the transactions contemplated under, associated with and/or related to the Additional HotelCCTs (being the New Lease Agreement, New Lease Guarantee and New Hotel Management Agreementpertaining to the New CCT Waiver Application).

Unitholders and potential investors of Regal REIT should note that completion of the Transaction issubject to certain conditions precedent (including Independent Unitholders’ approval and Regal REITobtaining sufficient new bank financing on terms that the Manager considers to be reasonablysatisfactory) which may or may not be satisfied. Accordingly, unitholders and potential investors ofRegal REIT are advised to exercise caution when dealing in the Units.

OVERVIEW

6

If you are in any doubt as to any aspect of this Circular or as to the action to be taken, you should consult your licensedsecurities dealer or registered institution licensed to deal in securities, bank manager, solicitor, professional accountant or otherprofessional adviser.

If you have sold or transferred all your units in Regal REIT, you should at once hand this Circular, together with theaccompanying form of proxy, to the purchaser or transferee or to the bank, licensed securities dealer or other agent throughwhom the sale or transfer was effected for transmission to the purchaser or transferee.

The Securities and Futures Commission of Hong Kong, Hong Kong Exchanges and Clearing Limited, The Stock Exchange ofHong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of thisCircular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any losshowsoever arising from or in reliance upon the whole or any part of the contents of this Circular.


the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong))

(Stock Code: 1881)

Managed by

Independent Financial Adviser to the Independent Board Committee,the Independent Unitholders and the Trustee in relation to

the Transaction Matters Requiring Approval

CIRCULAR TO UNITHOLDERS IN RELATION TO


(2) CONTINUING CONNECTED PARTY TRANSACTIONS; AND

(3) EXTRAORDINARY GENERAL MEETING ANDCLOSURE OF REGISTER OF UNITHOLDERS

A letter to the Unitholders is set out on pages 16 to 58 of this Circular.

A notice convening the EGM of Regal REIT to be held at Regal Hongkong Hotel, 88 Yee Wo Street, Causeway Bay, Hong Kongon Thursday, 20 July 2017 at 11:00 a.m. is set out on pages N-1 to N-3 of this Circular. Whether or not you are able to attendand vote at the EGM in person, please complete and return the accompanying form of proxy to the Unit Registrar of Regal REIT,Computershare Hong Kong Investor Services Limited of 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, HongKong in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours beforethe time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy willnot preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

30 June 2017

Page

CORPORATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

INDICATIVE TIMETABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

LETTER TO THE UNITHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2. THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3. KEY DOCUMENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

4. FINANCING OF THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

5. FEES AND CHARGES IN RELATION TO THE TRANSACTION . . . . . . . . . . . . . . 38

6. REASONS FOR, AND BENEFITS OF, THE TRANSACTION . . . . . . . . . . . . . . . . . 39

7. FINANCIAL EFFECTS OF THE TRANSACTION ON REGAL REIT . . . . . . . . . . . 40

8. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

9. CONTINUING CONNECTED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 46

10. IMPLICATIONS OF THE TRANSACTION UNDER THE REIT CODE AND THE

TRUST DEED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

11. RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

12. EXTRAORDINARY GENERAL MEETING AND CLOSURE OF REGISTER OF

UNITHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

13. ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

LETTER FROM THE INDEPENDENT BOARD COMMITTEE. . . . . . . . . . . . . . . . . . . . IBC-1

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . . . . . . IFA-1

APPENDIX I : Accountants’ Report in respect of the Target Company . . . . . . . . . I-1

APPENDIX II : Independent Property Valuer’s Valuation Report . . . . . . . . . . . . . . II-1

APPENDIX III : Pro Forma Financial Information of the Enlarged Group . . . . . . . III-1

APPENDIX IV : Market Consultant’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1

APPENDIX V : Summary of Government Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1

APPENDIX VI : General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1

NOTICE OF EXTRAORDINARY GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . N-1

TABLE OF CONTENTS

Regal REIT Regal Real Estate Investment Trust, a collective investment

scheme constituted as a unit trust and authorised under

section 104 of the SFO subject to applicable conditions from

time to time, or Regal Real Estate Investment Trust and the

companies controlled by it, as the context requires

Manager Regal Portfolio Management Limited

(in its capacity as manager of Regal REIT)

Unit No. 2001, 20th Floor

68 Yee Wo Street

Causeway Bay

Hong Kong

Directors of the Manager

Non-executive Directors Mr. LO Yuk Sui (Chairman)

Miss LO Po Man (Vice Chairman)

Mr. Donald FAN Tung

Mr. Jimmy LO Chun To

Mr. Kenneth NG Kwai Kai

Executive Directors Mr. Johnny CHEN Sing Hung

Mr. Simon LAM Man Lim

Independent Non-executive

Directors

Mr. John William CRAWFORD, JP

Mr. Bowen Joseph LEUNG Po Wing, GBS, JP

Mr. Kai Ole RINGENSON

Hon. Abraham SHEK Lai Him, GBS, JP

Trustee DB Trustees (Hong Kong) Limited

(in its capacity as trustee of Regal REIT)

52/F, International Commerce Centre

1 Austin Road West

Kowloon

Hong Kong

Unit Registrar Computershare Hong Kong Investor Services Limited

Shops 1712-1716, 17th Floor

Hopewell Centre

183 Queen’s Road East

Wan Chai

Hong Kong

Legal Advisers to the Manager Baker & McKenzie

14th Floor, Hutchison House

10 Harcourt Road

Hong Kong

CORPORATE INFORMATION

— 1 —

Legal Advisers to the Trustee Mayer Brown JSM

16th-19th Floors

Prince’s Building

10 Chater Road

Central

Hong Kong

Reporting Accountants Ernst & Young

22/F, CITIC Tower

1 Tim Mei Ave

Central

Hong Kong

Independent Financial Adviserto the Independent BoardCommittee, the IndependentUnitholders and the Trustee

Altus Capital Limited

21 Wing Wo Street

Central

Hong Kong

Market Consultant Savills (Hong Kong) Limited

23/F, Two Exchange Square

Central

Hong Kong

Independent Property Valuer Colliers International (Hong Kong) Limited

Suite 5701 Central Plaza

18 Harbour Road

Wanchai

Hong Kong

CORPORATE INFORMATION

— 2 —

In this Circular, the following definitions apply throughout unless otherwise stated. Also, where

terms are defined and used in only one section of this document, these defined terms are not

included in the table below:

Accountant’s Report the Accountants’ Report in respect of the Target Company as

set out in Appendix I of this Circular.

Additional Costs has the meaning ascribed to this term in section 5.1 of the

Letter to the Unitholders headed “Fees and Charges in

relation to the Transaction — Fees Payable to the Manager

and the Trustee and the Additional Costs in relation to the

Transaction”.

Additional Hotel CCTs has the meaning ascribed to this term in section 9.2 of the

Letter to the Unitholders headed “Continuing Connected

Party Transactions — New CCT Waiver Application”.

Adjusted GOP the aggregate of the Gross Operating Profit and Net Rental

Income.

Appraised Value the value of the New Hotel as at 23 June 2017 as appraised by

Colliers International (Hong Kong) Limited, an independent

property valuer and the principal valuer of Regal REIT, being

HK$1,400 million.

associated company shall bear the meaning as defined in the REIT Code.

Associate(s) shall bear the meaning as defined in the REIT Code.

Audited Report in relation to the New Hotel Management Agreement, means

the report of the Auditors on their audit of the books and

records of the New Hotel and their audit of the financial

information under the “Actual Year to Date” column of the

Profit and Loss Statements for the relevant Fiscal Year

prepared in accordance with the generally accepted

accounting principles adopted in Hong Kong and such

professional standards deemed appropriate by the Auditors for

this purpose, and by reference to the terms of the New Hotel

Management Agreement.

Auditors in relation to the New Hotel Management Agreement, means

an internationally recognised accounting firm experienced in

hotel audits as may be mutually agreed between by the Owner

and the Hotel Manager and engaged by the Owner to audit the

books and accounting records of the New Hotel for any Fiscal

Year, and to review the financial statement of the operation of

the New Hotel prepared and submitted by the Hotel Manager

for each Fiscal Year pursuant to the New Hotel Management

Agreement.

DEFINITIONS

— 3 —

Base Rent a fixed amount of monthly rent receivable.

Board the Board of Directors.

Business Day a day (excluding, Saturdays, Sundays and public holidays) on

which commercial banks are open for business in Hong Kong

and the Stock Exchange is open for trading.

Century City Century City International Holdings Limited (Stock code:

355), a company incorporated in Bermuda with limited

liability, ordinary shares of which are listed on the Stock

Exchange.

Conditions has the meaning ascribed to it in section 3.1(d) of the Letter

to the Unitholders headed “Key Documentation — Share

Purchase Agreement — Conditions Precedent”.

connected person shall bear the meaning as defined in the REIT Code.

Cosmopolitan Cosmopolitan International Holdings Limited (Stock Code:

120), a company incorporated in the Cayman Islands with

limited liability, ordinary shares of which are listed on the

Stock Exchange.

Current Assets Adjustment in relation to the consideration payable by the Trustee in

respect of the Transaction, the adjustment on a

dollar-for-dollar basis for the aggregate of all receivables and

all refundable utility and other deposits placed with relevant

authorities or suppliers of the Target Group as at completion

of the Transaction, provided that such adjustment will be

capped at HK$2 million.

Deed of Tax Indemnity has the meaning ascribed to it in section 3.2 of the Letter to

the Unitholders headed “Key Documentation — Deed of Tax

Indemnity”.

Deposit a deposit of HK$200 million (representing 14.71% of the

Hotel Purchase Price), which is payable by the Trustee to

P&R within one Business Day from the signing of the Share

Purchase Agreement and is refundable (without accrued

interest, if any) in limited circumstances (including but not

limited to where Independent Unitholders’ approval is not

obtained), in accordance with the terms of the Share Purchase

Agreement.

Deposited Property all the assets of Regal REIT.

Directors the Directors of the Manager.

DEFINITIONS

— 4 —

Dragon Pier has the meaning ascribed to it in section 2.5 of the Letter to

the Unitholders headed “The Transaction — Transaction

History”.

EGM the extraordinary general meeting of Unitholders convened by

and referred to in the EGM Notice.

EGM Notice the notice included in this Circular in respect of the EGM to

consider and, if thought fit, approve the EGM Resolutions.

EGM Record Date 20 July 2017, being the date by reference to which eligibility

of the Unitholders to vote at the EGM will be determined.

EGM Resolutions the Ordinary Resolutions to be passed at the EGM, as set out

in the EGM Notice and explained in this Circular.

Enlarged Group Regal REIT and the Target Group.

Excess the amount by which the Net Property Income for a Lease

Year exceeds the Base Rent for the same Lease Year.

FF&E all investments in the replacement of furniture, fixtures and

equipment at the New Hotel which are required to maintain

the New Hotel at the operating standards and at the operating

capacity of the New Hotel, and for the purpose of this

definition:

(a) “furniture” includes all loose furniture, furnishings,

decorations and appliances in restaurants, bars, hotel

rooms, offices, kitchens and workshops throughout the

New Hotel;

(b) “fixtures” includes all fixed furniture such as stationary

bar counters and reception desks, fixed carpets, marble

and hardwood floors, wall coverings and walk-in

freezers and fridges; and

(c) “equipment” includes kitchen equipment, ranges,

workshop machinery, cleaning equipment,

telecommunications equipment, computer equipment

and vehicles,

DEFINITIONS

— 5 —

but the term “FF&E” shall exclude (i) items which are

included as part of the fixtures of the building in which the

New Hotel is located; and (ii) Operating Equipment except for

those Operating Equipment owned by the Lessor on the day

on which the New Hotel Management Agreement becomes

effective and any additional Operating Equipment capitalised

under the circumstances of a Capital Addition as defined in

section 3.4(h) of the Letter to the Unitholders headed “Key

Documentation — New Hotel Management Agreement —

Capital Additions”.

FF&E Expenditure has the meaning ascribed to this term in section 3.4(g) of the

Letter to the Unitholders headed “Key Documentation — New

Hotel Management Agreement — Furniture, Fixtures and

Equipment Reserve & Expenditure”.

FF&E Reserve an interest bearing account established for funds to be held on

reserve for FF&E in the name of the Lessor at a bank

designated by the Hotel Manager and approved by the Lessor.

Fiscal Year in relation to the New Hotel Management Agreement, means

1 January in one year to 31 December of the same year, and

the first Fiscal Year shall commence on the day on which the

New Hotel Management Agreement becomes effective and

end on 31 December of the same year and the last Fiscal Year

shall end on the date of the expiration of the New Hotel


Fixed Charges expenses which constitute a non-operating expense in nature

in accordance with the Uniform System including but not

limited to government rent and rates, property tax and other

similar taxes, government charges in respect of the New Hotel

and other sundry fixed charges.

Gearing Ratio the aggregate borrowings of Regal REIT (as calculated under

the Trust Deed) as a percentage of the total gross asset value

of the Deposited Property as set out in Regal REIT’s latest

published audited accounts immediately prior to such

borrowing being effected (as adjusted by (a) the amount of

any distribution paid by Regal REIT since the publication of

such accounts; and (b) where appropriate, the latest published

valuation of the assets of Regal REIT if such valuation is

published after the publication of such accounts).

DEFINITIONS

— 6 —

Giant Sino has the meaning ascribed to it in section 2.5 of the Letter to

the Unitholders headed “The Transaction — Transaction

History”.

Government the government of Hong Kong.

Government Grant in respect of the New Hotel, the Government Lease under

which the land on which such New Hotel is located is held

from the Government by the Property Company.

Gross Operating Profit the Total Hotel Revenue less the Hotel Operating Expenses

during the same period.

Gross Revenues all revenue derived from the New Hotel, including the Total

Hotel Revenue and all subsidy payments, governmental

allowances and awards, and any other form of incentive

payments or awards which are attributable to the operation of

the New Hotel, but excluding: (a) hotel accommodation tax or

other similar government charges; (b) income derived from

securities and other property investments; (c) receipts from

expropriation awards or sales under the threat of

expropriation; (d) proceeds of any insurance other than

business interruption; (e) rebates, discounts or credits of a

similar nature; (f) gratuities paid to hotel employees; and (g)

payments received at the New Hotel for accommodation,

goods or services to be provided at other hotels.

Guarantors Paliburg and Regal Hotels.

HIBOR the rate of interest offered on Hong Kong dollar loans by

banks in the Hong Kong interbank market for a specified

period ranging from overnight to one year.

HK$ or Hong Kong dollars Hong Kong dollars, the lawful currency of Hong Kong.

Hong Kong the Hong Kong Special Administrative Region of the People’s

Republic of China.

Hotel Manager Regal Hotels International Limited, a company incorporated

in Hong Kong, which is also the hotel manager of the Initial

Hotel Properties, iclub Wan Chai Hotel, iclub Sheung Wan

Hotel and iclub Fortress Hill Hotel. It is a wholly-owned

subsidiary of Regal Hotels.

DEFINITIONS

— 7 —

Hotel Operating Expenses the expenses which constitute an operating expense in nature

in accordance with the Uniform System, including but not

limited to: (a) cost of sales; (b) payroll and related expenses

by hotel rooms, food and beverage, administrative and

general, sales and marketing, and repair and maintenance

departments; (c) expenses for Operating Equipment; (d) other

departmental expenses; (e) administrative and general

expenses; (f) sales and marketing expense; (g) repair and

maintenance expenses; (h) energy and utility expenses; and (i)

premiums of business interruption insurance, third party

liability insurance and other insurances against items like

theft or damage to hotel guests’ properties.

Hotel Purchase Price HK$1,360 million.

iclub Fortress Hill Hotel a contemporary, select service hotel with 338 guestrooms

situated at 18 Merlin Street, North Point, Hong Kong, owned

by Regal REIT through Wise Decade Investments Limited.

iclub Sheung Wan Hotel a contemporary, select service hotel with 248 guestrooms and

suites situated at 138 Bonham Strand, Sheung Wan, Hong

Kong, owned by Regal REIT through Tristan Limited.

iclub Wan Chai Hotel a contemporary, select service hotel with 99 guestrooms and

suites situated at 211 Johnston Road, Wan Chai, Hong Kong,

owned by Regal REIT through Sonnix Limited.

Independent Board Committee the Independent Board Committee of the Board (comprising

Mr. John William CRAWFORD, JP and Mr. Kai Ole

RINGENSON, both of whom are Independent Non-executive

Directors who have no direct or indirect interest in the

Transaction) which has been established to advise the

Independent Unitholders on the Transaction Matters

Requiring Approval.

Independent Financial Adviser Altus Capital Limited.

Independent Non-executiveDirectors

the Independent Non-executive Directors of the Manager.

Independent Property Valuer Colliers International (Hong Kong) Limited, an independent

property valuer and the principal valuer of Regal REIT.

Independent Property Valuer’sValuation Report

the Independent Property Valuer’s valuation report in respect

of the New Hotel included in Appendix II to this Circular.

Independent Unitholder(s) Unitholder(s) other than those who have a material interest in

the EGM Resolutions.

DEFINITIONS

— 8 —

Initial Hotel Properties Regal Airport Hotel, Regal Hongkong Hotel, Regal Kowloon

Hotel, Regal Oriental Hotel and Regal Riverside Hotel and

“Initial Hotel Property” means any one of them.

Intermediary Company Leading Brand Holdings Limited, a company incorporated in

the British Virgin Islands with limited liability and a

wholly-owned subsidiary of the Target Company.

IPO Circular the offering circular dated 19 March 2007 issued by the

Manager in connection with the listing of the Units on the

Stock Exchange by way of global offering.

Latest Practicable Date 23 June 2017, being the latest practicable date of ascertaining

certain information contained in this Circular prior to its

publication.

Lease Year (a) in respect of the initial lease term, each of the five

one-year periods commencing from the date that the

New Lease Agreement is executed or the relevant

anniversary thereof (as the case may be) and ending on

the date immediately preceding the date of the following

anniversary of the New Lease Agreement; and

(b) if the original lease is extended:

(1) the period commencing from the date immediately

following the date of expiration of the initial lease

term and ending on 31 December of the following

calendar year; and

(2) each calendar year immediately following the end

of the period described in (b)(1) above.

Lessee Favour Link International Limited, a company incorporated in

Hong Kong and a wholly-owned subsidiary of Regal Hotels.

Lessor the Property Company.

Listing Rules the Rules Governing the Listing of Securities on the Stock

Exchange.

Long Stop Date 30 September 2017, or such later date as may be agreed

between P&R and the Trustee (acting on the recommendation

and at the direction of the Manager).

Manager Regal Portfolio Management Limited (in its capacity as the

manager of Regal REIT), a company incorporated under the

laws of Hong Kong and a wholly-owned subsidiary of Regal

Hotels.

DEFINITIONS

— 9 —

Manager Acquisition Fee has the meaning ascribed to this term in section 5.1 of the




Transaction”.

Market Consultant Savills (Hong Kong) Limited.

Market Consultant’s Report the letter from the Market Consultant, as set out in Appendix

IV to this Circular.

NAV net asset value.

Net Property Income the amount equal to Adjusted GOP less: (a) the hotel

management fee payable under the New Hotel Management

Agreement; and (b) the Fixed Charges.

Net Rental Income the aggregate of: (a) income received from concessions and

other persons (not related to operation of the New Hotel)

occupying space of the New Hotel; and (b) licence fee income

(including income generated from mobile phone integrated

radio system antennae space rental at the New Hotel).

New CCT Waiver Application has the meaning ascribed to this term in section 9.2 of the


Party Transactions — New CCT Waiver Application”.

New Hotel the iclub Ma Tau Wai Hotel.

New Hotel ManagementAgreement

has the meaning ascribed to this term in section 3.4(a) of the


Hotel Management Agreement — General”.

New Lease Agreement has the meaning ascribed to this term in section 3.3(a) of the


Lease Agreement and New Lease Guarantee — General”.

New Lease Guarantee has the meaning ascribed to this term in section 3.3(f) of the


Lease Agreement and New Lease Guarantee — Lease

Guarantee”.

Operating Equipment supply items which may be consumed in the operation of a

hotel including chinaware, glassware, linens, towels,

silverware, tools, kitchen utensils, miscellaneous serving

equipment, uniforms, engineering and housekeeping tools and

utensils, and similar items, as more fully described in the New

Hotel Management Agreement.

DEFINITIONS

— 10 —

Ordinary Resolution a resolution passed at a meeting of Unitholders duly convened

and held in accordance with the provisions contained in the

Trust Deed and carried by a simple majority of the votes of

those Unitholders present and entitled to vote in person or by

proxy.

Owner has the meaning ascribed to this term in section 3.4(a) of the


Hotel Management Agreement — General”.

P&R P&R Holdings Limited, a joint venture company incorporated

in the British Virgin Islands with limited liability, held as to

50% by a wholly-owned subsidiary of Paliburg and as to 50%

by a wholly-owned subsidiary of Regal Hotels.

Paliburg Paliburg Holdings Limited (Stock code: 617), a company

incorporated in Bermuda with limited liability, ordinary

shares of which are listed on the Stock Exchange.

Performance Test the requirement for the Hotel Manager to achieve at least 80%

of the approved Gross Operating Profit in respect of the

operations of the New Hotel.

Profit and Loss Statement the profit and loss statement on the operation of the New

Hotel for the relevant calendar month and the Fiscal Year to

date prepared and delivered by the Hotel Manager to the

Lessee pursuant to the terms of the New Hotel Management

Agreement.

Property Company Land Crown International Limited, a company incorporated in

Hong Kong and a wholly-owned subsidiary of the

Intermediary Company.

Regal Airport Hotel the property sub-leased by Bauhinia Hotels Limited from the

Airport Authority Hong Kong on which Regal Airport Hotel is

situated.

Regal Connected Persons Group has the meaning ascribed to this term in section 9.1 in the


Party Transactions — Regal Connected Persons Group”.

Regal Hongkong Hotel the property owned by Cityability Limited on which Regal

Hongkong Hotel is situated.

Regal Hotels Regal Hotels International Holdings Limited (Stock code:

78), a company incorporated in Bermuda with limited

liability, ordinary shares of which listed on the Stock

Exchange.

Regal Hotels Group Regal Hotels and its subsidiaries.

DEFINITIONS

— 11 —

Regal Kowloon Hotel the property owned by Ricobem Limited on which Regal

Kowloon Hotel is situated.

Regal Oriental Hotel the property owned by Gala Hotels Limited on which Regal

Oriental Hotel is situated.

Regal REIT Regal Real Estate Investment Trust, a collective investment

scheme constituted as a unit trust and authorised under

section 104 of the SFO subject to applicable conditions from

time to time, the units of which are listed on the Stock

Exchange.

Regal REIT Group Regal REIT and its subsidiaries.

Regal Riverside Hotel the property owned by Regal Riverside Hotel Limited on

which Regal Riverside Hotel is situated.

REIT Code the Code on Real Estate Investment Trusts published by the

SFC (as amended from time to time).

SFC the Securities and Futures Commission of Hong Kong.

SFO the Securities and Futures Ordinance (Chapter 571 of the

Laws of Hong Kong) as amended, supplemented or otherwise

modified and the rules thereunder.

Share Purchase Agreement the sale and purchase agreement entered into between P&R,

the Trustee, Paliburg, Regal Hotels and the Manager dated 29

June 2017 in respect of the sale and purchase of the Target

Company Shares and assignment of the Shareholder Loan.

Shareholder Loan all amounts due (including principal, interest and other sums

(if any)), owing or payable by the Target Company to P&R in

respect of the loan advanced by P&R to the Target Company

and outstanding as at the date of completion of the

Transaction, such shareholder loan amount being

approximately HK$1,000 million as at the Latest Practicable

Date.

Significant Holder(s) has the meaning ascribed to this term in the REIT Code.

sqm square metre.

Stock Exchange The Stock Exchange of Hong Kong Limited.

Target Company Prosper Harvest Investments Limited, a company

incorporated in the British Virgin Islands and a wholly-owned

subsidiary of P&R.

Target Company Shares 100% of the issued share capital of the Target Company to be

acquired by the Trustee (or its nominee) on the terms of and

subject to the conditions of the Share Purchase Agreement.

DEFINITIONS

— 12 —

Target Group the Target Company, the Intermediary Company and theProperty Company.

Total Hotel Revenue revenue derived from: (a) the New Hotel in relation to: (i) allhotel rooms and suites rented for any period; (ii) food andbeverage sales; (iii) catering operations conducted outside ofthe New Hotel; (iv) miscellaneous banquet and meeting roomincome; (v) rental of audio/video equipment, use oftelephone, internet and other telecommunication devices inthe New Hotel; and (vi) laundry and dry cleaning servicesrendered; (b) other miscellaneous operated departments in theNew Hotel; and (c) service charge levied by the New Hotel onall hotel room revenue and food and beverage revenue(excluding in-hotel-room mini-bar revenue), as more fullydescribed in the New Hotel Management Agreement.

Transaction (a) the acquisition by the Trustee (acting on therecommendation and the instructions of the Manager) (or itsnominee) of the Target Company Shares, on the terms andsubject to the conditions of the Share Purchase Agreement;and (b) the assignment of the Shareholder Loan to the Trustee(or its nominee), on the terms and subject to the conditions ofthe Share Purchase Agreement.

Transaction Documents collectively, the Share Purchase Agreement in respect of theNew Hotel, as well as the Deed of Tax Indemnity, the NewLease Agreement, the New Lease Guarantee, the New HotelManagement Agreement and the loan assignment in respect ofthe New Hotel to be entered into at completion of theTransaction.

Transaction Matters RequiringApproval

the matters which require the approval of the IndependentUnitholders at the EGM, these being:

(a) the consummation by Regal REIT of the Transactioncontemplated under the Share Purchase Agreement andother transactions contemplated under, associated withand/or related to the Transaction including but notlimited to the execution of and consummation of thetransactions under the Deed of Tax Indemnity in respectof the New Hotel; and

(b) the consummation by Regal REIT of the transactionscontemplated under, associated with and/or related tothe Additional Hotel CCTs (being the New LeaseAgreement, New Lease Guarantee and New HotelManagement Agreement pertaining to the New CCTWaiver Application),

each as more fully described in the EGM Notice.

DEFINITIONS

— 13 —

Trust Deed the trust deed constituting Regal REIT dated 11 December

2006, entered into between the Trustee and the Manager, as

supplemented by a first supplemental deed dated 2 March

2007, a second supplemental deed dated 15 May 2008, a third

supplemental deed dated 8 May 2009, a fourth supplemental

deed dated 23 July 2010, a fifth supplemental deed dated 3

May 2011, a sixth supplemental deed dated 21 July 2011 and

a seventh supplemental deed dated 14 April 2015 all entered

into between the same parties (as may be further amended and

supplemented from time to time).

Trustee DB Trustees (Hong Kong) Limited, in its capacity as trustee

of Regal REIT.

Trustee Additional Fee has the meaning ascribed to this term in section 5.1 of the




Transaction”.

Uniform System the Tenth Revised Edition of the Uniform System of Accounts

for the Lodging Industry published by the American Hotel &

Lodging Association, 2113 N. High Street, Lansing, Michigan

48906, or such later edition adopted by the Hotel Manager for

implementation by the New Hotel from time to time.

Unitholder(s) holder(s) of the Units from time to time.

Units units of Regal REIT.

Variable Rent a percentage of the Excess (if any) to be paid as variable rent.

Words importing the singular shall, where applicable, include the plural and vice versa and words

importing the masculine gender shall, where applicable, include the feminine and neuter genders.

References to persons shall include corporations.

Any reference in this Circular to any enactment is a reference to that enactment for the time being

amended or re-enacted.

Any reference to a time of day in this Circular shall be a reference to Hong Kong time unless otherwise

stated.

Any discrepancies in the tables, graphs and charts between the listed amounts and totals thereof are

due to rounding. Where applicable, figures and percentages are rounded to one decimal place.

DEFINITIONS

— 14 —

Event Date and Time

Latest date and time for lodging transfers of

Units to qualify for voting at the EGM

14 July 2017 at 4:30 p.m.

Book closure period (both days inclusive) to

determine the eligibility of Unitholders to

vote at the EGM

17 July 2017 to 20 July 2017

Latest date and time for lodging proxy forms

for the EGM

18 July 2017 at 11:00 a.m.(1)

EGM Record Date 20 July 2017

Date and time of the EGM 20 July 2017 at 11:00 a.m.

Target date for completion of the Transaction if

the approvals sought at the EGM are obtained

and all other conditions precedent are satisfied

(or waived)

Mid-August to mid-September 2017

Further announcement(s) will be made by the Manager in relation to those events which are scheduled

to take place after the EGM as and when appropriate in accordance with applicable regulatory

requirements.

Note:

(1) Proxy forms have to be lodged not less than 48 hours before the time set for the EGM.

INDICATIVE TIMETABLE

— 15 —



(Stock Code: 1881)

Managed by

Directors of the Manager:

Non-executive DirectorsMr. LO Yuk Sui (Chairman)Miss LO Po Man (Vice Chairman)Mr. Donald FAN TungMr. Jimmy LO Chun ToMr. Kenneth NG Kwai Kai

Executive DirectorsMr. Johnny CHEN Sing HungMr. Simon LAM Man Lim

Independent Non-executive DirectorsMr. John William CRAWFORD, JPMr. Bowen Joseph LEUNG Po Wing, GBS, JPMr. Kai Ole RINGENSONHon. Abraham SHEK Lai Him, GBS, JP

Registered Office:

Unit No. 200120th Floor68 Yee Wo StreetCauseway BayHong Kong

30 June 2017

To: The Unitholders

Dear Sir or Madam,


(2) CONTINUING CONNECTED PARTY TRANSACTIONS; AND(3) EXTRAORDINARY GENERAL MEETING AND

CLOSURE OF REGISTER OF UNITHOLDERS

1. INTRODUCTION

The purposes of this Circular are, among other things:

(a) to provide you with further information of, among others, the Transaction MattersRequiring Approval and the New CCT Waiver Application;

LETTER TO THE UNITHOLDERS

— 16 —

(b) to set out the recommendation of the Independent Board Committee to the Independent

Unitholders on the Transaction Matters Requiring Approval as to whether they are fair and

reasonable;

(c) to set out the recommendation of the Independent Financial Adviser to the Independent

Board Committee, the Independent Unitholders and the Trustee in relation to the

Transaction Matters Requiring Approval; and

(d) to serve notice of the EGM.

The EGM Resolutions seek Independent Unitholders’ approval for:

(i) the consummation by Regal REIT of the Transaction contemplated under the Share

Purchase Agreement and other transactions contemplated under, associated with and/or

related to the Transaction, including but not limited to the execution of and consummation

of the transactions under the Deed of Tax Indemnity; and

(ii) the consummation by Regal REIT of the transactions contemplated under, associated with

and/or related to the Additional Hotel CCTs (being the New Lease Agreement, New Lease

Guarantee and New Hotel Management Agreement pertaining to the New CCT Waiver

Application).

Unitholders and potential investors of Regal REIT should note that completion of theTransaction is subject to certain conditions precedent (including Independent Unitholders’approval and Regal REIT obtaining sufficient new bank financing on terms that theManager considers to be reasonably satisfactory) which may or may not be satisfied.Accordingly, unitholders and potential investors of Regal REIT are advised to exercisecaution when dealing in the Units.

2. THE TRANSACTION

2.1 Overview

Reference is made to the announcement issued by the Manager dated 23 May 2017 which sets

out the key terms of a non-binding letter of intent in connection with the proposed entry into

definitive documentation between P&R and the Trustee (or its nominee) in respect of the sale of

100% of the issued share capital of and the shareholder loan to the Target Company that,

indirectly through its wholly-owned subsidiaries, owns the New Hotel.

On 29 June 2017, the Share Purchase Agreement was entered into, pursuant to which P&R agreed

to sell to the Trustee (or its nominee) the Target Company Shares, and assign to the Trustee (or

its nominee) the Shareholder Loan for the Hotel Purchase Price (being HK$1,360 million), plus

the Current Assets Adjustment (capped at HK$2 million), subject to the terms and conditions set

out therein.


— 17 —

P&R is principally engaged in development of properties for sale and/or rental through its

subsidiaries and currently holds all the shares in the Target Company. It is a joint venture

company incorporated in the British Virgin Islands with limited liability, held by Paliburg and

Regal Hotels in equal shares, both of which are directly and indirectly controlled by Century

City. The Lessee is a company incorporated in Hong Kong and is presently the lessee of the

Initial Hotel Properties, iclub Sheung Wan Hotel and iclub Fortress Hill Hotel. The Hotel

Manager is a company incorporated in Hong Kong and is presently the hotel manager of the

Initial Hotel Properties, iclub Wan Chai Hotel, iclub Sheung Wan Hotel and iclub Fortress Hill

Hotel. Each of the Lessee and the Hotel Manager is a wholly-owned subsidiary of Regal Hotels.

Paliburg, Regal Hotels and Century City are all Hong Kong listed companies principally engaged

in property development and investment, hotel ownership, operation and management business

and aircraft ownership and leasing, respectively. For further information as to P&R’s holding

structure, please refer to section 2.3 headed “Current Holding Structure of the New Hotel”.

The Target Company was incorporated in the British Virgin Islands solely for the purpose of

holding the entire issued share capital of the Intermediary Company. In turn, the Intermediary

Company was incorporated in the British Virgin Islands solely for the purpose of holding the

entire issued share capital of the Property Company. The Property Company is a private company

incorporated in Hong Kong and is not engaged in any other operations or business other than

holding the New Hotel and operating it as a hotel (such hotel operations to cease upon execution

of the New Hotel Management Agreement at completion of the Transaction) and does not

currently employ any employee. The New Hotel obtained its occupation permit in November

2016 and its hotel licence in May 2017. The New Hotel is still in its soft-opening phase (which

commenced on 23 May 2017) operating under the “iclub by Regal (富薈酒店)” brand.

2.2 Information on the New Hotel

(a) Description

The New Hotel is situated at No. 8 Ha Heung Road (formerly known as Nos. 8, 8A, 10, 10A, 12

and 12A Ha Heung Road), Kowloon, Hong Kong.

Number of Guestrooms: 340 guestrooms

Number of Storeys: 22 storeys (including basement and ground floor)

Gross Floor Area: Approximately 6,298 sqm

Covered Floor Area: Approximately 9,490 sqm

Facilities: Lounge, computer area and fitness area

The New Hotel obtained its occupation permit in November 2016 and its hotel licence in May

2017. The New Hotel is still in its soft-opening phase (which commenced on 23 May 2017)

operating under the “iclub by Regal (富薈酒店)” brand. As the New Hotel is newly developed,

the Manager currently has no plans to undertake major improvements or to redevelop the New

Hotel. Further, the Manager does not expect any material expenditure in respect of the New Hotel

in the immediate future.


— 18 —

(b) Location

The New Hotel is located on the section of Ha Heung Road which is close to Ma Tau Wai Road/

To Kwa Wan Road Garden, where the proposed entrance D of the future Ma Tau Wai MTR station

of the Shatin-Central link will be located. With its close proximity to both Kowloon City Road

and To Kwa Wan Road, the two major roads in the district, the New Hotel is well connected to

nearby districts, including Hung Hom, Tsim Sha Tsui and Jordan by buses and light buses.

(c) Competition

Hotels in Kowloon City and To Kwa Wan mainly target mid-to low-budget travellers and provide

a select-service offering. There are three existing limited to full-service hotels within the Ma Tau

Wai and To Kwa Wan vicinity, namely: (i) Harbour Plaza 8 Degrees (completed in 2009); (ii)

O’Hotel (completed in 2011); and (iii) Cruise Hotel (completed in 2014). These hotels have an

offering of 704 rooms, 151 rooms and 161 rooms respectively. Regal Oriental Hotel which is in

the wider Kowloon City vicinity has a relatively large offering of 494 rooms. These may

constitute competition to the New Hotel which is positioned as a select-service hotel and is

expected to be classified as a High Tariff B Hotel. For analysis of the competition conditions in

respect of the New Hotel, please refer to Appendix IV headed “Market Consultant’s Report” to

this Circular.

(d) Property Valuation

As at 23 June 2017, the New Hotel was valued by the Independent Property Valuer at HK$1,400

million. Such amount has taken into account the rent receivable under the New Lease Agreement

in respect of the New Hotel. The Hotel Purchase Price represents a 2.9% discount to the

Appraised Value.

For the assumptions of the Independent Property Valuer in determining this valuation, please

refer to Appendix II headed “Independent Property Valuer’s Valuation Report” to this Circular.

(e) Lease Agreement, Lease Guarantee, and Hotel Management Agreement

Upon completion of the Transaction, Regal REIT (through the Property Company) will enter into

the New Lease Agreement with the Lessee in respect of the entire New Hotel. The lease will

commence from the date of its execution and terminate on the date immediately preceding the

fifth anniversary date of the New Lease Agreement, unless extended at the sole discretion of

Regal REIT for a further term commencing from the date immediately following the date of

expiration of the initial lease term in 2022 and ending on 31 December 2027. The rent receivable

by the Property Company in respect of each Lease Year during the initial lease term shall be

4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum respectively, of the Hotel Purchase Price. If

extended, the rent receivable in respect of each Lease Year of such extension of the original lease

is to be determined based on an annual market rental review performed by an independent

professional property valuer jointly appointed by the Lessee and the Property Company.

Regal Hotels will, at the same time as entering into the New Lease Agreement in respect of the

New Hotel, enter into the New Lease Guarantee pursuant to which Regal Hotels will guarantee:

(i) the Lessee’s obligations to pay all amounts owing under such New Lease Agreement; and (ii)

the due observance and performance of such New Lease Agreement by the Lessee.


— 19 —

The New Hotel Management Agreement will also be entered into between the Lessor, the Lessee,

Regal Hotels and the Hotel Manager concurrently with the execution of the New Lease

Agreement, pursuant to which the Hotel Manager will be engaged to act as the exclusive operator

and manager of the New Hotel to supervise, direct and control the management, operation and

promotion of the business of the New Hotel during the 10-year operating term of the New Hotel

Management Agreement. For so long as the New Lease Agreement is in subsistence, the hotel

management fee, the marketing fee and reimbursable marketing expenses payable under the New

Hotel Management Agreement, are to be paid annually in arrears from the Lessee’s own funds

and is subordinated to all rent due under the New Lease Agreement. After the expiration or

earlier termination of the New Lease Agreement, the hotel management fee, the marketing fee

and reimbursable marketing expenses, are to be paid monthly in arrears from Regal REIT’s own

funds.

For further details, please refer to sections 3.3 & 3.4 headed “Key Documentation — New Lease

Agreement and New Lease Guarantee” and “Key Documentation — New Hotel Management

Agreement” respectively.

(f) Government Grant

The New Hotel, as with the other hotels currently owned by Regal REIT (other than Regal

Airport Hotel, which is leased by the Airport Authority Hong Kong to Regal REIT pursuant to

a sublease), will be held pursuant to a Government Grant. The Government Grant in respect of

the land on which the New Hotel is located will expire after 75 years from 26 June 2014.

For details of the Government Grant relating to the New Hotel, please refer to Appendix V

headed “Summary of Government Grant” to this Circular.

(g) iclub by Regal (富薈酒店)

The New Hotel is operating under the “iclub by Regal (富薈酒店)” brand introduced by the Regal

Hotels Group. The New Hotel will continue to operate under the “iclub by Regal (富薈酒店)”

brand following completion of the Transaction. iclub Wan Chai Hotel, iclub Sheung Wan Hotel

and iclub Fortress Hill Hotel are currently branded as “iclub by Regal (富薈酒店)” hotels.

The “iclub by Regal (富薈酒店)” brand has and continues to be positioned as an upscale

select-service hotel brand (typically with around 100 to 350 hotel guestrooms) complementing

the “Regal” brand’s full-service offering. The hotels are predominantly located in the world’s

gateway cities and close to the financial centres, regional business centres, convention and

exhibition venues, shopping and entertainment hubs, or popular tourist spots with sights and

attractions, and conveniently accessed by efficient transport infrastructure. The “iclub by Regal

(富薈酒店)” branded hotels are designed according to international quality hotel standards and

feature contemporary, chic, trendy, stylish and modern décor and design. The guestrooms are

designed with plenty of glass to balance indoor lighting and natural daylight, furnished with

comfortable furniture and bedding and equipped with tech-savvy facilities such as LCD TV, iPod

speaker, free internet and free WiFi, which are customised for international multi-tasking

executives and leisure travellers.


— 20 —

“iclub by Regal (富薈酒店)” offers discerning tech-savvy business and leisure travellers a

relaxed life-style, with built-in express check-in and check-out system for time conscious

travellers, selective refreshments and beverages served at a cozy lounge, and purposeful

facilities (such as, a computer area and fitness area) with intimate, friendly and tasteful

ambience. “iclub by Regal (富薈酒店)” also offers international business and leisure travellers

a smart, dynamic, efficient, functional, convenient and pleasant travelling experience that meets

the needs of contemporary international business travellers, at the right price with good value for

money lodging. The symbol “i” stands for “interactive experience”, “intelligent design” and

“innovative services”.

2.3 Current Holding Structure of the New Hotel

The current holding structure of the New Hotel is as follows:

62.28%

67.98%

0.05%

50% 50%

100%

100%

100%

100%

100%

}

Regal Hotels (Bermuda)

Century City(Bermuda)

Paliburg(Bermuda)

Prosper Harvest Investments

Limited (BVI) (Target Company)

Leading Brand Holdings Limited(BVI) (Intermediary Company)

Land Crown International Limited (HK) (Property Company)

New Hotel

Target Group

P&R Holdings Limited (BVI)


— 21 —

2.4 Expected Holding Structure of the New Hotel

Immediately after the completion of the Transaction, and assuming no other changes to the

holding structure of Regal REIT prior to such time, the expected holding structure of the New

Hotel is as follows:

74.89%

100% 100% 100% 100% 100%

100% 100% 100% 100%

100% 100% 100% 100% 100%

100% 100% 100% 100% 100%

100%

Regal Hotels (Bermuda)

Regal REIT (HK)

Existing Holding Companies(1)

Wise Tower Limited (BVI)

R-REIT Asset Holdings(NP) Limited (BVI)

R-REIT Asset Holdings(SW) Limited (BVI)

Prosper Harvest Investments Limited (BVI)

Fortune Mine Limited (BVI)

Plentiful InvestmentsLimited (BVI)

Leading Brand Holdings Limited (BVI)

Existing Intermediary Companies

Twentyfold Investments Limited (BVI) (2)

Existing Property Companies(3)

Wise Decade Investments Limited

Tristan Limited (HK)

Land Crown International Limited (HK)

iclub WanChai Hotel

iclub Fortress Hill HotelWan Hotel

Sonnix Limited (HK)(HK)

Initial Hotel Properties

iclub Sheung New Hotel(4)(4) (4) (4) (4)

Notes:

(1) (a) Regal REIT holds through R-REIT Asset Holdings (TST) Limited all legal and beneficial interests in Fit Result

Investments Limited; (b) Regal REIT holds through R-REIT Asset Holdings (Oriental) Limited all legal and

beneficial interests in Chasehill Limited; and (c) Regal REIT holds through Regal Asset Holdings Limited all legal

and beneficial interests in Yield Rich Limited, Wide Lead Corporation and Fieldstar Investments Limited.

(2) Fit Result Investments Limited, Chasehill Limited, Yield Rich Limited, Wide Lead Corporation and Fieldstar

Investments Limited hold all legal and beneficial interests in Ricobem Limited, Gala Hotels Limited, Cityability

Limited, Regal Riverside Hotel Limited and Bauhinia Hotels Limited, respectively.

(3) (a) Ricobem Limited, Gala Hotels Limited, Cityability Limited and Regal Riverside Hotel Limited hold all legal

and beneficial interests in Regal Kowloon Hotel, Regal Oriental Hotel, Regal Hongkong Hotel and Regal

Riverside Hotel, respectively; and (b) Regal Airport Hotel is leased by the Airport Authority Hong Kong to

Bauhinia Hotels Limited pursuant to a sublease expiring on 30 December 2028.

(4) The New Hotel is intended to be leased, and the Initial Hotel Properties, iclub Sheung Wan Hotel and iclub

Fortress Hill Hotel are presently leased, to the Lessee in accordance with the terms of their respective lease

agreements. iclub Wan Chai Hotel is self-operated by Regal REIT.


— 22 —

2.5 Transaction History

In December 2016, P&R and Dragon Pier Investments Limited (“Dragon Pier”) (a wholly-owned

subsidiary of Giant Sino Group Limited (“Giant Sino”)) entered into an agreement pursuant to

which P&R agreed to dispose of one ordinary share in the issued share capital of the Target

Company, representing a 50% equity interest in the Target Company, for a consideration of

HK$150 million to realise part of the value of the New Hotel. Based on their disclosures, the

consideration amount was determined after arm’s-length negotiation between the parties taking

into account, among other matters, the preliminary valuation of the hotel of HK$1,360 million

as at 21 December 2016 by an independent property valuer and the sum of HK$1,000 million

being the aggregate of all loans then made and were to be made/advanced by P&R to the Target

Company and outstanding on the completion date thereof. Immediately prior to the disposal,

P&R held the entire equity interest in the Target Company. Details of the aforesaid disposal are

set out in the joint announcement of Century City, Paliburg and Regal Hotels dated 28 December

2016 and the respective circulars of Century City and Paliburg dated 26 January 2017.

Subsequently, P&R and Dragon Pier entered into an agreement on 23 May 2017 pursuant to

which P&R acquired one ordinary share in the issued share capital of the Target Company from

Dragon Pier for a total consideration of approximately HK$165.7 million to consolidate the

entire equity interest in the Target Group. Based on their disclosures, the consideration amount

was determined after arm’s-length negotiation between the parties taking into account, among

other matters, the shareholder loan amounting to HK$1,000 million on the completion date

thereof. Details of the aforesaid acquisition are set out in the joint announcement of Century

City, Paliburg and Regal Hotels dated 23 May 2017.

Based on the disclosures made by Century City, Paliburg and Regal Hotels in their joint

announcement dated 23 May 2017: (i) Dragon Pier was an investment holding company wholly

owned by Giant Sino, which in turn was previously a controlling shareholder of Cosmopolitan

(a listed subsidiary of Century City and Paliburg) and as at the date of the joint announcement,

held 33.75 million ordinary shares of Cosmopolitan; and (ii) save for such aforesaid interest,

Dragon Pier and its ultimate beneficial owners were third parties independent of Century City

and Paliburg and their respective connected persons, as at the date of the joint announcement.

Based on the announcement of Cosmopolitan dated 7 June 2017, the number of ordinary shares

of Cosmopolitan in issue was 4,250,455,846 shares. Assuming the same number of ordinary

shares was in issue at the date of the joint announcement, Dragon Pier then held approximately

0.79% of the ordinary shares of Cosmopolitan in issue.

3. KEY DOCUMENTATION

3.1 Share Purchase Agreement

(a) Acquisition of Target Company Shares and Assignment of Shareholder Loan

Pursuant to the Share Purchase Agreement, P&R has agreed to sell to the Trustee (or its

nominee), as purchaser, the Target Company Shares, representing 100% of the issued share


— 23 —

capital of the Target Company, and assign to the Trustee (or its nominee) the Shareholder Loan,

subject to the terms and conditions set out therein. The obligations of P&R under the Share

Purchase Agreement are guaranteed by each of the Guarantors on a several basis in equal

proportions.

(b) Consideration

The consideration payable by the Trustee to P&R pursuant to the Share Purchase Agreement is

HK$1,360 million (the “Hotel Purchase Price”), plus the Current Assets Adjustment, provided

that such adjustment will be capped at HK$2 million. The Current Assets Adjustment of the

Target Group as at 31 December 2016 amounted to HK$1.26 million. P&R will notify the Trustee

of the Current Assets Adjustment shortly prior to completion of the Transaction, and provide

evidence (such as, utility receipts and unaudited management accounts) to the satisfaction of the

Trustee representing the Current Assets Adjustment of the Target Group as at completion of the

Transaction.

The total sum of the Hotel Purchase Price plus the Current Assets Adjustment reflects the

consideration payable in respect of the acquisition of the Target Company Shares and the

assignment of the Shareholder Loan, and (apart from the Deposit) will be payable at completion

of the Transaction. The Deposit is payable within one Business Day from the signing of the Share

Purchase Agreement.

The Hotel Purchase Price, as well as the Current Assets Adjustment, has been arrived at on a

willing buyer/seller in an arm’s length transaction basis, after taking into account the Appraised

Value and the transaction history of the Target Company.

The Manager does not contemplate any adjustments for current or non-current liabilities (as P&R

and the Guarantors have warranted in the Share Purchase Agreement that the Target Group shall

not, at completion of the Transaction, have any liabilities other than the Shareholder Loan that

will also be acquired by the Trustee) or non-current assets (as there are currently no material

non-current assets other than the New Hotel). Also, the Share Purchase Agreement contains

specific covenants in terms consistent with market practice that give a significant degree of

negative control to the Trustee in relation to the operation of the Target Group during the period

between signing of the Share Purchase Agreement and completion of the Transaction. For

example, the Share Purchase Agreement contains covenants that, among others, require the

Target Group not to do nor agree (conditionally or unconditionally) to do the following except

with the prior written consent of the Manager: (i) enter into any transaction or incur any liability

except in the ordinary course of business; (ii) dispose of any interest in the New Hotel; and (iii)

declare, pay or make any dividend or distribution or do or allow to be done anything which

renders its financial position less favourable than at the date of the Share Purchase Agreement.

These contractual protections mitigate the risk to the Trustee of any possible adverse changes to

the assets and liabilities of the Target Group arising from the acts or omissions of P&R.

(c) Deposit

Pursuant to the Share Purchase Agreement, the Deposit of HK$200 million is payable by the

Trustee to P&R within one Business Day from the signing of the Share Purchase Agreement.


— 24 —

The Deposit shall not be deposited into an escrow account and may be used by P&R without

restriction, and shall be refunded in full (without accrued interest, if any) by P&R to the Trustee

within 10 Business Days if the Share Purchase Agreement is terminated due to: (i) any Condition

not being satisfied (or waived) on or before the Long Stop Date; (ii) the completion obligations

of P&R not being complied with by P&R on the completion of the Transaction (including,

without limitation, the delivery of counterparts of the remaining Transaction Documents duly

signed by P&R, the Guarantors and/or the Lessee, as the case may be); (iii) any of the

representations and warranties given by P&R and the Guarantors being considered by the Trustee

or the Manager to have been breached, be untrue or misleading or any of P&R or the Guarantors

being in material breach of the Share Purchase Agreement; or (iv) P&R or any Guarantor failing

to procure compliance of each Group Company with the provisions of the Share Purchase

Agreement.

At completion of the Transaction, the Deposit shall be applied on a dollar-for-dollar basis against

part of the Hotel Purchase Price plus the Current Assets Adjustment.

(d) Conditions Precedent

Completion of the Transaction is conditional upon the satisfaction or waiver of the following

conditions (“Conditions”):

(i) if applicable, Paliburg and Century City obtaining its shareholders’ approval of the

transactions contemplated by the Transaction Documents, as appropriate, in a form

satisfactory to the Trustee and the Manager and in accordance with their respective articles

of association or bye-laws and the Listing Rules (as the case may be);

(ii) Regal Hotels obtaining its independent shareholders’ approval of the transactions

contemplated by the Transaction Documents, as appropriate, in a form satisfactory to the

Trustee and the Manager and in accordance with their respective articles of association or

bye-laws and the Listing Rules (as the case may be);

(iii) Independent Unitholders’ approval for: (1) the transactions contemplated under the Share


related to the Transaction; and (2) the transactions contemplated under, associated with

and/or related to the Additional Hotel CCTs, in accordance with the Trust Deed and REIT

Code;

(iv) all necessary consents or waivers being granted by third parties (including any

governmental or official authorities) in connection with the transactions contemplated

under the Transaction Documents and no statute, regulation or decision which would

prohibit, restrict or materially delay the sale and purchase of the Target Company Shares,

the assignment of the Shareholder Loan and/or the operation of the business by any member

of the Target Group after completion of the Transaction having been proposed, enacted or

taken by any governmental or official authority;


— 25 —

(v) the warranties remaining true and accurate and not misleading in any material respect at

completion of the Transaction;

(vi) each of P&R and the Guarantors having complied fully with certain customary

pre-completion obligations and otherwise having performed in all material respects all of

the covenants and agreements required to be performed by them under the Transaction

Documents;

(vii) no compulsory acquisition or resumption of the New Hotel and no notice of such intention

received from any governmental authority; and

(viii) Regal REIT obtaining or procuring a new bank facility of an amount no less than HK$500

million for the purposes of financing part of the Hotel Purchase Price, on terms that the

Manager considers to be reasonably satisfactory having regard to similar debt borrowings

of similar size and nature in the current loan market in Hong Kong.

The Manager has undertaken to use all reasonable endeavours to procure the satisfaction of the

conditions set out in paragraphs (iii) and (viii) above and P&R and the Guarantors have each

undertaken to use all reasonable endeavours to satisfy and/or procure the satisfaction of the

conditions set out above (other than paragraphs (iii) and (viii)) as soon as reasonably practicable.

The Trustee (acting on the recommendation and at the direction of the Manager) may in its sole

discretion waive the conditions set out in the paragraphs (v), (vi) or (viii) above, subject to

compliance with the REIT Code, the Listing Rules and any other applicable laws or regulations.

If any of the conditions shall not have been satisfied or waived on or before the Long Stop Date,

then the Trustee (acting on the recommendation and at the direction of the Manager) may, at its

option without any penalty:

(1) postpone the date by which the conditions must be satisfied or waived; or

(2) terminate the Share Purchase Agreement (whereby the Deposit shall be refunded to the

Trustee).

(e) Completion of the Transaction

Within five Business Days of the conditions precedent under the Share Purchase Agreement set

out in section 3.1(d) headed “Key Documentation — Share Purchase Agreement — Conditions

Precedent” above having been met to the satisfaction of the Trustee (or waived), the Trustee shall

(acting on the recommendation and at the direction of the Manager) give a notice to P&R

confirming that the Trustee is prepared to proceed with completion of the Transaction.

Completion of the Transaction shall take place on such date as may be agreed in writing between

the Trustee and P&R following the giving of such notice, and in any event within 10 Business

Days of the giving of such notice.

At completion of the Transaction, among other things, the Deed of Tax Indemnity, the New Lease

Agreement, the New Lease Guarantee and the New Hotel Management Agreement in respect of

the New Hotel (the agreed form being attached to the Share Purchase Agreement) will be

executed.


— 26 —

(f) Representations, Warranties and Indemnity

The Share Purchase Agreement contains customary representations and warranties given by P&R

and the Guarantors, including those in respect of P&R, the Target Group and the New Hotel.

These include:

(i) the Target Group shall not, at completion of the Transaction, have any liabilities other than

the Shareholder Loan that will also be acquired by the Trustee; and

(ii) the members of the Target Group shall have no other operations or business other than

holding the New Hotel and operating it as a hotel (such hotel operations to cease upon

execution of the New Hotel Management Agreement at completion of the Transaction).

P&R and the Guarantors (on a several basis in equal proportions between the Guarantors) have

undertaken to indemnify Regal REIT, the Trustee, the Manager and the Target Group for any loss,

damages, costs (including legal costs), expenses and other liabilities which Regal REIT, the

Trustee, the Manager or the Target Group may suffer as a result of any breach of the warranties.

The Share Purchase Agreement also sets out limitations on the liability of P&R and the

Guarantors in respect of any breach of warranties. The maximum aggregate liability of P&R and

the Guarantors in respect of all claims for breach of warranties under the Share Purchase

Agreement shall not exceed the Hotel Purchase Price plus the Current Assets Adjustment (capped

at HK$2 million). The Share Purchase Agreement provides for a limitation period of three years

from the completion of the Transaction for all claims (other than certain stamp duty-related

claims, for which there is no limitation period, and certain claims relating to tax-related

warranties, in which case the limitation period is seven years). Such limitation period is the

result of arm’s length negotiations between the relevant parties and is consistent with that

provided under the sale and purchase agreements in relation to the acquisition of the Initial Hotel

Properties, iclub Wan Chai Hotel, iclub Sheung Wan Hotel and iclub Fortress Hill Hotel. The

Manager considers that the liability cap and limitation period are acceptable as they are in-line

with normal commercial terms expected of similar transactions, and that Unitholders’ interests

are sufficiently protected notwithstanding these limitations.

3.2 Deed of Tax Indemnity

P&R and the Guarantors will, at completion of the Transaction, enter into the deed of tax

indemnity (the “Deed of Tax Indemnity”) in favour of the Trustee and the Target Group.

Pursuant to the Deed of Tax Indemnity, P&R and the Guarantors (on a several basis in equal

proportions between the Guarantors) will covenant, undertake and agree with the respective

beneficiaries that they will indemnify on demand the respective beneficiaries in respect of,

among other things, any liability for taxation resulting from or by reference to any event

occurring on or before completion of the Transaction or (as the case may be) completion of the

Transaction or in respect of any income, profits or gains earned, accrued or received by any of

the Target Group on or before completion of the Transaction.

A claim can be made on or prior to the seventh anniversary of the Deed of Tax Indemnity, save

for certain stamp duty-related claims for which there is no limitation period.


— 27 —

3.3 New Lease Agreement and New Lease Guarantee

(a) General

The Property Company will become a subsidiary of Regal REIT upon completion of the

Transaction. The Property Company will, at completion of the Transaction, grant to the Lessee

a lease to the New Hotel pursuant to a lease agreement (the “New Lease Agreement”) carrying

the terms described below.

(b) Term

The lease will be for a term commencing from the date of the New Lease Agreement (which will

be on the same date of completion of the Transaction) and ending on the date immediately

preceding the fifth anniversary date of the New Lease Agreement. The lease term may be

extended at the Lessor’s sole discretion for a further term commencing from the date

immediately following the date of expiration of the initial lease term in 2022 and ending on 31

December 2027.

(c) Rent and Deposit

The rent receivable by the Lessor (excluding rates, government rent, utility charges and other

sums payable by the Lessee under the New Lease Agreement) in respect of the New Lease

Agreement shall be:

(i) in respect of each Lease Year during the initial lease term, 4.0%, 4.25%, 4.5%, 4.75% and

5.0% per annum respectively, of the Hotel Purchase Price; and

(ii) if the original lease is extended, in respect of each Lease Year of such extension of the

original lease, such rent (comprising the Base Rent and the Variable Rent) as to be

determined based on an annual market rental review for that Lease Year performed by an

independent professional property valuer jointly appointed by the Lessee and Lessor,

such rent rates having been arrived at on a willing buyer/seller in an arm’s length transaction

basis.

The Lessee shall, during the lease term of the New Lease Agreement, maintain with the Lessor

a security deposit (in cash or other form of acceptable collateral) equivalent to:

(1) in respect of each Lease Year during the initial lease term, three months’ rental; and

(2) if the original lease is extended, in respect of each Lease Year of such extension of the

original lease, such amount which shall be the higher of (i) the amount of which an

independent professional property valuer jointly appointed by the Lessor and the Lessee

determines to be the market rate of deposit upon the annual market rental review; and (ii)

three months’ Base Rent,


— 28 —

in respect of the New Hotel, to secure the due observance and performance by the Lessee of its

obligations under the New Lease Agreement. The Lessor shall (without prejudice to any other

right or remedy) be entitled to deduct from such security deposit any payments or charges

payable under the New Lease Agreement and any costs, expenses, loss or damage sustained by

the Lessor as a result of any breach by the Lessee of its obligations under the New Lease

Agreement.

The security deposit shall be refunded to the Lessee by the Lessor, without interest, within 14

days after the later of: (a) the expiration of the New Lease Agreement; or (b) delivery of vacant

possession of the property to the Lessor in accordance with the New Lease Agreement, and in

each case, after settlement of any claims by the Lessor against the Lessee for any arrears in

payments or charges payable by the Lessee of its obligations under the New Lease Agreement.

(d) Right and Obligation to Operate

The Lessee has the rights and obligations under the New Lease Agreement to manage and operate

the New Hotel at the same or greater management and operating standards as what are prevailing

in hotels of comparable size, location, level of technology and quality of service in Hong Kong,

and shall provide the hotel services of a comparable standard.

As permitted under the New Lease Agreement, the Manager understands from the Lessee that it

intends to delegate the operation and management of the New Hotel to the Hotel Manager

pursuant to the New Hotel Management Agreement. For further details in relation to the New

Hotel Management Agreement, please refer to section 3.4 headed “Key Documentation — New

Hotel Management Agreement” below.

During the term of the New Lease Agreement, the Lessee shall at its own costs and expenses,

among other things, maintain and promptly renew the hotel licence and other licences to enable

the Hotel Manager to operate the New Hotel, comply with all the conditions imposed under the

hotel licence and other licences, maintain the New Hotel in good operating conditions and repair

and maintain insurance in respect of the New Hotel.

(e) Routine Maintenance and Repair

The Lessee is primarily responsible, at its sole costs and expenses, for the repair and

maintenance of the interior and exterior of the New Hotel subject to the New Lease Agreement,

including without limitation, electrical and mechanical equipment, floor coverings, furniture,

grounds and landscaping, plumbing, air-conditioning and ventilation, telephone equipment and

life and safety/security system. In addition to the foregoing, the Lessee shall, at its sole cost and

expense, maintain and repair all structural parts of the New Hotel, including but not limited to,

foundations, roof, external walls, external and internal structural walls, columns, beams and

supports, external pipes, sewages, and drains.

(f) Lease Guarantee

Regal Hotels will, at the same time as entering into the New Lease Agreement, enter into a lease

guarantee (the “New Lease Guarantee”) pursuant to which Regal Hotels will guarantee: (i) the


— 29 —

Lessee’s obligations to pay to the Lessor and the Trustee, on demand by the Lessor or the Trustee

(acting on the recommendation and at the direction of the Manager), all amounts (including,

without limitation, all rents, other charges and outgoings, interest, default interest, fees and

costs) from time to time owing or payable to the Lessor under the New Lease Agreement; and

(ii) the due observance and performance of all terms, conditions, covenants, agreements and

obligations contained in the New Lease Agreement, and on the part of the Lessee to be observed

and performed.

(g) Early Termination

The Lessor shall have the right to terminate the New Lease Agreement at any time during the

term of the New Lease Agreement by giving six months’ prior written notice to the Lessee but

without compensation interest or costs paid by the Lessor to the Lessee and the Lessee will not

have any claim whatsoever against the Lessor for such early termination of the New Lease

Agreement.

The Lessor shall also have the right to terminate the New Lease Agreement in the event of,

among other things, failure by the Lessee to make rental payments or breach by the Lessee of

certain material undertakings under the New Lease Agreement or New Hotel Management

Agreement.

The Manager intends, at the expiry of the New Lease Agreement (at which time the New Hotel

will have been in operation for some length of time), to explore all commercially viable options

then available in respect of the New Hotel. Depending on the prevailing circumstances and

market conditions at such time, this may include extending the lease term of the New Lease

Agreement, negotiating with interested parties for the lease of the New Hotel and/or entering into

a hotel management agreement with the Hotel Manager or another appropriate hotel operator, for

the operation of such New Hotel.

3.4 New Hotel Management Agreement

(a) General

The Lessee, the Lessor, Regal Hotels and the Hotel Manager, will enter into a hotel management

agreement (the “New Hotel Management Agreement”) concurrently with the signing of the New

Lease Agreement. The Hotel Manager will be engaged to act as the exclusive operator and

manager of the New Hotel to supervise, direct and control the management, operation and

promotion of the business of the New Hotel during the operating term of the New Hotel


The Lessor of the New Hotel is a party to the New Hotel Management Agreement since the term

of the New Hotel Management Agreement may exceed the corresponding New Lease Agreement

if the New Lease Agreement is terminated early or not renewed after the initial term.


— 30 —

During the term of the New Lease Agreement, the Lessee will assume the obligations of the

“Owner” under the New Hotel Management Agreement. For the purpose of this section, the

“Owner” shall, during the term of the New Lease Agreement, mean the Lessee and thereafter (i.e.

in the case of early termination of the New Lease Agreement) the “Owner” shall mean the Lessor

unless a substitute lessee is found.

(b) Operating Term

The term of the appointment of the Hotel Manager is 10 years, from the date of signing of the

New Hotel Management Agreement.

(c) Operation of the New Hotel

The Hotel Manager is required under the New Hotel Management Agreement to operate the New

Hotel solely under the “iclub by Regal (富薈酒店)” hotel brand name and to act in good faith,

to exercise due care and diligence and with full control and discretion, to operate, manage and

promote the business of the New Hotel, to provide all services lawfully or properly provided by

a hotel of comparable standard as the New Hotel and to act in the best interests of the Owner with

a view to optimising profit of the New Hotel.

All hotel employees are to be employees of the Hotel Manager, and it has sole discretion and

authority in the selection and employment of all hotel employees necessary for the proper

operation of the New Hotel. However, the Hotel Manager shall obtain the Owner’s approval

(which shall not be unreasonably withheld) prior to selecting and employing the general manager

and the financial controller of the New Hotel. All costs and expenses shall form part of the Hotel

Operating Expenses.

The Hotel Manager is also required to maintain all licences (other than the hotel licence and

some other licences set out in section 3.4(k) headed “Key Documentation — New Hotel

Management Agreement — Lessor’s Obligation to Maintain Hotel Licence and Other Licences”

below) in respect of the operation and management of the New Hotel.

The Hotel Manager is required to submit to the Owner an annual operating budget for the

Owner’s approval. If any part of the operating budget cannot be agreed by the Owner and the

Hotel Manager, the items in dispute shall be referred to an independent expert possessing the

relevant professional qualifications jointly appointed by the Owner and the Hotel Manager for

resolution and such resolution shall be final and binding upon the Owner and the Hotel Manager.

The Hotel Manager shall operate the New Hotel in accordance with the approved operating

budget and shall not deviate materially from the approved operating budget without the Owner’s

prior written consent.


— 31 —

(d) Hotel Management Fee

The Hotel Manager is entitled to payment by the Owner of a hotel management fee comprising

of:

(i) a hotel management base fee which is equal to:

(A) for so long as the New Lease Agreement is in subsistence, an amount equal to 1% of

Gross Revenues; or

(B) in any other cases during the term of the New Hotel Management Agreement, an

amount equal to 2% of Gross Revenues; and

(ii) a hotel management incentive fee which is equal to:

(A) for so long as the New Lease Agreement is in subsistence, an amount equal to 1% of

the excess of the Adjusted GOP over (1) the hotel management base fee and (2) the

Fixed Charges; or

(B) in any other cases during the term of the New Hotel Management Agreement, an

amount equal to 5% of the excess of the Adjusted GOP over (1) the hotel management

base fee and (2) the Fixed Charges.

The percentages for the hotel management base and incentive fees payable in respect of the New

Hotel have been arrived at on a willing buyer/seller in an arm’s length transaction basis and have

been commercially agreed between parties to be the same as the corresponding fee scales payable

under the hotel management agreements for iclub Sheung Wan Hotel and iclub Fortress Hill

Hotel.

For so long as the New Lease Agreement is in subsistence, the hotel management fee is to be paid

annually in arrears from the Owner’s own funds and is subordinated to all rent due under the New

Lease Agreement (i.e. the Owner will pay all rents due under the New Lease Agreement to the

Lessor before the Owner pays the hotel management fee to the Hotel Manager). After the

expiration or earlier termination of the New Lease Agreement, the hotel management fee is to be

paid monthly in arrears.

(e) Marketing Fee and Reimbursable Marketing Expenses

The Hotel Manager is entitled to charge a marketing fee at no more than 1% of the Total Hotel

Revenue for each Fiscal Year for the purposes of participating in national and international

advertising and mandatory corporate marketing programs approved by the Owner in the

operating budget. In addition to the above, the Hotel Manager is also entitled to produce

promotions and participate in trade shows and other sales activities for the New Hotel and all

such costs (which are budgeted for and approved by the Owner) shall be reimbursed by the

Owner to the Hotel Manager.


— 32 —

The percentages for the marketing fee payable in respect of the New Hotel have been arrived at

on a willing buyer/seller in an arm’s length transaction basis and have been commercially agreed

between parties to be the same as the corresponding fee scales payable under the hotel

management agreements for iclub Sheung Wan Hotel and iclub Fortress Hill Hotel.

(f) Routine Repairs and Maintenance

Routine repairs and maintenance are to be carried out by the Hotel Manager in accordance with

an annual repairs and maintenance estimate to be approved by the Owner. The structural

maintenance and repair of the New Hotel shall be the responsibility of the Owner and the costs

shall form part of the Hotel Operating Expenses for the New Hotel.

(g) Furniture, Fixtures and Equipment Reserve & Expenditure

The Lessee is required to fund the actual cost of any FF&E (the “FF&E Expenditure”) during

the initial term of the New Lease Agreement (or until the date that the New Lease Agreement is

terminated, if earlier).

Within two months from the end of each Fiscal Year, the Hotel Manager shall submit to the

Lessor and (during the term of the New Lease Agreement) the Lessee for approval, a proposed

estimate of expenditure for the ensuing Fiscal Year for the necessary additions to and

replacement of the New Hotel’s FF&E (the “FF&E Budget”). The final decision as to whether

or not to approve the FF&E Budget shall be made by the Lessor. Failure of the Lessor or the

Lessee (as the case may be) to disapprove shall be deemed to constitute its approval.

During the initial term of the New Lease Agreement (or until the date that the New Lease

Agreement is terminated, if earlier), the Hotel Manager may, in accordance with the approved

FF&E Budget, pay for additions to and/or replacement of FF&E (with such costs to be

reimbursed by the Lessee as per above).

If the original lease is extended, the Lessor shall be obligated to maintain an FF&E Reserve (all

funds in which shall belong to the Lessor) with an amount, equivalent to 2% of the Total Hotel

Revenue for the preceding calendar month as set out in the Profit and Loss Statement, to be set

aside monthly during the term of such extension. Further, as part of its review for each Lease

Year, the independent professional property valuer may determine a percentage of the Total Hotel

Revenue, as part of or in addition to the aforesaid amount set aside, which the Lessee is obligated

to contribute. After reviewing the applicable Audited Report and taking into account the

contributions made by the Lessee, if any, the Lessor has the discretion to set aside any additional

amount on account of the FF&E Reserve.

Where the original lease has been extended, the Hotel Manager may, in accordance with the

approved FF&E Budget, withdraw money from the FF&E Reserve to pay for additions to and/or

replacement of FF&E. Any amount remaining in the FF&E Reserve at the close of each Lease

Year of such extension shall be carried forward and be retained in the FF&E Reserve for the

subsequent Lease Year(s), but shall not be taken into account when calculating the contribution

to the FF&E Reserve for the subsequent Lease Year(s).


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(h) Capital Additions

The Hotel Manager is required to submit a budget in respect of planned capital expenditure (save

and except those investments falling within the definition of FF&E) (the “Capital Additions”)

for the Lessor’s and/or (during the term of the New Lease Agreement) the Lessee’s approval. In

the event the Lessor and/or the Lessee (as the case may be) disapproves or raises any objection

to the proposed budget or any part thereof, the Lessor and the Lessee shall co-operate with each

other in good faith to resolve the disputed or objectionable items. If the disputed or objectionable

items cannot be resolved by mutual agreement, the final decision as to whether or not to approve

the capital budget or any changes thereto shall be made by the Lessor.

Once approved, the Hotel Manager shall carry out Capital Additions in accordance with the

approval of the Lessor and (during the term of the New Lease Agreement) the Lessee as to the

design, construction standard, and other material aspects of the proposed capital alterations or

additions. All costs relating to Capital Additions required to conform with legal requirements

shall be borne by the Lessor. All other costs and expenses of Capital Additions shall be borne

by the Lessor and the Lessee in the manner agreed between them and shall not be paid from the

Hotel Operating Expenses or from the FF&E Reserve.

(i) Insurances

The Lessor is required to maintain property insurance on the New Hotel including all FF&E and

the Operating Equipment at not less than 100% of replacement costs, such policy to include the

Lessee (during the term of the New Lease Agreement) and the Hotel Manager as additional

insureds.

The Owner is required to maintain business interruption insurance covering loss of profit for the

Owner for a minimum period of 12 months resulting from interruption or cessation of operation

of the New Hotel. The insurance premiums are treated as the Hotel Operating Expenses. The

Lessor and the Hotel Manager will be included as additional insureds.

The Hotel Manager is required to maintain third party liability insurance and other insurances

against items like theft or damage to guests’ properties with a combined single limit for each

occurrence of not less than HK$100 million as well as workman compensation insurance,

employers’ liability insurance, insurances required by law and other insurances as the Hotel

Manager shall deem necessary. The insurance premiums are treated as Hotel Operating Expenses.

The Lessor and (during the term of the New Lease Agreement) the Lessee will be included as

additional insureds.

If the Hotel Manager or the Owner hires an outside contractor for any repair or maintenance work

for the New Hotel, the Hotel Manager or the Owner shall provide comprehensive general liability

insurance insuring the contractor for the work being done. The Hotel Manager, the Lessor and

(during the term of the New Lease Agreement) the Lessee will be included as additional insureds.

All insurance proceeds in respect of property damage shall be deposited into a bank account of

the Lessor, operated by the joint signatories designated by the Lessor and the Hotel Manager. All

monies withdrawn from such accounts shall be applied towards any repair or replacement work

for the New Hotel, together with replacing any Operating Equipment and FF&E (not otherwise

reimbursable by the Lessee under paragraphs 3.4(g) and/or 3.4(h) above).


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The Owner assumes all risks in connection with the adequacy of all insurance policies and all

loss and damages in excess of the insurance coverage. The Hotel Manager shall be released from

all claims and liabilities arising out of any damages or destruction of the New Hotel save for loss

or damages caused by default, wilful misconduct, fraud, or negligence of the Hotel Manager or

its associated companies.

(j) Default and Termination

Upon the occurrence of certain events, a non-defaulting party may terminate the New Hotel

Management Agreement by giving three months’ written notice. Such events include: (i) failure

of the Hotel Manager to operate the New Hotel in accordance with the prescribed operating

standards and the Lessor elects to terminate the New Lease Agreement on this ground; and (ii)

failure to perform any other covenant which has a material adverse impact on the operation of

the New Hotel or the rights or duties of the parties under the New Hotel Management Agreement

and not cured within 30 days after a written notice giving particulars of the breach is received

by the defaulting party.

Upon the occurrence of certain events, a non-defaulting party may terminate the New Hotel

Management Agreement immediately by serving a written notice of termination. Such events

include: (i) failure by the Owner or the Hotel Manager to pay sums due for over 30 days; (ii)

bankruptcy, insolvency, a petition for reorganisation, appointment of a receiver or entering into

of a judgment for bankruptcy against either the Owner or the Hotel Manager; (iii) any party to

the New Hotel Management Agreement ceasing to carry on business; and (iv) any change in the

shareholding of the Hotel Manager which would result in the Hotel Manager ceasing to be a

member of the Regal Hotels Group (unless as a result of reorganisation of the Regal Hotels

Group, a member of the Regal Hotels Group becomes listed on the Stock Exchange and the Hotel

Manager becomes a member of a group controlled by such listed company and Regal Hotels

retains not less than 30% of such listed company).

In addition, the Lessor is entitled to terminate the New Hotel Management Agreement if notice

to terminate the New Lease Agreement is served by the Lessor as a result of default by the Lessee

thereunder, subject to liquidated damages being payable to the Hotel Manager in such

circumstances. The amount of liquidated damages shall be the hotel management base fee and

hotel management incentive fee payable for three Fiscal Years or the remainder of the operating

term, whichever is shorter.

If the Hotel Manager fails to meet the Performance Test in any two consecutive Fiscal Years

commencing from the first Fiscal Year, the Owner shall have the right to terminate the Hotel

Management Agreement by giving at least three months’ written notice.

In assessing whether the Performance Test is achieved in a Fiscal Year, the threshold of 80% of

the approved Gross Operating Profit shall be reduced proportionately by reference to the number

of day(s) on which certain events occurred, and these include epidemics, pandemics or other

infectious diseases, force majeure and the Owner itself being in default of material obligations.

The Hotel Manager however has one chance to cure the non-performance by paying to the Owner


— 35 —

an amount equal to the difference between: (i) the actual Gross Operating Profit of each of the

two Fiscal Years; and (ii) 80% of the Gross Operating Profit in the approved operating budgets

for each of the corresponding Fiscal Years before the expiry of the three months’ notice period.

(k) Lessor’s Obligations to Maintain Hotel Licence and Other Licences

The Lessor is required to obtain, maintain and renew a licence under the Hotel and Guesthouse

Accommodation Ordinance (Chapter 349 of the Laws of Hong Kong) and other licences to enable

the Lessee or the Hotel Manager to operate a hotel business at the New Hotel. However, the

Lessor shall not be liable for any failure to obtain or renew such licences unless the failure is

caused by the default of the Lessor. All costs and expenses in relation to obtaining, maintaining

and renewing such licences shall be treated as Hotel Operating Expenses save and except

anysuch costs and expenses which constitute Capital Additions shall be borne by the Lessor and

the Lessee in the manner agreed between them (save and except that any such costs and expenses

required to conform with the legal requirements shall be borne by the Lessor). The Hotel

Manager shall comply with all the conditions under the licence as may be imposed by the

relevant licensing authority from time to time and shall keep the Lessor indemnified in respect

of any breach of the conditions and associated liabilities caused by the default of the Hotel

Manager.

4. FINANCING OF THE TRANSACTION

4.1 Total Consideration

The total consideration consists of: (a) the Hotel Purchase Price (being HK$1,360 million); and

(b) the Current Assets Adjustment (capped at HK$2 million).

4.2 Financing of the Transaction

It is expected that the Hotel Purchase Price (being HK$1,360 million) shall be satisfied in cash,

which will be financed by: (a) Regal REIT’s existing bank facilities; and/or (b) new bank

facilities secured against the New Hotel and/or other assets held by Regal REIT, and the Current

Assets Adjustment (capped at HK$2 million) shall be funded by Regal REIT’s internal resources.

Further announcement(s) will be made by the Manager in relation to the completion of the

Transaction and shall include certain details regarding the actual amount of the Current Assets

Adjustment paid by Regal REIT (if any), major commercial terms of the new bank facilities and

any amounts drawn down under the existing and/or new bank facilities, in each case for the

funding of the Hotel Purchase Price.

4.3 Existing and/or New Secured Bank Facilities

Regal REIT may rely upon existing and/or new bank facilities secured against the New Hotel or

other assets held by Regal REIT, to fund the Hotel Purchase Price. Such facilities shall be at

arms’ length, on normal commercial terms, fair and reasonable and in the interests of

Unitholders.


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Regal REIT had unutilised existing bank facilities of HK$1,123 million as at 31 May 2017 at

margins ranging from 1.15% per annum to 1.45% per annum plus HIBOR which can be used to

partially fund the Hotel Purchase Price, HK$800 million of which is pursuant to a bank facility

with an interest margin of 1.15% per annum over HIBOR. Depending on the size and terms of

the new bank facilities, the Manager may not draw down on its unutilised existing bank facilities

in full.

As the new bank facilities will be secured against the New Hotel, they are expected to provide

a relatively favourable finance cost as compared to unsecured borrowings. On the basis of the

Hotel Purchase Price of HK$1,360 million and the expected 55% loan-to-value ratio of the new

bank facility, the principal amount of the new bank facility (if obtained) is expected to be

HK$748 million and the interest rate is expected to be HIBOR plus a margin of no more than

1.15% per annum, which is within the pro forma profit sensitivity analysis set out in section 7.5

headed “Sensitivity of Pro Forma Profit for the year on the Enlarged Group for changes to the

average effective interest cost for financing the Transaction” to this Circular. To the extent that

there are any material changes to the foregoing illustrative particulars, the Manager will issue

further announcement(s) to provide details of such changes.

It is also a Condition to completion of the Transaction that Regal REIT obtains or procures a new

bank facility of an amount no less than HK$500 million for the purposes of financing part of the

Hotel Purchase Price, on terms that the Manager considers to be reasonably satisfactory having

regard to similar debt borrowings of similar size and nature in the current loan market in Hong

Kong. The Share Purchase Agreement may be terminated in the event that this Condition is not

satisfied, in which case the Deposit shall be refunded in full (without accrued interest, if any)

by P&R to the Trustee.

Regal REIT shall not draw down any excessive amount from such facilities that would cause

Regal REIT to breach the borrowing threshold (being 45%) permitted under paragraph 7.9 of the

REIT Code. Based on the assumptions set out in the pro forma consolidated statement of

financial position of Regal REIT set out in Appendix III to this Circular (including the entire

Hotel Purchase Price being funded by the existing and new bank facilities), the gearing ratio of

the Enlarged Group is expected to be approximately 40.8% as at 31 December 2016, upon

completion of the Transaction.


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5. FEES AND CHARGES IN RELATION TO THE TRANSACTION

5.1 Fees Payable to the Manager and the Trustee and the Additional Costs in relation to theTransaction

The expected acquisition fees payable to the Manager (the “Manager Acquisition Fee”) and theTrustee (the “Trustee Additional Fee”), as well as the additional costs (the “Additional Costs”)in relation to the Transaction, are set out below:

Manager Acquisition Fee(1): HK$13,600,000

Trustee Additional Fee(2): HK$50,000

Additional Costs(3): HK$7,000,000

Estimated Total Fees and Charges: HK$20,650,000

Notes:

(1) Basis for calculation: 1% of the Hotel Purchase Price payable to the Manager pursuant to clause 14.2.1 of the TrustDeed. For details of acquisition fee payable to the Manager, please refer to the section headed “Structure andManagement — REIT Manager — Fees, Costs and Expenses of the REIT Manager” in the IPO Circular.

(2) Pursuant to clause 14.3.2 of the Trust Deed, the Trustee is entitled to an additional fee in relation to dutiesundertaken which are of an exceptional nature or otherwise outside the scope of the Trustee’s normal duties suchas an acquisition or divestment by the Manager, subject to certain limits provided in the Trust Deed. The Trusteehas agreed with the Manager that it will charge Regal REIT a one-time additional fee based on the time and costsincurred by it for duties undertaken by the Trustee in connection with the Transaction, with such additional feeexpected to be approximately HK$50,000.

(3) Other estimated fees and expenses (including stamp duty, advisory fees, professional fees and expenses) incurredor are expected to be incurred by Regal REIT in connection with completion of the Transaction.

It is expected that the Manager Acquisition Fee, Trustee Additional Fee and Additional Costsshall be satisfied in cash, which will be financed by Regal REIT’s internal resources.

5.2 Additional Ongoing Fees and Charges Following Completion of the Transaction

Following completion of the Transaction, in addition to the fees payable to the Manager andTrustee in respect of Regal REIT’s existing property portfolio:

(a) the Manager is entitled under the Trust Deed to receive management fees attributable to theNew Hotel comprising: (a) a base fee of 0.3% per annum, subject to a maximum cap of0.5% per annum, of the value of the Deposited Property attributable to the New Hotel; and(b) a variable fee of 3% per annum, subject to a maximum cap of 5% per annum, of the netproperty income attributable to the New Hotel; and

(b) the Trustee is entitled under the Trust Deed to receive a fee based on a percentage of thevalue of the Deposited Property. The applicable fee percentage depends on the value of theDeposited Property. Based on the total value of the Deposited Property as at 31 December2016, together with the Appraised Value, the applicable fee percentage will be 0.0155% perannum, which may, with the approval of the Manager, be further increased to a maximumof 0.06% per annum.


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6. REASONS FOR, AND BENEFITS OF, THE TRANSACTION

The Board (including all the Independent Non-executive Directors) believes that the Transaction

will bring the following benefits to Unitholders:

(a) As disclosed in the annual report of Regal REIT for the year ended 31 December 2016, the

primary objectives of Regal REIT and the Manager are to provide long-term stable, growing

distributions and capital growth for the Unitholders through active ownership of hotels and

strategic investment in hotels, serviced apartments and/or commercial properties (including

office and retail properties), and part of Regal REIT’s growth strategy is to acquire

additional hotel and other properties that meet the Manager’s investment criteria. The To

Kwa Wan region, where the New Hotel is located, is currently a redevelopment zone

designated by the Urban Renewal Authority and such redevelopment is expected to improve

the condition of the region and will enhance the attractiveness of the New Hotel upon

completion. Having regard to the foregoing, the Manager considers the addition of a new

hotel property in such a region to Regal REIT’s existing portfolio of eight properties to be

in line with the long term objectives, vision and growth strategies of Regal REIT.

(b) The New Hotel will be operated under the “iclub by Regal (富薈酒店)” brand. For further

information in respect of the “iclub by Regal (富薈酒店)” brand, refer to section 2.2(g)

headed “The Transaction — Information on the New Hotel — iclub by Regal (富薈酒店)”

in this Circular. It is the Manager’s view that operating the New Hotel under the “iclub by

Regal (富薈酒店)” brand will provide financial benefits for Regal REIT through economies

of scale and enhance the brand recognition of “iclub by Regal (富薈酒店)”. For example,

a cluster of “iclub by Regal (富薈酒店)” hotels can share the same management team and

thereby reduce overheads and improve operating margins.

(c) The investment in the New Hotel will increase the scale of Regal REIT. Based on the

Appraised Value of HK$1,400 million, and such investment would increase the appraised

value of Regal REIT’s portfolio by approximately 6.3% (from HK$22,222 million as at 31

December 2016 to HK$23,622 million). Also, Regal REIT’s number of guestrooms would

increase by 7.4% (from 4,569 guestrooms and suites as at 31 December 2016 to

approximately 4,909 guestrooms and suites) and the gross floor area of Regal REIT’s

property portfolio would increase by 2.7% (from approximately 230,465 sqm as at 31

December 2016 to approximately 236,763 sqm). Such increase in scale may broaden and

enlarge Regal REIT’s income base, as well as further improve Regal REIT’s economies of

scale (in a similar way to that described in (a) above). The addition of one new hotel

property in Hong Kong to Regal REIT’s existing portfolio of eight properties may also

enhance Regal REIT’s market positioning and profile, and consequently, further improve

Regal REIT’s attractiveness among a wider group of investors.

(d) The New Lease Agreement will enable Regal REIT to mitigate its exposure to start-up risk

associated with the operation of the New Hotel, and ensure that Regal REIT receives a base

level of income during the initial term of the New Lease Agreement. The annual rent during

the initial term of the New Lease Agreement, being 4.0%, 4.25%, 4.5%, 4.75% and 5.0%

per annum respectively, of the Hotel Purchase Price, is expected to contribute additional

distributable income to the Unitholders during such period.


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7. FINANCIAL EFFECTS OF THE TRANSACTION ON REGAL REIT

7.1 Impact of Completion of the Transaction on the Financial Position of Regal REIT

The following information is presented for illustrative purposes only and is based on the

assumptions outlined below. The Manager considers these assumptions to be appropriate and

reasonable as at the date of this Circular. However, Unitholders should consider the information

outlined below in the light of such assumptions and make their own assessment of the future

performance of Regal REIT.

Based on the pro forma financial effects of completion of the Transaction as stated below and

Appendix III headed “Pro Forma Financial Information of the Enlarged Group” to this Circular,

the Manager does not foresee any material adverse impact on the financial position of Regal

REIT as a result of completion of the Transaction.

The pro forma financial effects of completion of the Transaction presented below were prepared

based on:

(a) the audited consolidated financial statements of Regal REIT Group for the year ended 31

December 2016; and

(b) the audited consolidated financial statements of the Target Group for the three years ended

31 December 2016 as set out in Appendix I headed “Accountants’ Report in respect of the

Target Company” to this Circular.

7.2 Pro Forma Distributable Income

The pro forma financial effects of the Transaction on the distributable income for the year ended

31 December 2016, as if Regal REIT had completed the Transaction on 1 January 2016 and based

on the other assumptions below, are as follows:

Actual (audited) Pro Forma

Regal REIT Groupfor the year ended31 December 2016

Enlarged Groupafter Completion

of the Transaction

(HK$’000) (HK$’000)

Profit for the year, before distribution to

Unitholders 563,980 475,226

Adjustments (52,618)(1) 42,815(1)&(2)

Distributable income 511,362 518,041

Units in issue 3,257,431,189 3,257,431,189

Distributable income per Unit HK$0.157 HK$0.159


— 40 —

Notes:

(1) The adjustments reflect those adjustments to distributable income provided for in the Trust Deed. Further, the pro

forma adjustments reflect the same items disclosed in Regal REIT’s distribution statement for the year ended 31

December 2016.

(2) The adjustments reflect those adjustments to distributable income provided for in the Trust Deed, including a

non-recurring write-off of HK$134 million as set out in the Accountants’ Report in respect of the Target Company

as set out in Appendix I of this Circular, which is a non-cash item.

The following assumptions have been made in respect of the Transaction:

(a) Regal REIT acquired the New Hotel on 1 January 2016 at the Hotel Purchase Price of

HK$1,360 million;

(b) the fair value of the New Hotel as at 31 December 2016 is assumed to be the Appraised

Value of HK$1,400 million;

(c) the New Lease Agreement in respect of the New Hotel commenced on 1 January 2016;

(d) the accounting rental income for the year ended 31 December 2016 (calculated as 4.5%,

being the average annual rent receivable during the initial lease term of the New Lease

Agreement, of the Hotel Purchase Price) is HK$61.2 million;

(e) the cash rental income for the year ended 31 December 2016 (calculated as 4%, being the

actual annual rent receivable during such year, of the Hotel Purchase Price) is HK$54.4

million, resulting in an adjustment of HK$6.8 million;

(f) the Manager Acquisition Fee, the Trustee Additional Fee and the Additional Costs for the

Transaction, all one-off costs, were paid during 2016;

(g) the Hotel Purchase Price was funded entirely from debt while the Manager Acquisition Fee,

Trustee Additional Fee and Additional Costs were funded from Regal REIT’s internal

resources; and

(h) the average effective interest cost of funding for the Transaction is HK$21.1 million (being

1.55% per annum of the Hotel Purchase Price).

For further details regarding the calculation of the pro forma distributable income, please see

Appendix III headed “Pro Forma Financial Information of the Enlarged Group” to this Circular.


— 41 —

7.3 Pro Forma NAV Per Unit

The pro forma financial effects of the Transaction on the NAV per Unit as at 31 December 2016,as if Regal REIT had completed the Transaction on 31 December 2016 and based on the otherassumptions below, are as follows:

Actual (audited) Pro FormaRegal REIT Groupas at 31 December

2016


of the Transaction(HK$’000) (HK$’000)

NAV 13,437,944 13,457,294

Units in issue 3,257,431,189 3,257,431,189NAV per Unit attributable to Unitholders HK$4.125 HK$4.131(1)

Note:

(1) The slight increase in NAV is attributable to: (i) the difference between the fair value of the New Hotel ofHK$1,400 million (being the Appraised Value) and the Hotel Purchase Price of HK$1,360 million; and (ii) one-offcosts associated with the Transaction, including the payment of the Manager Acquisition Fee, Trustee AdditionalFee and Additional Costs.


(a) Regal REIT acquired the New Hotel on 31 December 2016 at the Hotel Purchase Price ofHK$1,360 million; and

(b) the fair value of the New Hotel as at 31 December 2016 is assumed to be the AppraisedValue of HK$1,400 million.

For further details regarding the calculation of the pro forma NAV per Unit, please see AppendixIII headed “Pro Forma Financial Information of the Enlarged Group” to this Circular.

7.4 Pro Forma Capitalisation and Gearing Ratio

The pro forma financial effects of the Transaction on the capitalisation of Regal REIT as at 31December 2016, as if Regal REIT had completed the Transaction on 31 December 2016 andbased on the other assumptions below, are as follows:

Actual (audited) Pro FormaRegal REIT Groupas at 31 December

2016


of the Transaction(HK$’000) (HK$’000)

Total debt 8,340,100 9,700,100Net assets attributable to Unitholders 13,437,944 13,457,294Total capitalisation 21,778,044 23,157,394Total gross assets 22,377,334 23,770,334

Gearing ratio 37.3% 40.8%


— 42 —


(a) Regal REIT acquired the New Hotel on 31 December 2016 at the Hotel Purchase Price of

HK$1,360 million;

(b) the fair value of the New Hotel as at 31 December 2016 is assumed to be the Appraised

Value of HK$1,400 million;

(c) the Manager Acquisition Fee, the Trustee Additional Fee and the Additional Costs for the

Transaction, all one-off costs, was paid during 2016; and

(d) the Hotel Purchase Price was funded entirely from debt while the Manager Acquisition Fee,

Trustee Additional Fee and Additional Costs were funded by Regal REIT’s internal

resources.

Pursuant to the REIT Code, Regal REIT’s aggregate outstanding borrowings shall not at any time

exceed 45.0% of Regal REIT’s total gross asset value. Based on the information provided by the

pro forma consolidated statement of financial position of Regal REIT set out in Appendix III to

this Circular, the gearing ratio of the Enlarged Group after taking into consideration the expected

drawdown on Regal REIT’s existing and new banking facilities for the purpose of the

Transaction is expected to be approximately 40.8% as at 31 December 2016, upon completion of

the Transaction.

For further details regarding the calculation of the pro forma capitalisation of Regal REIT, please

see Appendix III headed “Pro Forma Financial Information of the Enlarged Group” to this

Circular.

7.5 Sensitivity of Pro Forma Profit for the year on the Enlarged Group for changes to theaverage effective interest cost for financing the Transaction

The following table sets out pro forma profit for the year of the Enlarged Group for changes to

the average effective interest cost for financing the Transaction, assuming all other assumptions

contained in the pro forma financial information remain the same except where consequential

amendments are required.

Sensitivity of Pro Forma Profit for the year on the Enlarged Group after the Transaction:

Average Effective Interest Cost(1) Changes in Pro Forma Profit for the year(2)

(HK$’000)

1.30% per annum 3,400

1.55% per annum 0

1.80% per annum (3,400)


— 43 —

Note:

(1) The rates per annum take into account an assumed one-month HIBOR of 0.40%.

(2) Figures in this table are based on the assumptions that: (i) Regal REIT acquired the New Hotel on 1 January 2016

at the Hotel Purchase Price of HK$1,360 million; and (ii) the average effective interest cost for the funding of the

Hotel Purchase Price is calculated at various percentages as compared to the 1.55% per annum as assumed in the

Appendix III headed “Pro Forma Financial Information of the Enlarged Group” to this Circular.

8. RISK FACTORS

8.1 Regal REIT is not fully insulated from the risks associated with the hotel industry despitethe structure of the New Lease Agreement

Regal REIT (through the Lessor) will lease the New Hotel to the Lessee pursuant to the New

Lease Agreement. However, the profitability of the New Hotel and the general economic outlook

for the hotel industry in Hong Kong will affect: (a) the property values of the New Hotel and

therefore the NAV per Unit; (b) the rent Regal REIT is able to obtain for the New Hotel under

the New Lease Agreement following the annual market rental review by the independent

professional property valuer; (c) the Lessee’s ability to pay rent (other than Variable Rent); (d)

the Variable Rent that Regal REIT can expect to receive (if any); (e) the ability of Regal REIT

to renew the New Lease Agreement on favourable terms following the expiry of the lease period;

and (f) the Manager’s ability to successfully pursue its long-term internal and external growth

strategies.

The profitability of hotel business is cyclical and sensitive to changes in the global, regional or

local economy generally. Since demand for hotel services in Hong Kong is affected by economic

growth, a global, regional or local recession could lead to a downturn and any such downturn

may affect business of the New Hotel. Other adverse factors outside the control of Regal REIT

and the Hotel Manager could include political unrest, natural disasters, changes in law and other

events which may impact negatively on the tourism industry and hotel business, including hotel

bookings and food and beverage businesses at hotels in Hong Kong. The occurrence of one or

more of these events may have an adverse effect on the operating performance of the New Hotel,

the Lessee and, ultimately, Regal REIT.

8.2 The Manager’s ability to effectively monitor the obligations of the Hotel Manager underthe New Hotel Management Agreement and to actively manage the New Hotel is limited

While the Manager believes that the New Lease Agreement and the New Hotel Management

Agreement contain suitable provisions to ensure that the New Hotel are adequately maintained

and that the Lessee and the Hotel Manager are motivated to enhance the quality and value of the

New Hotel, the Manager’s ability to actively manage the New Hotel is limited by the provisions

of the New Lease Agreement and the New Hotel Management Agreement. Under the terms of the

New Lease Agreement, the Lessee shall manage and operate (or procure the Hotel Manager to

manage and operate) the New Hotel and under the New Hotel Management Agreement, the Hotel

Manager will have full control and discretion in the management, operation and promotion of the

New Hotel, subject to certain matters requiring the approval of Regal REIT.


— 44 —

8.3 Regal REIT may not be able to enter into a New Lease Agreement and a New HotelManagement Agreement in the future on similar terms

Upon termination or expiration of the New Lease Agreement or the New Hotel Management

Agreement, subject to market conditions, the Manager may not be able to substitute the Lessee

or the Hotel Manager, as applicable, of the New Hotel in a timely manner, or on terms similar

to those under the New Lease Agreement or the New Hotel Management Agreement, as the case

may be. During any period where there is no lessee or hotel manager in place, the Manager will

have to directly operate the New Hotel and Regal REIT will be directly exposed to the operating

results of the New Hotel which would increase the volatility of Regal REIT’s operating results

and, in turn, affect its ability to make stable distributions to Unitholders.

If the New Lease Agreement is no longer in place and the New Hotel Management Agreement

is not terminated, the Hotel Manager will be entitled to a hotel management base fee of 2% of

Gross Revenue (instead of 1%) and a hotel management incentive fee of 5% of the excess of the

Adjsuted GOP over the hotel management base fee and the Fixed Charges (instead of 1%) and

the obligation to pay such fees will no longer be subordinated to the replacement lessee’s

obligation to pay rent to Regal REIT, as more fully described in section 3.4(d) headed “Key

Documentation — New Hotel Management Agreement — Hotel Management Fee”. The higher

hotel management fees may impact negotiations with potential lessees, which may have a

negative effect on distributions to Unitholders.

8.4 The New Hotel is still in its soft-opening phase (which commenced on 23 May 2017).Unitholders and prospective investors should be aware that there may be start-up riskassociated with the New Hotel

The New Hotel is newly developed and still in its soft-opening phase (which commenced on 23

May 2017). There can be no assurance with respect to Regal REIT’s performance with the New

Hotel becoming part of its portfolio. Accordingly, investors should be aware that there may be

start-up risk associated with the New Hotel. Such risks are not entirely mitigated by the New

Lease Agreement and New Lease Guarantee, as the underlying profitability of the New Hotel

may still affect the property value of the New Hotel and therefore the NAV per Unit.

8.5 There are risks to leveraging and limitations on Regal REIT’s ability to leverage

Regal REIT is expected to use leverage in connection with the Transaction and its other

investments. In addition, Regal REIT may, from time to time, require additional debt financing

to fund working capital requirements, to support the future growth of its business and/or to

refinance existing debt obligations. Borrowings by Regal REIT are limited by the REIT Code to

no more than 45% (or such other limit as may be stipulated under the REIT Code or as may be

specifically permitted by the SFC) of the total gross asset value of the Deposited Property as set

out in Regal REIT’s latest published accounts immediately prior to such borrowing being

effected, subject to certain adjustments. If the 45% borrowing limit is exceeded, the Manager

shall use its best endeavours to reduce the excess borrowings while not incurring further

borrowings. Where the interests of the Unitholders will not be prejudiced, the Manager may

dispose of Regal REIT’s assets in order to pay off part of the borrowings unless the overshooting


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of the borrowing limit results from a decrease in the market value of the assets. If a downward

revaluation of any property asset of Regal REIT occurs in the future (including, the New Hotel),

Regal REIT may exceed the 45% borrowing limit even without incurring any additional

borrowing. Therefore, there can be no assurance that Regal REIT’s borrowings will remain at all

times below the 45% borrowing limit, following any revaluation of assets or otherwise. From

time to time, Regal REIT may need to draw down on its banking facilities and use overdrafts,

but may be unable to do so due to the 45% borrowing limit prescribed by the REIT Code.

Further, the equity or debt financing to be provided to Regal REIT may be on terms that are not

favourable to Regal REIT. The availability of borrowings and access to the capital markets for

financing depends on prevailing market conditions and the acceptability of the financing terms

offered. Regal REIT’s ability to arrange for external financing and the cost of such financing

depends on numerous factors, including general economic and capital market conditions, interest

rates, credit availability from banks or other lenders, investor confidence in Regal REIT and

success of Regal REIT’s business. Due to the faster pace of growth of the US economy, the

Federal Reserve began to raise interest rates for the first time since the global financial crisis

towards the end of 2015, and subsequently raised rates twice in 2016. This may have an impact

on HIBOR and interest rates in Hong Kong, including in respect of the debt facilities entered into

by Regal REIT which may have a material adverse effect on Regal REIT’s financial performance.

8.6 The Manager’s due diligence review on the New Hotel may not have identified all materialdefects, breaches of laws and regulations and other deficiencies

The Manager has conducted a physical and technical inspection and investigation of the New

Hotel. Nevertheless, there can be no assurance that such inspections would have revealed all

defects or deficiencies affecting the New Hotel.

8.7 Failure by P&R, the Guarantors and/or other counterparties to fulfill their obligationsunder the Transaction Documents, such as any failure to refund the Deposit which is notheld in escrow, may have a material adverse effect on Regal REIT’s operations

Under the Transaction Documents, P&R, the Guarantors and/or other counterparties have made

(or will make) several commitments in favour of Regal REIT, including but not limited to the

refund of the Deposit, which is not held in escrow, in the circumstances described in section

3.1(c) above. Failure by such parties to fulfil any of the obligations in the Transaction

Documents may have a material adverse effect on Regal REIT’s operations.

9. CONTINUING CONNECTED PARTY TRANSACTIONS

9.1 Regal Connected Persons Group

For the purpose of the REIT Code, Regal Hotels is a Significant Holder (that is, a holder of 10%

or more of the outstanding Units) of Regal REIT, and is therefore a connected person of Regal

REIT under paragraph 8.1(d) of the REIT Code. Any person who is connected to Regal REIT

under paragraph 8.1(d) of the REIT Code, and any person who is connected to Regal Hotels as

described in paragraphs 8.1(e), (f) or (g) of the REIT Code is also a connected person of Regal


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REIT, and these persons include: (i) any director, senior executive or officer of Regal Hotels; (ii)

any associate (as defined in the REIT Code) of Regal Hotels or of any director, senior executive

or officer of Regal Hotels; and (iii) any controlling entity, holding company, subsidiary or

associated company (as defined in the REIT Code) of Regal Hotels (the “Regal ConnectedPersons Group”).

9.2 New CCT Waiver Application

Upon and after completion of the Transaction, members of the Regal REIT Group will enter into

transactions with members of the Regal Connected Persons Group in relation to the New Lease


the New Hotel (collectively, the “Additional Hotel CCTs”).

Accordingly, the Manager has applied to the SFC for a waiver (the “New CCT WaiverApplication”) from strict compliance with the disclosure and unitholders’ approvals

requirements under Chapter 8 of the REIT Code in respect of the Additional Hotel CCTs. Further

details regarding the Additional Hotel CCTs are described below.

(a) New Lease Agreement

Upon completion of the Transaction, Regal REIT (through the Property Company) will enter into

the New Lease Agreement with the Lessee in respect of the entire New Hotel. The Lessee is a

member of the Regal Connected Persons Group, and accordingly, the New Lease Agreement is

a connected party transaction pursuant to Chapter 8 of the REIT Code. Certain key information

regarding the New Lease Agreement is summarised in the table below:

Lessor: Property Company

Lessee: Favour Link International Limited

Commencement Date: Date of completion of the Transaction

Term: From the Commencement Date and ending on the date

immediately preceding the fifth anniversary date, and may be

extended at the Lessor’s sole discretion for a further term

commencing from the date immediately following the date of

expiration of the initial lease term in 2022 and ending on 31

December 2027

Further details of the New Lease Agreement are set out in section 3.3 headed “Key

Documentation — New Lease Agreement and New Lease Guarantee”.

(b) New Hotel Management Agreement

The Lessee, the Lessor, Regal Hotels and the Hotel Manager, will enter into the New Hotel

Management Agreement concurrently with the signing of the New Lease Agreement. The Hotel

Manager will be engaged to act as the exclusive operator and manager of the New Hotel to


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supervise, direct and control the management, operation and promotion of the business of the

New Hotel during the operating term of the New Hotel Management Agreement. The Hotel

Manager and the Lessee are members of the Regal Connected Persons Group, and accordingly,

the New Hotel Management Agreement is a connected party transaction pursuant to Chapter 8 of

the REIT Code. Certain key information regarding the New Hotel Management Agreement is

summarised in the table below:

Commencement Date: Date of completion of the Transaction

Term: 10 years from the Commencement Date

Further details of the New Hotel Management Agreement are set out in section 3.4 headed “Key

Documentation — New Hotel Management Agreement”.

(c) New Lease Guarantee

Regal Hotels will, at the same time as entering into the New Lease Agreement, enter into the New

Lease Guarantee pursuant to which Regal Hotels will guarantee: (i) the Lessee’s obligations to

pay all amounts owing under such New Lease Agreement; and (ii) the due observance and

performance of such New Lease Agreement by the Lessee. The New Lease Guarantee also

contains an indemnity in respect of all guaranteed liabilities. Regal Hotels is a member of the

Regal Connected Persons Group, and accordingly, the New Lease Guarantee is a connected party

transaction pursuant to Chapter 8 of the REIT Code.

Further details of the New Lease Guarantee are set out in section 3.3(f) headed “Key

Documentation —New Lease Agreement and New Lease Guarantee — Lease Guarantee”.

9.3 Waiver Conditions

(a) Period of Waiver

The New CCT Waiver Application applied for is in respect of the periods set out in the table

below, provided that the Additional Hotel CCTs are duly and properly carried out in accordance

with the terms and conditions of the relevant documents.

Agreement Period of Waiver

New Lease Agreement: From the date of the New Lease Agreement and ending on the

date immediately preceding the fifth anniversary date (and if

the original lease term is extended, for a further term

commencing from the date immediately following the date of

expiration of the initial lease term in 2022 and ending on 31

December 2027) or date of termination, whichever is earlier

New Hotel Management

Agreement:

10 years from the date of the New Hotel Management

Agreement or date of early termination, whichever is earlier


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New Lease Guarantee: From the date of the New Lease Guarantee to the last date of

subsistence

(b) Timing

The New CCT Waiver Application will only take effect once: (i) the Additional Hotel CCTs have

been entered into; and (ii) the consummation of the Transaction and the Additional Hotel CCTs

have been approved by the Independent Unitholders at the EGM by way of an Ordinary

Resolution.

(c) No Material Change

There shall be no material change to, or waiver or release by or on behalf of Regal REIT of any

of its rights and any obligations of the relevant connected persons of Regal REIT under the terms

and conditions of the Additional Hotel CCTs, without the approval of Unitholders (other than

those Unitholders who have a material interest in the relevant transactions within the meaning

of paragraph 8.11 of the REIT Code) by way of an Ordinary Resolution.

(d) Disclosure in Reports and Results Announcements

Details of the Additional Hotel CCTs will be disclosed in Regal REIT’s semi-annual and annual

reports and results announcements, as required under paragraph 8.14 of the REIT Code.

(e) Chapter 10 of the REIT Code

The Manager shall ensure compliance with any applicable disclosure requirements under Chapter

10 of the REIT Code. The Manager shall inform Unitholders by way of an announcement as soon

as practicable of any information which is necessary to enable Unitholders to appraise the

position of Regal REIT, including, without limitation, if there is: (i) any extension of the

completion date or long stop date or any delay in payment of damages or compensation as

specified in the Additional Hotel CCTs; (ii) any payments under the New Lease Guarantee; (iii)

any payment of hotel management fees (where paid by Regal REIT to the Hotel Manager); (iv)

rent reviews under the New Lease Agreement and details of the market rental packages

determined by the jointly appointed independent professional property valuer for each Lease

Year; and (v) any breach of terms of any of the Additional Hotel CCTs.

(f) Auditors’ review procedures

The Manager shall engage and agree with the auditors of Regal REIT to perform certain review

procedures on all of the Additional Hotel CCTs in respect of each relevant financial period. The

auditors will then report to the Manager on the factual findings based on the work performed by

them (and a copy of such report will be provided to the SFC), confirming whether all such

Additional Hotel CCTs:

(i) have received the approval of the Board (including the approval of all its Independent

Non-executive Directors); and


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(ii) have been entered into in accordance with the terms of the agreements and the Manager’s

internal procedures governing the transactions.

(g) Review by the Independent Non-executive Directors

The Independent Non-executive Directors shall review the Additional Hotel CCTs annually and

confirm in Regal REIT’s annual report for the relevant financial period that such transactions

have been entered into:

(i) in the ordinary and usual course of business of Regal REIT;

(ii) on normal commercial terms (to the extent that there are comparable transactions) or, where

there are insufficient comparable transactions to assess whether they are on normal

commercial terms, on terms no less favourable to Regal REIT than terms available to or

from (as appropriate) independent third parties; and

(iii) in accordance with the relevant agreements and the Manager’s internal procedures

governing them (if any) on terms that are fair and reasonable and in the interests of the

Unitholders as a whole.

(h) Access to books and records

The Manager shall allow, and shall procure the counterparty to the relevant Additional Hotel

CCTs to allow, the auditors of Regal REIT sufficient access to their respective records for the

purpose of reporting on the transactions.

(i) Notification to the SFC

The Manager shall promptly notify the SFC and publish an announcement if it knows or has

reason(s) to believe that the auditors and/or the Independent Non-executive Directors will not be

able to confirm the matters set out in (f) and/or (g) above.

(j) Paragraph 8.14 of the REIT Code

The Manager shall comply in full with the requirements of paragraph 8.14 of the REIT Code

where there is any material change to the terms of any Additional Hotel CCTs or where there is

any subsequent change to the REIT Code which may impose stricter requirements in respect of

disclosure and/or unitholders’ approvals.

9.4 Opinion of the Board

The board of directors of the Manager (including all the Independent Non-executive Directors

but excluding Directors interested in the below) confirms that in its opinion:

(a) the New CCT Waiver Application, and the basis for the New CCT Waiver Application, is

fair and reasonable having regard to the interests of the Independent Unitholders, as well

as the Unitholders as a whole; and


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(b) each of the Additional Hotel CCTs to be entered into upon and after completion of the

Transaction shall be: (i) in the ordinary and usual course of business of Regal REIT; and

(ii) on terms which are normal commercial terms, at arm’s length and are fair and

reasonable and in the interests of the Independent Unitholders, as well as the Unitholders

as a whole.

9.5 Opinion of the Independent Financial Adviser

Altus Capital Limited, appointed by the Manager as the Independent Financial Adviser, has

confirmed that, it is of the view that:

(a) the New CCT Waiver Application, and the basis for the New CCT Waiver Application, are







as a whole.

Details of the Independent Financial Adviser’s opinion, together with the principal factors taken

into consideration, and assumptions and qualifications in arriving at such opinion, are set out in

the “Letter from the Independent Financial Adviser” in this Circular.

9.6 Opinion of the Independent Board Committee

The Independent Board Committee has been established by the Board to advise the Independent

Unitholders on the Transaction Matters Requiring Approval, which includes the New CCT

Waiver Application. Altus Capital Limited has been appointed as the Independent Financial

Adviser to provide its opinion on the Transaction Matters Requiring Approval, including the New

CCT Waiver Application, to the Independent Board Committee (as well as the Independent

Unitholders and the Trustee).

Having taken into account the opinion of and reasons considered by the Independent Financial

Adviser, the Independent Board Committee considers that:

(a) the New CCT Waiver Application, and the basis for the New CCT Waiver Application, are







as a whole.


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9.7 Opinion of the Independent Property Valuer

Colliers International (Hong Kong) Limited, appointed by the Manager and the Trustee as the

Independent Property Valuer, has confirmed that, in its opinion, the New Lease Agreement, the

New Lease Guarantee and New Hotel Management Agreement associated with the Transaction

(including their respective duration, the rents receivable under the New Lease Agreement, the

requirements regarding security deposits, termination provisions and other terms and conditions

therein) are on normal commercial terms and consistent with normal business practice for

contracts of the relevant type and at the prevailing market level, except for: (a) the rents

receivable for the first five Lease Years which are above market level; and (b) the hotel

management fees, for so long as the New Lease Agreement is in subsistence, which are below

market level.

10. IMPLICATIONS OF THE TRANSACTION UNDER THE REIT CODE AND THE TRUSTDEED

10.1 Share Purchase Agreement and Deed of Tax Indemnity

Clause 15.1 of the Trust Deed requires any connected party transaction to be carried out in

accordance with the provisions of the REIT Code and any conditions (including any conditions

of waivers or exemptions from the operation of the REIT Code granted by the SFC from time to

time) imposed by the SFC from time to time. Under paragraph 8.1 of the REIT Code, connected

persons of Regal REIT include, among others, a Significant Holder (that is, a holder of 10% or

more of the outstanding Units) and associated companies.

Paliburg and Regal Hotels have an interest of approximately 74.92% and 74.89% in Regal REIT

respectively, and therefore each of Paliburg and Regal Hotels is a Significant Holder of Regal

REIT. P&R, being a joint venture company held as to 50% by a wholly-owned subsidiary of

Paliburg and as to 50% by a wholly-owned subsidiary of Regal Hotels, is an “associated

company” of both Paliburg and Regal Hotels within the meaning of the REIT Code. As a result,

Paliburg, Regal Hotels and P&R are each a connected person of Regal REIT within the meaning

of the REIT Code. Accordingly, the consummation by Regal REIT of the Transaction

contemplated under the Share Purchase Agreement and other transactions contemplated under,

associated with and/or related to the Transaction, including but not limited to the execution of

and consummation of the transactions under the Deed of Tax Indemnity, constitute connected

party transactions of Regal REIT under paragraph 8.5 of the REIT Code.

As the Hotel Purchase Price, plus the Current Assets Adjustment (capped at HK$2 million),

exceeds 5.0% of the latest net asset value of Regal REIT (as disclosed in its latest published

audited accounts, and adjusted for any distribution paid by Regal REIT since the publication of

such accounts), pursuant to paragraph 8.11 of the REIT Code and clause 15.1 of the Trust Deed,

the connected party transactions mentioned above require Independent Unitholders’ approval by

way of Ordinary Resolutions at the EGM.

In addition, as: (a) the Hotel Purchase Price, plus the Current Assets Adjustment (capped at

HK$2 million), represents 18.21% of the total market capitalisation of Regal REIT, based on the


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average closing price of the Units traded on the Stock Exchange for the last five Business Days

immediately preceding the Latest Practicable Date; and (b) the Appraised Value of the Target

Company represents 6.26% of the total assets of Regal REIT as at 31 December 2016, the

Transaction constitutes a discloseable transaction for Regal REIT under the Listing Rules (as if

the Listing Rules were applicable to Regal REIT).

10.2 The New CCT Waiver Application

The Manager has requested that the SFC grant the New CCT Waiver Application. For further

details, please refer to section 9.2 above headed “Continuing Connected Party Transactions —

New CCT Waiver Application”.

The Manager will seek approval of the Independent Unitholders at the EGM on the

consummation by Regal REIT of the transactions contemplated under, associated with and/or

related to the Additional Hotel CCTs (being the New Lease Agreement, New Lease Guarantee

and New Hotel Management Agreement pertaining to the New CCT Waiver Application).

10.3 Ordinary Resolutions

The Manager takes the view that the consummation of the Transaction and the Additional Hotel

CCTs are linked to each other and part and parcel of a significant proposal. The Additional Hotel

CCTs only arise from the consummation of the transactions contemplated under the Transaction

and will not be required but for the entering into of the agreements underlying the Transaction.

Accordingly, the Transaction will not proceed if the consummation by Regal REIT of the

transactions contemplated under, associated with and/or related to the Additional Hotel CCTs has

not been approved by the Unitholders at the EGM.

Please refer to the EGM Notice for the proposed resolutions in relation to the Transaction and

the Additional Hotel CCTs. As soon as practicable after the EGM, the Manager will issue an

announcement setting out the results of the EGM, including whether the proposed resolutions

have been passed.

10.4 Restrictions on Voting

Paragraph 9.9(f) of the REIT Code provides that where a Unitholder has a material interest in

the resolution tabled for approval, and that interest is different from that of all other Unitholders,

such Unitholder shall abstain from voting.

Further, under paragraph 3.2 of Schedule 1 to the Trust Deed, where a Unitholder has a material

interest in the resolution tabled for approval at a general meeting of the Unitholders, and that

interest is different from the interests of other Unitholders, such Unitholder shall be prohibited

from voting its Units or being counted in the quorum for the general meeting.

Certain members of the Regal Connected Persons Group (defined in section 9.1 of this Circular)

are parties to the Transaction Documents, and as such, have a material interest in the relevant

resolutions to be proposed at the EGM and have to abstain from voting on the EGM Resolutions,


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except pursuant to a proxy where a specific direction by an Independent Unitholder as to votingis given. Pursuant to the REIT Code and the Trust Deed, Regal Hotels has agreed that it willabstain, and will procure that its controlling entities, holding companies, subsidiaries andassociated companies (as defined in the REIT Code) will abstain, from voting on the EGMResolutions, except pursuant to a proxy where a specific direction by an Independent Unitholderas to voting is given.

So far as the Manager is aware, as at the Latest Practicable Date, the parties mentioned aboveas needing to abstain from voting were interested or deemed to be interested in 2,443,033,102Units representing approximately 74.99% of the Units in issue.

As at the Latest Practicable Date, to the best of the Manager’s knowledge, information andbelief, after having made reasonable enquiries, the Manager takes the view that save as disclosedabove, no other Unitholders are required to abstain from voting at the EGM in respect of theEGM Resolutions.

Based on the opinion of the Board and the information and confirmations given by the Managerto the Trustee (and having taken into account its duties under the Trust Deed and the REIT Code),the Trustee has confirmed that it is of the view that save as disclosed above, as at the LatestPracticable Date, no other Unitholders are required to abstain from voting at the EGM in respectof the EGM Resolutions.

10.5 Manager Has Discretion

Given the acquisition of the New Hotel is dependent on the satisfaction of certain Conditions,for the avoidance of doubt, Unitholders should note that the Trustee may not proceed with theacquisition if any of the Conditions shall not have been fulfilled (or waived) prior to the LongStop Date.

10.6 Waiver Application and Submissions Made to the SFC

(a) Application for the New CCT Waiver Application in respect of Chapter 8 of the REIT Code

The Manager has requested that the SFC grant the New CCT Waiver Application to Regal REITfrom strict compliance with the disclosure and unitholders’ approval requirements under Chapter8 of the REIT Code, in respect of the Additional Hotel CCTs, subject to and conditional upon,among other things, the approval of the SFC and the Independent Unitholders (by way ofOrdinary Resolution) and completion of the Transaction. For further details, please refer tosection 9.2 above.

(b) Submission for More Than Two layers of Special Purpose Vehicles in respect of the New Hotel

For facilitating future group re-organisation and disposal of property interests through anintermediate holding company to achieve savings in transaction costs, a submission has beenmade to the SFC for the use of no more than three layers of special purpose vehicles by RegalREIT in respect of the New Hotel, subject to the condition that there will be no change to themaximum number of three layers of special purpose vehicles used by Regal REIT without furtherapproval from the SFC.


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11. RECOMMENDATIONS

11.1 The Board

The Manager has conducted, and is satisfied with the results of, due diligence in respect of the

New Hotel and the Target Group, and no material irregularities or non-compliance issues have

been noted as at the Latest Practicable Date. Such due diligence has been carried out in

accordance with the relevant provisions of the REIT Code and the Manager’s compliance

manual.

Based on the due diligence conducted by the Manager, the Manager is satisfied that the Property

Company is the registered proprietor of the New Hotel and can legally occupy, use, lease and

transfer the New Hotel subject to any mortgages, charges, leasehold interests, rights of

occupation and overriding interests affecting the New Hotel. The Manager is also satisfied that

Regal REIT (through the Property Company) will hold good, marketable, legal and beneficial

title in the New Hotel upon completion of the Transaction.

Having regard to the reasons for, terms of, and factors and other information taken into

consideration in relation to, the Transaction Matters Requiring Approval and the Additional

Hotel CCTs as described in this Circular, the Board (including all the Independent Non-executive

Directors but excluding Directors interested in the below) consider that:

(a) the Transaction is: (i) being entered into in the ordinary and usual course of business of

Regal REIT; (ii) consistent with the investment objectives and strategy of Regal REIT; and

(iii) on terms which are normal commercial terms at arm’s length and are fair and

reasonable and in, and not prejudicial to, the interests of Regal REIT, the Independent

Unitholders, as well as the Unitholders as a whole; and

(b) the New CCT Waiver Application is fair and reasonable having regard to the interests of

Regal REIT, the Independent Unitholders, as well as the Unitholders as a whole; and the

Additional Hotel CCTs are: (i) being entered into in the ordinary and usual course of

business of Regal REIT; (ii) consistent with the investment objectives and strategy of Regal

REIT; and (iii) on terms which are normal commercial terms at arm’s length and are fair

and reasonable and in, and not prejudicial to, the interests of Regal REIT, the Independent

Unitholders, as well as the Unitholders as a whole,

and accordingly, recommend that the Independent Unitholders vote at the EGM in favour of the

EGM Resolutions.


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11.2 Independent Board Committee

The Independent Board Committee (which comprises two of four Independent Non-executive

Directors of the Manager, as the remaining two Independent Non-executive Directors are

presently independent non-executive directors of Paliburg) has been established by the Board to

advise the Independent Unitholders on whether the Transaction Matters Requiring Approval are

fair and reasonable. The Independent Financial Adviser has been appointed by the Manager to

advise the Independent Board Committee, the Independent Unitholders and the Trustee as to

whether the Transaction Matters Requiring Approval are fair and reasonable.

Your attention is drawn to the “Letter from the Independent Board Committee” set out in this

Circular, which contains the Independent Board Committee’s recommendations to the

Independent Unitholders, and the “Letter from the Independent Financial Adviser” set out in this

Circular, which contains among other things: (a) the Independent Financial Adviser’s advice to

the Independent Board Committee, the Independent Unitholders and the Trustee; and (b) the

principal factors taken into consideration by the Independent Financial Adviser, and assumptions

and qualifications adopted by the Independent Financial Adviser in arriving at such opinion. The

Independent Board Committee recommends that the Independent Unitholders vote at the EGM in

favour of the EGM Resolutions.

11.3 Independent Financial Adviser

Altus Capital Limited has been appointed as the independent financial adviser for the purposes

of paragraph 10.10(p) of the REIT Code to advise the Independent Board Committee, the

Independent Unitholders and the Trustee as to whether the Transaction Matters Requiring

Approval are fair and reasonable. In this regard, the Independent Financial Adviser considers

that:

(a) the Transaction is: (i) being entered into in the ordinary and usual course of business of

Regal REIT; (ii) consistent with the investment objectives and strategy of Regal REIT; and

(iii) on terms which are normal commercial terms at arm’s length and are fair and

reasonable and in, and not prejudicial to, the interests of Regal REIT, the Independent

Unitholders, as well as the Unitholders as a whole; and

(b) the New CCT Waiver Application is fair and reasonable having regard to the interests of

Regal REIT, the Independent Unitholders, as well as the Unitholders as a whole; and the

Additional Hotel CCTs are: (i) being entered into in the ordinary and usual course of

business of Regal REIT; (ii) consistent with the investment objectives and strategy of Regal

REIT; and (iii) on terms which are normal commercial terms at arm’s length and are fair

and reasonable and in, and not prejudicial to, the interests of Regal REIT, the Independent

Unitholders, as well as the Unitholders as a whole,

and accordingly, recommends that the Independent Unitholders vote at the EGM in favour of the

EGM Resolutions.

Details of the Independent Financial Adviser’s opinion, together with the principal factors taken

into consideration, and assumptions and qualifications in arriving at such opinion, are set out in

the “Letter from Independent Financial Adviser” in this Circular.


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11.4 Trustee

The Independent Financial Adviser has been appointed by the Manager to advise the Independent

Board Committee, the Independent Unitholders and the Trustee as to whether the Transaction

Matters Requiring Approval are fair and reasonable. Details of its opinion, together with the

principal factors taken into consideration, and assumptions and qualifications in arriving at such

opinion, are set out in the “Letter from the Independent Financial Adviser” in this Circular.

Colliers International (Hong Kong) Limited has been appointed by the Manager and the Trustee

to value the New Hotel. Its opinion is set out in Appendix II headed “Independent Property

Valuer’s Valuation Report” to this Circular. Further, the Independent Board Committee has been

appointed to advise the Independent Unitholders in respect of the Transaction Matters Requiring

Approval and its advice is set out in the “Letter from the Independent Board Committee” in this

Circular.

Based and in sole reliance on: (a) the opinion of the Board in this letter and the information and

assurances provided by the Manager; (b) the Letter from the Independent Financial Adviser; (c)

the Letter from the Independent Board Committee; and (d) the Independent Property Valuer’s

Valuation Report, the Trustee, having taken into account its duties set out in the Trust Deed and

the REIT Code:

(i) is of the view that: (1) the Transaction Matters Requiring Approval, are fair and reasonable

and in the interests of Independent Unitholders, as well as the Unitholders as a whole, and

are not prejudicial to such interests; and (2) the Transaction is consistent with Regal REIT’s

investment objectives and strategy; and

(ii) has no objection to the Manager proceeding with the Transaction Matters Requiring

Approval, subject to approval of the Independent Unitholders.

The Trustee has not made any assessment of the merits or impact of the Transaction Matters

Requiring Approval, other than for the purposes of fulfilling its fiduciary duties set out in the

Trust Deed and the REIT Code. Accordingly, the Trustee urges all Unitholders, including those

who are in any doubt as to the merits or impact of the Transaction Matters Requiring Approval,

to seek their own financial or other professional advice.

12. EXTRAORDINARY GENERAL MEETING AND CLOSURE OF REGISTER OFUNITHOLDERS

12.1 EGM

The EGM will be held at 11:00 a.m. on 20 July 2017 at Regal Hongkong Hotel, 88 Yee Wo Street,

Causeway Bay, Hong Kong, for the purpose of considering and, if thought fit, passing with or

without amendments, the Ordinary Resolutions set out in the EGM Notice, which is set out on

pages N-1 to N-3 in this Circular.

12.2 Closure of Register of Unitholders

The register of Unitholders will be closed from 17 July 2017 to 20 July 2017, both days

inclusive, to determine which Unitholders will qualify to attend and vote at the EGM, during


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which period no transfers of Units will be effected. For those Unitholders who are not already

on the register of Unitholders, in order to qualify to attend and vote at the EGM, all Unit

certificates accompanied by the duly completed transfer documents must be lodged with

Registrar of Regal REIT, Computershare Hong Kong Investor Services Limited, at Shops

1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong for

registration by 4:30 p.m. on 14 July 2017.

12.3 Voting

You can vote at the EGM if you are a Unitholder on 20 July 2017, which is referred to in this

Circular as the EGM Record Date. You will find enclosed with this Circular the EGM Notice

(please refer to pages N-1 to N-3 in this Circular) and a form of proxy for use for the EGM.

Your vote is very important. Accordingly, please complete, sign and date the enclosed form of

proxy, whether or not you plan to attend the EGM in person, in accordance with the instructions

printed on the form of proxy, and return it to the Unit Registrar of Regal REIT, Computershare

Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East,

Wan Chai, Hong Kong. The form of proxy should be completed and returned as soon as possible

but in any event not less than 48 hours before the time appointed for holding the EGM.

Completion and return of the form of proxy will not preclude you from attending and voting in

person at the EGM or any adjournment thereof should you so wish.

Persons who have an interest in the EGM Resolutions (which includes all the persons referred

to in section 10 headed “Implications of the Transaction under the REIT Code and the Trust

Deed” above) must decline to accept appointment as proxies in respect of the EGM Resolutions

unless the Unitholder concerned has specific instructions in his form of proxy as to the manner

in which his votes are to be cast in respect of the EGM Resolutions.

13. ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the Appendices to this Circular.

Yours faithfully,

By Order of the Board

Regal Portfolio Management Limited(as manager of Regal Real Estate Investment Trust)

Simon LAM Man LimExecutive Director


— 58 —



(Stock Code: 1881)

Managed by

30 June 2017

To: The Independent Unitholders

Dear Sir or Madam,


(2) CONTINUING CONNECTED PARTY TRANSACTIONS; AND(3) EXTRAORDINARY GENERAL MEETING AND

CLOSURE OF REGISTER OF UNITHOLDERS

We have been appointed as members of the Independent Board Committee to advise you in respect of

the Transaction Matters Requiring Approval, details of which are set out in the “Letter to the

Unitholders” in the circular dated 30 June 2017 from the Manager to the Unitholders (the “Circular”),

of which this letter forms a part. Terms defined in this Circular shall have the same meanings when

used in this letter unless the context otherwise requires.

The Independent Financial Adviser has been appointed by the Manager to advise us, the Independent

Unitholders and the Trustee as to whether the Transaction Matters Requiring Approval are fair and

reasonable. Details of their opinion, together with the principal factors taken into consideration, and

assumptions and qualifications in arriving at such opinion, are set out in the “Letter from the

Independent Financial Adviser” the text of which is contained in this Circular.

Having taken into account the opinion of the Independent Financial Adviser and the principal factors

and reasons considered by them, we consider that:

(1) the Transaction is: (i) being entered into in the ordinary and usual course of business of Regal

REIT; (ii) consistent with the investment objectives and strategy of Regal REIT; and (iii) on

terms which are normal commercial terms at arm’s length and are fair and reasonable and in, and

not prejudicial to, the interests of Regal REIT, the Independent Unitholders, as well as the

Unitholders as a whole; and

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

— IBC-1 —

(2) the New CCT Waiver Application is fair and reasonable having regard to the interests of Regal

REIT, the Independent Unitholders, as well as the Unitholders as a whole; and the Additional

Hotel CCTs are: (i) being entered into in the ordinary and usual course of business of Regal

REIT; (ii) consistent with the investment objectives and strategy of Regal REIT; and (iii) on




Accordingly, we recommend that the Independent Unitholders vote in favour of the EGM Resolutions.

Yours faithfully,

For and on behalf of Independent Board Committee of


Mr. John William CRAWFORD, JPIndependent Non-executive Director

Mr. Kai Ole RINGENSONIndependent Non-executive Director

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

— IBC-2 —

The following is the text of a letter of advice from the Independent Financial Adviser to the

Independent Board Committee, the Trustee and the Independent Unitholders in respect of the

Transaction and the Additional Hotel CCTs, which has been prepared for the purpose of incorporation

in the circular.

Altus Capital Limited

21 Wing Wo Street

Central, Hong Kong

30 June 2017

To: the Independent Board Committee, the Trustee

and the Independent Unitholders

Regal Real Estate Investment Trustc/o Board of Directors of Regal Portfolio Management Limited(in its capacity as manager of Regal Real Estate Investment Trust)


68 Yee Wo Street

Causeway Bay

Hong Kong

Dear Sir or Madam,

(1) CONNECTED PARTY TRANSACTIONSIN RELATION TO THE SHARE PURCHASE AGREEMENT

TO ACQUIRE THE NEW HOTEL; AND(2) CONTINUING CONNECTED PARTY TRANSACTIONS

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board

Committee, the Trustee and the Independent Unitholders in respect of the Transaction and the

Additional Hotel CCTs. Details of the Transaction and the Additional Hotel CCTs are set out in the

“Letter to the Unitholders” contained in the circular of Regal REIT dated 30 June 2017 (the

“Circular”) of which this letter forms part. Terms used in this letter shall have the same meanings as

those defined in the Circular unless the context requires otherwise.

On 29 June 2017, the Trustee and P&R entered into the Share Purchase Agreement, pursuant to which

P&R agreed to sell to the Trustee (or its nominee) the Target Company Shares, representing 100% of

the issued share capital of the Target Company and assign to the Trustee (or its nominee) the

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

— IFA-1 —

Shareholder Loan. The assets of the Target Company mainly comprise the New Hotel located at No.8

Ha Heung Road (formerly known as Nos. 8, 8A, 10, 10A, 12 and 12A Ha Heung Road), Kowloon,

Hong Kong. At completion of the Transaction, P&R and the Guarantors will enter into the Deed of Tax

Indemnity pursuant to which P&R and the Guarantors will undertake to indemnify on demand the

Trustee and the Target Group in respect of the Target Group’s taxation liabilities on or before

completion of the Transaction. In addition, upon completion of the Transaction, Regal REIT (through

the Property Company) will enter into the New Lease Agreement with the Lessee in respect of the New

Hotel, and at the same time, Regal Hotels will enter into the New Lease Guarantee pursuant to which

Regal Hotels will guarantee the obligations of the Lessee under the New Lease Agreement. It is also

intended that the New Hotel Management Agreement will be entered into between the Property

Company, the Lessee, Regal Hotels and the Hotel Manager concurrently with the signing of the New

Lease Agreement.

According to clause 15.1 of the Trust Deed, any connected transactions are required to be carried out

in accordance with the provisions of the REIT Code and any conditions (including any conditions of

waivers or exemptions from the operation of the REIT Code granted by the SFC from time to time)

imposed by the SFC from time to time. Under paragraph 8.1 of the REIT Code, connected persons of

Regal REIT include, among others, a Significant Holder (that is, a holder of 10% or more of the

outstanding Units) and its associated companies. Each of Paliburg and Regal Hotels has an effective

interest in more than 10% of the Units and therefore is a Significant Holder of Regal REIT. P&R is

an “associated company” of both Paliburg and Regal Hotels within the meaning of the REIT Code. As

a result, Paliburg, Regal Hotels and P&R are each a connected person of Regal REIT within the

meaning of the REIT Code. Accordingly, each of the following constitutes a connected transaction of

Regal REIT under paragraph 8.5 of the REIT Code:

(a) the execution of the Share Purchase Agreement and the consummation of the transactions

contemplated thereunder;

(b) the execution of the Deed of Tax Indemnity in respect of the New Hotel and the consummation

of the transactions thereunder;

(c) the execution of the New Lease Agreement and the consummation of the transactions

contemplated thereunder;

(d) the execution of the New Lease Guarantee and the consummation of the transactions

contemplated thereunder; and

(e) the execution of the New Hotel Management Agreement and the consummation of the

transactions contemplated thereunder.

Upon and after completion of the Transaction, members of the Regal REIT Group will enter into the

Additional Hotel CCTs, in relation to the New Lease Agreement, the New Lease Guarantee and the

New Hotel Management Agreement, with members of the Regal Connected Persons Group in relation

to the New Hotel. Details of the Additional Hotel CCTs are set out in the section headed “9.

Continuing Connected Party Transactions” in the “Letter to the Unitholders” of the Circular.


— IFA-2 —

Members of the Regal Connected Persons Group are parties to the Transaction and, as such, have a

material interest in the relevant resolutions to be proposed at the EGM and have to abstain from voting

on the EGM Resolutions. Pursuant to the REIT Code and the Trust Deed, Regal Hotels has agreed that

it will abstain, and will procure that its controlling entities, holding companies, subsidiaries and

associated companies (as defined in the REIT Code) will abstain, from voting on the EGM

Resolutions. To the best of the Manager’s knowledge, information and belief, after having made

reasonable enquiries, the Manager takes the view that save as disclosed above, no other Unitholders

are required to abstain from voting at the EGM in respect of the EGM Resolutions and based on the

foregoing information, the Trustee is of the same view.

As the maximum aggregate value of the above transaction exceeds 5.0% of the latest net asset value

of Regal REIT (as disclosed in its latest published audited accounts, and adjusted for any distribution

paid by Regal REIT since their publication), pursuant to paragraph 8.11 of the REIT Code and clause

15.1 of the Trust Deed, the connected transactions mentioned under paragraphs (a) to (e) above require

Independent Unitholders’ approval by way of Ordinary Resolutions at the EGM.

THE INDEPENDENT BOARD COMMITTEE

The Independent Board Committee, comprising two Independent Non-executive Directors, namely

Messrs. John William CRAWFORD, JP, and Kai Ole RINGENSON, has been constituted to advise the

Independent Unitholders in respect of the Transaction Matters Requiring Approval. We have been

appointed to advise the Independent Board Committee, the Trustee and Independent Unitholders in

this regard. As Messrs. Bowen Joseph LEUNG Po Wing, GBS, JP and Abraham SHEK Lai Him, GBS,

JP, being the other two Independent Non-executive Directors, are also independent non-executive

directors of Paliburg, they are considered as connected persons in this case and hence do not

participate as members of the Independent Board Committee.

INDEPENDENT FINANCIAL ADVISER

Altus Capital Limited is independent of Regal REIT, the Trustee, the Manager, each of the Significant

Holders of Regal REIT, each of the relevant connected person(s) with respect to the Transaction and

the Additional Hotel CCTs, and their respective Associates and connected persons of any of them.

Apart from normal professional fees payable to us in connection with this appointment and other

similar engagements, no arrangements exist whereby we will receive any fees or benefits from Regal

REIT, the Manager or any other party to the Transaction Matters Requiring Approval.

Altus Capital Limited has previously acted as an independent financial adviser to Regal Hotels with

regards to a major and connected transaction in relation to the provision of financial assistance. Regal

Hotels is a Significant Holder of Regal REIT, holding approximately 74.89% of the issued Units of

Regal REIT as at 31 December 2016 according to the annual report of Regal REIT for the year ended

31 December 2016 (the “2016 Annual Report”). Details of the aforesaid transaction of Regal Hotels

are set out in the circular of Regal Hotels dated 23 September 2016. Save for the aforesaid transaction,

we have not acted as an independent financial adviser for other transactions of Regal REIT or any of

the Unitholders for the last two years prior to the date of the Circular.


— IFA-3 —

Pursuant to Rule 13.84 of the Listing Rules, and given that remuneration for our engagement to opine

on the Transaction Matters Requiring Approval is at market level and not conditional upon successful

passing of the resolutions to be proposed at the EGM, and that our engagement is on normal

commercial terms, we are independent of Regal REIT.

As the independent financial adviser to the Independent Board Committee, the Trustee and the

Independent Unitholders, our role is to give an independent opinion to the Independent Board

Committee, the Trustee and the Independent Unitholders as to:

(a) whether the Transaction is being entered into in the ordinary and usual course of business of

Regal REIT and is consistent with the investment objectives and strategies of Regal REIT and

is at arm’s length on normal commercial terms, which are fair and reasonable and in the interests

of Regal REIT, the Independent Unitholders, as well as the Unitholders as a whole;

(b) whether the New CCT Waiver Application is fair and reasonable having regard to the interests

of Regal REIT, the Independent Unitholders, as well as the Unitholders as a whole; and whether

the Additional Hotel CCTs are: (i) being entered into in the ordinary and usual course of business

of Regal REIT; (ii) consistent with the investment objectives and strategies of Regal REIT; and

(iii) on terms which are normal commercial terms at arm’s length and are fair and reasonable and

in, and not prejudicial to, the interests of Regal REIT, the Independent Unitholders, as well as

the Unitholders as a whole; and

(c) how the Independent Unitholders should vote at the EGM in respect of the EGM Resolutions.

BASIS OF OUR ADVICE

In formulating our opinion, we have reviewed, among others, the Share Purchase Agreement, the Deed

of Tax Indemnity, the New Lease Agreement, the New Lease Guarantee, the New Hotel Management

Agreement, the 2016 Annual Report and other information as set out in the Circular, in particular, the

appendices including the Independent Property Valuer’s Valuation Report and the Market Consultant’s

Report. We have discussed the valuation methodologies, bases and assumptions for the valuation of

the New Hotel with the Independent Property Valuer.

We have also relied on the information and facts supplied, and the opinions expressed, by the Directors

and management of the Manager and have assumed that the information, facts and opinions provided

to us are true and accurate. We have also sought and received confirmation from the Directors and

management of the Manager that no material factors have been omitted from the information supplied

and opinions expressed. We have no reason to doubt the truth, accuracy and completeness of the

information provided to us or to believe that any material fact or information has been omitted or

withheld. We consider that we have been provided with and have reviewed sufficient information to

reach an informed view. We have also assumed that the statements and representations made or

referred to in the Circular were accurate and not misleading at the time they were made and continue

to be accurate and not misleading at the date of the EGM.


— IFA-4 —

We have no reason to believe that any statements, information, opinions or representations relied on

by us in forming our opinion are untrue, inaccurate or misleading, nor are we aware of any material

facts the omission of which would render the statements, information, opinions or representations

provided to us to be untrue, inaccurate or misleading. We have assumed that all the statements,

information, opinions and representations for matters relating to Regal REIT contained or referred to

in the Circular and/or provided to us by the management of the Manager, and the Directors have been

reasonably made after due and careful enquiry. We have relied on such statements, information,

opinions and representations and have not conducted any independent investigation into the business,

financial conditions and affairs or the future prospects of Regal REIT, save for our work done as set

out above.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our recommendation, we have taken into consideration the principal factors and reasons

set out below:

1. Background information

1.1 Information on Regal REIT

Regal REIT was listed on the Stock Exchange in 2007 and owns an investment portfolio of hotel

properties in Hong Kong, as more fully described under the paragraph headed “1.2 Information

on the hotel portfolio of Regal REIT” below in this letter. The formation of Regal REIT followed

a global trend to separate hotel ownership from hotel operation, allowing hotel managers and

franchisors to focus on hotel operations and brand extension, and hotel real estate investment

trusts to focus on asset ownership and growth opportunities. Regal REIT is the first hotel real

estate investment trust in Hong Kong and focuses on hotel ownership and seeks hotel managers

and franchisors to manage its hotel properties. As of 31 December 2016, Regal REIT owns a total

of eight operating hotels, with an aggregate of 4,569 guestrooms and suites.

1.2 Information on the hotel portfolio of Regal REIT

As at 31 December 2016, the property portfolio of Regal REIT comprised (a) the Initial Hotel

Properties; and (b) iclub Wan Chai Hotel, iclub Sheung Wan Hotel and iclub Fortress Hill Hotel

(collectively, the “iclub Hotels”). The Initial Hotel Properties are full-service hotels offering a

range of services including food and beverage outlets and other facilities, while the iclub Hotels

are select-service hotels which offer contemporary design and are equipped with tech-savvy

facilities.


— IFA-5 —

Set out below are the key specifications and operating parameters of the Initial Hotel Properties

and the iclub Hotels:

Hotel LocationGross floorarea (sqm)

Number ofrooms

Regal Airport Hotel Chek Lap Kok 71,988 1,171

Regal Hongkong Hotel Causeway Bay 25,090 481

Regal Kowloon Hotel Tsim Sha Tsui 31,746 600

Regal Oriental Hotel Kowloon City 22,601 494

Regal Riverside Hotel Shatin 59,668 1,138

iclub Wan Chai Hotel Wan Chai 5,326 99

iclub Sheung Wan Hotel Sheung Wan 7,197 248

iclub Fortress Hill Hotel Fortress Hill 6,849 338

Source: 2016 Annual Report

The following map sets out the location of the five Initial Hotel Properties and the three iclub Hotels:

Source: 2016 Annual Report


— IFA-6 —

For further details of the Initial Hotel Properties and the iclub Hotels, please refer to the 2016Annual Report.

1.3 Information on the New Hotel

Set out below are the key specifications of the New Hotel:

Location No. 8 Ha Heung Road (formerly Known as Nos. 8, 8A, 10,10A, 12 and 12A Ha Heung Road), Kowloon

Hotel features 22 storeys (including basement and ground floor) with 340guestrooms

Gross floor area Approximately 6,298 sqmStatus Construction completed, hotel licence obtained in May 2017

and has since commenced operations under the “iclub byRegal” brand

Valuation as at 23 June2017

HK$1,400 million

The New Hotel features 340 guestrooms with a wide range of facilities such as a lounge,computer area and fitness area, and it aims to accommodate the needs of business & leisuretravelers. The New Hotel is located on the section of Ha Heung Road which is close to Ma TauWai Road/To Kwa Wan Road Garden, where the proposed entrance D of the future Ma Tau WaiMTR station of the Shatin-Central link will be located. With its close proximity to both KowloonCity Road and To Kwa Wan Road, the two major roads in the district, the New Hotel is wellconnected to nearby districts, including Hung Hom, Tsim Sha Tsui and Jordan by buses and lightbuses. It is noted that the New Hotel will offer scheduled shuttle bus service and access to publictransportation where guests can commute to entertainment, shopping and cultural districtsaround Hong Kong. In addition, the New Hotel is within a walking distance to the nearby busand Cityflyer (Airport Bus) stations as well as the Ho Man Tin MTR station. Guests of the NewHotel may also access Kowloon Bay International Trade & Exhibition Centre or Hung HomStation easily by car.

According to the annual report of MTR Corporation Limited for the year ended 31 December2016, the Ma Tau Wai MTR station is expected to open by 2019 as one of the stops of theShatin-Central Link, which is expected to commence operation by 2019 and fully operate by2021. As such, the Shatin-Central Link is expected to connect the New Hotel (via Ma Tau WaiMTR station) to the core business districts of Wan Chai, Admiralty and Central on the HongKong Island, as well as to the emerging business districts of Kai Tak, Kowloon Bay and KwunTong in Kowloon, which is expected to provide a strong impetus to the performance of the NewHotel.

Given the strategic location of the New Hotel described above, it is expected to provide strongpotential demand for the New Hotel in the future. As detailed under the paragraph headed “7.1The Transaction is in line with the long-term objectives, vision and growth strategies of RegalREIT” below in this letter, the New Hotel is expected to enable Regal REIT to pursue its growthstrategies so as to enhance higher total revenue and seize value-adding investment opportunities.

Further details of the New Hotel are set out under the paragraph headed “2.2 Information on theNew Hotel” in the “Letter to the Unitholders” of the Circular.


— IFA-7 —

2. Principal terms of the Share Purchase Agreement

Pursuant to the Share Purchase Agreement, P&R has agreed to sell to the Trustee (or itsnominee), as purchaser, the Target Company Shares, representing 100% of the issued sharecapital of the Target Company, and assign to the Trustee (or its nominee) the Shareholder Loan,subject to the terms and conditions set out therein. We summarise below the principal terms ofthe Share Purchase Agreement. For details of the Share Purchase Agreement, please refer to theparagraph headed “3.1 Share Purchase Agreement” in the “Letter to the Unitholders” of theCircular.

Date of Agreement 29 June 2017

Consideration a. Hotel Purchase Price of HK$1,360 million; plus

b. Current Assets Adjustment of up to HK$2 million.

Deposit a. Upon signing of the Share Purchase Agreement, theTrustee shall pay to P&R the Deposit of HK$200 millionin cash by cheque or by way of electronic transfer toP&R’s bank account;

b. The Deposit shall not be deposited into an escrowaccount and may be used by P&R without restriction;

c. At completion of the Transaction, the Deposit shall beapplied on a dollar-for-dollar basis towards the Trustee’sobligation to pay the consideration; and

d. The Deposit shall be refunded (without accrued interest,if any) in full by P&R to the Trustee within ten BusinessDays in limited circumstances, such as that theprecedent conditions set out below cannot be satisfied,(including but not limited to where IndependentUnitholders’ approval is not obtained) in accordancewith the terms of the Share Purchase Agreement.

Key precedent conditions a. If applicable, Paliburg and Century City obtaining itsshareholders’ approval of the transactions contemplatedby the Transaction Documents, as appropriate, in a formsatisfactory to the Trustee and the Manager and inaccordance with their respective articles of associationor bye-laws and the Listing Rules (as the case may be);

b. Regal Hotel obtaining its independent Shareholders’approval of the transactions contempleted by theTransaction Documents, as appropriate, in a formsatisfactory to the Trustee and the Manager and inaccordance with their respective articles of associationor bye-laws and the Listing Rules (as the case may be);

c. Independent Unitholders’ approval of: (i) thetransactions contemplated under the Share PurchaseAgreement and other transactions contemplated under,associated with and/or related to the Transaction; and(ii) transactions contemplated under, associated withand/or related to the Additional Hotel CCTs, inaccordance with the Trust Deed and REIT Code; and


— IFA-8 —

d. Regal REIT obtaining or procuring a new bank facilityof an amount no less than HK$500 million for thepurpose of financing part of the Hotel Purchase Price, onterms that the Manager considers to be reasonablysatisfactory having regard to similar debt borrowings ofsimilar size and nature in the current loan market inHong Kong.

Warranties and indemnity a. The Target Group shall not, at completion of theTransaction, have any liabilities other than theShareholder Loan that will also be acquired by theTrustee; and

b. The members of the Target Group shall have no otheroperations or business other than holding the New Hoteland operating it as a hotel (such hotel operations tocease upon execution of the New Hotel ManagementAgreement at completion of the Transaction).

P&R and the Guarantors (on a several basis in equalproportions between the Guarantors) have undertaken toindemnify Regal REIT, the Trustee, the Manager and theTarget Group for any loss, damages, costs (including legalcosts), expenses and other liabilities which Regal REIT, theTrustee, the Manager or the Target Group may suffer as aresult of any breach of the above warranties.

The maximum aggregate liability of P&R and the Guarantorsin respect of all claims for breach of warranties under theShare Purchase Agreement shall not exceed the HotelPurchase Price plus the Current Assets Adjustment. All claimsare subject to a limitation period of three years from thecompletion of the Transaction (other than certain stampduty-related claims, for which there is no limitation period,and certain claims relating to tax-related warranties, in whichcase the limitation period is seven years).

When considering the fairness and reasonableness of the terms of the Share Purchase Agreement,

we have taken into account the following factors:

2.1 Consideration

Pursuant to the Share Purchase Agreement, the consideration of the Transaction consists of (i)

the Hotel Purchase Price; and (ii) the Current Assets Adjustment. The Hotel Purchase Price is

HK$1,360 million, which was arrived on a willing buyer/seller at arm’s length transaction basis

between P&R, Regal REIT and the Manager with reference to the Appraised Value and the

transaction history of the Target Company.

According to the Independent Property Valuer’s Valuation Report set out in Appendix II to the

Circular, the Appraised Value is HK$1,400 million as at 23 June 2017, which we consider fair

and reasonable (based on our analysis on the Independent Property Valuer’s Valuation Report

under the paragraph headed “3. Valuation on the New Hotel” below in this letter). As advised by

the Manager, the Hotel Purchase Price of HK$1,360 million, representing a discount of

approximately 2.9% on the Appraised Value, was mutually agreed after negotiation with P&R.


— IFA-9 —

The Current Assets Adjustment (capped at HK$2 million) is equivalent to the value of the current

assets of the Target Group, being the aggregate of all receivables in connection with the New

Hotel and all refundable utility and other deposits placed with relevant authorities or suppliers

in connection with the New Hotel as at completion of the Transaction. As indicated in the pro

forma financial information of the Enlarged Group set out in Appendix III to the Circular, the

Current Assets Adjustment of the Target Group as at 31 December 2016 amounts to

approximately HK$1.26 million. Taking into account the aforesaid figure, the Current Assets

Adjustment (capped at HK$2 million) is sufficient to cover the actual amount as at the

completion of the Transaction. Further, as the Current Assets Adjustment will be settled on a

dollar-for-dollar basis, we are of the view that such arrangement is fair and reasonable.

In consideration of the above, we are of the view that the consideration of the Transaction, being

the sum of the Hotel Purchase Price and the Current Assets Adjustments, is fair and reasonable.

2.2 Payment terms

As stipulated in the Share Purchase Agreement, Regal REIT is required to pay the Deposit of

HK$200 million to P&R within one business day from signing of the Share Purchase Agreement.

The Deposit will be applied on a dollar-for-dollar basis towards the Regal REIT’s obligation to

pay the consideration at completion of the Transaction. As such, the payment of the consideration

for the Transaction is expected to be divided as follows:

(i) payment of the Deposit of HK$200 million, representing approximately 14.7% of the Hotel

Purchase Price, within one business day from signing of the Share Purchase Agreement; and

(ii) payment of the remaining balance of the Hotel Purchase Price of HK$1,160 million,

representing approximately 85.3% of the Hotel Purchase Price, plus the Current Assets

Adjustment (capped at HK$2 million) at completion of the Transaction.

As indicated above, the amount of the Deposit represents approximately 14.7% of the Hotel

Purchase Price, and it will be financed by the existing bank facilities of Regal REIT, the details

of which are set out under the paragraph headed “2.3 Financing plan for the Transaction” below

in this letter. Given that (i) such Deposit will be utilised to pay the consideration of the

Transaction on a dollar-for-dollar basis at completion of the Transaction; (ii) the amount of the

Deposit representing approximately 14.7% of the Hotel Purchase Price; and (iii) the Deposit

shall be refunded in full by P&R to the Trustee under circumstances such as that the precedent

conditions set out in the table above cannot be satisfied, we consider this arrangement is

acceptable and reasonable.

Separately, we note that the Guarantors, being Regal Hotels and Paliburg, have guaranteed, on

a several basis in equal proportions, the obligations of P&R pursuant to the Share Purchase

Agreement, including the refund of such Deposit, if required. We have, therefore, also reviewed

the businesses, financial positions and results of each of the Guarantors, and summarised as

follows:


— IFA-10 —

Regal Hotels

Regal Hotels is a Hong Kong listed company (stock code: 78) principally engaging in hotel

ownership business undertaken through Regal REIT, hotel operation and management

businesses, asset management of Regal REIT, property development and investment, including

those undertaken through the joint venture in P&R and the interest in the retained houses in

Regalia Bay in Stanley, aircraft ownership and leasing business, and other investments including

financial assets investments. According to the 2016 Annual Report, Regal Hotels held

approximately 74.89% of the issued Units as at 31 December 2016.

As set out in its annual report for the year ended 31 December 2016, Regal Hotels had

consolidated NAV of approximately HK$11,828.4 million (excluding non-controlling interests)

as at 31 December 2016 and recorded consolidated revenue for the year ended 31 December 2016

of approximately HK$2,617.1 million. The consolidated net profit and consolidated net cash flow

from the operating activities of Regal Hotels for the year ended 31 December 2016 were

approximately HK$240.8 million and approximately HK$2,200.6 million, respectively.

As at 31 December 2016, Regal Hotels Group had time deposits and cash and bank balances of

approximately HK$3,700.7 million, current liabilities of approximately HK$3,035.0 million and

non-current liabilities of approximately HK$11,882.2 million, of which approximately

HK$6,170.7 million was Regal REIT’s bank borrowings, approximately HK$4,621.3 million was

the notes issued by RH International Finance Limited (a wholly-owned subsidiary of Regal

Hotels) or under the note programme established by R-REIT International Finance Limited (a

wholly-owned subsidiary of Regal REIT) in 2013, and approximately HK$954.6 million was

deferred tax liabilities.

As at 31 December 2016, the gearing ratio of Regal Hotels Group was approximately 33.2%,

representing the borrowings net of cash and bank balances and deposits as compared to its total

assets.

Paliburg

Paliburg is a Hong Kong listed company (stock code: 617) principally engaging in property

development and investment, construction and building related businesses, hotel ownership,

hotel operation and management, asset management, aircraft ownership and leasing business and

other investments including financial assets investments. According to the annual report of

Paliburg for the year ended 31 December 2016, Paliburg held approximately 67.93% of the

issued shares of Regal Hotels.

As set out in its annual report for the year ended 31 December 2016, Paliburg had consolidated

NAV of approximately HK$13,113.5 million (excluding non-controlling interests) as at 31

December 2016 and recorded consolidated revenue for the year ended 31 December 2016 of

approximately HK$2,771.8 million. The consolidated net profit and consolidated net cash flow

from the operating activities of Paliburg for the year ended 31 December 2016 were

approximately HK$235.4 million and approximately HK$1,233.2 million, respectively.


— IFA-11 —

As at 31 December 2016, Paliburg and its subsidiaries had time deposits and cash and bank

balances of approximately HK$4,488.9 million, current liabilities of approximately HK$6,503.2

million and non-current liabilities of approximately HK$15,497.2 million, of which

approximately HK$6,170.7 million was Regal REIT’s bank borrowings, approximately

HK$4,621.3 million was the notes issued by RH International Finance Limited (a wholly-owned

subsidiary of Regal Hotels) or under the note programme established by R-REIT International

Finance Limited (a wholly-owned subsidiary of Regal REIT) in 2013, and approximately

HK$2,169.9 million was deferred tax liabilities.

As at 31 December 2016, the gearing ratio of Paliburg and its subsidiaries was approximately

27.2%, representing the borrowings net of cash and bank balances and deposits as compared to

its total assets.

Based on the financial information of Regal Hotels and Paliburg above, we are of the view that

Regal Hotels and Paliburg as the Guarantors have the capability to meet their respective

obligations under the Share Purchase Agreement including the refund of the Deposit, if required.

2.3 Financing plan for the Transaction

Pursuant to the Trust Deed, Regal REIT is required to ensure that the total amount distributed

to the Unitholders shall not be less than 90% of the total distributable income for each financial

year and, therefore, Regal REIT does not maintain significant amounts of cash reserves. Instead,

the Manager intends to finance the payment for the consideration of the Transaction by the

combination of (i) Regal REIT’s existing bank facilities; (ii) new bank facilities secured against

the New Hotel and/or other assets held by Regal REIT; and/or (iii) Regal REIT’s internal

resources.

As set out under the paragraph headed “7.4 Pro Forma Capitalisation and Gearing Ratio” in the

“Letter to the Unitholders” of the Circular, as at 31 December 2016, the total debt of Regal REIT

amounted to approximately HK$8,340 million, representing approximately 37.3% of its total

gross assets value of approximately HK$22,377 million, which suggests that there is room for

Regal REIT to obtain the new bank facility with the New Hotel for the purpose of the

Transaction. In this regard, we understand the Manager has been negotiating with bank

syndicates to obtain the new bank facility. As at the Latest Practicable Date, we note that the

Manager had been in close negotiations with several banks who had provided indicative terms

and conditions, and as such, the Manager is confident in securing the new bank facility from one

of these banks, with detailed terms and conditions to be finalised. Based on the recent

discussions with these banks, the Manager advised that the loan-to-value ratio of the new bank

facility to be secured against the New Hotel is expected to be 55%, while the interest rate is

expected to be at HIBOR plus a margin of no more than 1.15% per annum, which is considered

to be fair and reasonable as compared to that of the outstanding bank facilities of Regal REIT

as at 31 December 2016, at margins ranging from 1.15% per annum to 1.45% per annum plus

HIBOR. On the basis of the Hotel Purchase Price of HK$1,360 million and the expected 55%

loan-to-value ratio of the new bank facility as mentioned above, the principal amount of the new

bank facility (if obtained) is expected to be HK$748 million.


— IFA-12 —

Apart from the aforementioned amount of HK$748 million to be financed by the new bank

facility, it is noted that the Deposit of HK$200 million and the balance of the Hotel Purchase

Price of HK$412 million will be funded by one of the existing bank facilities of Regal REIT. As

at 31 May 2017, the Regal REIT Group had in aggregate an un-utilised amount of HK$1,123

million bank facilities at margins ranging from 1.15% per annum to 1.45% per annum plus

HIBOR which can be used to partially fund the Hotel Purchase Price, HK$800 million of which

is pursuant to a bank facility with an interest margin of 1.15% over HIBOR and sufficient to

cover the Deposit and the balance of the Hotel Purchase Price. Depending on the size and terms

of the new bank facility, the Manager may not draw down on its un-utilised existing bank

facilities in full.

As set out in the table summarising the principal terms of the Share Purchase Agreement above,

one of the key precedent conditions stipulates that Regal REIT must obtain such a new bank

facility of an amount no less than HK$500 million on terms that the Manager considers to be

reasonably satisfactory having regard to similar debt borrowings of similar size and nature in the

current loan market in Hong Kong. Taking into account the aforementioned un-utilised amount

of HK$1,123 million of Regal REIT’s existing bank facilities as at 31 May 2017, the lowest limit

of HK$500 million of the new bank facility to be obtained is sufficient to cover the Hotel

Purchase Price together with such un-utilised amount of existing bank facilities. Also, in the

event that such precedent condition (i.e. Regal REIT obtaining a new bank facility of an amount

no less than HK$500 million on terms that the Manager considers to be reasonably satisfactory

having regard to similar debt borrowings of similar size and nature in the current loan market in

Hong Kong) cannot be satisfied on or before the Long Stop Date, the Trustee (acting on the

recommendation and at the direction of the Manager) may, at its option without any penalty,

postpone the completion of the Transaction to the date by which such condition is satisfied or

terminate the Share Purchase Agreement (whereby the Deposit shall be refunded to the Trustee).

Further, as discussed under the paragraph headed “8.3 Gearing ratio and cash flow” below in this

letter, the aggregate debt of Regal REIT, after taking into account the new bank facility (if

obtained) of HK$748 million and the drawdown of an existing bank facility of HK$612 million,is

expected to be no more than 45% of the total gross assets value of Regal REIT based on the

requirement under the REIT Code.

On the other hand, the Current Assets Adjustment of up to HK$2 million will be funded by Regal

REIT’s internal resources. As set out in the 2016 Annual Report, Regal REIT had approximately

HK$59 million cash and cash equivalents as at 31 December 2016, which is sufficient to cover

the Current Assets Adjustment.

In consideration of the above, we believe the financing structure for the Transaction is fair and

reasonable.

2.4 Precedent conditions

Having reviewed the precedent conditions to the Transaction set out in the Share Purchase

Agreement, we are of the view that the conditions set out therein are in general normal for

contracts similar to the Share Purchase Agreement and in line with the general market practice.


— IFA-13 —

We also note the Share Purchase Agreement stipulates that in case any of the precedent

conditions cannot be satisfied or waived, Regal REIT acting on the recommendation and at the

direction of the Manager may postpone the Transaction or terminate the Share Purchase

Agreement, which provides more flexibility and a further guarantee to Regal REIT.

2.5 Warranties and indemnity

The Share Purchase Agreement provides warranties given by P&R and the Guarantors in respect

of P&R, the Target Group and the New Hotel, while P&R and the Guarantors (on a several basis

in equal proportions between the Guarantors) have also undertaken to indemnify Regal REIT, the

Trustee, the Manager and the Target Group for any loss, costs and other liabilities they may

suffer as a result of breach of warranties. The maximum liability claimed under the indemnity

is the Hotel Purchase Price plus the Current Assets Adjustment, being the total consideration of

the Transaction. Further, as detailed under the paragraph headed “3.1 Share Purchase Agreement”

in the “Letter to the Unitholders” of the Circular, the limitation period of three years from the

completion of the Transaction (other than certain stamp duty-related claims, for which there is

no limitation period, and certain claims relating to tax-related warranties, in which case the

limitation period is seven years) is agreed via arm’s length negotiations between the relevant

parties, and is consistent with that provided under the sale and purchase agreements in relation

to the acquisition of the Initial Hotel Properties and the iclub Hotels. In light of the above, we

are of the view that the warranties and indemnity arrangement under the Share Purchase

Agreement is fair and reasonable and on normal commercial term.

2.6 Section summary

Taking into account all the factors and analysis above, we are of the view that the terms and

conditions of the Share Purchase Agreement are on normal commercial term and are fair and

reasonable.

3. Valuation on the New Hotel

According to the Independent Property Valuer’s Valuation Report, the details of which are set out

in Appendix II to the Circular, the Appraised Value of the New Hotel is HK$1,400 million as at

23 June 2017. When assessing the fairness and reasonableness of the Appraised Value, we have

reviewed the Independent Property Valuer’s Valuation Report and discussed with the

Independent Property Valuer in relation to (i) their scope of work for conducting the valuation

on the New Hotel; (ii) their relevant professional qualifications as property valuer; and (iii) the

methodology and assumptions used in performing the valuation on the New Hotel as well as

whether such methodology and assumption are appropriate and acceptable.

3.1 Valuation methodology

As stated in the Independent Property Valuer’s Valuation Report, the Independent Property

Valuer adopted the income approach - discounted cash flow analysis (the “Income Approach”)

and counter-checked the valuation by the market approach (the “Market Approach”) in arriving


— IFA-14 —

at the Appraised Value. We have discussed with the Independent Property Valuer (i) the rationale

for adopting the Income Approach as the principal valuation methodology for the New Hotel and

counter-checked by the Market Approach; and (ii) the bases and assumptions adopted in arriving

at the Appraised Value using the Income Approach and the Market Approach.

According to the Independent Property Valuer, the Income Approach is the most appropriate

valuation approach for assessing the market value of the New Hotel as it would better reflect

specific characteristics of an income-producing property such as the fixed and reversionary rents,

lease duration, hotel management arrangement, room rate growth, occupancy rates and all

outgoings. The Independent Property Valuer has also made reference to comparable transactions

in Hong Kong during a period around the date of valuation of the New Hotel although there are

only limited comparable transactions.

Therefore, the Independent Property Valuer primarily relied on the Income Approach by

assessing the long-term return that is likely to be derived from the New Hotel with a combination

of projected income over an assumed investment horizon of ten years’ time, where various

assumptions including incomes and expenses of the New Hotel and future economic conditions

in the market are made, and the potential sales price of the New Hotel at the end of the

investment horizon.

3.2 Valuation basis and assumptions

The valuation of the New Hotel is primarily based on the assumptions that (i) the New Hotel can

be sold on the open market without the benefit of deferred terms contracts, leasebacks, joint

ventures, or any similar arrangements which would affect its value; (ii) the New Hotel is free

from encumbrances, restrictions and outgoings of an onerous nature which could affect its value;

and (iii) the New Hotel is subject to the New Lease Agreement and the New Hotel Management

Agreement.

In arriving at the Appraised Value using the Income Approach, the Independent Property Valuer

has adopted a ten-year time frame in the projection of cash flows of the New Hotel. The ten-year

investment horizon enables an investor to make an assessment of the long-term return that is

likely to be derived from the New Hotel given the New Hotel is intended to be held for long-term

investment by Regal REIT. The Independent Property Valuer also advised that the adoption of a

ten-year term is a common practice when assessing an income generating property such as a

hotel. The Income Approach uses a set of assumptions as to income (e.g. room rates and

occupancy rates) and expenses (e.g. room costs, energy costs, management fees, government

rents and rates) of the New Hotel and future economic conditions (e.g. inflation rate) in the

markets in the ten-year horizon. The assumed income and expenses are determined with

reference to hotel premises in the proximity of the New Hotel as well as the Independent Property

Valuer’s knowledge of the market expectation for the New Hotel, and such figures are

mathematically extended over the ten-year period. Since the New Hotel is still in its soft-opening

phase (which commenced on 23 May 2017) operating under the “iclub by Regal” brand, the

Independent Property Valuer has projected the cash flows of the New Hotel by making reference

to the size and location of the New Hotel as well as their own analysis of relevant general and

economic conditions and business prospects of the New Hotel. The net cash flow over the


— IFA-15 —

ten-year period is discounted at a rate of 6.5% to derive the present value, and such discounted

rate reflects the time value of money in the discounted cash flow analysis and a risk premium

for the forecast cash flow to be materialised having regard to the risk-free rate based on the

prevailing yield of ten-year Hong Kong Exchange Fund Notes (approximately 1.4%), the

expected inflation (approximately 3% per annum) and the projected income over the forecast

period. The New Hotel is hypothetically assumed to be sold at the commencement of the eleventh

year of the cash flows, and the net income in the eleventh year is capitalised at a terminal

capitalisation rate of 3.5% to derive the capital value at the end of the tenth year. Such

capitalisation rate is determined after taking into account mainly the yields achieved in analysed

market sales of hotel premises and the Independent Property Valuer’s knowledge of the market

expectations for the New Hotel. The capitalised future value is also discounted at the same

discount rate of 6.5%.

We have reviewed and discussed with the Independent Property Valuer the aforesaid projections

of cash flows for the New Hotel together with the list of hotel premises referred to when making

the relevant assumptions. In addition, we have also examined the historical performance of the

iclub Hotels as well as the Hong Kong hotel industry statistics published by the Hong Kong

Tourism Board (the “HKTB”) such as occupancy rates, average room rates and expense ratios.

We note that the assumptions made in the cash flow projections of the New Hotel, in particular

the occupancy rates and the average room rates, have reflected the revenue generating ability of

the New Hotel and are reasonable as compared to the iclub Hotels, the referred hotel premises

and the industry statistics, taking into account the characteristics of the New Hotel including

location, operating scale, hotel facilities and target customers. The operating standards and

facilities of the New Hotel will be similar to the iclub Hotels, while the target customers will also

be comparable among the New Hotel and the iclub Hotels, who are looking for the right price

with good value for money lodging. Based on the above, we are of the view that the assumptions

made in the cash flow projections of the New Hotel by the Independent Property Valuer are

reasonable and in line with the figures of the iclub Hotels and the overall industry.

As a supporting approach, the Market Approach is used by the Independent Property Valuer to

counter-check the Appraised Value. In this regard, comparable sale and purchase transactions of

hotels in Hong Kong around the date of valuation were collected and analysed. The collected

comparables were then adjusted to take into account the discrepancies between the New Hotel

and the collected comparables with regards to the location, age, size and building quality. We

have considered and discussed the collected comparables about their characteristics such as

location, room size, facilities, other operating standards, positioning and target customers with

the Independent Property Valuer, and are of the view that the Market Approach was also

performed on a fair and reasonable basis.


— IFA-16 —

3.3 Independent Property Valuer’s competence

We have reviewed the qualifications and working experience of Mr. David Faulkner and Ms.Stella Ho from Colliers International (Hong Kong) Limited, who are responsible for thevaluation on the New Hotel and signing the Independent Property Valuer’s Valuation Report. Mr.David Faulkner is the Managing Director of Valuation and Advisory Services — Asia while Ms.Stella Ho is the Director of Valuation and Advisory Services. We noted that:

(i) Mr. David Faulkner has over 37 years’ experience in the valuation of properties of similarmagnitude and nature and over 30 years’ experience in Hong Kong and China. Mr. DavidFaulkner is a Fellow of the Royal Institution of Chartered Surveyors, a Fellow of the HongKong Institute of Surveyors and a Registered Professional Surveyor under the SurveyorsRegistration Ordinance (Cap. 417) in Hong Kong.

(ii) Ms. Stella Ho has worked extensively in the real estate sector for 17 years and has beeninvolved in a number of various valuation projects, covering sectors including hospitality.Her work experience spans the Asia Pacific Region, in particular in Hong Kong and thePRC. Ms. Stella Ho is a Member of the Royal Institution of Chartered Surveyors, a Memberof the Hong Kong Institute of Surveyors and a Registered Professional Surveyor under theSurveyors Registration Ordinance (Cap. 417) in Hong Kong.

Taking into account the above, we are satisfied that the Independent Property Valuer hassufficient experience and competency to perform the valuation of the New Hotel.

3.4 Section summary

In consideration of the above, we are satisfied that (i) the Independent Property Valuer hassufficient experience and competency to perform the valuation of the New Hotel; (ii) theIndependent Property Valuer’s scope of work is appropriate for performing the valuation on theNew Hotel; and (iii) the valuation assumptions and methodologies adopted by the IndependentProperty Valuer are fair, reasonable and complete in relation to the Independent PropertyValuer’s Valuation Report. Based on the above, we are of the view that the valuation of the NewHotel by the Independent Property Valuer is fair and reasonable.

4. Deed of Tax Indemnity

At completion of the Transaction, P&R and the Guarantors will enter into the Deed of TaxIndemnity in favour of (in respect of the Share Purchase Agreement) the Trustee and the TargetGroup. Pursuant to the Deed of Tax Indemnity, P&R and the Guarantors (on a several basis inequal proportions between the Guarantors) will covenant, undertake and agree with therespective beneficiaries that they will indemnify, on demand, the respective beneficiaries inrespect of, among other things, any liability for taxation resulting from or by reference to anyevent occurring on or before completion of the Transaction or (as the case may be) completionof the Transaction or in respect of any income, profits or gains earned, accrued or received byany of the Target Group on or before completion of the Transaction. A claim can be made on orprior to the seventh anniversary of the Deed of Tax Indemnity, save for contain stampduty-related claims for which there is no limitation period.

In addition, we have also identified certain transactions in relation to the acquisitions of hotelsvia acquiring the share capital of the holding companies, and we note that such transactions alsoinvolve the entering into similar deeds of tax indemnity.


— IFA-17 —

In light of the above, we are of the view that such arrangement is in line with market practice

and is beneficial to Regal REIT.

5. Additional Hotel CCTs

Upon completion of the Transaction, members of the Regal REIT Group will enter into

transactions with members of the Regal Connected Persons Group in relation to the New Lease


the New Hotel. Pursuant to paragraph 8.5 of the REIT Code, each of the transactions

contemplated under these agreements and documentation constitutes a continuing connected

party transaction, all together being the Additional Hotel CCTs.

Accordingly, the Manager has applied to the SFC for the New CCT Waiver Application. The

Manager will seek approval of the Independent Unitholders at the EGM on the consummation by

Regal REIT of the transactions contemplated under, associated with and/or related to the

Additional Hotel CCTs (being the New Lease Agreement, New Lease Guarantee and New Hotel

Management Agreement pertaining to the New CCT Waiver Application).

5.1 New Lease Agreement

Upon completion of the Transaction, the Lessor will grant to the Lessee a lease of the New Hotel

pursuant to the New Lease Agreement, the key terms of which are set out below.

Term The term of the New Lease Agreement will commence from

the date of the New Lease Agreement (which will be on the

same date of completion of the Transaction) and end on the

date immediately preceding the fifth anniversary date of the

New Lease Agreement. Such term may be extended at the

Lessor’s sole discretion for a further term commencing from

the date immediately following the date of expiration of the

initial lease term in 2022 and ending on the 31 December

2027.

Rent In respect of each Lease Year during the initial lease term, the

rent payable to the Lessor shall be 4.0%, 4.25%, 4.5%, 4.75%

and 5.0% per annum respectively of the Hotel Purchase Price.

In respect of each Lease Year of any extensions of the New

Lease Agreement, the rent payable to the Lessor shall be

determined based on an annual market rental review for that

Lease Year performed by an independent property valuer

jointly appointed by the Lessee and the Lessor.

Early termination The Lessor shall have the right, among other things, to

terminate the New Lease Agreement at any time during the

term of the New Lease Agreement by giving six months’ prior

written notice to the Lessee but without compensation interest

or costs paid by the Lessor to the Lessee.


— IFA-18 —

As indicated above, the New Lease Agreement has a five-year initial term with a discretionary

extension of another five years, which is longer than three years. Considering the New Hotel was

newly established in 2017, it may take time for the New Hotel to build up its presence in the

market and fully utilise its potential. As such, the duration of the New Lease Agreement provides

a reasonable period for the New Hotel to gradually develop its performance under a stable

tenancy arrangement, and diminish the administrative or marketing burdens for Regal REIT to

re-negotiate or, find another suitable lessee every three years. Besides, we have also identified

certain transactions entered into by companies listed on the Stock Exchange in relation to leasing

properties or entering into tenancy agreements. The durations of these lease/tenancy agreements

range from 3 years to 10 years, and the term of the New Lease Agreement falls within such range.

Further as discussed under this paragraph below, the five-year initial term with a discretionary

extension of another five years under the New Lease Agreement is also in line with the

arrangements for iclub Sheung Wan Hotel and iclub Fortress Hill Hotel that are under lease. In

light of the above, we consider the longer term of the New Lease Agreement is fair and

reasonable and is a normal business practice.

To assess the fairness and reasonableness of other terms and conditions of the New Lease

Agreement, we have attempted to identify similar transactions comparable to the New Lease

Agreement from the publicly available information; however, save for Regal REIT having

similar lease arrangement for its existing hotel properties, we could not find other publicly

announced transactions in relation to the leasing of hotel(s) in Hong Kong during recent years.

Given that the information below is limited to Regal REIT and the lessors are wholly-owned

subsidiaries of Regal Hotel, a listed company and connected person of Regal REIT under the

REIT Code, such lease arrangements would have to comply with the stringent corporate

governance and relevant requirements of the Listing Rules and the REIT Code governing Regal

Hotels and Regal REIT, respectively. On this basis, we are of the view that the information set

out below is an adequate benchmark for us to assess the fairness and reasonableness of the terms

of the New Lease Agreement.

Set out below are the key operating parameters of the existing hotel portfolio of Regal REIT.

HotelOperationsmode

Initiallease term

Discretionaryextension of

lease term

Estimated yieldas at 31

December 2016

(years)

(Note 1)

(years)

(Note1) (Note 2)

Regal Airport Hotel Under lease 9 5 7.3% (Note 3)

Regal Hongkong Hotel Under lease 9 5 3.3%

Regal Kowloon Hotel Under lease 9 5 3.0% (Note 3)

Regal Oriental Hotel Under lease 9 5 3.9%

Regal Riverside Hotel Under lease 9 5 3.5% (Note 3)

iclub Wan Chai Hotel Self-operated — — 2.8% (Note 3)

iclub Sheung Wan Hotel Under lease 5 5 6.0%

iclub Fortress Hill Hotel Under lease 5 5 5.9%


— IFA-19 —

Notes:

1. As advised by the Manager, the exact terms may have a few months difference as compared to the numbers

displayed in the table, as the expiry dates of the terms are generally set on the 31 December of the relevant year

while the effective dates of the terms may vary within the relevant year depending on the date of entering into the

relevant lease agreements. However, the terms were still determined on a yearly basis and the New Lease

Agreement also adopts the same arrangement. Therefore, the numbers of years are displayed instead of the exact

terms for easy reference.

2. The estimated yield as at 31 December 2016 is derived from the rent/base rent/net income receivable for the hotel

for the year ended 31 December 2016 divided by its corresponding market value as at 31 December 2016.

3. The estimated yield of the corresponding hotel includes non-hotel operating income, i.e. retail or office rentals.

According to the table above, both the iclub Sheung Wan Hotel and the iclub Fortress Hill Hotel

are under leases with a five-year initial term and a discretionary extension for another five years.

Therefore, the term of the New Lease Agreement as stated above, being a five-year initial term

plus a discretionary extension for another five years, is the same as the arrangements for iclub

Sheung Wan Hotel and iclub Fortress Hill Hotel, both of which are under the same brand and

have similar operating standards, facilities and target customers as the New Hotel as mentioned

under the paragraph headed “3.2 Valuation basis and assumptions” above in this letter. Further,

it is noted that the discretionary extension of the lease term for another five years under the New

Lease Agreement is also in line with the arrangements for the existing hotels of Regal REIT that

are under lease. In addition, the Lessor will have the discretion to terminate the New Lease

Agreement by giving six months’ prior written notice to the Lessee. In light of the above, we

consider the five-year initial term with options at the Lessor’s discretion for extension or

termination is in line with Regal REIT’s existing hotel portfolio, and it provides flexibility and

is beneficial to the Lessor and, therefore, Regal REIT.

Further, the New Lease Agreement also stipulates fixed rent rates for the five years during the

initial term, being 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum respectively of the Hotel

Purchase Price, which have been arrived at on a willing buyer/seller in an arm’s length

transaction basis. It is noted that the fixed rental duration under the New Lease Agreement are

two years longer as compared to those arranged for the iclub Sheung Wan Hotel and iclub

Fortress Hill Hotel. Having regard to the Market Consultant’s Report, we note that (i) the hotel

industry in Hong Kong at the beginning of 2017 has just begun to show signs of steady recovery

after suffering from the reduced tourists visitation in 2016, whilst in 2013 when Regal REIT

acquired iclub Sheung Wan Hotel and iclub Fortress Hill Hotel, the tourist visitation to Hong

Kong was on a record high and continued to grow, which gave the Manager’s confidence to the

performance of the aforesaid hotels; and (ii) the construction and road works for the

Shatin-Central Link and redevelopment projects in the Ma Tau Wai area are undergoing at the

moment, which the Manager believes and we concur that, may affect the successful performance

of the New Hotel. As such, the longer fixed rental duration under the New Lease Agreement is

expected to mitigate the New Hotel’s exposure to the start-up risk associated with its operating

environment as well as the market condition, and ensure Regal REIT can receive a base level of

income generated from the New Hotel during the initial term of the New Lease Agreement.

Therefore, the Manager is of the view, and we concur that, the five-year duration of fixed rent

is fair and reasonable.


— IFA-20 —

In addition, as mentioned in the notes to the table above, the estimated yields of the existing

hotels of Regal REIT are derived from the rent/base rent/net income receivable of the hotels

divided by the hotel market values. Since the rental income under the New Lease Agreement is

expected to be the only source of income generated by the New Hotel to Regal REIT after the

Transaction, the rental rates under the New Lease Agreement are compared to the estimated

yields of the existing hotels of Regal REIT in order to assess the fairness and reasonableness of

the rental arrangements under the New Lease Agreement. According to the table above, the

estimated yields of the Initial Hotel Properties and the iclub Hotels under lease range from

approximately 3.0% to 7.3% in 2016. While under the New Lease Agreement, the rent payable

to the Lessor for the first five years are fixed at 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum

of the Hotel Purchase Price respectively, which fall within the aforesaid range of estimated yields

of the Initial Hotel Properties and the iclub Hotels under lease. Given that (i) the Initial Hotel

Properties and the iclub Hotels under lease of Regal REIT all have operating histories and are

located in more popular areas than the New Hotel; and (ii) the estimated yields of some of the

Initial Hotel Properties and the iclub Hotels under lease have taken into account non-hotel

operation incomes such as retail rentals, the fixed rents of the New Hotel for the first five years

under the New Lease Agreement are fair and reasonable as compared to the historical financial

returns of the existing hotel portfolio of Regal REIT. Further, as advised by the Independent

Property Valuer who have identified, with their internal sources, certain income generating

properties including hotels and office premises, the yields of such properties during recent years

are lower as compared to the fixed rent rates for the first five years of the New Lease Agreement.

In view of the current economic situation in Hong Kong, the Independent Property Valuer

expects and we concur that the expected yield of such properties in Hong Kong will remain

stable, and as such the fixed rent rates for the first five years of the New Lease Agreement are

considered above market level.

On the other hand, in respect of the extended period of another five-year term of the New Lease

Agreement, the rent payable to the Lessor will be determined based on an annual market rental

review for each Lease Year of the extended period performed by an independent property valuer

jointly appointed by the Lessee and the Lessor. Such arrangement has been arrived at on a willing

buyer/seller in an arm’s length transaction basis. As the rents for the extended period will be

determined based on the market level, we are of the view that such arrangement is fair and

reasonable.

As stated under the paragraph headed “9.7 Opinion of the Independent Property Valuer” in the

“Letter to the Unitholders” of the Circular, the Independent Property Valuer has confirmed that,

in its opinion, among other things, the New Lease Agreement is on normal commercial terms and

consistent with normal business practices for contracts of the relevant type and at a prevailing

market level, except for the rents receivable for the first five Lease Years which are above market

level. Having discussed with the Independent Property Valuer and in conjunction with our

analysis above, we concur with the view of the Independent Property Valuer and consider that

the transaction contemplated under the New Lease Agreement is in the ordinary and usual course

of business, on terms determined at arm’s length basis, fair and reasonable and in the interests

of Regal REIT and the Independent Unitholders.


— IFA-21 —

5.2 New Lease Guarantee

Regal Hotels will, at the same time as entering into the New Lease Agreement, enter into the New

Lease Guarantee pursuant to which Regal Hotels will guarantee: (a) the Lessee’s obligations to

pay all amounts owing or payable to the Lessor under the New Lease Agreement; and (b) the due

observance and performance of the New Lease Agreement on the part of the Lessee.

Based on the fixed rent levels of 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum respectively

of the Hotel Purchase Price at HK$1,360 million for the first five years under the New Lease

Agreement, the guaranteed rent payable to the Lessor in respect of the New Hotel will amount

to approximately HK$54 million, HK$58 million, HK$61 million, HK$65 million and HK$68

million, respectively.

As set out under the paragraph headed “2.2 Payment terms” above in this letter, Regal Hotels had

consolidated NAV of approximately HK$11,828.4 million (excluding non-controlling interests)

as at 31 December 2016 and recorded consolidated revenue for the year ended 31 December 2016

of approximately HK$2,617.1 million. The consolidated net profit and consolidated net cash flow

from the operating activities of Regal Hotels for the year ended 31 December 2016 were

approximately HK$240.8 million and approximately HK$2,200.6 million, respectively, which

were above the annual guaranteed amounts under the New Lease Guarantee indicated in the last

paragraph. Therefore, we are of the view that Regal Hotels will be capable of meeting its

obligations under the New Lease Guarantee if required.

Besides, we noted that similar guarantees were also given by Regal Hotels for its obligations of

the relevant lessees of the Initial Hotel Properties, the iclub Sheung Wan Hotel and the iclub

Fortress Hill Hotel. As such, we consider the New Lease Guarantee is in line with the

arrangements for Regal REIT’s existing hotel portfolio.

As stated in the “Letter to the Unitholders” of the Circular, the Independent Property Valuer has

also confirmed that, in its opinion, among other things, the New Lease Guarantee is on normal

commercial terms and consistent with normal business practices for contracts of the relevant type

and at the prevailing market levels. Having discussed with the Independent Property Valuer and

in conjunction with our analysis above, we concur with the view of the Independent Property

Valuer and also consider that the transaction contemplated under the New Lease Guarantee is in

the ordinary and usual course of business, on terms determined at arm’s length basis, fair and

reasonable and in the interests of Regal REIT and the Independent Unitholders.

5.3 New Hotel Management Agreement

Concurrently with the signing of the New Lease Agreement, the Lessor, the Lessee, Regal Hotels

and the Hotel Manager will also enter into the New Hotel Management Agreement in respect of

the New Hotel. The Hotel Manager will be engaged to act as the exclusive operator and manager

of the New Hotel to supervise, direct and control the management, operation and promotion of

the business of the New Hotel during the operating term of the New Hotel Management

Agreement.


— IFA-22 —

The Lessor is a party to the New Hotel Management Agreement since the term of New Hotel

Management Agreement may exceed the New Lease Agreement if the New Lease Agreement is

terminated early or not renewed after the initial term.

Set out below are the key terms of the New Hotel Management Agreement:

Term The term of the appointment of the Hotel Manager is ten years

from the date of signing of New Hotel Management

Agreement.

Operation The Hotel Manager must operate the New Hotel solely under

the “iclub by Regal” hotel brand name and operate, manage

and promote the business of the New Hotel. All hotel

employees for the New Hotel must be employees of the Hotel

Manager.

Hotel management fees The Hotel Manager is entitled to payment by the Owner (i.e.

the Lessee or, as the case may be, the Property Company as

explained in this same paragraph below) of the hotel

management fees comprising the following:

a. a hotel management base fee which is equal to: (i) for so

long as the New Lease Agreement is in subsistence, an

amount equal to 1% of Gross Revenues; or (ii) in any

other cases during the term of the New Hotel

Management Agreement, an amount equal to 2% of

Gross Revenues; and

b. a hotel management incentive fee which is equal to: (i)

for so long as the New Lease Agreement is in

subsistence, an amount equal to 1% of the excess of the

Adjusted GOP over the hotel management base fee and

the Fixed Charges; or (ii) in any other cases during the

term of the New Hotel Management Agreement, an

amount equal to 5% of the excess of the Adjusted GOP

over the hotel management base fee and the Fixed

Charges.

As disclosed in the 2016 Annual Report, the term of the hotel management agreement for each

of the iclub Hotels is ten years. As such, the ten-year term of the New Hotel Management

Agreement is comparable to the historical practice for the iclub Hotels which are under the same

brand and have similar operating standards, facilities and target customers as the New Hotel as

mentioned under the paragraph headed “3.2 Valuation basis and assumptions” above in this letter.

Further, the ten-year term of the New Hotel Management Agreement is also co-terminus with the

New Lease Agreement if the New Lease Agreement is extended for a further five years after the

initial term. Similar to the discussion under the paragraph headed “5.1 New Lease Agreement”

above in this letter, the ten-year duration of the Hotel Management Agreement, which is longer

than three years, provides a reasonable period for the New Hotel to gradually develop its


— IFA-23 —

performance under a stable management, and diminish the administrative or marketing burdensfor Regal REIT to re-negotiate, or find another suitable hotel manager every three years. Asfurther discussed under this paragraph below, the duration of the New Hotel ManagementAgreement falls within the range of the terms of certain transactions we identified that involvethe entering into hotel management agreements. Therefore, we consider the longer term of theNew Hotel Management Agreement is fair and reasonable and is a normal business practice.

As described above, the arrangement of the hotel management fees under the New HotelManagement Agreement has adopted a “step up” mechanism. When the New Lease Agreement isin subsistence, the level of hotel management fees is irrelevant from Regal REIT’s point of viewsince such hotel management fees will be borne by the Lessee. During the term of the New LeaseAgreement, the Lessor will only be entitled to the rent under the relevant New Lease Agreement.The “stepped-up” level of hotel management fees will be triggered when the New LeaseAgreement is no longer in subsistence, which may occur when, for example, the New LeaseAgreement is terminated early or is not renewed after the initial term. The Lessor will thenbecome the Owner (as defined in the Circular) of the New Hotel and the Lessor will directly bearthe payment of the hotel management fees to the Hotel Manager. Save for the iclub Wan ChaiHotel which has directly adopted the same rate of hotel management fees as the “stepped-up”level for the New Hotel, the structure and rate of the hotel management fees (including the “stepup” mechanism) under the New Hotel Management Agreement are the same to those for theexisting hotels of Regal REIT as disclosed in the 2016 Annual Report. Hence, the hotelmanagement fees under the New Hotel Management Agreement are comparable to Regal REIT’sexisting hotel portfolio. Further, the percentages for the hotel management base and incentivefees payable in respect of the New Hotel have been arrived at on a willing buyer/seller in anarm’s length transaction basis and have been commercially agreed between parties to be the sameas the corresponding fee scales payable under the hotel management agreements for iclub SheungWan Hotel and iclub Fortress Hill Hotel.

In addition, we have also identified and examined certain transactions over the past two yearsinvolving the entering into of hotel management agreements by hotel operators or hotel realestate investment trusts. In consideration of the similar nature of the underlying assets, i.e. hotelproperty, we are of the view that these transactions are appropriate references for the New HotelManagement Agreement. Set out below are the key terms of the similar hotel managementagreements of the transactions:

Transactions Term(years)

Hotel management fee

Transaction A 3 For two hotels: 2% on the total operating income plus 6% of thegross operating profit;

For one hotel: 2% on the total operating income plus 2% of thegross operating profit subject to the fulfilment of performancetarget.

Transaction B 10 For one hotel:- base fee: 2% of the total operating revenue- incentive fee: 5% of the gross operating profit


— IFA-24 —

Transactions Term(years)

Hotel management fee

For the other hotel:- base fee: 2.5% of the total operating revenue- incentive fee: 5% of the gross operating profit

Transaction C 30 Base fee: 1.5% of the total revenue of the hotel

Incentive fee: 5% of the gross operating profit and licence feespayable under a trademark licence agreement

As indicated in the table above, the durations of the hotel management agreements vary from 3to 30 years and, therefore, it is difficult to compare the term of the New Hotel ManagementAgreement with the transactions. However, the ten-year term of the New Hotel ManagementAgreement falls within the range of terms of such transactions.

In respect of the hotel management fees, most of the transactions adopted a structure comprisinga base fee and an incentive fee. The hotel management fee rates under the New HotelManagement Agreement for so long as the New Lease Agreement is in subsistence (base fee rate:1% of Gross Revenues and incentive fee rate: 1% of the excess of the Adjusted GOP over thehotel management base fee and the Fixed Charges) are lower and more favourable to Regal REITas compared to those of the transactions, while the stepped-up level of the hotel management feerates under the New Hotel Management Agreement (base fee rate: 2% of Gross Revenues andincentive fee rate: 5% of the excess of the Adjusted GOP over the hotel management base fee andthe Fixed Charges) is comparable to the hotel management fee rates of such transactions.Therefore, we consider the hotel management fees under the New Hotel Management Agreementare fair and reasonable to Regal REIT, and such fees are better than (when the New LeaseAgreement is in subsistence) or in line with (at the stepped-up level) the market practice.

It should also be noted that, despite the subsistence of the New Lease Agreement or not, the NewHotel Management Agreement is expected to enable the New Hotel to maintain operation underthe management by the Hotel Manager during the term of such agreement, and as discussed underthe paragraph above, the stepped-up level hotel management fees (under the circumstance thatthe New Lease Agreement is not in subsistence) is still in line with the market practice.Therefore, the New Hotel Management Agreement does not rely on the subsistence of the NewLease Agreement, and is itself beneficial to Regal REIT even without a simultaneous exit optionas the New Lease Agreement which can at the Lessor’s sole discretion be terminated after theinitial term.

Similar to the New Lease Agreement and the New Lease Guarantee, the Independent PropertyValuer has also confirmed that, in its opinion, among other things, the New Hotel ManagementAgreement is on normal commercial terms and consistent with normal business practices forcontracts of the relevant type and at the prevailing market levels, except for the hotelmanagement fees, for so long as the New Lease Agreement is in subsistence, which are belowthe market level. Having discussed with the Independent Property Valuer and in conjunction withour analysis above, we concur with the view of the Independent Property Valuer and are of theview that the transaction contemplated under the New Hotel Management Agreement is in theordinary and usual course of business, on terms determined at arm’s length basis, fair andreasonable and in the interests of Regal REIT and the Independent Unitholders.


— IFA-25 —

5.4 Section summary

Taking into account of the analysis above, we are of the view that each of the Additional Hotel

CCTs to be entered into upon and after completion of the Transaction is in the ordinary and usual

course of business of Regal REIT, on terms which are normal commercial terms and determined

at arm’s length and fair and reasonable, and in the interests of the Independent Unitholders, as

well as the Unitholders as a whole.

In addition, the Additional Hotel CCTs are essential and an integral part of the Transaction.

Therefore, we consider it reasonable to seek the New CCT Waiver Application, subject to the

conditions as set out in the “Letter to the Unitholders” of the Circular. In light of our analysis

on the above, we are also of the view that the New CCT Waiver Application and its basis are fair

and reasonable and in the interests of the Independent Unitholders, as well as the Unitholders as

a whole.

6. Market conditions

6.1 Hong Kong tourism industry outlook

Hong Kong’s tourism industry has seen a recovery since 2015. This is evidenced by the first rise

of retail sales in Hong Kong as the number of tourists from Mainland China rebounded. In March

2017, the retail sales by value recorded a year-on-year increase of 3.1% and by volume climbed

up 2.7% year-on-year, and the number of Mainland Chinese arrivals to Hong Kong rose 10.4%

in March 2017 as compared to the same period of the previous year, marking the highest

increment since February 2015 as indicated by the data from HKTB. For the same period of time,

the number of visitors from Non-Mainland China has also marked a growth of 4.9% in March

2017 as compared to the same period of the previous year. In total, Hong Kong recorded a

rebound of visitor number by 8.8% in total in March 2017 compared to March 2016.

Total visitor arrivals by Country/territory of residence

March 2017 March 2016 Growth Percentage

Mainland China 3,330,769 3,017,173 10.4%

Non-Mainland China 1,255,417 1,196,628 4.9%

Total 4,586,186 4,213,801 8.8%

Source: HKTB

Short haul visitor numbers have also shown recovery and recorded a 5.3% year-on-year growth

for the period from January to March 2017, mainly contributed by the growing numbers of

Japanese and South Korean visitors, which grew substantially by 20.9% and 12.4% over the

periods respectively.


— IFA-26 —

According to the Travel and Tourism Competitiveness Report 2017, Hong Kong is ranked 11th

overall worldwide and 9th in prioritisation of travel and tourism. The report notes that Hong

Kong has world-class infrastructures and top ranked information communication technology

readiness, such that the city is able to attract tourists by balancing offers on the basis of natural

and cultural resources.

Following the completion of the South Island Line in 2016, the Shatin-Central Link is underway

to connect Tai Wai Station to Admiralty Station, covering the New Territories, Kowloon, and

Hong Kong Island, which is expected to significantly shorten the travel time between Shatin and

Central. Such upgrade on the public transport of Hong Kong will serve the interests of locals as

well as inbound visitors.

With reference to the One Country Two Systems Research Institute, a non-government public

policy think tank in Hong Kong, it is of the view that transportation between Hong Kong and

Pearl River Delta region is getting more convenient, given the upcoming expected completion of

the Hong Kong-Zhuhai-Macao Bridge in 2018, and the Guangzhou-Shenzhen-Hong Kong

Express Rail Link in 2018. These upgrades in the transportation infrastructure are expected to

greatly shorten the travel time between Hong Kong and Mainland China, and enable more

visitors in Mainland China from the Pearl River Delta to gain access into Hong Kong.

In the interest of international visitors, the third runway project for the Hong Kong International

Airport is expected to be able to accommodate the airport’s forecast demand up to 2030 and

beyond, which could expand the capacity to 620,000 air traffic movements per year and benefit

Hong Kong’s development as a whole. In addition, a number of major tourist attractions are

being renovated to enhance the city’s capacity in attracting new visitors. For example, both

Disneyland and Ocean Park are under expansion construction. Enhancement work is also being

carried out to revitalise the Avenue of Stars in Tsim Sha Tsui, which is expected to be completed

in 2018.

As stated in the Market Consultant’s Report as set out in Appendix IV to the Circular, the tourism

market in Hong Kong is on a positive trend with a rebounding number of overnight visitors,

diversification in the composition of visitors from Japan and South Korea, coupled with the

continuous advancement in transportation infrastructure, attraction facilities and hotel

accommodations. Also, Hong Kong is set to remain as a key regional and global tourism

destination, and the advancements should enhance the attractiveness of Hong Kong to visitors,

while the expansion in transportation facilities should accommodate the future increasing

number of travelers with greater efficiency.

6.2 Hong Kong hotel market outlook

From the beginning of 2017, the hospitality industry in Hong Kong has been exhibiting signs of

expansion. With reference to the ManpowerGroup Employment Outlook Survey for the second

quarter in 2017, the outlook for the net employment index of the service industry has improved

by 23% compared to that in the first quarter, which is mainly due to the rebounding figures in

inbound visitors and hotel occupancy rates in the beginning of 2017, along with the narrowing

in the drop of retail sales.


— IFA-27 —

With reference to the data provided by the HKTB, the Hong Kong hotel room occupancy rate

between January and March in 2017 rebounded to 88% compared to 83% for the same period in

2016.

With the excellent geographical location of Hong Kong, stable and efficient business

environment, and a strong institutional structure, all these supports the Hong Kong government’s

commitment in enhancing the appeal of Hong Kong as an ideal Meetings, Incentives,

Conventions and Exhibitions (“MICE”) destination in Asia. According to the data from the

Market Consultant’s Report, the Hong Kong Trade Development Council, the government-funded

trade facilitator and event organiser, organised over 30 major trade fairs in Hong Kong in 2016,

which together attracted 37,000 exhibitors and 760,000 buyers, recording 2.0% and 1.0%

year-on-year increases, respectively. However, the budgets for business travel have tightened

since global financial crisis in 2009, and the repeat vacation customers are demanding for

different accommodation experiences, and considering the above, the Market Consultant is of the

opinion that select-service hotels have a competitive advantage by offering the in-room

amenities of full-service hotels while keeping prices low in the absence of a full-spectrum

product offering.

Overall, taking into account the factors including signs of recovery in the occupancy rate

increasing demand from MICE travelers, and increasing occupation spending from the Mainland

Chinese visitors, we consider the outlook of the hotel market in Hong Kong is generally positive.

Further information on the hotel industry, including the Hong Kong tourism industry and hotel

market and their outlooks are set out in the Market Consultant’s Report in Appendix IV to the

Circular.

7. Reasons for and Benefits of the Transaction and the Additional Hotel CCTs

7.1 The Transaction is in line with the long-term objectives, vision and growth strategies of RegalREIT

As disclosed in the 2016 Annual Report, the primary objectives of Regal REIT and the Manager

are to provide long-term stable, growing distributions and capital growth for the Unitholders via

different strategic approaches including active ownership of hotels. Further, one of the visions

of Regal REIT and the Manager is to build up the existing portfolio of hotel properties in Hong

Kong and to be a pre-eminent owner of quality international hotels. As detailed in the growth

strategy of Regal REIT in the 2016 Annual Report, one core strategy the Manager intends to

achieve the aforementioned objectives and vision is external growth through selective

acquisitions of additional hotels that meet the Manager’s investment criteria, including

enhancing returns to Unitholders, majority ownership of the asset acquired, and income and cash

flow generating properties etc.

As stated above in this letter, Regal REIT will wholly own the New Hotel upon completion of

the Transaction as Regal REIT will acquire 100% of the issued share capital of the Target

Company, while the New Hotel is expected to keep generating fixed rental income for Regal

REIT for the first five years under the New Lease Agreement. In addition, as discussed under the


— IFA-28 —

paragraph headed “8.1 Earnings and distributable income” below in this letter, the New Hotel is

also expected to contribute more profit for Regal REIT and, therefore, the Unitholders, in the

long run with its rental income and potential capital gain in the future. Considering the above

factors, the New Hotel is generally in line with the investment criteria of the Manager and,

hence, is a suitable acquisition target for Regal REIT. As such, the Manager considers and we

concur that the Transaction aligns with the growth strategies of Regal REIT.

Further, according to the paragraph headed “1.3 Information on the New Hotel” above in this

letter, the New Hotel should enhance the presence of Regal REIT’s hotel portfolio into the heart

of Kowloon as well as its overall market share in the long term. The To Kwa Wan region, where

the New Hotel is located, is currently a redevelopment zone designated by the Urban Renewal

Authority, as the authority aims to improve local traffic circulation, open up roads and provide

more commercial or retail space. Such redevelopment is expected to improve the condition of the

region and will enhance the attractiveness of the New Hotel upon completion of the

redevelopment projects. Taking into account the above, the Manager considers and we concur

that the Transaction in relation to the New Hotel is in line with the long term objectives, vision

and growth strategies of Regal REIT.

7.2 The Transaction will increase the scale of Regal REIT

Considering the Appraised Value is HK$1,400 million, such investment in relation to the New

Hotel would increase the appraised value of Regal REIT’s portfolio by approximately 6.3% (from

HK$22,222 million as at 31 December 2016 to HK$23,622 million). Also, based on the

Specifications Summary for the New Hotel provided under the Share Purchase Agreement, Regal

REIT’s number of guestrooms would increase by 7.4% (from 4,569 guestrooms and suites as at

31 December 2016 to 4,909 guestrooms and suites) and the gross floor area of Regal REIT’s

property portfolio would increase by 2.7% (from approximately 230,465 sqm as at 31 December

2016 to approximately 236,763 sqm). Such increase in scale may broaden and enlarge Regal

REIT’s income base, as well as further improve Regal REIT’s economies of scale. The addition

of the New Hotel to Regal REIT’s existing portfolio of eight properties may also enhance Regal

REIT’s market positioning and profile, and consequently, further improve Regal REIT’s

attractiveness among a wider group of investors.

7.3 The Transaction will enhance the “iclub by Regal” brand under Regal REIT

The New Hotel will be operated under the “iclub by Regal” brand. Detailed information in

respect of the “iclub by Regal” brand is set out under the paragraph headed “2.2 Information on

the New Hotel” in the “Letter to the Unitholders” of the Circular. It is the Manager’s view that

operating the New Hotel under the “iclub by Regal” brand will provide financial benefits for

Regal REIT through economies of scale and enhance the brand recognition of “iclub by Regal”.

For example, the New Hotel can share the same management team as the iclub Hotels and thereby

reduce overheads and improve the operating margins.

7.4 The New Lease Agreement and New Hotel Management Agreement will enable Regal REIT tomitigate the start-up risks associated with the operation of the New Hotel and guarantee stableincomes

As discussed in the section headed “5. Additional Hotel CCTs” above in this letter, the New

Lease Agreement and the New Hotel Management Agreement will enable Regal REIT to mitigate


— IFA-29 —

its exposure to start-up risks associated with the operation of the New Hotel considering it is still

on its soft-opening phase (which commenced on 23 May 2017). Further, the New Lease

Agreement ensures that Regal REIT receives stable incomes during the initial term of the New

Lease Agreement, being 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum, respectively, of the

Hotel Purchase Price for the initial five years of the New Lease Agreement, and such annual rents

are expected to contribute additional distributable income to the Unitholders during the said

period. The Manager is of the view that such arrangement with the aforementioned levels of

stable income is considered attractive in the market.

8. Financial effects of the Transaction on Regal REIT

Upon completion of the Transaction, the Target Company will be wholly-owned by Regal REIT

and it will be consolidated into the financial statements of Regal REIT. As such, the financial

result of the Target Company will be consolidated into the income statement of Regal REIT.

Regal REIT’s earnings, therefore, will be enhanced by the rents receivable under the New Lease

Agreement, after deducting the relevant expenses.

Independent Unitholders should note that the following discussion of the financial effects of the

Transaction for Regal REIT and the Independent Unitholders is based on the illustrative scenario

provided in respect of the pro forma financial information of the Enlarged Group as set out in

Appendix III to the Circular, which is mainly based on the following assumptions:

• completion of the Transaction had taken place on 31 December 2016 for the unaudited pro

forma consolidated statement of financial position of the Enlarged Group;

• completion of the Transaction had taken place on 1 January 2016 for the unaudited pro

forma consolidated statement of profit or loss of the Enlarged Group;

• the entering into of the New Lease Agreement and the New Hotel Management Agreement

upon the completion of the Transaction on the completion date; and

• the Hotel Purchase Price was funded entirely by existing and/or new bank facilities secured

against the New Hotel and/or other assets held by Regal REIT.

8.1 Earnings and distributable income

As set out in the unaudited pro forma financial information of the Enlarged Group in Appendix

III to the Circular, the pro forma profit for the year before distribution to unitholders of the

Enlarged Group amounts to approximately HK$475 million, while the result of the Regal REIT

Group for the year ended 31 December 2016 was approximately HK$564 million. Unitholders’

attentions are drawn to the fact that the pro forma financial information of the Enlarged Group

is prepared for illustrative purposes only as if the Transaction had taken place as at 1 January

2016. The difference between the pro forma profit for the year before distribution to unitholders

of the Enlarged Group and the result of the Regal REIT Group for the year ended 31 December

2016 as shown above was mainly due to a non-recurring write-off of approximately HK$134

million due from a fellow subsidiary of the Target Company during the year ended 31 December


— IFA-30 —

2016 (as shown in the Accountants’ Report in respect of the Target Company as set out in

Appendix I of the Circular). However, upon completion of the Transaction, which is expected to

take place in 2017, no write-off is expected to be incurred. In addition, it should be noted that

the Target Group is expected to contribute to the profit performance of Regal REIT with the

rental income generated from the New Hotel after completion of the Transaction.

According to the paragraph headed “7.2 Pro Forma Distributable Income” in the “Letter to the

Unitholders” of the Circular, after applying the adjustments to distributable income provided for

in the Trust Deed, including the aforementioned write-off, the pro forma distributable income of

the Enlarged Group amounts to approximately HK$518 million, representing an increment of

approximately 1.3% in the distributable income of the Regal REIT Group for the year ended 31

December 2016 of approximately HK$511 million.

As mentioned under the paragraph headed “5.1 New Lease Agreement” above in this letter, the

rents receivable by Regal REIT for the first five years under the New Lease Agreement are fixed,

respectively, at 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum of the Hotel Purchase Price,

being HK$1,360 million. For illustrative purposes, the average annual rent receivable by Regal

REIT for the first five years under the New Lease Agreement of approximately HK$61 million

is adopted for the pro forma income statement, which is expected to be sufficient to cover the

estimated interest expense for the loans used to finance the Transaction as well as the fees

payable to the Manager and the Trustee in respect of the Transaction and the New Hotel.

It should also be noted that the acquisition fee of HK$13.6 million payable to the Manager and

the additional trustee fee of HK$50,000 payable to the Trustee are specifically related to the

Transaction in accordance with the terms of the Trust Deed and, therefore, are non-recurring

items. In addition, the New Hotel is also expected to have an increasing appraised value under

a stablised market and further redevelopments in the region, which will in turn be beneficial to

the Regal REIT Group.

8.2 Net assets

Following completion of the Transaction, the New Hotel, similar to the Initial Hotel Properties

and the iclub Hotels, will be accounted for as an investment property of Regal REIT. As set out

in the pro forma financial information of the Enlarged Group in Appendix III to the Circular, the

value of the New Hotel is recorded at its fair value, being the Appraised Value of HK$1,400

million, which reflects the Hotel Purchase Price of HK$1,360 million, the attributable costs of

HK$7 million expected to be incurred for the Transaction and a fair value adjustment of HK$33

million. As shown in Appendix III to the Circular, assuming there will be no significant change

in the fair value of the New Hotel on completion of the Transaction, and given that the

Transaction will be fully financed by bank facilities and/or Regal REIT’s internal resources (i.e.

no new Units will be issued), completion of the Transaction will give rise to a slight increase in

the NAV of Regal REIT from approximately HK$13,438 million to approximately HK$13,457

million, representing an increment of approximately 0.1%. It should be noted that any changes

in the fair value of the New Hotel in the future may directly affect the NAV of Regal REIT

attributable to the Unitholders.


— IFA-31 —

8.3 Gearing ratio and cash flow

As stated under the paragraph headed “2.3 Financing plan for the Transaction” above in this

letter, it is the intention of the Manager to finance the Hotel Purchase Price by the combination

of (i) a new bank facility secured against the New Hotel; and (ii) an existing bank facility secured

against other assets held by Regal REIT. Therefore, it is expected that the gearing ratio of Regal

REIT will increase upon completion of Transaction. The pro forma financial effect of the

Transaction on the gearing ratio of Regal REIT as at 31 December 2016, as if Regal REIT had

completed the Transaction on 31 December 2016, is as follows:

As at 31 December 2016

Actual(audited)

Regal REITGroup

Pro forma

Enlarged Groupafter completion

of the Transaction

Total debt (HK$’000) 8,340,100 9,700,100

Total gross assets (HK$’000) 22,377,334 23,770,334

Gearing ratio 37.3% 40.8%

As shown in the table above, the pro forma gearing ratio of the Enlarged Group increases slightly

as compared to the gearing ratio of the Regal REIT Group for the year ended 31 December 2016,

and is still below the maximum 45% permitted under paragraph 7.9 of REIT Code.

As at 31 December 2016, Regal REIT had bank facilities with an aggregate amount of

HK$7,555.0 million, comprising (i) term and revolving loan facilities of up to HK$5,500.0

million secured by four of the five Initial Hotel Properties; (ii) a term loan facility of HK$440.0

million secured by the iclub Wan Chai Hotel; (iii) term and revolving loan facilities of up to

HK$790.0 million secured by the iclub Sheung Wan Hotel; and (iv) term and revolving loan

facilities of up to HK$825.0 million secured by the iclub Fortress Hill Hotel. As at 31 May 2017,

the Regal REIT Group had in aggregate an un-utilised amount of HK$1,123 million bank

facilities at margins ranging from 1.15% per annum to 1.45% per annum plus HIBOR which can

be used to partially fund the Hotel Purchase Price, HK$800 million of which is pursuant to a

bank facility with an interest margin of 1.15% over HIBOR. As mentioned above, the Manager

expects to further obtain a new bank facility to be secured against the New Hotel with an

expected interest rate of HIBOR plus a margin of no more than 1.15% per annum to finance the

balance of the Hotel Purchase Price. Based on our discussions with the Manager, the existing

bank facilities and the new bank facility to be obtained should be sufficient to cover the Hotel

Purchase Price.


— IFA-32 —

RECOMMENDATION

Having considered the above reasons and factors, we are of the view that:

(1) the Transaction is: (i) being entered into in the ordinary and usual course of business of Regal

REIT; (ii) consistent with the investment objectives and strategies of Regal REIT; and (iii) on

normal commercial terms at arm’s length, which are fair and reasonable and in, and not

prejudicial to, the interests of Regal REIT, the Independent Unitholders, as well as the

Unitholders as a whole; and

(2) the New CCT Waiver Application is fair and reasonable having regard to the interests of Regal

REIT, the Independent Unitholders, as well as the Unitholders as a whole; and the Additional

Hotel CCTs are: (i) being entered into in the ordinary and usual course of business of Regal

REIT; (ii) consistent with the investment objectives and strategies of Regal REIT; and (iii) on




Accordingly, we would recommend the Independent Board Committee to advise, and we ourselves

recommend, the Independent Unitholders to vote in favour of the resolutions with regard to the

Transaction Matters Requiring Approval at the EGM.

Yours faithfully,

For and on behalf of

Altus Capital LimitedJeanny Leung

Executive Director

Ms. Jeanny Leung (“Ms. Leung”) is a Responsible Officer of Altus Capital Limited licensed to carry

on Type 6 (advising on corporate finance) regulated activity under the SFO and permitted to undertake

work as a sponsor. She is also a Responsible Officer of Altus Investments Limited licensed to carry

on Type 1 (dealing in securities) regulated activity under the SFO. Ms. Leung has over 26 years of

experience in corporate finance advisory and commercial field in Greater China, in particular, she has

participated in sponsorship work for initial public offerings and acted as financial adviser or

independent financial adviser in various corporate finance transactions.


— IFA-33 —

The following is the text of a report, prepared for the purpose of inclusion in this circular from Ernst& Young, Certified Public Accountants.

22/F, CITIC Tower1 Tim Mei AvenueCentral, Hong Kong

The DirectorsRegal Portfolio Management Limited(in its capacity as manager of Regal Real Estate Investment Trust)

Dear Sirs,

We report on the historical financial information of Prosper Harvest Investments Limited (the “TargetCompany”) and its subsidiaries (together, the “Target Group”) set out on pages I-3 to I-22, whichcomprises the consolidated statements of profit or loss and other comprehensive income, statementsof changes in equity and statements of cash flows of the Target Group for each of the years ended 31stDecember, 2014, 2015 and 2016 (the “Relevant Periods”), and the consolidated statements of financialposition of the Target Group as at 31st December, 2014, 2015 and 2016 and a summary of significantaccounting policies and other explanatory information (together, the “Historical FinancialInformation”). The Historical Financial Information set out on pages I-3 to I-22 forms an integral partof this report, which has been prepared for inclusion in the circular of Regal Real Estate InvestmentTrust (“Regal REIT”) dated 30th June, 2017 in connection with (i) the proposed acquisition of 100%of the issued share capital of the Target Company by DB Trustees (Hong Kong) Limited (in itscapacity as trustee of Regal REIT) (the “Trustee”); and (ii) the assignment of all amounts due, owingor payable by the Target Company to P&R Holdings Limited (“P&R”) to the Trustee.

Directors’ responsibility for the Historical Financial Information

The Directors of the Target Company are responsible for the preparation of the Historical FinancialInformation that gives a true and fair view in accordance with the basis of presentation and the basisof preparation set out in notes 2.1 and 2.2 to the Historical Financial Information, respectively, andfor such internal control as the Directors of the Target Company determine is necessary to enable thepreparation of the Historical Financial Information that is free from material misstatement, whetherdue to fraud or error.

Reporting accountants’ responsibility

Our responsibility is to express an opinion on the Historical Financial Information and to report ouropinion to you. We conducted our work in accordance with Hong Kong Standard on InvestmentCircular Reporting Engagements 200 Accountants’ Reports on Historical Financial Information inInvestment Circulars issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).This standard requires that we comply with ethical standards and plan and perform our work to obtainreasonable assurance about whether the Historical Financial Information is free from materialmisstatement.

APPENDIX I ACCOUNTANTS’ REPORTIN RESPECT OF THE TARGET COMPANY

— I-1 —

Our work involved performing procedures to obtain evidence about the amounts and disclosures in theHistorical Financial Information. The procedures selected depend on the reporting accountants’judgement, including the assessment of risks of material misstatement of the Historical FinancialInformation, whether due to fraud or error. In making those risk assessments, the reportingaccountants consider internal control relevant to the entity’s preparation of the Historical FinancialInformation that gives a true and fair view in accordance with the basis of presentation and the basisof preparation set out in notes 2.1 and 2.2 to the Historical Financial Information, respectively, inorder to design procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity’s internal control. Our work also includedevaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by the Directors of the Target Company, as well as evaluating the overall presentationof the Historical Financial Information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for ouropinion.

Opinion

In our opinion, the Historical Financial Information gives, for the purposes of the accountants’ report,a true and fair view of the financial position of the Target Group as at 31st December, 2014, 2015 and2016 and of the financial performance and cash flows of the Target Group for each of the RelevantPeriods in accordance with the basis of presentation and the basis of preparation set out in notes 2.1and 2.2 to the Historical Financial Information, respectively.

Report on matters under local regulatory requirements

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying FinancialStatements as defined on page I-3 have been made.

Dividends

No dividends have been paid by the Target Company in respect of the Relevant Periods.

No historical financial statements for the Target Company

As at the date of this report, no statutory financial statements have been prepared for the TargetCompany since its date of incorporation.

Yours faithfully,Ernst & Young

Certified Public AccountantsHong Kong

30 June 2017


— I-2 —

I. HISTORICAL FINANCIAL INFORMATION

Preparation of Historical Financial Information

Set out below is the Historical Financial Information which forms an integral part of this

accountants’ report.

The financial statements of the Target Group for the Relevant Periods, on which the Historical

Financial Information is based, were audited by Ernst & Young in accordance with Hong Kong

Standards on Auditing issued by the HKICPA (the “Underlying Financial Statements”).

The Historical Financial Information is presented in Hong Kong dollars (“HK$”).

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME

Years ended 31st December,

Notes 2014 2015 2016

HK$ HK$ HK$

REVENUE 4 — — —

Administrative expenses (83,703) (63,003) (113,137)

Write-off of an amount due

from a fellow subsidiary — — (134,349,596)

Finance costs 6 — — (1,883,964)

LOSS FOR THE YEAR AND

TOTAL COMPREHENSIVE

LOSS FOR THE YEAR 5 (83,703) (63,003) (136,346,697)


— I-3 —

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at 31st December,

Notes 2014 2015 2016

HK$ HK$ HK$

NON-CURRENT ASSET

Property, plant and equipment 9 527,002,258 600,002,973 861,308,154

CURRENT ASSETS

Deposits 65,000 826,920 1,256,920

Bank balances 47,836 57,805 91,419

Total current assets 112,836 884,725 1,348,339

CURRENT LIABILITIES

Creditors and accruals (6,085,823) (8,720,586) —

Tax payable (9,167) (9,167) —

Total current liabilities (6,094,990) (8,729,753) —

NET CURRENT ASSETS/

(LIABILITIES) (5,982,154) (7,845,028) 1,348,339

TOTAL ASSETS LESS

CURRENT LIABILITIES 521,020,104 592,157,945 862,656,493

NON-CURRENT LIABILITIES

Amount due to the immediate

holding company 13(b) (293,084,613) (292,839,236) —

Loan from a shareholder 13(b) — — (1,000,000,000)

Interest bearing bank

borrowings 10 (228,869,306) (300,315,527) —

Total non-current liabilities (521,953,919) (593,154,763) (1,000,000,000)

Net liabilities (933,815) (996,818) (137,343,507)

EQUITY

Issued capital 11 8 8 16

Accumulated losses (933,823) (996,826) (137,343,523)

Total equity (933,815) (996,818) (137,343,507)


— I-4 —

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Note Issued capitalAccumulated

losses Total equity

HK$ HK$ HK$

At 1st January, 2014 8 (850,120) (850,112)

Loss for the year and total

comprehensive loss for the

year — (83,703) (83,703)

At 31st December, 2014 and

1st January, 2015 8 (933,823) (933,815)



year — (63,003) (63,003)

At 31st December, 2015 and

1st January, 2016 8 (996,826) (996,818)



year — (136,346,697) (136,346,697)

Issue of share 11 8 — 8

At 31st December, 2016 16 (137,343,523) (137,343,507)


— I-5 —

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended 31st December,Notes 2014 2015 2016

HK$ HK$ HK$

CASH FLOWS FROM

OPERATING ACTIVITIESLoss for the year (83,703) (63,003) (136,346,697)Adjustments for:

Finance costs 6 — — 1,883,964Write-off of an amount due

from a fellow subsidiary — — 134,349,596

(83,703) (63,003) (113,137)Increase in deposits (65,000) (761,920) (430,000)Increase/(decrease) in creditors

and accruals 35,000 (5,000) 20,000

Net cash flows used in

operating activities (113,703) (829,923) (523,137)

CASH FLOWS FROM AN

INVESTING ACTIVITYAdditions to property, plant

and equipment (46,969,631) (62,825,801) (175,694,281)

CASH FLOWS FROM

FINANCING ACTIVITIESIssue of share 11 — — 8Net advance from/(repayment

to) the immediate holding

company 55,114,035 (245,377) 486,846,910Drawdown of bank loans 232,500,000 70,000,000 265,000,000Repayment of bank loans (232,500,000) — (567,500,000)Payment of loan costs (4,806,563) (1,309,817) (1,077,788)Interest paid (3,236,358) (4,779,113) (7,018,098)

Net cash flows from financing

activities 47,071,114 63,665,693 176,251,032

NET INCREASE/(DECREASE)

IN CASH AND CASH

EQUIVALENTS (12,220) 9,969 33,614Cash and cash equivalents at

beginning of year 60,056 47,836 57,805

CASH AND CASH

EQUIVALENTS AT END OF

YEAR 47,836 57,805 91,419

ANALYSIS OF BALANCE OF

CASH AND CASH

EQUIVALENTSBank balances 47,836 57,805 91,419


— I-6 —

II. NOTES TO THE HISTORICAL FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Target Company is a limited liability company incorporated in the British Virgin Islands.

The principal place of business of the Target Company is located at 11th Floor, 68 Yee Wo Street,

Causeway Bay, Hong Kong.

The Target Company is an investment holding company. During the Relevant Periods, the Target

Company’s subsidiaries were engaged in property development.

Prior to 30th December, 2016, the parent company of the Target Company was P&R, which was

incorporated in the British Virgin Islands. P&R is a joint venture indirectly held as to 50% by

each of Paliburg Holdings Limited (“Paliburg”) and Regal Hotels International Holdings Limited

(“Regal Hotels”), both of which were incorporated in Bermuda and are listed on The Stock

Exchange of Hong Kong Limited (the “Stock Exchange”). In the opinion of the Directors of the

Target Company, the ultimate holding company of the Target Company was Century City

International Holdings Limited, which was incorporated in Bermuda and is listed on the Stock

Exchange.

On 30th December, 2016, P&R disposed of 50% equity interest in the Target Company to Dragon

Pier Investments Limited (“Dragon Pier”), which was incorporated in British Virgin Islands.

Thereafter, in the opinion of the Directors of the Target Company, the Target Company became

a joint venture held as to 50% by each of P&R and Dragon Pier.

Subsequent to the end of the Relevant Periods, on 23rd May, 2017, P&R acquired 50% equity

interest in the Target Company from Dragon Pier.

As at the end of the Relevant Periods, the Target Company had direct and indirect interests in

its subsidiaries, all of which are private limited liability companies (or, if incorporated outside

Hong Kong, have substantially similar characteristics to a private company incorporated in Hong

Kong), the particulars of which are set out below:

Name

Place and date of

incorporation and place

of operations

Issued

ordinary

share capital

Percentage of equity

attributable to the Target

Company Principal

activitiesDirect Indirect

Leading Brand Holdings

Limited (note (a))

British Virgin Islands/

Hong Kong

13th July, 2010

US$1 100 — Investment

holding

Land Crown International

Limited (note (b))

Hong Kong

26th July, 2010

HK$1 — 100 Property

development


— I-7 —

Notes:

(a) No statutory financial statements have been prepared for this entity for the years ended 31st December, 2014, 2015

and 2016, as the entity was not subject to any statutory audit requirements under the relevant rules and regulations

in its jurisdiction of incorporation.

(b) The statutory financial statements of this entity for the years ended 31st December, 2014, 2015 and 2016 prepared

under Hong Kong Financial Reporting Standards (“HKFRSs”) were audited by Ernst & Young, Hong Kong.

2.1 BASIS OF PRESENTATION

The Historical Financial Information incorporates the financial statements of the Target Group

for the Relevant Periods. A subsidiary is an entity (including a structured entity), directly or

indirectly, controlled by the Target Company. Control is achieved when the Target Group is

exposed, or has rights, to variable returns from its involvement with the investee and has the

ability to affect those returns through its power over the investee (i.e., existing rights that give

the Target Group the current ability to direct the relevant activities of the investee).

When the Target Company has, directly or indirectly, less than a majority of the voting or similar

rights of an investee, the Target Group considers all relevant facts and circumstances in assessing

whether it has power over an investee, including:

(a) the contractual arrangement with the other vote holders of the investee;

(b) rights arising from other contractual arrangements; and

(c) the Target Group’s voting rights and potential voting rights.

The financial statements of the subsidiaries are prepared for the same reporting period as the

Target Company, using consistent accounting policies. The results of subsidiaries are

consolidated from the date on which the Target Group obtains control, and continue to be

consolidated until the date that such control ceases.

Profit or loss and each component of other comprehensive income are attributed to the owners

of the parent of the Target Group and to the non-controlling interests, even if this results in the

non-controlling interests having a deficit balance. All intra-group assets and liabilities, equity,

income, expenses and cash flows relating to transactions between members of the Target Group

are eliminated in full on consolidation.

The Target Group reassesses whether or not it controls an investee if facts and circumstances

indicate that there are changes to one or more of the three elements of control described above.

Notwithstanding that the Target Group had net liabilities as at the end of each of the Relevant

Periods, in the opinion of the Directors of the Target Company, it is appropriate that the

Historical Financial Information has been prepared under the going concern basis as P&R has

agreed to provide adequate financial support to the Target Group to meet its liabilities as and

when they fall due.


— I-8 —

2.2 BASIS OF PREPARATION

The Historical Financial Information has been prepared in accordance with HKFRSs (whichinclude all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards(“HKASs”) and Interpretations) issued by the HKICPA and accounting principles generallyaccepted in Hong Kong. All HKFRSs effective for the accounting period commencing from 1stJanuary, 2016, together with the relevant transitional provisions, have been early adopted by theTarget Group in the preparation of the Historical Financial Information throughout the RelevantPeriods.

The Historical Financial Information has been prepared under the historical cost convention.

2.3 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTINGSTANDARDS

The Target Group has not applied the following new and revised HKFRSs, that have been issuedbut are not yet effective, in the Historical Financial Information.

Amendments to HKFRS 1included in AnnualImprovements 2014-2016Cycle

First-time Adoption of Hong Kong Financial ReportingStandards2

Amendments to HKFRS 2 Classification and Measurement of Share-based PaymentTransactions2

Amendments to HKFRS 4 Applying HKFRS 9 Financial Instruments with HKFRS 4Insurance Contracts2

HKFRS 9 Financial Instruments2

Amendments to HKFRS 10and HKAS 28 (2011)

Sale or Contribution of Assets between an Investor and itsAssociate or Joint Venture4

Amendments to HKFRS 12included in AnnualImprovements 2014-2016Cycle

Disclosure of Interests in Other Entities1

HKFRS 15 Revenue from Contracts with Customers2

Amendments to HKFRS 15 Clarification to HKFRS 15 Revenue from Contracts withCustomers2

HKFRS 16 Leases3

Amendments to HKAS 7 Disclosure Initiative1

Amendments to HKAS 12 Recognition of Deferred Tax Assets for Unrealised Losses1

Amendments to HKAS 28included in AnnualImprovements 2014-2016Cycle

Investments in Associates and Joint Ventures2

Amendments to HKAS 40 Transfers of Investment Property2

HK(IFRIC)-Int 22 Foreign Currency Transactions and Advance Consideration2


— I-9 —

1 Effective for annual periods beginning on or after 1st January, 20172 Effective for annual periods beginning on or after 1st January, 20183 Effective for annual periods beginning on or after 1st January, 20194 No mandatory effective date yet determined but available for adoption

The Target Group is in the process of making an assessment of the impact of these new andrevised HKFRSs upon initial application but is not yet in a position to state whether these newand revised HKFRSs would have a significant impact on the Historical Financial Information.

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Property, plant and equipment

Property under construction is stated at cost less any impairment losses and is not depreciated.Cost comprises land cost, direct costs of construction and capitalised borrowing costs on relatedborrowed funds during the period of construction. Property under construction is reclassified tothe appropriate category of property, plant and equipment when completed and ready for use.

(b) Impairment of non-financial assets

Where an indication of impairment exists, or when annual impairment testing for an asset isrequired (other than financial assets), the asset’s recoverable amount is estimated. An asset’srecoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fairvalue less costs of disposal, and is determined for an individual asset, unless the asset does notgenerate cash inflows that are largely independent of those from other assets or groups of assets,in which case the recoverable amount is determined for the cash-generating unit to which theasset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverableamount. In assessing value in use, the estimated future cash flows are discounted to their presentvalue using a pre-tax discount rate that reflects current market assessments of the time value ofmoney and the risks specific to the asset. An impairment loss is charged to profit or loss in theperiod in which it arises in those expense categories consistent with the function of the impairedasset.

An assessment is made at the end of each reporting period as to whether there is an indicationthat previously recognised impairment losses may no longer exist or may have decreased. If suchan indication exists, the recoverable amount is estimated. A previously recognised impairmentloss of an asset is reversed only if there has been a change in the estimates used to determinethe recoverable amount of that asset, but not to an amount higher than the carrying amount thatwould have been determined had no impairment loss been recognised for the asset in prior years.A reversal of such an impairment loss is credited to profit or loss in the period in which it arises.

(c) Financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as loans and receivables. When financialassets are recognised initially, they are measured at fair value plus transaction costs that areattributable to the acquisition of the financial assets.


— I-10 —

Subsequent measurement

Loans and receivables are non-derivative financial assets with fixed or determinable payments

that are not quoted in an active market. After initial measurement, such assets are subsequently

measured at amortised cost using the effective interest rate method less any allowance for

impairment. Amortised cost is calculated by taking into account any discount or premium on

acquisition and includes fees or costs that are an integral part of the effective interest rate. The

effective interest rate amortisation and the loss arising from impairment are recognised in profit

or loss.

(d) Impairment of financial assets

The Target Group assesses at the end of each reporting period whether there is objective evidence

that a financial asset or a group of financial assets is impaired. An impairment exists if one or

more events that occurred after the initial recognition of the asset have an impact on the

estimated future cash flows of the financial asset or the group of financial assets that can be

reliably estimated. Evidence of impairment may include indications that a debtor or a group of

debtors is experiencing significant financial difficulty, default or delinquency in interest or

principal payments, the probability that they will enter bankruptcy or other financial

reorganisation and observable data indicating that there is a measurable decrease in the estimated

future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For financial assets carried at amortised cost, the Target Group first assesses whether impairment

exists individually for financial assets that are individually significant, or collectively for

financial assets that are not individually significant. If the Target Group determines that no

objective evidence of impairment exists for an individually assessed financial asset, whether

significant or not, it includes the asset in a group of financial assets with similar credit risk

characteristics and collectively assesses them for impairment. Assets that are individually

assessed for impairment and for which an impairment loss is, or continues to be, recognised are

not included in a collective assessment of impairment.

The amount of any impairment loss identified is measured as the difference between the asset’s

carrying amount and the present value of estimated future cash flows (excluding future credit

losses that have not yet been incurred). The present value of the estimated future cash flows is

discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate

computed at initial recognition).

The carrying amount of the asset is reduced through the use of an allowance account and the loss

is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying

amount using the rate of interest used to discount the future cash flows for the purpose of

measuring the impairment loss. Loans and receivables together with any associated allowance

are written off when there is no realistic prospect of future recovery and all collateral has been

realised or has been transferred to the Target Group.


— I-11 —

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases

because of an event occurring after the impairment was recognised, the previously recognised

impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later

recovered, the recovery is credited to profit or loss.

(e) Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar

financial assets) is primarily derecognised (i.e., removed from the Target Group’s consolidated

statement of financial position) when:

• the rights to receive cash flows from the asset have expired; or

• the Target Group has transferred its rights to receive cash flows from the asset or has

assumed an obligation to pay the received cash flows in full without material delay to a

third party under a “pass-through” arrangement; and either (i) the Target Group has

transferred substantially all the risks and rewards of the asset, or (ii) the Target Group has

neither transferred nor retained substantially all the risks and rewards of the asset, but has

transferred control of the asset.

When the Target Group has transferred its rights to receive cash flows from an asset or has

entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risk

and rewards of ownership of the asset. When it has neither transferred nor retained substantially

all the risks and rewards of the asset nor transferred control of the asset, the Target Group

continues to recognise the transferred asset to the extent of the Target Group’s continuing

involvement. In that case, the Target Group also recognises an associated liability. The

transferred asset and the associated liability are measured on a basis that reflects the rights and

obligations that the Target Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured

at the lower of the original carrying amount of the asset and the maximum amount of

consideration that the Target Group could be required to repay.

(f) Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as loans and borrowings.

All financial liabilities are recognised initially at fair value and net of directly attributable

transaction costs.

Subsequent measurement

After initial recognition, interest-bearing loans and borrowings are subsequently measured at

amortised cost, using the effective interest rate method unless the effect of discounting would be

immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss

when the liabilities are derecognised as well as through the effective interest rate amortisation

process.


— I-12 —

Amortised cost is calculated by taking into account any discount or premium on acquisition and

fees or costs that are an integral part of the effective interest rate. The effective interest rate

amortisation is recognised in profit or loss.

(g) Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or

cancelled, or expires.

When an existing financial liability is replaced by another from the same lender on substantially

different terms, or the terms of an existing liability are substantially modified, such an exchange

or modification is treated as a derecognition of the original liability and a recognition of a new

liability, and the difference between the respective carrying amounts is recognised in profit or

loss.

(h) Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement

of financial position if there is a currently enforceable legal right to offset the recognised

amounts and there is an intention to settle on a net basis, or to realise the assets and settle the

liabilities simultaneously.

(i) Borrowing costs

Borrowing costs directly attributable to the acquisition and construction of qualifying assets, i.e.,

assets that necessarily take a substantial period of time to get ready for their intended use or sale,

are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs

ceases when the assets are substantially ready for their intended use or sale. Interest is

capitalised at the interest rates related to specific development project borrowings. All other

borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist

of interest and other costs that an entity incurs in connection with the borrowing of funds.

(j) Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognised outside

profit or loss is recognised outside profit or loss, either in other comprehensive income or

directly in equity.

Current tax assets and liabilities are measured at the amount expected to be recovered from or

paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or

substantively enacted by the end of the reporting period, taking into consideration interpretations

and practices prevailing in the countries/jurisdictions in which the Target Group operates.


— I-13 —

Deferred tax is provided, using the liability method, on all temporary differences at the end of

the reporting period between the tax bases of assets and liabilities and their carrying amounts for

financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences while deferred tax

assets are recognised for all deductible temporary differences, the carryforward of unused tax

credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is

probable that future taxable profit will be available against which the deductible temporary

differences, the carryforward of unused tax credits and unused tax losses can be utilised.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and

reduced to the extent that it is no longer probable that sufficient taxable profit will be available

to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are

reassessed at the end of each reporting period and are recognised to the extent that it has become

probable that sufficient taxable profit will be available to allow all or part of the deferred tax

asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the

period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that

have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to

set off current tax assets against current tax liabilities and the deferred taxes relate to the same

taxable entity and the same taxation authority.

(k) Related parties

A party is considered to be related to the Target Group if:

(i) the party is a person or a close member of that person’s family and that person

(1) has control or joint control over the Target Group;

(2) has significant influence over the Target Group; or

(3) is a member of the key management personnel of the Target Group or of a parent of

the Target Group; or

(ii) the party is an entity where any of the following conditions applies:

(1) the entity and the Target Group are members of the same group;

(2) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary

or fellow subsidiary of the other entity);


— I-14 —

(3) the entity and the Target Group are joint ventures of the same third party;

(4) one entity is a joint venture of a third entity and the other entity is an associate of the

third entity;

(5) the entity is a post-employment benefit plan for the benefit of employees of either the

Target Group or an entity related to the Target Group;

(6) the entity is controlled or jointly controlled by a person identified in (i);

(7) a person identified in (i)(1) has significant influence over the entity or is a member

of the key management personnel of the entity (or of a parent of the entity); and

(8) the entity, or any member of a group of which it is a part, provides key management

personnel services to the Target Group or to the parent of the Target Group.

(l) Cash and cash equivalents

For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise

cash on hand and demand deposits, and short term highly liquid investments that are readily

convertible into known amounts of cash, are subject to an insignificant risk of changes in value,

and have a short maturity of generally within three months when acquired, less bank overdrafts

which are repayable on demand and form an integral part of the Target Group’s cash

management.

For the purpose of the consolidated statement of financial position, bank balances comprise cash

at banks, including term deposits, which are not restricted as to use.

3. SIGNIFICANT ACCOUNTING ESTIMATE

The preparation of the Target Group’s Historical Financial Information requires management to

make judgements, estimates and assumptions that affect the reported amounts of revenues,

expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of

contingent liabilities. Uncertainty about these assumptions and estimates could result in

outcomes that could require a material adjustment to the carrying amounts of the assets or

liabilities affected in the future.

Estimation uncertainty

The key assumption concerning the future and other key sources of estimation uncertainty at the

end of the reporting period, that has a significant risk of causing a material adjustment to the

carrying amounts of assets and liabilities within the next financial year, is described below.


— I-15 —

Impairment of non-financial assets

The Target Group assesses whether there are any indicators of impairment for all non-financial

assets at the end of each reporting period. Non-financial assets are tested for impairment when

there are indicators that the carrying amounts may not be recoverable. An impairment exists

when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount,

which is the higher of its fair value less costs of disposal and its value in use. The calculation

of the fair value less costs of disposal is based on available data from binding sales transactions

in an arm’s length transaction of similar assets or observable market prices less incremental costs

for disposing of the asset. When value in use calculations are undertaken, management must

estimate the expected future cash flows from the asset or cash-generating unit and choose a

suitable discount rate in order to calculate the present value of those cash flows.

4. REVENUE AND OPERATING SEGMENT INFORMATION

(a) Revenue

The Target Group did not earn any revenue during the Relevant Periods.

(b) Operating segment information

For management purpose, the Directors of the Target Company considered that the Target Group

has only one operating segment which is the property development. Since there is only one

operating segment for the Target Group, no further operating segment analysis thereof is

presented.

All of its assets and liabilities as at the end of each of the Relevant Periods were located in Hong

Kong.

As the Target Group did not generate any revenue during the Relevant Periods, no geographical

information related to revenue from external customers, or information about a major customer

is presented.

5. LOSS FOR THE YEAR

The Target Group’s loss for the year is arrived at after charging auditor’s remuneration of

HK$70,000, HK$50,000 and HK$85,000 for the years ended 31st December, 2014, 2015 and

2016, respectively.

None of the Directors of the Target Company received any fees or emoluments in respect of their

services rendered to the Target Group during the Relevant Periods.


— I-16 —

6. FINANCE COSTS


2014 2015 2016

HK$ HK$ HK$

Interest on bank loans 3,316,792 4,747,993 6,855,073

Amortisation of debt establishment costs 1,184,540 1,446,221 2,184,473

Total interest expenses on financial liabilities

not at fair value through profit or loss 4,501,332 6,194,214 9,039,546

Other loan costs 733,134 1,248,784 862,250

5,234,466 7,442,998 9,901,796

Less: Capitalised in respect of property,

plant and equipment (3,418,649) (7,442,998) (8,017,832)

Reimbursement from a fellow subsidiary (1,815,817) — —

— — 1,883,964

7. INCOME TAX

No provision for Hong Kong profits tax is required as the Target Group did not generate any

assessable profits arising in Hong Kong during the Relevant Periods.

A reconciliation of the tax credit applicable to loss for the year at the Hong Kong statutory tax

rate to the tax charge at the Target Group’s effective tax rate is as follows:


2014 2015 2016

HK$ HK$ HK$

Loss for the year (83,703) (63,003) (136,346,697)

Tax at the Hong Kong statutory tax rate of

16.5% (13,811) (10,395) (22,497,205)

Expenses not deductible for tax 13,811 10,395 22,497,205

Tax charge at the Target Group’s effective tax

rate — — —

8. LOSS PER SHARE

Loss per share information is not presented as its inclusion, for the purpose of this report, is not

considered meaningful.


— I-17 —

9. PROPERTY, PLANT AND EQUIPMENT

Property under construction2014 2015 2016HK$ HK$ HK$

Balance at 1st January 473,380,182 527,002,258 600,002,973Additions 53,622,076 73,000,715 261,305,181

Balance at 31st December 527,002,258 600,002,973 861,308,154

At 31st December, 2014 and 2015, the Target Group’s property under construction with acarrying amount of HK$527,002,258 and HK$600,002,973 was pledged to secure bankingfacilities granted to the Target Group, respectively (note 10).

10. INTEREST BEARING BANK BORROWINGS

As at 31st December,2014 2015 2016

Maturity HK$ Maturity HK$ Maturity HK$

Bank loans 2017 228,869,306 2017 300,315,527 — —

At 31st December, 2014 and 2015, the Target Group’s bank borrowings were (i) secured by apledge of the property under construction (note 9); and (ii) guaranteed by Paliburg and RegalHotels, on a several basis, up to HK$290,000,000 each.

At 31st December, 2014 and 2015, the interest bearing bank borrowings were denominated inHong Kong dollars and bore interest at the Hong Kong Interbank Offered Rate plus 1.55% perannum.

11. SHARE CAPITAL

As at 31st December,2014 2015 2016HK$ HK$ HK$

Authorised:50,000 ordinary shares

of US$1 each 390,000 390,000 390,000

Issued and fully paid:1, 1 and 2 ordinary shares

of US$1 each 8 8 16

On 23rd December, 2016, 1 ordinary share was issued at US$1 for cash to provide additionalworking capital for the Target Company.


— I-18 —

12. NOTE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

Major non-cash transactions

On 30th December, 2016, the Target Group entered into the following major non-cash

transactions:

(i) An advance to a fellow subsidiary in the amount of HK$134,349,596 was made by P&R on

behalf of the Target Group.

(ii) Creditors and accruals of HK$85,955,091 and tax payable of HK$9,167 of the Target Group

were assumed by P&R.

13. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions and balances set out elsewhere in the Historical Financial

Information, the Target Group had the following material related party transactions during

the Relevant Periods:


Notes 2014 2015 2016

HK$ HK$ HK$

Fellow subsidiaries:

Development consultancy fee (i) 5,600,000 1,200,000 800,000

Construction cost (ii) 2,826,000 42,421,000 53,804,000

Notes:

(i) On 14th June 2013, the Target Group entered into a contract with Paliburg Development Consultants

Limited, a fellow subsidiary of the Target Group, for the provision of development consultancy services to

the property development project of the Target Group in an amount of HK$8,000,000. The fee was charged

by reference to the stage of completion of the development project.

(ii) On 25th November, 2014, the Target Group entered into a contract with Chatwin Engineering Limited, a

fellow subsidiary of the Target Group, for the provision of main construction work to the property

development project of the Target Group in an amount of HK$110,200,000. The fee was charged by

reference to the value of work done as stipulated in the contract.

(b) The amount due to the immediate holding company and the loan from a shareholder are

unsecured, interest-free and not repayable within one year.


— I-19 —

14. COMMITMENTS

At the end of each of the Relevant Periods, the Target Group had the following outstanding

capital commitments in respect of the property development project:

As at 31st December,

2014 2015 2016

HK$ HK$ HK$

Contracted, but not provided for 281,175,550 257,053,902 —

15. FINANCIAL INSTRUMENTS BY CATEGORY

The financial assets of the Target Group comprise deposits and bank balances, which are

categorised as loans and receivables. The carrying amounts of these financial assets are shown

on the consolidated statements of financial position.

The financial liabilities of the Target Group comprise creditors and accruals, an amount due to

the immediate holding company, a loan from a shareholder and interest bearing bank borrowings,

which are categorised as financial liabilities at amortised cost. The carrying amounts of these

financial liabilities are shown on the consolidated statements of financial position.

16. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Target Group’s principal financial instruments comprise an amount due to the immediate

holding company, a loan from a shareholder and interest bearing bank borrowings. The main

purpose of these financial instruments is to raise finance for the Target Group’s operations. The

Target Group has other financial assets and liabilities such as deposits, bank balances, and

creditors and accruals, which arise directly from its operations. The carrying amounts of the

Target Group’s financial instruments approximate to their fair values at the end of the reporting

period.

The main risks arising from the Target Group’s financial instruments are interest rate risk, credit

risk and liquidity risk. The Directors of the Target Company review and agree policies for

managing each of these risks and they are summarised below.

Interest rate risk

The Target Group’s exposure to interest rate risk relates primarily to the Target Group’s bank

borrowings with floating interest rates. The interest rate and term of repayment of the Target

Group’s borrowings are disclosed in note 10 to the Historical Financial Information. The Target


— I-20 —

Group’s objective is to obtain the most favourable interest rate available for its borrowings. The

Target Group currently has not used any interest rate swap arrangements but will consider

hedging interest rate risk should the need arise.

As at 31st December, 2014 and 2015, it is estimated that an increase/decrease of 1% in interest

rate would increase/decrease the Target Group’s finance costs capitalised by HK$2,325,000 and

HK$3,025,000 during the years ended 31st December, 2014 and 2015, respectively, assuming

that the Target Group’s bank borrowings outstanding at 31st December, 2014 and 2015 were

outstanding for the whole years ended 31st December, 2014 and 2015.

Credit risk

The credit risk of the Target Group’s financial assets, which comprise deposits and bank

balances, arises from default of the counterparty, with a maximum exposure equal to the carrying

amounts of these instruments.

Liquidity risk

In the management of liquidity risk, the Target Group monitors and maintains a level of cash and

cash equivalents deemed adequate by management to finance the Target Group’s operations. The

Target Group also maintains a balance between continuity of funding and flexibility through the

funding from the immediate holding company and a shareholder and the use of banking facilities

in order to meet its liquidity requirements both in the short and long terms.

The maturity profile of the Target Group’s financial liabilities as at the end of each of the

Relevant Periods, based on the contractual undiscounted payments, is as follows:

31st December, 2014

Within1 year

Not repayablewithin1 year Total

HK$ HK$ HK$

Creditors and accruals 6,085,823 — 6,085,823

Amount due to the immediate holding

company — 293,084,613 293,084,613

Interest bearing bank borrowing 4,168,400 238,849,672 243,018,072

10,254,223 531,934,285 542,188,508


— I-21 —

31st December, 2015

Within1 year


HK$ HK$ HK$

Creditors and accruals 8,720,586 — 8,720,586

Amount due to the immediate holding

company — 292,839,236 292,839,236

Interest bearing bank borrowings 5,383,499 305,294,713 310,678,212

14,104,085 598,133,949 612,238,034

31st December, 2016

Within1 year


HK$ HK$ HK$

Loan from a shareholder — 1,000,000,000 1,000,000,000

Capital management

The primary objectives of the Target Group’s capital management are to safeguard the Target

Group’s ability to continue as a going concern and to enhance shareholders’ value.

The Target Group manages its capital structure and makes adjustments to it in light of changes

in economic conditions and the risk characteristics of the underlying assets. Capital represents

total equity. To maintain or adjust the capital structure, the Target Group may return capital to

shareholders or issue new shares. The Target Group is not subject to any externally imposed

capital requirements. No changes were made in the objectives, policies or processes for

managing capital during the Relevant Periods.

17. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Group or any of its subsidiaries

in respect of any period subsequent to 31st December, 2016.


— I-22 —

The following is the text of the Independent Property Valuer’s valuation report received from Colliers

International (Hong Kong) Limited, prepared for the purpose of inclusion in the circular, in

connection with the valuation of the property as at 23 June 2017.

TEL 852 2822 0525

FAX 852 2107 6017

Colliers International (Hong Kong) Ltd

Suite 5701 Central Plaza18 Harbour Road Wanchai

Hong Kong

COMPANY LICENCE: C-006052

30 JUNE 2017

REGAL PORTFOLIO MANAGEMENT LIMITEDUNIT NO. 2001, 20TH FLOOR

68 YEE WO STREET

CAUSEWAY BAY

HONG KONG

(AS “MANAGER” OF REGAL REAL ESTATE INVESTMENT TRUST (“REGAL REIT”))

AND

DB TRUSTEES (HONG KONG) LIMITED52/F, INTERNATIONAL COMMERCE CENTRE

1 AUSTIN ROAD WEST

KOWLOON

HONG KONG

(AS “TRUSTEE” OF REGAL REIT)

DEAR SIRS,

Re: Valuation of iclub Ma Tau Wai Hotel in Hong Kong (the “Property”)

Instructions

In accordance with the instructions for us to value the Property, we confirm that we have carried out

physical inspections, made relevant enquiries and searches and obtained such further information as

we consider necessary for providing you with our opinion of the Market Value of the leasehold

interests of the Property in its existing state, as at 23 June 2017 (the “Valuation Date”) for the purpose

of incorporation in the circular Regal REIT dated 30 June 2017.

APPENDIX II INDEPENDENT PROPERTY VALUER’S VALUATION REPORT

— II-1 —

We hereby confirm that:

• We have no present or prospective interest in the Property and are not a related corporation

of nor have a relationship with the Manager, the Trustee or any other party or parties with

whom Regal REIT is contracting.

• We are authorised to practice as valuers and have the necessary expertise and experience

in valuing similar types of properties.

• The valuation has been prepared on a fair and unbiased basis.

Basis of Valuation

Our valuation of the Property represents the Market Value, which is defined by the HKIS as “the

estimated amount for which an asset or liability should exchange on the date of valuation between a

willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the

parties had each acted knowledgeably, prudently and without compulsion”.

Valuation Standards

The valuation is carried out in accordance with “The HKIS Valuation Standards (2012 Edition)”

published by The Hong Kong Institute of Surveyors; and in compliance with the requirements

contained in Chapter 5 of the Rules Governing the Listing of Securities issued by The Stock Exchange

of Hong Kong Limited; and Chapter 6.8 of the Code on Real Estate Investment Trusts issued by The

Securities and Futures Commission in August 2014.

Valuation Rationale

In the course of our valuation, we have adopted the Income Approach — Discounted Cash Flow

Analysis (“DCF”). This approach is defined in the International Valuation Standards as a financial

modelling technique based on explicit assumptions regarding the prospective cash flows from income

generating properties. This analysis involves the projection of a series of periodic cash flows for an

income generating property. To this projected cash flow series, an appropriate discount rate is applied

to establish an indication of the present value of the rental income stream associated with the property.

We have undertaken a Discounted Cash Flow Analysis on an annual basis over a ten-year investment

horizon. This analysis allows an investor or owner to make an assessment of the long-term return that

is likely to be derived from a property taking into account capital growth.

In the case of our valuation, periodic cash flow is typically estimated as gross income less operating

expenses and other outgoings. The series of periodic net operating income, along with an estimate of

the reversionary or terminal value anticipated at the end of the projection period, is then discounted

at the discount rate, being a cost of capital or a rate of return used to convert a monetary sum, payable

or receivable in the future, into present value. The discount rate adopted is 6.5% which reflects the


— II-2 —

time value of money in the DCF Analysis and a risk premium for the forecast cash flow to be

materialized having regard to the risk free rate based on the prevailing yield of 10-year Hong Kong

Exchange Fund Notes (approximately 1.4%), expected inflation (approximately 3% per annum) and

the projected income over the forecast period.

We have assumed that the Property is sold at the commencement of the eleventh year of the cash flow

and the net income in the eleventh year has been capitalised at a terminal capitalisation rate to derive

the capital value at the end of the tenth year. The terminal capitalisation rate adopted is 3.5% mainly

taking into account the yields achieved in analysed market sale of hotel premises and our knowledge

of the market expectation for such properties. This expected return reflects implicitly the quality of

the investment, the expectation of the potential of future income growth and capital appreciation, risk

factor and the like. The capital value is discounted at the discount rate.

This analysis has then been cross-checked by the Market Approach assuming sale of the Property in

its existing state and by making reference to comparable sale transactions as available in the relevant

market. By analysing sales which qualify as “arm’s-length” transactions, between willing buyers and

sellers, relevant adjustments are made when comparing such sales against the Property.

Title Investigations

We have not been provided with extracts from title documents relating to the Property but have

conducted searches at the Land Registry. We have not, however, been provided with the original

documents to verify the ownership, nor to ascertain the existence of any amendments which may not

appear on our searches. We do not accept any liability for any interpretation which we have placed on

such information, which is more properly in the sphere of your legal advisers.

Sources of Information

We have relied to a considerable extent on the information provided by the Manager on such matters

as tenancy schedules, statutory notices, easements, tenure, floor areas, building plans and all other

relevant matters. Dimensions, measurements and areas included in the valuation are based on

information contained in the documents provided to us and are, therefore, only approximations.

We have also been advised by the Manager that no material factors or information have been omitted

or withheld from the information supplied and consider that we have been provided with sufficient

information to reach an informed view. We believe that the assumptions used in preparing our

valuation are reasonable.

Site Measurement

We have not carried out detailed on-site measurements to verify the correctness of the floor areas in

respect of the Property but have assumed that the areas shown on the documents and plans provided

to us are correct.


— II-3 —

Site Inspection

We have inspected the exteriors and the interiors of the Property. Our inspections of the Property was

carried out by David Faulkner (FRICS and FHKIS) and Stella Ho (MRICS and MHKIS), on 23 May

2017. During the course of our inspection, we did not note any serious defects. However, no structural

survey has been made and we are therefore unable to report as to whether the Property is free of rot,

infestation or any other structural defects. No tests were carried out on any of the services. Our

valuation has been prepared on the assumption that these aspects are satisfactory.

Assumptions and Caveats

Our valuation has been made on the assumption that the Property can be sold on the open market

without the benefit of deferred terms contracts, leasebacks, joint ventures, or any similar arrangements

which would affect its value.

No allowances has been made in our valuation for any charges, mortgages or amounts owing on the

Property nor for any expenses or taxes which may be incurred in effecting a sale. Unless otherwise

stated, it is assumed that the Property is free from encumbrances, restrictions and outgoings of an

onerous nature which could affect its value.

Our valuation has been made on the assumption that the Property is subject to a lease (the “Lease”)

and a hotel management agreement (the “HMA”).

The Lease is assumed to commence from the Valuation Date and end on the date immediately

preceding the fifth anniversary date, and may be extended at the lessor’s sole discretion for a further

term commencing on the date immediately following the date of expiration of the initial lease term

in 2022 and ending on 31 December 2027. The annual rent receivable in respect of the first, second,

third, fourth and fifth years of the lease term shall be 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum

respectively of the Hotel Purchase Price (i.e. HK$1,360 million). The rent receivable in respect of the

remaining lease term shall be determined based on annual market rental reviews to be conducted by

independent professional property valuer who will be jointly appointed by the lessor and the lessee.

The HMA is assumed to be for a term of ten years commencing from the Valuation Date. The hotel

manager under the HMA is entitled to payment by the lessee of a hotel management fee comprising

of:

(a) A base fee which is equal to (i) 1% of Gross Revenues derived from the Property (for so

long as the Lease is in subsistence); or (ii) 2% of Gross Revenues derived from the Property

(for other cases during the operating term of the HMA); and

(b) An incentive fee which is equal to (i) 1% of the excess of the Adjusted GOP (the aggregate

of the Gross Operating Profit and Net Rental Income) derived from the Property over the

base fee and the Fixed Charges (for so long as the Lease is in subsistence); or (ii) 5% of

the excess of the Adjusted GOP derived from the Property over the base fee and the Fixed

Charges (for other cases during the operating term of the HMA).


— II-4 —

In addition, we have made the following assumptions:

• All information on the Property provided by the Manager is correct.

• Proper ownership titles of and relevant planning approvals for the Property have been

obtained, all payable land premiums, land-use rights fees and other relevant fees have been

fully settled and the Property can be freely transferred, sub-let, mortgaged or otherwise

disposed of.

• The Property has been fully developed, and is occupied and used in full compliance with,

and without contravention of, all ordinances and regulations except only where otherwise

stated.

• Unless otherwise stated, we have not carried out any valuation on a redevelopment basis,

nor the study of possible alternative options.

• The Government Lease will be renewed upon expiry on normal terms.

Unless otherwise stated, all monetary figures stated in this report are in Hong Kong dollars (HK$).

This report and our valuation are for the use of the Manager and the Trustee of Regal REIT and the

report is for the use only of the parties to whom it is addressed and for no other purpose. No

responsibility is accepted to any third party who may use or rely on the whole or any part of the

content of this valuation.

Our Summary of Value and Valuation Report are attached hereto.

Yours faithfully,


Colliers International (Hong Kong) Ltd

Stella Ho

BSSc (Hons) MSc MRICS MHKIS RPS (GP)

Director

Valuation and Advisory Services

David Faulkner

BSc (Hons) FRICS FHKIS RPS (GP) MAE

Managing Director

Valuation & Advisory Services — Asia

Note: Stella Ho is a Member of the Royal Institution of Chartered Surveyors, a Member of the Hong Kong Institute of

Surveyors and a Registered Professional Surveyor under the Surveyors Registration Ordinance (Cap. 417) in the Hong

Kong Special Administrative Region (“Hong Kong”). She is suitably qualified to carry out the valuation and has over

17 years’ experience in the valuation of properties of this magnitude and nature.

Note: David Faulkner is a Fellow of the Royal Institution of Chartered Surveyors, a Fellow of the Hong Kong Institute of

Surveyors and a Registered Professional Surveyor under the Surveyors Registration Ordinance (Cap. 417) in the Hong

Kong Special Administrative Region (“Hong Kong”). He is suitably qualified to carry out the valuation and has over

37 years’ experience in the valuation of properties of this magnitude and nature, and over 30 years’ experience in Hong

Kong and China.


— II-5 —

SUMMARY OF VALUE

Property

Market Value in existingstate as at

23 June 2017HK$

iclub Ma Tau Wai Hotel 1,400,000,000


— II-6 —

PROPERTY

ICLUB MA TAU WAI HOTEL

No. 8 Ha Heung Road (formerly known as Nos. 8, 8A, 10, 10A, 12 and 12A, Ha Heung Road),

Kowloon, Hong Kong

Section C of Kowloon Inland Lot No. 4148

1. PROPERTY DESCRIPTION

iclub Ma Tau Wai Hotel (“ICMTW”) is a 22-storey building including 1 basement floor.

According to the information provided, it provides a total of 340 guestrooms accommodated on

5th to 23rd Floors of the building (4th, 13th and 14th Floors are omitted). Carparking spaces are

available on the basement and ground floor. Plant rooms are on 1st Floor. Communal podium

garden is situated on 2nd Floor. Hotel back of house, plant rooms and other ancillary

accommodation are on 3rd Floor. ICMTW has obtained the occupation permit issued by the

Building Authority dated 23 November 2016, and the hotel licence issued by the Hotel and

Guesthouse Accommodation Authority dated 17 May 2017.

ICMTW is located at Ma Tau Wai, a traditional residential area that is situated close to Kowloon

City and the new Kai Tak development. The immediate locality is predominantly residential

buildings.

Site Area : Approx. 699.83 sqm

Gross Floor Area1 : Approx. 6,298 sqm

Covered Floor Area : Approx. 9,490 sqm

Town Planning Zoning : “Residential (Group A)” zone under Approved Ma

Tau Kok Outline Zoning Plan No. S/K10/22 dated

15 April 2016.

Hotel Guestroom Configuration

Room Type No. of Rooms

iSelect 60

iPlus 160

iSelect Premier 72

iPlus Premier 48

Total 340

Note: The room sizes range from 11 sqm to 16 sqm.

Other Facilities

Common facilities include a lounge, computer area and fitness area.

1 The Gross Floor Area excludes 158.11 sqm lift exempted area.


— II-7 —

2. OWNERSHIP AND TENURE

Registered Owner : Land Crown International Limited

Lease Term : The Section C of Kowloon Inland Lot No. 4148 is

held under a Conditions of Sale No. 3945 for a

term of 75 years commencing from 26 June 1939

and renewable for a further term of 75 years.

Government Rent : 3% of the rateable value of the Property.

Major Registered Encumbrances

• Debenture and Mortgage in favour of Hang Seng Bank Limited, dated 11 July 2014,

registered vide Memorial No. 14080702080186. We understand from the Manager that the

Debenture and Mortgage will be released before or on completion of the Transaction, in

accordance with the Share Purchase Agreement.

3. ASSUMED LEASE AGREEMENT

As instructed, it is assumed that the Property is subject to the Lease. The Lease is assumed to

commence from the Valuation Date and end on the date immediately preceding the fifth

anniversary date, and may be extended at the lessor’s sole discretion for a further term

commencing on the date immediately following the date of expiration of the initial lease term in

2022 and ending on 31 December 2027. The annual rent receivable in respect of the first, second,

third, fourth and fifth years of the lease term shall be 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per

annum respectively of the Hotel Purchase Price (i.e. HK$1,360 million). The rent receivable in

respect of the remaining lease term shall be determined based on annual market rental reviews

to be conducted by independent professional property valuer who will be jointly appointed by the

lessor and the lessee.

4. ASSUMED HOTEL MANAGEMENT AGREEMENT

As instructed, it is assumed that the Property is subject to the HMA. The HMA is assumed to be

for a term of ten years commencing from the Valuation Date. The hotel manager under the HMA

is entitled to payment by the lessee of a hotel management fee comprising of:

(a) A base fee which is equal to (i) 1% of Gross Revenues derived from the Property (for so

long as the Lease is in subsistence); or (ii) 2% of Gross Revenues derived from the Property

(for other cases during the operating term of the HMA); and

(b) An incentive fee which is equal to (i) 1% of the excess of the Adjusted GOP derived from

the Property over the base fee and the Fixed Charges (for so long as the Lease is in

subsistence); or (ii) 5% of the excess of the Adjusted GOP derived from the Property over

the base fee and the Fixed Charges (for other cases during the operating term of the HMA).

5. HOTEL MARKET OVERVIEW

Over 2016, Hong Kong received a total of 56.7 million visitor arrivals, representing a single digit

year-on-year (“YoY”) decline of 4.5%; Mainland Chinese visitors continue to be the largest


— II-8 —

source of this market. Despite its 6.7% YoY decline from 45.8 million in 2015 to 42.8 million,

Mainland Chinese visitor arrivals showed an uptick from mid-2016 onwards2. In the first quarter

of 2017, 10.8 million arrivals from Mainland China were recorded, representing a growth of

3.8% compared to the same period of 2016. There was also further growth in the short haul

markets such as Japan (20.9% YoY); Indonesia (18.4% YoY) and Philippines (14.5% YoY).

Several long haul submarkets including USA (4.4% YoY); Canada (1.3% YoY) and New Zealand

(7.1% YoY) also registered growth compared to the same period in the previous year3.

Overnight visitor arrivals in the first quarter of 2017 have seen an increase of 6.3% YoY to 6.6

million visitors. In terms of country/territory, Mainland China visitors saw a YoY 6.4% growth

to 4.3 million. Short haul markets have seen a great increase of 9.2% to 1.5 million visitors. The

long haul markets have also recorded a slight increase YoY of 1.1%, to 0.8 million. Only 39.4%

of Mainland China visitors stay overnight in Hong Kong while 67% of the visitors from the

remaining markets stay overnight4.

The Hong Kong hotel industry experienced a relatively stable period in 2016 after the drop in

2015. The performance of High Tariff A Hotels finished 2016 with an average rate of HK$2,161

at an average occupancy of 84%. In the first quarter of 2017, the market saw a continuous

recovery. High Tariff A Hotels recorded an occupancy rate of 85% and an average room rate of

HK$2,110. High Tariff B and Medium Tariff hotels noticed slight increases in average rates to

HK$1,034 and HK$672, and recorded occupancy rates both at 89%. However, as a whole hotel

room rates declined by 2.1% to HK$1,272 per night, but had an increased occupancy rate of 5

percentage points to 88% for the first quarter of 2017. The sub-market in terms of locations

experienced slight increases in occupancy rates5.

The overall Hong Kong hotel market experienced 1.4% YoY room supply growth in 2016,

attributable to a noticeable 4.4% growth in room supply of the Medium Tariff hotel market,

which increased from 22,678 rooms to 23,669 rooms; 2.3% increase was seen for the High Tariff

B hotel market with new supply of 637 rooms; the High Tariff A hotel market remained stable

with a new supply of 52 rooms6.

Despite Hong Kong’s hospitality industry struggling against the decline in visitor arrivals,

outlook over the medium to long term remains optimistic. Hong Kong has attuned its tourism

strategy, stressing the importance of attracting high-yield overnight visitors. The government has

allocated HK$243 million to tourism in the 2017-18 Budget in order to implement this strategy7.

A wide range of diversified tourist attractions enhancing Hong Kong’s overall desirability as a

premier tourist destination are under process, notably the completion of Tai Shue Wan Water

2 Source: HKTB, Visitor Arrival Statistics - December 2016.3 Source: HKTB, Visitor Arrival Statistics - March 2017.4 Source: HKTB, Visitor Arrival Statistics - March 2017.5 Source: HKTB, Hotel Room Occupancy Report - March 2017.6 Source: HKTB, Hotel Room Occupancy Report - December 2016.7 Source: 2017-18 Budget, www.budget.gov.hk.


— II-9 —

World in July 2018 at Ocean Park, which is expected to accommodate 1.5 million visitors a year8.

The ongoing extensions of Disneyland are expected to further draw international leisure

travellers to Hong Kong. The Kai Tak Cruise Terminal that opened in 2013 welcomed 18 cruise

lines in 2016, double that of 2015. World Cruise Terminals projects the arrival of 550,000 cruise

passengers this year, representing a five-fold increase from the terminal’s first full year of

operation in 20149.

Hong Kong is recognised as the world’s premier Meetings, Incentives, Conventions and

Exhibitions (MICE) destination. The number of business travellers is expected to increase in the

coming period. The Government is committed to enhancing the appeal of Hong Kong as an ideal

MICE destination in Asia. In 2016, there were a total of 1,891,017 overnight MICE visitor

arrivals to Hong Kong, representing a YoY 9.9% growth10. The first quarter of 2017 recorded the

total overnight MICE visitor arrivals at 341,518, a growth of 8.8% YoY11.

In addition, there are a number of Hong Kong’s large-scale infrastructure projects, namely the

Guangzhou—Shenzhen—Hong Kong Express Rail Link, the Hong Kong—Zhuhai—Macao

Bridge (HZMB), a rail connection between the Hong Kong and Shenzhen airports, the Tuen

Mun—Chek Lap Kok Link and the Tuen Mun Western Bypass are expected to be completed

between 2017 and 2018 to enhance the connectivity to nearby major cities in Mainland China,

especially within the Pearl River Delta (PRD) region.

The hotel supply will keep pace with the demand. Unlike 2016 where new supply was limited,

there is an expected 6,517 new hotel rooms coming on stream in 2017 and by 2019, the total

number of rooms is expected to reach 87,41712. With the continued recovery of tourism, we

expect the occupancy rates will stay at high level in 2017.

The Property is located in To Kwa Wan, which is a traditional residential area. The major

development in the vicinity of ICMTW is the Kai Tak Development which is a part of the

government’s initiative of Energizing Kowloon East.

Kai Tak Development covers a total planning area of over 320 hectares which spans over the

ex-airport site together with the adjoining hinterland districts of Wong Tai Sin, Kwun Tong and

Kowloon City13. With a development mix of community, housing, business, tourism and

infrastructural uses, it is set to revitalise the surrounding areas. The Government has recently

completed a review to further increase the development intensity and enhance the site planning

of the Kai Tak Development Area. A total of 16,000 additional residential flats and

approximately 400,000 sqm of commercial floor area will be added in two phases14. Four hotel

sites are designated for hotel use.

8 Source: HKFP, “New Hong Kong waterpark to make a splash in 2018”, www.hongkongfp.com.9 Source: HKFP, “Kai Tak’s new cruise terminal- another white elephant, or travel hub in the making?”, www.hongkongfp.com.10 Source: MEHK- Statistics on MICE Arrivals 2016, Feb 2017.11 Source: MEHK- Statistics on MICE Arrivals 2017 (Jan-Mar), May 2017.12 Source: HKTB, Hotel Supply Situation- as at December 2016.13 Source: Gov HK, “Overview of Kai Tak Development”, www.ktd.gov.hk.14 Source: “2017 Policy Address”, Information Services Department (ISD).


— II-10 —

The Cruise Terminal is also another highlighted attraction in the area. According to the 2017

Policy Address, the Government will invite a tender for the Kai Tak Tourism Node in the vicinity

of the terminal to develop a world-class tourist attraction15, which is expected to further

strengthen its competitiveness within the region.

The MTR Shatin to Central Link is under construction and the commissioning date of the Tai Wai

to Hung Hom Section is expected in 2019. Under the existing alignment planning, the Property

will be within 10 minutes walking distance to the proposed Ma Tau Wai Station. Therefore the

transportation and the accessibility of the Property will be further enhanced16.

The Kowloon City District will have 17 hotels with a total of 7,795 rooms in the coming two

years. In addition to the 546-room Kerry Hotel Hong Kong at 38 Hung Luen Road which opened

in April 2017, the 54-room i Hotel (Kowloon South) at 179 & 181 Bulkeley Street, Hung Hom

is slated to open in the second quarter of 2017. The competition against the two hotels is

expected to be minimal as both hotels have different market positioning and pricing strategies.

A proposed hotel with 99 rooms at 103-107 Tam Kung Road is planned to open at the end of

2017. This may pose limited effect to ICMTW due to different development scale.

Based on the anticipated recovery in the overall hotel industry and supply-demand balance in the

short to medium term, as well as the strategic location and quality of services, it is anticipated

that ICMTW will follow the overall hotel market trend in 2017.

6. ESTIMATED NET PROPERTY YIELD17

3.9%

7. MARKET VALUE IN EXISTING STATE AT 23 JUNE 2017

HK$1,400,000,000 (Hong Kong Dollars One Billion and Four Hundred Million Only)

15 Source: “2017 Policy Address”, Information Services Department (ISD).16 Source: MTR’s website, www.mtr-shatincentrallink.hk.17 The Estimated Net Property Yield of ICMTW is derived from fixed rental receivable in the first year of the term of the Lease

divided by the Market Value.


— II-11 —

The following is the text of a report, prepared for the purpose of inclusion in this circular from Ernst

& Young, Certified Public Accountants.

22/F, CITIC Tower

1 Tim Mei Avenue

Central, Hong Kong

INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE

COMPILATION OF PRO FORMA FINANCIAL INFORMATION

To the Directors of Regal Portfolio Management Limited (in its capacity as manager of Regal Real

Estate Investment Trust)

We have completed our assurance engagement to report on the compilation of pro forma financial

information of Regal Real Estate Investment Trust (“Regal REIT”) and its subsidiaries (hereinafter

collectively referred to as the “Regal REIT Group”) by the directors of Regal Portfolio Management

Limited (the “Directors”) for illustrative purposes only. The pro forma financial information consists

of the unaudited pro forma consolidated statement of financial position as at 31 December 2016 and

the unaudited pro forma consolidated statement of profit or loss for the year ended 31 December 2016,

and related notes as set out on pages III-4 to III-10 of the circular dated 30 June 2017 (the “Circular”)

issued by Regal REIT (the “Pro Forma Financial Information”). The applicable criteria on the basis

of which the Directors have compiled the Pro Forma Financial Information are described on page III-4

of the Circular.

The Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of

(i) the proposed acquisition of 100% of the issued share capital of Prosper Harvest Investments

Limited (the “Target Company”) by DB Trustees (Hong Kong) Limited (in its capacity as trustee of

Regal REIT) (the “Trustee”); and (ii) the assignment of all amounts due, owing or payable by the

Target Company to P&R Holdings Limited to the Trustee (the “Transaction”) on the Regal REIT

Group’s financial position as at 31 December 2016 and the Regal REIT Group’s financial performance

for the year ended 31 December 2016 as if the Transaction had taken place at 31 December 2016 and

1 January 2016, respectively. As part of this process, information about the Regal REIT Group’s

financial position and financial performance has been extracted by the Directors from the Regal REIT

Group’s financial statements for the year ended 31 December 2016, on which an audit report has been

published.

Directors’ responsibility for the Pro Forma Financial Information

The Directors are responsible for compiling the Pro Forma Financial Information in accordance with

paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong

APPENDIX III PRO FORMA FINANCIAL INFORMATION OFTHE ENLARGED GROUP

— III-1 —

Limited (the “Listing Rules”) and with reference to Accounting Guideline (“AG”) 7 Preparation of

Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong

Institute of Certified Public Accountants (the “HKICPA”).

Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics for

Professional Accountants issued by the HKICPA, which is founded on fundamental principles of

integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

Our firm applies Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform

Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements,

and accordingly maintains a comprehensive system of quality control including documented policies

and procedures regarding compliance with ethical requirements, professional standards and applicable

legal and regulatory requirements.

Reporting accountants’ responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on

the Pro Forma Financial Information and to report our opinion to you. We do not accept any

responsibility for any reports previously given by us on any financial information used in the

compilation of the Pro Forma Financial Information beyond that owed to those to whom those reports

were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements

3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information

Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants

plan and perform procedures to obtain reasonable assurance about whether the Directors have

compiled the Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules

and with reference to AG 7 issued by the HKICPA.

For purposes of this engagement, we are not responsible for updating or reissuing any reports or

opinions on any historical financial information used in compiling the Pro Forma Financial

Information, nor have we, in the course of this engagement, performed an audit or review of the

financial information used in compiling the Pro Forma Financial Information.

The purpose of the Pro Forma Financial Information included in the Circular is solely to illustrate the

impact of the Transaction on unadjusted financial information of the Regal REIT Group as if the

Transaction had been undertaken at an earlier date selected for purposes of the illustration.

Accordingly, we do not provide any assurance that the actual outcome of the Transaction would have

been as presented.

A reasonable assurance engagement to report on whether the Pro Forma Financial Information has

been properly compiled on the basis of the applicable criteria involves performing procedures to

assess whether the applicable criteria used by the Directors in the compilation of the Pro Forma

Financial Information provide a reasonable basis for presenting the significant effects directly

attributable to the Transaction, and to obtain sufficient appropriate evidence about whether:


— III-2 —

• the related pro forma adjustments give appropriate effect to those criteria; and

• the Pro Forma Financial Information reflects the proper application of those adjustments to

the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting

accountants’ understanding of the nature of the Regal REIT Group, the Transaction in respect of which

the Pro Forma Financial Information has been compiled, and other relevant engagement

circumstances.

The engagement also involves evaluating the overall presentation of the Pro Forma Financial

Information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our

opinion.

Opinion

In our opinion:

(a) the Pro Forma Financial Information has been properly compiled on the basis stated;

(b) such basis is consistent with the accounting policies of the Regal REIT Group; and

(c) the adjustments are appropriate for the purpose of the Pro Forma Financial Information as

disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

Ernst & YoungCertified Public Accountants

Hong Kong

30 June 2017


— III-3 —

Introduction

The following is illustrative and unaudited pro forma financial information of the Enlarged Group (the

“Pro Forma Financial Information”), including the unaudited pro forma consolidated statement of

financial position and the unaudited pro forma consolidated statement of profit or loss, which have

been prepared on the basis of the notes set out below for the purpose of illustrating the effect of the

Transaction, as if the Transaction had taken place on 31st December, 2016 for the unaudited pro forma

consolidated statement of financial position and on 1st January, 2016 for the unaudited pro forma

consolidated statement of profit or loss.

The Pro Forma Financial Information has been prepared using the accounting policies consistent with

those of the Regal REIT Group as set out in note 2.4 to the financial statements included in the

published annual report of the Regal REIT Group for the year ended 31st December, 2016.

The Pro Forma Financial Information has been prepared for illustrative purpose only and because of

its hypothetical nature, it may not give a true picture of the financial position and financial

performance of the Enlarged Group had the Transaction been completed as at 31st December, 2016 or

1st January, 2016, where applicable, or any future date.

The Pro Forma Financial Information should be read in conjunction with the historical financial

information of the Regal REIT Group as set out in its published annual report for the year ended 31st

December, 2016 and other financial information included elsewhere in this Circular.


— III-4 —

A. Unaudited Pro Forma Consolidated Statement of Financial Position as at 31st December,

2016

The RegalREIT

Group

TheTargetGroup

Pro formaadjustments Notes

Unaudited proforma statement of

financial positionof the Enlarged

Group aftercompletion of the

Transaction

HK$’000 HK$’000 HK$’000 HK$’000

(Audited) (Audited)

Note 1 Note 2

NON-CURRENT ASSETS

Property, plant and equipment 590,000 861,308 (861,308) 3 590,000

Investment properties 21,632,000 — 1,360,000 4 23,032,000

7,000 5

33,000 6

Total non-current assets 22,222,000 861,308 23,622,000

CURRENT ASSETS

Accounts receivable 23,678 — 23,678

Prepayments, deposits and

other receivables 4,870 1,257 6,127

Due from related companies 4,597 — 4,597

Tax recoverable 185 — 185

Restricted cash 63,489 — 63,489

Cash and cash equivalents 58,515 91 (7,000) 5 50,258

(1,348) 7

Total current assets 155,334 1,348 148,334

Total assets 22,377,334 862,656 23,770,334

CURRENT LIABILITIES

Accounts payable 62,180 — 62,180

Deposits received 1,860 — 1,860

Due to related companies 1,255 — 1,255

Other payables and accruals 49,549 — 13,600 8 63,199

50 8

Interest-bearing bank

borrowings 170,000 — 612,000 9 782,000

Tax payable 45,507 — 45,507


— III-5 —

The RegalREIT

Group

TheTargetGroup



financial positionof the Enlarged

Group aftercompletion of the

Transaction

HK$’000 HK$’000 HK$’000 HK$’000

(Audited) (Audited)

Note 1 Note 2

Total current liabilities 330,351 — 956,001

NET CURRENT

ASSETS/(LIABILITIES) (175,017) 1,348 (807,667)

TOTAL ASSETS LESS

CURRENT LIABILITIES 22,046,983 862,656 22,814,333

NON-CURRENT

LIAIBLITIES,

EXCLUDING NET

ASSETS ATTRIBUTABLE

TO UNITHOLDERS

Interest-bearing bank

borrowings 6,170,746 — 748,000 9 6,918,746

Other borrowings 1,933,339 — 1,933,339

Due to a shareholder — 1,000,000 (1,000,000) 10 —

Deposits received 2,235 — 2,235

Deferred tax liabilities 502,719 — 502,719

Total non-current liabilities 8,609,039 1,000,000 9,357,039

Total liabilities, excluding net

assets attributable to

Unitholders 8,939,390 1,000,000 10,313,040

Net assets/(liabilities)

attributable to Unitholders 13,437,944 (137,344) 13,457,294


— III-6 —

Notes:

(1) The audited consolidated statement of financial position of the Regal REIT Group as at 31st December, 2016 has been

extracted from the published annual report of the Regal REIT Group for the year ended 31st December, 2016.

(2) The audited consolidated statement of financial position of the Target Group as at 31st December, 2016 has been

extracted from the accountants’ report as set out in Appendix I to this Circular and all values are rounded to the nearest

thousand.

(3) The adjustment represents the reversal of the property under construction for the New Hotel amounting to HK$861.3

million of the Target Group as at 31st December, 2016. Since the New Hotel forms part of the investment properties of

the Enlarged Group, the related carrying amount is reversed accordingly.

(4) The adjustment represents the acquisition of the New Hotel at the Hotel Purchase Price of HK$1,360 million.

(5) The adjustment represents directly attributable costs incurred for the Transaction of HK$7 million. For the purpose of

preparing the unaudited pro forma consolidated statement of financial position, these directly attributable costs would

be capitalised in the investment properties.

(6) The fair value of the New Hotel as at 31st December, 2016 is assumed to be HK$1,400 million, which is the Appraised

Value of the New Hotel. The adjustment represents fair value changes on the New Hotel, which is the difference between

the fair value of the New Hotel and the Hotel Purchase Price plus the directly attributable costs incurred for the

Transaction as per note (5) above.

(7) The adjustment represents additional payment of HK$1.3 million for the Current Assets Adjustment upon completion of

the Transaction pursuant to the Share Purchase Agreement.

(8) The adjustments represent (i) acquisition fee of HK$13.6 million paid to the Manager, computed at 1% of the Hotel

Purchase Price, in accordance with the provisions set out in the Trust Deed; and (ii) additional trustee fee of HK$50,000

paid to the Trustee in relation to the additional duties undertaken for the Transaction in accordance with the provisions

set out in the Trust Deed.

(9) The adjustment represents the drawdown of bank borrowings through a combination of (i) new non-current bank facilities

of HK$748 million secured against the New Hotel; and (ii) revolving loan facilities of the Regal REIT Group of HK$612

million.

(10) The adjustment represents the assignment of the Shareholder Loan to the Regal REIT Group pursuant to the Share

Purchase Agreement.


— III-7 —

B. Unaudited Pro Forma Consolidated Statement of Profit or Loss for the year ended 31st

December, 2016

The RegalREIT

Group

TheTargetGroup



profit or loss of theEnlarged Group

after completion ofthe Transaction

HK$’000 HK$’000 HK$’000 HK$’000

(Audited) (Audited)

Note 1 Note 2

REVENUE

Gross rental revenue 939,521 — 61,200 3 1,000,721

Gross hotel revenue 33,958 — 33,958

973,479 — 1,034,679

Property and hotel operating

expenses (29,592) — (29,592)

Net rental and hotel income 943,887 — 1,005,087

Interest and other income 190 — 190

Depreciation (8,139) — (8,139)

Fair value changes on

investment properties 91,252 — 33,000 4 124,252

REIT Manager fees (96,149) — (13,600) 5 (115,785)

(6,036) 6

Trust, professional and other

expenses (10,710) (134,463) (50) 5 (145,440)

(217) 7

Finance costs - excluding

distributions to Unitholders (235,637) (1,884) (21,080) 8 (258,601)

PROFIT/(LOSS) BEFORE

TAX AND

DISTRIBUTIONS TO

UNITHOLDERS 684,694 (136,347) 601,564

Income tax expense (120,714) — (5,624) 9 (126,338)

PROFIT/(LOSS) FOR THE

YEAR, BEFORE

DISTRIBUTIONS TO

UNITHOLDERS 563,980 (136,347) 475,226

Finance costs - distributions

to Unitholders (501,644) — (501,644)


— III-8 —

The RegalREIT

Group

TheTargetGroup



profit or loss of theEnlarged Group

after completion ofthe Transaction

HK$’000 HK$’000 HK$’000 HK$’000

(Audited) (Audited)

Note 1 Note 2

PROFIT/(LOSS) FOR

THE YEAR, AFTER

DISTRIBUTIONS TO

UNITHOLDERS 62,336 (136,347) (26,418)

Notes:

(1) The audited consolidated statement of profit or loss of the Regal REIT Group for the year ended 31st December, 2016

has been extracted from the published annual report of the Regal REIT Group for the year ended 31st December, 2016.

(2) The audited consolidated statement of profit or loss of the Target Group for the year ended 31st December, 2016 has been

extracted from the accountants’ report as set out in Appendix I to this Circular and all values are rounded to the nearest

thousand.

(3) The adjustment represents the recognition of rental income of HK$61.2 million for the New Hotel in the unaudited pro

forma consolidated statement of profit or loss.

Upon completion of the Transaction, the Regal REIT Group, through the Property Company, will enter into a lease

agreement (the “New Lease Agreement”) with the Lessee in respect of the New Hotel. The New Lease Agreement

commences from the date of completion of the Transaction and ends on the date immediately preceeding the fifth

anniversary date of the New Lease Agreement, which may be extended at the sole discretion of the Lessor for a further

term commencing from the date immediately following the date of expiration of the initial lease term in 2022 and ending

on 31st December, 2027. The rent will be fixed at 4.0%, 4.25%, 4.5%, 4.75% and 5.0% per annum of the Hotel Purchase

Price, which is assumed to be HK$1,360 million, in respect of the first, second, third, fourth and fifth years of the initial

lease term, respectively. The rent for the further term will be determined by independent reviews in the future.

For the purpose of preparing the unaudited pro forma consolidated statement of profit or loss, the New Lease Agreement

is assumed to be effective on 1st January, 2016 of which the rental income of the New Hotel for the lease period is

recognised on the straight-line basis over the first five years of the initial lease term in accordance with the Regal REIT

Group’s accounting policies.

(4) The adjustment represents fair value changes on the New Hotel. The fair value of the New Hotel as at 31st December,

2016 is assumed to be HK$1,400 million, which is the Appraised Value of the New Hotel.

(5) The adjustments represent (i) acquisition fee of HK$13.6 million paid to the Manager, computed at 1% of the Hotel

Purchase Price, in accordance with the provisions set out in the Trust Deed; and (ii) additional trustee fee of HK$50,000

paid to the Trustee in relation to the additional duties undertaken for the Transaction in accordance with the provisions

set out in the Trust Deed.


— III-9 —

(6) The adjustment represents (i) additional base fees of HK$4.2 million paid to the Manager, computed at 0.3% of the

increased carrying value of the deposited property of the Enlarged Group of HK$1,400 million after the completion of

the Transaction; and (ii) additional variable fees of HK$1.8 million paid to the Manager, computed at 3% of the rental

income generated from the New Lease Agreement of HK$61.2 million.

(7) The adjustment represents additional trustee fee of HK$217,000 paid to the Trustee, computed at 0.0155% of the

increased carrying value of the deposited property of the Enlarged Group of HK$1,400 million after the completion of

the Transaction.

(8) The adjustment represents additional interest expenses arising from the drawdown of bank borrowings through a

combination of (i) new non-current bank facilities of HK$748 million secured against the New Hotel; and (ii) revolving

loan facilities of the Regal REIT Group of HK$612 million. The amounts are calculated at an estimated average

borrowing rate of 1.55%, with reference to the existing borrowing rate of the Regal REIT Group and borrowing rates

in the market which the Regal REIT Group could reasonably tap into, on the estimated drawdown of bank borrowings

of HK$1,360 million to finance the Hotel Purchase Price.

(9) The adjustment represents the income tax effect of the pro forma adjustments mentioned in notes (3), (6) and (8) above,

calculated at the Hong Kong statutory tax rate of 16.5%.

(10) Apart from the above, no adjustments have been made to reflect any operating results or other transactions of the

Enlarged Group entered into subsequent to 31st December, 2016. In respect of the above pro forma adjustments, the pro

forma adjustments mentioned in notes (3), (6), (7), (8) and (9) above are expected to have continuing effects.


— III-10 —

The following is the text of the letter received from Savills (Hong Kong) Limited, the Market

Consultant, for the purposes of inclusion in this circular.

30 June 2017

Regal Portfolio Management Limited

(As “Manager” of Regal Real Estate Investment Trust (“Regal REIT”))

Unit 2001, 20/F, 68 Yee Wo Street

Causeway Bay

Hong Kong

And

DB Trustees (Hong Kong) Limited

(As “Trustee” of Regal REIT)

Level 52, International Commerce Centre

1 Austin Road West

Kowloon

Hong Kong

Dear Sir/Madam,

Re: Market Consultant’s Report

As requested, we have prepared a hotel market overview and individual asset analysis for Regal

Portfolio Management Limited, in its capacity as the manager of Regal REIT, for inclusion in the

circular by Regal REIT dated 30 June 2017. The report includes an overview of the Hong Kong hotel

industry and an assessment of a 340-room hotel property to be acquired by Regal REIT, the iclub Ma

Tau Wai Hotel, which is located in Kowloon City.

APPENDIX IV MARKET CONSULTANT’S REPORT

— IV-1 —

1.0 GENERAL OVERVIEW OF THE HOTEL MARKET IN HONG KONG

1.1 Macro economic overview

1.1.1 Key economic indicators

Hong Kong’s real GDP, 2000-2020F

-4

-2

0

2

4

6

8

10

0

500

1,000

1,500

2,000

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

20162017F

2018F2019F

2020F

2,500

3,000HK$ billion

GDP at 2013 Chain Link (LHS) YoY Changes (RHS)%

Source: Census and Statistics Department, FocusEconomics, Savills Research & Consultancy

After a rather weak start in 2016, Hong Kong’s economic growth picked up steadily as the year

progressed, alongside a generally stabilising external environment. Regional trade flows have

continued to revive amid the relative improvement in external demand, and in tandem,

merchandise export growth staged a visible rebound in the fourth quarter of 2016. For 2016 as

a whole, the Hong Kong economy grew by 1.9%, compared with 2.4% in 2015.

In the first quarter of 2017, the Gross Domestic Product (GDP) increased by 4.3% in real terms

over a year earlier, with external demand strengthening due to improving global economic

environment and domestic demand holding up well with full employment continuing to prevail.


— IV-2 —

Hong Kong inflation, 2000-2021E

-4

-3

-2

-1

0

1

2

3

4

5

6YoY, %

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

20162017E

2018E2019E

2020E2021E


Inflation continued to recede during 2016, amid soft import prices and moderate domestic cost

pressures with the composite CPI growing by 2.4%, the lowest level recorded since 2010.

Q1/2017 saw inflation pressure softening further with a 1.4% year-on-year (Y-o-Y) growth.

Unemployment rates, Mar 2003�Mar 2017

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

Mar

-20

03

Sep

-20

03

Mar

-20

04

Sep

-20

04

Mar

-2005

Sep

-20

05

Mar

-2006

Sep

-2006

Mar

-20

07

Sep

-20

07

Mar

-20

08

Sep

-20

08

Mar

-20

09

Sep

-20

09

Mar

-20

10

Sep

-20

10

Mar

-20

11

Sep

-20

11

Mar

-20

12

Sep

-20

12

Mar

-20

13

Sep

-20

13

Mar

-20

14

Sep

-20

14

Mar

-20

15

Sep

-20

15

Mar

-20

16

Sep

-20

16

Mar

-20

17

Total Employment (LHS) Unemployment Rate (RHS)

Number of people (millions)

Source: Census and Statistics Department, Savills Research & Consultancy


— IV-3 —

Labour demand improved considerably with the swift economic recovery from 2010 onwards,

and the unemployment rate gradually fell from its August 2009 peak to 3.1% for the three months

ending in May 2014, a new low since the Asian Financial Crisis of 1998. The employment

situation remained robust and the unemployment rate remained at a low level of around 3.2% to

3.4% from May 2014 to March 2017, a level signifying virtually full employment and healthy

local demand for labour.

Retail sales value and restaurant receipts, Q1/2005�Q1/2017

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Retail Sales Value (LHS) Restaurant Receipts (RHS)HK$ million HK$ million

Q1


The phenomenal growth in retail sales over the past decade, backed by robust Mainland tourist

spending on shopping, came to a halt in 2014 when restrictions on the Indivdual Visit Scheme

(IVS) were announced in that year. Retail sales, in particular luxury items, recorded their first

decline of 3.7% in 2015, with jewellery, watches and clocks, and valuable gifts declining by

15.6% in the same year. Backed by increasing incomes and changing dining patterns, restaurant

receipts have risen steadily throughout the past few years.

The retail market in Hong Kong continued to soften in 2016 on the back of a slower growth of

visitor arrivals and more cautious local spending. Retail sales were down 8.1% in value and 7.1%

in volume in 2016 compared with 2015 due to a slowdown in sales of high-end items, with

jewellery, watches and clocks, and valuable gifts down in value by 17.2% over the period. On

the domestic front, consumption demand showed a mixed picture, with consumer durables

declining by 20.9%, while sales of foodstuffs and supermarkets remained resilient, with sales up

by 1.7% and 0.8% respectively in 2016.


— IV-4 —

The decline in retail sales slowed in Q1/2017 with a 1.3% decrease recorded, with sales of

consumer durable goods continuing to decline by 11% Y-o-Y, of which sales of foodstuffs

remained resilient to record another 1.9% increase over the first three months of last year.

Jewellery, watches and clocks, and valuable gifts recorded their first rebound of 1.4% Y-o-Y after

three years of downward adjustments.

Residents continued to increase their spending on dining out with restaurant receipts recording

a 2.9% increase over 2016 and a further 4.1% increment was recorded in Q1/2017.

The primary measure of the incomes of the Hong Kong population living in private housing

estates is private median monthly household income. The previous peak in this measure was

recorded in Q1/2008, with the median income reaching HK$25,500 per month, but the

subsequent global crisis caused a dip in income to HK$24,000 per month in Q1/2009.

Subsequently, the performance of the local economy, which led to record low unemployment

rates, exerted upward pressure on private incomes, which rose to HK$35,500 per month in

Q3/2016, a new post-1994 high, and the figure declined slightly to HK$35,000 in Q4/2016. These

higher income levels are inevitably giving rise to more domestic retail spending.

1.1.2 Recent economic developments

a. Closer integration with China

Hong Kong has developed close links with China following the introduction of China’s

open-door policy in 1978, and this will remain a key factor in the future success of the

territory. On 18 October 2005, the Hong Kong government and the Central People’s

government reached an agreement to further liberalise measures governing Hong Kong’s

trade with China under the Closer Economic Partnership Arrangement (CEPA). Concessions

granted under CEPA give Hong Kong companies a first-mover advantage and encourage

better synchronisation in the chain of cross-boundary financial activity, goods production

and distribution.

CEPA’s main contribution to trade between the two partners is that it has removed import

tariffs on almost all Hong Kong-made products1 since January 2006, with the number of

products eligible for CEPA’s tariff-free treatment expanded from 273 to 1,8852 between

2004 and 2017.

Introduced as a liberalisation measure under CEPA, the IVS allows residents of selected

Chinese cities to visit Hong Kong in their own capacity. The coverage of the IVS now

includes 49 Chinese cities, representing approximately 270 million residents in total. In

2016, Chinese residents made more than 24.2 million trips to Hong Kong under the IVS,

1 Except for prohibited articles (such as used or waste electrical machinery and medical/surgical products, chemical

residues, municipal waste, tiger bones and rhinoceros horns).

2 Source: Goods entitled to CEPA Zero Tariff Preference - Mainland 2017 Tariff Codes, Product Description and Rules of

Origin (1 January 2017), Trade and Industry Department.


— IV-5 —

an increase of 3.4 times since 2005 but a decline of 13.3% from 2015, according to Hong

Kong Tourism Board (HKTB) data. These visitors accounted for 56.6% of all Chinese

visitors, and 52.8% of total visitors in 2016. The first three months of 2017 saw a rebound

in Chinese visitors via IVS of 3.2%, reaching 13.5 million.

One of the leading global sources for a wide range of light-manufactured goods and one of

the leading locations for the manufacture and assembly of high-tech electronic products is

the Pearl River Delta (PRD)3 region. The further development of this economy will require

the investment, management, market knowledge, technology and international connections

available through Hong Kong. Premier Li, in his latest government work report, has stated

an intention to develop this cluster of cities into the Guangdong-Hong Kong-Macao Big

Bay Area, bringing into play Hong Kong’s and Macao’s unique advantages to boost their

positions and functions in serving the country’s economic development and further

opening-up to the world.

b. International comparisons

Hong Kong is one of the world’s most open and dynamic free-market economies, and it also

benefits from its strategic location on the doorstep of China. The city serves as a centre for

international finance, trade, business and communications. At the end of 2016, the Hong

Kong Exchange (HKEx) was ranked seventh among the world’s major international stock

markets in terms of market capitalization, and fourth largest in Asia after Tokyo, Shanghai

and Shenzhen. Moreover, Hong Kong raised more capital via initial public offerings (IPOs)

in the three consecutive years from 2009 to 20114 than any other international stock market.

The amount of capital raised was ranked second among the global exchanges in 2013 and

2014, and Hong Kong regained its position as the market where most funds were raised

through IPO in the world in 2015 and 2016.

Compared with other countries, Hong Kong is highly-ranked in terms of economic strength

and competitiveness. In 2016, Hong Kong’s GDP per capita stood at $58,3225 (current

international dollars, adjusted for purchasing power parity (PPP), ranking it ahead of the

US, the UK and Japan. According to the United Nations’ Human Development Report 2016,

Hong Kong was categorised as a “Very High Human Development” region, enjoying high

life expectancy (84.2 years) and high levels of education (15.7 years) and income (GNI per

capita $54,265), and the city was ranked 12th worldwide, with the second highest human

development index in Asia after Singapore.

3 Refers to the PRD Economic Zone comprising Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing,

Zhongshan and Zhuhai. Also referred to as the ‘Greater PRD’ if Hong Kong and Macau are included.

4 Source: World Federation of Exchanges.

5 GDP based on PPP per capita GDP (current international dollar). Source: World Economic Outlook Database, April 2017,

International Monetary Fund (IMF).


— IV-6 —

Hong Kong was again ranked the freest economy among 180 economies in 2017 by the

Heritage Foundation6, which regularly ranks countries based on ten criteria on a scale of

0 to 100 (100 represents the highest degree of freedom). Hong Kong has retained the top

spot for 23 consecutive years, since the index was first published in 1995.

Hong Kong Dollar movements against major currencies, Dec 2014�Apr 2017

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Malaysianringgit

Britishsterling

Canadiandollar

Philippinepeso

Euro Chineserenminbi

Australiandollar

Singaporedollar

Thai baht Koreanwon

Indianrupee

Swissfranc

NewTaiwandollar

Japaneseyen

Source: Hong Kong Monetary Authority, Savills Research & Consultancy

Due to the faster pace of growth of the US economy, the Federal Reserve began to raise

interest rates for the first time since the global financial crisis towards the end of 2015, and

subsequently raised rates twice in 2016, which led to the appreciation of the US Dollar and

as a consequence the Hong Kong Dollar has appreciated by around 2.9% to 23.8% against

major currencies from 2015 to now.

1.1.3 Economic forecast

a. Key economic indicators

The uncertain global economic environment as well as a weakening Mainland economy is

likely to continue to impact Hong Kong’s economic performance in the short-term, while

the strengthening dollar should keep Hong Kong’s inflation in check in the near future. The

medium-term economic prospects of Hong Kong will depend on further successful

integration with the Mainland economy, the pace of Mainland and global economic

recovery as well as the role Hong Kong could play in China’s new regional initiatives such

as One Belt One Road.

6 Based on the 2017 Index of Economic Freedom, The Heritage Foundation.


— IV-7 —

Forecasts of key indicators, 2017E-2021E

% 2017E 2018E 2019E 2020E 2021E

Real GDP 2.1 2.1 2.3 2.4 2.5

CPI 2.0 2.4 2.5 2.5 2.6

Unemployment Rate 3.5 3.6 3.6 3.5 3.5

Private Consumption 2.4 2.0 2.2 2.5 2.7

Retail sales 1.1 1.9 2.6 3.2 3.8

Source: FocusEconomics

Hong Kong’s retail and consumer products sector is also forecast to slowly recover as there

are signs that with a potential uptick in overall economic sentiment, coupled with more

supportive long-term government policies, the sector may rebound after 2017. Stable

domestic economic growth will help boost consumer sentiment, primarily through the

stabilization and gradual rebound of the real estate and equity markets. Infrastructure

projects to further develop the airport’s capacity and other nearby developments will also

help make Hong Kong more attractive to tourists.

b. Population growth, distribution, profile and density

There were 7.37 million residents in Hong Kong at the end of 20167. Recently, population

growth has rebounded slightly, with an average annual growth rate of 0.7% recorded over

the five-year period from 2012 to 2016, compared with 0.6% and 0.4% from 2007 to 2011

and from 2002 to 2006 respectively. According to the report “Population and Household

Statistics Analysed by District Council District, 2016” by the Census and Statistics

Department, the mid-year 2016 population on Hong Kong Island was 1.25 million while

Kowloon and New Territories accounted for 2.24 million and 3.84 million persons

respectively.

The population density (including the marine population) in Hong Kong stood at 6,674

people per sq km at the end of 20168. By district, Kowloon is the most densely populated,

in terms of District Council Districts, with 47,687 people per sq km9 in mid-2016, followed

by Hong Kong Island and the New Territories, where the population densities stood at

15,949 and 4,034 people per sq km respectively in the same year.

7 Based on “Table 002: Population by Age Group and Sex”. Source: Census and Statistics Department.

8 Figures compiled using the population figure divided by Hong Kong’s land area (1,105 sq km). Source: Table 002:

Population by Age Group and Sex and Hong Kong Annual Digest 2016, Census and Statistics Department.

9 Figures compiled using the population figure divided by Hong Kong’s land area (1,105 sq km). Source: Population and

Household Statistics Analysed by District Council District, 2016 and Hong Kong Annual Digest 2016, Census and

Statistics Department.


— IV-8 —

According to the “Projections of Population Distribution, 2015-2024” by the Planning

Department, Hong Kong’s population is expected to increase from 7.35 million in mid-2016

to 7.63 million in mid-2021. By district, the projected populations on Hong Kong Island

will fall slightly from 1.25 million in mid-2016 to 1.22 million in mid-2021. For Kowloon

and the New Territories, the projection results anticipate increases from 2.21 million to 2.31

million and from 3.89 million to 4.09 million respectively over the same period.

The population is following an aging trend. According to the publication “Hong Kong

Population Projections, 2015-2064” by the Census and Statistics Department, the

proportion of people aged 65 and above is forecast to rise from 15% in mid-2014 to 23%

by mid-2024, while the proportion of those aged under 15 is projected to remain stable at

12%. The population aged between 15 and 64 is projected to fall from 73% to 65% over the

same period. As a result, the median age is projected to rise from 43.7 years in mid-2014

to 47.0 years by mid-2024.

1.2 General hotel market overview

1.2.1 Classification of hotel segments

Hotels in Hong Kong can be classified into three main categories (High Tariff A, High Tariff B

and Medium Tariff), based on a scoring system of five key criteria, namely location, facilities,

staff-to-room ratio, room rates and business mix, as set out by the HKTB.

There were 267 hotels in Hong Kong at the end of Q1/2017, representing 75,877 rooms, with

24% classed as High Tariff A, 38% as High Tariff B, 31% as Medium Tariff and 7% unclassified.

Distribution of hotel stock by class, Q1/2017

24%

38%

31%

7%

High Tariff A

High Tariff B

Medium Tariff

Unclassified

Source: HKTB, Savills Research & Consultancy


— IV-9 —

1.2.2 Hotel stock distribution by district

Tsimshatsui, the most popular core tourist and retail area in Kowloon, has the largest hotel stock

at 16,901 rooms or 22% of all hotel rooms, followed by Wan Chai District (13%), Central &

Western District (11%), Yau Ma Tei / Mong Kok (9%) and Kowloon City (9%), with the

remainder distributed across other districts of Hong Kong, according to the HKTB.

Distribution of hotel stock by district, Q1/2017

11%

13%

7%

2%

22%9%

9%2%

0%

1% 5%

1%

4%

5%

1%2%

6%Central / Western

Wan Chai

Eastern

Southern

Tsim Sha Tsui

Yau Ma Tei / Mong Kok

Kowloon CityKwun Tong

Sham Shui Po

Wong Tai Sin Kwai Tsing

Sai Kung

Sha Tin

Tsuen Wan

Tuen MunYuen Long

Island


The expansion of the hotel sector has slowed after a boom in 2012 which saw 4,188 rooms added

in that year alone. After that, net hotel room supply from 2013 to 2016 averaged 1,869 rooms per

annum.

In 2016, 422 and 622 new rooms were added on Hong Kong Island and in Kowloon respectively

with no new supply in the New Territories. The highest concentration of new rooms completed

were in Yau Ma Tei / Mong Kok (45.2%), followed by Wan Chai (24.6%) and Tsimshatsui

(14.4%).


— IV-10 —

1.3 Hotel operating performance

1.3.1 Overall market performance

Average hotel room rates, occupancy rates and revenue per available room, 1992-2016

0

10

20

30

40

50

60

70

80

90

100

0

200

400

600

800

1,000

1,200

1,400

1,600

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

%

Avg Room Rates (LHS) RevPAR (LHS) Occupancy Rate (RHS)

HK$


Between 1998 and 2003, average hotel room rates stood at approximately HK$706 per night but

with the introduction of the IVS in 2003, which boosted the tourism market, the average hotel

room rate rose by 52% from 2004 to 2008. When the global financial crisis hit, average room

rates then dropped by 16% from 2008 to 2009 due to the weakening economic situation, and a

reduction in the number of long-haul travellers from the US, Europe and Australia.

Corporate travellers also reduced their travel budgets, with some postponing their travel plans

during this cost-conscious period in 2008 and 2009. From 2009 to 2014, average room rates

rebounded strongly by 44%, with average hotel room rates standing at HK$1,473 per night for

2014 full year. The declining hotel guests from long-haul due to global economic uncertainties,

as well as slowdown in Chinese hotel guests due to anti — corruption policies and restrictive

travel measures introduced, put pressure on the average room rate from 2015 onwards, with room

rates declining by 9.2% and 3.7% in 2015 and 2016 respectively. For 2016 full year, the average

hotel room rate stood at HK$1,287 per night.


— IV-11 —

From 2003 to the end of 2014, average hotel occupancy rates showed a strong improvement from

approximately 70% to 90%, reflecting the healthy demand for hotel rooms, supported by robust

Chinese visitor numbers due to the IVS. With no significant impact from the “Occupy Central

movement”, visitor arrivals rose by 12% in 2014, while visitors from Mainland China increased

by 16% in the same year. The decline in visitor numbers from 2015 onwards led to occupancy

rate to drop to 86% in 2015; but with significant room rates corrections due to operators’ effort

to sell more room nights, occupancy rates slightly rebound to 87% in 2016.

With both room rates and occupancy rates improving significantly from 2003 to 2014, revenue

per available room (RevPAR)10 increased dramatically by 181% over the period. RevPAR

averaged HK$1,325 per night in 2014, an all-time high and 24% higher than the previous peak

in 1996. Subsequent weaknesses in hotel performances saw RevPAR decline by 13.3% and 2.6%

in 2015 and 2016 respectively to reach HK$1,120 per night in 2016.

The rebounding number of overnight visitors as well as gradually improving local economic

conditions led to an improved performance in the hotel sector over the first three months of 2017,

with occupancy rates increasing rapidly to 88% from 83% in the first three months of 2016.

Average room rates also recorded a much milder rate of decline of 2% over the same period, with

RevPAR registering a 4.4% Y-o-Y increase over the first three months of 2017 to reach HK$1,119

per night.

1.3.2 By-segment market performance

High Tariff A hotel market performance, 1992-2016

0

10

20

30

40

50

60

70

80

90

100

0

500

1,000

1,500

2,000

2,500

3,000

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

%Avg Room Rates RevPAR Occupancy Rate (RHS)

HK$


10 Calculated by occupancy x average room rate.


— IV-12 —

High-budget travellers are the main demand base for High Tariff A hotels, with senior business

executives and long-haul travellers usually staying in this category, especially those situated in

business districts or traditional tourist areas, such as Central, Wanchai/Causeway Bay and

Tsimshatsui.

Since 1992, average occupancy rates of well above 70% have been recorded for High Tariff A

hotels, even during the economic downturns in 1997, 2003 and 2008. Occupancy rates for High

Tariff A hotels dropped from 84% in 2007 to 72% in 2009 as the global financial crisis resulted

in a fall in high-budget business and long-haul travellers, while average room rates also fell by

15.8% over the period. The strongly rebounding economy, alongside improving visitor numbers,

helped to increase average occupancy rates and average room rates to 86% and HK$2,454 over

2014.

The anti-corruption drive in Mainland China and the decline of high end Mainland travellers,

together with a slowing influx of high-end business and vacation travellers from long-haul

markets hit the High Tariff A market hard, resulting in a decline in the 2015 occupancy rate to

83%. With long-haul visitor number stabilizing in 2016 and operators keen to maintain

occupancy by slashing rates, the occupancy rate rebounded to 84% in 2016. Average room rates

declined by 12.2% from 2014 to 2016 as a result.

RevPAR fell from HK$1,798 in 2007 to HK$1,302 in 2009 as a result of declining visitor

numbers, in particular long-haul, over the same period. Driven by an increase in long-haul

visitors as well as the changing accommodation patterns of Chinese visitors, RevPAR

performance for High Tariff A hotels rebounded to HK$2,049 in 2013.

In 2014, high occupancy and average room rates were supported by the return of high end

short-haul travellers, especially visitors from other Asia countries, e.g. South Korea, Japan and

India. RevPAR stood at an historical high of HK$2,109 in 2014, a 2.9% YoY growth from 2013.

The slowdown of the Eurozone and the US economy discouraged long-haul high spending

visitors from travelling abroad, including Hong Kong in 2015 and 2016, and this had an adverse

impact on the RevPAR of High Tariff A hotels which softened from HK$2,109 in 2014 to

HK$1,815 in 2016.

The High Tariff A market also experienced an uplift in demand over the first three months of

2017, with occupancy rates increasing from 81% in Q1/2016 to 85%, but this advance came at

the cost of reduced room rates of around 4% y-o-y, resulting in a flat RevPAR over the period

of HK$1,794 per night.


— IV-13 —

High Tariff B hotel market performance, 1992-2016

0

10

20

30

40

50

60

70

80

90

100

0

200

400

600

800

1,000

1,200

1,400

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


HK$


High Tariff B hotel demand comes largely from corporate visitors as well as overseas leisure

travellers who visit Hong Kong with mid to high budgets. The average High Tariff A hotel room

rate surpassed its 2007 and 2011 peaks in 2012, and this may have pushed some prospective High

Tariff A guests to stay in High Tariff B hotels in view of the rising costs.

With the exception of 2003, the year of the severe acute respiratory syndrome (SARS) outbreak,

High Tariff B hotels have maintained a very high average occupancy rate of well over 80% since

1992. Average room rates also showed a strong rising trend, increasing by 88% from HK$517 in

2003 to HK$974 in 2008, before the global financial crisis, when average room rates dropped by

20%. From 2009 to 2011, average room rates rose again by 45% on the back of the growing

number of tourists to HK$1,129, while for 2012 average room rates stood at HK$1,228. With the

fall in long-haul travellers by 2.3% in 2013 over 2012, combined with a decline in corporate

visitors and high budget travellers from the PRC, the occupancy rate dropped from 91% in 2012

to 89% in 2013.

A shift from high budget PRC travellers to mid budget PRC travellers helped to support the

occupancy rate of High Tariff B hotels, and the average occupancy rate rebounded to 91% in

2014. The average room rate stood at HK$1,201 and HK$1,205 per night in 2013 and 2014

respectively.

The slowing Mainland economy and in the Asia Pacific region from 2015 onwards has hit this

segment hard with both Mainland and short-haul travellers as their key target visitors. Hotel

operators were quick to react to adjust rates downward to try to maintain occupancy, with

average room rates declining by 14.5% from 2014 to 2016 as a result, while occupancy rate

slightly decline from 91% in 2014 to 88% in 2015 before rebounding to 89% in 2016.


— IV-14 —

RevPAR for High Tariff B hotels increased from HK$631 in 2009 to HK$1,027 in 2011 due to

the high occupancy rates. Average RevPAR continued its upward trend in 2012, standing at

HK$1,117, and surpassing the previous peak in 1996 for the first time by 2%. RevPAR for High

Tariff B hotels dropped by nearly 2% from the 2012 peak to HK$1,097 in 2014 due to a fall in

the average room rates. RevPAR continued to decline due to the reducing room rates and

registered a 16.1% drop to reach HK$920 per night in 2016.

The mid-budget hotel segment, mainly supported by returning short-haul business / vacation

travllers and increasing Mainland business travellers, registered improvements in both

occupancy rate (from 87% to 89%) and average room rates (1% y-o-y increase) over the first

three months of 2017, resulting in a 2.7% increment in RevPAR over the period, reaching

HK$917 per night.

Medium Tariff hotel market performance, 1992-2016

0

10

20

30

40

50

60

70

80

90

100

0

100

200

300

400

500

600

700

800

900

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016


HK$


Chinese visitors and tour groups, as well as individual tourists, are the main demand drivers for

Medium Tariff hotels. The rising number of Chinese tourists and their increasing wealth provide

strong support to this hotel segment.

Since 2004, the average occupancy rate of Medium Tariff hotels has been well over 80%,

supported by the introduction of the IVS, increasing to well over 90% in 2010 and 2011. The

average occupancy rates for 2013 and 2014 were recorded at 91% and 92% respectively.

Restrictive measures on IVS and the appreciating Hong Kong Dollar affected Mainland visitors

who spent most of their budgets on shopping, thus occupancy of Medium Tariff hotels decreased

the sharpest from 91% to 87% in 2015 and 2016 respectively.


— IV-15 —

Supported by high occupancy rates, average Medium Tariff hotel room rates recorded a very

strong performance, increasing by 134% from HK$334 in 2003 to HK$781 in 2012. A shift in

travel patterns away from overnight and towards same day travel by Mainland visitors led to a

mild correction in average room rates from HK$781 in 2012 to HK$761 per night in 2014. With

demand shrinking significantly, operators in this segment responded to reduce room rates by

12.6% over the past two years, amounting to HK$666 per night.

The average room rate and RevPAR in 2011 stood at HK$710 and HK$660 respectively. Driven

primarily by room rate growth while near full occupancy rates were recorded, RevPAR grew by

a further 9% in 2012 and stood at HK$719, on a par with the 1996 levels. The decrease in room

rate in 2014 slowed RevPAR to HK$700, a 2.6% fall from the previous peak in 2012. RevPAR

continued to decline by 17.2% in 2015 and 2016 to reach HK$579 per night.

The strong rebound in Mainland vacation travellers induced a similar improvement in the

Medium Tariff market from January to March 2017, which saw the highest increment in both

occupancy rates (from 79% to 89%) and average room rates (3% y-o-y increase), resulting in a

15.9% rebound in RevPAR over the period, reaching HK$598 per night.

1.4 Historical supply and demand by segment

1.4.1 Historical supply

Hotel stock by category, 2003-2016

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

High Tariff A High Tariff B Medium Tariff UnclassifiedNo. of rooms


Hotel inventory has increased steadily since the containment of SARS, and the total number of

hotel rooms rose by 36,735 or 96% from 2003 to 2016. By hotel category, the High Tariff B

sector saw the highest growth in room numbers at 12,482 over the period.


— IV-16 —

1.4.2 Historical demand

a. Overall hotel guest profile by segment

According to the HKTB, there were approximately 8 million hotel guests in 2015. This can

be broken down into Transient, Group and Others, representing 79.9%, 11.9% and 8.2%, of

the total respectively.

Hotel guest profile by segment, 2015

22%

37%

21%

3%

In-3%

1%

5%

3%0%

-in1%

4%

Corporate / Business FIT

Direct FIT

Whole / Package FIT

Corporate Group

house Meeting

Other MICE

Leisure Group

Airline CrewGovernment Walk

Others


An increasing number of regional offices of overseas companies in Hong Kong, as well as

the growing MICE market, resulted in the sustainable growth in business travellers, despite

declining total overnight visitor numbers. Corporate/Business Free Individual Travellers

(FIT) accounted for 22.2% of all hotel guests in 2015, a marked increase from 15.4% in

2014. Business visitors coming in Corporate Group, In-house Meeting and Other Meetings,

Incentives, Conventions and Exhibitions (MICE) accounted for 7.0% of all hotel guests in

2015, also an improvement of 5.2% in 2014.

The decline in Mainland visitors adversely affected the Direct FIT as well as Leisure Group

hotel guests, whose proportion declined from 42.7% and 9.2% in 2014 to 36.9% and 4.9%

in 2015 respectively.


— IV-17 —

b. Hotel guest profile by segment by hotel category

Hotel guest profile by segment by hotel category, 2015

Proxy to HKTB category High Tariff A High Tariff BMedium

Tariff

ADR Range >$2,351 $1,651-$2,350 $951-$1,650 <$950

Corporate / Business FIT 28.7% 22.3% 23.4% 16.0%

Direct FIT 38.8% 39.1% 35.0% 36.4%

Whole / Package FIT 17.8% 24.1% 17.9% 24.4%

Corporate Group 5.0% 3.7% 3.6% 2.1%

In-house Meeting 6.3% 1.9% 2.4% 0.7%

Other MICE 1.2% 0.4% 1.4% 0.8%

Leisure Group 0.6% 1.8% 3.1% 13.7%

Airline Crew NA 4.1% 6.1% 0.1%

Government 0.2% NA NA NA

Walk-in 0.5% 0.4% 1.2% 2.2%

Others 0.8% 2.2% 5.8% 3.7%


The classification of hotel guests is based on the ADR range, and to make it more

comparable to HKTB’s hotel classification, we have proxied the various ADR ranges with

the respective hotel classification in the above table.

Taking a closer look at hotel guest profiles by hotel segment, High Tariff A hotels welcomed

the highest proportion of Corporate/Business FIT, Corporate Group, In-house meeting and

MICE travellers, representing 28.3% to 41.2% of the total.

High Tariff B hotels recorded a high proportion of Direct FIT (35.0%) and

Corporate/Business FIT (23.4%), which was well supported by mid-budget corporate and

individual leisure travellers.

Medium Tariff hotels, on the other hand, had the highest proportion of tour groups (13.7%)

among all hotel categories, although Direct FIT were their major guest segment (36.4%) in

2015, as Chinese tourists coming to Hong Kong via the IVS and other low budget individual

travellers formed their main customer base.


— IV-18 —

c. Overall hotel guest profile by geography

Hotel guest profile by geography, 2015

37%

9%

4%

4%3%

10%

9%

10%

4% 10%

Mainland China

Hong Kong

Japan

South KoreaTaiwan

Southeast Asia

USA and Canada

Europe

Australia and New Zealand Others


We saw the highest percentage of hotel guests coming from Mainland China (36.9%) in

2015, followed by Europeans (10.4%) and Southeast Asians (9.5%). Notably, 9.2% of hotel

guests were locals, reflecting the fact that some suburban hotels attracted local vacation

demand during festive periods.

Hotel guest profile by geography and by hotel category, 2015

Proxy to HKTB category High Tariff A High Tariff BMedium

Tariff

ADR Range >$2,351 $1,651-$2,350 $951-$1,650 <$950

Mainland China 26.7% 30.1% 31.1% 46.6%

Hong Kong 8.9% 5.9% 8.5% 11.1%

Japan 3.5% 4.2% 4.3% 3.7%

South Korea 2.7% 2.2% 3.9% 5.1%

Taiwan 2.4% 2.6% 3.2% 4.1%

Southeast Asia 8.9% 10.5% 10.0% 8.7%

USA and Canada 19.8% 13.0% 8.7% 5.0%

Europe 12.9% 14.0% 12.4% 6.7%

Australia and New Zealand 5.1% 5.8% 5.2% 2.5%

Others 9.1% 11.7% 12.7% 6.5%



— IV-19 —

In 2015, High Tariff A hotels welcomed the highest percentage of Europeans (12.9% to14.0%) and Americans (13.0% to 19.8%), while the percentage of Mainland guests were thelowest (26.7% to 30.1%) among the three categories.

While High Tariff B hotels had a more balanced guest mix in terms of geography in 2015,as expected, we saw the highest concentration of Mainland guests (46.6%) in Medium Tariffhotels.

1.5 Share of hospitality revenue by hotel segment

Percentage distribution of hotel revenues, 2015

64.1%

32.5%

0.2%

0.8%

0.9%

1.6%

Rooms Department ,

Food & Beverage Department ,

Telephone Department ,

Spa/Health Club,

Minor-Operated Department ,

Rentals & Other Income,


According to data from the HKTB, in 2015 on average 64.1% of hotel revenue came from rooms,while the F&B department, a second important revenue source, contributed around 32.5% of totalrevenue. Other activities and services such as spas/health clubs and minor operations accountedfor the remaining 3.4%.

Percentage distribution of hotel revenues by hotel type, 2015

Proxy to HKTBclassification All hotels High Tariff A hotels

High Tariff Bhotels

MediumTariffhotels

ADR Range >$2,351 $1,651-$2,350 $951-$1,650 <$950

Rooms 64.1 49.4 61.4 68.5 74.4

F&B 32.5 45.0 36.0 28.9 22.0

Telephone 0.2 0.2 0.1 0.2 0.2

Spa/health club 0.8 2.9 0.4 0.2 0.1

Minor operations 0.9 1.1 0.8 0.8 0.8

Rents and other incomes 1.6 1.3 1.2 1.3 2.5



— IV-20 —

In the High Tariff A hotel category, room revenue accounted for a total of 49.4% to 61.4% of all

revenues, while around 36.0% to 45.0% of revenue came from F&B, higher than either High

Tariff B or Medium Tariff hotels. As most High Tariff A hotels are full-service hotels11 with an

ample choice of restaurants, and convention and meeting facilities with catering services, they

generally have a higher proportion of F&B income than other tariff hotels.

1.6 Brief overview of select-service hotel segment

Over recent years, the strata between limited-service and full-service hotel properties gave rise

to a hybrid known as the select-service segment. Select-service hotels offer the basics of

limited-service properties together with a selection of the services and amenities of full-service

hotel properties. Generally, this means some restaurant and banquet facilities but on a less

elaborate scale than at full-service hotels. It is also common for these hotels to be located in

convenient locations / transport nodes close to business districts as a high proportion of the guest

profile is budget business travellers and MICE visitors.

Hotels which are select-service keep operating costs down by offering services and amenities in

moderation. Such properties generally do not feature multiple restaurants, extensive catering

services, or a lot of meeting space. For example, a select-service hotel’s restaurant is likely to

offer a limited menu and generally does not open for all three meals, seven days a week.

In the case of in-room amenities, however, levels can approach or meet those found at

full-service hotels. In fact, commercial demand has grown among select-service hotels since

global financial crisis in 2009, as budgets for business travel have tightened. The select-service

segment has continued to increase its competitive advantage by offering the in-room amenities

of full-service hotels while keeping prices low in the absence of a full-spectrum product offering.

With business traveller numbers continuing to increase but with greater numbers facing budget

constraints, and with more repeat vacation customers wanting to have different accommodation

experiences, demand for select-service hotels in Hong Kong has increased over the past few

years. To cope with this increasing demand we see more full-service hotel operators opening

select-service hotels in convenient locations, while some limited-service hotel brands also try to

tap this market by providing more comprehensive in-room services and restaurant offerings in

their flagship products.

With Mainland business travellers (who usually have tighter budgets than their western

counterparts) look set to increase, coupled with the changing travel pattern of Mainland

individual travellers wanting a broader accommodation offering, we expect demand for

select-service hotels to increase over the next few years.

11 Full-service hotels are generally mid-price, upscale or luxury hotels with a restaurant, lounge facilities and meeting space

as well as minimum service levels often including bell service and room service. These hotels report food-and-beverage

revenue. Source: HotelNewsNow.com


— IV-21 —

1.7 Tourism/leisure industry market development and trends

1.7.1 Tourism transport infrastructure

There are a number of tourism infrastructure projects underway/under planning which will

further enhance the integration of Hong Kong with southern China, as well as improving the

attraction of Hong Kong to overseas tourists.

Key transportation and tourism infrastructure projects, 2018-2023 and beyond

Project Type Expected year of completion

Transport Infrastructure

1 Guangzhou—Shenzhen—Hong

Kong Express Rail Link

Rail 2018

2 Hong Kong—Zhuhai—Macau

Bridge

Bridge 2018 or after

3 Tuen Mun Western Bypass and

Tuen Mun—Chek Lap Kok

Link

Road Under review (Tuen Mun Western

Bypass) 1H/2019 at the earliest

(Southern connection of Tuen

Mun—Chek Lap Kok link) 2020 at the

earliest (Northern connection of Tuen

Mun—Chek Lap Kok link)

4 New border control point in

Heung Yuen Wai and Liantang

Border control

point

2018

5 Sha Tin to Central Link Rail 2019 (Sha Tin to Hung Hom)

2021 (Hung Hom to Admiralty)

6 Route 6 Road Under review (T2 and Central

Kowloon Route)

2019 (Tseung Kwan O — Lam Tin

Tunnel)

7 Hong Kong International

Airport — third runway

Airport 2023

Source: HKSAR government, Savills Research & Consultancy


— IV-22 —

Location map of key infrastructure

Source: HKSAR government, Savills Research & Consultancy

We will highlight below the progress of some infrastructure projects which will have an impact

on the local hotel market in general and on the subject property in particular.

a. Guangzhou—Shenzhen—Hong Kong Express Rail Link

The Hong Kong section of the Guangzhou—Shenzhen—Hong Kong Express Rail Link runs

wholly in a 26-km underground tunnel from the West Kowloon terminus to join the China

section at the boundary at Huanggang. The total journey time will be 48 minutes from West

Kowloon to Shibi in Guangzhou, and 14 minutes from West Kowloon to Futian in

Shenzhen. The estimated completion year is 2018.

b. Hong Kong—Zhuhai—Macau Bridge

The proposed Hong Kong—Zhuhai—Macau Bridge (HZMB) is a large sea crossing linking

Hong Kong, Zhuhai City and Macau. The bridge is designed to meet the demands of

passengers and freight land transport between Hong Kong, China and Macau, to establish

a new land transport link between the east and west coasts of the Pearl River, and to

enhance economic development. The HZMB Main Bridge is a 29.6-km, two-way, three-lane

carriageway in the form of a bridge-cum-tunnel structure comprising an immersed tunnel

of about 6.7 km. The estimated earliest completion year is 2018.


— IV-23 —

c. Tuen Mun Western Bypass and Tuen Mun—Chek Lap Kok Link

The proposed Tuen Mun—Chek Lap Kok Link and Tuen Mun Western Bypass will providethe most direct route between the northwest New Territories and Lantau. Upon completion,the new route will significantly reduce the journey time between the northwest NewTerritories and Lantau. The project will relieve the capacity of the existing roads, offerstrong support to the tourism and logistics industry and reinforce HKIA as an internationaland regional aviation hub by providing alternative land access.

d. New border control point in Heung Yuen Wai and Liantang

The new border control point (BCP) at Liantang/Heung Yuen Wai in the northeast NewTerritories will serve the cross-boundary goods vehicles and passengers travelling betweenHong Kong and Shenzhen East. The new BCP will connect with the Shenzhen EasternCorridor and provide efficient access across the border to the eastern part of Guangdong,including Shantou, Shanwei and Chaozhou, and the adjacent provinces such as Fujian andJiangxi.

e. HKIA — third runway

With a third runway, HKIA will be able to handle 102 air traffic movements (ATMs, alsoknown as flight movements) per hour, or a practical maximum annual capacity of about620,000 ATMs. This means HKIA could accommodate its forecast demand up to 2030 andpossibly beyond, giving a substantial boost to Hong Kong’s economy and securing theairport’s status as one of the world’s most important aviation hubs. It is estimated to becompleted by 2023.

1.7.2 Future tourist attractions

Project TypeExpected year ofcompletion

1 Expansion of Ocean Park Tourism infrastructure 2018

2 Expansion of Disneyland Tourism infrastructure 2018-2023

3 West Kowloon CulturalDistrict

Culture and entertainment From 2016 (in 3 phases)

4 Kai Tak Fantasy Culture and entertainment Under review

Source: Ocean Park, Disneyland, HKSAR government


— IV-24 —

a. Expansion of Ocean Park

The Park will build an all-weather 400,000-sq-ft waterpark called “Water World”, a

retail-dining-cum-entertainment zone and a parking zone at Tai Shue Wan. The Water World

is estimated to accommodate 7,000 visitors per day during peak season and 4,000 visitors

per day during the regular season. The retail zone will be located at the entrance of Water

World, providing group dining and upscale alfresco dining. The parking will be underneath

the water park with 250 car parking spaces and 10 coach parking slots.

The company estimated that non-local visitors’ length of stay in Hong Kong will be

extended by three quarters of a day with the addition of the facilities.

b. Expansion of Disneyland

Hong Kong Disneyland announced in November 2016 an expansion plan at the Phase 1 site

while exploring Phase 2 of the long-term development plan.

The expansion and development plan will run from 2018 until 2023 with the total number

of themed areas to increase from 7 to 9. It will be the first Disney theme park for “Frozen”

and “Marvel Super Heroes”. The plan will also transform the existing castle.

c. West Kowloon Cultural District

The West Kowloon Cultural District (WKCD) project is an important strategic investment

for the HKSAR government in its support for the development of arts and culture in Hong

Kong. It will meet the long-term infrastructure needs and foster the organic growth of the

culture and creative industries. The WKCD will be an integrated arts and cultural district

with world-class facilities, iconic architecture and quality programs. It aims to provide an

impetus to improve the quality of life, as well as acting as a cultural gateway to the PRD

region in southern China.

Alongside 15 performing arts venues of different types and scale (to be completed in

phases), a cultural institution with a museum (the M+) focusing on 20th and 21st century

visual culture, and an Exhibition Centre, with a focus on arts and culture and the creative

industries, will also be built. There will be retail-dining-entertainment facilities and

residential, hotel and office developments within the WKCD. The arts and cultural facilities

are proposed to be commissioned in phases starting from 2016.

d. Kai Tak Fantasy

In his 2013 Policy Address, the Chief Executive announced a proposal for the establishment

of a recreational landmark called Kai Tak Fantasy. It is located at the site of the former

airport runway in the Kai Tak Development area, Kwun Tong Ferry Pier Action Area and

the Enclosed Water Body between the Kai Tak Runway and Kwun Tong Ferry Pier Action

Area. According to the Energising Kowloon East Office, it will become a tourism,

entertainment and leisure destination with a “Healthy City” theme.


— IV-25 —

1.8 Market outlook

In the short term, the Hong Kong’s hotel market faces both external and internal challenges: the

resurgent Euro debt crisis and the generally weak economic prospects of the Eurozone mean

Europeans are less willing to travel abroad, both for business and leisure. Hong Kong is also

losing some of its competitive edge as a ‘shopping paradise’ to regional cities with the

competitive devaluation of currencies in most Asian countries. Recent hostile acts towards

Mainland visitors have also inevitably tarnished Hong Kong’s image as a tourist city.

To cope with these short term challenges and to commemorate the 20th anniversary of the

establishment of the Hong Kong Special Administrative Region (HKSAR), the Tourism

Commission joined with the HKTB to roll out a promotion called “Celebrate the 20th

Anniversary of the Establishment of the HKSAR with Smart Deals”, which kicked off on 1 April

and features over 40 deals and offers for visitors by 21 local attractions and trade partners.

The medium outlook for Hong Kong’s hospitality industry is more positive, as a number of

influences will continue to have an impact on the sector. Leisure travellers will be drawn to Hong

Kong by the recently completed and ongoing extensions of both Disneyland and Ocean Park. The

appeal of Hong Kong for Mainland Chinese as China’s most cosmopolitan and prosperous city

is expected to endure, in particular for the more affluent and mature groups who now seek a more

complete travel experience than simply shopping and are willing to spend more on hotels and

sightseeing. Other factors, such as rising incomes, improving employment prospects, a more

global perspective and more leisure time should also ensure a continuing flow of visitors from

elsewhere in Asia.

With Hong Kong’s strengthening role in the Pearl River Delta (PRD), China’s wealthiest and

most advanced region, the number of business travellers will rise. Hong Kong is becoming

economically integrated with China and will continue to play an increasingly important role as

a finance, logistics and business services hub. The already implemented Shanghai-Hong Kong

Stock Connect and Shenzhen-Hong Kong Stock Connect and the gradual establishment of Hong

Kong as the premier offshore Renminbi centre for China should attract more Chinese business

travellers, both short term and long term. These positive attributes will continue to strengthen

Hong Kong’s position as a preferred place for doing regional business and should therefore result

in an increasing number of overnight business travellers.

Hong Kong’s transport infrastructure projects will make cross-border travel easier as well as

improving mobility within Hong Kong itself, while HKIA’s proposed third runway could increase

the airport’s capacity to handle 607,000 flight movements, 102 million passengers and 8.9

million tonnes of cargo per year, meeting projected demand up to and possibly beyond 2030. The

project has been granted government approval and the Airport Authority has adopted the

three-runway system as a future development mode. This is already at an advanced planning

stage and it is anticipated that the entire project will take at least 11 years from planning to

implementation, thus any impact on the tourism industry in Hong Kong would be long-term.


— IV-26 —

In Asia’s competitive tourist market, however, threats do exist. Singapore has launched a number

of new ‘Integrated Resorts’ featuring casinos, and convention and exhibition facilities in order

to attract leisure and business travellers. Other regions and countries have also put in place

schemes similar to the IVS to attract Chinese arrivals, and as mentioned earlier, the decline of

Hong Kong to the fourth most visited destination by Mainland outbound tour groups (behind

Thailand, South Korea and Japan) in 2016 should serve as a wake-up call for Hong Kong to

initiate more tourist attractions and programmes to attract more Mainland visitors back to the

territory.

1.8.1 Future supply

Hotel supply forecast, 2000-2019E

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

E

2018

E

2019

E

No. of roomsNo. of roomsSupply (RHS) Stock (LHS)


Hotel supply by district, 2017E-2019E

3% 8%

10%

10%

6%3%

1%

12%

1%6%

13%

6%

6%

4%5%

6%

Central & Western Kowloon City

Kwai Tsing

Kwun Tong

Mongkok/Yau Ma TeiSai Kung

Sham Shui Po

Tsim Sha Tsui

Tsuen WanWong Tai Sin

Eastern HK

Wan Chai

Tuen Mun

Southern HKSha Tin

Island



— IV-27 —

Summary of hotel rooms in core and non core locations, 2017E-2019E

Core Non-core

3,392 rooms 9,157 rooms

27% 73%

Source: HKTB

Between 2017 and 2019, an additional supply of 12,549 hotel rooms is forecast to be released

into the market according to the HKTB, with 51.9% and 43.7% of the supply coming in 2017 and

2018 respectively. A majority (73%) of the future supply of hotel rooms is located in non-core

locations, while 27% is located in core areas. This supply is expected to be concentrated in Yau

Tsim Mong District (2,286 rooms), of which 1,476 rooms are in Tsimshatsui district. The second

and third largest are Eastern District and Kwai Tsing with 1,571 and 1,293 rooms respectively.

Estimated hotel supply by segment, 2017E-2019E

Hotel category Number of rooms %

High Tariff A 3,120 24.9%

High Tariff B 3,140 25.0%

Medium Tariff 6,289 50.1%


While no official data for future hotel supply by segment is available, we have estimated the

breakdown by taking into consideration the location, scale and possible future operators and

offerings of the hotel supply pipeline to compile the above table.

There will be approximately 3,120 hotel rooms (24.9%) completed over the next four years which

could fall into the High Tariff A category, a high proportion of which will be located in core

tourist areas (except the two hotels to be located in Ocean Park and Disneyland). Potential High

Tariff B and Medium Tariff hotel supply coming on stream represents 25.0% and 50.1% of future

hotel completions from 2017 to 2019, respectively.

1.8.2 Forecast demand and occupancy rates by hotel segment

The expected recovery in Mainland visitor arrivals, coupled with a rise in the number of business

travellers over the next few years, should form the basis of hotel demand in the short-term. In

2016, hotel rooms occupied was estimated to reach around 56,100 rooms per day with an

estimated 64,400 rooms available for sale per day (86% of the total number of rooms of 74,800).

Assuming a steady 5% per annum increment in hotel demand can be achieved in the short-term,

hotel rooms occupied would increase to 64,700 rooms per day by 2019.


— IV-28 —

Nevertheless, the forecast growth in demand this year and next may not keep pace with supply

with over 10,000 hotel rooms to be completed over the two-year period, and as such occupancy

rates are expected to adjust to 84% in 2017, 83% in 2018 before rebounding to 87% in 2019 when

most of the supply has completed.

In the medium term, we expect hotel occupancy to stabilize at the 5-year average from 2012 to

2016 of 88%. Based on the long term historical relationship between overall and different tariff

occupancy, the occupancy forecast over the next five years can be illustrated as follows.

Summary of average occupancy rate projections, 2017E-2021E

YearAll hotels

(%)High Tariff A

(%)High Tariff B

(%)Medium Tariff

(%)

2017 84 81 87 84

2018 83 80 86 83

2019 87 84 89 87

2020 88 85 90 88

2021 88 85 90 88

Source: Savills Research & Consultancy

1.8.3 Forecast average room rates and RevPAR

Short-term demand from affluent long-haul visitors, especially from the Eurozone, for High

Tariff A rooms may slow further, however, the slack may be gradually taken-up by affluent

Chinese, in particular business travellers working in the finance industry who are on more

generous budgets. High Tariff B hotels are expected to benefit from their more diversified guest

profile to take advantage of both overseas and Chinese business travellers on mid-range budgets.

Medium Tariff hotels are expected to suffer from the anticipated slowdown of leisure Chinese

visitors and tour groups on tighter budgets.

Looking at the medium to long term prospects of the hotel sector, we believe that hotel room

demand is well supported by growing numbers of increasingly affluent Chinese, recovering

long-haul visitors in particular from the U.S., and high-spending business travellers, increasingly

from Mainland China given closer economic integration, barring any unforeseen shocks.

There is a high positive correlation between average room rate growth and growth of hotel

demand, proxied by the occupancy rate, as well as economic growth, proxied by GDP. The

average room rate is projected to consolidate in 2017 and 2018 due to the amount of supply in

the pipeline, but should swiftly rebound from 2019 onwards when more incentives are introduced

by the government to revive the hotel sector, together with recovering demand from both short

and long haul markets as well as improving tourism infrastructure in the long run. RevPAR over

the next five years can then be estimated by utilizing both the occupancy rates and average room

rate forecasts.


— IV-29 —

The core demand base for high tariff hotels is high-spending business travellers and long-haul

tourists, who are less price sensitive, as well as wealthier mainland Chinese. Medium Tariff

hotels, on the other hand, are more geared towards backpackers, budget business travellers and

tour groups. We can derive the projected room rates and RevPAR for different hotel categories

from 2017 to 2021 by looking at the historical relationship between overall room rates and room

rates of different categories, as well as those for RevPAR.

Summary of average room rate projections, 2017E-2021E

YearAll hotels

(%)High Tariff A

(%)High Tariff B

(%)Medium Tariff

(%)

2017 -0.8% -0.7% -0.8% -0.8%

2018 -1.3% -1.3% -1.5% -1.4%

2019 +1.7% +1.6% +1.9% +1.8%

2020 +2.7% +2.6% +3.0% +2.9%

2021 +3.1% +2.9% +3.4% +3.3%

Average annual forecast +1.1% p.a. +1.0% p.a. +1.2% p.a. +1.2% p.a.


Summary of RevPAR projections, 2017E-2021E

YearAll hotels

(%)High Tariff A

(%)High Tariff B

(%)Medium Tariff

(%)

2017 -3.7% -3.9% -3.5% -3.9%

2018 -2.5% -2.5% -2.5% -2.7%

2019 6.2% 6.4% 6.0% 6.6%

2020 3.8% 3.7% 4.0% 4.0%

2021 3.1% 2.9% 3.4% 3.3%

Average annual forecast +1.4% p.a. +1.3% p.a. +1.5% p.a. +1.5% p.a.


The above projections are broad industry averages and the performance of individual hotels will

deviate from the mean due to specific micro-market factors and operating strategies. Hotels

facing less competition within their surrounding areas, offering superior amenities or in close

proximity to improved infrastructure are therefore expected to outperform the market as a whole.


— IV-30 —

2.0 HONG KONG TOURISM INDUSTRY OVERVIEW

2.1 Visitor arrivals analysis

2.1.1 Hong Kong’s strategic positioning as a tourism hub

Hong Kong ranked second in Asia (just behind Japan) and 11th in the world in terms of travel

and tourism competitiveness, according to the Travel & Tourism Competitiveness Index in 2017,

compiled by the World Economic Forum, which covers a total of 136 countries.

Hong Kong has long maintained its role as one of Asia’s key regional aviation hubs and this was

reinforced by the opening of the HKIA at Chek Lap Kok in 1998. Most of Asia’s major cities are

within a short flight of the SAR while almost half of the world’s population lies within six hours

flying time.

Hong Kong is one of the top shopping destinations in the world and was ranked sixth in the

’World’s 12 best shopping cities’, a survey conducted by Cable News Network (CNN) in 201412.

The Hong Kong retail offering is diverse, with global and luxury brand names complementing

local retailers. The robust retail sector is supported by a large tourist market and robust domestic

retail sales. Hong Kong has long been renowned as a shopping paradise and genuine-product

offering as well as price differentials have attracted Mainland shoppers in particular to cross the

border and shop in Hong Kong over the past decade.

Besides shopping, Hong Kong also offers a range of world class tourist attractions such as

Victoria Peak, Ocean Park, Hong Kong Disneyland and Ngong Ping 360 Cable Car. The two

internationally renowned theme parks, Hong Kong Disneyland and Ocean Park ranked 17th and

18th respectively in the “Top 25 amusement / theme parks worldwide” of the 2016 Theme

Index13 and also ranked 7th and 8th respectively in the “Top 20 amusement / theme parks in Asia

Pacific” of the same index in 2016, with the two parks attracting a combined 12.1 million

visitations in 2016.

Hong Kong is not all about leisure travel and sight-seeing however. Hong Kong has also been

an international trading hub for decades, as well as a popular meeting point for buyers and

suppliers given its strategic location, well established infrastructure and other competitive

advantages. Aided by some world class exhibition and convention facilities such as Hong Kong

Convention and Exhibition Centre (HKCEC) in Wan Chai and AsiaWorld Expo at HKIA, Hong

Kong has held many premier trade fairs and exhibitions over the years, attracting exhibitors and

buyers from all over the world.

12 Source: CNN

13 Source: TEA/AECOM The Global Attractions Attendance Report, 2016


— IV-31 —

In 2015/2016, the Hong Kong Trade Development Council (HKTDC), the government-funded

trade facilitator and event organizer, organized 30+ major trade fairs in Hong Kong, which

together attracted 37,000 exhibitors and 760,000 buyers, a 2% and 1% y-o-y increase

respectively. Of the 30+ fairs held, 11 were the largest of their kind in Asia, of which Electronics,

Jewellery, Gifts, Watches & Clocks and Lighting are the world’s largest. The increasing number

of exhibitors and buyers / attendees at these fairs will continue to boost MICE visitor demand

for high tariff hotels in Hong Kong.

2.1.2 Historical visitor arrivals

Visitor arrivals, 2001-2016

0

10

20

30

40

50

60

70No. of visitors (millions)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


Visitor arrivals jumped significantly in 2003 after the introduction and gradual implementation

of the IVS. According to the HKTB, from 2003 to 2014, visitor arrivals increased by 292% as

a result of strong Chinese arrival figures, and stood at 60.8 million at the end of 2014.

Global economic uncertainties, the outbreak of MERS in Korea, the appreciation of the Hong

Kong Dollar from 2015 onwards, new restrictive IVS measures (an attempt to stop parallel

traders), where the Central Government replaced multiple-entry individual visit endorsements

for permanent Shenzhen residents with a one-trip-per-week cap in early 2015, as well as an

anti-corruption campaign in Mainland China curbing luxury spending have all contributed to the

decline in visitor arrivals in 2015 and 2016, with overall visitor numbers declining by 2.5% and

4.5% respectively. Visitor arrivals amounted to 56.7 million at the end of 2016.

The strengthening global economy and stabilizing Hong Kong Dollar in late 2016 and early 2017

revived interest in Hong Kong and visitor arrivals rebounded by 0.4% y-o-y in Q4/2016, the first

quarter to register a y-o-y increment after five consecutive quarters of decline. Visitor arrivals

grew by another 3.7% y-o-y in the first three months of 2017 to reach 14.2 million.


— IV-32 —

2.1.3 Visitor Profile Analysis

a. Visitor arrivals by country of origin

A series of measures have been introduced to relax restrictions on travel by Mainland

Chinese to Hong Kong from 2001 onwards (application procedures as well as currency

controls), which have helped unlock hotel demand. This includes the IVS, which was

introduced in July 2003, and allows travellers from selected Chinese cities to visit Hong

Kong independently rather than coming only in tour groups. In 2009, the Mainland

government allowed eligible Shenzhen residents to apply for One�year Multiple�entry IVS

Endorsements to make it easier to visit Hong Kong. IVS now covers 49 mostly 1st and 2nd

tier cities in China, including approximately 270 million people.

From 2003 to 2014, visitor arrivals from China increased dramatically from 8.5 million to

47.2 million, a 458% rise after the implementation of the IVS. This tremendous growth has

made China the single most important source of tourists to Hong Kong and in 2014 their

number represented approximately 78% of that year’s total.

The restrictive IVS measures, coupled with an appreciating Hong Kong Dollar, Mainland

visitor numbers reversed their rising trend and registered a 3.0% decline in 2015 as a result.

The increasing overseas exposure of Mainland tourists also made them more willing to

travel to other Asian countries as well as countries in the West, as evidenced by the decline

of Hong Kong’s importance as a Mainland tourist outbound destination (1st in 2014, 2nd

in 2015, 4th in Q2/201614). With signs of some tension between Hong Kong residents and

Mainland tourists (mainly day trippers/parallel traders), Mainland visitor arrivals continued

to decline by 6.7% in 2016, reaching 42.8 million at the end of the year.

Mainland Chinese visitors saw a healthy rebound of 3.8% in the first three months of 2017

to reach 10.8 million, given a stabilizing China economy and ever closer economic

integration between Hong Kong and China.

14 Only visitor numbers in tour groups are counted. Source: China National Tourism Administration (CNTA)


— IV-33 —

Visitor arrivals from China, long-haul15 and short-haul16, 2001-2016

0

10

20

30

40

50

60

70

China Long Haul Short Haul

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

No. of visitors (millions)


The appreciating Hong Kong dollar in 2015 also affected both short-haul and long-haul

visitors coming to Hong Kong, with both numbers registering minor declines of 1.0% and

0.8% respectively in the year. Nevertheless, both types of visitor rebounded by 3.4% and

2.3% in 2016 respectively due to stronger economies at home. Short-haul visitors continued

their recovery and registered another 5.3% y-o-y growth from January to March 2017,

mainly represented by growing Japanese and South Korean visitors, which grew by 20.9%

and 12.4% over the same period. Dragged down by a decline in European visitors (-1.5%)

due to economic uncertainties in many European Union countries, long-haul visitor

numbers remained stable over the first three months of 2017.

b. Visitor arrivals by purpose of visit

According to data from the HKTB, of all overnight visitors to Hong Kong in 2016,

approximately 60.6% were here on vacation and 16.6% were visiting friends and relatives.

Overnight business travellers represented 15.2% of total overnight visitors with the

remainder (7.5%) in transit. Chinese overnight business travellers numbered 2,129,300,

representing 52.7% of the total overnight business visitors in 2016. The increase in Chinese

business travellers indicates Hong Kong’s importance as a global centre for finance, trade

and communications.

15 According to the HKTB, long-haul markets are defined as visitors from the Americas, Europe, Africa, the Middle East,

Australia, New Zealand and South Pacific.

16 According to the HKTB, short-haul markets are defined as visitors from North Asia, South and Southeast Asia, Taiwan

and Macau excluding Mainland China.


— IV-34 —

The first three months of 2017 saw an increment of 6.3% in overnight visitors, 62.6% ofwhom were visiting Hong Kong for vacation, while 16.5% were visiting friends andrelatives and 13.3% were in Hong Kong on business.

c. Overnight visitor arrivals by country of origin

Total overnight visitors increased by 187% from 2003 to 2014, primarily supported by thestrong increment in Mainland overnight visitors (at 235%), while both long-haul andshort-haul overnight visitors doubled over the period. Although the new restrictivemeasures on IVS travellers mainly dealt with same-day visitors, the appreciating HongKong dollar and the anti-corruption campaign in China also deterred Mainland visitors fromstaying overnight in Hong Kong, and as such overnight Mainland visitors declined by 5.7%and 3.5% in 2015 and 2016 to stand at 17.4 million in 2016, representing 65.4% of allovernight visitors.

Nevertheless, long-haul and short-haul overnight visitor numbers have both registered arebound over the past two years due to recovery in their home economies. Long-haulovernight visitors declined slightly by 1.2% in 2015 before strengthening by 2.6% in 2016,amounting to 3.3 million (12.6% of total overnight visitors); while short-haul overnightvisitors continued to increase by 0.7% and 7.6% in 2015 and 2016, reaching 5.9 million in2016, representing 22.0% of the total.

The first three months of 2017 saw a full-blown recovery of overnight visitors by 6.3%,mainly induced by a 6.4% rise in Mainland overnight visitors compared with the first threemonths of 2016. While long-haul overnight visitors registered another moderate 1.1% y-o-yincrease over the period, short-haul visitors registered a strong 9.2% y-o-y increase inQ1/2017, mainly induced by a 27.3%-growth in Japanese overnight visitors due to anappreciating Yen and a strengthening local economy.

2.1.4 Average length of stay

The average length of stay increased from 3.1 nights in 2001 to 3.6 nights in 2011, and then fellto 3.3 nights in 2015. This is most likely due to an increasing portion of Chinese overnightvisitors, who usually stay for a shorter period than long-haul visitors, and the global economicdownturn which negatively affected business travel. China overnight visitors now stay onaverage 0.8 nights less than long-haul visitors (4.0 nights in 2015), but longer than short-haulvisitors (2.9 nights in 2015).

Average length of stay, overall and Chinese visitors, 2010-2015

2010 2011 2012 2013 2014 2015

Overall 3.6 3.6 3.5 3.4 3.3 3.3

Mainland 3.9 3.9 3.7 3.4 3.3 3.2



— IV-35 —

Over the past decade, another notable trend has been the rising proportion of same-day-in-town

Chinese visitors. From 2001 to 2010, around 50% to 70% of visitors from China would stay

overnight in Hong Kong, although this percentage has gradually declined. Over 2011, the number

of same-day Chinese visitors surpassed their overnight counterparts for the first time and in 2016

the figure reached 25.4 million (59.4% of total China arrivals).

Chinese visitor arrivals, overnight vs. same-day, 2001-2016

0

5

10

15

20

25

30No. of visitors (millions) Overnight Visitors Same-day Visitors

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


This change in visiting patterns has been induced by the increasing number of IVS travellers

from southern China. There are also groups of repeat visitors who have already explored retail

venues in core locations such as Tsimshatsui and Causeway Bay. They may only make one-day

visits to areas such as Sha Tin and Sheung Shui to shop for daily necessities, but travel more

frequently to Hong Kong to do so. The latest restrictive measures have affected same-day

Chinese visitors and their number declined by 8.7% in 2016, much heavier than their Chinese

overnight counterparts (-3.5%).

2.1.5 Tourist expenditure by category

In 2016, visitor spending17 totalled approximately HK$296.2 billion — a 10.1% decline over the

previous year but still an increase of 379% compared with 2001 — HK$175.2 billion of which

was spent by overnight visitors, representing a 59.1% share. Approximately 54.5% of total

overnight visitor spending was on “shopping”, while 19.8% of such spending was on “hotel

bills”, and another 14.3% was on “meals outside hotels”.

Spending preferences differ among visitors from different countries: in 2016, Chinese visitors

allocated almost 65% of their spending to shopping, while overnight visitors from the US and

Europe spent more on hotels (around 43% to 47%). Short-haul visitors from Asia spent more

evenly on shopping and hotels (each category representing around 25% to 30% of the total).

17 Including both same-day-in-town visitors and overnight visitors. Source: HKTB.


— IV-36 —

According to the Visitor Profile Report 2015, published by HKTB, shopping was the most

attractive activity for tourists, and in 2015, 82% of all visitors did some shopping. Ready-made

wear was the most popular shopping item attracting 37% of all visitors in 2015, while other

popular items included snacks/confectioneries, cosmetics/skin-care products, and shoes/other

footwear.

Breakdown of overnight visitor expenditure by category and major market, 2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mainland

China

Taiwan South &

Southeast Asia

North Asia Europe, Africa

& the Middle

East

The Americas Australia, NZ &

South Pacific

Others

Shopping Hotel Bills Meals Outside Hotel Entertainment Tours Others


2.1.6 Tourist hotel spending patterns18

Driven by the increasing number of visitor arrivals and their changing travel patterns, especially

Chinese tourists who are beginning to value more leisure travelling experiences, overnight

visitor spending on hotel bills has been on a rising trend from 2003 to 2014, increasing from

HK$9,183 million in 2003 to HK$39,801 million in 2014, a 333% increase.

18 Includes all charges within hotels


— IV-37 —

Overnight visitor expenditure on hotel bills, 2001-2016

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HK$ million


Spending on hotel bills (+15.2%) has been growing slower than overall overnight spending

(+32.6%) from 2011 to 2014 when more Chinese visitors came to Hong Kong for day trips rather

than staying overnight. Nevertheless, as the decline in visitor arrivals (and thus spending) from

2015 onwards was also mainly induced by Chinese day trippers, the impact on spending on hotels

was less significant than on shopping - the decline of spending on hotel bills over the past two

years (-12.7%) was slower than overall overnight spending (-20.7%).

Overnight visitor spending per capita on hotel bills by country of origin, 2004-2016

HK$

USA / Canada Europe Australia / New Zealand Southeast Asia

North Asia Taiwan Mainland China

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500



— IV-38 —

All overnight visitor per capita spending on hotel bills by country fell from 2014 to 2016

alongside declining total hotel spending, ranging from -2.1% to -20.8%. Overnight visitors from

the US/Canada were the highest spenders on hotel bills with an average of HK$2,960 per capita

in 2016, followed by Australian/New Zealand and European hotel guests. Mainland Chinese hotel

guests spent an average of HK$970 per capita on accommodation in the same year, and was one

of the few regions to register an increase in 2016.

2.2 Business traveller market development and trends

Overnight business travellers from the US and Europe, as well as expatriates on short-term

contracts and higher budgets, usually opt to stay in hotels in traditional core business districts

such as Central, Wanchai/Causeway Bay and Tsimshatsui. Sheung Wan is an emerging area and

has been successfully attracting many young executives from the finance industry, given its

location close to Central. The hotels in major shopping areas are also very popular with tourists

from other Asian countries, including Taiwan, Japan and China.

Overnight business travellers to Hong Kong, 2001-2016

0

1

2

3

4

5No of visitors (millions)

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

2015

201

6


In 2016, 4,041,300 overnight business travellers visited Hong Kong, a 5.4% increase from 2014,

when over the same period overall overnight visitors declined by 4.4%. Business travellers from

Mainland China registered an above-average growth of 14.3%, standing at 2.13 million in 2016.

By country of origin, business travellers from Mainland China is the largest group among all

countries and accounted for 52.7% of the total in 2016, followed by South & Southeast Asia

(13.4%) and Europe, Africa & the Middle East (11.2%). From 2010 to 2016, Chinese business

travellers not only grew as a percentage of the total but also in absolute numbers. Mainland

Chinese business visitor arrivals grew from 1.39 million in 2010 to 2.13 million in 2016.

Meanwhile, their proportion of the total rose from 40.7% to 52.7%.


— IV-39 —

Number of overnight business travellers by country of origin, 2010-2016

0

1

2

3

4

5

Mainland China North Asia South & South East Asia

Taiwan Macau The Americas

Europe, Africa & the Middle East Australia, NZ & South Pacific

No of visitors (millions)

2010 2011 2012 2013 2014 2015 2016


From 2011 to 2016 the growth rate of business traveller arrivals from Mainland China has

outperformed those from both short-haul and long-haul markets. During the years when both

markets recorded a decline in number, business travellers from Mainland China still recorded

positive growth in 2012, 2013 and 2015 at rates of 6.0%, 2.6% and 13.3% respectively.

Yearly growth rate of business traveller arrivals by country of origin, 2011-2016

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Short haul Long haul Mainland China

2011 2012 2013 2014 2015 2016



— IV-40 —

In Q1/2017, the total number of overnight business traveller arrivals remained relatively stable

at about 869,400 when compared with a year ago. Visitors from Mainland China were the largest

group during the first quarter accounting for 53.9% of the total and the group grew by 1.7%

Y-o-Y. Meanwhile Europe, Africa and Middle East saw the highest growth rate of about 5.4%,

reflecting the gradual stabilization of the European economies after recent years of turmoil.

However, the short-haul market weakened on the back of the economic slowdown in Japan and

tensions in both North Korea and the South China Sea. The number of overnight business visitors

from short-haul markets fell by 4.4% over the period as a result.

2.3 MICE market development and trends

Hong Kong has become a centre for conventions and exhibitions in Asia. Approximately 1.9

million overnight MICE visitors came to Hong Kong in 2016, a 9.9% rebound from 2015 after

a 5.1% dip in the previous year, with current figure a record high and is 61.9% higher than the

level of 2008.

Overnight MICE visitors, 2008-2016

Year No. of overnight visitors YoY growth (%)

2008 1,167,657

2009 1,164,848 -0.2

2010 1,429,941 +22.8

2011 1,562,940 +9.3

2012 1,606,154 +2.8

2013 1,634,363 +1.8

2014 1,816,021 +11.1

2015 1,721,438 -5.1%

2016 1,891,017 +9.9%

Source: HKTB, Savills Research and Consultancy


— IV-41 —

Breakdown of MICE visitors by major market, 2008-2016

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2

No. of visitors (millions)

Mainland China North Asia South & Southeast Asia

Taiwan Macau The Americas

Europe, Africa and the Middle East Australia, N.Z. and S. Pacific

2008 2009 2010 2011 2012 2013 2014 2015 2016


The highest proportion of overnight MICE visitors were from Mainland China at 51.2%,

compared with 35.5% in 2008. The total number of Chinese overnight MICE visitors stood at

967,497 in 2016, a 133.7% increase from 2008.

MICE visitors are usually high-spending. The per capita spending of overnight MICE visitors in

2015 was HK$8,400, 16.1% higher than the per capita spending of overall overnight visitors in

the same year (HK$7,234).

2.4 Impact of government policies on the tourism sector

Planned new tourist infrastructure, as well as the further development of the MICE market,

should attract more overnight vacation and business visitors to Hong Kong. The on-going

expansion of Disneyland Hong Kong, the redevelopment of Ocean Park, the future Kai Tak

Fantasy, West Kowloon Cultural District (WKCD), as well as the new convention centre in

Wanchai (still in its early planning stage), are all new attractions and potential tourist drivers.

In terms of transport infrastructure, the Hong Kong section of the Guangzhou—Shenzhen—Hong

Kong Express Rail Link, Hong Kong—Zhuhai—Macau Bridge (HZMB), Tuen Mun—Chek Lap

Kok Link and Tuen Mun Western Bypass will further enhance the integration of China with Hong

Kong. The accessibility of Hong Kong from China will improve greatly upon the completion of

these projects.


— IV-42 —

While the Guangzhou-Shenzhen-Hong Kong Express Rail Link will shorten travel times from

key cities in China to Hong Kong significantly (Hong Kong to Guangzhou 48 minutes, Hong

Kong to Shanghai 8 hours, Hong Kong to Beijing 10 hours), and will inevitably draw more

long-haul Chinese visitors to Hong Kong who are likely to stay overnight, the shorter travel time

for short-haul Chinese visitors (mainly from Guangdong province) may also mean that more can

afford same-day travel and thus reduce the percentage of overnight visitors among this group.

The charge on airport users to fund the third runway project may have a mildly negative impact

on the number of visitor arrivals in the short term. However, it will increase the capacity of the

aviation industry, with the new runway able to accommodate the airport’s forecast demand up to

2030 and beyond (around 600,000 air traffic movements per annum), thereby benefiting the

tourism industry, especially Mainland travellers from more remote cities currently with limited

scheduled flights to Hong Kong.

2.5 Forecast visitor arrivals

The size of the China market and its growing wealth, coupled with positive prospects for

intra-Asian tourism and long-haul demand, are expected to generate sustainable demand for

tourism in Hong Kong. Coupled with the gradual completion of transport and tourist

infrastructure, visitor arrival numbers for Hong Kong are expected to rebound over the next five

years, despite competition from other Asian countries. The recent rebound in Mainland visitor

numbers is also a reflection that previous restrictive measures and the appreciating Dollar have

already been discounted. Nevertheless, a moderate pace of recovery is expected due to

uncertainties in the external environment such as a measured global economic recovery and

political and trading uncertainties in the region.

Visitor arrival forecasts, 2017E-2020E

Overall visitors Mainland visitors

2017 57,794,000 (+2.0%) 44,379,000 (+3.7%)

2018 60,961,000 (+5.5%) 47,462,000 (+6.9%)

2019 64,039,000 (+5.0%) 50,466,000 (+6.3%)

2020 67,241,000 (+5.0%) 54,251,000 (+7.5%)

Source: Pacific Asia Travel Association (PATA), Savills Research & Consultancy 19

We expect total visitor arrivals to grow at an average rate of 4.4% per annum from 2017 to 2020,

whereas Mainland arrivals will grow at around 6.1% per annum over the same period, with more

transport infrastructure further enhancing integration between the Mainland and Hong Kong to

be completed over the next four years.

19 By making such estimates, Savills has referenced tourist forecasts from various organizations, including but not limited

to HKTB, Pacific Asia Travel Association (PATA) as well as Hong Kong Tourism Demand Forecasting System by the

Hong Kong Polytechnic University


— IV-43 —

3.0 KOWLOON CITY DISTRICT HOTEL MARKET ANALYSIS

3.1 District development and trends

Kowloon City and its surrounding area is home to well-established residential, retail,

entertainment and commercial venues while scheduled improvements to transportation

infrastructure will ensure the future popularity of the area. Grade A office buildings, luxury

hotels, modern shopping malls, top-quality restaurants and magnificent views of the Hong Kong

Island skyline have also made Hung Hom a desirable place to stay for tourists. Located next to

Tsimshatsui, a must-go tourist destination where modern malls, Grade A office buildings and

cultural facilities can be found in abundance, which is an ideal location for tourist

accommodation.

Kowloon City has also developed as a transportation hub. Passengers travelling from Kowloon

City to other parts of Hong Kong are presented with a wide range of options including buses,

road, ferry and rail links (MTR East Rail Line and the Kwun Tong Extension Line), which

connect to all major business areas as well as major new developments.

The Kai Tak Development, spanning around 320 hectares, is located in the Kowloon City District

and will become part of the CBD2, providing 49,900 residential units housing a population of

134,000. It will provide a commercial Gross Floor Area of about 24.5 million sq ft upon full

completion after at least 2023.

The Shatin-Central Link will include the existing Hung Hom station and bring an additional three

new stations, To Kwa Wan, Ma Tau Wai and Ho Man Tin to the district. It will connect Tai Wai

to Hung Hom by 2019 and Hung Hom to Admiralty by 2021, bringing the district closer to the

two CBDs, Central and Kowloon East, upon completion. According to MTRC’s own estimates,

it will take 5 minutes to travel from Hung Hom Station to Admiralty Station. Kai Tak Station will

be just one stop from To Kwa Wan Station.


— IV-44 —

3.2 Hotel stock and supply

According to the HKTB, there were 13 hotels in Kowloon City at the end of 2016, comprising

approximately 6,927 rooms, 9.3% of Hong Kong’s total.

Kowloon City hotel stock distribution by year of completion, 2007—April 2017

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

No. of rooms

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Source: HKTB, Home Affairs Department, Savills Research & Consultancy

* Up to April 2017

The stock of hotel rooms increased by 1,562 or 26.4% from 2007 to April 2017. Harbourview

Horizon All-Suite Hotel (1,980 rooms), Harbourfront Horizon All-Suite Hotel (1,662 rooms) and

Harbour Plaza 8 Degrees (704 rooms) are the three largest hotels in the district. The most

recently completed hotel is Kerry Hotel (546 rooms) in 2017.

The opening of i Hotel (54 rooms), iclub Ma Tau Wai (340 rooms) and 103 - 107 Tam Kung Road,

To Kwa Wan (99 rooms) will account for a 493-room increment in 2017. According to the HKTB,

there is no clear timing for the pipeline of hotel room supply in either 2018 or 2019.


— IV-45 —

Future hotel supply, 2017-2019

Projects No. of hotel rooms Completion

i Hotel (Kowloon South) 54 2017

iclub Ma Tau Wai Hotel 340 2017

103 - 107 Tam Kung Road, To Kwa Wan 99 2017

409 - 411 Chatham Road North, Hung Hom Unknown Unknown

380 Prince Edward Road West, Kowloon City Unknown Unknown

Two Harbourfront, 22 Tak Fung Street, Hung Hom Unknown Unknown

84 - 102 Wuhu Street, Hung Hom Unknown Unknown

Total 493


Being part of Kowloon City, Kai Tak will be another major source of future supply in the mid

to long run. Besides a maximum 161,459 sq ft hotel to be provided by the site New Kowloon

Inland Lot No. 6556 at Kai Tak Area 1F Site 2 which was tendered to Nan Fung Development

Limited on 31st May, three hotel/commercial sites are planned in the runway precinct. While the

mixed use development on site NKIL6556 will be completed at the latest in 2023, a timeline for

the hotels in the runway precinct is still unknown and subject to government’s tendering process.

3.3 Hotel demand and occupancy rates

Given that the location is an expanding business area and a transportation hub, visitors to

Kowloon City are mainly tourists and business travellers from China and overseas. While tourists

with high budgets and business travellers who work in Hong Kong for a short period of time or

come to attend conferences and meetings tend to stay in full-service hotels on the harbour front,

mid-budget business travellers are more likely to stay in select-service hotels for a more

competitive room rate.

Occupancy rates in Kowloon City generally perform in line with the overall market. We proxy

the occupancy rate in the district by ‘Other Kowloon’, which is Kowloon excluding Yau Ma Tei,

Tsimshatsui and Mong Kok, due to a lack of data availability. Given that the location of Kowloon

City is not as prime as Tsimshatsui or Mong Kok as a business, shopping and transportation hub,

it has performed marginally below the overall market since 2012.


— IV-46 —

‘Other Kowloon’ and overall hotel monthly occupancy rate, Jan 2012—Mar 2017

0

10

20

30

40

50

60

70

80

90

100%

Jan-1

2

Mar

-12

May

-12

Jul-

12

Sep

-12

Nov-1

2

Jan-1

3

Mar

-13

May

-13

Jul-

13

Sep

-13

Nov-1

3

Jan-1

4

Mar

-14

May

-14

Jul-

14

Sep

-14

Nov-1

4

Jan-1

5

Mar

-15

May

-15

Jul-

15

Sep

-15

Nov-1

5

Jan-1

6

Mar

-16

May

-16

Jul-

16

Sep

-16

Nov-1

6

Jan-1

7

Mar

-17

Other Kowloon Overall


By March 2017, hotel occupancy rates in Other Kowloon had improved in line with the overall

market since September 2016 and have recorded Y-o-Y growth in occupancy every month,

ranging from 2 to 15 percentage points.

3.4 Competitive landscape

Kowloon City can be divided into Hung Hom, To Kwa Wan, Ma Tau Kok, Ma Tau Wai, Kai Tak,

Kowloon City, Ho Man Tin, Kowloon Tong and Beacon Hill. Existing hotels can be found only

in Hung Hom, To Kwa Wan, Ma Tau Wai, Kowloon City and Ho Man Tin. Hung Hom is the

largest hotel cluster and Grade A offices such as Harbourfront and One HarbourGate can also be

found here. The most expensive hotels are located along the harbour front targeting high-budget

business travellers including the two largest hotels, Harbourview Horizon (1,980 rooms) and

Harbourfront Horizon (1,662 rooms) which operate mainly as serviced apartments. Kerry Hotel

(546 rooms) is the newest High Tariff A accommodation in the area. Hotels in Ho Man Tin are

scattered, with Anne Black Guest House (48 rooms) and Caritas Lodge Boundary Street (40

rooms) operating as guesthouses for budget travellers. Metropark Hotel Kowloon (487 rooms) is

the only full-service hotel in Ho Man Tin.

Hotels in Kowloon City and To Kwa Wan mainly target mid-to low-budget travellers and provide

a select-service offering. Upon completion of the hotels in 2017, Harbour Plaza 8 Degrees (704

rooms), Regal Oriental Hotel (494 rooms) and iclub Ma Tau Wai (340 rooms) will be the three

largest hotels in the area.


— IV-47 —

3.5 Brief hotel market outlook

On the back of the new MTR extension which will include four stations in the district, KowloonCity will be just a few stops from CBD2, Central and Kowloon East. Upon completion of theHung Hom-Admiralty section of the Shatin Central Link in 2021, business travellers will bepresented for the first time with convenient but cost-effective hotel options in Kowloon City,especially during trade fairs.

Meanwhile the Kai Tak Development Area will be developed into a new residential, office andtourism node where quality Grade A office buildings, shopping malls and tourist attractions willbe found. This will provide extra hotel demand from both vacation and business travellers. Asa result, the typical hotel guest profile in the area is expected to improve in the future.

4.0 INDIVIDUAL HOTEL ANALYSIS

The subject property, iclub Ma Tau Wai Hotel, is located at No. 8 Ha Heung Road (formerlyknown as Nos. 8, 8A, 10, 10A, 12 and 12A Ha Heung Road), Kowloon, Hong Kong. The newlyopened select-service hotel is a 22-storey building (with one basement floor) with a total GrossFloor Area of approximately 6,298 sqm, providing 340 rooms. The contemporarily designedguestrooms are equipped with comprehensive amenities and interactive services in parallel withother iclub hotels in town. The hotel licence was issued in May 2017.

4.1 Location

The subject property is located on the section of Ha Heung Road which is close to Ma Tau WaiRoad / To Kwa Wan Road Garden, where the proposed Entrance D of the future Ma Tau WaiStation of the Shatin-Central Link will be located. With its close proximity to both Kowloon CityRoad and To Kwa Wan Road, the two major roads in the district, the subject property is wellconnected to nearby districts, including Hung Hom, Tsimshatsui and Jordan by buses and lightbuses.

4.2 Competition analysis and competitive positioning

There are three existing hotels within the Ma Tau Wai / To Kwa Wan vicinity, namely HarbourPlaza 8 Degrees, O’Hotel and Cruise Hotel.

Harbour Plaza 8 Degrees

Address 199 Kowloon City Road, To Kwa Wan

Owner Cheung Kong Property Holdings Limited

Year of completion 2009

No. of rooms 704

No. of restaurants and bars 3

Facilities Business centre, swimming pool, fitness centre,banquet/event hall and meeting/function rooms



— IV-48 —

Harbour Plaza 8 Degrees is a large scale full-service hotel located near the future To Kwa Wan

Station and the Kai Tak New Development Area. The hotel can accommodate wedding banquets

as well as business conferences and meetings.

O’Hotel

Address 42-46 Kowloon City Road, Ma Tau Wai

Owner Hongkong Smartway Enterprise Limited


No. of rooms 151

No. of restaurants and bars NA

Facilities Convenience store


O’Hotel is a smaller scale limited-service hotel located within walking distance of the subject

property. A convenience store on the ground floor is the only facility it provides.

Cruise Hotel

Address 188 Pau Chung Street, To Kwa Wan

Owner Hillgold Limited


No. of rooms 161

No. of restaurants and bars NA

Facilities NA


Cruise Hotel is a smaller scale limited-service hotel located near Harbour Plaza 8 Degrees as

well as the future To Kwa Wan Station. The hotel focuses mainly on providing accommodation

and has no specific facilities.

As the subject has 340 rooms and is positioned as a select-service hotel, we are of the opinion

that all three hotels within the vicinity are of a different scale and positioning, targeting different

hotel guest profiles and budgets, and as such they constitute very little competition to the subject.


— IV-49 —

4.3 SWOT Analysis

The SWOT analysis for the subject is as follows:

Strengths

• Newly completed hotel and is the

newest hotel within the vicinity

• Select-service positioning unique in

the vicinity and thus faces very little

competition

• iclub brand recognition

• conveniently located with easy access

to public transport

• In close proximity to nearby vibrant

business/tourist districts such as

Hung Hom and Tsimshatsui

Weaknesses

• Limited sea view

• No car park for guests/visitors (4 car parks

for hotel’s own use)

• Traffic congestion due to current

construction works for the Shatin-Central

Link

Opportunities

• Close to one of the entrances of the

future Ma Tau Wai Station of the

Shatin-Central Link

• Growing mid-budget business

travellers from the Mainland and Asia

provide strong potential demand for

the subject

Threats

• Future hotel supply in Kai Tak New

Development Area, but most are

differently positioned to the subject

4.4 Brief performance outlook for the subject property

The opening of the subject coincides with the on-going consolidation of the overall hotel market,

and with construction and road works for the Shatin-Central Link underway within the vicinity,

both of which may impact the initial performance of the subject. Nevertheless, the strategic

location of the subject with easy access to nearby business districts, coupled with the growing

mid-budget business travellers from both the Mainland and Asia should provide strong potential

demand for the subject in the future.

The medium to long-term prospects of the subject will rely on the recovering hotel market in

general and the business hotel segment in particular. The full operation of the Shatin-Central

Link by 2021, which will connect the subject (via Ma Tau Wai Station) to the core business

districts of Wan Chai, Admiralty and Central on Hong Kong Island, as well as to emerging

business districts of Kai Tak, Kowloon Bay and Kwun Tong in Kowloon, will provide the

strongest impetus to the subject’s performance. The select-service positioning for the subject

should be able to attract mid-budget business travellers along the Shatin-Central Link, while

spill-over demand during convention and trade fair periods from MICE visitors in Wan Chai and

other key business areas could also prove crucial to the success of the subject over the

longer-term.


— IV-50 —

Limitations on the report

This report contains forward-looking statements which state Savills (Hong Kong) Limited’s (the

Consultant) beliefs, expectations, forecasts or predictions for the future. The Consultant stresses that

all such forecasts and statements, other than statements of historical fact, outlined in this report should

be regarded as an indicative assessment of possibilities rather than absolute certainties. The process

of making forecasts involves assumptions about a considerable number of variables which are very

sensitive to changing conditions. Variations of any one may significantly affect outcomes and the

Consultant draws your attention to this.

The Consultant therefore can give no assurance that the forecasts outlined in this report will be

achieved or that such forecasts and forward-looking statements will prove to have been correct and

you are cautioned not to place undue reliance on such statements. The Consultant undertakes no

obligation to publicly update or revise any forward-looking statements contained in this report,

whether as a result of new information, future events or otherwise, except as required by law, and all

forward-looking statements contained in this summary report are qualified by reference to this

cautionary statement.

The report is prepared by the Consultant for information only. While reasonable care has been

exercised in preparing the report, it is subject to change and these particulars do not constitute, nor

constitute part of, an offer or contract. Interested parties should not rely on the statements or

representations of fact but must satisfy themselves by inspection or otherwise as to the accuracy. No

representation, warranty or covenant, express or implied, is given and no undertaking as to accuracy,

reasonableness or completeness of the information contained in this report. In producing this report,

the Consultant has relied upon external third-party information and on statistical models to generate

the forward-looking statements. It should be noted, and it is expressly stated, that there is no

independent verification of any of the external third-party documents or information referred to

herein. This report is limited to the matters stated in it and no opinion is implied or may be inferred

beyond the matters expressly stated herein.

Yours faithfully,


Savills (Hong Kong) LimitedSimon Smith

Senior Director

Head of Research & Consultancy


— IV-51 —

The land on which the New Hotel is located was formerly held from the Government for an initial term

of 75 years from 26 June 1939 with a right of renewal for one further term of 75 years created by a

Government Lease made between the Governor of Hong Kong of the one part and Wang Hang Banking

Mortgage & Land Investment Co., Ltd. of the other part which is deemed to have been granted

pursuant to Section 14 of the Conveyancing and Property Ordinance (Chapter 219 of the Laws of Hong

Kong) upon the deemed compliance with the terms and conditions contained in certain Agreement and

Conditions of Sale deposited and registered in the Land Registry as Conditions of Sale No. UB3945

in respect of Kowloon Inland Lot No. 4148 and the said initial term of 75 years of the abovementioned

Government Lease having expired on 25 June 2014 and is now held from the Government for the

further term of 75 years commencing from 26 June 2014 created by a new Government Lease in

respect of the land which is deemed to have been granted under and by virtue of the Government

Leases Ordinance (Chapter 40 of the Laws of Hong Kong) immediately upon the expiration of the said

initial term of 75 years of the abovementioned Government Lease.

APPENDIX V SUMMARY OF GOVERNMENT GRANT

— V-1 —

1. RESPONSIBILITY STATEMENT

The Manager and the Directors, collectively and individually, accept full responsibility for the

accuracy of the information given in this Circular and confirm, having made all reasonable

enquiries, that to the best of their knowledge and belief, there are no other facts the omission of

which would make any statement in this Circular misleading.

2. DISCLOSURE OF INTERESTS IN UNITS

Interests Held by the Manager and the Directors and Chief Executive Officers of theManager

The REIT Code requires that connected persons of Regal REIT shall disclose their interests in

Units. In addition, under the provisions of the Trust Deed, Part XV of the SFO is also deemed

to be applicable, among other things, to the Manager, the Directors and the chief executive

officers of the Manager.

The interests and short positions held by the Manager, Directors and chief executive officers of

the Manager in the Units required to be recorded in the register kept by the Manager under

Schedule 3 of the Trust Deed are set out below:

Long position in the Units as at the Latest Practicable Date:

Name of Director and theManager Nature of the interest

As at theLatest Practicable Date

Number ofUnits held

Approximate% of interest(3)

LO Yuk Sui(1) Interest in a controlled

corporation

2,443,033,102 74.99%

Regal Portfolio Management

Limited(2)

Beneficial owner 120,381,598 3.70%

Notes:

(1) The interests in 2,443,033,102 Units were the same parcel of Units held through Century City in which Mr. Lo

held approximately 58.67% shareholding interest.

(2) Regal Portfolio Management Limited is the Manager.

(3) The total number of Units in issue as at the Latest Practicable Date is 3,257,431,189.

Save as disclosed above, none of the Manager, Directors and chief executive officers of the

Manager were interested (or deemed to be interested) in Units, or held any short position in

Units, as at the Latest Practicable Date.

APPENDIX VI GENERAL INFORMATION

— VI-1 —

Unitholdings of Holders of 5% or More Interests

The following persons have interests or short position in the Units required to be recorded in theregister kept by the Manager under Schedule 3 of the Trust Deed:

Long position in the Units as at the Latest Practicable Date:

Name of Unitholder Nature of the interestAs at the

Latest Practicable Date

Number ofUnits held

Approximate% of interest(10)

Century City(1) Interest in a controlledcorporation

2,443,033,102 74.99%

Century City BVI HoldingsLimited (“CCBVI”)(1 and 2)

Interest in a controlledcorporation

2,443,033,102 74.99%

Paliburg(3 and 4) Interest in a controlledcorporation

2,440,346,102 74.92%

Paliburg Development BVIHoldings Limited(“PDBVI”)(3 and 5)


2,440,346,102 74.92%

Regal Hotels(6 and 7) Interest in a controlledcorporation

2,439,613,739 74.89%

Regal International (BVI)Holdings Limited(“RBVI”)(6 and 8)


2,439,613,739 74.89%

Complete Success InvestmentsLimited(9)

Beneficial owner 1,817,012,072 55.78%

Great Prestige InvestmentsLimited(9)

Beneficial owner 373,134,326 11.45%

Notes:

(1) The interests in 2,443,033,102 Units held by each of Century City and CCBVI were the same parcel of Units,

which were directly held by wholly-owned subsidiaries of CCBVI, PDBVI, RBVI and Cosmopolitan, respectively.

(2) CCBVI is a wholly-owned subsidiary of Century City and its interests in Units are deemed to be the same interests

held by Century City.

(3) The interests in 2,440,346,102 Units held by each of Paliburg and PDBVI were the same parcel of Units, which

were directly held by wholly-owned subsidiaries of PDBVI, RBVI and Cosmopolitan, respectively.

(4) Paliburg is a listed subsidiary of CCBVI, which held approximately 62.28% shareholding interest in Paliburg and

its interests in Units are deemed to be the same interests held by CCBVI.

(5) PDBVI is a wholly-owned subsidiary of Paliburg and its interests in Units are deemed to be the same interests held

by Paliburg.


— VI-2 —

(6) The interests in 2,439,613,739 Units held by each of Regal Hotels and RBVI were the same parcel of Units, which

were directly held by wholly-owned subsidiaries of RBVI and Cosmopolitan, respectively.

(7) Regal Hotels is a listed subsidiary of PDBVI, which held approximately 67.98% shareholding interest in Regal

Hotels and its interests in Units are deemed to be the same interests held by PDBVI.

(8) RBVI is a wholly-owned subsidiary of Regal Hotels and its interests in Units are deemed to be the same interests

held by Regal Hotels.

(9) These companies are wholly-owned subsidiaries of RBVI and their respective direct interests in Units are deemed

to be the same interests held by RBVI.

(10) The total number of Units in issue as at the Latest Practicable Date is 3,257,431,189.

Save as disclosed above, the Manager is not aware of any connected persons of Regal REIT,

including the Trustee and the Independent Property Valuer who were interested (or deemed to be

interested) in Units, as at the Latest Practicable Date.

Long positions in the shares and underlying shares of associated corporations of Regal REIT as

at the Latest Practicable Date:

Name of

Director

Name of

associated

corporation

Class of

shares held

Personal

interests

Corporate

interests

Family/Other

interests

As at the Latest Practicable Date

Total Number

of shares held

Approximate %

of interest

LO Yuk Sui Century City Ordinary (issued) 110,667,396 1,769,164,691(1) 380,683 1,880,212,770 58.69%

LO Po Man Century City Ordinary (issued) 112,298 — — 112,298 0.004%

Jimmy LO

Chun To

Century City Ordinary (issued) 251,735 — — 251,735 0.008%

LO Yuk Sui Paliburg Ordinary (issued) 90,078,014 740,860,803(2) 15,000 830,953,817 74.55%

LO Po Man Paliburg Ordinary (issued) 1,116,000 — — 1,116,000 0.10%

Donald

FAN Tung

Paliburg Ordinary (issued) 556 — — 556 0.000%

Jimmy LO

Chun To

Paliburg Ordinary (issued) 2,274,600 — — 2,274,600 0.20%

Kenneth NG

Kwai Kai

Paliburg Ordinary (issued) 176,200 — — 176,200 0.20%

LO Yuk Sui Regal Hotels Ordinary (issued) 24,200 622,855,261(3) 260,700 623,140,161 68.06%

LO Po Man Regal Hotels Ordinary (issued) 300,000 — 269,169(4) 569,169(4) 0.06%

LO Yuk Sui Cosmopolitan Ordinary

(i) (issued) — 3,117,856,716(5) — 3,117,856,716

(ii) (unissued) — 5,024,058,784(6) — 5,024,058,784

Total: 8,141,915,500 191.55%

LO Yuk Sui Cosmopolitan Preference (issued) — 2,345,487,356(6) — 2,345,487,356 99.98%

LO Po Man Cosmopolitan Ordinary (issued) 1,380,000 — — 1,380,000 0.03%

Jimmy LO

Chun To

Cosmopolitan Ordinary (issued) 2,269,101 — — 2,269,101 0.05%

LO Yuk Sui 8D International

(BVI) Limited

Ordinary (issued) — 1,000(7) — 1,000 100%


— VI-3 —

Notes:

(1) The interests in 1,769,164,691 issued ordinary shares of Century City were held through companies wholly-owned by

Mr. LO Yuk Sui (“Mr. Lo”).

(2) The interests in 694,124,547 issued ordinary shares of Paliburg were held through companies wholly-owned by Century

City, in which Mr. Lo held 58.67% shareholding interests.

The interests in 16,271,685 issued ordinary shares of Paliburg were held through corporations controlled by Mr. Lo as

detailed below:

Name of corporation Controlled by % of control

Wealth Master International Limited Mr. Lo 90.00%

Select Wise Holdings Limited Wealth Master International Limited 100.00%

The interests in 30,464,571 issued ordinary shares of Paliburg were held through corporations controlled by Mr. Lo as

detailed below:

Name of corporation Controlled by % of control

Wealth Master International Limited Mr. Lo 90.00%

Select Wise Holdings Limited Wealth Master International Limited 100.00%

Splendid All Holdings Limited Select Wise Holdings Limited 100.00%

(3) The interests in 421,400 issued ordinary shares of Regal Hotels were held through companies wholly-owned by Century

City, in which Mr. Lo held 58.67% shareholding interests. The interests in 599,025,861 issued ordinary shares of Regal

Hotels were held through companies wholly-owned by Paliburg, in which Century City held 62.28% shareholding

interests. The interests in other 23,408,000 issued ordinary shares of Regal Hotels were held through a wholly-owned

subsidiary of Cosmopolitan, in which P&R (which is owned as to 50% each by Paliburg and Regal Hotels through their

respective wholly-owned subsidiaries) held 64.26% shareholding interests. Paliburg held 67.98% shareholding interests

in Regal Hotels.

(4) The interests in 269,169 issued ordinary shares of Regal Hotels were held by Miss Lo Po Man as the beneficiary of a

trust.

(5) The interests in 2,731,316,716 issued ordinary shares of Cosmopolitan were held through wholly-owned subsidiaries of

P&R, which is owned as to 50% each by Paliburg and Regal Hotels through their respective wholly-owned subsidiaries.

The interests in other 386,540,000 issued ordinary shares of Cosmopolitan were held through wholly-owned subsidiaries

of Regal Hotels. Paliburg, in which Century City held 62.28% shareholding interests, held 67.98% shareholding interests

in Regal Hotels. Mr. Lo held 58.67% shareholding interests in Century City.

(6) The interests in 5,024,058,784 unissued ordinary shares of Cosmopolitan were held through wholly-owned subsidiaries

of P&R, which is owned as to 50% each by Paliburg and Regal Hotels through their respective wholly-owned

subsidiaries. Paliburg, in which Century City held 62.28% shareholding interests, held 67.98% shareholding interests in

Regal Hotels. Mr. Lo held 58.67% shareholding interests in Century City.

The interests in 2,345,487,356 unissued ordinary shares of Cosmopolitan are derivative interests held through interests

in 2,345,487,356 convertible preference shares of Cosmopolitan, convertible into new ordinary shares of Cosmopolitan

on a one to one basis (subject to adjustments in accordance with the terms of the convertible preference shares).


— VI-4 —


in the convertible bonds issued by a wholly-owned subsidiary of Cosmopolitan (the “CB Issuer”), which are convertible

into new ordinary shares of Cosmopolitan at a conversion price of HK$0.35 per ordinary share (subject to adjustments

in accordance with the terms of the convertible bonds).


in the convertible bonds issued by the CB Issuer, which are convertible into new ordinary shares of Cosmopolitan at a

conversion price of HK$0.40 per ordinary share (subject to adjustments in accordance with the terms of the convertible

bonds).

(7) 400 shares were held through companies controlled by Century City, in which Mr. Lo held 58.67% shareholding interests,

and 600 shares were held through a company controlled by Mr. Lo.

Save as disclosed above, as at the Latest Practicable Date, so far as is known to the Directors or chief executive officers

of the Manager:

(a) none of the Directors and Unitholders with an interest in more than 5% of all Units in issue has an interest, direct

or indirect in the Transaction Matters Requiring Approval;

(b) no person (other than a Director) is interested (or deemed to be interested) in Units, or holds any short position

in Units, which were required to be disclosed to the Manager and the Stock Exchange pursuant to Divisions 2, 3

and 4 of Part XV of the SFO; and

(c) none of the Manager, Directors or chief executives officers of the Manager had any interests or short positions

in the Units or any of its associated corporations (within the meaning of Part XV of the SFO) which were required

to be notified to the Manager and the Stock Exchange pursuant to Divisions 7, 8 and 9 of Part XV of the SFO

(including interests and short positions which they are taken or deemed to have under such provisions of the SFO),

which the Trust Deed, subject to certain exceptions, deems to apply to the Directors and chief executive officers of the

Manager, the Manager and each Unitholder and all persons claiming through or under them.

3. DIRECTORS’ INTERESTS IN ASSETS, CONTRACTS AND COMPETING BUSINESS

Save as disclosed in this Circular, as at the Latest Practicable Date:

(a) none of the Directors or proposed Directors had any direct or indirect interest in any assets

which have been, since the date that the latest published audited accounts of Regal REIT

were prepared, acquired or disposed of by (or leased to) or are proposed to be acquired or

disposed of by (or leased to) Regal REIT;

(b) none of the Directors or proposed Directors was materially interested in any contract or

arrangement entered into by Regal REIT and subsisting at the date of this Circular which

was significant in relation to Regal REIT’s business; and

(c) none of the Directors or proposed Directors or any of their Associates had interests in a

business which competes or is likely to compete, either directly or indirectly, with Regal

REIT’s business.


— VI-5 —

4. STATEMENT IN RELATION TO FINANCIAL POSITION

The Manager confirms that, as at the Latest Practicable Date, there has not been any material

adverse change in the financial or trading position of Regal REIT since the date that the latest

published audited accounts of Regal REIT were prepared.

5. EXPERTS AND CONSENTS

Each of the Independent Financial Adviser, the Independent Property Valuer, the Market

Consultant and the Reporting Accountant has given and has not withdrawn its written consent to

the inclusion of its name in this Circular. Each of the parties above where relevant has also given

their consent to the inclusion of its name in this Circular and/or its Appendices and all references

thereto, in the form and context in which they are included in this Circular.

The following are the qualifications of the experts who have been named in this Circular or have

given opinion or advice which are contained in this Circular.

Altus Capital Limited: A licensed corporation under the SFO licensed to carry out

Type 1 (dealing in securities), Type 4 (advising on securities),

Type 6 (advising on corporate finance) and Type 9 (asset

management) regulated activities

Colliers International (Hong

Kong) Limited:

Chartered Surveyors and Valuer

Savills (Hong Kong)

Limited:

Market Consultant

Ernst & Young: Certified Public Accountants

As at the Latest Practicable Date, none of the experts had any interest in Regal REIT or the right

(whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for

securities in Regal REIT.

As at the Latest Practicable Date, none of the experts had any direct or indirect interest in any

assets which have been, since the date to which the latest published audited accounts of Regal

REIT were prepared (being 31 December 2016), acquired or disposed of by or leased to or are

proposed to be acquired or disposed of by or leased to Regal REIT.


— VI-6 —

6. LITIGATION

As at the Latest Practicable Date, none of Regal REIT, the Manager, the Trustee, the Regal REIT

Group or the Target Group was involved in any litigation or claims of material importance and

no litigation or claims of material importance, by or against Regal REIT, the Manager, the

Trustee, the Regal REIT Group or the Target Group was pending or threatened.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at no charge during normal

business hours at the registered offices of the Manager from 9:00 a.m. to 5:00 p.m. on Business

Days, from the date of this Circular, up to and including the date of the EGM:

(a) Share Purchase Agreement (together with the agreed forms of the New Lease Agreement,

the New Lease Guarantee (with the agreed form of the New Hotel Management Agreement

appended thereto), the assignment of the Shareholder Loan and the Deed of Tax Indemnity

in respect of the New Hotel appended thereto);

(b) the Letter from the Independent Board Committee;

(c) the Letter from the Independent Financial Adviser;

(d) the Accountants’ Report in respect of the Target Company as set out in Appendix I to this

Circular;

(e) the Independent Property Valuer’s Valuation Report as set out in Appendix II to this

Circular;

(f) the pro forma financial information of the Enlarged Group as set out in Appendix III to this

Circular;

(g) the Market Consultant’s Report as set out in Appendix IV to this Circular;

(h) the written consents referred to in the section headed “Experts and Consents” of Appendix

VI to this Circular; and

(i) the announcement issued by the Manager dated 23 May 2017.

The Trust Deed will also be available for inspection at the registered office of the Manager for

so long as Regal REIT continues to be in existence.


— VI-7 —



(Stock Code: 1881)

Managed by

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of the unitholders (the

“Unitholders”) of Regal Real Estate Investment Trust (“Regal REIT”) will be held at Regal

Hongkong Hotel, 88 Yee Wo Street, Causeway Bay, Hong Kong on Thursday, 20 July 2017 at 11:00

a.m. (“EGM”) for the purpose of considering and, if thought fit, passing (with or without

amendments) the resolutions below.

Words and expressions that are not expressly defined in this notice of extraordinary general meeting

shall bear the same meaning as that defined in the unitholder circular of Regal REIT dated 30 June

2017 (the “Circular”).

ORDINARY RESOLUTIONS

1. “THAT subject to Resolution 2 below being approved, approval (which, where relevant, shall

include approval by way of ratification) be and is hereby given for:

(a) the consummation by Regal REIT of the Transaction contemplated under the Share


related to the Transaction including but not limited to the execution of and consummation

of the transactions under the Deed of Tax Indemnity in respect of the New Hotel, as more

fully described in the Circular; and

(b) authorisation be granted to the Manager, any Director of the Manager and the Trustee to

complete and to do all such acts and things (including executing all such documents as may

be required) as the Manager, such Director of the Manager or, as the case may be, such duly

authorised signatory of the Trustee may consider expedient or necessary or in the interest

of Regal REIT to give effect to all matters in relation to the Transaction generally.”


— N-1 —

2. “THAT subject to Resolution 1 above being approved, approval (which, where relevant, shall

include approval by way of ratification) be and is hereby given for:

(c) the consummation by Regal REIT of the transactions contemplated under, associated with

and/or related to the Additional Hotel CCTs (being the New Lease Agreement, New Lease

Guarantee and New Hotel Management Agreement pertaining to the New CCT Waiver

Application); and

(d) authorisation be granted to the Manager, any Director of the Manager and the Trustee to

complete and to do all such acts and things (including executing all such documents as may

be required) as the Manager, such Director of the Manager or, as the case may be, such duly

authorised signatory of the Trustee may consider expedient or necessary or in the interest

of Regal REIT to give effect to all matters in relation to the Additional Hotel CCTs,

generally.”

By Order of the Board


Simon LAM Man LimExecutive Director

Hong Kong, 30 June 2017

Registered Office:


68 Yee Wo Street

Causeway Bay

Hong Kong

Notes:

1. A Unitholder entitled to attend and vote at the Extraordinary General Meeting is entitled to appoint one or more proxies

to attend and vote on a poll in his/her stead. The person appointed to act as a proxy need not be a Unitholder.

2. In order to be valid, the form of proxy, together with the power of attorney or other authority (if any) under which it

is signed or a notarially certified copy thereof, must be deposited at the Unit Registrar of Regal REIT, Computershare

Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong,

not less than 48 hours before the time appointed for holding the Extraordinary General Meeting or any adjournment

thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person should

you so wish. In the event that you attend the meeting or adjourned meeting (as the case may be) after having lodged a

form of proxy, the form of proxy will be deemed to have been revoked.

3. Where there are joint registered Unitholders of a Unit, any one of such Unitholders may vote at the meeting either

personally or by proxy in respect of such Unit as if he/she were solely entitled thereto, but if more than one of such

Unitholders are present at the meeting personally or by proxy, that one of such Unitholders so present whose name stands

first on the register of Unitholders of Regal REIT (the “Register of Unitholders”) in respect of such Unit shall alone

be entitled to vote in respect thereof.


— N-2 —

4. The Register of Unitholders will be closed from 17 July 2017 to 20 July 2017, both days inclusive, during which period

no transfers of Units will be effected. In order to qualify to attend and vote at the Extraordinary General Meeting, all

Unit certificates accompanied by the duly completed transfer documents must be lodged with the Unit Registrar of Regal

REIT not later than 4:30 p.m. on 14 July 2017.

As at the date of this notice, the Board comprises Mr. LO Yuk Sui as Chairman and Non-executive Director; Miss LO Po Man

as Vice Chairman and Non-executive Director; Mr. Johnny CHEN Sing Hung and Mr. Simon LAM Man Lim as Executive

Directors; Mr. Donald FAN Tung, Mr. Jimmy LO Chun To and Mr. Kenneth NG Kwai Kai as Non-executive Directors; and Mr.

John William CRAWFORD, JP, Mr. Bowen Joseph LEUNG Po Wing, GBS, JP, Mr. Kai Ole RINGENSON and Hon. Abraham

SHEK Lai Him, GBS, JP as Independent Non-executive Directors.


— N-3 —

REGAL REAL ESTATE INVESTMENT TRUST

Documents

Transcript of REGAL REAL ESTATE INVESTMENT TRUST