Dear Friends,

During 2010, stormy conditions prevailed in China’s real estate market. Starting from April 2010, the Chinese government issued a series of tightening policies aiming to curb the overheating and speculation in the residential property market and to ensure the healthy development of the real estate industry, including increasing the threshold for loans for the second house and restricting loans for the third house, and stepped up its efforts to enforce existing policies as well. In December 2010, Shanghai and Chongqing were designated as the pilot cities for collection of property tax with detailed implementation measures coming up in January 2011. To curb liquidity and ease inflation, the central bank raised the required reserve capital reserve ratio six times within 2010 and further twice in the beginning of 2011, and increased the deposit and loan interest rate three times since October 2010. Facing these measures and expecting more rigid policies in the future, the market responded promptly. In the second quarter of 2010, transaction volume dropped substantially and the skyrocketed housing price lost its momentum. As a result, some developers even reduced their annual sales targets with pessimistic perspectives of the second half of the year. Nevertheless, in the second half of the year, under pressure from liquidity and inflation, and out of uncertainty in the effectiveness of the government policies, the property market witnessed a strong rebound in transaction volume and price. By the end of the year, many developers had not only accomplished their annual sales targets, but also recorded historical high in contract sales.

In spite of such complicated and chaotic market conditions, SOHO China persisted in its unique business and operation model and expanded significantly in both sales and scale. In 2010, SOHO China’s contract sales increased by 74% compared to that of 2009. Surpassed RMB10 billion in contract sales for the first time in 2009, the Company achieved another milestone with record high contract sales of RMB23.8 billion in 2010. The Galaxy SOHO project locked RMB2.77 billion contract sales within only three days after pre-sale launch in mid 2010 and recorded RMB14.6 billion contract sales by the end of the year, with 81% of total saleable GFA sold at an average selling price of approximately RMB70,000 per square meter. With such remarkable performance, the project ranked No.1 for the year in terms of contract sales among property projects in Beijing and the Company secured the sales championship among Beijing real estate developers for the second time consecutively. In addition, the completion and delivery of Sanlitun SOHO Phase II, comprising of four residential buildings and retail spaces with a total GFA of approximately 223,000 square meters, in 2010 contributed significantly to the Group’s turnover in the year. Meanwhile, more diversified projects were added to the Company’s land bank in Beijing. During the year, the Company acquired Danling SOHO in Zhongguancun, Beijing. The planned sales of this completed project will result in higher capital efficiency and quicker asset turnover.

While making outstanding achievement in Beijing, SOHO China has also had remarkable development in Shanghai. Following the successful acquisition and leasing of The Exchange-SOHO, the Company launched the sales of the project during the year and recorded RMB3.8 billion contract sales, which ranked as the No.1 sales project in Shanghai. Adhering to its core strategy to develop commercial properties at prime locations, SOHO China acquired three more projects, namely SOHO on the Bund, Hongqiao SOHO and Fuxinglu SOHO in Shanghai. Within only two years, it acquired four big projects in four districts, setting a solid foundation for further expansion in the region. SOHO’s unique business model was proved to be successful in Shanghai. The Company plans to speed up its development in Shanghai and expects that development projects in Shanghai will constitute half of its investments in the future.

While development and sales of commercial properties continues to be the Company’s business model and core strategy, the Company intends to maintain its sales scale. Meanwhile, the Company is planning to gradually hold more investment properties. Apart from the Tiananmen South (Qianmen) project, Phase I of which has completed construction and commenced operation, the Company is also considering to hold Guanghualu SOHO II in Beijing, and SOHO on the Bund and Fuxinglu SOHO in Shanghai as investment properties. Situated at the most prime locations in city centers, these projects are non-replicable projects with immense value. Holding these investment properties will bring stable and steady cash flow, save huge taxes that are payable if the projects are sold, and allow the Company to benefit from significant upside derived from asset appreciation.

Looking into the year of 2011, taming inflation will continue to be the government’s top priority. However, most of the cooling measures, ranging from more frequent rate hikes to purchase restrictions, are within market expectations. Property tax in Shanghai and Chongqing is expected to have limited impact on the market due to the low tax rate under the relevant implementation measures. The unexpected are those polices that restrict purchase and set price ceilings in residential property market, which effectively reduced the demand for residential properties in major cities. In particular, it takes away almost all investment demand for residential properties. In addition, the newly promulgated relocation regulations and the subsequent transition period for transition from the old to the new relocation regulations is expected to result in temporary shortage in land supply due to low efficiency. These measures will result in temporary shortage in both demand and supply in the residential property market and lead to price and volume stagnation. However, we expect these measures to be temporary measures aiming to generate immediate effects. Compared with the residential property market that is under the government’s close scrutiny, the commercial property market remains nearly unaffected by the policies and may become the only property investment vehicle that attracts tremendous investment. Therefore, we expect to see a significant increase in commercial property prices.

In the next few years, social housing will emerge as the main stream product and is projected to take over 50% of market share. Only by then, will the existing restrictions on pricing and purchase be lifted by the government. The consequent 50% shrinkage in market share is likely to cause industry consolidation that may squeeze out the smaller developers. On the contrary, competition in the commercial property market is far less fierce. We do not expect a large number of residential developers to enter into the commercial property sector. Nevertheless, traditional shopping mall model will be challenged by the development of on-line shopping. Creative and innovative strategies need to be adopted to maintain market share. As for office building demand, especially those from small and medium sized enterprises, will remain strong and sustainable.

SOHO China will adhere to its commercial property business model of developing properties in prime locations in first-tier cities, as well as selling and holding commercial properties. We will prudently undertake each step of expansion, and enthusiastically embrace every opportunity. Truthfulness, unity and innovation are the core of SOHO China’s philosophy in building and developing property towards creating material wealth. These core values constantly motivate all of SOHO China’s pursuits, serving as the standards guiding our every word, action, and decision. The glories of both history and the future are made up by connecting the exhilarating moments of the present. We strongly believe that continuing to devote our focus to each and every step along the way is the key to welcoming an optimally prosperous future with utmost confidence and free of regrets.

Pan Shiyi
Chairman
2 March 2011

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