Global Capital Flows Q JLL Research Report. Global Capital Flows. Global real estate investment remains strong despite growing caution

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1 Global Capital Flows Q JLL Research Report Global Capital Flows Global real estate investment remains strong despite growing caution

2 Global Capital Flows Q Contents Executive summary 3 Global and regional 4 Cities 5 Cross-border 6 Currency hedging 8 Outlook 9 Notes and methodology 10

3 Global Capital Flows Q Executive summary Investment in global commercial real estate held steady in the third quarter of 2018 as transactional volumes matched the US$170 billion witnessed in the third quarter of last year. Despite this, the strong start to the year means that year-to-date volumes are up 7% over the same period in 2017, to US$507 billion. Regional performance was mixed in the third quarter with the Americas emerging as the strongest performer for the first time this year. Underpinning the 13% growth in year-to-date volumes is the U.S. market, which continues to outperform expectations. EMEA saw investment sales activity drop by 4% as smaller regional markets began to show signs of fatigue. Momentum slowed in Asia Pacific this quarter after consecutive quarters of record-breaking growth. The region s third quarter volumes grew by a modest 3%, but year-todate totals are up by 20% due to the record first half. While London remains the world s most liquid real estate market, Seoul jumped to third place as a strong wave of domestic liquidity boosted its investment market to new heights. Chicago rose to join the Top 10 list, emerging as the ninth most active global market due to sustained demand for office and industrial assets. Asian investors continue to drive inter-regional capital flows as global cross-border activity outpaced the broader market and edged up by 2% from last quarter. EMEA is still the biggest beneficiary of inter-regional capital flows as elevated currency hedging costs make some investments in the U.S. cost-prohibitive for a number of foreign investors. Despite persisting concerns over trade tensions, Brexit and rising U.S. interest rates, global real estate markets continue to perform well. Even though yields remain at record lows in many global markets, occupier fundamentals are strong and, with rental growth forecast to tick over into 2019, the sector is set to remain attractive from a return perspective. We anticipate that global investment in commercial real estate over the full year will edge up slightly relative to 2017, to around US$730 billion. As we look ahead to 2019, we expect investment in global commercial real estate to decline to around US$700 billion, with continued investor selectivity and discipline as well as a lack of available stock due to investors holding onto assets for their reliable income streams, all likely to limit further investment growth. Direct commercial real estate transaction volumes, Q Q Q Q % Change Q Q Q % Change Q Q YTD 2017 YTD 2018 % Change YTD 2017 YTD 2018 Americas % 61 20% % EMEA % 74-18% % Asia Pacific % 35 3% % TOTAL % 170 0% %

4 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18 lobal & regional Global property markets remain resilient 4 Year-to-date investment hits highest level of cycle Third quarter investment in global commercial real estate held steady as volumes matched the US$170 billion we saw in Q However, thanks to the robust start to the year, year-to-date activity is 7% higher than last year at US$507 billion, the best performance since Direct commercial real estate transaction volumes Americas EMEA Asia Pacific Rolling Four-Quarter Average Global Capital Flows Q Meanwhile, sales activity fell during the third quarter in both the UK and France, but the healthy start to the year has kept year-to-date volumes in both markets up by 3% and 30% respectively. The largest declines in Q3 were seen in some of the region s smaller markets, which had seen significant growth in prior quarters; double-digit declines in year-to-date investment were recorded in Switzerland, Denmark, Spain, Norway, the Czech Republic, Finland and the Netherlands. After several quarters of record-breaking growth, markets in Asia Pacific took a breath as investment sales activity rose by a modest 3% in Q3 to US$36 billion. Nevertheless, year-to-date activity is up by 20% due to the robust start to the year. Core markets have continued to drive growth, with Australia, China and Japan all improving their year-todate performance from last year by 11%, 7% and 8% respectively. The strongest performers have been Hong Kong and South Korea, where year-to-date volumes are at all-time highs on the back of healthy investor demand for offices. U.S. market continues to outperform After a second quarter in which volumes stayed level, the Americas rebounded in the third quarter with volumes jumping by 20% to US$74 billion, bringing year-to-date activity up by 13% to US$206 billion. While Brazil, Canada and Mexico have all experienced lower liquidity than last year, the U.S. has been the main engine for growth in the region. Year-on-year investment in the U.S. rose notably in Q3 as the strong growth outlook and low unemployment spurred investment in offices to reach its highest level in six quarters. Despite some of the headlines, investment in retail also picked up as investors continued to demonstrate appetite for high-quality assets, with a particular emphasis on grocery-anchored properties. In what has been more of a mixed year for the EMEA market, the third quarter saw transaction volumes fall to US$74 billion, 18% lower than recorded in Q This decline puts year-to-date volumes at US$184 billion, 4% down on last year. Germany continues to be the strongest market in the region as volumes increased by 2% in Q3, boosting year-to-date totals by 8% to their highest level since Investor demand for the office sector remains elevated Quarterly investment in the office sector has averaged US$85.5 billion in 2018, 17% higher than during the first three quarters in the five years between 2013 and Fueling this growth has been the better-than-expected macroeconomy, rising wages and continued low unemployment in some advanced economies. The U.S. and UK have been among the biggest beneficiaries of this as year-to-date office investment has increased by 13% and 6% respectively. Meanwhile, tax reform in France has spurred elevated market activity in 2018, resulting in a 36% increase in office investment compared to the first three quarters of Global transactional volumes by sector Office Retail Industrial Hotel Mixed Other 17% 1% -5% 10% 1% 9% YTD 2018 YTD

5 Cities 5 South Korean capital flourishes at home and abroad Chicago makes its way into the Top 10 London kept its spot as the most liquid real estate market in the world in the third quarter, widening the gap to second place New York to US$1.1 billion after the second quarter saw just US$55 million separate the two markets. Meanwhile, Chicago emerged as the ninth most liquid market due to sustained demand for the office and industrial sectors. Since the beginning of the year, investors have made quarterly acquisitions averaging US$1.8 billion and US$977 million in each sector respectively, outpacing the long-run quarterly average for each by 14% and 80%. Among the major drivers of office investment over the past year has been the migration of suburban and out-of-state firms to the CBD in search of talent. At the same time, Chicago s industrial market has mirrored the growth seen throughout the rest of the country as investors continue to demonstrate insatiable demand for the asset class. Most active cities Rank YTD 2017 Rank YTD 2018 City YTD 2018 (US$ bn) YTD 2017 (US$ bn) 1 1 London New York Seoul Paris Hong Kong Tokyo Los Angeles Shanghai Chicago Washington, DC Rising domestic liquidity pushes Seoul into the Top 3 A combination of strong liquidity and the availability of product helped Seoul break out and become the third most liquid real estate market in the world in Q3. Year-todate volumes are already more than double those of last year and 23% higher than full-year The third quarter was particularly strong as acquisitions totalled US$7.0 billion, the highest quarterly level on record. Driving this activity have been domestic investors who have provided US$16.5 billion in liquidity through the first three quarters, 96% of the total seen this year. This compares to the US$13.1 billion that domestic groups spent over the course of the whole year in Global Capital Flows Q The increase in domestic liquidity in the South Korean market has been driven by the entrance of new real estate and alternative asset managers to the market in addition to heightened demand from established investors. Domestic investors have been focused on offices in the Gangnam district where fundamentals are among the most solid of Seoul s major business districts due to sturdy leasing demand from IT firms and co-working groups. Investors have responded with acquisitions amounting to US$6.8 billion throughout the Greater Gangnam Area over the past nine months, the highest level of activity ever seen in the submarket. This concentrated demand has resulted in a number of large-scale office transactions, such as the sale of the Samsung C&T Tower and the newly-constructed Gangnam N Tower, both of which were purchased by domestic investors and achieved record pricing. New sources of foreign capital emerge in London Despite continuing concerns over the possibility of a hard Brexit, London continues to attract cross-border capital; the third quarter saw foreign buyers make acquisitions totalling US$6.8 billion, the highest quarterly mark since Q This brings year-to-date cross-border capital inflows to US$16.5 billion, 8% more than last year. While investors from Hong Kong were the key drivers of offshore liquidity in London earlier this year and throughout much of 2017, South Korean investors have taken over and steadily ramped up their purchases in London over the course of Investment by Korean groups reached its peak in the third quarter with NPS s acquisition of Goldman Sachs London headquarters for a price in excess of 1.0 billion, making it the largest real estate transaction in London so far this year. 10 largest recipient cities of cross-border investment London New York Paris Frankfurt Hong Kong Washington, DC Los Angeles Tokyo Munich Brussels YTD 2018 YTD

6 Cross-border 6 Global Capital Flows Q Inter-regional flows, YTD 2018 (US$181 billion in total) Global Sources of Funds Global groups that raise capital from multiple regions, with less than 70% of the capital from a particular country Global capital flows balance out in the Americas While the Americas witnessed a net outflow of inter-regional capital after the first two quarters of the year, the third quarter brought about a significant uptick in acquisitions relative to dispositions. Purchases by inter-regional investors outpaced sales by US$3.8 billion in Q3, closing the gap that emerged after the first half of the year and equalising year-todate acquisitions and dispositions. Propelling this activity are global funds who were the most active purchasers of real estate in the Americas during the third quarter, even though they continue to be net sellers of commercial property globally. Furthermore, global funds remain the biggest inter-regional buyers of North American property with year-to-date acquisitions of US$14.1 billion, 91% more than Asian groups who are the next most active. Outside of the Americas, Europe continues to benefit from increased capital inflows from both Asian and Middle Eastern investors, who are the only two groups to have purchased more than they sold outside of their respective home regions so far this year. Net inter-regional flows by asset region Net inter-regional investment by source of capital Americas Americas Europe EMEA Asia Pacific Asia Pacific YTD 2018 YTD 2017 Middle East Global YTD 2018 YTD

7 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Cross-border 7 Inter-regional activity boosts cross-border flows Growth in cross-border flows outpaces the market Cross-border activity picked up for the first time this year, rising by 2% quarter-on-quarter and bucking the trend seen in the wider market between Q2 and Q3, as 43% of all transactions in the third quarter involved a foreign buyer or seller. This was driven by a 5% increase in inter-regional transactions from the second quarter as these transactions made up 75% of all cross-border deals in the third quarter, their highest share since the second quarter of Global cross-border transactional volumes Domestic Intra-regional Inter-regional Cross-border as % of total German outbound investment remains elevated 60% 50% 40% 30% 20% 10% Investors from Germany have emerged as the second largest buyers of foreign property with US$11.4 billion in acquisitions through the first three quarters of the year, just 3% lower than what they spent last year. This activity has been mainly down to a number of established players; the three most active investors this year have been Deka, Allianz and Union, all of whom are among the biggest institutional investors in Germany, as well as being recognised cross-border investors. 0% Global Capital Flows Q Top 10 cross-border purchasers by source of capital U.S. Germany Singapore Canada U.K. France Hong Kong South Korea China Switzerland Increased liquidity in the U.S. hotel market The US$600 million acquisition of The Plaza Hotel in New York by Qatar-based Katara Hospitality is among the most notable cross-border transactions of the third quarter. Even more noteworthy is the robust performance of the hotel sector over the course of 2018, with the U.S. in particular attracting US$4.7 billion in foreign capital since the start of the year, a 74% increase on The U.S. hotel market has seen an influx of liquidity this year due to the better-than-expected macroeconomic environment as well as the availability of high-quality stock, especially in the resort sub-sector. Private equity groups have been among the most active investors while REITs, who have previously been a significant source of liquidity, have taken a step back. Notable cross-border transactions, Q Property name Sale Location Sector price (US$ mn) Purchaser YTD 2018 YTD Purchaser source of capital Outbound investment from German groups as a whole has been heavily concentrated within Europe; 79% of all crossborder investment stayed within the region. Even though offices continue to be the most preferred asset class by a wide margin, German investors have shown continued appetite for retail with purchases amounting to US$2.7 billion so far this year. Investors, who have mainly been the large retail and institutional open-ended funds, have been focused on high-street assets in European markets, primarily in France and Spain th Ave U.S. Office 1,286 Brookfield AM Global Apollo Portfolio Chapter Living Portfolio U.K. Hotel 977 Vivion Capital Partners Israel U.K. Other 805 Allianz Germany The Adelphi U.K. Office 717 Ponte Gadea Spain The Plaza Hotel U.S. Hotel 600 Katara Hospitality Qatar

8 Currency Hedging Rising hedging costs impacting capital flows to the U.S. 8 Cross-border investors in the U.S. feel FX crunch One of the most important factors determining investment decisions for cross-border purchasers in the U.S. is the impact of rising currency hedging costs. Diverging interest rates between the U.S. and other major developed economies, as well as volatility in foreign exchange markets, have made investing in U.S. real estate increasingly unattractive for a number of offshore investors. Five-year cash-on-cash return on U.S. real estate investment* Return (%) 14% 12% Q Q Global Capital Flows Q funds, maintain internal standards for hedging in order to minimise currency risk. Conversely, German open-ended funds are required to hedge the equity portion of their foreign investments. Additional limitations on leverage mean that these investors typically make significant equity investments that need to be hedged. Rising hedging costs have resulted in a shift in focus by investors from both countries. South Korean investors have pivoted to Europe where year-to-date acquisitions are already at US$5.4 billion, just shy of the US$5.8 billion they spent over the entire year in On the other hand, purchases in the U.S. have dropped to just US$884 million so far this year. As European exposure grows, regulators and investors alike are considering softening hedging requirements in order to make the U.S. attractive once again and maintain a geographically balanced portfolio. 10% 8% 6% 4% 2% 0% EUR KRW GBP SGD AUD HKD ZAR *Assumes property yield of 4.7%, LTV of 50% and 1.3% borrowing margin Euro and Won investors hit hardest among major groups The impact of rising currency hedging costs can be best seen when comparing five-year cash-on-cash returns on a hypothetical U.S. property investment made in Q with those from an investment made in Q by investors from six different countries, each using their local currency. In this scenario, investors hedge all invested equity. While the average decline in returns across all our sample currencies is 3.15%, investors from South Korea and the Eurozone have been the hardest hit by rising hedging costs, facing a 3.87% and 3.65% decrease in fiveyear cash-on-cash returns respectively. This is particularly notable given that a large number of investors from both countries, South Korean insurers and German open-ended funds in particular, are among those which face regulations on hedging. While South Korean insurers are not required to hedge foreign currency exposure, they encounter higher capital requirements if they do not. Other South Korean investors, such as pension German investors, who have been among the biggest offshore investors in the U.S. in recent years, have similarly maintained a higher degree of focus on the European market this year with just US$2.3 billion spent in the U.S. compared to the $8.9 billion they have spent in other European countries. At its peak in 2016, the U.S. attracted 31% of all German outbound investment; this has fallen to just 20% as of this year. While some investors maintain dollar denominated funds for their U.S. investments, many others do not, and until hedging costs decrease, additional investments in the U.S. will be difficult to underwrite. U.S. share of total German and South Korean outbound investment Share (%) 60% 50% 40% 30% 20% 10% 0% Germany South Korea YTD 2018

9 Global market Outlook Global Capital Flows Q Continued outperformance in the Americas and Asia Pacific expected to lift global investment in 2018 While strong U.S. growth has underpinned the global economy, investors continue to contend with elevated trade tensions and political uncertainty. Moreover, rising U.S. interest rates, along with volatility in energy markets, have hit emerging markets particularly hard. With another U.S. rate hike expected before year-end, treasury yields at a seven-year high and oil prices continuing to rise, growth prospects may be set to diverge. In this environment of potentially renewed volatility and enhanced divergence in near-term prospects, real assets including commercial property look especially attractive. Despite yields keeping at record lows in many global markets, occupier fundamentals remain strong and, with rental growth forecast to tick over into 2019, the sector is set to remain attractive from a return perspective. We anticipate that global investment in commercial real estate over the full year will edge up slightly relative to 2017 to around US$730 billion. As we look ahead to 2019, we expect investment in global commercial real estate to decline to around US$700 billion, as continued investor selectivity and discipline are likely to limit further investment growth. Investors have been increasingly reluctant to exit investments partly because of their inability to find alternatives that provide the same income stream that they receive from property. This has widened the bid-ask spread in investment markets and stands to further impact activity levels going forward. Direct commercial real estate investment % -5% % -10% -0-5% -10% +15% +5% Americas EMEA Asia Pacific Global (F) 2019 (F)

10 10 Global Capital Flows Q Notes and methodology Direct real estate investment Entity-level transactions Development deals Americas Europe Middle East and Africa Asia Pacific Exchange rates Grossed-up figures Refers to the purchase of individual commercial property assets or portfolio of assets (or shares in special purpose vehicles that own assets) Includes: Transactions over US$5 million Sectors covered are office, retail, hotels, industrial, mixed-use and other (includes nursing homes, student accommodation, etc.) The data includes property company M&A, including REIT formations, where the following conditions are met: The transaction is essentially a real estate transaction Significant assets over and above the real estate assets (e.g. workforce, intellectual property, goodwill, etc.) are not transferred 70% + of revenues come directly from rental income Transactions involve a significant change of ownership The transaction must be at market price Only includes the percentage sold to new investors at the IPO price Excludes: Entity-level transactions; development deals; and multifamily residential investment Refers to corporate acquisitions, where significant assets over and above the real estate assets are transferred (e.g. workforce, intellectual property, goodwill, etc.). An example of this is REIT privatisation transaction churn where a company sells real estate assets to a majority-owned subsidiary Refers to transactions categorised as forward funded development and land transactions Detailed coverage of the direct real estate investment markets in Brazil, Canada, Mexico and the United States, and partial coverage of Argentina, Chile, Colombia, Costa Rica, Panama and Peru Varying coverage of the direct real estate investment markets in Austria, Belgium, Bulgaria, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the UK Varying coverage of the direct real estate markets in Bahrain, Israel, Kuwait, Lebanon, Qatar, Saudi Arabia and the UAE In Africa we cover South Africa, with varying coverage across the rest of the continent Varying coverage of the direct real estate investment markets in Australia, China, Hong Kong, India, Indonesia, Japan, Macau, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Vietnam and Thailand Transaction values are converted into US$ at the average daily rate for the quarter in which the transaction occurred Volumes are grossed-up to reflect market coverage Who we are We are the world s most trusted capital markets real estate advisor, executing more than US$650 million in deals every working day. Our 2,220 professionals in nearly 240 offices across 52 countries rely on in-depth market knowledge, financial acumen and enduring partnerships to match your dollars with the right opportunities at just the right time. With your specific needs in mind, we ll pair you with experts dedicated to the markets and asset types you re eyeing.

11 11 Global Capital Flows Q Want to know more? Lauro Ferroni Director, Research Pranav Sethuraman Senior Analyst, Global Capital Markets

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