GLOBAL INVESTOR INTENTIONS SURVEY N E CENTRAL & EASTERN EUROPE N E WESTERN EUROPE N 104.

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1 N E WESTERN EUROPE S E AFRICA N E CENTRAL & EASTERN EUROPE N E MIDDLE EAST GLOBAL INVESTOR INTENTIONS SURVEY N E ASIA S E PACIFIC CBRE Research

2 Global Investor Intentions Survey 27 Executive summary Economic conditions are positive and investors have ample capital to deploy in global real estate 4 of investors intend to spend more in 27 and 6 intend to spend less, indicating a continuing positive attitude to real estate as an asset class North America is the preferred region for global real estate investors Investors are more interested in the UK than in 26, despite the uncertainty over Brexit London, Los Angeles and Sydney are the most popular cities in their region Office is the most popular sector: Interest in logistics has increased Investors are increasingly targeting yield rather than growth Investors are more interested in direct investment and less interested in funds, than in 26 Figure : Global Investor Preference by Region NORTH AMERICA 6 CENTRAL & EASTERN EUROPE DEVELOPED ASIA WESTERN EUROPE MIDDLE EAST 6 EMERGING ASIA AFRICA 3 SOUTH & CENTRAL AMERICA 2 PACIFIC Source: CBRE Research, NCREIF, 26. CBRE, Inc. 27 CBRE Research

3 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Capital flows and capital value movements in 26 The volume of capital that flowed into global real estate in 26 was $895 billion, down by 9 from $986 billion achieved in 2. Despite the decline, $895 billion is the second highest annual volume of transactions since 27 and it indicates that investors were highly active in 26 (Figure 2). Despite the decline in capital deployed, 26 saw a broad-based increase in real estate capital values (Figure 3). Yield compression was the main diver of value uplift, in all regions, with rental growth being moderate and patchy. The strongest increase in capital values has been in EMEA, where economic growth has motivated investors over the year. The US has also seen growth with industrial and logistics the standout sector, where change and innovation has attracted intense investor interest. In APAC, investors inspired by the region s long-term potential, pushed capital values up, despite modest rental value growth (Figure 4). Real estate investment takes place alongside capital flows into equities, bonds and physical assets and is affected by the same broad forces. Figure 5 shows change in real estate capital flows and change in all global investment capital flows. The correlation is 75. In 26, investment in all global assets was down by, reflecting fears over the outlook for China and global economic weakness that persisted through to the end of Q3. Demand for real estate assets, down only 9 in 26, looks durable relative to the appetite for other investment types. $895 billion is the second highest annual volume of transactions since 27, indicating that investors were highly active in 26. Figure 3: 26 prime capital value growth (annual change) Source: CBRE Research, NCREIF, Office Retail Industrial AMERICAS EMEA ASIA PACIFIC Figure 4: 26 prime property rent growth (annual change) Office Retail Industrial Figure 2: Capital flows into global real estate (US$ billions) US$bn EMEA Americas APAC,2 Source: CBRE Research, 26. AMERICAS EMEA ASIA PACIFIC, Source: CBRE Research, Real Capital Analytics, Figure 5: Growth in capital flows in context Annual change () All Global Capital Flows Real Estate Capital Flows Note: 26 All Global Capital Flows is CBRE Estimate. Source: CBRE Research 27, Real Capital Analytics, IMF, CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 3

4 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Economic context for real estate investment in 27 Three broad factors drive capital flows: global economic growth relative to trend, the availability of debt capital, and investor sentiment. These factors vary from year-to-year in their relative importance. Growth in the advanced economies has been below trend in the last couple of years, due to the recession in the energy industry that followed the oil price crash of 24 and the slowdown in emerging markets. These negatives have largely subsided and we believe that global growth will pick up in 27. A number of the major, advanced economies, particularly the US and Japan, are planning to boost government spending and this is also positive to growth. Of course, higher growth means higher interest rates, but we believe that growth will motivate real estate investing in 27. CBRE professionals report that debt is cheap and easily available in most regions, with little apparent constraint from the recent rise in US bond rates. In the US, life companies are highly active alongside the banks, even filling a gap in the market for development finance. The same is true in Europe. While banks have retreated slightly, alternative lenders, including pension funds (via fund managers) are more than making up for it. In APAC, despite a strong year in Japan, banks have tightened in credit standards particularly for new construction, due to weaknesses in the macro-economy. Life insurance companies and pension funds are looking to expand their books in 27. This time last year, investors were reeling from the volatility in world stock markets, now they are seeing equities reach record highs and economic sentiment is positive at the start of 27. Although there is a high level of uncertainty about the direction that economic policy will take, there is also a growing anticipation that changes will unlock growth. In Europe, there is some nervousness about the elections in France, Germany and the Netherlands, but so far this does not seem to have dampened appetite for real estate. Our survey shows that, despite the uncertainty over Brexit, investors are increasingly interested in the UK. So, the investment context as we move through the early stages of 27 is broadly positive; however, there are some clouds on the horizon. Emerging market debt looks problematic in general as does Greece s financial situation. Nevertheless, economic momentum, alongside the yield advantages of property as an asset class, should ensure another year of substantial capital flows into global real estate. In 2, we forecast that capital flows into real estate would rise by : the outturn was 2. In 26, we forecast a 4 increase and, in the event, volumes fell by 9. Our forecast for volume growth in 27 is, or zero change. We also believe that there is considerable upside and downside potential depending on economic events: investment volumes could be up by or they could fall by as much as. Of one thing we are certain, investors have ample funds available. In total, survey respondents have US $.7 trillion of capital available to deploy in real estate in 27. What follows is a review of how these investors see the world. 4 CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 5

5 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Investor appetite and risk tolerance We asked investors if they were planning to spend more, the same, or less in 27 than 26. Those investors planning to spend more outweigh those planning to spend less by a margin (Figure 6). This indicates continued investor interest in real estate and is consistent with the constant level of transactions we mention above. A fuller analysis of the responses to this question, with a regional breakdown is shown in Figure 7. EMEA investors look to be the most optimistic with a much higher proportion planning to invest 2 or more. APAC investors cluster around the centre preferring to do a little more or a little less but mainly about the same; US investors are in line with the global average, which, as we have noted, is broadly positive. Figure 6: Balance of investors saying more rather than less investment in Last year we noticed that investors had shifted decisively in favour of core assets and away from secondary and value-added risk classes. That trend has partially reversed (Figure 8) in 27 with a fall in demand for core assets and an increased interest in core-plus and opportunistic assets. Investors main obstacle to deploying capital is the high price of real estate. This increased interest in core-plus and opportunistic reflects that issue, but it also shows that investors are slightly more risk on than they were last year. Americas investors are most inclined to move up the risk curve (Figure 9), which is consistent with a marked increase in preference for their home market which we discuss below. Figure 8: Purchasing activity 27 relative to Prime or core assets Core plus / Good secondary Value-add Opportunistic Distressed assets Figure 7: Purchasing activity relative to 26, global and regional Figure 9: Purchasing activity in 27, global and regional 5 Global EMEA Americas Asia Pacific 45 Global EMEA Americas Asia Pacific More than 2 lower Between - 2 lower Up to lower About the same Up to higher Between - 2 higher More than 2 higher Prime or core assets Core plus / Good Secretary Value-add Opportunistic Distressed assets 6 CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 7

6 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Preferred region North America was the most preferred region for the deployment of real estate capital in 26 and that preference has grown markedly in 27 (Figures and ). While investors are worried about rising interest rates, clearly the range of opportunities, relative safety, and growth prospects of North American markets are to the fore. This increase in preference for North America has come at the expense of both Western and Central & Eastern Europe and is almost entirely the result of a change in preference by Americas - investors for North America. In the 26 survey, Americas-based investors showed only a slight bias for North America (39) compared to Western Europe (37). In this year s survey, the preference for North America was very strong (74). We can interpret this in three ways: ) Americas-based investors are positive on the prospects for a revived US economy and the regional spill-over effects; 2) Americas-based investors have become worried about the state of European politics and the possible disintegration of the European Union; 3) Americas-based investors think that the dollar will rise further and that now is not a good time to convert into other currencies. It is probably a mix of all three NORTH AMERICA SOUTH AMERICA WESTERN EUROPE Figure : Regional investor preferences 27 v 26 Figure : Cross border investor intentions 27 v EASTERN EUROPE MIDDLE EAST AFRICA DEVELOPED ASIA EMERGING ASIA PACIFIC Brexit One of the key events of 26 was the referendum on the UK s membership of the European Union and the vote to leave. We only look at country preferences within the regional samples so we can t give an overall global view on the UK. Perhaps reflecting the surprising economic resilience of the UK, our survey suggests that investors are more interested in the UK in 27 than they were in 26. It might be tempting to think that this is due to UK investors increasing their home bias due to the weakness of sterling, but this is not the case. There is a strong increase in preference for the UK by other EMEA investors, as well as US domiciled investors active in the EMEA market. Our survey suggests that investors are more interested in the UK in 27 than they were in CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 9

7 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Preferred cities Within EMEA, London remains the most attractive city in the minds of investors. Berlin has moved up two places to become the second most preferred destination. Why do investors keep coming back to London? By far the most important factor that investors mention (34 of respondents) when asked about their criteria for selecting markets is that it is an established market with liquidity and transparency. An attractive risk and return balance is second (26) by some distance. London is, par excellence, a liquid and transparent market. Figure 2: Top target cities by region AMERICAS EMEA ASIA PACIFIC # LOS ANGELES #2 DALLAS/FORT WORTH # LONDON #2 BERLIN # SYDNEY #2 TOKYO In the Americas, Los Angeles is the stand-out preference for investors. Dallas/ Fort Worth has moved into second place. Washington, D.C. is the biggest mover, entering the top six at fourth, having not featured last year. Atlanta moves up one place and Seattle is sixth, having not made the top tier last year. In asking Americas investors about their city preferences we gave them 38 options, of which 22 were in the US and a catch all category other US metros. If other were an actual city it would have been the second ranked after Los Angeles. These other cities are outside the gateway and second tier markets. This indicates both the depth of the US market and that investors retain a strong appetite for real estate risk. #3 NEW YORK #4 WASHINGTON DC #5 ATLANTA #3 MADRID #4 AMSTERDAM #5 PARIS #3 SHANGHAI #4 MELBOURNE #5 BRISBANE In APAC, Seoul has dropped out of the top six and Hong Kong has moved in. Brisbane and Melbourne have swapped places. As with last year, Sydney is the top destination, with Tokyo second by some distance. Australia s cities remain highly popular with APAC investors because of their liquidity, transparency and positive long-term prospects. #6 SAN FRANCISCO #7 SEATTLE #6 WARSAW #6 HONG KONG CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research

8 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Preferred sectors Alternative investments In Figure 3 we look at sector preferences. Overall offices are the preferred sector but multifamily and logistics are also highly popular. The preference for retail dropped sharply between 26 and 27 (2 to 2): the product of a shift in preferences by EMEA and Americas investors, particularly the latter, towards logistics. Americas-based investors have a strong preference for industrial and logistics real estate and multifamily; two sectors that have performed extremely well this cycle due to changes in technology and demographics. EMEA and APAC investors have relatively more interest in the offices and retail sectors. Partly due to yield compression and partly due to changes in the structure of the economy, the last ten years has seen a strong growth in interest in real estate alternatives. A decade ago, 8 of investment transactions were outside the office/retail/industrial/hotel sectors: in 26, 27 were. In fact, many of these sub-sectors are by now so well established that they no-longer merit the sobriquet alternative. EMEA-based investors are most interested in alternatives and APACbased investors are the least interested. The most popular alternative route into real estate is via real estate debt. Americasbased investors have a stronger preference for debt than investors in other regions, probably because this market is larger and has a longer history in the US. Compared to 26, there is slightly more interest in retirement living and we also observe a longer term growth of interest in single family homes (Figure 4). Figure 3: Sector preference by region Figure 4: Alternative preference, by region 4 Global EMEA Americas Asia Pacific 4 Global EMEA Americas Asia Pacific Offices Logistics Other industrial Retail Hotels / Resorts Multifamily / Leased residential Other Real estate debt Leisure / Entertainment Healthcare Infrastructure Retirement living Student living Automotive / Car parks Self-storage Data centre Single family residential 2 CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 3

9 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Investment vehicles Direct investment is by far and away inventors preferred method of gaining access to real estate returns (Figure ). Furthermore, interest in direct investment is strongly up on 26. Within this category, investors prefer to buy single assets rather than portfolios by a ratio of two to one. Direct ownership in partnerships and joint ventures is investors second preference. The popularity of these vehicles has been stable over the last three years. While property funds are the third choice of our survey group there has been a strong decline in interest in this type of vehicle over the last three years, as a counterpart of the increased interest in direct investing. Similarly, interest in REITs has fallen for the last two years. This year, we asked investors whether they were interested in corporate acquisitions as a means of acquiring real estate and a large minority (2) were. Figure : Preferred investor vehicles 79 DIRECT 49 PARTNERSHIP / JOINT VENTURE / PARTIAL INTERESTS 26 PROPERTY FUND 26 DEVELOPMENT FUNDING 22 LISTED REAL ESTATE (INCLUDING LISTED REITS) 6 PRIVATE DEBT 8 CORPORATE AQUISITIONS 7 OTHER EQUITY 7 OTHER DEBTS 5 CMBS 4 CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research

10 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Investor motives Investor main concerns The key motivation for real estate investment in 27, relative to 26 (Figure 6) has changed. In 26, expectation of higher growth than other asset classes was the most important single motivation for real estate investment at 37 of responses. In 27 this has slipped to third, with less than 2 of responses. In 27, by contrast, we see a strong rise in income-related motivations for investing. The response yield relative to other asset classes rises from 2 in 26 to 3 of responses in 27. The importance of yield comes in this response and others in the survey. The decline in growth as a motivator for real estate investment is a hint that investors are beginning to think that we are in the mature phase of the cycle. It might partly be responsible for the big swing in Americas-based investors preference for deploying capital in the US. It also partly accounts for the decline in the balance of investors who are going to acquire more than last year over those who are going to do less. It strongly suggests that the long period of real estate yield compression has come to an end. That investors cite asset prices and availability of assets as the top two obstacles to deployment of capital, also suggests that the general willingness to bid prices higher is falling away (Figure 7). So, while demand looks relatively solid, vendors will have to adjust to this new reality. Figure 6: Investors main motivation for investing in real estate Yield relative to other asset classes Higher income return than other assets classes Expectation of better capital value growth than asset classes Other Hedge against inflation Asset class diversification Steady income stream from rents Figure 7: Investor main obstacles to purchase Geographic diversification 7 Yield relative to cost of debt (positive leverage advantage) 6 Asset pricing Availability of assets Competition from other investors Low market transparency Availability and/ or cost of debt Despite a quite volatile global political environment, with a number of key elections in Europe in 27, investors seem relatively unconcerned about global or local politics (Figure 8). Investors main worries are: An undefined global economic shock and faster than expected rises in interest rates. The latter concern is felt much more strongly this year than last, and is the biggest change in the responses to this question. The third most important worry, which confirms the comments made about pricing, is that property is overpriced, a bubble waiting to burst. Despite a quite volatile global political environment, with a number of key elections in Europe in 27, investors seem relatively unconcerned about global or local politics. Figure 8: Investor main concerns A global economic shock 22 undermining occupier demand Faster than expected interest rate rises Property is overpriced, a bubble waiting to burst Overbuilding leading to excess supply A local economic shock undermining occupier demand Global political instability (conflict and or terrorism) A change of government policy that makes property less attractive Local politcal instability Some other property market related shock Higher than expected owners Other Distressed sales by existing owners Deflation Lack of investment partners 2 Other Currency risk Tax Deflation 6 CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 7

11 Global Investor Intentions Survey 27 Global Investor Intentions Survey 27 Conclusions Dry powder by investor type As previously noted, the sum total of planned capital expenditure by investors is $.7 trillion. Investors will not be able to deploy all of this capital, but the figure illustrates the potential capital available for real estate investment. Figure 9 ranks the different classes of investor by their percentage of the total planned capital expenditure. The table gives a feel for the composition of our survey respondents; it also points to the professionalization of the real estate industry. A large proportion of the capital is in the hands of investment managers acting on behalf of others. Figure 9: Investor type by dry powder Fund / asset / investment manager 33 Private property company Developer (mainly for sale) Listed property investment company / listed REITs Private equity firm / venture capital Private individual investor / family office The economic outlook for real estate investing looks more positive in 27 than it was in 26; however, we are now in the eighth year of a global economic expansion and, by and large, property values have risen in every year since 29. Investors have ample capital and a strong motivation to invest in real estate because of its relatively high income yield. Investors are also aware that prices are high and seem disinclined to bid them any higher. Although investors do not seem unduly concerned about the big political shifts that are taking place, there is indirect evidence that they are nervous about Europe. North America is, more strongly than last year, the preferred region for investors. London, Los Angeles and Sydney are the most popular cities. Offices is the most popular sector but logistics, up very strongly in 27, is a very close second. Other 5 Insurance company 4 Pension fund 4 Bank - own balance sheet 3 Unlisted REITs 2 Sovereign wealth fund / sovereign investor 8 CBRE Research CBRE, Inc. 27 CBRE, Inc. 27 CBRE Research 9

12 Global Investor Intentions Survey 27 Key contacts For more information please contact: Global Research Leadership Nick Axford, Ph.D. Head of Research, Global t: e: Richard Barkham, Ph.D. Chief Economist, Global t: e: richard.barkham@cbre.com Neil Blake, Ph.D. Head of Forecasting and Analytics, Global t: e: Henry Chin, Ph.D. Head of Research, Asia Pacific t: e: Spencer Levy Head of Research, Americas t: e: Global Capital Markets Research Dennis Schoenmaker, Ph.D. Economist, Global t: e: dennis.schoenmaker@cbre.com Robert Fong Research Director, Asia Pacific t: e: robert.fong@cbre.com.hk Revathi Greenwood Head of Investment Research, Americas t: e: revathi.greenwood@cbre.com Jeanette Rice Head of Multifamily Research, Americas t: e: Raphaël Rietema Capital Markets, EMEA Research t: e: raphael.rietema@cbre.com Jos Tromp Head of Research, EMEA t: e: jos.tromp@cbre.com CBRE Disclaimer 27 CBRE, Inc. confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. To learn more about CBRE Research, or to access research reports, please visit the Global Research Gateway at: cbre.com/researchgateway 2 CBRE Research CBRE, Inc. 27

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