GLOBAL REAL ESTATE SECURITIES MARKET COMMENTARY Q2 2016

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1 GLOBAL REAL ESTATE SECURITIES MARKET COMMENTARY Q EXECUTIVE SUMMARY REAL ESTATE STOCKS HAVE PERFORMED WELL IN AN UNCERTAIN WORLD Real estate shares were positive for the quarter and are positive yearto-date as investors seek above average yield underpinned by stable earnings growth. Real estate companies out-performed broad equities and bonds during the Q2 and year-to-date. REAL ESTATE EARNINGS AND VALUES CONTINUE TO GROW Q2 earnings season is upon us and we expect quarterly earnings to come in as expected, even in the U.K. where earnings are generated by longer-term leases. A bottom-up view of the world through the lens of property company earnings will generally indicate that the real estate business is relatively healthy. GLOBAL PROPERTY STOCKS CONTINUE TO OFFER PROSPECTS FOR POSITIVE TOTAL RETURNS FOR THE BALANCE OF 2016 We expect global property companies to continue to attract investors seeking dividend yield supported by stable earnings growth in a low growth world. With dividend yield in the 3. range globally on a weighted average basis, and earnings growth in the 6% range this year and next, listed real estate companies are well positioned in a low interest rate, moderate growth economic environment. Subdued development starts, a low inflation/low interest rate environment, and a wide spread between initial yields on real estate and high quality bonds should support investor demand for real estate. We expect positive returns during 2H16. Exhibit 1: Global Real Estate Securities Performance as of June 30, 2016 Q Year 11.6% 3 Year 8.1% 5 Year 7.8% 7 Year 13.3% 10 Year 4.3% Source: FTSE EPRA/NAREIT Developed Index in USD - Net of Withholding Tax as of 06/30/2016. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. U.S. REITS BECOME A NEW GICS SECTOR IN SEPTEMBER Real estate becomes a new GICS sector this September in what is the first new GICS sector since the advent of GICS in REITs will move from the Financials sector into a new 11th sector called Real Estate. GICS (Global Industry Classification Standard) is the leading global listed equity classification system, maintained by S&P Dow Jones Indices and MSCI, Inc. and, as such, is a significant acknowledgement by leading index providers. cbreclarion.com

2 MARKET PERFORMANCE REVIEW REAL ESTATE STOCKS HAVE PERFORMED WELL IN AN UNCERTAIN WORLD Real estate shares were positive for the quarter and are positive year-to-date as investors seek above average yield underpinned by stable earnings growth in a low growth world. This is despite much uncertainty in the global economic outlook, which was made cloudier following the Brexit referendum vote. Property companies globally were sharply lower following the improbable June 23rd vote by the U.K. electorate to leave the European Union, but subsequently rebounded within a week as investors held out hope that the ultimate global impact may not be as negative as initially feared. Regionally, European property shares failed to rebound, causing negative regional performance for the quarter, with the majority of the negative performance occurring in the last week of June following the Brexit vote, particularly in the U.K. Share prices of listed property companies elsewhere in the world held up relatively well for the quarter, with North American REITs up approximately 6% and Asia-Pacific property shares up 3%, all of which occurred in June. Bright spots globally included German property companies and other safe haven geographies and currencies including U.S. REITs, Australian REITs and the Japanese yen. The yield of longer-term sovereign debt reflected a flight to safety, with the yield on the U.S. of 10-year Treasury falling to 1.47% at June 30th versus 1.77% three months ago and 2.27% at the beginning of the year. Year-to-date, a global real estate securities portfolio is up in the high single-digits. Real estate companies out-performed broad equities and bonds during Q2 and year-to-date. Exhibit 2: Global Real Estate Total Returns as of June 30, % % 1 8.8% 11.8% 6.1% 5.3% 4.4% 2.9% 11.2% 2.2% 1.7% % % -3 Canada U.S. Australia Hong Kong Singapore Japan Cont. Europe U.K. World Q Source: FTSE EPRA/NAREIT Developed Index - Net of withholding taxes in USD as of 6/30/2016. Please refer to the last page for index performance in other major currencies. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. YTD THE BREXIT VOTE INTRODUCES A HIGH DEGREE OF POLITICAL AND THEREFORE ECONOMIC UNCERTAINTY The Brexit referendum vote on the face of it sets into a motion a political process which carries many uncertainties and may take years to fully unfold, as the U.K. finds a new economic and political path in its relationship with the EU. There remains a possibility, however distant, that Britain finds a way to revisit this decision or otherwise mitigate its eventual impact. The political burden will be carried by the new Prime Minister of the U.K., Theresa May, who succeeds David Cameron following his resignation just weeks after the vote. In the meantime, we can only assume that Brexit will become a gradual reality and therefore reflect its impact into underwriting assumptions Global Real Estate Market Commentary Page 2

3 REAL ESTATE COMPANIES ARE BENEFITTING FROM A SEARCH FOR DIVIDEND YIELD SUPPORTED BY STABLE EARNINGS GROWTH IN A LOW-GROWTH WORLD Investors globally are seeking dependable yield underpinned by visible earnings growth. With dividend yield in the 3. range globally on a weighted average basis, and earnings growth expected in the 6% range this year and next, listed real estate companies are direct beneficiaries of this given investment characteristics. Landlord oriented business models in particular are benefitting from the search for yield, including many of the REIT structures globally, ranging from J-REITs to Australian REITs and REITs in North America. European REITs remain an exception given the recent Brexit referendum vote, although at some level, current dividend yields in the 4-6% range should underpin these companies. In the U.S., high dividend yield stocks have dramatically outperformed low dividend yielding stocks for the quarter and year-to-date. The difference between the highest yielding companies versus the lowest yielding companies year-to-date is approximately 13%, a trend which was exacerbated during the Q2. Exhibit 3: U.S. Economic Growth Highest Dividend Yield Quintile 13.6% MSCI U.S. REIT Index 6. Lowest Dividend Yield Quintile Source: CBRE Clarion and MSCI U.S. REIT Index as of 06/30/2016. Quintile analysis established by dividend yields within the CBRE Clarion investable universe. Dividend yields fluctuate and are not indicative of present or future investment performance. This information is not indicative of the performance of any CBRE Clarion investment strategy. Information is subject to change and should not be construed as investment advice. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results While an important part of the total return over time, dividend yield has rarely been the key determinant of U.S. REIT stock selection outperformance over time. The scramble for yield is understandable in a low return environment but unlikely to persist as the primary driver of relative performance. The strong performance of higher-yielding stocks is understandable as investors seek investments which offer an alternative to the persisting low yields of many investments, especially bonds. It is rare that dividend yield lasts as a primary driver of the relative returns of property companies. In 2001, for a period of about six months, stocks with higher dividend yields materially outperformed their peers despite lower quality portfolios and weaker balance sheets. This occurred again more recently during the first quarter of Each time period coincided with risk averse equity investor sentiment combined with a falling yield on the 10-year Treasury. However, our experience in this sector is that over any longer period of time, the market takes a more balanced consideration of dividend yield in the context of the other factors which have more persistently driven absolute and relative total returns to real estate stocks over time: namely, earnings growth, management quality, property quality and valuation (i.e., price to underlying real estate value or NAV), balance sheet capacity and quality, company strategy, and direction of underlying real estate fundamentals. These are the many factors underlying our fundamental analysis of property companies, which we believe determine the best investments to include in the portfolio. The significant outperformance of the higher-yielding and often lower-growth companies is a trend that we expect will eventually reverse itself and we remain committed to the multiple factors underlying our relative value analysis. 1H 2016 Total Return Global Real Estate Market Commentary Page 3

4 MARKET OUTLOOK GLOBAL PROPERTY STOCKS CONTINUE TO OFFER PROSPECTS FOR POSITIVE TOTAL RETURNS FOR THE BALANCE OF 2016 AND 5-1 OVER THE NEXT TWELVE MONTHS Real estate companies offer many investment attributes currently desired by investors, including attractive cash flow and dividend yields, stable underlying earnings growth, conservative and well-managed balance sheets, and a strong bid by private capital seeking for hard assets. We believe that global property companies will generate positive total return during the remainder of the year and 5-1 total return over the coming twelve months. Positive yet sluggish economic growth combined with historically low long-term interest rates bodes well for real estate and real estate securities versus other asset classes. The slower pace of economic activity, subdued development starts, a low inflation/low interest rate environment, and a wide spread between initial yields on real estate and high quality bonds should support investor demand for real estate. Central bank policy will remain accommodative, including the U.S. Federal Reserve Bank which we expect to raise policy rates only after seeing a very consistent stream of positive economic data. We expect continued monetary stimulus to help mitigate any economic slowdown. Listed property company earnings will generally be unaffected in this environment, with stable to improving occupancies, higher rents, and active transaction markets. While risks have become more elevated in the aftermath of the Brexit vote, we continue to believe any meaningful volatility creates a potential opportunity to buy high quality real estate companies with visible earnings at discounted prices. The Brexit referendum vote has caused global economic forecasts to be revised modestly down from already sluggish levels as the Brexit impact is largely a UK, and to a lesser extent Continental European, phenomenon. GDP projections in the U.K. were decreased by CBRE economists by a cumulative 3. by the end of 2018, perhaps reaching technical recession, although growth is never projected to go negative in any one calendar year. Economic projections elsewhere have been negatively impacted, particularly in Continental Europe. Economic impact beyond Europe however is expected to be minimal. Exhibit 4: GDP Growth Forecast Year-on-Year Real GDP Growth Rate (%) LT Average -4 Eurozone Australia USA China World UK Canada Japan Singapore Hong Kong Brazil Source: Oxford Economic Forecasting as of 07/01/2016 Note: Countries ranked, left to right, by the difference between the forecast for 2016 and the long term average rate. Long Term Average (LTA) is the geometric average of GDP growth rates for , with the exception of China, where CBRE Global Investors estimates the LTA. Historic data , and forecasts for 2015F-2018F come from Oxford Economic Forecasting. F refers to forecasts. Information is the opinion of CBRE Clarion as of the date of this presentation, which is subject to change and is not intended to be a forecast of future events, guarantee of future results, or investment advice. Forecasts and any factors discussed are not a guarantee of future results. Under a full Brexit scenario, we would expect an average basket of U.K. commercial property in the private market to fall in gross asset value by 12% in the medium term (through 2018). The decrease in assumed gross asset values would be sharper for London office and lower for retail, which are the two asset classes making up the majority of listed company portfolios. This is despite in-place rent remaining fairly stable given the long lease lengths typical in the U.K. and a London commercial property market which currently enjoys frictional vacancy levels. Given the post-brexit sell-off among the listed companies, the listed companies have already discounted this change in underwriting assumption. Low levels of new construction globally are also a positive in a slowing world and suggest that owners of existing properties should continue to enjoy some degree of improved pricing power. With visible earnings growth in the 6% range for this year and next, dividends growing at a slightly higher pace than earnings, and many listed property companies trading at a discount to private market values, listed real estate remains attractively valued versus the private market and continues to offer investors an investment option supported by current income via the dividend. Global Real Estate Market Commentary Page 4

5 DIVIDEND GROWTH REMAINS STRONG Current income generated by listed property s dividend yield remains a defining investment characteristic of the sector. Listed property companies dividend yield currently averages 3-4% globally and is growing at a very healthy clip. We project average dividend growth to be slightly ahead of earnings in 2016 and 2017, driven by a combination of improving company cash flows as well as an expansion of dividend payout policies which remain conservative. Increasing dividends are emblematic of healthy companies in improving markets. Exhibit 5: Forecasted Dividend Growth 1 9.6% 9.6% Weighted Average Dividend Growth 5.7% 4.8% 7.1% 5.4% 8.1% 7.7% Americas Asia-Pacific Europe World 2016 Forecast 2017 Forecast Source: CBRE Clarion as of 06/30/2016, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance. Exhibit 6: Current Dividend Yield 6% 4% Global Dividend Yield: 3.6% 2% -2% Continental United Canada Singapore Australia Hong Kong Europe Kingdom United States Japan Dividend Yield 5.2% 4.6% 4.4% 4.1% 3.9% 3.7% 3.4% 2.3% Current Spread 4.1% 2.6% 2.4% 3.9% 2.9% 2.9% Historical Spread 3.3% % -0.2% -1.6% -1.6% 1.1% -0.8% Source: CBRE Clarion, FactSet and Bloomberg as of 06/30/2016. Not all countries included. Historical spread is from 1990 for all countries except: Canada is from June 1994 and Singapore is from June Past performance is no guarantee of future results. Yields fluctuate and are not guaranteed. This information is subject to change and should not be construed as investment advice. Global Real Estate Market Commentary Page 5

6 EARNINGS GROWTH IS STEADY IN THE 6-7% RANGE Listed property company earnings will generally be solid, even in the U.K., with a continuation of trends seen over the past several years including improving occupancies, higher trending rents, and an active transaction markets. Low levels of new construction globally suggest that owners of existing properties should continue to enjoy improved pricing power as incremental demand for space exceeds incremental new supply. Earnings growth will be generated by a combination of internal growth-which is the organic growth derived from improving operating trends, such as higher occupancies, rising rental rates for newly signed leases, and smaller concessions packages for new tenants as well as external growth, which includes value-adding acquisitions, development and re-development activities. Companies with management teams which actively and intelligently deploy capital so that it is value- added to shareholders will be rewarded disproportionately. Exhibit 7: Regional Earnings Growth Forecast 1 1 LISTED REAL ESTATE REMAINS ATTRACTIVELY VALUED VERSUS PRIVATE MARKET REAL ESTATE, PARTICULARLY IN U.S. CORE PROPERTY TYPES The strength in listed real estate companies has brought valuations to be approximately in-line with the private market on a global weighted average basis. Disparities however persist. Geographies and sectors with above average cash flow and dividend yield are largely trading at premiums to estimated NAV while those with lower yields trade at a discount. In the U.S., real estate value largely resides in the core real estate sectors of apartments, retail, office, industrial, and lodging as a number of the specialty sectors trade well above NAV. U.K. property companies post-brexit trade at material discounts to our revised NAV s (we have reduced NAV s by approximately 11% through 2017) as the sell-off has been severe and uncertainty on Brexit persists. A key insight globally is that cap rates have not budged given negative policy rates in a number of key markets, continued low bond yields, low levels of inflation and wide spreads between cap rates and the cost of capital. A significant amount of dry powder from investors in the private markets, including private equity, pension funds and sovereign wealth, too, is underpinning static cap rates. Over $230 billion of estimated dry powder remains available in the U.S. alone for prospective investment in commercial property. Exhibit 8: NAV Premium/Discount by Region Current NAV P/D Hong Kong/ China 12% Continental Europe 7% 7% 6% Canada United States United States All Sectors United Kingdom Australia Singapore -1% Global Average Continental Europe -3% United States "Core" Sectors Japan Australia Canada Global Average 2015e f f Source: CBRE Clarion as of 06/30/2016. Information is the opinion of CBRE Clarion, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. e refers to estimates. f refers to forecasts. Forecasts and the factors noted are not indicative of future investment performance. -12% 10 Year Average Current NAV Premium / Discount -18% -24% Singapore Japan United Kingdom -31% Hong Kong/ China Information is the opinion of CBRE Clarion as of 06/30/2016, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance Year Average NAV P/D Global Real Estate Market Commentary Page 6

7 CAP RATES SHOULD REMAIN STEADY IN 2016 The spread between cap rates and 10-year sovereign bond yields remains at historically wide levels, and suggests that there is plenty of cushion should bond yields ultimately increase, which near-term appears unlikely. Looking out over the next six to twelve months, we expect long-term rates to remain low given continued sluggish economic growth globally, generally accommodative central bank policy, a decelerating China, implications of Brexit and current negative rates in Europe and Japan. The yield curve is expected to remain flatter than in many previous economic recoveries, meaning yields on longer-dated debt should remain relatively stable. Given the significant current spread between cap rates and government bond yields, we do not forecast a material increase in cap rates this year. Exhibit 9: Commercial Property Values vs. Fixed Income 12 United States Cap Rates Relative to Fixed Income 12 United Kingdom Initial Yield Relative to Fixed Income Prior Peak 8 Prior Peak Above average spread 4 Above average spread 2 U.S. Cap Rates 10-Year Treasury Yield United Kingdom Initial Yield 10-Year Treasury Yield Australian Cap Rates Relative to Fixed Income Cap Rates vs. 10-Year Treasury Yield Long-Term Avg. Spread Spread Prior Peak Current Spread 8 Prior Peak United States 317 bps 58 bps 418 bps 6 4 Above average spread Australia 192 bps -6 bps 361 bps 2 Australia Cap Rates 10-Year Treasury Yield United Kingdom 193 bps -90 bps 355 bps Source: NCREIF Property Index Transaction Cap Rate (equal weighted); IPD Australia Quarterly Digest All Property cap rates (weighted average ), IPD UK Monthly Digest, Factset, and Bloomberg.Information is the opinion of CBRE Clarion as of 03/31/2016, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance. U.S. REITS WILL BENEFIT FROM THEIR OWN GICS CLASSIFICATION AND A STREAMLINED REGULATORY ENVIRONMENT U.S. REITs will benefit from their own GICS classification sector beginning in September 2016, as equity REITs move from the Financials Sectors of the GICS classification standard into a new 11th sector called Real Estate. This is the first new GICS sector created since GICS was defined in GICS (Global Industry Classification Standard) is the leading global listed equity classification system, maintained by S&P Dow Jones Indices and MSCI, Inc. and, as such, is a significant acknowledgement by leading index providers that real estate investment trusts deserve a distinct representation among the now eleven major equity groups. Following the creation of its standalone GICS sector, we estimate Real Estate will become the 8th largest sector in the U.S. with an estimated weighting of 4.2% in the S&P Total Market Index. The new Real Estate sector will be larger than Utilities, Materials and Telecommunications, just behind Energy, and is still growing. By becoming a standalone sector, U.S. REITs will demand a more visible asset allocation decision by institutional investors who will have to more specifically dedicate resources to cover the sector. We believe that this will be positive for REIT demand. Global Real Estate Market Commentary Page 7

8 REGIONAL MARKET OUTLOOK In the Asia-Pacific region, we like Australia and the Japanese REIT sector. Australian investments are benefiting from an attractive combination of yield and growth, plus mergers and acquisitions activity which has recently increased given wide access to attractively priced capital by quality institutional investors, including listed real estate companies. In Japan, we prefer REITs with exposure to the Tokyo office market, which continues to experience improved rental growth as vacancies approach the 4% threshold at which landlords enjoy increasing pricing power. We also like Japanese retail in urban locations which is benefiting from strong inbound tourism and consumer spending as well as J-REITs with access to robust acquisition pipelines from their sponsors. We are cautious in Hong Kong and Singapore as the result of the indirect impact of weaker demand from mainland China, which is weighing on demand across all property types. Property companies in the U.K. have sold off hard to levels which reflect much of the impact of a Brexit scenario but risk remains elevated. Companies on the Continent will hold up better, depending on geography and property type. Listed property companies have sold off materially since the Brexit vote. Given continued uncertainty surrounding the future economic and political relationship between the U.K. and EU, and issues surrounding where we are in the economic and real estate cycles, we believe a market weight position is appropriate. We expect an average basket of U.K. commercial property in the private market to fall in gross asset value by 12% in the medium term (through 2018) and by 16% peak to trough (from 2016 to 2020). These are private market underwriting projections which the listed companies have already discounted. U.K. retail values will fall by around half the amount of London offices and be viewed as a more stable asset class, particularly Class A regional malls. As such, we favor over time the more economically stable sectors of grocery-anchored retail, dominant regional malls and selfstorage versus the more cyclical London office sector, particularly as longer-term questions arise surrounding the future of London as the financial capital of Europe. We would be buyers of the U.K. companies in these sectors on any material further weakness. The Continental European listed property stocks will not be as volatile as the U.K. but they are likely to come under pressure as the process of the U.K. s withdrawal continues. We consider our positions in the German residential and dominant European mall companies to be more defensive and therefore more desirable in this uncertain environment. Our positioning in the Paris office market might benefit from any future relocation of companies from the U.K., but this will take time and may be offset by political worries that France and perhaps other EU countries that may ultimately conduct their own referendums regarding EU membership. We remain selective on the office markets in Paris and on the Continent. The U.S. will outperform as investors seek favorable risk-adjusted total return. In the U.S., we prefer attractively value stocks that offer visible earnings growth, conservative balance sheets and modest development pipelines. Specifically, we favor the class A mall companies, data centers, and CBD office companies; we are more selective in the self-storage, suburban office and healthcare sectors, although acknowledge the relative attractiveness of dividend yield in an uncertain market. We remain selective on the more bond-like sectors that offer modest growth and trade at large premiums to our estimate of underlying private market real estate value. IMPORTANT DISCLOSURES AND RISK INFORMATION The views expressed represent the opinion of CBRE Clarion Securities which are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CBRE Clarion Securities believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimate, projections, and other forward-looking statements are based on available information and management s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. The securities discussed herein should not be perceived as a recommendation to purchase or sell any particular security. It should not be assumed that investments in any of the securities discussed were or will be profitable. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in real estate securities involves risks including the potential loss of principal. Real estate equities are subject to risks similar to those associated with the direct ownership of real estate. Portfolios concentrated in real estate securities may experience price volatility and other risks associated with non-diversification. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is no guarantee of future results. The FTSE EPRA/ NAREIT Developed Index is an unmanaged market-weighted index consisting of real estate companies from developed markets, where greater than 7 of their EBITDA (earnings before interest, taxes, depreciation, and amortization) is derived from relevant real estate activities. Investors cannot invest directly in an index. PA Global Real Estate Market Commentary Page 8

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