Global Real Estate Capital Markets Real Estate Data as of 2Q 2017 Economic/Capital Markets Data as of September 2017 Jon H. Zehner Presentation to ULI Scotland Thursday 28 September 2017 LaSalle Investment Management Global Real Estate Capital Markets 1
01 Global Macro Summary LaSalle Investment Management Global Real Estate Capital Markets 2
Capital Markets and Economic Outlook Stable SEPTEMBER 2017 GDP Forecasts for the 2017-2020 period were revised up for Canada and Eurozone countries, flat for UK and Asia-Pacific, and revised down for the US. Bond Yields in General Decline: In 2017, sovereign bonds yields have trended down in major economies. As a result, required IRRs were lowered for many European markets. US Federal Reserve Holds Off Rate Hike: The FOMC held the benchmark federal funds rate at 1.0-1.25% as inflation continues to run below the 2% target. As of July, Core PCE decelerated to 1.4% Y/Y. The Fed signaled the start of balance sheet normalization program in 2017. ECB Signals QE Scale-Back: plans for tapering 60bn/month stimulus program could be announced as soon as October. The ECB has kept the benchmark short-term interest rates at 0%. North Korea Threats: Geopolitical tensions rise, presenting threats to global security. Current implied stock market volatility in the US and South Korea, as measured by VIX, remains below other major geopolitical events in history. Currency risk is a potential drag on the regional economy. Capital Market Indicators: Capital market indicators have improved across markets, with upgrades in pricing balance indicators. Overall composite score turned positive for UK. LaSalle Investment Management Global Real Estate Capital Markets 3
Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 CPI, Y/Y Inflation Trends Stable and Low TIGHTENING LABOR MARKETS HAVE YET TO PUSH WAGES, AND INFLATION, SIGNIFICANTLY HIGHER CPI Inflation Y/Y Breakeven Inflation Forecast 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Country United Kingdom Breakeven Market Inflation Forecast for Next 10 Years Change over Last Year 3.05% 34 bps + 1.0% United States 1.77% 30 bps + 0.5% 0.0% -0.5% -1.0% Eurozone 1.20% 41 bps Japan 0.34% - -4 bps + US UK Eurozone Japan The breakeven market spread is the difference between nominal 10 year government bond yields and inflation-protected 10 year government bond yields (TIPS in the US). This difference is the market-implied expectation of inflation. Note: Market inflation forecast for next 10 years is: (10Y Note Inflation Protected 10Y Note) Source: Bloomberg. Data as of 31 August 2017 LaSalle Investment Management Global Real Estate Capital Markets 4
Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 10 Year Yields, % Yields Fall in August MORE GLOBAL GOVT BONDS OFFER NEGATIVE YIELDS AS MORE INVESTORS T ILT TOWARD SAFETY 45% Share of Government Bonds with Negative Yields* 2.7 10Y Government Bonds 40% 35% 2.2 30% 1.7 25% 20% 15% 1.2 0.7 10% 5% 0.2 0% -0.4 US: 2.12% Germany: 0.36% UK: 1.03% Japan: 0.01% The ECB has committed to buying 60bn of bonds each month through the end of 2017. *Based on LaSalle composition of Bloomberg Global Developed Sovereign Bond Index (maturities over 1 year in developed markets). Weighted based on current market value. Source: Bloomberg, LaSalle. Negative yield chart updated 30 August 2017, bond yields through 31 August 2017. LaSalle Investment Management Global Real Estate Capital Markets 5
LaSalle s Global Office Forecasts RENT DECLINES EXPECTED IN SOME MAJOR MARKETS Key City Annualized Rent Growth Forecast (17-20) Current Vacancy Rate (Q2 2017) Average Rent Growth and Vacancy Rate 2017-2020 Toronto Chicago RG: 1.7% Vac: 8.0% RG: 3.1% Vac: 10.5% New York London RG: 2.6% Vac: 10.8% RG: -3.2% Vac: 8.2% RG: 3.2% Amsterdam Vac: 10.9% Stockholm Frankfurt RG: 2.0% Vac: 8.5% RG: 1.8% Vac: 10.4% Shanghai RG: -0.3% Vac: 8.6% Tokyo RG: -1.1% Vac: 3.2% San Francisco RG: -6.5% Vac: 6.7% Washington DC RG: 1.9% Vac: 10.8% Munich RG: 4.3% Vac: 3.2% Hong Kong RG: 0.8% Vac: 1.9% Los Angeles RG: 3.5% Vac: 12.5% Houston Madrid RG: 2.4% Vac: 10.4% RG: -1.8% Vac: 20.2% Milan RG: 2.1% Vac: 14.9% Singapore RG: 3.8% Vac: 6.8% Paris RG: 2.4% Vac: 7.3% Sydney RG: 9.5% Vac: 6.7% Source: LaSalle Market Watch, LaSalle Market Tracking System. As of 2Q 2017, LaSalle Investment Management Global Real Estate Capital Markets 6
Capital Markets Healthy Overall - Pricing Imbalance Risks Mitigated LASALLE S GLOBAL CAPITAL MARKET DASHBOARDS (CMDS) POSITIVE CAUTION DANGER Supply/Demand Imbalance Debt/Equity Imbalance Pricing Imbalance US Canada Australia Japan Germany France UK Yield curve recession indicator Real estate transaction volumes Property vs BAA Bonds Leading indicators: recession CMBS issuance levels REIT price index vs. 6mo average Oversupply risk CMBS spreads (AAA) Public REIT vs Private values Yield curve recession indicator Real estate transaction volume Property vs BAA Bonds Leading indicators: recession Mortgage debt outstanding REIT prices Oversupply risk Cost of debt to real estate IPD capital growth Oversupply risk Cost of real estate debt Property vs Gov t Bonds Recession risk Bank exposure to CRE loans REITS vs Equities Corporate bond spreads Banks equity price index Real capital growth Oversupply risk Cost of real estate debt Property vs Gov t Bonds Recession risk Bank exposure to CRE loans REITS vs Equities Corporate bond spreads Banks equity price index IPD Capital Growth Oversupply risk LTVs Property vs Gov t Bonds Recession risk Banking sector health check REITS vs Equities Corporate bond spreads Bank CDS spreads Yield impact Oversupply risk LTVs Property vs Gov t Bonds Recession risk Banking sector health check REITS vs Equities Corporate bond spreads Bank CDS spreads IPD Capital Growth Oversupply risk Retail funds capital flows Property vs Gov t Bonds Recession risk Bank exposure to CRE loans REITS vs Equities Corporate bond spreads Bank CDS spreads IPD capital growth Each country has nine indicators; three in each group. The indicators are particular to each country, although some overlap and common themes are present Source: LaSalle. As of September 2017. LaSalle Investment Management Global Real Estate Capital Markets 7
02 UK Market Outlook What is this so-called slowdown of which you speak? LaSalle Investment Management Global Real Estate Capital Markets 8
Election outcome leading to softer stance on Brexit SOFT OR LONG BREXIT LESS DETRIMENTAL FOR UK ECONOMY Impact vs Previous Base Case* Description Scenario Economy Real Estate Revised Probabilities post General Election Soft or Long Brexit Deal by Conservativeled government Deal by Labour-led government 40% 15% 55% No Brexit No Brexit 5% 5% No Deal 10% Hard Brexit 40% Clean Break n/a* n/a* 30% * LaSalle previous Base Case in Nov. 2016 was that of a Hard Brexit with a Clean Break. It had a c60% probability attached to it. Source: LaSalle (09/17) PMA (07/17) LaSalle Investment Management Global Real Estate Capital Markets 9
Evolution of Brexit risks SOFT OR LONG BREXIT REDUCES KEY RISK: LONDON CITY OFFICES Brexit Risks at EU Referendum [June 2016] Brexit Risks Today [September 2017] London City Offices South East Offices London City Offices South East Offices Secondary Retail Secondary Retail Prime London Residential Student Housing Scotland Real Estate Prime London Residential Student Housing S Residential PRS Residential PRS Size of bubble indicates quantum of risk specific to Brexit (ie not related to the underlying drivers of the sector) PRS = Private Rented Sector Source: LaSalle (09/17) LaSalle Investment Management Global Real Estate Capital Markets 10
Growth (%) Inflation (%) Real wages fall despite relatively robust confidence & retail sales INFLATION SPIKE FOLLOWING BREXIT & ENERGY PRICE INCREASE TO DRAG ON ECONOMY Real Wage Growth [% pa] Inflation [% pa] 8 6 Forecast 6 5 4 4 2 3 0 2-2 1-4 0-6 -1-8 06/03 06/05 06/07 06/09 06/11 06/13 06/15 06/17-2 06/06 06/08 06/10 06/12 06/14 06/16 06/18 06/20 Nominal Wage Growth Inflation (inverted) Real Wage Growth RPI CPI ONS methodology: Pre-March 2006 uses CPI to calculate real wage growth whilst March 2006 onwards uses CPIH Source: LaSalle (09/17) Oxford Economics (08/17) ONS (06/17) LaSalle Investment Management Global Real Estate Capital Markets 11
Growth (%) GDP Growth (%) Real wages fall despite relatively robust confidence & retail sales INFLATION SPIKE FOLLOWING BREXIT & ENERGY PRICE INCREASE TO DRAG ON ECONOMY Real Wage Growth [% pa] Real GDP Growth [% pa] 8 4 Forecast 6 3 4 2 2 1 0 0-1 -2-2 -4-3 -6-4 -8 06/03 06/05 06/07 06/09 06/11 06/13 06/15 06/17-5 2004 2006 2008 2010 2012 2014 2016 2018 2020 Nominal Wage Growth Inflation (inverted) Real Wage Growth History & Current Forecast Previous Forecast (3 Months Ago) June 2017 wage growth is an estimate. ONS methodology: Pre-March 2006 uses CPI to calculate real wage growth whilst March 2006 onwards uses CPIH Source: LaSalle (09/17) Oxford Economics (08/17) ONS (06/17) LaSalle Investment Management Global Real Estate Capital Markets 12
Strongest prospects for wealth & income growth concentrated in South POCKETS OF STRENGTH IN KEY REGIONAL CITIES & MAJOR TOWNS Real Disposable Income [Cumulative Growth 2017-26] House Prices [Cumulative Growth 2017-26] Consumer Index [LaSalle composite tool] High LaSalle s consumer index comprises: GDP, retail sales, working-age population, income per capita & size/liquidity Source: LaSalle (09/17) Oxford Economics (06/17) LaSalle Investment Management Global Real Estate Capital Markets 13 Low
London tops E-REGI again in 2017 after 2016 s EU referendum blip MANY UK REGIONS IMPROVE THEIR SCORE WHILST NONE SEE A DECLINE Top 10 E-REGI UK E-REGI [Score Category] 2016 2017 Change 1 Paris London +1 2 London Paris -1 3 Stockholm Stockholm 0 4 Munich Istanbul +2 5 Luxembourg Dublin +2 6 Istanbul Luxembourg -1 7 Dublin Munich -3 8 Madrid Oslo +2 9 Stuttgart Stuttgart 0 10 Oslo Copenhagen-Malmö +1 High Source: LaSalle (09/17) Change to 2016 LaSalle Investment Management Global Real Estate Capital Markets 14 Low
03 Historical Market Capital Raise Trends LaSalle Investment Management Global Real Estate Capital Markets 15
Historical Market Capital Raise Trends ANREV/INREV/NCREIF CAPITAL RAISE SURVEY RESULTS Annual Capital Raising Trends by Regional Strategy For All Styles and Investment Vehicles ($ billion) $149.2 $132.5 $13.2 $41.9 $134.8 $9.2 $128.4 $11.9 $35.4 $37.7 $33.3 $86.4 $15.4 $19.3 $39.0 $11.4 $63.0 $20.3 $82.4 $23.8 $68.8 $59.6 $18.4 Funds continue to be the preferred method of investing for investors worldwide $22.9 2012 2013 2014 2015 2016 Asia Pacific European North American Global Source: 2017 INREV/ANREV/NCREIF Capital Raising Survey Report Please note that the report is based on surveying 162 fund managers globally. Whilst ANREV/INREV/NCREIF attempts to survey all fund managers, not all have participated in the survey, therefore the sample size and composition of the survey varies each year and figures should be considered as a minimum. LaSalle Investment Management Global Real Estate Capital Markets 16
2016 Private Real Estate Market Capital Raise Overview 2016 SURVEY CORRESPONDENTS RAISED $128.4 BILLION OF CAPITAL FOR NON-LISTED REAL ESTATE By Investment Location By Investor Domicile By Vehicle Type By Investor Type Europe 47% North America 26% Asia Pacific 18% Other 9% Europe 50% North America 26% Asia Pacific 22% Other 2% Funds 50% Separate Accounts 27% JVs & Club Deals 14% Fund of Funds 2% Debt Products 7% Pension Funds 47% Insurance Companies 17% Other 16% Sovereign Wealth Funds 9% Government Institutions 3% Fund of Funds 3% HNW / Family Office 3% Charities, non-profits org. 2% Source: 2017 ANREV/INREV/NCREIF Capital Raising Survey Report, data as at December 31, 2016. Please note that the report is based on surveying 162 fund managers globally. Whilst ANREV/INREV/NCREIF attempts to survey all fund managers, not all have participated in the survey, therefore the sample size and composition of the survey varies each year and figures should be considered as a minimum. LaSalle Investment Management Global Real Estate Capital Markets 17