Real Estate Investment Beyond(?) the Global Credit Crisis James Valente (james.valente@ipd.com) Director, North America November 29 th 2011 2011 ipd.com
Overview Variation in regional trends Global investment flows into real estate Changing expectations Pricing risks logo identifies you are associated with and that your fund(s) are independently measured and evaluated by an audited external organization 2011 ipd.com 2
Variation of performance across regions narrowing again 40 30 20 Total Retu urn (%) 10 0-10 Spread North America -20 Asia Global Europe -30-40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: 2011 ipd.com
As countries jockey for position 40 30 Ireland Ireland Korea Total Retun (%) 20 10 0-10 Portugal Sweden Portugal Ireland 95th % Ireland UK Sweden Germany Germany Germany UK Switzerland Korea UK Ireland US Ireland 75th % -20 Median Average -30-40 25th % 5th % Max/Min Ireland Ireland 2001 Source: 2002 2003 2004 2005 2006 2007 2008 2009 2010 2Q 2011 2011 ipd.com
The pattern of performance in 2009 Top 10 Johannesburg 8.1 Cape Town 7.7 Zurich 5.6 Geneva 5.5 Munich 5.3 Seoul 4.6 Edinburgh 4.4 Vienna 4.2 Oslo 3.6 Brussels 3.4 Bottom 10 Dallas -17.2 Denver -17.7 Portland -18.3 Atlanta -18.7 Boston -19.0 Los Angeles -20.0 San Francisco -22.1 Seattle -22.1 Miami -22.2 Dublin -22.9 Source: Above average Below average 2011 ipd.com
Shifted in 2010 Top 10 Washington DC 20.5 New York 19.8 London 19.4 Denver 17.3 San Diego 17.1 Minneapolis 15.9 Dallas 14.3 Los Angeles 14.3 Montreal 14.2 San Francisco 14.1 Bottom 10 Dusseldorf 3.8 Porto 3.2 Frankfurt 3.0 Berlin 3.0 Brussels 2.9 Madrid 2.2 Budapest 1.9 Prague 1.1 Tokyo -1.0 Dublin -1.4 Source: Above average Below average 2011 ipd.com
And again through first half of 2011 Top 10 Washington D.C. 22.6 San Francisco 22.6 Portland 21.3 Denver 19.9 New York 19.8 Seattle 19.4 Los Angeles 17.7 Philadelphia 17.4 Montreal 16.7 Minneapolis 16.5 Source: Above average Median/Average Below average Bottom 10 Manchester 7.3 Birmingham 6.6 Detroit 6.3 Edinburgh 6.3 Rome 5.5 Milan 5.2 Amsterdam 4.6 Rotterdam 3.9 Tokyo 1.3 Dublin -3.5 2011 ipd.com
Real estate favored among alternatives Pension fund allocations across alternatives, heading into 2011 YE 2010 55% 12% 18% 12% 3% YE 2009 52% 12% 21% 13% 2% Real Estate Infrastructure Private Equity Hedge s Commodities Source: Towers Watson, 2011 2011 ipd.com
Supported by improved transaction volume $350 $300 $250 $200 $150 $100 $50 $- 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 Quarterly Transactio on Volume (U.S. $ bil.) 4Q 2010 1Q 2011 2Q 2011 3Q 2011 Source: Real Capital Analytics Americas Asia / Pac. Europe 2011 ipd.com
And diverse regional investment flows Top Countries of Origin Country # $ % United States 754 $18,139 15% Hong Kong 142 $17,130 14% Canada 488 $12,284 10% Singapore 74 $10,881 9% UK 247 $9,593 8% Germany 100 $6,074 5% Netherlands 51 $5,967 5% France 105 $3,787 3% Norway 20 $3,246 3% Other 967 $33,514 28% Total 2,948 $120,614 100% Volume in Millions of $ Source: Real Capital Analytics Top Market Destinations Country # $ % London 99 $14,545 12% Paris 78 $6,702 6% Shanghai 16 $5,917 5% Manhattan 26 $5,393 4% Beijing 15 $2,588 2% Melbourne 29 $2,548 2% Kowloon 3 $2,507 2% Singapore 14 $2,359 2% Ruhr Valley 33 $2,249 2% Other 2,635 $75,806 63% Total 2,948 $120,614 100% Volume in Millions of $ 2011 ipd.com
Canadian firms invested abroad Top Market Destinations Market # $ % London 9 $3,638 22% Ruhr Valley 21 $2,004 12% Manhattan 2 $1,463 9% Melbourne 2 $1,255 8% Reading 1 $643 4% New Territories 1 $589 4% NYC Boroughs 1 $416 3% Dubai 1 $406 2% Bern 1 $300 2% Other 456 $5,780 35% Total 495 $16,493 100% Vo lume in M illio ns o f $ Source: Real Capital Analytics 2011 ipd.com
But expectations for value change have pulled back % respondents 70 60 Rise 50 40 30 20 10 0 Fall -10-20 Germany France UK HK Australia Japan USA Global Source: IPE Sept/Oct 2011 Mar-11 Jul-11 Sep-11 2011 ipd.com
Because the crisis is not over yet 90 80 Lehman s bankruptcy & TARP 70 60 50 40 30 20 Sub-prime crisis Extensive Govt intervention Recession concerns European sovereign debt crisis VIX (Nov. 2004 - Nov 2011) 10 0 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Source: VIX November 23, 2004 November 25, 2011) 2011 ipd.com VIX avg. (1990 - Current)
Growth expectations moderate 7% 6% 3Q 2011 (20 011-2013) 5% 4% 3% 2% 1% South America Asia Eastern Europe Oceania World North America Other W. Europe Euro Zone 45 0 0% 0% 1% 2% 3% 4% 5% 6% 7% 4Q 2010 (2011-2013) Source: Moody s Analytics 2011 ipd.com 14
With meaningful variety within regions 40% 20% 0% -20% -40% % Change in 3-Yr. GDP Forecast -60% -80% North America United States Canada Mexico South America Argentina Brazil Chile Euro Zone Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Other W. Eur0pe Denmark Norway Sweden Switzerland United Kingdom Eastern Europe Czech Republic Poland Russia Turkey Oceania Australia New Zealand South Africa Asia China India Japan South Korea Singapore Taiwan Hong Kong World Source: Moody s Analytics 2011 ipd.com 15
Pricing recovers near previous lows in some markets 14% 12% 10% 8% 6% Prime Cap Rates 4% 2% Americas US Canada Latin America Europe United Kingdom Germany France Italy Spain Netherlands Asia Pacific Asia (x-japan) Japan Australia/N.Z. Previous Low Crisis Peak 3Q 2011 Source: Real Capital Analytics 2011 ipd.com 16
Yet spreads remain wide 600 550 500 450 United States Germany Canada France Sweden Japan United Kingdom 3Q 2011 Spreads 400 350 300 Spain Australia Singapore 250 200 Hong Kong 150 45 0 100 100 150 200 250 300 350 400 450 Source: Moody s Analytics, Real Capital Analytics 2011 ipd.com 17 Average Spreads (2007-3Q 2011)
Because bond yields are low RISK 12 10 8 6 4 Yield (%) 2 0 United States Canada Germany Ireland Italy Netherlands Spain United Kingdom Japan South Korea Singapore Taiwan Hong Kong Australia New Zealand Previous Peak 3Q 2011 Forecast Peak (2012-2013) Nov. Bond Auction Source: Moody s Analytics 2011 ipd.com
Especially in markets where.. 150% 130% Japan = 220% 110% 90% 70% 50% 30% 10% Japan Greece Italy Belgium Singapore Ireland United States Portugal Germany Canada France World United Kingdom Brazil India Netherlands Spain Denmark Hong Kong China Korea, South New Zealand Australia -10% Public Debt -to-gdp (2010) Source: IMF 2011 ipd.com
And banks face potential capital shortfalls Country # Banks Tested CT 1 < 5 5< CT 1 < 6 U.K. 4 0 0 Ireland a 3 0 0 France 4 0 0 Germany 12 0 2(3) b Spain 25 3 6(7) b Italy 5 0 1 Portugal 4 0 4 Greece 6 2 2 a All three Irish banks failed in Dec. 2010 test b (.) additional bank at CT1=6.1 2011 ipd.com
Conclusions Markets (price) are recovering around the world Recovery has not been highly coordinated as investors chased expectations / rotated away from perceived risks Investors remain attracted to real estate and made significant investments during first three quarters of 2011 Growth expectations have pulled back Cap rates (especially primary global markets) are approaching previous cyclical lows But spreads remain very wide due to low benchmark bond yields THIS IS INJECTING RISK Spreads could contract quicker than property earnings grow due to political and banking risks 2011 ipd.com 21
Thank You For Your Time Jim Valente Director, Performance & Risk Analytics 20 N. Wacker Drive, Suite 1760 Chicago, IL60606 Tel: +1 312 646 6258 Email: james.valente@ipd.com Web: www.ipd.com/us Intellectual Property Rights and use of statistics as benchmarks Whether in the public domain or otherwise, 's statistics are the intellectual property of Investment Property Databank Limited. It is not permissible to use data drawn from this presentation as benchmarks. Investment Property Databank Limited () 2010. Database Right, Investment Property Databank Limited () 2010. All rights conferred by law of copyright and by virtue of international conventions are reserved by 2011 ipd.com Dec-11 22