2. 1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarized
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Summary
Abouhana
3. a) Still negative real interest rates (inflation!), especially in Asia
Major signals to real estate investors
Making property investments popular to combat inflation
Negative real interest rates
Real interest rates 5-Mar-13
3-month 10-year CPI (y-on-y)
United States -2.41 -0.80 2.90
Euro zone (Germany) -1.66 -0.22 2.10
China -2.13 0.32 3.20
Hong Kong -5.70 -4.26 6.10
Philippines -0.69 -0.95 3.90
Singapore -4.40 -2.78 4.80
Brazil 2.81 6.39 6.22
Source: Bloomberg
Abouhana
4. 1Demand-pull inflation: inflation stemming from stronger demand for products and services, normally leading to higher revenues (rents)
2Cost-push inflation: inflation stemming from higher commodity prices (pushing up interest rates – thus funding costs - without necessarily
producing higher rents in exchange)
Major signals to real estate investors
Real estate and inflation
perspectives
Values and rents tend to be correlated with demand-pull inflation
1
,
enhancing returns on equity
But cost-push inflation
2
may have an adverse impact on real estate
financing
If you have access to debt today “if” , rates are (still) reasonable
It is time to secure the cost of funding !
Abouhana
5. b)Different property drivers
Major signals sent to real estate
investors
Mature countries
Concerns over growth prospects for
rents and capital values
In particular for the office markets
Currency risk – which is rather new –
for EUR/USD/GBP denominated
investments
But prime products – whether
residential or commercial – are
heavily sought after
Emerging countries
Better growth prospects for rents and
capital values
For commercial and affordable
residential real estate
Not only in Asia, but also in Latin
America
But luxury home prices may cool off
due to tightening measures
Abouhana
6. Major Signals sent to Real Estate Investors
C) Stock market volatility
Real estate securities were very volatile in 2011, which does not
necessarily reflect the health of the underlying property
markets
Sentiment for real estate securities was particularly negative in
Asia
Given current and projected inflation rates
Given government measures to cool the markets
Abouhana
7. Major signals sent to real estate investors
Returns in the long run (source: EPRA, total return = share price performance + dividends, expressed in local currency)
Asset Classes(EUR) - 31 January 2013 Ytd return (%) 10-year annual return (%) 20-year annual return (%)
Global Listed Real Estate 6.9 6.0 9.0
Global Equities (FTSE) 4.7 3.8 NA
Global Bonds (JP Morgan) 0.6 4.4 6.0
European Real Estate 4.6 5.2 6.9
North American Real Estate 5.5 6.5 12.6
Asian Real Estate 10.1 5.8 6.9
Source: EPRA - All figures expressed in euros
Abouhana
8. 1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Summary
Abouhana
9. Real estate becomes increasingly
polarised
Asia and Latin America
Offices
Examples: Paris,
London, New York
Europe and the US
Retail
Between mature and emerging markets
Between the various property sectors
Within each sub-market
vs
.
vs
.
Abouhana
10. Real estate increasingly polarised
On the one hand, the
world is getting rid
of
Excessive leverage (coupled with re-financing issues)
Excessive oversupply
Property asset classes which are currently
“underperforming’’
This process may take several years.
Examples:
Residential assets along the Spanish costas, Ireland,
specific areas in the US
Secondary office buildings across the world (subject to
re-development)
Abouhana
11. Real estate increasingly polarised
Which are considered as good alternatives to other (often lower-
yielding) asset classes
Examples
•Energy-efficient buildings (the green revolution) across the
world
•Secured-cash flow prime commercial buildings across the world
•Residential assets in specific mature and emerging countries
alike (Benelux, France, Switzerland, Brazil, Asian countries
On the other hand, the world is progressively investing in
the right asset classes
Abouhana
12. The dichotomy between prime1
and secondary markets is widening, with:
Significant investor demand for prime product that is
often difficult to find
Leading to lower gross initial yields (capitalization
rates)
Secondary buildings gradually being phased out of
specific markets
Leading to higher gross initial yields
The search for energy-efficient buildings (Are
tenants willing to accept higher rents – How can the
green advantages be quantified properly?)
1
Prime markets refers to market composed of best-quality buildings, located in top locations.
Real estate increasingly polarised
Abouhana
13. 1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Summary
Abouhana
14. Where to invest today within the Real Estate universe?
Profile Age
Investment
strategy
Environmenta
l criteria
Occupation
Asset
type/location
Lower
risk
•Existing asset
•Core
•Core+
•Different
environmental
criteria
•Rented
(remaining
lease
duration)
•Prime
Higher
risk
•Development
project
•Assets under
re-
structuring
•Value-added
•Opportunist
ic
•High energy
consumption
•No label or
green
certificate
•High
vacancy
rate
•Secondary
General rule:
We should be at the right side of the investment
universe!
Abouhana
15. Where to invest today? Residential real estate
Mature countries
We have a choice between ‘good’ and
‘bad’ markets !
•Some ‘good’ markets are still
relatively well performing, and have
barely noticed any crisis
•Specific areas in France Belux
Switzerland, Scandinavia, the US …
•However, we expect capital gains to
ease in the future
•Land values are important when
considering residential investments
“Bad” markets are poorly performing
•Specific areas in Spain, Ireland,
Greece, the Baltics, the US …
It may take another 5 years or so
before the entire overhang will be
digested
•So prices are low, but may stay low
in the mid term
Emerging countries
We have a choice between ‘luxury’ and
‘affordable’ markets
Investors seem to progressively
favour ‘affordable’ housing
•Whether in Asia (South East Asia,
India, …) or Latin America (Brazil)
•Indeed, the luxury segment has
become very expensive, and may be
subject to volatility
•Local authorities are attempting to
cool off specific property markets
•Or economic conditions may suddenly
deteriorate in the future
Abouhana
16. Where to invest today ? Commercial real estate (1/2)
Emerging and mature markets alike
Investments should be made in prime assets (unless investors are
willing to take substantially higher risks)
Offices – still the most important asset class – should be energy-
efficient
The future is rather grim for existing stock
Retail is in many countries – but not in all countries - considered as less
cyclical
Especially in Continental Europe (due to strict planning regulations)
Although Logistics is cyclical, it carries a high cash yield today,
which may be attractive
Although return expectations should not be overestimated in the near
future, we think they will remain acceptable to investors
Abouhana
17. Return perspectives for commercial real estate (2/2)
Mature countries
We are expecting
Capital value growth in line with,
or slightly above inflation
expectations (2% or so) – yield
compression has finished
Stable headline rents, which are
‘mildly’ indexed
Effective rents may be lower as
landlords are aggressively
marketing to reduce vacancy rates
in some markets
Emerging countries
We are expecting
Higher growth in capital values
for prime properties, given the
strong (international) investment
demand
Modestly rising headline rents
Consequently, return on equity
– after reasonable gearing
(50%) – should
be in the region of 7% for
2014
Consequently, return on
equity – after reasonable
gearing – should be in
the region of 10-15% for
2014
Abouhana
18. Return perspectives for residential real estate
Mature countries
We are expecting
Slowing growth in prime housing
prices, although core markets are
expected to report positive
returns
Still difficult situation for
problematic areas
Emerging countries
We are expecting
Stabilising luxury housing prices
Growth in middle-income housing
prices
Consequently, return on equity
– after reasonable gearing
(50%) – should
be in the region of minus 10
to plus 5% for 2012
Consequently, return on
equity – after reasonable
gearing – should be in
the region of plus 0-15%
for 2012
Abouhana
19. 1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Summary
Abouhana
20. ConclusionsThe world is sending major signals to real estate investors. Real
interest rates are negative in many areas, and property drivers are
different across the globe
As a result, global real estate is increasingly subject to
polarisation. Consequently, investors should be advised to be at the
right side of the investment universe
For residential real estate in the mature markets, investments should
be made in these areas considered as being ‘good’ . Poorly performing
markets are rather cheap, but may remain inexpensive for a longer
while. In the emerging markets, investors are increasingly favouring
affordable housing development schemes
For commercial real estate – whether located in the mature or the
emerging markets – investments should be predominantly ‘prime’
(unless investors are willing to take substantially higher risks)
Abouhana