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RREEF Real Estate www.rreef.comConfidential – Not for Public Distribution
RREEF Real Estate
Global Strategic Outlook
Mark G. Roberts, CFA®, Managing Director, Global Head of Research, mark-g.roberts@rreef.com, +1-212-454-0974
9 March 2012
MIPIM
Certain information in this research report constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this research report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein.
Executive Summary & Global Portfolio ConsiderationsSection I
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 3
Region Descriptions
United States
Economic growth supports higher tenant demand for property.
We recommend a pro-cyclical weighting with an overweight to industrial and office on a combined basis. Maintain a meaningful allocation to retail and apartments to protect against downside risk.
Asia Pacific
Government, household and corporate balance sheets are healthier than other parts of the globe and supports growth.
Vacancy rates across are lower than other regions across the globe and we forecast higher rent growth.
Retail and logistics benefit from rising domestic consumption
Europe
Austerity programs and Euro crisis have resulted in higher unemployment and weaker tenant demand.
Vacancy rates remain relatively stable with minimal rent growth.
Logistics in key logistics hubs provide higher income and protect on downside risk.
Prime shopping centers outperform offices and logistics due to stable, yet low retail sales growth.
Summary of global outlook & real estate implications
Source: RREEF Real Estate. As of February 2012.
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 4
Total returns favor Asia, while excess returns favor the U.S.
United States Europe Asia Pacific0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Total Return Spread to Risk-free Return
*Performance represents forecasted average annual total returns from January 1, 2012 through December 31, 2016. There is no guarantee these projections will materialize.Source: RREEF Real Estate. As of February 2012.
Income yield levels higher in the U.S., capital value growth higher in Asia
Regional Total and Excess Return ForecastAverage 2012 to 2016*
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 5
Capital value trends globally
Sources: RREEF Real Estate, IPD, data as of December 2010 for Denmark, Finland, Netherlands, Norway, Portugal and Sweden. Data as of 2Q2011 for France. Data as of 3Q2011 for Australia and New Zealand. Data as of December 2011 for UK, USA and Canada. All data represents most recent available.
Values remain well below peak levels and provide intrinsic valueA
ust
ralia
Ca
na
da
De
nm
ark
Fin
lan
d
Fra
nce
Ne
the
rla
nd
s
Ne
w Z
ea
lan
d
No
rwa
y
Po
rtu
ga
l
Sw
ed
en
UK
US
A
-40%
-30%
-20%
-10%
0%
10%
20%
-15%
-9%
-3% -4%
-13%
-8%
-14%-11% -10% -11%
-34% -33%
4%
13%
0% 1%
5%
0% 0%2%
0%
5%
10%
15%
-12%
3%
-3% -3%
-8% -8%
-14%
-9% -10%-7%
-28%
-23%
Peak-to-Trough Decline Increase Since Trough Values Relative to Peak
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 6
Spreads to risk free rates vary globally
Spain, 141 bps
Hong Kong, 177 bps
Singapore, 207 bps
France, 347 bps
United Kingdom, 474 bps
Australia, 476 bps
Germany, 507 bps
Japan, 512 bps
Canada, 526 bps
Sweden, 528 bps
United States, 555 bps
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Risk Free Rate Cap RateSpread
Source: Real Capital Analytics .As of February 2012.
Due to low sovereign yields, real estate yields are attractive relative to bonds
Global Risk PremiaCap Rates vs National Risk Free rates
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 7
Risk return matrix for IPD returns
10-Year Return vs. Risk of IPD Index Returns*
*Represents average annual returns for past 10 years ending December 31, 2011 versus risk over same period as measured by return volatility.Sources: IPD, RREEF Real Estate.
0 2 4 6 8 10 12 140.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
10.7171943052096
5.18388624999997
11.76577
5.3
6.1
6.9
9.2
6.9
9.9
3.0
3.6
6.6
7.7
9.58.6
8.9
14.0
7.5
6.6
5.8
7.6
5.7
6.2
10.654368
7.160027999999986.717765
North America
Europe
Asia
Risk
Re
turn
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 8
U.S. and U.K. have higher betas over the last 10 years
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
10 Year Betas in Relation to the IPD Global Index*
Sources: IPD, RREEF Real Estate. Based on average annual returns for 2001-2010.
BETAS
EconomicsSection II
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 10
Source: DB Research. As at January 2012.
While recession risks have risen in Europe, Asia-Pacific continues to lead, followed by the Americas and Europe
Global GDP forecast map – 2012
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 11
Debt vs. Demographics: Asia favorable, U.S. has time, Europe addressing risks today
Median age vs Debt/GDP ratio, bubbles represent relative size of debt outstanding
Bubble size is in relation to relative nominal GDP. Sources: IMF, CIA WorldFactbook. As of 2011.
34 35 36 37 38 39 40 41 42 43 44 450
102030405060708090
100110120130140150160
2,560
2,246
2,051
1,407
783
3,310
469
458
414
305
229 204
192
14,582
1,574
Asia Europe North America t
Median Age (years)
De
bt
as
% o
f G
DP
(p
erc
en
t)
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 12
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2012f 2013f 2014fPercent
Projected GDP growth
f=forecast. There is no guarantee the projections or forecasts highlighted will materialize.Source: IHS Global Insight. As of February 2012.
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 13
01-2010 04-2010 07-2010 10-2010 01-2011 04-2011 07-2011 10-2011 01-20120
10
20
30
40
50
60
The market is settling and volatility is dropping
Global Equity Indices
VIX (volatility index)
Source: Bloomberg. As of February 2012.
01/2010 04/2010 07/2010 10/2010 01/2011 04/2011 07/2011 10/2011 01/201270
80
90
100
110
120
FTSEuroFirst 300 Index (Europe) MSCI Emerging Markets Index Topix Index (Tokyo) S&P500 (U.S)
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 14
Inflation has moved up due to commodities, but will likely settle
1/20
10
2/20
10
3/20
10
4/20
10
5/20
10
6/20
10
7/20
10
8/20
10
9/20
10
10/2
010
11/2
010
12/2
010
1/20
11
2/20
11
3/20
11
4/20
11
5/20
11
6/20
11
7/20
11
8/20
11
9/20
11
10/2
011
11/2
011
12/2
011
1/20
1280
90
100
110
120
130
140
150
160
170
180
Gold Prices Oil Prices Food Prices Metals
Sources: Daily Press, Federal Reserve Bank of St. Louis: FRED, U.S. Department of Agriculture (USDA), and U.S. Bureau of Labor Statistics (BLS).As of February 2012.
U. S. Producer Inflation
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 15
Inflation will likely be tame globally during next five years
Austra
lia
China
Japa
n
Singa
pore
South
Kor
ea
Asia-P
acific
Franc
e
Germ
any
Italy
Norway
Spain
Sweden
Unite
d Kin
gdom
Wes
tern
Eur
ope
Unite
d Sta
tes
Wor
ld-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%
Represents forecasted average annual inflation from 2012 to 2016. There is no guarantee the levels if inflation highlighted will materialize.Sources: IHS Global Insight, RREEF Real Estate. As of February 2012.
Average Annual Inflation Rate: 2012 to 2016
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 16
Interest rates expected to remain stable
Austra
lia
China
Japa
n
South
Kor
ea
Asia-P
acific
Franc
e
Germ
any
Italy
Norway
Spain
Sweden
Unite
d Kin
gdom
Wes
tern
Eur
ope
Unite
d Sta
tes
Wor
ld0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%
2012f 2016f
*f=forecast. There is no guarantee forecast rates will materialize.Sources: IHS Global Insight, RREEF Real Estate. As of February 2012.
Long term interest rates*
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 17
Global transaction volume
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011$0
$20
$40
$60
$80
$100
$120
$140
United States AsiaPacEMEA Global Average
Source: Real Capital Analytics.As of February 2012.
Global Transaction VolumeU.S. $ in Billions
FundamentalsSection III
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 19
f=forecast. There is no guarantee the forecast vacancy rates shown will materialize. *Office properties experienced higher vacancy rates during the 1990’s downturn, but all other properties hit historical highs.Forecasts are of the market and not of a RREEF Real Estate product. Sources: REIS , CBRE-EA (history), RREEF Real Estate (forecast). As of February 2012.
2008 2009 2010 2011Forecast
2012fForecast
2013fForecast
2014fForecast
2015fForecast
2016f
Apartment 6.8% 8.2% 6.7% 5.3% 4.5% 4.1% 4.0% 4.8% 5.4%
Industrial 11.8% 14.3% 14.3% 13.5% 12.3% 11.1% 10.3% 10.2% 10.2%
Office 14.2% 16.6% 16.5% 16.1% 15.5% 14.2% 12.6% 12.0% 12.3%
Retail 8.7% 10.3% 10.7% 10.8% 10.3% 9.6% 9.3% 9.0% 9.1%
Vacancy rate forecasts: 2012 - 2016
National U.S. Vacancy Rate Trends
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 20
Sector* 2011 2012 2013 2014 2015 2016
Apartments 5.8% 4.9% 5.9% 4.6% 2.9% 1.8%
Industrial 0.6% 2.6% 5.7% 6.9% 5.8% 4.3%
Office-CBD 1.0% 1.6% 4.9% 8.1% 7.8% 4.4%
Office-Suburb 1.1% 1.2% 3.7% 6.9% 7.4% 4.4%
Retail 0.5% 1.5% 4.0% 3.5% 3.5% 3.0%
NNN Equivalent Growth
Apartments 7.7% 6.2% 7.6% 5.7% 3.3% 1.7%Office CBD 0.3% 1.4% 6.9% 12.0% 11.1% 5.6%
Office Suburb 0.5% 0.7% 4.8% 10.0% 10.6% 5.7%
Forecast Period
2007 2008 2009 2010 2011 2012 2013 2014 2015 201680
90
100
110
120
130
140
150
160
Apartments - NNN IndustrialOffice CBD - NNN Office Suburban - NNNRetail
f=forecast2011 = 100*Industrial and Retail are forecast on a NNN basis (“NNN” – tenant pays for all property taxes, insurance, and building maintenance). Apartments and Office are forecast based on Gross Rents, and these are converted to NNN equivalent , assuming 2% per year expense increases, for consistency in comparison across sectors . Data represents the unweighted average of markets surveyed by RREEF. Past performance is not indicative of future results. There is no guarantee the forecast rates shown will materialize.Source: RREEF Real Estate. As of February 2012.
Rent growth from market peak: office to outperform in the longer term
U.S. average rent growth in sum of markets surveyed, by sector
CBD office will be top performer
Retail will lag
Apartment growth will recedef f f f f
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 21
After 2012, rent growth in the office sector should match the retail sector in Europe
European Aggregate Rental Growth Rate (%), 2011 - 2016
f=forecastForecasts are of the market and not of a RREEF Real Estate product. There is no guarantee the forecast rates shown will materialize.Source: RREEF Real Estate. As of February 2012.
2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f80
85
90
95
100
105
110
115
Logistics Office Shopping Centre
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 22
Asian rent growth like to be rapid, but more so in industrial and retail sectors
Asia- Pacific Aggregate Rental Growth Rate (%), 2007 - 2016
f=forecastForecasts are of the market and not of a RREEF Real Estate product. There is no guarantee the forecast rates shown will materialize.Source: RREEF Real Estate. As of February 2012.
2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f 85
90
95
100
105
110
115
120
125
130
Office Retail Industrial
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 23
Global office return metrics
f=forecastForecasts are of the market and not of a RREEF Real Estate product. There is no guarantee the forecast shown will materialize.Source: RREEF Real Estate. As of February 2012.
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0% U.S. Europe Asia
Average Office NOI growth 2012 – 2016f
4Q
11
Off
ice
Yie
ld P
rem
ium
Beijing, Shanghai
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 24
f=forecastForecasts are of the market and not of a RREEF Real Estate product. There is no guarantee the forecast shown will materialize.Source: RREEF Real Estate. As of February 2012.
Global retail return metrics
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0% U.S. Europe Asia
Average Retail NOI growth 2012 – 2016f
4Q11
Ret
ail
Yie
ld P
rem
ium
Beijing
Toyko
RREEF Real Estate – Global Strategic Outlook – 9 March 2012 25
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5% U.S. Europe Asia
Average Industrial NOI growth 2012 – 2016f
4Q11
In
du
stri
al Y
ield
Pre
miu
m
Global industrial return metrics
f=forecastForecasts are of the market and not of a RREEF Real Estate product. There is no guarantee the forecast shown will materialize.Source: RREEF Real Estate. As of February 2012.
Beijing, Shanghai