Global vision q4 2012 final

Q4 2012

GLOBAL VISION The Investment Outlook For Major Property Markets

GLOBAL VISION | Q4 2012

DISCLAIMER The contents of this report or document (“Report”) are confidential. This Report is being furnished to the recipient on the condition that it may be kept confidential and that it may not be shared with any third parties without the consent of CBRE Global Investors. A breach of these confidentiality obligations could lead to liability if any disclosure is made to third parties or unauthorized persons. Forecasts and projections regarding the likelihood of various sectoral, market and investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. CBRE Global Investors' clients may have acquired properties in the sectors and regions described in this research report. In addition, CBRE Global Investors is continuously marketing to new clients that will invest in properties within the sectors and regions covered. CBRE Global Investors Middle East Limited provides this material on behalf of CBRE Global Investors. CBRE Global Investors Middle East Limited is regulated by the Dubai Financial Services Authority. This marketing material is intended only for Professional Clients (as defined by the DFSA) no other persons should act upon it. Past or projected performance is not necessarily a reliable indicator of future results.


WELCOME TO GLOBAL VISION

Australia is nicknamed the Lucky Country. And its “luck” has been clearly apparent in recent years, registering one of the best top line economic performances of any of the world’s developed countries. Visiting Australia recently, I found that real estate investors there are reluctant to move capital offshore. And why should they? Property yields are high by global standards, fundamentals are in decent shape, and there’s potential for cap rate compression. For them, the rest of the world is scary and richly priced. Why would Aussies risk doing anything different? In fact why would investors anywhere in the world risk doing anything? Recessions throughout Europe, the looming “fiscal cliff” in the States, slowing growth throughout Asia – the world is scary. And in the “safe havens” like London and New York yields are headed for pre-Global Financial Crisis (GFC) levels. The easy solution – stay put, stay at home, keep investing in bond-like real estate. Risk-off! Australia is a great country, and should have several years of solid real estate investment performance. But luck never lasts forever, and Aussies should consider spreading some capital beyond their home front. In a similar vein, bad times don’t last forever. And real estate investors around the world shouldn’t be frozen by today’s scary headlines. And they shouldn’t exclusively plough into the world’s safe havens. The Eurozone crisis is creating headwinds around the world. But the impact of the crisis varies substantially, as does the economic outlook. The U.S. and China have clearly decelerated. Manufacturing, which has been a high point coming out of the GFC, has stalled. But domestic consumption, although cooling in both countries, remains resilient. The U.S. for-sale housing market is shifting from being a drag to a support of economic growth, while the for-rent apartment market remains buoyant. In China, the residential slowdown which has spooked investors is exhibiting a nascent rebound. Nothing is guaranteed, but un-relinquished gloom is unwarranted. Average core yields are down around the world. But the compression has been highly concentrated. Gateway office markets, fortress regional malls and state-of-the-art logistics facilities leased to credit tenants are all trading at cap rates close to pre-GFC lows. Given the plunge in interest rates, real estate yields are extremely attractive relative to fixed income. Spreads are at historically wide levels, meaning as rates rise with economic strengthening, it will be some time before they exert upward pressure on cap rates. Plus, most properties haven’t yet felt the yield compression. Assets in secondary markets or those affected by leasing challenges are trading at a huge gap to prime properties. That gap should close as economies mend, fundamentals improve, and capital expands its reach. And the fundamentals will improve. Construction levels are extremely low throughout the developed world. In the U.S. and Europe, new office supply barely compensates for demolitions and conversions. This means that even in an environment of moderate economic growth, any net demand cuts into existing vacancy, helping rents to heal. In this case, risk-off is helping investors. Yet there are new construction opportunities. The continued urbanization and growing incomes of many Asian and Latin American countries provide the most obvious examples of the fundamental need for new homes, shopping centers and distribution facilities. But more subtly, changing business and consumption patterns create development opportunities even in mature, slow growing economies. Think 100,000 square meter e-commerce fulfillment centers in core Europe. Or large-floor plate, seismically sound office buildings in Tokyo. Or new apartment communities in undersupplied U.S. metros. There’s a need for all of them and, in a risk-off environment, debt for their development is in short supply. Capital is often rewarded by going where it is scarce. In Global Vision we clearly identify the world’s risks. But we also identify sectors and geographies that can provide investment opportunities today or in the near future. Australians are understandably inclined to stay risk-off by remaining in their lucky country. Likewise global investors are tempted to stay with the tried and true. But the past few years have amply demonstrated that nothing stays stagnant. And it’s time to at least investigate some risk-on opportunities. Doug Herzbrun Global Head of Research


GLOBAL VISION Q4 2012 TABLE OF CONTENTS

GLOBAL ECONOMIC OUTLOOK .................................................................................. 1

GLOBAL DIRECT INVESTMENT MARKET ...................................................................... 3

GLOBAL INDIRECT INVESTMENT MARKET .................................................................. 5

RETURN FORECASTS ..................................................................................................... 7

NORTH AMERICA

UNITED STATES ....................................................................................................... 9

EUROPE

UNITED KINGDOM ............................................................................................... 11

GERMANY ............................................................................................................. 13

FRANCE ................................................................................................................ 15

NETHERLANDS ...................................................................................................... 17

SPAIN .................................................................................................................... 19

ASIA PACIFIC

JAPAN ................................................................................................................... 21

CHINA .................................................................................................................. 23

AUSTRALIA ............................................................................................................ 25

SOUTH KOREA ...................................................................................................... 27

SINGAPORE .......................................................................................................... 29

GLOBAL VISION | Q4 2012 | 1

GLOBAL ECONOMIC OUTLOOK

CBRE Global Investors believes that the macro-

economic backdrop for real estate occupier demand will remain challenging in the medium-term as growth is weighed down by the protracted work-out of impaired balance sheets. That said, given continued financial repression and a scarcity of “safe” assets, good quality real estate is likely to remain in demand.

In the U.S., the economy has fared relatively well as banks have been aggressive in writing down bad debts against a very supportive policy backdrop. The Federal Reserve has kept interest rates low and fiscal policy has also remained loose without incurring higher borrowing costs, thanks to the safe haven status of the U.S. Even then, activity has slowed over the last quarter (Figure 1), reflecting weakness in Europe, China and domestic housing and labor markets.

The key question is how far policymakers manage to avert the U.S. falling off the “fiscal cliff” – a fiscal tightening worth 4% of GDP as tax breaks and spending programs automatically expire in January 2013. (Figure 2) Both the Economist Intelligence Unit (EIU) and Moody’s Analytics expect policymakers to delay some of the tightening so that the “partial cliff” slows the recovery, but does not pull the U.S. back down to “stall speed” of c1.5%. They also forecast that any negative shock from the Eurozone would be offset by further central bank action.

That said, the risks to the U.S. economy lie firmly on the downside given the uncertainty over fiscal policy and continued weakness in the labor market. Moreover, it is arguable how far this risk has been priced into markets. By contrast, Europe is priced for Armageddon, and arguably the surprises will come on the upside as the Euro currency area inches toward some kind of permanent fiscal and banking union.

Indeed, we have seen a summer rally in Europe predicated on two signals that we are finally on the path to resolution: the drafting of legislation to create a banking union; and the European Central Bank’s commitment to eliminate “convertibility” risk premia from weaker member states’ bond yields. (Figure 3) Both of these measures should ease the “death loop” between weak bank balance sheets and unsustainably high public debt to GDP ratios. It would also go some way to unfreezing cross-border capital flows. However, the weaker states will still have to enact painful supply-side

reforms, which will dampen near-term demand, and so hinder German export-led economic growth as well.

Given the structural headwinds facing the Eurozone, it is quite an achievement for the UK to be mired in a relatively worse recession. (Figure 4) But this should hardly be surprising given that the UK is the most indebted major economy in the world and that the three engines of its prior growth – government spending, consumer spending, and financial services – are all now retrenching. Indeed, one could argue that the worst thing for the UK economy would be a successful resolution of the Eurozone crisis, after which UK bondholders might start to question the underlying fiscal position of the UK as opposed to its non-Eurozone “safe haven” attractions.

Growth has also decelerated in China as policymakers struggle to find a balance between increasing credit availability to the corporate sector but not re-stoking the residential property bubble. The monetary policy loosening that began in March showed up quickly in the real estate sentiment indicators, but the manufacturing sector is still stalling. (Figure 5) Further ahead, the downside risk to the Chinese economy remains the poor state of local government and bank balance sheets in a situation in a country where banking sector losses are tacitly underwritten by the central government.

Meanwhile, Japan is the only major economy to have seen consensus forecasts for 2012 revised up during the year, as the ¥10 trillion post-tsunami reconstruction budget injects the equivalent of 2.6% of GDP to the economy. However, growth is forecast to slow after 2013 as the new consumption tax is introduced, and the economy returns to its low growth norm.

Overall, of the International Monetary Fund’s “S-5” systematically important economies, the medium-term outlook looks weakest for China (and Singapore and Hong Kong) as it rebalances growth away from exports. The UK looks as weak as the Eurozone and both will see growth suffer as fiscal austerity continues. Despite downward revisions to near-term forecasts and the uncertainty over the “fiscal cliff”, the U.S. remains the best relative macro-economic bet. After all, while Japanese growth has returned to trend, that trend is low after two “lost decades”. (Figure 6)


GLOBAL ECONOMIC OUTLOOK – CHARTS

FIGURE 1: U.S. CORPORATE SECTOR ACTIVITY, 50=NEUTRAL LEVEL

FIGURE 2: AUTOMATIC U.S. FISCAL TIGHTENING IN JANUARY 2013 AS A % OF GDP

Source: Institute for Supply Management

Source: US Office of Management and the Budget

FIGURE 3: 10 YEAR GOVERNMENT BOND YIELDS, % FIGURE 4: REAL GDP REBASED TO 100 AT CYCLICAL PEAK

Source: Reuters

Sources: Eurostat, UK National Statistics

FIGURE 5: CHINESE ENTREPRENEURS’ EXPECTATIONS SURVEY, 100=NEUTRAL LEVEL

FIGURE 6: GDP FORECASTS, % PA & LONG RUN TREND

Source: National Bureau of Statistics, China

Source: Economist Intelligence Unit*LR Trend = 1980-2011

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GLOBAL DIRECT INVESTMENT MARKET

With macro-economic caution increasing and

continued constraints in the capital markets, H1 2012 saw weaker direct investment market activity than the corresponding period in 2011. Transaction volumes came in at $157bn in Q2 2012, up 5% on Q1 but down 23% on Q2 2011. (Figure 1) Activity in H1 2012 was also down 22% on the year before.

Figure 2 shows that the only markets with annual increases were the commodity economies of Canada and Australia, the non-Euro diversifier, Sweden, and Hong Kong. Activity in Japan was broadly flat despite the base effects of last year’s Tsunami, and the U.S. was also broadly flat. The big falls in deal volumes were seen in Europe – particularly Spain and Italy who are on the verge of seeking bail-outs. Interestingly, despite their safe haven status, Germany and the UK also saw marked falls in activity, perhaps reflecting lower non-European capital inflows.

Continued elevated risk aversion has not only led to a marked divergence in pricing between perceived prime and secondary assets. Given global macro-economic uncertainty, it remains difficult to underwrite acquisitions. As a result, the key factor defining prime has become the “visibility” of income streams – particularly tenant quality and lease length – and by how liquid the underlying market is, in case the asset has to be sold in an emergency. By contrast, assets with shorter, less certain income streams in less liquid markets continue to be punished by valuers and scorned by investors.

Figure 3 illustrates the illiquidity premium by showing that major metro area asset prices have risen by 41% since the trough of the cycle, but asset prices in non-major metros have risen by just 19% over the same period. Similarly, Figure 4 shows that global CBD Office prices have risen 96% since the trough of the cycle, compared to a mere 17% rise for Other Offices. And worst of all, Other Office prices have fallen 6% over the past three quarters.

Despite falling yields and rising prices for the best quality real estate, Figure 5 shows that property still provides at least a 200 basis point premium over the local government bond yield in all markets bar Hong Kong. Moreover, this premium is higher than the historic average, partly reflecting historically low bond yields in the U.S., UK, Germany and Japan.

There is a sense in which the on-going macro-economic certainty has created a “contest of uglies” between income-producing assets – a contest that prime real estate is winning. Bond yields in safe havens look expensive; bond yields in other countries look vulnerable to ratings downgrades and default. By contrast, while prime property yields are low relative to their own history, they look increasingly attractive in a world of financial repression and a shrinking pool of safe assets.

However, there is a limit to how far even prime yields can remain at historic lows with deteriorating fundamentals. London is the most obvious example of a market where prime yields could come under pressure as investors reassess the occupier market outlook – as is reflected in our revised forecasts – and the latest IPD data.

UK total returns decelerated to 0.4% q/q in Q2 2012, the weakest performance since Q2 2009. The 1.4% q/q income return was offset by a 1% q/q fall in capital values (Figure 6), reflecting rental values falling by 0.1% and the 0.9% negative impact of rising yields. Notably, yields are now rising in every part of the market except Central London shops and West End offices. Even City office yields are now rising.

U.S. total returns are also decelerating, although with nothing like the speed of the UK market, reflecting better fundamentals. Total returns on all property came in at 2.6% q/q in Q2 2012, in line with the performance in Q1. This reflected an income return of 1.4% and capital value growth of 1.1%, which in turn reflected rental value growth of 1.1% and flat yields. The performance across sectors was fairly similar, although it should be noted that the office portfolio vacancy rate did rise from 10.5% to 12.3%.

Meanwhile, in Continental Europe, the CBRE European Valuations Monitor is showing renewed weakness in Southern Europe and Italy. Capital values fell 4.9% in Q2 2012, the largest fall since Q2 2009. Worryingly, there are signs that this weakness is now spreading to the European “Core”, with capital values falling in Q2 in France for the first time since Q4 2009; and continuing to fall in the Nordics and the Benelux. However, while valuations softened in Germany in 2011, partly reflecting sales from open-ended funds, they stabilized in Q2 2012.


GLOBAL DIRECT INVESTMENT MARKET – CHARTS

FIGURE 1:TRANSACTION VOLUMES, $BN PER QUARTER FIGURE 2: TRANSACTION VOLUMES, %, H1 ‘12/H1 ‘11

Source: Real Capital Analytics Source: Real Capital Analytics

FIGURE 3: COMMERCIAL PROPERTY PRICE INDEX (2007=100)

FIGURE 4: GLOBAL REPEAT SALES VALUES BY SECTOR, REBASED TO 100 AT PEAK

Source: Real Capital Analytics, Moody’s Analytics Source: Real Capital Analytics

FIGURE 5: PROPERTY YIELD PREMIA OVER GOVERNMENT BONDS, BPS

FIGURE 6: AVERAGE PROPERTY CAPITAL VALUES, % Q/Q

Source: Real Capital Analytics Source: Investment Property Databank

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GLOBAL INDIRECT INVESTMENT MARKET

Global equity markets rallied in Q2 and Q3

2012 on the back of expectations and then announcements of central bank easing. The Fed announced an initial $40bn tranche of QE3 focused on buying mortgage-backed securities. The ECB announced a new Outright Monetary Transactions program allowing unlimited intervention in the secondary bond markets of countries where bond yields reflect a Eurozone exit risk premium. The only fly in the ointment is that the bond-buying is conditional on the country asking for a bail-out from the EU/IMF, leading to financial market uncertainty about when Spanish Prime Minister Rajoy will ask for such a bail-out.

Figure 1 shows that this renewed optimism fed into strong increases in the main indices for Germany, the Eurozone more widely, the U.S. and Singapore in the first seven months of 2012. And with listed real estate securities particularly sensitive to the interest rate cycle – both through relative pricing against bonds, and the price of credit – the gains were even greater. Prices have risen between 15% and 30% in the first seven months of the year, with particularly strong performance in developed Asia and safe haven Europe.

Despite the price increases, valuations remain attractive. Listed property securities were trading at a discount to net asset value in all markets bar Canada and the U.S. at end July 2012. (Figure 2.) And those discounts were larger than the long-run average in all markets bar the UK. Japanese real estate operating companies and shares in Hong Kong/China look particularly good value considering the deep discounts to already re-rated valuations.

The UK result partly reflects the fact that the influence of the majors holding a disproportionate amount of high quality Central London stock – the type of property that is in high demand. And what look like expensive valuations in the U.S. are actually more attractive when one looks at the discounts to NAV on a sectoral basis. Figure 3 shows that the “core” mainstream real estate sectors were actually trading at a 0.4% discount to NAV at end July 2012, with even steeper discounts in the hotel sector. By contrast, it is the healthcare, storage and net lease sectors with more challenging pricing.

Listed real estate securities also continue to provide an attractive premium to local government bond yields, in an analogous situation to the underlying real estate. At end July, the global average dividend yield was 3.6%, with the range running from Japan at 2.7% to Australia at 5.6%. With bond yields historically low, particularly in the UK and U.S., this has resulted in attractive spreads of between 200 and 400 basis points. Moreover, these yield spreads are well in excess of the long-run averages in all markets bar Canada. The most attractively valued markets on this basis are Continental Europe, the UK and Hong Kong, all with spreads c460bps higher than the historic average. (Figure 4)

In general, the performance of the listed securities market should reflect the underlying fundamentals of each market as analyzed later in this report. However, in a time of risk aversion, heightened investor appetite for high quality assets, and constrained access to capital, listed real estate securities are well placed given their high quality portfolios and ability to tap the public market for capital at more attractive rates than the private debt market.

In the unlisted real estate funds sector, total returns on U.S. funds were running at c3% y/y in Q1 2012 (the latest available data) regardless of style category. (Figure 5) Meanwhile, in Europe, the impact of deteriorating fundamentals, the high cost and difficulty of refinancing, and the difficulty of selling down closed-end funds in a falling market are taking their toll on returns. INREV reported all fund total returns to investors fell by 0.2% in Q2 2012, the first negative return since 2009. This reflected an income return of 0.7% q/q but a capital value fall of 0.9% - the fifth successive quarter of declining values.

Figure 6 shows that, as one might expect, core funds have seen more limited capital value falls than value added funds, given generally lower leverage levels and lower vacancy rates. However, it is interesting to note that the performance of the UK and Continental European funds in Q2 were almost identical. This shows that while a small top layer of the UK market may be holding up well on safe haven buying, the majority of the UK market is afflicted by very weak fundamentals, regardless of the country’s position outside of the Eurozone.


GLOBAL INDIRECT INVESTMENT MARKET - CHARTS

FIGURE 1: CHANGE IN EQUITY PRICES, END JULY 2012/END DEC 2011, %

FIGURE 2: LISTED PROPERTY SECURITIES NET ASSET VALUE PREMIUM/DISCOUNT BY REGION, %

Source: Reuters Source: FactSet and Bloomberg, as at 7/31/2012 *Average since Dec 2004

FIGURE 3: US LISTED PROPERTY SECURITIES NET ASSET VALUE PREMIUM/DISCOUNT, %

FIGURE 4: LISTED PROPERTY SECURITIES DIVIDEND YIELD, % & SPREAD OVER GOVT. BOND YIELD, PP

Source: Factset & Bloomberg, as at 7/31/2012 *Weighted average Source: Factset & Bloomberg, as at 7/31/2012

FIGURE 5: US UNLISTED FUND TOTAL RETURNS, % Y/Y FIGURE 6: EUROPEAN UNLISTED FUND CAPITAL VALUES, % Q/Q

Source: NFI-Townsend (USA) Source: INREV

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RETURN FORECASTS

METHODOLOGY CBRE Global Investors is proud to release the

results of our global return forecasting project. Investment research team members in the U.S., Asia Pacific and Europe collaborated on a pioneer project to synchronize total return forecasting methodologies.

The forecasts reflect core unlevered portfolio returns over a five year holding period (2012-2016). Total, income and appreciation returns were calculated using a multi-year cash flow model that utilizes inputs such as rent growth, indexation, lease renewals, cap rates, vacancy and expense ratios.

This section shows our return forecasts by major geography and property type. The returns are also calculated at the metro/property level for over 400 metro/property combinations to help guide investment decisions.

The return forecasts are a starting point in developing and managing an investment strategy. Submarket conditions and, to a greater extent, property-specific characteristics greatly impact overall returns.

SUMMARY OF RESULTS

The U.S. and Asia Pacific are expected to outperform. The U.S. results are driven by reasonable economic growth, low construction pipelines and generally attractive, below-replacement cost pricing.

Within the U.S., apartments and office have the strongest outlook. Strong demographic trends are boosting the apartment sector, while office will benefit from a strong cyclical upswing typically seen after a downturn.

Within Europe, logistics and retail are expected to outperform. In general, Europe’s forecasts are impacted by weak fundamentals and the high degree of uncertainty over the macro-economic outlook. However, the differences within Europe are large: the South drags down the returns for the whole of Europe.

Within Asia Pacific, logistics and retail are expected to outperform. The structural shortage of modern real estate stock, coupled with the large “catch-up” potential contribute positively to the Asia Pacific real estate return outlook.

FIGURE 1: U.S. AND ASIA PACIFIC EXPECTED TO OUTPERFORM

Source: CBRE Global Investors

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FIGURE 2: U.S. RETURNS BY PROPERTY TYPE


FIGURE 3: EUROPEAN RETURNS BY PROPERTY TYPE


FIGURE 4: ASIA PACFIC RETURNS BY PROPERTY TYPE


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UNITED STATES

The U.S. economic outlook darkened after a

good start to 2012. Many indicators such as employment, manufacturing and retail sales started to reflect a slowdown in the second quarter. In addition, the “fiscal cliff” of tax increases and spending cuts scheduled for 2013 poses a serious challenge to the fragile recovery. Looking ahead, the threat of another recession remains as the economy deals with a presidential election-induced policy paralysis, the ongoing Eurozone crisis and emerging markets’ slowdown.

At best, the U.S. economy is expected to grow at a moderate pace. Real GDP grew by 1.7% (second estimate) on an annualized basis during Q2 2012, down from 2.0% during the first quarter of 2012. The U.S. economy is forecast to grow by 2.1% in 2012, according to both Moody’s Analytics and the EIU. (Figure 1)

After a solid start to the year, employment continued to disappoint. Employment gains averaged 225,000 jobs per month in Q1 but slowed to 67,000 per month in Q2. July surprised on the upside and recorded 141,000 new jobs, but the August employment report tallied just 96,000 jobs. (Figure 2) The August unemployment rate fell to 8.1% from 8.3%. The drop was entirely driven by a lower labor force participation rate; unemployed workers gave up looking for work.

The negative news is discouraging and we continue to remain extremely cautious. Given the presidential election policy paralysis, we expect the U.S. economy to muddle along. Fortunately, the U.S. is well poised to improve robustly once its fiscal uncertainty is removed. For example, the banking system has recapitalized, corporate profits remain near record highs, households are de-leveraging and the housing market is gaining some traction. In addition, the Fed announced its third round of bond purchasing (QE3) and extended its zero interest rate policy until 2015.

The U.S. real estate market continues to present an attractive investment opportunity. Despite fears of continued economic weakness, a volatile stock market and generationally low treasury yields continue to make commercial real estate an attractive investment. (Figure 3) Investors should be very cautious and avoid pricing anything to perfection. Although current spreads provide a cushion as interest rates rise, investors should not anticipate further cap rate compression. (Figure 4)

Given the rocky economic climate, investors are chasing stability and income from core assets in trophy markets. However, pricing has become arguably overheated. For this reason, investors should consider expanding their horizons and look to Next-Tier markets that have similar characteristics and demand drivers as trophy markets, but without the trophy price tag. (Figure 5)

Office absorption in the second quarter rebounded from a weak first quarter. Hi-tech markets and low-cost metros experienced the biggest declines in vacancy over the past year. However, the big question is whether the slackening in the pace of job growth in the second quarter will manifest itself in coming quarters as reduced net new demand for office space. Our outlook for national office market fundamentals is continued improvement at a subdued pace over the next few quarters with much of the demand coming from the professional/business services sector.

The industrial sector’s availability rate fell in Q2 for the eighth consecutive quarter. Of the top 10 markets by size, the largest improvements in occupancies in the past year have been in Houston, Dallas/Ft.Worth, Chicago, Detroit and Greater Los Angeles, thanks to their status as national distribution/energy/auto hubs. Our forecast for industrial market fundamentals anticipates stable demand for industrial space, limited deliveries and continued declines in availability rates.

The apartment sector reported another solid quarter in Q2. Although supply almost doubled from Q1 levels, demand outpaced it by two-to-one and rents continued to rise. Strong demographic trends are the tailwinds for continued robust apartment demand, but the sector is facing headwinds in the form of a supply surge in select markets, a slow-moving labor market and a strengthening housing market. In light of new deliveries, the pace of rent growth is expected to be muted as properties vie for tenants. (Figure 6)

The retail recovery inched along in the second quarter, as the vacancy rate declined by another 10 bps to 13.0%. It is only 20 bps lower than its peak a year ago, highlighting the extremely slow pace of improvement in the retail sector. The retail recovery is expected to gradually move forward in 2013 and gain momentum in the outer forecast years.


UNITED STATES – CHARTS

FIGURE 1: ANNUAL GDP GROWTH, %PA FIGURE 2: MONTHLY EMPLOYMENT GAINS/LOSSES NUMBER OF JOBS (000s) M/M CHANGE

Source: Moody’s Analytics Source: Bureau of Labor Statistics

FIGURE 3: ASSET CLASS YIELDS, % FIGURE 4: AVERAGE PROPERTY CAP RATES, %

Source: NCREIF, Moody’s Analytics Source: Real Capital Analytics

FIGURE 5: COMMERCIAL PROPERTY PRICE INDEX MOODY’S/RCA CPPI (100=OCTOBER 2007)

FIGURE 6: FORECASTED ANNUAL RENT GROWTH FIVE YEAR AVERAGE (2013-2017)

Source: Real Capital Analytics; Major Markets are: New York City, DC, Boston, Chicago, Los Angeles and San Francisco

Source: CBRE Global Investors, CBRE-EA

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100

110

07 08 09 10 11 12

Major Markets

Non-Major Markets4.6%

3.9% 3.7% 3.6%

0%

1%

2%

3%

4%

5%

6%

Office Retail Apartment Industrial


UNITED KINGDOM

As pointed out in the introduction to Global

Vision, the UK economy remains very fragile, having returned to recession in a more pronounced manner than was widely anticipated. The UK is now in its third quarter of negative economic growth, contracting 0.5% in Q2 2012. If unrevised, this latest GDP estimate translates to a 1.1% contraction over the past three quarters. (Figure 1)

Whilst an unresolved Eurozone crisis has materially dampened sentiment, it is a misconception that if it weren’t for the currency union, the UK would be in full recovery mode. Far from it. Activity continues to be restrained by fiscal retrenchment, private-sector deleveraging and a precarious banking system. We also note that in the aftermath of the GFC a typical improvement in UK productivity has not occurred, (Figure 2) this after unemployment shot up, businesses became more profitable and Sterling was more competitive. The latest EIU forecasts call for GDP to contract by 0.5% in 2012 with average growth of 1.1% GDP p.a. in the following four years. This is a more negative prognosis than in our last report.

One of the few positives in the UK economy has been falling inflation. Since peaking last September, annual CPI has stayed below 3% for the previous three months mainly due to indirect tax and commodity price base effects. While this is surely welcome news for a struggling consumer a further implication has been the issuance of additional quantitative easing (QE) from the Bank of England. Although the effectiveness of QE has been called into question, further implementation will undoubtedly keep gilt yields suppressed. A concerning development is that QE has had little impact on lending to businesses in the UK's regions despite its promise of improving liquidity in the broader banking system. This is expected to further precipitate the “South East versus the rest” phenomenon which is also evident in property performance and investment volumes.

The impact of a fragile economic outlook on occupier fundamentals and investor sentiment continues to be reflected in UK direct property market performance. On the IPD monthly index, capital values have been negative for ten consecutive months, rental value growth is now declining and so total returns are driven solely by income. At the segment level, unsurprisingly, it is markets in London and the South East which are the relative outperformers.

Referring to yield quartile analysis evinces a reversal of long term trend with regard to real estate performance. (Figure 3) Low yielding properties (i.e. a prime proxy) have delivered the highest total returns over the previous three years, having generally benefited from both consistent capital value and rental value growth. On the other hand, the highest yielding quartile (i.e. secondary) was solely reliant on its income return and hence struggled to top inflation.

A key reason for this recent performance has been the widening prime secondary property yield gap. (Figure 4) This is occurring as investors continue to be cautious about the security and lengths of income streams. Whilst prime yields should remain flat across sectors through 2012, supported by loose monetary policy and sustained international demand, secondary yields are expected to continue their outward march.

CBRE Global Investors’ Q3 IPD All Property forecasts suggest a capital value fall of 6.7% this year followed by a further 1.4% in 2013. This near-term view remains below consensus. (Figure 5) The reason for a protracted period of capital value falls is that secondary property, in particular, has yet to experience the pronounced outward yield shift that we believe is inevitable.

On the back of low transaction volumes, there has been a lack of defensible market evidence to crystallize further declines. Given that the summer of 2012 has been particularly slow in terms of transactional activity, market evidence may prove slow in coming. It is, however, important to acknowledge that given the tendency of the IPD index to lag the market (by as much as six months), our investment teams are already seeing the aforementioned capital value falls in the market.

An interesting development over the previous few quarters has been the seeming demise of the once blossoming UK property derivatives market. (Figure 6) In Q2 2012 the total number of trades executed was the lowest in the instrument's relatively short history. Correspondingly, the total outstanding notational value of the market is a quarter of its Q4 2008 peak. Such a decline corresponds with the general lack of enthusiasm for the product that we have been hearing from UK domiciled institutional investors.


UNITED KINGDOM – CHARTS

FIGURE 1: REAL GDP REBASED TO 100 AT Q1 2008 FIGURE 2: PRODUCTIVITY (OUTPUT PER HOUR) DURING UK RECESSIONS, PRE-RECESSION PEAK OUTPUT=100

Source: National Statistics Source: National Statistics

FIGURE 3: UK ALL PROPERTY TOTAL RETURN PERFORMANCE BY YIELD QUARTILE

FIGURE 4: OFFICE VALUATION YIELDS

Source: IPD 2011 Annual Index

Source: CBRE Valuation Team. Latest=September 2012

FIGURE 5: ALL PROPERTY CAPITAL VALUE GROWTH FIGURE 6: TOTAL OUTSTANDING DERIVATIVES, £MN & NUMBER OF TRADES EXECUTED

Source: IPD Annual Index to 2011, CBRE Global Investors forecasts, IPF Source: IPD

92

94

96

98

100

06 07 08 09 10 11 12

Down 4.3% from Q1 2008Down 1.1% from Q3 2011Down 0.5% from Q1 2012

95

100

105

110

115

120

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1973198019902008

quarters since peak

0

2

4

6

8

10

12

14

3 years to Dec-11 31 years to Dec-11

Quartile 1(lowest) Quartile 2 Quartile 3 Quartile 4(highest)

0%

2%

4%

6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 10 11 12

Gap Prime <> SecondaryWest End Prime OfficeGood SecondarySecondary

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2011 2012 2013 2014 2015 2016

CBREGI Q3 2012 IPF Consensus (August 2012)

0

1,000

2,000

3,000

4,000

0

2,000

4,000

6,000

8,000

10,000

12,000

05 06 07 08 09 10 11 12

Total Outstanding Derivatives (Notional)Total Trades Executed (RHS)


GERMANY

The economic outlook for Germany is still solid

despite recession in many European countries. Real GDP expanded by 0.3% q/q in Q2 2012, driven by ongoing demand from economies outside the Eurozone and solid domestic consumer demand. Following weaker growth in 2013, stronger economic growth is expected from 2014 onwards. (Figure 1)

The unemployment rate declined to 6.8% in Q2 2012. (Figure 2) This low rate, in addition to expected wage increases and solid external demand, should help restrain recessionary developments. However, the still unsolved Eurozone sovereign debt crisis remains the key downside risk for our outlook on Germany.

Demand for German office space slowed during the first quarters of 2012. In the Big-5 German markets (Berlin, Frankfurt, Munich, Hamburg and Düsseldorf), take up decreased by 10% y/y during H1 2012. Given low construction activity, vacancy rates remained stable or even came down in a few markets, which then led to moderate nominal prime rent growth.

Office demand is expected to moderate in 2012 given the weaker growth scenario. However, the low development pipeline, limited speculative construction activity and sustained demand for prime space will limit downward pressure on prime rents. (Figure 3) Rents are actually forecast to increase moderately in 2012/2013 in some core markets, and more notably thereafter, which is in line with increasing economic growth.

Consumer demand was somewhat weaker in Q2 2012 as retail sales declined by -0.7% y/y. Overall H1 2012 real retail sales growth was still positive by 0.9% y/y. Despite low economic growth in Europe, German consumer confidence figures have not suffered thus far. Strong retailer demand and tight availability for prime retail space put upward pressure on retail rents in Q2 2012. (Figure 4) High street rents grew by 2.5% y/y on average across the Big 5 German markets.

The weaker growth expectation and planned austerity measures in 2012/2013 will likely constrain growth in consumer demand. But, this could be partially mitigated by the sound labor market, wage increases and moderate short-term inflation. Prime shopping center rents are forecast to rise moderately in 2012. High street rents in core markets are expected to continue to increase significantly next year. Retailers focus on prime retail areas in Germany within their multi-channel expansion strategies thereby creating a solid base for demand.

Logistics demand has slowed down, after historically high take up over the past two years. Leasing volumes came down in key markets by 35% y/y during H1 2012. However, the overall volume is still solid and above the 5-year average. Vacancy rates remained at low levels of around 4% in Q2 2012. As a result, prime logistics rents remained unchanged over the past quarter.

Logistics demand is expected to continue to weaken in 2012, in line with moderate economic growth expectations. Very low speculative construction activity is likely in the short to medium-term, so no downward pressure on rents is expected from supply. Rents are forecast to remain stable in 2012/2013 and might increase again in 2014, given the positive outlook for key logistics drivers in Germany post-2012. (Figures 5)

German commercial investment turnover reached EUR 4.3bn in Q2 2012 and 9.4bn during H1 2012, which is 16% lower than the previous year. Core acquisitions remained dominant and office was the most desired asset class (45% of total transaction activity) followed by retail (35%). Retail remains the investor darling, but the availability of core assets is tight. Logistics investment turnover improved during the past quarter, which led to a stake of almost 9% of total investments during the first half of 2012. Overall, prime property yields declined again slightly in major office markets and by 15 bps on average in key logistics hubs in Q2 2012.

We expect demand for German real estate to hold up well in 2012, although occupier markets may moderate and debt availability could tighten. Overall, prime yields are expected to decline moderately in 2012 as risk averse investors continue to focus on prime products in core European markets. Prime yields are forecast to remain at low levels in 2013/2014, as investor demand is not expected to weaken and economic growth strengthens. (Figure 6) Core real estate is still projected to offer favorable yields compared to competitive asset classes. The attractive risk-spread between property yields and bonds (government and corporate) is not expected to change soon.


GERMANY – CHARTS

FIGURE 1: REAL GDP GROWTH, % Y/Y FIGURE 2: UNEMPLOYMENT RATE, %

Source: Economist Intelligence Unit Source: Economist Intelligence Unit

FIGURE 3: OFFICE NET ADDITIONS TO STOCK*, % FIGURE 4: PRIME MARKET RENTAL GROWTH, % Y/Y INDEX 2007 = 100

Source: Property Market Analysis *Average German Big 5 markets

Source: Property Market Analysis, Investment Property Databank (history), CBRE Global Investors (forecast). Logistics/Office: Average German Big 5 markets

FIGURE 5: DEVELOPMENT OF KEY LOGISTICS DRIVERS (2007 = 100)

FIGURE 6: PRIME NET INITIAL YIELDS

Source: Economist Intelligence Unit Source: Property Market Analysis, Investment Property Databank (history); CBRE Global Investors (forecast). Logistics/Office: Average German Big 5 markets

-6%

-4%

-2%

0%

2%

4%

6%

92 94 96 98 00 02 04 06 08 10 12 14 160%

2%

4%

6%

8%

10%

12%

14%

92 94 96 98 00 02 04 06 08 10 12 14 16

Long-Term Average

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

92 94 96 98 00 02 04 06 08 10 12 14 16

Long-Term Average

-20

-15

-10

-5

0

5

10

15

98 00 02 04 06 08 10 12 14

SCOfficeLogistics

70

80

90

100

110

120

130

140

150

07 08 09 10 11 12 13 14 15 16

Industrial productionImport volume of goodsExport volume of goodsReal private consumption

3%

4%

5%

6%

7%

8%

9%

98 00 02 04 06 08 10 12 14

OfficeSCLogistics


FRANCE

French economic growth forecasts have been

revised downwards for 2012 and 2013. The economic recovery is expected to be slow and real improvement is not expected before 2014. (Figure 1)

The new government of President Hollande must deal with the delicate issue of reducing deficits without destabilizing the economy. It took a while before the French government finally announced its first measures in mid-September. Taxes will be increased for companies and for the wealthy.

Unemployment is expected to rise as a consequence of weak economic activity and austerity measures. For example, major French companies such as Peugeot and SFR (telecom) recently announced large redundancy plans. Unemployment is expected to remain around 10% until 2016, which is above the long-term average. (Figure 2) High unemployment is negatively impacting consumer confidence. And as a result, private consumption and retail sales will slow in 2012 and 2013, thus impacting retailers’ turnover and performance. (Figure 3)

So far this year the office occupier market has been slowing down but is not yet at distressed levels. On average, vacancy in the Paris region seems low at 6.6% although there are strong differences between the submarkets. Low vacancy will prevent a sharp fall of rents in 2012 and 2013 despite decreasing take up. From 2014 onwards, rental growth should accelerate for prime product as the economy improves. In addition, a lack of new and renovated supply will lead to a shortage of quality product especially in the Paris CBD.

Retailers are likely to face a decrease of their turnover due to expected low consumer spending in 2012 and 2013. Consequently, they prefer prime high street and shopping center locations that benefit from more secure turnover. This is why in 2012 we still expect some rental growth for prime Parisian high street retail, as it remains a competitive market with short supply and high demand. Rents in prime shopping centers are expected to remain flat as the number of visitors is on a decreasing trend at the national level. (Figure 4)

The logistics market showed relatively healthy take up so far in 2012 with almost 1 million m² leased in the first half of the year. Demand was biased towards Paris and Lyon, both exceeding long term average demand and making up

almost 90% of total take up. The second half of the year is expected to see reduced activity as forward looking indicators like the OECD Composite Leading Indicator and the Purchasing Managers index (PMI) point downwards. Especially the sharp fall in new orders for the PMI in July was disappointing. Construction activity is at very low levels, currently only 18,000 m² in Lyon, while no completions were reported so far in 2012. Availability in Paris declined further to 7.2% indicating further scarcity. Therefore, prime rental values are not likely to suffer dramatically but may feel the impact from reduced demand going forward to some extent, before picking up in the forecasted economic recovery later in 2014.

Investor interest in the French real estate market is still strong, but scarcity of good product is expected to keep investment volumes low. Three major transactions over EUR 500mn occurred during Q2. Investors remain focused on the same type of products: core, well-located and fully leased properties. Competition to acquire this type of product is strong, thereby preventing a sharp prime yield increase. Current yields are 4.75% for offices in Paris CBD and prime shopping centers. Office remains the dominant investment product (76%) followed by retail investments (19%) which remains particularly resilient in downturn periods, but availability is limited. As investors become more cautious, yields are expected to slightly increase.

In all sectors, the dichotomy will remain between prime and secondary products and the spread between the two is expected to widen even further. For logistics, pricing is reflecting increasing risk aversion and prime yields for Paris increased 20 bps to 7.2% per Q2, in line with the level in Lyon. Going forward, prime yields are likely to range between 7.0% and 7.5% depending on location, asset quality and lease length whereas secondary product could require yields above 8%. (Figure 5)

Residential pricing has been on an upward trend for years due to the structural lack of supply on the French residential market. (Figure 6) In 2012, prices are expected to decrease slightly even in Paris due to lower economic activity and lower growth of income levels. This moderation in the owner-occupier market will be favorable for the rental market.


FRANCE – CHARTS

FIGURE 1: REAL GDP GROWTH, % Y/Y FIGURE 2: UNEMPLOYMENT RATE, %

Source: Economist Intelligence Unit Source: INSEE, Economist Intelligence Unit (forecast)

FIGURE 3: PRIVATE CONSUMPTION AND RETAIL SALES, % Y/Y

FIGURE 4: PRIME MARKET RENTAL GROWTH, % Y/Y

Source: Economist Intelligence Unit Source: CBRE; CBRE Global Investors

FIGURE 5: PRIME NET INITIAL YIELDS, % FIGURE 6: RESIDENTIAL PRICES REBASED TO 100 IN 2000

Source: CBRE, CBRE Global Investors Source: INSEE – Notaires

-4%-3%-2%-1%0%1%2%3%4%5%

97 99 01 03 05 07 09 11 13 15

GDP

10yr average

6%

7%

8%

9%

10%

11%

90 92 94 96 98 00 02 04 06 08 10 12 14 16

Unemployment rate

Long-run average

-1%

0%

1%

2%

3%

05 06 07 08 09 10 11 12 13 14

Consumption

Retail sales

-10%

-5%

0%

5%

10%

15%

20%

25%

05 06 07 08 09 10 11 12 13 14 15 16

Offices - Paris CBD Retail HS - France

Retail SC - Paris Logistics - Paris

3%

4%

5%

6%

7%

8%

9%

10%

05 06 07 08 09 10 11 12 13 14 15 16

Offices - Paris CBD Retail HS - France

Retail SC - Paris Logistics - Paris

40

60

80

100

120

00 01 02 03 04 05 06 07 08 09 10 11 12

All residential

Apartments only


NETHERLANDS

GDP forecasts for The Netherlands were again

lowered over the past months. 2012 is likely to be a year of recession, and for the years thereafter economic growth is expected to be subdued. (Figure 1)

After the slowing Dutch economy led the 2013 deficit estimates to exceed the EU-imposed limit of 3%, the coalition government was forced to negotiate new budget cuts. As these negotiations failed, the Dutch governing coalition collapsed. The elections of mid-September were a victory for the liberals and also social democrats. This has given hope for a much more stable two party coalition. Nevertheless, austerity measures appear unavoidable. This causes much uncertainty and low consumer confidence.

Demand/supply ratios for office continued to be out-of-balance, as supply levels are historically high and take-up is historically low. As a result, vacancy remains at relatively high levels. Headline rents appear to be largely unaffected, as negative changes in rental level are more likely to be incorporated through increased incentives and/or rent free periods.

Appetite for investments in the office market declined considerably since the onset of the crisis, which resulted in investment volumes being at relatively low levels. (Figure 2) Current transactions concern either the prime end of the office market (i.e. purchase of The Rock by WestInvest) on the one hand or distressed portfolios (i.e. Uni-Invest portfolio) on the other hand. Given the bleak economic outlook and weak investor demand, yields are more likely to rise than to compress in the next few years.

Total retail turnover showed overall mild growth in May and June, after strong declines in April. Retail turnover is fully driven by price growth, whereas volumes continue to decline. (Figure 3) Supermarkets and fashion are two of the few retail categories that continue to show positive growth, whereas turnover of all other major categories remains particularly feeble. Demand for prime retail locations from international and domestic retailers remains strong as these assure dense pedestrian flows and solid turnover.

Retail in secondary locations continues to suffer from lower spending levels. This is most clearly demonstrated by the relatively high levels of vacancy at these secondary locations. As a result of favorable tenant and investor demand,

the market outlook for prime retail areas is positive. However, as yields are already at relatively low levels, a strong inward yield shift seems unlikely.

Contrary to expectations, the industrial/logistics market showed strong performance in the second quarter with take up of 450,000 sqm. Vacancy levels edged up to 7.2% indicating the market is well balanced which supported market rents and even led to some rental growth. Given the scarcity of modern supply, some speculative development could become attractive for both developers and some investors depending on their risk appetite. However, most institutional investors are likely to remain risk averse pending the wider Euro zone situation and thus focus on pre-let schemes to ensure security of income.

Drivers for the logistic sector look less healthy with Schiphol Cargo volumes down (Figure 4), the PMI Manufacturing index in negative territory, unemployment expected to rise and purchasing power under pressure. Still, some positive impact from the weaker Euro for trade outside the Eurozone may underpin trade growth going forward.

Investors remain cautious as well with below average investment volumes reported since the first quarter of 2011. Demand continues to focus on secure investments. Prime yields are therefore expected to remain stable in the near-term. (Figure 5)

The Dutch housing market is characterized by a dichotomy. As expected, the for-sale market in the Netherlands deteriorated further. In the first seven months of the year, house prices declined by 5%. (Figure 6) Since the start of the financial crisis (Q3 2008), prices have now corrected more than 15%. Further price declines are expected before the market stabilizes.

Contrary to the for-sale market, the residential rental market is doing well. Residential rents in the Dutch housing market increased on average by 2.8% in 2012, significantly stronger than in 2011 when rents increased by 1.8%. Demand for commercial rental housing is expected to increase as a result of ageing, reluctance or inability to buy a house and a further restriction of access to social housing. Particularly the mid-priced segment of the market (monthly rents between EUR 650 and EUR 1,000) is expected to benefit from the increase in demand. Supply is in this segment of the market is very low.


NETHERLANDS – CHARTS

FIGURE 1: GDP GROWTH, %Y/Y FIGURE 2: INVESTMENT VOLUMES PER SECTOR, € BN

Source: Economist Intelligence Unit Source: CBRE Research

FIGURE 3: DEVELOPMENT OF RETAIL TURNOVER FIGURE 4: SCHIPHOL CARGO HANDLING

Source: CBS Source: Schiphol Amsterdam Airport

FIGURE 5: PRIME MARKET NET YIELDS FIGURE 6: RESIDENTIAL TRANSACTIONS AND Y/Y HOUSE PRICE GROWTH

Source: CBRE Research (historic data); CBRE Global Investors (forecasts) Source: CBS

-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%

02 03 04 05 06 07 08 09 10 11 12 13 14 15

Change in stocks Private consumption

Government consumption Corporate investment

Net exports GDP growth

0

1

2

3

4

5

06 07 08 09 10 11 12

Office Retail Residential Warehousing Mixed Other

-6%

-4%

-2%

0%

2%

4%

08 09 10 11 12

Price (% change y/y)

Volume (% change y/y)

Value (% change y/y)

-30%

-20%

-10%

0%

10%

20%

30%

-30%

-20%

-10%

0%

10%

20%

30%

09 10 11 12

Cargo % growth y/y

12m moving average

LT average % growth y/y

3%

4%

5%

6%

7%

8%

08 09 10 11 12 13 14 15 16

Offices - Amsterdam South-AxisRetail SC - AmsterdamRetail HS - AmsterdamLogistics - West North-Brabant

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0

10

20

2009 2010 2011 2012

Total monthly transaction volume (000's) (LHS)

% nominal house price growth (y/y) (RHS)


SPAIN

The Spanish economic outlook worsened over

the last quarter. Stress over financial markets has impacted economic policy as funding costs heightened and access to external finance has become extremely difficult. Specifically, a financial aid package provided to restructure the Spanish banking system (max. of EUR 100bn) and mainly focuses on savings banks (Bankia bail-out). In addition, the Spanish Government passed new fiscal measures required by the new austerity program agreement with the European Union. (Figure 1 and 2).

Recently the ECB announced an “unlimited” bond buying program for Governments applying for financial assistance. This program might finally accelerate the expected Spanish formal request.

The forthcoming austerity measures will continue to drag down private consumption resulting in a weak medium-term outlook unless financial tensions and imbalances are resolved. (Figure 3)

The Spanish employment market continued to contract during the first half of 2012 with unemployment rates reaching new record levels of approximately 25%. In the short-term, further deterioration of the employment market is to be expected, as structural measures are likely to cause an economic contraction before any improvements start to arise. (Figure 4)

Spanish prime shopping center rental growth reacted swiftly during 2011 to the negative results seen in the previous year. However, prime rents are still expected to suffer during 2012 and a move into positive territory is not expected before domestic demand recovers. (Figure 5) A lack of debt availability hinders the shopping center investment market, restraining the ability to complete prime asset transactions despite existing investor appetite.

Spanish prime shopping center net initial yields have still not reacted, maintaining a flat trend over the last quarter. However, outward yield movements are expected in the short-term as a reaction to further rental drops and increasing illiquidity. The gap between prime and secondary yields is expected to increase as a result of the recent economic instability and weak prospects for secondary schemes. (Figure 6)

Vacancy rates in the main Spanish office markets still follow an increasing trend derived from the scarcity of demand, especially in Madrid office markets where take up levels were particularly weak. Accordingly, vacancy levels remain at historic highs (11.2% in Madrid and 13.6% in Barcelona by the end of Q2 2012).

Due to the above, prime office rents in Madrid and Barcelona continue to experience a downward correction. The combination of high vacancy levels and weak office demand is likely to lead to further rental declines during the next quarters. (Figure 5)

During the first half of 2012, the investment market has been dominated by national players. Despite the low investment volume, interest for prime continues to be intense, although unable to avoid further yield increases (25 bps during the first half). During 2012, prime office net initial yields are expected to remain stable, although they will be tested by the unclear economic situation. (Figure 6)

During the first quarter of 2012 the Spanish logistics market experienced the same difficulties suffered in the previous quarters. The diminishing demand for logistics services forced logistics operators to increase cost-cutting, thus exerting downward pressure on rents accompanied by a reduction in the demand for logistics premises.

Completions and the pipeline for new logistics premises continue at minimal or non-existent levels. Despite the lack of new supply, vacancy rates maintain an upward trend, currently standing at 14.3% and 11.1% in Madrid and Barcelona, respectively.

Accordingly, rental values in the main Spanish logistics markets, Madrid and Barcelona, continued to decrease during the first half of 2012. Property owners are reducing asking rents and the gap between asking and closing rents continues to exist, as property owners use different incentives. (Figure 5)

Investment volumes are far below pre-crisis levels as investors concentrate on secure assets with long-term leases and prestigious tenants from stable sectors which are hard to find in Spain at this moment. (Figure 6)


SPAIN – CHARTS

FIGURE 1: REAL GDP GROWTH, % Y/Y FIGURE 2: PUBLIC DEBT AS % OF GDP

Source: Economist Intelligence Unit

Source: Spanish Tesoro Publico

FIGURE 3: PRIVATE CONSUMPTION GROWTH, % Y/Y FIGURE 4: UNEMPLOYMENT RATE, %



FIGURE 5: PRIME MARKET RENTAL GROWTH, % Y/Y FIGURE 6: PRIME NET INITIAL YIELDS

Source: CBRE Research, PMA, CBRE Global Investors (forecast) Source: CBRE Research, PMA, CBRE Global Investors (forecast)

-5%-4%-3%-2%-1%0%1%2%3%4%5%

06 07 08 09 10 11 12 13 14 15 16

Euro AreaSpain

-9.3% -8.9%

-5.3%

-3.0%-2.1%

-12%

-9%

-6%

-3%

0%

10 11 12 13 14

-5%-4%-3%-2%-1%0%1%2%3%4%5%

06 07 08 09 10 11 12 13 14 15 16

Euro Area

Spain

0%

5%

10%

15%

20%

25%

Prev 10yr

09 10 11 12 13 14 15 16

SpainEuro Area

-30%

-20%

-10%

0%

10%

20%

30%

06 07 08 09 10 11 12 13 14

OfficesShopping CentersLogistics

3%

4%

5%

6%

7%

8%

9%

06 07 08 09 10 11 12 13 14

OfficesShopping CentersLogistics


JAPAN

According to the second preliminary estimates,

the Japanese economy expanded by 3.3% y/y in Q2 2012, led by a 5.5% y/y increase in business investment. A revival in industrial production (up 5.1% y/y in Q2 2012) was also observed. On a less positive note, domestic demand remained subdued with private consumption slowing to 3.3% growth y/y. Private consumption is expected to fall further as domestic car sales will most likely plummet upon the expiration of government subsidies. In addition, Tohoku reconstruction demand is thought to have peaked during the first half of 2012, so we may expect a fall in demand attributed to those activities. Nevertheless, the latest findings of the BOJ Tankan June 2012 Survey indicate a moderate recovery in the economy. (Figure 1) Consensus Economics (as of September 2012), mean forecast is for GDP growth of 2.4% in 2012 and of 1.3% in 2013.

Japan’s core property markets are at the initial stages of a cyclical recovery and the latest total returns from IPD suggest that all major property types are now performing in positive territory: the annualized total return for all property was 3.5%, with a 5.3% income return and -1.6% capital return. (Figure 2) Positive capital returns have been witnessed for both the residential and logistics sectors. The office sector is the last of the major property types to recover.

Office rents in the Tokyo central five wards are at their lowest point in a decade and they continued to fall throughout Q2 2012, albeit at a slower pace (down just 1.0% from year-end 2011). The large amount of new office supply which entered the market in H1 2012 pushed the vacancy rate higher to just over 10% for office buildings with floor plates over 500 tsubo*, exceeding the overall vacancy rate of 7.9% for all buildings for the first time in 10 quarters. Despite the temporary rise in vacancy rates, asking rents have increased by 2.9% compared to year-end 2011 for those office buildings located in inner Tokyo, which we believe indicates the start of the market recovery as new supply has peaked. According to Sanko Estate, the vacancy rate for large-sized buildings with floor plates over 200 tsubo was 6.3%.

As a premium has been placed on modern facilities with strong seismic-resistant structures, market polarization has been evident. Relocation trends have been characterized by moves from older buildings to better

locations/grades; this is leading to vacancies in lower grade buildings and those in secondary locations. We forecast office rents to bottom in 2012 and to pick up over the five year outlook: particularly for large-sized Grade S/A buildings. (Figure 3)

Rents for residential units in Tokyo are expected to pick up in the five year outlook, although growth prospects may be limited. High quality, strong specification-assets in high-amenity locations within the inner wards have been outperforming.

More investors are seeking investments in secondary cities such as Osaka, Nagoya and Fukuoka in order to take advantage of the potential for cap rate compression. We expect yields to compress by roughly 20 - 40 bps over the next five year period for quality assets located in regional cities, as yield spreads between Tokyo and regional cities have widened to a range of 100 -120 bps, well above the historical spread of 70 - 80 bps. (Figure 4)

Multi-tenant logistics facilities in Greater Tokyo witnessed vacancy rates fall to just 3.6% by Q2 2012. (Figure 5) Although average industrial rents may have already reached bottom, most relocations are centered on facility realignment plans that aim to lower total costs; hence, it may take some time before effective rent levels start to increase. But for prime assets, tight new supply and steady demand may likely provide a slight rental upside in the outlook.

The retail sector will likely continue to be the less favored sector for investment demand given the sector’s broad structural challenges. Japan’s retail sales fell for the first time in eight months in July (down 0.8% y/y). Payouts of summer bonuses by large companies fell 2.5% this year, and this may have contributed to the sales decline. The planned increase in the consumption tax rate may negatively affect consumer spending. Due to weak performance in shopping center sales, (Figure 6) key tenants and master lessees have attempted to negotiate down their rents at many suburban shopping centers; going forward, rents are expected to remain generally flat.

*Note: 1 Tsubo = 35.6 sqft or 3.3 sqm


JAPAN – CHARTS

FIGURE 1: BUSINESS CONDITIONS DIFFUSION INDEX FIGURE 2: IPD ANNUALIZED TOTAL RETURN BY SECTOR , %

Source: Bank of Japan Source: IPD

FIGURE 3: TOKYO OFFICE VACANCY RATE, % FIGURE 4: RESIDENTIAL CAP RATE TRENDS, YIELD SPREAD TO TOKYO, %

Source: CBRE Research, CBRE Global Investors Source: JREI, CBRE Global Investors

FIGURE 5: VACANCY TREND FOR GREATER TOKYO LOGISTICS

FIGURE 6: JAPAN Y/Y SHOPPING CENTER SALES TRENDS

Source: CBRE Research Source: Japan Council of Shopping Centers

-70-60-50-40-30-20-10

010203040

2Q1999

2Q2000

2Q2001

2Q2002

2Q2003

2Q2004

2Q2005

2Q2006

2Q2007

2Q2008

2Q2009

2Q2010

2Q2011

2Q2012

All Industry (All Enterprise)All Industry (Large Enterprise)Manufacturing (Large Enterprise)Non-Manufacturing (Large Enterprise)

-12.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

05 06 07 08 09 10 11 12

OfficeResidentialRetailAll Property

0%

2%

4%

6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 10 11 12

Large Sized Buildings (Floor Plate over 200 tsubo)Mid - Large Sized Buildings (Floor Plate 100 - 200 tsubo)Mid Sized Buildings (Floor Plate 50 - 100 tsubo)All Buildings

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%

04 05 06 07 08 09 10 11 12 13 14 15 16

Sapporo OsakaFukuoka Nagoya

0%

5%

10%

15%

20%

2Q2004

2Q2005

2Q2006

2Q2007

2Q2008

2Q2009

2Q2010

2Q2011

2Q2012

Vac: All

Vac: Existing

-15%-12%

-9%-6%-3%0%3%6%9%

12%15%

06 07 08 09 10 11 12

SC Total Sales (ALL)

Total Sales Moving Average (since July 2002)


CHINA

For the first half of 2012, China’s 7.8% y/y

real GDP growth rate was broadly in line with the Consensus Economics mean forecast of 7.7% (as of September). The lowering of the official GDP growth target to 7.5% by the authorities earlier this year does suggest that they are comfortable with a more moderate pace of expansion going forward. Not only did the external trade sector register noticeable decline, the domestic sector also revealed apparent slowdown.

Industrial production and construction activities remained subdued while domestic demand including retail sales, fixed asset investment and inventory restocking also showed signs of slower growth. The overall slowdown was in large part driven by the falling global demand resulting from the Eurozone debt crisis as well as the tightened fiscal, monetary and property policies implemented last year. The EIU is expecting a negative contribution to GDP from net exports for 2012 and 2013. (Figure 1)

Real interest rates continue to remain in positive territory, thanks to lower food prices which have led to a decelerating consumer price index. (Figure 2) The latest CPI reading was 2% y/y in August, slightly higher than the 1.8% y/y in July. Year-to-date (through August) CPI of 2.9% y/y reveals that the current CPI is close to the level of the Central Bank’s target of 3%, hence there may be room for monetary policy easing with the Central Bank poised to cut the policy rate further should CPI remain below the target for the rest of 2012.

In contrast to the weak manufacturing PMI, which traditionally reflects manufacturing activities that are mainly export-related, the non-manufacturing PMI, which focuses on the service related sectors, portrays a very different picture. (Figure 3) In fact, with the exception of seasonality in the Chinese New Year period (usually around February every year), non-manufacturing PMI reveals that the service industry has been in an expansion mode since 2009. Computer and software companies for example are among the most optimistic groups surveyed. Therefore, the fast development of the service sector amid the ongoing economic restructuring has supported the overall office and logistics sector well.

According to the National Bureau of Statistics, in July 2012 there were 50 cities which recorded a m/m residential price increase out of the 70 cities monitored, compared with zero cities recording average price increases in January 2012. (Figure 4) In contrast, the number of cities which recorded a decline in the m/m price fell to just 9 in July 2012 down from 52 in December 2011. This illustrates the high cyclicality of the residential market in China whereby sentiment can shift very quickly, particularly when real housing demand is “artificially” suppressed by restrictive policies. This is also in-line with our earlier estimation that overall, there is a housing shortage in China and there is a need to supply the end-user and upgrade demand with appropriately sized and valued stock. We continue to believe that supportive policies towards end-users will be the key driver for the on-going recovery in the overall residential market.

As the national trend of service sector expansion continues, office demand remained broadly stable in the first half of 2012 with domestic companies and state-owned enterprises the key drivers in absorbing office space. The strong momentum continues in Beijing given limited new supply and solid demand. (Figure 5) In Shanghai, however, financial institutions and MNCs are generally more cautious given the higher than historical average of new supply that has led to flat rental performance in H1 2012. If this trend continues, Beijing could be overtaking Shanghai to become the most expensive office market in China in terms of occupier cost in 2013.

Retail continued to be the best performing sector in the first half of 2012 as international retailers were active in the leasing market. Yet a high level of new supply across China may push vacancy higher over the medium term especially in selected Tier 2 and 3 cities. Domestic investors, in particular, continue to exert high interest for well-located retail properties. We expect cap rates for core retail properties to remain broadly stable over the medium term as China’s real estate market continues to develop. (Figure 6)


CHINA – CHARTS

FIGURE 1: CHINA’S REAL GDP & COMPONENTS, %Y/Y FIGURE 2: INFLATION, DEPOSIT RATE AND REAL* INTEREST RATE, %

Source: Economist Intelligence Unit Source: CEIC. *“Real interest rate” defined as 1Y deposit rate minus CPI

FIGURE 3: NON-MANUFACTURING PMI FIGURE 4: RESIDENTIAL PRICE MOVEMENT IN 70 MAJOR CHINESE CITIES, MONTH ON MONTH PRICE TRENDS, # OF CITIES

Source: CEIC, National Bureau of Statistics Source: CEIC, National Bureau of Statistics

FIGURE 5: OFFICE RENTAL INDEX, 2003Q1=100 FIGURE 6: SHOPPING CENTER CAP RATES BY CITY, %

Source: CBRE Research Source: CBRE Research, CBRE Global Investors

-5%

0%

5%

10%

15%

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Net Exports Fixed investment

Gov't consumption Private consumption

Real GDP

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

01 02 03 04 05 06 07 08 09 10 11 12

CPI 1Y Deposit Rate Real Interest Rate

40

50

60

70

80

08 09 10 11 12

Business Activitiy New BusinessBusiness Expectations

0

10

20

30

40

50

60

Jan-11 Jul-11 Jan-12 Jul-12

Price Decrease Price Stability

Price Increase

80

100

120

140

160

180

200

220

240

03 04 05 06 07 08 09 10 11 12

Beijing GuangzhouShanghai Shenzhen

4%

6%

8%

10%

12%

01 02 03 04 05 06 07 08 09 10 11 12 13

BeijingShanghaiGuangzhou


AUSTRALIA

GDP growth which is below trend, yet

nonetheless positive is the bittersweet base case for Australia in the outlook period. Growth is moderating with the EIU forecasting a 3.2% growth rate in 2012 and 3.0% in 2013. (Figure 1) The Consensus Economics mean GDP forecast for 2012 is now 3.5% (i.e. 30 bps high than the mean forecast of three months prior). However, the mean forecast for 2013 is now 2.9% (which is 30 bps lower than the mean of three months prior). The Reserve Bank of Australia left the policy rate on hold at its September meeting.

After 21 successive years of positive annual GDP growth, the near to medium term future of Australia’s economic growth rate has perhaps rarely been as uncertain as now. Since July 1st its export iron ore prices have slid from USD 127 per tonne to less than USD 87 per tonne. Usually when prices for its mineral exports fall, the AUD falls as well. Yet the AUD has recently remained strong – and above parity with the USD and this continues to harm the competitiveness of Australia’s other exports. Part of the reason is that its comparatively high interest rates and AAA credit rating have made its government bonds so attractive. Government bond yields remain at close to historically low levels. (Figure 2) Indeed over 75% of Australia’s government bonds in recent quarters have been purchased by foreign investors.

The most mining-dependent state economy, Western Australia, has recorded strong real estate returns on the back of the recent boom in its exports. Retail real estate total returns in the state were over 11% in the year to June 2012 according to PCA/IPD and its industrial returns even higher at over 17%. Its capital city, Perth, saw CBD office returns surpass 14% as did Brisbane, capital of the other major mining state of Queensland. Going forward, these locations may be hard hit by a global systemic shock affecting the commodities sector.

Nationally, the all property total returns (unlevered, in local currency terms) were 10% for the year to June 2012, according to PCA/IPD. These returns continue to be in line with our performance forecasts. (Figure 3) The PCA/IPD index which represents over AUD 135 billion of real estate assets has continued to outperform the main A-REIT index and the

broader equity index and the all series/maturities bond index for Australia over the 10 and 15 year periods. Total returns have also very easily outstripped CPI over the 1, 3, 5, 10 and 15 year periods.

Office sector total returns were 10.5% y/y as of June 2012 (with income returns delivering 7.5% and capital growth of 2.9%). Our forecast of the sector has moderated slightly, yet the average annual five year total return is in the low double digits, reflecting falling vacancy rates and reasonable rental growth (albeit at a different pace depending on the city). (Figure 4) Prime vacancy rates are currently lower than in most cities of the OECD and upcoming supply pipelines are below trend.

Yield spreads between property and government bonds are currently very wide, although they should narrow later in the outlook period. Thus, although the sector has notched up two years of solid performance already, we continue to believe that it is close to the start of an ongoing cyclical rebound.

The retail real estate sector has been the underperformer just as we had forecast, with total returns of 9.1% y/y in June 2012. Vacancy rates will likely remain in the low single digits given still fairly favorable demographics and little new supply, but we expect the sector’s income and capital value growth to be lower than historic figures. (Figure 5) Consumers and retailers face a number of headwinds in the coming few years which will challenge the sector, but we still forecast average annual total returns in the high single digits for the coming five year period.

The industrial sector remains attractive given its high income returns, which were 8.8% y/y as of June 2012. However, capital growth was much more modest at just under 1% for the same period. Import volumes should continue to expand over the next few years and with limited speculative development in the main markets, supply pipelines are fairly benign. We are forecasting total returns broadly in line with the historical average to continue for the coming five year period. Thus, the five year forecasts contain some rental uplift and modest capital value growth. (Figure 6)


AUSTRALIA – CHARTS

FIGURE 1: ANNUAL GDP GROWTH, % Y/Y FIGURE 2: LONG TERM GOVERNMENT BOND YIELD, %


FIGURE 3: PROPERTY TOTAL RETURNS BY SECTOR, % FIGURE 4: SYDNEY OFFICE RENT AND CAPITAL VALUE GROWTH TRENDS, %

Source: Property Council of Australia/International Property Databank for historical (national) index,CBRE Global Investors forecasts (for Sydney)

Source: CBRE Research, CBRE Global Investors

FIGURE 5: SYDNEY SHOPPING CENTER RENT AND CAPITAL VALUE GROWTH TRENDS, %

FIGURE 6: SYDNEY INDUSTRIAL RENT AND CAPITAL VALUE GROWTH TRENDS, %

Sources: CBRE Research, CBRE Global Investors Sources: CBRE Research, CBRE Global Investors

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

Real YoY GDP Growth10 Year Hist Average25 Year Hist Average

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Long-term bond yield 10 Year Hist Average25 Year Hist Average

-15%-10%-5%0%5%

10%15%20%25%30%35%

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

Retail

Office

Industrial

-35%

-25%

-15%

-5%

5%

15%

25%

35%

91 93 95 97 99 01 03 05 07 09 11 13 15 17

RentCapital Value

-5%

0%

5%

10%

15%

20%

25%

30%

35%

91 93 95 97 99 01 03 05 07 09 11 13 15 17

RentCapital Value

-15%

-10%

-5%

0%

5%

10%

15%

20%

91 93 95 97 99 01 03 05 07 09 11 13 15 17

RentCapital Value


SOUTH KOREA

The Korean economy continues to lose

momentum amid a slide in global demand for its exports. Real GDP growth slipped to its lowest level in almost three years after posting a modest expansion of 2.4% y/y for Q2 2012. This was below market expectations and was lower than the 2.8% rise recorded in Q1 2012. Weakening exports largely explain the subdued headline growth figure, but the softness in domestic demand played a role as well, given the contraction in fixed investment and the slowdown in private consumption growth. The EIU forecasts economic growth of 2.8% and 3.7% for 2012 and 2013, respectively. (Figure 1)

The soft GDP growth reading will likely raise expectations of further monetary easing following July’s 15 bps policy rate cut to 3.0%, the first rate reduction in over three years. The case for a second successive rate cut is strengthened by the latest economic indicators which point to a slowdown in activity. The sharp drop in August inflation to 1.2% y/y also paves the way for a cut in borrowing costs. Consensus Economics’ mean expectations for CPI growth for 2012 and 2013 are 2.3% and 2.9%, respectively. Over the period (2012-16), the employment growth rate is forecast to barely increase at just 0.2% per year, well below the average at 0.9% over the past five years (2007-2011). (Figure 2) Nonetheless, the unemployment rate is very low by global standards.

Seoul’s office markets show a clear sub-regional disparity in terms of supply and demand. The vacancy rate for the Central Business District (CBD) reached 14.4% in Q2 12, while Gangnam Business District (GBD) and Yoido Business District (YBD) were just 1.9% and 2.9%, respectively. (Figure 3) The ongoing supply cycle delivered two new buildings to the market in Q2 2012; Dongil building (GFA 43,798 sqm) in the GBD and Junghak-dong building (GFA 83,802 sqm) in the CBD. New office supply has triggered a tenant “flight to quality”, leading to stable vacancy levels among prime grade offices, while the secondary office vacancy rate has increased to double-digit levels.

Domestic capital continues to play a major role by enlarging the cash position into office investment (particularly for grade A offices) amidst a low interest rate environment. Over the mid-to-long term, the absorption of new supply

and the continuing economic recovery (hopefully on a more sustainable footing thus reducing occupational risk) could potentially lead to favorable entry pricing for secondary assets which could benefit from cyclical recovery. For the outlook period (2012-16), Seoul prime office rent is forecast to decrease by around 0.5% per year, while CBD prime rents are expected to come down further at 2.1% per year with deterioration in the near term but positive growth returning in the latter part of the outlook. (Figure 4)

Despite the healthy growth outlook for the Korean retail market (Figure 5), domestic consumer sentiment slightly weakened in Q2 2012. The drop of consumer sentiment in August suggests a potential decline of future retail sales. Following momentum from the successful completion and opening of retail property developments such as Time Square, COEX Mall and D-Cube City, development of mixed use shopping malls is being witnessed. Construction of an underground mixed use retail mall below the Seoul International Finance Centers (SIFC) in Yoido with a retail area of 89,000 sqm (GFA) was delivered in August 2012. Outside of Seoul, Square One with a retail area of 168,000 sqm (GFA) was completed in Incheon last month.

In H1 12, several retail property transactions were witnessed in the market. Investment yields for shopping malls in Greater Seoul will likely remain around 6% in 2012. Over the outlook period (2012-16), Seoul shopping mall rents are forecast to increase at around 4.9% per year, while capital values are expected to grow at 6.7% per year. (Figure 6)

In the logistics sector, global investors have been seeking acquisition of logistics centers whilst domestic investors are more gradually showing some interest. The attractiveness of the hotel and logistics sectors in the Greater Seoul area remain steady in terms of both leasing and investment demand. Reflecting sanguine interest in these sectors, entry yields for hotel and logistics edged down slightly in Q2 2012 and will likely remain stable in the near-term.


0%

1%

2%

3%

4%

5%

12 13 14 15 16

Real GDPAve. 2002-2011

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

-1%

0%

1%

2%

3%

02 04 06 08 10 12 14 16

Employment Growth (LHS)

Unemployment (RHS)

SOUTH KOREA – CHARTS

FIGURE 1: GDP GROWTH FORECAST, % Y/Y FIGURE 2: EMPLOYMENT GROWTH FORECAST & UNEMPLOYMENT RATE, %


FIGURE 3: SEOUL PRIME OFFICE VACANCY RATES FIGURE 4: PRIME OFFICE RENT & CAPITAL VALUE TRENDS

Source: CBRE Research Source: CBRE Global Investors

FIGURE 5: REAL RETAIL SALES & CONSUMER EXPENDITURE,% PA

FIGURE 6: PRIME RETAIL RENT & CAPITAL VALUE TRENDS

Source: Economist Intelligence Unit Sources: CBRE Global Investors

-4%

0%

4%

8%

12%

16%

20%

Q1 02

Q1 03

Q1 04

Q1 05

Q1 06

Q1 07

Q1 08

Q1 09

Q1 10

Q1 11

Q1 12

CBD GBD YBD Total

-25%

-15%

-5%

5%

15%

25%

02 04 06 08 10 12 14 16

Rental Growth Capital Value Growth

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

02 04 06 08 10 12 14

Retail Sales

Consumer Expenditure

-15%

-10%

-5%

0%

5%

10%

15%

20%

07 08 09 10 11 12 13 14 15 16

Capital Value Growth Rental Growth


SINGAPORE

Singapore’s economic growth moderated to a

1.7% y/y growth rate in H1 2012, compared to a 4.8% y/y rate in H2 2011. Both private and government consumption slowed. Net exports fell 6.6% y/y. With its export engine constrained by the global slowdown and the government to-date unwilling to extend fiscal support, the Singapore economy is set to remain soft for the rest of this year. Fiscal stimulus also comes with the challenge of containing a persistently high inflation rate; thus any policy measures for the remainder of this year will face a delicate balance amid the uncertain direction of the global economy. Against this backdrop, the EIU forecasts 2.6% and 4.0% real GDP growth rates for 2012 and 2013. (Figure 1) Property transaction volumes have also moderated this year. (Figure 2)

Office leasing activities in Q2 2012 were driven by takeup from the energy, commodities, insurance, and professional and legal services sectors. The larger occupiers, such as the banks still remained cautious. With the lower rents, some firms took the opportunity to consolidate into better quality buildings.

With no notable office completions and with resilient net absorption, the vacancy rate was 8.4% in the core CBD by the end of Q2. The next notable supply is Asia Square 2, with an expected completion date in H2 2013, and will continue to add to the vacancy rate. (Figure 3) Rents in Q2 12 continued to trend downwards, falling by 4.7% in the quarter to S$10.10 per sqft. While further rental decline is forecast, we expect the pace to ease in H2 2012. We believe the office sector will face challenges over the next 12 months, but with an assumption of stronger economic growth and a lower supply pipeline in the next three years, we expect a rebound of the office sector in 2014, and possibly by H2 2013.

Tourism receipts rose by 8% y/y in Q1 2012, with almost all components seeing an increase. Accommodation spending underwent the biggest increase, followed by shopping. The number of Mainland Chinese tourists continued to grow, with a 32% y/y increase in the first quarter, and they are now clearly the second largest nationality (after Indonesians) to visit Singapore. The tight labor market added support for a resilient retail sector thus far in 2012. The unemployment rate has been steady for the past 12 months and currently stands at a low rate of just 2.0% (Figure 4) driving private

consumption and consumer spending. Retail sales (excluding motor vehicle sales) grew by 2.3% in 2Q 2012 y/y.

The lack of new supply in prime locations (notably Orchard Rd) may offer some of those landlords a better prospect on rental growth. New international brands continue to seek retail space in Singapore and Asia in general. Baby Phat (US), Tally Weijl (Switzerland) and Shana (Spain) have recently taken up new space in suburban malls in Singapore. The suburbs are expected to see several new regional malls being built in conjunction with the development of transport nodes and may provide sectoral segmentation. We believe the retail sector is the most defensive property type and is likely to continue to deliver good total return growth in the years ahead.

The challenges of the global economy continue to plague industrial output in Singapore, which is highly sensitive to global trade cycles. (Figure 5) The slowdown in industrial output appeared to have stabilized in June and July, but slipped into negative territory again in August. The dip in the overall PMI was attributed to a further decline in new orders as well as first-time contraction in stockholdings of finished goods and imports. The outlook for industrial activities remained cautious as most operators have kept their strategic plans on hold while waiting for more concrete signs of a global economic recovery. Overall, industrial rents may likely be under pressure in H2 12 amid some incoming supply, yet the medium to long term fundamentals remain sound as Singapore plays an increasingly important role as a regional high tech and transportation hub.

The residential sector underwent a surge in sales volumes in Q2 2012, (Figure 6) with over 5,300 units sold. However, this sector presents high downside risk amid the uncertain economy, expectation of large new supply over the next few years, and a tightly regulated market. The residential sector is our least favored sector although niche opportunities may arise which offer attractive risk-adjusted returns. Niche projects are typically launched by good developers, and located in close proximity to MRT stations, and/or have high quality finishes and in many cases, exhibit a combination of these.


SINGAPORE – CHARTS

FIGURE 1: REAL GDP AND INFLATION RATE, % Y/Y FIGURE 2: PROPERTY TRANSACTION VOLUME, USD MN

Source: Economist Intelligence Unit Source: Real Capital Analytics

FIGURE 3: OFFICE RENTAL GROWTH, VACANCY RATE & GDP GROWTH, %

FIGURE 4: UNEMPLOYMENT RATE AND CHANGE IN RETAIL RENT AND CAPITAL VALUE TRENDS

Source: Economist Intelligence Unit, CBRE Research, CBRE Global Investors Source: Economist Intelligence Unit, CBRE Research, CBRE Global Investors

FIGURE 5: EXPORTS AND CHANGE IN INDUSTRIAL RENT AND CAPITAL VALUE TRENDS

FIGURE 6: RESIDENTIAL PRICE AND TRANSACTION VOLUME

Source: Economist Intelligence Unit, CBRE Research, CBRE Global Investors Source: Singapore Urban Redevelopment Authority Note: Price reflects all condominium properties, including non-completed projects

0%

1%

2%

3%

4%

5%

6%

2011 2012 2013 2014 2015 2016

GDP CPI

0

2,000

4,000

6,000

8,000

10,000

12,000

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Rolling 12-mo. Total Quarterly Vol.

-10%

-7%

-4%

-1%

2%

5%

8%

11%

14%

-55%-40%-25%-10%

5%20%35%50%65%80%

96 98 00 02 04 06 08 10 12 14 16

Rental Growth (LHS) Real GDP Growth (RHS)

Vacancy Rate (RHS)-15%

-10%

-5%

0%

5%

10%

15%

20%0%

1%

2%

3%

4%

5%

6%

Q401

Q3 02

Q2 03

Q1 04

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Q3 05

Q2 06

Q1 07

Q4 07

Q3 08

Q2 09

Q1 10

Q4 10

Q3 11

Q2 12

Unemployment Rate (LHS)Change in Rent (RHS)Change in Capital Value (RHS)

-15%

-10%

-5%

0%

5%

10%

15%

0

20

40

60

80

100

120

Q2 01

Q2 02

Q2 03

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Q2 05

Q2 06

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Q2 11

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Total Export (LHS) Change in Rent (RHS)

Change in Capital Value (RHS)

0

2,000

4,000

6,000

8,000

10,000

0

50

100

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Q2 01

Q2 02

Q2 03

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Q2 07

Q2 08

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Q2 10

Q2 11

Q2 12

Price Index (LHS)

Total transaction volumes (unit) (RHS)


CBRE GLOBAL INVESTORS CBRE Global Investors is one of the world’s largest real estate investment management

firms with $91.2 billion in assets under management. 1 The firm sponsors real estate investment programs across the risk/return spectrum in North America, Europe and Asia for investors worldwide including public and private pension funds, insurance companies, sovereign wealth funds, foundations, endowments and private individuals. Programs include core/core-plus, value-added and opportunistic strategies through separate accounts

and commingled equity funds, debt investment, global multi manager programs and listed global real estate securities vehicles.

A cornerstone of CBRE Global Investors is a timely, disciplined research process. Our dedicated global Investment Research Group provides a strategic understanding of both

local real estate markets and global economic and capital markets trends, which shapes highly informed real estate investment strategies and decisions.

DOUG HERZBRUN, GLOBAL HEAD OF RESEARCH

Mr. Herzbrun is responsible for CBRE Global Investors' research activities. He directs

strategic analysis of the economies, capital markets and property markets in North America, Europe and Asia. These analyses support the portfolio management and acquisition processes, and the development of new product concepts. He communicates research insights to the firm’s clients and prospects, and to the real estate community. He serves on the Global, Americas and Global Multi Manager investment committees.

Mr. Herzbrun has over 32 years of real estate investment research experience. He joined CBRE Global Investors in 1984 after four and one-half years with Coldwell Banker Real Estate Consultation Services.

Mr. Herzbrun received a B.A. in History from the University of California at Berkeley and a

Master of City and Regional Planning from Harvard University. He is a member the Education Committee of the National Council of Real Estate Investment Fiduciaries (NCREIF) where he is an instructor at their Academy program series. He is also a member of the Research Affinity Group of the Pension Real Estate Association (PREA), and of the Urban Land Institute (ULI).

SABINA KALYAN, GLOBAL CHIEF ECONOMIST

Based in London, Sabina is responsible for developing CBRE Global Investors’ house views on the outlook for the global economy and financial markets, and analyzing their

impact on real estate markets. She has been with the company for four years, and prior to this role, was the European Head of Research.

Sabina joins CBRE Global Investors from IPD where she was Chief Economist. Prior to this she worked for Capital Economics, where she developed their UK residential and commercial property market analysis and forecasting service.

Sabina studied economics at Lincoln College, Oxford University and is a member of the Society of Business Economists, the Society of Property Researchers and the Investment Property Forum.

1 Assets under management (AUM) refers to fair market value of real estate-related assets with respect to which CBRE Global Investors provides, on a global basis, oversight, investment management services and other advice, and which generally consist of properties and real estate-related loans; securities portfolios; and investments in operating companies, joint ventures and in private real estate funds under its fund of funds program. This AUM is intended principally to reflect the extent of CBRE Global Investors' presence in the global real estate market, and its calculation of AUM may differ from the calculations of other asset managers. As of June 30, 2012.


This document has been prepared by:

Andrew Angeli

Marije Braam

Isaac Carrascal

Annabelle Cavin

Juliet Cha

Angela Du

Doug Herzbrun

Maarten Jennen

Johan Kamminga

Sabina Kalyan

Danny Lee

Joaquin Linares

Christian Muller

Sandy Padilla

Eugene Philips

Chas Sun

Els Swaen

Shane Taylor

Marcel Theebe

Shinnosuke Tomita

Jaap Van Berkel

REGIONAL HEADS OF RESEARCH

NORTH AMERICA EUROPE ASIA PACIFIC

DOUG HERZBRUN Global Head of Research [email protected] TEL: + 1 213 683 4238

EUGENE PHILIPS Head of European Research [email protected] TEL: +31 20 202 2337

SHANE TAYLOR Head of Asia Pacific Research [email protected] TEL: +852 2846 3042


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Global vision q4 2012 final

Real Estate

Transcript of Global vision q4 2012 final