Real Estate Investment Strategies

1. Real Estate Investment Strategies Pol R. Tansens – March 2012

2. Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised Where to invest today? Residential markets Commercial markets Conclusions Summary

3. Still negative real interest rates (inflation!), especially in Asia Major signals to real estate investors Negative real interest rates Making property investments popular to combat inflation

4. 1Demand-pull inflation: inflation stemming from stronger demand for products and services, normally leading to higher revenues (rents) 2Cost-push inflation: inflation stemming from higher commodity prices (pushing up interest rates – thus funding costs - without necessarily producing higher rents in exchange) Major signals to real estate investors Real estate and inflation perspectives Values and rents tend to be correlated with demand-pull inflation1, enhancing returns on equity But cost-push inflation2 may have an adverse impact on real estate financing If you have access to debt today “if” , rates are (still) reasonable It is time to secure the cost of funding !

5. Different property drivers Major signals sent to real estate investors

6. Major signals sent to real estate investors C) Stock market volatility Real estate securities were very volatile in 2011, which does not necessarily reflect the health of the underlying property markets Sentiment for real estate securities was particularly negative in Asia Given current and projected inflation rates Given government measures to cool the markets

7. Major signals sent to real estate investors Returns in the long run (source: EPRA, total return = share price performance + dividends, expressed in local currency)

8. Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised Where to invest today? Residential markets Commercial markets Conclusions Summary

9. Real estate becomes increasingly polarised • The real estate investment world is getting increasingly ‘polarised’ • Leading to substantial differences in (expected) performances Between mature and emerging markets Asia and Latin America Europe and the US vs. Between the various property sectors Offices Retail vs. Within each sub-market Examples: Paris, London, New York

10. Real estate increasingly polarised • On the other hand, the world is progressively investing in the ‘right’ asset classes • On the one hand, the world is getting rid of • Excessive leverage (coupled with re-financing issues) • Excessive oversupply • Property asset classes which are currently “underperforming’’ This process may take several years. Examples: • Residential assets along the Spanish costas, Ireland, specific areas in the US • Secondary office buildings across the world (subject to re-development) • Which are considered as good alternatives to other (often lower-yielding) asset classes Examples • Energy-efficient buildings (the ‘green’ revolution) across the world • Secured-cash flow prime commercial buildings across the world • Residential assets in specific mature and emerging countries alike (Benelux, France, Switzerland, Brazil, Asian countries, …)

11. Real estate increasingly polarised • The dichotomy between prime1 and secondary markets is widening, with: • Significant investor demand for prime product that is often difficult to find • Leading to lower gross initial yields (capitalisation rates) • Secondary buildings gradually being phased out of specific markets • Leading to higher gross initial yields • The search for energy-efficient buildings (Are tenants willing to accept higher rents – How can the green advantages be quantified properly?) 1Prime markets refers to market composed of best-quality buildings, located in top locations.

12. Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised Where to invest today? Residential markets Commercial markets Conclusions Summary

13. Where to invest today within the Real Estate universe? General rule: We should be at the right side of the investment universe!

14. Where to invest today? Residential real estate

15. Where to invest today ? Commercial real estate (1/2) Emerging and mature markets alike  Investments should be made in prime assets (unless investors are willing to take substantially higher risks)  Offices – still the most important asset class – should be energy-efficient • The future is rather grim for existing stock  Retail is in many countries – but not in all countries - considered as less cyclical • Especially in Continental Europe (due to strict planning regulations) Although Logistics is cyclical, it carries a high cash yield today, which may be attractive   Although return expectations should not be overestimated in the near future, we think they will remain acceptable to investors

16. Return perspectives for commercial real estate (2/2) Consequently, return on equity – after reasonable gearing – should be in the region of 10-15% for 2012 Consequently, return on equity – after reasonable gearing (50%) – should be in the region of 7% for 2012

17. Return perspectives for residential real estate Consequently, return on equity – after reasonable gearing – should be in the region of plus 0-15% for 2012 Consequently, return on equity – after reasonable gearing (50%) – should be in the region of minus 10 to plus 5% for 2012

18. Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised Where to invest today? Residential markets Commercial markets Conclusions Summary

19. Conclusions • The world is sending major signals to real estate investors. Real interest rates are negative in many areas, and property drivers are different across the globe • As a result, global real estate is increasingly subject to polarisation. Consequently, investors should be advised to be at the right side of the investment universe • For residential real estate in the mature markets, investments should be made in these areas considered as being ‘good’ . Poorly performing markets are rather cheap, but may remain inexpensive for a longer while. In the emerging markets, investors are increasingly favouring affordable housing development schemes • For commercial real estate – whether located in the mature or the emerging markets – investments should be predominantly ‘prime’ (unless investors are willing to take substantially higher risks)

20. Pol R. Tansens Head of Real Estate Investment Stategy pol.tansens@bnpparibasfortis.com Thank you for listening !