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International Real Estate: An Examination of Risks

International Real Estate: An Examination of Risks. Gary A. Zdolshek, Principal November 2007 www.idrfof.com. We Recognize International Real Estate Benefits. Diversification: Currency, GDP, Return Performance Exposure to Growth Economies with Different Industry Composition

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International Real Estate: An Examination of Risks

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  1. International Real Estate:An Examination of Risks Gary A. Zdolshek, Principal November 2007 www.idrfof.com

  2. We Recognize International Real Estate Benefits • Diversification: Currency, GDP, Return Performance • Exposure to Growth Economies with Different Industry Composition • Potential to Protect Capital in Domestic Market Cycle Downturn • Expands Investment Grade Universe • Pension Acceptance/Should be Supported by Capital Flows • Strong Return History: Distressed Debt Recovery, Cap Rate Compression, Strong Fundamentals 2

  3. We Recognize International Real Estate Benefits But... 3

  4. Transparency Remains an Issue • Transparency of Markets Changes Investment Risk • Example: South Korea- Arrests, Imposition of Taxes Source: LaSalle 4

  5. GDP Growth Leads to Infrastructure Needs Sources: World Bank, American Society of Civil Engineers, ProjectFinance, A&L Goodbody Consulting, RailPage Australia, Business New Zealand, Government of India Map from Deloitte Research: Closing the Infrastructure Gap 5

  6. Asia is Huge, Europe is Similar Size to U.S. … Europe’s Largest Cities U.S. Largest Cities Source: Wikipedia, Various Sources 6

  7. Global Total = $24.6tn Global Investible = $16.2tn Global Invested = $9.8tn Invested stock US$3.2 trillion Investible stock US$6.1 trillion Total stock of US$9.2 trillion Europe Invested stock US$1.9 trillion Invested stock US$4.7 trillion Investible stock US$3.5 trillion Investible stock US$6.6 trillion Total stock of US$5.9 trillion Total stock of US$9.5 trillion Asia America …but Real Estate Markets Not Tied to Population Note: Estimates as at end 2006 Scale of Total, Investible and Invested Real Estate, by Region Source: RREEF/DB Real Estate, DTZ, ULI/PWC 7

  8. Investment Returns are Highly Volatile… • International real estate provides access to higher returning opportunities • Location becomes an important variable in determining risk adjusted returns Source: ING Clarion, S&P Citigroup, IDR Green indicates the best annual performance, yellow indicates the worst annual performance 8

  9. …as is Foreign Currency and Inflation • Inflation Rates in the former Soviet Union (FSU), Latin America, the Middle East, and Africa are Much Higher than Those of Developed Nations and the United States. • Investment in Foreign Currencies Increases the Volatility of Investment, Sometimes Favorably and Sometimes Unfavorably. The U.S. Dollar is Trading Near All Time Lows. Source: US Dollar Index, InvestmentTools.com 9

  10. Capital Flows have been Strong… Source: Real Capital Analytics, Jones Lang LaSalle, Morgan Stanley (1) As of September 2007 10

  11. …but Investment Markets Aren’t As Large 11

  12. …And Cap Rates Don’t Illustrate Arbitrage Sources: Prudential, IDR, Government Websites Data as of Nov. 2007 12

  13. Conclusion • International Real Estate Needs to be Carefully Analyzed and the Decision to Invest Should be a Strategic Objective • Growth Catalysts and Risk Exposures Need to be Considered and Understood • Correlation of Population Size to GDP Growth and Real Estate Markets is Limited TO THINK ABOUT: • Are Recent International Returns Fueled by Capital Flows, Improving Fundamentals, or Macroeconomic Issues? • International Real Estate Expands the Investment Grade Universe, but is the Risk/Return in Balance? • Performance Has Been Strong, But Will Future Performance Follow? 13

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