Real Estate Risk Mindsets: A Comparative Study in Brazil and Germany

1. Presentation prepared for the 16th European Real Estate Society Conference June, 2009 – Stockholm, Sweden MIND-SETS TOWARDS REAL ESTATE RISK: AN INITIAL COMPARISON BETWEEN BRAZILIAN AND GERMAN INSTITUTIONAL INVESTORS Rogerio Fonseca Santovito, M.Eng. Doctoral researcher, Polytechnic School, University of São Paulo João da Rocha Lima Jr. PhD Head professor - Real Estate Research Group

2. Research objectives • To provide theoretical basis and a methodology for institutional investors – mainly Brazilian pension funds - to properly consider real estate assets in their investment portfolios. • To get evidence on the impact that recent global financial markets crisis , and the reflexes on real estate markets, might have had on institutional investors’ investment decision making. • Initial step: to identify which influence factors Brazilian institutional investors recognize as relevant to their decision making processes.

3. Surveymethodology • Interviews: initial perceptions (context & factors of influence) • Literature review - international literature: • Morrison (2006) makes an analysis on the types of investors who operate in the capital market the U.S., identifying the profiles of investment directed to the assets of real estate. • Worzala et alli (2004) identifies the needs of institutional investors in United Kingdom, United States, Australia and Germany. • French, (2001) identifies risk perceptions of institutional investors from UK, especially pension funds managers.

4. Surveymethodology • Pfnuer and Armonat (2001): the authors accomplished a wide survey with German institutional investors. • results were systematized and made fully available, thus giving excellent conditions for the execution of comparative analyses; • similarities of real estate markets ‘context’; • Polytechnic School of USP and TechnischeUniversität Darmstadt already have a history of successful collaboration within under-gradate courses. • Study of the documentation from the original research accomplished in Germany, • Questionnaire design (to Brazilian context)

5. Questionnaire design • In general terms, the influence factors that can affect the performance of real estate investments are classified by: • the structural characteristics of a specific project, and by • the evolution of the general conditions of the environment. • Minor adjustments to Brazilian context were necessary • Pilot survey (six professionals) : • Large (top-three) Brazilian pension fund manager • Smaller Brazilian pension fund manager • Large asset manager representing international pension funds • Smaller asset manager representing international pension funds • Mature (more than 5 y. of experience) national investment fund • New (less than 5y. experience) national investment fund Sample size does not allows for generalization of the results, but validates the use of the resultant questionnaire.

6. Why institutional investors? – The context • Brazilian economy – recent developments: • [i] the acknowledgment to Brazil, by major international agencies of risk classification, of a sovereign risk classification that put the country into the Investment Grade category. • [ii] the recent progress on capital openings (IPO's), mergers and acquisitions of Brazilian real estate development companies. • [iii] the existence of margins, within regulatory limits, to increase the institutional investors' allocation of investments to real estate assets.

7. Why institutional investors? – The context It is estimated a contribution of capital in the real estate sector of $ 8.3 billion, derived from the IPO processes. Pension funds allocations in RE are proportionally small.

8. How RE investments are managed? • Managers recognize short term and long term opportunities for real estate investments, but the risk & return for each is not properly considered; • Individual projects are considered and analyzed, but with little or no consideration for the mixed-asset portfolio; • Real estate investment is usually seen as high-risk mostly due the lack of market information. Managers rely on past experience to manage real estate investments. • Several pension funds managers are concerned with the direct cost of monitoring, due to the fact that Brazil is a continental country, and monitoring direct investments incurs in a large contingent of people and resources.

9. Pilot-testresults • Factor of influence - preliminary comparison: Source: Author’s survey results and Pfnuer & Armonat (2001, 2004)

10. Final considerations • Extrinsic factors: improve market information system cannot be taken as the one and only solution to the problem. • On intrinsic factors: because of the high volume of technical information available, operational performance should be consolidated and translated into parameters, in such a way that is appropriate to support the actions of the investment manager, in an agile and timely manner.

11. Presentation prepared for the 16th European Real Estate Society Conference June, 2009 – Stockholm, Sweden Thank you very much for your attention Rogerio Fonseca Santovito, M.Eng. rogerio.santovito@poli.usp.br www.realestate.br