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Money into Property - Global 2012

May 11, 2012
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Money into Property Global 2012 Managing uncertain growth

26 April 2012 Contents
Introduction Section 2 ­ Current sentiment Section 3 ­ Our key views Appendix 2 7 11 15 Section 1 ­ Sizing of the market 3



Despite a weaker external environment, global property markets continued to move ahead in 2011, helping set a new record for global invested stock. In the regional rankings, Asia Pacific overtook North America to become the second largest region globally. o Asia Pacific showed 13% growth in invested stock in 2011, compared to an 8% increase in European stock and no growth in North America. A weak US dollar boosted growth across all non-US markets when expressed in US dollar terms. Deleveraging continued in North America and Europe last year, albeit at a slower pace. Asia Pacific joined this global trend for the first time in 2011. Global investment volumes rebounded by 9% in 2011. This rebound was led by North American and European markets with volumes increasing by 26% and 15% respectively. Asia Pacific volumes were just below their record level set in 2010.

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o

Authors
Kasia Sielewicz Forecasting & Strategy Research +44 (0)20 3296 2322 kasia.sielewicz@dtz.com Tony McGough Global Head of Forecasting & Strategy Research +44 (0)20 3296 2314 tony.mcgough@dtz.com Hans Vrensen Global Head of Research + 44 (0)20 3296 2159 hans.vrensen@dtz.com

Our global investors' and lenders' surveys indicate that market players are generally less optimistic compared to one year ago; but sentiment in Asia Pacific is much less negative than in Europe and North America. o In EMEA and North America, a large proportion of lenders expect a decrease in new lending and tighter terms and conditions. Asia Pacific lenders expect more growth reflecting less restrictive credit conditions and a stable regional economic outlook. Investors have become more realistic about growth of their net investments, with a higher proportion expecting a decrease this year, reflecting the return of risk aversion and associated difficulty sourcing prime property.

o



We expect continued focus on the remaining uncertainty in the current economic, political and regulatory outlook. To address this, we consider a number of possible economic scenarios. Looking forward, we expect Asia Pacific to drive global growth in invested stock under the base case. Under the downside scenario, we expect Asia Pacific to overtake Europe to become the largest region more quickly. o o In Europe, we anticipate that new capital reserve requirements will force more banks to deleverage in the next few years. Transaction volumes are expected to remain strong in Asia Pacific, although policy initiatives could have a significant impact. In Europe we expect subdued investment volumes as negative sentiment spreads across the region. Many attractive investment opportunities remain across all prime regional markets, as quantified under the latest DTZ Fair TM Value Index results for Q1 2012.
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Money into Property Global 2012

Introduction
We are very pleased to present the 38th year of Money into Property. The focus of this report is Global. We have published similar reports for Asia Pacific, Europe and the UK. This report has three main sections. The first section provides a detailed review of year end 2011 invested stock and transaction volumes. Invested stock is defined as investment-grade commercial real estate held by investors. Invested stock is differentiated from owner occupied real estate, both investment and noninvestment grade (Figure 1 and Box 1). A large share of owner occupied stock is non-investment grade and therefore not of interest to investors. In fact, 36% of the global total stock is considered to be non-investable. The majority of investable stock (which is the focus of this report) is already invested (Figure 2). In the second section we share the findings of our investors' and lenders' surveys which were undertaken between February and March 2012. The surveys provide an insight into current sentiment and together with our Fair Value methodology provide an indication of opportunities in real estate throughout the region. In the final section we provide our outlook for invested stock and capital flows in 2012 and also consider key policy changes and their potential impact on the markets. The appendix provides an overview of definitions and methodologies used.

Figure 1

Conceptual breakdown of total stock

Non-investable owner occupied stock

Total stock

Investable owner occupied stock

Investable stock
Invested stock

Source: DTZ Research

Figure 2

Breakdown of total stock, 2011, USD tn
9.6
17% 32% 53% 36% 27% 15% 47% 25% 36% 9.2 12.4 31.2 Non - investable owner occupied stock

Investable owner occupied stock

41%

31%

39%

Invested stock

Europe
Source: DTZ Research

North America

Asia Pacific

Global

Box 1: Stock definition
Total stock is the total value of the commercial real estate universe. Total stock comprises non-investable owner occupied stock, investable owner occupied stock and invested stock. Non-investable owner occupied stock is the value of commercial real estate that is not available to investors due to use or quality of the property. Investable owner occupied stock is the value of commercial real estate stock that is currently held by occupiers but is attractive to investors in terms of use and quality of the property. This represents potential for investors as occupiers sell their properties or undertake sale and leasebacks. Invested stock is the value of commercial real estate held by investors in the relevant country. As a consequence the invested stock should:a) Rise as owner occupiers sell property to investors b) Rise as new developments are unveiled and added to the invested stock c) Rise with the general rise in capital values Figure 1 d) Be negatively impacted by depreciation and retirement of stock.

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Money into Property Global 2012

Section 1 ­ Sizing of the market
Invested stock trends
Global invested stock sets new record in 2011 Despite moderate growth, as predicted, global invested stock established a new record of USD12.1tn in 2011. When measured in fixed exchange rates, invested stock grew by 4% compared to 3% in 2010 (Figure 3). In floating US dollar terms, Asia Pacific grew 13% followed by 8% for Europe and less than 1% in North America. Our forecasts last year proved accurate for Europe and Asia Pacific, while invested stock in North America did not grow by as much as we anticipated. Asia Pacific surpasses North America to become the second largest region globally As expected, Asia Pacific has overtaken North America to become the second largest region globally, with invested stock edging towards the USD4tn mark. Growth in invested stock in North America was weaker than expected, but at least did not move into negative territory. Meanwhile, a weak US dollar boosted growth across all other markets. Europe saw 8% growth in US dollar terms compared to 5% growth in local currencies. Similarly, nearly half of Asia Pacific's 13% headline growth was due to the weakness of the US dollar (Figure 4). Figure 5 (on next page) provides a detailed view on the individual country level performance as well as a breakdown by quadrant which we will discuss later in the report.

Figure 3

Global real estate invested stock, USD tn
2010 growth with fixed exchange rate 3% 2011 growth with fixed exchange rate 4%
14 12 12.1 Global 2011 growth 7%

10.9
4.2

11.3

10
8 6 4 2

4.1 4.5

Europe

8%

North 3.7 3.7 3.7 America

0%

Asia 3.0 3.4 3.9 Pacific

13%

0

Source: DTZ Research

Figure 4

Change in invested stock, 2011
13%

8% 7% 7%

5%

0.5%

0.4% Europe in USD Asia Pacific in local currency Global

North America

Source: DTZ Research

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Money into Property Global 2012
Figure 5

Global real estate invested stock, 2011

Canada USDbn 227

South Korea USDbn 155

United States USDbn 3,506 Netherlands EURbn 191

Sweden EURbn 108

Guangz
Japan USDbn 1,369 Hong Kong USDbn 219 Malaysia USDbn 57

China USDbn 1,283 India USDbn 43 Russia EURbn 101

United Kingdom GBPbn 537

Poland EURbn 43 Germany EURbn 474

Thailand USDbn 26

% growth in invested stock from 2010 (in local currency)
< -5% -5% to 0% 0.1% to 5% 5.1% to 15% > 15% Countries not covered

France EURbn 492 Singapore USDbn 124

Spain EURbn 342

Italy EURbn 263

Australia USDbn 453

Invested stock by source of capital Private equity Private debt

New Zealand USDbn 34

Public equity

Public debt
Source: DTZ Research, ESRI

Source: DTZ Research

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Money into Property Global 2012

Sources of capital
Global debt returns to growth, but equity still stronger

Figure 6

Global invested stock by capital source, USD bn
11,612 12,110 10,938 2011 growth

Private debt returned to growth in 2011, joining both private and public equity in their continued resurgence (Figure 6). Private debt added USD330bn to total invested stock in 2011, a tenfold increase from the previous year. Even so, this was still significantly below the USD493bn of added equity, predominantly private. In contrast, public debt continued to stagnate, falling by 1% during the year. Deleveraging pace slowing, but Asia Pacific joins in
2008

11,302
3,980 3,560 834 1,491 Private equity 12%

761 1,506

Public equity Public debt

10% -1%

5,475

5,806

Private debt

6%

2009

2010

2011

All regions are now reducing the share of debt in invested stock, as in 2011 Asia Pacific has joined the global trend started in 2010 (Figure 7). But the speed of deleveraging has slowed in North America, with the average loan-to-value (LTV) ratio falling by 2% to 67% in 2011, after a fall of 5% in 2010. European LTVs fell below 60%. At 58%, the average European LTV remains 2% below the global average. Despite this, LTVs remain as elevated as they were in 2007 near the peak of the cycle. Deleveraging driven by higher equity than debt growth Even though debt growth has turned positive in 2011, faster growth in equity has driven regional leverage ratios down. This is especially the case in Asia Pacific, where debt growth has remained strong, but is still surpassed by equity (Figure 8). Europe saw equity grow by double the rate of debt driving down LTV ratios. This represents a change from last year, when the decline in leverage was driven by debt actually declining in all regions except Asia Pacific. In 2011 North America was the only region that showed a continued decline in debt.

Source: DTZ Research

Figure 7

Total debt as percentage of invested stock
80%

75%
70% 65% 60% 55%
Europe Global North America

74% 69% 67% 64%

62%
60% 62% 60% 56% 55% 58% 55%

50% 45% 40% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Asia Pacific

Source: DTZ Research

Figure 8

Change in debt and equity, in USD terms
2010
20% 2011

15%
10% 5% 0% -5% -10%
North Europe Asia Global America Pacific North Europe Asia Global America Pacific

Change in debt

Change in equity

Source: DTZ Research

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Money into Property Global 2012

Transaction volumes
Global investment volumes up 9% in 2011 Despite an increase in invested stock, total transaction volumes in Asia Pacific in 2011 were below 2010 levels (Figure 9). During the year, North America and Europe showed a strong recovery in volumes with Europe overtaking Asia Pacific as the most actively trading region. Asia Pacific most liquid regional investment market Asia Pacific is the most liquid of the regional investment 1 markets, with an average liquidity ratio of 4%, slightly below the global average of 3% (Figure 10). Singapore is the most liquid market globally, with a liquidity ratio of 12% due to prolific REIT activity on the investment market and relatively small invested stock. However, when excluding land sales, which is a large proportion of transactions in developing markets of China and India, Asia Pacific's liquidity ratio more than halves to under 2%. In Europe the highest liquidity ratios can be found in the CEE markets, in Czech Republic (8%) and Poland (6%) in particular. In the Nordics, we also see above average liquidity. Despite this, we expect that investors will continue to focus on the UK and German markets where market activity is buoyant. North America is the least liquid at 2% in 2011 as the US transactions volumes remain muted and are below levels recorded at the peak of the market in 2007. Domestic investment dominates activity Domestic players continued to dominate global investment activity accounting for 80% of total investment in 2011. The cross-border activity remained unchanged, accounting for 20% of market activity (Figure 11). There was no change in the makeup of foreign investors on the global level. However, in Asia Pacific the intra-regional investors (i.e. investors from home region) increased their cross-border investment during the year, while in Europe the foreign investment was led by inter-regional investors (i.e. investors from outside the home region).

Figure 9

Global investment volumes, USD bn
700 600 500 400 300 388 356 61 199 37 89 158 73 0 2005 2006 2007 2008 2009 2010 2011 154
Asia Pacific -3% Global North America Europe

2011 growth
9% 26%

76 157

200 100

137

15%

Source: DTZ Research, Reis Services LLC, RealNet, Property Data

Figure 10

Liquidity ratios, 2011
Asia Pacific 14% 12% 10% 8% 6% 4% 2% 0% Europe North America

Source: DTZ Research

Figure 11

Global investment activity
11% 10% 9% 11% 9% 11%

79%

80%

80%

2009
1

2010 Intra-regional

2011 Inter-regional

Defined as the turnover of the market in relation to total invested stock

Domestic

Source: DTZ Research, Reis Services LLC, RealNet, Property Data

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Money into Property Global 2012

Figure 12

Section 2 ­ Current sentiment
Our lenders' and investors' surveys illustrate the prevailing market sentiment, which we expect to impact actual future performance.

Expectations for new lending and changes in terms and conditions
Gross new lending 14% 37% 36% 57% Down 10% Overall market lending terms and conditions 13% Tighten

64% 51%

Same

Lenders' survey
41%

Same

Lenders expect less new lending and tighter conditions Our survey of lenders, conducted in February and March of this year, paints a fairly pessimistic outlook for 2012 in comparison to last year; only 22% of respondents expect to increase new lending compared to half last year (Figure 12). A large number of lenders expect terms and conditions to tighten even further in 2012 in anticipation of a slow recovery (64% compared to 10% in last year's survey). These conditions are not anticipated to last for long though as one third of respondents expect the market to relax in 2013. Asia Pacific lenders three times more optimistic and European lenders three time less optimistic now Global lenders' pessimistic sentiment in 2012 is largely confined to EMEA and North America. There has been a threefold increase in the proportion of lenders (33%) expecting to increase new lending in Asia Pacific compared to last year (Figure 13). This reflects less restrictive lending conditions in the region that is expected to propel global growth. More progress on non-prime workouts during 2011 The working out of loans is well underway for prime property (Figure 14). Lenders' view of progress in 2012 is similar to the responses of the 2011 survey: only 15% state that the prime asset workouts are left to do compared to 20% last year. With non-prime property, 43% of the work-out is not yet started. This is 10% less than in last year's survey. In short, our lenders' survey shows that more progress has been made on working out nonprime versus prime collateral during the year.

50% 33% 22%
2012 2012 (2011 survey) (2012 survey)

30%

Relax 36%

Up

6%
2012 2012 2013 (2011 survey) (2012 survey) (2012 survey)

Source: DTZ Research

Figure 13

Expectations for new lending per region
8% 9% 11% Down 22% 30% 11%

56% 75% 82% 78% Same 67%

60%

33% 17%
North America

9%
EMEA

11%
Asia Pacific

Up

11%
North America

10%
EMEA Asia Pacific

2011 survey

2012 survey

Source: DTZ Research

Figure 14

Lenders' assessment of progress in loan workout
15%
5%

Have already finished

15%

42% Well underway 65% 70%

57%

53% 20% Prime Non-prime

43% Not started yet 15% Prime Non-prime

2011 survey

2012 survey

Source: DTZ Research

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Money into Property Global 2012

Lenders shift preference to prime asset lending Lenders intentions for exposure by asset class favour prime by a wide mark. 64% of lenders plan to increase their lending secured on prime, up from the 40% in last year's survey. In contrast no lenders wish to increase their non-prime exposure, a response that illustrates a continued `flight to quality'' in lending (Figure 15). On the contrary, 64% of lenders want less exposure here, compared to 33% last year. Aversion to lending for speculative development has deepened. There is very little development finance being made available, and only for pre-let schemes. Even here positive intentions have reduced since last year's survey. Basel III expected to have the largest negative impact on lending Looking forward, there are an increasing number of regulatory reforms being put in place as a response to the global financial crisis. When comparing the survey results of both lenders and investors, it is clear that the biggest majority of lenders (76%), and investors (60%), expect Basel III will have a negative impact among the reforms proposed (Figure 16). A smaller proportion of lenders and investors expect a negative impact from Solvency II and the EBA capital adequacy regulation, but the responses still reflect a broad-based expectation of reduced lending as a result. Lenders more negative than investors on impact from regulatory changes Both lenders and investors now expect regulatory reforms to have on balance a negative impact on property markets (Figure 17). Compared to 2011, both lenders and investors have become more negative. However, lenders are now nearly twice as negative compared to investors. This is a worrying sign for investors going forward, as we suspect that lenders may be in a better position to assess the impacts of pending regulations on lending than investors.

Figure 15

Lender intentions for loan book exposure, 2012

36% 60%

33% 64%

27% 55%

17%

27%

67% 64% 64% 40% 67% 36% 9%
2012* 2012 2012* 2012 2012* 2012

64% 45%

17%
2012*

9%
2012

Prime assets
Up
* depicts 2011 survey results

Non-prime assets Same

Speculative development

Pre-let development Down

Source: DTZ Research

Figure 16

Impact of regulatory reforms on lending, 2012

39%
60% 73% 76%

39% 52% 52%

49%

58% 34% 22% 4% 3% 16%

61%

40%

38%

46%

9%

7%

9%
Lenders Investors

10%

5%

Lenders Investors

Lenders Investors

Lenders Investors

In General Positive Up
Source: DTZ Research

Basel III

Solvency II Neutral Same

EBA estimated capital shortfall Negative Down

Figure 17

Impact of regulatory reforms on lending
Investors Lenders

36%

39%

Negative

47%
73%

Neutral

58%

58%

53%
Positive 6% 2011 survey 3% 2012 survey

22%
4% 2011 survey 2012 survey

Source: DTZ Research

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Money into Property Global 2012

Figure 18

Investors' survey
Investors become less optimistic on net investments Our survey findings show that on balance net investment globally is expected to increase in 2012 (Figure 18). However, the majority of respondents expecting to increase net investment have declined since 2010, from 76%, to 57%. Five times as many investors expected net investments to decrease (31%) compared to a year ago (6%). This reflects mounting caution in the market due to increased risk on the back of the continuing European sovereign debt crisis as well as difficulty in sourcing the right product. More competition in sourcing opportunities for prime The increased risk aversion of investors has led to increased competition for the best properties. Investors are finding it much more difficult to buy prime properties in 2012 compared to 2011 (Figure 19). In last year's survey, opportunities in the non-prime market were seen as more difficult to access. But, while a significant portion of investors (34%) still regarded non-prime as difficult to access, now a greater proportion (37%) see it as easy to source in 2012. This suggests that, with prime product keenly priced and very competitive, non-prime property has already become a more important target to a bigger section of the investor base. Decline in bank debt offset by increase from institutions

Net investment expectations in real estate
10% 6% 31% Down

14%

28%

11%

Same

76% 66% 57% Up

2010 survey

2011 survey

2012 survey

Source: DTZ Research

Figure 19

Global buying opportunities by property grade
Prime
4% 22% 60% Hard 30% 34% Non-prime

43% 74% Normal

29%

29%
37%

28%
11% 2011 2012 Easy 2011 2012

Nearly 70% of investors expect bank debt to decline during 2012, a near tripling from the 25% in last year's survey. The only category of debt expected to increase is from institutions, with 58% of investors projecting an increase (Figure 20). In fact, debt from institutions is expected to increase more than any other source of finance. Expectations for bonds and mezzanine finance have declined from last year's survey.

Source: DTZ Research

Figure 20

Expectations for availability of finance by lender
9% 25% 32% 10% Down 10% 19%

43%
27%

45%

Same

69%

44%

58% 48% 47% 44% Up 20% 11% Institutions Bank Other* Institutions Bank Other* 37%

2011 survey
*Other covers corporate bonds, CMBS and mezzanine finance
Source: DTZ Research

2012 survey

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Money into Property Global 2012

Bank lending is expected to drop most in EMEA and least in APAC The global decrease in commercial bank lending is largely explained by the significant expected decrease in EMEA, and to a significant extent in North America as well (Figure 21). In EMEA mezzanine finance and debt from institutions is expected to compensate for this reduction. In North America expectations for institutional funding are evenly balanced between growth and decline. In Asia Pacific debt from institutions is viewed as less important than bank lending, but it is corporate bonds which are expected to increase the most out of any source of finance. Half of EMEA investors in talks with banks on loan amendments Half of investors in EMEA and 75% in North America are in talks with banks on loan amendments and/or extensions (Figure 22). This contrasts with Asia Pacific where just over a quarter of investors are in a similar position. This is consistent with the global leverage ratios shown earlier. If loans are unable to be refinanced or extended then investors continue to favour equity injection as their most preferable solution. Partial loan repayment comes second in rank followed by consensual asset sales. Equity investments in property loans likely to be part of solution going forward

Figure 21

Expectations for availability of finance, 2012
15% 50% 31% 85% Normal 50% 50% Down 10% 11% 25% 36%

54% 13% 2%

50% Up

53% 40% 25%

Asia Pacific

EMEA

North America

Asia Pacific

EMEA

North America

Commercial bank lending

Debt from institutions

Source: DTZ Research

Figure 22

Investors' exposure to loan workout, 2012
9% 18% Extension and restructuring

39%
50%

44%

38%

11% 14% 73% 50% 25% 25%

14%

Extension only

42%

48%

No

Asia Pacific

EMEA

Equity investors' own involvement in bridging the overall market's financing gap is gradually increasing. Forty two percent of investors acknowledge that they have invested in property loans or engaged in partial equity positions. This is up by over a third from the 31% in 2011 (Figure 23). And among those who responded positively, the balance between investment in loans and in equity positions has now shifted to the former. Further movement of investors into property loans seems a possibility, but may be limited as the proportion of those not involved lacking capacity, as opposed to interest, is increasing.

North America

Global

Overall average

Source: DTZ Research

Figure 23

Investors' exposure to loan and equity positions
Yes No

Yes

Both 31% 42% 40% 32% 51% 65% No interest

20% No 69% 58%

42%

Property loans 49% No capability

40%
26%
2011 2012 2011 survey 2012 survey survey survey 2011 2012 2011 survey 2012 survey survey survey

Equity position

35%

2012 2011 2011 survey 2012 survey survey survey

Source: DTZ Research

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Money into Property Global 2012

Section 3 ­ Our key views
New European banking regulations are expected to accelerate deleveraging In addition to the Basel III regulation mentioned above, banks have been confronted with the European Banking Authority's (EBA) stress testing results. Furthermore, the European Central Bank has announced the LTRO (a 3-year term loan facility), which allows banks to delever over a longer time period. In our view, this should cushion the impact of the EBA 9% capital reserve requirements for July 2012. This rule is estimated to require European bank 2 deleveraging up to EUR3 trillion . Rules will increase the European debt funding gap Based on the assumption that commercial real estate loan books will be impacted in a proportion similar to the overall loan book, the European debt funding gap (the difference between maturing legacy debt and new debt available to replace it) will increase by up to 50%, i.e. an additional USD102bn bringing the total for Europe to USD226bn. Despite this increase, new equity capital and non-bank lending capital is expected to be sufficient to bridge the gap over the next three years. (Figure 24). Banks in Germany and France will be the most impacted by the EBA new requirement and their debt funding gap will increase accordingly by USD23bn and USD19bn respectively. Dutch banks will also face a huge increase in their debt funding gap to USD10bn. On a relative basis, Spain and Ireland continue to be the most exposed, with the highest debt funding gap compared to the size of the invested stock (Figure 25). Insurers are on track to bridge some of the gap We previously estimated there to be upwards of USD80bn (EUR60bn) of funding from insurance companies. More pension funds or insurance companies are now entering this market on the refinancing side or through new lending activity. In the end, we expect them to increase overall lending capacity and provide an additional USD150bn (EUR110bn) of new lending over 2012-14 (Figure 26). Europe appears as the most attractive region for their entry, as its debt funding gap is the biggest and the predominance of the banking sector is so problematic.
2

Figure 24

European debt funding gap 2012 -14, USD bn
50

40
30 20 10 0

Base

EBA 9% rule

Source: DTZ Research, Barclays Capital

Figure 25

European debt funding gap as % of invested stock
Debt Funding Gap as % of Invested Stock
18%

16%
14% 12% 10% 8% Hungary 6% 4% 2% 0% 0 1 10 Czech Republic Poland

Ireland

Netherlands

Sweden

Spain Germany UK Italy France

100

Debt Funding Gap 2012-14 USD bn (log scale)
Source: DTZ Research

Figure 26

Debt funding gap and available equity, USD bn
450 350 Additional USD 150bn available from insurers and other non-bank lenders 300 250 200

400
350 300 250 200

150
100

150
100 50 0 Global (LHS) Europe Asia Pacific North America

50
0

Available equity

Debt funding gap

DTZ Foresight, 2012 Global Outlook, 9 February 2012 Source: DTZ Research

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Money into Property Global 2012

Continued uncertainty triggers return of risk aversion Despite a solid recovery in 2011, the outlook for 2012 remains unclear as political, economic and regulatory changes continue. The related uncertainty has triggered a return of risk aversion from both corporate occupiers and investors alike. In Europe, sentiment deteriorated further over the final quarter of 2011. Despite efforts to contain the banking and sovereign debt crisis, there remain real concerns that one or more European economies will default on their debt leading to contagion across the region. In particular, after the Greek bail-out and the introduction of the LTRO facility, concerns have shifted to the capacity of Portugal, Spain and Italy to reduce their budget deficits as announced (Figure 27). Europe most affected, while Asia Pacific less affected by economic downside To deal with these uncertainties, we continue to consider alternative economic scenarios. The base case assumes a slow and steady recovery. Despite a recent downgrading, Asia Pacific GDP growth forecasts remain strong relative to Europe and the US in this base case scenario. This scenario assumes no disorderly default in the eurozone. The probability for the base case is at a low of 45%. The high level of global uncertainty is further confirmed by two downside (oil price spike and China hard landing) and one upside scenario (corporate reawakening). The probability of each of these is judged to 10%. However, the downside is best represented by the eurozone break-up scenario, which assumes up to five countries leave the eurozone. This has a 5% to 25% probability. The impact of the eurozone break-up scenario is more moderate for Asia Pacific than for Europe, with Asia Pacific growth supported by strong domestic consumption and intra-regional trade (Figure 28). Significant impact across European markets in downside scenario, industrial sector is most affected The Euro break- up scenario would impact prime capital values in 2012-2016, with the biggest declines in Europe (Figure 29). Capital value growth would, however, remain positive in Europe over the period, except for the industrial sector. Interestingly, Asia Pacific will see bigger impact than the US in this scenario.

Figure 27

Five-year government bond yields
20% LTRO announcement

LTRO II

16%

12%

8%

4%

0% Jan-11
UK

Apr-11
Germany

Jul-11
France

Oct-11
Spain Italy

Jan-12
Ireland

Apr-12
Portugal

Source: Bloomberg

Figure 28

Annual average GDP growth in %, 2012-16
5.6% 5.0% 5.2% 4.6% 4.2% 3.8% 3.5% 2.7% 2.9%

1.6% 1.2% 0.2% Eurozone Downside US Asia Pacific Base case Global Upside

Source: Oxford Economics

Figure 29

Prime capital values 2012-16, cumulative % change
Europe 20% Asia Pacific US

15%

10%

5%

0%

-5%
Office Retail Industrial Office Retail Industrial Office Retail Industrial

Base case
Source: DTZ Research

Downside

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Money into Property Global 2012

Invested stock forecasts
Moderate growth forecast to continue as capital values stabilise Based on our analysis of equity and debt flows across the globe, we forecast global invested stock to continue to rise in the next couple of years, with moderate growth of 4% in 2012 and 6% in 2013 (Figure 30). This compares to 7% growth in 2011. However in the downside scenario, global stock is projected to decline by 7% in 2012 with the three regions expected to register sharp declines, from -1% in North America to -14% for Europe. Forecast regional invested stock growth rates vary significantly The pace of the invested stock growth under base case will be significantly different across the regions, with Asia Pacific expected to post the fastest rate in 2012 (7%) and 2013 (10%), boosted by a strong stock growth (Figure 31). In North America, the ongoing recovery of capital values will be the main driver of the invested stock growth (4% each year) as development pipeline remains limited in this region. In Europe in particular capital growth has largely taken place already, but an increase in physical stock will ensure overall growth improves in 2013.

Figure 30

Forecast growth in invested stock
10% 5% 0% -5%

-10%
-15% -20%
2012 2013 2012 2013 2012 2013 2012 2013

Asia Pacific

North America

Europe Downside

Global

Base case

Source: DTZ Research

Figure 31

Forecast growth in invested stock by region and its constituent parts
12%
10% 8% 6% 4% 2% 0% 2012 2013 Asia Pacific 2012 2013 North America Capital growth
Source: DTZ Research

2012 2013 Europe Stock growth

2012 2013 Global

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Money into Property Global 2012

Investment volume projections
Global investment volumes expected to fall in 2012 Our expectation for 2012 is for global investment volumes to decrease due to lower activity in Europe and Asia Pacific, partly offset by moderate growth in the US. Investment volumes in Europe grew strongly in 2011, but activity in 2012 is expected to be impacted by weaker sentiment and the broader economic slowdown. Global investment activity is forecast to drop back to USD365bn in 2012, followed by a rebound in 2013 to USD395bn (Figure 32). US and Asia Pacific offer best value for investors The DTZ Fair Value Index currently stands at 57 (Figure 33). There are 69 HOT, 81 WARM and 42 COLD markets globally, with the US and Asia Pacific offering the most attractive investment opportunities. The score has improved in recent quarters in response to the more attractive pricing of property relative to other asset classes. In a low interest rate environment with subdued rates of return on many fixed income investments, property is offering relatively strong income returns, with many locations also offering investors the prospect of capital value growth over the medium term, once the economic environment stabilises. The US is offering the highest proportion of attractive markets, with 27 rated as HOT, while Asia Pacific has 24 markets rated as HOT. Very low rates of return on US treasuries make property an attractive investment. The stronger economic performance of countries such as China and Australia is expected to drive rental and capital value growth in the Asia Pacific region. There are also several attractively priced markets in Europe, with Germany and the UK in particular off ering solid income returns. Countries such as Spain, Italy and France, are enduring weaker economic conditions, and this is weighing down the European Fair Value score. Opportunities balanced across each sector
TM

Figure 32

Forecast of global investment volumes, USD bn

600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 388 76 365 395 95

356
61 137

85
140

157

155

158

154

140

145

Asia Pacific

Europe

North America

S ource: DTZ Research

Figure 33

Global Fair Value Index ratings by region
100% 46 18 80% 24 69 Hot

60

83

57

60%

27

54
40% 23 81

Warm

20% 26 0% Europe
Source: DTZ Research

4 12
Asia Pacific

42
4 US Global

Cold

Figure 34

Global Fair Value Index ratings by sector
100% 55 62 54 57

80%

33

10
26

69

Hot

60%

There are attractive opportunities across each sector, as shown in Figure 34. The retail sector currently has the highest index score of 62, followed by the office and industrial sectors with 55 and 54 respectively.

Warm 37 40% 25 19

81

20% 24 0% Office Retail Industrial Global (all property) 11

7

42

Cold

Source: DTZ Research

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Money into Property Global 2012

Appendix
Definitions
Invested stock refers to the value of investment grade commercial real estate held by different investor groups. The total value of the real estate capital market is defined as the total volume of commercial real estate debt outstanding plus the total value of equity in commercial real estate holdings. Private debt refers to the total outstanding loan value to the real estate sector that is not held in the form of listed financial securities. Loans granted and subsequently securitised prior to maturity are not included in this data. Private debt relates to the activity of all participants involved in the provision of commercial real estate loans including institutional lenders, commercial bank lending and insurance companies. Public debt refers to the total outstanding loan value to the real estate sector held in the form of listed financial securities, i.e. property company corporate bonds, covered bonds with commercial property as collateral and commercial mortgage backed securities (CMBS). Private equity refers to the equity proportion of the commercial real estate holdings of insurance companies, pension funds, private property companies, high net worth individuals and unlisted property vehicles. The debt proportion has been stripped out by applying a different gearing ratio for each investor group. Public equity refers to the equity proportion of the commercial real estate holdings of listed property companies, REITs and other listed property vehicles. The debt proportion has been stripped out by applying a different gearing ratio for each investor group. Gearing (or LTV) ratio is defined as debt/(debt+equity). The various investor groups have different gearing levels based on their risk profile, investment strategy, as well as their capital sources. Investment volumes refer to the total value of investment transactions in the commercial direct real estate market. Hotel and residential deals are excluded from the analysis.

Money into Property methodology
Private debt allocation In order to capture the value of commercial real estate loans issued by domestic banks to fund cross-border investment and likewise by foreign banks to fund domestic property investment, private debt is allocated based on the pattern of cross-border investment transactions. Cross-border allocation in invested stock The value of the commercial real estate held by different investor groups is allocated based on the location of the property rather than the origin of investor. Currency conversions Invested stock and its components are converted by using the average quarterly exchange rate for each year under review.

Transaction volumes
Transaction volumes represent the buying and selling of property and are independent of stock. For example there can be a lot of transactions, but if price does not change and the property is already in the invested stock figures then there will be no change in invested stock. The only change is the owner of the property, which could trigger a change in quadrant (say public to private). Higher transaction volumes do indicate interest in the market, they tend to imply more development activity or capital values are rising.

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Money into Property Global 2012

Fair value methodology
The DTZ Fair Value Index TM was launched in August 2010 and has now been rolled out for all 192 markets covered by DTZ forecasts. Fair value is the value at which an investor is indifferent between a risk free return and the expected return from holding property, taking into account the extra risk of investing in the property asset class. When the property price is at fair value, an investor is being adequately compensated for the risk taken in choosing to purchase real estate; similarly, when the property price is below the fair value price, an investor is being more than compensated for the risk taken in choosing to purchase real estate. When buying at or below fair value, an investor does not necessarily buy at the bottom of the market. Our fair value analysis focuses on prime assets and a five-year investment horizon, and hold for the market overall; individual transactions may provide opportunities and risks beyond the average market view. For more information see the note DTZ Fair Value Estimates ­ Methodology and Examples at www.dtz.com

Disclaimer
This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.
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