Transcript Slide 1

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
• 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
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We Recognize International Real Estate Benefits
3
Transparency Remains an Issue
• Transparency of Markets Changes Investment Risk
• Example: South Korea- Arrests, Imposition of Taxes
Source: LaSalle
4
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
Asia is Huge, Europe is Similar Size to U.S. …
Europe’s Largest Cities
U.S. Largest Cities
Source: Wikipedia, Various Sources
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…but Real Estate Markets Not Tied to Population
Global Total
= $24.6tn
Global Investible = $16.2tn
Global Invested = $9.8tn
Invested stock
US$3.2 trillion
Europe
Investible stock
US$6.1 trillion
Total stock of
US$9.2 trillion
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$9.5 trillion
America
Asia
Note:
Estimates as at end 2006 Scale of Total, Investible and Invested Real Estate, by Region
Source: RREEF/DB Real Estate, DTZ, ULI/PWC
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Total stock of
US$5.9 trillion
Investment Returns are Highly Volatile…
• International real estate provides access to higher returning opportunities
• Location becomes an important variable in determining risk adjusted
returns
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Average
Austrailia Hong Kong
28.4%
55.5%
-7.0%
22.7%
34.0%
157.6%
3.9%
-38.1%
14.8%
27.9%
26.9%
58.1%
0.5%
-38.5%
14.1%
-12.9%
3.1%
39.0%
-1.2%
-1.4%
1.8%
-13.8%
14.3%
-26.7%
45.4%
41.0%
36.1%
34.8%
-1.4%
0.3%
43.0%
38.9%
16.0%
21.5%
Japan United Kingdom Europe ex UK North America World Index Best-Worst Spread Standard Deviation
15.4%
-14.8%
-9.9%
27.9%
10.3%
70.3%
24.2%
-34.4%
-27.9%
-23.1%
3.6%
-14.3%
57.1%
19.8%
21.8%
81.8%
40.2%
17.2%
76.1%
140.4%
49.3%
16.6%
-10.9%
-11.9%
-3.8%
-15.3%
54.7%
17.1%
7.8%
6.3%
8.7%
15.4%
14.4%
21.6%
7.3%
-18.4%
41.6%
12.9%
33.7%
29.7%
76.5%
24.1%
-16.0%
20.1%
3.0%
18.3%
-10.1%
58.6%
20.5%
-17.4%
-18.5%
22.4%
-17.6%
-13.3%
40.9%
17.0%
0.5%
10.7%
-3.6%
-5.1%
4.7%
44.1%
15.1%
17.7%
13.4%
-0.4%
27.5%
13.2%
28.9%
11.2%
-23.5%
-7.5%
-1.2%
15.2%
1.6%
38.7%
12.4%
-1.3%
10.4%
32.6%
4.1%
2.8%
59.3%
17.9%
44.9%
46.0%
46.0%
38.0%
41.1%
8.0%
3.2%
38.0%
56.3%
46.4%
31.7%
36.6%
24.6%
8.5%
21.0%
-4.6%
12.0%
7.9%
6.8%
25.6%
8.8%
20.2%
71.6%
68.9%
35.8%
39.1%
51.4%
18.5%
5.8%
17.1%
15.2%
15.6%
Source: ING Clarion, S&P Citigroup, IDR
Green indicates the best annual performance, yellow indicates the worst annual performance
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14.0%
…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
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Capital Flows have been Strong…
Source: Real Capital Analytics, Jones Lang LaSalle, Morgan Stanley
(1) As of September 2007
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…but Investment Markets Aren’t As Large
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…And Cap Rates Don’t Illustrate Arbitrage
Country
Cap Rate
Treasury Note
Spread
United States
5.5%
4.2%
1.3%
South Korea
7.0%
5.4%
1.6%
China
8.0%
4.5%
3.5%
Taiwan
4.5%
2.6%
1.9%
Hong Kong
5.0%
3.5%
1.5%
Singapore
4.5%
2.9%
1.6%
Thailand
7.5%
5.0%
1.5%
India
11.0%
8.0%
3.0%
Russia
9.0%
7.8%
1.2%
Poland
5.8%
5.6%
0.2%
Hungary
6.0%
6.6%
-0.6%
Czech Republic
5.8%
4.7%
1.1%
Mexico
8.5%
7.7%
0.8%
Brazil
12.0%
12.6%
-0.6%
Argentina
10.0%
8.0%
2.0%
Sources: Prudential, IDR, Government Websites
Data as of Nov. 2007
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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?
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