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Global Financial Landscape The New Normal and Implications for Real Estate Finance - Taiwan Prof James D. Shilling Michael J. Horne Chair in Real Estate Studies DePaul University Lesson #1: Shortage of Capital Elsewhere in the World Stimulus is out and deficit reduction is in. Graph Illustrating G20 Budget Deficit as % of GDP 0 -1 Deficit as % of GDP -2 -3 -4 -5 -6 -7 -8 -9 -10 2005 2006 Source: Economists 2007 2008 2009 2010 Lesson #2: US regions that are like Portugal, Italy, Ireland, Greece, Spain, and now Britain Graph Illustrating places that are struggling to repay their debt Lesson #3: More favorable pricing is returning to real estate markets Graph Illustrating real estate income yields on US properties Source: NCREIF Lesson #4: Fortunately, Asia is ahead of Europe and US in terms of GDP growth Graph Illustrating estimated GDP growth for 2010 Thailand Taiwan South Korea Singapore Pakistan Malaysia India Hong Kong Australia Spain Netherlands Italy Greece Germany France Belgium Austria Euro area Canada Britian China Japan United States -6 -4 -2 Source: Economists 0 2 4 6 8 10 12 Lesson #5: Time to re-evaluate portfolio allocations Lesson #6: Problems that could impede increased capital flows to the region • Liquidity leads the way • Publicly-traded REITs are needed to provide liquidity • Without a well-established REIT market in Asia, how do foreign investors invest more in Asian real estate? • How do foreign investors go about investing in companies they know (Merton’s argument)? Lesson #7: Asian investors may have pushed up prices too high relative to current income (De Bondt and Thaler argument) Graph Illustrating REIT PE multiples, 2009-2010 Middle East/Africa Europe Asia/Pacific 2010 2009 Americas Global 0 5 10 Source: NAREIT, FTSE 15 PE multiple 20 25 30 Lesson #8: A broader perspective is needed Individuals worldwide will need increased liquidity in their retirement portfolios Lesson #9: ECFA should lead to higher real estate valuations Graphs illustrating relationship between current account deficits and real appreciation of real estate Source: Aizenman and Jinjarak (2008) Dec-72 Mar-74 Jun-75 Sep-76 Dec-77 Mar-79 Jun-80 Sep-81 Dec-82 Mar-84 Jun-85 Sep-86 Dec-87 Mar-89 Jun-90 Sep-91 Dec-92 Mar-94 Jun-95 Sep-96 Dec-97 Mar-99 Jun-00 Sep-01 Dec-02 Mar-04 Jun-05 Sep-06 Dec-07 Mar-09 6-month anualized rolling std dev Lesson #10: Dealing with leverage and volatility will be key Graph illustrating US REIT stock price volatility 160 140 120 100 80 60 40 20 0 Source: FTSE NAREIT US REIT Index Monthly Return.