Download - International Real Estate: An Examination of Risks Gary A. Zdolshek, Principal November 2007
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International Real Estate:
An Examination of Risks
Gary A. Zdolshek, PrincipalNovember 2007www.idrfof.com
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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
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Transparency Remains an Issue
Source: LaSalle
• Transparency of Markets Changes Investment Risk
• Example: South Korea- Arrests, Imposition of Taxes
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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
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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
Note: Estimates as at end 2006 Scale of Total, Investible and Invested Real Estate, by RegionSource: RREEF/DB Real Estate, DTZ, ULI/PWC
Asia
Europe
Invested stockUS$3.2 trillion
Total stock ofUS$9.2 trillion
Investible stockUS$6.1 trillion
Invested stockUS$4.7 trillion
Total stock ofUS$9.5 trillion
Investible stockUS$6.6 trillion
Invested stockUS$1.9 trillion
Total stock ofUS$5.9 trillion
Investible stockUS$3.5 trillion
Global Total = $24.6tn
Global Investible = $16.2tn
Global Invested = $9.8tn
America
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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
Austrailia Hong Kong Japan United Kingdom Europe ex UK North America World Index Best-Worst Spread Standard Deviation
1991 28.4% 55.5% 15.4% -14.8% -9.9% 27.9% 10.3% 70.3% 24.2%
1992 -7.0% 22.7% -34.4% -27.9% -23.1% 3.6% -14.3% 57.1% 19.8%
1993 34.0% 157.6% 21.8% 81.8% 40.2% 17.2% 76.1% 140.4% 49.3%
1994 3.9% -38.1% 16.6% -10.9% -11.9% -3.8% -15.3% 54.7% 17.1%
1995 14.8% 27.9% 7.8% 6.3% 8.7% 15.4% 14.4% 21.6% 7.3%
1996 26.9% 58.1% -18.4% 41.6% 12.9% 33.7% 29.7% 76.5% 24.1%
1997 0.5% -38.5% -16.0% 20.1% 3.0% 18.3% -10.1% 58.6% 20.5%
1998 14.1% -12.9% -17.4% -18.5% 22.4% -17.6% -13.3% 40.9% 17.0%
1999 3.1% 39.0% 0.5% 10.7% -3.6% -5.1% 4.7% 44.1% 15.1%
2000 -1.2% -1.4% 17.7% 13.4% -0.4% 27.5% 13.2% 28.9% 11.2%
2001 1.8% -13.8% -23.5% -7.5% -1.2% 15.2% 1.6% 38.7% 12.4%
2002 14.3% -26.7% -1.3% 10.4% 32.6% 4.1% 2.8% 59.3% 17.9%
2003 45.4% 41.0% 44.9% 46.0% 46.0% 38.0% 41.1% 8.0% 3.2%
2004 36.1% 34.8% 38.0% 56.3% 46.4% 31.7% 36.6% 24.6% 8.5%
2005 -1.4% 0.3% 21.0% -4.6% 12.0% 7.9% 6.8% 25.6% 8.8%
2006 43.0% 38.9% 20.2% 71.6% 68.9% 35.8% 39.1% 51.4% 18.5%
Average 16.0% 21.5% 5.8% 17.1% 15.2% 15.6% 14.0%
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…as is Foreign Currency and Inflation
Source: US Dollar Index, InvestmentTools.com
• 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.
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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 WebsitesData 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?