international real estate: an examination of risks gary a. zdolshek, principal november 2007
TRANSCRIPT
International Real Estate:
An Examination of Risks
Gary A. Zdolshek, PrincipalNovember 2007www.idrfof.com
2
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
3
We Recognize International Real Estate Benefits
4
Transparency Remains an Issue
Source: LaSalle
• Transparency of Markets Changes Investment Risk
• Example: South Korea- Arrests, Imposition of Taxes
5
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
6
Asia is Huge, Europe is Similar Size to U.S. …
Europe’s Largest Cities
U.S. Largest Cities
Source: Wikipedia, Various Sources
7
…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
8
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%
9
…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.
10
Capital Flows have been Strong…
Source: Real Capital Analytics, Jones Lang LaSalle, Morgan Stanley
(1) As of September 2007
11
…but Investment Markets Aren’t As Large
12
…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
13
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?