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Real Estate as a Strategic Asset ClassThe Benef i ts of I l l iquid InvestmentsReal estate, a key asset class in a portfolio, can offer stable income returns, partial protection against inflation, and good diversification with other investments in the portfolio.

An efficient real estate portfolio should include varied regions, sectors and investment strategies. While most investors still have a major “home bias” in their real estate portfolios, the trend toward a heavier international focus has been on the rise for some years.

The ongoing near zero-interest rate environment in most industrialized nations poses a variety of challenges to private and institutional investors, as traditional fixed-income investments do not provide the desired yield levels as they did in the past. In light of that, the benefits of real estate investments, such as low correlation to other asset classes and the relatively stable and attractive returns, are more prominent than ever. Moreover, the real asset element structured in real estate provides investors with stability in the current environment, which is subject to a number of uncertainties.

Less is More: Private Equity Investments` BenefitsDavid Swensen, the Chief Investment Officer at Yale University since 1985 and one of the world’s most

appreciated investors, realized decades ago that liquidity is an undesirable feature which should be avoided in a significant part of the portfolio.

Insisting on liquidity results in lower returns, a heavy price paid by the investor. The Yale Model is thus characterized by relatively heavy exposure to private equity compared to more traditional portfolios, dedicating about 20% of the portfolio to real estate. Since 1978, the real estate component of Yale’s portfolio has

yielded an annual average return of 11.6%.

The inefficiency embedded in the private equity markets creates opportunities for identifying mispriced assets, bearing a potential of

higher returns compared to the capital markets. Liquidity concession in a significant part of the portfolio suits sophisticated investors endowed with a long term view and ability to stand strongly at times of turmoil in the markets. One must keep in mind that private equity investments, like real estate, do have liquid elements within them, such as distributions originated in rent as well as realizations.

How to Invest in Real Estate?Investors seeking successful investments in real estate have to cover a wide range of specialist functions that are needed for implementing the real estate strategy and managing international real estate portfolios. Since most investors do not have these specific resources, an alternative way to invest is via indirect real estate investment vehicles, customized real estate mandates, or property clubs. Investing through tradable vehicles such as REITs is also an option, but the fact that these are liquid investments, that don’t have the benefit of illiquidity premium and also highly correlated to the stock market, must be taken into account.

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Source: IPD, Credit Swiss

Income Return Capital Value Growth Total

15

10

5

0

-5

-10

-15

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Why Invest in Real Estate?Por t fo l io Divers i f icat ionFrom a portfolio standpoint, the low correlation with other asset classes is definitely an important argument for investing in real estate. This means that by adding real estate to an existing portfolio of equities and bonds, investors can gain diversification benefits. In other words, similar portfolio returns can be generated with a lower risk, or higher returns can be generated with the same risk.

Diversifying the portfolio between tradable assets such as stocks and bonds in different regions is no longer as efficient as it used to be. In a global universe, when interest rate trends and countries’ economic shifts immediately affect other countries, the diversification effect becomes significantly lower and even non-existent. Diversification for the sake of risk reduction still exists effectively as long as the correlation between the assets in the portfolio is not whole, and even better if it is low or negative, as it is between real estate and bonds.

Relat ively High, Stable Cash Flow ReturnsIn a macroeconomic environment of continued low interest rate levels, the advantage of real estate investments, generating relatively high, stable yields, stands out. Looking at global real estate investment returns, it is notable that while returns from changes in capital values typically have cyclical fluctuations, the income yield was 5%-7% and is therefore a stable component of the total returns achieved.

Global Real Es tate Returns in % ( in local currency)

Source: PMA, Datastream, Credit Swiss

MSCI WORLD 10-year USgovernment bonds

Global REITs/real estate equities

Direct investmentsin office real estate,

global

MSCI WORLD

10-year US government bonds

Global REITs/real estate equities

Direct investments in office real estate, global

1

-

-

-

- 0.6

1

-

-

0.8- 0.34

1

-

0.3- 0.15

0.35

1

Correlation of price changes (all indices in local currency)Calculated on the basis of price indices for quarterly figures, starting from December 31, 2000

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Hedge Against InflationAs rental contracts are typically indexed to inflation, real estate investments offer partial protection against rising inflation. The link to inflation can differ depending on the country:

Cont inental Europe:In many continental European countries, rents are indexed directly to the Consumer Price Index (CPI), as it is in Switzerland. Germany has a rent review once inflation crosses a certain threshold. Another option is partial indexing, as is the case in Italy, for instance. There, 75% of the inflation will impact the rent.

Uni ted Kingdom:Rents are adjusted to inflation or the market typically every five years, whereby rents can only be increased to positive inflation.

US:Commercial real estate rents are generally increased annually at a fixed percentage of 2–3%.

Austral ia:Leases for shopping malls usually include an annual increase - either a fixed rate of 4-5% or the rate of inflation plus another 1.0-1.5%. There are various options for rent prices in office and industrial space, including fixed increases, based on the rate of inflation or a current market analysis.

A Global PortfolioThe global market for commercial real estate in 2011 was approximately USD 26.6 trillion, and by 2021 it will grow by 83% to USD 48.7 trillion. In 2011, the Swiss real estate market accounted for only 1% of the global real estate market, at USD 284 billion. In addition to a geographic distinction of markets, proper diversification of real estate investments also includes examination of business sectors on which the local economy is based. For instance, markets can be distinguished by whether they are mainly driven by commodities, finance, or government sector. The first category includes cities such as Brisbane, Perth, Calgary, and Santiago de Chile. Markets that largely depend on the financial industry are typically London, New York, and Tokyo, while the commercial real estate demand in cities such as Berlin and Washington D.C. depends stronger on the public sector. The formation of such industry clusters allows us to identify key drivers of each real estate market, to avoid any problematic segments, and to diversify across various industries.

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* Total returns on national level correspond to the weighted total returns of each leading city; Historical returns and financial market scenarios are no guarantee of current or future performance. Last data point: March 2014. Source: PMA, Credit Suisse.

France

Germany

Ireland

Italy

Netherlands

Spain

UK

USA

Japan

Australia

Hong Kong

Singapore

1.00 0.56

1.00

0.65

0.48

1.00

0.61

0.44

0.39

1.00

0.52

0.49

0.67

0.57

1.00

0.74

0.63

0.78

0.71

0.77

1.00

0.66

0.14

0.52

0.33

0.36

0.42

1.00

0.75

0.28

0.61

0.40

0.57

0.59

0.71

1.00

0.39

0.39

0.29

0.12

0.40

0.24

0.37

0.58

0.43

0.54

0.45

1.00

0.56

0.05

0.46

0.40

0.50

0.49

0.65

0.76

0.52

1.00

0.74

0.48

0.61

0.38

0.32

0.59

0.50

0.65

1.00

0.27

-0.08

0.06

-0.13

-0.18

-0.13

0.41

0.28

0.24

0.19

1.00

France Germany Ireland Italy Netherlands Spain UK USA SingaporeAustraliaJapan Hong Kong

The potential for diversification depends on the return correlation among the various markets; investing

in markets characterized by low or negative correlations would be more efficient. The following table

shows, for example, that while the returns of assets in NY and London often move in similar ways

(high positive correlation), holding real estate in Hong Kong and some European countries (Germany,

Italy, Netherlands, Spain) reduces risk as the combination is characterized by low and even negative

correlation values.

Estimated Correlation Matrix for Annual Total Returns on Office Spacefor Selected Countries (1990-2013)

Using Diversification to Reduce RiskRisks that affect a real estate portfolio can be divided in two:

SYSTEMATIC RISKSwhich can’t be reduced by

diversification. It is important

to note that the globalization

process has led to similarities

and compatibility in the market

cycles of different markets, thus

radicalizing this risk.

NON-SYSTEMATIC RISKSsuch as demographic changes, inflation,

vacancy rates, construction costs, financing

costs, etc. These risks, at the market level

or the property level, can be reduced by

implementing a global portfolio strategy.

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How to Invest in Real Es tate?

Investing in real estate can be done in several ways, including investment in the equity segment, the

debt structures, publicly accessible vehicles and private investment opportunities.

Pr ivate Investments

Direct investments in real estate assets requires a high equity threshold as well as a wide range of skills,

competencies and resources in order to thoroughly analyze the asset and the market. Investing via a

real estate investment specialist enables a lower equity threshold whereby due diligence is the specialist’s

responsibility. Investing this way is better done with a local real estate manager with a long proven track

record that includes times of crisis. Investing through a fund or Fund of Funds can also provide the investor

with broader diversification.

Publicly Listed Real Estate Investment Vehicles

Investing in real estate companies’ equities and bonds, as well as in Real Estate Investment Trusts

(REITs), provide investors with liquidity and low investment thresholds but also embedded volatility, as

they are highly correlated to the markets.

In fact, only long term holdings of these kind of investments will simulate private real estate investments

in a portfolio. Therefore, sophisticated investors would prefer the premium embedded in a long term

non-liquid investment.

In a memo published by CitiGroup, the bank’s investment division states that investors harm their long

term returns by over focusing on assets that are too liquid and can be turned into cash at virtually any

time. According to their estimation, investors shouldn’t be afraid of “locking” their money for months or

years in assets such as real estate, defined as less liquid. These non-liquid assets have the potential

of achieving higher yields and can be integrated in investment strategies that are not available

in the public markets.

Equi ty Debt

PRIVATE Direct investments with mandates or property clubs

Nom listed real estate funds and funds of funds

Direct mortgages Private real estate debt fund

Real estate equities REITs Listed real estate funds

Bonds from real estate companies

Mortgage REITs Mortgage backed securities

(CMBS/RMBS)

PUBLIC

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PROFIMEX LTD. 10 Zarhin Street P.O.B 1155 Ra’anana 4310101 Israel Tel: +972-9-7774444 Fax: +972-9-7774400

p r o f i m e x @ p r o f i m e x . c o m w w w . p r o f i m e x . c o m

Real Estate Investment StrategiesThe following graph shows the major real estate investment strategies, classified by Risk/Return Profiles. The particular characteristics of our strategies may change according to the market environment and may overlap in specific cases. Choosing the investment style depends on the investor’s objectives and expectations as well as one’s view on the markets.

Private equity real estate is an inefficient market, where information isn’t exposed to everyone, thus the investor should aspire to identify the managers’ specific qualifications and ability to produce excess returns given the inherent risk involved in the investment.

Re

turn

R isk

All markets including emerging,

development and speculative

development markets,

leverage higher than 60%

Major and secondary,

upside potential, and shorter

holding period markets,

leverage 55-65%

Major, developed markets,

stable, yielding assets, and

long holding periods,

leverage under 50%

High Return/Opportunistic

Enhanced/Value Added

Core

Income Security Growth Oriented

PROFIMEX is the private equity real estate arm of Bamberger-Rosenheim Ltd., established in 1969. We have

been adding value to the business community for 47 years with integrity, respectability and full transparency.

Over the past 17 years, PROFIMEX and its private and institutional investors, together with global JV

partners, have invested in assets with a total gross value of over $45 billion. Since its inception and as of

December 31, 2014, PROFIMEX has generated an IRR reflecting an average annual return of 12.93%