the case for investing in u.s. core real estate€¦ · investment opportunity and diversification...

The case for investingin U.S. core real estateProviding efficient access to the diverse U.S. market

William MaherHead of Research & Strategy, [email protected]

Contacts:

Daniel MahoneyVice President, National Director, Research & [email protected]

LaSalle Research & StrategyOctober 2016

THE

The large size of the U.S. and its variety ofeconomic drivers provide both a very largeinvestment opportunity and diversification benefitsto international real estate portfolios. U.S. open-end core funds maximize these benefits and helpmitigate the risks of cross-border investing byoffering immediate diversification across U.S.markets and property types, steady income, andhigh transparency thanks to the availability of awidely used benchmark, the NCREIF Open EndDiversified Core Equity (ODCE) Index. They canalso be a tax efficient option for institutionalinvestors and typically outperform directinvestments in their first year in rising marketenvironments.

The Residence Buckhead - Urban Multifamily in Mixed-Use Neighborhood

Cover Image: Elan Huntington Beach - Infill Orange CountyApartments, Huntington Beach, CA

LASALLE INVESTMENT MANAGEMENT | RESEARCH & STRATEGY THE CASE FOR INVESTING IN U.S. CORE REAL ESTATE | 3

Why the U.S.

Market Size

The U.S. is the world’s largest institutionalreal estate market, home to an estimatedone quarter – $2.5 trillion – of allinstitutional property. In 2015, U.S. realestate transaction volume totaled $440million, 36% of the global total. Thisactivity provides steady opportunity fornew investments and a wide menu ofmarkets and property types, all with acommon regulatory structure and sharedmarket conventions. The U.S. has moreinstitutional real estate assets undermanagement than the next three largestinstitutional markets combined – Japan,China and the U.K. Lower risk stabilizedassets represent the largest and mostliquid portion of the U.S. market.

As the world’s single largest consumermarket, the U.S. is less dependent onexports than other major developedmarkets. Exports of goods and services in 2015 were just 13% of GDP. Thiscompares to 18% in Japan, 19% inAustralia, 27% in the U.K., and 32% in Canada. The majority of U.S. goodsexports go to Canada and Mexico, withonly 7% of exports in 2016 year-to-dategoing to China. As a result, volatilecommodity prices have less impact on GDP and real estate demand. The recent reset to lower oil prices is anegative for a few U.S. markets, likeHouston, but demand for real estate inmost U.S. markets benefits from lowercommodity prices and resulting reductionin energy costs. The low share of exportsin the US could insulate the market to agreater degree from rising risk of changesin trade policy, notably in the wake of theUK's Brexit vote. By offering a differentbundle of risks, U.S. property investmentsprovide diversification, complementinginvestments in global markets withsignificantly different economic drivers.

Lower risk stabilizedassets represent thelargest and mostliquid portion of theU.S. market.

2001 L Street - Modern Downtown Multi-tenant Office,Washington DC

Source: LaSalle Investment Management 2016 Global Real Estate Universe

The Institutional Real Estate Universe(% of global by market)


Transparency

The U.S. ranks as the world’s fourth mosttransparent real estate market in JLL’s latest Global Real EstateTransparency Index(http://www.jll.com/GRETI). The U.S. is theglobal leader in tracking real estate marketdata, ranking first on this component oftransparency. Granular building-leveldatabases, time series data at thesubmarket level across property types, and robust transaction data give investors a clear view of market conditions. Onperformance measurement, the U.S. ranksbehind only the U.K., with long returnbenchmarks enabling investors to trackperformance. The U.S. NCREIF ODCEIndex, described in detail later, is the world’s longest-running real estate fundbenchmark. The U.S. also ranks among thetop ten real estate markets on governance,regulatory and legal protections, and theappraisal and transactions process.

Performance and Fair Value

Size and transparency are necessaryprerequisites for core investment, but real estate performance is paramount.Historically, U.S. property has deliveredtotal returns between those of globalequities and fixed income securities, similarto property returns in the U.K., Australia,Canada, and Japan (see table below). U.S. real estate is no longer as attractivelypriced as in 2010 to 2013. However, itsyield spread relative to corporate bonds isnear its 15 year average as of October2016. Real estate continues to offer anattractive premium relative to risk free U.S.Treasuries. This spread between theNCREIF income yield and U.S. Treasuries isalso near its 15-year average as of October2016.

Historic Returns by Asset Class and Market to 2Q 2016

AverageAnnualReturns

GlobalStocks1

Global Real EstateSecurities2

GlobalCorporateBonds3

GlobalGovernmentBonds4

GlobalProperty Fund Index(IPD)5

US ODCE Fund Index(NCREIF)6

UK DirectProperty(IPD)7

AustraliaDirectProperty(IPD)8

EuropeCoreFunds(INREV)9

1 Year -2.6% 12.6% 7.1% 8.5% 10.7% 11.8% 9.0% 13.3% 6.8%

3 Years 8.7% 8.9% 5.3% 5.7% 9.6% 13.0% 13.6% 11.5% 4.5%

5 Years 8.6% 8.6% 5.6% 5.1% 9.0% 12.7% 9.9% 10.7% 2.5%

10 Years 5.2% 5.0% 5.9% 4.6% 6.3% 6.2% 4.8% 9.2% -

20 Years 6.3% 8.5% 6.2% 4.9% - 9.6% 8.9% 10.5% -

Notes on sources:

1. MSCI All Country Gross World Total Return Index in Local Currency

2. EPRA/NAREIT Global (Developed) Index Total Return in US Dollars (Ticker: RUGL). No local currency EPRA index available

3. Citigroup World Corporate Bond Index Total Return in US Dollars (Local Currency History Not Available Prior to 1999)

4. Citigroup World Government Bond Index All Maturities Total Returns in Local Currency

5. IPD Global Property Fund Index Total Returns in USD

6. US NCREIF Open End Diversified Core Equity (ODCE) Index. Total Returns in US Dollars

7. UK IPD Quarterly Index in pounds after 2000, IPD Monthly index data used prior to 2000

8. IPD Property Index Total Returns in Australian dollars

9. Europe Core Funds Total Return in Local Currency. 69% of funds are open-end funds and 31% are closed-end funds

Data through 2Q 2016


The outlook for U.S. real estate netincome growth is strong over the nextthree years. LaSalle forecasts thatincome growth will average 3% for thefour major property types, driven by thecombination of 3 to 4% rent growth andstable occupancy. Property ownerscontinue to gain pricing power asvacancy tightens, and vacancy ratesare now below long-term averagesacross property types. LaSalle is beingmore selective, resulting in a lowersuccess rate in competitive auctions,but continues to see attractiveinvestment opportunities across thegrowing volume of transactions, bothon and off-market.

Core investing offers attractive risk adjustedreturns for investors with long investmenthorizons. High quality, stabilized, long-leasedassets are less sensitive than higher riskstrategies to market volatility. With highoccupancy and a small share of leasesrolling over each year, income is more stableand liquidity is likely to hold up better in toptier locations. We believe that U.S. core fundswhich focus on secular changes indemographics, technology, and urbanization(DTU) will generate superior income growthover multiple cycles. This long-terminvestment perspective is especially attractiveas we enter the seventh year of the currenteconomic recovery; the last three U.S. cycleslasted for eight years on average.

*Retail includes shopping centers, malls, and single tenant retail. Source: NCREIF, LaSalle Investment Management. ODCE data through 2016 Q2. Forecast based on overall vacancy forecast, most recent as of September 2016.

ODCE Vacancy Rate by Property Type

Kierland Village Center - Grocery Anchored Retail in Affluent, Built-out Trade Area, Scottsdale AZ

Forecast


Cross-Border Diversification

Property fundamentals and capital markets differ across countries, providingdiversification benefits. This shifts out the efficient risk-return frontier for a cross-border portfolio, an effect which may be greater when differences in debtmarkets are included (the tables at right are based on unleveraged returns only).Debt is currently accretive for most coreU.S. property acquisitions. The 2008-2009Global Financial Crisis highlighted theinterconnectedness of real estate marketsacross borders and drove up the cross-country correlations, but correlations aredown over the previous five years aseconomies have once again started tomove at different speeds. For example, the U.S. – Australia local currencycorrelation since 2010, while still high, has dropped to near zero. Correlations overfive years are also near zero between U.S.and Japan, and the U.S. and U.K.

Local CurrencyReturns AUS JPN FRA GER UK CAN US

Australia 1.00 0.90 0.95 -0.02 0.57 0.58 0.87

Japan 1.00 0.85 0.03 0.44 0.54 0.81

France 1.00 1.00 -0.16 0.47 0.85 0.80

Germany 1.00 -0.03 -0.22 0.14

UK 1.00 0.24 0.57

Canada 1.00 0.63

US 1.00

15 Year Local Currency Return Correlations (Assumes Perfect Currency Hedging)

Local CurrencyReturns AUS JPN FRA GER UK CAN US

Australia 1.00 0.62 0.78 0.98 0.31 -0.16 -0.02

Japan 1.00 0.06 0.79 0.68 -0.42 0.12

France 1.00 1.00 0.65 0.02 0.03 0.64

Germany 1.00 0.59 -0.70 0.08

UK 1.00 -0.25 0.23

Canada 1.00 -0.05

US 1.00

5 Year Local Currency Return Correlations (Assumes Perfect Currency Hedging)

Correlations are downcompared to the previousfive years as economieshave once again started tomove at different speeds

JeffJack - Urban Multifamily in ImprovingNeighborhood Near CBD, Chicago IL

Comparing correlations between real estate returns across markets highlights the diversification benefits ofan international portfolio. However, comparing only local return correlations does not include the impact ofcurrency fluctuations.

Due to limited index history, Japan correlations are based on data from Q1 2002- Q1 2016 (14 years). Returncorrelations are quarterly except in the cases of France and Germany, where only annual data is available.

Source: MSCI / IPD, NCREIF, LaSalle. Data to Q1 2016.


Currency Risk

International investing, whether in realestate or equities, the U.S. or Europe,involves currency risk. This risk can bepartially hedged in the short-term throughforward exchange contracts or throughoptions. Unlike fixed income investing,where future cash flows are known, realestate cash flows are uncertain, whichpresents a challenge for hedging. Futurecash flows and terminal values need to beforecast in order to hedge and if they differfrom those forecasts, investors may findthemselves over or under-hedged. Inpractice, many investors hedge on asliding scale, with more complete hedgingfor expected near-term distributions thathave more certainty and lower hedgeratios for more uncertain cash flows farinto the future. Core U.S. Funds have thebenefit of consistent distributions, whichmakes short-term hedging easier. However,

most cash flows of core real estate assetsare far in the future, tied up in the capitalvalue of the asset. There is potentialrefinancing risk if liquidity is needed to roll-over short term hedges for this capitalvalue.

Many large investors use an overlayhedge program, taking into account netpositions across asset class and currencies,and do not hedge individual investments.For investors with a long-term horizon, it can often make sense to leave cross-border investments unhedged; whileexchange rates are certain to be volatile,the current spot rate already reflects themarket’s long term forecast. In thecorrelation table below, realized returns in a single currency are much lesscorrelated, due to currency movementsthat were driven by cross-borderdifferences in exchange rates, tradebalance, and growth.

Local currency return correlations implicitly assume investors have perfect currency hedging, which is unrealistic. Currency movements over the real estate hold periods reflect dif-ferences in growth between countries, differences in monetary policy, and differences in trade balance. When currency changes that reflect these dynamics are incorporated in realestate correlations, these correlations are significantly lower and indicate cross-border investing provides more diversification benefits.

Due to limited index history, Japan correlations are based on data from 2002-2015 (14 years). Return correlations are quarterly except in the cases of France and Germany, whereonly annual data is available.

Source: MSCI / IPD, NCREIF, LaSalle. Data to Q1 2016 where available, to YE 2015 in all other cases.

575 Veterans Parkway - ModernWarehouse in Chicago's Prime I-55Corridor Submarket, Bolingbrook IL

AUS JPN FRA GER UK CAN US

Australia (AUD Return) 1.00 -0.07 0.46 0.04 0.35 0.07 0.22

Japan (JPY Return) 0.29 1.00 0.65 0.34 0.36 0.35 0.51

France (Euro Return) 0.39 0.08 1.00 -0.16 0.35 0.44 0.36

Germany (Euro Return) -0.14 0.18 -0.15 1.00 0.04 -0.28 0.31

UK (GBP Return) 0.02 -0.44 -0.44 -0.80 1.00 -0.02 -0.07

Canada (CAD Return) 0.09 -0.11 0.34 -0.14 0.04 1.00 -0.04

US (USD Return) 0.08 0.01 0.27 -0.04 0.08 0.19 1.00

15 Year Unleveraged Real Estate Correlations in A Single Currency(Unhedged Returns)


1. Immediate Diversification AcrossU.S. Markets, Property Types, andTenants, for both Small and LargeTicket Sizes

Within the U.S., investors in core fundsare immediately diversified by propertytype, by market, and by tenants and leasematurities. By contrast, direct investorsbuilding a portfolio from scratch throughindividual acquisitions face significantconcentration risk in the first several yearsof constructing such a portfolio. Corefunds enable investors with smaller ticketsto access the benefits of diversification,which might be unachievable throughdirect investment.

The wide variety of property types andmarkets in the U.S. makes nationaldiversification valuable. The underlyingdrivers of real estate demand vary betweenU.S. metropolitan areas: there are resource-driven markets like Houston, government-driven markets like Washington D.C., andtech-driven markets like San Francisco.Markets move at a range of speeds, fromfast-growing low barrier-to-entry markets

like Dallas, to slower growth higher barrier-to-entry markets like Boston and New York.The table below shows the total returncorrelations between the eight largestmarkets in the US for institutionalinvestment, many of which are below 0.75.Core funds with investments across thesemarkets achieve superior risk-adjustedreturns.

Similarly, diversification by property type is another important advantage. The scale of the U.S. market, combined withrelatively limited government rentregulation, has created an especially widevariety of investable property types. Uniqueamong major markets, U.S. multifamilyrentals make up a quarter of all institutionalproperty investments. Institutions reportingto NCREIF also own over $71 billion ofindustrial and logistics, primarily distributionwarehouses; these are 14% of the NPIbenchmark. Niche or specialty propertytypes such as medical office buildings,parking, self-storage, truck terminals,seniors housing, and student housing haveattracted many institutional investors.

Why Open-end Core Funds

US Market 30 Year Correlation Matrix

NY LAWash.DC

ChicagoSF BayArea

Boston Dallas Houston

NY 1.00 0.84 0.85 0.86 0.73 0.74 0.68 0.54

LA 1.00 0.83 0.82 0.70 0.71 0.67 0.57

Wash. DC 1.00 0.81 0.65 0.69 0.62 0.47

Chicago 1.00 0.75 0.69 0.67 0.54

SF Bay Area 1.00 0.67 0.68 0.53

Boston 1.00 0.62 0.39

Dallas 1.00 0.68

Houston 1.00

Source: NCREIF Based on quarterly returns over last 30 years, all property types

Within the U.S. market, core funds stand out as attractive vehicles for cross-borderinvestors for five reasons:


Niche properties have also seen their caprate spreads over traditional property typessteadily narrow over the last decade, andthey continue to have higher averageincome yields vs. traditional office,multifamily, retail, and industrial assets.

LaSalle’s latest estimate of the real estateuniverse shows that multifamily rentalsmake up 36% of the potential investableU.S. property stock, with other nicheproperty types making up 11%. For U.S.REITs, multifamily and niche are 52% total gross assets under management.

The ability to access and diversify acrossmultifamily and other niche property types, at scale, distinguishes the U.S. from other major real estate markets.Investors benefit from this variety. Forexample, U.S. multifamily residential iscountercyclical relative to other propertytypes. Because demand is relativelyinelastic and owners can keep propertiesnear full occupancy by immediatelyadjusting rents, it tends to outperform theindex during downturns and underperformlate in expansions. This quality makes it an especially good complement toportfolios that are over-weight propertytypes like office that have more pro-cyclical characteristics, as highlighted inthe graph above.

2. NCREIF ODCE Benchmark Index

A key driver of transparency is availabilityof real estate indices that enable investorsto monitor their managers and trackperformance. The 38 year-old NCREIFOpen End Diversified Core Equity (ODCE)Index, stands out as good benchmark,since it captures the impact of leverageand fund-level costs and is thereforedirectly comparable to individual fundreturns. Only seven other countries havecore fund indices with more than 10 yearsof history, and none of these are as largeas ODCE, with as much history, or with asmuch granular attribution data available.

NCREIF ODCE Fund IndexBy the numbers

As of Q2 2016Funds Included 24

Inception Date January 1978

Gross Asset Value $211 billion

Leverage 22.2%

Occupancy 92.9%

Diversification by Property TypeMultifamily residential 24.1%

Industrial 14.2%

Office 37.7%

Retail 20.0%

Hotels 0.8%

Self-Storage 2.1%

Others (Parking, Land) 0.3%

Apartment and Office Trailing Year Return Difference From Benchmark

Source: NCREIF. Data as of Q2 2016.

Source: NCREIF. As of Q2 2016. Note: Diversification values do notadd up to 100% due to masking criteria screens for some nicheproperty types.


3. Core Funds, on Average,Outperformed Direct Investments in Year 1

Returns on existing properties havehistorically outperformed those of new direct investments in the first year of ownership, making core funds acompelling alternative to direct investment.Fund investments have an advantagecoming out of the gate. Over the past 11 years, first year returns for newlypurchased assets have trailed the overallNCREIF Property Index by 2.7%. Lookingonly at positive return years, the lag is3.9%. This initial performance gap is caused by several factors. A new directacquisition has added acquisition andadministrative start-up costs that arewritten off in their initial year. Also, initialincome yields on core investments tend to be lower than the index as a whole. For example, average going-in cap ratesfor market acquisitions are slightly lowerthan the trailing year index return, despite typically higher occupancy for new acquisitions.

The ODCE Index is compiled by NCREIF,an independent non-profit association,whose members include pension fundinvestors and investment managers.ODCE includes 24 funds that conform to strict criteria for inclusion. Funds mustbe 95% or more invested in the U.S. and80% of fund assets must be invested instabilized core assets. To qualify forinclusion in the index, the fund must be diversified, with no more than 65% ofvalue in any one property type or regionand leverage may not exceed 40%.Current Q2 2016 member fund loan-to-value averages 22.2%. IPD / MSCI, whichentered the U.S. relatively recently,maintains a similar competitive index.Having both indices is a boon fortransparency and the IPD Index is usefulfor building cross-border indices. Two-thirds of the core open end fund assetstracked by IPD’s Global Property FundIndex are in the U.S. However, theNCREIF ODCE Index is the more widelyused of the two indices.

NCREIF ODCE Fund Index History

Gross, Value Weighted Returns. Income and appreciation returns do not sum to total return due to compounding.Source: NCREIF, LaSalle Investment Management. Data as of 2016 Q2.


Parking and hotels offer upside when theeconomy is strong. Truck terminals havevery high income returns throughout thecycle. Self-storage, student housing, andseniors housing are necessity-drivenniches and their demand holds up well inrecessions. Among these niches, LaSalleespecially recommends self-storage andmedical office, because they typicallyrequire low capital expenditures, and oftenhave tenants that are more likely toremain when their leases expire.

4. Specialist Strategies, Expertise, and Relationships

ODCE Index funds primarily invest instabilized core apartments, industrial,office, and retail properties. Some fundsalso selectively invest in higher riskprojects, such as apartment andwarehouse development, up to a limit. Mostfunds have 5 to 10% of gross assets undermanagement invested in these strategies.This enables core funds to develop-to-coreto take advantage of cyclical strength inproperty fundamentals. ODCE funds alsoselectively invest in several niche propertytypes. These specialized strategies capturediversification benefits that reduce overallportfolio risk and generate higher returns.They require specialized property typeexpertise, in-house experts, and strongjoint venture operating partnerrelationships. This is a key benefit toinvesting through a core fund. Given thesize of a typical separate account, or witha new fund, it is very difficult to reach ascale where this extensive diversificationinto niche sectors is possible at areasonable cost. The greater scale of acore open end fund also enables them toinvest in larger assets than a typicalseparate account. Larger assets can bemore efficient to manage and havehistorically outperformed smaller assets.

Securing attractive acquisitions andmaximum pricing on dispositions is in partdriven by having strong credibility in themarketplace for transactionprofessionalism and for following throughon commitments in a timely way. As aresult, core open-end funds, due to theirsize, long track record, and thediscretionary nature of their capital, tend tobe favored in many transactions over otherbuyers who are smaller, less well-known,or have non-discretionary capital sources.Niche properties types, several describedin more detail below, have a different setof income drivers and characteristics thatare often uncorrelated. Medical officecapitalizes on changes underway in U.S.healthcare delivery that have little to dowith the economic cycle.

Blackhawk on Halsted - Mixed Use Medical Office, Retail, and SpecialtyAsset in Affluent Urban Lincoln Park Neighborhood, Chicago IL

Medical Office: Medical office buildings(MOBs) are a specialized type of office thataccount for approximately 10% of the U.S.office sector; they are typically smaller, about60,000 square feet. Large private healthcaresystems, as well as independent practices,lease space in these buildings for outpatient consultations and minorprocedures. The U.S. healthcare industry is consolidating and many large healthcarenetworks are leasing MOBs to reduce costs(relative to on-campus hospital care) and becloser to patients. This is creating strongdemand from high-credit quality tenants.Moreover, the Affordable Care Act(“Obamacare”) has led to sharp increases inhealth insurance coverage and greaterdemand for medical services. Medical tenantstend to invest their own capital in tenantimprovements and are sticky, with aboveaverage renewal rates. MOB vacancyincreased very little during the GFC andhealthcare job growth remained positive.


Self-storage: U.S. self-storage propertieslease storage units to individuals for storingpersonal property. While leases are short-term, tenants tend to renew leases for manyyears. Their property in the storage unitsalso acts as collateral, discouraging rentdelinquency. Self-storage properties benefitfrom low capital expenditures and steadyincome growth. Properties in major metros,in locations with high population density,high incomes, and low ratios of existingstorage units to population, are well-protected from new supply. Owning severalproperties within a single market is often anadvantage because it provides economies of scale in marketing and operations.

Parking Garages: U.S. parking investmentsare typically multi-level parking structures,with a mix of transient daily parkers, regularmonthly commuters, and long term tenantssuch as nearby hotels. Most low densitylocations in the U.S. offer free parking, but in higher value locations, primarily urbanCBDs, parking commands significant rents.The higher the density, the greater thedemand for and willingness to pay forparking, and the trend toward urbanizationand greater density in U.S. downtowns hassupported rapid revenue growth throughrate increases. Urban parking garages oftensit on valuable land that could potentially beredeveloped into higher value office andmixed-use developments at some point inthe future.

5. Tax Efficiency

Open-end core funds are among the most tax efficient ways for cross-borderinvestors to access the U.S. market. A direct property investment (outside afund) by overseas investors in the U.S. – without a partner –can be onerous froma tax perspective. By contrast, clubinvestments and direct investment withless than a 50% interest may offer bettertax efficiency, but these non-controllinginterests can be harder to find and canrequire significant investor resources toassemble and review. U.S Open-end corefunds provide good efficiency for investorswith a long hold investment horizon.Investors are strongly encouraged toconsult their independent tax advisors fordetailed guidance on the legal and taxconsequences of different structures.

Pelican Parking Garage, Miami Beach FL

Self-storage, outside Philadelphia PA

LASALLE

Conclusion

For real estate investors venturing acrossborders, the U.S. market is attractive as aas a first, or second, step. Its large sizeand transparency means cross-borderinvestors can access more opportunitiesfor the same fixed search and time costsassociated with learning a new market.U.S. core real estate returns havehistorically provided diversificationbenefits. U.S. returns have correlationswell below one with other major realestate markets. And the U.S. market hasinvestable property types not available inmany other markets, including a largemultifamily sector and niche propertytypes like medical office.

Core open end funds are an especiallyefficient way to access the U.S. marketbecause they provide immediatediversification, even for investors with small ticket sizes. Funds are diversified by property type, markets, tenants and

assets, which reduces concentration risk.It is especially valuable because of large differences in drivers between U.S.markets and property types, ranging fromtechnology (San Francisco Bay Area) to government (Washington D.C.), tohealthcare (medical office). The scale of an open-end core fund gives investorsaccess to larger deals, specialized nichesectors, and acquisition opportunities that are inaccessible to smaller investors. Core funds also benefit from the highlytransparent NCREIF ODCE Indexbenchmark, tend to outperform directinvestments in their first year, and offer tax efficiency.

Pioneer Tower - 100% Leased Office in Target Downtown Market with Transit, Portland OR

Past Performance not Indicative of Future ResultsPast performance is not indicative of future results. No assurance can be given that the returns presented herein will be equal orsimilar to those achieved or expected to be achieved by an investor in any particular US core fund benchmarked to the ODCE Index or otherwise. The ultimate returns realized by any future investment will depend on numerous factors that are subject to uncertainty.

General Risks of Investing in Private Real Estate FundsInvestments in private real estate funds are speculative and involve special risk and there can be no assurance that a fund’sinvestment objectives will be realized or that suitable investments may be identified. An investor could lose all or a substantial portion of his or her investment. Private funds are generally not subject to the same regulatory oversight as registered funds.Investments may involve complex tax structures resulting in delays in distributing important tax information, may not be required to provide periodic pricing or valuation information, lack diversification, limited transparency, and may employ leverage and otherspeculative investment practices.

Real Estate RisksThe securities of issuers that are principally engaged in the real estate sector may be subject to risks similar to those associated with the direct ownership of real estate. These include: declines in real estate values, defaults by mortgagors or other borrowers and tenants,increases in property taxes and operating expenses, overbuilding, fluctuations in rental income, changes in interest rates, possible lack of availability of mortgage funds or financing, extended vacancies of properties, changes in tax and regulatory requirements (includingzoning laws and environmental restrictions), losses due to costs resulting from the cleanup of environmental problems, liability to thirdparties for damages resulting from environmental problems, and casualty or condemnation losses. In addition, the performance of thelocal economy in each of the regions in which the real estate owned by a portfolio company is located affects occupancy, market rentalrates and expenses and, consequently, has an impact on the income from such properties and their underlying values. No investmentstrategy or risk management technique can guarantee return or eliminate risk in any market environment.

The Sponsor makes no guarantee that the Fund will be able to achieve these targets in the long term. Targets are objectives and should not be construed as providing any assurance as to the results that may be realized in the future from investments in the Fund.Many factors affect Fund performance including changes in market conditions and interest rates and changes in response to othereconomic, political or financial developments. These targets are being shown for information purposes only and should not be reliedupon to make predictions of actual future performances. The information underlying any targets or other forecasts has been obtainedfrom or is based upon sources believed to be reliable, but the Sponsor assumes any responsibility for, or makes any representation orwarranty, express or implied as to the adequacy, accuracy or completeness of, any such information.

Important NoticeAny opinions, forecasts, projections or other statements, other than statements of historical fact that are made in this document areforward-looking statements. Actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. Accordingly, LaSalle makes no express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions,estimates, forecasts, or other information set out in this document or any further information, written or oral notice, or other document at any time supplied in connection with this document. All assumptions, figures and calculations contained in the information must beindependently verified by the professional investor and recipients should independently evaluate specific investments and strategies.

This information is intended to provide general information about common characteristics of open end real estate core funds. Thispublication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in investment fundssponsored by, or the advisory services of, LaSalle Investment Management and is subject to correction, completion and amendmentwithout notice. Any such offer, if made, will only be made by means of a confidential prospectus. The prospectus will includeinformation regarding investment risk and investors should have the financial ability and willingness to accept these risks. Allinformation obtained from third party sources is believed to be reliable and current, but accuracy cannot be guaranteed and we do notundertake to update any information contained in this document. All assumptions, figures and calculations contained in the information must be independently verified by the professional investor. This publication has been prepared without regard to the specific investmentobjectives, financial situation or particular needs of recipients. No legal or tax advice is provided. Recipients should independentlyevaluate specific investments and trading strategies and should engage its own legal, financial and tax advisors prior to investing inreal estate. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of itand agrees not to make use of the publication other than for its own general information purposes.

Copyright © 2016 LaSalle Investment Management. All rights reserved. No part of this publication may be reproduced byany means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopyingand recording on magnetic tape, or included in any information store and/or retrieval system without prior permission ofLaSalle Investment Management.

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