The Future of Global Real Estate

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					The Future of Global Real Estate

 A syndicated research
 programme uncovering
 the future of global
 property values

 Economist Intelligence Unit
 Country and Economic Research

 March 2009



                                   1
Our proposed methodology




                           2
A new dawn for real estate?
• Economic boom of the last six years characterised by:
   - huge increase in credit and liquidity
   - high demand for assets – equities, bonds, commodities, property

• Nevertheless, cheap credit not the only driver of property prices
   - demographic trends
   - changes in incomes
   - pace of urbanisation           Long-term “fundamentals”
   - macroeconomic environment

• But in many markets property prices rose far above a level which could be
  justified by these long-term drivers, i.e. above “fair value”

• Recent credit crunch accompanied by property bust of spectacular proportions


                                                                                 3
What about existing real estate research?

• Not many ‘global’ products as such
  - different consultancies focussing on different regions
  - e.g. Global Insight & Moody’s for US, Jones Lang LaSalle for
    separate regions
  - coverage mostly for developed / OECD economies

• Many survey based forecasts
  - short-term forecasts; limited country coverage
  - e.g. PwC “Emerging Trends in Real Estate”

• Modelling based on macroeconomic fundamentals seems
  restricted to academic research and international
  organisation working papers
  - e.g. International Monetary Fund’s (IMF) World Economic
    Outlook, 2008; OECD Economic Outlook No.78, 2005
                                                                   4
Our methodology

 • Theoretical background:

   - IMF, WEO 2004: “House prices in Australia, UK, Ireland and Spain
     exceeded their predicted values by 20 pc”

   - IMF, WEO 2007: “During 1997 to 2007 […] house prices were [up to] 30
     pc higher than justified by the fundamentals”

   - OECD, Economic Outlook
     2005:”To address [overvaluation]
     it is necessary to relate these
     prices to their putative underlying
     determinants”




                                                                            5
Our methodology

 • Econometric analysis to arrive at a real estate 'fair' price equation
    - based on a regression which best explains past price fluctuations given
      historical economic data
    - determine what should have happened to prices given the path of
      economic fundamentals in the past and determine the 'price gap‘


 • Forecasts: apply price equation to our in-house macroeconomic
   forecasts
    - determine the future path of 'fair' prices of real estate in light of future
      macroeconomic conditions
    - EIU’s forecasting approach will combine long-term economic forecasting
      with property specific factors and will ensure that price forecasts take
      appropriate account of the state of the economy and income levels.




                                                                                     6
Why the Economist Intelligence Unit?
Independent, long-run perspective required
Some property specialists will forecast property prices based on historic
trends and industry specific factors (such as availability of planning
permits etc). But a truly insightful long run property forecast requires
much more than this - it needs to be rooted in a deep understanding of
the broader national and international economic context.

This is an area in which the EIU has a proven track record. Therefore the
EIU’s forecasting approach, which combines long-term economic
forecasting with property specific factors, is designed to ensure that our
forecasts take appropriate account of the state of the economy and
income levels. Many of the mistakes in forecasting property prices in the
past have arisen because these factors were not taken sufficiently into
account.




                                                                             7
Why the Economist Intelligence Unit?
World leader in country analysis and forecasting.
For over 60 years we have provided business intelligence that corporate
executives, government officials and academics require to understand
developments around the world.

We cover more than 200 countries, providing economic forecasts on
the world's 150 largest markets.
A truly insightful long run property forecast needs to be rooted in a deep
understanding of the broader national and international economic context.
This is an area in which the EIU has a proven track record.

It is our analytical framework and forecasting methodology that
gives us our competitive edge.
Our approach combines the best in analysis–drawing on the country
expertise of our specialists–and the best in forecasting, grounded in
tested models, carefully vetted data and a quality–control process that
ensures both accuracy and consistency.
                                                                             8
Our methodology – variables to test
Price equation variables
Dependent variable
Change in real residential/commercial property price
Explanatory variables                                     Explanation / Hypothesis
Lagged change in real price                               ‘Persistence’ effect
Price divided by personal income per capita               ‘Reversion’ effect or affordability indicator
Growth in personal income per capita                      Reflects growing wealth and propensity to buy property
Income and corporation tax rates                          Act as downward pressures on the propensity to buy real estate
Short-term interest rate (real and nominal; current and   To reflect cost of borrowing for home-owners
lagged)
Long-term interest rate (real and nominal; current and    Reflects long-term financing costs for commercial property development
lagged)
Change in stockmarket prices                              Potential substitute for speculative investment
Population growth                                         Creating higher demand and upward pressure on prices
Growth in the number of households                        Creating higher demand and upward pressure on prices
Population aged 20-39 divided by total population         Reflecting pool of potential first-time buyers of property
Growth in supply of credit as percentage of GDP           To account for credit conditions which influence ability to finance property
                                                          acquisition
Unemployment                                              Business cycle indicator and potential pool of consumers/labour force
Residential/commercial rental yield                       To account for buy-to-let investors; also to account for rental market substitute
Global /regional real estate prices                       Relative domestic price to global prices, reflecting decision to buy/sell in other
                                                          regions                                                                              9
Our methodology – UK residential case study
 We are already able to accurately model quarterly UK residential property
 prices:
                                                        1.06
          Real house price growth                                  Model 1 drivers:
          (Source: DCLG)             EIU model estimate 1.04
                                                                    - Income growth
                                                                    - Previous growth in price
                                                        1.02          (speculator effect)
.010                                                                - Interest rates
                                                        1.00        - Population growth
.005                                                                - Growth in domestic credit
                                                        0.98        - Labour market conditions
.000

-.005
                                                               But what would have
-.010                                                          happened if prices were
        94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
                                                               driven only by economic
                  Residual      Actual      Fitted             fundamentals?

                                                                                                  10
Our methodology – UK residential case study
 Annual UK property prices based on ‘fundamentals’:
                                                     .3
       Real house price growth (Source:              .2      Model 2 drivers:
       DCLG)                                                  -   Income growth
                                                     .1
                                                              -   Interest rates
 .15                                                 .0       -   Population growth
                                                              -   Economic development
                           EIU fair price model      -.1
 .10
                           estimate
                                                              -   Labour market conditions
 .05                                                 -.2

 .00                                                       Actual prices rose faster
-.05                                                       than the economic
                                                           fundamentals since 1997
-.10
       82 84 86 88 90 92 94 96 98 00 02 04 06 08

                Residual       Actual       Fitted
                                                           But undervalued from
                                                           1990 to 1996
                                                                                             11
 Our methodology – Spain residential case study
      Again, controlling for fundamentals, residential prices in Spain rose above our
      ‘fair’ value from 2003. During the economic downturn, we expect actual prices to
      converge towards the “fairer” levels and even undershoot based on past trends.

Spain house price index, 2002=100                                               Model 3 drivers:
180                                                                              - Income growth
              R house price
               eal                                                               - Interest rates
160                                                                              - Population growth
               IU
              E fair price               Price                                   - Labour market conditions
140                                      gap

120


100


 80

               Source: Banco de Espana; Economist Intelligence Unit
 60            estimates
   1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009



                                                                                                              12
Our methodology – UK commercial case study
 We have also applied our approach to commercial property values. The
 preliminary results are shown below. Changes in key economic variables are
 able to explain much of the change in commercial property prices


                                                       Model 4 drivers:
                                                        - Income growth
                                                        - Interest rates
                                                        - Population growth
                                                        - Labour market
                                                          conditions
                                                        - Residential prices




                                                                               13
Our proposed deliverables




                            14
A new dawn for real estate?

 A model of residential and commercial property prices in over 50
 countries and 70 cities to identify "fair value" for each market based on
 long-term fundamentals.

 An exciting research project that will provide members with exclusive
 insight into the real estate market around the world.

• In which countries is real estate overvalued and how
  low are prices likely to fall?
• When can we expect a recovery?
• Which markets are undervalued and where will the next
  investment opportunities occur?

                                                                             15
 What will our research provide?

 There are numerous benefits arising from participating in this programme:

• Access price data for over 50 countries and 70 cities
  via a secure online platform
• Identify which markets are over- or undervalued and
  target your investments effectively
• Download exclusive forecast data for residential and
  commercial property prices to 2020
• Network with peers online
• Understand the key economic fundamentals driving
  real estate market prices around the world



                                                                             16
Geographical coverage
Countries – over 50
    Americas Western Europe                 Eastern Europe Middle East & Africa   Asia Pacific
    Argentina Austria      Netherlands      Bulgaria          Israel              Australia
    Brazil*   Belgium      Norway           Croatia           South Africa        China
    Canada    Cyprus       Portugal         Czech Republic United Arab Emirates   Hong Kong
    Colombia Denmark       Spain            Estonia                               India
    USA       Finland      Sweden           Hungary                               Indonesia
              France       Switzerland      Latvia                                Japan
              Germany      United Kingdom   Lithuania                             Malaysia
              Greece                        Poland                                New Zealand
              Iceland                       Serbia                                Philippines
              Ireland                       Slovak Republic                       Singapore
              Italy                         Slovenia                              South Korea
              Luxembourg                    Turkey                                Taiwan
              Malta                         Ukraine                               Thailand

                                                                                  * Commercial only




                                                                                                      17
Geographical coverage
Cities - over 70
    Americas        Western Europe           Eastern Europe Middle East & Africa Asia Pacific
    Boston          Amsterdam    Paris       Belgrade        Dubai                Bangkok
    Chicago         Athens       Rome        Bratislava      Tel Aviv (tbc)       Delhi
    Denver          Berlin       Stockholm   Budapest         Johannesburg        Jakarta
    Las Vegas       Birmingham   Vienna      Istanbul*                            Kuala Lumpur
    Los Angeles     Brussels     Zurich*     Kiev                                 Manila
    Miami           Copenhagen               Kosice                               Mumbai
    New York        Dublin                   Krakow                               Seoul
    San Diego       Edinburgh                Ljubljana                            Shanghai
    San Francisco   Frankfurt                Prague                               Taipei (tbc)
    Washington      Glasgow                  Riga                                 Tokyo
    Toronto         Helsinki                 Sofia                                Sydney
    Montreal        Lisbon                   Tallinn                              Melbourne
    Vancouver       London                   Vilnius                              Auckland
    Buenos Aires    Madrid                   Warsaw                               Wellington
    Bogota          Manchester               Zagreb
    Sao Paulo*      Milan
    Rio*            Munich
    Mexico City*    Oslo                                                          * Commercial only



                                                                                                      18
What are the research deliverables?

1. Online access
   A dedicated, secure micro-site for downloading and manipulating data
   and analyses, including a discussion-forum with EIU analysts and other
   syndicate members




                                                                            19
What are the research deliverables?

2. Real estate database
   Access comprehensive data on residential and commercial real estate
   prices for over 50 countries and 70 cities, annual and quarterly,
   including latest data and historical time series (480 data series)
3. Market studies
   Briefing papers on the history and outlook for real estate for each
   country, including summary reports on the medium-term
   macroeconomic outlook




                                                                         20
What are the research deliverables?

4. Forecasts and scenario testing
   Interactive forecasting model with residential and commercial price
   projections to 2020 with adjustable parameters for various forecast
   scenarios




                                                                         21
4. Forecasts and scenario testing




                                    22
Timeline, syndicate fees and project team




                                            23
   Timing
Project plan - Real Estate Syndicate
                                                            Week 1 Week 2   Week 3   Week 4   Week 5   Week 6   Week 7   Week 8   Week 9   Week 10
Contracts finished, clients on board                              1

Data collection - all price series (A & Q) (city/country)        1
Data collection - macro drivers (A & Q) (country)                       1
Data collection - macro drivers (A & Q) (city)                          1

Desk research - extra data collection                                            1

Database buliding                                                                1

Model   building - residential (country) (A & Q)                                                   1        1
Model   building - residential (city) (A & Q)                                                                        1
Model   building - commercial (country) (A & Q)                                                                               1
Model   building - commercial (city) (A & Q)                                                                                           1

Model forecasts finalised and checked                                                                                                  1         1

Country briefings write up                                                                1        1        1        1
Main report write-up                                                                                                          1        1

Reports sub-edit & finalised                                                                                                           1

Micro-site construction                                                                                     1        1        1        1

Delivery                                                                                                                                         1


                                                                                                                                                     24
    The team
  Project management team
• Andrew Williamson, Global Director Economic Research
• Gavin Jaunky, Senior Economist
• Robert Metz, Senior Analyst
  Economics team
• Robin Bew, Editorial Director and Chief Economist
• Robert Ward, Director, Global Forecasting
• Chris Pearce, Director, Economics Unit; Director, Data Services
    Regional teams
•   Charles Jenkins, Regional Director, Western Europe
•   Pat Thaker, Regional Director, Africa
•   Laza Kekic, Regional Director, Central & Eastern Europe; Director, Country
    Forecasting Services
•   Justine Thody, Regional Director, Latin America
•   Gerard Walsh, Regional Director, Asia
•   David Butter, Regional Director, MENA
                                                                                 25
 Fees
• £16,000 / US$24,000




 For more information, please contact us using the customer enquiry
 form at www.eiu.com/property




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