International Real Estate- Risk.ppt

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					International Real Estate:

   An Examination of Risks




   Gary A. Zdolshek, Principal
        November 2007
        www.idrfof.com
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




                                   2
We Recognize International Real Estate Benefits




                       3
            Transparency Remains an Issue
• Transparency of Markets Changes Investment Risk
• Example: South Korea- Arrests, Imposition of Taxes




                            Source: LaSalle




                                  4
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




                            5
Asia is Huge, Europe is Similar Size to U.S. …
                              Europe’s Largest Cities




                                   U.S. Largest Cities




                            Source: Wikipedia, Various Sources


                      6
  …but Real Estate Markets Not Tied to Population
                                                                                                  Global Total      = $24.6tn
                                                                                                  Global Investible = $16.2tn
 Invested stock
                                                                                                  Global Invested = $9.8tn
 US$3.2 trillion
Investible stock                                         Europe
 US$6.1 trillion
 Total stock of
 US$9.2 trillion




                                                                                                                  Invested stock
 Invested stock                                                                                                   US$1.9 trillion
 US$4.7 trillion
                                                                                                                 Investible stock
Investible stock                                                                                                  US$3.5 trillion
 US$6.6 trillion
                                                                                                                  Total stock of
 Total stock of                   America                                                                         US$5.9 trillion
 US$9.5 trillion                                                                    Asia



Note:   Estimates as at end 2006 Scale of Total, Investible and Invested Real Estate, by Region
Source: RREEF/DB Real Estate, DTZ, ULI/PWC



                                                                       7
              Investment Returns are Highly Volatile…
• International real estate provides access to higher returning opportunities
• Location becomes an important variable in determining risk adjusted
  returns
          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%
Source: ING Clarion, S&P Citigroup, IDR
Green indicates the best annual performance, yellow indicates the worst annual performance




                                                                            8
                  …as is Foreign Currency and Inflation
• 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.

Source: US Dollar Index, InvestmentTools.com




                                               9
                           Capital Flows have been Strong…




Source: Real Capital Analytics, Jones Lang LaSalle, Morgan Stanley
(1) As of September 2007




                                                                     10
…but Investment Markets Aren’t As Large




                  11
    …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 Websites
                              Data as of Nov. 2007


                                    12
                           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?

                                   13

				
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