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					GYODER Housing Finance and Turkey Conference III

Global Real Estate Capital Flows and Investment Prospects




Christian Schulte Eistrup
Head of European Real Estate Investment Strategy/Research
Istanbul, 15 November 2006
Real Estate Investing Today – Attractive, but Not Easy

• Globalisation continues, with greater velocity and record transaction volume

• Trend in Europe and Asia is going public; in the US, public to private

• Interest rate and cap rate convergence and synchronisation

• Stabilising interest rates, still at historic low levels

• Yield compression cycle nearing the end – BUT not expected to reverse

• Fundamentals recovering, so property cash flows expected to increase

• Capital inflows are at an all time high and competition for assets is fierce

• Real Estate continues to present inefficiencies which can be capitalised on

• Success requires differentiated strategies, ‘best in class’ managers and niche market
  and asset focus

• Returns remain attractive on a relative basis, but absolute returns will normalise
Global Real Estate (Still) Concentrated Geographically
Size and Distribution of the Market (Total Size : $16 Trillion)

                                      Real Estate Dist. by Region (% of Total)
                                                  Asia Tigers Emerging Asia
                                                          3% 4%
                                             Down Under
                                                    2%
                                              Japan
                                               13%
                                                                                          US / Canada
                  Emerging Europe, incl Turkey                                            36%
                                           3%

                             Core Plus Europe
                                          9%

                                                                                   Mexico
                                                                                   2%
                                             Core Europe                         South America
                                                    20%                    UK    1%
                                                                           7%
          •   About $16 Tn of invested commercial real estate globally
          •   Value is highly concentrated
              −   Top-5 (US, Japan, Germany, UK and France) represent >65% of the total

Source:   EPRA as at 30 June 2006
Increasingly Global Real Estate Capital Flows
Inter-regional Activity 1H 2006


                                                                               4.9


                                                                                           8.4
                                                     6.9                                                 0.8
                                                                                                                                     0.2
                                                                                                   2.7
                                         3.5
                                                                                           2.0                                         0.1
                                               5.4
                                                                                 22.3
                                                            4.1                              1.6
                                  13.2
                                                                  1.0   10.9
                                                      2.7
                                                                                                                              0.2
                                                                                                                       0.0

                                                                                                                                      3.8
                          2.3
                                                                                                                 2.8                         2.4


                    Global
                    source                                                                                                   0.5
                   of funds



        Asia-Pacific                                 Europe                          Americas                  Middle East                         Global Source of Funds



 Sources: Jones Lang LaSalle; Property Data (UK); KTI Finland; Real Capital Analytics (USA)
 Note:    Direction of arrows indicate flow of capital (e.g. Americas investors purchased US$8.4 Bn in Europe and sold US$4.9 Bn).
Strategic View on Global Opportunities


• Significant investment opportunities exist in real estate:
  −   Growth markets where real estate is vastly undersupplied
  −   Distressed markets where real estate is undervalued
      • Levered yield opportunities
      • Distressed asset and corporate opportunities, e.g. Germany
  −   Developed markets where there are
      • Considerable pricing inefficiencies between public/private
        valuations
      • Improving real estate fundamentals, e.g. London, Paris, Tokyo

• Focus on operating platforms that create value at the asset level and
  provide growth/franchise value upside
Global Market Opportunities

 Growth/Emerging Market        Distressed Market             Developed Market

 Representative Countries   Representative Countries     Representative Countries
 • Turkey, Russia, C./ E.   • Germany, Italy, Japan      • US, UK, France, Spain,
   Europe, China, India,                                   other W. Europe, Korea
   Mexico, Dubai

 Market Opportunities       Market Opportunities         Market Opportunities
 • Development/             • Corporate and Financial    • Exploiting mispricings
   Redevelopment              restructuring                between private and
 • Pre-IPO candidates       • Nonperforming loans          public real estate values
 • Requirement for growth   • Commercial property        • Improving real estate
   capital                    trading below                fundamentals
                              replacement cost           • Best of breed operations/
                            • Restructuring of             pursuit of niche
                              ownership of residential     strategies (Western
                                                           Europe)
                            • Distressed Debt
                                                         • Public company (non-
                                                           controlling investments)
Morgan Stanley Real Estate Funds
Global Comparison – Europe

           Demographics /               Market
 Region     GDP Growth      Distress   Recovery   Deal Characteristics

 Germany                                          • Distressed sellers (corporates & banks)


 UK                                               • London market recovery
                                                  • Public to private


 Italy                                            • Distressed sellers
                                                  • Wholesale to retail


 France                                           • Paris market recovery
                                                  • Yield / capital market opportunities


 Spain                                            • Residential / resort development


 Turkey                                           • Residential / retail development
Morgan Stanley Real Estate Funds
Global Comparison – Asia / US

            Demographics /               Market
 Region      GDP Growth      Distress   Recovery   Deal Characteristics

 US                                                • Ability to add operational upside and drive
                                                     NOl growth
                                                   • Hotels, office, multifamily and
                                                     demographics
                                                   • Public to private

 Japan                                             • Restructuring corporate sellers
                                                   • High quality income producing assets
                                                   • Japanese residential

 China/HK                                          • Development / redevelopment
                                                   • All property types
                                                   • Primarily Shanghai

 India                                             • Development / redevelopment
                                                     across all property types
Morgan Stanley Real Estate Funds
Investment Themes – Changing over Time

                      2000                                          2006

   • Corporate ownership transformation         • Public to Private in the US
   • Paris development                          • High level of corporate divestitures in
                                                  Japan and Germany
   • Public to Private transactions in Europe
                                                • Focus on quality assets
   • Pending J-REITS would improve domestic
     liquidity                                  • Focus on operating platforms that create
                                                  value at the asset level and provide growth/
   • Technology Initiatives                       franchise value upside
   • Distressed Loans                           • Market recovery growth in Tokyo, London,
                                                  Paris, Shanghai, Hong Kong and US
                                                  gateway cities

                                                • Development in Turkey, Russia, Central
                                                  and Eastern Europe, China, India and
                                                  Mexico
Morgan Stanley Real Estate Funds
Fund Geographic Distribution
International Funds Gross Acquisitions

    ’97-’00         ’00-’04              ’04-’06                        ’07-’09
                                                       Europe Other


                                                           Germany                Europe
                                                                                  35%
                                                                  UK
                                                             France
                                                                Italy
                                                   Emerging Markets
                                                              Other
                                                           India/Asia


                                                               China




                                                              Japan
New Opportunities are Beyond the Traditional

• Pre – IPO Growth Equity

• Public-to-Private Transactions

• Selected publicly listed companies – tactical allocation to niche
  managers and/or markets

• Private Equity Investments in Real Estate Operating Companies

• Real Estate Company Spin-Offs

• Secondary Interests in Private and Open-End Funds

• Aggregate Portfolio Roll-ups to IPO or sell to REITs

• Development in gateway Western cities and emerging markets
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