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 Disclaimer Morgan Stanley and its affiliates and its and their respective officers, employees and agents (collectively “Morgan Stanley”) do not give investment, tax, accounting, legal or regulatory advice and any prospective investor should consult their professional adviser. 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