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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
                                                                                          US / Canada
                  Emerging Europe, incl Turkey                                            36%

                             Core Plus Europe

                                             Core Europe                         South America
                                                    20%                    UK    1%
          •   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


                                                     6.9                                                 0.8
                                                                                           2.0                                         0.1
                                                            4.1                              1.6
                                                                  1.0   10.9

                                                                                                                 2.8                         2.4

                    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
      • 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
                            • 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
                                                   • 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
Morgan Stanley Real Estate Funds
Fund Geographic Distribution
International Funds Gross Acquisitions

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

                                                           Germany                Europe
                                                   Emerging Markets


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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