REAL ESTATE SECURITIES
Second Quarter 2009 MARKET PERSPECTIVES & OUTLOOK
Portfolio Managers’ Note
To Our Investors & Industry Colleagues,
Global REITs rebounded strongly in the 2nd Quarter of 2009, as the FTSE EPRA/NAREIT Global Developed Real Estate Index
posted a 31% total return, outperforming global equities which delivered an18% total return and global bonds which declined
-0.8% (returns in local currency). Year-to-date, G-REITs have managed to deliver a positive total return of 4%. However, on
a trailing 12-month basis their performance remains negative with a total return of -33.7%, underperforming both global
equities (-24.5%) and global bonds (+7.8%). The recovery in Global REITs’ performance has continued in early 3rd Quarter
with total returns of 12% since the end of Q2. Global economic trends are negative, but have begun to show signs of
bottoming. In contrast, real estate fundamentals generally continue to worsen. The tentative signs of a trough in the economy
are the spark that investors needed to begin underwriting when and how dramatic an eventual recovery will be, clearly shifting
sentiment to a more positive tone.
Capital structure and balance sheet strength continue to be key factors in assessing the health of global property stocks.
Property fundamentals, which were somewhat ignored as near-term liquidity issues dominated the attention of management
teams over the past few quarters, have once again become an important driver of underwriting considerations. While we
are not out of the woods with regard to dealing with over-leveraged balance sheets and upcoming debt maturities across the
global listed property universe, a number of companies have begun to restructure their balance sheets and the credit default
risk seems to have passed for the REIT market.
Roughly $43 billion of equity has been raised by Global REITs so far in 2009. For the most part, these offerings have been
well received by investors and share prices have reacted positively. U.S. REITS have accounted for approximately 40% of the
equity issuances with Australia having raised roughly 20% of the total. However, capital raisings have also taken center stage
in other markets including the U.K. and Singapore and more recently in Canada, Continental Europe, Hong Kong and Japan,
encompassing every major sub-region of the Global REIT market. A few recent capital raises have been offensive in nature,
as companies are positioning themselves to acquire deep-value assets from distressed sellers. This should have a material
effect on selected companies’ ability to offset weak near term internal growth.
REITs will play a meaningful role as assets change hands from undercapitalized sponsors to ﬁnancially stable ownership. We
believe that this theme is already taking shape with a recently announced major transaction in Europe involving two publicly
traded industrial companies, Segro and Brixton. Financially ﬂexible REITs are likely to gain the conﬁdence of institutional
investors and merit access to incremental debt and equity capital needed to fuel near-term acquisition activity, while access to
capital will be challenging for many private investors and private equity groups whose highly leveraged business models have
become increasingly irrelevant in today’s environment.
We hope you ﬁnd our Quarterly Report insightful and we welcome your views on its content.
Steve Carroll Jeremy Anagnos
Co-Chief Investment Ofﬁcer, Baltimore Co-Chief Investment Ofﬁcer, Baltimore
Phone: 1-410-244-3124 Phone: 1-410-244-3168
E-mail: firstname.lastname@example.org E-mail: email@example.com
QUARTERLY REPORT - SECOND QUARTER 2009
Table of Contents
Quarterly Summary 1
Global Market Outlook 3
Regional Perspectives 4
Global Valuation 8
Regional Perspectives Summary 9
Quarterly Conclusions 10
The information in this document is conﬁdential and meant for use only by the intended recipient. This material is
intended for informational purposes only, does not constitute investment advice, or a recommendation, or an offer or
solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for CBRE GRES
to enter into or arrange any type of transaction.
CBRE GLOBAL REAL ESTATE SECURITIES
Key Global Trends and Outlook
• In 2nd Quarter 2009, Global REITs rose 31% compared to equities which gained just 18%. The out-performance of the
REIT sector reﬂects a more constructive outlook for the broader global ﬁnancial system after the governments of most
major economies implemented stimulus efforts to keep the ﬁnancial markets aﬂoat and to provide the much needed
liquidity banks needed following the crisis that emerged in 2008. Government-sponsored stimulus plans are beginning
to stabilize the banks and these actions, combined with de-leveraging via equity issuance, have substantially removed
the fear of a possible collapse of the ﬁnancial system.
• While the ﬁnancial outlook for REITs has improved, we believe it will take several years until the underlying real estate
markets fully emerge from the current downturn as we forecast weak property-level operating fundamentals in most
markets through 2010. We also recognize that it will take time for REITs to further reduce debt levels and digest the
equity dilution necessary to repair their balance sheets. REITs will need to be patient with regard to reinstating prior
dividend distribution levels, as higher cost debt will limit the upside to earnings even as fundamentals improve.
• Roughly $43 billion of equity has been raised by Global REITs thus far in 2009. For the most part, these offerings have
been well received by investors and share prices have reacted positively as investors have become more conﬁdent that
most REITs would not only survive, but would be in a position to successfully deal with medium term debt reﬁnancing
needs. Numerous higher beta U.S. & international property stocks, which had traded at “option value” levels on concerns
that survivability was a concern, delivered total returns in excess of 100% during 2nd Quarter 2009. Investors recognized
that equity capital was available to property companies, albeit at a highly dilutive price to existing shareholders.
Performance of Global Property Stocks versus Global Equities and Bonds*
FTSE EPRA/NAREIT Global Developed
Real Estate Index
FTSE All World Series Index
JP Morgan Global Bond Index
-40% -30% -20% -10% 0% 10% 20%
* Local currency total returns; Performance data is through June 30, 2009
QUARTERLY REPORT - SECOND QUARTER 2009 1
Asset Class Index Comparison - Global/Sub-Regional Performance
Index Currency 1-Month QTD 1-Year 3-Year* Standard Dev.
FTSE EPRA/NAREIT Global Total Return Index Local 0.2% 31.0% -33.7% -15.0% 28.4%
FTSE All World Series Index Local -0.2% 18.0% -24.5% -6.8% 18.8%
Global JP Morgan Bond Index Local 0.8% -0.8% 7.8% 5.0% 3.6%
FTSE EPRA/NAREIT Australian Total Return Index AUD 3.8% 11.4% -45.7% -24.0% 25.7%
Australia FTSE Equity Index AUD 4.2% 10.6% -20.5% -3.8% 16.6%
JP Morgan Govt Bonds - Australia AUD -1.0% -3.7% 11.8% 6.7% 4.7%
FTSE EPRA/NAREIT Canadian Total Return Index CAD 4.5% 26.4% -26.9% -8.8% 22.6%
Canada FTSE Equity Index CAD 0.3% 21.7% -23.3% 1.6% 19.2%
JP Morgan Govt Bonds - Canada CAD 0.7% -2.5% 7.0% 6.9% 4.8%
FTSE EPRA/NAREIT U.S.Total Return Index USD -3.0% 30.8% -44.8% -19.0% 38.8%
U.S. FTSE Equity Index USD 0.2% 15.9% -25.8% -7.9% 18.7%
JP Morgan Govt Bonds - US USD -0.2% -3.2% 6.6% 7.6% 5.7%
FTSE EPRA/NAREIT Japan Total Return Index JPY 7.7% 37.8% -27.6% -12.7% 33.4%
Japan FTSE Equity Index JPY 3.0% 20.1% -29.6% -15.1% 21.2%
JP Morgan Govt Bonds - Japan JPY 0.9% 0.4% 3.5% 2.8% 2.2%
FTSE EPRA/NAREIT Hong Kong Total Return Index HKD 1.3% 51.8% 2.3% 10.5% 37.0%
Hong Kong FTSE Equity Index HKD 0.8% 37.0% -13.3% 9.3% 30.6%
JP Morgan Govt Bonds - Hong Kong HKD 0.2% -0.8% 6.7% 6.6% 4.4%
FTSE EPRA/NAREIT Singapore Total Return Index SGD -2.1% 48.1% -25.9% -2.1% 37.2%
Singapore FTSE Equity Index SGD -0.5% 40.9% -19.7% 2.9% 30.2%
JP Morgan Govt Bonds - Singapore SGD 0.0% -0.8% 8.3% 5.3% 4.2%
FTSE EPRA Europe Total Return Index Local -2.3% 16.2% -34.1% -20.4% 24.1%
Europe FTSE Equity Index Local -2.1% 17.0% -25.4% -8.6% 19.1%
Europe - JP Morgan Govt Bonds Local 1.2% 0.0% 12.2% 5.2% 4.2%
FTSE EPRA U.K. Total Return Index GBP -0.2% 19.1% -42.4% -27.6% 30.5%
UK FTSE Equity Index GBP -3.3% 10.1% -20.3% -6.3% 16.6%
JP Morgan Govt Bonds - U.K. GBP 1.0% -1.3% 13.5% 6.1% 6.6%
Source: FTSE EPRA/NAREIT Global Developed Real Estate Index, Bloomberg
Pricing as of 6/30/2009
The Best and Worst Performing Global Property Stocks
15 Top Performers in Q2 2009 15 Bottom Performers in Q2 2009
Perf. QTD Perf. QTD
Company Country Local Company Country Local
1 Quintain Estates U.K. 497.5% 1 Vivacon AG Germany -73.0%
2 Macerich Company U.S. 189.9% 2 Deutsche Wohnen Germany -11.0%
3 Brandywine Realty Trust U.S. 174.0% 3 Investors Real Estate Trust U.S. -8.0%
4 Cedar Shopping Centers U.S. 159.8% 4 Nieuwe Steen Investments Netherlands -5.5%
5 Agile Property Holdings Hong Kong 155.7% 5 National Healthcare Corp. U.S. -4.9%
6 U-Store-It U.S. 145.2% 6 Fabege Sweden -3.6%
7 Developers Diversiﬁed U.S. 139.1% 7 Commonwealth Property Trust Australia -3.6%
8 Hopson Development Holdings Hong Kong 135.0% 8 Mori Trust SOGO REIT Inc Japan -2.3%
9 CBL & Associates U.S. 132.9% 9 Kiwi Income Property New Zealand -2.1%
10 Brixton U.K. 126.8% 10 Equity Lifestyle Properties U.S. -1.7%
11 Keppel Land Singapore 124.5% 11 Hospitality Properties Trust U.S. -0.9%
12 Shimao Property Holdings Hong Kong 124.2% 12 Alexandria Real Est Equities U.S. -0.7%
13 St Modwen Properties U.K. 123.2% 13 Tokyu REIT Japan -0.4%
14 Kowloon Development Company Hong Kong 120.9% 14 Colonia Real Estate Germany -0.3%
15 Tokyo Tatemono Japan 115.1% 15 Nippon Building Fund, Inc. Japan 0.1%
Source: FTSE EPRA/NAREIT Global Index
2 CBRE GLOBAL REAL ESTATE SECURITIES
Global Market Outlook
Global Economic Growth Outlook
Gross Domestic Product
Trend vs. 2008
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Average Annual Percent Growth in 2009/2010
Source: Economist Intelligence Unit; CBRE Investors
India Trend vs. 2008
0 1 2 3 4 5 6 7 8 9 10 11 12
Average Unemployment Rate in 2009/2010
Source: Economist Intelligence Unit; CBRE Investors
Trend vs. 2008
-3 -2 -1 0 1 2 3 4 5 6 7 8 9
Average Annual Percent Growth in 2009/2010
Source: Economist Intelligence Unit; CBRE Investors
QUARTERLY REPORT - SECOND QUARTER 2009 3
Asia Paciﬁc • Ofﬁce rents continue to decline, albeit at a slower pace,
Economic News and a slippage in completion levels is becoming evident
in Singapore and Tokyo. Investment transactions are
• Policy supports in China and aggressive monetary pointing to higher values in Hong Kong. This is also
measures resulted in an accelerated growth pattern evident in Singapore where several lower-grade ofﬁce
during 2nd Quarter 2009. Lending levels grew 30% buildings were transacted in the mid-4% cap rate
year-over-year and recoveries emerged in areas of level.
consumption, production, and investment activity.
Though exports remain reasonably weak, we believe • According to CBRE Research in Tokyo, ofﬁce vacancy
rates rose to 4.4% in May. Despite a limited amount
various stimulus measures will allow the country to
of supply, weaker tenant demand continues to put
grow organically near its target level of 8%.
upward pressure on vacancy. Although market rents
• Hong Kong’s heavy reliance on ﬁnance, tourism, and are declining, the traditional Japanese lease structure
trade keep the economic and employment outlook allows for in-place rents to remain steady.
bleak over the mid-term. In Singapore, some early
• Several notable transactions are scheduled to close in
signs of an economic bottoming have emerged, with
Japan over the near-term with a number of high proﬁle
improved spending activity and stronger industrial
buyers including Nissay, Mitsubishi Estate, and some
production leading the city-state economy to positive
J-REITs involved in competitive bidding for premium
growth during 2nd Quarter. The Singapore government
assets. Virtually all of these transactions suggest that
has been proactive in subsidizing wages and providing pricing of prime ofﬁce in Tokyo is clearly not declining
loan guarantees, which has resulted in job losses substantially and that marginally higher cap rates have
having been less severe than expected. become attractive to new investors.
• Although most economic indicators in Japan remained • Australian property fundamentals are softening but
weak in Q2, there was solid improvement relative to are holding up better than in most regions. A further
Q1. Leading manufacturers aggressively cut production softening in asset values of roughly 5%-10% has
levels, setting the stage for a recovery. Economic taken place thus far in 2009 bringing peak-to-trough
stimulus measures have helped the Japanese economy valuations down by approximately -25%. Regional
weather the credit turmoil, and while sentiment remains and Super Regional Malls are holding up better than
cautious, it appears that the worst could be over. expected in terms of occupancy and rental growth,
• In Australia, interest rates were kept unchanged at beneﬁting from earlier economic stimulus measures.
3.0% and a further increase of 50-100 basis points is
expected by mid-2010, but further increases could be Valuation
difﬁcult should unemployment rates continue to rise as
forecast by the government. We believe that economic • Equity raising activity across Asia (via rights offering
conditions in Australia are better than in most global or placements), were oversubscribed by investors,
markets as the government maintains the ﬂexibility to conﬁdent of the companies’ ability to make accretive
further stimulate the economy and the country beneﬁts acquisitions. Strong demand for this new capital has
meaningfully from the pickup in commodities pricing helped push valuations higher.
and volume. Recently the IMF upgraded its GDP outlook • In China, most companies appear fairly-valued.
for 2009 and 2010 to -0.5% and +1.5%, respectively. While some are already reﬂecting a premium to NAV,
upside to valuation still exists for others from higher
Real Estate Market Trends & Highlights selling price assumptions and accretive land-bank
acquisitions, especially from those that have recently
• Buyers in China, Hong Kong, and Singapore rushed issued equity. Unlike the previous real estate boom
to acquire residential units during 2nd Quarter 2009 where company valuations reﬂected material growth
as ﬁnancing became more readily available and from forecasted transactions, today the market is
lower prices made product more affordable. Volumes mostly valuing companies based on existing portfolio
increased compared with 1st Quarter 2009 and prices values and corresponding income.
surged roughly 20% from the bottom reached earlier
in 2009. In many cities across China, transaction • Hong Kong and Singapore developers are trading
volumes are already at a multiple of levels reached in in a range from NAV parity to an approximate 20%
2008. Many companies are considering buying land premium, while the Hong Kong landlords are trading
to enhance growth prospects given the recent boom in at NAV discounts of 30%. The S-REITs’ pricing reﬂects
residential sales and equity raises. yield spreads of more than 700 basis points which
indicates that they are extremely attractive, especially
following recent recapitalization activity.
4 CBRE GLOBAL REAL ESTATE SECURITIES
• Discounts to NAV also narrowed towards the end of open-ended funds targeting prime, well-let regional
the quarter for Japanese REOCs and appear attractive shopping centers and central London ofﬁce buildings,
today. J-REITs’ yield spread (a more valuation important but the interest has spread more broadly to foreign and
metric than NAV discounts for REITs in Japan) also domestic opportunistic investors and pension funds.
declined due to lessening concerns about reﬁnancing Yields on assets with long-long term leases and good
challenges with an average current dividend yield covenants have stabilized in the 7%-8% range and in
slightly above 7%. some cases are being bid to even lower return levels.
Conversely, assets with perceived leasing risk are still
• The expected launch of public-private funds to help being heavily discounted and cap rates continue to rise,
J-REITs reﬁnance bonds has become more realistic, particularly for industrial and retail park properties with
as the program is now expected to be launched in growing vacant space.
September 2009. J-REITs have successfully rolled over
• Financing conditions remain constrained and deals
existing debt and ﬁnancing concerns have begun to
involving ﬁnancing requirements above £50 million
remain challenging to achieve. Several large U.K.
• Australian property valuations are expected to contract transactions for prime assets have been completed
further as cap rates are projected to rise another 50 to either through assumed ﬁnancing or cash rich buyers.
100 basis points over the next few quarters. Access to Transaction activity in Continental Europe has been
ﬁnancing remains difﬁcult, but year-to-date the listed more muted and yields are still rising while buyer and
sector raised over $8.5 billion to repay near-term debt seller expectations remain far apart.
maturities and to fund development commitments. • Occupier markets remain challenging in the U.K. and
Debt costs have also risen as terms for a secured Continental Europe. U.K. job losses are running at their
mortgage have risen to roughly 7%-9%. After seeing the highest level since the early 1990’s and unemployment
meaningful success of the listed property sector’s equity levels have risen sharply in Europe as well, particularly
issuances, unlisted property funds have also begun to in Spain where employment levels are expected to drop
tap their investors to shore up balance sheets. more than in any other global sub-region. A leading
German retailer, Arcandor, has ﬁled for bankruptcy,
while the number of retail tenants in administration in
the U.K. has continued to increase. This has resulted
Economic News in 15%-20% declines in net effective retail rents. Net
effective rent falls are even greater in the ofﬁce market,
• Economic conditions remain weak across Europe with as much as 40% drops in London’s West End.
and 2009 GDP forecasts have generally been
revised downward. However, there is now clearly a • In the U.K., £4.3 billion of new equity has been raised
so far in 2009, but there has been a shift from the
more constructive view toward 2010. We forecast an
heavily discounted initial “rescue” rights issues aimed
approximate 4% decline in U.K. GDP during 2009
at raising capital to avoid covenant breaches to a
and a slightly worse outlook for the Euro-zone with
series of more “opportunistic” capital raises aimed at
a projected 4.8% decline. A potential recovery of the positioning companies to capitalize on opportunities
U.K. economy could emerge in 2010 while Continental likely to emerge in the property markets over the
Europe’s recovery is expected to lag the U.K. near-to-mid-term. Offerings by some of the more
• Many had hoped that Continental Europe’s economy opportunistic companies including Great Portland,
would be more insulated by its robust household Shaftsbury, Big Yellow, and Helical Bar were heavily
sector and lower dependence on debt. However, weak oversubscribed despite many of these names already
retail sales and lower consumer conﬁdence levels reﬂecting signiﬁcant premiums to net asset value, but
have disproved this theory. The weak German export investors have begun to look “through the trough” and
market combined with the deteriorating CEE and Baltic are willing to underwrite an expected recovery in two
economies continue to weigh on Continental Europe years.
where many major ﬁnancial institutions have signiﬁcant • Within Continental Europe, selected companies have
exposure. also started raising equity to restore balance sheets,
despite management’s recent insistence that new
equity would not be required. Equity was raised during
Real Estate Market Trends & Highlights
the 2nd Quarter by a host of listed property companies
• We have noted a substantial recent pick-up in transaction including Corio, Norwegian Property, Beﬁmmo,
activity in the U.K. direct property market with yields Coﬁnimmo, and Sponda. In many cases, these capital
stabilizing and in some cases even compressing in raises are insufﬁcient to cover all near-term capital
primary market locations. Investor demand had initially needs and likely pave the way for a further 15%-20%
stemmed from sovereign wealth funds and German cut in appraised valuation as more equity is required.
QUARTERLY REPORT - SECOND QUARTER 2009 5
• A more positive outlook has led to increased takeover remain skeptical about valuations. The threat of further
activity within some segments of the market. Numerous dilutive equity raises is also likely across the Continental
small listed property companies have been subject to European market.
opportunistic takeover bids from private investors.
However, the major development amongst listed
property companies during the quarter was Segro’s NORTH AMERICA
bid for Brixton which will potentially make Segro the Economic News
dominant pan-European industrial company. Having
• The pace of economic contraction in the U.S. has slowed,
already doubled its market cap with a meaningful
but unemployment levels are still rising. National
rights issue, Segro is seeking additional capital to unemployment levels reached 9.5% in 2nd Quarter
redeem Brixton’s maturing bonds (which were close to 2009 and we expect levels to rise above 10% in 2010.
breaching covenants). We believe Segro’s successful After dropping 5.5% last quarter, we expect that 2nd
capital raising activities needed to facilitate the Brixton Quarter 2009 GDP will mark the fourth consecutive
acquisition are evidence that well-sponsored publicly quarterly decline, but will show a much lower level of
traded property companies will be prime beneﬁciaries decline than in the 1st Quarter.
of assets that come to market via forced sales.
Conversely, private equity and opportunistic investors • Improvement in some recently reported economic data
more reliant on highly leveraged deals have a much including retail and home sales offer signs that the U.S.
more challenging capital markets environment with economy may be emerging from the recession and we
expect 2nd Half 2009 GDP levels to show meaningful
which to contend.
improvement given easier year-over-year comparisons
to 2008 when the global ﬁnancial crisis was in full
Valuation swing. We project 2009 GDP to decline -3.2%, but
• In the U.K., direct property values have fallen by expect annual numbers to recover in 2010 to 0.6%.
approximately 50% from their peak in 2007 and cap Canada’s trajectory is similar to the U.S., although we
rates have risen roughly 250-350 basis points to a expect contraction levels to be lower.
range of 7%-8%. Until recently, the bulk of the fall in • Over seven million jobs in the U.S. have been shed
values was caused by rising yields. However, over the since the end of 2007. Given signiﬁcant layoffs across
past six months, declining fundamentals have become the ﬁnancial services and manufacturing sectors, we
the key driver of asset depreciation. expect employment numbers to get worse before
bottoming in 2010. In Canada, the employment base
• While improving overall balance sheet strength, the
is better insulated than in the U.S., but the national
recent wave of equity issuances in the U.K. meaningfully
picture presents regional variation with Western
diluted both NAV and earnings per share. Additionally, Canada posting better results than Eastern Canada
asset value falls and substantial write-downs of property which suffers from a challenging manufacturing sector.
portfolios by most major listed property companies That said, the energy sector has quickly reversed course
have further deteriorated NAV. As a result, the sector as a result of lower oil prices compared to 2008.
currently trades at only a small discount to recently
published NAVs, despite the sharp price correction
since the peak. However, in many cases, prices reﬂect a Real Estate Market Trends & Highlights
premium to our forecasted trough NAVs of 2010 which • Real estate fundamentals have reacted to the economic
reﬂect historically high cap rates. We believe selected slowdown rapidly and U.S. REITs will likely deliver 2009
U.K. property companies should command a premium same property NOI declines in the -3% to -4% range
valuation as they will likely be prime beneﬁciaries of with the lodging and multifamily sectors performing the
value creation opportunities over the next few years. worst given their relatively short term leases.
• Yields have risen in Continental Europe but not to the • Volatility in the U.S. lodging sector recently became
same extent as in the U.K., as valuation levels have evident with the bankruptcy ﬁling of the large $7.5
declined just 15%-20% since peaking in 2007. A lack billion Extended Stay Hotels chain acquired at the peak
of transparency makes valuation declines harder to of the cycle in 2007. Meaningful ramiﬁcations are likely
estimate, but the derivatives markets are reﬂecting an to emerge from the outcome of this ﬁling given the
approximate 25% drop by 2009-end with further falls multiple layers of CMBS parties involved. In the initial
expected in 2010. Continental European listed property reorganization plan, the borrower negotiated with
companies have yet to show substantial write-downs only senior-select bondholders, leaving more junior
to their portfolios, pointing to a lack of transactional CMBS and mezzanine holders out of the plan. This
evidence to support any meaningful impairment. We outcome is currently being challenged by subordinated
expect many of these property stocks to continue to bondholders who argue that bankruptcy negotiations
trade at large discounts to NAV for some time and must include the “special servicer” who ultimately has
potentially even widen from current levels as investors ﬁduciary responsibilities to all CMBS parties involved.
6 CBRE GLOBAL REAL ESTATE SECURITIES
• While ofﬁce fundamentals are among the worst across Valuation
property types and rents are declining rapidly in • We recently became less bullish on the U.S. REIT
several major North American markets, landlords are sector as a result of the swift run-up in prices and the
somewhat shielded by longer-term leases that will take generally reduced forward-looking guidance of many
time to be marked to lower in-place market rents. REITs’ management teams. Up until the end of Q2, our
• Following successful equity campaigns initiated during prime consideration had been the attractive valuation
2nd Quarter 2009 to begin the de-leveraging process, of the sector and our belief that the success that REITs
companies will continue to focus on capital needs over have had raising equity has been an endorsement
the next few years. However, management teams are of the sector’s reputable sponsorship and longer
now dedicating more effort towards leasing and tenant term viability. We believe that selected REITs will be
negotiations as the bargaining power has clearly substantial beneﬁciaries of value creation opportunities
moved from landlord to tenant. that should emerge over the next few years. REITs’
ability to demonstrate their ability to access equity
• We have seen a pickup in transaction activity, but
capital has provided a clear advantage over private
volume remains low. Property valuations in the U.S. have
investors that have been more reliant on debt capital to
clearly declined as witnessed by several retail and ofﬁce
achieve desired returns.
portfolios which recently traded at levels representing
valuation drops of roughly 50% versus levels achieved • We believe that a key reason REITs traded at a valuation
just a few years ago. A large divergence in cap rates level implying a 10%+ cap rate as the sector bottomed
exists between deals that are seller ﬁnanced and those in early March was based on the expectation that
that need new debt capital to close. While pricing has capital intensive companies like REITs that are heavily
become more attractive in the private real estate market reliant on debt would need to offer a premium spread
as evidenced by the 15% fall in the NCREIF Property over the cost of long-term borrowings. At that time
Index over the past two quarters, we believe that the this implied near double-digit rates. However, with the
broader private market’s imminent debt maturities will improvement in the capital markets and REITs’ recent
further negatively impact values, ultimately leading access to equity capital, the risk premium associated
to more distressed asset sales across most property with debt has been reduced.
types. • U.S. REITs currently trade at a sub-8.5% implied cap
• Debt capital remains scarce and reﬁnancing efforts will rate which appears to reﬂect reasonably fair value for
continue to be a challenge for all industry participants. the sector.
There is the potential for the CMBS market to gain some • Our investment bias towards the Canadian REIT
traction in 2nd Half 2009, but this is largely dependent market remains positive, as fundamentals should hold
on the potential success of the U.S. Federal Reserve’s up better than most global sub-regions and C-REITs
TALF Program which has yet to materialize. Selected have far less work to do with regard to improving
REITs in the U.S. plan to raise signiﬁcant capital by their capital structures. A stronger capital position has
accessing this government sponsored CMBS program. enabled Canadian REITs to sustain dividend levels and
• Roughly $15 billion of equity has been raised by U.S. will also likely keep cap rates from rising to the same
REITs so far in 2009 with some companies retuning degree as in the U.S. At nearly 9%, Canadian dividend
to the public market for a second visit following an yields are among the highest amongst REITs around the
overwhelming endorsement of the REIT sector in the globe and they continue to enjoy a 500+ basis points
ﬁrst round of capital raising activity. We believe the positive yield spread.
sector could utilize an additional $40 billion to $50
billion of equity over the next two years. In recent years,
higher leverage levels were instituted by management
teams eager to drive earnings growth. These more
aggressive borrowing policies ultimately resulted in
greater corporate risk proﬁles and ultimately resulted
in declining valuations and dramatically reduced
shareholder value. Going forward, we believe that
companies that: (1) Maintain debt levels more in line
with the sector’s long term 30-40% average; and (2)
Focus on the intensive asset management of existing
owned-properties rather than ancillary business
activities; will garner higher valuations.
QUARTERLY REPORT - SECOND QUARTER 2009 7
Global Valuation Summary
CBRE Global Real Estate Securities | VISTA ANALYTICS | June 30, 2009
% of Universe Current Annlzd 2009
Investable FF Mkt Cap (M) Dividend 2 Year Debt/ EBITDA 2009 CF NAV Prem/(Disc) Yield Spread
Universe USD Yield CF Grwth EV Yield Multiple Current Current
Australia 7.9% 48,431 9.44% -16.7% 41.9% 8.2% 8.2x -26.9% 3.9%
Hong Kong 31.2% 191,788 2.33% -0.3% 6.6% 7.8% 15.1x -1.7% -0.3%
Japan 13.9% 85,360 3.10% -1.7% 44.5% 9.9% 12.3x -8.9% 6.1%
Singapore 4.4% 26,815 5.16% -14.4% 21.0% 9.1% 13.7x -21.0% 7.6%
Continent 8.1% 49,601 7.23% 3.8% 48.7% 7.4% 11.3x -12.9% 3.6%
UK 4.4% 27,097 4.79% -3.2% 55.7% 5.6% 15.7x 1.7% 1.1%
Canada 1.6% 10,127 8.98% 6.3% 58.1% 7.7% 11.0x 7.8% 5.6%
US 28.6% 176,212 5.22% -7.6% 51.7% 7.0% 12.0x -3.3% 2.7%
GLOBE 100.0% 615,431 4.34% -3.7% 31.6% 7.8% 13.2x -6.3% 1.6%
* Standard deviations are based on local currency returns over 5 Years
** Metric only relevant in mature REIT markets
Global Property Securities Geographic Breakdown
34% Hong Kong
Source: FTSE EPRA/NAREIT Global Developed Real Estate Index as of 6/30/2009
8 CBRE GLOBAL REAL ESTATE SECURITIES
Regional Perspectives Summary
Region/Sub-Region Weight* Weighting Comments
Australia 9% OVER Limited new construction activity in most markets, but cap rates rising due to much softer
property fundamentals compared to a year ago. We have moved to overweight following the
listed sector's second round of equity raises to reduce debts level. New equity issuances have
been executed at meaningful price discounts and dilutive levels.
Hong Kong 19% UNDER We remain positive on residential property companies with exposure to China partly due
to better than expected sales pricing and attractive land-bank acquisitions. We have been
narrowing our underweight position in the Hong Kong market as strong liquidity could
persist and a pickup in transaction activity is supporting private market valuation levels.
Japan 15% UNDER While Japan’s economy and real estate fundamentals are expected to continue to show
weakness, we ﬁnd the leasing business for many developers and J-REITs as reasonably
defensive in light of the manageable level of new supply and the stable structures. More
transactional evidence should provide a ﬂoor on valuation and any signs of improvements in
real estate demand should boost the sector.
Singapore 4% OVER Due to its proactive government, Singapore has been more resilient than expected.
Household balance sheets are also healthy. Having raised a substantial amount of equity
capital, we expect leading companies to acquire high-quality assets during 2nd Half 2009.
Asia Paciﬁc 47% UNDER
Continental Europe 10% UNDER Economic and property fundamentals continue to deteriorate, but property valuations have
yet to correct materially in the direct market. Higher LTVs and shorter term debt maturities
place a higher emphasis on credit markets. We fear that signiﬁcant equity issuances are on
the horizon with the possibility of meaningful asset sales needed to restore balance sheets.
U.K. 6% OVER Weak property fundamentals exist across the sub-region. However, underlying property
values have already corrected signiﬁcantly and the direct property market has begun to
attract the attention of global investors. Balance sheets of selected companies have been
strengthened following equity issuances and a reset of dividend levels to sustainable levels.
Europe 16% UNDER
Canada 3% OVER Canada's REITs have demonstrated continued access to capital and the ability to navigate
through the current recession without experiencing much major distress. We believe
that multifamily REITs are well positioned over the medium-term given strong access to
government sponsored debt capital and a stable rent-controlled environment. We remain
concerned with respect to certain ofﬁce markets on the verge of receiving meaningful
delivery of new supply, including downtown Toronto and Calgary.
U.S. 34% NEUTRAL While we have become more positive towards the U.S. REIT sector given strengthened
balance sheets, we have recently neutralized our overweight position given the strong rally
driving REIT valuations to levels we believe are unwarranted in today's still challenging
capital markets and operating environment. We believe selected REITs are well positioned to
beneﬁt from value creation opportunities which should emerge over the next few years.
North America 37% OVER
*FTSE EPRA/NAREIT Global Developed Real Estate Index as of 6/30/09
QUARTERLY REPORT - SECOND QUARTER 2009 9
• The outlook for Global REITs has improved as their capital positions have strengthened following the meaningful amount
of equity raised in the past few months. Despite a more optimistic outlook, we believe it will take some time until the
sector materially emerges from the current downturn as we forecast property-level operating weakness in the U.S.
and a number of other markets to continue through at least 2010. Numerous companies will also face debt maturity
challenges near term as well which will require further equity issuance.
• While transaction levels are minimal compared to levels seen just a few years ago, there have been a few transactions
executed across property types including the retail, apartment, hotel, and ofﬁce sectors. This has provided some price
discovery and has conﬁrmed our belief that valuation levels have declined 25% to 50% from peak levels. We have yet to
see a substantial volume of distressed asset sales come to market thus far in 2009, but we do expect several distressed
portfolios to transact in the coming quarters as highly leveraged sponsors will need an exit strategy as debt will need to
be reﬁnanced. We believe several high-quality REITs with optimal balance sheets will be well positioned to capitalize on
some of these opportunities.
• Year-to-date, Australian REITs have raised nearly $9 billion of new equity (~32% of the existing market capitalization),
and have accelerated asset sales to shore up balance sheets. Given the improved capitalization of many companies in
Australia, a reasonably healthy local economy, and limited construction activity, we have shifted our view on this market,
notwithstanding the fact that property values may fall further.
• We remain positive on the residential market outlook in China, driven by strong demand and dwindling inventory levels.
Property developers’ recent capital raising activity should also enable them to acquire attractively priced development
sites near term. However, it is still premature to expect any near-term cap-rate compression in China’s commercial
property market. In Japan, we expect the increasing ﬂow of investment transactions to shed more light on the perceived
mis-pricing of selected J-REITs and J-REOCs. Despite a challenging near term economic outlook, limited new construction
activity and stable lease structures position the Japanese real estate securities market as relatively defensive.
• We remain cautious on the outlook for the underlying economy in the U.K. and expect occupancy levels to remain weak.
However, equity raised in the last six months by selected companies has substantially strengthened balance sheets and
should provide a solid position to weather the storm and be in a stronger ﬁnancial position to beneﬁt from acquisition
opportunities that emerge. The substantial valuation declines already seen in the direct property market and the weak
Sterling is attracting strong interest from both local and international investors and is likely to be one of the ﬁrst markets
to beneﬁt from any rebound.
• We remain concerned by the lack of preventative action being taken by the management teams of most listed property
companies in Continental Europe. Valuation levels have only fallen moderately and we feel the market has substantially
further to fall before investor interest picks up and transaction activity resumes. Despite our underweight position in
Continental Europe, we have maintained an overweight position in the French market where we have seen meaningfully
more transaction activity and substantial valuation corrections.
Key Global REIT Investment Management Contacts:
Steve Carroll Jeremy Anagnos Cab Grayson
Co-Chief Investment Ofﬁcer, Co-Chief Investment Ofﬁcer, Sr. Managing Director, Investor Services,
Baltimore Baltimore Washington D.C.
Tel +1-410-244-3124 Tel +1-410-244-3168 Tel +1 202 585-5577
firstname.lastname@example.org email@example.com firstname.lastname@example.org
If you wish to contact Regional Portfolio Managers of the CBRE Global Securities Team, please refer to their contact details below.
Portfolio Mgr. William K. Morrill, Jr. Jeremy Anagnos Daniela Lungu Hien Tan David Fan
Location Baltimore, Maryland Baltimore, Maryland London, England Sydney, Australia Tokyo, Japan
Phone 1-410-244-3133 1-410-244-3168 44-207-399-9634 61-2-9333-3451 81-3-5777-6382
Fax 1-410-244-3106 1-410-244-3106 44-207-399-9601 61-2-9333-3500 81-3-5777-6441
email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
CBRE GLOBAL REAL ESTATE SECURITIES 10
CBRE GLOBAL REAL ESTATE SECURITIES