rreef the future size of the global real estate market (2007)

8/8/2019 RREEF the Future Size of the Global Real Estate Market (2007)

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RREEF Research

Chart 1: The Growth of the Global Real Estate Market, 2006-2011

Source: RREEF Research

1An early and abbreviated version of the paper was published in EG Capital, June 2007

Table of Contents

1. Introduction....1

2. The Global Market Today.....2

3. Estimating Future Size......5

4. The Global Market Over

the next 5 Years..14

5. Conclusions 17

1. Introduction

It is extremely difficult to gain accurate figures on the size of the global real estate

market due to the fragmented and confidential nature of the industry across many

countries. Despite the difficulties, it is important to arrive at robust estimates to help:

Understand the scale of investment opportunities across various global

markets.

Assess the liquidity and liquidity risks across markets.

Develop appropriate investment strategies across global markets.

Beyond understanding the existing scale of the market it is also important to assess

how this will change over the short to medium term, as this can have a material

impact on investment strategy. Of particular significance are the regions and

countries that are likely to experience the most significant changes in value, in

absolute terms and relative to their existing size. Investment strategy should also be

influenced by the way in which the value of the market might change, whether through

appreciation, through the addition of new space or through sale and lease-back

activity. This paper presents research on the current value of the global real estate

market, and a set of approaches to estimating how the market is likely to change over

the coming five years1.

July 2007

Authors:

Peter Hobbs+44 (0)20 7547 4855

[email protected]

Henry Chin+44 (0)20 7545 6611

[email protected]

IMPORTANT: PLEASE SEE IMPORTANTDI SCLOSURES AND ANALYSTCERTIFICATION IMMEDIATELY AT THEEND OF THE TEXT OF THIS REPORT

The Future Size of the Global RealEstate Market

0

1,000

2,000

3,000

4,000

5,000

6,000

UnitedStates

Japan

Germany

UK

France

Canada

Italy

Australia

Netherlands

China

India

Brazil

Russia

US$Billion

0%

50%

100%

150%

200%

250%

300%

350%

400%2006 (LHS) 2011 (LHS) 5-Year Growth (RHS)

%Change2006-2011


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RREEF Research 2

2. The Global Market Today

Based on an established set of approaches2, the value of the total invested commercial

market is currently estimated to be close to US$10 trillion at the end of 2006. This invested

market, or the space that is owned by professional real estate investors, such as moneymanagers, funds, private investment vehicles, listed companies, institutions etc., is far

smaller than the US$16 trillion investible market which also includes space that is

currently owner occupied but might, in time, become institutional3.

Chart 2 : The Size of Global Real Estate Market Size, by Region

Source: RREEF Research, DTZ, ULI/PWC. As of Dec 2006

As illustrated by the chart of the ten largest real estate markets, the US accounts for more

than a third of the global investible stock, followed by Japan, Germany and the UK (Chart

3). However, the share of the global invested stock for the US is a relatively high

proportion of the total investible, due to the greater maturity of the market and the higher

proportion of the market that is owned by institutional investors. On the other hand, less

mature markets such as China, Mexico, Brazil and India, have a smaller proportion of their

markets that are institutionally owned. These differences reflect variations in market

maturity with, for instance, France having a similar sized investible market to China but a

far larger invested market.

2Urban Land Institute and PriceWaterHouseCoopers (2007), Emerging Trends in Real Estate,

PriceWaterHouseCoopers, USA; Key T. and Law V (2005), The Size of the UK Market, IPFSeminar, May, City University; Pramerica Real Estate Investors (2003), A Bird Eye of Real EstateMarkets, March, USA; DTZ Research (2006/2007), Money into Property: Global, June, London, UK;Hughes F and Arissen (2005), Global Real Estate Securities- Where do They Fit in the BorderMarket?, September, EPRA; Karin Witalis/ING (2004), Estimating the European Real EstateUniverse, European Real Estate Society Conference Milan, Italy3 Total stock refers to the overall stock of commercial real estate. Investible stock meansinvestment grade properties. This stock might currently be institutionally owned or owner-occupied but,in time, it should all become institutional. This is smaller than the total stock as much commercialreal estate is of too poor a quality to become institutional, or will always remain owner occupied.Invested stock, or the current stock refers to those properties which are currently owned byprofessional real estate investors for an investment purposes.

Global invested stock is

considerably smaller than

investible stock.

The share of the invested

stock varies from country to

country, due to different

levels of market maturity.

Total stock ofUS$9.2 trillion

Investible stockUS$6.1 trillion

Invested stock

US$3.2 trillion

US$3.5 trillion

Americas

Asia

Total stock of

US$9.5 trillion

America

Total stock of

US$5.9 trillionInvestible stock

Invested stock

US$1.9 trillion

Asia

Europe

Investedstock US$4.7trillion

Investiblestock US$6.6trillion



Invested stock

US$3.2 trillion




Invested stock

US$3.2 trillion

Invested stock

US$3.2 trillion

US$3.5 trillion

Americas

Asia

Total stock of

US$9.5 trillion

America

Total stock of

US$5.9 trillionInvestible stock

Invested stock

US$1.9 trillion

Asia

Europe

Investedstock US$4.7trillion

Investiblestock US$6.6trillion


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RREEF Research 3

Chart 3: Top 10 Markets By Investible Stock, 2006


The US dominates the global invested market, at 48% of the total, followed by Europe and

Asia, representing 33% and 19% respectively. Within Europe, the western countries

dominate, with the four largest markets of Germany, UK, France and Italy representing

nearly 70% of the total. Despite the pace of the recent growth, Central and Eastern

Europe account for only 5% of the value of the whole European market. The pattern is

similar in Asia where the more mature economies of Japan, Australia, Hong Kong and

Singapore account for 80% of the total. Although China and India have grown

dramatically in recent years, their invested stock still represents less than 10% of the

regional total.

Chart 4: Global Real Estate Market Value (Invested Stock), end 2006


The US invested stock

dominates the global real

estate market, followed by

Europe and Asia.

0

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6,000

UnitedStates

Japan

Germany

UnitedKingdom

France It

aly

China

Canada

Spain

Australia

SouthKorea

Mexico

Brazil

India

Invested Investible

US$Billion

0

1

2

3

4

5

6

7

Nor th Amer ica Latin Amer ica Wes tern

Europe

Eastern

Europe

Mature Asia Emerging Asia

Investible Invested

Americas Invested:$4.7 tn or 48% of Global Total

Europe Invested:$3.2 tn or 33% of Global Total

Asia Invested:$1.9 tn or 19% of Global Total

0

1

2

3

4

5

6

7

Nor th Amer ica Latin Amer ica Wes tern

Europe

Eastern

Europe

Mature Asia Emerging Asia

Investible Invested








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RREEF Research 4

Beyond variations in the size of market across the world, there are significant differences in

the share taken by the main property types of offices, retail, industrial, multifamily etc..

Although historical and cultural factors influence these differences, there seems to be

some broad patterns according to the maturity of markets. The most mature markets, such

as Australia, UK and US tend to have a relatively high proportion of retail property space,

reflecting the maturity and concentration of the retail industry and property markets in each

country. These markets also tend to have a small but fast growing alternative property

sector such as hospitality, medical offices, student housing and self storage. Even

amongst these countries there are significant variations with, for instance, the multifamily

market being an important component of the US market compared with the negligible size

of the market in the UK and Australia.

A second group of countries is the mature economies of Western Europe and Asia where

office markets tend to dominate the invested market. This reflects the relative immaturity

of the retail and the logistics markets in these countries, as well as the importance of

service based economic activity. IPD has, for instance, estimated that retail property

accounts for less than 20% of total institutional real estate in countries including Germany,

France and much of Scandinavia, and only 21% of the total market in Japan (Chart 5).

The third group of more emergent countries seem, paradoxically, to have a relatively large

share of retail and logistics space, reflecting the stage of their economic development.

Such countries tend to be dominated by export-oriented and manufacturing activities,

hence the relatively high shares of industrial space in the (albeit still currently very small)

domestic real estate markets. In addition, the increasing levels of disposable income and

the emergence of a highly independent middle class population have fuelled consumer

spending, resulting in a relatively high share of retail invested stock.

These differences in the composition of real estate markets in individual countries need to

be understood in order to estimate the likely growth of the market, as explained in the

following section.

Chart 5: Retail Sector Share of Total Invested Stock, end 2006

Source: RREEF Research, DTZ, IPD, NAREIT, NCREIF

Note: IPD and NCREIF estimate the share of property in different sectors based on the assets in the portfolios of

their contributors. For this reason both estimates can suffer in terms of their representativeness. For instance, theNCREIF index does not contain the assets of publicly listed (REIT) real estate so tends to understate theproportion of professionally owned retail real estate. In a similar way, the IPD UK index tends to understate theproportion of London office space in their UK index. For these reasons, adjustments have been made to the IPDand NCREIF published sector shares where appropriate.

The retail property sector

accounts for the highest

share in highly mature

markets.

Alternative property sectors,

such as medical offices,

student housing and self

storage, are fast growing.

Emerging countries have a

relatively large share of retail

and logistics space.

0%

10%

20%

30%

40%

50%

60%

Australia

UK

Ireland

Russia

China

USA

Japan

Finland

France

Sweden

Denmark

Germany


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RREEF Research 5

3. Estimating the Future Size of the Global Real EstateMarket

A number of assumptions need to be made in order to estimate the future growth of the

global real estate market around the three components of change: Appreciation, NetAdditions, and Sale and Leaseback (Chart 6).

Chart 6: Components of the Current and Future Invested Real Estate Market


3.1 Appreciation

Appreciation is, perhaps, the most fundamental component, and this is driven by the way

changes in rents and yields impact the value of existing real estate from one year to the

next, as well as the effect of depreciation or obsolescence. There are important

differences in the way the major property types appreciate (or depreciate) with, for

example, the office sector tending to be more volatile than the industrial sector in most

markets. For this reason, specific estimates need to be made for the major property types

in each market.

Appreciation is the most

fundamental component

impacting the future value of

real estate.

CurrentMarket Value

FutureMarket Value

Appreciation

Net Additions

Sale & Leaseback

CurrentInvested

Real Estate

CurrentMarket Value

FutureMarket Value

Appreciation

Net Additions

Sale & Leaseback

CurrentInvested

Real Estate


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RREEF Research 6

During 2006, rental growth picked up across most global markets, and this was

accompanied by continued cap rate compression. This was particularly the case for office

markets as they experienced a cyclical recovery, but also occurred in other property

sectors. The combination of these factors meant there was a surge in total returns, and in

appreciation, during the year. According to IPD and NCREIF, real estate appreciated by

around 10% in Spain, UK and the US, and as much as 15% in France.

The rental recovery is continuing in most markets during 2007 and, although cap rate

compression remains strong in some markets ranging from Japan and Eastern Europe, it is

slowing sharply in others such as the UK and the US. The combination of these factors

means that appreciation is expected to slow such that the value of the global real estate

market is expected to increase by around 7% during 2007. The peaking of the property

cycle means appreciation is set to slow further in the years to the end of the decade,

although there will continue to be significant variations. Value growth is likely to turn

negative in a number of countries such as Hong Kong and the UK, but will hold up well for

other markets particularly those sectors and countries benefiting from structural growth in

their markets. In overall terms, the global real estate market is set to appreciate an

average of 4% a year between 2008-11.

Although there are increasing concerns over the pricing of US real estate, it is likely that

the office sector will appreciate by around 10% over the next four years. This growth is

likely to be front loaded, driven by the current strong rent growth and the lagged effect of

recent cap rate compression. The slowing of the market and the slight upward pressure on

cap rates mean that capital values are likely to remain broadly flat in 2008-10 before

picking up again in 2011.

Chart 7: North America Real Estate Appreciation Index, 2006=100


The appreciation of the European market has tended to be more cyclical than North

America, and this trend is set to continue over the next few years. Strong office sector

appreciation in 2007 and 2008 will be driven by the further cap rate compression and

stronger rental growth. As rent growth slows and cap rates rise marginally across most

markets, appreciation is set to turn negative by the end of the decade.

The peaking of the property

cycle means appreciation is

set to slow in the years to the

end of the decade.

Value growth is likely to turn

negative in a number of

countries, such as Hong

Kong and the UK.

100

103

106

109

112

2006 2007 2008 2009 2010 2011

Office Retail Industrial


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RREEF Research 7

There are significant variations across Europe. On the one hand, Ireland, UK and Spain

are about to reach the peak of their current cycles. Real estate values in these countries

have grown significantly in the past couple of years and are expected to continue to do so

this year. However, as these traditionally volatile markets move past the peaks of their rent

growth and cap rate compression cycles, it is likely that values will turn flat or even

negative perhaps as early as 2008 onwards. On the other hand, other markets such as

Germany and Netherlands will benefit from a delayed rental recovery and a later

compression of cap rates such that values will likely continue to appreciate (albeit mildly)

for longer than the more volatile markets.

There is a similar pattern for the European retail markets, with appreciation being front

loaded. However, as the UK accounts for over 40% of the entire European retail market,

the relatively severe downturn in this market will shape the European market as a whole.

The UK is experiencing a surge of growth in shopping centre development with

completions in 2008 expected to be the highest since the previous peak in the early 1990s.

This surge in supply coupled with a weakening of consumer spending and increasing

concerns from investors suggests that UK retail value change will turn negative over the

next two to three years, depressing the overall prospects for the European market.

Chart 8: European Real Estate Appreciation Index, 2006=100


Asia seems set to have the strongest appreciation across the world, driven by strong rental

growth and cap rates compression. Appreciation is expected to exceed more than 15% in

each sector although, as for other global regions, this is likely to be front-loaded. Record

prices continue to be set for both A-grade and B-grade buildings across a range of markets

including Japan, South Korea, Singapore and Hong Kong, and this will be translated into

the broader appreciation of the market. But, as elsewhere, there are significant variations,

with the recent rise in interest rates and a slowing of rental growth leading to a peaking of

value growth in Hong Kong. Despite such exceptions, the outlook for appreciation remains

good, with the strongest growth expected in China, at over 15% per annum for offices over

the next five years, and India. Within China, the industrial sector is expected to appreciate

at an even faster rate, due to structural changes in this sector, favourable market

fundamentals, and strong demand from export oriented and manufacturing business.Although both China and India continue to experience strong appreciation, the actual

amount by which their markets will grow is relatively low due to the small size of the

Significant variations across

Europe

.

UK retail value growth will

turn negative over the next 2

to 3 years.

Asia has the strongest

appreciation with more than

15% of growth over the next

5 years

and China and India

expected to see double-digit

annual growth.

100

105

110

115

120

2006 2007 2008 2009 2010 2011



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RREEF Research 8

existing market. Overall appreciation growth in China and India will represent around

US$300 billion over the next five years, around half the amount of the US market.

The biggest Asian real estate market, Japan, is also experiencing a recovery in market

fundamentals and cap rates, leading to significant recent appreciation across the market.

Investor appetite is set to remain strong and market conditions remain favourable

suggesting that Japan will continue to have strong value growth over the short to medium

term.

Chart 9: Asia Pacific Real Estate Appreciation Index, 2006=100


3.2 Net Additions

A second component of value change is Net Additions, or the value of the space added to

the invested market less the space that is demolished or removed from the invested stock.

These estimates of net additions need to identify the invested value, and exclude the

space that is built for owner occupation or build to suit.

Real estate markets continue to be highly cyclical, so there are significant variations in the

amount of space that is added at different points through the cycle. The downturn in theglobal property markets during the early years of the decade meant that levels of new

construction slowed across most markets. There were exceptions, such as the fast

growing emerging markets of China, India, Russia and Central Eastern Europe. In China,

for instance, space under construction in Beijing and Shanghai ranged between 25-50% of

the existing stock between 2001 and 2006. Outside of these emerging markets, levels of

construction activity fell sharply which meant that net additions were relatively low in 2005-

06.

As rental growth has picked up and as cap rates have compressed, development activity

has resumed across most countries. The value of net additions will remain relatively low

during 2007, but will rise strongly between 2008-10, as the wave of recent starts comes to

fruition. There are large variations from country to country and from sector to sector. For

instance, the stronger performing and more volatile office markets such as the UK, Spain,Central Europe and parts of the US are experiencing a surge of activity. In others, where

Fast growing emerging

markets, such as China, India,Russia and Central Eastern

Europe, have a relatively high

level of construction activity.

100

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135

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150

2006 2007 2008 2009 2010 2011



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RREEF Research 9

vacancy rates remain high and demand relatively muted, such as Germany, Netherlands

and South Korea, net additions will remain relatively low.

Although there are variations between the mature markets net additions tend to represent

around 1-2% of existing stock, with slightly larger amounts in faster growing markets (such

as in Spain) or at markets that are suffering cyclical downturns (such as the UK in the early

years of this decade). As would be expected the level of development activity, and the

value of net additions, is far more significant in most of the fast-growing emerging markets,

as shown on Chart 10 and 11 . Given these high levels of development activity, a number

of emerging countries including China and India are expected to receive a tripling of the

existing inventory over the next five years, despite an expected slowing of the real estate

cycle. The level of development activity in both countries is enormous with, for example,

India likely to have more than 700 million square feet of office space completed,

representing a value of around $35 billion4.

Chart 10 : Net Additions as a % of total stock for major Western Office Markets


Note: Total floorspace based on Grade A space. f indicates forecast

While a large proportion of new office development tends to be owned as investment

assets, both retail and industrial tend to have a higher proportion of build to suit space, in

response to the specific needs of retailers and logistic operators. There are exceptions,

such as the major shopping centres or malls and the provision of space for third party

logistics operators as these tend to be developed and owned by institutional investors.

4RREEF Research (2006), Building up India, May 2006

Mature markets net addition

tends to be around 1%-2% of

the existing stock.

New office development

tends to be owned for

investment purposes.

-1%

0%

1%

2%

3%

4%

5%

2004 2005 2006 2007 f 2008 f 2009 f 2010 f 2011 f

USA UK Germany Spain

NetAdditionsasa%o

fatotalstock


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RREEF Research 10

Chart 11 : Net Additions as a % of total stock for major Asian Office Markets


Note: Total floorspace based on Grade A space. f indicates forecast

Beyond the growth of the main property types of office, retail and industrial, there is

another set of alternative property types that is experiencing strong growth, particularly in

the more mature markets. These alternatives include student housing, medical offices,

senior living, self storage and other types of property that are responding to social and

demographic changes. Although they represent a very small proportion of the overall

investment market, they are increasing the overall value of the real estate markets through

appreciation, new development and the sale and leaseback of existing assets5

.

Chart 12 : Net Additions as % of Total Stock for major Office markets, 2001-2011

Source: RREEF Research, Torto Wheaton, PMA, JLL

5 As an example of this, the institutionally owned student housing market in the UK is estimated torepresent US$9bn (or 1.25% of the overall real estate market). This market is set to grow throughappreciation, new development, and the sale of the additional US$25bn that is currently owned byuniversities. Source: King Sturge (2007), UK Student Accommodation Market 2007

Alternative property types are

experiencing strong growth,

especially in the mature

markets.

0%

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40%

60%

80%

100%

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160%

2004 2005 2006 2007 f 2008 f 2009 f 2010 f 2011 f

Japan China India

NetAdditionsasa%o

fatotalstock

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80%

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USA UK Germany Spain Japan China India

100%

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fTotalStock

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RREEF Research 11

3.3 Sale and Leaseback

The third driver of the future value of real estate involves Sale and Leaseback activity, or

the value of real estate that is transferred from owner occupation to the invested market.

There are wide variations in the proportion of real estate that is owner occupied with the

most mature markets such as the US or the UK having relatively low levels at around 30-

40%. In contrast, more emergent economies with limited institutional investment markets

tend to have a higher proportion of their real estate being owner occupied. For instance,

owner occupation is estimated to be around 90% in China, India and Russia, and over 70%

in countries such as South Korea, Taiwan, Czech Republic and Poland. Between these

extremes are the large mature economies with relatively immature real estate markets

such as Germany, Italy and Japan, where owner occupation is around 50-65%.

Each of these three types of country is experiencing pressure for sale and leaseback as

part of the broader outsourcing of non-core business activities. For instance, Real Capital

Analytics estimate that even in perhaps the most mature market in the world, the United

States, there were US$11billion of sale and leasebacks in 20066. In Europe, this activity

remains particularly strong in the UK, France, Italy and Germany with US$30 billion,US$12 billion, US$15 billion, and US$10 billion worth of sale and leaseback activity

respectively since 20007. Although these figures represent large sums of real estate, the

actual share of the overall market is relatively low, at around 0.3%-0.75% of total market

size for the most active markets such as US, UK and Spain. The relatively small share of

sale and leaseback activity demonstrates that it will take many years, even generations,

before the levels of owner occupation in many markets across the world fall to the levels in

the US or UK.

Chart 13 : Sale and Leaseback Activity Relative to Market Size in Europe, 2004 -

2006

Source: DTZ Research, RREEF Research

In order to estimate the likely scale of sale and leaseback activity, three separate drivers

are identified and measured for all the major markets around the world. First, the fiscal

pressures on governments and corporates as an indicator of the need for such

organisations to raise capital by divesting their real estate assets. Within Europe, a series

of governments and corporates have been faced with significant fiscal pressures and these

have been catalysts for them entering into significant sale and leaseback programmes.

This pressure to redeploy the capital tied up in real estate is becoming more widespread

6Real Capital Analytics (2007), Office Capital Trends Monthly, March

7DTZ (2007), Money into Property Global

Countries are experiencing

pressure for sale and

leaseback as part of the

broader outsourcing of non-

core business activities.

Three main drivers of sale

and leaseback activity, the

first of which is fiscal

pressure

0.0

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Sw eden Italy France Germany Netherlands UK Spain

%

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%


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RREEF Research 12

with, for instance, China Post being reported to be disposing of their non-core businesses,

such as hotels, in order to make use of the capital in their core business8.

The second dimension is the financial attractiveness, to occupiers, of renting compared

with owner occupation. In general terms, if the cost of borrowing is higher than the cost of

renting, it would tend to be sensible for occupiers to engage in selling and leasing back

their real estate. In this respect, there is a series of countries, such as New Zealand,

Central Europe, Australia and the US where interest rates are relatively high and

occupation costs (rents) are relatively low. At the other extreme are countries such as

Japan and Switzerland where there is less pressure on corporates to engage in sale and

leaseback activity due to the low cost of finance and the high cost of renting. Although the

ratcheting up of interest rates is likely to increase the pressure to dispose of non-core

businesses, the amount of sale and leaseback activity is likely to remain relatively low in

countries such as Japan and Switzerland.

Beyond the conventional process of selling and leasing back real estate, a third dimension

relates to the surge in the growth of private equity investing. This form of investing

has added a further catalyst to the transfer of real estate from the corporate to commercialreal estate sector. An increasing number of private equity transactions have been driven

by the hard, real estate, assets that underpin the corporate9. Although private equity

investing has touched most global markets, i t remains concentrated on those countries

where there is greater scope for shareholder activism. In the US and the UK, for instance,

private equity transactions have averaged US$286 billion and US$67 billion, or 2.5% and

4% of GDP over the past three years10

. This contrasts with a far smaller volume of US$21

billion (or 1% of GDP) in Germany and US$9 billion (or 0.2% of GDP in Japan). It is likely

that those countries with a higher penetration by private equity will lead to a higher volume

of corporate sale and leaseback activity.

Based on these three components and recent levels of activity, a rating of the different

countries according to the pressure for sale and leaseback is shown on Chart 15. This

chart reveals three distinct types of market. First, those with greatest pressure for sale and

leaseback activity that is likely to increase the value of real estate by around 0.6-0.75%

each year. At the other extreme, there is a group of countries, including Japan, Russia,

Switzerland and Norway where the level of sale and leaseback activity is set to be very

low, at less than 0.2% each year. Between these extremes is a third category where the

level of activity will be influenced by a range of political and business-specific factors such

that it could range between 0.2%-0.6% each year.

8 Jones Lang LaSalle Research, Asia Pacific Daily News.9 See for instance, PERE (July 2007), KKR eyes Macys, PERE (March 2007), KKR unveils US$7.3bnUS retail buyout10

Thomas Financial: Datastream

with the second being

financial attractiveness

and the third is the growth

of private equity investing.


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RREEF Research 13

Chart 14 : Private Equity Transaction Activity as a Percentage of GDP, 2005-2007

Source: Thomson Financial; Global Insights

Note: Private Equity activity for year to June and GDP for calendar years

It is important to recognise that sale and leaseback activity can be very lumpy, often driven

by political and regulatory changes, or trends in broader financial markets. A good

illustration of this is the case of Italy which experienced perhaps the highest level of sale

and leaseback activity in any one year during 2002, when US$9 billion of transactions took

place11

. Since this time, sale and leaseback activity in Italy has fallen sharply, averaging

only US$300 million a year, illustrating the volatility of this pressure to change the size ofthe real estate market.

Chart 15: Sale and Leaseback Attractiveness

Note: Based on the combined attractiveness of individual countries on the three dimensions of 1. fiscal distress(based on government fiscal balance as a % of GDP, 2005-07); 2. Cost of occupation relative to finance costs forowning; 3. Level of private equity transaction volumes relative to national GDP.

Source: RREEF Research; Global Insights; CBRE; Thomson Financial

11DTZ (2007), Money into Property Europe

Sale and leaseback activity

tends to be highly volatile

from one year to the next.

I

Sale and Leaseback Attractiveness More AttractiveLess Attractive

New Zealand

DenmarkUnited States

CanadaUnited Kingdom

South AfricaSpain

SwedenItaly

GermanyFrance

BrazilPortugal

AustraliaIndia

PolandAustriaMexico

ChinaBelgium

Finland

NorwaySwitzerland

Russia

Japan

Sale and Leaseback Attractiveness

Ranking

I


I


New Zealand

DenmarkUnited States

CanadaUnited Kingdom

South AfricaSpain

SwedenItaly

GermanyFrance

BrazilPortugal

AustraliaIndia

PolandAustriaMexico

ChinaBelgium

Finland

NorwaySwitzerland

Russia

Japan

Sale and Leaseback Attractiveness

Ranking

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5United Kingdom

NetherlandsCanada

New ZealandUnited States

SpainSweden

South AfricaFrance

GermanyAustralia

ItalyAustriaIrelandNorwayFinland

BelgiumSwitzerland

PolandJapan

PortugalChile

RomaniaIndiaBrazil

RussiaMexico

% of GDP

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5United Kingdom

NetherlandsCanada

New ZealandUnited States

SpainSweden

South AfricaFrance

GermanyAustralia

ItalyAustriaIrelandNorwayFinland

BelgiumSwitzerland

PolandJapan

PortugalChile

RomaniaIndiaBrazil

RussiaMexico

% of GDP


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RREEF Research 14

4. The Global Real Estate Market over the Next 5 Years

Based on the analysis of the three dimensions of change explained in the previous section,

the value of the global invested markets is set to grow by nearly 40% over the coming five

years, from US$ 9.8 trillion in 2006 to US$13.7 trillion in 2011. This growth is far smallerthan experienced during the bull run of recent years with, for instance, the U.S. market

increasing in value by over 20% in 2006 alone12

. Despite the slowing in the pace of

growth, the increase in the market by US$4 trillion represents a further significant growth in

the market that will provide opportunities, and risks, for investors participating across global

markets.

There are, however, important variations in the way the value will change over time and by

geography. During 2007, the major driver of change is set to be movements in the pricing

of real estate, with appreciation representing 70% of the change in the size of the market.

As rental growth declines and development activity picks up, a greater share of the change

will come to be driven by net additions. After representing only 29% of the increase in the

market size in 2007, this rises to 45% of the total by the end of the decade. Sale and

leaseback activity remains fairly constant through the cycle as this relates more to country-specific pressures to outsource real estate and is relatively insulated from market cycles.

Chart 16: Incremental Changes in the

Value of the Global Real Estate Market,

2007 -2011

Chart 17: % Change in Different Elements,

Global, 2007 - 2011

Source: RREEF Research Source: RREEF Research

There are also profound variations by geography. The American market is set to grow by

US$1.5 trillion, driven by appreciation at close to 60% of the total. The impact of

appreciation is front loaded, falling off to represent 50% of the total in 2009 before

recovering at the end of the decade. This is due to the combined effect of weaker rental

growth and a mild increase in cap rates later in the decade.

12According to ULI Emerging Trends in Real Estate (2006/2007), real estate invested stock for the

US has increased from US$ 3,588 billion in 2005 to US$ 4,258 billion in 2006.

The value of global invested

markets is set to grow by

40% over the next 5 years.

Appreciation represents more

than 60% of the change in

the size of the market in 2007

and 2008.

The American market will

experience significant growth,

of US$1.5 trillion over the

next five years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011

Appreciation Development Sale and Leaseback

0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011

Appreciation Net Additions Sale & Leaseback

% change onprevious year

0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011




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RREEF Research 15


Value of the American Real Estate Market,

2007 -2011

Chart 19 : % Change in Different Elements,

Americas, 2007 - 2011


The market cycle is expected to be more significant in Europe, with appreciationcontributing to a large share of the increase in value in 2007 and 2008 before the market

starts to slow the relative importance of appreciation falls sharply from over 70% in 2007

to under 30% in 2009 due to the easing of rent growth and the upward movement in cap

rates. The surge in development activity is set to have a particularly significant impact in

2009 and 2010 when it could to represent around 50% of value change across the

European market. The sale and leaseback activity is set to account for around 5-10% of

the annual increase. In overall terms, the market is likely to grow by US$1,100 billion over

the five years, based on appreciation of US$600bn, net additions of US$400bn and sale

and leaseback of around US$100bn.


Value of the European Real Estate Market,2007 -2011


Europe, 2007 - 2011


In Asia Pacific, the market is expected to grow by US$1.3 trillion over the next 5 years,

almost doubling the existing size of the market. Although this growth is driven by strong

appreciation, new development also contributes another US$460 billion.

with the European market

increasing by $1.1 trillion

and Asia-Pacific by $1.3

trillion

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2007 2008 2009 2010 2011



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2007 2008 2009 2010 2011



0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011



0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011




17/22

RREEF Research 16


Value of Asia Pacific Real Estate Market,

2007 -2011


Asia Pacific, 2007 - 2011


The scale of development activity and the maturing of real estate markets mean thatemerging markets are set to grow most strongly over the coming five years. This is

particularly the case in Asia where the fast pace of growth of China and India in particular

mean that the market will grow by 160%. Latin America and Eastern Europe will also grow

fast, by around 120% and 100% respectively. Compared with this, the growth rates for the

mature markets are far lower, ranging from 20% in Western Europe and North America to

40% in mature Asia.

Chart 24: Changes in Value of Global Real Estate Market, by Region, 2006-2011


Despite the pace of this growth, the current small scale of the emerging markets and, just

as significant, their limited institutionalisation means that the real estate markets will

continue to be relatively small even in five years time. By 2011 these markets are

expected to have grown by US$ 1.7 billion but they will still only represent 13% of the

global total - up from the 7% today, but still relatively small. Although the global share for

North America and Western Europe decrease in 2011, they still represent 70% of the

global total.

Emerging markets are set to

grow strongly, by over 100%

over the next five years.

But their size will still remain

relatively small.

0

1

2

3

4

5

6

No rth Am eri ca Lati n Am eri ca Wes tern Europe Eas tern Europe Mature As ia Em ergi ng As ia

0%

20%

40%

60%

80%

100%

120%

140%

160%

2006 ($tn) 2011 ($tn) Change 2006-11 (%)

Real EstateInvested Stock

Change inValue of RealEstate Market

0

1

2

3

4

5

6

No rth Am eri ca Lati n Am eri ca Wes tern Europe Eas tern Europe Mature As ia Em ergi ng As ia

0%

20%

40%

60%

80%

100%

120%

140%

160%

2006 ($tn) 2011 ($tn) Change 2006-11 (%)

Real EstateInvested Stock

Change inValue of RealEstate Market

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011


0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011



0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011




18/22

RREEF Research 17

5. Conclusions

The early years of this decade were of profound importance for the global real estate

industry. Most markets performed exceptionally well, and there were significant

improvements in the transparency and liquidity of markets, as well as in corporategovernance across the real estate industry. The size of the markets also grew rapidly, and

investment activity became increasingly cross-border and global.

With rental growth moving towards a cyclical peak and with less scope for further cap rate

compression, the performance of the real estate markets is set to fall off over the coming

five years. Certain markets are likely to experience significant cyclical downturns as

investors realise that current levels of pricing are unsustainable given the surge of new

supply and the prospect of weaker, or even negative, rental growth.

Despite this reduced performance, this paper has demonstrated that the real estate market

is set to continue to grow, and this will be accompanied by the ever increasing maturity and

transparency of the market. As ever, these trends are not uniform with significant

variations from country to country in terms of both the timing and nature of the growth. Thefastest pace of growth is expected to be in the emerging countries of Asia, Eastern Europe

and Latin America, but the more significant increases in overall value will continue to be in

the established markets of North America, Western Europe and Japan. Much of this

growth will be front-loaded due to the continued importance of appreciation in 2007 and

2008, and net additions will tend to become more significant towards the end of the

decade. These variations in the dimensions of the growth of the market are of great

importance to investors as they develop their strategies across the increasingly global real

estate market.

It is clear that the estimates provided in this paper need to be treated with caution as they

are subject to a series of assumptions and projections about the drivers of value. There is

also a series of external factors that could significantly impact the growth of the markets.On the one hand, there is the possibility that government initiatives could, for instance,

increase the amount of sale and leaseback activity greater than outlined in the paper. On

the other, there is a risk of a reversal in the recent high levels of financial market liquidity,

leading to potentially significant loss of value for many real estate markets. Despite these

caveats and these risks, this short paper provides important insights into the dimensions of

change in the market that should be a critical consideration when formulating real estate

investment strategies.

The performance of the real

estate markets is set to fall off

over the coming 5 years...

but the global real estate

market is set to continue to

grow with variations in thetiming and nature of growth

around the world..


19/22

RREEF Research 18

ANALYST CERTIFICATION

The views expressed in this report accurately reflect the personal views of the undersigned

lead analyst. In addition, the undersigned lead analyst has not and will not receive any

compensation for providing a specific recommendation or view in this report.

(Signed) Peter Hobbs


20/22

RREEF Research 19


21/22

20

Important disclosure

2007. All rights reserved.

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This material is intended for informational purposes only and it is not intended that it be relied on tomake any investment decision. It does not constitute investment advice or a recommendation or anoffer or solicitation and is not the basis for any contract to purchase or sell any security or otherinstrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction asa consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates,gives any warranty as to the accuracy, reliability or completeness of information which is contained inthis document. Except insofar as liability under any statute cannot be excluded, no member of theDeutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability(whether arising in contract, in tort or negligence or otherwise) for any error or omission in this

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The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at thetime of issue and are subject to change. This document is only for professional investors. Thisdocument was prepared without regard to the specific objectives, financial situation or needs of anyparticular person who may receive it.

An investment in real estate involves a high degree of risk and is suitable only for sophisticatedinvestors who can bear substantial investment losses. The value of shares/units and their derivedincome may fall as well as rise. Past performance or any prediction or forecast is not indicative offuture results. The forecasts provided are based upon our opinion of the market as at this date and aresubject to change, dependent on future changes in the market. Any prediction, projection or forecast onthe economy, stock market, bond market or the economic trends of the markets is not necessarilyindicative of the future or likely performance.

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22/22

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