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The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar 22 nd November 2006

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Page 1: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London

Presented by:

Richard Johnson

Managing Director

Istithmar

22nd November 2006

Page 2: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

“A journey of a thousand miles begins with a single step”- Traditional Chinese proverb

Page 3: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

230 Park Avenue

Page 4: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

What makes Real Estate investment attractive ?

Page 5: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

For international investors - a mix of science and art ?

Source of diversification - a risk adjusted return generator

Real estate as an inflation or deflation hedge

Real estate as a component of the investment universe

Real estate can be a strong cash flow generator

Natural affinity for real estate ?

Ego and “snob” Values

Different perceptions of value – “Because we can”

Page 6: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Grand Buildings

Page 7: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

What makes it attractive – practical aspects

Tool for risk dispersion

Management

Low covariance with gilts / bonds

Illiquidity

Land Based

Locally Specific

Lumpiness

Long term asset

Can be used for different purposes

DISADVANTAGES

High entry barrier

Monopoly value

Costs

High transaction costs

Cannot be moved

Needs Local Expertise

RE ATTRIBUTESADVANTAGES

I can influence asset performance

Page 8: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Market selection

Page 9: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

World real estate at night

Page 10: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

World Real Estate Value by Region

Total Stock US 7.1 Trillion

Invested Stock USD 2.4 Trillion

Investible Stock USD 4.7 Trillion

Invested Stock USD 4 Trillion

Investible stock USD 5.2 trillion Total stock USD

7.5 Trillion

Invested Stock USD 1.4 Trillion

Investible Stock 2.5

Trillion

Total Stock of USD 4.6 Trillion

Source: RREEF Research

Page 11: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Any time you take a chance you better be sure the rewards are worth the risk because they can put you away just as fast for a $10 heist as they can for a $1,000,000 job.

- Stanley Kubrick

Page 12: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

280 Park Avenue

Page 13: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Our changing world…

Page 14: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

What lies ahead?

Consolidation

Innovative Capital Markets

Further Globalisation

Emergence of newer markets

Continued growth of CMBS and Globalisation of REITs

Wider range of acceptable markets ?

Page 15: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Market Risks

Source: RREEF Research

Page 16: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Looking for growth

Page 17: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Picking deals and what you get from them

Potential Return

Source: RREEF Research Risk

CoreIRR 12%Leverage

50%

Value Add

IRR 12 - 18%Leverage 30 -

70%

Opportunistic

IRR 18 - 20%Leverage

70%+

- Equity investments in real estate related assets- seeks to capitalise on economic, financial and property market dislocation

- Properties requiring redevelopment- Moderate leverage- Intermediate hold

- Equity investments in stabilised, income producing properties- Low to moderate leverage- Long term hold

Page 18: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

W Hotel

Page 19: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Managing investor expectations

Short term sentiment and expectation management…

Create a diversified portfolio

Structure deals using a spread of financial instruments.

Active asset management to unlock value enhancement opportunities.

Monitor portfolio performance through regular reporting and appraisals.

Explore exit strategies to maximise IRR returns.

Page 20: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Hotel Washington

Page 21: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Global trends spurring greater real estate investment

Globalisation of capital flows

More efficient markets

Tighter tax regimes

Emerging Markets

“Weight” of capital

Page 22: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Global Flow of Capital into real estate 2005

Source: PwC

Page 23: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Success is a consequence and must not be a goal.- Gustave Flaubert

Page 24: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Adelphi

Page 25: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

“Follow the yellow brick road. We’re off to see the Wizard”- EH Harburg – The Wizard of Oz

Page 26: The Attraction of Investing in Real Estate A journey from the Palm to Park Avenue via London Presented by: Richard Johnson Managing Director Istithmar

Emirates Towers, Level 4, Sheikh Zayed Road, PO Box 17000. Dubai, United Arab Emirates

www.Istithmar.ae