2016 Global Outlook Charles...CONFIDENTIAL | NOT FOR REPRODUCTION ANNUAL INVESTOR MEETING | MAY 25,...
Transcript of 2016 Global Outlook Charles...CONFIDENTIAL | NOT FOR REPRODUCTION ANNUAL INVESTOR MEETING | MAY 25,...
2016 Global Outlook
Tony Charles
June 2016
1520342 exp 06/10/2017
CONFIDENTIAL | NOT FOR REPRODUCTION 2ANNUAL INVESTOR MEETING | MAY 25, 2016
Important Notice
General. The information contained herein refers to research, but does not constitute an equity research report and is not from Morgan Stanley Equity Research. Unless otherwise indicated, the viewsexpressed are those of the research and strategy team of Morgan Stanley Real Estate Investing (“MSREI”) and may differ from those of Morgan Stanley Equity Research and other Morgan Stanley affiliates(including others within MSREI). These views may also differ from investment strategies implemented by MSREI now or in the future. The information (including facts, opinions, estimates or projections)contained herein is based on financial, economic, market and other conditions prevailing as of the date hereof. As such, it remains subject to change at any time. By providing such information, MSREIassumes no obligation to provide any update or supplement to such information following the date hereof. Although reasonable care has been taken to ensure that the information (including facts, opinions,estimates or projections) contained herein is accurate, complete and fair, no warranty, express or implied, is made as to the accuracy, completeness or fairness of such information. Certain economic andmarket information contained herein may have been obtained from third parties sources. While MSREI believes that such sources are reliable, neither MSREI nor any other Morgan Stanley affiliate hasindependently verified such information or assumes any responsibility or liability for the accuracy, completeness or fairness of such information or any omission of information.
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Past Performance. Past performance is not indicative of future results. Any projected or target returns contained herein are being provided for informational purposes only. Investments in real estate mayresult in the loss of principal. There can be no assurance that any projected or target returns, or any returns at all, will be achieved.
Forward-Looking Statements. These materials contain projections and other forward-looking statements. Any statements that are not historical facts are forward-looking statements that involve risks and areinherently uncertain. Sentences or phrases that use such words as “believe,” “anticipate,” “plan,” “may,” “hope,” “can,” “will,” “expect,” “should,” “goal,” “objective,” “projected” and similar expressions alsoidentify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Portfolio “profiles” by property type, location, investment structure, leverage or return for blind poolor partially blind pool products should be treated as projections. Projections and other forward-looking statements, including statements regarding MSREI’s assessment of the market, are by their natureuncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatorydevelopments, errors in strategy execution, acts of God and other asset-level developments. There can be no assurance that projections and other forward-looking information will not change based onsubsequent developments and without further notice, and no assurance can be given as to outcome. You should not to place undue reliance on forward-looking statements, including forecasts and projections,and statements regarding the assessment of the market, which speak only as of the date referenced herein.
Targeted Purpose and Audience. These materials have been prepared for a specific purpose and a specific target audience. These materials have been designed for use on a one-on-one basis; if you arenot the intended recipient and/or plan on using these materials for other than the intended purpose, then these disclosures may not be adequate for your purposes. These materials do not purport to be all-inclusive or to contain all the information necessary to make an investigation or decision regarding MSREI or any investment in real estate. Please discuss any questions you may have with an appropriateMSREI representative.
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Limitations on Use/Distribution in Certain Jurisdictions. Offers and sales of interests in any fund referred to herein may not be registered under the laws of any jurisdiction. The distribution of thesematerials in certain jurisdictions may be restricted by law and persons into whose possession these materials come should inform themselves about, and observe, any such restrictions. Any failure to complywith these restrictions may constitute a violation of the laws of any such jurisdiction.
Investment Risk. Investments in real estate are speculative and include a high degree of risk. Investors could lose their entire investment. Investments in real estate are highly illiquid, and are only suitablefor long-term investors willing to forgo liquidity and put capital at risk for an indefinite period of time. Investments in real estate depend on specialized management skills, may not be diversified and may besubject to more abrupt or erratic price movements than the overall securities market. Other risks associated with investments in real estate may include the following: fluctuations in the value of underlyingproperties; defaults by borrowers or tenants; market saturation; changes in general and local economic conditions; decreases in market rates for rents; increases in competition, property taxes, capitalexpenditures or operating expenses; and other economic, political or regulatory occurrences affecting the real estate industry.
Consultation of Advisors. These materials do not constitute legal, tax, financial or other advice. The legal, tax and other consequences of any proposed transaction may differ for each recipient as a result of,among other things, the particular financial situation of, and the laws and regulations applicable to, each recipient. You should consult your own legal counsel, accountants and other advisors regarding theinformation contained herein and the transactions described hereby.
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CONFIDENTIAL | NOT FOR REPRODUCTION 3ANNUAL INVESTOR MEETING | MAY 25, 2016
MACRO
• Slower, below-trend global economic growth, held back by weakness in emerging markets
• Heightened market volatility may lead to tighter financial conditions
• Consumer and housing sectors to lead the next wave of global economic activity
CAPITAL MARKETS
• Real estate remains attractive long-term, relative to alternatives
• Transaction activity remains robust ($1.3 Tn for the TTM through 1Q 2016(1))
• Cap rates likely to stabilize or marginally increase, lowering expected future returns
FUNDAMENTALS
• Limited supply in most markets and asset types
• Strong forecasted rent growth
• Consumer and housing linked sectors likely to outperform (retail, logistics and residential)
Executive Summary
1. Real Capital Analytics, data as of Q1’2016.2. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to changes in
market or economic conditions.
Global Macro Backdrop
SECTION 1
CONFIDENTIAL | NOT FOR REPRODUCTION 5ANNUAL INVESTOR MEETING | MAY 25, 2016
Expansion
Recovery Repair
SlowdownU.S.
Canada
Brazil
Japan
China
Australia
India
U.K.
Germany
France
Spain
Italy
Russia
Bubble size = size of country economyAmericas Europe Asia Pacific
Sweden
Major Economies at Various Stages in the Cycle
1. Morgan Stanley Research.2. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to changes in market or economic
conditions.3. The market cycle positioning framework is the outcome of the use of an internal tool being developed by MSREI based on a consistent set of real estate metrics available on a
country-by country basis. It is aimed to help identify drivers of market performance, market positioning relative to prior cyclical peaks and troughs, turning points and implications for investing strategies. It is updated on a quarterly basis in line with the release of macroeconomic and commercial real estate data. The tool uses a mix of real estate fundamentals and capital markets metrics that are generally available in applicable countries (including rent, occupancy, cap rates and spreads and liquidity and values metrics). The majority of the metrics are based on “actuals”, versus relying on forecast data. Note that other outcomes could result if different inputs or assumptions are made. The market cycle positioning constitutes a “forward looking statement.” Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statement.
CONFIDENTIAL | NOT FOR REPRODUCTION 6ANNUAL INVESTOR MEETING | MAY 25, 2016
GDP Forecasts – Basecase and U.K. Leave Scenarios
2011 – 2020E
Prime City Office Rents – Remain vs Leave / Low
Growth Scenarios (1)
2009 – 2020E
Implications of Brexit
Y-o-Y, %Index, = 100 at 2009
2.0
1.2
2.2
2.9
2.3
1.7
2.3 2.2 2.1 2.1
1.6
(0.8)
(0.2)
0.9
1.5 1.5
1.8 1.7 1.6 1.5
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Basecase U.K. Basecase EuropeU.K. (leave) U.K. leave (bear)Eurozone (U.K. leave)
Forecast
80
100
120
140
160
180
200
2009 2012 2015 2018 2021 2024U.K.: Main U.K.: ExitParis: Main Paris: Low GrowthFrankfurt: Main Frankfurt: Low Growth
Forecast
1. In this scenario, central bank measures struggle to achieve traction and nominal government bond yields, economic growth, and inflation remain at exceptionally low levels in a mutually reinforcing weak-growth outlook
2. All forecasts are subject to change at any time and may not come to pass due to changes in market or economic conditions
Source: U.K. ONS, Moody’s Analytics, Morgan Stanley Research, forecasts as ofApril 27, 2016
Source: PMA, as of March 2016
CONFIDENTIAL | NOT FOR REPRODUCTION 7ANNUAL INVESTOR MEETING | MAY 25, 2016
Inflation
Emerging & Developed Markets
Market-Implied Change in Policy Rate over 2016
December 2015 expectations vs May 2016
Central Banks Remain Accommodative
1. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to changes in market or economic conditions.
2. Readers should be aware that forward-looking statements, and statements regarding MSREI’s assessment of the market are by their nature inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, acts of God, and other developments.
0.5
0.0
0.3
0.0
(0.1)
0.0
(0.2)
0.3
0.0
(0.1)
(0.2)
(0.5)
(0.4)
(0.5)
(0.6)
(0.4)
(0.2)
0.0
0.2
0.4
0.6
US Canada UK Sweden Eurozone Japan Australia
Americas Europe Asia Pacific
0
2
4
6
8
2010 2011 2012 2013 2014 2015 2016 2017
EM DM
(%) 2016 Expected Change, bps
CONFIDENTIAL | NOT FOR REPRODUCTION 8ANNUAL INVESTOR MEETING | MAY 25, 2016
WHICH OF THESE FOLLOWING OUTCOMES HAS NEGATIVE INTEREST RATES
ACHIEVED IN EUROPE?
A. Boosted inflation
B. Encouraged bank lending to the private sector
C. Weakened foreign inflows, depreciated the euro and stimulated exports
D. Increased investor appetite for higher yielding investments
E. None of the above
Audience Question
Structural Trends
SECTION 2
CONFIDENTIAL | NOT FOR REPRODUCTION 10ANNUAL INVESTOR MEETING | MAY 25, 2016
Working Age Population Growth
Annualized working age population (20 – 64) growth
Demographic Trends
Source: UN Population Division, MSREI Strategy, data as of July 2015Notes1. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to
changes in market or economic conditions.2. Readers should be aware that forward-looking statements, and statements regarding MSREI’s assessment of the market are by their nature
inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, acts of God, and other developments.
Aging Population
%
2.7
2.3
1.6
0.6 0.6
1.1
0.5
1.9
0.9
0.3 0.0
0.3
1.4
0.7 0.7
0.2 0.1 0.1
(0.0)
(0.4)(0.5) (0.6) (0.7)
(0.9)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mexico Brazil Australia Sweden UK U.S. France China Spain Italy Japan Germany
2000 - 2015 2015 - 2030
CONFIDENTIAL | NOT FOR REPRODUCTION 11ANNUAL INVESTOR MEETING | MAY 25, 2016
Increasing Urbanization Rates
2014
Demographic Trends
Source: UN Population Division, MSREI Strategy, data as of July 2015Notes1. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to
changes in market or economic conditions.2. Readers should be aware that forward-looking statements, and statements regarding MSREI’s assessment of the market are by their nature
inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, acts of God, and other developments.
United States Mexico
Brazil
DenmarkSweden
France
Italy
Spain
Eurozone
United Kingdom
Australia
China
India
Japan
20
40
60
80
100
0 1 2 3 4 5 6 7 8 9
Bubble Size:
Newly Urbanized Population
(2004-2014, MM People)
% of Population urbanized
Ten year % change
Urbanization
CONFIDENTIAL | NOT FOR REPRODUCTION 12ANNUAL INVESTOR MEETING | MAY 25, 2016
Office Space Usage
U.S. & Europe
Technology Trends
Source: NAIOP, Costar, BLS, Moody’s Analytics, as of April 2016Notes1. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to
changes in market or economic conditions.2. Readers should be aware that forward-looking statements, and statements regarding MSREI’s assessment of the market are by their nature
inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, acts of God, and other developments.
Mobility and the Sharing Economy
Square Feet per Employee
190
200
210
220
230
240
2000 2002 2004 2006 2008 2010 2012 2014
U.S. Europe
CONFIDENTIAL | NOT FOR REPRODUCTION 13ANNUAL INVESTOR MEETING | MAY 25, 2016
3
4
5
6
7
8
9
2011 2012 2013 2014 2015 2016A++ A (Average) B (Average)
Industrial Demand & E-commerce
Net Absorption & YoY E-commerce Sales Growth
Mall Cap Rates
Cap Rates by Quality
Technology Trends
Net Absorption, MM SF %
1. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to changes in market or economic conditions.
2. Readers should be aware that forward-looking statements, and statements regarding MSREI’s assessment of the market are by their nature inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, acts of God, and other developments.
Source: CBRE-EA, Census Bureau, Moody’s Analytics, data as of June 2016 Source: Green Street Advisors, MSREI Strategy, data as of 1Q 2016
E-commerce impacts
E-commerce Sales, YoY %
299
216
172
-54
-243
30
142 137
248 252 245
0
5
10
15
20
25
30
-300
-200
-100
0
100
200
300
400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Industrial Net Absorption E-commerce Sales
CONFIDENTIAL | NOT FOR REPRODUCTION 14ANNUAL INVESTOR MEETING | MAY 25, 2016
Airbnb’s Potential Impact to Hotel Demand
US and Europe Room Nights
Sharing Economy
Source: Morgan Stanley Research, as of November 2015
AirBnB
MM
Hotel Occupancy
%
2,796 2,866 2,926 2,982 3,044 3,115 3,189
3164 95
123
148 168183
65.0
65.5
66.0
66.5
67.0
67.5
68.0
68.5
69.0
69.5
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2014 2015 2016 2017 2018 2019 2020
Hotel Demand Airbnb Basecase Hotel Occupancy Airbnb Weaker Airbnb Stronger
1. All forecasts are subject to change at any time and may not come to pass due to changes in market or economic conditions
CONFIDENTIAL | NOT FOR REPRODUCTION 15ANNUAL INVESTOR MEETING | MAY 25, 2016
Bank Lending Standards
For Commercial Real Estate Loans
Construction Loans
Construction and Development Loans Outstanding
Regulatory Trends
Net % Easing Standards
1. The opinions expressed herein are those of the MSREI team as of the date of this presentation and are subject to change at any time due to changes in the market oreconomic conditions
Source: Board of Governors of the Federal Reserve, Bank of England, data as of June 2016
Source: FDIC Quarterly Banking Profile, data through December 31, 2015
197
231245
272
338
450
565
629
591
451
321
240
203 210239
275
0
100
200
300
400
500
600
700
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5(80)
(60)
(40)
(20)
0
20
40
60
2007 2008 2009 2010 2011 2012 2013 2014 2015
U.S. UK
Impact on Lending
USD, Bn
Commercial Real Estate Implications
SECTION 3
CONFIDENTIAL | NOT FOR REPRODUCTION 17ANNUAL INVESTOR MEETING | MAY 25, 2016
Annual Returns and Volatility
Return CAGR and Ten-Year Annual Volatility, to 1Q 2016
Real Estate Returns Remain Attractive
7.5
(6.2)
(0.0) (0.8)
4.8 5.411.5
2.7
7.5
5.00.40.8
-1.2
2.4 3.34.9
7.95.8
23.2
7.1
17.7
3.9
22.2
(10.0)
(5.0)
0.0
5.0
10.0
15.0
20.0
25.0
European Private RealEstate
European Public RealEstate
Hedge Funds MSCI Europe Pan-EuropeanAggregate Bond Index
Pan-European High-Yield Bonds
1 yr 5 yr 10 yr Annual Volatility
%
Source: IPD, FTSE/ERPA NAREIT, Hedge Fund Research, Inc. © HFR, Inc., MSCI, Barclays, MSREI, as of June 20161. As of 1Q 2016 based upon total return on a quarterly basis. Private Real Estate is the IPD Pan-European Index, Public Real Estate is the FTSE/ERPA NAREIT Developed
Europe REIT Index, Hedge Funds are the Fund-of-Funds index from Hedge Fund Research, Inc., Stocks are the MSCI Europe, Bonds are the Barclays Pan-European Aggregate Index, High Yield is Barclays Pan-European High Yield Bond Index. MSREI calculations
2. Past performance is not necessarily indicative of future results
CONFIDENTIAL | NOT FOR REPRODUCTION 18ANNUAL INVESTOR MEETING | MAY 25, 2016
Real Estate Transaction Volume (1)
Encouraging Liquidity
Source: Real Capital Analytics, data as of May 2016
USD Bn
548
161
60
151
232
282
342
388
486 459
413
240
125
170
211 196
256
308
349 312
273
167
231
382 410
440
642
549
504 483
0
100
200
300
400
500
600
700
'08 '10 '12 '14 '16Q1TTM
'08 '10 '12 '14 '16Q1TTM
'08 '10 '12 '14 '16Q1TTM
Americas: $352 Bn cross-border
CanadaChina
NorwaySingapore
Qatar
EMEA: $1018 Bn cross-border
United StatesUK
CanadaGermanyFrance
Asia Pacific: $294 Bn cross-border
Hong KongChina
SingaporeUnited States
Canada
Cross-Border Domestic Capital (Non-Development) Development Sites
Leading Cross-Border
Capital Sources:
Asia Pacific
TTM Volume as % of '07:
177%
Americas
TTM Volume as % of '07:
84%
EMEA
TTM Volume as % of '07:
76%
CONFIDENTIAL | NOT FOR REPRODUCTION 19ANNUAL INVESTOR MEETING | MAY 25, 2016
Real Estate Cycles
Cycle Duration
Market Cycle Normalizing
Years
1. Cycle model: 1) Rent: YOY, vs peak, 3 year forecast; 2) Occupancy: YOY, 1 year forecast; 3) Cap rate and spreads to 10YT: vs peak, YOY change; 4) PPSF and liquidity: vs peak, YOY change. All countries positioned reflect office assets, except for the US, which includes office, retail, apartment and industrial sectors.
Source: PMA, NCREIF, MSREI Strategy, data as 1Q 2016
12
9
12
5
87
8
2
6
7
6
3
0
2
4
6
8
10
12
14
U.S. UK Europe Japan
Longest Average Current
Market Cycle (2)
1Q 2016
Source: Source CBRE-EA, PMA, NCREIF, RCA, Bloomberg, MSREI Strategy, data as of 1Q 2016
Netherlands
Falling
Bottoming
Accelerating
Peaking
U.S.
Decelerating Weakening
Sweden
Singapore
South Korea
UK, U.S.
Spain
Italy
France
CEE
Germany
Japan
AustraliaDenmark
Austria
China
Finland
Office
Industrial
Retail
Ireland
UK
France
Germany
France
Germany
UKSpainItaly
Spain
CONFIDENTIAL | NOT FOR REPRODUCTION 20ANNUAL INVESTOR MEETING | MAY 25, 2016
Sydney
Melbourne
BrisbanePerth
ShanghaiHong Kong
Tokyo
Osaka
Singapore
Seoul
LondonParis
Madrid
Milan
Frankfurt
New York
DC
SF
Houston
Chicago Stockholm
(60)
(40)
(20)
0
20
40
60
(60) (50) (40) (30) (20) (10) 0 10 20 30 40 50 601Q 2016 1Q 2015
Office Markets vs. peak
By Market
Market Cycle: Arbitrage opportunities
Source: PMA, MSREI Strategy, data as of 1Q 20161. Readers should be aware that forward-looking statements, and statements regarding MSREI’s assessment of the market are by their nature
inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulator developments, acts of God, and other developments.
2. The opinions expressed herein are those of the MSREI team as of the date of the presentation and are subject to change at any time due to changes in market or economic conditions.
Rent, % of peak (2007 – 2008)
Capital Values, % of peak (2007 – 2008)
CONFIDENTIAL | NOT FOR REPRODUCTION 21ANNUAL INVESTOR MEETING | MAY 25, 2016
WHICH SECTOR HAS THE BEST INVESTMENT PROSPECTS IN EUROPE OVER THE NEXT
THREE YEARS?
A. Residential
B. Retail
C. Office
D. Logistics
E. Hotels
Audience Question
CONFIDENTIAL | NOT FOR REPRODUCTION 22ANNUAL INVESTOR MEETING | MAY 25, 2016
Global Real Estate Environment & Opportunities
Note:The opinions are those of the MSREI team as of the date of the presentation and are subject to change at any time due to changes in market or economic conditions
• Value-add / Repositionings
• Select new developments
• Recapitalizations
• Defensive / cash flow
investments
• Core in non-core markets
• Recapitalization / distressed
opportunities
Developed markets
• Value-Add / Repositionings
• Defensive / cash flow
investments
Growth markets
• Development partnerships
UNITED STATES EUROPE ASIA
• Recovery softening, interest
rates set to rise in line with
inflation
• Volatility = tighter financing
conditions
• Fundamentals holding as new
supply remains muted
• Capital flows robust, yields
stabilizing
• Pricing divergence between
prime and non-prime
• Improving and more broad-
based macro recovery, but
structural challenges remain
• ECB QE program expanding,
consumer spending
accelerating
• Yield spreads between core
and non-core markets still
exist
• Geopolitical tensions
heightened
• Japan: Rent recovery
accelerating despite slow
growth economy
• Australia: GDP growth
slowing, property
fundamentals moderating but
yield compression continues
• China: heightened volatility as
economy transitions and
slows. Long term
fundamentals remain
favorable
UNITED STATES EUROPE ASIA
REGIONAL MARKET THEMES
TARGETED INVESTMENT STRATEGIES BY REGION