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GLOBAL VISION2016 MID-YEAR UPDATE

WELCOME TO GLOBAL VISION

Real estate investors may feel they have been on a rollercoaster ride over the past decade. During the Global Financial Crisis, growth in the world’s economies, strong occupier space demand and high real estate investment sales volumes and prices all collapsed. The recovery from that downdraft has been by fi ts and starts, with numerous double-dip recession scares. But by most measures, economic and real estate conditions are mostly back to where they were prior to the GFC. Most national economies have re-gained all their lost output, and then some. Occupier demand is generally back on track. Recent investment activity has paced the 2007 previous peak, and prices for prime assets have returned to pre-crisis levels.

Since our last edition of Global Vision, the rollercoaster has continued. The year opened “risk-off,” with a big sell-off in global equity and corporate bond markets. Recent economic news in many countries, notably the U.S., China and Japan, has been disappointing. Pricing for prime real estate assets remains sharp, but interest in secondary properties and locations has receded.

Recently, January’s dark clouds have somewhat dissipated. Equity markets have largely rebounded back to the range of the past couple of years. Commodity, particularly oil, prices have perked up, although they’re still way below mid-2014 levels. Manufacturing is imperiled by global overcapacity, but consumption remains solid, especially in developed markets. Consumers are shifting, however, to more experiential and online spending, challenging traditional channels.

In this mid-year update of our 2016 Global Vision, we review what has and hasn’t changed over the past six months. Our global economic outlook remains largely intact – moderate expansion close to trend. The most notable exception is the U.S., where “escape velocity” just isn’t in the cards; instead quarterly volatility will average to just middling performance.

Likewise, our outlook for real estate returns remains muted. The economic backdrop translates into sustained occupier demand. Limited new supply in many developed countries means rents will trend up. But the era of cap rate compression is over. Accommodative monetary policy means lower-for-longer interest rates. But even a mild cap rate expansion will generally negate income growth. Core real estate returns will be positive, but will be driven by income, not appreciation, and will trend below recent gains.

In this update, we identify ways astute real estate investors can still capture solid, even outsized, performance. One way is by identifying sectors/geographies with superior relative value as described in our RARE analysis. Another is to capitalize on pricing disconnects between the public and private markets as delineated in our Listed Real Estate discussion. Another is to participate in the Infrastructure universe. Investors in direct real estate should focus on investment themes that will be resilient in the rollercoaster ride of economic and pricing cycles. In our regional outlooks, we detail our preferred investment themes in Europe, Asia Pacifi c and the States.

We trust you’ll fi nd this update of Global Vision interesting and informative. We welcome your comments on our fi ndings, and look forward to regularly sharing our outlook.

Doug HerzbrunGlobal Head of Research

“The more things change, the more they stay the same.”*

*Jean-Baptiste Alphonse Karr, 19th Century French writer.

CBRE GLOBAL INVESTORS

GLOBAL HEADQUARTERS515 South Flower Street • 31st FloorLos Angeles, CA 90071United States +1 213 683 4300

Global Vision is published semi-annually by CBRE Global Investors. Our intent is to provide all readers with a global investment outlook for all of the major property markets. We aim to provide coverage of real estate investment and development trends, with an emphasis on economic and political implications, real estate fi nance and capital markets metrics and other real estate-related issues throughout the developed and developing world. Please contact us if you are interested in receiving a more detailed analysis and more specifi c commentary of a particular region, country or metropolitan area.

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Recommended bibliographical listing:CBRE Global Investors. Global Vision Update 2016. Los Angeles, CA: CBRE Global Investors, 2016.

If you have any questions/comments about this publication, would like to be added to our distribution list, or would like permission to reprint any text or graphics, please reach out to any of our Global Strategy & Research Team members as listed in the back, or contact one of our primary offi ces directly, with information as shown above.

1 Assets Under Management (AUM) refers to fair market value of real estate-related assets with respect to which CBRE Global Investors provides, on a global basis, oversight, investment management services and other advice, and which generally consists of properties and real estate-related loans; securities portfolios; and investments in operating companies, joint ventures and in private real estate funds under its fund of funds program. This AUM is intended principally to refl ect the extent of CBRE Global Investors’ presence in the global real estate market, and its calculation of AUM may differ from the calculations of other asset managers. As of March 31, 2016.

CBRE Global Investors is one of the world’s largest real estate investment management fi rms with $89.71 billion in assets under management. Founded in 1972, the fi rm sponsors real estate investment programs in North America, Europe and Asia Pacifi c for investors worldwide including public and private pension funds, insurance companies, sovereign wealth funds, foundations, endowments and private individuals. Programs include core/core-plus, value-added and opportunistic strategies through separate accounts and commingled equity funds, debt investment, global multi manager programs and listed global real estate securities vehicles. The fi rm offers synergistic access to the world’s premier real estate platform and employs approximately 800 professionals working in 29 offi ces in 20 countries.

GLOBAL MACRO ECONOMIC ANALYSIS 1

RARE (Risk-Adjusted Real Estate) 4

GLOBAL LISTED REAL ESTATE 6

GLOBAL LISTED INFRASTRUCTURE 10

EUROPEAN OUTLOOK 12

ASIA PACIFIC OUTLOOK 16

U.S. OUTLOOK 20

GLOBAL STRATEGY & RESEARCH TEAM 24

TABLE OF CONTENTS

GLOBAL VISION | 2016

GLOBAL VISION | 2016 | 1

Since the last edition of Global Vision, fi nancial markets have gone through a pronounced risk-off phase on the back of fears over the pace of the Chinese slowdown; the impact of dramatically lower oil prices; a rise in U.S. corporate credit spreads; and the rise of political risk around Brexit in the UK. However, since the apex of that fear in January, markets have calmed and some of the economic high frequency data have recovered. More signifi cantly, despite the December increase in the U.S. Fed Funds rate, the prevailing trend has been for central banks to cut interest rates, sometimes into negative territory, in order to stimulate global demand.

How has all of this impacted our base case economic view? The biggest change is that we are now adopting a more bearish scenario for the U.S., in which the economy is already at the start of a cyclical slowdown. We are also more bearish on the knock-on impact of the Chinese slowdown on Singapore and Hong Kong. That said, we are

more optimistic on the outlook for Australia, the UK and the Eurozone, due to their more accommodative monetary policies. A key point to remember is that we are not, however, forecasting a recession in any major market over the forecast period.

Starting off with the U.S., GDP growth is forecast to run at 1.9% pa over the next fi ve years, never reaching “escape velocity” before slowing in 2019 and 2020. This compares to the previous forecast of 2.4% pa. (Figure 1). Employment growth runs at 1.2% pa, rather than 1.5% pa and the unemployment rate edges up to 5.3%, rather than remaining at 4.8%. The Fed Funds rate still rises but at a slower pace, reaching a peak of 3.2%. It must be emphasized that even with this “modest growth” scenario the U.S. does not fall into a recession. Rather, the cyclical slowdown we had always anticipated has just come earlier than previously expected.

Turning to China, the forecasts assume that China continues to structurally shift toward the consumer sector and to liberalise its capital markets. This leads to decent but diminishing GDP growth, decelerating from 6.9% in 2015 to 5.6% in 2020. The true GDP growth rate is likely a percentage point lower than the offi cial reported number, but this is still suffi cient for China to create jobs. It also supports the regional economic view that wage growth and consumer spending in the major coastal cities are holding up well. This relatively benign forecast does not ignore the fact that China faces the daunting challenge of clearing bad loans off bank balance sheets (although she is far from alone in this respect). But this leads back to the forecast of accommodative monetary policy to offset the potential credit crunch, as this clean-up works its way through the system.

Switching to Japan, without serious structural reform, the fears are that Japan will be trapped in a low-growth,

GLOBAL MACRO ECONOMIC ANALYSIS

2 | CBRE GLOBAL INVESTORS

low-infl ation environment. This might be better than being trapped in defl ation, but with yields already historically low, it begs the question of how much more juice there is left in the recovery. GDP growth is forecast to run at around 1% pa for the next fi ve years and still above long-term average. Crucially, infl ation is expected to average 1% over the fi ve years, which isn’t the 2% target Bank of Japan Governor Kuroda would like, but beats defl ation.

Meanwhile, in the Eurozone we are fi nally seeing a sustained, if modest, recovery. GDP growth increased from 0.9% in 2014 to 1.5% in 2015 and is expected to accelerate to 1.8% in 2016 and 2017. This is a modest, upward revision of the forecasts used in the last forecasting round and represents a period of above-trend growth throughout the fi ve-year forecast period. In contrast to most other major markets where the consumer is driving growth, in the Eurozone it’s industrial production growth that is forecast to outpace the wider economy. Most importantly, monetary policy is forecast to remain exceptionally benign, with the ECB still in loosening mode.

Within the Eurozone aggregate, the markets forecasted to see the fastest growth are Ireland and Spain, but the Netherlands has also seen a sizeable upward revision and looks set for a strong cyclical upswing. France and Germany have remarkably similar growth rates, as France accelerates and Germany decelerates.

Perhaps the most signifi cant point is not that these numbers have been revised up and look fairly good – although that is certainly a pleasant change – but that the risks around the forecasts have diminished. In the last forecasting round we were explicitly pricing in an orderly Grexit, whereas today, a massive further monetary loosening and bond purchase programme has markedly lowered the chances of that happening.

Finally, the UK economy is, like the U.S., further along in its cycle than its European peers and similarly achieved its cyclical peak for GDP growth in 2014. Oxford Economics expects the most gentle of gentle slowdowns, reverting to trend growth of 2.25% pa in 2018 and 2019 before it re-accelerates. There’s no recession and actually no build-up of spare capacity from below-trend growth. The consumer sector starts off outpacing the wider economy but then underperforms as rising interest rates stymie the highly indebted household sector. The expectation is for infl ation to slowly accelerate toward the Bank of England’s 2% target, but for employment growth to decelerate.

This is a fantastic set of forecasts and the very shallow nature of the cyclical downturn might raise eyebrows were it not for the very strong population growth numbers (both from a rise in the native birth rate and immigration) that underpin what might be seen as a structural shift in trend growth. Accordingly, when looking at the real

estate forecasts, which do show a pronounced cyclical slowdown, one should read them as being heavily infl uenced by fundamental valuation metrics, sector specifi c supply issues, and the rise in the government bond yield that should naturally accompany such a period of robust growth.

Overall, the macro forecasts are pretty benign. China is in a soft landing, as is the U.S. to some extent, and to an even more minimal extent, the UK. The Japanese recovery loses a bit of steam too. Australia and the Eurozone respond positively to monetary loosening – the former driven by consumers and the latter by industry. The only markets that look buffeted by both domestic and international factors are Singapore and Hong Kong, but even there Oxford Economics is not forecasting recession. In general, infl ation is low around the world, but is reverting to central bank targets. And while central banks have less ammunition than they might like, what has been used seems to be supporting modest growth.

FIGURE 1: Base Case GDP Forecasts, % pa, 2016-2020

Sources: Oxford Economics for all markets except the U.S. which is Moody’s Analytics.

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A key metric we like to look at is how growth is forecast to behave relative to historic trend. Robust growth is, very simply, typically what you need to generate sustained job creation, which drives real estate demand, which propels rent growth. In every major market in Europe and the U.S., as well as Australia, this condition is met. In the case of Hong Kong, Singapore and China, this isn’t the case and means that while individual markets and assets might still look attractive, the basic macro demand picture is not as supportive.

Alongside the base case macro forecasts, CBRE Global Investors also chooses a globally consistent set of downside forecasts. Our current downside scenario is a China Hard Landing. In this scenario, Chinese investment spending collapses in 2016, new house building is 50% lower than at its peak in 2013 and private sector investment is scaled back as balance sheets deteriorate. This is accompanied by a credit crunch, as banks suffer from a spike in non-performing loans. As

one might imagine, this scenario affects the Asia Pacifi c markets most. (Figure 3) However, the Eurozone is as affected by this as Japan, given its successful orientation toward high-value exports to China, particularly by Germany, the manufacturing engine of Europe.

For the U.S. we have adopted a Moody’s scenario that is broadly in line with the China Hard Landing scenario. The “next-cycle recession” sees the U.S. fall into recession in 2019 before starting to recover in 2020. The magnitude of the recession is similar to that experienced in the early 1980s and early 1990s, but much less severe than the Global Financial Crisis. In the UK we have chosen to create a proprietary Brexit scenario, which assumes that the UK votes to leave the European Union on June 23rd 2016. The details of the scenario, are explained in a White Paper available to our clients, but the upshot of this scenario is that the UK experiences a 3.5% loss in GDP by 2019 but narrowly escapes a recession. It experiences half the fi nancial sector job losses seen in the Global Financial Crisis.

Overall, we feel that these downside scenarios refl ect the most proximate risk to each region’s economy and provide a stringent stress test for our real estate forecasts.

FIGURE 3: Difference Between Base Case & Downside Case 5 Year Forecast GDP Growth, PP


FIGURE 2: Difference Between The Current & Previous 2016-2020 Forecast For GDP Growth, PP (aggregate)


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BREXIT) Australia U.S. SingaporeHongKong China


RARE PORTFOLIO CONSTRUCTION AND RISK MANAGEMENT TOOLThe past six months have seen several changes to both structural and cyclical risks across both the global economy and property markets. Concerns around Brexit, woes in the energy sector, ECB’s expansion of QE and further rate cuts are all events investors have faced in early 2016. Changes in property market risks have been dominated by changes in current pricing, specifi cally in countries previously overlooked by many investors, as property yields are at or near historical lows across a growing number of markets. While these markets may still provide a healthy spread to government bonds, one may question whether government bonds are artifi cially low. At this point in the cycle, it is imperative to be cognizant of the risks within one’s portfolio.

Despite this dynamic risk environment, total return expectations for the 2016-2020 period are forecast to be 5.8% annually, a modest 10 basis points reduction from six months ago. While total return drivers vary by region and property type, a consistent global theme is that the majority of total returns will

be derived from income returns (4.9% income return; 0.9% capital growth). The U.S. is forecast to experience higher rent growth, but is expected to face expanding cap rates, whereas EMEA and APAC are forecast to experience lower rent growth but lesser-to-no cap rate expansion. The diverging cap rate outlooks across regions are driven by differing interest rate outlooks. Global aggregates provide high-level context but mask regional differences between local countries or cities.

We view risk as an eleven letter word – “appropriate” – so long as the risk undertaken is commensurate with an appropriate forecasted return. CBRE Global Investors’ has developed a proprietary tool called RARE (Risk Adjusted Real Estate), a top-down analytical model that uses regression analysis on a number of economic, real estate and capital market variables to set return and risk parameters. The RARE tool, along with other traditional risk management processes, is utilized by CBRE Global Investors in a variety of ways such as creating portfolios that best meet our clients’ risk tolerance/investment goals and performing forward looking attribution analyses on individual assets during hold/sell reviews. Our RARE score quantifi es

the expected return-to-risk ratio, which then helps guide our portfolio managers towards country/property type combinations with favorable RARE scores.

Particularly given today’s market, it is imperative to develop a disciplined investment strategy that forecasts returns on a risk-adjusted basis. From a risk-adjusted perspective, the U.S. appears to be attractive, with all four property types providing above average risk-adjusted returns within the RARE framework. In contrast, although it is forecast to provide the highest absolute returns, APAC does not provide many compelling risk-adjusted core opportunities, in aggregate. EMEA looks fair from a risk-adjusted perspective, however this region includes countries such as the Netherlands, which looks competitive, but other countries such as the UK, which are less attractive on the margin. Industrial assets are forecast to provide higher risk-adjusted and absolute returns across all regions, whereas offi ce assets are expected to provide poor risk-adjusted and absolute return prospects. CBRE Global Investors’ RARE tool will help investors navigate the current investment environment. (Figure 1).

RARE:RETURN AND RISK IN AGLOBAL RISK ANALYSIS FRAMEWORK


RISK FRAMEWORKWhile generally there is a long-term reward for risk taking, it is paramount that clients are aware of the level and changes in risks faced when making long-term property investments, not only at the time of acquisition, but over the entire hold period. For this reason, we have constructed a property-type-specifi c risk model that tracks relativities in investment risk for global property markets.

The property market risk is modeled at the country and property type level. The model makes a distinction between structural vs. cyclical risks and economic vs. property risks.

• Structural for long-term risks, which usually do not change signifi cantly over time, vs. cyclical for shorter-term risks, which are more prone to change over time along with the business and property cycles.

• Property risks, which directly impact property market pricing, vs. economic risk, which indirectly impact property market pricing.

The output of this model is a risk classifi cation that provides a risk score for each sector/market combination.

RETURN FORECASTSCBRE Global Investors models proprietary forecasts for close to 300 sector/metro combinations, producing a fi ve-year outlook. Regression analysis is used to forecast occupancy, rents and cap rates. These outcomes are used to generate fi ve-year return forecasts, taking into account prevailing lease practices and expense ratios

in the different markets. This top-down approach is corroborated by a bottom-up review of the local markets by the Firm’s on-the-ground asset management and acquisitions teams. These results are updated semi-annually. The process has been rigorously back-tested and is predictive. The return forecasts are a starting point in developing and managing an investment strategy. (Figure 2)

RARE SCORES:

The risk classifi cations are then combined with our respective markets return outlook to identify the most favorable expected return-to-risk ratio (Return/Risk = RARE Score) or markets that offer either an expected return or risk profi le in line with investment objectives. Based on the weighted average return-to-risk profi le of all markets and sectors, the RARE tool provides a systematic framework for acquisition or disposition decisions. Periodic review of existing allocations and a potential subsequent strategic rebalancing over time will help to achieve portfolio targets over extended periods.

Return and Risk for Offi ce, Retail, Industrial and Residential Markets (2016-20)

FIGURE 1: Outlook by Region and Property Type

FIGURE 2: Annual Portfolio Total Returns (2016-2020)

Source: CBRE Global Investors

Note: Returns are core and unlevered.Source: CBRE Global Investors

5.1%

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Europe

Asia Pacific

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Asia Pacific

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Asia Pacific

Industrial Retail Office Residential

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Cont. Europe other USA

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United Kingdom

USA China

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Japan

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China

United Kingdom


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Australia

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Lower Risk Risk Higher Risk

Industrial Office Retail Residential Average Global


GLOBAL REAL ESTATE STOCK WERE UP MID-SINGLE DIGITS Q1 2016 FOLLOWING A FLAT 2015Real estate shares generated a mid-single-digit, positive total return for Q1 2016 despite volatility in a macro-driven quarter. Real estate stocks outperformed broad equities for the quarter, led by North American and Asia Pacifi c property shares. Catalysts of this improvement in sentiment were a combination of accommodative central bank policy in Europe and Asia Pacifi c, bond yields that remain low, tighter spreads in U.S. high yield credit markets, and a rebounding energy market. Central bank policy remained both a critical input to, as well as, refl ective of economic trends. In addition to the Bank of Japan’s move to negative rates announced in late January and a series of accommodative monetary policy stimulus measures announced by the ECB in March, dovish comments from the U.S. Federal Reserve Bank implied that the Fed would rather be late in raising policy rates than early given the balance of risks. The Fed’s announcement, along with the others, was well received by the market, with bond yields moving lower and equities, including real estate stocks, moving higher. The yield on 10-year treasury fi nished about fl at by the end of Q1, at 1.77%, but was sharply lower from 2.27% at year-end 2015. A “bottom-up” view of the world through the lens of property company earnings indicates

that the real estate business is healthy, with generally improving fundamentals and solid earnings growth.

EARNINGS GROWTH IN 2016 IS PROJECTED TO BE IN THE 6-7% RANGE, CONSISTENT WITH 2015Earnings growth of real estate companies in 2016 is expected to be consistent with that in 2015. Q1 2016 earnings have generally been poised to do better than expected following 2015 in which earnings were generally revised up. Earnings were revised up in 2015 in the U.S. apartment, mall and self-storage sectors, London offi ce market and Tokyo offi ce markets. U.S. apartments, for example, generated

growth in cash fl ow per share of 10% by the end of the year, versus 8.0% at the beginning of the year. Demand has been particularly strong in the coastal markets, including the technology- driven Bay Area, where rental increases exceeded 10% year over year. Trends have been weaker in a number of Asian markets, including Hong Kong retail and Singapore offi ce, both of which are suffering from the headwinds of a decelerating China. Dividends in 2015 grew at a fast clip, keeping pace with the growth in earnings in the 7% range. Among U.S. REITs alone, 94 companies raised dividends during 2015, with an average growth rate of nearly 11%. No U.S. REITs cut regular dividends last year, which is the fi rst time this has occurred in modern REIT history.

FIGURE 1: Global Listed Real Estate Total Returns as of March 31, 2016

Source: FTSE EPRA/NAREIT Developed Index - Net of withholding taxes in USD as of 3/31/2016. Past performance is no guarantee of future results.

GLOBAL LISTED REAL ESTATE

18.3%

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Q1 2016 2015


LISTED REAL ESTATE TRADES AT A DISCOUNT TO PRIVATE MARKET REAL ESTATE, EVEN AFTER STRONG Q1 2016 PERFORMANCE. Valuations of listed property companies versus the private market remain at a discount to estimated net asset value (NAV), with an implied global weighted average cap rate of 5.6%. In the U.S., the discount to NAV has tightened to approximately 8% for the “core” real estate sectors of apartments, retail, offi ce, industrial and lodging. The UK “majors,” with signifi cant portfolios concentrated in London, continue to trade at discounts exceeding 20%. Many Asian developers still trade at over a 35% discount to NAV, quite below their long-term averages. A key insight globally is that cap rates have not budged given negative policy rates in a number of key markets, continued low bond yields, low levels of infl ation and wide spreads between cap rates and the cost of capital.

Over $250 billion of “dry powder” exists in the form of unallocated equity from investors in the private markets, including private equity, pension funds and sovereign wealth funds, looking to invest in U.S. commercial property, underpinning static cap rates.

MARKET OUTLOOKThe economic backdrop remains favorable for listed property companies. Global economic growth, although muted versus past cycles, remains in the 3% range. The combination of moderate yet steady economic growth and historically low long-term interest rates bodes well for real estate and real estate securities. We believe the economic and real estate cycle has further room to run and that our high single-digit projection for 2016 total

returns for global real estate securities continues to be conservative. The slower pace of economic recovery, subdued development starts, a low infl ation/low interest rate environment, and a wide spread between initial yields on real estate and high quality bonds, should support continued investor demand for real estate. Rates of economic growth are increasingly divergent around the globe and are refl ected in central bank monetary policy. The U.S. Federal Reserve Bank is entering a tightening phase, however gradual, versus other geographies, which will maintain accommodative monetary policies, including the European Central Bank, Bank of Japan and People’s Bank of China. Listed property company earnings will generally remain solid in this environment, with improving occupancies, higher rents, and active transaction markets. We believe any meaningful volatility generated from central bank actions creates an opportunity to buy high quality real estate companies with visible earnings at discounted prices.

The spread between cap rates and 10-year sovereign bond yields remains at historically wide levels, and suggests that there is plenty of “cushion,” as bond yields increase, especially considering that we are still early-to-mid-way in the rental rate recovery cycle in many real estate markets globally. We expect an increase in long-term rates around the globe to be measured, given continued sluggish economic growth globally, generally accommodative central bank policy, a decelerating China and low policy rates on a relative basis in Europe and Japan.

Low levels of new construction globally also suggest that owners of existing properties should continue to enjoy improved pricing power. With visible earnings growth in the 6-7% range for this year and next, dividends growing at about the same pace as earnings, listed property companies trading at a discount to private market values and M&A activity heating up, listed real estate remains attractively valued and continues to offer investors a yield-oriented investment option anchored by current income via the dividend.

FIGURE 2: Regional Earnings Growth Forecast

Source: CBRE Clarion as of 03/31/2016. Information is the opinion of CBRE Clarion , which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. “f” refers to “forecasts”. Forecasts and the factors noted are not indicative of future investment performance.

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2015f -0.8 7.3 7.8 11.2 7.5 3.0 3.1 6.3 2.8 6.2

2016f 8.7 8.1 7.0 6.5 5.9 5.4 3.7 2.2 1.1 6.5

2017f 5.2 9.3 7.0 5.9 4.3 4.5 3.0 5.7 2.4 6.2


U.S.Among U.S. listed companies, we view favorably the apartment sector, data centers and high-end mall companies. We are more selective in the net lease and healthcare sectors. By geography, this includes many of the gateway cities located in the Northeast and in California, including New York, San Francisco and Los Angeles. While there are skeptics seeking an infl ection point or peak in markets such as New York City offi ce, with a signifi cant fi nancial industry presence, or Northern California offi ce and apartments, with some questions surrounding incremental demand from technology companies, underlying property fundamentals continue to be robust. [Manhattan REIT SL Green Realty confi rmed strength in its markets with a Q1 2016 earnings release that showed an improvement in same-property net operating income of 10.2% and releasing spreads of 39% versus 15% in 2015, and an improvement in occupancy of 20 bps to 97.4%. California offi ce REIT Kilroy reported a marginal improvement in

occupancy to 94.9% and earnings in-line with expectation. Earnings growth (funds from operations, a proxy for cash fl ow per share) from both SL Green and Kilroy remain on track to meet our expected 8-9% range for SL Green and 6-7% range for Kilroy in 2016.] We remain cautious on the Washington D.C. metro area, which continues to be soft, particularly in Northern Virginia. We also remain cautious on the more bond-like sectors of net lease and healthcare, but take into account potential syndicate activity and takeover possibilities in our portfolio positioning, as well as acknowledged safe and growing dividend yields. Healthcare REITs, a traditional “safe haven” for investors seeking yield and stability, disappointed in Q1, as the result of renewed concerns regarding the fi nancial stability of healthcare operating companies, which operate and pay rent to the healthcare REITs, particularly in the skilled nursing sector. Other parts of the healthcare tenant and REIT landscape held up better, including medical offi ce buildings.

U.S. REITs will benefi t from their own GICS (Global Industry Classifi cation Standard) sector designation that occurs after the market closes at the end of August 2016, as U.S. REITs “come of age” by moving from the Financials sector to a new 11th sector called Real Estate, which will be the 8th largest GICS sector by size, with an estimated 4.2% weighting in the S&P Total Market Index. GICS is the leading global listed equity classifi cation system, maintained by S&P Dow Jones Indices and MSCI, Inc. and as such is a signifi cant acknowledgement by leading index providers that listed real estate companies deserve a distinct classifi cation. This is the fi rst new GICs sector since the advent of GICS in 1999. By becoming a standalone sector, U.S. listed real estate companies will demand a more visible asset allocation decision by institutional investors who will have to dedicate specifi c resources to covering the sector. Some estimates put potential buying power of U.S. REITs at over $100 billion, although we believe actual net demand will more likely be more muted.

EUROPEWe like the prospects for property companies in the UK that are attractively valued as the result of weakness based on Brexit concerns and are selective in Europe. In the UK, property fundamentals are improving more visibly than on the Continent, although the Continent presents opportunity for extra current yield, particularly as the ECB continues to provide monetary stimulus through 2016. We prefer companies with higher growth characteristics, such as London offi ce companies, dominant Continental retail companies and German residential, all of which have reported steadily improving rental growth.

FIGURE 3: Global NAV Premium/Discount by Region

Information is the opinion of CBRE Clarion as of 03/31/2016, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance.

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1%0.4%

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-15%-18%

-27%

-47%

-55%

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-35%

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J-REITs ContinentalEurope

UnitedStates

All Sectors

Australia Canada GlobalAverage

UnitedStates"Core"Sectors

Singapore UnitedKingdom

Hong Kong/China

J-REOCs

10 Year A

verage NA

V P/D

Cur

rent

NA

V P

/D

10 Year AverageCurrent NAV Premium / Discount


Valuations are attractive in the UK listed sector. [Witness bellwether Land Securities trading at a c20% discount to NAV with an implied cap rate in the 5.5% range.] While cap rate compression has run its course in this cycle, rent growth prospects in London for 2016 remain strong and gearing has been reduced. [Land Securities, for example, had a gearing of c30% loan to value.] In the event of a “Bremain” vote, UK listed property companies are likely to re-rate upwards in response to reduced macro risk.

We also remain constructive on the London specialist offi ce investors and developers, [such as Great Portland Estate and Derwent London,] where the short-term development projects offer needed operationally-upside potential due to rising rental values and are enjoying some of the strongest rental growth across Europe in 2016. The tenant base also includes many creative and technology fi rms. While new supply will be delivered across London, particularly in the 2018-2020 timeframe, vacancies at present are historically low, in the 2-3% range for

both the City and West End submarkets.On the Continent, pan-European shopping mall companies offer an attractive combination of yield and growth. [These companies include Klepierre and Unibail Rodamco,] whose high quality malls continue to gain market share with above-average, like-for-like rental growth. Many of their malls are true “destinations,” with an emphasis on experience, and are well designed and innovative, proving resilient to the on-line retail threat, as retailers grow sales in the malls by 2- 3%. Access to capital of both companies is also deep, with competitive interest rates achieved upon refi nancing with generally longer durations. [Unibail-Rodamco successfully placed 11 and 20-year maturity bonds of €500m each during April 2016, with coupons of 1.25% and 2.0%, respectively.]

German residential offers predictable growth in rental income of 2-3% across Germany, and c5% in Berlin. Such quality of income growth is highly prized in this low infl ationary, low growth environment--[Deutsche Wohnen and ADO Properties provide

a high weighting to Berlin.] In addition, targeted acquisitions can utilize the very low cost of debt and make better use of the operating platform, driving economies of scale and net earnings.

ASIA PACIFICIn the Asia Pacifi c region, the Australian and Japanese REITs offer attractive current yield via dividends. Australian REITs offer an attractive combination of yield and growth. The Sydney and Melbourne offi ce markets are showing signs of strengthening, following several years of digesting new supply, and retail demand remains steady if slightly decelerating. Diversifi ed A-REITs such as GPT Group have exposure to both offi ce and retail properties in these markets and offer a 4.7% dividend yield.

In Japan, we prefer REITs with exposure to the Tokyo offi ce market, which continues to experience improved rental growth as vacancies approach the 4% threshold, and retail in urban locations, which is benefi ting from strong inbound tourism and consumer spending. [J-REIT Japan Retail generates a 3.3% dividend yield.] In addition, we like companies with access to robust acquisition pipelines from their sponsor, which should lead to above average earnings growth. We are cautious in Hong Kong and Singapore as the result of the indirect impact of weaker demand from mainland China, which is weighing on demand across all property types, particularly high-end retail in Hong Kong. The Singapore offi ce market continues to meet headwinds from new supply and is not as favorably positioned as retail. Residential dynamics in Asian markets remain subject to policy risk, as governments ranging from Beijing to Hong Kong to Singapore periodically introduce measures to either stimulate or curb investment demand.

FIGURE 4: U.S. NAV Premium/Discount by Property Type

Information is the opinion of CBRE Clarion as of 03/31/2016, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance.

“Core” Real Estate Sectors -8% Discount to NAV

35%

18% 17%

9%5%

1%

-4%

-13%-15%

-18%

1%

-20%

-15%

-10%

-5%

0%

5%

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Storage TechnologyReal Estate

NetLease

Healthcare ShoppingCenters

Residential Industrial Hotels Office Malls Average


GLOBAL LISTED INFRASTRUCTURE STOCK PERFORMANCE1

Global listed infrastructure rebounded sharply from February lows. All major regions enjoyed positive returns, with the Americas region seeing the strongest, at 12.3% (U.S. 11.5% and Canada 18.3%), due to rebounding energy prices and recapitalizations via equity issuance. U.S. performance was led by the Regulated Electric, Integrated Electric and Gas Distribution utility sectors. Utility merger activity spurred investor attention as did the more subdued interest rate outlook. During Q1 2016, there were four public utility M&A announcements, representing nearly $20 billion in enterprise value, at premiums ranging between 23-50% to the unaffected stock prices. Rail stocks and tower companies both lagged, rising less than 3% each for the quarter.

Listed infrastructure stocks in Continental Europe rose 6.7%, while UK stocks were fl at. On the Continent, Regulated Electric, Gas Distribution and Airport sectors were the best performers. The Toll Road sector lagged, with a 4.1% total return, despite strong traffi c growth trends.

In Developed Asia, Australia and New Zealand led performance, with returns of 13.3% and 14.6% respectively. Transport sectors, Airports and Toll Roads were the common drivers for both markets, as fundamentals continued to improve for companies operating these assets. Japan was the main laggard, delivering a negative 5.3% total return.

Equity market performance in Japan was weak in the quarter after the Bank of Japan introduced negative rates, which weighed on stocks.

Emerging markets continued to rebound following a strong end to 2015, rising 8.3%. Brazil was the star performer, up 29%. The markets in Brazil rebounded on the back of political winds shifting towards an assumed more market friendly leadership. Mexico was also strong during the quarter, rising 11.7%. The other large Emerging Markets, China and India, were negative during the quarter.

KEY THEMES We continue to believe one of the most important drivers for infrastructure

stocks in the near and medium term will be the changing energy landscape. The primary way to reduce carbon emissions and battle climate change is to switch from coal to natural gas and renewable power for power generation. This conviction results in two major investment themes for listed infrastructure companies globally.

Renewable energy investment is increasing due to global policy initiatives and society’s demand for “green” energy. New energy infrastructure companies have been created to be the ultimate owners of these power generation assets once they have established long-term contracts, typically with high quality counterparties, such as utilities or large corporate users like Google

GLOBAL LISTED INFRASTRUCTURE

FIGURE 1: Returns of Global Listed Infrastructure Universe versus Global Equities and Global Bonds

Source: Global Infrastructure, Global Equities, and Global Bonds are represented by the UBS Global Infrastructure & Utilities 50-50 Index, - Net Withholding Tax through 02/28/2015 and FTSE Global Core Infrastructure 50/50 Index from 03/01/2015-03/31/2016; MSCI ACWI IMI - Net of Withholding Tax and Barclays Global Aggregate Bond Index as of 03/31/2016 respectively. Information is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. An index is unmanaged and not available for direct investment. This is not representative of the performance of any CBRE Clarion strategy.Past performance is no guarantee of future results.

8.9%

1.4%

8.6% 8.5%

6.6%

8.9%

0.3%

-4.4%

5.6%5.3%

4.3%

5.7%5.9%

4.6%

0.9%

1.8%

4.4%5.3%

-5%

0%

5%

10%

Q1 2016 1 Year 3 Year 5 Year 10 Year 15 Year

Global Infrastructure Global Equities Global Bonds

1 All discussion of performance of infrastructure stocks refers to the UBS Global Infrastructure & Utilities 50-50 Index – Net of Withholding Tax through 02/28/2015 and FTSE GlobalCore Infrastructure 50/50 Index from 03/01/2015-03/31/2016.


FIGURE 2: Global Listed Infrastructure Valuation Summary (Forecast)

Source: CBRE Clarion investable universe, Bloomberg and FactSet, as of 03/31/2016. Forecasts based mostly on consensus estimates. This is for informational purposes only, is subject to change, and is not intended as investment advice, or a guarantee of future results.Forecasts and any factors discussed are not a guarantee of future results.

and Apple. Moreover, traditional utility companies are increasingly active not only in contracting for these assets, but also in developing them. We expect this renewable energy investment to drive predictable and steady earnings and dividend growth for a growing number of renewable energy infrastructure companies and utilities.

The second major theme related to climate change policy is the greater penetration of gas fi red power generation to replace more polluting coal fi red generation. While renewable energy investment is a cleaner fuel source than natural gas, it cannot provide baseload power or follow changes in demand when needed. As a result, the demand for natural gas is increasing in nearly all markets. Fortunately, the supply of natural gas is plentiful in the U.S. Infrastructure is required to transport the gas (pipelines) from production areas to the power plants (storage) and to residential customers (distribution). Finally, natural gas demand globally will require investment in plants to liquefy natural gas for transport to international markets from the U.S. (LNG export facilities). The opportunity for investment spans

gas pipelines, storage, distribution and export terminals and we expect midstream infrastructure companies, utilities and gas distribution companies to be active in seeking investment.

Another key theme is the continued positive performance of Transportation assets linked to passengers. Passenger related Transportation assets, such as Toll Roads, Airports and Passenger Rails, bucked overall economic trends in most major markets to show continued traffi c growth in 2015. Early signs point to growth in 2016 as well.

Consumption trends remain positive due to improving labor markets as well as the signifi cant downward pressures on fuel costs. Owners of these assets are reporting stable or rising growth in traffi c that is generating double-digit earnings growth due to operating and fi nancial leverage. We believe that this is very attractive in an environment where economic growth appears to be stagnant and investors can benefi t from small levels of volume changes that would deliver double-digit earnings growth.

FIGURE 3: Breakdown of Global Listed Infrastructure Universe

Source: CBRE Clarion and Bloomberg as of 03/31/2016. Percentages may not add to 100% due to rounding. CBRE Clarion’s defi nition of the global listed infrastructure universe is roughly US$2.8 trillion in equity market cap and consists of 405 companies.

P/E EPS Growth EV/EBITDA Dividend Yield

2016 2017 2 YR CAGR (17/15) 2016 2017 2016 Debt E/V DDM P/D

Airports 23.8x 21.7x 10.50% 15.1x 13.7x 3.20% 24.30% -3.20%

Water 21.9x 19.9x 7.40% 10.7x 10.2x 3.40% 40.50% -8.60%

Communications 19.0x 17.1x 13.50% 16.1x 14.9x 2.70% 30.30% -21.80%

Midstream/Pipelines 11.9x 10.9x 4.50% 13.1x 11.6x 7.30% 42.10% -3.50%

Rail 14.5x 12.9x 14.30% 9.1x 8.5x 2.20% 24.90% -24.80%

Toll Roads 20.1x 18.4x 7.00% 13.5x 11.9x 3.80% 30.00% -14.40%

Gas Distribution 16.9x 16.6x 4.90% 11.2x 10.8x 3.30% 33.70% -5.50%

Integrated Electric 15.3x 14.7x 2.30% 9.0x 8.6x 3.90% 45.70% 7.50%

Regulated Electric 17.6x 16.9x 3.80% 12.3x 11.6x 3.80% 39.10% -5.00%

Renewable Energy 12.1x 11.1x 18.90% 11.3x 10.1x 6.50% 50.40% -27.70%

Global 16.0x 15.0x 6.00% 11.4x 10.6x 4.10% 37.80% -9.60%

46% United States

6% Canada

3% Latin America

18% Continental Europe

5% United Kingdom

11% Asia

7% Emerging Asia

3% Australia/NZ

23% Integrated Electric20% Regulated Electric17% Midstream/Pipelines12% Rail 6% Gas Distribution 5% Toll Roads 5% Communications 4% Water 3% Airports 2% Ports 2% Renewable Energy 1% Diversified

Investing in infrastructure securities involves risks including the potential loss of principal. Infrastructure equities are subject to risks similar to those associated with the direct ownership of infrastructure. Portfolios concentrated in infrastructure securities may experience price volatility and other risks associated with non-diversifi cation. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fl uctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Yields fl uctuate and are not guaranteed.

The FTSE Global Core Infrastructure 50/50 Index provides exposure to infrastructure as defi ned by the Industry Classifi cation Benchmark (ICB) and adjusts the exposure to certain infrastructure sub-sectors. Company weights are limited to 5%. The UBS 50/50 Index is an unmanaged market-weighted index which consists of infrastructure and utility companies from developed markets whose fl oats are larger than US $500 million.


THE RECOVERY BROADENSDespite a bumpy start to the year, Europe‘s growth outlook is broadly unchanged since our last edition of Global Vision. An economic recovery is both gradually accelerating and broadening to include more countries. Many of the favourable demand drivers that supported economic expansion over the past year endure and in some cases are strengthening quite considerably. A low interest rate, low infl ationary environment is providing support for consumer spending. Unemployment rates are trending downward in many countries, while both business and

consumer surveys indicate a better assessment of economic conditions compared to a year ago.

In contrast to the past few years where the differences between Europe’s best and worst performing national economies were more pronounced, that gap is now narrowing. Europe’s Northern core remains a bedrock of economic stability, while a greater number of peripheral economies are fi nding new-found resilience. Spain, CEE and Sweden are expected to be standout performers over the coming fi ve years. Interestingly, each country’s forecast is driven by fundamentally different drivers.

BREXIT OR BREMAINThat is of course unless the UK votes to leave the European Union on June 23rd of this year. Bank of England Governor Mark Carney could not have been any more explicit: Britain faces its biggest domestic risk if it decides to leave the European Union. And our assessment suggests that the rump Eurozone would also experience a period of reduced growth, with small, open economies who rely heavily on trade with the UK being most vulnerable (Table 1).

EUROPEAN OUTLOOK

Most Impacted(>1% reduction in

GDP at peak)

Moderately Impacted(0.5-1% reduction in

GDP at peak)

Least Impacted(<0.5% reductionin GDP at peak)

UK France Italy

Belgium Germany CEE

Netherlands Eurozone Nordics

Ireland

TABLE 1: Brexit Projected Impact On Economic Growth From 2016-2020 For Select European Countries

EURO

PEAN

OU

TLOO

K


Brexit and its ensuing risks are certainly registering with the property community, but it appears that many are attaching a low probability to such an outcome. For most commercial real estate occupiers the possibility of Brexit has broadly gone unnoticed. Property investors on the other hand are certainly curious about the implications to commercial real estate, though the prospect has yet to manifest in prime pricing.

While betting markets, numerous credible forecasting services and our own internal straw poll all point to the UK remaining in the EU (Figure 1), the prospect of an alternative scenario should not be dismissed. That said, in the run up to the plebiscite and even in the weeks following a potential exit from the EU, we are not recommending fundamentally altering portfolio strategy. Irrespective of the outcome of the June referendum, we take the view that the UK will remain business friendly and among the world’s most attractive environments for foreign investors. Property will still benefi t from market transparency, liquidity, rule of law and favourable lease structures. Fortunately,

these attributes are not being decided in the June referendum.

WHY DO YOU ALWAYS HAVE TO BE SO NEGATIVE?One of the bigger developments over the past half year has been negative interest rate policy (NIRP) moving from

the unthinkable to reality. Commercial banks are being charged to park money in the Eurozone, Switzerland, Denmark and Sweden and this phenomenon is showing no signs of abating (Figure 2). Whilst NIRP indicates a fragile economic backdrop and very low infl ationary pressures, it also signals two important forces for commercial property: very low borrowing costs for prime assets and further downward pressure on property yields, which may seem out of kilter with any gradual improvement in the leasing environment.

Alongside this of course is the massive QE which continues to be felt in the form of exceptionally low government bond yields. While the jury is still out on the effectiveness of these non-traditional monetary policy tools, debt will prove accretive to total returns and the outlook for prime property yields is more benign than six months ago.

FIGURE 1: CBRE Global Investors Internal Straw Poll: “How Do You Think The UK Will Vote in the Brexit Referendum”

Source: CBRE Global Investors

FIGURE 2: Eurozone Policy Rates & Infl ation

Sources: European Central Bank & Eurostat.

7974

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Refi rate

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EXPANDED FOCUSAgainst this capital markets backdrop, European transactional markets have proven quite vigorous (Figure 3). 2015 was a record year for deal activity across Europe, as investors broadened their focus to include more markets, sectors and strategies. Southern Europe is increasingly sought after as investors of various equity and debt backing grow to accept the growth outlook and sense an attractive value proposition. Another interesting trend is investors looking to second-tier cities in the large markets and smaller European capital cities in search of higher in-going yields. Nordic capitals and German B cities have stood to benefi t most.

Though still above recent trend, momentum has admittedly waned somewhat in the fi rst quarter of 2016, as pricing has become more aggressive. The relative lull in activity is most evident in the UK, where deal volumes are 30% lower than a year ago. The spectre of Brexit is necessitating inactivity from international capital, while domestic investors appear increasingly mindful that we are late in the property cycle. Despite the caution that currently besets the market, intention surveys continue to signal the UK will receive positive net investment over the coming year.

TICKING ALONG NICELYOwing to a gradually improving economic environment and diminishing supply of modern stock, occupier markets continue to tick along nicely. With the exception of Warsaw and Central London, supply pipelines have been constrained. This is helping rental growth broaden to the plurality of prime European property markets (Figure 4). We are seeing healthy levels of active requirements from a broad range of business segments in places like Berlin, Copenhagen and Stockholm. Industrial markets, across formats and geographies, are doing particularly

well, as SME’s expand and third party logistics operators adapt to a shifting retail landscape. Rental growth has been most widespread in the retail sector, with Italian markets faring particularly well over the past half year. Favourable demand dynamics, however, appear to be constrained to prime markets. There remains a polarisation of occupier demand between well located assets, which are highly sought after, and peripheral locations, which continue to struggle with vacancy.

OUTLOOKEurope’s prime property markets are benefi ting from favourable fundamentals and they remain attractive to both domestic and foreign investors. As Europe has one of the most benign monetary policy backdrops globally, we expect a prolonged period of low infl ation and low interest rates. This should be supportive of property’s relative yield advantage during the forecast horizon. Prime yields should edge down further during 2016 before stabilising in 2017 as rent growth continues to accelerate. Taken together, we expect that European commercial property will deliver attractive returns over the medium term.

FIGURE 3: European Direct Investment Volumes

Source: CBRE EMEA Research

FIGURE 4: Prime Headline Rents, Cumulative Growth Over the Cycle

Source: CBRE EMEA Research

0%

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06 07 08 09 10 11 12 13 14 15 16

Latest=Q1 2016

Office Retail Industrial Other

Average since Q1 2009: €€40 40 bnbn

-60%

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Pari

s

Lond

on

Mila

n

Dub

lin

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ich

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khol

m

Lisb

on

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nna

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saw

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rid

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lin

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on

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nna

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s

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rid

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kfur

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burg

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saw

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on

Mad

rid

Latest = Q1 2016

Trough to current Previous peak to trough

Retail Offices Industrial

EURO

PEAN

OU

TLOO

K


DOMINANT RETAIL CENTRES

CYCLICAL OFFICERECOVERY

PRIME LOGISTICS FACILITIES IN MAJOR DISTRIBUTION HUBS

NICHE RESIDENTIAL INUNDER-SUPPLIED MARKETS

Preferred Markets• Madrid & Barcelona

• Amsterdam

• For higher risk-adjusted return investors - Budapest

Retailers are concentrating their presence in dominant retail locations/formats

Shortage of modern space in city centres combined with strong demand from media and tech companies in emerging locations

Shortage of modern facilities and strong demand driven by e-commerce

Demographic trends combined with shortage of supply for independent/assisted living facilities and student accommodation

EuropePreferred

InvestmentThemes

Preferred Markets• Central London & Paris high street

retail

• Northwest European dominant shopping centres with asset management potential

• Southern Europe for yield compression & rent growth

Preferred Markets• Major northwest European markets

• Warsaw and Czech Rep

• Barcelona, Madrid and Milan

Preferred Markets• London residential

• Student housing in northwest Europe

• Senior living in the UK

• Dutch social housing given regulatory change


SOME GROWTH DRIVERS DOWNGRADEDSeveral major economies in APAC have seen their near term (2016 and 2017) GDP growth forecasts downgraded since our September 2015 forecasting round. These include Japan (-90 bps), Taiwan (-160 bps), Singapore (-30 bps), Hong Kong (-80 bps) and South Korea (-60 bps), Consensus Economics mean forecast, April 2016.

Interestingly, China’s near-term GDP outlook is similar to six months prior (it was initially downgraded but was more recently upgraded). Even agencies that measure China’s GDP quite differently/independently expect recent stimulus measures to pay off. Capital Economics calculated China’s GDP growth to be just 4.2% in 2015 but forecasts 5.5% growth this year. Illustrative of the diverse economies in this region, the Philippines and New Zealand have seen their forecasts upgraded. Still, 4.4% GDP growth for the whole region both this year and next (and 5.6% for APAC-ex Japan) remains strong by global standards, even if below the regional long-term average.

Against this backdrop, we have shaved off some near-term rental growth, also mindful that several markets surprised on the upside in 2015, with some of those rental hikes frontloaded. The policy context, given this weak growth forecast scenario, will remain accommodative this year and thus supportive for both investors and occupiers. But it is the rolling back of temporary stimulatory measures, the eventual tightening of monetary policy as well as the size of the supply pipeline in each market that drives the differences in the market forecasts within the region.

SIZABLE TRADING VOLUMESSales volume in early 2016 has been decidedly less robust than 2015. Near record-breaking volumes of commercial real estate transactions were recorded in APAC in 2015, with USD 132.1 billion of signifi cantly-sized assets, according to RCA (Figure 1). Locals were the most active buyers, although the Australian and Indian offi ce sector and the hotel sector of Hong Kong and Australia all saw over half of their total transaction volume acquired by offshore buyers.

In China, residential transaction volumes and prices in the Tier 1 cities and a few of the Tier 2 cities have been extremely strong. Last December, Xi Jinping called for destocking in housing policy and that appeared to serve as a green light for many local governments to incentivize greater access to their residential markets. By February this year, the minimum downpayment for mortgages had been cut to 20% and various transactions costs were slashed. We have been tracking periodically (in our Watch reports of December 2015 and March 2016) the progress of volume clearance and price rises in a range of Chinese cities and have noted how rapidly prices in certain cities have rebounded.

The policy changes in China driving some of this growth have been a lifting of the one child policy, a further relaxation of Hukou policy, the loosening of mortgage rates and the lowering of downpayment ratios. Greater autonomy has been decentralized to the local level for appropriate housing purchase policy. As several cities’ stocks of unsold inventory have diminished rapidly, some cities are tightening already, even with accommodative monetary policy at the national level.

ASIA PACIFIC OUTLOOK

ASIA

PAC

IFIC O

UTLO

OK


PRICING DILEMMASFor several years now, we have forecasted and subsequently observed cap rate compression in many of the region’s markets, with the Japanese and Australian markets among the last in the region to re-price. There too, cap rates for the prime, and some secondary markets, have approached and even surpassed the low levels of the last cyclical peak in late 2007/early 2008. But given the unprecedentedly low government bond yields across the region, currently above-average yield spreads relative to the LTA yield spread may be a buy signal to some investors when assessing relative value. Still others look to better value in secondary assets/locations, where enhanced tactics can be deployed and where core product can be built. As seen in Figure 2, several prime offi ce markets in the region – notably Sydney, Seoul and Hong Kong – still see current spreads above their LTA (2003-2015) spread. Notably all three of these markets have encountered negative yield spreads, when, just prior to the GFC, property yields were at their record low yet bond yields were much higher.

INVESTMENT PERFORMANCEHeavy trading volume, some still-attractive yields and yield spreads relative to government bonds resulted in prices being bid higher/appraised higher; thus several markets delivered strong full-year returns in 2015. Australia, for example, recorded an all-property total return of 14.0% for 2015, including 15.5% from its industrial market and 14.6% from its offi ce market. These returns are well above

FIGURE 1: Market Transaction Volumes In 2015 By Buyer (Local Vs Foreign)

Source: RCA. Based on independent reports of properties and portfolios USD 10 million and greater.

FIGURE 2: Prime Offi ce Net Yields Relative to 10 Year Government Bonds: Range, Average and Current Spread (Q1 2003 – Q4 2015)

Source: CBRE, EIU, CBRE Global Investors. Markets are ranked, left to right by the greatest difference between the Q4 2015 yield spread and the average yield spread.

0 5 10 15 20 25

Japan OfficeChina Office

Australia RetailAustralia Office

Japan RetailChina Retail

Japan ApartmentHong Kong Office

Australia IndustrialJapan Hotel

Japan IndustrialSouth Korea Office

Singapore OfficeHong Kong Retail

Australia HotelHong Kong Hotel

India OfficeChina Apartment

Hong Kong IndustrialChina Industrial

Investment Volumes, USD Billions

Cross-Border Domestic

-4%

-2%

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High 2003-2015 Low 2003-2015 Current Q4 2015 Average 2003-2015


the long-term average and were super-charged by strong capital value uplift, particularly coming through in the index in 4Q 2015. But as we have warned previously, its “commodity-sector-exposed” markets would likely not enjoy such pricing. In fact, Perth yields are rising. Japan has also been delivering solid returns to investors: turning to the ANREV Japan index (which measures fund performance and is inclusive of leverage), reveals that the 1-year total return in 2015 was 22.3% and the 3 and 5-year annualized returns were 17.6% and 7.8%, respectively.

As fl agged in our forecasts last year and redoubled in our latest re-forecast, the city states of Singapore and Hong Kong are likely to be among the weakest performers in the fi ve-year outlook. Not much has really changed in our view

here since the last Global Vision was published and we continue to hold that their high street retail and residential markets will particularly be under some strain for the next few years.

OUTLOOKWith demand varying widely, Central Bank policy having such a strong infl uence on property fundamentals as well as differing supply responses amongst markets, the fi ve-year total return forecasts across the 49 APAC markets are quite disparate. At the broad aggregate level, the regional (unlevered, weighted in LCU) fi ve- year total return is a little lower than previously forecasted. In part this was due to the stronger-than-expected actuals that were recorded in some key markets in 2015.

A lower-for-longer interest rate environment for Japan and China has been adopted compared to the previous forecast in light of several variables including: a slower pace expected with the U.S. Federal Reserve rate hikes than previously expected, and still low CPI and more modest GDP growth domestically. This more accommodative approach will be sustained via various measures in both countries and not until the mid-to-end of the fi ve year outlook do we expect upward yield pressure in their best property markets. Other economies though will likely need to move sooner.

ASIA

PAC

IFIC O

UTLO

OK


MODERNRETAIL FORMATS

CYCLICAL /STRUCTURAL TRENDS IN OFFICE

PRIME LOGISTICS FACILITIES IN MAJOR DISTRIBUTION HUBS

RESIDENTIAL IN UNDER-SUPPLIED MARKETS

Preferred Markets• Solid rent growth in Tokyo and Hong Kong

but yields are low; Sydney CBD

• Consider prime locations of selected Tier 2 Japanese cities, fringe CBD/Innovation districts ofSydney and Melbourne, HK

• Dislocated markets: Perth, Brisbane, Kuala Lumpur

Global and local retailers are expanding their footprint in emerging locations and utilizing formats given strong demographic demand

Shortage of quality space in some CBDs and CBD fringe locations and structural rise of services sectors requiring more space

Demand for state-of-the-art facilities driven by new infrastructure and growth of e-commerce and 3PL activity

Demographic trends in selected cities and submarkets, need for higher quality of stock

Asia Pacifi cPreferred

InvestmentThemes

Preferred Markets• Refurbish, redevelop and reposition

well located high street shops or malls in Seoul, Tokyo, Sydney, Melbourne

• Distressed opportunities: Hong Kong high street and development projects in Emerging South East Asia

Preferred Markets• Build-to-hold/sell in Greater Seoul and

Busan in Korea and selected cities across China, Hong Kong

• Core markets: Sydney, Melbourne, Brisbane, all with relatively high yields

Preferred Markets• Core play: yield compression in second tier

Japanese cities

• Value add: niche residential for special uses or conversions to residential in Sydney, Melbourne, Auckland

• Development: Selected cities in China as part of mixed-use projects


Now that the dust around the turbulence in global equity and commodity markets has settled, we can take a clearer look at the resilience of the current U.S. economic expansion. Unable to quite break out of the slow, steady and modest growth that has characterized the six-year recovery so far, the expansion remains one of the strongest in the developed world. The stability, transparency and “safe haven” status of the U.S. economic system remains a big draw for investors across the globe. For every naysayer that points to low levels of cap ex spending, strong dollar and declining corporate profi ts, there is an optimist that highlights the strength in the labor market, the promise of the housing market, decent consumer spending and real wage growth as unemployment rates fall. On balance, the U.S. economy appears to be in the slow and steady growth mode in the near-to-medium term. This modestly positive growth will provide support for the commercial real estate fundamentals to stay on track for further improvement. However, its vulnerability to dislocations in global capital markets and other exogenous shocks is heightened as we move further away from the last recession.

MODEST AND MEASUREDBesides the possibility of a soft/hard landing in China and the question surrounding Brexit, the impact of Fed funds rate normalization is the biggest unknown for investors, as the Fed pursues a data-dependent approach to unwinding its zero interest rate policy. A “lower for longer” policy appears to be the most probable outcome, given where global economic conditions and other central banks stand. This

measured approach, based on how well the economy continues to perform and how quickly infl ationary forces build up, signals that although there will be moves by the Fed, they wouldn’t be sharp and shocking to the steady expansion. It also means that future value appreciation in commercial real estate will no longer be driven by capital markets. The pause in the upward momentum in pricing in early 2016 is a hint of that broader future trend.

FIGURE 1: The U.S. Economy: Protracted Moderate Growth

Sources: Moody’s Analytics; CBRE Global Investors

U.S OUTLOOK

-5%

-4%

-3%

-2%

-1%

0%

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3%

07 08 09 10 11 12 13 14 15 16 17 18 19 20

Perc

ent C

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Real GDP Employment


U.S. O

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On the other hand, property markets are just now teeing up to reap the benefi ts of improving market fundamentals and real rent growth. Occupancies are at cyclical highs and supply pipelines are relatively modest, with the exception of apartments, giving landlords the upper hand. Investment volumes in early 2016 were a knock below the unusually high levels in early 2015, but cap rates have held steady. Spreads relative to government bonds remain attractive, although relative to Baa corporate bonds, spreads appear to be in the richly priced territory. The promise of continued improvement in demand means that NOI growth will drive the valuation of commercial real estate going forward, even as modest economic growth, slowly rising interest rates and supply pipelines put downward pressure. Our forecast calls for core/unlevered returns over the next fi ve years to be lower than recent history and in the 5-6% range, with apartments anchoring the lower end and retail the upper end of the range.

INDUSTRIAL: GOOD GOODS FLOW IS ALL THAT MATTERSStronger dollar, more imports and decent, if not always consistent, consumer spending are driving demand for industrial space. Long considered a steady and boring asset class, changes in supply chain infrastructure and

functional obsolescence as e-commerce transforms the sector, make for a sought-after asset class. Retailers and third-and fourth-party logistics that are pursuing a seamless, omnichannel strategy for fl ow of goods to the consumer and distribution warehouses, are an integral part of that changing supply chain. Evolution of the “last-mile” facilities to cater to same-day deliveries in major population centers is another segment to watch. Availabilities are at their lowest since 2000, pushing rents and boosting construction pipelines. Spreads wider than other property types, particularly outside the major gateway markets, and a stable income outlook make industrial properties an attractive value proposition.

RETAIL: EXPERIENCE MATTERSThe retail sector has been at the wrong end of the e-commerce supply chain re-confi guration. But retail is no stranger to change as it has to continually re-invent itself. Availability rates for neighborhood and community shopping centers, the most liquid retail

FIGURE 2: Annual Return 2016-2020 Versus History

Sources: CBRE Global Investors; NCREIF

FIGURE 3: Absorption Has Gained Traction, But Will Cool

Note: Retail is Neighborhood & Community CentersSources: CBRE EA; PPR; CBRE Global Investors

0%

2%

4%

6%

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12%

Office Retail Industrial Apartment

Forecast Last 10 Years Last 20 Years

-400

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-100

0

100

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f 2018f 2019f 2020f

Ann

ual N

et A

bspo

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n (S

F, m

illio

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Retail

Office

Apartment

Industrial


segment, remain high enough and rent growth tepid enough for no meaningful supply, the saving grace for the sector. Although more insulated from e-commerce than other segments, such as big box retailers and department stores, grocery anchored centers are feeling the impact of consumers choosing to eat out more. On the other hand, some retail segments are doing better than others. Those offering experiential surroundings – high streets, class A malls, lifestyle centers – or those that are offering value – outlets, and discount chains – are clearly tapping into consumer preferences. As always, location and demographics are key for any retail investment.

OFFICE: CREATIVITY REQUIRED The new workplace is characterized by lavish features and foments jealousy among those who are still stuck in grey cube farms. No longer just a place to work, offi ce spaces are talent recruitment tools for the millennial workforce. As companies have backfi lled shadow space and want modern confi gurations, they are seeking new buildings which

have been slow to materialize. Like in apartments, locations and buildings with connectivity are increasingly important and a nationwide aging building stock means that there are opportunities to re-develop as well as develop new offi ce infrastructure. Vacancies are not quite back to pre-recession levels, but with technological advances, that may never materialize, as employers make do with less space. Some markets, usually tech-heavy metros, are at the leading edge of the recovery and are beginning to experience some softening in fundamentals.

APARTMENTS: MATURITY BRINGS WISDOMIt is safe to say that the apartment sector is past its cyclical peak but it would be foolish to say that it is all downhill from here. Vacancies have generally been rising since mid-year 2015 but they are rising from generational lows and signal a still tight market as they hover in the low-4% range. The sector will continue to enjoy the tailwinds

of the demographic and structural changes that still have room to unwind. Resultant changes in attitudes and access to homeownership as well in the desirability of neighborhoods with connectivity and amenities that are meaningful to new renters, will drive value growth in the sector that has seen cap rates hit historic lows. The challenge to NOI growth will be from the supply side, where rising vacancies in the upscale/luxury segments in particular will lead to more concessions and a restrained rent growth trajectory. Metro and site selectivity will be key determinants for future growth.

OUTLOOKThe drag from capital market dislocation and strains in the macroeconomic picture in the last six months is beginning to fade but has not entirely disappeared. Investor psyche remains fragile even as the frothy pricing has taken a step back and debt markets remain favorable (even if terms have gotten a tad dearer.) Against this backdrop of increased vulnerability from the capital markets, property market fundamentals remain sound and forecasts for stable demand and NOI growth continue to be strong. This will drive total returns, as an accommodative monetary policy and strong investor appetite for real estate as a stable asset class with strong relative performance keeps the momentum going.

FIGURE 4: Vacancies Have Dropped Sharply, But Are Bottoming Out

Note: Retail is Neighborhood & Community CentersSources: CBRE EA; PPR; CBRE Global Investors

2%

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016f 2018f 2020f

Vaca

ncy/

Ava

ilabi

lity

Rate

Office

Retail

Industrial

Apartments


U.S. O

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OFFICE RECOVERY ANDEVOLUTION

DOMINANT, EXPERIENTIAL RETAIL VENUES

STATE-OF-THE-ART DISTRIBUTION CENTERS

SELECT MULTI-FAMILY

Preferred Markets• Affl uent trade areas

• 24/7 neighborhoods

• Dominant or specialty supermarket anchored neighborhood centers

• Lifestyle centers

• Premier trophy malls

• Prime high streets

Accelerating demand for highly functional buildings in live/work/play environments

Centers that provide a differentiated experience and/or convenience targeted to affl uent shoppers

Buoyant absorption due to e-commerce and strengthening consumer spending

Demographics and lifestyle choices driving resilient demand for apartments

U.S.Preferred

InvestmentThemes

Preferred Markets• Metros with strong forecast rent

growth, diversifi ed tenant drivers and modest construction pipelines

• 24/7 CBDs

• “Innovation districts”

• Highly amenitized suburban nodes

Preferred Markets• Metros with large and/or growing population

and jobs

• Ready access to ports-of-entry

• Multiple transportation nodes and intermodal facilities

Preferred Markets• Major coastal metros with homeownership

barriers

• High population/job growth metros, primarily in the West and South

• Infi ll neighborhoods proximate to employment centers and amenities

• Mass transit access


MAARTEN JENNEN [email protected]

Maarten serves as Director of Investment Solutions. His responsibilities include managing performance benchmarking and attribution analysis globally and to work closely with investment teams, clients and prospects to improve investment decisions.

ISAAC CARRASCAL [email protected]

Isaac serves as Senior information specialist at the Information Center. He is responsible for the management of Market Information and Data for the organization.

MARIJE BRAAM [email protected]

Marije serves as the Head of EMEA Retail Research and is responsible for coordinating pan-European retail research including transactions, strategic research, market and portfolio forecasting.

ANDREW ANGELI [email protected]

Andrew is a Senior Director and Head of UK Research and is responsible for tracking economic data as well as monitoring market trends for all product types.

FRANK AALBERS [email protected]

Frank is an associate within the Dutch Research & Strategy team. His responsibilities are analysing and forecasting the Dutch real estate markets and he has a key role in the underwriting for acquisitions and dispositions of the Dutch Funds.

DAVID INSKIP [email protected]

David is a Director within the UK research team and is responsible for monitoring market trends and expanding property forecasting coverage.

MICHAEL HESP [email protected]

Michael is a Senior Associate in the Dutch Strategy & Research Team and jointly responsible for all research related activities in The Netherlands.

SABINA KALYAN [email protected] is a Managing Director and serves as Global Chief Economist and Head of European Research. She is responsible for developing the fi rm’s house views on the outlook for the global economy and fi nancial markets, and analyzing their impact on real estate markets.

SIMON KRISTIANSEN [email protected] is a Senior Analyst with the European research team. He is responsible for analyzing macroeconomic trends and real estate market fundamentals in the Nordic and UK markets.

MILOU BAKKER [email protected]

Milou Bakker is a junior information specialist. She helps to run the Information Center from the Schiphol offi ce.

ESAT GÜLER [email protected]

Esat is an Associate and responsible for market research in the Central and Eastern European markets (CEE) and specifi c research for the EMEA region.

MARCEL THEEBE [email protected]

Marcel serves as Director of Research Analytics. He is responsible for the data analysis and modeling of global forecasts and for the creation of a company-wide global House View and he is also manager of the Information Center.

RUUD WEERTS [email protected]

Ruud joined the Global Strategy and Research team as an Investment Analyst in 2014. His responsibilities include benchmark and performance attribution analysis for investment programs across the globe.

ANTHONY WIRTH [email protected]

Anthony serves as Head of EMEA Logistics Strategy & Research.

CHRISTIAN MÜLLER [email protected]

Christian is a Director and is responsible for research and strategy in Germany.

AMSTERDAM

FRANKFURT

LONDON

GLOBAL RESEARCH TEAM


GLO

BAL STRATEG

Y AN

D RESEA

RCH

TEAM

PATRICIA LANNOIJE [email protected]

Patricia serves as Head of EMEA Offi ce Strategy & Research and responsible for all research related activities in France.

JEREMIAH LEE [email protected]

Jeremiah is a Senior Associate focusing on U.S. real estate market analysis and forecasting.

JULIET CHA [email protected]

Juliet has been with the fi rm since 2007 and is responsible for Korea research activities including acquisitions, dispositions, asset planning and forecasting of markets. She is also heavily involved in investor services.

DOUG HERZBRUN [email protected]

Doug serves as Global Head of Research and directs strategic analysis of the economies, capital markets and property markets globally. He serves on the Global, Americas and Global Multi Manager investment committees.

SHUBHRA JHA [email protected]

Shubhra serves as a Senior Director for U.S. research activities. She is responsible for providing research and strategy support to U.S. investment teams.

SHANE TAYLOR Based in Hong [email protected]

Shane serves as Head of Research & Strategy for Asia Pacifi c and is a member of the regional management team and regional investment committee.

SHINNOSUKE TOMITA Based in [email protected]

Shinnosuke works in several roles in asset management, corporate administration, internal audit and portfolio management.

RODRIGO VAZQUEZ MUNOZ [email protected]

Rodrigo is a Senior Associate responsible for all the relevant strategy and research activities in Southern European markets including Spain, Italy and Portugal.

DAVID MORRISON [email protected]

David serves as Global Head of Strategy and is responsible for developing and implementing investment strategies, programs and products for the fi rm and its clients and overseeing the investment committee process globally.

BRIAN MCINERNEY [email protected]

Brian serves as a Director whose responsibilities include investment performance analysis and assisting in the development and implementation of both investment and corporate strategies.

RYAN PATAP [email protected]

Ryan is a Senior Associate focusing on U.S. property market analysis and forecasting.

HONG KONG

LOS ANGELES

PARIS

TOKYO

MADRID

SEOUL

www.cbreglobalinvestors.com16:070

CBRE CLARION SECURITIES IMPORTANT DISCLOSURES AND RISK INFORMATION

The views expressed represent the opinion of CBRE Clarion Securities which are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specifi c investment. Stated information is derived from proprietary and non-proprietary sources which have not been independently verifi ed for accuracy or completeness. While CBRE Clarion Securities believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimate, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. The securities discussed herein should not be perceived as a recommendation to purchase or sell any particular security. It should not be assumed that investments in any of the securities discussed were or will be profi table. Actual results, performance orevents may differ materially from those expressed or implied in such statements. Investing in real estate securities involves risks including the potential loss of principal. Real estate equities are subject to risks similar to those associated with the direct ownership of real estate. Portfolios concentrated in real estate securities may experience price volatility and other risks associated with non-diversifi cation. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fl uctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is no guarantee of future results.

The FTSE EPRA/ NAREIT Developed Index is an unmanaged market-weighted index consisting of real estate companies from developed markets, where greater than 75% of their EBITA (earnings before interest, taxes, depreciation, and amortization) is derived from relevant real estate activities. Investors cannot invest directly in an index.

DISCLAIMERForecasts and projections regarding the likelihood of various sectoral, market and investment outcomes are hypothetical in nature, do not refl ect actual Forecasts and projections regarding the likelihood of various sectoral, market and investment outcomes are hypothetical in nature, do not refl ect actual investment results and are not guarantees of future results.

CBRE Global Investors’ clients may have acquired properties in the sectors and regions described in this research report. In addition, CBRE Global Investors is continuously marketing to new clients that will invest in properties within the sectors and regions covered.

CBRE Global Investors Middle East Limited provides this material on behalf of CBRE Global Investors. CBRE Global Investors Middle East Limited is regulated by the Dubai Financial Services Authority. This marketing material is intended only for Professional Clients (as defi ned by the DFSA), no other persons should act upon it. Past or projected performance is not necessarily a reliable indicator of future results.

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