Challenges and opportunities for European real estateInsights from our sixth annual EMEIA Real Estate Workshop

1

2

Ongoing economic and political uncertainty in Europe and elsewhere around the world continues to create substantial challenges for the real estate sector. How best to respond and where the most attractive opportunities lie are topics of much debate.

These issues featured prominently during Ernst & Young’s sixth annual Real Estate Workshop, one of our largest gatherings of senior real estate executives from across Europe, Middle East, India and Africa (EMEIA). The event, based in London, attracted more than 400 top real estate owners and developers, institutional investors, lenders and corporate occupiers — including many leading real estate private equity funds, REITs and property companies.

This report shares key findings from the conference, drawing on the insights shared by leading industry individuals and Ernst & Young experts.

This report includes the results of snap surveys taken during the 2012 conference using interactive delegate polling technology. These polls capture the views and sentiments of conference participants — CEOs, CFOs, global managing directors, fund managers and tax directors working in a range of organizations across the sector: real estate funds (60%), real estate corporates (20%) and real estate service companies (20%).

Foreword

Highlights ► Few real estate players have developed a specific Eurozone

breakup strategy, though the widespread mood is cautious, appreciating the need to prepare businesses for future unpredictable economic shocks.

► Although market uncertainty does create opportunities, some current expectations about the extent of those opportunities may be over optimistic.

► Fifty-five percent of real estate leaders expect core plus funds to be most successful in Europe over the next five years, with 24% backing core funds and 21% backing opportunity funds.

► The funding gap remains an issue — institutional investors and insurers may be unable to fill it, but growing real estate activity among sovereign wealth funds and high net worth individuals could provide alternative sources.

► Raising a real estate fund is achievable, but success depends on recognizing investors’ need for greater comfort and their concerns about alignment of interest, visibility of asset types, and geographies’ and managers’ past track records.

Ad Buisman Ernst & Young EMEIA Head of Real Estate

Howard Roth Ernst & Young Global Real Estate Leader

3

2012 political and economic outlook

Real estate professionals attending Ernst & Young’s conference were almost equally split in their views of the Eurozone’s future. Asked whether the Eurozone would survive in its current form for the next 12 months, 48% thought it would not.

Michael Portillo, keynote speaker at this year’s conference, said politicians and policy advisors will be highly focused on the Eurozone’s problems during 2012. “There’s an enormous amount of political capital invested in the Euro, so huge amounts will be expended in trying to save it.”

Ernst & Young’s economic forecasting group, ITEM Club, assumes an orderly resolution of the Eurozone crisis will be found. It expects Eurozone GDP to be flat in 2012. An expected fall in UK inflation in 2012 should encourage a domestic recovery later in the year, with added impetus coming from the Queen’s Jubilee and the Olympic Games. Nevertheless, the risks are unprecedented and eyes remain trained on developments in the Eurozone.

No industry event can ignore the impact of the Eurozone crisis. While political will remains focused on stabilizing the Eurozone, business has to cope with the aftermath.

48% of real estate professionals thought the Eurozone would not survive in its current form for the next 12 months.

“Whatever the outcome of the immediate Eurozone situation, the longer-term outlook for developed markets is for slower and more volatile growth than the trend over the past two decades. Management needs to review and evaluate the appropriateness of their business models for this new environment. There will not be a return to business as normal; we are witnessing the emergence of a “new normal.”

Mark GregoryChief EconomistErnst & Young

Michael PortilloKeynote speakerFormer Cabinet minister, broadcaster and political commentator

4

Real Estate’s response

Only 21% have developed a Eurozone contingency plan.

“We are one of the 21% that got together in a room and thought about what we need to do if the Eurozone breaks up. We got quite detailed about banks, money flows, capital controls and insurance contracts and are proceeding with caution.”

Philip BarrettManaging Director — Head of Pramerica’s European Opportunity and Value-Add Funds Pramerica Real Estate Investors Ltd.

“We can make the business case for central London, Paris and for a handful of cities in Germany. There are opportunities outside of those places, but I am not sure our capital is willing to be at the leading edge of that. So we don’t have a contingency plan (for Eurozone breakup); it’s more that our strategy will be not to invest other than in those markets I mentioned, and we will be quite cautious.”

Paul BrundageExecutive Vice President Oxford Properties

“We are concerned about liquidity issues in the bank market. We have been managing our clients’ portfolios conservatively. We have been extending leases where we can and making sure income security is sufficiently robust. We have managed our debt maturities as sensibly as we can and generally been preparing the business for any further economic shocks.”

John HumberstonePartner Orchard Street Investment Management

5

Investment outlook in 2012

Two-thirds of participants (66%) thought the current climate offered a great buying opportunity for those looking for bargains from distressed sellers keen to exit. However, the idea that a flood of bargain buys from banks would be hitting the market was starkly challenged.

Peter Denton, Head of Real Estate Finance, BNP Paribas, said, “The biggest impediment to loan book sales is that there is no one who wants to lend the money. In the normal, mainstream banking market, there is zero interest. So the biggest impediment to nonperforming loans sales is that the return required for investors to be able to buy all equity is so gargantuan that it’s impossible for the banks to take that loss.”

Seventy percent of conference participants said they were back in buying mode in 2012, with 60% thinking the current market an attractive one for opportunity funds. Panelists were generally cautious. However, Ric Lewis, Chief Executive and Chairman, Tristan Capital Partners, certainly did not see the market as an attractive one. “There’s a great level of dislocation in the marketplace, and when there’s uncertainty, there’s good opportunities,” he acknowledged. “But the dislocation will not be great enough for this to be the greatest buying opportunity of the last 20 years. But I think they are going to be measured opportunities. I think we’re going to have a long, slow grind in the European marketplace.”

Some might say that uncertainty goes hand in hand with opportunity. But are some expectations misconceived? For opportunity funds and other real estate players, success depends on a return to fundamentals and the demonstration of real estate expertise. Though investors are interested in real estate’s potential, they are increasingly selective about the opportunities they support.

70% said they were back in buying mode in 2012.

“Bankers think about whether to sell or whether to enforce the property themselves. It’s the clear gap between these two numbers that has led to so little selling of loans. I can assure you the level of enforcement and restructuring that happens in banks is huge — we just don’t hear about it.”

“I think it is a stock picker’s market. It’s about trying to find individual opportunities that make sense.”

Philip BarrettPramerica

Peter DentonHead of Real Estate FinanceBNP Paribas

(in center, above)

6

The conference featured some lively debate and revealed much skepticism over opportunity funds’ target returns. It became clear that there is an urgent need to redefine their offer and focus more clearly on the risk element of the risk-return equation.

Our panel of senior bankers and heads of funds could not see how funds could achieve returns of 20%, or even 18%, without taking extremely high risks.

There was real emphasis around the importance of a return to real estate fundamentals.

Delegates attending the conference appeared persuaded by the cautious tone of the panelists’ debate. Asked which funds would be most successful in Europe over the next five years, just 21% backed opportunity funds, while 55% picked core plus funds and 24% core funds.

What next for opportunity funds?

“If you want to get to the higher return in this environment, you have to go back to real estate fundamentals — you need to find tenants who will pay you rent. If you are going to get to a higher return, you have got to create it. You have got to take refurbishment and re-leasing risk. You’ve got to go back to property fundamentals, and you’ve got to do that against an economic environment that’s very challenging.”

“Our industry does a poor job at thinking about the risk part, but that’s how we should be defining opportunity funds: what are the characteristics of the portfolio you are putting together; how are you getting the return? Leverage is part of it, but the preponderance of the return is probably coming from the back end, rather than current income.”

“If you use 60% or 65% leverage, which is pretty much what you can get now, show me how you get an 18% net strategy without reaching for risk, without climbing that 10 meter dive board and doing a six-point

-difficulty dive. It’s impossible. There is still an opportunistic spectrum that we should be investing in, but we should be looking for 12%-13%, depending on the market.”

Ric LewisChief Executive and ChairmanTristan Capital Partners

(pictured above)

Philip BarrettPramerica

7

Could insurance companies help fill the funding gap? Olivier Piani, Global Head of Real Estate, Allianz, believed insurers were increasingly turning to real estate as an alternative to government bonds.

Increased insurer interest in real estate may be on the cards, but it may not be sufficient to fill the funding gap. Senior debt requires high-quality real estate and experienced operators — but there is a limited pool of such high-quality opportunities.

Investors are increasingly interested in joint ventures and in using funds more tactically, as a means of entering and gaining knowledge of a new market.

Wenzel Hoberg, Head of Real Estate for Europe, at Canadian Pension Plan, said, “We realize we are better off looking after ourselves, so as a result of the crisis, we want to stay away from discretionary mandates and move into the joint venture space. We like 50-50 situations. We like joint boards. It means we can protect ourselves best. It also means we need to build larger teams, and we need expertise in markets. So we are trying to build up that know-how.”

Ultimately, we believe the industry is shrinking, Ric Lewis, Chief Executive and Chairman, Tristan Capital Partners, said, “We all know of firms that have merged, shrunk, consolidated or gone away. But our industry is now in a second stage of consolidation. A lot of us who have survived are realizing there’s no food to eat — there’s no new capital. Investors are becoming more choosy.”

Where will funding come from?

56% did not expect institutional investors to fill the

funding gap.

“We have decided we are not investing anywhere if we don’t have our people on the ground.”

Paul BrundageOxford Properties

“If you want to renew a German government bond, you get ten-year paper at less than 2%. So the insurance business model doesn’t work. Instead, they can do more in real estate and in lending to real estate. Last year, we tried this. We did two deals, and we now intend to go outside Germany.”

Olivier PianiGlobal Head of Real EstateAllianz Alternative Assets

(pictured, on right below)

Sovereign Wealth Funds News and Family Offices now control US$19.5 trillion* of global capital. A survey by the Campden Wealth Family Office in 2011 identified that real estate allocations have increased from 14% to 18%. Ernst & Young has seen firsthand an increased interest in accessing a variety of investments in the real estate sector.

* CapGemini SA and Merrill Lynch Global Wealth Management; US$15 trillion attributed to Family Offices and US$4.5 trillion attributed to Sovereign Wealth Funds News

8

Globally, 440 real estate funds are targeting US$151 billion of capital — three times the amount raised in 2010. Only half of those that had a final close in 2011 were able to reach their target. In essence, too many funds are chasing too little equity.

Raising funds in the year ahead

For fund-raising to be successful, a number of criteria must be met. A clear exit route is particularly important. Investors also want to see an alignment of interests, as demonstrated through co-investment by fund managers as individuals. They are also increasingly expecting a fees discount for early participation.

There is investor pressure for sector-specific funds (whether by geography or asset type) and for certain geographies to be excluded. Last year, a number of funds excluded Greece, for example. “Investors want as much comfort and visibility as possible over where their money will be invested,” said Ernst & Young Partner Rishi Bhuchar.

As to who is investing, there is evidence of increased investment from European investors for European funds. “There is particular interest from the Nordic region looking at Euro-denominated investments,” Bhuchar noted. However, investors will only invest alongside like-minded investors — and preferably a smaller, rather than a larger number of them.

A fund manager’s track record is highly important. Investors want to know about behavior and performance since 2007.

In terms of market trends, investors are favoring joint ventures and co-investment opportunities over discretionary funds.

“The GPs that will survive are those perceived to have behaved well with investors and lenders and brought them to the table and engaged with them.”

Rishi BhucharPartner, Real Estate Corporate FinanceErnst & Young LLP

(pictured above)

9

Outlook for Real Estate Against a backdrop of ongoing uncertainty emanating from the Eurozone crises, the macroeconomic outlook for 2012 is weak. This is translating into limited demand drivers across most real estate sectors and, consequently, very challenging occupier markets in which to undertake real estate strategies with any significant degree of confidence.

It is expected that 2012 will bring increasing divergence in performance and pricing between prime and secondary assets as occupier markets remain challenging. The onset of the European debt crisis has resulted in caution once again becoming the overriding theme for existing landlords, potential investors and tenant decision-making.

The corporate sector has made significant progress in addressing funding issues, streamlining operating models, and managing cash and capital requirements in a more defensive manner. Often, this has included rationalizing property portfolios. Many occupiers are better placed to weather further shocks. Ultimately, they will also be well positioned to selectively drive investment, growth and expansion.

From a real estate investment perspective, supply constraints across a number of markets, enhanced by the limited availability of development capital, will continue to provide a degree of support to fundamentals at a time of weak demand. The time lag required to effect a supply response to an improvement in demand will be a further contributing factor to an eventual recovery. This is expected to particularly be the case in the office and retail markets.

Conclusion Back to real estate fundamentals for 2012

► Banks continue to selectively release assets, with an increasing pipeline expected in 2012.

► ►The pricing of secondary property is expected to weaken, making investment and lending options increasingly challenging.

► Clear strategy and focus on real estate fundamentals will be key to capitalizing on opportunities in 2012, particularly those emerging from bank deleveraging and restructuring of companies.

► ►Success will hinge on strong leadership that will retain and motivate the blend of talent required to truly excel in understanding real estate fundamentals, financing and capital markets.

10

Bank deleveraging in 2012 The process of bank deleveraging is expected to increase in 2012 with a pipeline of opportunities, such as large loan portfolios, continuing to materialize. With bank capital structures supported through unconventional means, it may require a further uncontrolled external shock to significantly accelerate the deleveraging process. Opportunities for investors will, however, continue to emerge with capital strategy expected to be a key driver of an increase in transaction activity. A secondary issue remains the question of how to resolve broken capital structures around secondary assets at a time when weak occupier markets present limited real estate options.

Winning in an uncertain marketMany real estate businesses have made significant progress in addressing legacy issues (at both a platform and asset level), but the more favorable window that existed between 2010 and 2011 has now closed. Challenging occupier and capital markets will make for a difficult operating environment in 2012. At a time when identifying the trajectory of macro events remains extremely challenging, the winners will likely be those who have positioned their businesses to respond to further unforeseen shocks and are, therefore, able to selectively take advantage of the opportunities that will inevitably arise.

Whether managing existing portfolios or raising new capital, a strong leadership team remains a prerequisite in the current environment. Experience, a proven track record, and strong relationships with existing investors and lenders are all important attributes. Retaining the best advisors who show deals, ensure tax break utilization and transact using the right structure is also fundamental. Around this, the ability to both attract and retain the best talent with the correct blend of real estate, financial and strategic experience will remain crucial.

Success will hinge on strong leadership that will retain and motivate the blend of talent required to truly excel in understanding real estate fundamentals, financing and capital markets.

Ernst & Young is one of the largest integrated Real Estate practices of the Big Four professional services firms. We have over 7,500 dedicated professionals worldwide, therefore we are able to harness the strong synergies across multiple professional services, including audit, tax, transactions and business advisory. In turn, this enables us to provide a wide range of robust services in response to a multitude of real estate issues, efficiently and seamlessly.

Our advice is objective and independent, and our past experience includes work in all areas of real estate where we have been able to demonstrate that we are best positioned to assist with complex challenges and opportunities.

To discuss any of the contents in this paper or any other matter, please contact:

Rick SinkulerGlobal Real Estate Markets Leader

Tel: +�1 312 879 6516Email: richard.sinkuler@ey.com

Marion CaneREIT Practice Leader

Tel: +�44 20 7951 5795 Email: mcane@uk.ey.com

Ad BuismanEMEIA Head of Real Estate

Tel: +�31 88 407 9433Email: ad.buisman@nl.ey.com

Howard RothGlobal Real Estate Leader

Tel: +�1 212 773 4910 Email: howard.roth@ey.com

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2012 EYGM Limited. All Rights Reserved.

EYG no. DF0138.

In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

Expiry date: No expiry date

1251500.indd (UK) 02/12. Creative Services Group.

Assurance | Tax | Transactions | Advisory

Dean HodcroftUnited Kingdom & Ireland Head of Real Estate

Tel: +�44 20 7951 4870Email: dhodcroft@uk.ey.com

Jean-Roch VaronEMEIA Real Estate Assurance Leader

Tel: +�33 146 93 63 89Email: jean-roch.varon@fr.ey.com

Karl HambergerEMEIA Real Estate Tax Leader

Tel: +�49 89 14331 13662 Email: karl.hamberger@de.ey.com

TaxFinancial reporting

Transaction real estate

Christoph EhrhardtEMEIA Transaction Real Estate Leader

Tel: +�49 71 19881 19560Email: christoph.ehrhardt@de.ey.com

Mark WesleyHead of Real Estate Advisory

Tel: +�44 20 7951 3279Email: mwesley@uk.ey.com

Business advisory and corporate occupiers

Real Estate Funds

Michael HornsbyEMEIA Real Estate Funds Practice Leader

Tel: +�352 42 124 8310Email: michael.hornsby@lu.ey.com

Fraser GreenshieldsReal Estate Finance and Capital Markets Practice Leader

Tel: +�44 20 7951 7151Email: fgreenshields@uk.ey.com

Real estate finance and capital markets

REITs

Matt WilliamsIFRS Practice Leader

Tel: +�44 20 7951 0098Email: mwilliams5@uk.ey.com

IFRS

Ernst & Young