http://www.data.pt.ci-iberica.com/sites/default/files/NOV_2009_JLL_GMP by Paulo Morais

Global Market Perspective October 2009 Overview Highlights • Economic recovery emerges in majority of global markets • Global banks on the mend • Transaction volumes increase in Europe, Asia activity pauses, Americas remain subdued • Corporate occupiers sense rental rate bottom approaching in some markets • Four signs of recovery to watch

Global Economy Economic recovery emerges in majority of global markets Global economic output is expected to return to positive growth in the third quarter, the first positive move in a year. The latest available indicators are shown in our Global real estate health monitor below. 2009

Germany

France

Japan

China

Australia

Official Interest Rate %

0.13%

0.50%

1.00%

0.10%

5.31%

3.25%

GDP QOQ %

-0.3%

-0.7%

0.3%

0.2%

0.9%

7.9%

0.6%

CPI YOY%

-1.5%

1.6%

-0.3%

-0.2%

-1.2%

0.6%

1.5%

Consumer Confidence MOM %

-2.6%

9.2%

13.2%

2.7%

n/a

0.6%

1.7%

Employment YOY %

-3.9%

-2.1%

-0.5%

-2.5%

-1.3%

0.7%

0.1%

Retail Trade MOM %

-1.7%

0.5%

-0.1%

1.0%

2.1%

0.9%

Housing Starts YOY %

-29.6%

-8.9%

n/a

3.1%

-38.4%

1.4%

-24.1%

OECD Leading Indicator MOM%

1.6%

2.4%

1.3%

1.4%

1.5%

0.9%

Manufacturing PMI, Index level

52.6

49.5

49.6

52.5

54.5

55.0

52.0

Stock Market, MOM to 30 Sep.

3.6%

4.6%

4.0%

3.9%

-3.4%

4.2%

5.9%

REIT Market, MOM to 30 Sep.

6.0%

-0.8%

19.2%

5.5%

-1.3%

-0.3%

9.9%

Recession/ Slowing

Troughing

General Trend % General Trend: Worsening Neutral Improving

Note: China GDP YOY Source: Global Insight, Global Property Research, FRB, BOE, ECB, BOJ, PBC, RBA, Yahoo Finance, Jones Lang LaSalle

Global Market Perspective October 2009

Global banks on the mend An unprecedented level of global government support designed to restore liquidity in the credit markets and stimulate demand has effectively halted an economic free-fall. Monetary policy and strong investor demand have fuelled $1.3 trillion in capital raises by financial institutions alone. Global corporate debt and equity issuance across all sectors reached $4.2 trillion through September, 35 percent ahead of the 2008 pace and on track to set an all-time annual issuance record. While international banks have a large degree of real estate exposure to clear, they seem resilient enough to handle the slow stream of commercial property value losses that inevitably will occur as the commercial real estate market follows residential into the “loss recognition” phase. Loss estimates and opinions on the health of international banks vary. To help gauge these factors, Jones Lang LaSalle examined 126 international banks and the cost investors in bank bonds would pay to buy insurance against a bank default, known in the market as a credit default swap (CDS). For illustration purposes only, assume an investor purchases a 5-year bond issued by a bank at a spread of 3 percent above an index of 3 percent for a total yield of 6 percent. If that investor wants to buy insurance against a default by the bond-issuing bank, they would take 1 percent of their spread and buy CDS insurance, receiving a 5 percent yield instead. In essence, credit default swaps provide insurance against bank defaults. The lower the cost of the CDS, the better the market perception is of the bank’s health. The table below illustrates how the cost of CDS has come in dramatically from the beginning of the year indicating the capital markets are feeling more secure about the health of global banks. Health of international banks*: Cost of credit default swaps Region

January 09 (in bp)

September 09 (in bp)

Change

Asia Pacific

348

121

-65%

231

119

-48%

Europe

224

142

-37%

* average of 126 banks in survey Source: Jones Lang LaSalle

To put this in perspective, the cost to insure a bank-backed security now rivals the cost of investing in general investment grade instruments across the globe. Broadly speaking, confidence in banking is improving and liquidity is coming back into global markets. While it may spill over into real estate in the near future, banks remain selective in their real estate lending. Real estate in search of liquidity Stronger corporate balance sheets and increasing liquidity in the global lending markets will lead to improving real estate fundamentals. In one sign of increased liquidity, the issuance of Euro-denominated covered bonds has surged as banks and corporations seek to raise money in the capital markets. These loans typically are secured against receivables from consumer loans on houses, with a guarantee from the issuer/bank. In total, €172 billion has been issued this year by prominent players such as ING, BNP Paribas and Volkswagen. Central banks across Europe have purchased €14 billion of these bonds as part of their efforts to ease liquidity in the credit markets, and these purchases are likely to continue. As a result, spreads have tightened to a degree where it is becoming significantly cheaper for some corporations to raise money through these means than through the issuance of senior unsecured debt.

Global Market Perspective October 2009

In Germany, covered bonds known as Hypothekenpfandbriefs have provided a major source of capital for real estate lending, with €36.1 billion of new mortgage Pfandbrief issued in the first half of 2009. This has allowed German lenders to continue to be the most active in real estate lending markets across Europe. The conservative valuation regime and historic record of no defaults since their inception nearly 250 years ago make them popular with investors. Spreads are tighter than for other covered bonds, thanks to the superior credit rating of Pfandbrief.

Global Property Market Overview The geography of recovery Many economists and government officials are increasingly confident that the world has begun to enter an economic recovery mode. At the same time, active recovery in the real estate markets is beginning to form in regions where the banking system is healing. Asia’s economy is in the lead, benefiting most from a more-rapid-than-expected rebound and renewed attention from both foreign and domestic investors seeking attractive relative pricing. Despite challenging economic and credit conditions in Europe, improving investor sentiment is driving increased transaction interest and activity for a band of prime real estate across most sectors and markets. In contrast, US commercial property markets continue to struggle under the weight of weak corporate demand, concerns about the size of potential loan losses and worries over the willingness of lenders to recognize asset value declines. However, Federal Reserve Chairman Ben Bernanke seemingly has put aside fears that commercial real estate could be the next global financial market contagion. He recently stated that “commercial real estate remains a very serious problem,” but added that he did not think another major crisis was brewing. Global real estate markets In some markets in Asia, strong positive sentiment in the residential sales sector is spilling over into the commercial sectors. In general, quarterly declines in office rents moderated in the third quarter of 2009, with the exception of Singapore, where there is a large supply pipeline. Effective rents in some markets look to be close to the bottom. Hong Kong, for example, registered a quarterly decline of just 1.5 percent while Sydney experienced a 2.3 percent fall. Underlying demand for new space remains subdued in the region, and over the short term, corporate occupier expansion is not expected to pick up substantially. This, combined with the fact that a number of markets will see major supply additions, is likely to result in further rental falls into 2010. In contrast, moderate rental increases are expected during the next 12 months for a minority of markets, generally where vacancy rates remain low. Across Europe, gross leasing volumes for the third quarter were down about 5 percent overall, and net absorption remained negative. Encouragingly, 30 percent of the European markets that Jones Lang LaSalle monitors experienced higher leasing levels. On the rental side, prime office rents were stable in most regional markets, with a few falls in Central Europe, Spain, Ireland and Sweden. The majority of European rental markets will likely bottom in 2010, but a significant rebound is not expected until 2011. In the United States, the deterioration in office market fundamentals has not reached the bottom due to continued job losses. The drops in occupancy and rents are decelerating, but tenants are still contracting, staying primarily costfocused and looking for short-term, flexible solutions. Asking office rents have dipped nearly 10 percent over the past year, while effective rental rates have declined more than 15 percent on average and 30 to 40 percent in some major markets. While leasing activity actually may pick up in early 2010, a full US real estate recovery is unlikely to begin until vacancy peaks at about 20 percent in late 2010 or early 2011.

Global Market Perspective October 2009

Prime office capital value and rent decline Market peak to Q3 2009 London Tokyo New York San Francisco Paris Singapore Washington, DC Frankfurt Sydney Hong Kong -70

-60

-50

Capital value decline

-40

-30

Rent Decline

-20

-10

% change in local currency

Source: Jones Lang LaSalle

Real Estate Transactions Momentum in Europe builds After reaching a low point in the first quarter, transaction activity in Europe is building along with investor confidence. Direct investment in the region increased in the third quarter to €18 billion, a 40 percent increase from €12.9 in the second quarter. This marked the second consecutive quarter of increased transaction volumes. The positive momentum is expected to continue into the fourth quarter, which traditionally has the strongest transaction activity. Investor interest remains focused on prime, secure, income-producing property in the transparent markets of Western Europe. Beyond this narrow band of investor favorites, little enthusiasm can be found for Europe’s remaining markets. Some parts of the European market currently are flooded with equity, often from high-net-worth individuals, while institutions are enjoying positive flows into their funds. Cross-border investment is growing at a faster pace than domestic investing, and the UK, Spain and France are the chief beneficiaries of the latter. Some easing of credit availability is also evident, particularly for new purchases of prime buildings. By some estimates, as many as eight banks are able to lend and underwrite loans of up to €80 million to €110 million for a single asset, while others are able to arrange €400 million to €550 million of debt to refinance maturing CMBS loans. Transaction volumes in Europe are expected to reach more than €60 billion by year-end. The most pronounced increase in transaction activity is found in the Central London office market, where £5.3 billion of properties have changed hands in the first nine months of the year. Buyers include institutions from Germany and Switzerland, private equity investors from Australia, Germany, Ireland and Russia, and the Middle East sovereign wealth funds. Volumes increased in most major markets in the third quarter, and the movement of investors to other markets is another milestone as new transaction appetites start to spread. Looking ahead, transaction volumes should continue to increase. Asia activity pauses Across most of Asia, there was a slight lull in transaction activity during the past month as investors seemingly awaited evidence that the second quarter rebound was sustainable. That said, China and Hong Kong experienced a pronounced increase in activity, largely fuelled by liquidity from Chinese investors. For the first time in more than a year, foreign banks became more willing to look for solutions to some of their troubled Asian commercial real estate investments. Meanwhile, Asian banks became more willing to lend, although their tolerance for risk remains relatively low with loan-to-value requirements at 50 percent.

Global Market Perspective October 2009

Both the number and size of regional transactions are increasing. China Investment Corporation will invest about $2 billion into three US distressed asset-focused funds, including one managed by Goldman Sachs and another managed by Oaktree Capital Americas remain subdued In the United States, transaction activity remains subdued in response to weak investor sentiment and scarce credit. In the third quarter, transaction volumes for large office, industrial, retail and apartment properties totaled just $10.5 billion, an increase of 13 percent from the second quarter. Year to date, transaction volume registered approximately $29 billion, or 75 percent lower than the comparable period in 2008, and 91 percent off the record pace established during the first three quarters in 2007. Foreign investment has been virtually nonexistent, although there is evidence that German funds are becoming interested buyers in select properties. In what some say may be the first step in re-starting the commercial-mortgage bond market, US real estate company Developers Diversified Realty Corporation received a $400 million loan from Goldman Sachs. Both are working with the Federal Reserve to make the loan the first to qualify for the Term Asset-backed Securities Loan Facility. In a sign of more expected defaults to come, Tishman Speyer and Walton Street Capital defaulted on a loan on the undeveloped portion of a 64-acre parcel of land in Los Angeles. Elsewhere in the Americas, Jones Lang LaSalle represented Siemens in selling a long-term leased 298,000-square-foot industrial plant in Guadalajara, Mexico. The property traded for $12 million with a cap rate of approximately 12 percent. The transaction was successfully completed in a six-month term. In Brazil, cap rates for Class A office space have compressed to 10.5 percent, despite the fact that the net absorption for offices has stalled. Large pension funds have begun to acquire Class A commercial properties, and financial institutions have accelerated the creation of new structures such as real estate funds to provide investment sales to their clients. Recent offerings sold out quickly. Examples of recent global real estate transactions Transaction

Buyer

Seller

Price

Yield

Notes

Broadgate Estate, London

Blackstone

British Land

£1.1 billion for a 50% stake

7.1 %

One of the largest European property transactions to date

Bullring Shopping Centre, Birmingham

The Future Fund

Land Securities

£210 million for a 33% stake

6.85%

Two Office Buildings and The Charles Hotel in Lenbachgärten, Munich

AM Alpha GmbH

Immofinanz

€200 million

<6%

Largest German Transaction to Date; seller is Immofinanz

103 Mount Street, London

Kajima Property Europe Limited

PRUPIM

£31.6 million

6.5%

Trophy office and retail building located in the heart of Mayfair

BBVA portfolio, Spain

RREEF Alternative Investments (Lead of Consortium)

BBVA Banco Bilbao Vizcaya Argentaria

€1.2 billion

n/a

A consortium of banks provided debt up to €960 billion, about 80% of assets’ value

Global Market Perspective October 2009

Transaction

Buyer

Seller

Price

Yield

Baltzar City Retail and Office Property, Malmo

Catella Real Estate AG Kag on behalf of Focus Nordic Cities Fund

RREEF Alternative Investments

€ 40 million

n/a

Independence Wharf, Boston

Credit Suisse Group’s Real Estate Asset Management Core Fund

US$ 106 million

Slightly >8%

Largest office closing in Boston since Jan

Portfolio of Corus Bank condominium loans, US

Starwood Capital

US$ 554 million for 40% stake

n/a

Federal Deposit Insurance Corporation (FDIC) sold failed bank assets

Industrial plant in Guadalajara, Mexico

Local investment group

US$ 12 million

Approximately 12%

Pujiang Shuanghui Building Block 9, Shanghai

Agricultural Bank of China

Shanghai Ruiming Property Co. Ltd.

RMB 3.773 billion

n/a

Office building Shanghai International Passenger Terminal Center

China State Development & Investment Corp.

Franshion Properties/ Sinochem Corporation

US$ 153 million

n/a

Nexxus Building, Hong Kong

Chinese Private

MSREF

HK$ 4.0 billion

Approximately 3.5%

FDIC

Notes

Largest transaction in Hong Kong so far in 2009

Sources: Jones Lang LaSalle, Real Capital Analytics, various published reports

Corporate Market Conditions Corporate occupiers sense rental rate bottom approaching in some markets Corporate occupiers are redefining their corporate real estate strategies. In London and major cities in China, this has translated into increased demand from corporate occupiers, a marked uptick in market testing and greater levels of due diligence in anticipation of improving leasing volumes in 2010. In other parts of the world, where credit remains scarce and economic fundamentals have yet to pick up, occupiers remain reluctant to commit, and leasing volumes continue to decline. At the moment, headline rents are being further sweetened by high levels of incentives. However, the willingness of landlords to offer such inducements will dissipate as demand improves. Supply dynamics also play a role. The supply of Class A space in premier locations typically sought by corporate occupiers is quite tight, requiring many to move quickly and decisively. Corporations will begin to enter into leasing contracts when consolidation, integration or the opportunity to upgrade the quality of occupied space necessitates action, although few transactions will be driven by out-and-out expansion. As a result, net negative absorption will continue well into 2010. What is telling is that corporate occupiers from the sector that entered the crisis first – financial services – are now back in the market, testing and transacting in some cases. Nomura in London and Commerz Bank in Frankfurt both were active during the third quarter. In New York City, many of the big players are still squarely in downsizing mode, but some smaller and mid-sized financial services firms have stoked some activity of late. Elsewhere across industries, the public/government and health care sectors are the only ones globally that remain active. In many cases, they are the only show in town.

Global Market Perspective October 2009

Focus: Hotels Hotels: first in, first out of the crisis? Among the hardest hit of all property sectors has been the hotels market. Global hotel values are estimated to have declined 20 to 50 percent from their peak, depending on market and asset type, as a result of substantially reduced trading income and higher capitalization rate requirements. The latter reflects lower appetite for risk, operational uncertainty and the continued lack of debt. As an asset class, hotels tend to be more vulnerable to sharp swings in performance as rooms are let every night. The fact that values have fallen so steeply, however, suggests that the hotel market potentially has hit bottom. With major world economies showing signs of recovery, hotels may be amongst the first property sectors to recover as lodging demand is highly correlated to economic activity. Reliance on variable cash flows also means that room rates quickly can be adjusted in a rising economy. The current outlook therefore presents significant potential for growth in trading income and recovery in hotel values. The global hotel transactions market registered its second consecutive period of growth in the third quarter of 2009 -testament to the recovery prospects for the sector. Total transaction volumes were just under $3 billion, marking a 40 percent increase over second quarter 2009 volumes. By region, Europe, Middle East and Africa (EMEA) continues to be the most active, recording more than $1.2 billion in hotel sales, followed by Asia Pacific at $1.0 billion and the Americas at just over $700 million. RevPAR (revenue per available room rate) declines also are starting to abate in most major cities. A few markets, including Rome and Seoul, posted modest increases in August.

Outlook Four signs of recovery to watch Several key forces are likely to shape the global commercial real estate markets in the months ahead. Watch for these indicators: Government intervention withdrawal Policymakers may pull money from the financial system when they feel the time is right. Central bankers in Australia recently raised short-term interest rates by 25 basis points while policy leaders in the Eurozone and the UK, have yet to raise policy rates. The United States is beginning to consider moving interest rates off their current unusually low levels. However, if central banks tighten policy and wind down their balance sheets too quickly, it could lead to a pullback in liquidity conditions. Liquidity restoration The interest rate environment will always impact real estate. Ultra-low near-term interest rates could prove to be a boost to capital flows as money is redirected from low-yielding money-market funds. EPFR Global, a fund data provider, estimates that $332 billion, or 10 percent of all money-market assets in the United States, have been withdrawn from these funds by investors to date. Although US Treasury securities and corporate bonds are likely the principal beneficiaries at present, commercial real estate may be moving up the list in the eyes of investors. However, the current exceptionally easy monetary policy and bloated central bank balance sheets also pose a risk if they persist long enough to create asset price inflation coupled with lagging fundamentals. Already, some concerns about unsustainable price increases are surfacing in China. Should unnatural liquidity conditions be prolonged, these concerns likely will spread geographically.

Global Market Perspective October 2009

Commercial property and note sale auction activity is picking up in the United States. Jones Lang LaSalle launched its own online auction service to help encourage banks to clear their books by improving pricing, transparency and market participation. China’s purchasing power Mainland China’s property investment market has entered a unique phase in which international investors are at their weakest in terms of purchasing power and domestic institutions are being encouraged, via direct and indirect means, to expand aggressively in this area for the first time. While international investors may not continue to dominate as domestic institutional investors emerge and grow, China will continue to incorporate international capital expertise via existing and new cooperative approaches. Bulk versus asset-by-asset workouts Banks in the Americas and Europe increasingly will take a long-term and holistic view to work out problem real estate holdings. Rather than the sporadic sale of assets, look for them to seek out more structured, larger-scale portfolio restructuring solutions. In the US, the FDIC has taken this approach with smaller banks its has put into receivership as evidenced by the recent auction of all of Corus Bankshares’ problematic real estate loans to a consortium led by Starwood Capital Group. Conclusion The worst of the global commercial property meltdown is over. Now, the case for a commercial property recovery is gradually being fortified by recent and ongoing improvements in the global economy, investor sentiment, market liquidity and corporate balance sheets. To date, much of this improved sentiment and outlook has been rooted in the Central Bank policy action on a global scale as well as the robust acceleration of the Chinese economy. Clearly, the road ahead is long and winding, but the momentum is on recovery’s side.