Global Market Perspective 3Q 2011 by Jones Lang LaSalle Spain

GLOBAL MARKET PERSPECTIVE Global Foresight Series 2011

Global Market Perspective Third Quarter 2011

Global Market Perspective Third Quarter 2011 Markets Pause amid Sovereign Debt Concerns As we move through the third quarter of 2011, chilly economic headwinds are leading to a more cautious attitude among real estate investors and corporate occupiers. The heightened investor demand of the past few months has been tempered by mounting concerns over the handling of the sovereign debt crises in Europe and the U.S., and by increasing doubts about the future pace of global economic expansion. The momentum in leasing activity has also slowed as some corporate occupiers put the brakes on large capital projects and hiring plans until there is greater certainty over near to medium-term economic conditions. Nonetheless, barring significant economic setbacks, such as a major sovereign debt default or a supply-related spike in oil prices, we believe that the current lull in real estate sentiment is temporary and that global markets will return to a more confident stride in the final months of 2011. Latest data on real estate market fundamentals continue to be encouraging, and our forecasts of investment activity and price growth for 2011 have in fact seen a positive upgrade over the past quarter, a reflection of the resilience of the real estate recovery. The key highlights from the third quarter Global Market Perspective are: •

Global commercial real estate investment volumes are up 50% year-on-year in Q2. Based on transactions in the pipeline, we believe that full-year 2011 volumes are now on track to exceed our original projection of US$440 billion.

•

This activity has supported continued growth in capital values for prime office assets, up 19% over the past year (in 23 major markets). The pace of growth is slowing however, as yield compression comes to a halt in many markets.

•

The momentum in capital markets in the United States has been particularly strong; transaction volumes have surged impressively in Q2, yields have compressed and debt market liquidity has improved. Despite some signs of investor caution, the second half of 2011 is likely to be even stronger than the first half.

•

Investor activity faltered during Q2 in some markets in Europe, such as London, where despite strong investor demand, the lack of product has constrained volume growth. In other parts of Europe, the sovereign debt crisis is affecting investors’ appetite for risk and deals are taking longer to close, which is pushing activity into the second half of the year.

•

Russia is the main growth story over the last quarter. Moscow tops the capital value growth league table, investment volumes are at record levels, and deals in the pipeline point to Russia being one of Europe’s largest investment markets at year end.

•

Leasing markets are showing a mixed picture. In Asia Pacific net absorption is still at near record levels, but leasing volumes have disappointed in the U.S. and Europe, where economic uncertainty is impacting demand.

•

Corporate occupier demand is particularly buoyant in China and India, while Brazil continues to demonstrate impressive strength in office market fundamentals. A number of South East Asian markets, such as Jakarta, are also now reappearing on the international radar and registering strong corporate demand.

•

The global office vacancy rate stands at 14% and is declining steadily. We expect the rate to fall to 13.3% by year end, with development activity in both North America and Europe at a cyclical low.

•

The supply gap for prime assets has deepened in many top-tier markets during Q2, prompting acceleration in rental growth at close to 11% year-on-year (across 23 major office markets), the highest level since Q4 2007. Beijing, Moscow, Jakarta and Hong Kong are expected to top the rental growth league table this year.

Global Market Perspective Third Quarter 2011

Global Market Perspective Third Quarter 2011 Contents Global Economy................................................................................................................................................................ 4 Global Property ................................................................................................................................................................. 6 Capital Markets Outlook.......................................................................................................................................... 7 Leasing Markets Outlook........................................................................................................................................ 8 Global Real Estate Health Monitor................................................................................................................................... 9 Real Estate Capital.......................................................................................................................................................... 10 Corporate Occupiers ...................................................................................................................................................... 14 Office Markets ................................................................................................................................................................. 16 Office Demand Dynamics ..................................................................................................................................... 16 Office Supply Trends ............................................................................................................................................ 18 Office Rental Trends ............................................................................................................................................. 20 Office Capital Values and Yield Trends ............................................................................................................... 22 Retail Markets.................................................................................................................................................................. 23 Industrial Warehousing Markets.................................................................................................................................... 25 Hotel Markets................................................................................................................................................................... 26 Residential Markets ........................................................................................................................................................ 28 Recent Key Transactions ............................................................................................................................................... 29

Global Market Perspective Third Quarter 2011

Global Economy Economic momentum has weakened, but growth fundamentals still in place The momentum of the global economy appears to have weakened in recent weeks. Leading indicators of business activity suggest that economic growth slowed during Q2, most notably in advanced economies, where a combination of subdued private consumption, higher commodity prices and supply-chain disruptions from the Japanese earthquake have dented economic activity and confidence. Nonetheless, the lull in global economic expansion is expected to be temporary, with growth projected to reaccelerate during the latter half of the year. The fundamental drivers of growth are still in place – namely accommodating macroeconomic policy, stronger business spending due to robust cash flows and continued growth potential in emerging economies. Accordingly, IHS Global Insight has only slightly downgraded its global economic growth forecast for 2011 to 3.3%. GDP Projections 2011 in Major Economies – Recent Movements Australia

China

France

Germany

India

Japan

USA

Jan 2011

2.5%

9.5%

1.5%

2.7%

8.3%

1.2%

1.8%

3.2%

Apr 2011

2.4%

9.3%

1.6%

3.0%

8.3%

0.0%

1.5%

2.8%

Jul 2011 (Latest)

2.1%

9.4%

2.0%

3.5%

7.9%

-1.2%

1.1%

2.5%

Change Jan-Jul (basis points)

- 40

-10

+ 50

+ 80

- 40

- 240

- 70

-70

Source: IHS Global Insight, July 2011

Elevated downside risks Since we last reported in April 2011, the balance of risks to the global economy has shifted more to the downside. This reflects mounting concerns about sovereign debt in the Eurozone periphery, the recent softening in economic activity in the U.S. and further political tensions in the Middle East. In broad strokes, downside risks are being reduced as continued deleveraging of households, banking sectors and governments takes place in many advanced economies. However, debt reduction also carries with it a number of negative side effects: reduced consumer demand, regulatory uncertainty in the financial sector, and a series of sovereign debt crises linked to the political challenges of implementing swift and significant debt reduction. Symptomatic of these elevated risks are rising sovereign credit default swap spreads in some Eurozone economies, retreating global stock prices and falling long-term bond yields in those core advanced economies with the highest-rated government debt. Continued divergence in economic performance Economic forecasts point to continued divergence in the pace of growth between advanced and emerging economies. Growth in advanced economies is projected to average 2.2% per year during 2011-12. This would represent a modest deceleration from the 2.8% achieved in 2010. Weaker-than-expected growth in the U.S. and Japan has been partly offset by stronger activity in core Eurozone economies. Recent economic indicators have disappointed in the United States, especially in terms of job creation, a weak housing market, and the government debt reduction stalemate. Nonetheless, while the U.S. appears to have hit a ‘soft patch’, a ‘double dip’ scenario is unlikely, and there are several upside risks, including strong export growth and pent-up consumer demand. IHS Global Insight expects U.S. growth to reach 2.5% in 2011, rising to 2.6% in 2012.

Global Market Perspective Third Quarter 2011

In contrast, economic growth has surprised on the upside in Europe, powered by stronger-than-expected activity in the Eurozone’s core economies. However, there is significant divergence between the dynamic export-driven economies of Germany and the Nordics, where 2011 growth is expected to be in excess of 3.5%, and the Eurozone’s southern periphery (i.e. Greece, Portugal, Spain and Italy), where combined growth is likely to be less than 0.5% per year in 2011-12. The UK and France sit in the middle of these two groups, with forecast growth of around 1-2% in 2011-12. The outlook for the European economies will be dominated by mounting concerns surrounding sovereign debt contagion from the Eurozone periphery, with new tensions now being felt in Italy and Spain. Following the triple disasters in Japan in March, there are signs that the worst is over and that supply-chain and power disruptions are being fixed more quickly than expected. Although the Japanese economy is projected to contract by 1.2% overall in 2011, a robust rebound is anticipated for the second half of the year, with growth hitting an impressive 4.5% in 2012, representing the highest uplift for more than 20 years. Emerging markets driving global expansion Growth in most emerging economies continues to be strong, with many markets already operating at or above pre-crisis levels of output. Favourable income and employment dynamics in the large emerging economies, particularly in Asia Pacific, point to sustained expansion in 2011-12. Growth is predicted to decelerate only slightly from the high levels of last year, with around 6.5% projected for emerging economies in 2011, compared with just over 7% in 2010. In China, there are increasing signs of a slowdown, with GDP moderating to 9.5% in Q2, but a ‘hard landing’ is unlikely; growth is forecast to soften to 9% per year in 2011-12. India’s economy is expected to continue to retain good traction, such that the gap between China and India’s growth rates may have largely disappeared by 2012. Latin America will continue to be boosted by commodity exports and domestic demand, but the pace is likely to ease in 2011 as policy is tightened more aggressively to combat overheating economies. Growth in Emerging Europe is higher than previously anticipated, partly due to the strong performance of Poland and Turkey. Economic prospects in the Middle East and North Africa remain clouded by political and social turmoil, although the outlook has improved for energy exporters, such as Saudi Arabia, where higher energy prices have enabled governments to follow expansionary economic policies. Inflation and interest rate outlook With the recent drop in commodity prices, inflation may be easing, particularly in advanced economies. However, inflationary pressures remain strong in the large emerging economies, which are characterised by strong output and credit growth. China’s inflation rate has risen to 6.4% and is close to double-digits in both India and Russia. Most emerging economies are now implementing tightening monetary policies. China and India have been particularly aggressive; China has raised its reserve requirement ratio six times already in 2011, while India has raised policy interest rates by 175 basis points. Weakening inflationary pressures and muted economic growth in many advanced economies indicate that accommodating monetary conditions are likely to persist. The probability that the U.S. Federal Reserve Bank or the Bank of England will hike policy interest rates has decreased, with many forecasters now predicting that rates are unlikely to rise until 2012. On the other hand, the European Central Bank has started its tightening cycle - it has already raised interest rates twice this year.

Global Market Perspective Third Quarter 2011

Global Property Regional divergence characterising Q2 2011 Despite the chilly economic headwinds, global real estate markets have continued on their recovery path during Q2. Investors and corporate occupiers are certainly more cautious than three months ago and confidence levels are being challenged by the more uncertain economic environment. Nonetheless, key real estate indicators have continued to reveal further improvement in market fundamentals during the past quarter – overall net absorption is positive, leasing volumes are steady, oversupply is gradually disappearing and the supply gap for prime assets has deepened in many core markets, which is pushing up prime rents. The current lull in confidence is accentuating regional differences. The markets in Asia Pacific and Latin America continue to motor strongly and have sustained high levels of activity. In the United States, the real estate market has surprised on the upside during Q2 and is now in a much better shape to face potential economic headwinds during H2 2011. Meanwhile, overall activity in Europe faltered in Q2; investment and leasing volumes were flat, and the outlook for the region’s real estate markets is increasingly overshadowed by the Eurozone sovereign debt crisis. Prime Offices - Capital Value Clock, Q2 2010 v Q2 2011

Q2 2010

Q2 2011

Shanghai

Beijing Shanghai

London

Capital Value growth slowing Hong Kong

Capital Value

London growth Washington DC accelerating New York, Sao Paulo Moscow Chicago, San Francisco Toronto, Seoul, Singapore Los Angeles, Berlin, Paris Milan, Sydney

Americas EMEA Asia Pacific

Sao Paulo, Washington DC Capital Value Amsterdam growth slowing Hong Kong New York, Moscow Singapore Capital Values Capital Value San Francisco Mexico Chicago, Toronto bottoming out growth City Beijing accelerating Los Angeles Berlin, Stockholm Jakarta Atlanta, Dallas Detroit, Madrid Paris, Sydney Frankfurt Mumbai Atlanta, Dallas, Amsterdam Frankfurt, Milan Brussels, Stockholm Brussels, Seoul Jakarta, Mumbai, Tokyo

Capital Values falling

Capital Values falling Capital Values bottoming out

Detroit, Mexico City Madrid, Tokyo

Notional capital values based on rents and yields for Grade A space in CBD or equivalent. In local currency.

The Jones Lang LaSalle Property Clocks SM As of Q2 2011

Prime Offices - Rental Clock, Q2 2010 v Q2 2011

Q2 2010

Q2 2011

Mexico City Hong Kong Rental Value Singapore Atlanta, Chicago growth slowing London Los Angeles Sao Paulo, Moscow New York Shanghai Rental Value Rental Values Rental Value Madrid bottoming out growth growth Dallas, Toronto Hong Kong accelerating Rome, Seoul accelerating San Francisco Dubai New York, Beijing Sao Paulo Brussels, Frankfurt, Milan Washington DC Shanghai Stockholm, Jakarta Amsterdam, San Francisco London, Singapore Sydney, Berlin, Paris Stockholm, Tokyo Mumbai Johannesburg, Jakarta Paris, Beijing Toronto Washington DC Dallas Berlin, Moscow Frankfurt, Milan Mumbai, Sydney Johannesburg

Rental Value growth slowing

Americas EMEA Asia Pacific

Rental Values falling

Detroit

Rental Values falling Rental Values bottoming out Seoul Dubai Detroit Mexico City Madrid Los Angeles, Brussels Amsterdam Atlanta, Chicago Rome, Tokyo

Based on rents for Grade A space in CBD or equivalent. In local currency.

The Jones Lang LaSalle Property Clocks SM As of Q2 2011

Global Market Perspective Third Quarter 2011

CAPITAL MARKETS OUTLOOK Global direct commercial real estate investment totalled US$103.5 billion in Q2 2011, which is 50% ahead of the US$68.8 billion transacted in Q2 2010. This activity has supported continued growth in capital values on prime assets, which have increased at an annual rate of 19% across 23 top-tier office markets. While the momentum remains strong, the drivers of growth are shifting. Some markets, such as the U.S., have been surprisingly robust, while others in Europe have faltered, reflecting a lack of product and increasing investor concern about Eurozone sovereign debt contagion. While investors are displaying greater caution, there are several factors which support continued growth during the remainder of 2011, and we now expect full-year 2011 global volumes to exceed our original projection of US$440 billion: •

Additional bank product is coming up for sale in Europe and the U.S., some of it of very good quality

•

The large emerging markets appear to be absorbing the impact of regulatory measures without a ‘hard landing’

•

The pipeline suggests that the U.S. will carry its investment growth momentum into the second half of the year

•

Current deals in the market confirm that Japan is rebounding from March’s disaster

•

Private buyers are materialising as a significant force, especially from emerging markets, attracted by property’s ‘safe haven’ characteristics. Middle Eastern capital is also back in the market.

The pattern of growth is evolving from what we foresaw earlier in the year. The recovery in the U.S. has proven strong, and despite recent investor caution, momentum is still building and investment activity is broadening. Add to this an improvement in debt market liquidity and still attractive spreads, and the second half is likely to be even healthier than the first half of this year. In contrast, Q2 did not maintain the momentum of Q1 in some of the key European markets, notably London, where there is lack of supply in the prime segment keenly sought by investors. Germany, Russia and the Nordics, on the other hand are doing better than expected. Across Europe, the sovereign debt crisis is impacting investors’ appetite for risk. Hence, it is taking longer for larger deals to close. While we continue to anticipate growth in European volumes in H2, the rate will be affected by the speed with which the sovereign debt crisis is handled.

US$ billions

Direct Commercial Real Estate Investment, 2005-2011 350 300 250 200

+25%

+75-80%

150 +15-20%

100 50 0 Americas 2005

2006

EMEA 2007

2008

2009

Asia Pacific 2010

2011 Projection

Global Market Perspective Third Quarter 2011

LEASING MARKETS OUTLOOK Leasing markets are showing a mixed picture across the globe. Asia Pacific and Latin America continue to be home to some of the world’s strongest markets, with continued buoyancy in corporate occupier activity in China, India and Brazil. However, increasing economic headwinds are prompting some hesitation among corporate occupiers in the U.S., Europe and Australia, where leasing volumes in H1 2011 have disappointed compared to H2 2010. Some companies are delaying making final leasing decisions until there is more certainty over near to medium-term economic conditions. In addition, many tenants (with leases expiring in 2011/2012) completed lease extensions at the bottom of the market in 2009/2010 to take advantage of discounted rates, and this has reduced the need to act in the markets now. Leasing volumes are also being constrained by selective supply shortages. Office vacancy rates have continued to trend downwards from the peak in Q3 2010, with new deliveries at a cyclical low in both the U.S. and Europe. The global office vacancy rate now stands at 14% (across 94 cities), which compares with 14.5% at the peak of vacancy cycle in Q3 2010; by year end, it is expected to have fallen to 13.3%. Supply gaps for prime space in many top-tier office markets are pushing up rental growth - to 11% year-on-year (across 23 major markets), representing its highest level since Q4 2007. The BRIC markets of Moscow, Beijing and Sao Paulo witnessed some of the sharpest rental uplifts in Q2, but prime rental growth is also becoming more entrenched across a broader range of Asia Pacific markets, in U.S. gateway cities and in some top-tier European markets. Despite a gloomier global economic outlook, we remain bullish on rental growth prospects for the top-tier office hubs, with double-digit uplifts forecast for many markets where the balance is shifting in favour of landlords. Strongest rental growth for full-year 2011 is projected for Beijing (35-45%), Jakarta and Moscow (30-40%) and Hong Kong (20-30%). Prime Offices – Projected Value Change in 2011

Rental Values + 20%

Beijing, Moscow, Jakarta, Hong Kong

+ 10-20%

Shanghai, Singapore, Sao Paulo Washington DC, San Francisco London*, New York*, Toronto

+ 5-10%

Paris, Stockholm Mumbai, Sydney

Capital Values Moscow, Beijing, Hong Kong, Jakarta San Francisco, Washington DC Shanghai, Singapore New York*, Toronto Sao Paulo, London* Stockholm, Paris, Frankfurt Chicago, Los Angeles, Mumbai

+ 0-5%

Frankfurt, Chicago, Los Angeles

Sydney

- 0-5%

Tokyo

Tokyo, Mexico City

- 5-10%

Brussels, Madrid Mexico City

Brussels, Madrid Dubai

- 10-20%

Dubai

* New York – Midtown, London – West End. Nominal rates in local currency. Source: Jones Lang LaSalle, July 2011

Global Market Perspective Third Quarter 2011

Global Real Estate Health Monitor Economy National GDP

Real Estate Investment Markets

OECD

National

Capital

Leading

Investment

Value

Indicator

Volumes

Change

Prime Yield

Real Estate Occupier Markets

Yield Gap

Rental

Net

Change Absorption

Vacancy Rate

Supply Pipeline

Frankfurt

3.5%

-0.4%

+34%

+6.1%

4.9%

190

0.0%

-0.1%

14.3%

2.3%

Hong Kong

5.6%

+11%

+43.8%

3.5%

110

+32.2%

+3.9%

4.8%

4.2%

London

1.1%

-0.2%

+22%

+18.8%

4.0%

+11.8%

+3.0%

6.0%

2.5%

Moscow

4.4%

-0.1%

+115%

+66.7%

9.0%

+50.0%

+4.4%

16.8%

13.0%

New York

2.5%

0.0%

+117%

+20.6%

4.7%

154

+5.0%

+1.2%

10.8%

0.0%

Paris

2.0%

-0.6%

+30%

+10.5%

4.75%

134

0.0%

+1.5%

7.0%

2.5%

Sao Paulo

4.4%

-0.7%

+284%

+39.2%

10.0%

384

+32.5%

+6.5%

6.0%

27.3%

Shanghai

9.4%

-0.4%

+20%

+32.9%

6.1%

220

+31.2%

+12.3%

7.3%

36.5%

Singapore

3.8%

+233%

+30.6%

4.2%

185

+32%

+13.4%

6.3%

22.3%

Sydney

2.1%

-0.5%

+28%

+4.5%

6.9%

168

+7.5%

+2.5%

8.0%

1.6%

Tokyo

-1.2%

-0.4%

-26%

+3.0%

3.6%

246

0.2%

+6.5%

5.7%

9.9%

Real Estate data as at end Q2 2011 Definitions and Sources National GDP: Change in Real GDP. National projection, 2011. Source: Global Insight OECD Leading Indicator: Composite Leading Indicator: Month on Month % Change. Latest Month. Source: OECD Direct Commercial Real Estate Volumes: National data. Rolling Annual % Change. Source: Jones Lang LaSalle Capital Value Change: Notional Prime Office Capital Values. Year on Year Change. Latest Quarter. Source: Jones Lang LaSalle Prime Yield: Indicative yield on prime/grade A offices. Latest Quarter. Source: Jones Lang LaSalle Yield Gap: Basis points that prime office yields are above or below 10-year government bond yields. Latest Quarter. Source: Jones Lang LaSalle, Datastream Rental Change: Prime Office Rents. Year on Year Change. Latest Quarter. Source; Jones Lang LaSalle Net Absorption: Annual net absorption as % of occupied office stock. Rolling Annual. Source: Jones Lang LaSalle Vacancy Rate: Metro area office vacancy rate. Latest Quarter. Source: Jones Lang LaSalle Supply Pipeline: Metro area office completions (2011-2012) as % of existing stock. Source: Jones Lang LaSalle

Global Market Perspective Third Quarter 2011

Real Estate Capital Growth momentum continued into Q2, but lead markets are changing Global direct commercial real estate investment totalled US$103.5 billion in Q2 2011, which is 50% ahead of the US$68.8 billion transacted in Q2 2010. While the momentum remains strong, the drivers of growth are shifting. Some markets, such as the U.S., have been surprisingly buoyant, and the Americas has once again led the regional growth table with an annual gain of 128%. Both EMEA and Asia Pacific are up year-on-year, but experienced a slowdown compared to Q1 2011. In Europe the slowdown reflects a combination of lack of product and increasing investor concern about Eurozone sovereign debt contagion. In Asia Pacific, lower volumes were mostly a consequence of the temporary fall in investment activity in Q2 in Japan, the regionâ&#x20AC;&#x2122;s largest property investment market. Russia - the star performer in Q2 There were 16 billion-dollar country investment markets in Q2 2011, among which the most active were the U.S. (US$41.7 billion), the UK (US$10.8 billion), Germany (US$7.9 billion), Canada (US$5.1 billion) and China (US$5.1 billion). Japan dropped out of the top markets globally, on account of the natural disasters in March, which shrank volumes to just under US$1.5 billion. Among the billion-dollar markets, the most notable increase was in Russia (+239% year-on-year); at US$2.3 billion, it experienced its strongest quarter on record.

Direct Commercial Real Estate Investment - Quarterly Trends, 2007-2011

US$ billions 200

188

206 203

161 150

137 114

102

Q210

Q110

100

103 95

Americas

EMEA

Q211

Q111

Q410

Q310

Q409

Q309

Q209

Q109

Q408

Q308

Q208

Q108

Q407

Q307

Q207

Q107

Asia Pacific

Source: Jones Lang LaSalle, July 2011

Global Market Perspective Third Quarter 2011

Direct Commercial Real Estate Investment - Regional Volumes, 2010-2011

$US Billions Americas EMEA Asia Pacific TOTAL

Q2 11 48.7 35.7 19.0 103.5

Q1 11 31.3 36.3 27.2 94.8

% change Q1 11 Q2 11 56% -2% -30% 9%

Q2 10 21.4 30.3 17.1 68.8

% change Q2 10 Q2 11 128% 18% 11% 50%

Source: Jones Lang LaSalle, July 2011

Direct Commercial Real Estate Investment - Largest Markets, 2010-2011

$US Billions US UK Germany Canada China Australia France Sweden Hong Kong Russia Singapore South Korea Japan Brazil Norway Netherlands

Q2 11 41.7 10.8 7.9 5.1 5.1 4.0 3.7 3.0 2.4 2.3 2.2 2.0 1.5 1.5 1.3 1.1

Q1 11 22.9 14.0 7.3 1.7 4.2 1.4 3.4 2.2 2.6 1.1 4.0 2.7 9.0 6.7 0.4 1.2

% change Q1 11 Q2 11 82% -23% 9% 206% 20% 193% 10% 32% -7% 111% -44% -26% -84% -78% 224% -11%

Q2 10 16.2 11.1 5.2 3.5 2.1 1.9 2.9 1.8 2.3 0.7 0.7 1.3 5.8 1.6 0.8 1.4

% change Q2 10 Q2 11 157% -3% 53% 47% 146% 109% 29% 65% 3% 239% 225% 51% -75% -12% 62% -27%

Source: Jones Lang LaSalle, July 2011

Global Market Perspective Third Quarter 2011

China and Australia rebound to lead Asia Pacific growth In Asia Pacific, investment volumes at US$19 billion in Q2 were down compared to the previous quarter (-30%) but up compared to Q2 2010 (+11%). The Q1 to Q2 seasonal slowdown is normal in this region, driven by Japan’s fiscal yearend, but Japan’s recent crisis has aggravated the normal pattern. However, the fact that volumes are still up year-onyear is testament to the strength of other markets in Asia Pacific. For the full-year 2011 our forecasts are unchanged at US$100 billion, a 15-20% increase on 2010 levels. China is currently the region’s most active market. At US$5.1 billion, volumes were 20% higher than the previous quarter and more than double that of a year ago. In the first half as a whole, volumes are up some 26% year-on-year, suggesting that while the government’s ongoing regulatory tightening might be constraining the property investment market, it is far from driving it into a ‘hard landing’. Last quarter, we speculated that the tightening measures might be behind Q1’s slowdown in activity. That appears to have been temporary. Another market to register strong growth was Australia, which rebounded from its slowdown in Q1. The US$4 billion transacted in the quarter (up 109% from a year prior) was spread broadly in terms of geography, sector and lot size, with both domestic and foreign investors active. While some of this was pent-up demand from the first quarter, the pace of growth is still likely to continue through the second half of the year. Similar to 2009/2010, offshore investors continue to seek exposure to the Australian market. In addition, Australian investors have been repatriating funds from the sale of offshore assets, providing another source of capital for investment in the domestic market. Large investors, including the major A-REITs, are finding debt increasingly accessible, either through conventional bank lending or through non-bank lenders and credit markets within Australia and offshore. Investment activity faltered in some European markets In Europe, investment volumes in Q2 2011 totalled €24.8 billion (US$35.7 billion). This represents a 4% rise (in euro terms) on a year ago, but contrary to our expectations last quarter, the momentum of growth slowed. Lower economic confidence, the ongoing sovereign debt crisis and concerns about the health of bank balance sheets are affecting sentiment. Current market evidence suggests that larger deals now take longer to close, and we suspect that some deals currently ‘under offer’ have been pushed back into the second half of the year. Consequently, during H2 2011 we expect some larger deals to close, supporting further growth. Overall for 2011 we anticipate an increase in volumes over 2010 of up to 25%. The UK remains the region’s most liquid market, but in Q2 its market share has slipped to 30% of the EMEA region from 37% a year ago. Tight supply of product, particularly in Central London, has held back investment volume growth. Moreover, the polarisation within the UK market continues, with London offices attracting the majority of investment and activity outside London concentrated heavily on retail. Germany extended its recovery in Q2, registering some €5.5 billion (US$7.9 billion) in volumes, with retail taking the greatest share of activity at 44%. The sovereign debt crisis has heavily impacted investment activity in the periphery of the Eurozone. The sum of volumes for those directly affected (Greece, Ireland, Portugal and Spain) was just €302 million, or 1.2% of the EMEA total. Furthermore, Italy, which has become the latest target of the bond markets, saw a considerable fall-off in volumes in Q2; its quarterly total volumes are now lower than they were even in the depths of the credit crunch. The lending market across Europe remains difficult but there are some positive signs. Firstly, new lenders have entered the market, notably insurers on the back of Solvency II regulatory changes; and, secondly, we have seen the first successful CMBS placement with institutional investors since 2007, which could signal a possible reopening of a refined form of the European CMBS market.

Global Market Perspective Third Quarter 2011

North America at its most active since 2007 North America experienced an exceptionally strong Q2, with volumes in both the U.S. and Canada at their highest level since the end of the boom in 2007. In the U.S., volumes totalled US$42 billion, up 157% from a year ago. All property sectors experienced robust growth thanks to increased debt availability and a hunger among investors for yield options in the low interest rate environment. While investors have broadened their geographic search across the U.S. for quality assets in additional secondary markets as well as less prime locations in leading gateway markets, their activity still heavily favours centrally-located core office investment in leading markets, most notably New York and Washington DC. As the second half of 2011 unfolds, it is probable that the recovery in the capital markets for institutional-quality office properties will continue to incrementally expand to additional markets and product sub-types, as the U.S. remains on schedule for an expansion in investment sales volume of 70% for the full year. Improving liquidity in U.S. debt markets Liquidity in the U.S. commercial real estate debt markets continued to increase during Q2. A key to the improvement in loan availability and options for investors has been the recovery in the CMBS market. New issuances surged to slightly more than US$17 billion during the first half of 2011, from just US$2.4 billion during the comparable period in 2010. Issuance in Q2 was roughly even with the pace established in the first three months of the year, as US$8.4 billion in bonds were priced during Q2. Looking ahead to prospective third quarter activity, notwithstanding some volatility in the market in recent weeks, it does appear that full-year CMBS issuance is still on track to triple or quadruple the total of US$11.6 billion recorded in 2010. Sharp bounce in Canada; Brazil settles back Canada also saw a sharp bounce, with investment activity more than tripling from Q1, making it the fourth most active market globally. The rebound was primarily fuelled by burgeoning demand from domestic investors for all product types in the Toronto market. Investment activity and sentiment in Brazil dropped back in Q2 from the heady volumes of the previous six months, as several very large portfolio deals were digested. Nonetheless, the marketâ&#x20AC;&#x2122;s coming-out as a global destination for capital is far from over; at US$1.5 billion, activity in Brazil was nearly double the average quarterly volume over the past five years. With limited standing product, most funds are going into development and land acquisitions.

Global Market Perspective Third Quarter 2011

Corporate Occupiers A pause for reflection Momentum within the global occupational markets has slowed. Economic uncertainty, fuelled by the debt crises in Europe and the U.S., has left corporate occupiers pausing for reflection. Questions about the pace and extent of global economic recovery have resurfaced, causing some corporates to re-apply the brakes to capital investment projects, rein in medium-term strategies and rethink headcount assumptions. Overall global corporate occupier demand has been flat over Q2, reflecting this uncertainty but also current market dynamics. Many tenants took advantage of soft global market conditions during 2009 and early 2010 to renegotiate or renew leases in order to buy time, reducing the need to act in the markets now. Similarly, some corporates satisfied large floorspace requirements at the back-end of 2010, and replacement demand of a similar magnitude has yet to materialise. As our Global Office Market Conditions Matrix illustrates, real estate market conditions have also hardened amid acute shortages of quality supply. This is particularly true of Asia Pacific, where strong headcount growth and expansionary activity over the last 12 months have rapidly absorbed available space within core markets. The result has been rapid rental increases which, in turn, have pushed occupancy costs above an acceptable ceiling for the majority of corporate occupiers. Over the short term, corporates will be seeking further market disposals amid growing pressures on headcount. This has been most noticeable within the technology sector, with Cisco, Microsoft and Research in Motion (RIM) announcing significant global headcount reductions in recent weeks. Occupiers across all sectors could follow suit, placing downward pressure on net absorption and leasing volumes. Alongside rising uncertainty is a growing introspection from corporate occupiers. This takes two clear forms: â&#x20AC;˘

The internal corporate real estate (CRE) function within many corporate occupiers continues to be rethought and remodelled to drive stronger business engagement and deliver greater strategic value to the decision making of the wider business.

â&#x20AC;˘

This same CRE function is actively investigating the opportunity to transform the existing workplace. This is driven by the twin aims of supporting cost avoidance initiatives while simultaneously raising the efficiency and productivity of the portfolio. The reduction in capital expenditure levels might serve to halt progress here; nevertheless, over the longer term, workplace programmes will be a key feature of the CRE market.

Finally, there has been evidence of further evolution in the CRE outsourcing market over recent months, particularly within EMEA. A growing number of EMEA-domiciled corporations are coming to the market for (often global) real estate solutions to complex, mixed office and industrial portfolios. These typically first-generation outsourcers are not merely seeking support for transactional activity, but are also engaging with service providers to drive transformation in CRE team structure, strategy and delivery. They are seeking support in addressing the challenges of decentralisation; of poor real estate metrics and monitoring; and of implementing coherent and strong portfolio strategies. Transformation is also apparent among the more established EMEA markets, with second and third-generation outsourcers renewing or retendering in the market, a trend which has, in part, been fuelled by churn among senior CRE leaders.

Global Market Perspective Third Quarter 2011

Global Office Market Conditions Matrix, 2011-2013 Market

2011

2012

2013

Market

2011

2012

2013

Market MARKET

Chicago

Brussels

Beijing

Los Angeles

Frankfurt

Hong Kong

New York

London

Mumbai

San Francisco

Madrid

Shanghai

Toronto

Moscow

Singapore

Washington DC

Paris

Sydney

Mexico City

Stockholm

Tokyo

Sao Paulo

Dubai

2011

2012

2013

Tenant Favourable Neutral Market Landlord Favourable

* Relates to conditions in the overall office market of a city. Conditions for prime CBD space may differ from the above. Source: Jones Lang LaSalle, July 2011

Global Market Perspective Third Quarter 2011

Office Markets OFFICE DEMAND DYNAMICS A mixed picture of leasing activity The office leasing markets are showing a mixed picture of activity across the globe. Asia Pacific continues to have among the world’s most dynamic leasing markets, with particularly buoyant corporate occupier activity evident in China and India. Office markets in Brazil are also demonstrating impressive strength, as the supercharged economic growth in 2010 is flowing through to robust demand. In the U.S., while net absorption is at its highest for four years, leasing volumes have weakened from H2 2010 amid concerns about the state of the economy. Likewise in Europe, overall volumes in Q2 have disappointed and are barely unchanged on a year ago. Nonetheless, there are some bright spots in the region, notably Poland, Russia, Germany and the Nordics, where stronger demand has reflected more vibrant economic conditions. Leasing activity across Asia Pacific remains healthy Leasing activity across Asia Pacific remains healthy, although tenants are becoming more cost focused and ‘smart growth’ is an important theme. Positive business sentiment (albeit less upbeat than in Q1 2011) and corporate hiring continue to underpin demand in its main office hubs. Total net absorption remained at near record levels in Q2, a third higher than the same period last year. In China’s Tier I cities, occupier demand from both domestic firms and MNCs remained particularly robust and hiring expectations are still rising. The most sizeable net absorption has been recorded in Beijing, at an impressive annualised rate of 25%. India has also seen significant take-up particularly from the IT/ITES sector. In emerging South East Asia, occupancy levels improved further in Jakarta and Manila on the back of strong economic growth. Meanwhile, net absorption moderated in Hong Kong and Singapore due to slower expansion demand from financial sector tenants. It also reflects the fact that many large corporate occupiers had already increased space requirements over the past six months. The Tokyo CBD has seen no lease cancellations following the earthquake, while some tenants have capitalised on more affordable rents to relocate or upgrade to newer or better-quality buildings. In Australia, leasing activity in Sydney and Melbourne is patchy and the volatility in international markets has affected sentiment. Leasing volumes flat in most of Europe Corporate occupier demand for office space across Europe was unspectacular in Q2 with circa 2.7 million sq m of office space take-up, 2% higher than Q1 2011 and 4% higher than in Q2 2010. On a positive note though, it was 8% above the 10-year average. Office market conditions across the region continue to vary widely and reflect the underlying economies. The CEE region, the Nordics, Germany and increasingly France support the emergence of expansionary demand, whereas corporate occupiers in Greece, Portugal, Spain and Ireland remain cautious, with demand driven by lease events, consolidation and cost containment. For the full-year 2011, take-up is likely to be similar to 2010, with indications that Eurozone contagion fears are pushing occupier decisions into 2012. Take-up is expected to grow in 2012 (stronger in the CEE region than in Western Europe) but expectations are muted, with overall volumes forecast to be around 10% higher in 2012 than this year. Markets in the CEE region, Germany and the Nordics, as well as London and Paris, are expected to perform better than the regional average.

Global Market Perspective Third Quarter 2011

Strongest net absorption in U.S. for four years Outperformance in employment growth among professional and business service industries in the earlier parts of the U.S. economic recovery have been a catalyst for the upturn in office net absorption. In Q2 2011, the U.S. office market achieved the greatest amount of quarterly absorption since Q4 2007, the largest gains being recorded in New York, Houston, Seattle and Dallas. Certain industry sectors have driven this expansion – notably technology, biotechnology, energy, banks and other financial services. Still, there remains great disparity in the depth of participation in the leasing market by asset quality. All of the absorption gains realised in 2010 and 2011 are attributable to the Class A sector. By contrast, the Class B sector is now entering its fifth year of occupancy declines. … but overall U.S. leasing volumes disappoint From a U.S. leasing activity perspective, overall volumes, while steady in Q2, are substantially lower than in Q3 and Q4 2010, with relative economic weakness prompting some hesitation among corporate occupiers. Moreover, numerous tenants (with leases expiring in 2011/2012) completed lease extensions at the bottom of the market in 2009/2010 to take advantage of discounted rates, and thus the near-term roll on leases is less than usual. Offices – Net Absorption, Year to Q2 2011 Beijing Mumbai Singapore Shanghai Sao Paulo Tokyo CBD Moscow Mexico City Hong Kong London Sydney Toronto San Fran. Brussels Wash. DC Paris New York Stockholm Madrid Frankfurt Chicago Los Angeles

-5

% of occupied stock

Americas EMEA Asia Pacific Source: Jones Lang LaSalle, July 2011. Covers all office sub-markets in each city. Tokyo - CBD-3 kus

Global Market Perspective Third Quarter 2011

OFFICE SUPPLY TRENDS Global vacancy trending downwards Office vacancy rates have continued to trend downwards, with the global rate standing at 14% in Q2 2011 (across 94 cities), compared to 14.5% at the peak of vacancy cycle in Q3 2010; by year end, it is expected to have fallen to 13.3%. Vacancy rates are now falling across all three global regions. Absorption exceeding new supply in the main emerging markets In Asia Pacific, despite the region being at the peak of its office development cycle, strong and sustained corporate occupier demand has led to an unexpected fall in the regional vacancy rate, down from 10.9% in Q1 to 10.5% in Q2. We now expect the rate to fall below 10% by year end. Beijing has shown the fastest pace of decline, with the vacancy rate falling precipitously from 23% a year ago to barely 8% by Q2. Despite a significant supply pipeline, vacancy levels in most Tier I locations in India generally edged lower in Q2, underpinned by strong take-up from the IT/ITES sector. Likewise across Latin America, and specifically Brazil, increasing new supply is being met with formidable demand from a wide variety of expanding office tenants. During Q2, the Sao Paulo market once again registered falling vacancy levels, and in fact another record low was reached at 6%. On the other hand, Mexico City continues to witness rising vacancy despite strengthening absorption, and without further postponements to the supply pipeline, vacancy rates could extend beyond the current 13%. New supply at cyclical low in mature markets In both North America and Europe subdued development activity is contributing to falling vacancy rates. The U.S. rate continued to drop and is now approaching the 18% barrier, a feat not achieved since Q3 2009. New York, Dallas and San Francisco are among those markets seeing the most substantial declines over the quarter. By year end, we expect the U.S. vacancy rate to have fallen to around 17.5%. The decline in vacancy in Europe has been more modest, with the regional rate falling by only 10bps to 10.2% in Q2, despite new deliveries being at a 15-year low. Throughout the remainder of 2011 and during 2012, we expect vacancy to decrease, although the reduction will be modest - falling to 9.8% by year end and to 9.6% by the end of 2012. Much of the supply will be second-hand space, which will continue to trade sluggishly. Supply gap deepening in Europe’s top-tier cities A supply gap for prime and Grade A space has emerged in some of Europe’s top-tier locations, notably London, Paris and Moscow, where limited availability is driving rental growth. In London this is prompting an increase in new development starts, but in the absence of speculative finance, levels are still well below average. A shortage of new supply is likely to remain a feature of the London office market through 2012-2013. Some developers are seizing the opportunity to plug the supply shortages through refurbishment. Dubai – one of world’s highest vacancy rates Dubai continues to have one of the world’s highest office vacancy rates, with the whole market nudging towards 50%, and more space becoming available in even the best-quality buildings. The social and political turmoil that has swept through the MENA region over the past six months has had a positive but muted effect on the Dubai real estate market. While supporting an increase in demand in some sectors of this traditional ‘safe haven’, this boost has been insufficient to offset the impact of excessive levels of new supply.

Global Market Perspective Third Quarter 2011

Office Vacancy Rates - Major Markets, Q2 2011 %

Americas 17.1%

Europe 10.2%

Asia Pacific 10.5%

Mumbai

Beijing

Sydney

Shanghai

Singapore

Tokyo CBD

Hong Kong

Moscow

Frankfurt

Stockholm

Brussels

Madrid

Paris

London

Chicago

Los Angeles

San Francisco

Washington DC

Mexico City

New York

Toronto

Sao Paulo

Regional vacancy rates based on 46 markets in the Americas, 24 markets in Europe and 24 markets in Asia Pacific. Covers all office sub-markets in each city. All grades except Asia and Latin America (Grade A only). Tokyo relates to CBD only Source: Jones Lang LaSalle, July 2011

Office Supply Pipeline - Major Markets, 2011-2012 Mumbai Shanghai Sao Paulo Dubai Singapore Beijing Mexico City Moscow Tokyo CBD Hong Kong Stockholm Paris London Frankfurt Madrid Brussels Sydney Washington Los Angeles Toronto San Francisco New York Chicago

2011 2012

Completions as % of existing stock

Covers all office sub-markets in each city. Tokyo - CBD-3 kus Source: Jones Lang LaSalle, July 2011.

Global Market Perspective Third Quarter 2011

OFFICE RENTAL TRENDS Strongest rental growth since Q4 2007 Rental growth on prime office space in the world’s top-tier markets is at its highest level since Q4 2007, averaging 11% y-o-y across 23 major markets. During Q2, the strongest increases were recorded in Moscow, Beijing, Jakarta and Sao Paulo. Rental uplift is now also becoming more entrenched across the whole Asia Pacific region, in U.S. gateway cities and selected top-tier markets in Europe. Despite a gloomier global economic outlook, we remain bullish on rental growth prospects in the world’s main office markets, with double-digit uplifts expected in many markets where the balance is shifting in favour of landlords. Further uplift in Asia Pacific Net effective rents rose further in most Asian markets in Q2 2011, with a few exceptions such as Tokyo, which saw a further rental decline, albeit at a slower rate. Strongest quarterly growth was recorded in Beijing (+15.2%) and Jakarta (+14.6%). Rents are expected to increase further during the remainder of 2011, with major markets such as Shanghai and Singapore likely to see an uplift of 15-25% for the full year. The Beijing (+35-45%) and Hong Kong (+20-30%) office markets could see even higher rates of full-year growth. Moscow leads Europe The European Office Rental Index grew by 2.1% over Q2 (and by +5.1% year-on-year) reflecting robust performance in some CEE markets – notably Moscow (+20%) - as well as modest growth in Germany, Stockholm and London. The challenging debt situation and austerity measures continue to drag on confidence in the Eurozone periphery and markets such as Madrid, Barcelona, Dublin and Athens are still recording rental declines. On aggregate, we expect rental growth of 6% during 2011 for the European markets. Overall U.S. office market bottoming out Average U.S. office rents held steady in Q2, marking the fifth consecutive quarter of limited movement, implying that the overall U.S. office sector has bottomed from a pricing standpoint. Landlord concessions continue to drop, as both rentfree periods and tenant improvement allowances are down more than 10% from their peaks in 2010. Performance by geographic market remains variable. Overall, CBD rents nationally are up by 1.6% since the end of 2010, while suburban rents in the same period were down more than 1%. Accelerating rental growth on U.S. Class A / trophy assets Rents in the U.S. Class A and trophy tower segments in some of the primary CBD markets are experiencing much stronger growth. This is particularly so in localised markets such as the Plaza District in Midtown Manhattan New York, the upper floors in some Boston Financial District and Back Bay towers, Pennsylvania Avenue buildings in Washington DC and ‘view space’ in the South of Market district in San Francisco. Over the remainder of 2011, these and other similarly prime locations in core urban areas will continue to see the most significant rental growth and a shift in negotiation leverage towards landlords.

Global Market Perspective Third Quarter 2011

Prime Offices - Rental Change, Q2 2010-Q2 2011 Moscow Beijing Sao Paulo Hong Kong Singapore Shanghai Jakarta San Francisco Wash. DC London Stockholm Sydney Mumbai New York Chicago Tokyo Paris Frankfurt Brussels Toronto Los Angeles Madrid Mexico City Dubai

% change

-25 -20 -15 -10

-5

Americas EMEA Asia Pacific Based on rents for Grade A space in CBD or equivalent. In local currency. Source: Jones Lang LaSalle, July 2011.

Prime Offices – Capital Value Change, Q2 2010-Q2 2011 Moscow Beijing Hong Kong Sao Paulo San Francisco Shanghai Jakarta Washington DC Singapore Toronto Stockholm New York London Paris Mumbai Los Angeles Frankfurt Chicago Sydney Brussels Madrid Tokyo Dubai Mexico City

-20

% change

-10

Americas EMEA Asia Pacific Notional capital values based on rents and yields for Grade-A space in CBD or equivalent. In local currency. Source: Jones Lang LaSalle, July 2011. COPYRIGHT © JONES LANG LASALLE IP, INC. 2011. All Rights Reserved

Global Market Perspective Third Quarter 2011

OFFICE CAPITAL VALUES AND YIELD TRENDS Capital appreciation echoing rental growth Capital values for prime office assets have continued to grow robustly at an annual rate of 19% across 23 top-tier cities. However the pace of growth is slowing, as yield compression disappears in many prime markets, with the notable exception of U.S. gateways. Some markets, such as Sao Paulo and Mexico City, are beginning to see yields drift upwards as interest rates rise. In most prime markets, further capital appreciation is expected to echo rental growth. Yields stabilising in Asia Pacific and Europe In Asia, although investment activity moderated in Q2 and market yields have remained broadly stable, most major markets saw either stable or increasing capital values. Capital values in Beijing and Jakarta recorded the largest quarterly increases of 17.1% and 14.7% respectively, followed by Hong Kong, Shanghai and Bangalore with increases in the range of 5-10%. The exceptions to this growth trend are found in North Asia (e.g. Tokyo and Seoul) and a few South East Asian markets (e.g. Bangkok and Kuala Lumpur). Based on the European Capital Value Index, prime office capital values in Europe grew 12.2% year-on-year, with the strongest growth recorded in Moscow on the back of robust prime rental uplift. Prime yields have now stabilised in the majority of European office markets, and while there may still be further compression in some CEE markets, for most the yield trend will be flat over the short term, with an upward drift over the medium term. Yields falling in the U.S. In contrast, average yields for office properties in the U.S. declined sharply in Q2, as solid demand from investors for lower-risk properties sparked competitive market bidding for a fairly limited pool of core product. The average yield nationally for office investments plunged an impressive 90 basis points in Q2 to a preliminary 5.8%. However, this significant yield compression is very unlikely to be repeated in coming quarters and, in fact, the decline may be temporarily reversed later in 2011. Already, supply of product on the market has increased markedly in certain cities, potentially introducing a more balanced supply-demand dynamic to the latter half of 2011. For prime offices in gateway markets, yields drifted further downward during Q2 and are now, on average, around 20-40 basis points off the levels seen at the previous market cycle peak during 2007. Prime Offices – Yield Shift, Q2 2010 – Q2 2011 Brussels Frankfurt London Madrid Moscow Paris Stockholm Chicago Los Angeles New York San Francisco Toronto Washington DC Sao Paulo Mexico City Beijing Hong Kong Mumbai Shanghai Singapore Sydney Tokyo

Q2 2010 – Q1 2011 Q1 2011- Q2 2011

Basis point change -150

-100

-50

Global Market Perspective Third Quarter 2011

Retail Markets Strong retailer demand in China All major Asian Tier I cities saw declining retail vacancy rates in Q2 2011. Retailer demand remains strongest in Greater China, with luxury, F&B and fast fashion retailers helping to boost rental growth. In India, the retail leasing market continues to recover, although rental movement has been mixed across its Tier I cities. In contrast, the retail property sector in Australia retreated slightly in Q2, with low retail turnover growth and consumer confidence at a twoyear low, resulting in retailer caution. Rental growth was flat or minimal in most sub-sectors in Australia. German cities lead rental growth in Europe Annual retail sales posted mixed results throughout Europe during Q2 2011 and they are expected to remain volatile during the rest of the year. Prime high street rental levels stayed broadly stable over the quarter, although some CEE, German, Nordic and Dutch markets are seeing upward pressure on rental values. Prague, Amsterdam, the major German cities, Stockholm and Helsinki all recorded growth in high street rents during Q2. Retailer demand for prime unit shops and shopping centre space throughout Europe improved for cities with healthy fundamentals. Financially strong retailers continue to seek opportunities to expand their presence in the best high streets and shopping centres. Investor demand is still focused on core European markets, with significant equity available for high-quality assets across the majority of Europe. Investors driven by higher returns are concentrating on growth markets in Russia and Turkey. Prime retail capital value growth over the last 12 months was 7.5%, up from 6.9% in the previous quarter. Dubai market close to bottom turning point With more tourists from the rest of the Middle East region visiting Dubai, retail spending levels have grown during 2011. Unlike Dubai’s office and residential sectors (which continue to experience excessive new supply), the supply pipeline was turned off in the retail market some time ago. With no major completions over the past year, this has provided the market with some ‘breathing space’. Rentals are close to the bottom of the current cycle in prime malls, but are likely to decline further in secondary locations as retailers relocate to the better-performing centres. U.S. retail market still to bottom out Retail rents in the United States continued to fall during Q2, decreasing slightly less than 1%, and by approximately 2.5% over the course of the past year. Meanwhile, the U.S. retail vacancy rate held steady at 7.1%. Low consumer confidence levels and a high unemployment rate are dragging out the bottoming-out of the retail sector to a greater extent than the other major property types. The poor showing in many economic indicators, most notably employment, augurs for a slower recovery in retail fundamentals during H2 2011 than previously anticipated. More national chains are downsizing their store footprint, which in some cases involves subleasing portions of stores, and in others it involves addressing the real estate realities of expanding with new store formats in urban and downtown markets. In Canada, the retail market landscape is currently dynamic with some major shifts underway. Several major American retailers are seeking to grow margins by increasing their presence within the country as the strong Canadian dollar and generally more stable consumer environment make for an attractive expansion opportunity. Over the coming quarters, the competition among retailers for market share will intensify, as Canadian retailers seek to adapt by developing strategies to respond to the challenge posed by new foreign entrants.

Global Market Perspective Third Quarter 2011

Prime Retail – Rental Clock, Q2 2011 Americas EMEA Asia Pacific

Singapore

Hong Kong

Rents Falling

Rental Growth Slowing

Chicago Beijing

Rental Growth Accelerating

Rents Bottoming Out

Washington DC

Moscow, Shanghai San Francisco, Los Angeles

Berlin Sydney London, Milan Paris, Mumbai Madrid, Tokyo Dubai

New York City

Source: Jones Lang LaSalle, July 2011

Prime Industrial Warehousing - Rental Clock, Q2 2011 Americas EMEA Asia Pacific

Singapore

Rental Growth Slowing

Rents Falling

Rental Growth Accelerating

Rents Bottoming Out

Amsterdam Hong Kong Beijing London Shanghai Philadelphia, Frankfurt Warsaw, Sydney Atlanta, New York / Northern New Jersey

Source: Jones Lang LaSalle, July 2011

Tokyo Chicago, Dallas, Houston, Los Angeles Paris, Madrid

Global Market Perspective Third Quarter 2011

Industrial Warehousing Markets Asian markets see further rental growth The Asian warehousing markets continue to be buoyed by robust economic growth and regional trade flows. Rents grew steadily in Q2 2011, building on the gains of previous quarters. Demand for logistics/warehousing space in mainland China and Hong Kong remains healthy, though activity in Q2 was limited by availability of space. In Singapore, strong tenant demand for high-tech space was mainly due to relocations by IT companies and financial institutions, while demand for conventional industrial units was stable. Industrial occupier activity in Australia improved on Q1, but take-up is likely to be down on last year’s levels and rents are broadly flat. Increasing evidence of U.S. market recovery Sentiment in the U.S. industrial market turned more cautious over the course of Q2 as a slowdown surfaced in some of the leading domestic and international economic indicators that affect the industrial property market. Still, the overall vacancy rate continued its steady decline, dropping another 20-30 basis points in Q2. Preliminary estimates suggest that aggregate industrial vacancy for Q2 fell to a 9.7-9.8% range, having peaked a year ago. While some speculative development is beginning to appear in the tightest of the major distribution markets such as the Inland Empire (Southern California) and Central Pennsylvania, new construction is unlikely to develop into a major national trend in the immediate term. Demand for U.S. warehousing space continues to improve, but levels are not yet healthy. Preliminary overall net absorption appears to have maintained a similar intensity to levels experienced in the prior two quarters. However, signs point to more U.S. markets slowly emerging from a cyclical trough, which is fuelling moderate optimism. Meanwhile, asking rents have largely flattened, and as more markets – particularly the major logistics markets – record decreases in total vacancy, average effective rents are beginning to rise, especially in more desirable submarkets and for higherquality space. In Canada’s industrial market, fundamentals remain two to three quarters from the absolute trough, as demand has still not reappeared in all markets. However, as in the U.S., performance has been highly segmented, and asking rents are already increasing in some of the most sought-after submarkets. Buttressed by demand generated by emerging economies, western Canada’s industrial markets will outperform those in the eastern half of the country, where growth will face the headwinds of soft demand conditions in the United States. Selective return to speculative development in Europe Corporate occupier demand for warehousing continues to be uneven across Europe; dynamic in markets with high economic growth, while subdued in markets facing austerity measures and/or weak economic growth. Nevertheless, the need to secure efficient and stable supply chains is still driving network optimisation and is sustaining robust demand for modern units across the whole region. Despite declining availability of modern warehousing, development is being driven by build-to-suit. Some speculative development is returning however, particularly in CEE markets such as Poland and Russia, where developers are now prepared to build speculative units in warehousing parks where lease contracts are already secured on parts of the scheme. Furthermore, fuelled by ongoing network optimisation, the number of large-scale developments has risen noticeably and we expect to see more development starts for such units over the coming months. Prime warehousing rents remained unchanged in most markets in Q2. Increases were limited to London and the CEE markets of Moscow, Warsaw and Prague, where strong competition and low levels of modern supply are boosting rents. In contrast, rental declines are still a feature of markets hit by austerity and/or high vacancy (e.g. Dublin, Lyon, Paris and Madrid). Despite improved rental growth prospects for H2 2011, the uncertain economic outlook may restrain overall rental increases.

Global Market Perspective Third Quarter 2011

Hotel Markets Global capital flows are bouncing back The global hotel investment market is gaining momentum, driven by easing levels of liquidity, improved hotel trading performance and banks’ actions to speed up workout programmes. Reflecting the accelerating pace of activity, we have upgraded our full-year forecasts for global hotel investment volumes to US$34.8 billion in 2011, which would mark a 28% increase on 2010 levels. US$14.8 billion in hotel assets changed hands in the first six months of 2011, representing a 117% improvement on the same period last year. The Americas registered a compelling 187% year-on-year upsurge, with transaction volumes totalling US$7.4 billion, driven by large single-asset deals in gateway cities like New York. US$4.7 billion in hotel transactions took place in the EMEA region, an 84% increase on the same period last year; activity accelerated as a result of a marked increase in the number of assets going into administration. In Asia Pacific, deal volumes totalled US$2.6 billion, a 59% year-on-year increase. Global Hotel Investment Volumes, 2000-2011 140

200%

177%

120

150%

US$ Billions

100 100% 80 50% 60 28%

-50%

20 0

-100% 2000

2001

2002

2003

2004

2005 Q3

2006 Q4

2007

2008

2009

Forecast

2010

2011F

% YoY

Source: Jones Lang LaSalle Hotels

Forecasts for 2011 upgraded in most global regions REITs continued as the most acquisitive buyers in the Americas, although private equity investors, who were on the sidelines during the downturn, made a strong comeback in H1 2011. A recent notable deal was the sale by Morgans Hotel Group of the 168-room Royalton and 114-room Morgans Hotels in New York to FelCor Lodging Trust for US$140 million. Hotel sales in the Americas are expected to total US$16 billion in 2011, up from our previous forecast of $13.1 billion. The upward revision reflects the increased pace of activity and large pending transactions, including Chatham Lodging Trust and Cerberus Capital Management L.P.’s acquisition of 64 assets for approximately US$1.13 billion.

Global Market Perspective Third Quarter 2011

As anticipated, a marked increase in the number of assets going into administration, with lenders increasing the speed of their workout programmes, is currently characterising EMEA deal activity. Early in June, RBS took control of a portfolio of 42 Marriott hotels in the UK, while von Essen Hotels had already been put into administration earlier in April by Lloyds Banking Group and Barclays. Hotel investment volumes are expected to rise to US$15.1 billion across EMEA in 2011, a US$2 billion increase on our previous forecast, with significant product projected to come to market in the second half of the year. Activity in Asia Pacific totalled US$2.6 billion with the main action taking place in Singapore, Australia, China, Japan and Hong Kong. Singapore dominated the transactional market in H1 2011 with volumes surpassing US$1 billion, a result of pent-up investor demand. Our outlook for total transaction volumes in Asia for 2011 remains unchanged at US$2.75 billion, with growth in countries like Singapore and Thailand expected to offset the lower levels of activity in Japan, due to the March earthquake. In Australasia, deal volumes totalled US$478 million in the first half of the year, with offshore capital featuring strongly, accounting for 76% of the total. Transaction levels are expected to reach US$1 billion in Australasia by year-end, up from our previous forecast of $800 million, with cross-border investment forecast to remain an important feature. Even so, a change in buyer profiles is anticipated; the Australian domestic funds that have been on the sidelines for the last two to three years are predicted to join the mix of investors. Middle Eastern capital stepping up Asian offshore investment activity has declined recently as the regionâ&#x20AC;&#x2122;s investors have found it increasingly difficult to compete with rising price expectations. However, Middle Eastern hotel investors have stepped up and acquired assets totalling US$1.7 billion in the first half of 2011. They accounted for 35% of offshore capital in H1 and are expected to remain major players during H2 2011. Overall, offshore investment accounted for 34.5% of total activity in H1 2011 against 53% in 2010 - the decline has been mainly driven by increased domestic activity in the U.S. Notable deals include the portfolio acquisition of six InterContinental properties by Toufic Aboukhater for US$650.5 million, sold by Morgan Stanley Real Estate Funds; an Emirati private investor buying the 164-room Four Seasons hotel in Buenos Aires for US$64 million from CorpGroup Activos Inmobiliarios; and a consortium comprising IFA HR, Kuwait Real Estate Company and United Investments Portugal acquiring the 669-room YOTEL in New York from Related Companies for US$315 million. Source of Hotel Investment, 2009-2011 Global Africa Middle East Latin America North America Asia Europe Domestic 0%

10%

20%

30%

40%

50%

60%

70%

% of total hotel investment H1 2011

2010

2009

Global Market Perspective Third Quarter 2011

Residential Markets U.S. multifamily sector continues to outperform In the United States, the rental apartment sector carried on its expansionary march during Q2, as national vacancy rates dipped by a further 30 basis points to below 6%. However, the pace of improvement slowed slightly from that seen in Q1, which runs counter to the typical seasonal trend. This could indicate that the slowing in the U.S. economy, and particularly the jobs market, has had a negative effect on a property sector that has so far outperformed throughout this recovery. The pace of unit leasing during the summer months will help to shed further light on this trend. In a continuation of recent trends, asking and effective rents edged further upward, assisted by the tightening market conditions created by a low level of new supply. Deliveries in 2011 will remain very low historically and this will continue through the first half of 2012. This will begin to change, however, in the latter half of 2012 into early 2013, as multifamily construction starts have been trending up since early 2011. In the meantime, the demand picture remains bright. Positive demographic trends for the sector - including a national homeownership rate that has declined by more than 250 basis points over the past five years (and is still falling), combined with the still weak ‘for sale’ housing market - present a compelling case for the population of renters in the U.S. to experience strong growth over the coming quarters. Over the medium term, the Millennial Generation has entered its prime rental years, so broad demographic trends are also supportive of strong rental unit demand. Tightening measures impact on Asian residential sales Across Asia, the residential sales markets were quiet in Q2 2011, with fewer launches and sales recorded, as a result of ongoing tightening measures by various governments. Residential capital values remained largely stable or posted small increases in Q2, though prices in Hong Kong rose a further 7.3% during the quarter. The exception was the luxury apartment sector in Beijing where average prices fell by 1.9% q-o-q. Residential leasing demand was generally stable across the region. The leasing market in Singapore improved in Q2, with net absorption in luxury properties double that seen in Q1. Demand continued to improve in Beijing and Shanghai on the back of requirements from expatriates and wealthy Chinese from across the country. Corporate expansion also fuelled strong enquiries in Jakarta. Effective rents generally increased steadily in most Asian cities in Q2. London – still a market apart The UK housing market is characterised by a low transaction environment with turnover around 45% below 2007 peak levels and circa 30% lower than the 10-year average. Contributory factors are the absence of first-time buyers and the scarcity of affordable mortgage finance. Overall, house prices in the UK are falling, with price changes averaging -1.2% in the year to Q2 2011 (according to Nationwide). London is proving to be a market apart from the rest of the UK. Housing demand is stronger in a local economy that is outpacing the rest of the country, while both existing and new supply is insufficient to meet demand. Price growth in Greater London is averaging 2.9% per year but is even higher in prime central London locations where demand is boosted by international purchasers. Annual price growth is running at 5.9% for prime central London properties. Increasing signs of stability in Dubai In Dubai, there are increasing signs of stability in the residential market, with prices and rentals showing marginal increases in some established up-market areas for the first time since the market crashed in 2008. Strong demand is being reported for villas in iconic projects such as The Palm. The influx of buyers from less stable markets in the region, combined with the recent announcement that purchasers of residential properties in Dubai will qualify for three-year residency visas, will help boost demand, but these factors are unlikely to be sufficient to offset the ongoing impact of high levels of new supply over the next 12 months in both Dubai and Abu Dhabi.

Global Market Perspective Third Quarter 2011

Recent Key Transactions AMERICAS Country/City

Property

Brazil, Vila Velha Barra Sol

Sectors Retail

Sales Price

Comments

US$ Mill 183

In Vila Velha, located in the state of Espirito Santo, Aliansce Shopping Centers has purchased a 50,000 sq m shopping mall under development. Barra Sol will be the largest mall in the state.

Brazil, Curitiba

Mega Centro Industrial Logístico Curitiba

In Curitiba, Capital Realty Infraestrutura Logística has purchased a 120,000 sq ft (11,100 sq m) distribution centre at a price per sq m of approximately US$627.

Canada

Retail Portfolio

Retail

591

Primaris Retail REIT has purchased a five-shopping centre portfolio from Ivanhoe Cambridge. The portfolio comprises approximately 2.5 million sq ft and includes three centres in Ontario, as well as one each in Edmonton and Montreal. The initial yield is estimated at approximately 6.4%.

Canada, Toronto Atrium on Bay

Office

356

On Toronto's downtown periphery, this three-office building complex has been traded at an estimated initial yield of 6.5%. The nearly 1.1 million sq ft (994,000 sq m) property, which also includes retail space, has been sold by Hines REIT to H&R REIT.

U.S.

Retail Portfolio

Retail

9,000

U.S. Chicago

One Superior Place

Multifamily

320

Hartz Mountain Industries has acquired the 809-unit high-rise property from Brookfield Asset Management. The 12-year-old property includes some retail space and was traded at an estimated initial yield of 5.0%

U.S. Seattle

Key Center

Office

217

In central Bellevue, Kilroy Realty has purchased an approx. 493,000 sq ft (45,800 sq m) office property from Beacon Capital Partners at an estimated initial yield of 6.2%. The asset was approximately 90% occupied at the time of sale.

U.S. Boston

Marlborough Complex

Office

161

In Boston's far western suburb of Marlborough, Hines REIT has purchased this fivebuilding, 532,000 sq ft (49,400 sq m) office complex for US$161 million. The seller was Eaton Vance; the transaction was a partial sale and leaseback.

Centro Properties Group has completed its landmark sale of 585 neighbourhood and community shopping centres to Blackstone for a reported sum in the region of US$9 billion. The portfolio comprises over 92 million sq ft (8.5 million sq m) of space and is spread throughout 39 US states.

Global Market Perspective Third Quarter 2011

EUROPE

Property

France, Paris

38-46 Rue du Rocher

Office

475

German fund Deka has purchased an office development in central Paris from Nexity SA. Nexity will continue to oversee the construction of the 31,800 sqm of offices, restaurants and apartments. The scheme is believed to be around two-thirds pre-let.

Germany, Frankfurt

Deutsche Bank Zentrale

Office

840

Deutsche Bank has completed a sale and leaseback deal at their HQ - the Twin Towers in Frankfurt - to a closed-end real estate fund to be launched by DWS Investments, the mutual fund arm of Deutsche Bank's asset management business. The building has been comprehensively refurbished and is now one of the country's ‘greenest’ banking headquarters, awarded the highest possible LEED and DGNB certifications.

Germany, Hamburg

Hamburger Meile

Retail

366

Real I.S. has purchased the Hamburger Meile shopping centre for a new closed-end fund that will be launched later this year. The vendor was a joint venture between ECE and the Bruhn Group but ECE will retain a 15% stake in the centre as well as the management responsibilities.

Germany, Karstadt Portfolio Hamburg/Munich

Retail

360

Quantum Immobilien KAG has purchased a portfolio of three Karstadt department stores from Highstreet Holding for its new Prime Retail Germany fund - indicative of the current popularity of the German retail sector. Highstreet has since disposed of two further Karstadt stores in Munich, which were purchased by a joint venture between Signa and Centrum - for a further US$360 million.

Poland, Warsaw Promenada Shopping Centre

Retail

246

Atrium European Real Estate has purchased Promenada Shopping Centre - a prime centre in Warsaw, comprising 42,000 sq m of retail and 12,000 sq m of office space. The retail component is 100% let. The vendor was Carpathian, who acquired the property in two parts in 2006 and 2009 for €144.5m. Jones Lang LaSalle acted for the vendor.

Sweden

Retail Portfolio

Retail

383

A consortium of investors comprising Grosvenor, Bouwinvest REIM and a major Canadian institutional investor has acquired a portfolio of four retail properties - including three shopping centres in Stockholm and a supermarket in Helsingborg. The acquisition is part of the partners' investment programmes and represents a long-term commitment to the Swedish property market. Finance was provided by SEB and the vendor was Unibail-Rodamco.

UK, London

Aviva Tower

Office

470

Aviva Tower - the last building to be sold from Simon Halabi's White Tower portfolio, following a breach in loan-to-value covenants - has been purchased by a private investor from Asia Pacific, confirming the increasing demand from international buyers for prime central London real estate. Jones Lang LaSalle acted for the purchaser.

UK, London

10 Aldermanbury Square

Office

424

As a further example of the continuing presence of cross-border capital in the central London market, 10 Aldermanbury Square has been sold to JP Morgan Asset Management by Commerz Real. This was the second largest transaction to take place in the UK in Q2 2011.

UK, London

Island Site, Leadenhall Street

Office

310

A group of five buildings earmarked for a 1 million sq ft (93,000 sq m) redevelopment has been purchased by a joint venture between two funds managed by Henderson and a Canadian pension fund. The buildings were previously owned by clients of Investream and were put into administration last year. The sale attracted fierce bidding, with a reported 12 parties submitting final bids.

Mixed

207

The asset has been purchased by a joint venture between a fund managed by Brockton Capital and retail developer Milligan. Jones Lang LaSalle advised the purchaser. This was the largest transaction in the UK outside central London in Q2 2011.

UK, Birmingham The Mailbox

Sectors

Sales Price

Country/City

Comments

US$ Mill

Global Market Perspective Third Quarter 2011

ASIA PACIFIC

Country/City

Sales Price

Property

Sectors

Australia, Melbourne

Northland Shopping Centre

Retail

484

The Canada Pension Plan Investment Board (CPPIB) has acquired a 50% stake in the 92,400 sq m Northland Shopping Centre from the Gandel Group for A$455 million at a yield of 6.25%. This deal is the largest in Australia so far in 2011.

Australia, Brisbane

Waterfront Place

Office

230

Stockland Direct Office Trust No.1 (SDOT1) has disposed of its 50% interest in Brisbane's Waterfront Place project for A$216.4 million to the Future Fund. In addition, Stockland has entered into an agreement to sell 50% of the entity that owns the adjacent Eagle Street Pier to the Future Fund for A$16 million on the basis of a completed refurbishment.

China, Shenyang Shenyang Red Star Macalline Furniture Mall, Shenyang Longemont Shopping Mall and Offices

Mixed

575

Singapore-listed REIT Perennial China Retail Trust has acquired a 50% stake each in Shenyang Red Star Macalline Furniture Mall, Shenyang Longemont Shopping Mall and Offices for RMB 3.7 billion.

China, Shanghai

Shanghai New World Changning Commercial Center

Mixed

492

SOHO China has acquired Shanghai New World Changning Commercial Center from Shanghai Trio Property Development for RMB 3.2 billion.

China, Shanghai

Silver Court

Mixed

365

The Mapletree India China (MIC) Fund has acquired a mixed-use development, Silver Court, in Shanghai’s Luwan District. While transaction details have not been officially announced, the estimated transaction price for the entire project was around RMB 2.37 billion.

China, Beijing

Xidanhui Plaza (office component)

Office

240

The office component of Xidanhui Plaza has been bought by the Bank of China for RMB 1.56 billion for its own use.

Hong Kong

Nan Fung Plaza

Retail

150

Hong Kong-listed The Link REIT has acquired the commercial portion of Nan Fung Plaza in Tseung Kwan O from Nan Fung Group for HK$1.17 billion.

Japan, Tokyo

Arena Tower

Office

117

United Urban Investment Corporation, a domestic J-REIT, has acquired Arena Tower from Arena Tower Y.K. for JPY 9.5 billion at a yield of 5.6%.

Korea, Seoul

Hana Securities Building

Office

248

Mirae Asset MAPS has acquired the Hana Securities Building, which was owned by HSB Property Investments for KRW 248 billion.

Singapore

Anson House

Office

119

ING Real Estate has purchased Anson House for S$148 million from a private high-networth individual investor who acquired the property in 2009 for S$85 million from a fund managed by Australia’s Macquarie Bank.

US$ Mill

Comments

COPYRIGHT © JONES LANG LASALLE IP, INC. 2011. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forwardlooking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on©the viewsLANG expressed in this IP, report. COPYRIGHT JONES LASALLE INC. 2011. All Rights Reserved 31