MIPIM 2009 – Wrap Up Session
The Dynamics of Fear Versus Greed In The Current Real Estate Market: A Round-up Of The Market Outlook Janice Stanton and François Ortalo-Magné
13 March, 2009
0
Global Real Estate Investment USA
Europe
Asia Pacific
Latin America
Annual Investment Volumes ($bn)
1200 1000 800 600 1
400 200 0 2001
2002
2003
Source: Cushman & Wakefield, Real Capital Analytics
2004
2005
2006
2007
2008
"Greed" versus “Fear" Greed
Fear
Price adjustments from market peak in 2007
■ Global recession accelerating downwards
■ US bids off 30-45 percent ■ UK bids off 45-60 percent ■ W Europe bids off +/-35 percent ■ Central Europe bids off 30-35 percent ■ Eastern Europe bids off 40-45 percent ■ China bids off 25-30 percent ■ India bids off 35-50 percent ■ Hong Kong bids off +/-45 percent
Source: Cushman & Wakefield, Real Capital Analytics
■ RE fundamentals deteriorating and rents falling across most all markets ■ Availability of debt still an issue in the market ■ Anticipated distressed debt sales
2
700 2007 600
2008
500 400 300
3
200 100
Source: Cushman & Wakefield, Real Capital Analytics
Ko re a
So ut h
us si a R
et he rl a nd s
N
Sp ai n
Fr an ce
an y G
er m
K U
Ja pa n
C
U
hi na
0 S
Commercial Property Investment US$ bn pa
The Top 10 Targets for Global Investment
Same Picture But Different Strokes
120
Yield Increase (bp) in 2008
Rent Growth in 2008 10%
• Rental Growth Slowing, but most sharply in Asia
8%
100
6%
80
• Yields Europe furthest advanced
4%
60
2%
• Investment Volumes American markets see greatest falls.
0%
40
-2%
20
-4%
0 Americas * Europe
Asia
-6% Americas
Europe
*Cushman & Wakefield believes that the actual cap rate increase in 2008 was 100bp by year end.
Source: Cushman & Wakefield, Real Capital Analytics
Asia
4
2008 Conditions
Global Face Rental Growth (All Sector, Prime Average)
30% 25% 20% 15% 10% Europe
5%
Asia
0%
North America
-5%
Latin America
-10% -15% -20% -25% 2002
2003
Source: Cushman & Wakefield
2004
2005
2006
2007
2008
5
US Market
6
Recession By State
7
The Market In 2008
• Rental Growth • Slowed quickly in h2, particularly in the office sector. • Turned negative in the 4th Quarter. • Yields • Correction accelerated in 4Q2008 , cap rates up 100 bp from 2007 levels.
Prime Rental Growth (Office) CBD
Non-CBD
14%
Industrial Hotel Retail Apartment
8%
12% 7%
10% 6%
8% 5%
6%
3%
2% 0%
8
4%
4%
• Investment Volumes • Down 72% to 2003 levels.
Prime Yield (All Property Types)
2%
2006
2007
2008
2006
2007
2008*
*Fall off in investment sales activity make quarterly cap rate changes unreliable due to lack of trades.
Source: Cushman & Wakefield
Crisis In Investor Confidence And Debt Least Impacted
Most Impacted
All-cash buyers
Leveraged buyers
Assets with assumable debt or seller financing
Owners with near-term loans maturing
Super prime assets, and stable assets <$50M
Secondary property and markets Large transactions
Gateway cities Land, retail, hotels
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Thoughts On 2009 • US economy to bottom by mid 09 – but with real estate rent decreases through 2010. • Vacancy rates forecasted to rise 6% on average, it is a tenant’s market. • Investment activity increases in the second half of 2009 as some distressed sellers are forced to the market due to maturing debt. • Traditional lenders (insurance companies and banks) when able, will roll maturing debt “a rolling loan gathers no moss”. 10
• Cap rates are expected to rise 100bp on average across property types to 7.5%. • Best buying opportunity in late 2009-2010. • Low inflation and low interest rates lead to higher rates in 2010 as we “inflate” our way out of the recession.
The Debt Market •
LTV ratios have dropped to 60% and borrowing spreads as much as 400 bp.
•
•
Low interest rates subsidized the cost of real estate debt, but the primary consideration today is debt capacity constraints.
CMBS activity is down from $230B in 2007 to $12B in 2008 and is expected to remain at this level through most of 2009.
•
Insurance companies and other traditional lenders are preserving debt capital to roll their own maturing loans in 2009.
•
Very few lenders are providing capital to new lenders today. Current Value Cap Rate
10-yr Treasury Yield
Spread
14% 12% 10%
11
8% 6% 4% 2% 0% -2%
Source: Cushman & Wakefield, NCREIF
2008
2005
2004
2003
2001
2000
1999
1998
1996
1995
1994
1993
1991
1990
1989
1988
1986
1985
1984
1983
-6%
2006 Jan-09*
-4%
*NCREIF appraised cap rates are used in most market conditions but the due to the current disparity between transaction and appraised values, transaction cap rates are used for the January 2009 figures.
Theoretical Repricing of Capital
Prices Off 25-28% for Institutional Players Post Credit Crunch Jun 25 2007
Scenario Property Cost Year 1 NOI NOI Annual Increases Initial Cap Rate Reversion Year 11 Cap Rate First Mortgage LTV Mezz LTV First Mortgage Loan Term Mezz Loan Term First Mortgage Amort Term Mezz Amort Term 10 Year Treasury Spread to First Mortgage Rate First Mortgage Rate Mezz Rate Year 11 NOI Residual Value Reversion Costs Leveraged Equity Return Hurdle
Oct 3 2007
$ 100.00 $ 5.89 3.00% 5.89% 6.89% 75.00% 5.00% 10 years 10 years Interest Only 20 years 5.09% 127 bps 6.36% 9.00% $ 7.91 $ 114.87 1.50%
$ $
85.50 5.89 3.00% 6.88% 7.88% 65.00% 15.00% 10 years 10 years 30 years 20 years 4.52% 260 bps 7.12% 12.50% $ 7.91 $ 100.33 1.50%
Jan 22 '08 no mezz
Jan 23 '08 w/mezz
Sep 16 '08 no mezz*
Sep 16 '08 w/mezz*
Theoretical Oct 3 '08 no mezz
Theoretical Oct 3 '08 w/mezz
$ $
$ $
$ $
$ $
$ $
$ $
91.94 5.89 3.00% 6.40% 7.40% 60.00% N/A 10 years 10 years 30 years 20 years 3.63% 190 bps 5.53% 10.77% $ 7.91 $ 106.86 1.50%
92.64 5.89 3.00% 6.35% 7.40% 60.00% 15.00% 10 years 10 years 30 years 20 years 3.63% 190 bps 5.53% 10.77% $ 7.91 $ 106.86 1.50%
$ $
80.43 5.89 0/0/0/3 7.32% 8.32% 60.00% N/A 10 years 10 years 30 years 10 years 3.44% 275 bps 6.19% 13.33% 7.46 89.64 1.50%
78.85 5.89 0/0/0/3 7.46% 8.32% 60.00% 15.00% 10 years 10 years 30 years Interest Only 3.44% 275 bps 6.19% 13.33% $ 7.46 $ 89.64 1.50%
$ $
75.12 5.89 0/0/0/3 7.83% 8.83% 60.00% N/A 10 years 10 years 30 years 10 years 3.64% 280 bps 6.44% 16.11% 7.46 84.39 1.50%
72.31 5.89 0/0/0/3 8.14% 8.83% 60.00% 15.00% 10 years 10 years 30 years Interest Only 3.64% 280 bps 6.44% 16.11% $ 7.46 $ 84.39 1.50%
10.50%
10.50%
11.50%
11.50%
11.50%
11.50%
12.50%
12.50%
CHANGE IN VALUE
-14.5%
-8.1%
-7.4%
-19.6%
-21.2%
-24.9%
-27.7%
Debt Terms Price Change Component
-9.0%
-14.3%
Equity Cost Increase/ Reduced NOI Growth Component
-15.9%
-13.4%
* Mezz rates include amortized up front points.
Source: Cushman & Wakefield Capital Markets Group
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Theoretical Repricing of Capital
Predatory Capital Bidding at 45% Discounts Predatory Capital Assumptions Post Credit Crunch Jun 25 2007
Scenario Property Cost Year 1 NOI NOI Annual Increases Initial Cap Rate Reversion Year 11 Cap Rate First Mortgage LTV Mezz LTV First Mortgage Loan Term Mezz Loan Term First Mortgage Amort Term Mezz Amort Term 10 Year Treasury Spread to First Mortgage Rate First Mortgage Rate Mezz Rate Year 11 NOI Residual Value Reversion Costs Leveraged Equity Return Hurdle
$ 100.00 $ 5.89 3.00% 5.89% 6.89% 75.00% 5.00% 10 years 10 years Interest Only 20 years 5.09% 127 bps 6.36% 9.00% $ 7.91 $ 114.87 1.50%
Oct 3 2007 $ $
83.95 5.89 3.00% 7.01% 7.50% 65.00% 15.00% 10 years 10 years 30 years 20 years 4.51% 293 bps 7.44% 11.00% $ 7.91 $ 105.46 1.50%
Jan 22 '08 no mezz
Jan 23 '08 w/mezz
Sep 16 '08 no mezz*
Sep 16 '08 w/mezz*
Theoretical Dec 3 '08 no mezz
Theoretical Dec 3 '08 w/mezz
$ $
$ $
$ $
$ $
$ $
$ $
76.63 5.89 3.00% 7.68% 7.75% 60.00% N/A 10 years 10 years 30 years 20 years 3.54% 331 bps 6.85% 13.00% $ 7.91 $ 102.05 1.50%
77.77 5.89 3.00% 7.57% 7.75% 60.00% 15.00% 10 years 10 years 30 years 20 years 3.54% 331 bps 6.85% 13.00% $ 7.91 $ 102.05 1.50%
$ $
63.46 5.89 0/0/0/3 9.27% 8.00% 60.00% 0.00% 10 years 10 years 30 years N/A 3.31% 365 bps 6.96% 15.00% 7.46 93.19 1.50%
63.46 5.89 0/0/0/3 9.27% 8.00% 60.00% 0.00% 10 years 10 years 30 years N/A 3.31% 365 bps 6.96% 15.00% $ 7.46 $ 93.19 1.50%
$ $
54.82 5.89 0/0/0/3 10.74% 8.50% 60.00% 0.00% 10 years 10 years 30 years N/A 2.70% 580 bps 8.50% 15.00% 7.46 87.71 1.50%
$ $
54.82 5.89 0/0/0/3 10.74% 8.50% 60.00% 0.00% 10 years 10 years 30 years N/A 2.70% 580 bps 8.50% 15.00% 7.46 87.71 1.50%
10.50%
12.50%
14.50%
14.50%
18.00%
18.00%
20.00%
20.00%
CHANGE IN VALUE
-16.1%
-23.4%
-22.2%
-36.5%
-36.5%
-45.2%
-45.2%
Debt Terms Price Change Component
-9.0%
-14.3%
Equity Cost Increase/ Reduced NOI Growth Component
-15.9%
-13.4%
* Mezz rates include amortized up front points.
Source: Cushman & Wakefield Capital Markets Group
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European Capital Markets
14
The European Market In 2008
12%
Prime Rental Growth (All Europe Average)
10%
7.0%
Prime Yield (All Europe average)
6.8%
8%
• Yields Correction accelerated in h2, with yields out 8090 bp since 2007 peak.
6.6%
6%
• Rental Growth Slowed quickly in h2, particularly offices
6.4%
4%
• Investment Volumes Down 55% to 2004 levels.
6.2%
2% 6.0%
0% 2006
2007
2008
5.8% 2006
Source: Cushman & Wakefield
2007
2008
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G U er K m Fr any an Sp ce N Be ain et lgi he um rla Sw nds e N den or Lu Ir way xe ela m nd bo Au urg Fi stria nl Po and Bu lan d D lg a e r CI nm ia S ark St a Ba t e s lt Ru ics s Sw Slo v sia a itz ki er a l Cr and Uk oati ra a T in e H urke un y ga ry Ro Ita m ly G ania re e Se ce rb Cz ia Po ec r tu h ga l
% Change in Investors Score
Targets For Investment Changes in Investor Views â&#x20AC;&#x201C; 2008 vs 2009/10
70%
60%
50%
40%
30%
20%
10%
0%
-10%
Source:Cushman & Wakefield, Investor Survey 2009 16
The Profile Of The Eurozone Recession…… GDP (Quarterly Change annualised)
Inflation
Interest Rates
5%
4%
% pa Growth/end rate
3%
2%
1% 17
0%
-1%
-2%
-3% Q1 08
Q2 08
Q3 08
Source: Consensus Economics/Cushman & Wakefield
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Required Returns 8.0%
•
•
•
On a risk-adjusted basis, Western European property needs to produce a total return of 6.7% to match bonds. With yields increasing, the growth required from property to hit its benchmark has dropped from to less than 1% pa. The yield gap has increased significantly meanwhile, with average prime net yields 370 bp higher than the Euro-zone base rate. The market is therefore now better priced but we still need rental and income growth to meet a fair risk-adjusted benchmark.
7.0% 6.0%
Return/Yield
5.0% 4.0% 3.0% 2.0% Required Return Eurozone Base Rate
0.0%
•
•
In a market of falling rents and increasing vacancy – this suggests risk premiums have further to rise. Further East the adjustment required is more severe due to the increase in bond yields. Required returns have hit 15.5% and with yields up to an average of 9.4%, required growth stands at 6.1% pa.
Net Yield
1.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 05 05 05 05 06 06 06 06
Cushman & Wakefield
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 07 - 07 07 07 08 08 08 08 09
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Asia Capital Markets
19
The Market In 2008 Prime office rental growth in major Asian cities 100
y-o-y growth, %
80 60 40 20 0 -20 20
2007
Singapore
Korea (Seoul)
Japan (Tokyo)
India (New Delhi)
Hong Kong
China (Beijing)
Australia (Sydney)
-40
2008
Source: Cushman & Wakefield
â&#x20AC;˘ Rental Growth Slowed quickly in 4Q, some cities now have falling rents
The Market In 2008 Prime office yield in major Asian cities 10.0 9.0
yield, %
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0
21
2007
2008 Source: Cushman & Wakefield
â&#x20AC;˘ Yields Entry yields up sharply in developed markets of Singapore and Sydney.
Singapore
Korea (Seoul)
Japan (Tokyo)
India (New Delhi)
Hong Kong
China (Beijing)
Australia (Sydney)
0.0
Thoughts On 2009 • The decline in global markets is now universal - but it’s not uniform. • Decoupling of emerging and mature markets has not happened. • Risk may not yet be adequately priced in all markets, but much of the bad news is now priced in • It may be too soon to talk of recovery, but stabilisation may be nearer than we think. • Financial stability is improving but not liquidity – which continuing to restrict the market. • Income and security are key to performance. Which markets and sectors can provide this? • Occupational markets will weaken further but rents are adjusting more rapidly than usual. • Differing recovery profiles in 2010/11. • Those markets which fell first may be the first to recover – and with exchange rates to consider as well, the world's biggest markets- the UK and the US – are favoured.
22
Heard at MIPIM 23
We Are in the Fog, More to Come
• Continuing stream of bad news • Extreme volatility • More to come • Economy – space market – property market • Financial sector 24
The Wealth,… That Never Was
An enormous amount of wealth that came from financial innovations, …. • Arbitrage between real estate and financial markets • Low pricing of risk • Self-reinforcing flow of funds to the sectors (profit reinvestments) …is now gone.
25
The Big Issue Remains Lack of Debt
• Mixed faith in government actions • Choice of instruments • Lack of willingness to take sufficient action • No evidence that interest rates remain a useful instrument • Take time to long to affect economy • Recent actions have added to the fog
26
Optimal Response
• Wait and see strategy? • Constrained by lack of funds • Constrained by reallocation away from real estate • Optimal response to •Low perceived cost of waiting •High risk of further hits
27
Optimal Response
• Wait and get ready strategy • Reorganize internally • Sort and strengthen current relationships • Strengthen current investments For 4-5 year downturn
• Line up capital for forthcoming opportunities Starting next year
28
Return of Market Activity
• MIPIM Summit Participants • Second half 2009: 0% • First half 2010: 75% • Second half of 2010: 25% • Heard on the floor • 19 large investors out of 21 to invest in 2009
29
What Are We Waiting For?
• End of bad news (in the media) • Financial sector – commercial real estate lending • Economy • US consumers shopping again 30
Dealing with the Current Uncertainty
• Current transactions are not benchmarks • They all have a story • Not necessarily simply fire-sales • Huge bid-ask spread • Early movers got burned • Professional/survival risk?
31
Going Forward
The sovereign wealth funds are not the answer â&#x20AC;˘ Their sources of funds â&#x20AC;˘ Their domestic needs
32
Going Forward
The end of financial engineering as we have known it • Refocus on the real estate • Property management, leasing strategies • Longer term focus • High yield, low return, low risk strategies • Greater transparency
33
Going Forward
More government involvement • Regulations • Support sensible entrepreneurship? • Stifle entrepreneurship? • Nationalizations • Handling of new power through ownership stake? • Handling of new power through foreclosures realized by owned entities?
34
Where to Look?
• The UK • Is the correction over? • What will replace the financial sector tenants that were users of large spaces? • Less opportunities • France • Italy • Germany
35
Where to Look?
• Asia • China remains a valuable a long term play • Tokyo pricing is becoming attractive • South America • Brazil • And more?
36
Where to Look?
• The US is becoming attractive • Emerging market type returns in a transparent market • Fresh capital is getting lined up • Small deals for now (debt constraint) 37
The Positive
Green is here to stay – Sustainability 2.0 • From green to sustainable development • From pollution to the social fracture • From “I” to “WE” 38
The Positive
Real estate as an asset class is here to stay Definitely a denominator effect BUT: No discussion about eliminating real estateâ&#x20AC;&#x2122;s role in a diversified portfolio The current crisis provides the opportunity for newcomer entry
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MIPIM in this Context
• The year to talk among bruised friends • The year to talk among senior-level friends • Bar tables, taxis, … • Cities and regions booth experiences • A few smiles • The newcomers • The ones who sold in 2006-07
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MIPIM in this Context
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The Champagne Did Flow!
AVROSITI Holding A blown-up island to be transformed into â&#x20AC;˘ A sustainable community â&#x20AC;˘ Featuring buildings at the image of the mountains of Azerbaijan, soaring to the sky 42
See you next year!
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