Global Vision H2 2014

GLOBAL VISIONH2 2014

CBRE GLOBAL INVESTORS

GLOBAL VISION | H1 2014

Real estate research often seems like a numbers game. Quantifi able employment, absorption, supply, and vacancy rate projections largely determine rent growth and underlay going-forward returns. Quantifi able analysis is crucial in identifying investment opportunities and underwriting assets. But a grasp of the quantifi able is not enough. Researchers must also have a solid sense of longer-term structural trends and their implications for property investment.

I have the opportunity to travel around the world and provide CBRE Global Investors take on these more qualitative structural trends. For instance, the worlds offi ce markets are being impacted by a myriad of factors including globalization, technological innovation, competition for skilled talent and changes in demographics. These forces are interactive and reinforcing. In developed countries, globalization means the metros with the greatest demand will be those with economic concentrations in services or goods that can be exported to the rest of the world. Technological innovation enables this ability to export to the global marketplace. It also means the physical space in which fi rms operate is changing. And although many countries remain mired with overall high unemployment rates, there is actually a shortage of the tech savvy workers that todays growing sectors need. Amongst the most tech-savvy workers are Millennials the children of the Baby Boomers. Many Millennials want to work in different locations and physical environments than the older generation. They will soon be the largest cohort of workers and theyll be the decision makers.

There are also profound shifts affecting the retail and logistics sectors. The most noteworthy is the rise of e-commerce. Online consumption is exploding, reducing sales at many bricks-and-mortar stores. In developed countries, overall demand for retail space has been anemic, while absorption of logistics facilities has been robust. Many retailers have suffered as their stores became showrooms for their online competitors.

It would be a mistake to write off physical stores. Most successful physical retailers are going omni-channel, with a growing online presence. Many are fi ghting back by using their existing locations for ship from store or reserve in store programs to fulfi ll their own website sales. Physical stores have an advantage of proximity to consumers. One of the biggest challenges for pure online retailers like Amazon is the distance of their facilities from consumers, particularly as they increasingly offer same-day delivery. A particularly interesting trend is pure play online retailers opening bricks-and-mortar locations. These are located in high footfall venues high streets with a lot of tourism traffi c and dominant regional malls. These stores function in large part as billboards for their brand. Of particular note was Amazons recent announcement of their fi rst store located in Manhattan it will be within eyeshot of the Empire State Building.

These fundamental trends are tied into the strong urbanization trend being witnessed throughout the U.S. Many of todays fastest growing, globalized, and technologically profi cient businesses are clustered in cities. They are there because their techy-savvy workers covet those locations. When striving to attract top talent, location both in terms of neighborhood and building amenities is part of the compensation package. The more fi rms, the more workers, the more workers the more amenities, the more amenities the more fi rms it is circular and reinforcing. And where do the expanding retailers want to be? In high footfall urban locations thats where the coveted eyeballs are, particularly the eyeballs of younger, tech-savvy well paid workers.

When I talk to Americans, theyre excited about the urbanization trend getting back to the vibrant city centers that characterized the States in the early 20th century. When I talk to Asians and Europeans, the reaction is more quizzical. Asia is more recently urbanized vibrant, frenetic density is a given. In Europe, the appreciation of in-town living and high street retail never went away. The continent offers many of the worlds most livable urban environments. In many ways, the U.S. is going through Europeanization by adopting some of the regions most enviable traits.

In Global Vision, we review the quantifi able and the qualitative, and are happy to share the implications for real estate investing.

Doug HerzbrunGlobal Head of Research

WELCOME TO GLOBAL VISION


TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

GLOBAL ECONOMIC PERSPECTIVE 5

GLOBAL CAPITAL MARKETS OUTLOOK 9

RETURN FORECASTS 11

RARE FRAMEWORK 13

PUBLIC REAL ESTATE 15

SPECIAL FEATURE: GLOBAL LISTED INFRASTRUCTURE 21

EUROPEAN OUTLOOKEUROPEAN OUTLOOK 24

UNITED KINGDOM 27

GERMANY 29

FRANCE 31

NETHERLANDS 33

IBERIA

SPAIN 37

PORTUGAL 39

CENTRAL AND EASTERN EUROPE 41

ASIA PACIFIC OUTLOOK

ASIA PACIFIC OUTLOOK 46

JAPAN 51

AUSTRALIA 55

SOUTH KOREA 57

CHINA 59

AMERICAS OUTLOOK

AMERICAS OUTLOOK 64

UNITED STATES

OFFICE MARKET OUTLOOK 67

INDUSTRIAL OUTLOOK 71

RETAIL MARKET OUTLOOK 73

APARTMENT MARKET OUTLOOK 77

CANADA 81

BRAZIL 83

GLOBAL STRATEGY & RESEARCH TEAM 87


GLOBAL HEADQUARTERS

515 South Flower Street31st FloorLos Angeles, CA 90071United States+1 213 683 4300

EUROPEAN HEADQUARTERS

Schiphol Boulevard 281G-tower, 7th fl oor1118 BH SchipholThe NetherlandsTel +31 20 202 2200

ASIA PACIFIC HEADQUARTERS

3501 Two Exchange Square8 Connaught PlaceCentralHong KongTel +852 2846 3000

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

Printed in Los Angeles, CA. All rights reserved. No part of this publication may be reproduced in any form or by an means, electronic or mechanical, including photcopying and recording, or by any information storage and retrieval system, without written permission of the publisher.

Recommended bibliographical listing:CBRE Global Investors. Global Vision H2 2014. Los Angeles, CA: CBRE Global Investors, 2014.

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

1 Assets Under Management (AUM) refers to fair market value of real estate-related assets with respect to which CBRE Global Investors provides, on a global basis, oversight, investment management services and other advice, and which generally consists of properties and real estate-related loans; securities portfolios; and investments in operating companies, joint ventures and in private real estate funds under its fund of funds program. This AUM is intended principally to refl ect the extent of CBRE Global Investors presence in the global real estate market, and its calculation of AUM may differ from the calculations of other asset managers. As of September 30, 2014.


CBRE Global Investors is one of the worlds largest real estate investment management fi rms with $88.61 billion in assets under management. Founded in 1972, the fi rm sponsors real estate investment programs in North America, Europe and Asia for investors worldwide including public and private pension funds, insurance companies, sovereign wealth funds, foundations, endowments and private individuals. Programs include core/core-plus, value-added and opportunistic strategies through separate accounts and commingled equity funds, debt investment, global multi manager programs and listed global real estate securities vehicles. The fi rm offers synergistic access to the worlds premier real estate platform and employs more than 1,000 professionals working in 30 offi ces in 21 countries.

1 | CBRE GLOBAL INVESTORS

THE OUTLOOKReal estate investment markets are benefi ting from several key trends. Relatively high and stable yields are attractive to core investors in a world of low fi xed income and volatile stock markets. Subdued supply pipelines, especially in developed countries, mean that even moderate economic growth is supporting improving fundamentals. In developing economies, expanding middle classes and businesses need more and better real estate. In all countries, changing patterns of offi ce space utilization and the evolution of how consumers acquire goods and services is resulting in demand for new real estate products.

EUROPEThe key theme for Europe is rotation from prime to secondary; from North to South and in the UK from London to the regions.

UK data have surprised on the upside, resulting in markets pricing in an interest rate tightening cycle in sync with that in the U.S. The big difference is that the UK has not deleveraged at the household level, so the Bank of England will be cautious about how far and fast to raise rates. Our forecasts for London remain the strongest of any major metro area in Europe, and pleasingly, are driven by fundamentals strong population growth. The upshot is that the UK should experience solid growth, stronger in London, but with rising interest rates, a less marked rise in bond yields, and given the potential European Union referendum, increased exchange rate volatility.

By contrast, recent Eurozone data have disappointed, and most worryingly its the Northern core markets that are stagnating France from a lack of structural reform depressing corporate decision-making, and Germany from the strength of the Euro and weakened sentiment during the Ukraine crisis. More widely, with infl ation ebbing lower, there is a serious risk that the region falls into defl ation. By contrast, Spain and Portugal have taken tough decisions and this is refl ected both in their current very robust growth rates and the forecasts. Unfortunately they just arent large enough to drag up the Eurozone average.

The outlook for Europe is the diametric opposite of the post-fi nancial crisis norm that took hold between 2010 and 2013, where investors favored the UK for growth and yield compression and the northern major markets for defensive income, while shunning the distressed Southern European markets. Today, the UK is still favored but investors have turned to regional cities and value-add strategies as standing

EXECUTIVE SUMMARY

Core:

Acquire prime logistics facilities in well-located areas near ports or distribution hubs that generates defensive higher yielding income in Northern European or select CEE countries

Focus on Class A offi ce buildings with manageable leasing risk in supply constrained CBD locations in second tier UK or Northern European cities.

Target dominant retail centres with grocery-anchored tenants that are insulated from e-commerce risk in affl uent catchment area across Europe.

Capitalize on Spains attractive rental recovery and yield compression across all sectors in major tier 1 cities.

Focus core strategies should on high-quality assets with minimal cap-ex exposure and manageable lease up risk to minimize downside and maximize income.

Enhanced: Acquire offi ce properties in CBD locations with

signifi cant lease-up potential and rehab needs to bring building up to high-quality expectations of the market in France, UK and Germany.

Develop offi ce in CBD locations that have seen a lack of Class A supply delivered to the market in the big six UK cities.

Target shopping centres that have a proven track record in supply constrained markets that need signifi cant upgrades and/or new tenant mix across Western Europe and Poland

The worlds economies remain poised for growth, even as hopes for a synchronous, smooth, self-sustaining economic expansion have faded. Developed economies, notably the U.S., will be particularly strong over the next two years. The worst excesses of the past decade have been

worked away and many countries have made signifi cant structural reforms and have far more effi cient economies.

PREFERRED EUROPEAN INVESTMENT STRATEGIES

GLOBAL VISION | H2 2014 | 2

investments in the South becoming increasingly expensive. The northern safe havens still promise defensive income but with the Southern European markets bouncing back, no longer look as attractive on a relative basis. And where Spain was once untouchable, yield compression is now driving investors into Portugal and Northern Italy.

ASIA PACIFICNear term political risks and cyclical shifts are front and center in our outlook for Asia Pacifi c economies and property markets. However, we still expect property total return performance in many of the regions markets to be attractive to investors of various risk appetites.

Broadly, we forecast Japans total return contribution to the region to accelerate, whereas the double digit core returns recorded in many other parts of the rest of the region in recent years will moderate. Cycles aside, investors should not lose sight of the structural opportunities offered by the property markets of Asia Pacifi c.

The regional economy as a whole has proved to be quite resilient. In spite of the big policy reforms underway in both China and Japan, as well as national transport-related tragedies impacting Malaysia, South Korea and Taiwan this year and measurably affecting consumer sentiment there, the growth trajectory remains in line with expectations of a year prior. GDP growth forecasts for the region as a whole are close to 5% per year in the near term. Excluding the larger, yet-slower-growing Japan, the mean GDP forecast is for a pace of growth just over 6% for both this year and next. This is very good, trend-aligned regional growth and comes with a particularly favorable infl ationary outlook for the next few years with expectations of CPI mostly within the target bands set by Central Banks.

The broadly stable economic growth in the Asia Pacifi c region has led to strengthened occupier demand in the commercial sector. The average vacancy rates in many Asian offi ce markets fell below their respective 10-year historical averages due to improving leasing activities.

Core: Selectively acquire offi ce in Tokyo and major

Australian markets for yield-focused investors. Target state-of-the-art logistics facilities in both

Japanese and Australian markets that still display some attractive yields.

As core yields in most other markets have approached record lows, be poised for potential re-pricing opportunities in the medium term. Reversionary yields are moving up.

For total return investors, good income growth and capital value growth over the medium to long term still likely but appreciation rates will likely

moderate.

Enhanced: Refurbish, retrofi t and reposition well-located retail,

offi ce and residential in selected submarkets of low-vacancy-trending cities such as Tokyo, Hong Kong, Seoul and Singapore. Consider re-zoning opportunities for higher and better use value.

Develop modern logistics facilities, focusing on build-to-suits.

Develop undersupplied modern retail formats in Southeast Asia.

Chinese residential and mixed-use development in selected cities with better supply-demand fundamentals, taking advantage of: land price and volume falls; developers seeking capital; and demand returning as housing purchase restrictions are lifted.

Conduct cosmetic upgrades to well-located, functional, older-style logistics in Tokyo and Osaka.

PREFERRED ASIA PACIFIC INVESTMENT STRATEGIES


AMERICASThe American economy has re-accelerated and is on a path toward a self-sustaining expansion. The outlook is not risk free the international situation remains challenging and an unanticipated interest rate spike could de-rail progress but the overall outlook is on the upside.

The economys strength can be seen in the job market. In 2014, the U.S. has been generating 227,000 jobs per month an annual level of 2.7 million jobs the best level in over a decade. Job gains are becoming more broad-based, spreading beyond their initial post-GFC surge in technology, energy, healthcare and low-paying services. Those sectors are still growing but now so are construction, manufacturing, and even state and local governments.

The long-awaited acceleration in the improvement of U.S. offi ce market fundamentals is fi nally here. Corporate earnings continue to be robust and business confi dence remains on an upward trajectory. Absorption is no longer confi ned to a handful of metros. Sunbelt and housing bust cities are catching up to the ones driven by technology or energy. Although the performance gap between metros is steadily reducing, submarkets within metros have diverging performances. In many metros, the central business districts and innovation districts are outperforming the suburbs.

U.S. industrial absorption has been on a torrid pace over the past two years largely due to strong demand for e-commerce fulfi llment centers and a more modest revival of domestic manufacturing. Future prospects for industrial look bright as demand/supply imbalances are expected to continue into 2017.

The U.S. retail sector is still at the early stages of a recovery and retailers are facing a litany of challenges as they attempt to boost sales. However, many of the vital signs look healthy. U.S. retail sales are now trending at a 5% annual growth rate and a strengthening U.S. economy is good news for the retail sector especially. Further improvement in business and consumer confi dence, and most importantly, an eventual increase in wages, as slack in the labor market fi nally dissipates, will pave the way for stronger retail sales growth.

The performance of the U.S. apartment market will be shaped by four major factors. One stronger job growth and consumer confi dence boosting household formation by millennials; two changing attitudes about homeownership and lack of access to credit; third future rent growth in the absence of meaningful rise in household incomes; and, lastly, how quickly can lenders respond to signs of overheating new supply. Vacancies are expected to gradually rise until demand catches up to the current supply surge. Rent growth is expected to moderate as the sector enters a post-recovery phase.

Core:

Selectively acquire stabilized offi ce, focus on CBDs and innovation districts, pursuing better value in next tier metros.

Buy state-of-the-art warehouse/distribution facilities in major trans-shipment nodes proximate to large consumer bases, especially ones that fulfi ll e-tailers needs.

Target retail that provides a differentiated experience serving affl uent demographics.

Target live/work/play environment for offi ce, retail and apartment investments.

Enhanced:

Develop and re-position apartment communities focusing on transit-orientated locations, providing community characteristics appealing to Millenials and Boomers.

Re-position offi ce buildings, appealing to the new way of working, targeting infi ll locations.

Develop offi ce, industrial and residential condominium projects on entitled sites in submarkets with proven demand.

PREFERRED U.S. INVESTMENT STRATEGIES


Entering 2014, there was a widespread expectation that the global economy would have a breakout year. The worlds major economies appeared on track for a period of synchronous, sustainable growth.

Todays mood is more ambiguous. The global economy is growing this year and is poised for moderate acceleration going forward. But the fragility of the worlds economies continues to be demonstrated, and unforeseen exogenous shocks keep rising to the surface.

THE U.S. BACK AS THE WORLDS KEY GROWTH DRIVER

The U.S. was particularly well positioned to have a breakout year in 2014. The effects of the GFC had largely disappeared household and business deleveraging is over, fi nancial institutions have cleared up their balance sheets, and the for-sale residential sector has rebounded. Federal fi scal austerity, a huge, if often undiscussed, drag on the economy for the past three years is dissipating. Fundamental strengths including an energy renaissance, highly profi table and confi dent corporations, a growing population and a fl exible, entrepreneurial economic structure all support continued expansion.

But the U.S. started the year with an abysmal performance. GDP dropped during the fi rst quarter. The drop resulted from temporary factors unusually brutal winter weather, right-sizing of inventories and a surprising decline in healthcare expenditures. Fortunately, the U.S. bounced back quickly in the spring and summer. But the Q1 performance is a cautionary note that theres still fragility out there, and any number of exogenous shocks could again disrupt the upward trajectory.

The odds are that the States expansion will accelerate going into 2015 and 2016. As illustrated in Figure 1, the U.S.

has more than re-gained its GFC output losses. The country has moved beyond recovery and is into expansion territory, driven by its fundamental strengths. The worlds largest and arguably most vigorous developed economy, the U.S. will disproportionately drive global growth in the near-term.

JAPAN WAITS FOR THE THIRD ARROWAs Japan adopted the Abenomics program, the country seemed to fi nally be breaking out of its lost decades of anemic growth and defl ation. The programs fi rst two arrows stimulative fi scal policy and accommodative

God writes straight in crooked lines

FIGURE 1: The U.S. Is In Expansion Territory

Sources: CBRE Global Investors and EIU

GLOBAL ECONOMICPERSPECTIVE

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monetary loosening helped drive the value of the Yen down and consumer and business confi dence up. Exports, corporate profi ts and the stock market all benefi tted. GDP surged during Q1 2014.

But much of the Q1 strength was distorted. Households went on a spending spree before a consumption tax hike. The second quarter experienced a severe GDP drop demonstrating a still fragile expansion. There are pockets of strength in Japan, notably high value exports and the Tokyo region. But Japan faces profound long-term headwinds including an aging and declining population and many ineffi cient sectors. Progress must be made on the third arrow of Abenomics structural reform for the economy to even maintain its recent growth rate.

THE UNITED KINGDOM AN UPSIDE SURPRISE

The worlds biggest upside surprise in recent years has been the UK economy. The country has benefi tted by an upswing in business and fi nancial

services, illustrative of its business and immigrant friendly environment. The UK has also seen a consumer rebound tied to surging house prices, especially in London and the countrys South East. A chronic undersupply of housing has driven some of the residential boom, but the more substantial effect is very low interest rates. This adds considerable fragility to the UK outlook as rates normalize. The UK should remain a top near-term performer. But it will keep a watchful eye across the channel to continental Europe its top trading partner.

THE EUROZONE DISAPPOINTSA year ago Europeans came back from their summer vacations with a sense of optimism. After a double dip post-GFC recession and frequent bouts that the Euro would collapse as a common currency, better times appeared on the horizon. Peripheral Europe had pulled back from the break; sovereign bond yields tumbled. And northern European countries were solidly progressing.

Fast forward a year and the situation is decidedly cloudier. Low interest

rates arent spurring activity as lending remains in the doldrums. Theres a real fear of a Japanese style defl ationary downward spiral reducing consumption and raising the real costs of governments heavy debt burdens. Much of the region is at risk of a triple dip recession. Germanys powerful export machine is faltering. France is refl ecting more of its Mediterranean side in its diffi culty implementing structural reforms. Italy is fortunate it has vigorous informal sectors because its top line statistics are dire. The one upside performance has been Spain, where reforms are re-positioning the economy to be more productive. But the overhang of last decades housing bust remains a drag.

The recent depreciation of the Euro provides a glimmer of hope. Accelerating import prices may thwart defl ation, although for the wrong cost push reasons. It would be much better if infl ation were being driven by the demand pull of a vigorous economy. Even the positive effects of a weaker Euro on tourism and exports could be limited much of Europes trade and even vacationers are within the region.


EVEN CHINAS TREES DONT GROW TO THE SKYChinas top line numbers remain enviable by world standards. GDP growth is remarkably consistent from quarter to quarter. And slowing down to the seven percent range hardly seems a disaster in fact it should be expected for an economy thats almost 80 percent bigger than it was prior to the GFC (Figure 2). China is undergoing an intentional and needed transition from its historic export/investment driven model to an economy supported more by domestic demand. This will necessitate freeing up its service sector, and removing the crutches from many state owned enterprises. That transition is hard to make. (Japan has been trying for decades to limited effect.)

The greatest concerns regarding China are an unfolding housing market correction, over-investment in manufacturing, and the amount of debt built up in various stimulus programs during and since the GFC. The housing correction is real, but hardly fatal. China has a history of severe but relatively short residential cycles. This one too will be cured by continued migration to the cities, pent-up demand by already urbanized middle income households still living in substandard quarters, and the fact that incomes are outpacing home prices. China is also in an enviably position to deal with its debt problems the central government sits on USD 4 trillion in reserves, households have substantial savings, and the country runs an impressive current account surplus.

A WORLD OF WORRIESIn recent months geo-political threats to the worlds economies have expanded. The Russia/Ukraine confl ict has brought war to Europes eastern fl ank and has un-nerved much of the continent. Succession movements and

Eurosceptic parties election successes are threatening the trajectory of post-World War harmony. The hopeful Arab Spring has given way to confl ict across North Africa and the Middle East, with particularly tragic results in Syria and Iraq. Even in generally prosperous Asia, territorial disputes between China, Japan and their neighbors compromise

stability and progress. And now West Africas horrifi c Ebola virus epidemic is casting fear thousands of miles away.

One of these threats alone is probably not big enough to derail the worlds economic recovery. In a world of unintended consequences some could actually have a near-term stimulative

FIGURE 2: Chinas Economy Is Far Bigger Than Prior To The GFC

Source: Economist Intelligence Unit

...So Even As Chinas Growth Rate Decelerates,The Absolute Gains Are Huge

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FIGURE 3: Most Developed Economies Are Poised To Accelerate

Sources: Economist Intelligence Unit, Moodys Analytics (U.S.)

effect in safe haven countries. Interest rates may remain lower longer than anticipated. Historically, a crisis in the Middle East would have driven up oil prices. But the world has experienced a surge in petroleum extraction pushing prices down a net plus for the worlds consumers. Instead the cumulative effect of all these challenges has rattled confi dence. This is clearly seen in the performance of the worlds equity markets this year. Confi dence is a necessary prerequisite for continued growth, and business and consumer confi dence is being severely tested as memories of the GFC remain raw.

A CROOKED PATH FORWARDHope for a synchronous, smooth, self-sustaining economic expansion has faded. But the worlds economies remain poised for growth. Developed economies, notably the U.S. and the UK, will be particularly strong over the next two years (Figure 3). The worst excesses of the past decade have been worked away. Many countries have made signifi cant structural reforms and have far more effi cient economies. Loads of people are benefi ting from more dynamic and revised economic policies, and they continue to move into and up in the middle class.

Real estate investment markets are positioned to benefi t in the near-term environment. Relatively high and stable yields will be attractive to core investors in a world of low fi xed income yields and volatile stock markets. Subdued supply pipelines, especially in developed countries, mean that even moderate economic growth will support improving fundamentals. In developing

economies, expanding middle classes and businesses need more and better real estate. In all counties, changing patterns of offi ce space utilization and the evolution of how consumers acquire goods and services will result in demand for new real estate products.

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The path to prosperity may be crooked, but it is attainable.


Global real estate investment activity has been solid in 2014. Years of highly focused investment interest in the safe havens has driven their yields down to very low levels. Therefore a strengthening theme in global investment markets is the shift towards next tier segments of the market. An important catalyst for this broadening investor attention is the strong increase in fi nancing opportunities across the globe. A broadening group of real estate debt providers has entered the market and is willing to fi nance a growing range of property types and at increasing LTV levels. There is now an abundance of capital available to fi nance property deals at increasingly attractive rates.

Global transaction activity grew by a modest 3% YoY during the fi rst half of 2014. Strong growth was present in the EMEA and Americas regions, up 18% and 12%, respectively, with a decline recorded in the Asia Pacifi c region. (Figure 1)

In the last publication of Global Vision we highlighted the stable nature of the top investment cities. Despite the increased interest for second tier cities the Top-6 of global markets, including cities such as New York, London, Tokyo and Paris, all saw their YoY transaction activity grow during the H1 2014. However, when looking at the more recent Q2 fi gures we do see that London has started to lose part of its gravitational force for global capital.

In Europe, the recovery in investment volumes continued during H1 2014. This recovery is manifested in numerous ways. Investor attention is recovering in second tier cities and countries in the periphery of the continent but also across the property risk spectrum with increased interest for value-add and opportunistic strategies. The strongest increases in volumes took place in Southern European recovery markets and the Netherlands, but even early recovery markets such as the UK and Germany saw deal volumes rise. In

the UK in particular, there has been a sharp fall in good secondary yields as investors increasingly move to regional markets and take leasing risk in anticipation of a strong rental recovery. While the European countries advance to a more recovered economic state and the capital fl ows into their secondary markets, the activity in the Southern countries remains clustered in their key cities.

Growth in European transaction volumes is partly driven by increasing cross-border investments. A major source of non-European based capital comes from U.S. investors who spend 75% of their non-domestic investments in Europe. Asian investors are also increasingly fi nding their way to the European property markets. (Figure 2)

Also noteworthy is the sharp increase in capital raising in the European listed property market. 2014 is set to become a very strong year for large IPOs and recapitalizations for the European listed property market. Several listed companies used the availability of equity to gain access to investment opportunities without having to recycle capital from existing investments. Improved property fundamentals are attracting more investors attention to the property markets and a growing number of investors appear willing to tolerate the more volatile public route in order to gain exposure.

Growth in transaction activity in the Americas is confi ned to the U.S., which accounted for 94% of the volumes and grew by over 20% YoY during the fi rst six months of the year. On the contrary, other markets in the Americas saw strong declines in their investment turnover. Signifi cant real

FIGURE 1: Global Transaction Activity

Source: Real Capital Analytics

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GLOBAL CAPITALMARKETS OUTLOOK


FIGURE 2: Source and Destination of Cross-Border Capital Flows

Source: Real Capital Analytics

FIGURE 3: Capital Value Growth at Mid-Year 2014

Source: CBRE Research

estate transactions in Canada dropped by over 60% in USD terms despite, or perhaps due to, Canadian investors becoming increasingly important actors in the global property markets. In Brazil volumes dropped to historically low levels.

The investment trend in the U.S. was positive for all property types but most pronounced for the retail sector which saw YoY transaction volume rise by almost 60%. Overall transaction volumes were up 23% YoY, continuing the trend of rising activity that started in 2009. Increasing rent anticipation keeps interest in CBD offi ce markets strong but especially in the retail and industrial market next tier cities benefi t from an increase in investor interest. In line with the European trend, investors are increasingly searching for more attractive yields by going to non-gateway markets and acquiring assets with re-leasing potential.

Cross-border capital infl ows are modest, especially when most capital infl ow comes from Canada and Europe and is largely constrained to traditional gateway cities such as New York, Boston, Washington DC and Los Angeles.

Transaction volumes in the APAC region during H1 2014 are down

17% YoY making it the worst half year period since H1 2010. However, when looking at long term averages this is perhaps more a normalization from exceptionally high levels. The decrease was broad based across countries and sectors. For example, former investor darlings Singapore and Hong Kong show strong declines in turnover activity. Notable is the strong decline in the volatile Chinese land sale volumes during the second quarter of 2014 following two years of unusually high turnover. The international capital fl ow into Australia remains high with Sydney

and Melbourne targeted by global investors looking for relatively attractive yield levels.

Globally, improving economic circumstances helped to push up prime rents. Continued investor activity property put yields under pressure leading to positive YoY changes in prime capital values across sectors and continents. (Figure 3) Within this rather uniform picture European prime retail is the global leader in capital appreciation. This segment of the market benefi ts from an intensifi ed battle for securing the best spots in town as major retailers battle increased online competition.

Real estate transaction volumes are expected to remain at high levels for the next several years. Theyll be driven by the increasingly favourable occupier markets and the lubricating effect of capital availability. Prime yields are forecast to remain at low levels across the globe but expected to show some decompression in the U.S. and UK as interest rates start to rise. Markets with anticipated signifi cant yield compression are very limited and confi ned to Southern, Central and Eastern Europe, where yields are currently still at somewhat elevated levels. However, even in these countries, yields are quickly declining with increased investor interest.

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We have developed proprietary tools that have been back-tested and are dependable ways to add value and manage risk through portfolio construction. This Framework provides investors a tool to help create and manage portfolios that best meet their return goals and risk tolerance.

The fi rst step in this process is regression analysis of economic, property market and credit and capital markets data to build and predict returns over the next fi ve years. Our modeling process has been rigorously tested and can rank higher returning markets over lower returning markets, or can help indicate the direction of markets.

METHODOLOGYCBRE Global Investors calculates proprietary forecasts for close to 300 sector/market combinations, producing a 5- year outlook for occupancy, rents, cap rates and returns. The results of both top-down (modeling) and bottom-up approaches (local market knowledge) are updated semi-annually.

The charts in this section show the aggregate results of CBRE Global Investors latest proprietary real estate return forecasts.

These forecasts are for core investments, without leverage effects, held over a fi ve year period, in local currency terms. Most importantly, these forecasts simulate a portfolio return to investors, taking into account prevailing lease practices and expense ratios in the different markets. The return forecasts are a starting point in developing and managing an investment strategy. Submarket conditions and, to a greater extent, property-specifi c characteristics greatly impact overall returns.

FIGURE 1: ANNUAL PORTFOLIO TOTAL RETURNS (2015-19)

5.6%

5.9%

6.1%

6.2%

6.6%

7.1%

7.1%

7.3%

7.4%

7.5%

8.1%

8.4%

0% 2% 4% 6% 8% 10%

Residential - Europe

Residential - U.S.

Residential - Asia Pacific

Office - Europe

Retail - U.S.

Office - U.S.

Retail - Europe

Office - Asia Pacific

Retail - Asia Pacific

Industrial - U.S.

Industrial - Europe

Industrial - Asia Pacific

RETURN FORECASTSAs one of the worlds largest real estate investment managers,

CBRE Global Investors is dedicated to setting a standard that will improve risk management in the industry and for our investors.


FIGURES 2-5: ANNUAL UNLEVERED PORTFOLIO TOTAL RETURN PROJECTIONS (2015-19)

SUMMARY OF RESULTS Asia Pacifi c is expected to outperform. Within Asia Pacifi c, the structural shortage of modern real estate stock,

coupled with the large catch-up potential, contribute positively to the real estate return outlook.

The U.S. results are driven by reasonable economic growth, low construction pipelines and generally attractive, below-replacement cost pricing.

The headline result for Europe is slightly less positive than the U.S., although there is a wide dispersion of returns across markets. Rent growth forecasts are improving in many areas but remain relatively weak in the region. The aggregate result is infl uenced by the inclusion of residential with its structurally low going-in yields.

7.5%7.1%

6.7% 6.6%5.9%

0%

2%

4%

6%

8%

Industrial Office All Property Retail Residential

U.S.

8.1%7.1%

6.6% 6.2%5.6%

0%

2%

4%

6%

8%

10%

Industrial Retail All Property Office Residential

Europe

8.4%7.5% 7.4% 7.3%

6.1%

0%

2%

4%

6%

8%

10%

Industrial All Property Retail Office Residential

Asia Pacific

7.5%6.7% 6.6%

0%

2%

4%

6%

8%

Asia-Pacific U.S. Europe

Global


COMBINING RETURN AND RISKCBRE Global Investors has developed tools that help create and manage portfolios with an attractive balance of return and risk. In addition to proprietary global return forecasts, the risk framework offers a forward-looking view of investment risk in direct property markets that enables us to review real estate markets current risk premiums.

Our risk assessment focuses on downside risk and considers more dimensions than traditional and solely backward looking volatility-based risk

measures. It combines structural and cyclical aspects of investment risk in a consistent way across the globe. As such, the model is capable of showing risk relativities across investment opportunities. This allows investors to make a more thorough analysis of the real attractiveness of higher returns.

RARE MODELIn the RARE model (Risk Adjusted Real Estate) we combine our risk assessments of countries with our core return outlook at a global scale. (Figure 1)

The diagonal line illustrates required returns for various degrees of risk where the return-to-risk ratio always equals the global weighted average. Markets positioned above the line are expected to generate relatively attractive risk-adjusted returns, while markets underneath the line are expected to deliver below-average returns per unit of risk. Hence, our analysis provides an indication of relative value.

RARE: RETURN AND RISK IN A GLOBAL RISK ANALYSIS FRAMEWORK

FIGURE 1: RARE Analysis For Offi ce, Retail and Industrial Real Estate Markets (2015-19)

Source: CBRE Global Investors

Portugal

USA China

Japan

United Kingdom

Germany

France

Italy

Spain

Average

Australia

Canada

Korea

Sweden

Belgium

Poland

Netherlands

Singapore

Hong Kong

Denmark

Taiwan

Malaysia

Czech Republic

Finland

Norway

New Zealand

Hungary

Romania

Slovakia

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

Retu

rn f

ore

cast

20

15

-19

p.a

.

Lower Risk Risk Higher Risk

Americas Asia-Pacific Europe Average bGlobal Average


DIFFERENT LEVELS OF RISKThe chart clearly illustrates the wide scale of risk around the globe. Risk-averse investors might focus solely at the left segment of the chart, where core European markets such as Germany, France and the UK are positioned, as well as the U.S. and Australia.

The middle section contains peripheral European markets like Italy and Portugal and more developed Asian markets like Japan and Singapore. Countries such as Malaysia and Poland form the upper boundary of this middle-risk segment; despite a higher structural risk, Malaysia almost ranks equally to Poland where the cyclical risk is higher.

Return-seeking investors might focus at the right part of the chart, with higher-risk markets such as Romania and China.

HIGHEST RISK-ADJUSTED RETURNS

Within each risk segment, we expect various markets to offer attractive risk-adjusted returns for the coming fi ve years when compared to the global average.

In the core segment, smaller European countries such as the Nordics and the Netherlands currently have somewhat better return prospects and lower risk assessments than larger countries Germany and the UK, where risen prices have increased pricing risk and keep the return outlook for high-quality investments modest.

In the middle section of the chart, core properties in Spain and Portugal are expected to provide relatively attractive risk-adjusted returns given their re-pricing potential, while the Taiwanese return outlook is humble for its risk due to very low prime initial yields and modest

rent growth by Asian standards. In the higher risk section, Hungary stands out with an almost similar expected return as Romania but also a substantially lower property market risk assessment. Although China has the best return outlook for the shown Asian countries, its return per unit of risk is below the global average.

This analysis shows that returns are just one side of the story. Market with lower returns can be more attractive in risk-adjusted terms than markets with higher returns. For example, China is expected to provide higher returns than Australia but lower risk-adjusted performance.

CONCLUSIONS

It should be noted that the outlook concerns markets for predominantly fully-let, unleveraged assets; hence, this analysis serves as a framework for core investment decisions. Individual properties in markets further below the diagonal line could still offer attractive investment opportunities, just as value-add strategies or leverage could move specifi c market positions throughout the chart.

Nevertheless, as it is better to own a good building in a good market than in a bad market, this risk framework helps create and manage core portfolios with an attractive balance of return and risk.

FIGURE 2: Risk Quadrants

Structural Economic

Risk

Cyclical Economic

Risk

Structural Property Market

Risk

Cyclical Property Market

Risk


*See important disclosures and risk information at the end of the document.

EXECUTIVE SUMMARYREAL ESTATE SHARE PERFORMANCE TAKES A PAUSEGlobal real estate share performance paused in September which resulted in negative performance for the third quarter, an arguably healthy consolidation of otherwise positive total return. Real estate stocks have generated favorable returns over the past nine months as the result of low bond yields, accommodative capital markets, and improving fundamental demand for real estate space with limited new supply. Despite this pullback in performance in Q3, the factors driving the positive performance year-to-date remain in place with property share valuations that are now more attractive.

MACRO ENVIRONMENT CONTINUES TO PROVIDE A POSITIVE BACKDROP FOR REAL ESTATE SECURITIES

The current shape of the yield curve is good for property companies and refl ects a low infl ationary environment. While the yield curve is expected to steepen over the next twelve months, in anticipation of economic improvement, forward markets indicate that the increase will be modest. Our macro-economic view continues to be one that sees global economic conditions improving over time and bond yields commensurately moving higher, although gradual in pace and change in trajectory. Real estate shares should benefi t from the current environment which has historically proven favorable for performance.

FUNDAMENTALS FOR REAL ESTATE IMPROVINGWe underwrite property companies to generate earnings growth in 2014 and 2015 in the +6-7% range, following a steady +6.3% in 2013, as the economic recovery in most developed economies begins to gain further traction, and positively affect real estate cash fl ows. Given that the majority of the cash fl ows are largely contractual in nature, there is a fairly high degree of visibility to these projections, with any potential revisions likely to be positive not negative. (See Figure 3.)

VALUATIONS REMAIN ATTRACTIVE

We estimate that listed property companies are trading at an average discount of 8% to NAV, a discount below the long term average. The discount to NAV provides a cushion

for REIT pricing should interest rates move higher. In effect, the market has already built into its pricing higher cap rates should interest rates risecap rates which are conservatively higher than transactional evidence. In a world of gradual economic improvement, listed real estate trading at discounted valuations should offer investors attractive total return potential over time anchored by current income via the dividend. (See Figure 6.)

MARKET PERFORMANCE REVIEWWhile global real estate shares generated a high single digit total return over the fi rst nine months of the year, the positive performance paused in September, resulting in negative performance for the quarter. Property share performance was weakest in Continental Europe and Japan. European returns were negative amidst

PUBLICREAL ESTATE

FIGURE1:FTSE EPRA/NAREIT Developed IndexPerformance as of September 30, 2014

Q3 2014 -4.4%

YTD 7.2%

1 Year 6.7%

3 Year 15.6%

5 Year 11.3%

7 Year 0.8%

10 Year 7.8%

Source: FTSE EPRA/NAREIT Developed Index in USD as of 09/30/2014. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.


increasing evidence that economic recovery in the eurozone remains fragile, and that the European Central Bank is perhaps being excessively deliberate and too slow in providing quantitative easing. Japanese property shares were lackluster possibly as a result of the lack of immediate catalysts, as investors await further potential action by the BOJ and Japanese government.

Bucking the trend was the positive performance recorded in Hong Kong, which was driven in part by a series of easing measures by the Chinese government, which have the intent of stimulating demand for residential housing and overall economic growth. While these measures supported positive performance in Q3, it remains unclear how effective these policies will ultimately be.

Overall, we believe the Q3 consolidation to be a natural pullback as the market digests the potential for higher interest rates. The pullback is a reminder that listed shares do not always go up and is arguably healthy for a sector which has recorded strong total return year-to-date. Despite the negative Q3 performance, the factors driving the positive performance year-to-date remain in place with property share valuations that are increasingly attractive.

MACRO ENVIRONMENT CONTINUES TO PROVIDE A POSITIVE BACKDROP FOR REAL ESTATE SECURITIES

The combination of gradually improving economic growth but scant evidence of infl ation provides the framework for continued potential outperformance for real estate companies, which provide attractive current yield and steady earnings growth. The current shape of the yield curve is good for property companies and refl ects a low infl ationary environment. While forward markets indicate a higher bond yield on the U.S. 10-year Treasury in

twelve months, the upward shift in the yield curve should prove to be modest. Longer-term yields (U.S. 10-year Treasury) in the near term have settled in to a more benign level, closing at 2.49% at quarter end. This has arguably been the result of mixed economic data, particularly in the euro zone, which has seen recent week data out of Germany. German 10-year bond yields trended lower during the quarter, thereby putting indirect pressure on yields in other capital markets, including the U.S. In contrast, more recent employment data in the U.S. supports an economic scenario of improving employment, housing and consumer confi dence, all of which underpin improving demand for commercial property including offi ce space, apartments and shopping centers via higher retail spending. Economic recovery is less consistent outside the U.S., where the U.K. looks more resilient than the Continent, and the Asia-Pacifi c region remains fragmented, ranging from a stimulus fueled Japan, to a government managed slowdown in China which indirectly affects the entire region, including commodity dependent Australia. Our macro-economic view continues to be one that sees global

FIGURE 2: Global Real Estate Total Returns as of September 30, 2014

Source: FTSE EPRA/NAREIT Developed Index in USD as of 09/30/2014. Please refer to the last page for index performance in other major currencies. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

-3.2%

-6.2%

-3.5%

2.3%

-3.2%

-9.5%

-5.4%

-8.8%

-4.4%

14.0%11.7%

8.0% 7.6%5.5% 5.3%

3.6%

-12.5%

7.2%

-15%

-10%

-5%

0%

5%

10%

15%

20%

United States Australia United Kingdom Hong Kong Singapore Cont. Europe Canada Japan World

Q3 2014 YTD

In the U.S., CBRE Global Investors expects average annual rent growth for offi ces and industrial properties to outpace

infl ation in the next few years.


FIGURE 3: Regional Earnings Growth

Source: CBRE Clarion as of 09/30/2014. Information is the opinion of CBRE Clarion , which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. a refers to actual, f refers to forecasts. Forecasts and the factors noted are not indicative of future investment performance.

0%

2%

4%

6%

8%

10%

12%

UnitedStates

Australia Hong Kong/China

UnitedKingdom

J-REITs ContinentalEurope

J-REOCs Canada Singapore GlobalAverage

2013a 8.0 0.1 7.4 2.3 1.1 4.2 7.1 7.4 1.5 6.3

2014f 8.4 6.6 6.3 5.5 5.0 4.7 4.1 3.5 2.2 6.8

2015f 8.0 4.7 5.8 6.8 2.3 4.7 8.3 4.4 11.5 6.9

FIGURE 4: Regional Dividend Growth

Source: CBRE Clarion, FactSet and Bloomberg as of 09/30/2014. Not all countries included. Past performance is no guarantee of future results. Forecasts and any factors discussed are not indicative of future investment performance. Yields fl uctuate and are not guaranteed. This information is subject to change and should not be construed as investment advice.

9.6%

3.8%

4.9%

6.9%

9.7%

2.9%

4.0%

6.5%

0%

5%

10%

Americas Asia-Pacific Europe World

2014 Forecast 2015 Forecast

Wei

ghte

d Av

erag

e D

ivid

end

Gro

wth


economic conditions improving over time and bond yields commensurately moving higher, although gradual in pace and change in trajectory. Real estate shares should benefi t from the current environment which has historically proven favorable for performance.

OUTLOOKFUNDAMENTALS FOR REAL ESTATE IMPROVINGProperty companies are achieving internal cash fl ow growth (primarily the lease-up of currently vacant space, mark-to-market of expiring leases, and embedded rental rate growth through contractual annual rate increases), as evidenced by decreasing vacancy rates in major asset classes, ranging from U.S. apartments, global industrial, offi ce markets in London, Tokyo, New York, San Francisco and Los Angeles, and lodging in global gateway cities. With this, landlords increasingly are

exercising pricing power by pushing rental growth and limiting tenant concessions such as free rent or tenant improvements, thereby increasing net effective rents. Witness the offi ce vacancy in central Tokyo currently at 5.65% versus 9.40% just over two years ago. In the U.S., CBRE Econometric Advisors expects average annual rent growth through year-end 2014 to outpace infl ation, at 3.4%, and top 4% per year by 2016.

Property companies are growing cash fl ow per share additionally via external growth of acquisitions and value added recycling of capital. Property values continue to rise as cap rates hold fi rm and even decrease further, as the spread to bonds remains wide. Real estate companies have been actively raising fresh equity, with U.S. property companies raising $3.7 billion in September alone, in what represents an active and generally accretive sourcing and investing of capital.

GROWING EARNINGS SUPPORT ATTRACTIVE YIELDS AND MAY LEAD TO EXPANDING DIVIDEND PAYOUTS

Current income generated by the dividend remains a defi ning investment characteristic of the listed property sector. Listed property companies dividend yield currently averages nearly 4% globally and is growing at a very healthy rate. We project average dividend growth to equal earnings growth in 2014 and 2015 at nearly 7%, driven by a combination of improving company cash fl ows as well as a gradual expansion of dividend pay-out policies which remain conservative.

The spread between dividend yields and bonds also continues to be above-average as shown in Figure 5, suggesting good relative value versus fi xed income investment alternatives, and a buffer of sorts as interest rates potentially and eventually rise.

FIGURE 5: Regional Dividend Yield

Source: CBRE Clarion, FactSet and Bloomberg as of 09/30/2014. Not all countries included. Past performance is no guarantee of future results. Forecasts and any factors discussed are not indicative of future investment performance. Yields fl uctuate and are not guaranteed. This information is subject to change and should not be construed as investment advice.

-2%

0%

2%

4%

6%

Canada Australia Cont. Europe Singapore United States Hong Kong United Kingdom Japan

Dividend Yield Current Spread Historical Spread

Global Dividend Yield: 3.7%


ATTRACTIVE VALUATIONS OF LISTED PROPERTY WHILE PRIVATE MARKET PRICING REMAINS STRONG

We estimate that listed property companies trade at an average discount of 8% to NAV, a discount below the long term average. As shown in the Figure 6, real estate is trading near par or at a discount in many major markets around the world. The discount to NAV provides a cushion for REIT pricing should interest rates move higher. In effect, the market has already built into its pricing higher cap rates should interest rates rise, cap rates which are conservatively higher than transactional evidence.

This provides potential additional upside, as the year unfolds, to returns otherwise fueled by a growing dividend stream and higher earnings. Transaction volumes also remain elevated, as investors including private

equity, sovereign wealth, pension funds, other institutional capital, and listed companies all vie for potential deals, putting continued downward pressure on cap rates.

There is an increasing disconnect with private market transactions and implied pricing in the listed markets, witness the September announcement by U.S. offi ce REIT Boston Properties that it will sell a 45% stake in three high-quality core assets to Norges Bank Investment Management for approximately $1.5 billion in cash, or $1,073 per sf which is an estimated 3.9% cap rate on 2015 net operating income.

The three assets included are 601 Lexington Avenue in Midtown Manhattan and 100 Federal Street and Atlantic Wharf in Boston. This compares to an implied cap rate on Boston Properties shares at quarter end of ~5%.

Separately in September, Hilton Hotels announced the $1.95 billion proposed sale of the Waldorf Astoria to Chinese insurance company, Anbang Insurance Company, which equates to $1.4 million/room and in the range of a 3% implied yield, versus an implied yield on Hiltons shares of 6.1%.

While all of Hiltons properties are not iconic such as the Waldorf, there nonetheless is a sizeable difference between pricing in the private market versus implied pricing in the listed market. Hilton will retain a long-term management contract on the hotel, which adds to its economics.

FIGURE 6: NAV Premium/Discount

Information is the opinion of CBRE Clarion as of 09/30/2014, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Forecasts and any factors discussed are not indicative of future investment performance. * Singapore historical average beginning in December 2004.

10 Year Average NAV P/D

Cur

rent

NAV

P/D

CBRE Clarion

Current Model

Cap Rate

5.5% 4.3% 6.2% 6.3% 6.0% 4.9% 5.8% 5.5% 5.5% 4.6% 3.5%

10 Year AverageCurrent NAV Premium / Discount

8% 6%

0.0%

-4% -4%

-5% -8% -8%-13%

-29%-31% -35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

ContinentalEurope

J-REITs Canada Australia UnitedStates

All Sectors

UnitedKingdom

UnitedStates"Core"Sectors

GlobalAverage

Singapore* Hong Kong/China

J-REOCs


PUBLIC REAL ESTATE:REGIONAL INVESTMENT RECOMMENDATIONS

In the U.S., we remain favorable on the industrial, apartment and lodging sectors as well as coastal CBD offi ce and high-end mall companies, and are more cautious on the storage, net lease and healthcare sectors. Portfolio positioning emphasizes property types which can benefi t the most from improving economic conditions and companies with management teams that can take advantage of their market positioning, either via local expertise, balance sheet strength and/or if warranted development activities.

By geography, this includes many of the gateway cities located in the northeast and in California, including New York, San Francisco and Los Angeles. We remain cautious on the more bond-like sectors of net lease and healthcare but take into account potential syndicate activity and takeover possibilities in our portfolio positioning.

In Europe, U.K. property fundamentals are improving more visibly than on the Continent. Investments in Europe are focused on companies with higher growth characteristics, such as London offi ce companies and German residential. Elsewhere on the Continent, we favor select value names which offer a high level of cash fl ow and dividend yield. We also believe that there may be more merger and acquisition activity involving euro zone property companies.

In the Asia-Pacifi c region we like the prospects for Japan and Australia, but are very selective elsewhere in the region. Positioning in the Asia-Pacifi c region continues to tread carefully around decelerating economic growth in mainland China and ever-changing government policies aimed at limiting price appreciation for the residential sectors in Hong Kong, Singapore and mainland China.

We are more positive on the offi ce and retail property types in these markets than on residential. We also continue to see value in the Tokyo offi ce market, which is showing improved occupancies and accelerating rental growth after years of stagnation. Land values in Tokyo have recently improved and offi ce vacancy has tightened, with vacancy in the fi ve central wards now in the mid-5% range versus the mid 8% range just a year ago. While gradual, improvement in Tokyo offi ce rents is steady and visible.

We believe that global property stocks offer investors an attractive investment option, anchored by current yield via a growing dividend and underpinned by increasing real estate cash fl ows derived from improving economic and commercial property fundamentals.


GLOBAL LISTEDINFRASTRUCTURE

25% Integrated Utilities

22% Regulated Utilities

16% MLP

13% Oil/Gas Transport & Storage

12% Rails

5% Toll Roads

4% Airports/Ports

3% Communications

FIGURE 1: BREAKDOWN OF THE GLOBAL LISTED INFRASTRUCTURE INVESTMENT UNIVERSE

Source: CBRE Clarion and Bloomberg as of 09/30/2014. Percentages may not add to 100% due to rounding. CBRE Clarions defi nition of the global listed infrastructure universe is roughly USD3.4 trillion in equity market cap and consists of 411 companies.

48% United States

7% Canada

4% Latin America

17% Continental Europe

4% United Kingdom

10% Asia

7% Emerging Asia

3% Australia/NZ

UNDERLYING FUNDAMENTALS ARE SUPPORTIVE FOR LISTED INFRASTRUCTURE

In our view the low growth, low infl ation, low interest rate environment is a very positive macro backdrop for capital intensive assets such as infrastructure. Risks to the economic outlook have less impact to the inelastic demand profi le of infrastructure assets. Over the next 12 months, we continue to expect the total return to be 12-14% driven by continued growth in earnings and a stable dividend yield. Our conviction in multiple expansion for the group has been strengthened by the lower for longer interest rate outlook combined with the low growth environment as we believe investors will ascribe more value to the stable and visible earnings of listed infrastructure stocks.

KEY THEMES

We remain positive on the secular U.S. energy renaissance theme. Rising production for the next several years of oil and natural gas is leading to signifi cant energy infrastructure investment. Recently, the market has become concerned about the level of oil prices (lower) and their impact on drilling activity that drives fl ow through MLP pipelines.

We believe that the level of oil price remains at a level (around $80/barrel) that is attractive for energy and production companies to remain active. We would be more concerned if oil falls to the $60/barrel level for a sustained period. Also, we remind investors that the companies in the oil/gas storage and transportation sector own assets that are generally contracted on a long term basis and not subject to day-to-

day commodity pricing. While the volume of fl ow can impact the assets, lower price levels can also incent higher end-user demand thus representing a potential positive for asset owners.

Within the U.S., the rising production of energy is coinciding with an increased level of energy exports. In fact, the U.S. has become a net exporter of energy, which is likely to accelerate as new liquefi ed natural gas (LNG) export terminals come on-line in 2016-2019.

We believe that the infrastructure build-out for export activity will play an increasingly important role in the future growth of the sector. In addition to the recently approved LNG export agreements with non-FTA countries, Congress is in the early stages of considering the export of crude oil. The U.S. is already the largest exporter of

SPECIAL FEATURE


FIGURE 2: GLOBAL LISTED INFRASTRUCTURE UNIVERSE VALUATION SUMMARY (FORECASTS)

P/E2015

EPS Growth 2 YR CAGR2015/2013

EV/EBITDA 2015

Dividend Yield2014

Debt/EV

Regulated Utilities 16.1x 5.7% 11.1x 4.1% 38.5%

Integrated Utilities 14.7x -0.8% 7.7x 4.0% 39.2%

Oil/Gas Storage & Transports 22.0x 11.9% 15.8x 4.1% 26.1%

Transportation 17.7x 16.6% 7.6x 2.2% 21.3%

Communication 17.1x 14.4% 16.4x 1.6% 28.2%

Global 17.9x 8.7% 11.8x 3.6% 31.0%

Source: CBRE Clarion, Bloomberg, FactSet, and Global Infrastructure & Utilities 50-50 Index as of 09/30/2014. Forecasts based mostly on consensus estimates. This is for informational purposes only, is subject to change, and is not intended as investment advice, or a guarantee of future results. Forecasts and any factors discussed are not a guarantee of future results.

propane in the world and will soon be exporting ethane as well. We are positive on those companies that are positioned to capitalize on these opportunities in the coming years.

We retain a favorable view of the railroad sector in North America. Volumes are expected to be robust for the third quarter earnings season, as demand continued to bounce back after a severely weather impacted fi rst quarter. Over the medium term, the improving economy will lead to increased freight activity and better volume and pricing for the railroad stocks. In addition, we believe that the crude-by-rail theme remains intact as rail networks offer oil and gas producers fl exibility in their supply chain by providing immediate transportation capacity without the need for long-term commitments.

Demand for renewable energy is increasingly globally. China, Japan, Europe and the U.S. are all investing hundreds of billions of dollars to reduce reliance on fossil fuels through investment in solar, wind, biomass and hydroelectric projects. The result of many years of this investment is that the costs for renewable technology are decreasing, making

them more competitive with traditional power generation. We are positive on renewable energy companies globally and we expect continued growth in the renewable sector for years to come.

U.S. utilities are faring well this year due to their bond-like characteristics, but it is those with exposure to power markets that are becoming more attractive in our view. The polar vortex winter of 2014 sparked fear among regulators and policy makers and they are beginning to act. In order to ensure reliable power supply, the U.S. is undergoing a change in thinking on demand-response and capacity markets, two levers available to the regulatory bodies to encourage (through both incentives and penalties) power availability.

While the outcome is still to be decided, we believe that companies exposed to power markets may benefi t from rising demand and limited supply, enabling stronger and more predictable earnings.

LIQUID AND DIVERSE INVESTMENT UNIVERSEThe global listed infrastructure universe is broad and diverse, consisting of over

400 companies and over $3 trillion in equity market capitalization. Investors have the opportunity to invest in a liquid, diversifi ed portfolio with exposure to varied regulatory, political and economic exposure, while also targeting areas where infrastructure investment is accelerating and driving earnings growth.

LISTED INFRASTRUCTURE STOCKS TRADE AT ATTRACTIVE VALUATIONS

The average dividend yield is 3.6% and earnings are projected to grow a compounded 8.7% the next 2 years. The average multiple of 11.8x EBITDA is a discount to private market transactions that have occurred in the market this year for a range of infrastructure assets (utilities, gas pipelines, airports and towers).

Our expected total return is driven by the yield and earnings growth with upside should the public market trade closer to private market valuations.


EURO

PEAN

OU

TLOO

K

EUROPEAN OUTLOOK

THE UK BOOM CONTINUES BUT CORE EUROPE STAGNATESTo start with the economic backdrop, the dichotomy between the UK and Eurozone has widened further. UK data have surprised on the upside, resulting in markets pricing in an interest rate tightening cycle in synch with that in the U.S. The big difference is that the UK, unlike the U.S., has not deleveraged at the household level, so the Bank of England will be cautious about how far and fast to raise rates. But the message is clear, the years of an extremely accommodative policy backdrop are drawing to a close. Meanwhile, domestic demand is strong, but the

potential UK referendum on whether to remain a member of the European Union in 2017, could result in hiring and leasing decisions being put on hold. Accordingly, most forecasters expect 2014 to be the peak year for growth. That said, the forecasts for London remain the strongest of any major metro area in Europe, and pleasingly, are driven by fundamentals strong population growth. The upshot is that the UK should experience solid growth, stronger in London, but with rising interest rates, a less marked rise in bond yields, and given the potential referendum, increased exchange rate volatility.

EUROZONE GROWTH ROTATES FROM THE NORTH TO THE SOUTHBy contrast, the Eurozone data since the last edition of Global Vision have disappointed on the downside, and most worryingly its the Northern core markets that are stagnating France from a lack of structural reform depressing corporate decision-making, and Germany from the strength of the Euro and weakened sentiment during the Ukraine crisis.

More widely, with infl ation ebbing lower, there is a serious risk that the region falls into defl ation, and while the European Central Bank is poised to introduce quantitative easing, Figure 1 shows that it needs a substantial balance sheet expansion just to get back to its 2012 level, let alone to get it up to the level needed to refl ate the economy. And as Japan shows, even at levels of c60%, QE cannot work in a vacuum: France and Italy must also structurally reform. By contrast, the smaller Southern European economies have taken tough decisions and this is refl ected both in their current very robust growth rates and the forecasts. Unfortunately they just arent large enough to drag up the Eurozone

FIGURE 1: The UK Forward Curve Is Flattening

Source: Bank of England

The key theme for Europe in this edition of Global Vision is rotation from prime to secondary; from North to South and

in the UK from London to the regions.

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average. However, the better growth prospects do translate into relatively attractive demand fundamentals and property returns. The upshot is that the Eurozone is set for a period of ultra-low interest rates and infl ation, coupled with a decent recovery in the South, and weaker growth in the North. How far this turns around depends on how far the Euro depreciates against the Dollar thus helping Germany and how far France and Italy break their political deadlock.

NORTHERN SAFE HAVEN MARKETS OFFER DEFENSIVE INCOME BUT AT A HIGH PRICE

What Does This Mean For Real Estate?

From a capital market perspective, despite rising interest rates, the fl attening of the bond yield curve and increasingly competitive margins of debt should mean that real estate can provide attractive cash on cash yields even as property yields compress. And for those seeking higher risk-adjusted returns, the rotation into good secondary assets with some leasing risk in the major UK cities is likely to continue given the broad-based recovery in occupier demand.

However, as we reach the back end of the fi ve-year forecast period, the UK, like the U.S., is likely to be facing higher interest rates, higher supply and rents that have passed their peak, resulting in a typical cyclical slowdown.

Accordingly, on a fi ve-year view the forecasts for portfolio returns on core unlevered UK property now sit at the lower end of the rankings, as shown on page 11. This is entirely to be expected given that the UK led the rest of Europe both into and out of the last cycle and is doing so once again.

Just as the portfolio return forecasts show the recovery moving from the UK to the Continental Europe, within that market it is rotating from the northern safe haven markets to the southern recovery markets and the Central and Eastern European emerging markets.

The problem is that prime property in Germany and France, and indeed Sweden, is now trading at yields that are near to their previous cyclical lows. But without the fundamental economic and occupier market recovery, one is paying a relatively keen price for defensive income, and this shows in the relatively low forecast portfolio returns.

Indeed, the prospect of massive QE in the Eurozone suggests that, if the U.S. and UK experience is any guide, there is room for our forecasts to be under-estimating just how far prime yields could fall.

Moreover, without that fundamental economic recovery, the attraction of moving into secondary cities for yield compression is less compelling than in the UK. One can still, of course, move into regional cities for a higher yield, but even Tier 1 cities are operating with markedly lower liquidity than London and Paris, moving into Tier 2 comes with even higher illiquidity.

HIGHER RISK-ADJUSTED RETURNS ARE AVAILABLE IN THE SOUTH AND CEE

As a result, there are two themes which are arguably more attractive. The fi rst is to look at the Southern European recovery markets. To be sure, yield compression has been incredibly rapid in Spain, and is starting to take place in Portugal. Moreover, investors could be over-estimating how quickly the economic recovery translates into a rental recovery given the overhang of space in some markets.

Nonetheless, in terms of capital value per square metre, good quality assets in these markets look attractively priced, and the painful structural reforms that have been undertaken have set these markets up for higher trend growth rates than France and Italy. This is refl ected in our revised forecasts for portfolio returns in Spain and Portugal that exceed those for some CEE markets over the next fi ve years.

This brings us nicely to the CEE markets, where stronger economic growth forecasts coupled with an emerging middle-class makes for a potent mix. The problem is that this is obvious demand growth, and not undetected by developers. As a result one does have


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to be careful about oversupply and the Warsaw offi ce market is a great example at present with the largest absolute volume of supply of any European market excluding London.

Unsurprisingly, the offi ce forecasts calls for lower returns in Warsaw than in the less mature but rapidly recovering markets of Budapest and Bucharest. This holds true for the other property types. Although less supply issues and more a refl ection of higher in-going yields that still have room for yield convergence with the more CEE mature markets, and stronger fundamental demand growth.

EUROPE THROUGH THE LOOKING GLASS

Overall, the outlook for Europe is the diametric opposite of the post-fi nancial crisis norm that took hold between 2010 and 2013, where investors favoured the UK for growth and yield compression and the northern major markets for defensive income, while shunning the distressed Southern European markets.Today, the UK is still favoured but investors have turned to regional cities and value add strategies as standing investments in the South becoming increasingly expensive. The northern safe havens still promise defensive income but with the Southern European markets bouncing

back, no longer look as attractive on a relative basis. And where Spain was once untouchable, yield compression is now driving investors into Portugal and Northern Italy.

Looking ahead, as we have explained, this has had a marked impact on our forecasts for portfolio returns with the South and CEE looking more attractive than the core Northern markets. Indeed, the UK looks similar to the U.S. with the same challenge of how real estate will react to higher interest rates, good but not spectacular growth, and the inevitable cyclical slowdown at the end of the fi ve-year forecast period.


NEAR TERM STRENGTH

The near term outlook for the UK economy and its property market has improved yet again since our last Global Vision. UK growth has been surpassing its trend for the previous fi ve quarters, positioned to be the strongest performer amongst major developed economies in 2014. While accommodative monetary policy unquestionably lends a hand, the current economic vigor is also a function of successful structural reforms brought about through austerity budgets and the relative dynamism of many segments of the economy.

Reassuringly, the grounds for growth are becoming broad-based. This is affi rmed in sentiment surveys from the services and manufacturing sectors, offering promise for commercial real estate occupational demand. The consumer has good reason to be chipper. Household spending is being bolstered by employment growth, improving credit availability and the wealth effects of accelerating house price rises. With a benign infl ation outlook and monetary policy likely to remain loose, at least over the near term, conditions are ripe for this momentum to continue.

MEDIUM TERM QUESTION MARKS

Notwithstanding the current robust recovery phase, we remain somewhat skeptical about the medium-term sustainability. After all, there has been a lack of progress at shifting the balance of the economy away from private consumption and towards private-sector investment and exports. This is of particular concern given that an indebted household sector has been running its savings down and is

vulnerable to interest-rate increases. Furthermore, a prolonged period of sluggish real earnings growth is likely if weak productivity trends are not reversed.

Owing to these countervailing forces we adopt a cautious view about the growth potential in the outer years of the forecast horizon, one that is evident in our property market forecasts (Figure 1).

UK PROPERTY PERFORMANCE

RETURNS REBOUND

The economic backdrop in the UK is clearly supportive for commercial property. According to recent indices, all property total returns for were nearly 20% year-to-date through August, with capital growth accounting for the bulk of that return. While London has been able to deliver sustained strong performance, the regional story is gaining pace. Admittedly, the components driving performance are different. In the regions, yield shift is by far the biggest contributor to capital

FIGURE 1: All Property Total Return Components

Source: CBRE Global Investors August 2014 forecasts

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value growth. While this phenomenon has been particularly pronounced over the last six months, we believe that there is scope for further inward movement. In contrast, rental value growth is making a notable contribution in London and the South East.

A LANDLORDS MARKET

Occupational markets are fi nally demonstrating momentum. Buoyed by greater optimism in the domestic outlook, UK businesses are taking decisions on space requirements that they had previously found reasons to postpone. Within our own directly held portfolios, we are signing more leases

and offering fewer incentives to do so.Regional offi ces are moving from strength to strength. Grade A vacancy rates are falling quickly in a host of regional centers and rent free periods are drifting in. Taken together, we can assert that a landlords market is fi nally returning.

BUYERS ARE BACK

UK capital markets have proven rather buoyant in recent quarters as an increasingly diverse pool of buyers target the market. The recent sales of a partial stake in the Bluewater Shopping Centre and a prime offi ce asset on Hannover Square in Londons West End offer proof of just how much capital is deployable at the moment. There were at least ten distinct all cash offers vying for these two assets, implying nearly 10bn of dry powder. Competition for more digestible lot sizes also remains fi erce.

This has been most pronounced for South East offi ces, high street retail in Cathedral towns, multi-let industrials

and assets with infl ation-linked income streams - segments of the market appealing to different return profi les. With property investors keen for a bit of risk, debt fi nancing becoming more attractive and propertys still-compelling spread to the risk free rate, 2014 is on track to be the most active year in terms of transactions since 2007.

ANOTHER GOOD YEAR AWAITS

Given the anticipated weight of capital vying to enter the market and strengthening occupier fundamentals, the potential for above-trend property performance exists over the coming year.

A strengthening rental outlook for London offi ces, South East offi ces and industrial property should boost the broader market. The appearance of rental growth that is increasingly being priced into asset underwriting in other segments of the market will determine if performance continues with such vigor beyond 2015.

The scale of change in Central Londonhas been fundamental. Led by a diverse lot of offi ce occupiers who are no longer

wedded to traditional locations, the number of under offers has reached a

post-crisis high.


OCCUPIER MARKETS WELL BALANCED

Germanys economy is expected to grow at historic averages over the medium-term, although a moderate slowdown is anticipated in the next few quarters as result of rising geopolitical risks and defl ationary trends across Europe. Occupier markets are stable, but do not outperform in the current economic environment. Consumer demand is balanced and retailers race for prime space in prosperous German regions will persist. Offi ce and logistics occupiers are remaining rather reluctant with regard to re-location or expanding space. Above average owner occupier demand is driving the logistics market to some extent. Occupiers often decide to own (build) rather than rent the logistics facility in the current low interest rate environment. Across all sectors, speculative construction is at reasonable levels and vacancy rates are declining. (Figure 1) Known pipeline-projects are not expected to put downward pressure on rents, which are forecasted to increase moderately over the next years across the key real estate sectors.

INVESTOR DEMAND STRONG

Documents

Global Vision H2 2014