RREEF Real Estate Global Real Estate Strategic Outlook April 2012

RESEARCH REPORT
Global Real Estate Strategic Outlook
April 2012
Prepared By:
Mark Roberts Global Head of Research mark-g.roberts@rreef.com Alan Billingsley Head of Research, Americas alan.billingsley@rreef.com Leslie Chua Head of Research, Asia Pacific ex-Japan/Korea leslie.chua@rreef.com Simon Durkin Head of Research, Europe simon.durkin@rreef.com Marc Feliciano Chief Investment Officer, Americas marc.feliciano@rreef.com Paul Keogh Chief Investment Officer, Asia Pacific paul.keogh@rreef.com Gianluca Muzzi Chief Investment Officer, Europe gianluca.muzzi@rreef.com Koichiro Obu Head of Research, Japan/Korea koichiro.obu@rreef.com Kurt W. Roeloffs Global Chief Investment Officer kurt.w.roeloffs@rreef.com
Table of Contents
Executive Summary ............................................................................. 2 Global Portfolio Considerations and Risks ........................................... 3 Real Estate Performance ..................................................................... 8 Economic Outlook .............................................................................. 11
United States .........................................................................................................13 Europe....................................................................................................................14 Asia Pacific ............................................................................................................15
Capital Markets Outlook ..................................................................... 16

Real Estate Fundamentals ................................................................. 21

Conclusion ......................................................................................... 33 Appendix ............................................................................................ 34 Important Notes.................................................................................. 36 Global Research Team ...................................................................... 37
RREEF REAL ESTATE Global Real Estate Investment Outlook and Market Perspective | April 2012
Executive Summary
Globally, real estate continues to offer attractive value relative to the bond market with lower volatility in contrast with the equity market. Despite concerns that real estate values increased too quickly or capitalization (cap) rates fell too much, initial yield spreads are wide compared to government bonds and real estate capital values remain well below their peak levels. At the same time, public debt-to-GDP ratios are elevated and countries struggle to build economic momentum. In this environment, we recommend investors target urban areas and property sectors which not only provide greater certainty of income to protect against downside risks, but also provide an opportunity to capture higher net operating income as economic growth improves over the next several years. The following highlights our key findings: Global Portfolio Considerations and Risks: We continue to believe global investors should overweight the Asia Pacific region by 3 percentage points relative to global stock estimates by DTZ. Balance sheets are healthier than in the Western world, and real estate fundamentals remain stable. The outlook for the United States is also improving and warrants an overweight of 2 percentage points, notwithstanding currency and tax effects which are an important consideration for investors. In the United States, 2011 marked an inflection point as vacancy rates started to improve across the commercial sectors. Turning to Europe, we recommend an underweight of 5 percentage points relative to global stock estimates. Certainty of income in the stronger economies of France, Germany, the Nordics and the United Kingdom should provide protection against downside risks. Assets in these markets are also expected to outperform as sovereign risks are reduced. Total Return Outlook: We forecast returns in a majority of covered markets and sectors globally will range from 6.5 percent to 11 percent. Clearly there are outliers on either side of this range. In the near term, we expect a greater portion of total return will be driven by income. Forecasting global economic momentum improving in 2013, we expect higher levels of income growth. Capital Market Trends: Capital flows into real estate are expected to increase in 2012. Relative to the bond market, initial yield spreads have reached historic levels and stand in excess of 400 basis points relative to a longer-term average of 100 to 300 basis points. Granted, interest rates will likely remain suppressed. Still, with limited new construction on the horizon, net operating income during the next five years will be driven by a combination of both rent growth and rising occupancy. These factors are likely to attract capital and support liquidity for the asset class. Key Strategies by Region: In the Asia Pacific region, we recommend targeting the retail and logistics sectors more broadly and the office sector more narrowly. Efforts to support a growing middle class will result in a need to upgrade obsolete logistics and retail centres. These sectors also provide higher income yields today relative to office properties. We recommend greater selectivity in office investing, mostly targeting Australia and Japan. In Europe, while a painful restructuring is underway in Southern states, the core markets of Germany, United Kingdom and the Nordic region have lower levels of unemployment and will benefit from structural reforms among the Europe Union
as the growth outlook improves. Tactically, Ireland and select cities in Italy and Spain provide compelling value-added and opportunistic strategies today. Turning to the United States, we recommend a modest pro-cyclical approach with greater emphasis on the industrial and office sectors while maintaining a meaningful allocation to apartments and retail to protect against downside risks.
Global Portfolio Considerations and Risks

Globally, real estate investing continues to offer attractive risk-adjusted returns relative to other asset classes. Initial yields are significantly higher than the bond market. While our real estate return forecasts are broadly in line with the equity market in the range of 8 percent, volatility in the real estate market is lower. Despite concerns that real estate values have increased too quickly and cap rates fallen too far, the latest performance figures from the International Property Databank (IPD) indicate that capital values generally remain well below their peak levels.
Capital Value Trends Globally

Peak-to-Trough Decline 20%
13%
Increase Since Trough
Values Relative to Peak

15% 10%
10%
4% 3% 0% 1%
5% 0% 0%
2%
5% 0%
0% -10%
-12% -3% -9% -15% -13% -3% -4% -3%
-8% -8%
-8% -11% -14% -14%
-9% -10% -10% -11%
-7%
-20% -30% -40%
-23% -28% -34% -33%
United Kingdom
Netherlands
Finland
Portugal
France
Sources: RREEF Real Estate, IPD, data as of December 2010 for Denmark, Finland, Netherlands, Norway, Portugal and Sweden. Data as of 2Q2011 for France. Data as of 3Q2011 for Australia and New Zealand. Data as of December 2011 for UK, USA and Canada. As of March 2012.
As presented in the chart above, the United Kingdom led the global downturn as capital values declined 34 percent following the peak in 2006. Over the last five years, capital values have only risen 10 percent and remain 28 percent below peak levels (as of December 2011). Similarly in the United States, capital values peaked a year later in 2007 and faced a precipitous decline over the ensuing six quarters falling 33 percent. With the outlook for growth improving in the United States, investors have taken notice and capital values have risen by 15 percent yet also remain 23 percent below their peak levels. Turning to other parts of the globe, a similar pattern emerges, although not to the degree experienced in either the United Kingdom or United States. For example, given the strength of the Australian market, which is due in part to the thirst for commodities by China, property prices did not decline to the same degree. Nevertheless, values remain 12 percent below the previous peak.
United States
Australia
Canada
Denmark
Norway
New Zealand
Sweden
The question now becomes: Despite the increase in capital values, does real estate continue to offer intrinsic value relative to the bond market? Based upon the most recent transaction activity, we believe so. Utilizing data from Real Capital Analytics, the following chart highlights initial yields versus national sovereign interest rates in key markets. Globally, assets are trading at extremely wide initial yields relative to local bond rates. The Netherlands and the United States show the highest spread at 556 basis points and 555 basis points, respectively. Even in Japan, which is typically known for its low initial yields due to its low interest rate environment, spreads are amongst the highest across the globe standing at 512 basis points, as of February 2012. In Europe, now that the ECB has finally reduced short-term interest rates in an effort to support growth and offset austerity measures, initial yield spreads widened and currently stand well above average.
Capitalization and Risk Free Rates

Fourth Quarter 2011
Spread Netherlands, 556 bps United States, 555 bps Sweden, 528 bps Canada, 526 bps Japan, 512 bps Germany, 507 bps Australia, 476 bps United Kingdom, 474 bps France, 347 bps Singapore, 207 bps Hong Kong, 177 bps Spain, 141 bps Italy, -61 bps 0%
Note: Includes all commercial properties. Source: Real Capital Analytics. As of February 2012.
Cap Rate Risk Free Rate
2%
4%
6%
8%
10%
One could argue that wide initial yield spreads are simply driven by risk aversion as investors seek safety in government bonds. In other cases, investors may take the view that inflation and interest rates are going to increase. As such, they may require a minimum initial yield which is creating elevated spreads against a backdrop of low interest rates. However, it is important to contrast the levels we are seeing today with those we witnessed at the peak of the market in 2006 and 2007. During the market peak, initial yield spreads were in the range of 200 basis points in Asia, 100 basis points in the United States and 50 basis points in Europe. Today, yield spreads are significantly higher, and more importantly, the risk of improving fundamentals improving is greater than the risk of deteriorating fundamentals. In 2007, occupancy rates in many markets and sectors across the globe stood at peak levels. As a result, some investors bid-up prices and drove down cap rates on the belief they would be compensated through robust near-term rent growth. Unfortunately, investors were sorely disappointed, as tenant demand waned in the midst of a construction cycle, fuelling rising vacancy rates. Fundamentals are quite different in the current market. 2011 marked an inflection point in fundamentals in the United States. With scant construction and rising employment growth,
vacancy rates have started to decline. In the Asia Pacific region, vacancy rates are stable with the exception of a few notable office markets, namely Hong Kong and Singapore which, after a rapid recovery, are at risk for slowing. In Europe, while vacancy rates have stabilized in Germany, France and the Nordics due to the euro crisis, they are generally lower than the levels experienced during the peak in the credit crisis. As such, we believe the next several years will provide investors an opportune time to invest in real estate globally. Not only can investors capture higher going-in yield on lower capital values, but investments made during the recovery portion of the cycle will likely garner higher net operating income growth. As construction levels remain limited globally, any improvement in job growth and leasing activity will directly translate into lower vacancy, positive net absorption, and higher net operating income growth. Finally, when constructing a global portfolio, we believe it is important to not only address the outlook on relative value as described above, but also important to appreciate the intrinsic characteristics of markets. The return potential of any market reflects the nature of the political, social and economic advantages one market holds versus another. To simplify this analysis, we can compare the relative systematic risk of one country versus another utilizing global performance data from IPD. This view holds important implications for investors as they construct a global portfolio. In the chart below, we show the systematic risk, or beta of major countries across the globe.
10 Year Betas in Relation to the IPD Global Index

Betas 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2
Sources: IPD and RREEF Real Estate. As of March 2012.
From a global perspective, Europe tends to offer more defensive characteristics while the United States offers more offensive characteristics. In an improving global market, relative performance can be enhanced with greater exposure to the United States. In contrast, both Australia and Japan also appear to offer defensive characteristics, as each produces a beta of less than 1.0 relative to the Global IPD Index. We are mindful of the tax and currency issues investors face on a global basis. In some instances, currency hedging can add to performance, but from a downside perspective, tax and currency hedging can consume as much as 1.5 percent to 3.0 percent of total returns depending upon the investors domicile.
Nevertheless, the systematic risk is a function of the intuitive insights investors have about these markets. In Europe, longer-term lease structures or planning constraints create defensive characteristics. In addition, tenants often bear the burden of capital expenditure costs. As such, Europe can provide greater certainty of income. At the opposite end of the spectrum, lease structures in Japan are shorter than in other global markets. Frequent mark-to-market information on rents in Japan allows for greater insight on capital value trends, serving to reduce volatility. In addition, it is more difficult to assemble land parcels due to strata title and fractured land ownership, slowing the pace of development. In the United States, there are generally fewer supply constraints compared to other global markets, and the volatile nature of the real estate cycle is more pronounced than what is witnessed in either Europe or Asia. As such, the United States generally experiences higher downside as well as the upside risk.
Global Real Estate Allocation

Neutral Global Portfolio RREEF Real Estate Recommended Regional Weightings
Europe 37%
Asia Pacific 31%
Europe 32%
Asia Pacific 34%
United States 32%

Source: DTZ (As of June 2011) and RREEF Real Estate (As of March 2012).
United States 34%
Regional Allocation House View

Taking the differences between the three regions into consideration, we have developed our House View on global allocation. Our view is based on a few key assumptions. First, based on DTZs estimate of invested stock globally, a neutral global portfolio would have an allocation of 37 percent to Europe, 31 percent to Asia Pacific and 32 percent to the United States. Reflecting our view that the global economy will begin to recover later in 2012 and 2013, we recommend a modest pro-cyclical weighting, leading to an active overweight of 3 percentage points to Asia Pacific, 2 percentage points overweight to the United States and an underweight of 5 percentage points to Europe during the next three to five years. This recommendation is blind to tax and currency effects, which could diminish the benefits of excess performance from this weighting depending on investor domicile. The table on the following page highlights the rationale behind our weighting recommendation.
RREEF Real Estate Global Strategy

Region Descriptions
Economic growth supports higher tenant demand for property. United States Overweight (+2%) Limited new construction and declining vacancy combined with wide yield spread leads to attractive total returns. We recommend a pro-cyclical weighting which results in active overweight to industrial and office on a combined basis. Protect against downside risk by maintaining a meaningful allocation to retail and apartments relative to the NCREIF Index. Government, household and corporate balance sheets are healthier in Asia Pacific than other parts of the globe. Governments still have fiscal and monetary ammunition to support growth. China is implementing policies to support domestic consumption. Asia Pacific Overweight (+3%) Vacancy rates across the region are generally lower than in Europe and the United States. Initial yield levels are lower, and the spread to sovereign yields is competitive with the United States. Strengthening domestic consumption supports retail demand. Industrial sector is expected to have the highest total return over next five years, driven by external trade supported by recovering economies in developed countries. Mixed but strong overall performance in office sector due to significant yield compression in some markets and tenant preference for upgraded space versus obsolete space. Austerity programs have resulted in higher unemployment and weaker tenant demand. However, lower inflation reduces the risk of higher cap rates at exit. New construction pipeline has eroded which supports the fundamentals as markets recover. Europe Underweight (-5%) Vacancy rates remain relatively stable, yet rent growth is minimal and we expect some declines in Southern Europe. Stronger income return from logistics in key logistics hubs protect on downside risk. With limited new development, expect capital values to rise as recovery occurs. We expect prime shopping centers to outperform offices and logistics due to stable, yet low retail sales growth. Offices in London, Stockholm and Munich are still expected to be among the outperformers. Meanwhile, we expect performance of offices in Spain and Italy to lag.
Sources: RREEF Real Estate. As of March 2012.
The table on the next page presents our expected real estate investment return forecasts and risks by city and by property sector for major global cities. The cities are grouped by excess expected return which reflects our outlook for total returns less current yields on sovereign debt. Markets were grouped into three categories, outperform, market perform and underperform relative to one another within their region. The risk ratings represent the historical volatility of returns. In this context, risk does not necessarily represent a bad expected outcome, but rather it reflects the uncertainty of returns relative to one another as demonstrated by past performance. As such, we counsel investors to consider risk and return together to develop an appropriate strategy which serves their investment objective. For example, we believe markets such as San Francisco and Hong Kong office both demonstrate above average uncertainty in future returns. From a cyclical perspective though, the fundamentals in San Francisco have only recently started to improve and initial yields relative to bonds are high, so there may be a greater chance that total returns exceed our expectations. The reverse appears true in Hong Kong. Fundamentals are currently favourable. Both vacancy rates and initial yields relative to sovereign yields are
low. While we expect substantial rent growth in the near term, economic growth in the region has subsided and the government is encouraging development. In addition, the Hong Kong dollar is pegged to the U.S. dollar and rising interest rates in the United States could impact capital values in Hong Kong. We believe these factors could lead to underperformance in the medium term.
Global Real Estate Market Excess Return and Total Investment Risk Profiles of Forecasts (2012 to 2016)
Low Risk United States Asia R-Miami-Ft.Lauderdale I-Tokyo R-Seattle R-Singapore R-San Jose Europe I-Amsterdam I-Rotterdam United States I-Los Angeles R-Los Angeles I-Seattle R-Washington DC Average Risk Europe (cont.) United States I-Miami-Ft.Lauderdale R-Sweden R-United Kingdom Asia Europe I-London O-Beijing I-Marseille O-Tokyo I-Paris R-Beijing O-London: City R-Kuala Lumpur R-Poland R-Tokyo Europe United States Europe I-Hamburg A-Boston I-Frankfurt O-Amsterdam A-Los Angeles O-London: West End O-Munich A-Miami-Ft.Lauderdale R-Italy R-Belgium I-Atlanta R-Netherlands R-Germany I-Boston Asia I-NYC-Northern NJ I-Melbourne O-Chicago I-Sydney Asia I-Hong Kong O-Dallas O-Melbourne R-Boston O-Seoul R-Chicago O-Sydney R-San Francisco R-Shanghai Asia United States Europe I-Taipei A-Atlanta I-Madrid O-Kuala Lumpur A-Chicago O-Milan O-Taipei A-Dallas O-Paris: CBD R-Melbourne A-Washington DC O-Paris: La Dfense R-Sydney I-Dallas O-Stockholm R-Atlanta R-France R-Dallas Asia R-Taipei High Risk United States Europe I-San Jose R-Spain O-Boston O-Los Angeles Asia O-Miami I-Beijing O-NYC-NorthernNJ I-Shanghai O-San Francisco O-San Jose O-Seattle United States Europe A-NYC-NorthernNJ I-Prague A-San Francisco O-Frankfurt A-San Jose O-Warsaw A-Seattle A-Washington DC I-Washington DC Asia O-Atlanta I-Seoul R-NYC-NorthernNJ I-Singapore O-Shanghai R-Hong Kong R-Seoul Europe Asia I-Milan O-Hong Kong O-Madrid O-Singapore
Average Return Underperform
Outperform
United States I-Chicago O-Washington D.C. Europe O-Brussels O-Hamburg
Markets with the highest ratio of the expected excess return to risk
A: Apartments I: Industrial O: Office R: Retail centers
Markets with the lowest ratio of the expected excess return to risk
Source: RREEF Real Estate. As of March 2012.
Real Estate Performance

2011 Real Estate Performance
Based on the most recent reports available from NCREIF and IPD, real estate returns performed well across the globe in 2011. Asia Pacific produced a broad range of returns. In Australia, total returns over the trailing 12 months as of the end of the third quarter of 2011 were 10.5 percent (the most recent data available). In addition, returns were balanced across each property sector with each sector producing returns within a narrow range. A majority of the return was driven by income which registered 7.5 percent and capital growth of 2.9 percent. These returns were higher than the 9.3 percent return posted in 2010. In Japan, IPD reports monthly returns through October of 2011. At that time, total returns in Japan registered only 3.5 percent for the year reflecting an income return of 5.3 percent and a capital decline of 1.7 percent. However, this trend underscores the disparity in returns across sectors. The office sector posted the lowest return of 1.9 percent driven by
capital value declines of 2.9 percent. In comparison, the logistics sector registered a total return of 8.4 percent driven by healthy income levels of 5.9 percent and capital growth of 2.4 percent. Turning to Europe, IPD reported on the Pan-European fund returns. As of the third quarter of 2011 (the most recent data available), funds across Europe posted a total return of only 5.1 percent for the trailing twelve months. On average, these funds were leveraged 39.4 percent. In the United Kingdom, IPD reported performance on a similar fund index at year-end 2011. The pooled funds in the United Kingdom have an average leverage level of 16.5 percent and produced a total return of 7.1 percent. Finally in the United States, NCREIF reported that the NFI-ODCE (fund) index, which had a leverage level of 25 percent, delivered a total return of 16.0 percent for 2011. In addition, the NCREIF Property Index, which reports performance of unleveraged property level performance, posted total returns of 14.3 percent for the year. This was up slightly from the prior year when real estate delivered a total return of 13.7 percent. Income returns comprised 6.1 percent while capital value gains accounted for 7.8 percent.
Real Estate Performance Outlook

Looking forward, total returns will likely moderate to more normalized levels in 2012 before improving into 2013. The following total returns are drawn from our global cities markets which reflect prime markets in each region. Because the forecasts are for prime markets, the total returns are modestly lower than what can be achieved with average returns in each region. In addition, return forecasts in each region are based on an equally-weighted forecasts in line with our economic and real estate fundamental outlook. On a nominal basis, the Asia Regional Total and Excess Return Forecast Pacific will likely lead, with 2012 to 2016 stronger fundamentals driving Total Return Excess Return 9% performance through higher 8% rent and income growth. In 7% contrast, a greater portion of 6% 5% total return in the United States 4% will be driven by income yield in 3% 2% the short run. As vacancy rates 1% decline in 2013, we expect 0% higher levels of net operating United States Europe Asia Pacific income growth leading to Source: RREEF Real Estate. As of March 2012. appreciation. Turning to Europe, vacancy rates will remain relatively stable despite the backdrop of the euro crisis. As such, most of the total return is driven by yield. As euro risks fade later this year, the market is well poised to experience higher rent levels. Within each region, we believe additional excess performance can be achieved by overweighting property sectors and markets within a region. The following charts highlight our expected nominal and excess return by sector within each region.
Regional and Property Type Total Return Forecast 2012 to 2016

12% 10% 8% 6% 4% 2% 0%
Regional and Property Type Excess Return Forecast 2012 to 2016

10% 8% 6% 4% 2% 0%
Note: Excess return is over national sovereign yields. Source: RREEF Real Estate. As of March 2012.
Economic Outlook
While economic momentum in the United States is improving, the debt crisis in Europe and the soft-landing being engineered in China have impacted the global economy. As a result, we believe the global economy is set to grow at a slower pace in 2012. The implications for real estate are two-fold: 1) the amount of tenant demand in both Europe and the Asia Pacific region are likely to slow; and 2) with demand slowing, the risk of inflation has receded. Notwithstanding sovereign credit risks, the probability of rising interest rates, which would cause initial yields on real estate to rise, is limited. While we expect lower global GDP growth in 2012, our outlook improves in 2013 and 2014. As highlighted in the chart below, the Asia Pacific region is expected to lead followed by the United States and Europe.
Projected GDP Growth

2012 30 25 20
Percent
2013
2014
15 10 5 0 -5
Sources: IHS Global Insight. As of March 2012.
Other factors supporting our view on global growth include: While there are significant differences by region across the globe, in the aggregate, the slower pace of economic growth can be seen in the purchasing managers indices (PMI), trade and real fixed investment. We expect lower levels of growth in the first half of 2012 before increasing in the second half. Offsetting these risks is the reduction in volatility seen across the globe. Owing in part to concerted efforts by the European Central Bank, Chinas commitment to growth and positive leading growth indicators from the United States, financial volatility has receded. In particular, U.S. money markets have significantly reduced exposures to European sovereign debt resulting in lower risk. At the same time, European banks are reducing lending to both Europe and Asia which results in modestly lower liquidity in those regions. In addition, the pace of lending remains subdued in the United States. Additionally, the regulations required by Basel III will curb the overall pace of lending until banks can adequately recapitalize their balance sheets.
Stock Volatility and U.S. Inflation Expectations

VIX index 70 60 50 40 30 20 10 0
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
U.S. CBOE VIX
Cleveland Fed Inflation 1 Year Expectations 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0%
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Source: CBOE, Federal Reserve Bank of Cleveland. As of March 2012.
The silver lining to the reduced pace of growth globally is the significant reduction in inflation risks. During the last several months, oil, food, metals and raw materials prices have stabilized and even declined modestly. Nevertheless, potential conflict with Iran increases downside risk to growth forecasts, as evidenced by recent increases in oil prices. By region, advanced countries in the Asia Pacific region and emerging markets are expected to lead the globe with growth ranging from 5 percent to 6 percent as reported by the IMF. With momentum in the United States increasing, 2 percent to 2.2 percent growth is expected. Europe is expected to trail and produce growth shy of 1 percent in 2012. The greatest issue facing economies across the globe is the overhang of debt. This is especially critical in the advanced economies where the median age of the population is significantly higher than in the emerging economies. (See the chart on next page which shows debt-to-GDP versus age). While the debt-to-GDP ratio for European countries is generally lower than in the United States, the population in Europe is older and suggests its debt issues must be resolved sooner. While the United States has a time advantage due to a younger population, it too must address this issue. The economies with the highest overhang of debt will likely see lower levels of government spending which will serve to reduce the optimal amount of growth. With growth remaining below optimal levels, we expect to see elevated unemployment during the next five years compared to the levels witnessed during the last 10 years. As such, advanced economies are likely to see higher levels of savings and productivity, and lower levels of consumption. When combined with slack labor markets, the risk of inflation has clearly been reduced. The risk of higher inflation and interest rates are diminished in the short run due to subdued price inflation and slack labor markets. Together, this trend poses a lower risk of elevated exit cap rates. Still, to hedge the risk of higher inflation rates, we generally recommend targeting shorter lease structures. Additionally, as the economic outlook improves in 2013, we expect rent levels to increase more broadly. Assets with exposure to shorter term lease structures can more readily capitalize upon these trends.
Median Age vs. Debt/GDP Ratio

Asia 160 150 140 130 120 United States Ireland Portugal Canada France Poland China South Korea Czech Republic Sweden Hong Kong Norway United Kingdom Netherlands Spain Italy Japan Greece Europe North America
Japan (actual): Debt to GDP: $220
Debt as % of GDP (percent)
110 100 90 80 70 60 50 40 30 20 10 0 34 35 36 37 38 39 40 41 42 43 44 45 Australia Germany
Median Age (years)

Note: Bubble size is in relation to relative nominal GDP. Source: IMF and CIA World Factbook. As of March 2012.
U.S. Economic Outlook

Although far from robust, the economy continues to demonstrate steady gradual improvement. The weekly initial unemployment claims, a leading indicator for employment growth, ended 2011 at 375,000 on a four-week moving average and continued to head lower. More recently, the four-week moving average declined to 359,000 in February, below the key threshold of 400,000 which signals to stronger employment growth. Job growth averaged over 130,000 per month for 2011, bringing unemployment down to 8.5 percent in December. Retail sales moved up modestly during the holiday season, growing 3.7 percent in 2011. In our view, home prices appear to have bottomed and permitting activity and sales are improving. As we look forward, several key leading indicators underpin our view that growth in 2012 will outpace 2011 in the United States, absent adverse shocks to the economy: Household debt relative to disposable income has fallen to levels not seen since the mid-1990s. Back then, when household debt levels reached the levels we see today, it released some pent-up demand and propelled economic growth. Corporate profits and profit margins, which have reached historic highs, continue to climb and corporate balance sheets have been deleveraged. Companies have become more efficient and this has led to generally higher levels of productivity which support increases in corporate profits as well as wage growth. After pausing in the second quarter, industrial production and capacity utilization increased. At year-end 2011, production was 2.9 percent higher than a year ago and the amount of capacity firms used increased to 78.1 percent. With households expected to release additional pent-up demand in 2012, we expect capacity utilization will increase to nearly 80 percent and result in employment growth in excess of 1 percent.
The most important drivers to this recovery have been energy, professional and business services, education and health services, manufacturing, technology and trade. As economic growth expands further, recovery will broaden to additional sectors, including consumption. In the absence of further headwinds, more robust economic growth could be expected. Despite these positive leading indicators, there are downside risks to consider. Currently, the most significant of these risks come from abroad. The European crisis still has the potential for political failures that could lead to the dissolution of the euro. Risks of conflict with Iran are increasing, which at the very least would cause a spike in oil prices. Finally, lower bank lending stemming from Basel III could retard the pace of growth more deeply than what is already factored into our forecasts. Domestically, the United States has time on its side to resolve its fiscal issues because the median age of the population is lower than Europe or Japan. However, tax rates are scheduled to increase in 2013 and growth in government spending will decline as the budget reconciliation act agreed to in 2011 is implemented. As a result, we believe the U.S. economy will grow in the range of 2 percent to 2.5 percent which is slower than its potential of 3.2 percent. With above average unemployment and below average economic growth, the silver lining for real estate investors is that inflation and interest rates are expected to remain historically low which reduces the risk of declining capital values across most property sectors.
European Economic Outlook

The pace of economic activity slowed throughout much of Europe in recent months pushing the euro area into recession during the fourth quarter of 2011. This second recession is expected to be relatively short and moderate and we believe that following a solution to the current euro crisis, Europe will enter a period of slow recovery. We expect the periphery countries of Greece, Spain, Italy and Portugal will require a long and painful period of structural adjustment which will result in higher levels of unemployment, lower government spending and reduced access to credit. The combined result will lead to lower levels of tenant demand and higher initial yield spreads in the real estate market. In contrast, the core countries of Germany, France, United Kingdom, Nordics and Central Europe are in a stronger position. These four countries remain some of the most competitive in the world. Additionally, austerity programs within these four counties and stronger government balance sheets leave their debt positions on a sustainable path, and boost the economic prospects overall for the European Union. The solution to the crisis is not likely to emerge quickly, but will be the result of a gradual combination of greater fiscal union, an enhanced bailout package, increased support from the ECB and a long process of reform and austerity. There are clear risks to this view, with the first half of 2012 likely to prove particularly difficult in the face of refinancing requirements. Given that currency collapse could lead to a period of widespread severe recession, we believe policy makers will take all possible steps to preserve the integrity of the euro. Growth in the eurozone is forecast to average just 0.3 percent in 2012. Within the currency area the divide in performance between the core and periphery is set to remain Germany growing 1.0 percent in the year and Greece contracting 5.0 percent. The Euro-
14
pean economy and financial system is highly integrated, and no country is expected to be immune from the current downturn. However, economies outside of the eurozone are forecast to be relative outperformers, benefitting from independent monetary policies, relatively less exposure to the crisis, and in Central and Eastern Europe, continued economic convergence In addition, by the end of 2013 some of the governments in stronger financial positions, such as Germany, the Netherlands and Poland, should be starting to draw their austerity programs to a close, and increase government spending growth. Other countries will follow as the forecast period progresses. While we do not expect government spending to drive a European economic expansion, by the end of the forecast period it should no longer be a drag on GDP growth.
Asia Pacific Economic Outlook

Growth in the Asia Pacific region will slow in 2012. The external slowdown will inevitably hurt headline growth for export-oriented economies such as Hong Kong, Singapore, and Taiwan. Along with Australia, we expect these countries to grow at pace with the United States at roughly 2 percent in 2012 before rising in 2013. More broadly, we expect South Korea, Malaysia and Indonesia to grow faster, in the range of 3.5 percent to 6 percent with China leading the region with growth in excess of 8 percent. While these figures look optimistic relative to the rest of the globe, they mark a slowdown from what the region has experienced following the global financial crisis. The laggard in the region is Japan, where growth is expected to resume to a modest level of 1 percent following the devastating effects of the natural disasters last year. To support additional levels of growth, Asia Pacific policy makers have sufficient monetary and fiscal policy tools to partly offset any economic drags coming from the West. Domestic demand, particularly in the larger emerging economies, has also supported economic growth in the region following the global financial crisis. Strong government, household, and corporate balance sheets will help ease the process of recovery if the region is hit again by a global slowdown emanating from the debt crisis in Europe. Indeed, many Asia Pacific governments are shifting their priorities toward supporting growth. Australia, Indonesia and Thailand have already introduced back-toback interest rate cuts in recent months. Despite the slower pace of manufacturing and export growth, unemployment throughout the region remains dramatically lower than either Europe or the United States. Across the region, unemployment ranges from a low of 1 percent in Thailand to 7 percent in the Philippines. Key real estate markets such as Japan, Hong Kong, Singapore and Australia generally post unemployment rates less than 5.4 percent. In light of strong balance sheet strength across the region, excluding Japan, a meaningful increase in the overall unemployment rate is unlikely. As such, we expect to see more consistent and reliable tenant demand for space in the Asia Pacific relative to other regions across the globe. Still, with the demand for commodities and manufacturing export growth receding, the risk of inflation has been reduced and there is limited risk of sovereign rates rising across the region. Therefore, we expect to see limited risk of capital values on real estate declining. The key risk for the region stems from the soft landing China is engineering. Home prices in China fell for a fourth month in a row in December 2011, declining in 60 out of 100 cities, after the government reiterated plans to maintain curbs that include higher down-
15
payment and mortgage requirements, according to SouFun Holdings Ltd. However, overall investment in housing will likely contribute to growth due to government efforts to expand the supply of social housing in support of urbanization. The government has indicated it plans to start the construction of 7 million homes in 2012. While lower than the amount of 10 million constructed in 2011, this goal is higher than the 5 million targeted in 2010.
Capital Markets Outlook

Real estate transaction volumes in 2011 improved throughout the year globally despite the onslaught of systemic impacts ranging from natural disasters in Japan, the Arab spring, credit downgrades in the United States and the sovereign debt issues in Europe. As reported by Real Capital Analytics, transaction volume increased in 2011 by 17 percent to $792 billion. While volume remains below the peak experienced in 2007, total transactions in 2011 reached a level similar to what occurred in more normalized periods such as in 2004. We attribute higher investor demand to several factors, namely: 1) income yields relative to local sovereign yields remain attractive; 2) the volatility of returns is lower than the equity markets; and 3) the risk of new construction has been reduced globally, thus the probability of fundamentals improving appears greater than the chance of fundamentals declining in a number of primary markets. Additionally, real estate can provide a high correlation to inflation.
Quarterly Global Transaction Volume

$120 United States AsiaPac EMEA Global Average
$100
$80
Billions
$60
$40
$20
$0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Note: All property types, transactions over $10 million. Does include land. Source: Real Capital Analytics. As of March 2012.
Transaction volume in both the United States and Asia Pacific is likely to increase in 2012 because of improving fundamentals and increased mortgage flow. As a result, we expect to see stable to modestly lower capitalization rates in the commercial sectors in the United States. In the Asia Pacific region, we also expect to see stable to modestly lower cap rates for retail and logistics properties while office yields remain stable. Finally, while a higher degree of sales activity in Europe is expected as well, debt capital does not appear as plentiful in that region due to the sovereign debt issues as well as regulation stemming
from Basel III. As a result, cap rates for prime property in key markets are expected to remain stable if not decline modestly due to investor demand for lower risk assets.
While listed REITs and unlisted funds were net acquirers in 2011, equity market volatility and more challenging fundraising conditions in the second half of last year suggest these groups may not be as active in the first half of 2012 with the exception of within the United States. Outside of the United States, REITs have returned to trading at a discount to net asset value. At these levels, they are more reluctant to raise capital to acquire assets. In the United States, REITs are trading at a premium to net asset value which suggests they are likely to provide an additional source of liquidity to the market and provide higher transaction volumes in 2012.
U.S. Capital Markets Outlook

Capital is rapidly returning to real estate and total volume increased 51 percent in the past year, reaching an estimated $186 billion. More importantly, sales volumes began to broaden to the industrial and retail sectors, which accounted for roughly $72.5 billion in transactions. Higher demand for these sectors resulted in sales volume for industrial increasing by 72 percent and retail transactions growing by 77 percent. Apartment demand was still brisk and posted volumes of $48 billion, which was 55 percent higher than 2010. Meanwhile, demand for offices grew 32 percent on volume of $67.2 billion.
U.S. Transaction Volume and Capitalization Rates

$400 $350 $300
Billions
Cap Rate (right) $353
8.0%
7.5%
$250 $200 $150 $100 $50 $0 2007 2008 2009 2010 2011 6.0% $146 $123 $60 6.5% $180 7.0%
Source: Real Capital Analytics. Includes apartment, industrial, office and retail properties. As of March 2012.
Sources of capital are U.S. Capitalization Rates broadening as real Apartment Industrial Office Retail estate is increasingly 9.0% viewed as a desirable 8.5% investment class, 8.0% given its yields relative 7.5% to risk in an improving 7.0% market. With improv6.5% ing occupancy and 6.0% income, investors are 5.5% becoming more 5.0% confident in the asset class. As a result, capitalization rates Source: Real Capital Analytics. declined for all propAs of March 2012. erty types in 2011. This was most apparent for apartments and CBD office properties, but capitalization rates also declined for industrial, suburban office and retail properties. This trend was particularly strong in the first half of the year, while capitalization rates flattened somewhat in the second half as investors perceived that risk was increasing globally. Yields relative to long term Treasuries, however, have increased during this period, arguably making real estate an even more attractive investment relative to bonds.
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
Real Estate Transaction Buyer Profiles

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001
As of March 2012.
Unknown User/other Private Listed/REITs Inst'l/Eq Fund Cross-Border
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Real Capital Analytics.
Transactions in 2012 will likely see further increased activity, surpassing 2004 levels of nearly $200 billion. Capitalization rates for well-leased high-quality properties are falling below 7.0 percent for industrial, office and retail properties, and below 6.0 percent for apartments (and below 5.0 percent for higher-quality assets in gateway cities). Quality continues to rule, and the highest caliber assets are transacting at cap rates approaching those achieved during the peak of the market. Rates are also beginning to compress in second-tier markets, but a spread between these and primary markets still exists. Yields also remain justifiably elevated for value-added and core-plus properties, although we expect declines as the market improves during the year.
4Q11
European Capital Markets Outlook

The first and second European Capitalization Rates halves of 2011 could Apartment Industrial Office Retail not have been more 8.5% different. Real Capital 8.0% Analytics reports an 7.5% overall European 7.0% investment volume in 6.5% 2011 of close to 6.0% $152.1 billion, roughly 5.5% 5.0% 14 percent more than 4.5% in 2010 on U.S. dollar 4.0% amounts. This positive annual comparison masks the contrast Source: Real Capital Analytics. between the two As of March 2012. halves of the year. While the strong growth first half reflected improving sentiment and was over 20 percent above the same period in 2010, the growth slowed in the second half and the fourth quarter, which usually tends to be the most active period of the year, was only slightly better than the third quarter and 11 percent below fourth quarter 2010. Once again, risk aversion has spiked, investor sentiment has weakened, liquidity has been withdrawn and the focus has moved back to core, prime quality and secure income.
Investors clearly favoured retail and office over industrial and residential; these two sectors, retail and office, accounted for roughly 42 percent and 28 percent of the total investment volume, respectively. However, a shift in the structure of transactions towards retail and apartments, which had already been visible in 2010, was distinct also in 2011. This is clearly the effect of the flight into more stable, income producing investments which provide better protection in times of uncertainty.
European Transaction Volume and Capitalization Rates

$350 $300 $250
Billions
$322
Cap Rate (right)
7.5% 7.0% 6.5%
$200 $150 $100 $50 $0 2007
$169 $133 $97
6.0% $152 5.5% 5.0% 4.5% 4.0%
2008
2009
2010
2011
Source: Real Capital Analytics. Includes industrial, office and retail properties. As of March 2012.
Continued investor risk aversion is also evident from the geographic structure of transactions. Despite the moderate decline, the United Kingdom still accounted for roughly 29 percent of the total investments in the region. The focus was clearly on London where roughly 58 percent of the capital was deployed a slow but steady increase compared with 50 percent in 2009, 47 percent in 2007 or 42 percent in 2005. The United Kingdom
11Q4
was closely followed by Germany, which has become an increasingly popular investment target in Europe. Investments in German real estate increased by almost 36 percent from just over 20bn in 2010 to nearly 30bn in 2011 with a major focus on retail including several large shopping centre transactions like CentrO in Oberhausen, Skyline Plaza in Frankfurt and PEP in Munich. Poland is also quickly gaining popularity with investors. Not surprisingly, the opposite holds for the distressed Southern European countries. The deal volume in this part of the continent is less than one third of the number registered back in 2007, reflecting the current investor sentiment. A quarterly survey of investor intentions by PMA clearly shows that geographical preferences lie in Germany, France, the Nordics and Poland. With initial yield spreads remaining relatively attractive for prime assets in risk adverse markets, we do not expect to see a meaningful shift in capitalization rates in the short run.
Asia Pacific Capital Markets Outlook

Total direct real estate Asia Pacific Capitalization Rates investment volume in Apartment Industrial Office Retail the Asia Pacific region 9.0% stood at $91 billion in 8.5% 8.0% 2011 or 7 percent 7.5% higher than 2010 7.0% levels, according to 6.5% Jones Lang LaSalle. 6.0% Japan, China, and 5.5% Australia remained the 5.0% 4.5% largest investment 4.0% markets across the region. Owneroccupiers, financial Source: Real Capital Analytics. institutions, and REITs As of March 2012. dominated acquisitions, accounting for nearly half the volume in 2011. In the final quarter of 2011, China posted a 68 percent quarterly increase in volume, while Australia recorded a 45 percent uptick. Foreign investment drove deals in Australia, while acquisitions in markets such as Japan, China, Hong Kong, and Singapore were largely led by local investors.
Despite the increase in transaction volume in 2011, there was a pullback in activity in the last quarter of the year as concerns over the European debt crisis held some investors back. While global cross border transactions increased, transactions from the listed sector retreated as REITs, particularly the J-REITs, traded at a discount to net asset value. In total, transactions from the listed sector dropped by almost $19 billion from 2010 levels, as reported by Real Capital Analytics. As a result, capitalization rates reached a trough in the first half of 2011, but have held steady since then. Looking ahead in 2012, the region could provide a good buying opportunity through reduced competition or creative strategies, such as moving risk capital into maturing debt. Capital markets in Asia Pacific continue to attract all classes of investors looking to access the regions stability and growth in an uncertain global economy. Institutional investors remain interested in the region and with consolidation in the funds industry the turnover should provide opportunities for both buyers and sellers in 2012. In addition, RREEF Real Estate expects real estate transaction volumes for secondary assets and smaller markets
11Q4
to fall due to increased risk aversion. Because fundamentals are favourable in the retail and logistics sector in many cities, we believe there is a greater chance of capitalization rates declining than rising. However, the office sector remains mixed due to low cap rate levels in certain markets. For example, we expect a modest increase in yields in Singapore and Hong Kong due to conditions in those markets. In contrast, our outlook calls for declining yields in Japan and Australia as fundamentals improve.
Asia Pacific Transaction Volume and Capitalization Rates

$140
$121 Cap Rate (right)
$120 $100
Billions
6.5% $86 $66 $85 $91 6.0%
$80 $60 $40 $20 $0

2007 2008
5.5%
5.0% 2009 2010 2011
Source: Jones Lang LaSalle, Real Capital Analytics. Capitalization rates include industrial, office and retail properties only. As of March 2012.
Real Estate Fundamentals

U.S. Real Estate Fundamentals
All property market sectors are firmly into recovery, but each sector is at a different stage of this cycle. Apartments have completed their second year of solid rent growth along with a dramatic rise in occupancy and income. With an increase in economic activity, the industrial sector posted the second highest decline in vacancies following the apartment sector. The office and retail sectors stabilized and saw modest improvements in 2011, experiencing nominal rent growth, but are now firmly into the recovery phase of the cycle. Absorption achieved in 2011 bodes well for stronger rent growth in 2012. It should also be noted that there are dramatic differences in performance by city, submarket and asset quality. Nonetheless, with a broadly based economic recovery, virtually all markets are well poised for future growth.
U.S. Vacancy Rate Trends

Actual 2008 2009 2010 2011 2012 2013 Projected 2014 2015 2016
Multi-Family Industrial Office Retail

As of March 2012.
6.8% 11.8% 14.2% 8.7%
8.2% 14.3% 16.6% 10.3%
6.7% 14.3% 16.5% 10.7%
5.3% 13.5% 16.1% 10.8%
4.5% 12.3% 15.5% 10.3%
4.1% 11.1% 14.2% 9.6%
4.0% 10.3% 12.6% 9.3%
4.8% 10.2% 12.0% 9.0%
5.4% 10.2% 12.3% 9.1%
Sources: REIS, CBRE-EA (History) and RREEF Real Esate (Forecast).
U.S. Sector Rent Comparison Summary 4Q2011

2011 = 100
150 140 130 120 110 100 90 80 2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F Apartments Industrial Office CBD Office Suburban Retail
Note: All rents are NNN. F indicates forecast years. Sources: REIS, CBRE-EA (History); RREEF Real Estate (Forecast). As of March 2012.
U.S. Multi-family
With rental demand far exceeding new supply, rent growth has been robust. During the third quarter of 2011, the overall national average effective rent for the sector surpassed the previous rent peak established at the end of 2007. Washington D.C., San Francisco and San Jose all have now exceeded their prior peak rents by upwards of 10 percent. At the same time average rents in the Southern California markets of Los Angeles, Orange County and Riverside/San Bernardino, along with Atlanta and Phoenix, are still below their previous peak levels. Although the near-term outlook for multi-family remains robust, the sector is expected to reach the mature phase of the real estate cycle during the outer years of our forecast. We believe cyclical trends and an intensifying construction pipeline are expected to temper NOI growth. After stabilizing in the low-four percent range during the next few years, the overall U.S. multi-family vacancy rate is expected to begin trending higher in 2015, producing decelerating rent growth. From a competitive perspective, there are several factors which we believe will impact the sector, namely: 1) single-family housing affordability has increased significantly due to lower house prices and mortgage rates; 2) the cost of ownership relative to renting has been reduced significantly and presents a risk to tenant demand; 3) the government is looking for ways to convert single-family homes to rental property which would increase the supply of rental property. Combined with low going-in capitalization rates, the sector poses some risks. To offset these risks, we recommend investing in markets and sectors where tenant demand is greater or the competitive threats from single-family housing are lower. Markets that have a high percentage of renters by choice or necessity include the high-cost coastal markets of the San Francisco Bay Area, New York, Coastal Southern California, Pacific Northwest and Washington DC. As a result, these markets are most capable of outperforming the national average for rent growth over the long term.
U.S. Industrial
In 2011 the recovery in the industrial sector advanced at a pace which was higher than 2010, yet slightly below average. The market absorbed a healthy 118 million square feet of space, or 0.9 percent of its base during the year. This compares to a long-term average of 1.2 percent and recovery period averages of about 1.5 percent. 2011 was the first complete year of sustained positive net absorption since 2007. Vacancy ended 2011 at
13.5 percent, an 80 basis point decline for the year. U.S. manufacturers and technology companies continued to lead recovery trends, as did consumers and blue chip retailers, contributing to a surge in demand for larger bulk warehouse space and industrial space in high-tech hubs. Key economic drivers proved resilient in 2011 and should support favorable industrial space demand in the future. Retail spending and international trade have normalized and should grow moderately in 2012 and more strongly thereafter, fueling warehouse demand. Continued uplift for U.S. manufacturers and high-tech firms should aid near-term recovery for multi-tenant industrial properties. Sustained employment and population growth unmistakably drive improved demand fundamentals. Benefits of improved demand accrue faster when there is a supply-side gap, which is currently in place in the United States. In no period during the last 30 years has the industrial construction pipeline been so muted. We expect that it will take until at least 2013 or 2014 before developers can begin building any meaningful amount of space. The Global Gateway and national inland hub markets continue to lead demand trends. Strong activity in Atlanta, Chicago and Dallas during the second half of 2011 lifted their total net absorption figures into the top 10 among U.S. metros. Riverside, Los Angeles, and Houston also exhibited strong demand and are expected to be top demand performers in 2012. Distinct regional economic growth should stimulate broader demand trends in 2012. Our top picks for 2012 and over the next few years are comprised of markets that benefit from some or all of the following: trade linkages to Asia, Mexico/Latin America and Canada, have larger populations with above average-plus growth and incomes, important transportation, high-tech, medical and energy nodes.
U.S. Office
The office sector is approaching a point in the cycle where it historically generates the strongest rebound among the property types. Gateway cities with vibrant downtowns will continue to see outperformance for core investment strategies, such as Boston, Chicago, New York, San Francisco and Washington. In addition, submarkets in leading cities have already posted 2011 rent gains ahead of their anticipated pace Austin, Boston, Houston, New York, San Francisco and San Jose portending broader recovery to come. Nonetheless, the path to wider recovery in the office sector will be sluggish and segmented, as early leading submarkets remain clustered in gateway metros and those with techand energy-rich economies. And, even stalwart investment locations, such as New York and Washington D.C., are not without vulnerable submarkets. Urban submarkets remain key foundations for investment, but select close-in suburban nodes are poised for accelerated rent recovery, particularly when considering their growth potential beyond the next two years. Key drivers of office space demand include the technology, professional and business services, and energy sectors. The U.S. economy continues to become office-based, with an increasing share of total employment working within offices. While near term demand and rent growth is forecast to be modest for the sector, office should outperform over the longer five year outlook. Limited new supply is anticipated during this period allowing for strong market improvement in the outer years of our forecast. Challenges facing demand recovery arise from shadow space lingering in empty cubicles, tenants focusing on more efficient space utilization, and increasing hurdles facing the finance and federal govern-
23
ment (including their contractors) sectors. These challenges have been incorporated into our forecasts. Demand should begin making appreciable gains by 2013. As a result, vacancy is expected to decline another 50 basis points in 2012, but by 2014 should settle firmly below 14 percent, historically a trigger point for accelerated rent growth, and proceed to the 12 percent range by 2015, spurring further rent recovery. Limited new development will assist the recovery, with 2011 deliveries at their lowest in 17 years. Deliveries in 2012 should be a notch below 2011, with the bulk of construction activity confined to a handful of metros. Washington, D.C. stands out as one of the most highly active metros for new supply, accounting for nearly a quarter of 2012 new product.
U.S. Retail
With consumers now beginning to regain confidence, retail sales are returning to prerecessionary levels, allowing for vacancies to decline. Nevertheless, absorption has been tepid because retailers have been cautiously focused on raising profit levels. With continuing downward pressure on bricks and mortar retail space from online sales, retailers have been decelerating the pace of expansions. With a more positive outlook emerging though, retailers are once again looking at expansion for 2012. With virtually no new supply in the pipeline, the prospects for lower vacancy and renewed rent growth are improving. Our forecast calls for continued gradual, moderate market recovery in the near term in line with recent trends, and accelerating gains in the following years. We see vacancies in community and neighborhood shopping centers declining slowly from about 11 percent currently to 9 percent by 2015 as moderate demand absorbs existing vacancies with little new space added to the market. In general, regional malls have been better performers through the downturn and now are further into recovery, while power center and lifestyle centers have lagged, but there is considerable variation in each category. Rent growth will be generally commensurate with occupancy rates, not reaching the previous peak nationally until 2015. One of the hallmarks of performance in the retail industry during the recovery has been the so-called hourglass effect in which the luxury and discount retailers thrived, while middle-market retailers have struggled. We expect these trends to continue and recommend investment emphasis on necessity shopping centers and high street retail. High street retail responds to emerging changes in lifestyle of U.S. professional classes, both young and more mature, who are increasingly favoring urban mixed use environments. Analysis by RREEF Real Estate demonstrates that high street retail consistently achieves lower vacancy and turnover and much higher rents than traditional shopping centers. These assets can be expected to outperform in the coming years. The grocery industry has consolidated in recent years, with one to two national or regional chains generally dominating each metro. At the same time, the remaining traditional grocers are facing new types of competition at both the high and especially low end of the spectrum: gourmet and organic retailers appeal to higher-income consumers, while less affluent households rely upon the discount retailers that increasingly offer groceries (e.g., Wal-Mart, Target). With increasing market bifurcation, some metros and centers will fare better than others. Already, the best centers and metros are edging into recovery, while their weaker coun-
24
terparts continue to suffer. Markets with the best prospects are the relatively prosperous metros with the greatest constraints to supply. Most of these metros are found on the coasts: New York, San Francisco, Miami, and Seattle, among others. Conversely, many of the metros with the highest initial vacancy rates and lowest rents at the peak of the cycle typically located in the nations faster growing southern metros -- experienced the greatest vacancy spikes and rent declines and are the slowest to recover.
European Real Estate Fundamentals

European Sector Rent Comparison Summary 4Q2011
2011 = 100
115 110 Industrial 105 Office 100 Retail 95 90 2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F
Note: European average weighted by stock; based on changes in prime rents and prime yields. F indicates forecast years. Sources: PMA (History); RREEF Real Estate (Forecast). As of March 2012.
European Office
As the outlook for employment growth worsened in the second half of 2011, office markets in Europe lost momentum, especially in some of the more fragile markets in Italy and Spain. As a result, the net absorption of office space, which lagged below its historical average since 2008, will continue to underperform through to the mid-decade. On the upside, supply has responded with net additions to stock falling well below historical averages in most markets, a pattern also set to continue in the foreseeable future. This should keep the vacancy rate relatively stable across Europe as a whole London is clearly the outperformer among the U.K. markets with the West End offering the strongest prospects due to supply constraints. Tight availability led to solid rent growth in London in 2011. While rent growth prospects for 2012 are more limited, the West Ends office outlook is still the strongest in the United Kingdom. Outside London, the near-term prospects for rent growth in regional markets are negligible. Manchester, Birmingham, and Glasgow continue to struggle with overhangs of fairly recent speculative office supply. In France, prospects for near-term weakness in office absorption in Paris could force rents down in the near term, especially in La Dfense where oversupply from speculative construction will destabilize fundamentals. By contrast, the supply-constrained Paris CBD should enjoy a stronger and faster recovery in the outer years of the forecast, with rents averaging near 4 percent growth compared to less than 2 percent in La Dfense. Europes strongest major office market continues to be Stockholm, which lies outside the eurozone and has been buffered to some degree from the immediate turmoil. With its development pipeline under control, recent tenant demand has been channelled toward central locations, keeping the vacancy rate much lower in the CBD than in the fringe. Office fundamentals benefit from Swedens relative economic resilience and sound fiscal
management, but the downside risk of financial contagion spreading out from the eurozone cannot be dismissed. In Germany, a weaker economy in 2012 will dampen office market fundamentals. Nevertheless, over the next two years both Berlin and Munich are expected to see rents rise modestly amid solid net absorption and limited supply pipelines. The longer term prospects for these markets are above average by German standards, with rents expected to average 2.5 percent to 3 percent annual growth after 2013. In Frankfurt, a high vacancy rate, moderate but steady supply, and turbulence in European financial markets will keep office fundamentals destabilized in the near term, with rent growth resuming in the outer years of the forecast. The impact of the global financial crisis in 2008 had a major impact on the office markets of Spain and Ireland. With another recession looming over Europe in 2012, headline rents will fall further in both Madrid and Barcelona in the near term. Of these two Spanish markets, Barcelona struggles more to contain its supply pipeline and this will delay its recovery cycle behind Madrid. Milan, Rome, and Lisbon will be among the last of Europes peripheral office markets to recover. In Central and Eastern Europe, Warsaw enters 2012 following the stellar outperformance of its office fundamentals in 2011. Strong economic conditions in Poland, a constrained supply pipeline, limited options for prime product, and a declining vacancy rate all contributed to a surge in office rents in Warsaw in 2011. Warsaw will continue this momentum in the near term. Meanwhile, rents in Prague held steady over the past couple of years and are unlikely to move much in the near term. Prague remains a relatively stable market with modest take-up and marginal additions to supply. Finally, Budapests office market still struggles with net absorption despite favourable economic conditions. While the major Central and Eastern European office markets face varying prospects in the near term, their fundamentals should begin converging in the outer years of the forecast. Rents in all three marketsWarsaw, Prague, and Budapestare expected to average growth of 2.5 percent to 3 percent per annum between 2014 and 2016.
European Industrial
In the near term, we expect key logistic hubs in Northern European countries, such as Paris, Hamburg or Stockholm, to outperform. Established trading links and access to growth export markets such as China will play a major role. In the medium term, however, the rebalancing of the weaker eurozone should encourage medium term export growth. The Iberian countries in particular, with their close links to emerging Latin America, may provide medium term logistics investment opportunities. Industrial units that can provide the facilities for fast growing high-tech manufacturing and online distribution are likely to prove particularly attractive. In the current climate, the U.K. logistics market is likely to experience little momentum in the near term. In London and across regional markets, rents are forecast to stay relatively flat, growing at well below a 1 percent per annum pace over the next two years. As demand slowly returns, rents should rise modestly at 1 percent to 2 percent per annum, with recovery in the Scottish markets lagging behind London and the regional English markets. The German and Dutch markets should follow a little further behind, with moderate growth of 0.5 percent to 1 percent per annum during this same period.
26
Europes peripheral logistics markets in Spain, Italy, and Portugal showed signs of stabilising in 2011, following sharp rent declines in the previous two years. As Europe moves into recession in 2012, rents in these markets will fall further under renewed downward pressure. The Italian markets in particular are vulnerable to a downturn and could perhaps slide 1 percent to 2 percent per annum in the near term. In the outer years of the forecast, Spain is best positioned for an earlier recovery, with rents returning to a 1 percent to 2 percent per annum growth rate. Even in the outer years of the forecast, logistics fundamentals in Lisbon, Milan, and Rome will remain soft in the wake of recession and austerity programs. Riding on solid rent increases in 2011, Warsaw is one of Europes best positioned markets for a soft landing. Fundamentals remain in good shape, and rents could still climb in the near term, albeit at a much slower pace than in 2011. Fundamentals in Prague and Budapest will be softer in the near term. Improving economic conditions in the outer years of the forecast should position all three markets for longer term growth of 1.5 percent to 2.5 percent per annum after 2013.
European Retail
The worsening retail climate continued through to the end of the year leading to an annual decline in sales of 0.1 percent across the European Union. However, the overall sales figures mask significant differences across the continent. Greece, Spain and Portugal were the clear underperformers being at the epicenter of the eurozone crisis and facing a long period of severe austerity, Greek consumers registered an almost double-digit annual decline in retail sales. The best performing retail sales figures tended to be found outside of the eurozone, in the Nordics and parts of Eastern Europe, such as the Baltic States. Within the eurozone, France saw the greatest increase in retail sales during 2011, as rising real wages and rapid house price growth supported spending. As such, we believe prime shopping centres outside southern Europe are going to outperform the other two sectors over the next 5 years driven mainly by a more stable yield outlook and moderate rent growth. Generally, we expect this property type to deliver positive value growth across the continent, but established Western European locations like France, Netherlands or Denmark will find themselves in the lower quartile. The outperformers are to be found in more dynamic Central and Eastern European economies, in particular Poland and the Czech Republic, or in some of the countries hit worst by the downturn and expecting strong recovery, in particular Spain and Ireland. On the other hand, caution is required when acting elsewhere in Southern Europe as we do not expect the consumers in Italy and Portugal to return quite as strongly as in Spain. Strained household budgets and the continued shift towards multichannel retailing favour large dominant schemes that are located next to large population centres and occupied by dominant national retailers versus local independent stores. However, as pricing becomes aggressive for these schemes, opportunities can also arise outside of the typical core destinations. A detailed knowledge of individual retail catchments will be required to identify these core opportunities. In locations where a gap between the retail offer and potential catchment demand exists, targeted asset management could provide opportunities.
27
Asia Pacific Real Estate Fundamentals

Asia Pacific Sector Rent Comparison Summary 4Q2011
2011 = 100
125 120 115 110 105 100 95 90 2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F Industrial Office Retail
Note: European average weighted by stock; based on changes in prime rents and prime yields. F indicates forecast years. Sources: DB Global Markets, Asia Economics Monthly (History); RREEF Real Estate (Forecast). As of March 2012.
Asia Pacific Office

Japan: Amid a sluggish economy after the earthquake, the vacancy rate stood at 9 percent in Tokyo and 11 percent in Osaka at the end of 2011the highest levels in a decade for both cities. Because of the March 2011 Thoku earthquake, newer, higher quality, quake-resistant, and energy efficient buildings are attracting more tenants. Overall vacancy rates are expected to remain high in 2012. Looking forward, we expect vacancy rates decline from 9 percent to the long term average, around 5 percent in Tokyo. As this unfolds, we expect rents increase an average of 2.5 percent to 3.0 percent per annum during the same period, although we expect 2012 will be a difficult year. Together, we expect net operating income will grow in excess of 4 percent. When combined with high initial yield spreads in the range of 5 percent, the market offers attractive buying opportunities with total returns in the range of 7 percent to 10 percent. Also, because lease terms are shorter in Japan, investors can more readily realize the benefits of improving fundamentals in their performance. Seoul: Office rents in Seoul have been resilient throughout this economic cycle but are vulnerable to supply shocks. In 2011 prime rents in the Seoul CBD softened because of a supply increase within the submarket (Center 1 and Ferrum Tower). Elsewhere, rents were stable in the Yoido and Gangnam business districts where supply was limited. The notable new supply in 2012 will be limited to IFC Seoul Tower 2 in the Yoido submarkets. Despite this new supply, vacancy rates declined to roughly 5 percent in 2011. As the average vacancy rate in Seoul falls to 4 percent over the near term, rents are expected to begin rising within the next 18 months. With cap rates at 6 percent, initial yields are higher than most of the Asian cities and are expected to remain relatively steady in the foreseeable future. Given the stable interest rate environment and relatively lower volatility, the market provides stable risk-adjusted returns for core investors. Beijing and Shanghai have established themselves as Chinas major office markets. Beijing serves as an administrative centre and Shanghai has evolved into a major financial hub for the country. As a result, vacancies have fallen from the high teens to single digits and rents have risen to levels similar to other major financial centres in the region. Furthermore, demand from domestic banks and corporations are now on par and even greater than demand from multinational companies and international banks. Looking forward, while we expect to see stable amounts of new supply in order to replace obsolete stock, tenant demand is expected to keep pace. We believe vacancy rates will remain in
the range of 8 percent to 9 percent with rents growing 5 percent in Shanghai and 8 percent in Beijing on average over the next five years. With initial yields in the range of 5 percent to 5.5 percent for prime property, we expect total returns in the range of 9 percent to 12 percent. Hong Kong: In light of the precarious economic environment, tenants are slowing their expansion and relocation plans. Rents in the core financial districts are particularly sensitive to economic conditions. However, a shortage of space, a lack of new supply, and low vacancy rates have resulted in prime rents holding up, at least for now. Based on previous downturns in 1998, 2003 and 2008 though, we do not expect these fundamentals to hold in the short run. Despite low vacancy rates going into past downturns, rents still declined. In the near term, we expect vacancy rates to increase because the government supports further office development. At the same time, initial yield spreads relative to local bond yields are low as competition for assets is high. As rents soften, there is a chance spreads widen. Also, because of the currency peg to the U.S. dollar, the region is vulnerable to interest rate increases in the United Sates. In the medium term, as global economic growth rebounds, Hong Kong will benefit given its strategic role as a finance and trade distribution leader in the region. Singapore: Over three million square feet of new office space was delivered in 2011. This is the largest amount of completed office development the city-state has experienced over the past decade. While the new supply helped to improve the overall quality of the office stock, the office market has since softened. For the first time since the market bottomed out in late 2009, the average monthly net effective rents for Grade A office space tracked by JLL in the Raffles Place/New Downtown micro-market fell by nearly 5 percent in 2011. We expect that as vacancy rates rise, further downward pressure on rents is inevitable and will lead to a favourable tenants market. Looking ahead, the markets future supply of office space over the next five years from 2012 to 2016 is forecast to average 2.2 million square feet per annum. Rents are forecast to decline by about 10 percent to 15 percent in 2012. Similar to Hong Kong, competition is keen in this segment and initial yields are low which present some near term risk. Australia: The impact of a two speed economy in Australia is now particularly apparent in the commercial real estate markets with CBD office rents in the capital cities of resource rich states of both Queensland (Brisbane) and West Australia (Perth) outstripping those of the traditional finance-and-trade-centered CBDs of Melbourne and Sydney. New supply for office accommodation is expected to be tight. This will likely offset potentially slower short-term demand especially in the key financial services economies of Melbourne and Sydney. But with mining continuing to contribute to a significant proportion of economic growth, the office markets are more likely to surprise on the upside rather than disappoint. In both Melbourne and Sydney, we expect vacancy rates to remain relatively stable in the range of 6 percent to 8 percent with rents growing 3 percent to 4 percent in Melbourne and 5 percent to 6 percent in Sydney on average over the next five years. In addition, initial yields are amongst the highest in the region due to relatively higher bond yields and stand in the range of 6.5 percent to 7.0 percent. Knowing the market has a beta of less than 1.0 relative to the IPD Global Index, the market provides strong relative value.
29
Asia Pacific Retail

Japan: The number of large-scale shopping malls is increasing in Japan, but the average sales turnover of each property is not growing because of over-supply. Retail sales in properties with large-scale formats softened amid the economic slowdown in the second half of 2011 and weaker tourism due to the strong yen. We expect sales will remain relatively weak in department stores and large-scale shopping centres in the short-tomedium term compared to speciality stores along high streets and direct channels (such as online shopping and television shopping). South Korea: Unlike most western and many Asian countries, department stores are still regarded as more prestigious than other store formats in South Korea. However, some new trends are emerging. In the past, global fashion brands needed to enter into a joint venture with local partners. Today, these brands tend to enter the market on their own, with the ability to act independently from department stores. The fundamentals of Seouls shopping centre market look resilient, with flat to low single digit annual rent growth rates expected in 2012. Investment access can be challenging though because the shopping centre stock tends to be either owner-occupied or controlled by conglomerates. Still, the market offers attractive investment opportunities as base rents closely track CPI. In addition, cap rates stood at 6.5 percent in 2011 and they are expected to remain stable and provide attractive investment returns. China: Prospects for the retail market are supported by rising incomes and urbanisation. However, the growing sophistication of many Chinese shoppers has resulted in a polarisation in the retail scene on the mainland. While the Tier 1 cities continue to witness a proliferation of more high-end retail concepts including specialty shops, other cities are more reliant on traditional anchor/multi-tenanted shopping centres. Malls that are quick to adapt continue to outperform the rest of the market. Competition has been intense with only a handful of active local and foreign investors (Wanda, China Resources Land, COFCO, CapitaLand, Swire, Kerry, Hang Lung, SHKP) participating in the market and providing the capital investment and management expertise. International brands including high street and luxury brands continue to seek new opportunities in China as domestic business and leisure travel is growing at a rapid pace. Yields are tight, especially for high-end shopping malls, and this reflects the scarcity of quality assets which supports a development strategy in Tier 1 markets. Hong Kong: Despite economic uncertainties, the retail sector is somewhat cushioned, with many of the traditional retail sub-districts able to maintain rents and still attract tenants. Strong tourism, especially from mainland China, supports the retail sector. In August 2011, monthly total visitor arrivals climbed 17.7 percent year-over-year to 4.1 million, posting a new monthly record surpassing 4 million for the first time. Moreover, a total of 2.9 million mainland visitors were recorded in August or a 23 percent year-over-year increase. The labour market was also surprisingly strong. The wage index increased 6.9 percent year-over-year in nominal terms in June 2011. Against this backdrop, retail sales increased 23.1 percent year-over-year to HK$34.2 billion in October 2011 on the back of a buoyant local consumption demand and tourist spending. The purchasing power of mainland tourists is likely to continue supporting the local retail property market. Singapore: This sector continued to receive a boost from foreign visitors in the final quarter of 2011. October 2011 set an arrivals record for the 10th consecutive month, with 1.1 million visitors. In the first ten months of 2011, overall visitor numbers rose by 15.5
30
percent year-over-year to about 10.9 million. Furthermore, spending by tourists and local residents kept the cash registers ringing, and in October the retail sales index (excluding motor vehicles) was boosted by 5.9 percent year-over-year. Close to 500,000 square feet of private retail space was completed in 2011 which is below the five-year average of 670,000 square feet. CBRE estimates that 795,000 square feet of retail space will be built 2012. Development activity in 2012 will focus on suburban areas and malls such as JCube and Vista XChange. Reflecting the weaker economic outlook, average rents for prime Orchard Road and the Regional/Suburban submarkets were unchanged in the final quarter of 2011. Looking ahead, global uncertainties combined with inflationary pressures could dampen employment and tourism prospects. This would in turn impact spending by consumers and visitors and result in lower retail sales. When combined with higher levels of new supply, we expect vacancy rates modestly rise and rent growth diminishes. Australia: Growth in online shopping is expected to outstrip growth in total retail turnover during 2012, continuing a trend that has developed over the last few years. As online retailing continues to expand, some retail sectors will be more at risk including those that are non-food or discretionary. Key drivers of online shopping include a stronger currency and the proliferation of tablet devices as well as the role of social media in purchasing decisions. Whilst the shopping centre will always form part of the retail landscape, its role within the overall retail experience is rapidly changing. Yet, this threat maintains a highdegree of discipline in the market. Vacancy rates in institutional prime assets in both Sydney and Melbourne are generally less than 3 percent. Looking forward, we expect rents grow an average of 2.5 percent to 3 percent per annum and initial yields remain stable at 6.0 percent to 6.5 percent. From a strategic perspective, retail In Australia not only offers a competitive total return, it also provides some defensive characteristics.
Asia Pacific Industrial

Japan: The volume of new supply was very limited in 2010 and 2011 (due to the credit crisis and financial difficulties in the previous years), and this steered vacancy rates on a recovering trend. They fell to a healthy level of around 5 percent in both Greater Tokyo and Greater Osaka in the third quarter in 2011. The declining trend of logistics rents levelled off in Tokyo and Osaka, with a stable outlook expected in the near term in both markets. Industrial assets are becoming popular among domestic and foreign investors seeking higher yields in the range of 6 percent which is 50-100 basis points higher than what can be delivered in the office or retail sectors. South Korea: Like Japan, the Korean industrial sector has evolved in recent years. Large-scale modern leasable stock has been added, some of which was developed and/or is owned by global logistics companies. The government provides incentives to these logistics-related foreign investments, including tax relief, financial support, and flexible labour regulations. Gyeonggi province which completely surrounds Seoul and Incheon is the most popular investment destination. However, the overall volume of leasable (as opposed to owner-occupied) stock is still limited and the vacancy rate tends to be vulnerable to supply increases. Also the liquidity of these assets is not consistent. Because of the risky nature of the asset, the lack of liquidity and transparency, cap rates are relatively high at around 9 percent in 2011 and are expected to compress gradually as the market matures. As such, the market offers a viable strategy for value-added investors who seek to achieve a higher return through improved liquidity or by developing next generation space while minimizing downside risk because of the high initial yields offered in the market.
31
China: Consolidation in the industrial property market in China could accelerate as global players such as GLP, ProLogis, and Goodman increase their investments. The industrial/logistics market presents new potential given the expansion of many key infrastructure links across railway, air, and shipping platforms. The migration of secondary industry from coastal to inland areas will result in more demand for logistics space. The current slowdown in the global economy and the subsequent drop in international trade could potentially be offset by the promotion of Chinas domestic consumption. In addition, the lack of quality stock is expected to support rental growth. Yields are expected to trend downward, reflecting the growing maturity of the market. Overall, we expect investors can achieve total returns in the range of 10 percent to 15 percent for unleveraged property. Hong Kong: The Hong Kong Trade Development Council (HKTDC) is forecasting exports will only grow at 1 percent in value but will decline in volume by 3 percent in 2012. The HKTDCs export index fell to 40.6 in the third quarter 2011, which was the second consecutive quarter with a reading below the benchmark level of 50. A reading below 50 indicates a pessimistic sentiment during the quarter and signals contraction in Hong Kong exports over the short term. The slowdown in the growth of export trade is already reflected in the leasing market, where export-oriented 3PL operators have put expansion plans on hold. While rents are expected to climb to record highs in the near term because of tight vacancies, increasing vacancy pressure will likely lead to a correction in 2012.The buyer-seller standoff over pricing will keep investment volumes low. Investors will also demand higher yields to justify higher borrowing costs and negative rental growth. Singapore: Weakness in the electronics and biomedical clusters weighed on the manufacturing sector and this resulted in a softer leasing activity in the second half of 2011 which in turn tempered rental growth. Plant expansions are likely to be put on hold while consolidation activities may potentially take root if the major economies fall deeper into the rut. The increase in consolidation activity may also give rise to shadow space as firms look to sublease excess space to supplement their income. This would put downward pressure on rents. Nonetheless, a moderation in the pipeline of factory space from an estimated annual average of 7.2 million square feet between 2002 and 2011 to some 4.7 million square feet per annum for the period between 2012 and 2015 could provide some relief to downward pressure on rents. So will positive economic growth, which is forecast at between 1 percent and 3 percent for 2012 for Singapore. Yields are forecast to remain between 6 percent and 7 percent. Australia: Once a less-favoured real estate asset class, industrial properties are once again on many investors radar. With a shortfall of prime grade industrial space to meet current demand, rental pressures are set to intensify over the next 24 months. As a result, RREEF Real Estate forecasts a significant upside in the national industrial markets from 2012 as the impact of the available shortage becomes more pronounced. And with ecommerce booming, this will only exacerbate the shortage of product especially in the key population hubs of Sydney and Melbourne. The steady pattern seen in 2011 would also see prime grade yields compress and values rise in 2012. Meanwhile, the lack of prime grade stock on the market is leading many owner-operators to take a design-andconstruct approach rather than waiting for a suitable opportunity. At the moment, logistics and retail firms are driving demand. Yields are averaging between 7 percent and 8 percent, with total returns in the low teens.
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Conclusion
While economic momentum in the United States is improving, the sovereign debt crisis in Europe and construction of soft-landing by the Chinese government will result in slower growth globally in 2012. However, slower growth reduces the risk of rising interest rates, and initial yields for commercial real estate. Looking forward, total returns for real estate will likely moderate to more normalized levels in 2012 before improving in 2013 on a global level. On a nominal basis, the Asia Pacific region will lead in return performance, driven by stronger fundamentals, producing higher rent and income growth. In contrast, a greater portion of total return in the United States will likely come from income yield in the short run. As vacancy rates decline in 2013, we expect higher levels of net operating growth in the United States across property types. In Europe, vacancy rates will remain relatively stable despite the backdrop of the debt crisis. As such, most of the total return is driven by income yield. As risks to the euro area fade later this year, the market is well poised to experience higher rent growth throughout the European Union. Reflecting our view that the global economy will begin to recover later in 2012 and 2013, we recommend a modest overweight to Asia Pacific and to the United States with a modest underweight to Europe. The following table highlights the rationale behind our recommendation for each of our regional strategies.
Conclusion Regional Strategies

United States We recommend a 23% weight to industrial and a 30% weight to office. Combined, this results to a 4% active weight to these two pro-cyclical sectors. Protect against downside risk by maintaining a meaningful allocation to retail (25%) and apartments (22%) relative to the NCREIF Index. Apartments are attractive in high-cost, supply constrained coastal markets. Warehouse recovery broadening to more cities in key states/markets of California, Florida, Northern New Jersey and Seattle. CBD office markets of Boston, Denver, Los Angeles, Miami, New York and Seattle outperform as do select suburban markets in Los Angeles, Orange County and San Diego. Industrial sector is expected to have the highest total return outlook over next five years , driven by external trade supported by recovering economies in developed countries Mixed but strong overall performance in office sector due to significant yield compression in some markets and tenant preference for upgraded space. Australia, Japan, Korea, China provide attractive performance, while Singapore and Hong Kong present near-term risks. Strengthening domestic consumption and increasing net absorption continues to support retail space demand. Singapore, High-Street retail in Japan, Beijing and Shanghai provide attractive relative value. Also, suburban retail provides value-add opportunities. Focus on fully let buildings within the CBD markets of London, Stockholm, Paris and Munich. These protect against the downside and outperform as Europe recovers. Prime shopping centers outperform due to stable yield and moderate rent growth. Outperformance delivered in dynamic markets of Czech Republic and Poland. As austerity fades, expect a strong recovery in Spain and Ireland due to pent-up demand. Logistics provides high income to protect on the downside. Key logistics hubs of Paris, Hamburg and Stockholm with export links to growing markets such as China outperform. In the medium term, Iberian markets with links to Latin America provide opportunities.
Asia Pacific
Europe
Source: RREEF Real Estate. As of March 2012.
33
Appendix: Sustainable Investing Outlook

In addition to the traditional market, financial and risk factors that must be considered in capital allocations, investors increasingly must take into account the sustainability of the assets they acquire and how they are managed. This is particularly true for real property markets, where a diverse but convergent set of economic, market, and regulatory forces are combining to move the industry to adopt greener practices. Indeed, the move to sustainability in many leading markets around the world has been redefining standards of institutional-quality buildings and the responsibilities of fiduciaries. In the coming years, questions about any green premiums will increasingly shift to a proliferation of brown discounts. A 2011 study by Johnson Controls (JCI)1 of 4,000 global executives and building owners responsible for energy management and investment decisions in commercial and publicsector buildings found that 70 percent of respondents viewed energy management as very or extremely important, up 10 basis points over the prior year. With building owners and tenants facing higher energy costs in recent years and the risk of still more increases in the future the greatest motivation toward sustainability across all regions in the JCI study was the cost savings that green technologies and practices deliver to building owners and tenants alike. Financial incentives to improve building performance further strengthen the economics of investments in building performance, and were the second most often cited factor in the JCI study. Sustainability has also been propelled by both rising government mandate and evolving local market standards. Even when not required by law, tenants are increasingly demanding greener facilities: to attract employees, impress customers and to satisfy shareholders. Little known only a decade ago, there are now some 8,700 LEED-certified buildings globally, covering more than 1.6 billion gross square feet of building area, plus another 1,100 buildings certified under the BREEAM standard. 2 According to the U.S. Green Building Council, one million square feet of building area world-wide is now registered for potential certification every day. A multitude of other certification systems have also been adopted across the globe, in addition to numerous energy assessment protocols, both voluntary and mandatory. This confluence of forces is leading to increasing evidence of the value that sustainability adds to buildings and portfolios and potentially even to their owners. Empirical studies of rental rate premiums and lower cap rates for buildings with environmental labels such as LEED and BREEAM and ratings such as ENERGY STAR.3 Labels and strong NABERS4 ratings are gaining traction as an increasing number of properties lease and trade. Accordingly, sustainability considerations are becoming an increasingly important and integral component of commercial real estate investment decisions. Of course, market standards and government regulations vary widely by geography and product type, requiring that investors understand the nuances of local environmental standards and
1 2
Johnson Controls, International Facility Management Association and the Urban Land Institute (2011): 2011 Energy EfficiencyIndicator: GLOBAL Results.
LEED stands for Leadership in Energy and Environmental Design, an assessment system developed by the US Green Building Council. BREEAM is the BRE Environmental Assessment Method established in the UK by the Building Research Establishment (BRE). ENERGY STAR is a program administered by the US Department of Energy that benchmarks buildings on a 1-100 scale, awarding labels for buildings scoring 75 or above i.e. buildings in the top quartile for normalized energy performance. NABERS is the National Australian Built Environment Rating System - a national initiative managed by the New South Wales Office of Environment and Heritage that rates buildings for their energy performance by awarding up to 6 stars.
34
regulations as well as the traditional market and financial factors that underpin investment decisions. Responsible fiduciary practices now demand that investment managers possess and apply such knowledge to identify and manage to the risks and opportunities that sustainability presents in the same manner that they do more traditional ones.
35
Important Notes
2012. All rights reserved. RREEF Real Estate, part of RREEF Alternatives, the alternative investments business of Deutsche Asset Management, the asset management division of Deutsche Bank AG offers a range of real estate investment strategies, including: core and value-added and opportunistic real estate, real estate debt, and real estate and infrastructure securities. In the United States RREEF Real Estate relates to the asset management activities of RREEF America L.L.C., and Deutsche Investment Management Americas Inc.; in Germany: RREEF Investment GmbH, RREEF Management GmbH and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154) an Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for RREEF Real Estates direct real estate business), and Deutsche Asset Management (Hong Kong) Limited (for RREEF Real Estates real estate securities business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N); in the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited and Deutsche Asset Management (UK) Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Limited and Deutsche Alternative Asset Management (Global) Limited; in addition to other regional entities in the Deutsche Bank Group. Key RREEF Real Estate research personnel are voting members of various RREEF Real Estate investment committees. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF Real Estate and its affiliates. This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only. It does not constitute investment advice, a recommendation, an offer, solicitation, the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer. An investment in real estate involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/ units and their derived income may fall or rise. Any forecasts provided herein are based upon RREEF Real Estates opinion of the market at this date and are subject to change dependent on the market. Past performance or any prediction, projection or forecast on the economy or markets is not indicative of future performance. The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Certain RREEF Real Estate investment strategies may not be available in every region or country for legal or other reasons, and information about these strategies is not directed to those investors residing or located in any such region or country. For Investors in the United Kingdom: Issued and approved in the United Kingdom by Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited, and Deutsche Asset Management (UK) Limited of One Appold Street, London, EC2A 2UU. Authorised and regulated by the Financial Services Authority. This document is a non-retail communication within the meaning of the FSA s Rules and is directed only at persons satisfying the FSA s client categorisation criteria for an eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client. When making an investment decision, potential investors should rely solely on the final documentation relating to the investment or service and not the information contained herein. The investments or services mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with us you do so in reliance on your own judgment. For Investors in Australia: In Australia, Issued by Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154), holder of an Australian Financial Services License. This information is only available to persons who are professional, sophisticated, or wholesale investors under the Corporations Act. An investment with Deutsche Asset Management is not a deposit with or any other type of liability of Deutsche Bank AG ARBN 064 165 162, Deutsche Asset Management (Australia) Limited or any other member of the Deutsche Bank AG Group. The capital value of and performance of an investment with Deutsche Asset Management is not guaranteed by Deutsche Bank AG, Deutsche Asset Management (Australia) Limited or any other member of the Deutsche Bank Group. Deutsche Asset Management (Australia) Limited is not an Authorised Deposit taking institution under the Banking Act 1959 nor regulated by the Australian Prudential Authority. Investments are subject to investment risk, including possible delays in repayment and loss of income and principal invested. For Investors in Hong Kong: Interests in the funds may not be offered or sold in Hong Kong or other jurisdictions, by means of an advertisement, invitation or any other document, other than to Professional Investors or in circumstances that do not constitute an offering to the public. This document is therefore for the use of Professional Investors only and as such, is not approved under the Securities and Futures Ordinance (SFO) or the Companies Ordinance and shall not be distributed to non-Professional Investors in Hong Kong or to anyone in any other jurisdiction in which such distribution is not authorised. For the purposes of this statement, a Professional investor is defined under the SFO.
36
Office Locations:
Frankfurt Mainzer Landstrae 178-190 60327 Frankfurt am Main Germany Tel: +49 69 71704 0 Hong Kong Floor 58 International Commerce Center 1 Austin Road West, Kowloon Hong Kong Tel: +852 2203 8888 London 1 Appold Street London EC2A 2UU United Kingdom Tel: +44 20 754 58000 New York 345 Park Avenue 25th Floor New York NY10017-1270 United States Tel:+1 212 454 6260 Paris Floor 4 3 Avenue de Friedland Paris France Tel: +33 1 44 95 63 80 San Francisco 101 California Street 26th Floor San Francisco CA 94111 United States Tel:+1 415 781 3300 Singapore One Raffles Quay South Tower 048583 Singapore Tel: +65 6423 8385 Tokyo Floor 17 Sanno Park Tower 2-11-1 Nagata-cho Chiyoda-Ku Tokyo Japan Tel:+81 3 5156 6000
Global Research Team

Global
Mark Roberts Global Head of Research mark-g.roberts@rreef.com Kurt W. Roeloffs Global Chief Investment Officer kurt.w.roeloffs@rreef.com
Americas
Alan Billingsley Head of Research, Americas alan.billingsley@rreef.com Marc Feliciano Chief Investment Officer, Americas marc.feliciano@rreef.com Ross Adams Industrial Specialist ross.adams@rreef.com Bill Hersler Office Specialist bill.hersler@rreef.com Ana Leon Property Market Research ana.leon@rreef.com Andrew J. Nelson Retail Specialist andrewj.nelson@rreef.com Alex Symes Economic & Quantitative Analysis alex.symes@rreef.com Brooks Wells Apartment Specialist brooks.wells@rreef.com Stella Yun Xu Property Market Research stella-yun.xu@rreef.com
Europe
Simon Durkin Head of Research, Europe simon.durkin@rreef.com Gianluca Muzzi Chief Investment Officer, Europe gianluca.muzzi@rreef.com Jaroslaw Morawski Property Market Research jaroslaw.morawski@rreef.com Nazanin Nobahar Property Market Research nazanin.nobahar@rreef.com Arezou Said Property Market Research arezou.said@rreef.com Maren Vaeth Property Market Research maren.vaeth@rreef.com Simon Wallace Property Market Research simon.wallace@rreef.com
Asia Pacific
Koichiro Obu Head of Research, Japan/Korea koichiro.obu@rreef.com Leslie Chua Head of Research, Asia Pacific ex-Japan/Korea leslie.chua@rreef.com Paul Keogh Chief Investment Officer, Asia Pacific paul.keogh@rreef.com Orie Endo Property Market Research orie.endo@rreef.com Edward Huong Property Market Research edward.huong@rreef.com
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RREEF Real Estate Global Real Estate Strategic Outlook April 2012

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RREEF Real Estate Global Real Estate Strategic Outlook April 2012

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RESEARCH REPORT

Global Real Estate Strategic Outlook

Capital Markets Outlook ..................................................................... 16

Real Estate Fundamentals ................................................................. 21

Global Portfolio Considerations and Risks

Capital Value Trends Globally

Increase Since Trough

Values Relative to Peak

-8% -11% -14% -14%

-9% -10% -10% -11%

-20% -30% -40%

-23% -28% -34% -33%

Capitalization and Risk Free Rates

Cap Rate Risk Free Rate

10 Year Betas in Relation to the IPD Global Index

Sources: IPD and RREEF Real Estate. As of March 2012.

Global Real Estate Allocation

Asia Pacific 31%

Asia Pacific 34%

United States 32%

United States 34%

Regional Allocation House View

RREEF Real Estate Global Strategy

Average Return Underperform

United States I-Chicago O-Washington D.C. Europe O-Brussels O-Hamburg

A: Apartments I: Industrial O: Office R: Retail centers

Real Estate Performance

Real Estate Performance Outlook

Regional and Property Type Total Return Forecast 2012 to 2016

Regional and Property Type Excess Return Forecast 2012 to 2016

Projected GDP Growth

Sources: IHS Global Insight. As of March 2012.

Stock Volatility and U.S. Inflation Expectations

U.S. CBOE VIX

Source: CBOE, Federal Reserve Bank of Cleveland. As of March 2012.

Median Age vs. Debt/GDP Ratio

Debt as % of GDP (percent)

110 100 90 80 70 60 50 40 30 20 10 0 34 35 36 37 38 39 40 41 42 43 44 45 Australia Germany

Median Age (years)

U.S. Economic Outlook

European Economic Outlook

Asia Pacific Economic Outlook

Capital Markets Outlook

Quarterly Global Transaction Volume

U.S. Capital Markets Outlook

U.S. Transaction Volume and Capitalization Rates

Cap Rate (right) $353

Real Estate Transaction Buyer Profiles

Unknown User/other Private Listed/REITs Inst'l/Eq Fund Cross-Border

Source: Real Capital Analytics.

European Capital Markets Outlook

European Transaction Volume and Capitalization Rates

Cap Rate (right)

7.5% 7.0% 6.5%

$200 $150 $100 $50 $0 2007

$169 $133 $97

6.0% $152 5.5% 5.0% 4.5% 4.0%

Asia Pacific Capital Markets Outlook

Asia Pacific Transaction Volume and Capitalization Rates

6.5% $86 $66 $85 $91 6.0%

$80 $60 $40 $20 $0

5.0% 2009 2010 2011

Real Estate Fundamentals

U.S. Vacancy Rate Trends