Global (Real Estate) Capital Markets. Global (Real Estate) Capital Markets Residential Prices

Global (Real Estate) Capital Markets

The Past (2000-2007) o Prices

Owner-occupied residential Income Property

o Sources of Equity o Sources of Mortgage Debt o Where Did All the Money Come From?

Capital Market Flows Real Estate

The Present Credit Crunch

The Future

o What are the risks?

Global (Real Estate) Capital MarketsResidential Prices

House Price Appreciation Rates1999:4-2007:3

100.00

120.00

140.00

160.00

180.00

200.00

220.00

240.00

260.00

280.00

300.00

Quarter

Pri

ce I

nd

ex

Los Angeles (13.4%)

San Diego (11.3%)

US (7.6%)

Denver (4.5%)

Dallas (4.0%)

Omaha (3.6%)


House Prices 2006:3-2007:3

85.00

90.00

95.00

100.00

105.00

110.00

115.00

2006:3 2006:4 2007:1 2007:2 2007:3

Quarter

Pri

ce I

nd

ex

UT (+12.9%)

TX (+6.3%)

CO (+2.2%)

US (+1.8%)

FL (-2.1%)

MA (-2.3%)

CA (-3.6%)


MSANAME2006:3-2007:3

price change (%)Odessa, TX 17.5Midland, TX 17.3Wenatchee, WA 14.9Provo-Orem, UT 13.6Grand Junction, CO 13.4Ogden-Clearfield, UT 13.3Salt Lake City, UT 12.7Cumberland, MD-WV 12.3Casper, WY 12.1San Angelo, TX 11.9Lebanon, PA 11.6Idaho Falls, ID 11.2Killeen-Temple-Fort Hood, TX 10.8


MSANAME2006:3-2007:3

price change (%)Vallejo-Fairfield, CA -7.3Salinas, CA -7.7Naples-Marco Island, FL -8.2Port St. Lucie, FL -8.3Sacramento-Arden-Arcade-Roseville, CA -8.7Palm Bay-Melbourne-Titusville, FL -9.2Modesto, CA -9.3Sarasota-Bradenton-Venice, FL -10.0Cape Coral-Fort Myers, FL -10.0Stockton, CA -10.4Yuba City, CA -11.6Santa Barbara-Santa Maria-Goleta, CA -12.2Punta Gorda, FL -12.4Merced, CA -13.7


Colorado House Prices2006:3 to 2007:3

90.0

95.0

100.0

105.0

110.0

115.0

120.0

2006:3 2006:4 2007:1 2007:2 2007:3

Quarter

Pri

ce In

dex

Grand Jnct (+14.0%)

Boulder (+3.1%)

Co Spr (+1.6%)

Fort Collins (+0.2%)

Pueblo (+0.2%)

Denver (-0.3%)

Greeley (-0.9%)

Global (Real Estate) Capital MarketsIncome Property Cap Rates

Apartment Cap Rates

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

10.00%

Month

Ra

te

10-Year T

cap rate

spread


Office Cap Rates

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Month

Ra

te

10-Year T

cap rate

spread


Industrial Cap Rates

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Month

Ra

te

10-Year T

cap rate

spread


(Strip) Retail Cap Rates

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Month

Ra

tes

10-Year T

cap rate

spread


Cap Rate Spreads

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%2001:1

2001:7

2002:1

2002:7

2003:1

2003:7

2004:1

2004:7

2005:1

2005:7

2006:1

2006:7

2007:1

2007:7

Month

Sp

read

apts

industrial

office

retail

Composition of Buyersoffice, industrial, retail and multifamily properties $5 mil.+

32% 30%34%

22%

7% 12% 3%

6% 5%

3%

7%9%

14%40%

17% 13% 11%

10%

8% 8%7%

11%

17% 19% 22%13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 20079 mos

inst'l

foreign

reit/public

user/other

fund

syndicator

condoconverter

private

Equity CapitalSource: Real Capital Analytics

Source: Real Estate Alert

Number of Funds

0

50

100

150

200

250

300

350

400

450

2002 2003 2004 2005 2006 2007

Targeted Equity Raisein billions

$0

$50

$100

$150

$200

$250

2002 2003 2004 2005 2006 2007

The Universe of Private Equity Funds

Equity

Source: Real Capital Analytics

Sources of Equity Capital% of Acquisitions Finance by CMBS

13%

25%

54%

72%

56%

22%

32%

39%

inst'l

foreign

reit/public

fund

syndicator

pvt out ofstate

pvt instate

total

inst'l, 13%

foreign, 11%

reit/public, 10%

fund, 40%

syndicator, 2%

pvt in state, 12%

pvt out of state, 10%

Equity CapitalSource: Real Capital Analytics

Foreign

0

5

10

15

20

25

30

35

2002 2003 2004 2005 2006 2007

Bill

ions

Other

Latin America

Euro

Pac Rim

Canada

UK

Australia

Mid East

German

Foreign Acquisitions of US Property(trailing 12 months, office, industrial, apartment, retail properties)

Source: Real Capital Analytics

Global (Real Estate) Capital MarketsMortgage Debt Outstanding

Mortgage Debt Outstanding

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Bill

ion

s o

f U

SD

residential

commercial

Global (Real Estate) Capital MarketsChange in Mortgage Debt Outstanding

Percent Change in Mortgage Debt

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Pe

rce

nt

Ch

an

ge

residential

commercial

Global (Real Estate) Capital MarketsWhere Did the Money Come From?

Increases in Global Capital Flows Attributable to:

Increase in Global Wealth o US Corporate Profits o Savings by Foreigners

Chinese save 30% of income Oil producing countries

Saudi Arabia, Russia and Iran are 30% of the world’s oil production

Central Banks Increased Liquidity o Fed

Federal Funds Rate Money Supply

Global (Real Estate) Capital MarketsWhere did the money come from?

US Corp Profits

$0.0

$200.0

$400.0

$600.0

$800.0

$1,000.0

$1,200.0

$1,400.0

$1,600.0

$1,800.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Bill

ion

s o

f U

SD

Global (Real Estate) Capital MarketsWhere did the money come from?

Percent Change in Corp Profits

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Per

cen

t C

han

ge

Global (Real Estate) Capital MarketsThe Fed

Today (December 11, 2007), the Federal Open Markets Committee (FOMC) announced it would lower its target federal funds rate by 25 basis points to 4.25%. The federal funds rate is the rate depository institutions charge each other to borrow reserves on a very short term (e.g. overnight) basis. The Fed achieves its target by buying/selling securities in the open market.


US Govt Interest Rates

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

2000

:1

2000

:4

2000

:7

2000

:10

Month

Rat

e

Fed Funds

3-mo Tbills

10-yr Tbonds


The Money Supply

MO: physical currency plus accounts at the central bank M1: M0 + cash held in reserve + demand (checking) accts M2: M1 + savings accounts + money market accts + small CDs ( < $100,000) M3: M2 + all other CDs + Eurodollar deposits + repurchase agreements


Money Supply and Economic Growth in US

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2000 2001 2002 2003 2004 2005 2006

Year

Per

cen

t C

han

ge

Growth in M2

Economic Growth

M2 - Growth

Global (Real Estate) Capital MarketsWhere Did the Real Estate Capital Come From?

Shift in investors' preferences (positive alphas)

o Real estate really is a separate asset class

o Households allocate more wealth to real estate

o Investors allocate more to real estate

Lower cost of debt resulted in

Lower WACC

More leverage for real estate acquisitions

o Equity Investors: Private Equity/Hedge Funds

Example: Blackstone

o Credit Markets: Wall Street Financial Engineers

Examples: CDOs

Global (Real Estate) Capital MarketsWhere did the Real Estate Capital Come From?

Securitization of real estate

o Residential Real Estate

Securitizing Subprime Mortgages

Underwriters overwhelmed

o Commercial Real Estate: more diversification (less risk?)

CMBS

CDOs

o Consequences

Higher L/Vs: more leverage

Private Equity/Hedge Funds In

Traditional Institutional Investors Out

Global (Real Estate) Capital MarketsThe Present

Consequences of the Current Credit Crunch

Credit Spreads increasing

Required DSCs decreasing

Lower L/V (zero?, but not for too long)

Cash is king (again)

Marginal investors (real property valuations) depend on WACC

OUT: Financial engineers (Wall Street); Private Equity/Hedge Funds

IN: Real estate expertise; Traditional Institutional Investors

Source: Commercial Real Estate Direct; Real Capital Analytics

CMBS Spreads to Treasuries

0

100

200

300

400

500

600

Jan‘05

Apr Jul Oct Jan‘06

Apr Jul Oct Jan‘07

Apr Jul Oct

AAA10Yr

BBB-

Global (Real Estate) Capital MarketsThe Future

Higher cost of debt

o Increase underwriting standards (especially residential)

o Lower L/Vs

More accurate risk pricing

o For high risk tranches & CDOs

o Spatial pricing of risk in credit markets

China will figure out ways to invest internally


What Are the Risks?

US (then Global) Recession

USD Continues to get hammered in Currency Markets

US Balance of Trade Deficit

$100/barrel oil (or higher)

Political response: isolationism

Global (Real Estate) Capital MarketsCurrency Markets

USD vs EURO

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

Month

FX

Global (Real Estate) Capital MarketsCurrency Markets

USD vs CAD

0.9000

1.0000

1.1000

1.2000

1.3000

1.4000

1.5000

1.6000

1.7000

20

00

:1

20

00

:4

20

00

:7

20

00

:10

20

01

:1

20

01

:4

20

01

:7

20

01

:10

20

02

:1

20

02

:4

20

02

:7

20

02

:10

20

03

:1

20

03

:4

20

03

:7

20

03

:10

20

04

:1

20

04

:4

20

04

:7

20

04

:10

20

05

:1

20

05

:4

20

05

:7

20

05

:10

20

06

:1

20

06

:4

20

06

:7

20

06

:10

20

07

:1

20

07

:4

20

07

:7

20

07

:10

Month

Fx


Balance of US Trade (Billions_of_USD)

-1,000.0

-900.0

-800.0

-700.0

-600.0

-500.0

-400.0

-300.0

-200.0

-100.0

0.0

100.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Bill

ion

s o

f U

SD


Balance of US Trade as a Percent of US GDP

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Pe

rce

nt

of

GD

P



Documents

Global (Real Estate) Capital Markets. Global (Real Estate) Capital Markets Residential Prices