ISA midyear 2016 2 - LaSalle Investment Managementof 2016 appear to conﬁ rm our outlook for low global growth, low interest rates and capital market volatility. In this uncertain

Investment Strategy Annual

Mid-Year UpdateJULY 2016

Contents

The Global Viewat Mid-Year3

The EuropeanDivorce11

The Outlook forthe UK 13

The Outlook for Continental European Real Estate17

The Outlook forAsia Pacifi c21

The Outlook forNorth America29

The Global View at Mid-Year

LaSalle’s Strategy and Research team has been more negative than

consensus since the beginning of the year1 . Thus far, the events

of 2016 appear to confi rm our outlook for low global growth,

low interest rates and capital market volatility. In this uncertain

environment, we believe real estate plays an important stabilizing

role in an investment portfolio, but risk levels are rising along with

core valuations. The turmoil in the capital markets might open up

higher-yielding buying opportunities from distressed sellers as the

implications of the Brexit vote in the UK ripple around the world.

The risk of rising interest rates, however, has been greatly diminished

by the Brexit vote. On a “spread” basis, real estate looks to be

fair value or inexpensive against investment grade sovereign and

corporate bonds. But, we can expect weaker fundamentals alongside

higher prices for core real estate in some countries – this is not a

combination conducive to strong double-digit returns for core real

estate over the next two to three years. At the same time, single-digit

returns in the 4% to 7% range with low leverage should be suffi cient

for many risk-averse investors.

This mid-year report contains a summary of the fallout from the June

23 referendum in the UK. Over-reactions in the capital markets could

open up higher-yielding opportunities from distressed sellers as the

implications of this historic vote ripple around the world. It is still too

early to know how or exactly where capital shortages will be created,

but we expect they will become apparent fi rst in the UK and the EU,

1 “The Bear Went Over the Mountain” The PREA Quarterly, March 2016.

3 | 2016 MID-YEAR ISA


which will be hardest hit by the impending divorce. Nearly all open-end

real estate funds in the UK have suspended redemption requests; we

do not expect to see a similar “gating” of open-end funds in Australia,

Canada, Germany, the US or other major developed markets. But,

liquidity concerns are rising around the world, especially from nervous

individual investors.

The UK, now the world’s sixth largest economy2, has been the epi-

center for political and fi nancial tremors and the aftershocks are still

coming. While we don’t believe that the fallout from the June 23 Brexit

referendum will be cataclysmic or systemic, the law of unintended

consequences suggests that investors should closely watch for ripple

eff ects in the EU, North America and even all the way to Asia Pacifi c.

These are the trends we are following most closely:

• A general tilt toward “risk-off ” investing while corporate investment, consumer spending and bank lending are likely to down-shift from their already weak pace.

• Waning confi dence in the European Union by the electorates of many of member states.

• A sharp rise in the US Dollar and the Japanese Yen on world currency markets.

• A steady fall in world trade in 2016 that has reversed the trend of six years of post-Global Financial Crisis (GFC) growth.

• A gradual downward drift in the Chinese Yuan as it tracks the Euro. This may lead to more pressure from Chinese investors to fi nd safe haven assets denominated in currencies other than Sterling, the Euro or the Yuan. The likely targets: the Aussie dollar, the Japanese Yen and the USD.

• A potential targeting of US assets, including real estate, by cross-border capital.

2 The devaluation of Sterling pushed the UK below France as measured in USD by the World Bank.

We expect more activity by high-net-worth individuals than by institutions, at least until last December’s FIRPTA3 reforms are clarifi ed by the US tax authorities.

• The possibility (and at this point it is only talk) of a redistribution of banking activity and talent from London to other fi nancial centers in Western Europe and North America.

• An over-reaction to the Brexit referendum that confuses the posturing of fi nancial institutions and the rhetoric of politicians for actual facts. We also observe that the market may under-estimate the length of time it will take to negotiate new terms of trade and reciprocal migration agreements between the UK and the Continent. We believe that these new terms will unfold over years, not months.

• A broad-based populist rejection of globalization, immigration, and free trade as pillars of open trade in democratic societies, especially in Western countries.

The 2016 edition of LaSalle’s Investment Strategy Annual focused on

“investment strategies for the mature phase of the cycle”. In this mid-

year update, we reaffi rm all of our broad-brush recommendations.

Foremost among them:

1. Seek a balance between defense and off ense (with an emphasis on defense).

2. Take out “cycle insurance” for both domestic and international portfolios of real estate.

3. Consider fi nancial structures that trade the dwindling opportunity to receive value appreciation for a preferred return.

4. Maintain the discipline of a “required return” despite swings in investor sentiment, concomitant capital market volatility, and the temptation to stretch assumptions to meet a targeted rate of return.

5. Sell non-strategic assets, while there is still an abundance of capital seeking fully-leased real estate.

3 Foreign Investment in Real Property Tax Act


Defensive Strategies Still Make Sense

The economic, fi nancial and political events of the fi rst half of the year

have (unfortunately) confi rmed the importance of these defensive

strategies. Unprecedented capital market events continue to roll

through the global equity and bond markets. Real estate is not immune

from these powerful forces—a steady and dependable supply of debt

and equity capital is needed to extend the six-year run of rising real

estate values in most countries for another year or two. Four important

lead indicators of capital fl ows all showed shrinkage in the fi rst half of

the year:

1. Direct deal transaction volumes fell about 20%. (a steeper drop in the UK)

2. REIT IPO/secondary issuance was fairly quiet.

3. Queues in many open-end private equity funds shrank. And now, many of the largest UK open-end funds (catering to individuals, rather than institutional investors) have suspended redemptions.

4. CMBS issuance fell in several countries (most notably the US) as regulatory changes went into eff ect.

Fears of a denominator eff ect lessened after the Q2 bounce-back in

equities from their mid-February freeze and then again in the two

weeks following the short-lived Brexit Dip. The tentative recovery of

most large-cap equity indices means there is still plenty of capital

targeting real estate. Meanwhile, the “lower for longer” mantra in the

bond market continues to create distortions across all capital intensive

industries, with real estate certainly near the head of the pack. For the

fi rst time in fi nancial history, negative interest rates are now found in

seven major countries. Moreover, central bank QE programs in the EU

and Japan have been extended to corporate bonds and other private

credit instruments. All of this means that investors have fewer places

to fi nd secure, positive yields. As a result, pension funds and insurance

companies gravitate to long-dated bonds in Australia, Canada, the

US and, until recently, the UK. These countries all look attractive in

terms of their ability to stay in positive territory, but the rush to safety

reduces yields in these positive interest rate countries to historic lows.

More than 30% of the investment-grade sovereign bond universe

now off ers investors zero or negative yields. This situation could put

downward pressure on investment grade corporate bonds and on core

real estate as well (see fi gure 1 and 2 on the following page).

Many Sovereign Bond Yields are Now Negative

Result is Upward Pressure on Core Real Estate Pricing

Source: Bloomberg As of 30 June 2016

Five Year Government NoteRates Go Negative

A Majority of Government BondsYield Less Than 1%

Lower for Longer will Persist for Years to Come

Source: Bloomberg, LaSalle. Updated 30 June 2016

10Y Government Bonds

fi gure 2

fi gure 1



Patience Required for Opportunistic Investing

In sum, a staccato beat of alarming headlines provides the backdrop

to a risk averse investment environment. Major market stabilized real

estate will likely be on the receiving end of yield-seeking capital fl ows

in the short run. Higher-yielding opportunities to take advantage

of capital shortages, will take time to emerge…but we sense they

will come. The downward re-rating of global growth rates, infl ation

expectations and interest rates in 2016 means that the ‘triple low’4

4 Low economic growth, low infl ation, low interest rates.

macro environment will persist for several more years. A ratcheting

down of growth expectations in China, the US, the UK, Canada

and Australia all contribute to an extension of the lower for longer

environment, and possibly through the end of the decade in the case

of the EU and Japan (see fi gure 3 below).

As we explained in the ISA-2016, we believe this lower for longer

situation can actually boost core real estate returns in the short-run,

even as it dampens the long-run outlook for rental income growth.

As a result, real estate values for stabilized assets in major markets

outside the UK may continue to increase or hold steady. But, the

0%

1%

2%

3%

4%

5%

6%

7%

GD

P G

row

th

2016 Forecast as of Dec. 2015 2016 Forecast 2017 Forecast 2018 Forecast

GDP Growth Forecasts

GDP Outlooks Have Trended Lower

UK GDP Forecast Revised Sharply Down in Face of Brexit

Source: Bloomberg Survey of Forecasters – Latest forecasts as of 24 June 2016

UK, US, France, and Germany 2016 and 2017 forecasts use Consensus Forecasts as of 28 June 2016. UK 2018

forecast uses IPD PMA Estimate for Brexit scenario

fi gure 3


cyclical recovery in fundamentals will be moving much more slowly

than in recent years. In the UK, fundamentals and values are likely to go

into reverse. The saving grace is that construction fi nance and supply

pipelines are showing an uncharacteristic degree of discipline for this

stage of the cycle, which could keep a downward infl ection point at

bay in most markets outside the UK (see fi gure 4 above).

Over time, the secular themes of demographics, technology and

urbanization (DTU) will continue to drive strong demand in live-

work-play districts dominated by tech-fi rms and millennial workers.

However, these DTU drivers could go on “pause” in some countries

until the uncertainty cloud lifts. Also, the most obvious sub-markets

are now fully priced and a strong supply-response has ramped up.

Investors will have to fi nd a mix of DTU drivers that are less obvious—

either by moving into the next tier of pioneering districts or by

anticipating how millennial and boomer generation households will

behave as they go through the next stage of their life-cycles. The

millennial generation is now well past the halfway mark of joining the

workforce in most countries. The front-end of this generation may

be ready to start a family or to put a bit more distance between their

place of residence and their place of work (even taking into account

their delayed approach to household formation). Similarly, an aging

workforce continues to extend their working lives, both by necessity

and by choice. In wealthy countries, “boomers” are obsessed with

maintaining their health, but are also starting to spend more on travel/

leisure, if they can aff ord it. All of these trends are starting to show up

in international real estate markets. Investors should be able to earn a

risk premium by getting ahead of these trends, relative to investing in

fi gure 4

Global Fundamentals: Cycle Positions at Mid-Year 2016

Mid year 2016

Source: LaSalle (06/16)

Note: China represents Shanghai & Beijing


fully-leased core properties in well-established locations. While “lower

for longer” boosts the expected exit value of “create core” strategies,

leasing could be harder to achieve in a slow growth environment.

A result of the risk-averse environment at mid-year and falling

sovereign yields, is that more core real estate markets around the world

migrated back into the “fair value” or “inexpensive” range in our relative

value model (see fi gure 5 above). At the same time, cross-border and

domestic capital sources in many countries could narrow their range of

target investments for a combination of diff erent reasons.

This “return to basics” approach includes a focus on these traditional,

core themes:

• The income produced by high quality core assets still generates yields at a healthy premium to sovereign and corporate bonds.

• Investors will have to factor in less coordinated central bank policies globally and the corollary of increased currency volatility.

• At a time when all asset prices are high relative to historic metrics, real estate is grounded in valuation metrics like replacement cost that are elusive in other asset classes.

• Real estate’s low correlation with other asset classes should provide diversifi cation benefi ts. This was demonstrated by the resilience of listed REITs and the uninterrupted cash fl ows from private equity real estate.

• An investor’s ability to create wealth by developing and leasing buildings produces a reasonable risk-reward proposition in slow-growth market, but assumptions must be realistic and take into account the ‘triple low’ macro environment...and the likelihood that construction fi nance will be even harder to obtain in a risk-off environment.

Global Fair Value Analysis

North America and Europe Clustered, Asia Pacific More Dispersed

As of 1Q2016. Source: LaSalle.

Expected vs. Required Returns

Expected and required unleveraged 10 Year IRRS for core real estate

fi gure 5


Real Estate’s Track Record5

A review of the 5, 10 and 20 year numbers for real estate (see fi gure

5 on previous page) show real estate’s resilience despite the sharp

downdraft in values that occurred in 2008-2009. Institutions and

households can both take comfort in these long-run real estate metrics,

which have earned real estate a place in most investors’ investment

portfolios. The fundamentals of supply and demand appear to be well-

balanced going into the second half of the year in most of LaSalle’s

major markets (a few exceptions noted). Yet, real estate is inextricably

linked to the broader capital markets. That means a big part of the risk

embedded in real estate values today comes from the possibility that

fi xed-income and stock portfolios are also near peak levels in terms of

valuations. A sharp downdraft in other asset categories would cause

liquidity to dry up and threaten real estate values.

5 Past performance is not necessarily indicative of future results.

Real Estate investors in the largest IPD/MSCI benchmark countries

have enjoyed low double-digit returns (~10% to 11%) over the past 1, 3

and 5 years for unlevered, core investments. Private equity investors

who used leverage or took on “value-add” or development risk also

achieved higher returns. Listed REIT investors have also done well over

the 1/3/5 year historic time frame: 12.6%, 8.9%, 8.6%. Thus far in 2016,

private equity real estate markets are likely to pull back slightly to earn

single-digit returns, except in the UK where we expect property values

to fall in line with the sharp drop that has already occurred in UK REIT

prices. The strong, historic numbers don’t tell the whole story. The

underlying dynamic is that when capital markets get highly volatile,

real estate has historically been partially, but not fully, insulated from

the ensuing turmoil (see fi gure 6 below).

Notes on Sources

MSCI All Country Gross World Total Return Index in Local Currency

EPRA/NAREIT Global (Developed) Index Total Return in US Dollars

Citigroup World Corporate Bond Index Total Return in US Dollars (Local Currency History Not Available Prior to 1999)

Citigroup World Government Bond Index All Maturities Total Returns in Local Currency

UK Investment Property Databank (IPD) Quarterly Standing Property Total Returns in British Pounds, data prior to Dec 2001 is IPD Annual.

US NCREIF Property Index Total Returns in US Dollars

Canada Investment Property Databank (IPD) Quarterly Standing Property Total Returns in Canada Dollars

Australia Investment Property Databank (IPD) Quarterly Standing Property Total

Returns in Australian Dollars

*2Q 2016 quarterly return for UK, Canada, Australia , and US is forecast. Actual data history through 1Q 2016. Updated 6 July 2016

Mid-Year 2016 Returns

Bonds and Property Outperformed Equities Over Last Four Quarters

fi gure 6


The European Divorce

Anyone who wants to leave this family can’t expect to get rid of all

the obligations while holding on to all the privileges.

- Angela Merkel June 28, 2016

As the saying goes, what a diff erence a day makes. History will

record that on the 23rd June 2016, a majority in the UK electorate

voted for the UK to leave the European Union (EU), ending 43

years of participation in the European economic and political union.

In just 24 hours the positive short-term prospects of the region’s

strongest developed economy evaporated, creating severe fi nancial

turbulence and volatility in the fi nancial markets around the world.

The remainder of 2016 will be characterised by further market and

political instability in both the UK, and to some extent Continental

Europe, as the terms of the divorce are debated and decided on both

sides of the English Channel. Moreover, other counties are now also

reconsidering their commitment to the EU.

The medium to long-term implications are hard to gauge as they

depend on so many diverse factors, many of which are more

emotional than rational. For example, the start date and duration of

the negotiation period between the UK and the EU is quite uncertain

at this stage, and there is even speculation that some form of re-

vote is still possible, right up until the request to leave the EU is

invoked by the UK Parliament as stipulated in Article 50 of the Lisbon

Treaty. Despite all the uncertainty, it is clear the Euro region now


faces the prospect of slower growth and a

prolonged period of ultra-low or increasingly

negative government bond yields. Central

banks will guard against any breakdown of

the fi nancial system by encouraging lending

and hence economic activity. Yet, nearly half

of the region’s stock of government bonds

currently trade at negative yields and the

German 10-year Bund dropped from 9bp

pre-Brexit vote to a negative 12.5bp a week

later. Investors are willing to buy money-losing

government bonds, rather than invest in risk

assets. Investors in UK real estate will carefully

balance the attractive secure income that

the asset class still off ers with heightened

risks of pricing adjustments in the short

term. Continental European investors will

continue to edge up the risk curve as long as

the recovery in their real economy is able to

continue, but will have one eye keenly trained

on political risk contagion from the UK (see

fi gure 7 below).

fi gure 7

Where are we in the economic cycle?

Mid year 2016



The Outlook for the UK6

The new Prime Minister, Theresa May, believes that her Conservative

Government has a clear mandate7 to initiate negotiations with the

EU under Article 50 of the Lisbon Treaty, though the formal notice

to exit is not expected this year. The remainder of 2016 will see a

period of intense uncertainty which will act as a drag on the UK’s real

economy. The implications for exchange rates, interest rates, bond

yields, equities, and infl ation are wide-reaching and multi-faceted.

Relations and trade with the EU will most likely be adversely aff ected

in the medium to long term, but a signifi cantly weaker currency in the

short term would benefi t exports (the FTSE 100 has already factored

this in within a week after the vote) and could even draw-in foreign

investment looking to capitalize on capital shortages.

Looking ahead to 2017, investors should expect persistent

uncertainty. During further periods of negotiation with the EU and

other future trade partners over the next two to fi ve years the UK

could see a curtailment in economic performance. However, a full

Brexit would ultimately accelerate the shifting pattern of UK trade

away from the EU and towards the US and emerging markets,

where the majority of the world’s long-term growth is located.

The Southeast UK, is now home to one of the world’s most liquid,

transparent, and investor-friendly real estate markets. Greater

London will need to reinvent itself outside the EU, and the overall

prospects for the UK outside the EU could gradually become more

positive than what is implied by current market commentators.

6 For a very detailed analysis of the potential impact please see our March 2016 paper entitled “The Impact of Brexit on UK

Real Estate” (refreshed post-referendum results on June 24, 2016).

7 “Brexit means Brexit”, Theresa May, 30 June 2016.


The implications for Scotland, however, are more serious as the push

towards independence will now be renewed with vigour. Pro-EU

Scottish politicians will have to make the case for an independent

Scotland joining the euro and being heavily reliant on a weak but

recovering oil market. Real estate investors could see a yield premium

materialise refl ecting this uncertainty in due course.

From a real estate perspective, investment volumes and leasing

activity may decline during the period of uncertainty. If the political

landscape stays unclear we expect an upward pressure on real estate

risk premiums. However, given the ultra-low interest rate and bond

yield environment we expect UK real estate yields to move out by a

modest 40-50 bps on average to circa 6% by the end of 2017 in this

scenario. We are more concerned about the occupational markets

than the movements in yields. We expect high-quality assets in strong

Central London locations to resist any erosion in value, although there

are nuances to this. For example, the high prices and reliance on

international fi nance in London puts this market segment at risk in the

short term. We believe the yield correction will therefore be felt most in

London City offi ces (greatest degree of occupier uncertainty) followed

by London West End offi ces (lowest starting point for yields). The Bank

of England will need to balance the need to curtail rising infl ation (a

potential issue after the GBP weakened) with fi scal stimulus. However,

the expectation is that they will cut or maintain low interest rates for

even longer. As a result, we expect the forecast correction in real estate

pricing to be largely restricted to 2016-17 and medium-term capital

infl ows into real estate will only be interrupted rather than reversed

(see fi gure 8 below).

Source: LaSalle, Thomson Reuters (11 July 2016)

Initial Reaction to Brexit Triggers Sterling Slump

fi gure 8


Financial services account for 18% of London’s economy, and, whilst

fi nancial institutions will not move en masse away from London to

other parts of the world, business decision-making will be delayed

and expansion plans put on hold. Certainly, fewer long-term occupier

decisions will be forthcoming until most of the volatility has dissipated.

Those tenants with commercial fl oorspace currently under off er will

push landlords for higher incentives and/or lower rents, and landlords

will be inclined to oblige. London’s status as global fi nancial centre will

be debated around the world, and so in the short term many investors

will avoid or re-price any value-add investments in the City or fringe

Central London offi ces. Cautious lenders and developers may now

delay existing construction activity (particularly in the City of London)

even if more than 40% of offi ce space being built in London is pre-let

by future occupants. Nonetheless, in our opinion these postponements

will not be enough to off set declines in London City Offi ce average

rents of 10% to 15% over 2017-19 (see fi gure 9 below).

Source: LaSalle (06/16) RICS (03/16)

Deloitte Real Estate (05/16)

Signs that the offi ce development pipeline is peaking

...although emerging evidence of

postponements

Central London Office Pipeline [under construction]

0

1

2

3

4

5

6

7

8

9

Und

er C

onst

ruct

ion

(sq

ft m

illio

n)

Historic Range Under Construction

-80

-60

-40

-20

0

20

40

60

80

Q2 06 Q3 07 Q4 08 Q1 10 Q2 11 Q3 12 Q4 13 Q1 15

Cos

t Exp

ecta

tions

Net

Bal

ance

(%)

Input Costs Output Prices

Construction Survey: Costs [net balance of responses]

City, Midtown & Kings Cross seeing a lot of construction activity relative to their history

Sentiment around construction prices peaked at similar levels to pre-GFC

INCREASE

DECREASE

fi gure 9

Parts of the Retail sector may see muted spending and less retailer

expansion in the short term. Nonetheless, retail is intrinsically the

most defensive commercial real estate sector. It has many long, index-linked leases which off er protection in a higher-infl ation environment.

What’s more, demand for convenience or necessity shopping is

unlikely to be scaled back dramatically, and we expect discount food

retailers and fast-fashion retailers to prosper relative to others. By

contrast, discretionary spend often falters in economic downturns,

although tourist destinations will prove resilient given the sharp sterling

devaluation which will boost visitor fl ows to the UK.

House builders share prices are often seen as a barometer for

the overall UK economy. Their volatility in the near term does not

necessarily refl ect the prospects for the wider housing market. Other

than a potential short-term correction in house prices, the overall

impact of Brexit on the nascent residential Private Rented Sector (PRS)

should also be muted given the entrenched under-supply that will

take many years to redress. Indeed, recent studies have shown that

migration into the UK represents less than 6% of the expected future

demand for rented housing. Elsewhere, student housing investments

may also be aff ected if EU students tuition fees were to increase

(which is far from certain), but these too will recover as modern

purpose-built accommodation is still in short supply.

LaSalle’s Investment Recommendations for UK Real Estate

The volatility that will characterise UK real estate in 2016-17 will

provide both substantial hurdles and rare acquisition opportunities.

Selling by open-end funds could be one of the fi rst of several chances

to buy rarely-traded assets. Over time, the market’s medium-term

occupier prospects are only slightly diminished. With this in mind, we

recommend overweighting strategies that focus on income visibility

and durability in the short term which we expect will outperform more

value added positions a risk-adjusted basis (see fi gure 10 on following

page).

• Already sought-after by pension funds as an alternative to low or negative-yielding bonds, real estate assets with long, index-linked leases outperformed during the GFC and should do so again over the next few years – particularly if infl ation overshoots its 2.0% target due to a weaker sterling. We believe investors should focus on future-proofed retail and even hotel or student housing where the local market dynamics are resilient and the underlying land values are high. Despite poor recent performance for the sub-sector as a whole, this strategy should not preclude top-performing supermarkets.

• Any signifi cant capital market repricing will lead to an opportune time to enter the market – particularly for US dollar-denominated and Japanese yen-denominated investors – who have faith in the long-term strength of the UK economy and its large, transparent, and liquid real estate market. The combination of a potential 15-20% drop in London’s capital values and a devalued sterling will tempt many into acquiring mis-priced core assets, many of which will be in sought-after locations in Central London. We believe even domestic investors with a long-term target will seek to take advantage if their allocation to real estate allows. This window only opens briefl y each cycle and so should be viewed as a rare opportunity. Entry timing could be crucial and so investors should be prepared to move quickly and decisively in 2016-2017.

• If the drop in capital values is signifi cant enough to erode the gains made in recent years, some borrowers may fi nd themselves in breach of loan covenants. In this scenario, the downside protection of being a lender rather than a borrower could prove its worth. As traditional lenders typically retreat in times of uncertainty, new lending will be attractive and mezzanine fi nance can earn higher cash yields than equity.


The Outlook for Continental European Real Estate8 The uncertainty that will engulf the UK over the remainder of 2016 will

be felt across the English Channel (or La Manche as the French refer

to it). The immediate reaction of the stock markets and government

bond yields in both “safe haven” and peripheral European countries is

testament to the close connections still in place. However, the EU27

countries will most concern themselves with the political ramifi cations

of their own populist movements. Elections in France, Germany and the

Netherlands in 2017 will be important barometers of public opinions

across Europe as whole.

8 For a very detailed analysis of the potential impact please see our May 2016 paper entitled “The Impact of Brexit on Continental

European Real Estate” (refreshed post-referendum results on June 24, 2016).

Beyond the negative impacts from the volatile fi nancial markets, the

continent’s real economy should remain broadly integrated and able

to build upon its recent positive momentum. In the medium term,

countries that trade most with the UK may be more aff ected. These

include Ireland and Germany, amongst others, and so logistics demand

specifi cally linked to this trade route may see an impact Ports such

as Rotterdam, Antwerp, and Dublin may also experience a drop in

activity in the medium term, although the overall strength of the global

economy will have a greater bearing on their outlook.

In the main, the tolerance for risk is unlikely to change and we

expect both occupiers and investors to continue with their pre-Brexit

business plans based on a broadly recovering set of economies. Taking

PRS = Private Rented Sector (Residential)

DTU = Demographics, Technology, Urbanisation


UK Investment Recommendations

Focus on Core as we enter the next phase of the cycle


fi gure 10

Non-Core: Wait for Signifi cant Price Drop


Sources: JLL (04/16), LaSalle (05/16)

Offi ce take-up near a ten year high on the Continent

Likely to fall in London City

LaSalle’s View of Europe’s Most Sizable DTU-Rich Markets

UK Germany France Benelux Nordics Italy & SpainLondon Munich Paris Amsterdam Stockholm Madrid

Manchester Frankfurt Lyon Rotterdam-The Hague Copenhagen-Malmö Barcelona

Birmingham Berlin Marseille-Nice Brussels Gothenburg Milan

Edinburgh Hamburg

moderate leasing, refurbishment or development risks

in the stronger occupier markets is still recommended

on a risk-adjusted basis. Although change is unlikely

to be on a large scale, the headwinds facing London’s

fi nancial markets outside the EU should blow in favour

of cities such as Frankfurt, Paris, Dublin, and, to a lesser

extent, Amsterdam and Madrid. By way of illustration,

were 5,000 jobs to move from London to La Défense in

Paris, a conservative estimate would be that La Défense

vacancy rate would fall by 200 bps – a signifi cant boost

to this 3.4 million sqm offi ce market. This will not happen

overnight; central to resolving London’s future will be the

issue of passporting rights (the ability to freely market

fi nancial products and services within the EU), and this

will be embroiled in political wrangling for some time to

come.

Regardless of the potential upside from Brexit for cities

such as Paris or Frankfurt, offi ce demand across Europe

Source: LaSalle

fi gure 11


is undergoing a strong renaissance in DTU rich cities. Falling vacancy

rates are leading to rental growth in an increasing number of offi ce

markets (see fi gure 11).

A modest Continental consumer revival feeds into retailer performance

and ultimately retail rental growth and logistics rental growth too.

However, we note that increasing competition from multi-channel

retailing means that real rental growth is confi ned to prime locations in

Europe.

LaSalle’s Investment Recommendations for European Real Estate

Major continental markets are now in the recovery or expansion phase

of their occupier cycle. Germany and Sweden lead the pack but Spain

has made the greatest strides in 2016. The capital markets are also very

strong in Germany and Sweden, and strengthening in the rest of the

Eurozone. Important social reforms are underway in France that could

soon release the brakes on its economic growth. Given the paucity of

positive yields across a growing number of fi xed-income products, we

expect domestic and international investor demand for continental

European real estate assets to continue unabated over the next few

years. Competition for core income-producing real estate is expected

to remain intense, and it may not be that surprising to see prime assets

fall below the 3% mark in more markets in the coming years.

With this context in mind our investment recommendations are as

follows:

• We have not changed our view that urban and / or dominant shopping destinations off er defensive income profi les. This risk-off strategy could also be supplemented with edge-of-CBD offi ces in Paris and Germany’s top fi ve markets and Milan.

• Investors with long investment horizons and modest risk appetite should also target urban logistics. The sector boasts relatively high yields and underlying land values are expected to increase as these cities’ populations grow and the urban fabric expands. An exit strategy could involve a conversion to residential or other use in due course.

• A build-to-core or refurbish-to-core strategy in enduring locations of a select number of cities tops the list of recommendations. DTU-rich cities have good population growth, deep pools of tenants including the technology sector, and an ability to attract both business travellers and tourists. In particular, we see potential in the Berlin and Netherlands residential markets, as well as both destination and convenience shopping centres across the continent. We also recommend forward-funding offi ces in the strongest locations of those DTU-rich cities, mitigating any planning risk.

• For those markets where investors have faith in the long-term outperformance, we recommend waiting for the opportune time to execute tailored higher-risk strategies, including acquiring distressed real estate or recapitalising borrowers. Some of the risks that may create such opportunities are a cooling Berlin investment market, an oversupplied Frankfurt offi ce market, an oversupplied German logistics market, the rise of populism leading to excess loosening of budget defi cits in Southern Europe, and negative interest rates forcing fl edging banks to offl oad assets.


*Shopping centres and prime high street shops

DTU = Demographics, Technology, Urbanisation


Continental Europe Investment Recommendations

Another looming source of both risk and opportunity is the October

Italian referendum to amend the Constitution, as proposed by Prime

Minister Mateo Renzi. A result against Renzi’s proposed reforms would

likely empower the Eurosceptic and populist Five Star Movement

(M5S) and would in turn spark the risk of another Eurozone crisis.

Indeed the M5S supports a referendum on Eurozone membership

and advocates tax cuts + spending increases. In other words, an M5S

government would probably lead to a surge in bond yields, credit

rating downgrades, economic weakness and further trouble for Italian

banks. Indeed Italian lenders already have €360 billion ($400 billion)

of bad loans, equivalent to about a fi fth of GDP. Italy does not have

a bad bank such as Ireland’s NAMA or Spain’s SAREB. Prime Minister

Renzi wants to use public money to shore up the country’s banks.

This could create interesting investment opportunities for high octane

strategies aimed at acquiring Italian-state guaranteed bundles of NPLs.

It seems that eight years after the GFC, distressed Italian real estate

loans could fi nally come to auction. However current European rules

say governments cannot bail out banks unless bondholders take losses

fi rst. It appears that, after Brexit, Italy’s October referendum is the next

“stress test” of European capital market stability (see fi gure 12 above).

fi gure 12


The Outlook for Asia Pacifi c

Asia Pacifi c has many cultural, political and historic ties to

the UK -- especially Australia, Hong Kong, India, Singapore,

and New Zealand. However, its trade linkages today are much

closer to the economies of the US, China and Japan. While

a full assessment of the impact of Brexit on Asia Pacifi c real

estate will take time, capital markets moved to a risk-off

mode immediately after the UK referendum. Initial impacts on

the region were mainly on currencies and concerns about a

potential drag on Asia Pacifi c’s exports and growth. Volatility

has declined in the weeks since the Brexit vote, as fi nancial

markets had the opportunity to digest the initial shock.

Asian REIT indexes mostly recovered, due to their defensive

income characteristics. Several Asian currencies have seen

some reversal from the immediate impact. At fi rst, the Yen

rose quickly against world currencies. This illustrates how

world markets still consider Japan to have a relatively stable

fi nancial system, despite other pressing issues like high levels

of government debt, an aging population, and slow economic

growth. By contrast, the China Yuan has weakened against

the USD and the Yen. More currency and market volatility can

be expected until investors have more visibility on the outlook

for major Asia trading partners including the US, the EU and

the UK. In the near term, relatively strong growth prospects

for the region are expected to continue to attract global

capital. Given growing levels of intra-Asia Pacifi c trade, there

are good reasons to believe the region will weather the Brexit

shock well.


LaSalle's Asia Pacifi c House View

The Brexit referendum has not fundamentally changed our Asia

Pacifi c house view. Our base case economic outlook of ‘triple low’

remains unchanged, but with a slightly higher probability. No global

recession is expected as a result of the

Brexit referendum and we believe the

probability of the ‘boom/bust’ scenario

decreases slightly. On a relative basis,

the economic growth in Asia Pacifi c is

projected to continue to exceed that

of the US and Europe. This economic

backdrop will support real estate market

demand, barring no other major shocks

from the global economy and capital

markets. The biggest risks in the region

are not tied to Brexit, but are linked more

closely to rising debt levels in China and

the slow political reform process in Japan.

We do not believe that export-driven

economies in the region could be

signifi cantly impacted due to the potential weaker trade demand from

the UK and EU. However, Japan and China, could face more challenges

from future currency volatility, because of their reliance on exports.

The yen appreciation, which pre-dates the Brexit referendum, could

be a headwind for Japanese exporters. Japan’s monetary and fi scal

stimuli are likely to mitigate part of this negative impact. The Japanese

government and central bank have already taken measures to counter

any abrupt gains in the yen. Furthermore, Japan’s two largest trade

partners are China and the U.S., with almost 40% of total trade . The

UK and EU only constitutes about 13% of Japan’s total trade . In this

context, economic conditions in China and the U.S. are more important

than the UK and EU.

The Chinese yuan depreciated the most

(against the US dollar) in fi ve months on June

24, but has recovered some ground in recent

weeks. Although a depreciating currency is

good for exports, the Chinese government

has another important task to maintain

currency stability in expectation of joining the

IMF’s basket of reserve currencies in October

2016. The People’s Bank of China has been

injecting funds into the system, which was

the primary reason why we did not see the

off shore yuan depreciate as much as other

currencies of export-driven economies.

We recommend closely monitoring the

movements of the off shore yuan, as

substantial depreciation could cause capital outfl ows, triggering further

capital market volatility. The volatility could ultimately dampen the

country’s economic growth. We are not seeing any material adverse

impact on China as of now. However, we recommend closely observing

loan growth and loan quality, and the availability of credit in China.

Banks may tighten lending criteria and credit spreads to private sector


borrowers may rise. The bottom line is that Japan and China have

substantial currency reserves, which provides their governments with a

capability to intervene and to stabilize markets.

Over the long-term, there could be some tapering eff ect on APAC

trade from Brexit, but very limited. Asia Pacifi c countries have been

trading more within the region than outside it. China is a far more

important trading partner for most Asia Pacifi c countries than the UK

and EU. Slightly more than 80% of China’s total trade is with the rest of

the world (excluding the UK and EU). Additionally, all trade agreements

between the UK and Commonwealth countries of the region will not

change because of Brexit. To some extent, the Brexit referendum could

accelerate a shift in trade toward higher growth economies, such as

Asia Pacifi c where the majority of the world’s long-term growth is

located (see fi gure 13 above).

Highly Active Capital Markets Across Asia Pacifi c

Interest Rates and Yields

Within the region, signifi cant stimulus measures have been undertaken

to support economic growth. More monetary and fi scal policy

responses are on the way as a response to the Brexit referendum, with

China, Japan and South Korea leading the way. The Fed is likely to

postpone further rate hikes which would benefi t many Asian countries

whose monetary policies are closely tied to the Fed funds rate. The

delay of the US rate hikes should keep downward pressure on cap rates

in markets such as Hong Kong and Singapore.

The Brexit referendum reinforces our view of a low interest rate, low

infl ation, and low growth (‘triple low’) environment within Asia Pacifi c

over the near and medium term. Further policy responses are likely to

Note: 1) Asia Pacifi c includes Australia, Hong Kong, Japan, New Zealand,

Singapore, South Korea and Emerging & Developing Asia. 2) All fi gures are as of end

2015 and are denoted in USD billion

* Please note “EU” includes the UK

Source: IMF

UK and EU are Not Key Trade Partners

of Asia Pacifi c

AP Countries Have Been Trading More With Each

Other Than US and EU

fi gure 13


prolong the ‘lower for longer’ interest

rate environment, both in the region

and globally. Japan’s negative interest

rates are expected to alleviate the

pressure from the yen appreciation and

market volatility, which are weighing on

corporate confi dence and investment.

In turn, real estate yields in Japan

are increasingly attractive relative to

negative-yield government bonds from

the perspective of domestic investors;

and the wide yield spreads remain

attractive to foreign investors. Australia

and South Korea are likely to have more

room for further rate cuts compared to

Japan. As a result, Australia and South

Korea are expected to attract investors

who are seeking higher absolute yields.

The “lower for longer” phenomenon is

expected to keep borrowing costs low

in all three countries and this will keep

the return profi le of real estate assets

attractive relative to other asset classes.


Intra-Asia Pacifi c Capital Flows Likely to Grow

In times of capital market volatility, we expect fund fl ows will continue

to be directed to Japan and Australia real estate markets, as they

are perceived as safe havens of the region. Banks are also becoming

more conservative in their real estate lending practices. Bank can be

expected to divide borrowers into bifurcated groups—those with stable

income and strong credit (who will get full access to the debt markets)

and those with high vacancies and weak credit (who will be denied

access to low-cost debt). ‘Flight to safety’ by both debt and equity will

likely drive core yields lower (see fi gure 14 above).

We expect new and growing pools of capital to continue to target the

acquisition of core real estate assets in the region, in the absence of

any further abnormal or un-anticipated shocks to the global economy

or capital markets. Within the region, the continued growth of public

REIT markets and REITs’ demand for yield, coupled with a greater

focus on real estate among large and growing sovereign wealth funds

and pension plans, could cushion some impact on yields from the

risk-off investment sentiment. In the near term, the relatively strong

growth prospects of the region are expected to continue to attract

global capital. Asian capital that was directed to the UK or Europe may

decide to target the US or stay closer to home or within the region,

which could boost real estate deal fl ow within Asia Pacifi c. We could

see some denominator eff ect among the US pension funds if stock

markets continue to react negatively, which could limit their allocation

to Asia Pacifi c real estate. Historically, European pension funds have

Source: JLL REIS, as of 1Q2016

Notes: 1) All series refers to prime offi ce; 2) Market s represented above are Sydney

CBD, Melbourne CBD, Tokyo 3kus, Shanghai CBD, Beijing CBD, Hong Kong

Central, Singapore Marina Bay, Seoul CBD, London West End, Paris CBD, New York

CBD, and San Francisco CBD

Strong Core Asset Pricing in Asia

Pacifi c Globally

Opportunities in Under-Valued Assets for Value Creation & Build-to-Core in AP

fi gure 14


low allocations to stocks in their portfolios; therefore, the impact of

the denominator eff ect is low. For North American investors who are

considering Asia Pacifi c or European real estate, the Brexit turmoil calls

for a reconsideration of whether the UK/EU represents more distress

and hence better value, or whether international money should be

deployed to faster-growing parts of Asia Pacifi c instead.

Risks and Opportunities in Asia Pacifi c Markets

In sum, we expect the impact of Brexit on the region to be muted.

Downside risks to the region’s economy and capital markets could

include other ongoing challenges: China’s high domestic debt levels,

and Japan’s potential and prolonged defl ationary environment. In our

view, the “triple low” environment could persist across Asia Pacifi c for

an extended period. When rates and bond yields are low and capital

markets are volatile, real estate usually gets the benefi t of capital fl ows

for being a relatively higher yielding asset class.

In the short term, if more volatility or uncertainties arise in other

parts of the world, Asia Pacifi c’s relatively stable (for now) collection

of nation states and treaties could be viewed more favorably by

international investors. Recent yen appreciation also creates a good

window to take advantage of the currency swing, and consider

moving forward planned disposition timelines of Japanese assets.

Additionally, we have been monitoring opportunities in South Korea,

Malaysia and Singapore due to rising transparency and improved

market fundamentals. These countries are also more attractive

given recent currency depreciation. In South Korea, we continue to

favor the modern industrial sector, with attractive cap rates and the

sector’s rapid institutionalization. In Malaysia, the real estate market

is becoming more transparent in selected sectors, but the key to a

successful strategy remains keeping the investment period short with

fl exible exit options. Singapore and Hong Kong are historically the most

susceptible to any global capital market volatility. We could potentially

fi nd contrarian buying opportunities, if brief liquidity withdrawals occur

in the capital markets. Bid-ask spreads could widen in Singapore luxury

residential and prime CBD offi ce, and Hong Kong retail and residential.

Singapore presents higher risks than Hong Kong, with a combination

of higher expected supply and weaker demand in the luxury residential

and prime CBD offi ce sectors. Singapore is likely to lead Hong Kong on

the timing of investment opportunities.


If capital markets become highly volatile for an extended

period of time, real estate would not be fully insulated. We

recommend closely monitoring real estate market liquidity

and investment sentiment. If pricing dislocation emerges, it

could create investment opportunities. Debt markets also

require close monitoring, as banks in several countries of the

region are reliant on the global wholesale debt market.

We continue to focus on markets with relatively better

fundamentals such as Sydney, Melbourne, Tokyo, Osaka,

Seoul, and logistics in fi rst and second tier cities in China.

The fundamentals that drive long-term performance in

enduring locations will ensure out-performance during times

of uncertainty. In Australia, we expect very little impact

on the occupier demand particularly in the non-resource

driven markets. Another risk to near-term investment and

hiring intentions is the likely ‘hung parliament’ result of

Australia’s July 2nd Federal election. However, overall the

country’s growth outlook remains strong and stable relative

to most developed economies and this stable growth looks

even more attractive for real estate investors, apart from

the weaker resource-driven markets in Western Australia.

In Japan, rental growth is likely to be muted for the offi ce

sector. However, the leasing market is tight and oversupply

is not a pressing issue. In Singapore, the logistics sector

continues to off er highest relative values. In Hong Kong,

the offi ce and logistic sectors remain highly sought after, as

vacancy rates are low despite demand is at risk.


The systemic risks in Asia Pacifi c from Brexit

are low. China and Japan have deep reserves

to manage their way through currency and

fi nancial volatility. Eastern Australia, South

Korea and Eastern China are all growing and

their real estate markets are reasonably strong.

The macro risks in the region (China debt and

Japan defl ation) are manageable as long as

monetary policy makers and bank regulators

are careful to address these two big threats

to the region’s stability. Looking ahead, we

recommend that investors turn their attention

to hunting for higher yields and returns, but

maintain the discipline to resist the temptation

of stretching assumptions (see fi gure 15).

Asia Pacifi c Investment Recommendations

fi gure 15


The Outlook for North America

Falling Interest Rates Likely to Forestall Declining Real Estate Values

Capital market upheavals provided the

most headlines in 2016 both globally and in

North America, even before the Brexit vote.

Brexit had a sharp, temporary negative

impact on US and global equities, but US

corporate and CMBS bonds held steady, a

good sign for real estate values. Extremely

low government bond yields have increased

investor demand for low risk real estate

in 2016 and Brexit increases the likelihood

that interest rates will stay very “lower

for longer”. Economic growth throughout

North America has been disappointing so

far in 2016, although minimal fallout from

Brexit is expected. The Federal Reserve

will be slow to raise US short-term interest

rates, while long-term rates are likely to

stay low in the context of extremely low

global yields and a global appetite for

US Government and investment-grade

corporate bonds.

So far in 2016, real estate fundamentals and

prices plateaued in the United States and were

fl at or down in Canada and Mexico. Despite

decelerating growth in the fi rst half of the year,

US real estate fundamentals remain strong with

below long-term average vacancy rates and

only pockets of elevated new supply. This will

help the US real estate market weather slower

than forecast growth. Recent strong job growth

numbers and labor participation rates in June

are encouraging, but single-month employment

data can be noisy and the US economy is still

fi ghting the headwinds of a strong dollar and

weak domestic demand from corporates and

consumers. On the margin, risks have increased

for investments that rely on leasing or growth

in rents but opportunities to add value are

numerous. Canada has been hit harder by low

energy prices and new supply, so fewer areas

will outperform.



United States: Pause in Prices, but IntenseCompetition for Core Assets

After falling short of supposed trend level 3%

GDP growth in 2015 for the 10th consecutive year,

forecasters have again lowered forecast GDP growth

for 2016 after a weak start to the year. The consensus

outlook for ~2% growth for the next three years

may come down as job growth moderates slightly

and Brexit fallout is taken into account. LaSalle is

anticipating slower than consensus GDP growth (1-

1.5%) in 2016 and 2017 but no recession over the next

three years. Risks are greater on the downside, as

global growth could weaken or domestic or overseas

political turmoil (e.g. UK/Europe but other areas as

well) could hinder economic growth and trade. Key

commercial interest rates (Baa bonds and mortgage

rates) did not move up with Brexit and are likely to

stay low for the next several years.

In terms of regional trends, the Sunbelt markets are growing fastest

and will continue to do so. Markets with strong housing construction

are fi nally rebounding, providing a strong boost in metros such as

Atlanta, Orlando, Dallas and Phoenix. While gateway CBDs continue

to attract jobs and residents, less prominent downtown markets

are also benefi tting, such as Atlanta, Miami and San Diego. We have

become more cautious on technology-driven markets, particularly

San Francisco and San Jose, over the past year as growth and real

estate fundamentals begin to cool in these locations. The broader

investor pool is starting to agree, with pricing for all but the best assets

being driven by core-plus and value-add investors rather than pure

core buyers. The Houston economy and offi ce market is slowing as

expected and real estate transactions have virtually stopped, and we

expect interesting opportunities will eventually emerge in the nation’s

fourth largest metro.

Real Estate Fundamentals have been in line with expectations in

2016, with net demand close to new deliveries. Consequently, national

vacancy rates are approaching cyclical lows and are forecast to tick

up over the next few years as new supply is delivered and demand


moderates. With vacancy rates below long term averages for all

property types, rent growth is still strong but will decline to infl ationary

levels (2-3%) over the next few years. Warehouse demand continues to

surprise on the upside due to the growth of e-commerce; rent growth

and occupancy rates are the highest in 15 years. We expect warehouse

rents to outperform other property types through 2018, particularly in

markets with below average new

supply. The weakest segment will

remain suburban offi ce, with rents

fl at or falling, excluding suburban

“town centers” that are walkable

and have a mix of uses.

Real Estate Capital Markets –

Nationally, overall real estate prices

have leveled off after six years of

double digit growth. Demand has

remained intense for properties

with secure income, particularly

high quality apartments, warehouse

and grocer anchored retail in

major markets. This will continue

as interest rates remain low and

risk aversion is high. Transaction volumes declined over the fi rst fi ve

months of 2016 relative to year ago levels but are likely to stay above

long term averages with debt and equity capital remaining available

from a variety of sources.

NPI9 appreciation fell to 1% in the fi rst quarter of 2016 after averaging

2% per quarter in 2015. We forecast NPI appreciation of 2-4% for all

of 2016 and a small decline in 2017, both down from our view of six

months ago. With interest rates (both Treasuries and corporate bonds)

falling this year, unleveraged US core real estate remains fairly valued

relative to bonds and other fi xed income alternatives.

Other capital market developments

so far in 2016 include:

• The late January/early February dip in stock and bond prices was further evidence of the fragility of the global economy and capital markets. The stock market, including REITs, have recovered from that drop but several core REIT sectors (apartments, malls, offi ce) still trade at large discounts to private market values. During this volatile period, private market real estate provided stable returns.

• Cap rates for core warehouse and neighborhood retail properties declined 20-40 basis points over the past six months due to intense competition for these low volatility sectors. With rents up, many core properties are trading at prices

well above replacement cost in the strongest markets. Offi ce cap rates have held steady or increased slightly as investors perceive more risk in that property type.

• Based on concerns about the economy as well as regulatory guidance, lenders have become more cautious in 2016, particularly for development and non-stabilized assets. Also, regulatory changes are expected to reduce

9 NCREIF Property Index.


CMBS originations later this year. In the long run, this can be a positive for the market if it becomes a brake on potential excess supply.

• Although the US is one of the most attractive options for global capital, particularly with changes to FIRPTA10 , interest from foreign investors is less clear due to economic woes in Europe and the stronger US dollar. Investment Recommendations – The 2016 ISA recommended that investors think about “portfolio insurance” to help weather a potential softening as well as continued volatility. Some of the ways that we recommend investors put this into action:

• Core: Demand for space is likely to slow over the next few years - we urge caution about lease expirations in offi ce markets with signifi cant new construction underway. Select niche property types such as medical offi ce and self-storage and will out-perform in the next downturn and over the long term (see chart).

• Value add and build/renovate to core strategies remain attractive in the US for short term strategies, particularly in markets where core prices exceed development costs by a wide margin. In some situations preferred equity and mezzanine debt positions in development projects can be attractive strategies because they protect against some economic and valuation risk. Capital structures should anticipate both potential pricing and economic shifts.

• As we have noted for several years, long term demographic, technology and urbanization trends are changing the nature and location of much real estate demand. Our recent research eff orts have focused on changing technologies and the impact on real estate investment. The sharing economy (e.g. AirBnB, Uber, etc.) will shift some demand (particularly hotels) away from institutional properties but also make some locations more competitive and reduce the costs of real estate ownership and investing. Technologies such as Internet of Things (IoT) will also create new ways to improve tenant satisfaction while lowering energy use.

• Other recent research into the apartment market found that new properties tend to achieve lower rent growth than the overall market, due in part to high starting rents. Pro forma rent forecasts should consider this dynamic. LaSalle’s Capital Market Dashboard was developed to track capital markets and other

10 Foreign Investment in Real Property Tax Act of 1980.

indicators that anticipate short term economic and fi nancial infl ection points. Those indicators fl ashed warning and caution signs earlier this year but have since recovered. As shown below, current caution signals included falling real estate transaction volumes and private real estate values that are high relative to REITs. The generally positive readings suggest that a near-term shift in pricing is unlikely.

Canada: Energy Price Shock has Bifurcated the Economy and Real Estate Markets

Similar to many other countries, Canada’s economic growth will be

positive but below trend in 2016 and 2017 as slowing global growth

creates a headwind. Oil prices remain too low to stimulate new

investment in the oil sands, which will constrain growth and real

estate markets in Alberta. In the rest of Canada, however, government

investment, consumer spending and net exports will remain positive,

driving modest economic growth going forward.


Source: LaSalle. Updated 1 July 2016.

US: Signals Indicate Mature Real Estate Cycle

2 of 9 Indicators Now Signalling “Caution”

and 1 in “Danger”

fi gure 16

Source: CBRE-EA, LaSalle

Warehouse Availability vs. New Supply

Low supply, low availability markets

poised for rent growth

fi gure 17


Major sector includes apartment, industrial, offi ce, and retail property types. Niche property types include

health care, self storage, lab space, manufactured homes and student housing.

Source: Green Street Advisors,. As of June 2016.

Niche Sectors Off er Better Growth, Less Volatility

Also A Growing Share on US REIT Market Cap

Note: Investment ideas with no country designation apply to both the U.S. and Canada.

North America Investment Recommendations

Focus on Long Term DTU Trends and Portfolio Insurance

/ Downside Protection

fi gure 18

fi gure 19


The impacts on real estate from lower oil prices are mostly confi ned to

Alberta. Real estate markets there will remain challenged in the near

term, with the offi ce markets of Calgary and Edmonton continuing

to see rising vacancy and further new supply. Elsewhere in Canada,

industrial is the strongest sector, with low vacancy rates, particularly in

Toronto and Vancouver. Growth of e-Commerce is prompting retailers

to expand distribution activities, fueling good demand for warehouses.

With the Canadian dollar weak, Canadian real estate has become more

attractive to foreign capital. Though overall transaction volumes are

down from a year ago, foreign capital has accounted for over 40% of

Canada’s transaction volume in Q1 2016. Chinese and German buyers

have recently purchased two large, CBD offi ce assets in Vancouver and

foreign capital is reportedly awaiting opportunities in Alberta. Strong

foreign interest in Canada’s real estate markets is expected to continue,

maintaining upward pressure on pricing. The best core opportunity

identifi ed in the 2016 ISA was warehouses in Toronto, Ottawa, Montreal

and Vancouver and we are still bullish on those markets. Industrial

fundamentals have improved in these markets over the last six months

and are expected to remain strong. Retail is slowly recovering from

higher-than-normal vacancy rates due to Target’s liquidation in 2015.

However, the continued rapid growth of e-commerce and rapidly


changing fashion tastes will continue to challenge secondary malls

and power centres. Pricing often misses this risk, and thus retail

remains an underweight property type. For higher return strategies,

investments focused on LaSalle’s DTU themes continue to off er

the best opportunities in the Canadian market. We continue to like

lease-up in emerging tech and well located suburban offi ce nodes,

high street retail repositioning and urban small-bay industrial lease

up strategies. Multifamily build-to-core is a compelling higher return

strategy, but success will be limited to large, deep markets like

Toronto, with supportive demographics and well-matched supply

and demand fundamentals.

Canada’s 10-year government bond yields continue to touch all-

time lows and are currently ~30 bps lower than at the end of 2015,

with the most recent declines driven by fallout from the Brexit vote.

By comparison, the IPD/MSCI Index income yield has held steady

at 5%, widening the spread to an attractive 3.9%, compared to the

long term average of 3.2%. Spreads to Corporate BBB bonds are

also compelling. Lending spreads have not substantially increased

and debt capital is readily available, which makes leveraged

returns particularly attractive. Despite softness in fundamentals in

some markets and weaker NOI growth expected in the near term,

current spreads provide further cushion for modest income yield

compression, which is likely to continue given continued foreign

and domestic investor interest in core assets in most markets.

Any opinions, forecasts, projections or other statements, other than statements of historical fact, that are made in this Report are forward-looking statements. Although LaSalle Investment Management, Inc. believes that the expectations refl ected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, neither LaSalle nor any of its affi liates makes any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this Report or any further information, written or oral notice, or other document at any time supplied in connection with this Report, and nothing contained herein shall be relied upon as a promise or representation regarding any future events or performance.

Past performance is not necessarily indicative of future results. Any investment themes or suggestions included in this Report are general in nature and not tailored to any specifi c investor’s investment objectives. These investment themes and suggestions are not intended use by any specifi c investor. Investors should consult their investment advisors as to the applicability of any suggestions to such investor’s investment objectives.

Benchmarks and Indices

It is not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index. Index returns do not represent the results of actual trading of investible assets/securities. Index returns do not refl ect payment of any sales charges or fees an investor may pay to purchase the securities or assets underlying the index or index linked investments or any additional management fees or other fees and expenses charged by a particular investment. The imposition of these fees and charges would cause the performance of an index linked investment to be diff erent than the index performance. The index information may contain back tested data. Back-tested performance is not actual performance, but is hypothetical. There are frequently material diff erences between back tested performance results and actual results subsequently achieved by any investment strategy.

Real Estate Risks

The risks similar associated with the direct ownership of real estate include: declines in real estate values, defaults by mortgagors or other borrowers and tenants, increases in property taxes and operating expenses, overbuilding, fl uctuations in rental income, changes in interest rates, possible lack of availability of mortgage funds or fi nancing, extended vacancies of properties, changes in tax and regulatory requirements (including zoning laws and environmental restrictions), losses due to costs resulting from the cleanup of environmental problems, liability to third parties for damages resulting from environmental problems, and casualty or condemnation losses. In addition, the performance of the local economy in each of the regions in which the real estate owned by a portfolio company is located aff ects occupancy, market rental rates and expenses and, consequently, has an impact on the income from such properties and their underlying values. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment.

Jacques GordonGlobal StrategistChicago+1 312 897 [email protected]

Bill MaherHead of North America StrategyBaltimore+1 410 878 [email protected]

Mahdi MokraneHead of European StrategyLondon+44 207 852 [email protected]

Elysia TseHead of Asia Pacifi c StrategySingapore+ 65 6494 [email protected]

Robin GoodchildInternational Director London+44 207 852 4390 [email protected]

Rich KleinmanDirector, US Research & StrategyChicago+1 312 897 [email protected]

Catherine ChenNational DirectorHong Kong+852 3182 5365 [email protected]

Simon MarxRegional DirectorLondon+44 207 852 [email protected]

Chris Langstaff Senior Vice PresidentToronto+1 (416) 304 6018chris.langstaff @lasalle.com

Manuel ZapataRegional DirectorMexico City+ 52 55 5980 8090 [email protected]

Leigh WarnerNational Director AustraliaBrisbane+61 7-3002 [email protected]

Yasuo KonoNational DirectorTokyo+813 6880 [email protected]

David Baskeyfi eldNational DirectorLondon+44 207 852 4490david.baskeyfi [email protected]

Zuhaib ButtAssociate DirectorLondon+44 207 852 [email protected]

Anne Koeman-SharapovaNational DirectorLondon+44 207 852 [email protected]

Daniel MahoneySenior Vice PresidentChicago+1 312 897 [email protected]

Simone CaschiliAssociateLondon+44 207 852 [email protected]

Alejandro DiaqueAssociateMexico City +52 55 5980 [email protected]

Irène FosséAssociateLondon+44 207 852 [email protected]

Elton LiAssociateHong Kong+852 3182 [email protected]

Mark RussoAssociateChicago+1 312 897 [email protected]

Jack HopperResearch AnalystChicago+1 312 897 [email protected]

Aya Miyazaki Analyst Tokyo+81 3 6880 [email protected]

Chris PsarasAnalystLondon+44 207 852 [email protected]

Huw WilliamsAnalystLondon+44 203 147 1605

Interns:Kevin Ansong,Hannah Rowell, Fernanda Sanchez

Administration:Mary Burke,Kayley Gafur

Layout:Joe Oslawski

AmsterdamSimon Carmiggeltstraat 12

1011 DJ Amsterdam

Netherlands

p: +31 20 530 88 88

Baltimore100 East Pratt Street

Baltimore, MD 21202

United States

p: +1 410 878 4800

BrisbaneLevel 53, 111 Eagle Street

Brisbane, QLD 4000

Australia

p: +61 7 3002 4200

Chicago333 West Wacker DriveChicago, IL 60606United Statesp: +1 312 897 4000

Hong KongSuite 2002A, 20th FloorCCB Tower3 Connaught Road CentralHong Kongp: +852 3182 5333

LondonOne Curzon StreetLondon W1J 5HDUnited Kingdomp: +44 20 7852 4200

Mexico CityMonte Pelvoux 111, Piso 6Lomas de ChapultepecD.F. 11000Mexicop: +52 55 5980 8089

MunichViktualienmarkt 8/5Munich OG-80331 Germanyp: +49 89 21 11 130

New York330 Madison AvenueNew York, NU 10017United Statesp: +1 212 812 5700

Paris112 Avenue KléberCedex 16Paris 75784Francep: +33 1 56 43 46 46

PraguePrague Burzovní PalácRybná 682/14110 00 Prague 1Czech Republicp:+420 222 191 409

Seoul16th fl oor Two IFC23 Yeouido-dong(10 Gukjegeumyung-ro)Seoul 150-010South Koreap: +82 2 6137 6137

Shanghai25th Floor, Tower 2, Plaza 661366 Nanjing West RoadJing An DistrictShanghai 200040Chinap: +86 21 6393 3333

Singapore9 Raffl es Place#37-01 Republic PlazaSingapore 048619Singaporep: +65 6494 3500

Sydney167 Castlereagh StSydney NSW 2000Australiap: +61 2 9284 7925

Tokyo5th Floor Meijiseimeikan2-1-1 Marunouchi Chiyoda-kuTokyo 100-0005Japanp: +81 3 6880 2800

Toronto199 Bay StreetSuite 4610, Box 407Tornoto, Ontario M5L 1G3Canadap: +1 416 304 6000

Other Offi ces: Atlanta, Luxembourg, Madrid, Milan, San Diego, San Francisco, Vancouver

Documents

ISA midyear 2016 2 - LaSalle Investment Managementof 2016 appear to conﬁ rm our outlook for low global growth, low interest rates and capital market volatility. In this uncertain