New Trends and Winning Corporate Strategies in Commercial Real Estate

2013

New Trends and WinningCorporate Strategies inCommercial Real EstateHEC EMBA - Final Individual ProjectYilmaz KARAUC1dw2013

New Trends and Winning Corporate Strategies in Commercial Real Estate

ACKNOWLEDGEMENTS

I would like to acknowledge the contributions of the following managers that I interviewed from various organizations basedin Paris, London, Brussels, Zurich, Istanbul and Kuwait in the preparation of my Final Individual Project report relative to thereal-estate finance and investment ventures / funds:

Mr. Nino

Mr. Alexandre

Mr. Alessandro

Mr. Iain

Ms. Emilie (Mtre)

Mr. Andrea

Mr. Michael

Mr. Levent

Mr. David

Mr. Umur

Mr. Philippe

Mr. Bruno

Mr. Matthew

Mr. Orhan

Mr. Levent

M. Jean-Philippe

Mr. Franck (Mtre)

Mr. George

Mr. Laurent

Mr. Arnaud

Mr. Philippe

Ms. Antonia (Mtre)

Ms. Elyza

Mr. Claudio

Ms. Magali

Mr. Michael

Mr. Max

Mr. Andrew

Mr. Jose

Mr. Jérôme

Mr. Preben

Mr. Matthew

Mr. Mark

Mr. Burhanettin

Mr. Alexander

AMOR

BEAUBAT

BRONDA

BRYSON

CAPRON

CORSALE

DOWLING

ERSALMAN

GIRAUD

GUVEN

JOLAND

JONARD

KELLY

KILIC

KIRAZOGLU

KÜSS

LAGORCE

LAKHOVSKY

LEHMANN

MALBOS

MINH

RACCAT

ROTUNDU

RUDOLF

SERTLET

SPIES

THORNE

THORNTON

VALANTE

VERDIN

VESTDAM

WEBSTER

WYNNE SMITH

YURTSEVEN

ZEIDLER

Founder

Director of Acquisitions

Head of Global Investor Solutions

RE & Hotel Finance, Director

Lawyer RE Investment Funds

Director

Managing Director - Head of RE

EVP Strategic Planning & Finance

Founding Partner

Executive Vice President

Managing Director France

Managing Director

Consultant, Solutions

President

Director, RE Project Finance

Deputy Director Investment France

Lawyer Structuring & Taxation

Head of Commercial Real Estate

EVP Marketing & Communication

VP Investments

Senior Director OPCIs

Lawyer RE Finance

Director Venture Capital / LBO

MD Acquisitions & Sales RE AM

Asset Manager

SMD / Chair Investment Committee

SVP International Development

Founding Partner – Co CE

MD Head of Research & Strategy

Director RE Financial Analysis

President

MD Global RE Financing

Global CEO Hotel Investments

General Manager Turkey

VP Covered Bonds

AVERROES PARTNERS RE

STAM EUROPE

ABERDEEN ASSET MGT

EUROPE ARAB BANK

GIDE LOYRETTE NOUEL

BRECON CAPITAL SOLUTIONS

BOUBYAN CAPITAL INVESTMENT

ECZACIBASI HOLDING

INOVALIS

GARANTI MORTGAGE

TISHMAN SPEYER

OFI MANDATS

LLOYDS BANKING GROUP

KILIC HOLDING PARTICIPATIONS

GARANTI BANK

BNP PARIBAS REAL ESTATE

WINSTON & STRAWN

AEROPORTS DE PARIS

CBRE

IVANHOE CAMBRIDGE STIQ

TISHMAN SPEYER

LEFEVRE PELLETIER & ASSOCIES

HARBOR BRIDGE

CREDIT SUISSE AG

AFORGE FINANCE

TISHMAN SPEYER

BRIDGE STREET RESIDENCES

INTERNOS REAL INVESTORS

J.P. MORGAN ASSET MGT

TISHMAN SPEYER

VALHALLA HOSPITALITY RE

HSBC BANK

JONE LANG LASALLE HOTELS

PRAMERICAREI TURKEY

MOODY’S INVESTORS SERVICE

Paris

Paris

Brussels

London

Paris

London

Kuwait

Istanbul

Paris

Istanbul

Paris

Paris

London

Paris

Istanbul

Paris

Paris

Paris

Paris

Paris

Paris

Paris

London

Zurich

Paris

London

London

London

London

Paris

London

London

London

Istanbul

London

I would particularly like to thank my advisor Serge DESVIGNES, Venture Capital professional, coach of entrepreneurs inventures, development & fund-raising, co-founder of a Business Angels fund (Paris Angels Capital), partner of SMEs, PrivateEquity teaching and tutoring at HEC EMBA, and to Philippe JOLAND, the Managing Director of TISHMAN SPEYER France, forguiding the overall development of this report and for their contributions to its content.

CBX Tower, ParisDesigned by KPF and SRA Architects

New Trends and Winning Corporate Strategies in Commercial Real Estate Page a

EXECUTIVE SUMMARY

In today’s economic crisis there is no viablesolution in focusing only on asset classes andon what investors want. So, should we justkeep going forward thinking positively aboutwhat we are enterprising, pray and stayoptimistic about the future?

The real estate business needs to be re-invented by vertical integration of competenciesin delivering sustainable building solutions withsuperior customer value: focus on customerintimacy, operating excellence and product &service leadership.

It is literally a new way of thinking andexecuting work to avoid commoditization of thereal estate.

Real Estate Market Overview

According to the IMF, 58 European banks should disposeof €1.5 trillion of real estate assets within 2 years, whilethe investment volume in Europe for the whole year of2012 was close to €100bn, and looking ahead to 2013volumes would be rising modestly to €110bn.

Business Overview

Back to fundamentals; economic performance first!

Real estate investors have taken comfort from the factthat they have survived the turmoil of the past few yearsand are now turning their attention to the best bets forfuture investment although the real estate industry doesnot expect the economic climate to be better in 2013.

Businesses are now focused on managing risks anddesigning strategies around positive trends such asdemographics, technology and urbanization.

2013 will be a tough year for real estate fund managersdue to the pressures of a challenging equity raisingenvironment and regulations that will accelerate furtherconsolidation in the sector. The challenges andopportunities that they are facing can be viewed as thebeginning of a new phase in the industry's evolution,requiring a recalibration of traditional business models.

Amid the many uncertainties, however, this is a period inwhich creative investors can thrive. Indeed, devising andoffering creative solutions for the market will be a keydifferentiator for successful funds in this new environment.

Tenants

No rent, no business! The difficult economic backdrop isforcing corporate users to put expansion plans on holdand to adapt development and/or relocation strategies totheir decreasing needs.

Until banks recover their adequacy, tenants will havedifficulty in accessing loans to finance the developmentof their industrial and commercial activities, and thereforein creating employment and demand for space.

New Trends

A key emerging trend will be the need to pay increasedattention to societal & consumer needs as a way ofsecuring long-term income. The future is all aboutinvesting from bottom up by considering what peoplereally want.

- As technology and media tenants edge out financialservices as the most active tenants in major Europeancities, building design needs to inspire creativity. Notjust a box but an environment.

- Stores will serve retailers’ internet based business asthey now need multichannel responses.

- Shopping centers serving as a meeting place forpeople & a showcase must be sustainable, the outdoorspace one of quality and the interior use flexible.

- Major corporate tenants will seek to work withdevelopers in consortiums to co-occupy buildings as away of securing improved buildings, with less butbetter-quality space.

- Providing sustainable buildings will involve more thansupplying an energy-efficient building, not just offeringbuilding value, but also helping to achieve a higherretention rate for their workforces and better businessperformance.

- In an increasingly complex & stressful world, customerswill demand better-quality office space and betterworking conditions to cope with the additionalpressures of modern society. The next cycle will be ahuman resource cycle.

Proposed Strategies

Put the occupier at the center of the business; they arenot just a tenant! Opportunities exist for large andintegrated real estate managers that contribute to theirtenants’ organizations by tailored offering.

- Consider strategic partnerships for effective valuechain management with select corporate tenants andlarge investors.

- Provide the best total solution with adequate productand services to an affordable price.

- Rely on competences in design & construction to targetrestructuring and repositioning projects, and landentitlements for new development.

The challenge that leaders are faced with is to cope withuncertainty: take risks, make opportunistic moves andinnovate by inventing, creating and imagining feasibilityconditions for the business.

To succeed in today’s dynamic real estate marketplace,leaders must be more forward thinking collaborative, andflexible in financing, designing and building structures.

Attracting, developing and retaining resources, both oftalents and capital, will lead to success.

New Trends and Winning Corporate Strategies in Commercial Real Estate Page b

CONTENTS

EXECUTIVE SUMMARY .........................................................................................................................................................................................................A

1. INTRODUCTION TO REAL ESTATE .................................................................................................................................................................1

1.1 VALUE CHAIN.........................................................................................................................................................................................................................11.2 REVENUE FLOWS...................................................................................................................................................................................................................11.3 INVESTMENT STRATEGIES AND PERFORMANCE EXPECTATIONS...............................................................................................................................................21.4 EXPECTED EUROPEAN MARKET TOTAL RETURNS 2005-2016F ...............................................................................................................................................21.5 CYCLES OF DISTRESS AND RECOVERY: WHERE DO WE STAND?..............................................................................................................................................3

2. REAL-ESTATE INDUSTRY ANALYSIS ...........................................................................................................................................................4

2.1 CLIENTS .................................................................................................................................................................................................................................42.1.1 Tenants...................................................................................................................................................................................................................42.1.2 Investors .................................................................................................................................................................................................................4

2.2 SUPPLIERS ............................................................................................................................................................................................................................52.2.1 Service Providers ...................................................................................................................................................................................................52.2.2 Banks......................................................................................................................................................................................................................62.2.3 Construction Professionals ....................................................................................................................................................................................7

2.3 NEW ENTRANTS .....................................................................................................................................................................................................................72.3.1 Sovereign Wealth Funds........................................................................................................................................................................................72.3.2 Real Estate Debt Funds .........................................................................................................................................................................................8

2.4 MAIN COMPETITORS ..............................................................................................................................................................................................................92.4.1 Characteristics........................................................................................................................................................................................................92.4.2 Positioning Map................................................................................................................................................................................................... 10

2.5 SUBSTITUTES...................................................................................................................................................................................................................... 102.5.1 Traditional Asset Managers ................................................................................................................................................................................ 102.5.2 Investment Banks................................................................................................................................................................................................ 10

3. FORCES INFLUENCING REAL-ESTATE INVESTMENT ................................................................................................................... 11

3.1 POLITICAL ........................................................................................................................................................................................................................... 113.2 ECONOMICAL ...................................................................................................................................................................................................................... 113.3 TAXATION ........................................................................................................................................................................................................................... 113.4 INFLATION ........................................................................................................................................................................................................................... 123.5 REPORTING ........................................................................................................................................................................................................................ 133.6 ACCOUNTING ...................................................................................................................................................................................................................... 133.7 REGULATIONS..................................................................................................................................................................................................................... 133.8 ECOLOGICAL....................................................................................................................................................................................................................... 14

4. CONCLUSIONS FROM EXTERNAL ANALYSIS...................................................................................................................................... 15

4.1 KEY ISSUES ........................................................................................................................................................................................................................ 154.2 KEY FINDINGS..................................................................................................................................................................................................................... 154.3 CONCLUSION: VERTICAL INTEGRATION REQUIRED ............................................................................................................................................................... 16

5. GROWTH AND REFOCUSING OPPORTUNITIES................................................................................................................................ 17

5.1 THREAT INDUCED STRATEGIC OPPORTUNITIES ..................................................................................................................................................................... 175.1.1 Tenant related ..................................................................................................................................................................................................... 175.1.2 Value Chain Management related ...................................................................................................................................................................... 195.1.3 Investor related.................................................................................................................................................................................................... 195.1.4 Building Sustainability related ............................................................................................................................................................................. 20

5.2 PROBLEMATIC INDUCED STRATEGIC OPTIONS....................................................................................................................................................................... 21

6. CUSTOMER-CENTRIC STRATEGIES ............................................................................................................................................................ 22

6.1 STRATEGIC PARTNERSHIPS................................................................................................................................................................................................. 236.1.1 Investment Partnership ....................................................................................................................................................................................... 236.1.2 Development Partnership.................................................................................................................................................................................... 236.1.3 Lease Partnership ............................................................................................................................................................................................... 236.1.4 Service Partnership ............................................................................................................................................................................................. 23

6.2 EMBRACE SUSTAINABILITY .................................................................................................................................................................................................. 24

7. STRATEGY IMPLEMENTATION ....................................................................................................................................................................... 25

7.1 CUSTOMER INTIMACY AND OTHER VALUE DISCIPLINES ........................................................................................................................................................ 257.1.1 Customer Intimacy .............................................................................................................................................................................................. 257.1.2 Operational Excellence ....................................................................................................................................................................................... 267.1.3 Product / Service Leadership .............................................................................................................................................................................. 27

7.2 ACTIONS LIST FOR STRATEGY IMPLEMENTATION.................................................................................................................................................................. 287.3 PROPOSED ORGANIZATION ................................................................................................................................................................................................. 297.4 KEY POINTS TO BE RETAINED .............................................................................................................................................................................................. 29

8. HOW PRE-LEASE IMPROVES THE BUSINESS PLAN...................................................................................................................... 30

8.1 TYPICAL BUSINESS PLAN FOR DEVELOPMENT PROJECT TO BE LEASED AFTER DEVELOPMENT.............................................................................................. 308.2 ALTERNATIVE BUSINESS PLAN FOR PROJECT PRE-LEASED PRIOR DEVELOPMENT................................................................................................................ 308.3 CONCLUSIONS .................................................................................................................................................................................................................... 31

New Trends and Winning Corporate Strategies in Commercial Real Estate Page c

EXHIBITS

9. EXHIBIT A – CHARACTERISTICS OF MAIN STAKEHOLDERS ................................................................................................ 32

10. EXHIBIT B – REAL ESTATE INVESTMENT SCHEMES ............................................................................................................. 33

10.1 METHODS OF INVESTMENT .................................................................................................................................................................................................. 3310.2 INVESTMENT STRUCTURES.................................................................................................................................................................................................. 3310.3 CORPORATE GOVERNANCE................................................................................................................................................................................................. 3410.4 JOINT VENTURE INDICATIVE PROCESS................................................................................................................................................................................. 3410.5 CRAFTING THE INVESTMENT THESIS .................................................................................................................................................................................... 3510.6 STRATEGIC PARTNERSHIPS................................................................................................................................................................................................. 35

11. EXHIBIT C – CHARTS AND GRAPHICS ............................................................................................................................................. 37

11.1 TYPICAL PROJECT STRUCTURE / ORGANIZATION CHART ...................................................................................................................................................... 3711.2 EUROPEAN C.R.E. DEBT MATURITY PROFILE ...................................................................................................................................................................... 3711.3 AVAILABLE EQUITY, DEBT AND TARGET GEARING (IN US$) .................................................................................................................................................. 3811.4 FORCASTED RETURNS BY PROPERTY TYPE......................................................................................................................................................................... 38

11.4.1 European Returns ............................................................................................................................................................................................... 3811.4.2 US Returns.......................................................................................................................................................................................................... 3811.4.3 Asia Pacific Returns ............................................................................................................................................................................................ 38

12. EXHIBIT D – SYNOPTIC TABLES RELATED TO SUSTAINABILITY.............................................................................. 39

12.1 GREEN PROPERTY ALLIANCE – RECOMMENDED COMMON METRICS .................................................................................................................................... 3912.2 SELECT GREEN BUILDING CERTIFICATION SYSTEMS............................................................................................................................................................ 3912.3 GOVERNMENT ENERGY BENCHMARKING AND RATING SCHEMES .......................................................................................................................................... 39

13. EXHIBIT E – GLOSSARY ............................................................................................................................................................................... 40

14. EXHIBIT F – ACKNOWLEDGEMENTS .................................................................................................................................................. 42


New Trends and Winning Corporate Strategies in Commercial Real Estate Page 1

1. INTRODUCTION TO REAL ESTATE

1.1 VALUE CHAIN

The value chain for the real estate industry, depicted in the figure below, is divided here into five main segments. Theeconomic activity moves from left to right, the actors in each color-coded segment providing inputs via a series oftransactions.

Most owners and developers must go through the financing segment before they can acquire a property, andsubsequently use a real estate broker to effect the property sales/lease transaction. Large property owners eitherperform their own property management or pay a management firm to perform this service.

Similarly, if the transaction involves new construction, the owner/developer may have its own construction capabilitiesor hire a construction management firm to erect the building. The final segment in the value chain is Tenant Use, whichrepresents the final product, or a building devoted to a specific residential, commercial, or industrial use.

1.2 REVENUE FLOWS

Below a schema summarizes the revenue flows to stakeholders, who are involved directly in the real estate.


1.3 INVESTMENT STRATEGIES AND PERFORMANCE EXPECTATIONS

An investor who invests in real estate directly or through unlisted funds, targets higher return than what they mayreceive from riskless placement (i.e. treasury bonds). The expected performance should be at least 5% to 15%depending on the level of risk associated with the investment strategy as shown below.

CORE / CORE PLUS

PER

FOR

MA

NC

E

RISKLow

Hig

h

High

· Targeted Return: 4.5% to 10%

· Holding period: 10+ years· High cash flow

· Current income· Moderate value increase· Strategy: hold & exploit

· Segments: offices, retail,residential

· Leverage: <50%

· Large Trophy buildings in CDBlocation, properties with longterm leases to strong credittenants.

· Targeted Return: 10% to 15%· Holding period: 2 to 8 years

· Moderated cash flow· Current income + Capital

appreciation· Good value increase

· Strategy: fix, lease & sale· All segments

· Leverage: 40% to 65%

· Recovering markets, buildingswith upside potential realizedthrough value added activeasset management.

· Targeted Return: +15%

· Holding period: <5 years· Moderate cash flow

· Capital appreciation· Strong value increase· Strategy: develop, lease & sale

· All segments (including land)· Leverage: >65%

· Turnaround , international, orunderutilized assets in need ofrepositioning, redevelopment,expansion, leveraged plays.

VALUE ADDED

OPPORTUNISTIC

Riskless Rate

1.4 EXPECTED EUROPEAN MARKET TOTAL RETURNS 2005-2016F


1.5 CYCLES OF DISTRESS AND RECOVERY: WHERE DO WE STAND?

Since the credit crunch in 2007, the real estate industry is facing a period of significant structural and cultural changes,with cautious investors, large-scale regulations, low performances, reduced fees & rising costs for fund managers, andthe ongoing illiquidity of capital markets. The difficult economic backdrop is also forcing corporate users to putexpansion plans on hold and to adapt relocation strategies to their decreasing needs.

The diagram below illustrates the macroeconomic, property and capital market trends.

Decliningvalue

In the property markets, current macro trends result in declining tenant demand and take-up. As a result, vacancy ratesrise and capital values decline. This eventually leads to declining net operating income and debt service coverageratios. With liquidity restrained, bankruptcies emerge and bank capital ratios come under pressure.

With debt capital less plentiful, landlords turn to equity investors to recapitalize their balance sheets. With bankslooking to recapitalize their balance sheets, distress sales also begin to emerge.

As such, opportunities to acquire non-performing loans and distressed property are usually the first to emerge in suchsettings. In these cases, investors typically buy assets at significant discounts to face value and total returns are morelikely driven by increases in capital value as a result of rising liquidity.

Amid too many uncertainties, the question is “Have we already reached rock bottom for 2013?”


2. REAL-ESTATE INDUSTRY ANALYSIS

2.1 CLIENTS

2.1.1 TENANTS

The economic meltdown of 2008 to 2009 accelerated several predictable trends and triggered some not-so-predictable ones.

- Monetizing properties: numerous companies have sold properties to raise working capital, and some of them, byleasing back what they need and retaining a buy-back option.

- Renegotiating leases: in return for an extension of their leases, industrial conglomerates have asked owners forreduced rent or rent free periods, additional tenant improvements, and buy-outs or expansion options. The resultsof this strategy: rent reductions and much better terms.

- Repositioning locations: even several highly reputable companies have vacated “trophy” properties in favor oflower-cost space. In executing this strategy, some companies have co-located business units, increasedutilization, upgraded workspaces, and improved energy efficiency, using occupancy cost savings for otherpriorities.

- Mixing uses: companies have sought properties that mix offices with hotels, apartments, and retail uses. Forthem, it is a means of providing services and lively work environments for employees and customers alike. Forowners, this is a way of reducing risks, procuring finance, and offering better value.

- Valuing sustainability: industry wisdom believes that building to green standards is 5% to 10% more costly thanconventional construction, so developers have deferred projects or expected corporate tenants to pay thedifference. But recent studies show that green building costs are declining and the break-even time is shorter,while market values and rents are rising.

Certainly, the economic context and the weak demand of tenants has induced real estate investors to carry outoperations of smaller volume, with more architectural research, greater comfort for the occupier, reduced exploitationand maintenance costs, and an improved quality of finish with tighter overall cost. But, to command sufficient marketsupport, to generate the requisite rental revenue, and to justify its purchase and/or development, the real estate mustalso make a corresponding and consistent value contribution to the business economics of those enterprises thatoccupy and utilize it.

CBRE Global Investors believes that the macroeconomic backdrop for real estate tenant demand will remainchallenging in the medium-term as growth is weighed down by impaired balance sheets.

2.1.2 INVESTORS

Investors in real estate assets have different objectives and priorities, and their attitudes vary with respect to risk, tocapital growth versus income and to asset class and quality. But there appears to be consensus on the developmentof the macroeconomic environment amongst European investors.

The present uncertainty due to the ongoing instability in the Eurozone is seen as likely to cause delays in real estateinvestment, financing, construction and occupation.

Several high-profile real estate investments by largeinstitutions and sovereign wealth funds demonstrate thatproperty assets are back on investors' agendas. Due to lack oflending from banks, cash-rich investors, including largeinstitutions and sovereign wealth funds now lead marketactivity and are keen to close deals on terms that are favorableto them.

Investments by property type

Investors continue to favor a strategy focused on multipleproperty types. Single property type funds remain the minority,and retail as the preferred sector. Hotel and other alternativesectors, predominately healthcare and parking continued toincrease their share, signaling that some investors havegreater focus on assets with longer lease terms.


Geographical focus

Single country funds representing 57% of available capitalreflect investors’ increased focus on markets that they knowbest, and where they are able to deploy capital more easily.

Preference towards investing in home market and regionreflect the continued uncertainty and risk aversion amonginvestors.

Investment Styles

Whilst many funds are currently focused towards coreopportunities, funds already raised and seeking to deploycapital highlight a broader mix of investment styles.

Funds are more focused on opportunistic investment as aresult of having difficulties in sourcing suitable investmentopportunities, especially across Europe.

There is an increase in funds moving up the risk curve reflecting the lack of core products in the market. This couldplace greater pressure on legacy funds targeting to deploy capital towards opportunistic assets as their investmentperiods start to run out.

2.2 SUPPLIERS

The bargaining power of suppliers, which in this industry means land or property owners, construction professionals,services providers, and banks, could be based on a number of factors: concentration of suppliers, switching costs,scarcity of property types, the property market, financial markets and contribution to profitability.

2.2.1 SERVICE PROVIDERS

a) Property Managers

A property management firm operates a property on behalf of the owner, including renting, collecting rent, performingmaintenance, and so on. Since the property manager takes care of the operation and tenant use of the building, it isin a position to affect decision making by the owner. Many property managers also serve as real estate brokers, thusacting as agents who perform the transactions to buy, sell, and lease properties.

By far the most dominant players in the U.S. and European property management industry are the full-service realestate firms, the largest of which have a footprint in nearly every box of the real estate value chain, includingdevelopment, mortgage brokerage, investment management, real estate brokerage, and property and constructionmanagements. These full-service real estate firms serve corporate clients that occupy large amounts of buildingspace, and take on such companies as “corporate real estate” clients, and thus are closely involved in nearly all ofthe important real estate decisions they make.

This industry of service providers has emerged in the last decade, led by global, billion-dollar firms such as CBRE,Colliers, Jones Lang LaSalle, and BNP Paribas RE. They manage the entire value chain, from short-term leases tomultiyear development projects, making it possible for companies to outsource most or all of their propertymanagement needs. They have made great headway in professionalizing real estate services. Their brokers,traditionally paid on commission, have morphed into salaried “relationship executives” who are awarded bonuses notonly for closings but also for client satisfaction.

Organizations benefit from the firms’ expertise, focus, and efficiencies, and from their willingness to provide certainessential services at low or no cost. The service firms, which used to be affected by episodic revenues and boom-bust cycles, benefit from the more predictable fees they receive through multiyear contracts.

b) Facility Managers

Facility Management covers all supporting activities that are mainly all the other activities that are not part of the mainfunctional process of tenants’ business activities however they create the conditions necessary to the successfulrunning of their core business. Among supporting activities in real estate, we can mainly mention primarily security,fire safety, energy & utility operation, regulated maintenance, repairs, cleaning, power input, reception, helpdesk,mail, tenant improvements, portfolio analysis, performance reporting, removal services, landscaping, cateringservices, waste management, and janitorial services.


Tenants continue to look for ways to drive out unnecessary costs and to improve efficiency by means of globalservice delivery and operating models. A real estate and facilities management (REFM) operation is one of the areasof focus, especially, since for many firms, it is their second largest expense after personnel.

This includes identifying ways to enhance the size and use of their real estate footprint and delivering facilitymanagement services in the most cost-effective manner. REFM outsourcing continues to be a viable option for manyend-user organizations to help them achieve this. Some tenants are trying to shift more risk to the service providers,to achieve guaranteed savings, or to create more shared risk. Facility Managers are increasingly asked todemonstrate more value in the energy management and sustainability arena.

Tenants want to have good site data, technology systems, service level agreements, and KPIs to enhance theirability to monitor performance (cost and service) and make data-driven decisions. In essence, tenants now ask theirservice providers to adjust their operating model. Service providers that align themselves with their customer’s need,combined with having the right talent, innovative ideas, cutting-edge practices and continuous improvementprograms, will probably be the most successful in expanding their business.

c) Real Estate Agents

Agents and brokers act as intermediaries between entities that buy, sell and lease real estate. Many of them alsoprovide property management services to commercial real estate owners.

Brokers occupy a central position in the value chain, since most real estate sales and leasing transactions must gothrough them. However, they have no influence over decisions regarding program, futures and energy use inbuildings. By definition, they play a neutral role in which it is not in their best interest to limit or define the buildingchoices they provide to their clients.

d) Legal Advisors

Today the real estate market is more complex and volatile than ever. Legal advisors are involved in each step of realestate projects; from initiation, finance to project delivery, taxation and exploitation, and they play a major role in thesuccess of real estate investments. Deals involving multiple jurisdictions and complex financing structures arehandled by global law firms across a wide spectrum of the industry and in every type of market conditions.

Development projects take time proceeding through several phases over many years. Each phase of the projectrequires different legal expertise in different locations (e.g. international structuring). Therefore, a strategic globalview, legal research & update, and knowledge management throughout the whole life of the project are keys tosuccess.

2.2.2 BANKS

The European real estate lending market is undergoing significant structural changes as a consequence of the creditand financial crisis and the regulatory changes that are being imposed on banks; its traditional source of debt. At thesame time at least €1 trillion of real estate loans will need to be refinanced over the next four year period.1

The last INREV survey reveals that approximately10% of fund managers have failed to securerefinancing on at least one asset due to thewithdrawal of bank lenders from the market.

Banks continue to offer balance sheet lending buthave been highly selective about new loanoriginations and select borrowers with whom theyalready have long-standing relationships. In additionto balance sheet loans, the CMBS market in Europehas made a modest return to a fraction of where itwas in the peak years.

On the distressed market in Europe, most banks stillcannot afford to take losses on their books workingout construction and development loans in spite oftheir intent to exit international real estate markets.

1 INREV: “European Real Estate Debt Fund Study”, October 2012


2.2.3 CONSTRUCTION PROFESSIONALS

a) Developers

A business that wants to create value from its real estate generally partners with a developer, who re-positions theland and buildings through “entitlements” (such as zoning and building permits), a localized regulatory process thatcan take years and cost millions for large projects.

When those entitlements have been obtained, the value of the land is some greater than its cost, but this additionalvalue is usually locked up while the site is under development. As infrastructure is added, both financial and marketrisks may decrease, as long as the project is aligned with demand.

Through this process, as the developer’s cash flow is the key to its survival, they will have to stay patient and vigilantin order to preserve the project’s economics during this costly and time-consuming process. Once assets are leased,their value depends on the user’s commitments, and the real estate capital & leasing markets.

b) General Contractors

This segment includes construction companies that carry out trade works and/or perform construction managementfor large property owners. They are often responsible for every phase of the construction from the initial idea throughdesign, construction, and commissioning to the completion of the building for its end use.

Construction management companies undertake every aspect of building construction on behalf of large clients.

c) Other Construction Professionals

There are a multitude of contractors (architects, designers, consultants, subcontractors, suppliers, and inspectors)that are involved in each phase of the development process. This category is highly fragmented. It would be difficultto identify any single entity having sufficient power to have any significant impact on building.

In many countries, Owners are liable for any contractor involved in the construction phase in respect to health, safety& environment, labor law, payment guarantees, and insurances.

To understand the complexity of project organization for development projects, please refer to the typical projectstructure / organization chart in Exhibit B (§11.1).

2.3 NEW ENTRANTS

New entrants in the market can come from multiple sources. To explore this, a closer look should be taken at boththe real estate and the investment management markets in broader terms.

It should be noted that the concept of a “new entrant” is increasingly difficult to use in the real estate investmentmarket, since different businesses with different business models, such as investment banks, private equity firms,sovereign funds, and debt funds are already very active and causing diversification of this market with direct andindirect investments in real estate.

2.3.1 SOVEREIGN WEALTH FUNDS1

In recent times Sovereign Wealth Funds (SWFs) have become an important source of international real estateinvestments, and are increasingly exercising their muscle by investing directly in property as a way of cutting feesand potentially achieving better returns.

SWFs are typically large, sophisticated and experienced investors in property and are, therefore, ideally suited todirect investment. Some SWFs, such as Qatar Investment Agency, even have their own subsidiaries set up purely toinvest in real estate.

When funds choose property funds, 59% per cent invest in private funds while 35% choose listed-property funds.SWFs have also been prepared to invest in higher risk property strategies. Opportunistic and value-added fundswere the most popular strategies, favored by 75% and 65% of SWFs, respectively.

Unsworth’s research shows that the total combined assets of such funds now stands at more than $44.62 trillion andhave increased by nearly 15% since 2011.

1 Top1000funds.com: “SWFs in real estate” analysis by Sam Riley, April 11th, 2012


Top five sovereign wealth funds by allocation to real estate:

Rank SWF Country Allocation (Bn)

1 Abu Dhabi Investment Authority UAE $47.03

2 Qatar Investment Authority QATAR $25.65

3 Government of Singapore Investment SINGAPOUR $24.75

4 China Investment Corporation CHINA $20.75

5 Kuwait Investment Authority KUWAIT $9.77

*source Prerequin

2.3.2 REAL ESTATE DEBT FUNDS

Fund managers and institutional investors having internal property knowledge are capable of validating the relevanceof an underlying asset.

Believing that banks may not return to the market in the medium term and that the industry is in a period of structuraldeleveraging, presents a good opportunity for them to consider debt investing.

A significant number of funds have been established with the purpose of acquiring and originating commercial realestate debt. Many of these funds have stated that their focus is on distressed debt or mezzanine lending. Theinvestors in these funds have been coming from a wide range of sources, which include traditional equity investors.1

In the last 3 years at least 19 real estate debt funds havebeen launched with an estimated target size of €9-10 bn.

A number of distinct real estate debt fund strategieshave been identified.

These are based on the various tranches of debt beingsought in the market.

A whole loan strategy is a combination of senior andmezzanine debt for which borrowers are prepared topay a higher price as it offers them a one stop-shopsolution rather than looking for separate lenders.

Some funds have also adopted a strategy to providea mix of loans within the whole capital stake.

A distressed debt strategy is usually associated withopportunity funds that acquired portfolios of loansfrom banks, governments and defaulted CMBSissues at significant discounts.

The majority of debt funds have a strategy to focus onproviding newly originated loans secured by good-quality, well-located real estate, mainly in the UK andstable western European countries such as Germany,the Nordics, the Netherlands and France.

Prior to the financial crisis, European senior real estateloans typically funded up to 85% of the property valueand junior loans a further 10% leaving little equityprotection for lenders.

Now with rebased values, senior lenders often providedebt equivalent to no more than 50% of asset value.

1 Commercial Mortgage Securities Association Europe: Real Estate Debt Funds, September 2008

Debt FundStrategy

LTVRange %

Target grossreturn %

Senior 0 - 60 4 - 6

Subordinated 60 - 80 8 - 15

Whole loans 0 - 75 6 - 8

Mixed debt 0 - 80 8 - 10

Distressed loans 50 - 100 15 - 20

*source INREV, 2012


2.4 MAIN COMPETITORS

2.4.1 CHARACTERISTICS

Origin Investors RE Assetsunder Mgt

RiskProfile

Type ofAssets

Services

CBRE GlobalInvestors

UK/USA FoundationsPrivate Wealth

Sovereign WealthInstitutional

$90 Bn. Core, Core PlusValue AddedOpportunistic

Debt & Securities

OfficesRetail

ResidentialLogistics

Property ManagementAsset ManagementFund Management

Blackstone USA FoundationsPrivate Wealth

SovereignInstitutional

$57 Bn.+$11 Bn. $ to invest

Value AddedOpportunistic

DistressedDebt & Securities

Offices, RetailHotels

ResidentialLogistics

Asset ManagementFund Management

PramericaREI

USA InstitutionalQualified Inv.

€51 Bn. Core, Core PlusValue AddedOpportunistic


Logistics

Investment Mgmt.

Jones LangLaSalle RealEstate

UK/USA Private WealthInstitutional

$48 bn. Core, Core PlusValue AddedOpportunistic

Debt & Securities

All asset typesIn CRE

Investment Mgmt.Project Development

Property ManagementFacility ManagementValuation / Brokerage

TishmanSpeyer

USA Private WealthFin. Institutions

$42 Bn.7,200,000m²

CoreCore plus

Value-AddedOpportunistic

OfficesResidential

Project DevelopmentProperty Management


Axa RealEstate

FR Pension FundsFin. Institutions

High Worth Indiv.

€42 Bn.14,400,000m²

Core, Core PlusValue AddedOpportunistic

Debt & Securities

Offices, RetailLogistic, Hotels

ResidentialClinics


Invesco UK Institutional €39 Bn. CoreValue Added

Securities


Logistics


Unibail-Rodamco

FR Institutional €29 Bn. Core, Core PlusValue AddedOpportunistic

Securities

RetailOffices

Convention &Exhibition Ctrs.

Investment Mgmt.Project Development

Operations

Crédit SuisseReal EstateAM

CH InstitutionalQualified Inv.

$32 Bn. CoreCore plus



HealthcareResidential

Project DevelopmentAsset ManagementFund Management

Carlyle USA Public PensionsFin. Institutions

High Worth Indiv.

$30 Bn. Value AddedOpportunistic


Industrial, EnergyInfrastructure

Project DevelopmentAsset Management

IvanhoeCambridge

CAN Caisse de Dépôt etPlacement du

Québec

31 Bn. CAD CoreCore plus


ResidentialRetirement

Project DevelopmentAsset ManagementInvestment Mgmt.Property Mgmt.

Aberdeen UK InstitutionalProfessionals &

Individual Wealth

€24 Bn. CoreCore plus

OfficesRetail

Asset Management

Hines USA Pension fundsGov. Inv. Authorities

InstitutionalIndividual investors.

$24 Bn. Value AddedOpportunistic

All asset types Fund ManagementInvestment Mgmt.

Project DevelopmentProperty Management

AEW Global FR Institutional €36 Bn. Core, Core PlusValue AddedOpportunistic

Debt & Securities

Offices, RetailLogistic, Clinics

Industrial


BNP ParibasReal Estate

FR Institutional €11 Bn. CoreCore plus


Offices, RetailLogisticsIndustrial

Hotels

Project DevelopmentInvestment Mgmt.

Property ManagementValuation / Brokerage


2.4.2 POSITIONING MAP

2.5 SUBSTITUTES

Real estate investors have alternative ways of investing. They are in no way obliged to invest their capital in realestate through a real estate investment manager. Well-known substitutes within the real estate spectrum are self-managed direct property investment and self-managed investments in real estate equity or debt products (indirectinvestments).

Switching to these alternatives may not be easy, though, since institutional investors in many cases lack theinfrastructure to manage the investments effectively by themselves.

Common stock and bonds always compete for allocation with real estate investment products, but real estateperforms well in asset-liability management studies. When interest rates rise, real estate performance may slowdown, which might drive institutional investors to look for higher returns elsewhere.

2.5.1 TRADITIONAL ASSET MANAGERS1

Year-end 2011 assets under management (AUM) for global alternatives reached record levels of $6.5 trillion, havinggrown at a 5-year rate of over 7 times that of traditional asset classes (alternatives include hedge funds, privateequity and investments in real estate, infrastructure and commodities in a variety of vehicles including limitedpartnerships, fund of funds, managed accounts, and increasingly, mutual funds and undertakings for collectiveinvestment in transferable securities, or UCITs).

Most traditional asset managers have not yet made the internal changes required to capture opportunities in themainstreaming of alternatives. Institutions and advisors also assert that asset managers need to ramp up capabilitiesin risk management and product expertise.

2.5.2 INVESTMENT BANKS

Products that investment banks typically offer are opportunity funds. A wide variety of real estate investments may becovered by such funds, which can range from holding portfolios in less mature countries to stakes in development, totakeover of entire real estate companies.

On the other hand, investment banks are in many cases investment managers as well and as such they offer e.g.core portfolios as well. Besides investments, investment banks also offer advisory (banking) and financing services,which leads to a total experience of a transaction driven, mainly short-term focused type of real estate business.

1 Report of McKinsey & Co “The Mainstreaming of Alternative Investments, June 2012


3. FORCES INFLUENCING REAL-ESTATE INVESTMENT

3.1 POLITICAL

The current sovereign debt crisis in Europe induces political risk.

Indeed, the summer rally in Europe has given two signals on the path to resolution: the drafting of legislation tocreate a banking union; and the European Central Bank’s commitment to eliminate “convertibility” risk premium fromweaker member states’ bond yields. Both of these measures should ease the “death loop” between weak bankbalance sheets and unsustainably high public debt to GDP ratios.

3.2 ECONOMICAL

The impact of the current financial crisis on revenue streams, cost structures and profitability is having a profoundeffect on the economic and structural landscape of the industry.

Ongoing market volatility is also continuing to exert stress on asset managers and impact investor confidence.Reduced asset values, several periods of strong outflows and the significant growth of lower margin passive fundsand Exchange Traded funds have impacted fees and revenues for many asset managers.

The destruction of wealth caused by plummeting stock markets and portfolios, the second time this has happened formany equity investors in Europe and the US in less than ten years, also triggered a breakdown in investor trust. As aresult, investors are becoming more sophisticated in their buying criteria, demanding greater transparency, increasedreporting and more heavily scrutinizing fee levels in relation to performance.

3.3 TAXATION

All countries have their own specificities in real estate investments; in particular taxation and town planning that willnot surprise cross-border investors who are accustomed to preliminary investigations and adaptations required foreach operation.

As capital moves between jurisdictions and cross-border investment leads to taxation (direct and indirect) of theoffshore investor, the way it does in the US and could more often in parts of Europe, careful tax planning gainsgreater significance in planning successful real estate strategy.

Larger real estate investments are generally structured through a foreign company with a view to mitigate tax, whenthe applicable tax treaty precludes the levying of capital gains tax or enables a tax optimized structure in this regard(e.g. tax treaty between France and Luxembourg). The foreign company holds a local entity that in turn owns theproperty.

Another tax optimization route commonly used for the acquisition of substantial real estate asset portfolios consists inusing a real estate investment trust (REIT) that is exempt from corporate income tax in many countries (i.e. there aremore than 30 different type of fund vehicle in Europe).

In recent years the number of different types of fund vehicle available to, and chosen by, sponsors and managers ofreal estate funds has proliferated, to a sometimes bewildering extent.

Fund managers also increasingly face heavy pressure to control and minimize the regulatory and other operatingcosts of setting up and running fund structures, in a world that continues to seek to impose regulation on all types offunds and their managers. Moreover, investors are increasingly sensitive towards incurring any significant taxleakages, and in particular tend more often to press sponsors to offer fund vehicles that best match the investor’sspecific tax attributes.1

A new double-taxation treaty signed between Germany and Luxembourg affects how Luxembourg based privateequity funds are taxed on German investments. There have also been questions as to whether there could be acoordinated approach across Europe to follow Germany’s example.

Currently, the French-Luxembourg tax treaty is also being re-negotiated in order to enable a taxation of capital gainsin France. However certain tax treaties make it possible to tax the capital gain in the country of disposal only if twolayers of company are inserted.

Without wide-scale amendments to domestic laws, though, changes to tax treaties would not have a significantimpact either on how funds are formed or on what their long-term exit strategies are.

1 PWC: “Managing Asset: European Real Estate Fund Regimes”, October 2010


Below is a non-exhaustive example on French taxation1:

Stakeholder Acquisition/Disposal Development Exploitation

Investor Purchase of share in Propco subjectto Registration duty: 5% and in othertype of company: 3% + 0,5 foramounts between 200 to 500K€ and0,25% for the amounts above.

Sale of asset capital gain: 34,44%local companySale of share capital gain: 33,33%

Individual wealth tax: from 0,25% to0,55% (except financial investments)

REITs Sales of share registration duties: 5%for legal entities holding more than20% of shares in the OPCI

Dividends to nonresidents: 25% WhTbut subject to provisions

Owner Registration duties 5,09% or less incertain conditions 0,715%Land Registration Ta: 0,1%Notary fee: 0,825% +VAT

VAT: 19,6%Development tax: 785€/m² builtSub-density tax: Max 25% of landprice

Real estate assets: 3% yearly if noprofessional use.Tax on CRE: from 30€ to 344€/m²depending on location and asset type

Tenants VAT: 19,6%

In addition, the VAT treatment of real estate transactions also varies between European countries. Therefore fundshave to cope with the VAT complexities inherent in both the transactions carried out in multiple jurisdictions, as wellthe complex bundle of services that surround the transactions.

Complex VAT issues often affect real estate transactions and, if mismanaged, can have a serious impact on returnon investment (ROI). These VAT issues therefore require the attention of investors and managers throughout theinvestment lifecycle. To ensure real estate transactions deliver maximum returns, below is an overview of the keyVAT areas for consideration throughout the lifecycle of investments in real estate: 2

Sourcing Acquisition Exploitation Exit

Assess the place oftaxation of investmentsourcing services,taking into accountlocal VAT regulationsand practices.

Ensure an optimalrecovery of input VATon acquisition costs.

Identify whether the acquisition issubject to VAT.

Consider capital adjustment rules, asthey may have a severe impact onthe ROI for the whole investmentperiod.

Identify whether the acquisition canbe structured as a transfer of goingconcern.

In the case of a share deal, considerthe historical risks attached to thetarget, and identify the appropriateguarantee and documentation to beclaimed from the seller.

Development projects bring addedcomplexity, including themanagement of VAT cash-flow.

Take advantage of specificlocal VAT deduction rules.

Consider opting for VAT onthe use of the immovableproperty to maximize inputVAT recovery on runningexpenses.

Carefully monitor localformalistic VAT obligations,as they may also impair ROI,if mismanaged.

Evaluate the impact oftenancy turnover and defineappropriate rental pricing.

Identify the VAT impact fromthe disposal of the asset forthe seller (VAT exempt /taxable transaction,adjustment period, transfer ofgoing concern).

Identify formal or agreedVAT obligations that may beattached to the buildingunder local VAT legislationand consider acceptablewarranty to be granted to thepurchaser.

In the case of a share deal,identify whether transactioncosts are VAT exempt or ifVAT can be deducted.

Real estate funds have been and will increasingly be subject to tax audits as taxing authorities look for additional taxrevenues. Therefore, fund managers are led to focus on day-to-day compliance. In a few cases, entities have begunoutsourcing their internal tax departments to specialist firms to streamline the administrative process while ensuringtheir tax planning meets all jurisdictional requirements.

3.4 INFLATION

Inflation levels in many European countries are around 3% with certain markets such as Russia substantially higherat around 7%. As a consequence, further inflationary pressure may drive investment in real estate assets in themedium term. It is expected that certain real estate asset prices keep pace with inflation and the hope that resurgentdemand in certain markets outstrips overall supply. But the picture varies by country.

1 Note: Some institutions are not subject to the VAT (e.g. insurers, and those not having opted for the VAT on rents)2 Atoz-Taxand: “Managing VAT for pan-European Real Estate Funds”


The worries of inflation come from European current monetary policies in preparation and the trillions of dollars ofQuantitative Easing that the Fed has been pumping into the US economy since 2009. With so much money injectedinto the economy, inflation is just around the corner. The theories go that it will drive mortgages down, people willrefinance, buy new houses, and kick start construction and real estate. This is the danger to mortgage REITs.Mortgage rates go down and their very profitable spreads deteriorate.

3.5 REPORTING

Investors that used to receive quarterly performance data in arrears, are now demanding more frequent and detailedupdates from their real estate fund managers. At the height of the crisis, some managers provided monthlyvaluations. In addition, investors are focusing on metrics such as how liquidity is being managed. This shift is partlyto do with the severity of the downturn and with the depths to which some property values fell. In addition, real estateis a complex investment, and investors want to be aware of any inherent risks. There are myriad factors that maytogether have an impact on the attractiveness of the property.

Furthermore, the tenant covenant, including who the tenants are, what their business is and whether they are stablerent payers, is also a critical driver of successful returns. Investors are increasingly seeking this level of detail on theassets in which they have invested, and they expect their fund managers to be able to provide it more quickly andprecisely than ever before.

The level of detailed reporting required is likely to increase in the years ahead. Risk management has become asignificant factor in investors' thinking, and these financial metrics are also valuable to fund managers as they enablethem to ensure they are meeting their investment mandates. For example, they may have a limit on the level ofgearing in the portfolio, or how much exposure there is to particular sectors such as office or retail.

Even some data on building sustainability performances could be requested by tenants. The energy efficiency of abuilding is set to become an even more important factor in years to come, as tenants - particularly in the public sector- increasingly make real estate choices based on "green" ratings.

Powerful analytic tools are available that allow this level of detail to be mined and analyzed for the benefit of thefund's investors. Nowadays, leading service providers in the real estate area can offer technologies that aggregatedata from all the underlying real estate assets in a fund, and store it in a data warehouse for ready access via theinternet. By partnering with third-party service providers to access these capabilities, investors and managers canavoid the ongoing investment required to ensure that these technologies remain cutting edge and keep pace withmarket evolution.

3.6 ACCOUNTING

Regulators and shareholders increase pressure on companies to improve the volume and quality of their financialreporting disclosures. In addition, standard setters are issuing new standards and interpretative guidance. Most ofthe new accounting standards and interpretations are not yet effective, but will have a significant impact on futurefinancial reporting.

The Financial Accounting Standards Board (FASB) recently issued an exposure draft that would significantly changethe way real estate entities account for their investments. The proposal requires investment property entities tomeasure investment property at fair value with changes in fair value reported in net income.

This proposal would be a significant change for entities that currently follow a historical cost accounting model (e.g.,certain REITs), as well as real estate funds that follow a variety of fair value accounting models. It would also affectreal estate funds that follow the investment company guide and account for their investments at fair value withoutconsolidation.

3.7 REGULATIONS

The real estate industry is braced for significant regulatory change in the coming years, as regulators turn thespotlight on issues of investor protection and systemic risk. These regulations across the financial services sectorswill have a substantial impact on available capital in the real estate fund sector globally while both the United Statesand Europe are enacting stricter enforcement on alternative investment funds specifically.

a) Alternative Investment Fund Managers Directive

The AIFMD is a European regulatory initiative that is set to come into force in July 2013, and impacts managers of allnon-UCITS funds (Undertakings for Collective Investment in Transferable Securities), including hedge funds, privateequity and real estate funds with geared assets of more than €100 M or ungeared assets of more than €500 M.


In addition, it may also affect other arrangements used in the real estate sector, such as joint ventures and propertyinvestment companies, and will require European AIFMs to be subject to capital requirements, detailed reporting anddisclosure requirements. Many fund managers expect the biggest negative impact to be on internal costs andoperational complexity.

b) Basel III

This regulation is a global regulatory standard on bank capital adequacy, stress testing and market liquidity riskagreed upon by the members of the Basel Committee on Banking Supervision in 2010-11, and impacts the flow ofcapital to real estate funds. It requires banks to increase their capital and liquidity, which leads to a reduction in thecapacity for banking activity and a significant increase in the cost of provision of lending.

Therefore banks may not return to the market in the medium term and the industry is in a period of structuraldeleveraging. This means that borrowers either need to provide more equity or find another type of debt capital tobridge the finance gap.

c) Solvency II

Affecting EU-based insurance and reinsurance firms, Solvency II establishes a "three pillar" system for riskmanagement, governance, reporting and ongoing supervision, as well as capital and solvency requirements.

The Solvency II could mitigate a portion of the potential capital reductions brought on by Basel III. Geared toward theinsurance market, it will enforce stricter risk criteria for the assets that insurance companies invest in. This willnaturally affect how real estate funds report to insurance companies. Improving transparency could also encourageEuropean insurers to lend more to the real estate markets.

d) European Market Infrastructures Regulation

The EMIR is designed to impose transparency and greater control over derivatives markets and will requirestandardized transactions to be cleared through central clearing counterparties (CCPs), and will affect to some extentall market participants and users of over-the-counter (OTC) derivatives.

This regulation is highly significant for real estate investment funds because they are typically leveraged and useOTC instruments to hedge their exposure to adverse interest rate movements. If they invest in overseas propertyassets that produce foreign currency cash flows, they may also use derivatives such as long-dated currency swapsto counter currency risk.

These features have significant consequences for real estate funds. First, they will need to pay for the additionalstages in the cleared model (electronic execution facilities, clearing members, central counterparty clearing, tradereporting), costs that they do not currently have to meet. Second, as real estate funds do not normally holdappreciable amounts of cash or assets that are eligible at the CCPs, they could struggle to find the cash or eligibleassets to collateralize their use of derivatives. In addition, if real estate funds are unable to arrange swaps to hedgethe interest rate on their debt, they may need to seek fixed-rate interest payments, or they may be unable to raisefinance.

3.8 ECOLOGICAL

European real estate investors are seeking to put their sustainability activities on a broader footing. Today’s “green”strategies address the entire real estate portfolio and also apply at company level. The search for improvedenvironmental performance will require greater involvement of the building’s tenants and service providers.

In the last survey, conducted in first quarter 2012, some 25% of the real estate investors surveyed are alreadypresenting building metrics such as final energy consumption, lifecycle costs and waste volume at portfolio level.Similarly, 34% of investors have incorporated sustainability into their Corporate Social Responsibility (CSR) strategy.Sustainability is perceived within the real estate sector as a holistic concept.

A building’s environmental performance depends on the tenant whose behavior has a significant impact on it. Arelated challenge concerns the degree to which building owners or managers control tenant space. Otherwisecomparable buildings, with the same style of construction, similar location, and intensity of use, may nonethelessvary in their measured sustainability due to differences in data availability (e.g. whether the tenants provide theirowners with detailed energy usage data). “Green leases” that specify tenant reporting requirements should reducethis issue over time, but for now, access to tenant data remains an obstacle to robust sustainability reporting. 1

1 RREEF: “Measuring What’s Important about Building Sustainability”, October 2012


4. CONCLUSIONS FROM EXTERNAL ANALYSIS

4.1 KEY ISSUES

According to the IMF, 58 European banks should dispose of €1.5 trillion ($2 trillion) of real estate assets within thenext two years, while the investment volume in Europe for the whole of 2012 was close to €100bn, and lookingahead to 2013 volumes should be rising modestly to €110bn.

Loan sales continue across Europe, and have shifted from performing loans to secondary assets with risingdiscounts, which are now ranging from 50%-70%, compared to around 25%-30% a year ago.

It is expected the overall debt volume available and the loan-to-values (LTVs) offered by banks financing projects(average of 50% to 62% in 2012 for good quality buildings with stable cash-flow) will fall far more substantially in2013. As a consequence, there will be a decrease in debt flows and a rise in equity flows.

Real estate investment is clearly, but not exclusively, characterized by risk aversion. This is reflected in pricing andmay provide some interesting opportunities down the line. The risk premium between core and riskier assets iscurrently continuing to widen.

Increasing number of non-European investors (sovereign wealth funds, family offices and other overseas investors)are amassing core assets with little or no debt, largely but not exclusively in London and Paris. Consequently,those seeking higher returns traditionally offered by such properties may have to pursue less traditional real estateinvestment classes. This is likely to involve a move towards alternative assets, which include residentialdevelopment, student housing, serviced apartments, and care homes.

2013 will be a tough year for real estate fund managers due to the pressures of a challenging equity raisingenvironment and regulations. Lower fees on new mandates and the increase in costs from regulations willaccelerate further consolidation in the sector.

The current economic context causing deficits to commercial and industrial firms in difficulty create an opportunityto externalize all or part of their real estate assets without major consequences on their taxation (however, level oftax reduction is limited in certain countries).

Cash shortage to develop core activities leads commercial and industrial firms also to consider externalizing all orpart of their real estate assets.

A huge number of existing properties have become older and obsolete creating finance requirements for renovationto comply with operational, health, safety, security and environmental constraints.

4.2 KEY FINDINGS

The rehabilitation of the market is being shaped by two major trends – globalization of capital and specialization ofstrategies.

Investors and fund managers are mainly focused on investment strategies as described in §1.3 rather than tenants’needs and capabilities. There is a huge gap between offering and tenants’ needs. Tenant is not really at the centerof the business.

Few players have vertically integrated capabilities, each with singularities. This creates opportunities to them inlooking for corporate strategies focused on global corporate tenants.

The greatest leverage in the value chain is found in (i) companies that own and operate real estate, and (ii) firmsthat either invest in them or manage property for them. There are trade-offs between a real estate company’s scaleand the nature of its leverage. For example, a full-service firm may have a large number of square feet undermanagement, but it has only indirect influence. A single developer/owner, in contrast, may have less total squarefootage, but by virtue of ownership they have direct control over property decisions.

Effective Facility Management, particularly in multitenant occupation, can bring added-value both to the owner andtenants through efficient real estate operation, and therefore increase tenant satisfaction and their perception ofvalue while also creating a closer understanding of tenant needs.

Sustainability is still rising up the corporate agenda. REITs, developers, banks, or investors, say environmentalconcerns are now intrinsic to their due diligence. In the consumer world, brands are considering how to managedown carbon footprints and how to supply more sustainable products – an agenda which is beginning to influenceretail development.


4.3 CONCLUSION: VERTICAL INTEGRATION REQUIRED

Away from the short term market dynamics there are other threats to real estate funds where opportunities exist forpurchasers and developers, in particular for cash rich players having vertically integrated competences. The currentcontext is forcing real estate fund managers and developers to question their business model and mission, and toreconsider their allocation of resources, organization and skills in order to maintain their positions.

Below schema indicates functions that need to be integrated, as well as issues to deal with having consequences onall other functions.

Although the current context creates many opportunities that depend on how risks are managed and feasibilityconditions set, and the trust of investors and customers in fund manager/venture partner’s ability to do things correctly,this is insufficient to create business. Managers should also create a differential advantage in value proposition totenants and in value creation for investors by its structuring, positioning and services.

Capabilities in development and multidisciplinary expertise in many fields in real estate will undeniablyrepresent a differential advantage for funds in managing the whole process to provide durable & sustainable coreassets, efficient operational solutions for tenants and high “Economic Value Added” for investors.

•Vacancy rates rise

•Tenant pressure on rent

•Flexible lease terms

•Low economic performance

•Cash shortage

•CRE property values fall

•Reduced fees

•Eurozone crisis: uncertainty•Difficult exit & disposal•Low return•Broken capital structures•New investment trends•Risk aversion•High market attractiveness

across Europe•No consensus on CMBS market

•Limited lending

•Project finance

•Limited time & budgetconstraints

•Land location

•Procurement

•Sustainability metrics

•Green agenda

•Regulations & Reporting

•Complexity in fund structuring

•Compliance & Risk Mgmt

•Refinancing: Funding gap

•Source deal flow

•Structural shifts: costs rise

•Competition for talents

•SWFs appetite on core assets

FundManagement

DevelopmentManagement

EstateManagement

InvestmentManagement


5. GROWTH AND REFOCUSING OPPORTUNITIES

5.1 THREAT INDUCED STRATEGIC OPPORTUNITIES

5.1.1 TENANT RELATED1

a) How do Tenants consider real estate?

For most businesses, real estate is the largest or second-largest asset on the books. Real estate affects everyone:customers, employees, investors, regulators, neighbors, and it is not easy to manage.

Commercial real estate is not merely an operating necessity; it’s a strategic resource. But it rarely captures seniormanagement’s attention. In many organizations, real estate remains a reactive, second-order staff function, focusedon discrete projects and deals rather than on the company’s broader strategic issues. Location and layout choicesare made within business units, driven by short-term needs, and based on conventional wisdom. Proximity toheadquarters can take precedence over customers’ and employees’ preferences.

b) How do Tenants assess real estate performance?

Most tenants, in particular large corporations, assess an organization’s real estate portfolio through the evaluation offive factors: space, price, grade, area, and risk. For complex portfolios, greater weight may be assigned to certainfactors for certain facility types. For example, in financial services, for instance, area is more important for branchsales offices and call centers than it is for head-quarters offices, which are generally less dependent on customerinterface and numerous employees. In a retail enterprise with low operating margins, price will most likely beassigned greater weight because of its high impact on profitability. And in industrial firms with extensivemanufacturing and distribution facilities, risk will weigh more heavily.

Amount

Amount of space inorganization’s realestate portfolio,categorized bygeography, unit, other

Price

Organization’s totaloccupancy costs,including rents, capitalexpenses, andmaintenance expenses

Grade

Building class (A, B, C),space type (office,retail, other), andinterior standards(lavish, utilitarian,Spartan)

Area

Submarkets(downtown, suburbs)and site locations(primary, secondary)

Risk

Portfolio’s exposure tomarket, financial, andenvironmental volatility

Key Ratios m² per employee revenue per m²

cost per m² cost per employee cost as % of revenue

(for sales & servicefacilities)

capital cost per m²

% of each:

building class space type quality level

% of sites

sites in eachsubmarket

primary andsecondary locations

market value tobook value

portfolio value % of debt to equity % of total capital

invested inhazardous sites

Evaluation Are theorganization’s usesof space appropriatefor the requirementsof each category?

How does this usagecompare withinternal & industrybenchmarks?

Are theorganization’soccupancy costsappropriate for itsmarket conditions,profit economics,and functionalrequirements?

How do these costscompare withinternal & industrybenchmarks?

Are theorganization’sbuilding and interiorstandardsappropriate for itsoperatingrequirements andcost structure?

How do these stan-dards compare withinternal and industrybenchmarks, andpeer organizations?

Are theorganization’sfacilities located inareas that aresuitable for itsfunctions,customers, profitmargins, and keysuccess factors?

How do these loca-tions compareacross theorganization’s unitsand with those ofindustry peers?

Are the portfolio’smarket, financial,and environmentalrisks in line with theorganization’sfunctions, profiteconomics, capitalstructure, andenvironmentalfactors?

How do these riskscompare withinternal & industrybenchmarks?

Key Findings:

Consider global key account holder function that includes customized, proactive and dynamic tenant-led assetmanagement with regular reporting about the key performances indicators of the total portfolio leased.

Add (i) social qualitative KPIs for the employees’ wellbeing that deeply affects their behavior, performance,creativity, and ownership, (ii) and KPIs for the impact of the investment scenarios on the tenant company’sfinancial performance (equity, ROIC, gearing, cash, opex vs. capex) and on the bottom line.

1 HBS: “What every leader should know about real estate” by Mahlon Apgar IV, November 2009


c) How do Tenants consider flexibility in real estate?

Nimble organization ensures that it has maximum flexibility throughout its real estate holdings, even if that meanspaying more up front in some instances. Flexibility can be financial (leasing instead of owning), physical (designingmodular space), and organizational (redistributing work).

Financial: Companies that prize flexibility tend to own less and lease more. Lease terms offer a way to maximizeflexibility. Shorter terms, with more frequent and earlier termination dates, expansion and exit clauses, and renewaloptions, can help a company adapt to changing circumstances. Coordinating the end dates of leases, subleases, andexit clauses in adjacent spaces also allows organizations to shift or disband operations.

Savvy tenants negotiate leases as they do equipment purchases: They establish a base price and define an array ofoptions for which the company is willing to pay a premium, depending on the flexibility it needs. They can make in-telligent decisions about how much to pay when they understand the variability of business needs.

In volatile times, up-front costs may be low relative to the hidden operational costs of having too little or too muchspace, or the wrong type of space in the wrong place.

Physical: The simplest form of physical flexibility is space that is easy to subdivide or sublease. In buildings thatoffer such space, companies can take advantage of less-expensive long-term leases while adapting to changingcircumstances by subleasing some of their space to others.

Buildings can be designed with future uses in mind, making it easier for organizations to trade a costly, complex, orobsolete use for a new, more marketable one. These adaptable designs have simple, generic common areas,standardized space modules, movable walls, and accessible electric and HVAC infrastructure, all of which make thespace easy to reconfigure when anticipated uses or operating expenses change.

Organizational: Some companies maintain their real estate flexibility by considering alternative workplacearrangements for employees (e.g. working from home). They also routinely offer telecommuting options to manykinds of employees and, as a result, are finding opportunities to decrease their real estate costs and increaseemployee satisfaction.

Key Findings:

Rent structure that tenants expect is the incentive based lease in line with defined KPIs: including services such asassistance in planning their real estate strategy, in property and facility management, and in reporting.

This moves the negotiation from bargaining on rent prices to studying suitable and effective solutions with bettereffect on the bottom line for the tenant.

Pricing model (rental with balanced payment terms compounding deposit, fixed rent, variable rent, services, andincentives) could be schematized as follows.

Services

Fixed Rent

Opex by Tenant

Total Cost of Ownership

Disruptive Lease Classic LeaseEnd-User

Tenant BenefitCombined benefits

Saving share

Total Cost of Occupancy

Variable Rent

This scheme could be more easily implemented in hotels, retail outlets, clinics, care homes and serviced residencesrather than in other asset types. However it requires close partnership between the owner and its selected corporatetenants (global key accounts).


5.1.2 VALUE CHAIN MANAGEMENT RELATED

In the traditional real estate value chain, there has been a drive towards segmentation, with specialization in everylayer. The ultimate building owner (on paper) is just the investor detached from its investments. It no longer has adirect portfolio of properties, but invests via external managers, be it listed property companies or private fundmanagers. Alignment between owner and manager can be achieved through co-investment, but mostly happensthrough performance-based compensation.

The typical fund manager (or property company) acquires and disposes of assets, but leaves property management(including, most of the time, maintenance and capex planning) to external companies. External property managersmight be better at achieving economies of scale for systematic tasks, such as cleaning, and they might have a betternetwork to attract tenants.

But the fund manager loses direct control of the property, and therefore no longer has a good feel for tenantsatisfaction and the technical state of the building. And again, the objectives of the external property manager are notnecessarily aligned with the objectives of the fund manager, or, the owner.

Then, there is the tenant. After all, real estate should be about the tenant. But the tenant is not really the person thatoccupies the property; it's a "tenant rep" which is usually not directly connected to, let alone in, the C-suite.

The tenant rep has to find space that satisfies a number of parameters: location, quality and price. Service costs areusually not part of this equation. The ultimate satisfaction of the employee with the space is assumed to be positivelyrelated to these parameters. But maybe there are other factors that make the employee happy - and ultimately moreproductive, such as light, space, (lack of) noise, vertical integration, services and facilities.

The disintegration of the value chain brings many benefits, as specialization usually does. But it also has manydisadvantages and a backlash is on the way. There is a trend towards reintegration of the value chain (build-to-own,in-house property management, and closer control of the ultimate owner, through club deals and JVs).

Most importantly, smartbuilding owners put thepyramid upside down: theemployee on top, or theconsumer in a shoppingcenter, or the patient in ahospital. Real estate canthen serve the purpose of:increasing employeeproductivity, creating ashopping experience, orenhancing patient recovery.

That requires a better integration of tenant representatives in the average organization. “Understand your business,and understand what your people need to do their best work.”

Actually, real estate can play a much more fundamental role for business than is currently realized, buildings shouldbecome more central to the business of the modern corporation, and they can be exploited to execute part of thecorporate strategy. Better buildings may assist in: attracting and retaining human capital, establishing and reaffirminga brand in the marketplace, and decreasing operational costs.

The upside-down pyramid also requires in-house property management, or better alignment between propertymanagers and fund managers. Also fund managers should be compensated on a longer-term basis.

5.1.3 INVESTOR RELATED

There has been a naïveté on the part of some real estate funds, investors and financiers in completing their risk-reward calculus. Indeed, many of them minimized risk in order to pursue reward, and now they are paying anenormous and painful price. In fact, in reviewing some of the reckless financial engineering that occurred (in therating, slicing, and dicing of different tranches of risk and in packaging and selling them off) one might argue that theylooked at reward as being almost completely divorced from risk.

Real estate historically has been such an attractive investment opportunity because of its relative lack oftransparency not everyone knows or is able to isolate all the factors involved in financing, building, or acquiring asuccessful project.


That is why it is critical to delve deeply intothe fundamentals of the real estate itself, tofactor in, for example, more accuratemeasurements of supply and demand,adequacy to tenant needs, replacement cost,entitlement risk, financing alternatives,design, execution, and phasing issues.

Also worthy of attention are how companiesevaluate and execute on what once wereconsidered second-tier issues, such asoperations, service delivery processes, andachieving economies of scale. Developers andinvestors are starting to have a betterunderstanding of the risk components as wellas a greater capacity to seize opportunitiesand mitigate those risks.

5.1.4 BUILDING SUSTAINABILITY RELATED1

a) Current Status of Industry Metrics

Industry participants have yet to agree on common standards with robust and reliable metrics to measure thesustainability of commercial properties and portfolios to ensure regulatory compliance, to drive organizations togreater achievement and raise industry accountability and to gauge the efficacy and financial returns ofenvironmental enhancement projects.

Investors currently face a multitude of systems and tools (LEED, Green Globes, BREEAM, DGNB, Green Star,CASBEE), each with its own metrics, approach, technical requirements, and priorities, reflecting the needs andbiases of their adherents. Too often systems and tools measure (and reward) efforts and intermediate outputs ratherthan performance. Data rarely helps support operating decisions at the building level.

The multiplicity of systems in service around the globe has created a hodgepodge of rating systems using their ownterminology, reporting systems, and measurement schemes.

This multitude of conflictingmethods inhibits inter-countrycomparisons and drives systemand training costs up for manyproperty owners that operateacross borders. Regionaldifferences in environmentalconcerns invites disputes in whatshould be measured.

The notion of “sustainability” isfundamentally a subjectivedetermination.

There are no appropriate benchmarks based on property functions, (retail versus office), intensity of use (occupancy,hours of operation), degree of owner control, and climatic zone, among other factors.

The lack of transparent and comprehensive standards also invites reporting “cherry pick” results, where firms selectthe data elements that best fit their agenda rather than those that most fairly represent actual performance. As aresult, owners and lenders lack the data needed to assess risks, to value sustainability investments and to underwriteprojects.

b) New Initiative

Among several initiatives by various groups to propose industry metrics, those undertaken by Green PropertyAlliance (GPA), a working group of some fifteen major UK-based investors and property organizations is interesting.

1 RREEF: “Measuring What’s Important about Building Sustainability”, October 2012

* Source: Ernst & Young


In a 2010 report, the group proposed a set of common metrics in four key categories: energy use, water use, wasteproduction, and carbon emissions. 1 (See Exhibit C §12.1)

This proposal has not yet been widely implemented by property firms, although both the European Public Real EstateAssociation and European Association for Investors in Non-Listed Real Estate Vehicles reference these metrics as“best practice recommendations.”

The GPA approach also was adopted by the GRI’s Construction and Real Estate Sector Supplement reportingstandard, which was finalized in 2012 and presents a specific GRI reporting format for property firms. Since GRI isthe leading global standard for sustainability reporting at the organizational level, the GPA approach may well gainfurther traction in the industry.

5.2 PROBLEMATIC INDUCED STRATEGIC OPTIONS

As a result of the analysis of the real estate industry conducted above, fund managers should thoughtfully answer thefollowing question to explore the most viable strategic options.

How to develop and sustain a profitable business model that creates value for chosen tenants and investors soas to capture a part of this value?

1 GPA: “Establishing the Ground Rules for Property: Industry-wide Sustainability Metrics”, October 2010


6. CUSTOMER-CENTRIC STRATEGIES

Tenants and investors are two customers for real-estate funds, currently with opposite interests. However, if there is notenant, then it would be difficult to find an investor.

Real estate business success today requires a new depth of customer insight, the tenant being at the center.

Companies that listen closely to the needs of their customers and develop buildings and services based on thoseneeds, with highly tailored problem solving capabilities and greater adaptability, are more likely to develop trusting,intimate relationships with their customers.

Customer intimacy is critical to helping real estate funds achieve their business objectives, including identifying (i)future investment and development opportunities with occupiers and investors, (ii) and prospects for lease or sale.

Business success is built not solely on short-term or one-shot deals, but largely on the trust that companies developwith their customers over time. Once a company has earned its customers’ trust – and loyalty – by understanding theirperspective and treating them fairly, then it is able to draw long-term economic value from those relationships.

Companies that excel at customer intimacy, by aligning their business strategies to develop a comprehensive view ofeach customer and leveraging the business potential of each relationship, improve as a result both operationalexcellence and product & service leadership.

To achieve success, proposed strategic moves in this section require that the real estate fund manager verticallyintegrates competencies in delivering real estate solutions with superior customer value, excels in customer intimacy,and masters to some extent the other two value disciplines, and even initiates new value disciplines such assustainability.

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The Customer Intimacy concept from marketing, which describes the ability of a supplier to become accepted andknown as the regular partner with its customer, creates a virtuous circle; the better the supplier knows the customercompany with its objectives and difficulties, the better he is able to provide an optimal solution. In the following section(§7 “Strategy Implementation”), this concept is transposed to real estate business through its action list.


6.1 STRATEGIC PARTNERSHIPS

The largest and most efficient organizations team with firms offering a full range of facilities functions and servicessuch as: Investment partnership, Development partnership, Lease Partnership, and Service partnership.

Such partnerships succeed if both parties agree on two conditions. First, the organization must be willing to sharesome control over its resources / properties. Second, the real estate fund manager must agree not to focus solely ontransactions but to work toward long-term goals such as strategic advantage, fair returns to investors, occupancy-cost reduction, and employee satisfaction.

6.1.1 INVESTMENT PARTNERSHIP

Investors invest alongside the founding partners, which include the fund manager. The fund manager’s goal is togenerate the best possible capital appreciation of the liquidation value of the asset portfolio at the maturity term inorder to give an optimized return to shareholders. Their interests and those of the shareholders are perfectly alignedthanks to a commitment from the fund manager to invest a part of his own net worth in the portfolio.

There are many advantages to this type of business investment. It is easy to set up and also affordable.

A business becomes more powerful and more profitable when there are more people and therefore more resourcesavailable, and for that reason more assets are available. The more people within an investment partnership, becauseof the pooling associated with property, the greater the willingness of the lending company to offer loans to theinvestment partnership. This allows for an over-all business venture while still sustaining each partner’sspecialization.

The future occupier could also be invited to the investment partnership.

6.1.2 DEVELOPMENT PARTNERSHIP

Companies that develop their own real estate rarely achieve results comparable to those of independententrepreneurs and professionals as it is not a core competence for most companies. In addition, internal real estategroups are subject to organizational pressures that outsiders can escape.

One way to ensure sound real estate decisions is to prohibit the company’s finance arm from underwriting its owncorporate facilities. This keeps business units from requesting uneconomical price breaks from the corporate realestate function, and corporate real estate from pressuring business units to take space they don’t need.

6.1.3 LEASE PARTNERSHIP

In some instances, a leasing relationship between owner and tenant can evolve into a partnership.

Owners invest substantial time & money in finding tenants, and tenants effectively underwrite the owners’ financing.Given that interdependence, smart owners aspire to teamwork with their tenants, and smart tenants seek ownerswith a long-term interest in their success. In a “performance lease”, a retailer’s rent may be based partly on itsrevenues. This arrangement would press the owner to create an environment for customers and employees thatpromotes the retailer’s success.

6.1.4 SERVICE PARTNERSHIP

In addition to property and facility management, the owner may provide tenant-led asset management to its largecorporate tenants, assist them in their strategy planning & execution linked to real estate related issues, and providesolutions, advice and regular reports on the portfolio leased.

a) Client Solutions

Whether the occupier acts as an investor or tenant, real estate issues are becoming increasingly complex andintegrate in a constantly changing environment. Real estate provides a source of value creation that requires perfectmastery of costs and risks. In this context, the occupant needs a service dedicated to listening to its real estateissues and relevant real estate solutions in the service of its corporate strategy.

b) Portfolio Management

The tenant needs a dynamic, moving picture of where corporate strategy is driving its real estate holdings and of howthe footprint could change depending on the route they take. The company may have too much space in one locationand too little in another, or the wrong kind of space in certain areas.


The analysis will also show which leases are expiring and when, their amounts and costs over time, and how thelocations and sequence of expirations could complicate, or even block, future actions. For example, offices that donot need to be down-town are relocated to nearest less costly submarkets.

The portfolio approach is especially important when a company is going through a major change, such as a merger,an acquisition, or a divestment. Rationalizing an organization’s real estate (matching space and facilities to strategicand operational needs) can be as important as rationalizing the workforce. The process of equating supply anddemand, physically, financially, and operationally, often involves relocations, closures, and dispositions.

c) Real Estate Intelligence

Tenants need real estate intelligence: accurate data, synthesized into relevant information, interpreted in the contextof corporate and competitive realities. It allows them to understand trade-offs and to connect real estate decisions tocorporate strategy. The foundation of real estate intelligence is a database that includes square footage, occupancycosts, uses, capital values, utilization levels, and other relevant information, arrayed by line of business, function, andlocation. The quality and effectiveness of the database increase with scale.

So, tenants need a dashboard that focuses only on fundamentals and synthesizes the key issues. Wise tenants paymore attention to internal measures of facilities’ costs, productivity, and utilization than to fluctuations in the realestate market. They need periodic reporting of internal ratios that link real estate to business economics acrossbusiness units, markets, submarkets, and building types. To this end, many tools are used, such as space budgeting,lease decision analysis, and employee location mapping.

6.2 EMBRACE SUSTAINABILITY

Tenants are beginning to choose green buildings to reduce emissions, and many occupiers are making it clear thatenvironmental concern is a both a long-term obligation and an opportunity.

Green buildings may cost more up front, but they deliver high returns over the long term. Investors, advisers, andother stakeholders can glean some ready insights and comparative metrics.

For example, the voluntary LEED building certification is becoming a standard for financing and marketing majorcorporate buildings. And Dow Jones’s Sustainability Indexes use economic, social, and governance criteria thatfocus on long-term shareholder value. These tools, already used by asset managers, aim to set the bar for corporatecitizenship.

Green Real Estate policies & projects generally succeed if they meet four criteria.

- First, they must be strategic: occupiers need to be able to see how they connect to the business mission.

- Second, their benefits must be measurable, if not precisely quantifiable. In this new, barely charted realm, evenproxy measures such as carbon footprint and sustainability indices can be used to support new directions andpilot projects.

- Third, the policies must be operational, but they do not necessarily require new programs. If the first two criteriaare met, executives can signal their support for green projects within existing programs.

- Finally, green initiatives should be aspirational. They count with consumers and rank high on young employees’agendas.

A good starting point for a common set of metrics for a building’s performances would be those recommended byGPA (§12.1). Certainly there are many other possible metrics such as renewable energy use, indoor air quality, andembedded energy used in the construction materials. Sustainability is sufficiently new for most organizations thatexisting systems inevitably will need to be modified or adapted to capture the required raw data for reportingsystems. Such efforts should be amply rewarded in the payback from more efficient building operations and moreeffective capital planning.

Going green is a hard business issue of cost, competitiveness, and survival. Real estate has significant opportunitiesto affect the sustainability of the planet. With greater transparency, every organization will be accountable for itsenvironmental footprint, and stakeholders will expect positive results.


7. STRATEGY IMPLEMENTATION

7.1 CUSTOMER INTIMACY AND OTHER VALUE DISCIPLINES

For market leadership, companies typically excel at one value discipline, but going further by mastering two couldresolve the inherent tensions between the operating models that each value discipline demands.

Real estate products representing heavy and long-term investments require intelligent programming, functionaladequacy, efficient operating, and optimized & tailored sustainable solutions that fit exactly a specific tenant’s needsto leverage its business performances.

Therefore real estate fund managers must push the boundaries of customer intimacy while meeting at least industrystandards in the two other value disciplines, and align their entire operating model on that, marketing being thecentral task of the management. 1

7.1.1 CUSTOMER INTIMACY

Dedication to meeting the needs of carefully selected customers is the critical requirement for survival and growth.Value, and tomorrow’s sales and profits, are created by today’s satisfied customers who want to continue doingbusiness with the company.

A company pursuing a strategy of customer intimacy continually tailors and shapes products and services to fit anever increasingly refined definition of the customer, and provide a better overall result for them than anyone else.

At the outset, it can be expensive to build customer loyalty for the long term, but the customer’s lifetime value to thecompany is much more important than the value of any single transaction, profit will accrue over the lifetime of therelationship with the customer.

While operational-excellence companies and product-leadership firms never look beyond a client’s immediate needfor a product or basic service, the customer-intimate developer becomes familiar with the occupier’s business,understands its broader, underlying problems to be solved, and thus can propose reliable services, and createappropriate solutions in financing and structuring the deal, as well as programming and designing the building.

The customer-intimate developer uses its superior expertise to solve the client’s underlying problem in regard to realestate, provides its corporate clients with experts in estate management to change the way the customer finances,owns and uses the building, and also changes and adapts the building design and management to the occupier’sneeds.

a) Operating model

The complex real estate solutions for global corporate clients (legally, financially, technically, and operationally) needto be crafted and integrated by sophisticated account teams and specialized service and product support groups.The result: a total solution tailored and coordinated by a dedicated account team and efficiently delivered throughselected specialized experts.

Building a body of expertise in account teams and specialized service groups is the foundation of a customer-intimate relationship.

Customer intimacy requires the efforts of the whole company and the complete alignment of various functions suchas product development (design & construction), estate management, fund management and corporateadministration to achieve a total solution for these customers.

If everyone in the company is not passionately client-driven, the difficulties in receiving internal support would leadthe account team to offer, at best, customer responsiveness, but not intimacy.

b) Management of people

The central management challenge is to assemble, integrate, and retain talented people who can stay at the forefrontof new paradigms and real estate issues that affect their clients’ business. The proof of their value is found only inresults: the client recognizing that the company has been instrumental in its success.

1 Note: “Today, however, a business needs to adopt a multiple perspective and to satisfy different groups of stakeholders, which may include shareholders,employees, managers, customers, suppliers, creditors, the government and the community in which it operates. A central task of the management is alsoreconciling these diverging and partly conflicting interests.” – P.Doyle & P.Stern :” Marketing, Management and Strategy” - 2006


Customer-intimate companies need a broad set of skills and styles to get the job done. They hire a mixture ofseasoned and inventive people who are adaptable, flexible, and multitalented. The blend of experience andinventiveness prevents skills from becoming obsolete or irrelevant.

The success of the account team rides on the powerful service groups that stand behind them. When these accountrepresentatives get hired by their clients, as sometimes they do, their effectiveness is usually seriously diminished.They have lost access to these shared resources, the leverage of being an outsider, and the learning that comesfrom being in an organization that deals with many similar client situations.

Techniques should be developed for sharing among account teams the general insights on the best practices gainedin working with particular clients. This institutionalization of knowledge is a key to the competitive edge.

c) Delivery system

The strength of customer-intimate companies lies not in what they own, but what they know and how they coordinateexpertise to deliver solutions. They assume a general contractor’s role, by coordinating and integrating manyfunctions with partners and subcontractors (legal, taxation, structuring, financing, and works), in designing a totalsolution for their clients and taking responsibility for the solution’s execution.

The major success factor for them is their networks of product and service capabilities. They bring a combination ofsubcontracted components and their own services to extract their profit.

d) Creating a deep relationship

Customer-intimate companies take the long view and make investments in building relationships. But to receive aneventual return, they have to retain their clients. So clients without deep relationship potential are avoided or shed.

To be worthy of a customer-intimate company’s attention, clients must meet the following selection criteria:

Attitude: The best potential clients are those who feel something is missing from traditional owner-tenantrelationships and that a greater opportunity exists out there somewhere, but they have not been able to define ityet.

Operational: The ideal operational fit exists when the client has no reliable competence in real estate.

Financial: The client has large, untapped potential where it had no understanding of the earnings that werepossible if their real estate assets had been better managed (financing, taxation, structuring, occupancy, use,design).

7.1.2 OPERATIONAL EXCELLENCE

It is a specific strategic approach to the production and delivery of products and services. The objective is to lead theindustry in price and convenience by seeking ways to minimize overhead costs, to eliminate intermediate productionsteps, to reduce transaction and other “friction” cost, and to optimize business processes across functional andorganizational boundaries. 1

Speed of response is fundamental for operational excellence, and systems that provide fast and relevant informationare the means to achieve it. Building operations around information systems emphasizes integration and low-costtransaction processing.

In the real estate industry, Operational Excellence also requires focus on the delivery system and vertical integrationof competencies - from financial engineering to design & construction - to manage the complexity in time, on budgetto the given quality, in a safe manner, and litigation free.

Regarding the project works, developers and construction companies can find ways to achieve even greaterefficiency, not by vertically integrating, but by virtually integrating. Thus they should view themselves and theirstrategic suppliers and contractors not as discrete, allied entities, but as members of a single project delivery team,and repeat their collaboration over several projects providing the continuity to create operationally efficient & bondedteams.

1 Note: “Efficiency reflects productivity and is internal to the company and easily measured and can often be improved quickly. In contrast, effectiveness is aboutsatisfying customer’s needs; it is externally determined and not easily measured, and achieving it is usually a lengthy process. However, effectiveness is muchmore important than efficiency to the survival and success of the organization.

Management has to ensure that the primary focus of the organization is entrepreneurial rather than internal; efforts are put into making it effective beforemaking it more efficient.” – P.Doyle & P.Stern :” Marketing, Management and Strategy” - 2006


Many sound processes already exist in fund, asset, property, due diligence, project and construction management.But process implementation is a hard task, and it can be successfully achieved and continuously improved only if thepeople forming the team are regularly trained and become over time used to working together.

Training helps people perform; performance boosts self-worth; a sense of worth builds employees’ loyalty to the teamand customer. The benefits of this self-reinforcing approach to management will show up in both happy employeesand a robust set of profit figures.

Operational excellence is met when different business functions and tasks are efficiently and effectively coordinated(e.g. financial mounting, legal structuring, due diligence, contract management, program management, design &construction, change management, time, cost & quality management, property management).

Cost efficiency and convenience are fundamental to any partnership. Regular region-wise benchmarks must beundertaken in order to provide continuously improved solutions with better total cost of occupancy to tenants.

Operationally excellent companies obtain their growth in three coordinated ways. They work to assure a constant,steady volume of business so as to keep their assets (people and capital) continually working; find new ways to usetheir existing assets; and replicate their formula in other markets.

e.g. The famous German architect Ludwig Mies van der Rohe, widely regarded as one of the pioneering masters ofmodern architecture, is also one of the good examples. He has created an influential twentieth centuryarchitectural style, stated with extreme clarity and simplicity. He strove toward architecture with a minimalframework of structural order balanced against the implied freedom of free-flowing open space.

He called his buildings "skin and bones" architecture. He sought a rational approach that would guide thecreative process of architectural design. He is often associated with the aphorisms, “less is more” and “God isin the details”. He always used recurrent details on his projects until he improved these details or found bettersolutions.

7.1.3 PRODUCT / SERVICE LEADERSHIP

Real estate fund managers and developers that excel in this discipline develop state-of-the-art buildings andservices. They are creative, that means recognizing and embracing ideas that usually originate outside the company,move quickly, and relentlessly pursue new techniques & solutions to the problems.

What will arouse tenant curiosity is the ability and the determination of the real estate manager to develop buildingsand provide services that the tenant recognizes as superior: a product that delivers real benefit and performanceimprovements for the tenant’s business.

Tenants do not want real estate as a product, but as an effective solution to their problems with high quality tailoredservices; tenant’s employees as a lifestyle; and customers and suppliers as easily accessible. They need a realestate solution that goes beyond supplying fresh concepts and stimulating experience, to changing the occupier’sculture to align it with the company strategy.

e.g. The Design & Innovation department of Accor, a leading global hotel operator, is a good example of this valuediscipline. It is a very fluid organization structured around creation of products, not around any particularfunction, and works cross-functionally. Its members are regularly reorganized and redeployed toward the mostpromising prototype room concepts for worldwide Accor brands.

The design team continuously generates a stream of prototype hotel room concepts that are clearly better andpossibly path-breaking (e.g. F1, Etap Cocoon, Next), and injects passion into the organization at all Companylevels. The Formule 1 hotel concept, for example, has also created a new operating model. The innovationteam delivers features that affect positively both the performance of hotel operation and customer experience”

Real estate developers might also develop prototype spaces and features for other asset classes (offices, retail,logistics, etc.) to be continuously improved and deployed over many projects with the required level of customizationfor global corporate tenants.

Mix-use programs (offices, residences, hotel and retail) should also be considered as it could deliver global solutionsto occupiers with significant time saving on daily routines. Thus tenants would pay a price premium for that extravalue delivered.


7.2 ACTIONS LIST FOR STRATEGY IMPLEMENTATION

StrategyCustomerIntimacy

OperationalExcellence

ProductLeadership

Value Proposition Best total solution Adequate total cost Adequate buildings & services

Golden Rule Solve the client’s broader problem Variety kills efficiency (butintegrate a dose of flexibility)

Cannibalize your success withbreakthroughs (but stay adequate)

Core Processes Client acquisition & development Solution development

End-to-end product delivery Customer service cycle Regular benchmarks on total cost

of occupancy

Design & Innovation Commercialization Market exploitation

Improvement Levers Problem expertise Service customization

Process redesign Continuous improvement

Employ recent technologies Follow higher industry standards

StrategyImplementation

Strategy Segment and select corporatetenants for partnerships

Understand the selected tenants’businesses and their value chains

Redefine value for those tenants Set up bonding relationship based

upon mutual advantage Tailor offerings to match exactly

the demands of those tenants

Provide tenant with reliablesolutions & services at competitiveprices and deliver with minimaldifficulty or inconvenience

Pricing based on overall business Built exit barriers Mission statement with respect to

the particular tenant Define account strategy

Offer tenants adequate buildingsand services that consistentlyenhance the tenant ‘s use

Develop trust both with tenantsand suppliers

Establish situation appraisals withtenants and suppliers

Shared Values Team spirit Sustainability

Reliability and Responsibility Mutual trust & loyalty for fair deals

Structure Single point of contact at the top Core team with tenant Contribute to tenant’s organization Located partly at the tenant office Create the club concept for mixed-

use programs Propose investment partnerships

Re-engineering Organizational flexibility Multi-channel direct deals with

tenants to fix issues Flat organization built around

supporting both the back-line andfront-line teams

Ad-hoc Fluid organization structure Project teams External synergies by strategic

alliances

Systems Knowledge Management gathering data about tenants and investors Total Quality Management

Open Enterprise Resources Planning (PM Web) Talent management and clear succession plan Periodic education and training cycles for all staff

Appraisal & reward system integrates smart customer-related goals Route large investors / corporate tenants to the team representative locally in charge of their account

Key Staff Global key account holder Tenant-led asset manager

Program coordinator Investor-led asset manager

Project manager Property Manager

Skills Influencer Reactivity Customer & value driven Empathy and active listening Synthesis and communication Intimacy with the tenant’s business

Leadership Proactivity Entrepreneurial driven Dynamism Open minded Multi-disciplinary teams

Expertise Resilience Solution driven Analytic Out of box thinking Creativity & Innovation

Styles Empowered front-line staff that areadaptable, flexible & multitalented

Survey of tenant satisfaction Identify the attributes most valued

by tenants Monitor competitive performance

over time, at least annually Long-term co-operation based

upon mutual trust, self-interest andcommitment

Care on determinants of servicequality and tangibles

Combine detailed tenantknowledge with operationalflexibility

Ability to follow standardprocedures and to cope withunpredictable demands

Respond quickly to almost anyneed, from customizing a productto fulfilling special requests

Explore cross-functional attitudes No adversarial relationship Region-wise benchmarks

Empower staff to identify the keystasks themselves

Encourage staff to get on withfinding and implementing solutions

Open innovation for intelligent andsustainable buildings

Share ideas & exploit synergies Capitalize on failures Motivated staff with commitment to

high service standards Peer group control


7.3 PROPOSED ORGANIZATION

The more real estate fund manager’s organization vertically integrates complementary competences, the more it willhave the capacity to enhance the efficiency and effectiveness of the real estate solutions, and the value both fortenants and investors.

However, this integration should avoid any service that could create conflict of interest, such as consultancy intransactions and arbitration.

CorporateAdministration

FundManagement

EstateManagement

ProjectDevelopment

Board / Investment CommitteeAccountingHuman ResourcesCorp. Social Responsibility Mgmt.Compliance ManagementRisk ManagementInformation SystemsData Filing ManagementCorporate MarketingBusiness Development

Fund GovernanceLegal CounselFund RaisingProject FinanceInvestor RelationsAccounting & ReportingInvestment ManagementTax Director

ProspectionMerger & AcquisitionDue Diligence Mgmt.Asset ManagementProperty ManagementProgram MarketingKey Account Holder for globalcorporate tenants (StrategicSupport & Advisory Services)Relationship Management

Design & Innovation ManagementTechnical Due Diligence Mgmt.Owner RepresentationProgram ManagementContract ManagementCost Management

7.4 KEY POINTS TO BE RETAINED

PROPOSED MISSION STATEMENT

Our main principle is to listen to the “Voice of the Client” and see the situation through the “Eyes ofthe Client” to solve their broader problem, and to continually improve & deliver superior value. In thisway, we contribute to the Client’s organization and business with reliable services providing the besttotal solutions for occupiers in real estate and high “Economic Value Added” for investors.

In order to achieve this task, firstly we focus on the Client’s business and its value chain, customizeour services and products, and create a bonding relationship based upon mutual advantage. This isfundamental in creating the differentiation.

Then, we build capacity for the Client by selecting the right personnel, motivating, empowering andtraining them for the task in order to ensure the service consistency and effectiveness as well astheir ability to cope with unpredictable demands.

Finally, we are committed to deliver buildings with the assurance that at every step in the valuechain we have a positive impact on both people and communities, and a reduced environmentalfootprint.

Our true asset is the loyalty of our tenants, employees, investors and suppliers. We considercustomer value as the indispensable source of both shareholder value and employee satisfaction.

Team spirit, sustainability, reliability and responsibility, mutual trust and loyalty for fair deals are ourshared values and keys to successful achievements.


8. HOW PRE-LEASE IMPROVES THE BUSINESS PLAN

The two simulations below with different operating processes for the same project are for comparison purpose only.The figures in blue cells on sheet §8.2 are manually changed as project commercial risk decreases.

8.1 TYPICAL BUSINESS PLAN FOR DEVELOPMENT PROJECT TO BE LEASED AFTER DEVELOPMENT

8.2 ALTERNATIVE BUSINESS PLAN FOR PROJECT PRE-LEASED PRIOR DEVELOPMENT

Surface : 42 000 m²Loan to

Cost

Cost of

Capital185 222 €

Yield on

Cost

Target Annual Rent per m² : 600 € Loan: 40% 4,25% 10,21% 8,17%

Target Total Annual Rent : 25 200 K€ Equity: 60% 12,00% 10,27% Net Profit

Target exit yield : 6,25% WACC : 8,90% 1,60 110 520 €

DESIGNATION (K€ excluding VAT) BUDGET DEVELOPMENT PHASE TOTAL

1 2 3 4 5 6 7

Land & Development Costs 253 082 -32 274 -69 693 -69 693 -69 693 -11 730 -253 082

Marketing & Promotion + Leasing Costs 9 563 -956 -956 -956 -956 -5 738 -9 563

Tenant Adaptations 5 500 -5 500 -5 500

Developers Fees 15 625 -3 125 -3 125 -3 125 -3 125 -3 125 -15 625

Project Contingency 10 708 -2 677 -2 677 -2 677 -2 677 -10 708

Total Project Costs 294 478 -35 399 -76 451 -76 451 -76 451 -23 988 -5 738 0 -294 478

Incovered charges & Capex Improvements 3% -252 -1 008 -1 008 -2 268

Tenant Deposit 6 300 6 300

Rental Income 25 200 25 200 50 400

Yearly Cash Flow -35 399 -76 451 -76 451 -76 451 -24 240 24 754 24 192 -240 046

Disposition Proceeds: 380 772 380 772

UNLEVERED CASH FLOW -35 399 -76 451 -76 451 -76 451 -24 240 24 754 404 964 140 726

Loan Proceeds 9 575 82 389 31 518 0 0 123 481

Loan Repayment -123 481 -123 481

Costs of Financing & Guarantees 10 147 -2 029 -2 029 -2 029 -2 029 -2 029 -10 147

Loan Interests 0 0 -407 -3 908 -5 248 -5 248 -5 248 -20 059

LEVERED CASH FLOW -37 429 -78 480 -69 313 0 0 19 506 276 235 110 520

PRESENT VALUE -33 418 -62 564 -49 335 0 0 9 882 124 955 -10 481

NPV (check if Economic Value Added) -33 418 -95 982 -145 318 -145 318 -145 318 -135 435 -10 481 -10 481

Equity Comitted:

Unlevered IRR:

Levered IRR:

Equity Multiple:

EXPLOITATION PHASE

Surface : 42 000 m²Loan to

Cost

Cost of

Capital113 776 €

Yield on

Cost

Target Annual Rent per m² : 600 € Loan: 60% 3,75% 13,24% 8,12%

Target Total Annual Rent : 25 200 K€ Equity: 40% 12,00% 20,46% Net Profit

Target exit yield : 6,25% WACC : 7,05% 2,16 136 447 €

DESIGNATION (K€ excluding VAT) BUDGET DEVELOPMENT PHASE TOTAL

1 2 3 4 5 6 7

Land & Development Costs 253 082 -32 274 -69 693 -69 693 -69 693 -11 730 -253 082

Marketing & Promotion + Leasing Costs 0 0

Tenant Adaptations 0 0

Developers Fees 15 625 -3 125 -3 125 -3 125 -3 125 -3 125 -15 625

Project Contingency 10 708 -2 677 -2 677 -2 677 -2 677 -10 708

Total Project Costs 279 415 -35 399 -75 495 -75 495 -75 495 -17 532 0 0 -279 415

Incovered charges & Capex Improvements 3% -1 008 -1 008 -1 008 -3 024

Tenant Deposit 6 300 6 300

Rental Income 25 200 25 200 25 200 75 600

Yearly Cash Flow -35 399 -75 495 -75 495 -75 495 12 960 24 192 24 192 -200 539

Disposition Proceeds: 380 772 380 772

UNLEVERED CASH FLOW -35 399 -75 495 -75 495 -75 495 12 960 24 192 404 964 180 233

Loan Proceeds 22 974 48 114 49 221 50 354 0 0 0 170 664

Loan Repayment -170 664 -170 664

Costs of Financing & Guarantees 10 147 -2 029 -2 029 -2 029 -2 029 -2 029 -10 147

Loan Interests -862 -2 666 -4 512 -6 400 -6 400 -6 400 -6 400 -33 638

LEVERED CASH FLOW -15 316 -32 076 -32 814 -33 570 4 531 17 792 227 900 136 447

PRESENT VALUE -13 675 -25 571 -23 357 -21 334 2 571 9 014 103 091 30 739

NPV (check if Economic Value Added) -13 675 -39 246 -62 602 -83 936 -81 366 -72 352 30 739 30 739

Equity Comitted:

EXPLOITATION PHASE

Unlevered IRR :

Levered IRR:

Equity Multiple:


8.3 CONCLUSIONS

The risks are lower in case of pre-lease prior the development, and return on invested capital is higher.

Economic performance is improved thanks to the cost savings and early rental receipt.

Financial performance is nearly doubled thanks to the higher leverage with less interest rate and cash-flowrequirement in equity.

It is clear that the real value is essentially created by the tenant.

EXHIBITS



9. EXHIBIT A – CHARACTERISTICS OF MAIN STAKEHOLDERS

Fund managers specializing in real estate developments are constantly under pressure by the following mainstakeholders that influence real estate economic performance.

The table below synthetizes their characteristics and expectations from real estate projects, that vary depending ontheir position in the value chain.

Builders Developers Investors Occupiers

Gross Margins orObjectives

22 to 25% 15 to 17% 18% IRR grossproperty level

N/A

Design Constructability &Rational methods

Easy to build Attractive designProgram flexibility

Functionality, Flexibility,Safety, Security

Construction Quality& Equipment

Minimum requiredby contract

Optimized solutions High Quality& Durability

High performancesLow operating costSustainability

Expected Added-Values

Rapid buildSaving on contingenciesTechnical solutions

Leadership in project &contract administration.Control of the program, costsand the validation process.Efficiency in analysis andsynthesis for resolutions.Rapid reaction and fluidity indecision making

Better EVAHigh asset valorisation.Balanced risk assessment.Efficient asset disposal.Feasibility conditionsdriven.Effective cash flow control.

Improvement of theoperational profitability.Employee well-beingBrand equity.

Characteristics Technical skills.Claim wise organisations.( + ) WCRCost orientated

Business developersInitiators & Promoters( - ) WCRResult orientated

Project financeFunds/Asset managersLegal wiseValue orientated

Tenant / OwnerProperty & Facility MgtExploitation performanceorientated

Profiles Construction industryNational

Real-Estate industryNational

Finance sectorInternational

Various industrial &commercial sectorsInternational

Decision-making Project levelRapidRe-active

Program levelSlowPro-active

Corporate / Portfolio levelRapidOpportunistic

Property levelSlowUrgency.

Buying Behavior Short term missionsSingle assignmentsAs neededLow fees

Project duration and repetitiveassignmentsStandard missionsAs requiredCompetitive environment andstandard fees

Investment cycle periodsRepetitive or continuousassignmentsCustomised servicesHigh fees

Per propertySingle & short termassignmentAs requiredCompetitive environmentLow fees

Contracts Construction ContractLump-sum

Development ContractDelegated OwnerDMC/GMP or Lump-sum

JV or Limited partnershipMergers & AcquisitionsLoan agreementsSecurities

Lease Agreement


10. EXHIBIT B – REAL ESTATE INVESTMENT SCHEMES

10.1 METHODS OF INVESTMENT

Depending on their ability to conduct real estate business, investors may decide on either a direct and/or an indirectinvestment, as shown below.

In recent years the number of different types of fund vehicle available to, and chosen by, sponsors and managers ofreal estate funds has proliferated in Europe, to a sometimes bewildering extent.

Fund managers are also increasingly facing heavy strains to control and minimize the regulatory and other operatingcosts of setting up and running fund structures, in a world that continues to seek to impose regulation on all types offunds and their managers.

Moreover, investors are increasingly sensitive towards incurring any significant tax leakages, and in particular tendmore often to press sponsors to offer fund vehicles that best match investors’ specific tax attributes.

10.2 INVESTMENT STRUCTURES

An alternative to discretionary funds, the commonly used structure is a joint venture by institutional investors whoprefer this model for new relationships or developers without an institutional track record, as this will provide flexibilityto test the relationship on a limited basis and modify the arrangement based on the experience.

It also provides the owner/developer with more flexibility to use multiple equity funding sources (i.e., no exclusivitygiven to investors, ownership structures varying per asset). It can be more cumbersome to raise capital on a deal bydeal basis and provides the developer less long term certainty of funding sources. Also, joint ventures carry specificrisk; each partner enters into the deal and negotiates the specific terms and conditions.

Single AssetJoint-Ventures

Strategic/ProgramJoint-Ventures

Entity/GPInvestment

CommingledFunds

Joint ventures are individuallynegotiated and tailoredtransactions

A joint venture may be formedto:- Acquire a specific property, a

portfolio of properties,

- Make entity Level Investment

- Recapitalize an existingpartnership

- Develop or redevelop aproperty

Widely used vehicle for sponsorswho have a good reputation andtrack record

Establishes terms on which aseries of investments may bemade with a single investor orsmall number of investors

Terms vary widely and areindividually tailored (e.g.,discretion within a box vs. dealby deal approval)

Can offer a more certain fundingsource for projects withinspecified parameters

Investments by one or moreinvestors at the operatingcompany (entity) or sponsorequity (GP) level

Involves sale of a portion of allincome streams generated bythe entity or the GP

Investments can take form ofcommon or preferred equity andcan vary with respect togovernance

Can provide permanent capitaland a longer term/globalsolution for the sponsor

Creates alignment of interest;typically aids in raisingadditional JV capital

Group of investors pool theirresources to create a largerinvestment

Money is gathered from varioussources that is managedtogether in one account

Includes a wide variety ofentities including insurancecompanies, group trusts, limitedpartnerships, LLCs and privateor untraded REITs


10.3 CORPORATE GOVERNANCE1

The collective impact of the tightened conditions in credit markets, governments’ budget deficits and tax decisionsmay prompt the Fund to re-examine the stability and durability of its investment structure.

Cross-border real estate platforms for real estate investment have varying degrees of complexity. However, at theircore they may deploy a “master” holding company (or other entity) together with a number of underlying assetowning entities. In addition, the investment structure could also include financing and “feeder” entities whose aim willbe to optimize cash flows and assist in maximizing investor returns.

Whilst the original “raison d’être” for adopting a particular investment structure and approach might have been welldocumented and rigorously tested, it is likely that, over time, and with subsequent legislative changes the investmentstructure may have become less responsive to meeting the project’s commercial objectives. Therefore theoperational procedures and policies in relation to specific entities within the structure are to be updated to reflectcurrent “best practice”.

To this end, investment structure should be examined by counsel with a view to confirming that it is able to deliverspecific commercial results and has appropriate corporate governance procedures in place.

Review Assessment Recommendations

Review existing investment structure andconfirm key risk areas and risk indicators.

Consider if the tax rationale for the structureremains valid in light of legislative changesin the interim.

Review corporate governance andsubstance including:

- Composition and authority of the boardand location of board meetings

- Bookkeeping and accounting policies

- Powers of authorization

- Management of bank accounts includingupdated projected cash flows

- Arrangements with service providers

Identification of non-compliant issues andoverlay these with substance risk andjurisdictional risk.

Test the nature of the processes carriedout and decisions made.

Evaluate compliance with thincapitalization, transfer pricing andoperational presence requirements.

Consider alternative approaches givenchanging market dynamics and reconfirmthe business model.

Propose refinements to investmentstructure to ensure effectiveness from ataxation perspective.

Propose amendments to the “modusoperandi” for maintaining the integrity ofthe structure.

Establish guidelines for the transactionteams including processes for formation /dissolution of entities.

Implementation of any changes.

10.4 JOINT VENTURE INDICATIVE PROCESS2

OutlineObjectives

PrepareMarketingMaterial

Pre-Marketing

FormalMarketingEffort

InvestorDueDiligence

FinalProposal &Negotiation

Outline objectives

Identify majortransaction issues

Due diligence andunderwriting

Develop returnsanalysis

Explore structural& financialalternatives

Formulate keyinvestment terms

Prepare Teaser

Finalize investorlist

Continue duediligence andprepare othermarketing material& presentations

Begin assemblingelectronic dataroom and/orsupporting info

Develop financialmodel

Contact & screenpotential investors

Complete anddistribute Teaser

Incorporatefeedback & refinemarketing material& presentation(and potentiallyterm sheet) asnecessary

Evaluate cultural“fit”

Negotiate andexecute CAs

Incorporatefeedback & refinemarketing material& financial model

Open data room

Respond toinvestor requestsand questions

Begin draftingFinal Agreement

Receive proposals

Tier potentialinvestors based ontransaction criteria

Distribute draftFinal Agreement

Facilitate duediligence process,respond to theinvestor questions

Conductmanagementpresentations andsite visits (ifapplicable)

Finalize duediligence

Negotiateproposals

Negotiate and signFinal Agreement

Closing and fundstransfer

1 BDO LLP, UK2 Belk College of Business, ULI: “Private Equity Capital for Commercial Real Estate: Understanding and Navigating the Options”, January 2011

INVESTOR TIMELINE


10.5 CRAFTING THE INVESTMENT THESIS1

Business Strategy Define investment focus (asset type) Acquisition v. development Determine investment strategy (core, core-plus, etc.)

Narrow the focus of the transaction, as needed Consider industry trends & fundamentals

Portfolio & PipelineQuality

Footprint (environmental) Mix of (re) development / stabilized assets

Size and age of portfolio

Track Record &Performance

Historical returns Cycle adjusted returns

Deal activity and operating performance in past year

Internal & ExternalGrowth Story

Upside from new projects brought online? Access to off-marketed deals?

Anticipated returns

Management TeamExperience

Quality sponsor Depth of bench

Ability to navigate current market environment Strong relationships

Well EstablishedScalable Platform

Vertically integrated Platform to support larger scale business

Intensive AssetManagement

“Right-sized” organization Cost controls

Revenue enhancement

10.6 STRATEGIC PARTNERSHIPS

1 Belk College of Business, ULI: “Private Equity Capital for Commercial Real Estate: Understanding and Navigating the Options”, January 2011


11. EXHIBIT C – CHARTS AND GRAPHICS

11.1 TYPICAL PROJECT STRUCTURE / ORGANIZATION CHART

11.2 EUROPEAN C.R.E. DEBT MATURITY PROFILE


11.3 AVAILABLE EQUITY, DEBT AND TARGET GEARING (IN US$)

11.4 FORCASTED RETURNS BY PROPERTY TYPE

11.4.1 EUROPEAN RETURNS

11.4.2 US RETURNS

11.4.3 ASIA PACIFIC RETURNS


12. EXHIBIT D – SYNOPTIC TABLES RELATED TO SUSTAINABILITY

12.1 GREEN PROPERTY ALLIANCE – RECOMMENDED COMMON METRICS

12.2 SELECT GREEN BUILDING CERTIFICATION SYSTEMS

12.3 GOVERNMENT ENERGY BENCHMARKING AND RATING SCHEMES


13. EXHIBIT E – GLOSSARY

Balance sheet loan: A loan that a lender will retain on its books instead of selling it off to another financial institution or toindividual investors at a discount. Some borrowers may prefer balance sheet loans because they would rather deal with theoriginal lender in the event that a problem may develop during the course of the life of the loan.

Carried interest: The general partner’s share of the profits generated through a private equity fund. The carried interest,rather than the management fee, is designed to be the general partner’s chief incentive to strong performance. A 20%carried interest – meaning that the remaining 80% reverts to the limited partners – has been the industry norm, althoughsome firms now take 25% or even 30%, based on very strong performance on past funds.

Catch-up: This is a common term of the private equity partnership agreement. Once the general partner provides its limitedpartners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all ofthe profits until the agreed upon profit-split, as determined by the carried interest, is reached.

Co-investor: Although used loosely to describe any two parties that invest alongside each other in the same company(venture), this term has a special meaning in relation to limited partners in a fund. By having co-investment rights, a limitedpartner in a fund can invest directly in a company also backed by the fund managers itself. In this way, the limited partnerends up with two separate stakes in the company; one, indirectly, through the private equity fund to which the limited partnerhas contributed; another, through its direct investment. Some private equity firms offer co-investment rights to encouragelimited partners to invest in their funds.

Core: These are fully stabilized properties with credit quality tenants on long term leases. These investments are welllocated in primary and secondary markets. This strategy seeks a secure return, largely generated from ongoing operatingcash flows, limited lease rollovers and a prudent use of leverage relative to value.

Core Plus: This is a moderate risk/moderate return strategy. The fund will generally invest in core properties however someof these properties will require some form of enhancement or value-added element. A common Core Plus investment wouldbe a class “A” office building in a CBD in a primary market. The property would have good tenants, but might have a lot ofupcoming lease roll. Core investors would see this lease roll as a threat to their reliable income, but Core Plus investorsmight see this as an opportunity to increase rents.

Distributions: Cash or stock returned to the limited partners after the general partner has exited from an investment. Stockdistributions are sometimes referred to as “in-kind” distributions. The partnership agreement governs the timing ofdistributions to the limited partner, as well as how any profits are divided among the limited partners and the general partner.

Drawback: A disadvantage or inconvenience.

Due diligence: A process of inspection that a private equity firm carries out before closing on a deal. A common example ofdue diligence is the process through which a potential acquirer evaluates a target company or its assets for acquisition.

Exit: The means by which an investor realizes a return on its investment. A real-estate exit plan is a backup for investors todispose of their properties quickly to make money from their investment.

Fair value: also called fair price, is a concept used in accounting and economics, defined as a rational and unbiasedestimate of the potential market price of a good, service, or asset. The fair-value balance sheet provides information forinvestors who are interested in the current value of assets and liabilities, not the historical cost.

Fund of funds: A private equity fund that, instead of being used to make direct investments in companies, is distributedamong a number of other private equity fund managers, who in turn invest the capital directly. Funds of funds often giveindividual limited partners access to funds from which they would otherwise be excluded. Also, by spreading the capital morewidely, the risk to limited partners is reduced.

Fund raising: The process through which a firm solicits financial commitments from limited partners for a private equity fund.Firms typically set a target when they begin raising the fund, and ultimately announce that the fund has closed at such-and-such amount, meaning that no additional capital will be accepted. Sometimes, however, the firms distinguish between interimclosings (first closings, second closings, etc.) and final closings. The term “cap” is used to describe the maximum amount ofcapital a firm is willing to accept into its fund.

General partner: In addition to being used as a title for top-ranking partners at a private equity firm, general partner (orgeneral partnership) is used to distinguish the firm managing the private equity fund from the limited partners, the individualor institutional investors who contribute to the fund.

General partner claw-back: This is a common term of the private equity partnership agreement. To the extent that thegeneral partner receives more than its fair share of profits, as determined by the carried interest, the general partner claw-back holds the individual partners responsible for paying back the limited partners what they are owed.


General partner contribution: The amount of capital that the fund manager contributes to its own fund in the same way thata limited partner does. This is an important way in which limited partners can ensure that their interests are aligned withthose of the general partner.

Leveraged buyout: The acquisition of an asset in which the purchase is leveraged through loan financing, rather than beingpaid for entirely with equity funding. The assets of the company being acquired are put up as collateral to secure the loan.

Limited partners: Institutions or individuals who contribute capital to a private equity fund. Limited partners typically arepension funds, private foundations, and university endowments. However, private equity firms themselves may serve aslimited partners in other firms’ funds, as, for example, when a large buyout firm channels money to a fund managed by aventure capital firm. See also General partner.

Limited partner claw-back: This is a common term of the private equity partnership agreement. It is intended to protect thegeneral partner against future claims, should the general partner or the limited partnership become the subject of a lawsuit.Under this provision, a fund’s limited partners commit to pay for any legal judgment imposed upon the limited partnership orthe general partner. Typically, this clause includes limitations on the timing or amount of the judgment, such as that it cannotexceed the limited partners’ committed capital to the fund.

Loan-to-Own: or "Distressed-to-Control" strategies where the investor acquires debt securities in the hopes of emergingfrom a corporate restructuring in control of the company's equity

Mezzanine fund: Used to provide a middle layer of financing in some leveraged buyouts, subordinated to the senior debtlayer, but above the equity layer. Mezzanine financing shares the characteristics of both debt and equity financing.

Opportunistic: This is a high risk/high return strategy. The properties will require a high degree of enhancement. Thisstrategy may also involve investments in development, repositioning, raw land, and niche property sectors. Investments aretactical, where the investor is willing to take entrepreneurial risk to achieve out-sized returns.

Passive Investing: An investment strategy involving limited ongoing buying and selling actions. Passive investors willpurchase investments with the intention of long-term appreciation and limited maintenance.

Preferred return: The preferred return is a minimum annual internal rate of return sometimes promised to the limitedpartners before the general partner shares in profits. In effect, the preferred return ensures that the general partner shares inthe profits of the partnership only to the extent that the investments perform well. Once the preferred return is met, there isoften a catch-up period in which the general partner receives the majority or all of the profits until it reaches the agreed uponprofit-split, as determined by the carried interest.

Prime Yield: Represents the initial yield estimated to be achievable for a notional office property of highest quality andspecification in the best location fully let and immediately income producing in a market at a given date. The yield is derivedfrom the rental income divided by the purchase price.

Rebasing property value: To revalue the base cost of the property at current market value in order to counter the effects ofany capital gains tax, or reducing any future gain.

Quantitative easing (QE): An unconventional monetary policy used by central banks to stimulate the national economywhen conventional monetary policy has become ineffective. A central bank implements QE by buying financial assets fromcommercial banks and other private institutions in order to inject a pre-determined quantity of money into the economy. Thisis distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specifiedtarget value. QE increases the excess reserves of the banks, and raises the prices of the financial assets bought, whichlowers their yield.

Total quality management or TQM: An integrative philosophy of management for continuously improving the quality ofproducts and processes. TQM is based on the premise that the quality of products and processes is the responsibility ofeveryone involved with the creation or consumption of the products or services offered by an organization, requiring theinvolvement of management, workforce, suppliers, and customers, to meet or exceed customer expectations.

Value Added: This is a medium-to-high risk/medium-to-high return strategy. It will involve buying a property, improving it insome way, and selling it at an opportune time for a gain. Properties are considered value added when they exhibitmanagement or operational problems, require physical improvement, and/or suffer from capital constraints. Often theseproperties have a high vacancy rate or some physical obsolescence. Value Add investors will buy these properties at adiscount, and work to increase the occupancy or fix the physical deficiencies. Once the property has been stabilized, theseproperties may be sold to Core investors.

Withdrawal: The act of taking out money or other capital

Yield: The annual income earned from an investment expressed usually as a percentage of the money invested; the rate ofreturn. In real estate, Yield refers to the effective annual amount of income that is being accrued on an investment. The Yieldon income property is the ratio of the annual net income from the property to the cost or market value of the property.


14. EXHIBIT F – ACKNOWLEDGEMENTS

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Options”, January 20115. BNP Paribas Real Estate: “Client Solutions”, June 20116. CBRE Global Investors: “Global Vision: The Investment Outlook for Major Property Markets “,Q4 20127. Challenges: “Regards”, December 20th, 20128. Deloitte LLP: “Real estate predictions 2012: New realities, new perspectives”, 20129. DTZ: “Occuper Perspective: Obligations of Occupation EMEA”, February 201210. DTZ: “Great Wall of Money”, October 201211. DTZ: “Investment Market Update, Europe Q3 2012”, October 201212. DTZ: “Property Times, Europe Offices Q3 2012”, November 201213. DTZ: “Net Debt Funding Gap, Europe 2012-2013”, November 201214. Duke University: “An Analysis of the US Real Estate Value Chain with Environmental Metrics”, April 200815. Ernst & Young: “Global Market Outlook: Trends in real estate private equity”, October 201216. Ernst & Young: “Global Capital Confidence Barometer”, August 201217. Ernst & Young: “Private Equity: Evolution of the Operating Model”, April 201218. Ernst & Young: “Real Estate Non-performing Loan Investor Survey”, 201219. Ernst & Young: “European real estate assets investment indicator 2012”20. Ernst & Young: “Global Perspectives, 2012 REIT Report”, 201221. Henderson Global Investors: High Return Debt Fund, July 201222. HBS: “Navigating the global real estate downturn: why returning to fundamentals can help protect and enhance value” by

Nicolas P. Retsinas23. HBS: “What every leader should know about real estate” by Mahlon Apgar IV, November 200924. HBS: “Customer Intimacy and Other Value Disciplines” by Michael Treacy and Fred Wiersema, February 199325. INREV: “European Real Estate Debt Fund Study 2012”, October 201226. Journal of Taxation of Financial Products: “Mortgage REITs – A Primer” by K. Peter Ritter, issue 4, 201127. KPMG: “Global Real Estate and Facility Management Outsourcing Pulse Survey”, 201228. KPMG: “The Agile Asset Manager - Report”, August 201129. KPMG: “Basel III and Implications”, 201130. Lefèvre Pelletier & Associés et CBRE : “Lois Grenelle : Mode d’Emploi”, October 201031. Magali Sertlet-Revault “Externalisation immobilière, est-ce que l’OPCI est un véhicule de choix?”, February 201032. McKinsey & Co: “The Mainstreaming of Alternative Investments”, June 201233. Moody’s Investor Service: “Global Bank Debt Report”, November 201234. Neils Kok: “What’s next in Real Estate? Reintegrating the Value Chain”, April 201235. Peppers & Rogers Group and IBM: “The Customer Intimacy Imperative”, 201036. P. Doyle & P. Stern “Marketing Management and Strategy”, 200637. PWC: “Emerging Trends in Real Estate 2013 - Europe”, January 201338. PWC: “Emerging Trends in Real Estate 2013 - US”, October 201239. PWC: “Emerging Trends in Real Estate 2012 - Europe”, January 201240. PWC: “Top Issues Facing Asset Managers”, April 201241. PWC: “Managing assets: European Real Estate Fund Regimes, October 201042. Rothschild / Cadwalader: “European Distressed Debt Market Outlook”, January 201243. RREEF: “Global Real Estate Strategic Outlook”, April 201244. RREEF: “Building Labels vs. Environmental Performance Metrics”, October 201245. Rockspring Property Investment Managers: “European Real Estate Quarterly”, Spring 201246. State Street: “Vision Focus, Real Estate: a new model for fund managers”, December 201147. Treacy, M. and Wiersema F.: “The Discipline of Market Leaders”, 199548. Union Investment Real Estate GmbH: “Green Buildings”, Sustainability Survey, August 201249. World Finance Magazine: “Learning from Property Market Mistakes”, September-October 2012

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PURPOSE OF THE PRESENT DOCUMENT

“Final Individual Project”

The FIP is an individual project conducted during the second part of theHEC Executive MBA program which consists of recommendations for a keydevelopment aspect of the company or professional project of theparticipant.

It is also done under the supervision of an advisor who offers guidancewith regards to the methodological aspects of the project. The FIP leads toa written report and oral presentation in front of an appointed jury whoare either faculty members or corporate executives.

Strategic recommendations & action plan

The capstone project of the Executive MBA program, the FIP enablesparticipants to validate individually what they have learned during theprogram and to encapsulate this in a professional project. Their analysisculminates in strategic recommendations substantiated by an action plan.

About the author

Along with Yilmaz’s construction and project

management background knowledge, he has

achieved real estate investments’ targets in

multicultural business environments by better

handling risks and organizations on development

and repositioning projects.

During his 27 years of professional assignments

for many top international companies, such as

Accor, Tishman Speyer, Bovis Lend Lease, Cisco,

Philips, Cargill, Pilkington, Toyota, Volvo, Dogus,

Midland, and British Petroleum, he has managed

and successfully completed large scale

construction projects worldwide. Yilmaz is also

lecturer at MSc “Management and Strategy of

Real Estate Investments and Construction” at

Pantheon-Sorbonne in Paris.

Yilmaz has graduated from the Polytechnics in

Istanbul in 1983; has successfully completed his

MSc degree at Pantheon-Sorbonne in 1988, and

recently obtained his EMBA from HEC Paris in

early 2013.

Being a certified CMAS Master Instructor in scuba

diving, in his spare time, he enjoys taking part in

many training programs at the French Federation

of Undersea Studies & Sports.

Contact: [email protected]

March, 2013

« New Trends and Winning Corporate Strategies in Commercial Real Estate »

This document contains information in summary form and is therefore intended for generalguidance only. It is not intended to be a substitute for detailed research or the exercise ofprofessional judgment. Neither HEC nor the author can accept any responsibility for lossoccasioned to any person acting or refraining from action as a result of any material in thispublication.

Yilmaz KARAUC

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New Trends and Winning Corporate Strategies in Commercial Real Estate