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RISK OR REWARD: WHAT IS DRIVING INVESTOR SENTIMENT IN 2017 AND BEYOND?
Matthew LawtonHFF, L.P.
James HendersonBarings
Martine PhilibertIvanhoe Cambridge Inc.
Eric WurtzebachMacquarie Capital
2017 NMHC Apartment Strategies Outlook Conference January 24, 2017
Risk Or Reward: What is Driving Investor Sentiment in 2017 and Beyond
MATURE NOI GROWTH CYCLE
Source: National Council of Real Estate Investment Fiduciaries, JPMorgan
RETURN PERFORMANCE DRIVES DEMAND FOR CRE
Source: HFF Research, MSCI, Standard & Poors
RETURN PERFORMANCE DRIVES DEMAND FOR CREYear Corporate Bonds S&P 500 Commodities Treasuries NCREIF REITs15yr 24.4% 131.5% 7.0% 90.9% 260.1% 397.6%
10yr 24.1% 104.6% -43.7% 60.2% 104.3% 105.2%
5yr 11.0% 77.0% -43.6% 20.7% 72.5% 81.0%
1yr 5.5% 4.0% -13.3% 6.6% 10.6% 24.0% Commercial real estate has outperformed corporate bonds, the S&P 500, commodities and treasuries over the
last 10 to 15 years
Provides a favorable risk-adjusted return relative to other asset classes and countries
Institutional and HNW allocations to real assets are significantly increasing
Rising allocations of new capital will, over time, increase capital flows into the asset class, supporting valuations
Source: HFF Research, Dow Jones Corporate Bond Index – equal weight investment grade corporate bonds, S&P Total Return Index – total return including capital appreciation, assumes dividend reinvestment, Bloomberg Commodity Index – annually rebalanced excess return index based on futures price fluctuation, Dow Jones CBOT Treasury Index – default-free returns available within the US, FTSE NAREIT Total Return Index – non-timber, non-infrastructure REITs total return including capital appreciation, assumesdividend reinvestment
CRE BENEFITING FROM INCREASING ALLOCATIONS
2.1%
3.2%3.7%
2.9%
4.5%
5.2%5.6%
8.9%
10.3%
0%
2%
4%
6%
8%
10%
12%
1980 1985 1990 1995 2000 2005 2010 2016Actual
2017Target
Target Real Estate Allocation of Institutional Investors
Source: Hodes Weill, Cornell University
$720B OF FUND AUM, UP ~80% SINCE PRIOR PEAK
Source: HFF Research, National Council of Real Estate Investment Fiduciaries, Preqin
$18 $20 $27$46
$79 $74$61
$32$16
$31$47
$64 $65
$86
$111
$76$86
$21 $25 $33
$54
$101 $100 $105
$43
$18
$38
$59
$88
$104 $114
$153
$100
$113
$152
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
0
20
40
60
80
100
120
140
160
180
200
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 3Q'15 3Q'16 2016
$b Individual Portfolio Entity Apartment YoY Change
APARTMENT TRANSACTION VOLUMES REMAIN FLAT IN 2016
Source: Real Capital Analytics
* 2016 Transaction Volumes Are Preliminary
3Q16 Transaction Volumes Are Up 11%
YoY
2016 Preliminary Transaction
Volumes Flat YoY
APARTMENT LENDER COMPOSITION
2%
6%
10%
8%
3%
7%
6%
5%
5%
3%
44%
52%
52%
52%
68%
8%
7%
8%
8%
6%
4%
3%
5%
5%
2%
15%
10%
9%
10%
7%
19%
14%
11%
11%
9%
1%
2%
1%
1%
1%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2016
2015
2014
2013
2012
CMBS Financial Government Agency Insurance International Bank National Bank Regional/Local Bank Private/Other
Source: Real Capital Analytics
APARTMENT CAPITALIZATION RATE SPREADS
1.63%
2.38%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
10yr UST RCA MM Apartment Cap RCA NMM Apartment Cap RCA Apartment Cap Rate
RCA Non-Major Market Cap Rate
RCA Major Market Cap Rate
RCA Apartment Cap Rate10yr UST
MM: 238 vs. 201
2.38% USTSpreads (bps)
Current vs. LT Avg.
RCA: 334 vs. 321
NMM: 376 vs. 301
Source: Real Capital Analytics, Bloomberg
0
20
40
60
80
100
120
140
160
180
4%
5%
6%
7%
8%
9%
10%
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Major Market Non-Major Market Poly. (Spread (bps))
APARTMENT CAP RATE SPREAD B/W MARKET SEGMENTS AT ALL-TIME HIGH
Source: Real Capital Analytics
138+ bps
FOREIGN INVESTORS’ RATIONALE FOR US CRE INVESTMENT
Diversification Out Of Country
& Currency
Better Risk Adjusted Returns
Safe HavenFor Capital
Platform Investing/
Separate Account
Increased Risk Tolerance
(Market/Asset)
Geopolitical Headlines
Source: HFF Research
SOVEREIGN WEALTH FUNDS – CALPERS $302 BILLION AUM
$850
$335
$582
$592
$792
$350
$409
$457
$474
$814
$0 $100 $200 $300 $400 $500 $600 $700 $800 $900
Qatar Investment Authority
Government of Singapore Investment Corporation
National Pension Service (S.Korea)
Hong Kong Monetary Authority Investment Portfolio
SAFE investment Company (China)
SAMA Foreign Holdings (Saudi Arabia)
Kuwait Investment Authority
Abu Dhabi Investment Authority
China Investment Corporation
Government Pension Fund - Global (Norway)
Billions
AsiaPac Middle East Europe
Source: SWF Institute, HFF Research
$96B OF FOREIGN INVESTMENT IN 2015, DOWN 27% YTD
Source: Real Capital Analytics, JPMorgan
$10
$16
$25
$41
$76
$16
$5
$13
$25
$30
$41 $43
$96
$60
$44
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 3Q15 YTD 3Q16
Fioreign Market Share (%
)To
tal F
orei
gn C
apita
l Inv
estm
ent
$B
Asia Australia Europe MENA North America South America Series5
15Foreign CapitalSource: Real Capital Analytics
FOREIGN CAPITAL FOCUS ON APARTMENTS YTD 2016
16Foreign CapitalSource: Real Capital Analytics
YTD 2016 DESTINATIONS OF OFFSHORE INVESTMENT INTO APARTMENTS
US OFFERS RELATIVELY ATTRACTIVE YIELDS & ECONOMIC PERFORMANCE
BOND MATURITY IN YEARS
Country 2 Year 3 Year 5 Year 7 Year 10 Year 30 YearSwitzerlandJapan
Germany
Netherlands
Belgium
France
Sweden
Denmark
Spain
Italy
United Kingdom
United States
Country 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
United States 1.184 1.435 1.876 2.192 2.392 2.997
Germany -0.746 -0.738 -0.494 -0.220 0.261 1.003
France -0.647 -0.461 -0.045 0.149 0.813 1.753
United Kingdom 0.145 0.199 0.560 0.899 1.332 1.988
Japan -0.207 -0.171 -0.127 -0.041 0.046 0.753
Source: ANZ Research, FactSet, ThomsonReuters, J.P. Morgan Chase, Wall Street Journal , Fitch, as of November 18, 2016
