UK and Global Real Estate Trends – Opportunities for 2011/2012 20 September 2011, London

Copyright © 2011 by K&L Gates LLP. All rights reserved.

UK and Global Real Estate Trends – Opportunities for 2011/2012

20 September 2011, London

European Real Estate Outlook

Peter DamesickEMEA Chief Economist, CBRE

20 September 2011

CB Richard Ellis | Page 3

Agenda

• Global context

• Economic background

• Occupier market trends

• Capital flows in European real estate

• Performance and pricing

• Prospects


A world of differences

GDP per person, % change Q2 2007 to Q2 2011

Source: Macrobond


CBRE Global Office Capital Value Index

Source: CBRE Research as of Q2 2011

Asian values almost at previous peak, EMEA lagging


Economic Divergence in Europe

Source:, Eurostat

GDP, Q1 2008 = 100


Government debt to GDP ratio

Source: IMF

% of GDP


Trends in Unit Labour Costs

Source: Macrobond, OECD

Index (Q1 2000 = 100)

Uncompetitive economies in European periphery a key structural issue


CBRE Global Office Rent Index

Source: CBRE Research as of Q2 2011.

Index (Q1 2001 = 100)


European Office Take-Up28 Western European markets, 10 CEE markets

Source: CB Richard Ellis

6 Month Rolling Totals (000’s Sq M) % of Stock


CBRE EU-27 Prime Office Rent Index


Change per Annum (%) Index


Prime Office Rents: Recovery Progress Changes in rents: peak-to-trough and trough to Q2 2011


Change in Prime Rent (%)


Office Development Completions as % Total StockWestern Europe vs. CEE

Source CB Richard Ellis

% of Total Stock


Office Supply Pipeline


% of Total Stock

Vacant office space plus developments scheduled for completion by end of 2013


Shopping centre development pipeline, Q1 2011


Sq m per 1,000 population

Schemes of 20,000 sq m or more

* Data is for Moscow and St. Petersburg only


European retailer expansion plans


Proportion of sampled (203) retailers targeting country


CB Richard Ellis EU-27 Prime Retail Rent Index


Change per Annum (%) Index


Global Real Estate Investment Sales * *Commercial real estate only

Source: Real Capital Analytics

Billion US$


Real estate investment in Europe

Source: CB Richard Ellis, Property Data, KTI

Million €


London €9.4 bn

Paris €1.9 bn

Berlin €0.8 bn

Moscow €0.8 bn

Frankfurt €0.7 bn

North America

€ 13.1 bn Asia

€ 5.0 bn

Australia

€ 0.9 bn

Middle East

€4.2 bn

Source: CB Richard Ellis, PropertyData, KTI

Non-European buyers invested €24 billion in Europe in 2010-H1 2011

Cross-region capital flows into Europe, 2010-H1 11


Investment volumes by countryGrowth in German and CEE in H1 2011


Billion €


Retail property investment in Europe


Billion € %


Retail investment by country/region


Billion €


CB Richard Ellis EU-15 prime yield index


Weighted average prime yield


European Property Value Indices

Source: CB Richard Ellis, European Valuation Monitor

Q4 2007 = 100


Source: CB Richard Ellis. European Valuation Monitor

Q4 2007 = 100

European Property Value Indices


‘Prime’ versus ‘Average’ Office Capital Values


Index June 2009 = 100

Average values taken from European Valuation Monitor


Average prime property yield minus 10-year govt bond

Source: CB Richard Ellis, Macrobond

Percentage points

Yield gap evolution


Renewed Anxieties

• Downgrade of growth expectations

• Eurozone debt threatening banking stability

• Loss of faith in policy-makers

• Capacity for action – what tools left?

• Political divisions and obstacles

• Fall in business and consumer confidence

• Rise in investment risk aversion


Eurozone GDP GrowthAlternative forecasts

Source: Oxford Economics

Real GDP Growth (%)

Forecasts


“Muddling through”

• Euro debt crisis contained, but with recurrent stress points

• Fiscal austerity curbs growth

• Monetary policy stimulus maintained

• Deleveraging continues

• Consumers under pressure

• Gradual pick-up in business investment

• Overall slow growth with wide divergences in country performance


European Real Estate: Outlook Summary

• Slow growth environment

• Subdued occupier demand – cost-sensitive

• Rental growth limited - mainly prime space where in short supply

• Development restrained

• Debt market constraints

• Major refinancing needs

• Banks more active in managing loans

• Limited new lending – low risk

• Investor bias to larger, liquid markets

• Continued polarisation between prime and secondary

• Prime properties stable/improving with competition for core stock

• Good secondary in stronger markets - opportunity

• Concern for poorer secondary/tertiary stock – yields to soften further



China Matters: What are the real estate opportunities?

Real Estate Breakfast SeminarLondon, September 2011Amy L. Sommers, PartnerK&L Gates - Shanghai

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Topics:

2025: Planning for China’s built environment

Urban planning 2001 to 2011: Xintiandi as a case study

Gov’t policy aims and concerns: where the next opportunities may lie

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First, some context…

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China by 2025…

350 million Number of people added to China’s urban population – 5+x Great Britain’s current popul.

5 billion SQM Area of roads that will be paved

170 Number of mass-transit systems that could be build

40 billion SQM Amount of floor space that will be built

50,000Number of these buildings that could be skyscrapers – akin to building 10 cities the size of New York City

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Real Estate Development in China

Past Decade: Urban re-development has been a key driverImproving housing stockUpgrading lifestyle from socialist, planned housing to market-driven, invested-oriented housing

Next Decade:Widening to Tier 2 and 3 citiesLinking cities/regions through infrastructure (transport/energy)Demographically-driven opportunities

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Red China …or Grey?

“China’s demographic challenges are captured neatly in the popular saying that the country “will grow old before it grows rich.” China will start going grey some time this decade, and the process will accelerate after 2020.

“ By 2030, China is projected to have more than 300 million citizens beyond retirement age. This will present what the Chinese call a “4-2-1” problem: a single child with two parents and four grandparents to care for.

“Given the significant burdens this will impose, the government is already looking at ways to better fund healthcare. Beijing allocated $124 billion last year for healthcare reform, aiming for basic universal health coverage in the coming years.” Source: http://docs.eurasiagroup.net/chinaoutlook.pdf

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Past Decade - Urban Redevelopment: Re-imagining Old Shanghai - Xintiandi

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Xintiandi - completed 2001

Lifestyle project in central Shanghai

Based on re-imagined use of vernacular structures

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Xintiandi site in 1998

At the time many considered China too poor/unsophisticated - project was doomed to fail or to attract only expatriates

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Xintiandi - 10th Anniversary

Huge success - in 5 yrswill double to 1.2M SQM

Lesson: Predicting what will be popular in China is a mystery…

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Demographics & policy: key drivers in China’s real estate sector

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China’s Healthcare Aims - an example of how policy can drive development…

Improvement of services at grass-roots level: including support for the development of 2000 county-level hospitals; construction or expansion of 3700 urban community health care centers and 11,000 community heath care stations within three years.

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Opportunities & Pressures

Obviously, these forecasts for urbanization spell potential opportunities for all sorts of stakeholders, such as: makers of transit system equipment architects/designers/engineering services,

building/construction material providers suppliers of energy and energy infrastructure health care/aged care

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China’s 12th Five-Year Plan

Proposed by the Chinese Communist Party’s Central Committee in 10/10, adopted by National People’s Congress in 3/11 7 “Strategic Emerging Industries” have been identified and are focused on health care, energy, technology sectorsFocus is on ‘inclusive growth’ of the economy, which will take the form of social benefits (health care), improved living standards (environmental concerns such as clean energy), and value-added industries (growth in R&D facilities)

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Implications for the built environment

Implementation of the aims articulated in the 12th FYP will involve development of China’s built environment, e.g.:

construction of hospital facilitiesWater treatment facilities, power transmission

systems, development of energy-efficient buildings

R&D activities in IT and other areas will require suitable facilities and these users will require housing/amenities for associated workers

Source: http://apcoworldwideinc.com/Content/PDFs/Chinas_12th_Five-Year_Plan.pdf

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Opportunities & Pressures

What about pressures? Power generation: 700 - 900 gigawatts of new coal-fired power

capacity will be constructed from 2005-2025 Arable land supply is diminishing – worst case, 20% decline Inadequate supplies of potable water – today, 59% of China’s river

water is below international standards for potability

Concerns re overheating of real property sector mean that whether foreign-invested real estate projects will obtain needed approvals will be driven in part by whether their organization’s projects/services will (a) help address or redress these pressures or (b) to achieve FYP goals

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Opportunities & Pressures (cont)

Contradictions betw/ national & local govts abound:

Nat’l govt banned construction of new golf courses in ‘04

June 20: People’s Daily reported over 400 golf courses have been constructed since 2004

How? Often by registration as sports parks, recreational parks and forestation areas

"Some local governments have undertaken such programs in an effort to to boost their economies. So they register the clubs under different classifications, and the local government turns a blind eye on farmland and forest acquisition.”*

*Yan Jinming, vice-president of the School for Public Administration at Renmin

University

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Overview of Legal Restrictions for Investing in China Real Property

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Foreign Investment in Real Property

China restricts foreign investment in RE; essentially at least one of these conditions must exist:

if one is a PRC-registered business, one can develop or purchase property for one's own use

one can purchase equity (stock) in a company that hold/develops/rents RE

one can form a company to acquire land rights from the government & develop a project for rent/sale to third parties

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Challenges/restrictions:

Can't buy property w/out forming a company in the PRC – and PRC companies can’t be easily dissolved/wound up - so this significant

Special capitalization and approval requirements before making an investment

Requires converting foreign currency and the gov’t is increasingly concerned about pressure on the RMB to rise – possible to get other approvals, but not be allowed to convert capital to fund the project

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Sectors/areas where foreign projects more likely to be welcome?

Niche projects - eg, health care/bio tech Projects filling policy aims - eg, develop the West

– getting approvals in Chongqing and Chengdu is probably like Shanghai 15 years ago

Senior living, affordable housing, energy-efficient/’green’ projects (again, ties back to policy aims)


Real Estate in Russia:Recent Developments and New Opportunities

William ReichertK&L Gates LLP4th Lesnoy Pereulok 4, 5th Fl.Moscow, Russia+7 (495) [email protected]

57

I. Current Russian Real Estate Market

II. Legislative Developments Affecting Real Estate

III. Major Projects and Opportunities for Investment

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I. Current Russian Real Estate Market

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Commercial Real Estate Industry Overview

Return of confidence to the Russian real estate investment market in Q2 2011

Moscow is currently one of the hottest investment markets in Europe

Q2 2011 saw the largest ever quarterly investment volume in Russia

Overall investment volume provides for the potential for 2011 to match the record levels of 2007 and 2008

60

Commercial Real Estate Industry Overview Investment Volumes by quarter, 2005 - 2011

Information from CBRE

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Real Estate Investment: H1 2011- Deals

Total volume of deals – Euro 1.77 billion (13 deals) including Euro 1.6 billion in Q2 2011 (11 deals)

Largest Deal: purchase of Ritz-Carlton Hotel in central Moscow by Verny Capital from Capital Partners for Euro 424 million

47% of White Square business center (110,750 m²), purchased by consortium of VTB and TPG from Coalco

50% of White Gardens business center (95,000 m², under construction, due in 2012), purchased by consortium of VTB and TPG from Coalco

Alfa Arbat business center (47,200 m²), purchased by Promsvyaznedvizhimost from TNK-BP

90% of Berlin House/Geneva House (7,400 m² / 9,875 m²) purchased by Lenhart Global from Eastern Property Holdings

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Real Estate Investment: H1 2011 - Deals

Kaluzhsky shopping center (57,000 m²), purchased by Binbank from Z-Build

Filion shopping center (128,000 m²), purchased by Kompleksnie Investicii from Rubin Development

Gorbushkin Dvor shopping center (60,000 m²), purchased by Kompleksnie Investicii from Rubin Development

FM Logistics Industrial Park in Khimki (north of Moscow) (75,000 m²), purchased by Hines Global REIT (USA) from AIG Global Real Estate

Metropolis II business center (22,300 m²), purchased by Heitman from Capital Partners

Proposed sale of CJSC “Inteco”, one of the largest developers in Moscow, to a Binbank shareholder and OJSC “Sberbank Investment” for an estimated US$ 1.2 billion

I

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Real Estate Investment: H1 2011 – Refinancing

Hermitage Plaza business center (Raiffeisen)

Romanov Dvor business center (Nordea)

Gogolevsky 11 business center (Raiffeisen)

Metropolis business center (Nordea)

Ducat III business center (UniCredit)

Four Winds business center (Nordea)

Immofinanz retail portfolio (Rosbank)

White Square business center (VTB, closing in process)

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Demand up by 30-40% compared to 2010

Aggregate supply - 11m m²; new supply - 200-250k m²

New supply will be very low in 2011 (890k m², the lowest during 2008-2010)

New supply will shift away from the city center due to a ban on construction in central Moscow (announced by Mayor Sobyanin):

Suspension of some issued permits and audit of previously issued documents

Limitation and prohibition of virtually all new construction

Likely not to include reconstruction and capital improvements

Possible outcome: fewer offices to rent, return to “seller’s market”, more new offices outside the city center

Moscow Office Market: H1 2011

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Moscow Office Market: H1 2011

Signs of return of confidence to the market:

Stable take-up: volume of deals (leases) in Q2 – 296,000 m² (41% quarterly increase)

Overall vacancy decreased to 12.5% (18% in Class A, 12% in Class B)

Prime rents continue to rise

Tenants attracted primarily by quality

Average rental rate for fitted-out prime offices – US$1,050 per m² per year

97,500 m² of office space delivered to the Moscow market in Q2 2011, a 64% decrease compared to Q1 2011

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Russian Warehousing Market: H1 2011

Current State:

Demand up by 20% compared to 2010 Share of foreign companies as tenants – 10% Increasing size of transactions Rent up by 5-7%; purchase prices stable

Trends:

Increase in demand Increase in rent and purchase price expected to be at least 10%

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II. Legislative Developments Affecting Real Estate

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Applicable law

Civil Code of the Russian Federation

Land Code of the Russian Federation

Town-Planning Code of the Russian Federation

Federal law on state registration of rights to immovable property and related transactions (Registration Law)

Regional laws and regulations

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Proposed Amendments: Civil Code Project

To avoid potential disputes with regard to title registration, the following new registration principles have been proposed:

Verification of basis for original registration of title

Establishment of a true and accurate public register

Introduction of notarization requirement for all transactions creating, changing or terminating rights that are subject to state registration

Property = land plot + building

A land plot and an object on the land plot (building, construction) owned by the same person are considered a sole real estate object

Currently, there is no such concept in Russian law (however, there is a concept of “common fate” of land plots and objects, i.e. all objects closely bound with land plots follow the fate of land plots)

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Proposed Supreme Commercial Court Plenum Resolution*

Seller’s lack of title to real estate upon signing a contract will not in itself lead to the contract’s invalidity, but title will be required for state registration

Better identification of future real estate objects in contracts (important for preliminary agreements and agreements concerning future real estate): location, size, other characteristics, defined in accordance with the

construction plan identification is adequate if the total floor area to be conveyed and

the price per square meter can be established such data can be contained in transfer-delivery certificates

*Plenum Resolutions are obligatory for commercial courts in Russia

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III. Major Projects and Opportunities for Investment

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Skolkovo Research Center

“Russian Silicon Valley” Center for research, development

and commercialization of: energy efficiency and savings nuclear technologies space technologies medical technologies strategic computer technologies

and software Construction expected to take from

three to seven years Largest experimental center for new

economic policy Located 2km to the west of Moscow

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Skolkovo Research Center

Unprecedented legal regime for Skolkovo participants:

Will be exempt from VAT and profits tax for 10 years

Will deal with customs authorities only through the Skolkovo management company, which will be responsible for dealing with customs officials

Land plots and buildings in Skolkovo will be owned by the Skolkovo management company

No quotas will be needed from migration authorities to employ a foreigner; Skolkovo management company will be responsible for paperwork required

Participants must be Russian legal entities, created specifically for research activities, and physically located in Skolkovo (starting from January 1, 2014, prior to then they can be elsewhere in Russia)

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Moscow: extension of territory Aimed at creation of a metropolitan federal

district

Ease the concentration of traffic and business, and possibly form an administrative and financial center outside the city center

Planned to be finalized by the second half of 2012

The new territory is close to Rublevskoye highway, the most expensive and prestigious location in the Moscow Region (with official residences of the President, Prime Minister, oligarchs)

Moscow is to be extended by an additional 160k ha (currently the territory is 109k ha)

The extension is likely to result in a rise in price of land plots and buildings on the territory

Image from www.mos.ru

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Kaluga Region: Industrial Park Development

Total area for industrial construction – 2.3 ha

Over US$ 3 billion of foreign capital invested since 2007, to exceed US$ 5 billion by 2012

Large multinational residents include Samsung, GE, Volvo, Renault, VW, Nestle, L’Oreal, Peugeot/Citroën, Mitsubishi Motors, John Deere

Direct access to federal highways, railway lines and local population centers

Overall infrastructure is already in place and well-funded

Regional government engaged and committed to project’s success

Information from CBRE

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Olympic Games Sochi 2014

Government allocated US$ 12 bln to 2014 Olympics and Paralympics

Approximately US$ 17.8 bln of private investment expected (more than 200 investment projects)

Construction: Coastal cluster

Approximately 50% sports related, 50% infrastructure related Central focus - Olympic Park, connecting all competition venues,

parking zone and infrastructure to accommodate 75,000 visitors Other infrastructure: including airport, three railway lines, recycling

facilities, hotels

Mountain cluster Biathlon and ski complexes, a bobsled track, a snowboard park, etc.

Satellite construction: service, tourism, infrastructure

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Football World Cup 2018

Cities: Kazan, Kaliningrad, Krasnodar, Moscow, Nizhniy Novgorod, Rostov-on-Don, Samara, St. Petersburg, Saransk, Sochi, Volgograd, Yaroslavl, Yekaterinburg

Total amount of expenditure - approximately US$ 22 bln, including:

approximately US$ 8.6 bln for

construction and renovation of roads approximately US$ 4.4 bln for construction and renovation of arenas

Approximately US$ 33.3 bln for construction of high speed railroad network

Image from russiatrek.org

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Titanium Valley

Special economic zone located in the Urals*

Aimed at developing titanium production for aviation, medicine and aero-construction components

More than US$ 1.8 bln to be invested

Will initially cover 300 ha, to be expanded to 1,800 ha

Boeing, Rolls Royce, Spirit, Goodrich, MHI, Alenia are expected to become initial members of the project

Airbus, Snecma, Embraer, Turbomeca may also join

Incentives include no property tax, land tax, transport tax, reduced income tax

*A major factor in establishing the special economic zone is the proximity of OJSC VSMPO-AVISMA Corporation, the world’s largest manufacturer of titanium.

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Caucasus Silicon Enterprise

Private-public partnership with equal investment volume

Amount of investment -approximately US$ 1.14 bln

Amount of annual production -

approximately US$ 1.4 bln

Image from www.themoscowtimes.com

Cluster for silicon production for helioenergetics (solar energy)

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Green Building

Supporting legislation:

Federal law on saving energy and increasing energy efficiency

Federal law – technical regulations on the safety of building and facilities

Federal law on heating supply

Few buildings certified under green standards in Russia, around 20 projects registered for LEED or BREEAM certification

No unified Russian standard currently exists; buildings are being certified under LEED, BREEAM or corporate standards (i.e. Olympstroy standard)

Olympstroy, the state corporation tasked with building sites for the Olympics, is working on its own corporate Green Standard for Olympic construction:

10 venues to be certified under BREEAM and LEED

150 venues to be certified under Olympstroy’s Green Standard

Buildings in Skolkovo are master planned to be LEED certified

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Green Building

The Center for Ecological Certification “Green Standards” (CECGS) has prepared a draft of a national standard to be discussed and reviewed

A consortium consisting of CECGS, the Russian Green Building Council (RuGBC)* and Olympstroy agreed that the amended Russian Green Standard would include the Olympstroy Green Standard

On June 21, 2011 President Medvedev issued orders to the Government and the State Duma to prepare and adopt draft laws for economic stimulation of activities aimed at reducing negative effects on the environment

In late September 2011 a RuGBC working group will announce recommendations in line with the President’s orders

Growing market for consultancy and architectural services

*RuGBC is a newly formed non-profit organization dedicated to the development and adoption of green building practices (170 members in 2 years)


UK and Global Real Estate Trends – Opportunities for 2011/2012

20 September 2011, London

Documents

UK and Global Real Estate Trends – Opportunities for 2011/2012 20 September 2011, London