Global Capital Flows 2011

1st Quarter Executive Summary

In Q1 2011, there was $94 billion in direct commercial real estate investment worldwide, up 40% from a year ago. Cross-border flows accounted for two-fifths of all volumes. Jones Lang LaSalle forecasts the highest annual volumes since 2007 at $440 billion in 2011, an upgrade to our prior forecast of $380-400 billion made in January. Inter-regional volumes were up 70% in Q1, with almost $16 billion in purchases. This rise is larger than the increase in the overall market, indicating a strong preference for foreign assets. Domestic buyers dominated in both Asia-Pacific and the Americas, but in EMEA over a third of volumes were inter-regional, reflecting the global appeal of some of the regions markets, notably London and Paris. Of the top ten markets, five were in Asia-Pacific (Tokyo, Singapore, Hong Kong, Seoul and Shanghai); three in the Americas (New York, Washington DC and Los Angeles); and two in EMEA (London and Manchester). Retails share of total volumes rose in Q1 to nearly a third of all transactions, from a quarter in all of 2010. Meanwhile, though total office transactions grew, the sectors share slipped to 45% from nearly half of all volumes in 2010. A key observation in Q1 is the rapidly growing share of the global commercial real estate investment market belonging to the high-growth emerging markets and to commodity-rich countries. We expect this to continue into 2012. The net disposals data support this: the largest cross border net vendors in Q1 were also the more advanced economies, led by the US, France and Japan.
Direct Commercial Real Estate Volumes 2008-2011 by quarter
$ US bn 140 120 100 80 60 40 20 -60% -25% -1% 8% -16% -19% -1% -1% 5% 6% -16% 92% 55% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80%

Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Domestic Intra-regional Inter-regional % Change q-o-q Source: Jones Lang LaSalle

Direct Commercial Real Estate Volumes 2008-2011 by region

$ US bn 140 120 100 80 60 40 20 0 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 AM AP EU AM % Change y-o-y AP % Change y-o-y EU % Change y-o-y 400% 350% 300% 250% 200% 150% 100% 50% 0% -50% -100% -150%

Source: Jones Lang LaSalle

In this report we refer to direct commercial real estate transactions, excluding development, land and residential. This includes all transactions over a $5 million threshold. All figures are in US dollars.

Who?
Who is active - sources of capital?
The most active source of capital in Q1 was the US, with acquisitions of just under $20 billion, including both domestic and foreign transactions. It was also market leader in 2009 and 2010, but this reflects the depth of the home market: 87% of US acquisitions were domestic. Notably, excluding the global funds, which are always the largest cross-border purchasers, the largest source of foreign-bound capital in Q1 was also the US, to the tune of $2.6 billion, with notable deals such as Cerberus acquisition of the Metro retail portfolio in Germany. The US lead in this category differs from recent years where Germans have led. The changes in German fund legislation contributed to a hesitancy to commit new capital. Looked at in net terms (acquisitions minus disposals), the top three in Q1 were the global funds ($3.4 billion), Thailand ($1.1 billion), and China ($1.1 billion), followed by Singapore and Canada. Thailands presence is due to a single transaction: Big C Supercentres purchase of the Carrefour portfolio. Nevertheless, the growing significance of emerging market private and institutional money is clear. If we look only at net cross-border transactions, the global funds remain on top, followed by Canada, Singapore, China and Germany. The global funds are back in acquiring mode as more retail money flows into real estate and debt access loosens in some countries, notably Russia, the US and parts of Asia. But as will become clear over the course of this report, a rapidly growing share of the global commercial real estate investment market belongs to the high-growth emerging markets and to commodity-rich countries like Canada. Improving transparency and solid economic prospects will only add to this trend. The net disposals data support this: the largest cross border net vendors were also the more advanced economies, led by the US (-$2.2 billion), France (-$1.3 billion), and Japan (-$1.1 billion). In Japans case, this was not related to the 11 March natural disasters. It was predominantly a few large transactions in China that were underway prior to the earthquake. The others were widely spread, both in terms of geography and sector. We expect the trend of emerging market net acquisition to continue until advanced economies really start to tighten monetary policy.
Top 10 purchasers globally by source of capital
USA UK Global Germany
Japan Singapore

2011

Netherland China France Canada 0 10 Domestic 20 30 40 $ US bn 50 60 70 80

Cross-border

*Top bar is 2010 - Second bar is 2009 Source: Jones Lang LaSalle

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Who?
Who is active client types?
Equity markets are in good health: the World Federation of Exchanges reported an 18% annual gain in global value through March. This helped the listed commercial property firms re-enter the market: in Q1, amongst the biggest net acquirers globally were the listed REITs ($8.7 billion) and the listed developers and prop cos ($2.6 billion). In contrast, the biggest net divestors were the unlisted developers and prop cos ($7.5 billion) and the privates ($3.8 billion). These observations are broadly true across regions, albeit in the Americas the unlisted funds were the largest net acquirers ($4.8 billion), while in Europe the institutions were significant net investors ($.3.8 billion), particularly the insurance funds. The latter is related to regulatory change favouring commercial real estate assets. With high net worth individuals bidding on trophy assets across all regions, it is surprising to see privates as net divestors. However, it is a few large retail portfolio transactions in Europe behind the data. Exclude these figures and private investors are close to net balance. Unlisted firms, meanwhile, were active divestors across numerous regions and sectors. This is a reflection of their development role in the real estate industry: these completed assets are being sold into the investment market to generate capital for the developer.

POMO Singapore

Regent Street London

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What?
What sectors are hot and which are not?
Global transaction volumes by sector The long-term rise in retails share of commercial real estate investment has persisted into the early $ US bn months of 2011. The office sectors share of total 250 value in Q1 was 45%, down from an average of over 50% the past three years, while for retail 200 the equivalent figures were 28.5% and 23%, respectively. Looking at the number of transactions, 150 the gap between the retail and office shares is even smaller: 33% of all transactions were retail, while 100 only 35% were office.

We expect this secular trend to continue. The increasing number of joint ventures and partnerships between local/regional retail experts and global capital will only bring more money to the sector.This reduces the perceived difficulties in managing the peculiarities of individual retail assets something which has benefitted offices in the past. Offices are perceived as more standard country to country or across regions. The question is whether slower economic growth and reduced disposable incomes in the advanced markets will affect this trend. We do not believe so. The evolution of retail investment will likely reflect the broader market with a shift in composition towards large developing markets, which are short of prime retail product, and away from core markets with high levels of retail provision. Given higher risks, this will boost the appeal of JVs and partnerships, as mentioned above. Also, in a higher-inflation world, the use of turnover leases, notably in Continental Europe, will also increase the appeal of retail.
2008 1% 4% 8% 12% 54% 21% 24% 4% 6% 10%

50 0 Office

2008 Retail Industrial

2009 Hotel Mixed

2010 Other

Q1 2011

Source: Jones Lang LaSalle

2009 2% 5% 9% 10% 25%

2010 2% 2% 9% 13% 49% 29%

2011 1%

54%

46%

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Where?
Where is the capital going?
The composition of investment is changing: secondary and tertiary markets in mature economies are very subdued and emerging markets are growing rapidly. Looking ahead, we believe volumes could return to the levels of 2006 / 2007 peak at $700-800 billion, provided the BRICS and other emerging markets continue to account for a growing proportion of activity. The contribution of the BRICS markets to global investment volumes has gradually increased from less than 2% in 2007 to 13% in Q1 2011, and further rises are anticipated as the markets become more transparent and the quality of their building stock steadily improves. Drilling down to city level and excluding portfolio transactions the most active city-markets worldwide in Q1 were Tokyo all wards ($6.9 billion), Greater London ($5.2 billion) and Singapore ($4 billion). This differs from the same quarter a year ago in that Seoul has been displaced as the third most active city-market. Also, while volumes have fallen in Tokyo, they have risen in all other top ten city markets. Of the top ten, five markets were in Asia-Pacific (Tokyo, Singapore, Hong Kong, Seoul and Shanghai); three in the Americas (New York, Washington DC and Los Angeles); and two in EMEA (London and Manchester). Compared to Q1 2010, Manchester and the US markets are in and Paris, Berlin, Sydney and Toronto dropped out. Manchester was boosted by a single large transaction: the sale of Trafford Centre to Capital Shopping Centres for about 1.6 billion. Looking ahead, Tokyos market will unavoidably be affected by Marchs natural disasters. Investors are requesting updated engineering reports and this will delay some acquisitions, though domestic and global investors tell us they are committed to the market medium term. London remains a focus for many cross-border investors, particularly from Asia-Pacific and the Middle East, while the re-kindling of activity in the US will push its markets back up the top ten table over the course of the year. Do not underestimate the large emerging markets not already in the top ten; watch Bangkok, Beijing, Moscow, So Paulo and Warsaw.
New top traded markets in 2010 include Sweden and Canada
USA UK Japan Germany China France Australia Sweden Canada Hong Kong 0 10 Domestic 20 30 Cross-border 40 50 $ US bn 60 70 80 90

*Top bar is 2010 - Second bar is 2009 Source: Jones Lang LaSalle

1 Sheldon Square - London

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Why?
Why investors are behaving in this fashion and what it tells us about the future.
The pace of activity in commercial real estate investment is picking up more rapidly than was predicted at the bottom of the cycle in 2009. Arguably, the rise in volumes is also surprising when considered against the headwinds facing the economy, including sluggish job creation in the advanced markets; sovereign debt concerns; the ongoing process of household deleveraging; overheating in some emerging markets; soaring commodity prices; and so on In fact, the ratio of commercial real estate investment activity to nominal GDP is picking up more rapidly than at this point in previous cycles. This indicates the asset market is growing more rapidly than the overall economy. This is partly because of accommodative monetary policy in the US and Europe, which is reflating asset markets, but there are sound reasons for investing in commercial property: its perceived inflation hedge; prime rental growth due to short supply in many key CBD markets; appealing risk-adjusted returns compared to more volatile asset classes; and attractive pricing outside the prime markets which corrected earliest. Looking ahead, it is likely that we will continue to move back towards the 2006 / 2007 peak levels of volume in the range of $700 to 800 billion, head winds notwithstanding. But as we have stressed throughout this report, it is a different batch of commercial property which will be trading hands. The data in Q1 shows that large, liquid markets such as London, Tokyo, and New York will continue to dominate, but new product in China, India, Brazil, Turkey and Russia, will gain in importance. In particular, retail in the big emerging markets will grow more rapidly than the overall investment market. How do these markets avoid another bubble? The development of top quality product is key. It is in short supply and there is abundant equity looking to go to commercial property, provided confidence can be built with a suitable local or regional partner. There is no question that
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it is a tricky balancing act: low interest rates in developed economies are fuelling inflation in emerging economies, and their own macropolicy controls are difficult to fine tune witness Chinas efforts in the residential sphere. A steady progression back to the $800 billion mark is not a foregone conclusion. It will require a move up the risk curve for groups of investors that are currently only pursuing core. Alternatively, the growth in emerging market property investment will stall, with a smaller group of investors trading the same core product at elevated capital values predominantly for income purposes.

Evening Star Building, Washington DC Evening Star Building - Washington DC

Global Real Estate Investable Universe: 2010

Public Real Estate US$2.0 trillion

Institutional Public & Private US$6.0 trillion

All Commercial Real Estate US$34.4 trillion

Source: LaSalle Investment Management

Inter-regional volumes increased by 70% y-on-y as investors move out of their regions in Q2011

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For more information, please contact the following: Arthur de Haast International Director Europe tel +44 20 7399 5873 arthur.de-hasst@eu.jll.com Fadi Moussalli Regional Director Middle East tel +971 4 4266 955 fadi.moussalli@jll.com Stephen Miles National Director Europe tel +44 20 73995266 stephen.miles@eu.jll.com Shelley Mathews National Director Global Retail tel +44 20 7399 5240 shelley.mathews@eu.jll.com Steve Collins Regional Director Americas tel +1 202 719 5626 steve.collins@am.jll.com Rob Gibson Chief Operating Officer Europe tel +44 20 7399 5870 robert.gibson@eu.jll.com Chris Staveley Regional Director Europe tel +44 20 7399 5340 chris.staveley@eu.jll.com John Talbot International Director Australia tel +61 2 9220 8486 john.talbot@ap.jll.com Alistair Meadows Regional Director Asia tel +65 6494 3878 alistair.meadows@ap.jll.com Paul Guest Regional Director Head of Global Research tel +65 6494 3728 paul.guest@ap.jll.com

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