Research Report

Global Real Estate Strategic Outlook

April 2013

For qualified investors only not for use by retail investors.

RREEF America LLC 345 Park Avenue, 25th Floor New York, NY 10154 Tel. 212-454-6260 Fax. 212-454-6616

Prepared By:
Mark Roberts Global Head of Research mark-g.roberts@db.com Leslie Chua Head of Research, Asia Pacific ex-Japan/Korea leslie.chua@db.com Simon Durkin Head of Research, Europe simon.durkin@db.com Andrew J. Nelson Retail Specialist andrewj.nelson@db.com Koichiro Obu Head of Research, Japan/Korea koichiro.obu@db.com Jaimala Patel Quantitative Strategy jaimala.patel@db.com Alex Symes Economic & Quantitative Analysis alex.symes@db.com Simon Wallace Property Market Research simon.wallace@db.com
Niketan Gawade Property Market Research niketan.gawade@db.com

Table of Contents
Executive Summary ............................................................................1 Global Considerations and Risks ........................................................2 Global Allocation .................................................................................3 Global Economics ...............................................................................7 Global Capital Markets ........................................................................8 Pricing ...........................................................................................9 Regional Updates ............................................................................. 10 Asia Pacific .................................................................................10 Europe ........................................................................................11 United States .............................................................................. 12 Conclusion ........................................................................................14 Appendix I: Regional Clusters ........................................................... 16 Appendix II: Regional Lease Structure .............................................. 16 Important Notes ................................................................................ 17 Global Research Team ..................................................................... 18

NOTE: Following the combination of Deutsche Bank's asset and wealth management capabilities into one new division, these previously separate businesses were unified under one identity the Deutsche Asset & Wealth Management name and the platinum Deutsche Bank logo. Accordingly, the global real estate investment business (formerly RREEF Real Estate) has adopted the new Deutsche Asset & Wealth Management brand in place of the RREEF name and the RREEF logo. The following Global Real Estate Strategic Outlook follows the recently published regional Real Estate Strategic Outlooks for the United States, Europe and Asia Pacific, which were published prior to the re-branding.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

Executive Summary
Property markets continue to improve globally, as demand is recovering in most regions and construction is a risk in only a handful of markets. Debt markets are thawing globally and transaction volume should increase steadily. Within each region, Asia Pacific, Europe and the United States, there remains a yield premium between the primary and secondary markets. Current economic, capital market and property conditions lead us to recommend global investors overweight to Asia Pacific and the United States, and underweight to Europe.

Real estate in most parts of the globe remains attractive for investment. Improving property fundamentals with little new construction in the near-term are supporting a rebound in incomes globally. While yields have compressed for core real estate in prime markets, spreads to local government bonds remain at historic highs, providing strong relative performance. Additionally, lenders are slowly returning to the market and providing attractive financing, resulting in stronger investor demand and rising transaction volume. While the real estate investment market continues to improve, economic uncertainty in all three regions, Asia Pacific, Europe and the United States, remains a threat to the outlook. Reduced global trade, austerity in the developed world and the tenuous conditions in Europe could drag on economic growth and decrease the amount of investment opportunities. Asia Pacific and the United States will likely have stronger economic growth in the near-term with fewer risks to the outlook relative to Europe. Accordingly, for global investors we continue to recommend an overweight in Asia Pacific and the United States, while maintaining an underweight to Europe. The following is a summary of our regional strategies:

Regional Strategies
Asia Pacific We remain selective on the office market as demand has cooled, but yet new supply remains in check. Conditions are likely to improve in 2014 as global economic growth expands. We favor higher yielding office markets in Australia, Seoul and Tokyo. Non-discretionary retail remains attractive due to rising consumption and stable retail sales growth in this segment of the market. Well-located supermarkets and neighborhood centers provide stable income and there is lower supply-side risk. In the industrial sector, we favor logistics space over traditional warehouse space. Tenants and investors are turning towards more integrated distribution centers that have proliferated with the spread of e-commerce. Income yields are attractive and a limited supply of these types of high-quality assets should support rising capital values relative to traditional warehouses.

Europe For defensive core strategies, emphasize high street retail, residential and selective office assets in London, Germany and the Nordics where initial yield spreads remain wide to bonds and markets less impacted by the eurozone recession. Consider investments in markets where fundamentals are mispriced such as in strong secondary locations in Northern and Western Europe. Initial yields are much higher than prime markets and there are opportunities to acquire assets with long-term leases. As the economy improves into 2014, capital values could recover quickly. To access higher cash flows, target well-positioned shopping centers and prime logistics in key transportation hubs. Dominant shopping centers retain leasing levels and there is less investor competition due to large lot sizes. For logistics, supply threats are low and income yields are well above bond rates. Debt investments are increasingly attractive. Lack of debt availability from traditional sources opens opportunities for both core (senior) and higher yielding (junior, mezzanine) investments. United States Recommend an overweight to industrial. Significant improvement in tenant demand should benefit from a pro-cyclical economic recovery. Maintain modest underweight to apartments as the sector is well into expansion. Emphasize exposure to high-cost housing markets with barriers to new construction. Modest underweight to the office sector, yet be aware of improving momentum. Office vacancy is still elevated and we expect stronger NOI growth in 2014 and 2015. Neutral to slight underweight to retail. The sector provides downside protection due to long leases, yet lower NOI growth than what is expected in the other sectors. Emphasize asset selection as the market is bifurcated between best in class versus obsolete assets and inferior locations. As in Europe, debt investments are increasingly attractive. Opportunities for investment are opening up in higher yielding debt investments as traditional lenders are looking for lower LTVs.

Source: Deutsche Asset & Wealth Management. As of April 2013.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

Global Considerations and Risks

Our view on the global allocation for real estate investment has not changed materially from the prior Global Strategic Outlook published in October 2012. We continue to recommend an overweight to Asia Pacific and the United States, while maintaining an underweight to Europe.

Regional Total and Excess Returns (2013 to 2017)

Total Returns 12% 10% 8% 6% 4% 2% 0% Europe
1

Excess Returns

United States

Asia Pacific

Excess returns are the difference of the forecast regional aggregate interest rates for long-term (generally 10-year) government bonds provided by Oxford Economics from the forecast total returns from Deutche Asset & Wealth Management. Sources: Oxford Economics and Deutsche Asset & Wealth Management.

Note: This information is a forecast and due to a variety of uncertainties, and assumptions made in our analysis, actual events or results or the actual performance of the markets covered may differ from those presented. As of April 2013.

Real estate in the United States should provide attractive risk-adjusted returns going forward. Increasing economic activity and improving employment conditions are fueling stronger tenant demand. With little new supply coming online, vacancy rates in the commercial sectors are declining. Additionally, initial yields relative to government bonds remain at historic highs. Finally, lending terms are attractive and the CMBS market is starting to expand, supporting greater liquidity and lead to higher capital values. With the exception of in Japan, economic growth in the Asia-Pacific region is expected to surpass conditions in Europe and the United States. China and Southeast Asia lead the region with growth ranging from 5% to 8%. Even in the slower growth markets of Australia and Korea, we expect GDP to rise by 2.5% or more. In contrast to the United States, vacancy rates in the office sector have risen modestly, yet vacancy rates are lower in the Asia Pacific than in many markets in the other two regions. Overall, there appears to be greater tenant demand for industrial and retail space, and total returns in these sectors are expected to surpass the office market. Europe remains in recession and vacancy rates are expected to continue rising in many markets. However, investor demand remains strong in the United Kingdom, Germany and Sweden, as these markets are likely to recover before others in Europe. Property fundamentals in the periphery remain depressed and as debt capital remains scarce for risky assets, property values could decline further. Similar to Asia Pacific, retail and logistics are expected to outperform office. Assuming economic growth stabilizes during the next few quarters, investor demand is likely to move beyond the core markets in search of more attractive yields.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

Global Allocation
Our starting point in developing a strategic allocation is to define a neutral portfolio. We evaluate the inventory of investible real estate globally using information from DTZ. The proportion of investible real estate by region is then compared to the economic size of each market as defined by gross domestic product (GDP), adjusted for currency by using purchasing-price parity. Because investing in real estate usually entails a long investment horizon, we look at not only the proportion of current GDP in the major markets across the globe, but also the proportion of GDP expected in the future reflecting regional growth rates.

Global Real Estate Allocation

DTZ Neutral Global Portfolio Global 2012 GDP Distribution

United States & Canada 33%

Asia Pacific 28%

United States & Canada 36%

Asia Pacific 28%

Europe 39%

Europe 36%

Sources: DTZ, IHS Global Insight and Deutsche Asset & Wealth Management. As of April 2013.

The figure below highlights the share of regional global demand today and in 2022. We have grouped countries into clusters which have real estate markets with similar performance characteristics and can be viewed as substitutes for one another within a global framework. The countries that comprise these clusters are identified in Appendix I. What is most striking is the increase in the share of global demand generated by the Emerging Asian markets contrasted against other regions across the globe. The emerging markets in Asia, consisting of China, Southeast Asia and India, are expected to increase at nearly twice the pace of aggregate global GDP growth during the next ten years, increasing the global share of output from 13% of total output in 2012 to 19% in 2022.

Regional share of global demand (2012 and 2022)

2012 GDP 40% 35% 30% 25% 20% 15% 10% 5% 0% N. S. America Europe CEE Nordics German UK & France & Emerging Volatile Speaking Ireland Benelux Asia Asia Mature Australia Asia & NZ 2022 Forecast GDP

Sources: IHS Global Insight and Deutsche Asset & Wealth Management. As of April 2013.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

The mature markets of Europe, which include France, Germany, Spain, and Italy, are likely to see their share of global GDP shrink modestly. An aging population combined with lower birth and immigration rates suggests that the level of growth will increase only modestly, causing the European share of global output to decrease by around one percentage-point for each cluster. The following charts highlight both the historical and expected unleveraged core returns for each of our clusters. 1 During the last 20 years, there has been an intuitive relationship between return and risk which is explained by several factors such as the growth, lease structures and appraisal practices of each country. Overall, global returns during the last 20 years range from 7% to 9%. At the low end of the range are the German-speaking markets which produced consistent returns. High investor demand and limited new development has led to stability in these markets. In addition, valuation practices in the German-speaking markets follow a concept of sustainable value, which is in contrast to markto-market approach used in the United States and the United Kingdom.

20 Year Risk and Return Performance (1992 to 2011) 2

14.0% Emerging Asia 12.0% CEE 10.0% Australia & NZ France & Benelux Nordics 6.0% German Speaking 4.0% Mature Asia 2.0% 0.0% 0.0% South Europe North America UK & Ireland Volatile Asia [23.3,10.8]

Return

8.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Volatility
Sources: Deutsche Asset & Wealth Management using data from NCREIF, JLL and DTZ. As of April 2013.

At the opposite end of the risk spectrum are Emerging Asia and the United Kingdom, which both have higher volatility. Emerging Asia experienced elevated growth during the last several years, thus producing the highest returns globally. In addition, lease terms tend to be shorter in some of the emerging markets, resulting in more frequent tenant turnover and re-pricing of lease rates that can contribute to volatility in income streams and therefore, corresponding capital values 3. The United Kingdom has also shown a high degree of volatility, which can be explained by two factors. First, as mentioned earlier, the United Kingdom has the most progressive appraisal policies of all clusters globally and capital values reflect forward expectations, as properties are generally mark-to-market quarterly. Secondly, lease structures in the United Kingdom are usually 5 to 10 years, but can be as long as 25 years. Thus, assets are priced more closely to the bond market, so
1

For the United States and United Kingdom, we utilized historical data from NCREIF (US) and IPD (UK). For the other regions, we constructed a historical time series using prime data calibrated to the returns available from IPD. For example, IPD produces a short history of total returns for several markets in Europe and Asia. Using prime data, we replicated the shorter term performance from IPD. Once we developed the proprietary model, we then applied the prime data to produce a longer term time series. Index performance is shown for illustrative purposes only and is not intended to represent historical or to predict future performance of any specific investment or Deutsche Asset & Wealth Management strategy. Deutsche Asset & Wealth Management products may have experienced negative performance over these time periods. Past performance is not a guarantee of future results.
2 Note that Mature Asia starts in 1997 as returns from the early 1990s are not representative of the current risk/return profile. For illustrative purposes only. Past performance is not indicative of future results. 3

Please see Appendix II for a summary of lease structures across the globe.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

even small changes in interest rates can have nearly an immediate impact on capital values.

Expected Total Return Ranges by Region (2013 to 2017)

25%

20%

15%

10%

5%

0% German France & UK & Speaking Benelux Ireland

Source: Deutsche Asset & Wealth Management. As of April 2013.

Nordics

South Europe

CEE

North Australia Mature Emerging Volatile America & NZ Asia Asia Asia

The performance of the core markets in Europe along with Australia and North America tend to reflect a combination of both higher income levels and greater income growth relative to other regions. Lease structures for commercial property in these markets average 3 to 10 years. As such, the lease turnovers are more frequent than in the United Kingdom, creating the potential for higher income growth. In addition, because lease terms are shorter than average, initial yields are high relative to other markets. Looking ahead over the next five years, we expect property returns globally to outperform their longer-term average. It should be noted, however, that historical returns are diminished due to the decline in capital values following the global financial crisis. Due to investor risk-aversion and reduce debt capital available for development, the amount of new construction globally is well below average. Given the limited amount of risk capital devoted to new construction, we do not expect a surge in development activity soon. Second, as world economic growth improves in 2013 and 2014, declines in unemployment rates will translate directly into improved occupancy and income growth. Returns in Asia Pacific and North America are likely to outperform Europe. Higher economic growth in both regions relative to Europe and maturation of Emerging Asia will bolster returns. However, strong performance in these regions will likely come with higher volatility and risks from new construction later in the cycle. In Europe, the markets of Germany, Poland, the United Kingdom and Ireland, and the Nordics will likely outperform the rest of the region early in the forecast period. However, as the residue of the euro crisis dissipates, Southern Europe, France and Benelux will likely strengthen and begin to outperform. We expect performance in Southern Europe to be strong, but to vary from asset to asset. Central and Eastern Europe (CEE) will likely outperform the region and, similar to Emerging Asia, maturation of the commercial real estate market will lead to stronger growth and returns.

This information is a forecast and due to a variety of uncertainties, and assumptions made in our analysis, actual events or results or the actual performance of the markets covered may differ from those presented.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

In the United States, we expect performance in the industrial sector will start to outpace the apartment and retail sectors during the next five years. The industrial property type currently has higher yields than both of the other sectors, which will lead to higher income returns. Additionally, in contrast to the apartment and retail markets, the industrial sector also has three potential sources of income growth over the next few years, namely declining vacancy rates, rising rents, and higher passing rents, which will lead to greater appreciation. These same effects are likely to take hold in the office market in 2014, producing higher income growth in that sector as well. In the Asia-Pacific region, we expect similar outperformance in the industrial sector. Rising global demand for trade combined with better intra-regional trade should support demand for logistics. Due to limited new construction of shopping centers, low unemployment and stable wage growth, we expect solid performance in the retail sector. With the exception of a few key office markets in Australia and Southeast Asia, we expect the office sector will generate total returns towards the lower end of the range depicted in the charts on the previous pages. This is mainly due to the effects of rising vacancy rates during the last two years. As occupier demand improves in the mid-term, we expect offices to begin to outperform.

Parameters Determining a Neutral Portfolio

France & Benelux Southern Europe U.K. & Ireland

German Speaking

DTZ Invested real estate (%) Investible real estate reweighted (%) Long term economic growth Liquidity Transparency Country risk Core Total Return Outlook Recommended weight

6.0 6.1

8.3 8.5

7.7 7.9

3.2 3.3

10.1 10.3 neutral

32.9 33.6

3.0 3.1

11.1 11.3

2.1 2.1

13.5 13.8

outperform
Source: Deutsche Asset & Wealth Management. As of April 2013.

underperform

Taking into account the preceding factors, we also overlay additional aspects such as liquidity, transparency, and country risk to arrive at our global allocation. Global investors have the potential of achieving total returns in the range of 7% to 9% during the next five to ten years by maintaining overweight positions to the United Kingdom, Nordics, North America, Australia and Mature Asia. As we expect average rates of return in Germany, as well as Volatile Asia and Emerging Asia, we recommend neutral weights to these regions. Finally, given the economic and demographic challenges in France and Southern Europe, we currently recommend an underweight to these regions.

This information is a forecast and due to a variety of uncertainties, and assumptions made in our analysis, actual events or results or the actual performance of the markets covered may differ from those presented.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

Emerging Asia

North America

Volatile Asia

Mature Asia

Australia

Nordics

Global Economics
The pace of global economic expansion is expected to remain sluggish in general during 2013, but this year is likely to see the start of a sustained recovery. With confidence rising, extensive adjustments undertaken by both governments and consumers, and the continued support of central banks, economic growth going into the middle of the decade is set to gather pace in all three regions underpinning our view that occupier demand for real estate will strengthen during the coming five years. Rising optimism is evident across equity markets. An improving eurozone, signs of a United States housing recovery and accelerating Chinese growth have led to a rally in global equity prices since last November, pushing the Dow Jones Industrial Average up to a record high in March. Furthermore, many confidence indicators globally have been improving for both businesses and consumers, which if sustained, will help to lay the foundation for stronger spending growth. A key driver of rising global confidence has been the marked improvement in the eurozone crisis. Increasingly proactive ECB policy and greater cooperation between European politicians has led to a large reduction in the yield on government debt in the periphery of the eurozone, buying policymakers needed time as they restructure the currency area. The risk of a Greek exit has been diminished, and even with the consternation in the Cypriot financial system, policy reforms and strict austerity programs are helping to improve competitiveness and rebalance the eurozone periphery. Under the guidance of a new leadership team, the Chinese economy is set to remain a major driver of global growth. Having avoided a feared hard landing in 2012, the economy accelerated during the second half of the year. Although the new leadership faces considerable challenges in supporting the countys transition to a fully developed, economic superpower, rapid GDP growth of more than 8% per annum to set to be sustained during the coming five years.

Projected GDP Growth

2013 50 40 30 20 10 0 -10 South Europe France & German Australia North Benelux Speaking America Mature Asia Nordics UK & Ireland Volatile Asia CEE Emerging Asia 2014 2015

Source: IHS Global Insight. As of April 2013.

The global economy will continue to feel the impact of fiscal retrenchment as governments in Europe, Japan and the United States attempt to reduce deficits and maintain the confidence of debt markets. In the United States, the worst of the fiscal cliff was largely avoided and a compromise on the debt ceiling is expected to be found. However, the Sequester is currently forcing $85 billion of spending cuts in 2013, with further cuts in the years that

Percent

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

follow. In Europe, despite rising public discontent, most governments will continue to pursue austerity programs. However, having already made substantial progress in previous years, the speed of deficit reduction should start to slow. As a result of government spending cuts, the pace of recovery globally will be constrained until the second half of the decade. Having experienced a fall in output during the recession, current growth conditions are therefore likely to leave considerable volume of spare capacity in the global economy for a number of years. Although currency movements and policy changes could lead to variations in the short-term outlook from a national perspective, at a global level this environment should support low levels of inflation during the medium term, providing central banks with the scope to provide accommodative monetary policy for the foreseeable future.

Central Bank Policy Rates (2012 & 2017)

2012 8% 7% 6% 5% 4% 3% 2% 1% 0% South Korea Japan United States Australia United Kingdom China Eurozone 2017

Sources: Oxford Economics and Deutsche Asset & Wealth Management. As of April 2013.

The willingness of central banks to provide support remains evident. The Federal Reserve is standing behind its quantitative easing program, pledging to keep interest rates subdued until late 2014. In Europe, the ECB cut its Repo rate to a record low in 2012, and has pledged to provide unlimited bond market support at the request of member states. Additionally, the Bank of England expanded its program of quantitative easing. Central banks across Asia Pacific are also implementing rounds of easing. The Bank of Japan, at the behest of the new government, doubled its inflation target in January 2013 to 2%, opening the path for extensive easing. Additionally, the Peoples Bank of China recently reversed course from previous monetary tightening, and the Reserve Bank of Australia and the Bank of Korea cut base rates in 2012, and could reduce them further in 2013. Loose monetary policy will help to act as a counterbalance to fiscal and financial sector deleveraging. These policy measures are expected to maintain low bond yields, in turn supporting the attractiveness of real estate investment.

Global Capital Markets

Investors continued to prefer core properties in prime markets in 2012. Total transaction volume increased only 4.5% globally, and the top markets continued to garner a large portion of the total volume. The exception was in the United States; although the top five markets received more than 30% of the capital, most markets had positive gains in transaction volume. In Europe, more than 50% of total transactions occurred in the United Kingdom and Germany, with capital particularly focused on the Central London office market. In Asia Pacific, investment flows were relatively strong in the major commercial markets of Hong Kong, Australia, Japan and Korea, while activity in China was relatively subdued.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

Although transaction volumes are difficult to forecast, there are several themes that we regard as key drivers of liquidity. Improving economic indicators in Asia Pacific, specifically in the emerging markets, should fuel transaction volume in that region. In Europe, it is likely that core markets will continue to attract most of the transaction volume because of ongoing uncertainty. However, privatization programs across emerging parts of Europe (mainly Central and Eastern Europe) may also add substantial deal volumes. Additionally, deleveraging may force troubled assets to come to market in larger quantities. In the United States, increased deal volume will likely be generated by the improving real estate fundamentals. However, transactions should move away from the heated apartment markets into properties with slightly higher yields.

Pricing
The narrow geographic focus of investors kept prime yields in core markets below historic averages during 2012. Spreads between prime markets to secondary markets remain high because of perceived differences in the strength of fundamentals. Additionally, a spread between the top properties and secondary stock within each market persists. This trend is less significant in the riskier markets of Southern Europe where even the best properties are trading at elevated yields, albeit price discovery remains challenging as there are few trades. High growth markets in Asia Pacific, such as Emerging Asia and Volatile Asia, have experienced strong capitalization compression due to expected income growth.

Office Cap Rates Tier 1 and Tier 2 Cities

Asia Pacific
Tier 1 Markets 9% 8% 7% 6% 5% 4% 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 12Q4 Tier 2 Markets
9% 8% 7% 6% 5% 4%

Europe
Tier 1 Markets Tier 2 Markets

United States
Tier 1 Markets 9% 8% 7% 6% 5% 4% Tier 2 Markets

07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 12Q4

07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 12Q4

Sources: Real Capital Analytics and Deutsche Asset & Wealth Management. As of April 2013.

Although cap rates in the top markets are at historic lows, suppressed government bond interest rates have allowed yield spreads to remain relatively high. Elevated yield spreads are most pronounced in core Europe, where capitalization rates are high and government bond yields are low, but also exist in the United States and Mature Asia. Contrasting with this trend, spreads in Southern Europe and CEE are low as government bond yields are much higher than in more mature markets.

6 Tier 1 cities were the top 5 for Asia Pacific and Europe, and top 9 for the U.S. in terms of transaction volume. The sum of volume for the tier 1 cities were at least 60% of total volume of the top 30 cities in each region, according to Real Capital Analytics.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

Global Risk Premia in Fourth Quarter 2012

Spread 0.0% (bps)

2.0%

4.0%

6.0%

8.0%

10.0%

Nordics 518bps German Speaking 490bps Fra. & Benelux 477bps UK & Ireland 437bps Mature Asia 431bps North America 361bps Australia & NZ 328bps Emerging Asia 306bps CEE 265bps Southern Europe 192bps Volatile Asia 189bps 0.0%
As of April 2013.

Risk Free Rate Income Yields

2.0%

4.0%

6.0%

8.0%

10.0%

Source: PMI, JLL and Deutsche Asset & Wealth Management.

Spreads are relatively low, and cap rates and bond yields are high in Emerging Asia, CEE and Southern Europe, but for contrasting reasons. Emerging Asia and the CEE countries have strong growth potentials, but tighter monetary policy and higher country specific risks resulting in higher government bond yields. Cap rates are elevated in this country due to real estate market maturity and transparency, but investors are paying a small spread over the government bonds due to high growth potential. In Southern Europe, bond yields are high due to default and growth risks. Cap rates in Italy, Spain and Portugal are elevated due to low income growth, but transparency and maturity of the real estate market, and the relative risk to bonds enable investors to pay a smaller spread. In 2013, prime property yields in the core markets globally will likely remain below historic averages, with further compression still possible due to the attractive spread to sovereign rates and increasing availability of debt. By the outer years of our forecast, however, bond yields are forecast to rise, inevitably pressuring property yields to move out in those markets as the spread narrows. However, rising bond yields are correlated with an improving economy, and stronger rent growth will give some protection on yield expansion the core markets.

Regional Updates
Asia Pacific
While the Asia-Pacific region is still growing faster than many other parts of the globe, we do not expect to see a quick turnaround in economic growth in 2013. Rents and capital values are not likely to rise in 2013 as rapidly as they did over the preceding two years. Nevertheless, ample liquidity and the low cost of debt will keep yields flat or perhaps even compressing as institutional investors hunt for the best spreads. As a consequence, total returns could slip marginally in 2013, yet still remain higher than other regions of the globe. Logistics will likely remain the strongest property type in the region as the economy returns to stronger growth. Office demand is cooling, but should recover with relative ease in the top markets.

DEUTSCHE ASSET & WEALTH MANAGEMENT Global Real Estate Strategic Outlook | April 2013

10

Office | Focus on higher yielding markets. Demand for office space has cooled and is weakening in some key centers. However, supply has remained moderate due to tighter lending requirements from banks, and will likely stay below historic averages during the next three to five years. Due to softening demand regionally, we favor the higher yielding office markets in Australia (Brisbane, Melbourne, and Sydney), Korea (Seoul) and Japan (Tokyo). Some core investors may choose to look beyond the traditional CBDs, venturing into suburban office districts as long as the surrounding infrastructure and transport links support these locations. Despite compressing yields in Australia, spreads to government bonds are close to historic highs, between 375 bps and 425 bps. Spreads in Japan are higher, at approximately 450 bps. Office assets in South Korea (Seoul) also provide a decent spread of 250 bps to 325 bps, pointing to relatively healthy risk-adjusted returns. Retail | Favor non-discretionary. While prime retail is vulnerable to consumer sentiment, non-discretionary retail remains a necessity and hence provides stable income return. This includes supermarkets, neighborhood centers, and suburban retail that serve the immediate residential catchment. These centers can give investors a cushion against fluctuations in discretionary spending and are less exposed to the impact of online retailing. Although China has recently had the regions strongest growth, investors should be cautious due to large amounts of new supply and a recent slowdown in consumer spending. Investors should note that the current environment has prompted retail investors to rethink their approach to the retail property sector as rising affluence and technological advances reshape consumer spending patterns. We see this as a positive move as more retailers respond to the changes in consumer habits, but will be a risk to obsolete retail centers. Industrial | Positive on logistics, neutral on traditional warehouse. Tenants and investors have made a strategic move away from the traditional warehouses, turning instead to the more integrated distribution centers that have proliferated with the spread of e-commerce. For investors, the longer leases of logistics centers provide stable income, and capital expenditures are typically lower than other commercial assets. A persistent shortage of this asset class has led to conversions or built-to-suit products even in the more advanced economies of Australia, Japan, and South Korea. In Australia and China, the growing populations of some of the key cities have resulted in greater demand for specialized warehousing including food distribution centers. Investors should look at the more mature markets of Australia, Mature Asia and Volatile Asia although opportunistic investors may wish to consider investing in China and the key cities within South East Asia.

Europe
Real estate performance will continue to be polarized across Europe as the slow and muted recovery takes hold from 2014. The north-south divide will prevail with some exceptions. Capital growth will continue to be positive in London and most of the German markets with values in France continuing to fall in all sectors apart from logistics. Within national markets the gap between prime and second-tier assets will continue to widen and the range of total returns delivered over the forecasting period will be equally as wide. The industrial product type will remain strongest in the near term with office improving by middecade. Retail properties will remain bifurcated with properties in the best locations greatly outperforming secondary properties. Southern Europe could see further deterioration, as job losses continue across the periphery. Office | Prime focus and peripheral rebound. Reflecting the economic environment, office demand is set to remain weak across much of Europe during the next year. Beyond

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this, a gradual improvement in economic conditions and business sentiment should support a return to positive office rental growth. Initially this is likely to be limited to the major cities within northern Europe, particularly the major German cities, Central London, Warsaw and to a lesser extent the Paris CBD. By the middle of the decade, the recovery is forecast to gain momentum, and include prime eurozone periphery locations, as rising demand and little development supports a bounce-back in rents, which are now well below their pre-recession peak. This forecast rebound in the periphery is subject to a high degree of risk and likely to be restricted to only the most prime locations and buildings. Retail | Cautious consumers and structural changes. European retail real estate is undergoing a period of extensive change. The sector is faced with low consumer confidence, household deleveraging, and the continued growth of online sales is diverting spending from physical stores. Investors continue to be excited about infill, prime locations, but secondary locations are struggling with occupancy and rents. Similar to the office sector, the economic cycle is likely to favor investment in core Europe over the short term, but attractive opportunities should be available in the periphery starting mid-decade. However, as a result of technological advancement, the European retail sector is expected to polarize further during the coming five years, with consumers and retailers, and therefore investors, increasingly favoring shopping locations that offer either convenience, experience or a combination of the two. Industrial | Contracted to the core. Lower intra-European trade and sharp declines in demand across the eurozone periphery, has led logistics operators to focus space demand upon a smaller geographic area. During 2013, demand will remain focused upon northern European ports, and transportation corridors in Germany and Poland. As economic activity gains strength from 2014 to 2015 onwards, demand is expected to spread to secondary northern ports before picking up along the north-south distribution corridor in Western Europe, running through France to Milan, Barcelona and Madrid. With a slow and divergent economic recovery expected, structural trends such as the growth of ecommerce and improving supply chain efficiencies will also continue to be the principal drivers of demand for logistics space. Debt Investment | Restrictive lending opens investment opportunities. Traditional lenders are restricted as the European financial landscape is enduring structural change. The result is a shortfall of debt and lenders are using what capital that is available on prime properties in core markets. Investors are gaining opportunities to fill the lending gap left from the banks and insurance companies, specifically in the subordinated debt market. As traditional investors have retreated from this space and in an environment in which lower LTVs from senior lenders are becoming the norm, borrowers are forced to seek out new sources of finance to bridge the gap.

United States
Property markets continue to edge further into recovery in the United States. Apartments are already back to peak rents in many key markets and vacancies are below their longterm averages. However, for industrial, office and retail properties, growth has been more elusive, with rents still well below prior peaks and vacancies significantly above historical averages. The coming year will be another period of modest improvement, followed by more robust growth in 2014. At this stage in the real estate cycle, the outlook for the office and industrial sectors is improving relative to the apartment market, and we expect retail will maintain a stable outlook. Apartment properties will likely continue to perform well during the coming year, but will weaken as new supply enters the market. Industrial will accelerate, followed by office. Like in Asia Pacific and Europe, the retail sector is changing

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structurally and while the best properties will outperform, secondary locations will only improve modestly along with the economy. Office | Still looking for lift. With only a smattering of markets performing strongly, the last three years have been an arduous ride for the sector. However, the payoff is coming, and by 2014 we should be able to confirm that we are firmly into recovery. Office demand should finally begin accelerating in 2013, achieving 40% more net absorption than in 2012. Early recovery office markets continue to be those with strong tech, energy, education and healthcare components. As such, Austin, Boston, San Francisco and San Jose should lay claim to the highest peak-to-peak rent gains through 2017. Investment capital remains strongly focused on key submarkets in primary CBDs, but is moving toward suburban and secondary markets. Outside of the top-tier markets, recommended alternatives include Los Angeles, Orange County, San Diego and Seattle. Retail | Recovery fundamentals in place. Consumers are in their strongest position in at least five years: home sales and prices are up, foreclosures are down, household debt is down, and jobs and incomes are rising (if slowly). These improvements have driven retail sales above pre-recession peaks in most segments. But the recovery is proving uneven, with superior markets and centers thriving while their inferior counterparts struggle or fail. Thus, the retail sector overall continues to improve slowly, with tepid leasing just outpacing historically low construction. The best-performing metros and submarkets for retail will be dense, supply-constrained markets, particularly those with high disposable incomes. As in recent years, we generally favor the more affluent and dynamic coastal markets, though southern California continues to lag while Texas markets are surging. More so than for other property sectors, asset selection is critical. Retailers increasingly favor the dominant centers in markets and so should investors. These dominant centers consistently outperform competitive centers in terms of both occupancy and rent growth. Industrial | Focus on high-barrier markets. The industrial market finished the year on a high note with new demand up and the national vacancy rate 70 basis points down on the start of the year the most for any property sector in the United States. While the warehouse segment is clearly leading overall trends and it will continue to do so, the prospects are good that traditional demand drivers for the sector will continue to support a broadening base of demand in 2013 and thereafter, especially as housing market recovery gains momentum in coming years. We advocate overweighting high-barrier markets and limiting core investing in lower barrier markets. High-barrier markets consistently outperform in terms of average vacancy rates, both overall and for new vintage space in the same markets. In the past three years the high-barrier markets tend to weather growth and recession cycles better, while also tending to achieve higher rents and more sustained rent growth. Apartments | New construction is a risk. The near term outlook for apartments remains positive, however, longer term indicators are less positive due to rising homeowner affordability, escalating new supply and a recovering for-sale housing market. Market fundamentals are expected to favor landlords for another 12 to 18 months before moderating as a wave of new projects are delivered to the market. Construction will be concentrated in the top markets, with one-third of the total in Washington, Dallas, New York, Seattle, Austin, and Houston. In addition, ever increasing rents and rising housing affordability are expected to turn more renters into homeowners. With supply and demand fundamentals becoming more balanced, the apartment market is expected to reach equilibrium in the next 12 to 18 months as the vacancy rate returns to the historic average.

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Debt Investment | Attractive opportunities are emerging. With real estate markets continuing to recover, attractive opportunities will emerge for debt investment. Underwriting standards by traditional lenders are still relatively conservative, though loosening, leaving room for debt investors to serve the market, particularly for deals seeking higher loan-to-value ratios and equity investors looking to refinance debt issued at the top of the market. Additionally, the expected gap between mortgage maturities and new originations during the next few years will continue to provide opportunities for investment across the risk spectrum. Equity investors will likely increase demand for loans throughout the capital stack in 2013, providing opportunities for mezzanine or preferred equity investments.

Conclusion
The global economy is in a period of structural change. Previous excesses in Europe and the United States continue to unwind, while the Asian economies relentlessly gain in strength. This process of adjustment increases macro risks, while curtailing the pace of recovery in certain parts of Europe and the United States. Nonetheless, the current economic environment should encourage central banks to maintain loose monetary policy and low interest rates supporting the current historically low sovereign debt yields in the United States and core Europe. In general, real estate is favorably priced when compared to sovereign debt yields, while low levels of construction should help to ensure that as global unemployment rates decline over the next few years, tenant demand should translate directly into lower vacancies and higher net operating income growth. Capital markets are generally improving globally, but with some exceptions. Real estate debt markets are thawing in the United States and Asia Pacific, and insurance company lending and public debt issuance is expected to rise. Even in Europe, private investors and funds are emerging and will likely fill some of the gap left behind by the banking sector. Capital will continue to be adverse to Southern Europe, but opportunity funds will be able to aid property markets in the region. As a result of improving debt markets, high yield spreads between real estate and government bonds and a reduction of investor riskaversion, transaction volume will likely increase globally during the next five years. Property fundamentals are likely to improve globally, but at varying rates, and this will impact how investors should allocate capital. Markets are getting a tailwind from the lack of new construction, as rents have not exceeded replacement cost in most markets, and sources of debt are still wary of development risk even where rents are high enough to justify the costs. Within each region, we believe that warehouse/logistical properties will outperform other property types in the near term. Relatively high yields and rising incomes will result in outperformance for the industrial sector regionally. Office properties will see declining vacancy make an impact on rents starting in 2014 in most markets. Retail properties will have varying performance in each region. The top shopping centers will continue to attract tenants, but as consumption growth is still cyclically weak in some markets and structural changes are occurring globally in how the consumer shops in terms of technology, secondary locations will likely suffer in terms of rent growth and occupancy. The current economic environment, capital market conditions and property fundamentals give us conviction with our recommended regional allocation, which gives an overweight to Asia Pacific and the United States, and an underweight to Europe. Within the clusters, we suggest overweight to economies that are relatively stable: Australia, Mature Asia, North America, the Nordics and the United Kingdom. We expect average rates of return in

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Germany as well as Volatile and Emerging Asia; we recommend neutral weights for these regions. Additionally, given the economic and demographic challenges in France and Southern Europe, we currently recommend an underweight to these regions.

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Appendix I: Regional Clusters

Members of regional clusters
Cluster Name
CEE France & Benelux German Speaking Nordics Southern Europe U.K. & Ireland North America Australia & New Zealand Emerging Asia Maturing Asia Volatile Asia
Source: Deutsche Asset & Wealth Management. As of April 2013.

Member Countries
Poland, Hungary, Czech Republic France, Belgium, Luxemburg, Netherlands Germany, Austria, Switzerland Norway, Sweden, Finland, Denmark Spain, Portugal, Italy United Kingdom, Ireland United States Australia China, Thailand, Taiwan, Malaysia, Philippines Japan, South Korea Hong Kong, Singapore

Region
Europe Europe Europe Europe Europe Europe North America Asia Pacific Asia Pacific Asia Pacific Asia Pacific

Appendix II: Regional Lease Structure

Typical lease structures
Office/ Industrial Australia Belgium Canada China Denmark 5 to 10 3, 6 or 9 5 to 10 3 to 5 3 to 5 3 to 5 10 to 12 5 to 10 2 to 3

1
Rent Indexation Frequency Annual Annual 5-Year None Annual Basis Market value or fixed percentage (4-5%) Health Index (CPI) Market value or at a rate not to exceed a set dollar amount Market values. Rents reviewed at renewal CPI or fixed percentage Office/ Industrial: INSEE (cost of construction index) Retail: ILC (Indice des Loyers Commerciaux) Verbraucherpreisindex (CPI) Market value Fixed indexation is less common. Rents reviewed at renewal 75% of ISTAT index Market value Fixed indexation is less common. Rents reviewed at renewal CPI or fixed percentage (2-4%) Rental level change based on market fluctuation IPC CPI Market value (upward only) CPI 2% or 3% after the second year Fixed indexation is less common. Rents reviewed at renewal Market values. Rents reviewed at renewal Inflation-linked leases are becoming more commonplace in certain sectors Fixed indexation, inflationindexation less common. Expense Responsibilities Tenant Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Internal Repairs Maintenance Structural Internal Repairs Maintenance Structural Internal Repairs Maintenance Landlord Structural Structural Structural Structural Structural

Average Lease Length (number of years) Retail 5 9 5 to 10

France

Annual

Structural

Germany Hong Kong Indonesia Italy Japan Malaysia Netherlands Philippines Singapore South Korea Spain Sweden Taiwan Thailand Vietnam United Kingdom United States
1

3 to 10 2, 3 or 6 2 to 3 (5 to 10 for larger spaces) 6+6 2 3 5 to 10 3 to 5 2 to 3 3+2 3 to 5 3 to 5 2 to 3 3 (6 for larger spaces) 2 to 3 5 to 15

Annual None None unless agreed upon

Structural Structural Structural Structural Structural Structural Structural Structural Structural Structural Structural Structural Structural Structural Structural

6+6 5 to 10

Annual None None

5 to 10

Annual None

2 to 3 2+2 5+ 3 to 5

None Annual Annual Annual Annual None None

5 to 15

5-Year

5 to 10

10

1/3/5

Data includes typical lease structures for commercial real estate.

Sources: DTZ, Cushman & Wakefield, Jones Lang LaSalle, Deutsche Asset & Wealth Management. As of April 2013.

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Important Notes
2013. All rights reserved. Deutsche Asset & Wealth Management represents the asset management and wealth management activities conducted by Deutsche Bank AG or any of its subsidiaries. Deutsche Asset & Wealth Managements real estate investment business is part of the Alternatives and Real Assets platform. In the US, Deutsche Asset & Wealth Management relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154) Australian financial services license holder; in Japan: Deutsche Securities Inc.*; in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for direct real estate business), and Deutsche Asset Management Hong Kong (for real estate securities business), in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N) and in the United Kingdom, Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited, and Deutsche Asset Management (UK) Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Ltd and Deutsche Alternative Asset Management (Global) Ltd; in addition to other regional entities in the Deutsche Bank Group (*) For DSI, financial advisory (not investment advisory) and distribution services only. Key Deutsche Asset & Wealth Management research personnel are voting members of various investment committees. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by Deutsche Asset & Wealth Management and its affiliates. This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only. It does not constitute investment advice, a recommendation, an offer, solicitation, the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer. An investment in real estate involves a high degree of risk, including possible loss of principal amount invested, and is suitable only for sophisticated investors who can bear such losses. The value of shares/ units and their derived income may fall or rise. Any forecasts provided herein are based upon Deutsche Asset & Wealth Managements opinion of the market at this date and are subject to change dependent on the market. Past performance or any prediction, projection or forecast on the economy or markets is not indicative of future performance. The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance.

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Office Locations:
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Global Research Team

Global
Mark Roberts Head of Research & Strategy mark-g.roberts@db.com
Niketan Gawade Property Market Research niketan.gawade@db.com

Americas
Ross Adams Industrial Specialist ross.adams@db.com Bill Hersler Office Specialist bill.hersler@db.com Ana Leon Property Market Research ana.leon@db.com Andrew J. Nelson Retail & Sustainability Specialist andrewj.nelson@db.com Jaimala Patel Quantitative Strategy jaimala.patel@db.com Alexander Makarovski Performance & Risk Analysis alexander.makarovski@db.com Alex Symes Economic & Quantitative Analysis alex.symes@db.com Brooks Wells Apartment Specialist brooks.wells@db.com Jay Wengang Performance & Risk Analysis jay.wengang@db.com

Europe
Simon Durkin Head of Europe simon.durkin@db.com Jaroslaw Morawski Property Market Research jaroslaw.morawski@db.com Maren Vaeth Property Market Research maren.vaeth@bd.com Simon Wallace Property Market Research simon.wallace@db.com

Asia Pacific
Leslie Chua Head of Asia Pacific ex-Japan & Korea leslie.chua@db.com Koichiro Obu Head of Japan & Korea koichiro.obu@db.com Minxuan Hu Property Market Research minxuan.hu@db.com Natasha Lee Property Market Research natasha-j.lee@db.com

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