Brazil: Property Development, Investment and FinanceCreating Livable Communities, Real Estate Value,

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Brazil Property Development, Investment and
FinanceCreating Livable Communities, Real Estate
Value, and Robust Capital Markets

• Whats Driving the Global Real Estate Capital
  Markets?

Stephen Blank Senior Fellow, Finance ULI the
Urban Land Institute
3 August 2004
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Whats Driving the Global Real Estate Capital
Markets?

• Increasing complexity
• New risks to manage
• New stakeholders to manage
• Macro Trends
• Weight of Capital
• Securitization
• Globalization
• Resiliency
• Governance and Accounting
• Transparency

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New Risks to Manage Increasing Complexity
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Multiple Stakeholders to Manage Increasing
Complexity
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Change Remains the Only Constant
Availability of Capital
Macro Trends
Securitization
Governance
Resiliency
Globalization
Transparency
Volatility
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Global Real Estate and Capital Markets Macro
Trends

• Real estate capital markets acting as a governor,
  reducing risk of future supply-demand imbalances
  by allocating capital
• Development now driven by demand rather than
  supply of capital and industries hormone levels
• Real estate industry is transforming itself from
• Local to national to global
• Generic to niche or specialized
• Independent operator to strategic alliance
  partner
• Anonymous to branded
• Deal-driven to relationship-driven

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Global Real Estate and Capital Markets Macro
Trends (Continued)

• Focus on day-to-day operations to focus on users
  and even the customers of users
• Representatives of client to clients advisors
• Entrepreneurs to team leaders and coaches
• Next step?
• From physical, bricks and mortar operating
  environments to virtual real estate companies

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Securitization

• Process of creating synthetic, tradable
  securities whose performance seeks to mirror the
  performance of the underlying asset
• Securitization provide liquidity for both
  traditional and non-traditional assets

• Has transformed real estate equity and debt
  financing industry from exclusively private
  market to one where both public and private
  sectors flourish
• Trading of real estate securities may become
  disconnected from property market fundamentals,
  creating arbitrage opportunities

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Real Estate UniversePrincipal Real Estate
Markets
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Universe of Global REIT and REIT-Like Companies
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Universe of Global Real EstateOperating Companies
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U.S. Growth of Real Estate Investment Trusts
(1971 Present)
Number of REITs
REIT Equity Capitalization
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U.S. Public Market Penetrationby REITs by
Property Sector
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REIT Business Model is Growing Quickly in Asia
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Securitized Loansthe Fastest Growing Segment of
the Mortgage Market
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U.S. Mortgage Market Securitization 2003
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Growth in Global Issuance of Commercial
Mortgage-Backed Securities
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Investment Characteristics ofSecuritized Real
Estate

• Securitized real estate has become increasingly
  attractive in recent years to individual and
  institutional investors due to
• Liquidity traded in the public securities
  markets
• Security owning a Hard asset versus a
  financial asset
• Diversification enhances overall portfolio
  performance
• Yield provides competitive current as well as
  overall rates of return
• Low correlation with performance of other asset
  classes
• Less market fluctuations as compared to other
  asset classes
• Inflation Protection historical hedge against
  inflation

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Historical Compound Annual Equity Market
Performance(1, 3, 5, 10, 15, and 20-year basis)
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Real Estate Cycle-Tested at Last

• Real estate industry no longer follows the
  pattern of past real estate cycles
• Real estate markets are not overbuilt as
  development is now demand, not money, driven

• Conventional and securitized lenders are
  exercising both caution and discipline in the
  underwriting process
• Institutional and individual investors worldwide
  have begun to note the end of the BoomBust
  cycles normally associated with real estate
  investment

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Multifamily and Commercial Mortgage Delinquencies
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Commercial Mortgage-Backed Securities Virtuous
Circle
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Globalization

• Real estate capital markets now integral part of
  global capital markets
• No longer considered a Stepchild, treated
  differently and made to sit in the corner due
  to misbehavior

• Real estate owners, developers, and
  institutional investors are increasingly
  implementing global, cross-border, strategies
• 12 European nations now economically integrated,
  utilizing one common currency the uro
• Association of Southeast Asian Nations, Japan,
  Korea, and China plan a common currency union by
  2012

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Recent Trends in Globalization of the Real Estate
Business

• While globalization appears to run counter to the
  local sharpshooter business model, it offers
• A wider array of public, private, and structured
  equity and debt capital sources
• Access to capital at lower cost
• REIT model is being adopted worldwide
• U.K., France, Pan-Europe, Singapore, Korea, Hong
  Kong, Japan, Australia,
• Platform to acquire assets in new markets where
  ownership is fragmented and resources for new
  development are limited

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Three Phases of Globalization of Real Estate
Industry

• Phase I Lend Lease
• Phase II U.S. REITs
• ProLogis, AMB Property, and Simon Property Group
  acquired assets in Mexico
• ProLogis, Chelsea, AMB Property, Simon Property
  Group, and Mills expanded into the European
  markets
• ProLogis, Chelsea, and AMB further expanded into
  Japan and other parts of Asia
• Structures have included a variety of formats
  such as co-investments and joint ventures
• Phase III Westfield has merged three
  publicly-held affiliates into a single, 16
  billion (U.S.), internally advised/managed,
  vertically-integrated, global regional mall
  owner/operator

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Availability of Capital

• Individual and institutional investors are
  increasing the portion of their portfolios
  allocated to real estate
• Real estate investment provide current income
  for individuals as well as to fund distribution
  to pension beneficiaries

• Institutional Sources
• Public REITs
• Pension Funds
• Foundations/Endowment Funds
• Banks and Insurance
• Off-shore Financial Institutions

• Individual
• Private Equity
• High-Net-Worth Individuals
• Family Offices
• Private REITs/Mutual Funds
• Off-shore Individual Investors

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2004 Global Pension Fund Real Estate Investment
Allocations
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Resiliency

• Traumas and shocks are not new to the real
  estate industry and real estate capital markets
• New found resiliency reflects real estate
  industrys maturity into a cycle-tested,
  user-friendly asset class

1998 Russia defaults on its Sovereign debt on
August 18th 2001 September 11th 2004
Geo-political and economic uncertainty
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Real Estate Capital MarketsAugust 18, 1998
September 30, 2001

• Russias default on its Sovereign debt on August
  18, 1998 was to signal the end of the
  then-current real estate cycle
• The global capital markets remained dysfunctional
  through the balance of 1998
• Real estate indicators immediately began to
  react
• By the end of the third quarter of 1998
• Performance of the National Council of Real
  Estate Investment Fiduciaries Indices peaked
• Capitalization rates reached their cycle low
• Transaction activity started to decline from its
  cycle high
• Institutional investor attitudes abruptly started
  to shift

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Real Estate Investment PerformanceReal Estate
Capitalization Rates
Investment Performance
Capitalization Rates
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Transaction Activity
Number of Transactions
Value in Billions
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Real Estate Capital MarketsSept. 11 to October
5, 2001

• In general, the global capital markets remained
  open with no flight to quality or liquidity
  (except for Junk bond sector)
• During the period, 3 CMBS offerings priced at
  anticipated spreads over Treasury bonds while 8
  corporate IPOs were postponed due to market
  conditions
• Real estate lenders closed committed transactions
  as scheduled without re-pricing or renegotiation
• Both conventional and securitized lenders
  continued to accept applications and provide
  soft quotes, subject to due diligence
• Property sales subject to binding contracts
  closed as scheduled without re-pricing or
  renegotiation
• Real estate equity securities traded better than
  all corporate indices except the S P 500 real
  estate debt traded better than corporate and bank
  debt

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2004/2005a Reprise of the late 1980s and Early
1990s?

• Much discussed disconnect between capitalization
  rates and fundamentals appears to be disappearing
• Real estate capital markets have acted as a
  governor, allocating capital flows rationally
• Increased disclosure and transparency has led to
  better decision making at all levels
• Overall, industry-wide leverage is below
  historical norms
• Fewer proprietary risk takers remain active in
  the equity and debt capital markets
• Real estate capital markets now capable of
  pricing a wide array of risks, thereby
  increasing liquidity and investment alternatives

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Bolts out of the Blue

• Disruption of the credit derivative products,
  leveraged commodity investment, and Carry Trade
  markets leading to a 1998-type financial crises
• High levels of consumer debt
• Oil price increases continuing to shock world
  economy
• Foreign investors discontinue purchasing of U.S.
  Treasury securities
• Continued short-term and/or long-term budget
  deficits
• Continued fluctuation in the relative value of
  world currencies
• Renewed inflation

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Governance and Globalization of Regulation

• Corporate governance scandals in U.S. and Europe
• New environment where individual and
  institutional investors are requiring improved
• Risk management
• Internal controls
• Transparency
• Financial reporting
• Unprecedented change in accounting standards
• Harmonization and integration on a global basis
• Governance by an international accounting
  standards board
• Basel II capital adequacy standards for
  lending, including real estate acquisition,
  construction, and development

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Jones Lang LaSalle Global Real Estate
Transparency Index 2004

• JLL Transparency Index was designed to help
  cross-border investors to better understand local
  market dynamics
• First introduced in 1999 presently cover 50
  countries
• Focuses on issues of greatest concern to global
  investors
• Availability of accurate financial and market
  information
• Regulatory and legal environment
• Security of legal title and enforceability of
  property rights
• Financial disclosure and governance of listed
  real estate companies
• Zoning and building codes
• Since introduction, 22 countries have maintained
  their rankings, 25 countries have improved by at
  least one tier, and none have declined

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Factors Defining Low Transparency

• Absence of financial benchmarks
• Lack of historical or current market statistics
  on supply, demand, or rent
• Financial statements of listed vehicles which are
  neither detailed nor standardized according to
  international standards
• Real estate tax procedures and building and
  zoning codes that are not published or
  selectively enforced
• Situations were local assistance or
  under-the-table payments are required to navigate
  the investment, development, and management
  process
• Environment in which government or public
  utilities acquire private property on short
  notice without fair compensation

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Factors Defining High Transparency

• Markets are completely open and organized
• Markets operate in a legal and regulatory
  environment characterized by a consistent
  approach to enforcement of published rules and
  regulations
• Respect for private property rights

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Where Does Brazil Fit?

• Australia
• New Zealand
• United States
• United Kingdom
• Canada
• ? Columbia
• 31. ? Mexico
• 37. ? Chile
• 40. ? Argentina
• 43. ? Brazil

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Jones Lang LaSalle Global Real Estate
Transparency Index 2004

• Australia
• New Zealand
• United States
• United Kingdom
• Canada
• Mexico
• Chile
• 37. Brazil
• 40. Argentina
• 43. Columbia