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Credit Suisse_Global Property Research_May 2013

Credit Suisse_Global Property Research_May 2013

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Published by Alex Walker
Credit Suisse Global Property Research May 2013
Credit Suisse Global Property Research May 2013

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Published by: Alex Walker on May 13, 2013
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Zurich, 8 May 2013
Investment horizon: 6
12+ months
Global Real Estate Research
Martin Bernhard, CFA, Tel. +41 44 334 83 22martin.bernhard@credit-suisse.com
Equity Research
Dominik Garcia, Tel. +41 44 334 56 33dominik.garcia@credit-suisse.com
Important disclosures are found in the Disclosure appendix 
Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision. For a discussion of the risks of investing in the securities men-tioned in this report, please refer to the following Internet link:
US real estate: Good start into 2013
"US real estate" is one of Global Research's Top InvestmentIdeas for 2013 (idea No. 5), which were launched in Novem-ber 2012. Since then, the performance of most direct andindirect US real estate investments has been good (see Figure1 for real estate stocks). While the valuations of many listedUS real estate investments are no longer cheap, we continueto see value strategically due to a rather promising fundamen-tal outlook. We expect the US housing market recovery tobroaden in the coming quarters, given record-high homebuyer affordability, and attractive rental yields coupled with stable toslightly positive rental growth prospects and improved lendingavailability (see special topic on page 4) form the basis of our continued constructive view on commercial real estate. We aretherefore keeping the "US real estate" investment idea active.
Housing market: Recovery likely to broaden
Most US residential market indicators improved further goinginto 2013. In February, the Case-Shiller index for single-familyhouse prices in 20 large cities recorded its strongest monthlyincrease since March 2005. House prices rose by 1.2% MoMand by 9.3% YoY. House prices are up in all cities surveyedon a yearly comparison, with harder-hit cities in the South-West generally having outperformed. Home sales and home-building activity continued to pick up as well. One-family exist-ing home sales increased by about 10.3% YoY to 4.95 millionunits (seasonally-adjusted, annualized) in March, and housingstarts (1.04 units, +47% YoY) surpassed the one million markfor the first time since June 2008 (see Figure 2). Homebuild-ing continues to be too low when assuming normal replace-ment rates and demographic trends. Further gains are there-fore likely.Housing demand is returning due to very affordable houseprices and record-low mortgage rates. Nationwide house pric-es are down by about 30% from their peak in the summer of2006. Thanks to the correction, US homes are now fairly val-ued again when compared with median family incomes, andare cheaply valued when additionally considering current rec-ord-low mortgage rates. The 30-year mortgage fixed rate has
Research Monthly
Global Real EstateWe remain positive on US real estate, Top Investment Ideafor 2013, No. 5
Private Banking
Global outlook:
We remain constructive onglobal commercial real estate, given attrac-tive rental yields vs. bonds, and bottomingrental growth in many markets.
Top Investment Idea for 2013 No. 5,"US real estate":
Fundamental case re-mains promising; upside potential for listedinvestments slightly more limited after a verygood start to the year.
Real estate equities:
We continue to seeupside potential for REITs given appealingdividends, and favor the USA and Asia. 
Figure 1
Good performance of listed US real estate in recent weeks
Datastream, Credit Suisse
Index (26. Sep = 100)
 Zurich, 8 May 2013Research Monthly
2declined from close to 6.5% in 2008 to about 3.5%. Elevatedunemployment remains a drag. However, labor market condi-tions are slowly improving, and our economists expect growthin the US to re-accelerate later in the year. Overall, we there-fore believe that the housing market recovery will continue inH2 2013. And if there is a temporary weakening, the medium-term downside potential is very much limited at current levels,in our view.
Commercial property: Attractive yields, rents bottom out
Investment demand for US direct commercial property wasrobust in Q1 2013. The first quarter's transaction volume in-creased by 35% YoY to about USD 72.8 bn, according toRCA, a research company. This represents the second highestquarterly volume since the financial crisis. The NCREIF indicesfor direct market performance have remained solidly positive,and rental yields have been fairly stable at attractive levels inthe first few months of the year. US office properties returnedabout 1.9%, apartments around 2.6%, industrial propertiesapproximately 2.5% and retail properties close to 3.7% in Q12013. At 6%, the average rental yield on prime offices or apartments is still around 400 basis points higher than theyield on 10-year US government bonds. Spreads are evenhigher for suburban office, industrial and retail properties (seeFigure 3). Prime office yields differ regionally between 4.5%(New York, San Francisco) and 6.7% (Atlanta, Miami). Theinterest rate environment will likely remain accommodative for the time being. Our economists expect the Federal Reserve toleave interest rates at near zero over at least a 12-month hori-zon. US commercial real estate should therefore continue toattract investors looking for yield, and we could see modestyield compression in the next few months, also in the primesegment.In addition, rental incomes bottomed out in all sectors (seeFigure 7), and vacancies peaked. According to research com-pany R.E.I.S., average rents gained 3% YoY in the US apart-ment sector, 2% YoY in the office sector and a modest 0.7%YoY in the retail real estate sector in Q1 2013. Going forward, we expect the rental performance ranking to reverse, withretail properties slightly outperforming, and the apartment sec-tor slightly underperforming. Retail rental markets should startbenefiting from the healthier balance sheets of domestic con-sumers. US households have de-leveraged quite a lot in recentyears (partly through defaulting on mortgages), and are now inthe position to expand spending levels more strongly again ifeconomic conditions improve. The upside for rents in theapartment sector, on the other hand, will likely be limited bythe recovery in homebuyer demand. Buying a home is a sub-stitute for renting a home.
Listed real estate: Still upside despite richer valuations
In terms of listed real estate side, we recommended real es-tate investment trusts (REITs) to gain exposure to the com-mercial real estate sector, and homebuilder stocks to benefitfrom the housing market recovery. In absolute terms, USREITs and homebuilders have performed very strongly sinceinception of the investment idea on 27 November, partly bene-fiting from the overall equity market rally. As of 7 May 2013,US REITs had increased by about 20.7%, which is slightlymore than the MSCI World Index (see Figure 1). US home-builder stocks increased by about 24.1% over that period,outperforming the MSCI World by 5.7%. However, home-builder stocks have also been far more volatile than REITs andthe overall stock market, indicating higher risk. Given currentvaluations and the risk profile, we currently slightly prefer USREITs to homebuilder stocks. But, strategically, homebuildersalso have upside potential, in our view. US REITs offer appeal-ing dividend yields of around 3.8% on average, and dividendsshould be sustainable, given that rental markets are at cyclicallows and there is potential for further financing cost reduc-tions.
Martin Bernhard,martin.bernhard@credit-suisse.com,+41 44 334 83 22
Figure 2
Figure 3
Gradual homebuilding recovery likely to continue US commercial real estate yields offer attractive spread
Datastream, Credit Suisse
RCA, Bloomberg, Credit Suisse
US housing startsNew housing building permits
'000 units (SAAR)
135791101030507091113Office - CBDOffice - SuburbanRetailApartmentsIndustrial US 10-year government bonds Average rental yield, %
 Zurich, 8 May 2013Research Monthly
Real estate equities
We see further upside potential for REITsstrategically despite richer valuations, as themonetary environment should remain sup-portive.
Strategy: Selectivity is required at the re-gional and company levels. We prefer Asian& US REITs.
Real estate investments have recorded an attractive perfor-mance so far in 2013. Global property stocks have added17% since the start of the year and have outperformed theMSCI World Index by about three percentage points. Thebest-performing markets year-to-date are Japan (+56%), Australia (+14%) and the USA (+14%).
US REITs: Simon Property our preferred stock 
We continue to see value in real estate investment trusts(REITs) strategically despite the fact that they are no longer cheaply valued after the rally in recent quarters. The monetaryenvironment should remain supportive for the time being.Moreover, rental income growth could start increasing moder-ately in many regions in the coming months given improvingeconomic conditions and low supply side risks. Regionally, wecontinue to prefer the USA and Asia due to more favorablegrowth prospects and better financing conditions.Simon Property Group (BUY) is currently our preferred USREIT within our research coverage universe. Simon Property isone of the largest US retail real estate companies, with a soliddevelopment pipeline and access to low-cost funding. Avalon-Bay Communities (HOLD) and Alexandria Real Estate Equities(HOLD) are potential long-term quality names in the USapartment and life science real estate sectors, respectively.However, the near-term upside potential for both stocks isprobably limited as they appear fully-priced, in our view. Apartfrom single stocks, investors can gain exposure to the USREIT sector through mutual funds and ETFs.
Dominik Garcia, dominik.garcia@credit-suisse.com, +41 44 334 25 38
Real Estate Equities*
Last 30 days Last yearMoM/YoYLast 180daysCurrentHigh/LowDYSpread***Premiumto NAV ****12M fwdP/E1-6M6-12M+
Physical Real Estate Funds
Last 30 days Last yearMoM/YoYLast 180daysCurrentHigh/LowDYSpread***Premiumto NAV ****12M fwdP/E1-6M6-12M+
** SXI Real Estate fund index*** Spread between dividend yield and 10-year government bond in basis points. For Asia ex-Japan, EM, World US-Treasuries; Rest: local government bonds***** Absolute view for World and Swiss real estate funds, Relative views for regional real estate equity marketsData as of market close of 7/5/2013, with band representing +/- standard deviation from period average
2.4%19%1.1% Japan Australia2.4%8.9%
DataStream, Bloomberg, Immobilienbrief, Credit Suisse/IDC* MSCI Real Estate indices
583.0%-22%Emerging Markets18.6%
 Valuation Indicators
 Absolute Performance
Swiss real estate funds**
Market Absolute Performance
UK Europe (ex. UK) Asia ex-Japan
3M historical volatility3M historical volatility
 Valuation Indicators
**** Premiums for Swiss real estate equity and funds as of 31/3/2013; other premiums as of 1/5/2013

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