GLOBAL REAL ESTATE SECURITIES

MARKET COMMENTARY
Q3 2016
EXECUTIVE SUMMARY
GLOBAL REAL ESTATE STOCKS ARE UP 10% THROUGH SEPTEMBER
Real estate shares moved higher during Q3 to finish up over 10% yearto-date through September. Property companies have outperformed
broad equities and bonds year-to-date with performance underpinned
by attractive dividend yields and stable earnings growth.
REAL ESTATE EARNINGS AND VALUES CONTINUE TO GROW
We expect third quarter earnings to come in largely as expected as a
bottom-up view of the world through the lens of property company
earnings indicates that the real estate business is relatively healthy.
Real estate fundamentals are strong as a result of stable to improving
occupancies, higher rents, and active transaction markets.
GLOBAL PROPERTY STOCKS OFFER PROSPECTS FOR POSITIVE
TOTAL RETURN OVER THE NEXT 12 MONTHS
We have a positive outlook for global real estate. We expect global
property companies to continue to attract investors seeking dividend
yield supported by stable earnings growth in a low growth world. With
dividend yield in ~4% range globally, and earnings growth in the 6%
range this year and next, listed real estate companies are well positioned
in a low interest rate, moderate growth economic environment.
Subdued development starts, a low inflation environment, and a wide
spread between initial yields on real estate and high quality bonds
should support investor demand for real estate.
U.S. REITS BECAME THE 11TH GICS (GLOBAL INDUSTRY
CLASSIFICATION STANDARD) SECTOR ON SEPTEMBER 1ST
Equity REITs reached an important milestone on September 1st when
they moved from the Financials Sector of the GICS classification
standard into a new 11th sector called Real Estate. GICS is the leading
global listed equity classification system, maintained by S&P Dow Jones
Indices and MSCI, Inc. and, as such, is a significant acknowledgement
by leading index providers that real estate investment trusts deserve a
distinct representation among the now eleven major equity groups. By
becoming a standalone sector, U.S. REITs will demand a more visible
asset allocation decision by institutional investors who will have to be
more specifically dedicate resources to cover the sector. We believe
that this will be positive for REIT demand over time.

cbreclarion.com

Exhibit 1:
Global Real Estate Securities
Performance as of September 30, 2016
Q3 2016

1.3%

1 Year

14.9%

3 Year

7.7%

5 Year

12.3%

7 Year

10.0%

10 Year

3.4%

Source: FTSE EPRA/NAREIT Developed Index in USD - Net of Withholding

Tax as of 09/30/2016. An index is unmanaged and not available for direct
investment. Past performance is no guarantee of future results.

MARKET PERFORMANCE REVIEW

GLOBAL REAL ESTATE STOCKS UP 10% THROUGH SEPTEMBER
Real estate shares were modestly positive for the Q3 and have generated over a 10% total return for the first nine months of 2016.
Listed real estate stocks globally have moved steadily higher as the result of investment characteristics including attractive current
yield via the dividend underpinned by stable earnings growth, conservative balance sheets and improving property fundamentals.
Property companies in the Asia Pacific and European regions outperformed in Q316, led by strong returns in Hong Kong as well
as Continental Europe. Year-to-date, North American companies along with those in the Asia-Pacific region have outperformed.
European total return has been bogged down by negative returns in the U.K., which have sagged as the result of the late June
Brexit vote which put into motion a long process clouded by political uncertainty. A weak British Pound has exacerbated the
weakness for unhedged investors based outside the U.K. Real estate stocks have out-performed broad equities and bonds
year-to-date through September 30th. Property companies have performed well against a backdrop of accommodative central
bank monetary policy which has kept interest rates and the yield curve low relative to history, as economic growth has remained
sluggish and as the lower for longer interest rate environment becomes an increasing reality. This is despite a well-telegraphed
intention by the U.S. Federal Reserve Bank to raise policy rates most likely in its December meeting, which will prospectively put
some upward pressure on interest rates which otherwise remain historically low. The yield on 10-year Treasury finished at 1.60%
at the end of the third quarter versus 1.47% at the end of Q216 and 2.27% at year-end 2015.
Exhibit 2: Global Real Estate Total Returns as of September 30, 2016
30%
25%

22.9%
20.0%

20%

19.3%

16.6%

15.8%
13.5%

15%

10.5%

10.2%

8.4%

10%
6.1%
4.1%

5%

1.9%

1.3%

0.6%
0%
-0.1%

-1.1%

-5%

-4.6%

-10%
-15%
-20%
-20.1%
-25%
Hong Kong

Cont. Europe

Singapore

United Kingdom

Australia

Q3 2016

Japan

United States

Canada

World

YTD

Source: FTSE EPRA/NAREIT Developed Index - Net of withholding taxes in USD as of 09/30/2016. Please refer to the last page for index performance in other major currencies. An index is
unmanaged and not available for direct investment. Past performance is no guarantee of future results.

U.S. REITS BECAME THE 11TH GICS SECTOR ON SEPTEMBER 1ST

Equity REITs reached an important milestone on September 1st when they moved from the Financials Sector of the GICS classification
standard into a new 11th sector called Real Estate. This is the first new GICS sector created since it was defined in 1999. GICS
is the leading global listed equity classification system, maintained by S&P Dow Jones Indices and MSCI, Inc. and, as such, is a
significant acknowledgement by leading index providers that real estate investment trusts deserve a distinct representation among
the now eleven major equity groups. Real Estate is the eighth largest GICS sector, with a 4% weight of in the S&P Total Market
Index. REITs have grown significantly by market capitalization over the past 20 years and now represent approximately 13% of all
institutional quality real estate in the U.S. With this, REITs have become an actionable way for investors to access a significant
asset class in a liquid format. REITs bring balance sheet discipline, quality management, transparent financial results and
clear communication to a real estate sector which has historically been dominated by private investors and lacked many of these
attributes.
By becoming a standalone sector, U.S. REITs will demand a more visible asset allocation decision by institutional investors who will
have to be more specifically dedicate resources to cover the sector. We believe that this will be positive for REIT demand over time.
Global Real Estate Market Commentary | Page 2

MARKET OUTLOOK
GLOBAL PROPERTY STOCKS CONTINUE TO OFFER PROSPECTS FOR POSITIVE TOTAL RETURN
Real estate companies offer many investment attributes currently desired by investors, including attractive cash flow and dividend
yields, stable underlying earnings growth, conservative and well-managed balance sheets, and a strong bid by private capital
seeking for hard assets. We believe that global property companies will generate positive total return of 5-10% over the coming
twelve months. Positive yet sluggish economic growth combined with historically low long-term interest rates bodes well for real
estate and real estate securities versus other asset classes. The slower pace of economic activity, subdued development starts, a
low inflation/low interest rate environment, and a wide spread between initial yields on real estate and high quality bonds should
support investor demand for real estate. Central bank policy will remain accommodative, including the U.S. Federal Reserve Bank
which we expect to raise policy rates only after seeing a very consistent stream of positive economic data. We expect continued
monetary stimulus to help mitigate any economic slowdown. Listed property company earnings will generally be unaffected in this
environment, with stable to improving occupancies, higher rents, and active transaction markets.
The Brexit referendum vote has caused global economic forecasts to be revised modestly down from already sluggish levels as
the Brexit impact is largely a UK, and to a lesser extent Continental European, phenomenon. Economic projections elsewhere
have been negatively impacted, particularly in Continental Europe. Economic impact beyond Europe however is expected to be
minimal. While risks have become more elevated in the aftermath of the Brexit vote, we continue to believe any meaningful
volatility creates a potential opportunity to buy high quality real estate companies with visible earnings at discounted prices.
Exhibit 3: GDP Growth Forecast
8
2015
2016F
2017F
6

2018F
LT Average

-2

-4
Eurozone

China

Australia

World

UK

USA

Canada

Japan

Hong Kong

Singapore

Brazil

Source: Oxford Economic Forecasting as of 10/24/2016

Note: Countries ranked, left to right, by the difference between the forecast for 2016 and the long term average rate. Long Term Average (LT Average) is the geometric average of
GDP growth rates for 1998-2015, with the exception of China, where CBRE Global Investors estimates the LTA. Historic data 1998-2014, and forecasts for 2016F-2018F come from
Oxford Economic Forecasting. F refers to forecasts. Information is the opinion of CBRE Clarion as of the date of this presentation, which is subject to change and is not intended
to be a forecast of future events, guarantee of future results, or investment advice. Forecasts and any factors discussed are not a guarantee of future results.

Global Real Estate Market Commentary | Page 3

DIVIDEND GROWTH REMAINS STRONG

Current income generated by listed propertys dividend yield remains a defining investment characteristic of the sector. Listed
property companies dividend yield currently averages ~4% globally and is growing at a very healthy clip. We project average
dividend growth to be slightly ahead of earnings in 2016 and 2017, driven by a combination of improving company cash flows
as well as an expansion of dividend payout policies which remain conservative. Increasing dividends are emblematic of healthy
companies in improving markets.
Exhibit 4: Forecasted Dividend Growth

Weighted Average Dividend Growth

10%

9.6% 9.6%
8.5%
8.0%
7.3%

7.1%

6.2%
5.6%
5%

0%

Americas

Asia-Pacific
2016 Forecast

Europe

World

2017 Forecast

Source: CBRE Clarion as of 09/30/2016, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts
and any factors discussed are not indicative of future investment performance.

Exhibit 5: Current Dividend Yield

6%

4%

Global Dividend Yield: 3.7%

2%

0%

-2%
Dividend Yield
Current Spread
Historical Spread

Canada

Australia

Singapore

Cont. Europe

United Kingdom

United States

Hong Kong

Japan

5.5%
4.5%
3.3%

4.6%
2.7%
1.1%

4.5%
2.7%
0.1%

4.1%
3.9%
-0.1%

3.7%
3.1%
-1.6%

3.6%
2.0%
1.1%

3.5%
2.6%
-1.6%

2.5%
2.5%
-0.8%

Source: CBRE Clarion, FactSet and Bloomberg as of 09/30/2016. Not all countries included. Historical spread is from 1990 for all countries except: Canada is from June 1994 and
Singapore is from June 1998. Past performance is no guarantee of future results. Yields fluctuate and are not guaranteed. This information is subject to change and should not be
construed as investment advice.

Global Real Estate Market Commentary | Page 4

EARNINGS GROWTH IS STEADY IN THE 6-7% RANGE

A bottom-up view of the world through the lens of property company earnings indicates that the real estate business is healthy,
with generally improving fundamentals and solid earnings growth. Earnings growth of real estate companies has largely come
in as expected in 2016 to-date and in many instances revised up during the year. For example, among U.S. REITs during Q2
earnings, approximately 60% beat consensus earnings expectations, 23% met and 17% missed. Net operating income has been
revised up during the year in the U.S. industrial, office and data center sectors but have been more challenged in the decelerating
apartment sector and lodging sectors. Fundamentals have remained weak in a number of the Asian markets including Hong
Kong retail and Singapore office, both of which are suffering from the headwinds of a decelerating China and less demand from
luxury spending, although recent data suggests some level of stabilization in Hong Kong. Earnings among European property
companies benefit from long lease-term in the case of the U.K. and gradual improvement on the Continent but are otherwise
decelerating at this point in the real estate cycle. Office vacancy in London currently is very tight in the 3% range despite anxiety
surrounding the longer-term implications on rental growth from Brexit.
Exhibit 6: Regional Earnings Growth Forecast
15%

10%

5%

0%

-5%

Hong Kong/
China

Continental
Europe

United
Kingdom

United
States

Singapore

Japan

Australia

Canada

Global
Average

2015e

-1.8

8.1

13.8

8.1

2.9

6.5

6.0

4.2

6.6

2016f

10.3

8.6

6.2

5.9

5.7

5.4

1.9

0.5

6.4

2017f

8.0

4.9

4.5

6.4

2.9

5.6

4.6

1.3

6.1

Source: CBRE Clarion as of 09/30/2016. Information is the opinion of CBRE Clarion , which is subject to change and is not intended to be a forecast of future events, a guarantee of
future results, or investment advice. e refers to estimates. f refers to forecasts. Forecasts and the factors noted are not indicative of future investment performance.

CAP RATES SHOULD REMAIN STEADY IN 2016

The spread between cap rates and 10-year sovereign bond yields remains at historically wide levels, and suggests that there
is plenty of cushion should bond yields ultimately increase, which near-term appears unlikely. Looking out over the next
six to twelve months, we expect long-term rates to remain low given continued sluggish economic growth globally, generally
accommodative central bank policy, a decelerating China, implications of Brexit and current negative rates in Europe and Japan.
The yield curve is expected to remain flatter than in many previous economic recoveries, meaning yields on longer-dated debt
should remain relatively stable. Given the significant current spread between cap rates and government bond yields, we do not
forecast a material increase in cap rates this year.

Global Real Estate Market Commentary | Page 5

LISTED REAL ESTATE REMAINS ATTRACTIVELY VALUED VERSUS PRIVATE MARKET REAL ESTATE, PARTICULARLY IN U.S.
CORE PROPERTY TYPES
Listed property companies at September 30th traded at an estimated 5% discount versus the private market estimated net asset
value (NAV). The implied global weighted average cap rate of 5.6% compares favorably to fixed income alternatives and a cost
of capital which remains historically low. In the U.S., the modest premium is driven by pricier net lease, health care and date
center property types while the core real estate sectors of apartments, retail, office, industrial, and lodging remain at a discount
to our estimate of private market value. The U.K. majors, with significant portfolios concentrated in London, continue to trade at
discounts exceeding 15% post Brexit. Implied cap rates for many of the U.K. majors are in the 5% range. Many Asian developers
trade at over a 35% discount to NAV, materially below their long-term averages with implied cap rates in many cases exceeding
6%. A key observation and insight globally is that cap rates have remained low given negative policy rates, low bond yields, low
levels of inflation and wide spreads between cap rates and the cost of capital. A significant amount of dry powder from investors
in the private markets, including private equity, pension funds and sovereign wealth, too, is underpinning cap rates. Over $200
billion of estimated dry powder remains available in the U.S. alone for prospective investment in commercial property, before
taking into account any leverage.
Exhibit 7: NAV Premium/Discount by Region
10%

10 Year Average
Current NAV Premium / Discount

6%
4%

5%

5%

2%
-1%

-5%

-5%

-4%
-5%

-10%

-10%
-10%

-10%
-15%

-15%
-20%

-20%

-20%

10 Year Average NAV P/D

0%

0%

Current NAV P/D

10%

-25%

-25%
-26%

-30%

-30%
Continental
Europe

Canada

United
States
All Sectors

Australia

United States
"Core"
Sectors

Global
Average

Singapore

United
Kingdom

Japan

Hong Kong/
China

Information is the opinion of CBRE Clarion as of 09/30/2016, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment
advice. Forecasts and any factors discussed are not indicative of future investment performance.

Global Real Estate Market Commentary | Page 6

REAL ESTATE COMPANIES CAN PERFORM WELL IN THE FACE OF RISING INTEREST RATES
While a short-term move higher in interest rates typically can cause short-term dislocation among yield-sensitive asset classes,
including the listed property company sector, history suggests that property company shares ultimately benefit from the underlying
forces that cause rates to move higher, namely positive economic growth. When examined more closely globally, evidence is
such that property shares generally perform well in a capital markets environment with higher bond yields. The following chart
shows the 12-month performance in U.S. property shares during periods in which U.S. interest rates rise and fall. While the
positive returns during periods of rising interest rates may buck conventional wisdom for some, the favorable performance is not
surprising given that improving economic conditions also tend to lead to improvement of the revenue line for owners/operators
of commercial property and that this over time typically more than offsets any increase in debt expenses.
Exhibit 9: REIT Performance in a Rising Interest Rate Environment

Average 12-month Performance of Real Estate Securities versus other Asset Classes, December 31, 1994 September 30, 2016
U.S. 10-Year Rates Falling

U.S. 10-Year Rates Rising

<-50 bps

-50 to 0 bps

0 to +50 bps

>50 bps

U.S. Core Bonds

8.7%

Real Estate
13.2%

Real Estate
25.2%

Global Equity
22.6%

U.S. Corporate Bonds

8.7%

U.S. Equity
10.1%

Global Equity
17.7%

U.S. Equity
22.1%

U.S. High Yield Bonds

4.4%

Global Equity
8.2%

U.S. Equity
16.7%

Real Estate
21.0%

U.S. Equity
2.6%

U.S. High Yield Bonds

7.2%

U.S. High Yield Bonds

12.4%

U.S. High Yield Bonds

11.9%

Real Estate
-0.2%

U.S. Corporate Bonds

6.2%

U.S. Corporate Bonds

5.6%

U.S. Corporate Bonds

3.0%

Global Equity
-1.8%

U.S. Core Bonds

5.3%

U.S. Core Bonds

4.2%

U.S. Core Bonds

1.6%

Note: Performance shown represents the average 12-month total return for each asset class shown when bond yields moved by the amount indicated at the top of each column.
Source: CBRE Clarion as of 09/30/2016 in USD. Real Estate, Global Equity, U.S. Core Bonds, U.S. Equity, U.S. High Yield Bonds, U.S. Corporate Bonds represented by FTSE EPRA/
NAREIT Developed Index, MSCI World Index, Barclays U.S. Aggregate Bond Index, S&P 500 Index, Barclays U.S. Corporate High-Yield Index, Barclays U.S. Corporate Investment Grade
Bond Index, respectively. Information is the opinion of CBRE Clarion, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or
investment advice. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Global Real Estate Market Commentary | Page 7

REGIONAL MARKET OUTLOOK

In the Asia-Pacific region, we like Australia and Japan. Australian investments are benefiting from an attractive combination
of yield and growth, plus mergers and acquisitions activity which has recently increased given wide access to attractively priced
capital by quality institutional investors, including listed real estate companies. In Japan, we prefer companies with exposure to
the Tokyo office market, which continues to experience improved rental growth as vacancies approach the 4% threshold at which
landlords enjoy increasing pricing power. We also like Japanese retail in urban locations which is benefiting from strong inbound
tourism and consumer spending as well as J-REITs with access to robust acquisition pipelines from their sponsors. We remain
cautious in Hong Kong and Singapore as the result of the indirect impact of weaker demand from mainland China, which is
weighing on demand across all property types, although valuations are increasingly pricing this in.
Property companies in the U.K. have rebounded but risk remains elevated. We believe property companies on the Continent
will hold up better, depending on geography and property type. U.K. property companies have largely rebounded to pre-Brexit
levels, but sterling remains down over 10% during this time period versus the USD, reflecting increased levels of risk. Given
continued uncertainty surrounding the future economic and political relationship between the U.K. and EU, and issues surrounding
where we are in the economic and real estate cycles, we believe an underweight position is appropriate in the U.K. We expect an
average basket of U.K. commercial property in the private market to materially soften in gross asset value in the medium term
(through 2018). U.K. retail values will fall less than London offices though and be viewed as a more stable asset class, particularly
Class A regional malls. As such, we favor the more economically stable sectors of grocery-anchored retail, dominant regional
malls and self-storage versus the more cyclical London office sector.
We believe the Continental European listed property stocks will be less volatile than those in the U.K., but could come under
pressure as the process of the U.K.s withdrawal continues. We consider our positions in the German residential and dominant
European mall companies to be more defensive and therefore more desirable in this uncertain environment. Our positioning in
the Paris office market would benefit from any future relocation of companies from the U.K., as well as from gradually improving
office fundamentals, but both will take time. We remain selective on the office markets in Paris and on the Continent.
We believe the U.S. will outperform as investors seek favorable risk-adjusted total return. In the U.S., we prefer attractively
valued stocks that offer visible earnings growth, conservative balance sheets and modest development pipelines. Specifically,
we favor the class A mall companies, data centers, industrial, shopping center and CBD office companies; we are more selective
in the self-storage, suburban office, apartment and healthcare sectors. Apartments have underperformed in the face of supply
concerns in coastal markets and decelerating top-line growth but are reaching more attractive valuations with still robust absolute
growth. We remain selective on the more bond-like sectors that offer modest growth and trade at large premiums to our estimate
of underlying private market real estate value.

IMPORTANT DISCLOSURES AND RISK INFORMATION

The views expressed represent the opinion of CBRE Clarion Securities which are subject to change and are not intended as a forecast or guarantee of future results. This material is for
informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and
non-proprietary sources which have not been independently verified for accuracy or completeness. While CBRE Clarion Securities believes the information to be accurate and reliable,
we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimate, projections, and other forward-looking statements are
based on available information and managements view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions
which may involve known and unknown risks and uncertainties. The securities discussed herein should not be perceived as a recommendation to purchase or sell any particular security.
It should not be assumed that investments in any of the securities discussed were or will be profitable. Actual results, performance or events may differ materially from those expressed or
implied in such statements. Investing in real estate securities involves risks including the potential loss of principal. Real estate equities are subject to risks similar to those associated with
the direct ownership of real estate. Portfolios concentrated in real estate securities may experience price volatility and other risks associated with non-diversification. While equities may
offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable
fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is no guarantee
of future results.
The FTSE EPRA/ NAREIT Developed Index is an unmanaged market-weighted index consisting of real estate companies from developed markets, where greater than 75% of their EBITDA
(earnings before interest, taxes, depreciation, and amortization) is derived from relevant real estate activities. Investors cannot invest directly in an index.
PA10272016

Global Real Estate Market Commentary | Page 8

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