CBRE CLARION SECURITIES LISTED REAL ESTATE: AN EFFECTIVE PROXY FOR PRIVATE REAL ESTATE

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1 CBRE CLARION SECURITIES LISTED REAL ESTATE: AN EFFECTIVE PROXY FOR PRIVATE REAL ESTATE This paper examines the relationship between listed and private real estate and considers how an allocation to listed real estate stocks can benefit an investor s real estate allocation. We demonstrate that listed real estate: Delivers Returns Competitive with Private Real Estate Over the Long Term Listed real estate generates private real estate-like returns over the long-term. Generates a Strong Return Correlation with Private Real Estate After Adjusting for Pricing Lags Returns of the listed real estate market lagged two to four quarters have a high correlation to private real estate returns. Achieves Allocation Targets Efficiently Investment in listed real estate achieves exposure to difficult-to-access geographic markets and property sectors in the private market. Facilitates Positive Investment Arbitrage Listed real estate enables an investor to potentially benefit from attractive pricing versus the private market. Listed real estate s liquidity, diversification characteristics, favorable corporate governance, and transparency have also been positive attributes supporting the inclusion of public real estate in an overall real estate allocation. LISTED REAL ESTATE DELIVERS RETURNS COMPETITIVE WITH PRIVATE REAL ESTATE OVER THE LONG TERM Listed property returns are competitive with returns on private real estate over time. Public real estate has posted a total return of 7.65% on average per annum over the past two decades, which is above the 7.12% total return generated by private real estate. EXHIBIT 1: Performance of Global Listed Real Estate and Private Real Estate JUNE 2012 Listed Real Estate Delivers Returns Competitive with Private Real Estate Over the Long Term Page 1 Listed Real Estate Generates a Strong Return Correlation with Private Real Estate After Adjusting for Pricing Lags Page 2 Listed Real Estate Achieves Allocation Targets Efficiently Page 3 Listed Real Estate Can Facilitate Positive Investment Arbitrage Page 4 9% 9.38% 9.30% Listed Total Return Direct Total Return Conclusion Page 5 8% 7.65% 7% 7.12% Prepared By: 6% 10 Years 20 Years Sources: CBRE Clarion Securities, S&P Developed Property Index, IPD Global Returns for All Property Note: All returns calculated in USD for periods ending December Listed returns are impacted by leverage at the company levels. LISTED REAL ESTATE: AN EFFECTIVE PROXY FOR INVESTMENT IN PRIVATE REAL ESTATE

2 In the U.S., long-term returns of listed property companies are also competitive with returns of direct real estate, generally exceeding them on average for the 10-year and 20-year time periods as reflected in the following chart. Listed returns are comparable to those of opportunistic funds over these time periods, despite the higher risk profile of opportunistic funds. EXHIBIT 2: Performance of U.S. Equity REITs and Private Real Estate 12% Equity REITs Core Funds Value-Added Funds Opportunistic Funds 10.9% 11.1% 10.2% 10.6% 8% 6% 6.4% 5.2% 7.2% 6.9% 4% 10 Years 20 Years Sources: NCREIF & The Townsend Group (Time-Weighted Index Returns, All Fund Indices are calculated by geometrically linking quarterly time-weighted before advisory fee (gross) returns, weighted based on the fund s quarterly average weighted capital), NAREIT (FTSE NAREIT Equity REITs Index) for periods ending December LISTED REAL ESTATE GENERATES A STRONG RETURN CORRELATION WITH PRIVATE REAL ESTATE AFTER ADJUSTING FOR PRICING LAGS The following chart illustrates that listed real estate has a high correlation with private real estate, once the effects of timing are taken into account. The analysis demonstrates that by lagging listed real estate market returns to the private market s returns by two to four quarters, the correlation materially increases to a range of 0.6 to 0.9. To examine the relationship between private and public real estate returns, we compared returns in the private market to returns of listed property companies in countries that account for more than half of the market capitalization of the world s developed property markets Australia, Japan, the Euro-zone and the U.S. 1 We also compared private market returns to returns of a global listed property company benchmark to evaluate the relationship more broadly. Our analysis spans , which covers both up-market and down-market cycles. Exceptions to this time period are Japan, whose private market benchmark data goes back to 2003, and the global private market benchmark, whose data goes back to EXHIBIT 3: Rolling Annual Correlation of Listed and Private Real Estate Returns, Australia Eurozone United States Global Japan Same Time Period Correlation Listed Leads Private by 2Qtrs Listed Leads Private by 4 Qtrs Sources: IPD, NCREIF, S&P, CBRE Clarion Securities Note: Data for Japan from Shorter period vs. other markets due to more limited data availability for private market benchmarks. 1 As per 12/31/2011 weights in the FTSE EPRA/NAREIT Developed Index. LISTED REAL ESTATE: A PROXY FOR AN INVESTMENT IN DIRECT REAL ESTATE

3 The correlation between the public and private real estate markets based on same time period returns indicates a modest correlation for the period analyzed. Once lagged, first by two quarters then by four quarters, the correlation numbers increase significantly to levels which suggest a strong relationship between listed and private real estate returns. The reason this makes sense is the real-time discounting typical of the listed markets versus a lagged and smoothed appraisal process which characterizes most private market valuations. Once this lag is accounted for, returns for listed and direct property are directionally more similar. Public markets provide a glimpse into the potential future direction of values for the private real estate market. Two key factors explain the lead between public real estate and the direct market. The more critical factor is liquidity, which allows for instantaneous pricing of information in the public market. Since public real estate securities are traded on national exchanges, they are liquid and reflect investor expectations rapidly. Private market transactions, on the other hand, are relatively illiquid with higher transaction costs, thus delaying price discovery. The second key factor for the lag between public and private real estate returns is the appraisal valuation mechanism used in calculating direct real estate values. The public market incorporates available information into real-time price changes, thus creating instantaneous price discovery. Private market pricing is generally appraisal-based, including transaction evidence that can be thin. The private market pricing mechanism is inherently less transparent than the public market pricing mechanism and is vulnerable to being based on recent transaction values using a small set of transaction data (if such data are available). As a result, price discovery does not occur until the actual sale of property which can create a disconnect between the appraised valuation and the actual transaction price. LISTED REAL ESTATE ACHIEVES ALLOCATION TARGETS EFFICIENTLY The global real estate securities investment universe comprises approximately 800 listed property companies with a combined total equity market capitalization of greater than $1.4 trillion. The sector is diverse in terms of geography and property sector as reflected in the following chart: EXHIBIT 4: Global Listed Real Estate Offers Diverse Geographic and Property Sector Exposure Geographic Allocation 32% United States 5% Canada 3% Other Americas 20% Hong Kong/China 8% Japan 5% Singapore 5% Australia 7% Other Asia Continental Europe 3% United Kingdom 2% Middle East / Africa Property Sector Allocation 36% Multi-Sector 13% Office 13% Residential 9% Malls 8% Shopping Centers 6% Hotels 4% Healthcare 4% Industrial 2% Real Estate Services 2% Self Storage 3% Other Sources: CBRE Clarion Securities, as of 12/31/2011 The large and liquid market of global real estate securities provides investors with an ample opportunity to efficiently trade in and out of portfolio positions in a timely manner, and with limited impact on market prices. For example, we have analyzed the global market and determined that a full investment or divestment of $1 billion could be achieved within 3 to 5 trading days. This assumes a portfolio of 75 to 100 securities and that trading activity in each individual security is less than 25% of an individual securities 90 day average daily trading volume. Our research indicates that the average daily trading volume of global property companies in exceeds $6 billion. In the U.S., the retail regional mall sector is predominantly controlled by listed U.S. retail REITs and selected public and private pension funds. Listed U.S. REITs own approximately 74% of all U.S. enclosed regional malls and 88% of Class A enclosed regional malls. As a result, it is rare for high-quality regional malls in good locations to come to market although numerous REITs are actively developing and redeveloping malls and outlet centers today. In Australia, more than 20% of the country s institutional quality commercial real estate is owned by listed Australian REITs. Given the defensive nature of the Australian economy and its commercial real estate market, this geographic region has garnered strong capital flows from investors seeking investments in core real estate. This trend has intensified over the past few years. LISTED REAL ESTATE: A PROXY FOR AN INVESTMENT IN DIRECT REAL ESTATE

4 In Hong Kong s central business district and New York City s Manhattan submarket, exposure to institutional quality office properties can be difficult to achieve. Many of the major office towers in Hong Kong s CBD are held by large, listed property companies. The sale of major individual office properties in this market has been rare in recent years and strata title sales involving individual floorplates or a few floorplates has been far more common. Manhattan, the most important office market in the U.S., is heavily dominated by listed U.S. REITs. Approximately 15% of the office inventory in this market is held by four of the largest U.S. REITs, although there are numerous large office markets across the U.S. where listed REITs ownership percentage is far smaller. These are a few examples of the opportunity that institutional investors have as they attempt to gain exposure to institutional quality commercial real estate at attractive price points in major markets around the world. Listed property companies in the Americas, Europe and Asia Pacific currently hold thousands of top quality properties and many companies are considered some of the top operators in the industry. The liquid nature of the listed real estate market enables investors to achieve almost immediate access and exposure to high quality commercial real estate in various geographies and property sectors around the world. LISTED REAL ESTATE CAN OFFER POSITIVE INVESTMENT ARBITRAGE History has proven that the listed real estate market has often offered investors the ability to gain exposure to high quality real estate portfolios held by listed property companies at a discounted price to the value of the underlying real estate. Investors have been able to achieve this exposure in an expeditious manner given the liquidity of the listed real estate market. As a result of this positive investment arbitrage opportunity, investors have had the potential to achieve outsized returns as the gap between public and private market pricing has narrowed. The chart below reflects the global and country-specific discounts and premiums of the listed property markets relative to the underlying recent net asset values of the aggregated companies in each market. In addition, the chart includes data reflecting the 10-year average net asset values in order to assess current pricing levels and those over the long term for each listed real estate market. Further, the figures below the chart indicate the implied capitalization rates of the listed real estate markets relative to current capitalization rates sourced from the direct real estate market. This chart shows the positive investment arbitrage currently available in virtually all the non-north American markets. Commercial property fundamentals are generally improving and most markets are in the midst of a healthy real estate recovery. Therefore, we expect net asset values of many companies to grow for at least the next few years. As a result, and all else being equal, the pricing inefficiencies that currently exist should increase and may offer greater opportunity for investment performance upside in the near term. EXHIBIT 5: Global Listed Property Securities NAV Premium/Discount by Region 20% 10 Year Average Current NAV Premium / Discount 20% 8% 6% Current NAV P/D 0% - -20% -30% -40% -7% -11% -17% -17% -24% -25% -38% 0% - -20% -30% -40% 10 Year Average NAV P/D -50% Canada United States Continental Europe Global Average Australia J-REITs United Kingdom Singapore* Hong Kong/ China -48% -50% J-REOCs CBRE Clarion Current Model Cap Rate Implied Listed Market Cap Rate 6.4% 6.5% 5.8% 6.0% 6.9% 5.3% 5.5% 5.7% 5.1% 4.8% 6.1% 6.3% 6.0% 6.6% 7.8% 5.8% 6.4% 7.0% 7.4% 6.5% Source: CBRE Clarion Securities, as of 12/31/2011. *Singapore historical average from December LISTED REAL ESTATE: A PROXY FOR AN INVESTMENT IN DIRECT REAL ESTATE

5 Based on the data in the previous chart, global listed real estate is currently priced at an approximate 11% discount to the underlying property values of the companies constituting this investment universe. This equates to a 6.6% implied capitalization rate which is higher than the 6.0% yield for private market equivalent quality real estate. In addition, global listed real estate is also trading at a discount relative to the 10-year average discount for the sector. Listed real estate markets in different countries are trading at varying discounts (or premiums), which is partly a function of the growth outlook in each market. We expect many of the markets trading at discounts to experience a narrowing of the gap in the near future. CONCLUSION For investors who have a long-term investment horizon, performance of listed real estate generally leads the performance of direct real estate and acts as an efficient proxy for direct real estate-like returns. Over the long term, listed real estate behaves similar to direct real estate. Listed market performance has a meaningful correlation with performance in the private real estate market when taking into account for the time lag of returns in the private market. The time lag in the private market versus the listed market typically ranges from 2 to 4 quarters although this can differ depending on the geographic market. Evaluating the listed market s performance can provide some evidence into the future pricing of the private real estate market. The public real estate market provides access to many geographies and property types which may be difficult or time consuming to access in the private markets, such as the regional mall property type, difficult to access submarkets such as mid-town Manhattan, and certain geographies in the Asia-Pacific region. The access is quick and liquid. Portfolios can also be re-shaped easily. As a result of the variability of returns between public and private real estate, there are periods in which investment arbitrage opportunities exist. During these periods, an investor can achieve exposure to high quality, core real estate at discounts to what the real estate would cost in the private market while incurring much lower transaction costs. An investment in a broadly diversified portfolio of global listed real estate provides a transparent portfolio of high quality real estate holdings which are valued on a real-time basis and offer core real estate returns over time. LISTED REAL ESTATE: A PROXY FOR AN INVESTMENT IN DIRECT REAL ESTATE

6 IMPORTANT DISCLOSURES 2012 CBRE Clarion Securities LLC. All rights reserved. The views expressed in this paper 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 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, estimates, projections, and other forward-looking statements are based on available information and management s 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 analysis in this paper is based on historical data and was constructed with the benefit of hindsight. We make no representation that any account has, will, or is likely to achieve similar results. 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 invested in real estate securities may experience price volatility and other risks associated with non-diversification. While equities may offer the potential for long-term growth, they generally have a potential for volatility. Past performance of various investment strategies, sectors, vehicles and indices are not indicative of future results. There is no guarantee that the investment objective will be attained. Results may vary. Indices are unmanaged and not available for direct investment. There is no guarantee that risk can be managed successfully.

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