WHY RISING INTEREST RATES ARE ACTUALLY GOOD FOR GLOBAL REAL ESTATE STOCKS

WHY RISING INTEREST RATES ARE ACTUALLY GOOD FOR GLOBAL REAL ESTATE STOCKS AUGUST 2015 Prepared by: W. Stevens Carroll, CPA Senior Global Portfolio Manager Jonathan Miniman, CFA Portfolio Manager According to conventional wisdom, the specter of rising interest rates foreshadows poor share price performance for global real estate stocks (REITs). But our research shows that s not the case for the investor. Admittedly, rising rates can temporarily generate headwinds for yield-sensitive asset classes such as REITs. However, we ve found that over time REIT shares typically benefit from the underlying forces that cause rates to move higher namely, positive economic growth. www.cbreclarion.com

RISING RATES = REIT STOCKS GAINS Our analysis of the 12-month performance of REIT shares, when yields of 10-year sovereign bonds from the United States, the United Kingdom, Hong Kong, and Japan moved either up or down, has led us to these three conclusions: Increases in bond yields are generally associated with improving economic conditions, which tend to boost tenant demand, revenue, and profits for owners and operators of commercial properties. REIT shares have generated positive total returns during periods of rising interest rates over the past 20 years. For instance, in the 12-month periods when yields of sovereign bonds have climbed by 25 to 50 basis points, REIT shares have recorded these gains on average: 24% in the U.S., 25% in the U.K., 33% in Hong Kong, and 32% in Japan (see Exhibit 1). In contrast, when sovereign-bond yields have declined, REITs results have been mixed, and have trailed results achieved during times of rising yields. For example, in the 12-month periods when yields of sovereign bonds have dropped by more than 75 basis points, REIT shares have risen only an average of 6% in the U.S., have lost an average of 3% in the U.K., have fallen an average of 4% in Hong Kong, and have sunk 11% on average in Japan. Why Rising Rates are Actually Good for Real Estate Stocks Page 2

REIT STOCKS HAVE PRODUCED DOUBLE-DIGIT TOTAL RETURNS WHEN INTEREST RATES ARE ON THE RISE In our judgment, what this means is that REIT shares should not be confused with bonds, whose prices fall when rates rise; the performance patterns of bonds and REIT stocks are markedly different. REIT shares historically have gained when bond prices have fallen and rates have climbed (and, significantly, when economic conditions have strengthened). In fact, REITs total returns have been greatest over 12-month time periods in rising-rate environments. Exhibit 1: 12-month Changes in Interest Rates and Global REIT Share Prices United States United Kingdom Avg. 12 Month Total Return (USD) 3 2 1-1 26% 27% 24% 21% 13% 8% 7% 6% Avg. 12 Month Total Return (GBP) 3 25% 22% 21% 2 15% 12% 12% 1 6% -3% 12 12 Month Month Change Change in in Bond Bond Yields Yields (bps) (bps) 12 12 Month Change in in Bond Yields (bps) -1 <-75-75 to -50-50 to -25-25 to 0 0 to +25 +25 to +50 +50 to +75 >75 <-75-75 to -50-50 to -25-25 to 0 0 to +25 +25 to +50 +50 to +75 >75 60 32 26 34 18 21 16 28 Hong Kong* Avg. 12 Month Total Return (HKD) 6 5 41% 4 32% 33% 3 23% 2 17% 2 2 1-1 -4% 12 Month Change in Bond Yields (bps) -2 <-75-75 to -50-50 to -25-25 to 0 0 to +25 +25 to +50 +50 to +75 >75 Japan Avg. 12 Month Total Return (JPY) 6 5 4 3 2 1-1 -2 68 25 44 20 23 18 19 18 56% 53% 32% 2 8% 2% 3% -11% 12 12 Month Month Change Change in in Bond Bond Yields Yields (bps) (bps) <-75-75 to -50-50 to -25-25 to 0 0 to +25 +25 to +50 +50 to +75 >75 # of Observations 63 19 21 28 13 10 5 22 19 18 55 67 49 13 7 7 Source: Bloomberg and CBRE Clarion as of 06/30/2015. *Hong Kong data is from June 1999 June 30, 2015 (183 twelve month observations). All other data from December 1994- June 30, 2015 (237 twelve month observations) UK: FTSE EPRA/NAREIT UK Index, UK Gov Bonds 10 Year Note Generic Bid Yield; Hong Kong: FTSE EPRA/NAREIT Hong Kong Index, HK Generic 10 Year Yield Index;, U.S.: MSCI U.S. REIT Index, U.S. Generic Govt. Bond 10-Year Yield, Japan: FTSE EPRA/NAREIT Japan Index; Japan Govt. Bond Year to Maturity 10-Year Simple Yield. An index is unmanaged and not available for direct investment. Yields fluctuate and are not guaranteed. Past performance is no guarantee of future results. Why Rising Rates are Actually Good for Real Estate Stocks Page 3

ECONOMIC GROWTH TRUMPS RISING RATES Our observation in reviewing performance numbers is that economic growth tends to trump rising rates in relation to the performance of REIT shares. And REITs that are most economically sensitive tend to perform especially well in this environment. We have reviewed the performance of real estate securities during time periods when GDP is growing versus when GDP is contracting. Our research indicates that during rolling 12-month periods of economic growth from June 1995 to June 2015, REIT stocks in four major global markets have produced positive total returns a majority of the time when the economy is growing. In the U.S., property stocks had positive total returns 86% of the time GDP was positive. Japan property stocks had positive total returns 7 of the time GDP was positive. United Kingdom property stocks had positive total returns of 77% of the time GDP was positive. Hong Kong property stocks had positive total returns 72% of the time GDP was positive. (See Exhibit 2). Why Rising Rates are Actually Good for Real Estate Stocks Page 4

GLOBALLY, REITS HAVE PRODUCED POSITIVE TOTAL RETURNS A MAJORITY OF THE TIME WHEN THE ECONOMY IS GROWING GDP performance patterns demonstrate the following fundamental catalysts for REITs: When the economy and business confidence are rebounding, tenant demand rebounds as well. Increased tenant demand enables landlords to enhance their pricing power by raising rents. Increased pricing power produces increased operating profits for REITs. Increased operating profits permit REITs to increase their dividends, and the stock market in turn generally rewards REITs with higher share prices. In short, REIT investors have benefited from both increased income and capital gains when REITs fundamentals and the economy were picking up. Exhibit 2: 20-Year History of Real Estate Stock Returns vs. GDP Growth United States Property Stocks Japan Property Stocks Positive total returns 86% of the time GDP was positive. Positive total returns 7 of the time GDP was positive. FTSE NAREIT Equity REIT 12-Month Rolling Total Return 12 8 4-4 -8-10 -8-6 -4-2 0 2 4 6 8 10 GDP 12-Month Rolling Change United Kingdom Property Stocks FTSE EPRA/NAREIT Japan 12-Month Rolling Total Return 12 8 4-4 -8-10 -8-6 -4-2 0 2 4 6 8 10 Hong Kong Property Stocks GDP 12-Month Rolling Change Positive total returns 77% of the time GDP was positive. Positive total returns 72% of the time GDP was positive. FTSE EPRA/NAREIT UK 12-Month Rolling Total Return 12 8 4-4 -8-10 -8-6 -4-2 0 2 4 6 8 10 GDP 12-Month Rolling Change FTSE EPRA/NAREIT HK 12-Month Rolling Total Return 12 8 4-4 -8-10 -8-6 -4-2 0 2 4 6 8 10 GDP 12-Month Rolling Change Source: CBRE Clarion Bloomberg and FactSet as of 06/30/2015. Data is from June 30, 1995 through June 30, 2015. Returns are represented in local currency. United States: FTSE NAREIT Equity Index (USD); Japan: FTSE EPRA/NAREIT Japan Index (JPY); United Kingdom: FTSE EPRA/NAREIT U.K. Index (GBP); Hong Kong: FTSE EPRA/NAREIT Hong Kong Index (HKD). An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Why Rising Rates are Actually Good for Real Estate Stocks Page 5

CONCLUSION In sum, the stock market has been acutely aware that the impact of rising revenue and operating profits in times of economic expansion are more important to REITs value (and stock prices) than the impact of higher rates. Although REIT stocks can be volatile in the short term when interest-rate risk first becomes more prevalent, they tend to shine in the longer term as the economy grows, despite the higher rates.

GLOSSARY FTSE NAREIT Equity Index is an unmanaged market cap weighted index comprised of equity REITs. The NAREIT Equity index is available daily. The NAREIT Equity index includes healthcare and net lease REITs, but excludes real estate operating companies. The requirement for inclusion in this index is for a company to be an exchange listed equity REIT. There is no minimum size or liquidity requirement for an equity REIT to be included in this index. MSCI U.S. REIT Index (RMS): RMS is comprised of U.S. Real Estate Investment Trusts (REITs) of reasonable size and liquidity weighted by market capitalization and considered representative of U.S. equity REIT performance. FTSE EPRA/NAREIT Developed Property 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. The FTSE EPRA/NAREIT U.K. Index is a subset of the FTSE EPRA/NAREIT Developed Index and is designed to track the performance of real estate companies and REITS listed on the London Stock Exchange. By making the index constituents free-float adjusted, liquidity, size and revenue screened, the series is suitable for use as the basis for investment products, such as derivatives and Exchange Traded Funds (ETFs). The FTSE EPRA/NAREIT Hong Kong Index is designed to track the performance of listed real estate companies and REITS in both developed and emerging markets. By making the index constituents free-float adjusted, liquidity, size and revenue screened, the series is suitable for use as the basis for investment products, such as derivatives and Exchange Traded Funds (ETFs). The FTSE EPRA/NAREIT Japan Index is designed to track the performance of listed real estate companies and REITS in both developed and emerging markets. By making the index constituents free-float adjusted, liquidity, size and revenue screened, the series is suitable for use as the basis for investment products, such as derivatives and Exchange Traded Funds (ETFs). IMPORTANT DISCLOSURES 2015 CBRE Clarion Securities LLC. All rights reserved. The views expressed represent the opinions of CBRE Clarion which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as investment advice or a recommendation for any security. It 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. Actual results, performance or events may differ materially from those expressed or implied in such statements. Past performance of various investment strategies, sectors, vehicles and indices are not indicative of future results. Investing in real estate securities involves risk including to 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 some 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. There is no guarantee that risk can be managed successfully. There are no assurances performance will match or outperform any particular benchmark. Indices are unmanaged and not available for direct investment. PA06302015

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