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NOVEMBER 2016 CBRE Research © 2016 CBRE, Inc. | 1 VIEWPOINT GLOBAL INVESTMENT • CBRE estimates the global stock of institutional commercial real estate to be worth $27.5 trillion as of 2015. There is a strong correlation between the flow of investment capital into a country and its stock of institutional grade real estate. Emerging European countries—such as Ukraine, Bulgaria, Estonia and Serbia—attract more investment volume than their commercial real estate stock size would suggest. Latin American and Gulf Cooperation countries attract less investment volume than their commercial real estate stock size would predict, suggesting unexplored investment possibilities. Global Investment How much real estate stock is there?

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Page 1: Q3 Global Viewpoint Investable RE

NOVEMBER 2016 CBRE Research © 2016 CBRE, Inc. | 1

VIEWPOINT GLOBAL INVESTMENT

• CBRE estimates the global stock of institutional commercial real estate to be worth $27.5 trillion as of 2015.

• There is a strong correlation between the flow of investment capital into a country and its stock of institutional grade real estate.

• Emerging European countries—such as Ukraine, Bulgaria, Estonia and Serbia—attract more investment volume than their commercial real estate stock size would suggest.

• Latin American and Gulf Cooperation countries attract less investment volume than their commercial real estate stock size would predict, suggesting unexplored investment possibilities.

Global Investment

How much real estate stock is there?

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VIEWPOINT GLOBAL INVESTMENT

Over the past 20 years, our knowledge of real estate and its investment performance characteristics has developed enormously. One area lagging in this advancement is our knowledge of how much stock is available for institutional investment. This is not a major issue, as investment decisions are usually based on estimates of expected returns, but it is useful to know. In a “neutral” multi-asset portfolio, asset types will appear roughly in proportion with those asset types’ shares of the global investable universe. In the absence of a global database of individual real estate assets and values, those interested in the size of this universe have to estimate it.

Estimates of the global real estate universe are typically based on a stock-to-output methodology 1 in which the amount of real estate is a function of GDP in U.S. dollars. This is not unreasonable: an economy’s stock of capital should have a consistent relationship with output over the long term. In 1999, Liang and McIntosh developed a GDP-driven investable universe methodology that many have since revised to calculate their own estimates. Prudential (2012) 2 estimated the global institutional real estate stock using this approach, arriving at $26.6 trillion. To put this in context, the value of global stock markets is $69 trillion 3 and the value of global bond markets is over $100 trillion. 4 This is not a strict “apples to apples” comparison, but it does suggest that the “neutral” institutional portfolio should hold around 14% of its assets in real estate.

Real Capital Analytics’ (RCA) increasingly comprehensive database on capital flows enables us to “cross check” these GDP-based estimates of global investable real estate stock. If GDP-based estimates are accurate, they should correspond with nominal levels of investment transactions across countries and regions. Of course, issues of market maturity and transparency will cause the relationship between market size and liquidity to be less than perfect, but for the OECD countries it ought to be positive and reasonably strong.

Richard Barkham

Global Chief Economist

Dennis Schoenmaker

Global Economist

1. Liang Y & McIntosh W, 1999, Global Commercial Real Estate, Prudential Real Estate Investors, New Jersey.2. Fiorilla, P., Kapas, M., and Liang, Y. “A Bird’s Eye View of the Global Real Estate Markets: 2012 Update.” Prudential Real Estate Investors, 2012.3. http://www.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/4. http://www.goldcore.com/us/gold-blog/100-trillion-global-bond-bubble-poses-systemic-risk-to-financial-system/

The “neutral” institutional portfolio should hold around 14% of its assets in real estate.

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VIEWPOINT GLOBAL INVESTMENT

In this ViewPoint, we:• explain the methodology for estimating real estate market size;• estimate the size of the global real estate market, using the latest data and providing a

breakdown by country;• look at the relationship between capital flows into real estate and estimated market size; and• note patterns in our results, having judged the methodology to be effective

METHODOLOGY

The size of the global institutional real estate universe is estimated according to the following approach: First, we classify countries as developed or developing, based on a U.S. inflation-adjusted threshold of annual per-capita GDP ($20,000 in 2000). 5 For developed countries (i.e., those with GDP above the threshold), we calculated institutional real estate to be 45% 6 of the nominal GDP in U.S. dollars. For countries with GDPs below the threshold, the size of the institutional real estate market was adjusted, as stocks of institutional real estate are significantly smaller in countries where GDP per capita is lower. Accordingly, we adjusted the market size by a factor proportionate to the difference between the country’s per-capita GDP and the threshold level. The larger the difference, the lower the estimate of stock. 7 The adjustment factor was: 8

Institutional real estate = 0.45 x GDP x [((per capita GDP )/(threshold GDP))^(1/3) ] (1)

For example: for Switzerland, a developed country, we calculated an institutional real estate size of $0.29 trillion (45% of the nominal GDP in U.S. dollars). For India, a developing country, it was $0.36 trillion (0.45 x 2,062,960 x [(1,571/27,526)^(1/3) ]).

5. This results in a per-capita GDP threshold level of $27,526 in 2015.6. Forty-five percent is a level based on Prudential’s informed judgment. 7. The adjustment factor diminishes with lower levels of per-capita GDP. For example, our adjustment factor was 0.90 for a country with a GDP per capita of $20,000, and 0.82 for a country with a GDP per capita of 15,000.8. The methodology also takes very high population densities into account. We adjusted Hong Kong and Singapore upward by 100% and adjusted Bahrain, Kuwait, Qatar, United Arab Emirates and the UK up by 25%.

Region Value (US$ Trillions)

Asia Pacific $3.9

Emerging Asia Pacific $4.0

Latin America $1.4

North America $8.8

Developed Europe $7.5

Emerging Europe $0.8

Rest of World $1.1

Figure 1: Value of Global Investable Commercial Real Estate

Source: CBRE Research, Oxford Economics, 2016.

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Since Prudential’s 2012 estimate, China’s share of the world real estate stock has grown dramatically, from 7% to nearly 12%.11 This reflects the rapid growth and development of that country.

GLOBAL INSTITUTIONAL REAL ESTATE UNIVERSE

Using nominal U.S. GDP and GDP per capita data from Oxford Economics, we valued the investable commercial real estate market worldwide (see Appendix A for our country breakdown) at $27.5 trillion as of 2015 (see Figure 1). 9 By region, the Americas has the largest investable stock value, with $10.2 trillion; EMEA and APAC followed, with $9.5 trillion and $7.9 trillion, respectively. On a more focused scale, North America has the largest share, with $8.8 trillion, or approximately 32%, followed by developed Europe and emerging APAC, with investable stock sizes of $7.5 trillion and $4.0 trillion, respectively. Developed APAC totaled $3.9 trillion, followed by Latin America ($1.4 trillion), the rest of the world 10 ($1.1 trillion) and emerging Europe ($0.8 trillion).

Figure 2 lists the top 16 countries and their respective shares of the total. In our estimates, the top five countries accounted for approximately 60% of investable stock worldwide, while 58% occurred within the G7. The BRIC countries held 17%. Together, the G7 and BRIC countries claimed 75% of the total global investable stock, which is slightly higher than their combined share (69%) of total global output.

Source: Oxford Economics, CBRE Research, 2016.

9. It is important to note that this methodology does not control for currency movement. The trade-weighted U.S. dollar index soared in 2015, lowering relative GDP for a majority of countries, which provides an explanation for the relatively small recent growth of the global CRE universe versus previous research.10. See Appendix A.11. Fiorilla, P., Kapas, M., and Liang, Y. “A Bird’s Eye View of the Global Real Estate Markets: 2012 Update.” Prudential Real Estate Investors, 2012.

Figure 2: Global Institutional Stock, by Country

Rank Country Value (US$ Trillions) Share (%)

1 United States 8.07 29.99

2 China 3.18 11.83

3 Japan 1.85 6.89

4 United Kingdom 1.60 5.95

5 Germany 1.50 5.61

6 France 1.08 4.05

7 Italy 0.81 3.03

8 Canada 0.69 2.60

Rank Country Value (US$ Trillions) Share (%)

9 South Korea 0.61 2.30

10 Australia 0.55 2.05

11 Brazil 0.54 2.03

12 Spain 0.52 1.96

13 Russia 0.41 1.55

14 India 0.35 1.33

15 Mexico 0.35 1.32

16 Rest of countries 5.31 17.50

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THE RELATIONSHIP BETWEEN MARKET SIZE AND INVESTMENT INFLOW

Our main contribution is to investigate the relationship between nations’ estimated real estate market size and their actual real estate investment flows, 12 using correlation and regression. We also looked at the correlation between the investable stock size and cross-border investment flows specifically, which allowed us to examine any outliers.

The correlation between investable stock size and total investment flows was very high, at 83% (r-squared: 69). 13 This statistically significant relationship is illustrated in Figure 3. The regression-based “best fit” line allows us to calculate “true” outliers: countries that do not conform to the general rule. 14 The outliers are interesting: they might be countries for which the methodology did a poor job of estimating market size, or they could be countries where the flow of real estate investment differs from what market size suggests we should expect. Given the strength of the relationship between stock and flow, we think the methodology is effective—so we have focused on why capital flows might have been above or below what was expected.

12. Real estate capital flows are based on the total level of investment activity for all sectors from 2008-2015 (Real Capital Analytics data). 13. In the figures, we used the natural logarithm of both the investable stock size and investment flows to rearrange the distribution. In original values, the correlation between them is 94%. Logarithms are quite often used in the analysis of size variables where the distribution is skewed—e.g., where there are a few large countries and many small ones. The advantage is that logarithms allow us to investigate such a skewed distribution with linear statistical techniques. 14.We defined “true outliers” as countries with residuals that were more than one standard deviation from the mean.

Figure 3: Total Investment Flows and Stocks of Institutional Real Estate, by Country

Dots below the line are countries that have attracted less investment volume than the size of their stock would indicate; those above the line have attracted more. Above the line are some emerging European countries—including Ukraine, Bulgaria, Estonia and Serbia—as well as Hong Kong, Singapore, Sweden and Luxembourg, among others. Gulf Cooperation countries like Oman, Bahrain and Saudi Arabia, and Latin American countries such as Venezuela, Colombia and Argentina were among those attracting less investment than their available real estate stock would suggest.

16

14

12

10

8

6

4

26 8 10 12 14 16 18

Available Institutional Real Estate Stock (millions)

Invest

ment

Flows

(milli

ons) R2 = 0.69

Source: CBRE Research, Real Capital Analytics, 2016.

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VIEWPOINT GLOBAL INVESTMENT

To further test the robustness of the relationship, we also used foreign investment flows. The cross-sectional correlation between the investable stock and foreign investments flows was around 80% (with an r-squared of 65)—slightly lower than total investment flows. As before, we investigated outliers and plotted the “best fit” line, which is visible in Figure 4.15 The outliers we identified are broadly the same: on average, most of our markets in emerging Europe (e.g., Poland, Czech Hungary, Ukraine and Serbia) have been attracting more investment than one would expect, given their available institutional real estate stock. We found that the U.K. and Luxembourg were also “above the line.” Below the line, in this case, were most of the Gulf Cooperation and Latin American countries, as well as Malta, South Africa and Israel.

We assert quite strongly that there is nothing “wrong” with countries that have recorded lower levels of real estate investment than their stock levels would have us expect. Indeed, investors should have a good look at these countries, as they likely to have assets that are quite well priced by today’s standards.

15. Note that three countries (Oman, Qatar and Venezuela) are not included, as they have no foreign investment.

Market maturity and transparency will affect the relationship between investment flows and the institutional real estate stock. We therefore used the World Bank Group’s ease of doing business index to control for transparency and market access. This third approach enabled us to test the “true” linear relationship between investment flows and the available institutional investment stock. In this case, the model fit, in terms of explained variance, was much higher—0.80, versus the 0.69 and 0.65 of Figures 3 and 4, respectively. China, India, Brazil, Luxembourg, Vietnam, Ukraine, Bulgaria, Serbia and the Philippines were showed to have attracted more investment than their available real estate stocks and ease of doing business score would have suggested. Meanwhile, Venezuela, Oman, Malta,

Figure 4: Foreign Investment Flows and Stocks of Institutional Real Estate, by Country

14

12

10

8

6

4

26 8 10 12 14 16 18

Available Institutional Real Estate Stock (millions)

Invest

ment

Flows

(milli

ons) R2 = 0.65

Source: CBRE Research, Real Capital Analytics, 2016.

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Bahrain, South Africa, Colombia and Saudi Arabia have been attracting less investment than their available real estate stocks would suggest is appropriate.

CONCLUSIONS

Overall, we conclude that the current market size methodology is reliable. Each of the three approaches to the relationship between stock size and investment flow produced similar findings: emerging European countries were predominant among those attracting more investment than available institutional stocks would predict, while Gulf Cooperation countries attracted less. Further insights might result from spending more time on threshold levels and the adjustment factor for developing countries. The latter might include distinguishing developing markets from developed markets in a new way, such as using an OECD versus non-OECD threshold. In further research we will examine the questions: Does the relationship between investment flows and institutional stock hold at the city level?

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VIEWPOINT GLOBAL INVESTMENT

Source: Oxford Economics. Nominal GDP in $U.S.

Developed Europe

Emerging Europe

Emerging Asia

Developed Asia Pacific

North America

Latin America

Rest of World

Austria Bulgaria China Australia Canada Argentina Bahrain

Belgium Czech Republic India Hong Kong United States Brazil Israel

Cyprus Estonia Indonesia Japan Chile Morocco

Denmark Hungary Malaysia New Zealand Colombia Oman

Finland Latvia Philippines Singapore Costa Rica Qatar

France Lithuania Thailand South Korea Mexico Saudi Arabia

Germany Poland Vietnam Taiwan Panama South Africa

Greece Romania Peru Turkey

Ireland Russia Venezuela

Italy Serbia

Luxembourg Slovakia

Malta Slovenia

Netherlands Ukraine

Norway

Portugal

Spain

Sweden

Switzerland

UK

Appendix A

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VIEWPOINT GLOBAL INVESTMENT

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

FOR MORE INFORMATION REGARDING THIS

REPORT, PLEASE CONTACT:

Richard Barkham, Ph.D.Chief Economist, Global+44 20 7182 [email protected]

Dennis Schoenmaker, Ph.D.Economist, Global+44 20 7182 [email protected]

FOR MORE INFORMATION REGARDING CBRE

RESEARCH, PLEASE CONTACT:

Nick Axford, Ph.D.Head of Research, Global+44 20 7182 [email protected]

Neil Blake, Ph.D.Head of Research, EMEA+44 20 7182 [email protected]

Henry Chin, Ph.D.Head of Research, Asia Pacific+852 2820 [email protected]: @HenryChinPhD

Spencer LevyHead of Research, Americas+1 617 912 [email protected]: @SpencerGLevy

To learn more about CBRE Research, or toaccess additional research reports, pleasevisit the Global Research Gateway at:www.cbre.com/researchgateway.