contextobjective: to outperform the ipd other balanced put index by 0.5% p.a. over a rolling...

Context

| 2 Global Investors Change The Rules

§  More clearly defined “property cycle” closely linked to domestic economy

§  Investment demand & pricing largely driven by domestic investors

§  Cost of capital determined locally by interest rate policy and bond markets

§  Pricing more closely linked to local real estate market demand/supply fundamentals

§  Occupier demand largely driven by local businesses

§  Low levels of transparency

§  Unsophisticated due diligence process

“Local markets for local people” Traditional Real Estate Investment Market Structure

Insular and more simplistic in nature


•  Equities offer a “risk premium” in form of higher return to compensate for additional volatility

•  Real estate offers a “risk premium” in the form of higher returns to compensate for illiquidity and other risks

Financial theory dictates that government bonds are the market off which other assets are priced:

Source: Fidelity International, June 2017.

Traditionally a lot hung on the concept of the “risk-free” rate Real Estate & The Risk Free Rate Investment Model

Investors want to be rewarded with a return premium for taking risk

§  The risk free investment model was developed by investors when real estate markets were:

–  Dominated by domestic capital

–  Priced RELATIVE to competing asset classes

“…the last decade has witnessed “globalisation” of real estate investment markets with significant implications for market pricing and structure…..

Required rate of return = risk free rate + risk premium

Globalisation Of Real Estate Investment Markets


•  Cost of capital determined at source, NOT relative to local bond market

•  International investors have a wider range of risk return expectations

•  Weight of money determining price in key centres

Major implication for future market pricing models

Source: Fidelity International; Real Capital Analytics, May 2017.

Growth in cross border investment has driven significant changes Changing Nature Of Investment Capital

Real estate investment markets are increasingly “globalised”

$-

$50

$100

$150

$200

$250

$300

$350

$400

2008 2009 2010 2011 2012 2013 2014 2015 2016

Bill

ions

Value Of Global Cross Border Real Estate Investment Purchases 2008 to 2016 US$ bn


•  They see additional value beyond just the price

•  Portfolio diversification

•  Wealth protection

•  Political stability

•  Legal security

International investors are often less price or performance sensitive

Source: Fidelity International; JLL, January 2017.

It’s about a whole lot more than performance Cross Border Investment: No Single World View

International investors can have a wider range of risk return expectations

JLL Global Real Estate Investment Transparency Index 2016 Score Closer to 1.0 Denotes Greater Transparency

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Uni

ted

Kin

gdom

A

ustra

lia

Can

ada

Uni

ted

Sta

tes

Fran

ce

New

Zea

land

N

ethe

rland

s Ire

land

G

erm

any

Finl

and

Sin

gapo

re

Sw

eden

P

olan

d S

witz

erla

nd

Hon

g K

ong

Bel

gium

D

enm

ark

Nor

way

Ja

pan

Cze

ch R

epub

lic

Italy

S

pain

Ta

iwan

C

hina

- Ti

er1

Luxe

mbo

urg

Indi

a - T

ier1

G

reec

e S

outh

Kor

ea

Rus

sia

- Tie

r1

Turk

ey

UA

E -

Dub

ai

UA

E -

Abu

Dha

bi

Viet

nam


“We target a wide range of carefully chosen properties – including retail, office and industrial units across the UK. Our long-term goal is to maintain a balanced portfolio with the potential to grow sustainably. Objective: to outperform the IPD other Balanced PUT Index by 0.5% p.a. over a rolling three-year period”

Source: Fidelity International; Hermes Property Unit Trust; Norges Bank Investment Management, June 2017.

Cross-border Investors Are Different

“We will target 10 to 15 global cities with favourable long-term fundamentals. The target cities share long-term economic attractiveness, and real estate markets characterised by transparency, liquidity and supply restrictions. –  In the US, we focus on New York, Boston, Washington, D.C. and San Francisco. –  In Europe, we concentrate on London, Paris, Berlin and Munich. –  In the developed markets in Asia, we target Tokyo and Singapore. –  We may consider other cities if attractive opportunities arise”

Benchmark: 62.5% equity, 37.5% bonds

Cross-border

Traditional domestic

Big players march to a different tune Compare a UK balanced fund to the Norwegian GPF


•  Broadly divided into “prime” and “secondary” or “AAA- A” and “the rest”

•  Prime values increasingly influenced by global capital flows

•  Pricing of secondary markets driven by local investors

Emergence of a two tier market in some countries

• Core Eurozone = Germany, France & Benelux. Source: Fidelity International; CBRE, March 2017.

Real Estate Market Starting To Resemble Other Global Asset Classes Towards A Globalised Real Estate Investment Market

Core real estate investment markets are being restructured

Core Eurozone* All Property - Prime v Secondary Initial Yields 1Q1990 to 1Q2017

0

50

100

150

200

250

300

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Yiel

d Sp

read

(Bps

)

Initi

al Y

ield

(%)

Spread - Bps

All Prime

All Secondary


Cost of capital determined at source, NOT relative to local bond market

Source: Fidelity International; Real Capital Analytics, March 2017.

Now Asia takes top spot….. Multiple & Changing Sources Of Capital

The drive for global diversification challenges established pricing models

Value of Cross Border Transactions By Source Of Capital US$bn per annum 2007 to 2016

0%

5%

10%

15%

20%

25%

30%

$0

$50

$100

$150

$200

$250

$300

$350

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% C

apita

l Fro

m A

sia

Valu

e O

f Tra

nsac

tions

– U

S$bn

Asia Europe ex UK US UK % Asia

•  Sources of capital evolve over time

•  For each capital source, required rate of return also varies over time

•  Link to domestic risk free rate is weakened


Office Transaction Yields by Source of Capital (Cross Border Deals Only) Rolling 12 Month Average - % per annum

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

'08 '09 '10 '11 '12 '13 '14 '15 '16

Asia Europe America All Offices

Considerable difference in required rates of return Yields by Source of Capital

Asian, European and American investors have changed positions over time


Implications For The Future


Cross border investment highly focused in most liquid markets Investible Universe Is Being Redefined

70% of investment turnover in 12 months to March 2017 was in just 5 countries


$b YOYChgUnitedStates 387.8 -8%Germany 68.5 -4%UnitedKingdom 53.1 -45%China 35.0 -2%Japan 31.3 -19%France 30.5 -12%Australia 23.8 -26%Canada 18.5 1%Spain 17.9 76%Sweden 17.3 12%Netherlands 14.7 7%SouthKorea 14.0 30%HongKong 13.2 -10%Italy 10.1 -4%Singapore 10.0 107%AllOthers 78.1 -13%GrandTotal 823.9 -10%*excludingdevelopmentsites,rankbasedonLast12Months

Last12Months

“…Cross border investment is increasingly focused in small number of key countries and cities


Emergence Of The Global “Super” Investors New Market Structure

Source: Fidelity International; Willis Towers Watson; Statista; SWF Institute – March 2017.

Top insurers, pensions, managers and SWFs together have 1.8 trillion in buying power

Data assumes a typical 5% allocation to direct real estate for insurers, pension funds and SWF’s

Value Of Global Real Estate Assets Held By Top 10 Insurers, Pension Funds, Sovereign Wealth Funds & Property Fund Managers – March 2017 (US$ bn)

Insurers Pensionfunds Sovereignwealthfunds(non-pension) Realestatefundmanagers

AXA $970 GPIF,Japan $1,163 ADIA $828 TheBlackstoneGroupL.P. $143Allianz $928 GPF,Norway $866 ChinaInvestmentCorporation $814 BrookfieldAssetManagement $141Metlife $878 FederalRetirementThrift,US $443 KuwaitInvestmentAuthority $524 PGIM,Inc $116PrudentialFinancial $757 NationalPension,SouthKorea $435 SAMAForeignHoldings $514 THRealEstate $92PingAnInsurance $735 ABP,Netherlands $384 HongKongMPIF $457 Hines $91JapanPostInsurance $686 NationalSocialSecurity,China $295 SAFEInvestmentCompany,China $441 CBREGlobalInvestors $82Legal&General $588 CalPERS,US $286 GIC,Singapore $350 UBSAssetManagement $74NipponLife $586 CentralProvidentFund,Singapore $211 QatarInvestmentAuthority $335 PrincipalRealEstateInvestors $68Aviva $575 CanadaPension,Canada $202 InvestmentCorporationofDubai $201 AXAIM-RealAssets $66Prudentialplc $573 PFZW,Netherlands $186 TemasekHoldings,Singapore $180 J.P.MorganAssetManagement $65

TotalAssets $7,276 $4,471 $4,644 $938

Allocatedtodirectrealestate $364 $224 $232 $938


Pricing for prime assets in most core markets now at record levels Prime Assets To Trade In Narrower Spread

Prime Office Initial Yields March 2017 vs Previous Cyclical High & Low - %

Source: Fidelity International; CBRE, March 2017.

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0Lo

ndon

-C

entra

l -C

ity

Lond

on -

Cen

tral -

Wes

t End

Ber

lin

Mun

ich

Par

is Il

e-de

-Fra

nce

Current Yield Previous Cyclical Low (2004-2008) Cyclical High (2009-present)


§  “For a safe-haven investor intending to hold prime property in perpetuity, values could feasibly rise much further while still maintaining relative value.”

§  For these investors, “fair value could be achieved with prime office yields ranging from 1.8% to 2.4%

in London, Paris, New York and Tokyo, pointing to a substantial premium above investors with a more conventional approach”

§  “For a certain set of investor preferences, the market remains good value despite recent yield compression”

Source: Fidelity International; IPF Short Paper 24 - What is Fair Value?, December 2015.

And therefore our definitions of risk free are also different My Risk Is Not Your Risk

Some super league members require significantly lower yields


§  Increasing cross-border capital flows leads to greater global integration

§  Integration is not happening at every level in every market

§  The largest cross-border investors focus on one layer of the market only – “Global Cities”

§  The key characteristics of this market layer are:

§  Reliable liquidity

§  Transparency

§  Big lot sizes

§  Locations recognised as global cities

§  Bond investors might call this layer triple AAA; equity investors might call it blue chip

Global cities and global “super” investors change the rulebook The Rules Are Being Redefined

Super sized have new heuristic, textbook is atrocious


§  Investment decisions made differently §  Less focus on classic approach (risk free rate + premium) §  Very long holding periods §  More focus on transparency, liquidity, capital preservation §  More focus on diversification in widest sense (not just real estate) §  More sophisticated DD processes bringing property into line with other asset classes

§  Greater pricing volatility in market for prime assets in global cities §  Prices driven by weight of money §  Property fundamentals seen through different prism

§  New indices will be required to meet demands from global investors §  Global rather than regional or national §  Top tier rather than whole of market

§  Potential impact on DCF valuation §  What’s the discount rate for a transparent, liquid global city?

New market characteristics Implications For The Future

What investors can expect to see going forward?


Important information

FIL Limited and its respective subsidiaries form the global investment management organisation that is commonly referred to as Fidelity International. Fidelity International only gives information on products and services and does not provide investment advice based on individual circumstances. Any service, security, investment, fund or product outlined may not be available to or suitable for you and may not be available in your jurisdiction. It is your responsibility to ensure that any service, security, investment, fund or product outlined is available in your jurisdiction before any approach is made regarding that service, security, investment, fund or product. The document may not be reproduced or circulated without prior permission and must not be passed to private investors. Past performance is not a reliable indicator of future results. Unless otherwise stated all products are provided by Fidelity International, and all views expressed are those of Fidelity International. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity International. Assets and resources are of Fidelity International unless otherwise stated.

No statements or representations made in this document are legally binding on FIL Limited or the recipient.

All information regarding the operation of and investments of FIL Limited managed portfolios is confidential. Any other information that we have provided about the Fidelity International group, unless contained within FIL Limited’s most recently published annual report, could also be price sensitive. Therefore all such information should be treated in confidence and used exclusively for the purposes of assessing FIL Limited's current or potential standing as a provider of institutional investment management services. The information is not to be distributed to any other party without the prior written agreement of FIL Limited.

Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to sell /cash in this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact. Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority. FIL Investments International is a member of the Fidelity International group of companies and is registered in England and Wales under the company number 1448245. The registered Office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ, United Kingdom.

Fidelity, Fidelity International, the Fidelity International Logo and F symbol are trademarks of FIL Limited.

RE2017090

contextobjective: to outperform the ipd other balanced put index by 0.5% p.a. over a rolling...

Documents