RREEF Research

The Future Size of the Global Real

July 2007
Estate Market

Table of Contents
1. Introduction………………....1
1. Introduction
It is extremely difficult to gain accurate figures on the size of the global real estate
market due to the fragmented and confidential nature of the industry across many
countries. Despite the difficulties, it is important to arrive at robust estimates to help:

2. The Global Market Today.....2
3. Estimating Future Size…......5
4. The Global Market Over
the next 5 Years……………..14
5. Conclusions ………………17
¾ Understand the scale of investment opportunities across various global
markets.
¾ Assess the liquidity and liquidity risks across markets.
¾ Develop appropriate investment strategies across global markets.
Beyond understanding the existing scale of the market it is also important to assess
how this will change over the short to medium term, as this can have a material
impact on investment strategy. Of particular significance are the regions and
countries that are likely to experience the most significant changes in value, in
absolute terms and relative to their existing size. Investment strategy should also be
influenced by the way in which the value of the market might change, whether through
appreciation, through the addition of new space or through sale and lease-back
activity. This paper presents research on the current value of the global real estate
market, and a set of approaches to estimating how the market is likely to change over
the coming five years1.

Chart 1: The Growth of the Global Real Estate Market, 2006-2011

6,000 2006 (LHS) 2011 (LHS) 5-Year Growth (RHS) 400%

Authors:
350%
Peter Hobbs 5,000

+44 (0)20 7547 4855 300%

peter.hobbs@rreef.com
4,000
% Change 2006 - 2011

250%
Henry Chin
US$ Billion

+44 (0)20 7545 6611 3,000 200%

henry.chin@rreef.com
150%
2,000

100%

1,000
50%

0 0%
Brazil
United States

Japan

Canada

Australia

China

India

Russia
Italy
Germany

UK

Netherlands
France

IMPORTANT: PLEASE SEE IMPORTANT

DI SCLOSURES AND ANALYST
CERTIFICATION IMMEDIATELY AT THE
END OF THE TEXT OF THIS REPORT

Source: RREEF Research

1
An early and abbreviated version of the paper was published in EG Capital, June 2007
2

Global invested stock is
considerably smaller than
investible stock.
The share of the invested
stock varies from country to
country, due to different
levels of market maturity.
RREEF Research
2. The Global Market Today
Based on an established set of approaches2, the value of the total invested commercial
market is currently estimated to be close to US$10 trillion at the end of 2006. This invested
market, or the space that is owned by professional real estate investors, such as money
managers, funds, private investment vehicles, listed companies, institutions etc., is far
smaller than the US$16 trillion “investible” market which also includes space that is
currently owner occupied but might, in time, become institutional3.
Chart 2 : The Size of Global Real Estate Market Size, by Region
Total stock of
Invested stock US$9.2 trillion
US$3.2 trillion
Europe
Investible stock
US$6.1 trillion
Invested
stock US$4.7
trillion
Invested stock
US$1.9 trillion
America
Americas
Asia
Total stock of
Investible Total stock of US$5.9 trillion
stock US$6.6 US$9.5 trillion Investible stock
trillion
US$3.5 trillion
Source: RREEF Research, DTZ, ULI/PWC. As of Dec 2006
As illustrated by the chart of the ten largest real estate markets, the US accounts for more
than a third of the global “investible” stock, followed by Japan, Germany and the UK (Chart
3). However, the share of the global “invested” stock for the US is a relatively high
proportion of the total “investible”, due to the greater maturity of the market and the higher
proportion of the market that is owned by institutional investors. On the other hand, less
mature markets such as China, Mexico, Brazil and India, have a smaller proportion of their
markets that are institutionally owned. These differences reflect variations in market
maturity with, for instance, France having a similar sized “investible” market to China but a
far larger “invested” market.
2
Urban Land Institute and PriceWaterHouseCoopers (2007), “Emerging Trends in Real Estate,
PriceWaterHouseCoopers”, USA; Key T. and Law V (2005), “The Size of the UK Market”, IPF
Seminar, May, City University; Pramerica Real Estate Investors (2003), “A Bird Eye of Real Estate
Markets”, March, USA; DTZ Research (2006/2007), “Money into Property: Global”, June, London, UK;
Hughes F and Arissen (2005), “Global Real Estate Securities- Where do They Fit in the Border
Market?”, September, EPRA; Karin Witalis/ING (2004), “Estimating the European Real Estate
Universe”, European Real Estate Society Conference Milan, Italy
3
“Total” stock refers to the overall stock of commercial real estate. “Investible” stock means
investment grade properties. This stock might currently be institutionally owned or owner-occupied but,
in time, it should all become “institutional”. This is smaller than the total stock as much commercial
real estate is of too poor a quality to become institutional, or will always remain owner occupied.
“Invested” stock, or the current stock refers to those properties which are currently owned by
professional real estate investors for an investment purposes.
2
 Chart 3: Top 10 Markets By Investible Stock, 2006

6,000 Invested Investible

5,000

4,000

US$ Billion
3,000

2,000

1,000

0
Japan

India
Italy
France

China

Canada

Spain

Australia

South Korea

Mexico

Brazil
United Kingdom
United States

Germany

Source: RREEF Research

The US invested stock The US dominates the global invested market, at 48% of the total, followed by Europe and
dominates the global real Asia, representing 33% and 19% respectively. Within Europe, the western countries
dominate, with the four largest markets of Germany, UK, France and Italy representing
estate market, followed by
nearly 70% of the total. Despite the pace of the recent growth, Central and Eastern
Europe and Asia.
Europe account for only 5% of the value of the whole European market. The pattern is
similar in Asia where the more mature economies of Japan, Australia, Hong Kong and
Singapore account for 80% of the total. Although China and India have grown
dramatically in recent years, their invested stock still represents less than 10% of the
regional total.

Chart 4: Global Real Estate Market Value (Invested Stock), end 2006

Americas Invested: Europe Invested: Asia Invested:

$4.7 tn or 48% of Global Total $3.2 tn or 33% of Global Total $1.9 tn or 19% of Global Total

7
Investible Invested
6

0
North America Latin America Western Eastern Mature Asia Emerging Asia
Europe Europe

Source: RREEF Research

RREEF Research 3
The retail property sector
accounts for the highest
share in highly mature
markets.
Alternative property sectors,
such as medical offices,
student housing and self
storage, are fast growing.
Emerging countries have a
relatively large share of retail
and logistics space.
RREEF Research
Beyond variations in the size of market across the world, there are significant differences in
the share taken by the main property types of offices, retail, industrial, multifamily etc..
Although historical and cultural factors influence these differences, there seems to be
some broad patterns according to the maturity of markets. The most mature markets, such
as Australia, UK and US tend to have a relatively high proportion of “retail” property space,
reflecting the maturity and concentration of the retail industry and property markets in each
country. These markets also tend to have a small but fast growing “alternative” property
sector such as hospitality, medical offices, student housing and self storage. Even
amongst these countries there are significant variations with, for instance, the multifamily
market being an important component of the US market compared with the negligible size
of the market in the UK and Australia.
A second group of countries is the mature economies of Western Europe and Asia where
office markets tend to dominate the invested market. This reflects the relative immaturity
of the retail and the logistics markets in these countries, as well as the importance of
service based economic activity. IPD has, for instance, estimated that retail property
accounts for less than 20% of total institutional real estate in countries including Germany,
France and much of Scandinavia, and only 21% of the total market in Japan (Chart 5).
The third group of more emergent countries seem, paradoxically, to have a relatively large
share of retail and logistics space, reflecting the stage of their economic development.
Such countries tend to be dominated by export-oriented and manufacturing activities,
hence the relatively high shares of industrial space in the (albeit still currently very small)
domestic real estate markets. In addition, the increasing levels of disposable income and
the emergence of a highly independent middle class population have fuelled consumer
spending, resulting in a relatively high share of retail invested stock.
These differences in the composition of real estate markets in individual countries need to
be understood in order to estimate the likely growth of the market, as explained in the
following section.
Chart 5: Retail Sector Share of Total Invested Stock, end 2006
60%
50%
40%
30%
20%
10%
0%
Ireland
Japan
Australia
Russia
China
Finland
France
Sweden
UK
USA
Denmark
Germany
Source: RREEF Research, DTZ, IPD, NAREIT, NCREIF
Note: IPD and NCREIF estimate the share of property in different sectors based on the assets in the portfolios of
their contributors. For this reason both estimates can suffer in terms of their representativeness. For instance, the
NCREIF index does not contain the assets of publicly listed (REIT) real estate so tends to understate the
proportion of professionally owned retail real estate. In a similar way, the IPD UK index tends to understate the
proportion of London office space in their UK index. For these reasons, adjustments have been made to the IPD
and NCREIF published sector shares where appropriate.
4

Appreciation is the most
fundamental component
impacting the future value of
real estate.
RREEF Research
3. Estimating the Future Size of the Global Real Estate
Market
A number of assumptions need to be made in order to estimate the future growth of the
global real estate market around the three components of change: Appreciation, Net
Additions, and Sale and Leaseback (Chart 6).
Chart 6: Components of the Current and Future “Invested” Real Estate Market
Current Future
Market Value Market Value
Sale & Leaseback
Net Additions
Appreciation
Current
Invested
Real Estate
Source: RREEF Research
3.1 Appreciation
Appreciation is, perhaps, the most fundamental component, and this is driven by the way
changes in rents and yields impact the value of existing real estate from one year to the
next, as well as the effect of depreciation or obsolescence. There are important
differences in the way the major property types appreciate (or depreciate) with, for
example, the office sector tending to be more volatile than the industrial sector in most
markets. For this reason, specific estimates need to be made for the major property types
in each market.
5

The peaking of the property
cycle means appreciation is
set to slow in the years to the
end of the decade.
Value growth is likely to turn
negative in a number of
countries, such as Hong
Kong and the UK.
RREEF Research
During 2006, rental growth picked up across most global markets, and this was
accompanied by continued cap rate compression. This was particularly the case for office
markets as they experienced a cyclical recovery, but also occurred in other property
sectors. The combination of these factors meant there was a surge in total returns, and in
appreciation, during the year. According to IPD and NCREIF, real estate appreciated by
around 10% in Spain, UK and the US, and as much as 15% in France.
The rental recovery is continuing in most markets during 2007 and, although cap rate
compression remains strong in some markets ranging from Japan and Eastern Europe, it is
slowing sharply in others such as the UK and the US. The combination of these factors
means that appreciation is expected to slow such that the value of the global real estate
market is expected to increase by around 7% during 2007. The peaking of the property
cycle means appreciation is set to slow further in the years to the end of the decade,
although there will continue to be significant variations. Value growth is likely to turn
negative in a number of countries such as Hong Kong and the UK, but will hold up well for
other markets particularly those sectors and countries benefiting from structural growth in
their markets. In overall terms, the global real estate market is set to appreciate an
average of 4% a year between 2008-11.
Although there are increasing concerns over the pricing of US real estate, it is likely that
the office sector will appreciate by around 10% over the next four years. This growth is
likely to be front loaded, driven by the current strong rent growth and the lagged effect of
recent cap rate compression. The slowing of the market and the slight upward pressure on
cap rates mean that capital values are likely to remain broadly flat in 2008-10 before
picking up again in 2011.
Chart 7: North America Real Estate Appreciation Index, 2006=100
112
Office Retail Industrial
109
106
103
100
2006 2007 2008 2009 2010 2011
Source: RREEF Research
The appreciation of the European market has tended to be more cyclical than North
America, and this trend is set to continue over the next few years. Strong office sector
appreciation in 2007 and 2008 will be driven by the further cap rate compression and
stronger rental growth. As rent growth slows and cap rates rise marginally across most
markets, appreciation is set to turn negative by the end of the decade.
6
 Significant variations across
Europe…
.
UK retail value growth will
turn negative over the next 2
to 3 years.
Asia has the strongest
appreciation with more than
15% of growth over the next
5 years…
…and China and India
expected to see double-digit
annual growth.
RREEF Research
There are significant variations across Europe. On the one hand, Ireland, UK and Spain
are about to reach the peak of their current cycles. Real estate values in these countries
have grown significantly in the past couple of years and are expected to continue to do so
this year. However, as these traditionally volatile markets move past the peaks of their rent
growth and cap rate compression cycles, it is likely that values will turn flat or even
negative perhaps as early as 2008 onwards. On the other hand, other markets such as
Germany and Netherlands will benefit from a delayed rental recovery and a later
compression of cap rates such that values will likely continue to appreciate (albeit mildly)
for longer than the more volatile markets.
There is a similar pattern for the European retail markets, with appreciation being front
loaded. However, as the UK accounts for over 40% of the entire European retail market,
the relatively severe downturn in this market will shape the European market as a whole.
The UK is experiencing a surge of growth in shopping centre development with
completions in 2008 expected to be the highest since the previous peak in the early 1990s.
This surge in supply coupled with a weakening of consumer spending and increasing
concerns from investors suggests that UK retail value change will turn negative over the
next two to three years, depressing the overall prospects for the European market.
Chart 8: European Real Estate Appreciation Index, 2006=100
120
Office Retail Industrial
115
110
105
100
2006 2007 2008 2009 2010 2011
Source: RREEF Research
Asia seems set to have the strongest appreciation across the world, driven by strong rental
growth and cap rates compression. Appreciation is expected to exceed more than 15% in
each sector although, as for other global regions, this is likely to be front-loaded. Record
prices continue to be set for both A-grade and B-grade buildings across a range of markets
including Japan, South Korea, Singapore and Hong Kong, and this will be translated into
the broader appreciation of the market. But, as elsewhere, there are significant variations,
with the recent rise in interest rates and a slowing of rental growth leading to a peaking of
value growth in Hong Kong. Despite such exceptions, the outlook for appreciation remains
good, with the strongest growth expected in China, at over 15% per annum for offices over
the next five years, and India. Within China, the industrial sector is expected to appreciate
at an even faster rate, due to structural changes in this sector, favourable market
fundamentals, and strong demand from export oriented and manufacturing business.
Although both China and India continue to experience strong appreciation, the actual
amount by which their markets will grow is relatively low due to the small size of the
7

Fast growing emerging
markets, such as China, India,
Russia and Central Eastern
Europe, have a relatively high
level of construction activity.
RREEF Research
existing market. Overall appreciation growth in China and India will represent around
US$300 billion over the next five years, around half the amount of the US market.
The biggest Asian real estate market, Japan, is also experiencing a recovery in market
fundamentals and cap rates, leading to significant recent appreciation across the market.
Investor appetite is set to remain strong and market conditions remain favourable
suggesting that Japan will continue to have strong value growth over the short to medium
term.
Chart 9: Asia Pacific Real Estate Appreciation Index, 2006=100
150
Office Retail Industrial
145
140
135
130
125
120
115
110
105
100
2006 2007 2008 2009 2010 2011
Source: RREEF Research
3.2 Net Additions
A second component of value change is Net Additions, or the value of the space added to
the invested market less the space that is demolished or removed from the invested stock.
These estimates of net additions need to identify the “invested” value, and exclude the
space that is built for owner occupation or “build to suit”.
Real estate markets continue to be highly cyclical, so there are significant variations in the
amount of space that is added at different points through the cycle. The downturn in the
global property markets during the early years of the decade meant that levels of new
construction slowed across most markets. There were exceptions, such as the fast
growing emerging markets of China, India, Russia and Central Eastern Europe. In China,
for instance, space under construction in Beijing and Shanghai ranged between 25-50% of
the existing stock between 2001 and 2006. Outside of these emerging markets, levels of
construction activity fell sharply which meant that net additions were relatively low in 2005-
06.
As rental growth has picked up and as cap rates have compressed, development activity
has resumed across most countries. The value of net additions will remain relatively low
during 2007, but will rise strongly between 2008-10, as the wave of recent starts comes to
fruition. There are large variations from country to country and from sector to sector. For
instance, the stronger performing and more volatile office markets such as the UK, Spain,
Central Europe and parts of the US are experiencing a surge of activity. In others, where
8

Mature markets’ net addition
tends to be around 1%-2% of
the existing stock.
New office development
tends to be owned for
investment purposes.
RREEF Research
vacancy rates remain high and demand relatively muted, such as Germany, Netherlands
and South Korea, net additions will remain relatively low.
Although there are variations between the mature markets net additions tend to represent
around 1-2% of existing stock, with slightly larger amounts in faster growing markets (such
as in Spain) or at markets that are suffering cyclical downturns (such as the UK in the early
years of this decade). As would be expected the level of development activity, and the
value of net additions, is far more significant in most of the fast-growing emerging markets,
as shown on Chart 10 and 11 . Given these high levels of development activity, a number
of emerging countries including China and India are expected to receive a tripling of the
existing inventory over the next five years, despite an expected slowing of the real estate
cycle. The level of development activity in both countries is enormous with, for example,
India likely to have more than 700 million square feet of office space completed,
representing a value of around $35 billion4.
Chart 10 : Net Additions as a % of total stock for major Western Office Markets
USA UK Germany Spain
5%
Net Additions as a % of a total stock
4%
3%
2%
1%
0%
-1%
2004 2005 2006 2007 f 2008 f 2009 f 2010 f 2011 f
Source: RREEF Research
Note: Total floorspace based on “Grade A” space. f indicates forecast
While a large proportion of new office development tends to be owned as investment
assets, both retail and industrial tend to have a higher proportion of “build to suit” space, in
response to the specific needs of retailers and logistic operators. There are exceptions,
such as the major shopping centres or malls and the provision of space for third party
logistics operators as these tend to be developed and owned by institutional investors.
4
RREEF Research (2006), Building up India, May 2006
9
 Chart 11 : Net Additions as a % of total stock for major Asian Office Markets

Japan China India

160%

140%

Net Additions as a % of a total stock

120%

100%

80%

60%

40%

20%

0%
2004 2005 2006 2007 f 2008 f 2009 f 2010 f 2011 f

Source: RREEF Research

Note: Total floorspace based on “Grade A” space. f indicates forecast

Alternative property types are
experiencing strong growth,
especially in the mature
markets.
Beyond the growth of the main property types of office, retail and industrial, there is
another set of “alternative” property types that is experiencing strong growth, particularly in
the more mature markets. These alternatives include student housing, medical offices,
senior living, self storage and other types of property that are responding to social and
demographic changes. Although they represent a very small proportion of the overall
investment market, they are increasing the overall value of the real estate markets through
appreciation, new development and the sale and leaseback of existing assets5.

Chart 12 : Net Additions as % of Total Stock for major Office markets, 2001-2011

100% 150%

80%
Annual Average Net Additions as % of Total Stock

70%

60%

50%

40%

30%

20%

10%

0%
01 to 06
07 to 08
09 to 11

01 to 06
07 to 08
09 to 11

01 to 06
07 to 08
09 to 11

01 to 06
07 to 08
09 to 11

01 to 06
07 to 08
09 to 11

01 to 06
07 to 08
09 to 11

01 to 06
07 to 08
09 to 11

USA UK Germany Spain Japan China India

Source: RREEF Research, Torto Wheaton, PMA, JLL

5
As an example of this, the institutionally owned student housing market in the UK is estimated to
represent US$9bn (or 1.25% of the overall real estate market). This market is set to grow through
appreciation, new development, and the sale of the additional US$25bn that is currently owned by
universities. Source: King Sturge (2007), UK Student Accommodation Market 2007

RREEF Research 10

Countries are experiencing
pressure for sale and
leaseback as part of the
broader outsourcing of non-
core business activities.
Three main drivers of sale
and leaseback activity, the
first of which is “fiscal
pressure”…
RREEF Research
3.3 Sale and Leaseback
The third driver of the future value of real estate involves Sale and Leaseback activity, or
the value of real estate that is transferred from owner occupation to the invested market.
There are wide variations in the proportion of real estate that is owner occupied with the
most mature markets such as the US or the UK having relatively low levels at around 30-
40%. In contrast, more emergent economies with limited institutional investment markets
tend to have a higher proportion of their real estate being owner occupied. For instance,
owner occupation is estimated to be around 90% in China, India and Russia, and over 70%
in countries such as South Korea, Taiwan, Czech Republic and Poland. Between these
extremes are the large mature economies with relatively immature real estate markets
such as Germany, Italy and Japan, where owner occupation is around 50-65%.
Each of these three types of country is experiencing pressure for sale and leaseback as
part of the broader outsourcing of non-core business activities. For instance, Real Capital
Analytics estimate that even in perhaps the most mature market in the world, the United
States, there were US$11billion of sale and leasebacks in 20066. In Europe, this activity
remains particularly strong in the UK, France, Italy and Germany with US$30 billion,
US$12 billion, US$15 billion, and US$10 billion worth of sale and leaseback activity
respectively since 20007. Although these figures represent large sums of real estate, the
actual share of the overall market is relatively low, at around 0.3%-0.75% of total market
size for the most active markets such as US, UK and Spain. The relatively small share of
sale and leaseback activity demonstrates that it will take many years, even generations,
before the levels of owner occupation in many markets across the world fall to the levels in
the US or UK.
Chart 13 : Sale and Leaseback Activity Relative to Market Size in Europe, 2004 -
2006
0.8
0.7
% 0.6
0.5
0.4
0.3
0.2
0.1
0.0
Sw eden Italy France Germany Netherlands UK Spain
Source: DTZ Research, RREEF Research
In order to estimate the likely scale of sale and leaseback activity, three separate drivers
are identified and measured for all the major markets around the world. First, the fiscal
pressures on governments and corporates as an indicator of the need for such
organisations to raise capital by divesting their real estate assets. Within Europe, a series
of governments and corporates have been faced with significant fiscal pressures and these
have been catalysts for them entering into significant sale and leaseback programmes.
This pressure to redeploy the capital tied up in real estate is becoming more widespread
6
Real Capital Analytics (2007), Office Capital Trends Monthly, March
7
DTZ (2007), Money into Property Global
11

… with the second being
financial attractiveness…
… and the third is the growth
of private equity investing.
RREEF Research
with, for instance, China Post being reported to be disposing of their non-core businesses,
such as hotels, in order to make use of the capital in their core business8.
The second dimension is the financial attractiveness, to occupiers, of renting compared
with owner occupation. In general terms, if the cost of borrowing is higher than the cost of
renting, it would tend to be sensible for occupiers to engage in selling and leasing back
their real estate. In this respect, there is a series of countries, such as New Zealand,
Central Europe, Australia and the US where interest rates are relatively high and
occupation costs (rents) are relatively low. At the other extreme are countries such as
Japan and Switzerland where there is less pressure on corporates to engage in sale and
leaseback activity due to the low cost of finance and the high cost of renting. Although the
ratcheting up of interest rates is likely to increase the pressure to dispose of non-core
businesses, the amount of sale and leaseback activity is likely to remain relatively low in
countries such as Japan and Switzerland.
Beyond the conventional process of selling and leasing back real estate, a third dimension
relates to the surge in the growth of “private equity” investing. This form of investing
has added a further catalyst to the transfer of real estate from the corporate to commercial
real estate sector. An increasing number of private equity transactions have been driven
by the hard, real estate, assets that underpin the corporate9. Although private equity
investing has touched most global markets, it remains concentrated on those countries
where there is greater scope for shareholder activism. In the US and the UK, for instance,
private equity transactions have averaged US$286 billion and US$67 billion, or 2.5% and
4% of GDP over the past three years10. This contrasts with a far smaller volume of US$21
billion (or 1% of GDP) in Germany and US$9 billion (or 0.2% of GDP in Japan). It is likely
that those countries with a higher penetration by private equity will lead to a higher volume
of corporate sale and leaseback activity.
Based on these three components and recent levels of activity, a rating of the different
countries according to the pressure for sale and leaseback is shown on Chart 15. This
chart reveals three distinct types of market. First, those with greatest pressure for sale and
leaseback activity that is likely to increase the value of real estate by around 0.6-0.75%
each year. At the other extreme, there is a group of countries, including Japan, Russia,
Switzerland and Norway where the level of sale and leaseback activity is set to be very
low, at less than 0.2% each year. Between these extremes is a third category where the
level of activity will be influenced by a range of political and business-specific factors such
that it could range between 0.2%-0.6% each year.
8
Jones Lang LaSalle Research, Asia Pacific Daily News.
9 See for instance, PERE (July 2007), KKR eyes Macy’s, PERE (March 2007), KKR unveils US$7.3bn
US retail buyout
10
Thomas Financial: Datastream
12
 Chart 14 : Private Equity Transaction Activity as a Percentage of GDP, 2005-2007

Mexico
Russia
Brazil
India
Romania
Chile
Portugal
Japan
Poland
Switzerland
Belgium
Finland
Norway
Ireland
Austria
Italy
Australia
Germany
France
South Africa
Sweden
Spain
United States
New Zealand
Canada
Netherlands
United Kingdom

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

% of GDP

Source: Thomson Financial; Global Insights

Note: Private Equity activity for year to June and GDP for calendar years

Sale and leaseback activity
tends to be highly volatile
from one year to the next.
It is important to recognise that sale and leaseback activity can be very lumpy, often driven
by political and regulatory changes, or trends in broader financial markets. A good
illustration of this is the case of Italy which experienced perhaps the highest level of sale
and leaseback activity in any one year during 2002, when US$9 billion of transactions took
place11. Since this time, sale and leaseback activity in Italy has fallen sharply, averaging
only US$300 million a year, illustrating the volatility of this pressure to change the size of
the real estate market.

Chart 15: Sale and Leaseback Attractiveness

Less Attractive Sale and Leaseback Attractiveness More Attractive

I
New Zealand
Denmark
United States
Canada
United Kingdom
South Africa
Spain
Sweden
Italy
Germany
France
Ranking

Brazil
Portugal
Australia
India
Poland
Austria
Mexico
China
Belgium
Finland
Norway
Switzerland
Russia
Japan

Sale and Leaseback Attractiveness

Note: Based on the combined attractiveness of individual countries on the three dimensions of 1. fiscal distress
(based on government fiscal balance as a % of GDP, 2005-07); 2. Cost of occupation relative to finance costs for
owning; 3. Level of private equity transaction volumes relative to national GDP.

Source: RREEF Research; Global Insights; CBRE; Thomson Financial

11
DTZ (2007), Money into Property Europe

RREEF Research 13

The value of global invested
markets is set to grow by
40% over the next 5 years.
4. The Global Real Estate Market over the Next 5 Years
Based on the analysis of the three dimensions of change explained in the previous section,
the value of the global invested markets is set to grow by nearly 40% over the coming five
years, from US$ 9.8 trillion in 2006 to US$13.7 trillion in 2011. This growth is far smaller
than experienced during the bull run of recent years with, for instance, the U.S. market
increasing in value by over 20% in 2006 alone12. Despite the slowing in the pace of
growth, the increase in the market by US$4 trillion represents a further significant growth in
the market that will provide opportunities, and risks, for investors participating across global
markets.

Appreciation represents more
than 60% of the change in
the size of the market in 2007
and 2008.
There are, however, important variations in the way the value will change over time and by
geography. During 2007, the major driver of change is set to be movements in the pricing
of real estate, with “appreciation” representing 70% of the change in the size of the market.
As rental growth declines and development activity picks up, a greater share of the change
will come to be driven by “net additions”. After representing only 29% of the increase in the
market size in 2007, this rises to 45% of the total by the end of the decade. Sale and
leaseback activity remains fairly constant through the cycle as this relates more to country-
specific pressures to outsource real estate and is relatively insulated from market cycles.

Chart 16: Incremental Changes in the Chart 17: % Change in Different Elements,
Value of the Global Real Estate Market, Global, 2007 - 2011
2007 -2011
% change on Appreciation Development Sale and Leaseback
previous year
100%
Appreciation Net Additions Sale & Leaseback
12%
90%

80%
10%
70%

8% 60%

50%
6%
40%

30%
4%
20%

2% 10%

0%
0% 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Source: RREEF Research Source: RREEF Research

The American market will
experience significant growth,
of US$1.5 trillion over the
next five years …
There are also profound variations by geography. The American market is set to grow by
US$1.5 trillion, driven by appreciation at close to 60% of the total. The impact of
appreciation is front loaded, falling off to represent 50% of the total in 2009 before
recovering at the end of the decade. This is due to the combined effect of weaker rental
growth and a mild increase in cap rates later in the decade.

12
According to ULI “Emerging Trends in Real Estate” (2006/2007), real estate invested stock for the
US has increased from US$ 3,588 billion in 2005 to US$ 4,258 billion in 2006.

RREEF Research 14
 Chart 18: Incremental Changes in the Chart 19 : % Change in Different Elements,
Value of the American Real Estate Market, Americas, 2007 - 2011
2007 -2011
% change on Appreciation Development Sale and Leaseback
previous year
100%
Appreciation Net Additions Sale & Leaseback
9%
90%

8% 80%

7% 70%

6% 60%

5% 50%

4% 40%

30%
3%
20%
2%
10%
1%
0%
0% 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Source: RREEF Research Source: RREEF Research

… with the European market
increasing by $1.1 trillion …
The market cycle is expected to be more significant in Europe, with appreciation
contributing to a large share of the increase in value in 2007 and 2008 before the market
starts to slow – the relative importance of appreciation falls sharply from over 70% in 2007
to under 30% in 2009 due to the easing of rent growth and the upward movement in cap
rates. The surge in development activity is set to have a particularly significant impact in
2009 and 2010 when it could to represent around 50% of value change across the
European market. The sale and leaseback activity is set to account for around 5-10% of
the annual increase. In overall terms, the market is likely to grow by US$1,100 billion over
the five years, based on appreciation of US$600bn, net additions of US$400bn and sale
and leaseback of around US$100bn.

Chart 20: Incremental Changes in the Chart 21 : % Change in Different Elements,

Value of the European Real Estate Market, Europe, 2007 - 2011
2007 -2011
% change on Appreciation Development Sale and Leaseback
previous year
100%
Appreciation Net Additions Sale & Leaseback
12%
90%

80%
10%
70%

8% 60%

50%
6%
40%

30%
4%
20%

2% 10%

0%
0% 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Source: RREEF Research Source: RREEF Research

… and Asia-Pacific by $1.3 In Asia Pacific, the market is expected to grow by US$1.3 trillion over the next 5 years,
trillion … almost doubling the existing size of the market. Although this growth is driven by strong
appreciation, new development also contributes another US$460 billion.

RREEF Research 15
 Chart 22: Incremental Changes in the Chart 23 : % Change in Different Elements,
Value of Asia Pacific Real Estate Market, Asia Pacific, 2007 - 2011
2007 -2011
% change on Appreciation Development Sale and Leaseback
previous year
100%
Appreciation Net Additions Sale & Leaseback
25%
90%

80%
20%
70%

60%
15%
50%

40%
10%
30%

20%
5%
10%

0%
0% 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Source: RREEF Research Source: RREEF Research

Emerging markets are set to
grow strongly, by over 100%
over the next five years.
The scale of development activity and the maturing of real estate markets mean that
emerging markets are set to grow most strongly over the coming five years. This is
particularly the case in Asia where the fast pace of growth of China and India in particular
mean that the market will grow by 160%. Latin America and Eastern Europe will also grow
fast, by around 120% and 100% respectively. Compared with this, the growth rates for the
mature markets are far lower, ranging from 20% in Western Europe and North America to
40% in mature Asia.

Chart 24: Changes in Value of Global Real Estate Market, by Region, 2006-2011
Change in
Real Estate Value of Real
Invested Stock Estate Market
2006 ($tn) 2011 ($tn) Change 2006-11 (%)

6 160%

140%
5

120%
4
100%

3 80%

60%
2

40%
1
20%

0 0%
North America Latin America Western Europe Eastern Europe Mature Asia Emerging Asia

Source: RREEF Research

But their size will still remain
relatively small.
Despite the pace of this growth, the current small scale of the emerging markets and, just
as significant, their limited institutionalisation means that the real estate markets will
continue to be relatively small even in five years time. By 2011 these markets are
expected to have grown by US$ 1.7 billion but they will still only represent 13% of the
global total - up from the 7% today, but still relatively small. Although the global share for
North America and Western Europe decrease in 2011, they still represent 70% of the
global total.

RREEF Research 16

The performance of the real
estate markets is set to fall off
over the coming 5 years...
… but the global real estate
market is set to continue to
grow with variations in the
timing and nature of growth
around the world..
RREEF Research
5. Conclusions
The early years of this decade were of profound importance for the global real estate
industry. Most markets performed exceptionally well, and there were significant
improvements in the transparency and liquidity of markets, as well as in corporate
governance across the real estate industry. The size of the markets also grew rapidly, and
investment activity became increasingly cross-border and “global”.
With rental growth moving towards a cyclical peak and with less scope for further cap rate
compression, the performance of the real estate markets is set to fall off over the coming
five years. Certain markets are likely to experience significant cyclical downturns as
investors realise that current levels of pricing are unsustainable given the surge of new
supply and the prospect of weaker, or even negative, rental growth.
Despite this reduced performance, this paper has demonstrated that the real estate market
is set to continue to grow, and this will be accompanied by the ever increasing maturity and
transparency of the market. As ever, these trends are not uniform with significant
variations from country to country in terms of both the timing and nature of the growth. The
fastest pace of growth is expected to be in the emerging countries of Asia, Eastern Europe
and Latin America, but the more significant increases in overall value will continue to be in
the established markets of North America, Western Europe and Japan. Much of this
growth will be front-loaded due to the continued importance of appreciation in 2007 and
2008, and net additions will tend to become more significant towards the end of the
decade. These variations in the dimensions of the growth of the market are of great
importance to investors as they develop their strategies across the increasingly global real
estate market.
It is clear that the estimates provided in this paper need to be treated with caution as they
are subject to a series of assumptions and projections about the drivers of value. There is
also a series of external factors that could significantly impact the growth of the markets.
On the one hand, there is the possibility that government initiatives could, for instance,
increase the amount of sale and leaseback activity greater than outlined in the paper. On
the other, there is a risk of a reversal in the recent high levels of financial market liquidity,
leading to potentially significant loss of value for many real estate markets. Despite these
caveats and these risks, this short paper provides important insights into the dimensions of
change in the market that should be a critical consideration when formulating real estate
investment strategies.
17
 ANALYST CERTIFICATION

The views expressed in this report accurately reflect the personal views of the undersigned
lead analyst. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report.

(Signed) Peter Hobbs

RREEF Research 18
RREEF Research 19
Important disclosure
© 2007. All rights reserved.

RREEF is the brand name of the real estate and infrastructure division for the asset management
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This material is intended for informational purposes only and it is not intended that it be relied on to
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An investment in real estate involves a high degree of risk and is suitable only for sophisticated
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20
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RREEF Research 21