Andrew Baum and David Hartzell, Global Property Investment, 2011 International real estate investment: 1

Andrew Baum and David Hartzell, Global Property Investment, 2011 Source: Henley Business School, University of Reading Cross-border investing has boomed

Andrew Baum and David Hartzell, Global Property Investment, 2011 Norwegian fund buys £448m stake in Regent Street 4 November 2010 | By Kat Baker The Crown Estate is to join forces with the managers of the Norwegian Government Pension Fund Global in a new £1.8bn Regent Street partnership. The Norwegian pension fund will spend £448m to take a 25% stake in Regent’s Street in a deal representing a yield of around 4.5%. The deal marks the first time the Crown Estate has sold a stake in a standing investment and highlights the continued strong appetite from overseas investors for central London property.

Andrew Baum and David Hartzell, Global Property Investment, 2011 The case for international Diversification Higher returns Lack of local product Regulation Global benchmarks

Andrew Baum and David Hartzell, Global Property Investment, 2011 Diversification? Returns Source: IPD indices, NCREIF Australia Canada Ireland UK US

Andrew Baum and David Hartzell, Global Property Investment, 2011 Diversification? Correlations Correlations between UK all property returns and other global market sectors Source: IPD indices, NCREIF AustraliaCanadaIrelandUKUS Australia Canada Ireland UK US

Andrew Baum and David Hartzell, Global Property Investment, 2011 Limitations Smoothing Historic data Specific risk and sampling error: is the index replicable? Leverage Illiquidity Taxes and fees Currency

Andrew Baum and David Hartzell, Global Property Investment, 2011 Returns: global real estate, 2005 Source: IPD, NCREIF 30.1% 0.5% 13.4% Market Return, %

Andrew Baum and David Hartzell, Global Property Investment, 2011 The case against international Can you diversify? Implementation challenges Formal barriers –Taxation, fees and costs Informal barriers –Currency!

Andrew Baum and David Hartzell, Global Property Investment, 2011 Formal barriers Exchange controls Limits on foreign ownership Taxation of foreign owners

Andrew Baum and David Hartzell, Global Property Investment, 2011 Tax Pension funds pay no tax at home Withholding (income, not capital) taxes often applied on income internationally Income may be taxed but capital gains may not be Various structures can mitigate tax –Using debt to wash out income –Using tax treaties –Using vehicles domiciled in favourable tax regimes (Lux) Dividends and loan note interest taxed differently from rent

Andrew Baum and David Hartzell, Global Property Investment, 2011 Tax: case UK investment manager; captive insurance fund France performance prospects attractive Dutch pension funds likely co-investors, attractive fees Tax treaties France-Netherlands, UK-Netherlands Tax penalties for overseas investors in France 18.5% transfer tax on buildings – 1.75% on companies Income tax relief on interest in France Lower taxation of loan interest in Netherlands

Andrew Baum and David Hartzell, Global Property Investment, 2011 The French property fund External debt c. 65% 100 %

Andrew Baum and David Hartzell, Global Property Investment, 2011 Case: the French property fund Fund is controlled by Dutch nationals in Netherlands ABC fund owns BV to allow sale of portfolio without collapsing fund Tax treaty Netherlands - France means no tax paid by Dutch tax free entities Tax treaty Netherlands - UK means no tax paid in Netherlands by UK life fund

Andrew Baum and David Hartzell, Global Property Investment, 2011 Case: the French property fund Investors provide loans to top co to reduce tax on income received Dutch BVs own French prop cos to widen net of possible tax-favoured buyers Companies own French buildings to avoid transfer tax of 18.5% on sale – 1.75% company transfer tax French prop cos use debt to reduce French income tax on dividends paid up

Andrew Baum and David Hartzell, Global Property Investment, 2011 Informal barriers Currency risk Political risk Information asymmetry Limits on exit Equity Debt

Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions Formal barriersInformal barriers Ability to investWillingness to invest Restriction to capital accountsLegal and title risk Legal barriersPolitical risk Taxes and costsEconomic stability Currency risk Liquidity risk Cultural barriers Geographical barriers

Andrew Baum and David Hartzell, Global Property Investment, 2011 Currency: risk Euro GBP USD JPY Local Source: IPD global index returns, Property market returns averaged 11% in local currency; but averaged 7% to an unhedged Eurobloc investor, and 13% to a UK or US investor