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

2. Andrew Baum and David Hartzell, Global Property Investment, 2011 Currency: the carry trade SWF interested in buying Turkish shopping centre –Cap rate 12% –Expected IRR 20% –Turkish bond yield/interest rate 14% What is the leveraged return in Turkish lira? ke = [ka-(kd*LTV)]/(1-LTV) where –ke = return on levered equity –ka = return on unlevered asset –kd = cost of debt ke = 0.2 - (.14*.6)/(1-.6) = 0.2 - 0.084/0.4 = 29% (approx.)

3. Andrew Baum and David Hartzell, Global Property Investment, 2011 Currency: the carry trade SWF interested in buying Turkish shopping centre –Turkish bond yield/interest rate 14% –US bond yield/interest rate 5%; Why not borrow US dollars to buy shopping centre? What is the new leveraged return in Turkish lira? ke = [ka-(kd*LTV)]/(1-LTV) ke = 0.2 - (.05*.6)/(1-.6) = 0.17/0.4 = 42.5% (approx.) What’s the catch?

4. Andrew Baum and David Hartzell, Global Property Investment, 2011 Turkey shopping centre: leveraged IRRs Turkish return leveraged 26.77% Year012345 Cash flow-400.00120.00129.60139.97151.171032.59 Interest84.00 Cash flow-400.0036.0045.6055.9767.17948.59 IRR26.77%

5. Andrew Baum and David Hartzell, Global Property Investment, 2011 Turkey shopping centre: leveraged IRRs Turkish return leveraged 26.77% US return leveraged 37.34% (cheap debt, no currency movement) Year012345 Cash flow-400.00120.00129.60139.97151.171032.59 Interest30.00 Cash flow-400.0090.0099.60109.97121.171002.59 IRR37.34%

6. Andrew Baum and David Hartzell, Global Property Investment, 2011 Turkey shopping centre: leveraged IRRs Turkish return leveraged 26.77% US return leveraged 37.34% (cheap debt, no currency movement) US leveraged return 18.03% (cheap debt, currency falls) Year012345 Cash flow-400.00110.09109.08108.08107.09461.07 Interest30.00 Cash flow-400.0080.0979.0878.0877.09431.07 IRR18.03%

7. Andrew Baum and David Hartzell, Global Property Investment, 2011 Dealing with risk Example: Turkey – assume 8% RP, 14% RFR Maximise excess return: IRR (K + G) – RFR – RP (K + G) = 12% cap rate (K) + 8% growth (G) = 20% IRR IRR – RFR – RP = 20% - 14% - 8% = -2%: SELL Example: US – assume 4% RP, 5% RFR Maximise excess return: IRR (K + G) – RFR – RP (K + G) = 8% cap rate (K) + 2% growth (G) = 10% IRR IRR – RFR - RP = 10% - 5% - 4% = 1%: BUY

8. Andrew Baum and David Hartzell, Global Property Investment, 2011 Turkey shopping centre: unleveraged IRRs Turkish return unleveraged 20% Year012345 NOI1000.00120.00129.60139.97151.17163.26 Exit1469.33 Cash flow1000.00120.00129.60139.97151.171632.59 IRR20.0%

9. Andrew Baum and David Hartzell, Global Property Investment, 2011 Turkey shopping centre: unleveraged IRRs Turkish return unleveraged 20% US return unleveraged 10.1% (currency falls) Year012345 NOI1000.00110.09109.08108.08107.09106.11 Exit954.96 Cash flow1000.00110.09109.08108.08107.091061.07 IRR10.09%

10. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? Assume different buyer strategies –unleveraged, Turkish buyer –unleveraged, US buyer –leveraged, Turkish buyer –leveraged, US buyer (using local debt) –leveraged, US buyer (using US debt, carry trade) Add variance in two variables Examine expected returns and risks of these strategies –35 scenarios for each strategy –Variance in currency exchange rate, exit cap rate

11. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? Assume range of different property out-turns –different exit cap rates centred on the going-in yield of 12% –range from +3% to -3% at 1% rests –7 possible values, equal probability Assume different currency exchange rates –expected equal annual values based on interest rate differential of -9% –range from +9% to -27% at 9% rests –5 possible values, equal probability

12. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? Currency deflation 9%12345 Exit yield move3%16.296.6919.257.909.88 2%17.417.7121.6110.2012.51 1%18.648.8424.1112.6115.22 0%20.0010.0926.7715.1618.03 -1%21.5311.4929.6317.9020.99 -2%23.2613.0832.7420.8524.15 -3%25.2414.936.1724.0927.56 SD3.212.956.075.816.34 Mean20.3410.4027.1815.5318.33 CV6.333.534.482.672.89 1: Unleveraged, Turkish buyer 2: Unleveraged, US buyer 3: Leveraged, Turkish buyer 4: Leveraged, US buyer (local debt) 5: Leveraged, US buyer (carry trade)

13. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? Currency deflation 0%12345 Exit yield move3%16.29 19.2527.1731.05 2%17.41 21.6129.0632.99 1%18.64 24.1131.0935.08 0%20.00 26.7733.3037.34 -1%21.53 29.6335.7239.81 -2%23.26 32.7438.4042.52 -3%25.24 36.1741.3945.45 SD3.21 6.075.115.18 Mean20.34 27.1833.7337.75 CV6.33 4.486.617.28 1: Unleveraged, Turkish buyer 2: Unleveraged, US buyer 3: Leveraged, Turkish buyer 4: Leveraged, US buyer (local debt) 5: Leveraged, US buyer (carry trade)

14. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? 1: Unleveraged, Turkish buyer 2: Unleveraged, US buyer 3: Leveraged, Turkish buyer 4: Leveraged, US buyer (local debt) 5: Leveraged, US buyer (carry trade) Currency deflation 18%12345 Exit yield move3%16.29-1.4519.25-16.78-100 2%17.41-0.521.61-12.68-20.96 1%18.640.5424.11-8.80-12.86 0%20.001.6926.77-5.03-6.79 -1%21.532.9929.63-1.26-1.52 -2%23.264.4632.742.573.37 -3%25.246.1336.176.568.16 SD3.212.726.078.3437.18 Mean20.341.9827.18-5.06-18.66 CV6.330.734.48-0.61-0.50

15. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? 1: Unleveraged, Turkish buyer 2: Unleveraged, US buyer 3: Leveraged, Turkish buyer 4: Leveraged, US buyer (local debt) 5: Leveraged, US buyer (carry trade) Currency deflation -9%12345 Exit yield move3%16.2927.819.2546.2850.77 2%17.4129.0221.6148.0552.54 1%18.6430.3724.1149.9854.46 0%20.0031.8726.7752.1056.57 -1%21.5333.5529.6354.4558.91 -2%23.2635.4532.7457.0761.52 -3%25.2437.6236.1760.0464.47 SD3.213.536.074.944.92 Mean20.3432.2427.1852.5757.03 CV6.339.144.4810.6411.59

16. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? 1: Unleveraged, Turkish buyer 2: Unleveraged, US buyer 3: Leveraged, Turkish buyer 4: Leveraged, US buyer (local debt) 5: Leveraged, US buyer (carry trade) Currency deflation 27%12345 Exit yield move3%16.29-8.4319.25-100.00-100 2%17.41-7.5521.61-100.00-100 1%18.64-6.5924.11-100.00-100 0%20.00-5.5126.77-100.00-100 -1%21.53-4.3129.63-100.00-100 -2%23.26-2.9532.74-22.00-100 -3%25.24-1.3936.17-14.84-24.51 SD3.212.536.0739.8628.53 Mean20.34-5.2527.18-76.69-89.22 CV6.33-2.084.48-1.92-3.13

17. Andrew Baum and David Hartzell, Global Property Investment, 2011 What is the risk? All scenarios 1: Unleveraged, Turkish buyer 2: Unleveraged, US buyer 3: Leveraged, Turkish buyer 4: Leveraged, US buyer (local debt) 5: Leveraged, US buyer (carry trade) a assuming inflation of +9% in Turkey 12345 Average return20.3411.9427.184.021.05 Average real return a 11.3411.9418.184.021.05 SD3.0213.755.7048.5856.08 CV nominal6.740.874.770.080.02 CV real3.760.873.190.080.02

18. Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions: unleveraged Turkish buyer Expected return: 20% nominal Mean return: 20.3% (11.3% real assuming 9% inflation) Range: 16.3% – 25.2% Risk: 3.0% Return is immune to changes in currency Risk-adjusted return: 6.7% nominal (3.8% real) Chance of negative return: 0/35 Chance of return below domestic risk-free rate: 0/35

19. Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions: unleveraged US buyer Expected return: 10.1% (real and nominal, assuming 0% inflation) Mean return: 10.9% with expected currency change, 11.9% with risk Range: 6.7% – 14.9% with expected currency change Range: -8.4% – +37.6% with currency risk Risk: 3.0% with expected currency change Risk of changes in currency boost this to 13.8% Risk-adjusted return: 0.87% Chance of negative return : 9/35 Chance of return below domestic risk-free rate: 13/35

20. Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions: leveraged Turkish buyer Expected return: 26.8% nominal Mean return: 27.2% (18.2% real assuming 9% inflation) Range: 19.3% – 36.2% Risk: 5.7% Return is immune to changes in currency Risk-adjusted return: 4.8% nominal (3.2% real) Chance of negative return : 0/35 Chance of return below domestic risk-free rate: 0/35

21. Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions: leveraged US buyer (local debt) Expected return: 15.2% Mean return: 15.5% with expected currency change Mean return: 4.0% with currency risk Range: 7.9% – 24.1% with expected currency change Range: -100% – +60.0% with currency risk Risk: around 5.8% with expected currency change Risk of changes in currency boost this to 48.6% Risk-adjusted return: 0.08% Chance of negative return : 12/35 Chance of return below domestic risk-free rate: 13/35

22. Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions: leveraged US buyer (carry trade) Expected return: 18.0% Mean return: 18.3% with expected currency change Mean return: 1.1% with currency risk Range: 9.9% – 27.6% with expected currency change Range: -100% – +64.5% with currency risk Risk: around 5.2% with expected currency change Risk of changes in currency boost this to 56.1% Risk-adjusted return: 0.02% Chance of negative return : 12/35 Chance of return below domestic risk-free rate: 13/35

23. Andrew Baum and David Hartzell, Global Property Investment, 2011 Conclusions Deal is more efficient for domestic buyer Leverage damages risk-adjusted return Using leverage adds huge risk for US buyer Local borrowing is less risky, but only marginally 12345 Average return20.3411.9427.184.021.05 Average real return a 11.3411.9418.184.021.05 SD3.0213.755.7048.5856.08 CV nominal6.740.874.770.080.02 CV real3.760.873.190.080.02