1. Optimal Global Real Estate Portfolio – A Practical Approach
17th Annual ERES Conference
Milan, June 25th 2010
Presented by:
Dr Jaroslaw Morawski, RREEF Research. Tel. +49 (69)

2. Agenda RREEF approach to a real estate investment strategy
Investment Universe
Global Allocation Analysis

3. RREEF approach to a real estate investment strategy
Section I
RREEF approach to a real estate investment strategy 3

4. Strategic market allocation is conducted in three stages
Objectives
Return
Risk
Liquidity …
Investment Universe
Investment Style
Geography
Stage 2:
Universe
Market pre-selection
Neutral Portfolio
Stage 3:
Strategic &
Tactical Allocs
Optimizations: Constraints & Risk Profiles
Allocations by Sector & Geography
Source: RREEF Research

5. Section II
Investment Universe 5

6. Global Investment Universe is Analysed In Terms of 12 Regions
Mature Asia
Volatile Asia
Emerging Asia
UK & Ireland
Australia & NZ
German Speaking
France & Benelux
North America
Southern Europe
Latin America
Nordics
CEE
Source: RREEF Research 6

7. Invested real estate and market maturity
The starting point for a RE “market portfolio” is the size of the investment market
Invested real estate and market maturity
Invested Real Estate
$bn
Source: RREEF Research; DTZ 2008

8. But markets differ also with respect to liquidity …
Real estate stock and investment volumes
Real estate stock (bn€)
Investment volume as % of invested stock
Source: RREEF Research; DTZ 2008 8

9. Jones Lang LaSalle Real Estate Transparency Index
… and transparency
Jones Lang LaSalle Real Estate Transparency Index
Source: Jones Lang LaSalle 2008 9

10. Emerging markets will remain the main drivers of the global economy
Projected average annual GDP growth
Source: Global Insight March 2010 10

11. Real estate stock and investment volumes 2005-2008
Given the distribution of the global GDP, investment grade real estate stock can be expected to grow particularly strongly in the emerging markets
Real estate stock and investment volumes
Source: RREEF Research; Global Insight, DTZ 2009 11

12. … although there are still substantial structural risks
S&P sovereign rating vs. Transparency International Corruption Perception Index (CPI)
S&P Rating / CPI C B BB
BBB A AA
AAA
Source: Transparency International, S&P, April 2010 12

13. Taking all these issues into account leads to a neutral portfolio …
German Speaking
UK & Ireland
France & Benelux
South Europe
Nordics
CEE
North America
Australia
Mature Asia
Volatile Asia
Emerging Asia
Latin America
Importance
Invested real estate (%)
10.7
8.7
7.2
4.7
2.6
1.3
45.5
2.5
11.0
1.2
3.0
1.4
Liquidity ▼▼ ▲▲ ▼ ▲
Very high
Long term economic growth ◄►
Transparency
High
Market growth potential
Country risk
Medium
Corruption
Neutral allocation (%) 8 10 7 4 3 2 50 1
This compression of yields means that real estate has become more expensive across global markets, as demonstrated by this chart. The chart shows the bond rates and spread with cap rates for US, UK, Germany and Japan.
The dark blue is the bond yield so, at end 2004, Japanese bond yields were 1.5%, and cap rates at 4%, so an attractive spread. During 2005, cap rates had compressed, but falls in bond yields meant that spreads remained attractive. [this is nominal, but real interest rates are 100bp lower in japan than in us and uk] During this year, cap rates have compressed – this shows to mid year 2006, and bond yields risen, narrowing the spreads, particularly in UK and in New York. Low in absolute terms and relative to cost of finance.
Seems that US markets have peaked, and are set to rise (ULI survey), due to:
Real cost of money rises
Rental growth peaking.
Real estate set to be seen as more expensive and equities doing well
Europe:
Seems to expect further 50bp compression in 2007 (GRI conference)
Source: RREEF Research, April 2010 13

14. … and to rational allocation ranges around the neutral portfolio
Neutral portfolio and rational allocation ranges
Allocation
How close to the neutral portfolio shell we stay?
This compression of yields means that real estate has become more expensive across global markets, as demonstrated by this chart. The chart shows the bond rates and spread with cap rates for US, UK, Germany and Japan.
The dark blue is the bond yield so, at end 2004, Japanese bond yields were 1.5%, and cap rates at 4%, so an attractive spread. During 2005, cap rates had compressed, but falls in bond yields meant that spreads remained attractive. [this is nominal, but real interest rates are 100bp lower in japan than in us and uk] During this year, cap rates have compressed – this shows to mid year 2006, and bond yields risen, narrowing the spreads, particularly in UK and in New York. Low in absolute terms and relative to cost of finance.
Seems that US markets have peaked, and are set to rise (ULI survey), due to:
Real cost of money rises
Rental growth peaking.
Real estate set to be seen as more expensive and equities doing well
Europe:
Seems to expect further 50bp compression in 2007 (GRI conference)
Source: RREEF Research, April 2010 14

15. Neutral portfolio and rational allocation ranges
… by continent
Neutral portfolio and rational allocation ranges
Allocation
This compression of yields means that real estate has become more expensive across global markets, as demonstrated by this chart. The chart shows the bond rates and spread with cap rates for US, UK, Germany and Japan.
The dark blue is the bond yield so, at end 2004, Japanese bond yields were 1.5%, and cap rates at 4%, so an attractive spread. During 2005, cap rates had compressed, but falls in bond yields meant that spreads remained attractive. [this is nominal, but real interest rates are 100bp lower in japan than in us and uk] During this year, cap rates have compressed – this shows to mid year 2006, and bond yields risen, narrowing the spreads, particularly in UK and in New York. Low in absolute terms and relative to cost of finance.
Seems that US markets have peaked, and are set to rise (ULI survey), due to:
Real cost of money rises
Rental growth peaking.
Real estate set to be seen as more expensive and equities doing well
Europe:
Seems to expect further 50bp compression in 2007 (GRI conference)
Source: RREEF Research, April 2010 15

16. Global Allocation Analysis
Section III
Global Allocation Analysis 16

17. The focus is on the risk-return profiles of the markets
Average gross returns and
Return volatility
Fund has delivered superior returns, before adjusting for risk.
Sharper ratio?
Source: RREEF Research, IPD, PMA, April 2010 17

18. Allowing for transaction costs, hedging and taxes…
Transaction and hedging costs
Estimated tax leakage
Fund has delivered superior returns, before adjusting for risk.
Sharper ratio?
Note: One-off transaction costs amortized over a10 year holding period, average estimated hedging cost against USD
Source: RREEF Research, April 2010 18

19. Average gross and net returns 1999-2009
… can substantially change the relative attractiveness of markets
Average gross and net returns
Fund has delivered superior returns, before adjusting for risk.
Sharper ratio?
Source: RREEF Research, IPD, PMA, April 2010 19

20. Efficient Frontiers 1990-2014f
Efficient Frontiers Based on Different Return Definitions
Efficient Frontiers f
Average Return
Return Volatility
Source: RREEF Research, April 2010 20 20

21. Constrained Allocation Dominated by the US
Efficient Allocations depending on the Level of Volatility based on Net Returns
Allocation
Return Volatility
Source: RREEF Research, April 2010 21

22. Changing Market Situation Calls for Short Term Tactical Allocations, which can Deviate from the Long Term Strategy
Constrained Efficient Frontiers for selected Sub-Periods based on Net Returns
Average Return
Return Volatility
Return Volatility
Source: RREEF Research, April 2010 22

23. Efficient Frontiers 1990-2014f
Applying Annual Tactical Adjustments to the Investment Strategy Could Allow Increasing the Average Return Level by Over 100 bps
Efficient Frontiers f
Average Return
Potential effect of active portfolio adjustments
Return Volatility
Source: RREEF Research, April 2010 23

24. Year-by-Year Tactical Allocations for a Maximum Volatility of 7.5%
Year-by-Year Optimal Allocations for a Conservative Strategy
Year-by-Year Tactical Allocations for a Maximum Volatility of 7.5%
Allocation
Return
Source: RREEF Research, April 2010 24

25. Long-term strategic allocations and the tactical tilt in 2011-2014 for a low risk portfolio
Strategic and tactical allocation with a maximum volatility of ca. 7.5%
Allocation
Source: RREEF Research, April 2010 25

26. … by continent
Strategic and tactical allocation with a maximum volatility of ca. 7.5%
Allocation
Source: RREEF Research, April 2010 26

27. Important Information
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