The Future of Global Real Estate

1
The Future of Global Real Estate

• A syndicated research programme uncovering the
  future of global property values
• Economist Intelligence Unit
• Country and Economic Research
• March 2009

2
Our proposed methodology
3
A new dawn for real estate?

• Economic boom of the last six years characterised
  by
• huge increase in credit and liquidity
• high demand for assets equities, bonds,
  commodities, property
• Nevertheless, cheap credit not the only driver of
  property prices
• demographic trends
• changes in incomes
• pace of urbanisation
• macroeconomic environment
• But in many markets property prices rose far
  above a level which could be justified by these
  long-term drivers, i.e. above fair value
• Recent credit crunch accompanied by property bust
  of spectacular proportions

Long-term fundamentals
4
What about existing real estate research?

• Not many global products as such
• different consultancies focussing on different
  regions
• e.g. Global Insight Moodys for US, Jones Lang
  LaSalle for separate regions
• coverage mostly for developed / OECD economies
• Many survey based forecasts
• short-term forecasts limited country coverage
• e.g. PwC Emerging Trends in Real Estate
• Modelling based on macroeconomic fundamentals
  seems restricted to academic research and
  international organisation working papers
• e.g. International Monetary Funds (IMF) World
  Economic Outlook, 2008 OECD Economic Outlook
  No.78, 2005

5
Our methodology

• Theoretical background
• IMF, WEO 2004 House prices in Australia, UK,
  Ireland and Spain exceeded their predicted values
  by 20 pc
• IMF, WEO 2007 During 1997 to 2007 house
  prices were up to 30 pc higher than justified
  by the fundamentals

• OECD, Economic Outlook 2005To address
  overvaluation it is necessary to relate these
  prices to their putative underlying determinants

6
Our methodology

• Econometric analysis to arrive at a real estate
  'fair' price equation
• based on a regression which best explains past
  price fluctuations given historical economic data
• determine what should have happened to prices
  given the path of economic fundamentals in the
  past and determine the 'price gap
• Forecasts apply price equation to our in-house
  macroeconomic forecasts
• determine the future path of 'fair' prices of
  real estate in light of future macroeconomic
  conditions
• EIUs forecasting approach will combine long-term
  economic forecasting with property specific
  factors and will ensure that price forecasts take
  appropriate account of the state of the economy
  and income levels.

7
Why the Economist Intelligence Unit?

• Independent, long-run perspective required
• Some property specialists will forecast property
  prices based on historic trends and industry
  specific factors (such as availability of
  planning permits etc). But a truly insightful
  long run property forecast requires much more
  than this - it needs to be rooted in a deep
  understanding of the broader national and
  international economic context.
• This is an area in which the EIU has a proven
  track record. Therefore the EIUs forecasting
  approach, which combines long-term economic
  forecasting with property specific factors, is
  designed to ensure that our forecasts take
  appropriate account of the state of the economy
  and income levels. Many of the mistakes in
  forecasting property prices in the past have
  arisen because these factors were not taken
  sufficiently into account.

8
Why the Economist Intelligence Unit?

• World leader in country analysis and
  forecasting.
• For over 60 years we have provided business
  intelligence that corporate executives,
  government officials and academics require to
  understand developments around the world.
• We cover more than 200 countries, providing
  economic forecasts on the world's 150 largest
  markets.
• A truly insightful long run property forecast
  needs to be rooted in a deep understanding of the
  broader national and international economic
  context. This is an area in which the EIU has a
  proven track record.
• It is our analytical framework and forecasting
  methodology that gives us our competitive edge.
• Our approach combines the best in
  analysisdrawing on the country expertise of our
  specialistsand the best in forecasting, grounded
  in tested models, carefully vetted data and a
  qualitycontrol process that ensures both
  accuracy and consistency.

9
Our methodology variables to test
Price equation variables
10
Our methodology UK residential case study

• We are already able to accurately model
  quarterly UK residential property prices

Real house price growth (Source DCLG)

• Model 1 drivers
• Income growth
• Previous growth in price (speculator effect)
• Interest rates
• Population growth
• Growth in domestic credit
• Labour market conditions

EIU model estimate
But what would have happened if prices were
driven only by economic fundamentals?
11
Our methodology UK residential case study

• Annual UK property prices based on
  fundamentals

Real house price growth (Source DCLG)

• Model 2 drivers
• Income growth
• Interest rates
• Population growth
• Economic development
• Labour market conditions

EIU fair price model estimate
Actual prices rose faster than the economic
fundamentals since 1997 But undervalued from
1990 to 1996
12
Our methodology Spain residential case study
Again, controlling for fundamentals,
residential prices in Spain rose above our fair
value from 2003. During the economic downturn, we
expect actual prices to converge towards the
fairer levels and even undershoot based on past
trends.

• Model 3 drivers
• Income growth
• Interest rates
• Population growth
• Labour market conditions

Price gap
Source Banco de Espana Economist Intelligence
Unit estimates
13
Our methodology UK commercial case study
We have also applied our approach to commercial
property values. The preliminary results are
shown below. Changes in key economic variables
are able to explain much of the change in
commercial property prices

• Model 4 drivers
• Income growth
• Interest rates
• Population growth
• Labour market conditions
• Residential prices

14
Our proposed deliverables
15
A new dawn for real estate?

• A model of residential and commercial property
  prices in over 50 countries and 70 cities to
  identify "fair value" for each market based on
  long-term fundamentals.
• An exciting research project that will provide
  members with exclusive insight into the real
  estate market around the world.
• In which countries is real estate overvalued and
  how low are prices likely to fall?
• When can we expect a recovery?
• Which markets are undervalued and where will the
  next investment opportunities occur?

16
What will our research provide?
There are numerous benefits arising from
participating in this programme

• Access price data for over 50 countries and 70
  cities via a secure online platform
• Identify which markets are over- or undervalued
  and target your investments effectively
• Download exclusive forecast data for residential
  and commercial property prices to 2020
• Network with peers online
• Understand the key economic fundamentals driving
  real estate market prices around the world

17
Geographical coverageCountries over 50
18
Geographical coverageCities - over 70
19
What are the research deliverables?

• 1. Online access
• A dedicated, secure micro-site for downloading
  and manipulating data and analyses, including a
  discussion-forum with EIU analysts and other
  syndicate members

20
What are the research deliverables?

• 2. Real estate database
• Access comprehensive data on residential and
  commercial real estate prices for over 50
  countries and 70 cities, annual and quarterly,
  including latest data and historical time series
  (480 data series)
• 3. Market studies
• Briefing papers on the history and outlook for
  real estate for each country, including summary
  reports on the medium-term macroeconomic outlook

21
What are the research deliverables?

• 4. Forecasts and scenario testing
• Interactive forecasting model with residential
  and commercial price projections to 2020 with
  adjustable parameters for various forecast
  scenarios

22
4. Forecasts and scenario testing
23
Timeline, syndicate fees and project team
24
Timing

25
The team

• Project management team
• Andrew Williamson, Global Director Economic
  Research
• Gavin Jaunky, Senior Economist
• Robert Metz, Senior Analyst
• Economics team
• Robin Bew, Editorial Director and Chief Economist
• Robert Ward, Director, Global Forecasting
• Chris Pearce, Director, Economics Unit Director,
  Data Services
• Regional teams
• Charles Jenkins, Regional Director, Western
  Europe
• Pat Thaker, Regional Director, Africa
• Laza Kekic, Regional Director, Central Eastern
  Europe Director, Country Forecasting Services
• Justine Thody, Regional Director, Latin America
• Gerard Walsh, Regional Director, Asia
• David Butter, Regional Director, MENA

26
Fees

• 16,000 / US24,000

For more information, please contact us using the
customer enquiry form at www.eiu.com/property