Sebastian Gläsner IPD Investment Property Databank GmbH, Wiesbaden The Influence Of Ownership, Sector Allocation And Investment Style On Portfolio Volatility

© IPD 2 Research motivation The German property market described by the IPD Total Return index DIX showed low volatility over the last two decades Even in times of worldwide financial crisis in 2008 and 2009, the Total Return remained (slightly) positive The underlying property appraisals have frequently been criticised for smoothing and lagging tendencies as a consequence of “sustainable” factors that enter the valuation process Although the polycentric German property market does not necessarily need to show as much volatility as for example the London-focused UK market, we want to deepen our understanding of the index performance

© IPD 3 German properties of foreign investors As IPD offers specialised benchmarks for groups of clients, such as e.g. insurances, we compared the group “foreign investors” to the German investors Data refers to standing investments only (no transactions, no developments) Index calculation is capital weighted (IPD standard)

© IPD 4 Investor performance – Total return Sharpe outperformance of foreign investors from 2003 to 2007, peak in 2006 Strong underperformance in 2008 and 2009

© IPD 5 Investor performance – Income return Constantly higher income returns of foreign investors

© IPD 6 Sector allocation Foreign investors are strongly over-allocated in sector industry (32.4% vs. 2.3%) Both investor groups have a focus on office and retail investments

© IPD 7 The German index by investor groups We assigned each portfolio to an investor type: –Asset manager –Foreign investor –Insurance –Open-end fund (retail and institutional) As we apply statistical analysis, each property has the same weight, the “index” is not capital weighted like IPD standard We excluded properties with a CV of less than EUR from the analysis

© IPD 8 Data Investors in the German DIX

© IPD 9 Properties by investor group # Total returns InvType analysis possible? asset manager 5 foreign investor >>> analysis for insurance open-end fund industry asset manager foreign investor >>> analysis for 2007, 2008 and 2009 insurance open-end fund office 1, asset manager foreign investor >>> no analysis for sector "other" insurance open-end fund other asset manager foreign investor >>> analysis for 2008 and 2009 insurance open-end fund residential 578 1, ,291 asset manager foreign investor >>> analysis for insurance open-end fund retail total 2,651 2,774 2,202 2,990

© IPD 10 Investors in the German DIX Means of Total Returns mean TR sectorInvType analysis possible? industry asset manager5.7% foreign investor9.4%7.2%-0.1%-3.3% >>> analysis for insurance-4.0%-2.5%-32.1%-40.0% open-end fund-2.9%-0.2%5.9%4.3% total 5.5%5.4%0.4%-2.7% office asset manager7.2%5.4%4.9%1.3% foreign investor-10.5%6.7%0.9%-5.2% >>> analysis for 2007, 2008 and 2009 insurance1.4%4.7%4.1%3.0% open-end fund-1.3%1.9%3.2%3.6% total 0.2%3.7%3.6%2.5% other asset manager2.8%-4.1% 3.9% foreign investor2.1%-0.8%-2.3%-9.8% >>> no analysis for sector "other" insurance4.0%4.1%2.0%0.7% open-end fund2.3%4.4%5.1%2.5% total 3.2%3.6%2.9%0.6% residential asset manager 7.3% 6.6% foreign investor-15.8%-4.9%1.5%1.4% >>> analysis for 2008 and 2009 insurance7.1%5.8%4.8%4.9% open-end fund7.5%4.5%3.9%8.3% total 7.0%6.6%4.0%5.4% retail asset manager-22.1%4.8%3.5%-0.3% foreign investor8.8%8.4%0.1%1.5% >>> analysis for insurance2.8%3.3%4.2%1.9% open-end fund-0.2%4.2%5.1%3.5% total 2.7%5.1%2.7%1.9% total 2.6%5.2%3.3% higher mean total return lower mean total return Foreign investors achieved higher total returns in 2006 and 2007 and lower total returns in 2008 and 2009 in all analyzed sectors

© IPD 11 Investors in the German DIX Standard deviation of Total Returns sd TR sectorInvType industry asset manager6.8% foreign investor16.1%9.1%6.6%10.6% insurance open-end fund18.4%14.7%10.2%3.9% total 16.8%10.9%8.2%10.8% office asset manager13.7%11.4%5.5%6.4% foreign investor18.4%7.4% 12.2% insurance11.9%8.9%9.7%10.0% open-end fund10.6%6.7%5.8%4.9% total 11.5%8.3%8.0%8.8% other asset manager12.9%27.8% 6.2% foreign investor20.2%13.4%22.5%17.8% insurance11.7%7.1%10.4%12.0% open-end fund6.5%5.4%5.5%5.9% total 10.2%8.4%10.4%11.2% residential asset manager 16.2% 11.2% foreign investor19.2% 7.2%9.3% insurance11.6%7.5%8.5%9.0% open-end fund11.7%3.1%1.5%4.9% total 11.7%13.3%8.3%10.4% retail asset manager foreign investor13.4%8.6%9.0%10.7% insurance12.5%8.1%8.8%12.8% open-end fund11.3%6.9%5.6%5.9% total 12.6%8.2%8.5%10.7% total 12.1%10.8%8.4%10.4% lower cross spread higher cross spread The spread (sd) between single property returns within the groups does not vary significantly

© IPD 12 Foreign investments are more volatile Investor / period mean TR median TR domestic 08/094.2%4.8% foreign 08/090.1%1.0% domestic 06/073.7%4.4% foreign 06/077.7%8.2% -30% -20% -10% 0% +10% +20% +30% Foreign investors: Mean total returns of 7.7% in 2006/2007 Returns dropped to 0.1% in the 2008/2009 period Domestic investors: Mean TR of 3.7% in the 2006/2007 period Even higher returns (4.2%) in 2008/2009

© IPD 13 Industry investments are more volatile -30% -20% -10% 0% +10% +20% +30% DIX (excl. industry): Mean total returns of 3.9% in 2006/2007 Similar returns of 3.3% in the 2008/2009 period Industry sector: Mean TR of 5.5% in the 2006/2007 period Sharpe decline to -1.6% in 2008/2009 >>> As foreign investors are strongly over-allocated in the industry segment, both effects interfere Investor / period mean TR median TR DIX 08/093.3%4.3% industry 08/09-1.6%-1.2% DIX 06/073.9%4.7% industry 06/075.5%7.3%

© IPD 14 Retail properties: Domestic vs. foreign investors -30% -20% -10% 0% +10% +20% +30% Analysis of retail sector, as both investor groups have sufficient assets for comparison Domestic retail investors Low total returns of 2.3% in 2006/2007 Higher returns of 3.5% in the 2008/2009 period Foreign retail investors: Mean TR of 8.6% in the 2006/2007 period Sharpe decline to 0.9% in 2008/2009 >>> As each group has more than 100 retail properties in every analyzed year, the conclusion is that foreign investors had their assets appreciated in the 2006/2007 period and depreciated in the 2008/2009 period. For German investors there was only a minor change in the market values of their retail investments Investor / period mean TR median TR retail DIX 08/093.5%5.0% retail foreign 08/090.9%1.1% retail DIX 06/072.3%4.4% retail foreign 06/078.6%8.2%

© IPD 15 Accounting for investment risk To account for different risk levels of investments, analysis focuses on capital growth rather than Total Return The risk of a property is measured by the maximum income return the property realized between 2000 and 2009 The terciles of the resulting distribution of income returns define the dummy regression groups “IRlow”, “IRmed” and “IRhigh”

© IPD 16 Dummy regression: Explaining capital growth 2009 by Investor type, sector and income return Foreign investments have significantly lower capital growth lm(formula = CG09 ~ InvForeign + InvFund + InvInsurance + SecIndustry + SecOffice + SecResidential + SecRetail + Irlow + IRhigh) Coefficients: EstimateErrort valuePr(>|t|) (Intercept)-3.6%1.0% *** InvForeign-4.9%0.6% *** InvFund1.1%0.7% InvInsurance-0.5%0.5% SecIndustry-2.5%1.2% * SecOffice1.2%0.9% SecResidential5.3%1.0% *** SecRetail1.8%1.0% IRlow0.1%0.4% IRhigh0.4% Signif. codes: 0 '***' '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: on 2980 degrees of freedom (2956 observations deleted due to missingness) Multiple R-squared: , Adjusted R-squared: F-statistic: on 9 and 2980 DF, p-value: < 2.2e-16

© IPD 17 Dummy regression: Explaining capital growth 2008 by Investor type, sector and income return lm(formula = CG08 ~ InvForeign + InvFund + InvInsurance + SecIndustry + SecOffice + SecResidential + SecRetail + IRlow + IRhigh) Coefficients: EstimateErrort valuePr(>|t|) (Intercept)-0.2%1.4% InvForeign-5.5%1.3% *** InvFund-0.7%1.3% InvInsurance-0.6%1.3% SecIndustry-0.7%1.1% SecOffice0.4%0.7% SecResidential2.9%0.8% *** SecRetail0.7%0.8% IRlow-1.2%0.4% ** IRhigh-1.2%0.4% ** --- Signif. codes: 0 '***' '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: on 2192 degrees of freedom (3744 observations deleted due to missingness) Multiple R-squared: , Adjusted R-squared: F-statistic: on 9 and 2192 DF, p-value: < 2.2e-16 Foreign investments have significantly lower capital growth

© IPD 18 Dummy regression: Explaining capital growth 2006 by Investor type, sector and income return Foreign investments with higher growth rates, but not significant due to few observations Neither significant results for 2007 and 2005 lm(formula = CG06 ~ InvForeign + InvFund + InvInsurance + SecIndustry + SecOffice + SecResidential + SecRetail + IRlow + IRhigh) Coefficients: EstimateErrort valuePr(>|t|) (Intercept)0.2%2.0% InvForeign2.6%2.1% InvFund-2.8%1.9% InvInsurance-0.2%1.9% SecIndustry-1.8%1.6% SecOffice-2.5%0.7% *** SecResidential3.9%0.8% *** SecRetail-1.4%0.8% IRlow-0.8%0.5% IRhigh-0.5%0.5% Signif. codes: 0 '***' '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: on 2192 degrees of freedom (3744 observations deleted due to missingness) Multiple R-squared: , Adjusted R-squared: F-statistic: on 9 and 2192 DF, p-value: < 2.2e-16

© IPD 19 Overview: Significant capital growth differences Stars indicate significance level, “sign” refers to the sign of the estimate, i.e. whether the deviation is positive or negative Foreign investments deviate highly significant negative in 2008 and 2009 Objects with high income returns were appreciated in 2005 and depreciated in 2008 CG~InvType+ sector+IR Sig.signSig.signSig.signSig.signSig.sign # foreign owned prop InvForeign (+) (-) ***- - InvFund.-***- InvInsurance **- - SecIndustry * - SecOffice.-***- SecResidential *** SecRetail.-.+ IRlow **-***-**- IRhigh *+**- Signif. codes: 0 '***' '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

© IPD 20 Dummy regression: Significant capital growth differences retail Capital growth of foreign investments deviates highly significant negative in 2008 and 2009 and positive between 2005 and 2007 Objects with high income returns were depreciated in 2008 CG ~ InvForeign + IRlow + IRhigh Est.Sig. signSig.signSig.signSig.sign # foreign owned retail prop InvForeign6.7%***5.7% *** 3.0% *** -5.4% *** -4.0% *** IRlow-2.5%*0.1%-0.4%-0.2%-1.1% IRhigh0.7%-0.8%-1.7% * -0.9%1.5% Signif. codes: 0 '***' '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

© IPD 21 Sum up Volatility of total return differs between domestic and foreign investors in Germany Foreign investors are strongly over-allocated in the industry segment Asset allocation is a necessary control variable when comparing domestic and foreign investments on the German market Retail investments of foreign investors showed significantly more volatility between 2005 and 2009 Open research questions: –Are foreign investors more opportunistic than domestic investors (by the fact that they went abroad)? –Differences between foreign and domestic investors in other countries? –Differences in the selection of properties within a sector (core office versus opportunistic office within Frankfurt)? June 25

© IPD 22 Aug-15 Thank you for your attention! IPD Investment Property Databank GmbH Kirchgasse Wiesbaden Dr. Sebastian Gläsner Telefon: (0611) – 89