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

2. © IPD www.ipd.com 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

3. © IPD www.ipd.com 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)

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

5. © IPD www.ipd.com 5 Investor performance – Income return Constantly higher income returns of foreign investors

6. © IPD www.ipd.com 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

7. © IPD www.ipd.com 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 500.000 EUR from the analysis

8. © IPD www.ipd.com 8 Data Investors in the German DIX

9. © IPD www.ipd.com 9 Properties by investor group # Total returns InvType2006200720082009analysis possible? asset manager 5 foreign investor 39 51 78 144 >>> analysis for 2006-2009 insurance 1 1 1 1 open-end fund 17 15 13 17 industry 62 67 92 162 asset manager 16 23 36 89 foreign investor 5 17 42 46 >>> analysis for 2007, 2008 and 2009 insurance 626 536 428 442 open-end fund 542 373 370 247 office 1,189 949 876 824 asset manager 9 5 3 foreign investor 5 7 10 9 >>> no analysis for sector "other" insurance 128 71 62 65 open-end fund 95 55 52 37 other 237 138 124 114 asset manager 672 717 foreign investor 2 1 136 150 >>> analysis for 2008 and 2009 insurance 559 459 427 414 open-end fund 17 15 7 10 residential 578 1,147 570 1,291 asset manager 1 1 1 19 foreign investor 105 140 234 298 >>> analysis for 2006-2009 insurance 249 172 163 183 open-end fund 230 160 142 99 retail 585 473 540 599 total 2,651 2,774 2,202 2,990

10. © IPD www.ipd.com 10 Investors in the German DIX Means of Total Returns mean TR sectorInvType2006200720082009analysis possible? industry asset manager5.7% foreign investor9.4%7.2%-0.1%-3.3% >>> analysis for 2006-2009 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 2006-2009 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

11. © IPD www.ipd.com 11 Investors in the German DIX Standard deviation of Total Returns sd TR sectorInvType2006200720082009 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

12. © IPD www.ipd.com 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

13. © IPD www.ipd.com 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%

14. © IPD www.ipd.com 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%

15. © IPD www.ipd.com 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”

16. © IPD www.ipd.com 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%-3.5390.000*** InvForeign-4.9%0.6%-7.9810.000*** InvFund1.1%0.7%1.5970.110 InvInsurance-0.5%0.5%-0.9450.345 SecIndustry-2.5%1.2%-2.0690.039* SecOffice1.2%0.9%1.3170.188 SecResidential5.3%1.0%5.5380.000*** SecRetail1.8%1.0%1.8030.071. IRlow0.1%0.4%0.2500.803 IRhigh0.4% 1.1020.270 --- Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: 0.09332 on 2980 degrees of freedom (2956 observations deleted due to missingness) Multiple R-squared: 0.1222, Adjusted R-squared: 0.1195 F-statistic: 46.09 on 9 and 2980 DF, p-value: < 2.2e-16

17. © IPD www.ipd.com 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%-0.1290.897 InvForeign-5.5%1.3%-4.1520.000*** InvFund-0.7%1.3%-0.5380.591 InvInsurance-0.6%1.3%-0.5020.616 SecIndustry-0.7%1.1%-0.6340.526 SecOffice0.4%0.7%0.5630.574 SecResidential2.9%0.8%3.8770.000*** SecRetail0.7%0.8%0.9780.328 IRlow-1.2%0.4%-2.7300.006** IRhigh-1.2%0.4%-3.1660.002** --- Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: 0.07451 on 2192 degrees of freedom (3744 observations deleted due to missingness) Multiple R-squared: 0.09674, Adjusted R-squared: 0.09303 F-statistic: 26.08 on 9 and 2192 DF, p-value: < 2.2e-16 Foreign investments have significantly lower capital growth

18. © IPD www.ipd.com 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%0.1110.912 InvForeign2.6%2.1%1.2180.223 InvFund-2.8%1.9%-1.4360.151 InvInsurance-0.2%1.9%-0.1280.898 SecIndustry-1.8%1.6%-1.0900.276 SecOffice-2.5%0.7%-3.3940.001*** SecResidential3.9%0.8%4.6060.000*** SecRetail-1.4%0.8%-1.6500.099. IRlow-0.8%0.5%-1.4950.135 IRhigh-0.5%0.5%-1.0140.311 --- Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1 Residual standard error: 0.07451 on 2192 degrees of freedom (3744 observations deleted due to missingness) Multiple R-squared: 0.09674, Adjusted R-squared: 0.09303 F-statistic: 26.08 on 9 and 2192 DF, p-value: < 2.2e-16

19. © IPD www.ipd.com 19 Overview: Significant capital growth differences 2005-2009 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 2005 2006 2007 2008 2009 Sig.signSig.signSig.signSig.signSig.sign # foreign owned prop. 2053102214327 InvForeign (+) (-) ***- - InvFund.-***- InvInsurance **- - SecIndustry * - SecOffice.-***- SecResidential ***+ + + + + SecRetail.-.+ IRlow **-***-**- IRhigh *+**- Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

20. © IPD www.ipd.com 20 Dummy regression: Significant capital growth differences retail 2005-2009 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 2005 2006 2007 2008 2009 Est.Sig. signSig.signSig.signSig.sign # foreign owned retail prop. 105 140234298 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 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

21. © IPD www.ipd.com 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

22. © IPD www.ipd.com 22 Aug-15 Thank you for your attention! IPD Investment Property Databank GmbH Kirchgasse 2 65185 Wiesbaden Dr. Sebastian Gläsner Telefon: (0611) 33 44 99 – 89 sebastian.glaesner@ipd.com