HOUSE_OVERSIGHT_024174

Listed real estate

UBS Global Index DTR (28 June): 1,375 (last month: 1,320)

UBS View UBS Global Index DTR (6-month target): 1,400 ¢ A slight positive monthly performance has been driven by rebounds in the higher beta markets, respectively Hong Kong, Japan and Singapore.

e Listed real estate is still attractively valued on different earnings ratios and trade on a slight discount to NAV. Earnings yields over 5 year swap rate are attractive currently attractive, yet the flattening of interest curves has come to a halt and we see less support from it in the future.

e Little supply of commercial space across the globe leads vacancy rates to gradually decline and low capitalization rates in core markets support capital values. Also rental yields remain attractive compared to high grade bond yields. However, further significant capital appreciation is unlikely. This is especially due a slow down in rental income as economic growth is subdued. Hence, future performance is limited.

e Although slightly reduced, we maintain our preference for US REITs due to stable fundamentals and like Australia as a conservative play. We slightly overweight Hong Kong, stay neutral towards Singapore, but maintain a slight underweight in Japan as fundamentals remain unconvincing.

A Positive scenario UBS Global Index DTR (6-month target): 1,500 ¢ Improving macroeconomic data in the US, positive economic surprises in Europe followed by monetary easing in China help to increase growth prospects that support rental income growth, while refinancing costs remain low in a low inflation environment. Real estate offers a comparatively attractive yield. Negative scenario UBS Global Index DTR (6-month target): 1,300 ¢ The US growth path disappoints investor expectations and causes the comparatively high valuation levels there to correct, significantly affecting global real estate. Furthermore, a more severe recession in Europe triggers a tightening of credit standards, making listed real estate more dependent than ever on bank financing at a time when credit markets are already fragile. Real estate underperforms global equities because the correlation between the availability of credit and short-term performance is high.

Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching Why it matters

We do not expect capitalization rates to decrease much from now. Rental yields have already been pushed down by decreasing bond yields; we see a diminishing support from the interest curve, which has significantly flattened in the past. Global commercial real estate transaction volumes are down year-on-year due to a lack of product in core markets and constraints on debt financing. Global rental growth has softened and very modest growth will feature major markets overall.

Capitalization rates and rental yields

Transaction volumes and future rental growth in direct markets

Credit markets and financing costs

36 UBS

Lending conditions have been a little tightened. However, well financed listed companies have still good access to credit, while others are more restricted.

Preference: neutral

Recommendations

Tactical (6 months)

¢ We maintain our neutral stance towards listed real estate after a good performance year-to-date and due to a relative less attractive valuation compared to global equities. Going forward returns are limited by subdued revenue growth. However, we still expect listed real estate to stay comparatively attractive in a low growth, low rates environment.

Strategic (1 to 2 years)

e A cyclical slowdown in rents limits growth, but attractive refinancing conditions are supportive. We see potential for higher payout ratios in the US and Asia, while Europe has to consolidate balance sheets.

Preference (6 months) Our market preferences for listed real estate*

sector based on UBS Global Real Estate Index domestic total return, which is not the overall secter view

Source: UBS CIO, as of 26 June 2012

Note: Past performance is not an indication of future returns.

For further information please contact CIO's asset class specialist Thomas Veraguth, thomas.veraguth@ubs.com

Please see important disclaimer and disclosures at the end of the document.

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