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Americas Real S napShot!

Real estate — Winter 2014

Current developments in the key markets in the Americas

• Brazil Positive growth despite uncertainty in the economic environment

• Canada The rise of real estate investment trusts (REITs) and real estate operating companies (REOCs) • Chile A slow year for the real estate industry

• Mexico Opportunities despite a challenging market

• United States increasing optimism in the real estate market Introduction

Welcome to the inaugural edition of KPMG’s Americas Real SnapShot. This document was prepared by a network of seasoned KPMG professionals aligned to different functional groups within the member firms across the Americas region. These specialists have a deep understanding regarding the complex nature of the real estate markets throughout the Americas. KPMG’s Real Estate practice understands real estate and the related financial factors and maintains an extensive database on all regional submarkets. Through both our regional and global networks of interdisciplinary experts, member firms can offer a wide spectrum of real estate-related services for challenging local and international mandates. KPMG professionals extensive experience and advice can help clients achieve added value in the real estate sector.

Andrew Weir Global Chair, Real Estate and Construction

Greg Williams Head of Americas, Real Estate and Construction

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Brazil Positive growth despite uncertainty in the economic environment

Macroeconomic overview Office market

The Brazilian economy remains sensitive to global economic As a result of the upturn in the economy in 2010 and 2011, instability, which, coupled with the downturn in local foreign investors identified opportunities in commercial manufacturing activity, has raised doubts about the future buildings. At that time, the percentage of upscale performance of economic indices. offerings was still small compared to the demand. These investments are maturing and a volume of approximately The Brazilian currency has suffered abrupt depreciation in the 1 million square meters is expected to be delivered in 2013. last few months, returning the country’s currency exchange According to a report by Cushman & Wakefield, 680,000 square with the United States to rates observed in 2008. In 2013, meters were delivered in the first three quarters of 2013, depreciation reached 20 percent and exchange rates have compared to the 802,000 square meters delivered in 2012.1 remained unstable, in tandem with the volatility of the international economy. The effects of currency devaluation are This volume of commercial enterprises will enter the market increasing concerns over the impact on inflation, which has at a time of uncertainty, which is why companies have revised been fought by economic policies in combination with their investment budgets, and growth plans have been Brazilian interest rate increases from 7.25 percent to gradually reduced at every new release of economic indices. 10 percent in recent months. Accordingly, the growth in the number of office building, Despite its efforts, the Brazilian Government has admitted the commercial office, distribution center and logistics warehouse 4.5 percent inflation target will not be met and expects it will launches in 2013 provides tenants with a large number of level off at 5 percent. options and greater power to bargain for better rental prices. This situation should remain stable, depending on the Additionally, the government forecasts a 4 percent economic location, or even show a decline in the case of regions growth rate for 2014. However, this forecast is more saturated with enterprises. optimistic than the market report Focus, which is released on a weekly basis by the Central Bank of Brazil. It estimates a Rent in São Paulo mere 1.99 percent growth in relation to GDP in the next year. BRL per month The unemployment rate disclosed by the Brazilian Institute of 146 Geography and Statistics (IBGE) showed a downward trend 139 over the last few years. In 2009, the average rate stood at 130 8.1 percent. In June 2013, it was 6 percent, a level slightly 110 higher than the one observed in 2012, when the annual 90 average was 5.5 percent. That means the index leveled off to a point where it started being called ‘full employment’.

Year GDP (%) Interest rate (%) Inflation (%) 2009 -0.30 8.75 4.31 2009 2010 2011 2012 Q2 2013 2010 7.50 10.75 5.91 Source: Brazil Marketbeat Office Snapshot Q2, 2013, Cushman & 2011 2.70 11.00 6.50 Wakefield 2012 0.90 7.25 5.84 2013 2.30* 10.00 5.91 2014* 1.99 10.50 5.99

* Projection January 2014 Source: Central Bank of Brazil

1 Brazil Marketbeat Office Snapshot Q2 2013, Cushman & Wakefield

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Retail market

With over 27 new enterprises in operation and an average of Shopping Centers Association (ABRASCE) made new 398 million monthly visitors, the Brazilian mall sector recorded estimates, reducing the number of expected inaugurations a 10.65 percent rise in sales in 2012 compared to the previous from 47 to 41. year, and totaled BRL119.5 billion in revenue. Enterprises have been inaugurated at a 60 percent The excellent performance in 2012 can be explained by the rate. Four stores out of 10 are vacant when the usual average low unemployment rate, rise in wages and increase in credit, success rate of an inauguration would be above 85 percent. the latter of which continues to extend at reasonable levels. According to ABRASCE, the vacancy rate of the sector in Brazil, which reached 6 percent 5 years ago and fell to 1.47 percent in On the 2013 horizon, the scenario is slightly different. Despite late 2012, rose again and doubled to 3 percent in May. the number of expected shopping mall inaugurations being at an all-time record, including the announcement of 47 new The downturn in the economy, shrinking demand and enterprises, shopping center companies have reviewed their consequent slowdown in retail expansion helps to explain the plans to inaugurate new enterprises and have postponed part aforementioned scenario. of the inaugurations planned for this year. The Brazilian

Number of Revenue (BRL Year GLA (million m2) Number of stores shopping malls billion per year) 2008 376 8.645 65,500 64.60 2009 392 9.081 70,500 74.00 2010 408 9.512 73,775 91.00 2011 430 10.344 80,192 108.00 2012 457 11.403 83,631 119.50

Source: Sector data – July 2013, ABRASCE, www.portaldoshopping.com.br

Americas Real SnapShot!/Winter 2014 / 3

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Brazil

Housing market

Even at a time of uncertainty in the economic environment, Although the general perception of the economy signals the sales behavior and number of new residential real estate distrust of the future, the real estate industry in São Paulo launches in the city of São Paulo in the first half of 2013 came went in the opposite direction, showing progress when as a surprise. According to the real estate market survey compared to 2012. This was mainly fostered by continued conducted monthly by the São Paulo Housing demand for residential real estate, a wide range of credit (SECOVI-SP), sales from January to June 2013 reached extension and interest rates that are still attractive. 17,500 units. The volume was 46 percent higher than the one observed in the same period in 2012, when 11,981 units Real estate debt market were sold. The volume of real estate loans granted in the country is Total sales in the first half of 2013, as measured using the positive. From January to June of 2013, the Brazilian system sales overall value (PSV), amounted to approximately of savings and loans (SBPE) granted BRL49.6 billion in BRL10.6 billion. After a correction using the National Index financing, a 34 percent increase in credit assigned during the of Construction (INCC-DI), that amount corresponds to a first half of 2012 (BRL37 billion). 63 percent growth in relation to the BRL6.5 billion amount observed in the first half of the 2012. It is worth stressing that according to Brazil’s banking regulations, part of the funds raised through savings accounts With respect to real estate value, according to the Knight should be funneled to real estate financing. These Frank Global Price Index, an index that monitors real investments, as they are fully guaranteed by the federal estate prices in 55 countries, Brazil was the country where government, provide a safe haven for small investors in figures rose the most in 2012 (15.2 percent). It was followed turbulent times. The balance of savings accounts reached the by Hong Kong, up 14.2 percent; Turkey, up 11.5 percent; and record figure of BRL420 billion in June of 2013 and in Russia, up 10.7 percent. These indices led to Brazil’s December 2012 it was BRL389 billion. nomination, for the second consecutive year, as the best market for investment in real estate among emerging markets This movement of funds represented 244,700 units benefiting and second, just below the US, in offering the best capital gain from the contracting that occurred in the first half of 2013, up opportunities, according to the Association of Foreign 14 percent on the 214,300 units contracted in the same period Investors in Real Estate (AFIRE). in the previous year.

In the city of São Paulo, the price per square meter showed In addition to the fact that real estate financing indices show the following behavior progress: growth, it is worth stressing that the system has protections, among which stands out the strictness in the granting of credit. Loan-to-value, the share of credit in the total value of BRL ’000 per m2 the real estate, for example, was 65 percent in June 2013. 7. 8 That means 35 percent of the real estate value is paid by the 7. 2 6.6 buyer seeking financing, using his or her own savings. Another important index is the default rate, currently at 5.2 approximately 1.9 percent of existing credits. 3.9 These and other factors explain why real estate loans are currently the object of fierce competition between banks, despite the fact that Brazil appears among the last countries in the world where the ratio between real estate balance and 2009 2010 2011 2012 2013 local GDP is analyzed. Even considering the growth in the last few years, this ratio was 7.4 percent in May 2013, far below Source: Secovi-SP report – First Semester 2013, Embraesp the European indices.

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Canada The rise of real estate investment trusts (REITs) and real estate operating companies (REOCs)

Macroeconomic overview

Canada’s economy shook off last year’s growth slump in the 4.6 million square feet in 2012. Of that, 1.9 million square feet first quarter of 2013, as real GDP grew at a healthy 2.5 percent or 41.7 percent, is attributable to The Bow, an office tower in annualized pace driven by a stronger trade performance. Calgary. By contrast, there was 8.0 million square feet of However, the remainder of 2013 was more uneven, as a office absorption across the country in 2011. subpar external backdrop and subdued domestic demand held growth in Canada’s economy to a modest 1.7 percent pace. In 2012, office absorption in Vancouver, Calgary, Edmonton and Winnipeg totalled 3.5 million square feet or 76.6 percent Major Canadian banks and the central bank (Bank of Canada) of the country’s total increase in occupied space. This is expect GDP growth to close out 2013 at around 2 percent slightly remarkable as these markets only account for 32.2 percent below the forecast. Forecasts are positive for 2014, with an of the national office inventory. estimated GDP growth rate around 2.3 percent to 2.5 percent for The Canadian industrial market made modest gains in 2012 the first half of the year with more optimistic forecasts for 2015. as a relatively robust domestic economy was offset by Overall, there is cautious optimism about the Canadian weak trade activity. In 2012, occupied space in western economy. While growth has been slow, it has held up well Canada industrial markets increased by just over 9.7 million despite the recent malaise in the US. As long as demand from square feet (83.4 percent of national absorption). Activity the US and Asia is steady or increasing, Canada should enjoy in the west dwarfs the 1.9 million square feet of absorption economic stability, at least in the short term. in central and eastern Canada. Well-capitalized businesses continue to take advantage of Office market record-low interest rates by pursuing ownership. Users are expected to continue to drive the industrial market in 2013, but are Leasing activity continues to be active as expire and motivated by very different criteria. As a result, users are stretching select tenants expand and others consolidate. Absorption the buy versus rent equation and pushing up land prices, which are figures show that occupied office space expanded by making speculative development increasingly difficult.

Real GDP Growth in Canada

10 GDP growth 4-Quarter moving average 8

6

4

2

0

-2

-4 rcent Change at Annual Rate at Change rcent Pe -6

-8 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4*Q1*Q2*Q3*Q4*Q1*Q2*Q3*Q4* 2006 2007 2008 2009 2010 2011 2012 2013 2014 * Forecast Sources: Statistics Canada and Bank of Canada and Bank of Nova Scotia and BMO Financial Group and RBC and TD Bank Financial Group and MAPI accessed through http://www.mapi.net/system/files/EO-119_0.pdf

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Office market outlook 2013

Downtown 2011 2012F* 2013F* Yo Y

Vacancy rate 6.2% 6.0% 6.0%

Net class a rental rate (psf) $23.65 $25.05 $25.80

Absorption (SF in millions) 5.73 2.66 0.89

New supply (SF in millions) 1.98 2.36 1.02

Under construction (SF in millions) 4.34 8.91 10.60

Suburban 2011 2012F* 2013F* Yo Y

Vacancy rate 11.0% 11.3% 11.3%

Net class a rental rate (psf) $17.08 $17.82 $18.28

Absorption (SF in millions) 2.23 1.87 3.36

New supply (SF in millions) 1.31 2.73 3.75

Under construction (SF in millions) 4.59 7.30 4.86

Overall 2011 2012F* 2013F* Yo Y

Vacancy rate 8.3% 8.3% 8.3%

Net class a rental rate (psf) $19.85 $20.52 $21.07

Absorption (SF in millions) 7.96 4.56 4.25

New supply (SF in millions) 3.28 5.08 4.77

Under construction (SF in millions) 8.93 16.21 15.45

* Forecast Source: Canada Market Outlook 2013, CBRE Research

Americas Real SnapShot!/Winter 2014 / 7

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Canada

Retail market

Canadian retail leasing market fundamentals continued their Canadian new home construction (Level) winning ways with yet another solid year of healthy demand (000's) Housing starts and just the right amount of new retail space. Retail St. John’s completions will total 3.4 million square feet in 2012, a 3-year in 2013) high, before reaching 4.3 million square feet in 2013. The Halifax Average household national vacancy rate, which is 4.9 percent, continues to track formation 2006-2011 lower. It is expected to end 2013 at 4.7 percent. Saint John

Canadian retailers spent much of 2012 preparing for Target’s Québec arrival in 2013, which brought significant new competition to Montréal the Canadian retail landscape. While Target’s Canadian operations have underperformed initially, its mid-market Ottawa position is expected to affect almost every point along the retail spectrum. Similarly, the arrival of Nordstrom in 2014 and Toronto other US retailers will bring another level of service and products that will provide formidable challenge to Canadian Winnipeg retailers which responded admirably to date. Regina At the least, Target’s arrival and Nordstrom’s gradual rollout Saskatoon has already initiated a number of major renovations and additions in some of Canada’s premier retail . Edmonton

The retail investment market has been very competitive, with Calgary cap rates compressing over the last few years yet stabilizing as of late. Vancouver Residential market Victoria

After a decade of robust home price and construction growth, 0 510152025303540 major housing markets from coast to coast appear to be landing Source: Canada Market Outlook 2013, CBRE Research softly. The drop in activity over the second half of 2012 and early 2013 has brought both existing home sales and the pace of Canadian existing home market construction more in line with their historical performances. Existing home sales (units) Forecast From a regional perspective, outperforming markets will 600,000 include those that enjoy favorable affordability and above- Existing home prices ($) average economic prospects. This list includes Regina, 500,000 Calgary and Edmonton. On the other side, the underperformers are expected to be those cities that have 400,000 built up the greatest amount of excesses, including 300,000 Vancouver, Toronto and Montreal. However, so far the prediction of these markets’ demise has failed to materialize. 200,000 In general, any short-term adjustment in prices is likely to be modest during the 2013-2014 forecast horizons. 100,000

The drop off in sales in recent months has been mirrored by 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 an almost equal decline in new listings available for sale. Well-balanced markets have helped to keep home prices Source: Canadian Real Estate Association, F. by TD as of October 2013 growing in most major markets, albeit at a more modest pace than was experienced in recent years.

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Largely owing to the low interest rate environment, housing US, while two REITs were invested solely in European assets. In has remained affordable to average households in most major fact, two of the US-based REITs found it more attractive to list on markets. Interest rates are expected to head higher over the the TSX as opposed to a US stock exchange. medium term. However, as many analysts predict the Bank of Canada is likely to hold off on rate increases until the end of In addition, Canadian pension funds have been increasingly 2014, any change in borrowing rates is expected to be modest looking towards foreign markets to find real estate assets that and gradual. Even as interest rates creep back up, the meet their investment profile. This trend has resulted from combination of growing incomes and slowing home price prime Canadian real estate assets being fully priced. In growth should keep affordability decent in most markets. addition, pension funds already hold many of the trophy assets in Canada and they are not selling them any time soon. The effect of the recent home building boom will be twofold. First, it will put some bargaining power back in the hands of Recently, increasing interest rates and the prospect of further purchasers, applying modest downward pressure on home interest rate increases has resulted in a significant decline in prices. While TD Economics sees rationale for downward the value of REIT equities. Since 1 May 2013, REIT issuers pressure on prices over the next few years have experienced a significant decline in unit values, with the (because that is where the overbuilding has been Canadian REIT indexes off approximately 12.5 percent from concentrated), there will likely be some knock-on effects to 1 January to 31 October. In the fall of 2013, there was little the single-family home market. Second, in response to slower appetite for new REIT IPO equity offerings. Financings are price growth and an increased inventory of units for sales, being completed, but not as easily or at the heady pace of the homebuilders are likely to scale back on construction activity. last 2 years. Established REITs have been able to raise capital As such, residential investment is likely to be a soft spot for through secondary ‘bought deals’, while others have turned to the Canadian economy over the next few years. But then issuing convertible debt as a means for financing acquisitions. again, that has been said before. Cap rates by sector

Capital markets 10% Office – CBD A Retail – neighbourhood The past year has been another exceptional one for publicly 9% Industrial – A & B traded real estate investment trusts (REITs) and real estate Multi-housing – high rise B operating companies (REOCs). With the low interest rate 8% environment, REITs were favored destinations for capital in search of yield. During the 12 months from July 2012 to July 7% 2013, there were 16 initial public offerings (IPOs) by newly formed REITs. KPMG in Canada acted as auditor for 12 of 6% those entities that successfully completed IPOs and was the tax advisor on two of the others. In the first half of 2013, the 5% real estate sector on Toronto Stock Exchange (TSX) and TSX 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Venture Exchange (TSXV) raised over CAD3.2 billion through 42 equity financings. Source: Canada: Investment MarketView Q1, 2013, CBRE Research

The rise in prominence of REITs in capital markets has had a similar impact on real estate markets. REITs have been much more competitive than in the past in pursuing real estate assets, resulting in compression of capitalization rates. As REIT demand was strong, four REITs emerged with assets located solely in the

Americas Real SnapShot!/Winter 2014 / 9

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Chile A slow year for the real estate industry

Macroeconomic overview Office market

The Chilean economy grew 4.1 percent in the first quarter During the first quarter 2013, a total of 57,138 square meters of 2013, down from 5.7 percent in the fourth quarter 2012. For office space was added to the market, resulting in a total the first time since the third quarter 2011, GDP growth fell accumulated inventory of 2.7 million square meters. Of the below 5 percent. As compared to the fourth quarter 2012, total new space added, Class A+/A and Class B contributed most indicators witnessed some moderation at the start of 38,205 square meters and 18,933 square meters, respectively. the year as a result of slow expansion in manufacturing and The average vacancy rate for Class A+/A offices during the first industrial activity, while the country’s domestic demand quarter 2013 stood at 5.26 percent, almost double compared to slowed more gradually (6.8 percent in the first quarter 2013, the fourth quarter 2012 (2.91 percent). The increase in the compared to 8.2 percent in the fourth quarter 2012)2. vacancy rate can be primarily attributed to the new space added The mining sector showed a robust growth of 7.8 percent. during the period in the El Bosque-El Golf, Santiago Centro, Providencia and Estoril-La Dehasa submarkets. During 2008-12, the Chilean construction industry grew at a For Class B offices, the average vacancy rate during the first compound annual growth rate (CAGR) of 5.19 percent, to quarter 2013 was 2.64 percent, almost similar to that in the about US$36.1 billion, driven by the rapid foreign direct fourth quarter 2012 (2.69 percent). Of the 10 expected investment inflow. Reconstruction after the 2010 earthquake projects in 2013, only a few entered the market, however, is another factor that has fuelled the growth of this industry. 2014 is expected to witness up to 14 new projects. This is According to Timetric, an economic and business research expected to increase the vacancy rate. firm, the construction industry output during 2012-17 is expected to grow at a CAGR of 8.15 percent, to reach Figure 2: Historical class A+/A office behavior US$53.4 billion by 2017. Production In the wake of the falling copper prices and slow private Absorption investment activity, the Chilean economy witnessed a modest 200,000 Vacancy rate (%) 6 growth of 4.5 percent during the first quarter 2013. Furthermore, 180,000 5 Chile Central Bank expects full year growth of 4.2 percent, as 160,000 compared to 5.6 percent in 2013. The International Monetary 140,000 Vacancy rate (%) Fund (IMF) recently lowered its 2013 growth forecast for Chile 4 120,000 from 5.6 percent to 4.5 percent growth in 2014.

2 100,000 3 m Figure 1: Economic indicators 80,000 2 60,000 12% Real GDP growth 40,000 10% Inflation (CPI) 1 20,000 8% Unemployment rate 0 0 6% 2006 2007 2008 2009 2010 2011 2012

4% Source: Market research office call A+/A, Q1, 2013, Colliers International 2%

0% The rent value and sale prices of Class A+/A office space have shown no significant variations. A slight decrease in the -2% 2005 2007 2009 2011 2013*2015* 2017* average rental prices is expected due to increase in different choices joining the market. In the next few quarters, sale prices * Forecast are expected to gradually increase due to more demand and Source: World Economic Outlook database October 2013, IMF, accessed January 2014 decreased supply. On the contrary, the average rental price of Class B increased 10 percent and is expected to remain stable in the next few months.

2 Macroeconomic indicators, 1Q, 2013, Central Bank of Chile

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Retail market

In the coming years, the office market is set to remain The average vacancy rate of the Santiago metropolitan area dynamic, according to CBRE Global Research and Consulting. during the first half of 2013 stood at 4.63 percent, an increase At present, a total of 859,659 square meters of office space of more than 1.5 percent, year-over-year. The vacancy rates and is under development and is expected to come online in the absorption levels of northeast, north and center for the period next 3 years. In 2013, there was approximately 440,000 square remained healthy. Conversely, the southwest zone witnessed a meters of total space under development. very high vacancy rate of approximately 15 percent, driven by the entry of three new projects and low absorption. Figure 3: Office space supply, (square meters) 450,000 Figure 4: Retail supply and vacancy rate in Santiago

400,000 3000 14 350,000 Vacancy rate (%) 2000 300,000 9 2 2 250,000 m

m 1000 200,000 4

150,000 0 -1 100,000

50,000 -1000 -6 North

0 Centre 2013* 2014* 2015* South East North-East Vitacura Lo Barnechea Santiago South/West Production (m 2) Absorption (m2) Las Condes Providencia Huechuraba Vacancy rate (%) * Forecast Source: CBRE Global Research and Consulting, Santiago office market Source: Retail market report 2nd semester 2012, Colliers International report, Q1, 2013, accessed August 2013

Americas Real SnapShot!/Winter 2014 / 11

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Chile

During 2012, approximately 13,000 square meters of rental Figure 6: Retail sales index space entered the market, leading to 13 percent year-over-year 14.0 increase in the accumulated inventory. During the first half of 2013, 5,000 square meters entered the market, covering three 12.0 strip centers in the southwest zone. By the end of 2013, 10.0 approximately 18,000 square meters is expected to enter the 8.0 market. The new space will cover seven projects, mainly 6.0

distributed in the northeast zone, and is expected to increase riation (%) 4.0 the vacancy rate. Va 2.0 Figure 5: Production of strip centers 0.0

3 30000 y/13 Jul/12 Jan/13 Aug/12 Sep/12 Oct/12 Nov/12 Dec/12 Feb/13 Mar/13 Apr/13 Jun/1 25000 Ma Source: Trading Economics database, accessed 12 August 2013 20000

2 15000 m Residential market 10000 Residential construction has been the driving force in Chile’s building industry growth. According to Business Monitor 5000 International (BMI), the sector accounted for roughly 50 percent 0 of the overall construction sector. Over the last few years, the 2006 2007 2008 2009 2010 2011 2012 2013* Chilean residential real estate market has witnessed significant Source: Retail market report 2nd semester 2012, Colliers International growth, driven by strong economic conditions and increase in credit availability. Another reason is the 2010 earthquake. It The retail sector prospects remain bright, driven by increasing destroyed over 220,000 homes, as well as one-third of consumption due to strong economic growth, available hospitals and schools in the southern regions of Maule and consumer credit and rising consumer confidence. Retail sales Bío Bío. As a result, there has been strong growth in the are increasing steadily and disposable income has expanded by construction industry due to reconstruction activities. 10 percent in 2012. To move with the favorable environment, the retailers are eyeing property investments in retail. The sales of residential units in 2012 grew by 18 percent, year- over- year. More than 69,000 residential units were sold during the According to World Property Channel, major Chilean retailers year, primarily driven by the economic growth of 5.6 percent and plan to invest approximately US$7.1 billion by 2017. Of the total low unemployment rate of 6.3 percent (lowest since 2005) 4. planned investment, Falabella, one of the country’s major retailers, is planning to invest approximately US$4.0 billion. The increase in credit availability and relaxed credit grant, coupled The company intends to build its already-large retail portfolio with launch of ‘Cajas de Compensacion’ (a social welfare scheme to 527 stores and 51 malls. This is followed by the planned that provides loans to individuals who have faced difficulty investment of approximately US$1.2 billion by Cencosud, accessing the traditional bank finance) have become demand projected investment of approximately US$1 billion by SMU drivers. During the third quarter of 2012, the short-term mortgage and an investment of approximately US$0.5 billion by Parque rates declined 1−4.9 percent. The credit volumes of ‘Cajasde Arauco. Other investments include those of Ripley, La Polar Compensacion’ institutions increased approximately 78 percent and Hites, totaling approximately US$0.35 billion, during October 2011-12. Flexible credit options, such as installment US$0.15 million and US$0.10 billion, respectively3. payment schemes offered by the companies, are another reason for the demand growth. Moreover, the country’s planned mining investment of approximately US$112 billion is expected to create long-term High demand and rise in sales volumes has resulted in strong opportunities for the retail industry in cities near mining hubs. appreciation in prices, especially in top cities such as Santiago. This is likely to see sharp economic and population growth in The average real price of a new house rose by about the next few years. 6.6 percent year-over-year in Chile. From 2004-12, the Chilean real house prices increased 30 percent.

3 Chilean retailers plan over $7 billion in property investments, World Property Channel, dated 16 January 2013 4 Chilean residential real estate market activity at highest level in four years, World Property Channel, 17 September 2012

12 / Americas Real SnapShot!/Winter 2014

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Figure 7: Inflation-adjusted house prices (year-over-year percent change) 8.0 6.0 4.0 2.0 % 0.0 -2.0 -4.0 -6.0 2005 2006 2007 2008 2009 2010 2011 2012 1Q13

Source: Global Real Estate Trends, Scotiabank Economics, 7 June 2013 The long-term growth prospects remain bullish. However, there has been a significant drop in requests for residential construction permits. Developers seem to have taken a cautious medium-term approach, considering that a large chunk of residential space is due to come online and the central bank’s increasing concern about the sector.

Figure 8: Building permits (million meters squared) R.M. (Santiago) Rest of the country National 5.0 4.3 4.5 4.4 4.5 4.0 4.1 3.9 4.0 3.7 3.7 3.6 3.5 2 3.0 2.5 2.0

million m 1. 5 1. 0 0.5 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2011 2012 2013

Source: Informe MACH macroeconomia y construccion, Chilean Chamber of Construction report, June 2013

Real estate debt market During 2013, the average mortgage lending rate was 4.45 percent compared to 4.33 percent in 2012, with the growth rate of residential home sales slowed. The banks have tightened their lending standards for companies associated with the sector, leading to more stable leverage.

Americas Real SnapShot!/Winter 2014 / 13

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Mexico Opportunities despite a challenging market

Macroeconomic overview Office market

The Mexican GDP growth declined 0.7 percent in the second During the first half of 2013, 1.7 million square feet of office quarter of 2013, which is linked with the poor performance of space has come online in Mexico City11. In addition, the industrial (due to a slump in construction and mining) and construction pipeline strengthened with the commencement services sectors (which declined for the first time since of building on many new offices. As of the third quarter in 2009)5. The sectors contracted by 1.1 percent and 0.4 percent, 2013, the office space was up to 13 million quarter feet12. respectively6. The weakening performance in these sectors The overall occupancy rate during the first half of 2013 remained was primarily because of poor performance in the US, which robust. Approximately 3.56 million square feet of office space sources 80 percent of all Mexican exports7. went on , while 0.4 million square feet was sold13. The Mexican government had lowered its growth forecast for Overall occupier activity 2013 to 1.8 percent from 3.1 percent on stagnant exports to the US and low public spending. And GDP growth for 2013 Leasing activity ended up close to the official revised forecast of 1.8 percent8. Sales activity 6 5.03 The activity in the construction sector for the same period 5 4.40 contracted 4 percent, largely due to the lower activity of public

. 4 companies9. Several major infrastructure projects have also 3.56 been delayed waiting for the fiscal reform to be approved, 3 2.63 2.77 which was the driver of the Mexican construction industry 2 1.58 10 and, thereby, the overall economy . Million sq. ft 1 0.61 0.44 0.58 0.4 Real GDP growth 0 7% Unemployment rate 2009 2010 2011 2012 1H2013 5% Source: Mexico City Office Snapshot, Q2, 2013, Cushman & Wakefield 3% 1% -1% During the second quarter of 2013, the offices market in -3% Monterrey reported an inventory and availability rate of -5% approximately 8 million square feet and 17 percent, -7% 14 * * * * * respectively . 11 12 17 13 14 15 16 20 2 010 20 2005 2006 2007 2008 2009 20 20 20 20 20 In Monterrey, more than 20 Class A+ and A buildings are Source: The Economist Intelligence Unit, EIU country data, accessed under construction, which is expected to increase the 15 3 September 2013 inventory by 3 million square feet within the next few years .

5 Latam Daily Flash, BBVA Research, 21 August 2013 6 Ibid 7 Mexican Market Update: Q1, 2013, Clarion Partners, May 2013 8 “Mexico cuts growth forecast to 1.8% as exports to US slow”, Bloomberg, 20 August 2013 9 “Mexico economy grows less than expected as industry contracts”, Bloomberg, 20 August 2013 10 “Slowing constructions sector a drag on Mexican economy”, The Brownsville Herald, July 2013 11 Mexico City Office Snapshot, Q2, 2013, Cushman & Wakefield 12 Mexico City Office Snapshot, Q3, 2013, Cushman & Wakefield 13 Ibid 14 Monterrey Office Market Overview Q2, 2013, Colliers International 15 Ibid

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The housing supply in Mexico during 2012 showed slight The availability rate during the second quarter of 2013 was growth. The housing starts showed an annualized growth rate 7.7 percent 20. Currently there are 1.2 million square feet under of about 370,000 housing units through November 201216. construction, of which 72 percent are Class A buildings in Apodaca21. Approximately 171 million square feet are According to Mexican National Housing Commission, over the projected in different industrial parks22. next 6 years, demand for housing units will reach 2.78 million units. Furthermore, the annual demand of 463,000 housing During the second quarter 2013, the Monterrey industrial units is the sum of the required 222,000 new family units and submarkets had 7.4 million square feet of industrial buildings the current deficit of 242,000 units17. available. Of those, 61 percent were Class A and 39 percent were Class B23. Housing starts During the second quarter 2013, the sales and income (of 0.6 buildings larger than 20,000 square feet) stood at 0.51 0.50 0.5 0.48 0.49 0.49 approximately 2.1 million square feet and the next absorption 0.47 0.46 0.46 24 0.43 was 1.4 million square feet . 0.4 0.38 0.38 0.37 Net absorption 0.3 2.0 1.45 0.2 1. 5 1.40 million units* 0.1 . 1. 0 0.75 0.40 0.5 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0.0 2010 2011 2012 million sq. ft -0.5 Source: Mexico Real Estate Outlook, BBVA Research, January 2013 -0.49 -1.0 -1.00 The mortgage market through October 2012 showed a -1.5 5 percent growth in the number of mortgage loans, leading Q1 Q2 Q3 Q4 Q1 Q2 to approximately 600,000 individual loans18. 2012 2013 The three biggest developers (Corporación GEO, Urbi Source: Monterrey Industrial Market Overview Q2, 2013, Colliers International Desarrollos Urbanos SAB and Desarrolladora Homex SAB) are under restructuring negotiations with creditors due to At the end of the second quarter 2013, average monthly lease government policy changes and an aggressive leverage rates per square foot in Class A and Class B buildings fell in 19 strategy .It is expected that banks will need to write off an the range of US$0.32 – US$0.46. and US$0.32 – US$0.4425. important amount of their outstanding loans. Otherwise, the companies will file for bankruptcy. We expect a change in the composition of the industry in the short-term.

16 Mexico Real Estate Outlook, BBVA Research, January 17 Mexico: growing demand for residential real estate, Contract Italiano, June 2013 18 Monterrey Office Market Overview Q2, 2013, Colliers International 19 “Mexico offers credit for home builders battered by policy shift”, Bloomberg, 1 July 2013 20 Monterrey Industrial Market Overview Q2, 2013, Colliers International 21 Ibid 22 Ibid 23 Ibid 24 Ibid 25 Ibid

Americas Real SnapShot!/Winter 2014 / 15

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Mexico

Real estate investment market

During the last year, the Infrastructure and Real Estate Trust There are some reforms that may affect real estate (FIBRA) received six bids through the Mexican Stock investments in Mexico. Below are some of the relevant Exchange (BMV) for more than US$4 billion. reforms approved:

In addition, four bids were submitted of more than US$300 • limitation on deductions million by the Development Capital Certificates (CKD) market, • limits on specific payments (royalties, interests, technical as well as five subsequent public offerings of an amount assistance) greater than US$4.5 billion. • additional corporate income tax on dividends (10 percent) • modification of FIBRA rules Both FIBRA and CKD are vehicles designed to invest primarily • foreign pension funds exemption new rules. in real estate and infrastructure projects. The main investment has been made by Mexican pension funds (Afore), while certain foreign pension funds also have invested through these vehicles.

FIBRAs results

Million of pesos 1Q, 2013 2Q, 2013 %

Total income 1,657.3 2,228.8 34.5%

Net operating income (NOI) 1,115.7 1,644.0 47.4%

Net profit 755.7 1,440.8 90.6%

Dividend per certificate (cents) 1.53 1.87 22.6%

Rent income 1,327.3 1,687.9 27.2%

Ocupancy (%) 80% 83% 4.4%

CKDs results

Million of pesos 3Q, 2012 3Q, 2013 %

Total income 514.5 1,931.9 275.5%

Source: Group BMV, www.bmv.mx Tax reforms in real estate

In compliance with the constitutional mandate, the federal government presented to the congress on 8 September 2013 the proposed economic package for fiscal year 2014. This package was discussed by the Finance and Public Credit Commission (FPCC) of the Chamber of Deputies Chamber and the revised proposal was made public on 17 October 2013. Afterwards, the senate reviewed and made some amendments to the reforms proposed. Finally, on 31 October 2013, the final version of the tax reform was approved by the Mexican congress.

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. United States Increasing optimism in the real estate market

Macroeconomic overview becoming increasingly optimistic. Nearly three-quarters of respondents expect the US economy to continue improving The US economy ended 2013 on a mixed note, with real GDP over the next year. showing a 1.9 percent increase for the year, down from a 2.8 percent increase in 2012. At the same time, 4th quarter GDP A key focus on market expansion rose a healthy 3.2 percent, suggesting the economy is building Propelled by increasing optimism about the overall economy, real some momentum26. This mix of economic news is characteristic estate industry executives believe geographic expansion will be of this less-than-robust recovery: job growth, for instance, a key focus over the next year. More than half (58 percent) of averaged 182,000 per month in 2013, essentially unchanged survey respondents expect their company to make the biggest from 2012 (183,000 per month)27. Unemployment also improved, spending increases on geographic expansion, representing an reaching 6.7 percent in December 2013 versus 7.9 percent in increase from previous years. Within the US, the southwest and December 201228, but some of this gain must be attributed to the the northeast offer the top real estate opportunities. estimated significant number of job seekers putting their search on hold. Where are the best real estate investment opportunities in the US? Real GDP growth rate in the US

5.0 Northeast 4.0 Northwest Midwest 3.0 20% 36% 16% 2.0

1. 0

ange from preceding period 0.0 None, don't know 10% rcent ch -1.0 Pe -2.0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 2012 2013 Southeast Source: US Department of Commerce – Bureau of Economic Analysis Southwest 28% Similarly, the US real estate industry is experiencing the effects 45% of a steady but sluggish economic recovery, with increasing Multiple responses allowed revenues, low interest rates and continued availability of affordable financing. It is anticipated that interest rates will Source: 2013 Real Estate Industry Outlook Survey, KPMG in the US gradually increase, which will likely impact investment timing. And, with the fate of anticipated tax code changes still unclear, New development trending up investors are proceeding with appropriate caution as they Multi-family development continues to lead real estate evaluate new investment opportunities. development, as it has in recent years. However, this year’s survey results also reveal expected increases in retail and Real Estate Industry Outlook Survey hospitality development in 2014. This rising trend in new development across asset classes is likely in response to a The results from KPMG in the US’s 2013 Real Estate Industry more optimistic economic outlook and the improved access Outlook Survey show that real estate executives are to financing that is now available for such projects.

26 Bureau of Economic Analysis “advance estimate”, 30 January 2014 27 Bureau of Economic Analysis, 10 January 2014 28 ibid

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. United States

How much new development do you expect to commerce in For more in-depth findings, please go to the following website to the US in 2014? download the 2013 Real Estate Industry Outlook Survey: http://www.kpmg.com/US/en/topics/2013-outlook-surveys/ Multifamily 11% 46% 43% Pages/2013-real-estate-outlook-survey.aspx

Industrial 22% 58% 20%

Hospitality 21% 61% 18%

Retail 30% 51% 19%

Office 21% 65% 14%

020406080100

None Some A significant amount

Source: 2013 Real Estate Industry Outlook Survey, KPMG in the US Pursuing revenue growth Acquisitions, improving real estate fundamentals and geographic expansion are expected to drive revenue growth over the next 3 years. Meanwhile, as some markets are stabilizing post- recession, more executives are still seeking safety and security when investing. Survey respondents expect Class A assets in primary markets and development opportunities to be at the top of their investment wish list over the next year. Which of the following types of assets will you be in the market to acquire/invest in over the next 12 months?

Class A assets in 48% 13% primary markets

Development opportunities 25% 24%

Class A assets in secondary 12% 27% and/or tertiary markets

Distressed assets 7% 20%

3% Class B/C assets 14%

Other 5% 2%

020406080

Biggest opportunity 2nd biggest opportunity

Source: 2013 Real Estate Industry Outlook Survey, KPMG in the US

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© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Contact us

Andrew Weir Global Chair, Real Estate and Construction T: +852 2826 7243 E: [email protected]

KPMG in US Greg Williams Head of Americas, Real Estate and Construction T: +1 214 840 2425 E: [email protected]

KPMG in Brazil Ederson Carvalho T: +55 11 2183 3282 E: [email protected]

KPMG in Canada Lorne Burns T: +1 604 691 3114 E: [email protected]

KPMG in Mexico Guillermo Ochoa T: +52 55 5264 8519 E: [email protected]

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Publication number: 132165-G Publication date: February 2014