GLOBAL REAL ESTATE SECURITIES MARKETS
A REVIEW and OUTLOOK
offered by LaSalle Securities
FEBRUARY 2008
LaSalle Investment Management (Securities) L.P. and LaSalle Investment
Management Securities B.V., (together "LaSalle Securities") subadvise Seligman
LaSalle Global Real Estate Fund and Seligman LaSalle International Real Estate
Fund. LaSalle Securities is a part of LaSalle Investment Management (LIM).
LaSalle Investment Management is one of the world's leading real estate
investment managers and has been managing public and private real estate assets
for over 20 years.
What is your near-term outlook for global real estate
securities, and what longer-term trends do you see?
The financial news was not good in late 2007. Concerns about a slowdown in the
US economy and its subsequent impact on global growth have fueled volatility in
the equity markets, with both the MSCI EAFE Index of the broad global stock
market and the FTSE EPRA/NAREIT real estate company indexes down significantly
since the beginning of 2008. In an effort to shore up the prospects for the US
economy, the Federal Reserve slashed the Fed Funds Rate by 75 basis points in
mid-January, and 50 basis points at month end, its fifth cut in five months. In
addition, tax cuts loom large as a fiscal stimulus plan gets underway.
Many public real estate company analysts are predicting poor stock performance
in at least the first half of 2008. We expect the most pessimistic of the 2008
predictions will fall wide of the mark, but it's clear that the credit system is
in the midst of a setback, and the likelihood that the consumer will be impacted
is increasing. High energy costs are having an impact on the consumer as well,
with crude oil prices topping $100 per barrel in early January. The US economy
is slowing, and consumer sentiment is at a low level.
On a positive note, fundamentals for most real estate markets around the world
remain reasonably solid and are continuing to improve even if at a decelerating
pace. Improved occupancy and, more significantly, market rental increases are
driving increased property net income. In many markets, companies are finding
that development and redevelopment activities are still profitable. The credit
market issues that are reducing the amount of speculative new supply work to the
advantage of the public real estate companies, which generally operate with
lower leverage than their private counterparts. Our view is that strong
fundamentals, limited new supply and continued strong institutional demand for
real estate should limit operating downside in most global real estate markets
for the next several quarters.
It is important to note that landlords are protected to a certain extent in a
difficult economy given the long-term leases underlying their properties. Thus,
generally, REIT earnings have less volatility than public equities as a whole.
Historically, public real estate companies have been able to generate gains in
earnings even in times when the economy was slowing. In fact, the REIT sector in
the US has had only one negative earnings year in the past decade, demonstrating
the protection provided by long-term leases.
Longer term, we expect that the trend towards securitization of real estate by
public companies organized in REIT-like tax-pass-through entities will continue
throughout the world, with significant growth in the German market in 2008 and
2009. More US REITs will take on properties and projects in other economies,
often in joint venture with international financial institutions or investors.
We believe that institutional investors will continue to increase their
allocation to the real estate sector, and retail investors in many countries
will become more comfortable with and interested in investing in companies that
own diversified portfolios of income-producing properties.
In your view, are we expecting a recession in the US?
What impact would a US recession have on global real
estate securities?
Our baseline forecast for the REIT sector calls for full year GDP growth of 1%
in the US, with global GDP growth of 3%. We believe the strength of the global
economy, the export support provided by the weak dollar, and strong Fed and
other US government intervention will help prevent a hard landing.
It seems clear that, if the US economy catches cold, the rest of the global
economy will grab the aspirin bottle. The US economy -- larger than the next
three countries' GDPs combined -- continues to dominate the world's economic
activity. The question is whether the market has overshot the reality. As often
as not, the stock market has advanced during a recession, after having sold off.
We expect public real estate companies' earnings growth to continue for the
foreseeable future in practically all of our markets. While this would logically
lead to increases in the prices of global real estate stocks over the long term,
market volatility and the tendency of short-term oriented investors to push
prices away from fundamentals -- whether up or down -- will cause periods when
there is a disconnect between the prices of real estate stocks and their
underlying values. We believe today is one of those times.
Where do you currently see favorable opportunities in the
marketplace from both a fundamentals and valuation standpoint?
Public real estate currently trades at a discount to private market values
throughout the world. We estimate Price to Net Asset value discounts of 17% in
the US, 26% in Europe, 5% in Asia, and 17% for the globe as a whole. We have
seen some softening in private market values in the US and Europe, particularly
for second tier assets, and we expect some additional softening in certain
markets over the next several months. Still, we think the magnitude of decline
will be limited by healthy (albeit softening) fundamentals, limited new
construction, and continued strong appetites for real estate from institutional
investors.
We think that high-quality retail centers will have minimal impact from the
down-turn, and we expect that retailers will try to keep their best locations.
Many of these companies seem to have very attractive relative valuation levels.
We find apartments attractive in markets that have low single family
affordability and limited overhang from condos. The apartment REITs are trading
at above-average NAV discounts, and we believe public pricing already reflects
expectations for a significant slowdown in demand.
[LOGO] The UK market has seen the severest markdown of share prices to property
values, largely due to the fact that the only major real estate market in the
country, London, is a financial services-focused city. British real estate
market fundamentals are still solid with significant rental growth in the last
few years, which should provide significant built-in positive rental increases
for the next few years.
Continental Europe shows very solid real estate fundamentals combined with
steady macroeconomic growth. Most markets are experiencing good same-property
rental growth and have been less impacted by the credit market woes than have US
or UK markets. We prefer companies with strong asset and management teams,
particularly those with a retail focus. There seem to be attractive external
growth opportunities available for companies involved in development activity
and capital partnerships, as many management teams appear capable of adding
value to the real estate held by these entities. The attractive valuations found
in this region are supported by the fact that many companies are buying back
stock.
[LOGO] Fundamentals for Australia in general are solid, although they vary by
property sector. The strongest sectors are retail and office. Solid retail
fundamentals are showing no sign of weakening and most office markets are
improving nicely. Residential markets are seeing some improvement within city
limits, but demand in outer suburbs remains weak. Many Australian companies have
significant investments outside of Australia, which generally offer better yield
spread to debt cost. The Australian market has seen no direct impact from the
credit market turmoil until very recently, with the difficulties of Centro, a
highly-levered company that has had difficulty refinancing short-term
acquisition debt.
[LOGO] Japan has seen little direct impact from credit problems, yet stocks in
these markets have declined recently with investor concern over potential future
impacts. We think the Tokyo office market will have healthy revenue growth in
this sector. We believe that tight occupancy with solid space demand will be
what drives strong rental growth in the office sector. External growth through
accretive acquisitions also remains available in these markets.
[LOGO] Fundamentals for Singapore are as strong as we have seen. Many companies
are investing regionally (in China, Malaysia, Japan, Korea, Vietnam, and India)
and provide a more stable way to invest in these rapidly growing economies.
[LOGO] The Hong Kong economy is very strong; its companies consistently
outperformed in the second half of 2007 and company valuations are not as
compelling as they were earlier this year. The growth of demand for new office
space is outpacing the growth in supply, which has been a big positive for
office rents in the market. Hong Kong's retail market continues to improve as
general business sentiment and tourist spending remain strong. Several Hong Kong
companies also provide a gateway to investing in China, which is seeing very
strong growth in real estate market fundamentals.
Will global real estate companies be able to add to and
upgrade their portfolios in this market? Do you expect to
see Merger and Acquisitions (M&A) and privatization activity return?
Despite rising borrowing spreads and credit tightening, financing remains
affordable and available for lower leverage investors such as the public real
estate companies and institutional pension funds. Indeed, the evolving market
may give these entities an opportunity to make the profitable investments only
buyers with access to higher leverage could make over the past several years. At
the same time, continued NAV discounts of the magnitude we see today in the
market will attract those buyers that can secure appropriate financing. We
expect there will be some increase in M&A activity later in the year, but we do
not think it will return to the level of 2005-2006 any time soon.
Any final thoughts?
When assessing the uncertainty in the marketplace today, it is important to
recall the cornerstone of a long-term investment strategy -- diversification.
Real estate, specifically global real estate securities, plays an important role
in diversifying mixed-asset portfolios. In fact, because of its historically low
correlation to traditional equities and bonds and its strong historical
risk-adjusted returns, studies have demonstrated that a prudent allocation to
global real estate securities should be included in a mixed-asset portfolio for
long-term investors.
Although we cannot erase all the uncertainty in the marketplace today, we are
encouraged by the aggressive stance of the US Government. Both fiscal and
monetary policies are being utilized to stave off a recession. These actions
bode well for the US and global economies and for the prospects of the global
real estate sector. Real estate fundamentals remain intact and we believe values
look attractive.
Putting it all together in our discounted cash flow analysis, current prices
give investors an opportunity to buy some of the best real estate around the
globe at steep discounts.
Seligman LaSalle Global Real Estate Fund
TOP 10 HOLDINGS AS OF 12/31/07
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Westfield Group ............................................................6.4%
Simon Properties Group .....................................................4.3
ProLogis ...................................................................3.8
Vornado Realty Trust .......................................................3.7
Unibail ....................................................................3.2
Boston Properties ..........................................................2.4
Land Securities Group ......................................................2.4
Kimco Realty ...............................................................2.4
British Land ...............................................................2.4
Equity Residential .........................................................2.2
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Total .....................................................................33.2%
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Seligman LaSalle International Real Estate Fund
TOP 10 HOLDINGS AS OF 12/31/07
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Westfield Group ............................................................9.7%
Unibail ....................................................................4.0%
Land Securities Group ......................................................3.6%
British Land ...............................................................3.6%
Unibail-Rodamco ............................................................3.3%
GPT Group ..................................................................3.3%
Goodman Group ..............................................................2.9%
Mitsui Fudosan .............................................................2.7%
Klepierre ..................................................................2.7%
Nippon Building Fund .......................................................2.4%
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Total .....................................................................38.2%
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Top 10 holdings exclude short-term instruments and are shown as a percentage of
total net assets. Each Fund is actively managed and its holdings are subject to
change. There can be no assurance that the securities listed above have remained
or will remain in a Fund's portfolio. Holdings should not be construed as a
recommendation to buy or sell any security, an indication that any security is
suitable for a particular investor or that any of the securities listed were or
will be profitable. Portfolio holdings information is available at
www.seligman.com.
The views and opinions expressed are those of LaSalle Securities as of the date
stated, are provided for general information only, and do not constitute
specific tax, legal or investment advice to any one person. Opinions, estimates,
and forecasts may be changed without notice. There can be no guarantee as to the
accuracy of market forecasts.
The listing of any securities herein should not be construed as a recommendation
to buy or sell any issue. It should not be assumed that any of the securities or
holdings discussed were or will prove to be profitable, or that investment
recommendations or decisions made in the future will be profitable or will equal
the investment performance of the securities discussed herein.
Investments in real estate securities may be subject to specific risks, such as
risks to general and local economic conditions, and risks related to individual
properties. Investing in one economic sector, such as real estate, may result in
greater price fluctuations than owning a portfolio of diversified investments.
Past performance does not guarantee or indicate future results.
Although real estate securities have, over the long-term, outperformed, this
performance has not continued.
Diversification of your investment portfolio does not assure a profit or protect
against loss in a declining market.
Smaller company stocks may experience larger price fluctuations than
large-company stocks or other types of investments. The Funds are
"non-diversified" and thus may hold fewer securities than other funds. A decline
in the value of those investments would cause a Fund's overall value to decline
to a greater degree than if the Fund held a more diversified portfolio.
There are specific risks associated with global investing, such as currency
fluctuations, foreign taxation, differences in financial reporting practices,
and rapid changes in political and economic conditions. Because of the special
risks involved with investing in securities of emerging market companies,
investing in such companies should be considered speculative and not appropriate
for individuals who require safety of principal or stable income from their
investments.
There is no guarantee that a Fund's investment goals/objectives will be met, and
you could lose money.
This material is authorized for use only in the case of a concurrent or prior
delivery of the offering prospectus of Seligman LaSalle Global Real Estate Fund.
You should consider the investment objectives, risks, charges, and expenses of a
Fund carefully before investing. The prospectus, which contains information
about these factors and other information about the Fund, should be read
carefully before investing. You can obtain Seligman LaSalle International Real
Estate Fund's most recent Stockholder report by contacting your financial
advisor or Seligman Services, Inc. at 800-597-6068. The report and other
information are available on the Securities and Exchange Commission's EDGAR
Database. Seligman Advisors, Inc. is the principal underwriter of the Seligman
mutual funds. Seligman Advisors, Inc. is not affiliated with LaSalle Securities
or LaSalle Investment Management.
For more information on any of Seligman's real estate securities portfolios
contact your financial advisor or Seligman Advisors, Inc. at 800-221-2783.
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