United States Real Estate Report Q4 2009

Housing prices are continuing to fall, due largely to foreclosures and distress sales, which account forover 40% of sales according to the national Association of Realtors. The annual rate of housingbuilding starts has fallen by 12.8% since March, resulting in the lowest figure since records began in1959. However, as a result, the large inventories of unsold homes are reducing, and we can expect thestart figures to bottom out.

Decreased employment has led to a fall in demand for office space, especially in leading financialdistricts, where financial services firms are vacating. Office rents are dropping as a result. Mid-TownNew York has suffered a 31.5% drop year-on-year (y-o-y) according to CB Richard Ellis (CBRE).

Finance continues to be a crucial factor. Although interest rates are low, the banks are cautious aboutlending, not without good reason. Results of the Federal Reserve's 'stress test' were announced inMay, finding that 8.5%, or US$53bn of the US$600bn assets held by the 19 banks surveyed could belost under an 'adverse' economic scenario. The bankruptcy in April of General Growth Propertiesresulted from the company's inability to refinance US$27bn in debt racked up during the housingboom. According to CBRE analyst Richard Wong 'it is likely that real estate markets will enduresimilar events in the months to come, as market conditions and a struggling economy will apply morepressure on already stressed property owners'.

Although economists were expecting a drop of some 1.2% in construction spending in April, thecommerce department reported a rise of 0.8%. The increase derived mainly from private investment innon-residential developments. In Q209 we flagged growth in construction spending as a key indicatorof improving conditions, and we consider this small but positive result an encouraging sign.

We continue to believe that the following are the key issues to monitor for the real estate sector in thecoming year or so:

Ongoing growth in construction spending - whether as a result of the government's fiscal stimuluspackage or not. For all the past problems of the economy, the absolute level of activity remainsenormous.

A pick-up in the volume of house sales in the majority of markets - given that this would indicatethat prices have fallen to market-clearing levels.

Any improvement in conditions in the markets for non-government bonds, given that these are(and over the long term will likely continue to be) the main source of funding for the real estatesector.

Premiums and discounts to net asset values (NAVs) on real estate investment trusts (REITs) -which will give an indication of investor sentiment towards the real estate sector or, moreprecisely, the various sub-sectors.