"high priest of optimism"

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GlobeSt.com: An odd year, in all, given credit anddollar problems. How do you see capital flowing out of the US intoforeign markets?

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Hull: We've seen a strong flow of capital througha number of vehicles, including pension funds, into the globalmarkets. Over the past few years, Europe has been a key target, butAsia and Japan have also been growing in their relativeattractiveness over the past year and we've seen a lot of attentionin those markets.

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Europe continues to see US capital flowing in, both through corefunds and more opportunistic players. But of course the relativestrength of sterling and the euro do make that more difficult. Soperhaps you'll see more capital flowing the other way in 2008, withequity-based core funds finding the US CBD markets in particularmore attractive than they did in 2007.

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GlobeSt.com: And what of the capital flowing outsidethe US markets? And talk a bit about Asia as well.

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Hull: If you asked that question pre-July we wouldhave had a very different answer than now at the end of the year.Both New York and London have seen similar reactions--in time anddepth--to the changes in the debt markets. That's probably becausethose two markets are mature in their relative cycles. Londoncertainly leads the way in Europe and tends to run up to six monthsahead of other markets, with Paris close behind. London is thedominant capital market in Europe and now perhaps the world.

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GlobeSt.com: So the post-July situation has changedthat dramatically?

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Hull: The answer, and you will love this, is yesand no. The yes bit is in those mature markets that were reachingthe peak of their cycle, where debt was very aggressive and supplywas beginning to cause some concern. In those cities, the responsewas to limit the supply of stock in maybe two to three years, whichactually provides a good cap on the market and may have alreadyprevented overheating.

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The no bit comes in that while we've seen deal flows dry up,London figures so largely in Europe and represents a very largepercentage of the office trades that any change in those marketshas a disproportionate effect on London itself. But there are stillmarkets in Europe that are not affected by the credit crunch asmuch as London. There are markets both in Central and EasternEurope and other non-core locations that have not attracted themost leverage in the past and were more equity driven by their corefundamentals as investment locations. But all markets will beaffected to some degree. Everyone feels the thinning of the marketthrough the lack of debt.

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GlobeSt.com: Are you essentially an optimist? We'veheard that by midyear life will once again be wonderful if a bitmore cautionary.

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Hull:

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The dominant equity players will be in the market during thecourse of 2008. You'll find the German open-ended funds, which areseeing strong inflows, spread across Europe and in the states. Andtheir timing will be excellent, since they restructured only overthe past couple of years. You'll see more Middle East money cominginto the European market in particular, and perhaps indirectly intothe US. And obviously we have a huge amount of Australian capitallooking to place itself, particularly in Europe and Asia.

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That's all positive, but it's not going to replace the scale ofdebt that's supported the market over the past couple of years. Wewill probably see good transactional demand during 2008 but theturnover will be below 2007.

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GlobeSt.com: It's said that we should expect Chinesefunds to flow into the US. Same dynamic taking place in UK?

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Hull: That's very fair. I mentioned a second agothe equity-based funds and the biggest are the sovereignfunds--from Singapore, the Middle East and China, which is perhapsthe biggest untapped sovereign fund globally. We've already seenthem take stakes in key IPOs. If the direct real estate market goteven a small percentage of the dollars that could be allocated fromthe Chinese sovereign fund, that could have a very positiveeffect.

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GlobeSt.com: From where you sit, what would be yourlist--in descending order--to place capital?

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Hull: Most clients pay for this. Rather than giveyou a list, let me give you a number of markets that areinteresting, that are attractive to our clients. Definitely Japanand the wider Asian markets, which includes Hong Kong, Singaporeand increasingly the mainland Chinese markets, although that's veryhard to access at the moment. We haven't seen a lot of foreigninvestment in mainland China although that's not to say there isn'ta lot of capital looking to get in.

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GlobeSt.com: From what I understand the Chinesegovernment is fueling interest in second-tier cities.

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Hull: And they will be key places to invest. Oncethose markets begin to open up with more transparency andefficiency, a lot of interest will arise in those markets.

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GlobeSt.com: Even into 2009?

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Hull: As we get closer to the Olympics there willbe a lot of pull factors for capital going into China and a lot ofthose second-tier cities could actually be key destinations forcapital--if the tax-efficient structures to get capital out of thecountry can be managed. That has really been the key problem.

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GlobeSt.com: And continuing with your shortlist?

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Hull: I was going to say that the effect of thecredit crunch is that prices in the UK dropped back. The Londonmarket certainly dropped back 10% to 15% in the past quarter. Thatwill make it relatively attractive. The UK, as you may know, tendsto offer longer and guaranteed upward-only leases when compared toother countries. So I think the UK will probably see quite a lot ofcapital in 2008.

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GlobeSt.com: And the US?

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Hull: That will be interesting. There's a lot ofchange taking place in the US. The core equity funds will look foropportunities but a lot of those opportunities will be satisfied inthe European market. As I said, the larger sovereign and theopen-ended funds from Germany will be the key US buyers in2008.

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John Salustri

John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.