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Lagging capital flows: A Sign of Safer Financial Markets?

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With gross cross-border capital flows totaling 65 percent less than in 2007, the global financial crisis is continuing to shape the global financial system; large European and US banks have retrenched from foreign markets. Investors should be aware that these facts don’t symbolize a detrimental future for financial globalization. Despite inherent risks, the slow recovery from pre-crisis conditions signals towards an increasingly stable and risk-sensitive opportunity for financial globalization. Measurements in the volatility of foreign direct investment reveal a larger share in global equity than before the crisis. Overall, current financial and capital accounts imbalances have decreased – dropping from 2.5 percent of world GDP in 2007 to 1.7 percent in 2016.

One of the major factors towards the retreat of gross cross-border capital flows are the Eurozone banks.  The total of foreign loans and other claims in 2016 were down by $7.3 trillion (45%) since the crisis. Close to half of the retreat in investment occurred at the hands of intra-Eurozone borrowing, with interbank showing the largest decline. This retrenchment reveals that global banks are reappraising country risk. Domestic policies aimed at promoting internal investments, and new regulations complexifying foreign operations result in the current market developments.

Blockchain, new digital platforms and machine learning will create new systems for cross-border capital flows and further broaden participation. Keith Knutsson of Integrale Advisors argues, “New technologies most definitely increase transaction speeds and reduce cost barriers to transact across borders, but the challenges arise through the methods regulators will employ to monitor and manage a new financial age.”

Indeed, central banks of developed countries have been increasingly prevalent in capital markets, providing both capital as well as liquidity through unconventional policies. Assets of the European, Japanese, English and US central banks have nearly tripled since 2007, reaching $13.4 trillion in 2016. Central banks were forced to intervene in the money and financial markets to ensure liquidity.

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Real Estate Programs: How the Universities of the USA stack up

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The unpleasant working hours and the grim atmosphere in the Finance industry has caused many gifted students to jump ship into the sector of real estate and Entrepreneurship. Firms like Google and Facebook have long taken over major banks as dream employers while real estate offers a myriad of job opportunities.

Yet compared to (investment) banking and consulting, recruitment for jobs in the real estate sector is less structured. Large companies in this sector don’t focus their recruitment like tech firms and investment banks at prestigious campuses with set amounts of students hired per year, rather revolving it through personal connections.

This approach seems logical, as many of the skills for real estate jobs for hedge funds or private equity firms require skills like those used in Finance: analysis, pricing, logic. A major difference are people skills.

With such similarities, and current development in job prospects, real estate programs and business programs carry many similarities. It is therefore vital to evaluate both: undergraduate business programs and real estate programs to judge among the most exceptional programs in the nation.

The rank of each program is usually measured through various metrics, as the methodology of Forbes, Princeton Review, and the US News & World Report suggest. Unfortunately, many of these rankings are geared towards prospective students with wellness in mind, emphasizing various metrics that are of little importance for recruiters and businesses.

“It is always important to keep in mind the different interests of the parties involved; the characteristics of a university that stand out to a student are not necessarily aligned with those of a recruiter” said Keith Knutsson of Integrale Advisors.

For example, the Forbes ranking bases 50% on the happiness and debt level of students, and an additional 7.5% on students’ graduation rates.

The Princeton Review bases its ratings “on surveys of 137,000 students at the 382 schools,” with each survey covering 80 questions. The questions cover a student’s opinion on:

  • school’s academics/administration,
  • life at their college
  • their fellow students
  • themselves

While this approach certainly creates results with large samples, the qualitative nature of the questions, unreliable nature of peoples’ opinion, and lack of relevant information make it difficult to take such results as a serious metric for program rankings.

The US News & World Report on the other hand arrives at its results for Undergraduate Business rankings by surveying “deans and senior faculty members at each undergraduate business program accredited by the Association to Advance Collegiate Schools of Business.” The opinion of those surveyed is assessed, creating the ranking seen on the website.

Additionally, those same respondents nominate the ten best programs in business specialty areas like accounting, marketing finance, and real estate. Those programs that received the most mentions in each area appear on the site ranked in descending order by number of mentions.

Under these metrics, the real estate rankings for 2017 are as following:

  • University of Pennsylvania
  • University of Wisconsin – Madison
  • University of California – Berkeley
  • University of Georgia
  • University of Southern California
  • New York University
  • University of Texas – Austin
  • University of Florida
  • Marquette University
  • Cornell University

This mention-only ranking notably differs from the results of the overall best undergraduate business programs which are:

  • University of Pennsylvania
  • Massachusetts Institute of Technology
  • University of California – Berkeley
  • University of Michigan – Ann Arbor
  • New York University
  • Carnegie Mellon University (tied)
  • University of Texas – Austin (tied)
  • University of Virginia (tied)
  • Cornell University (tied)
  • Indiana University – Bloomington (tied)

Other methodologies such as the College Report from Payscale rank schools by the average starting pay and mid-career pay of alumni. The value behind such information is well-reasoned, but the data lacks information regarding graduate degrees and doesn’t cover a considerable portion of students. Until such data can be more comprehensive, it seems as if the US News & World Report has the most usable information for businesses and recruiters alike.

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Shopping from The Outside

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Among the uncertainty of the retail industry, open-air shopping centers have been outperforming. According to an index that tracks shopping center Real Estate Investment Trusts, shares of REIT’s that own and operate the sector of open-air shopping centers are up 7% since June 3rd. However, year to date, the sector is still down 14%.

“The retail industry is currently very unpredictable” said Keith Knutsson of Integrale Advisors.

An open-air mall is comprised of strip malls that don’t have enclosed walkways linking stores, food courts, and power centers which serve as broad, open, centers that include department stores and a few small tenants. It also includes community centers, which are neighborhood shopping centers that offer convenience oriented stores.

Retail landlords have been shaken up in recent years as the online shopping market dominates and major retailers continue to close stores. Occupancy rates declined in the first half of the year, however most 2017 store closures have already occurred due to the fact that tenants usually stay in the second half as they look to the year-end holiday profits. As a result, some REITs are gaining a lot of traction.

Federal Realty, a major REIT focusing on shopping centers, has recently announced a $345 million joint venture this month with Primestor Development Inc. This comes as an attempt to overtake a majority stake in a portfolio comprised of retail properties in several communities in Southern California.

Strip centers are not as susceptible to the shortcomings of the retail industry because they have less exposure to apparel retailers and offer more affordable leases for their tenants. Mall landlords are working harder to woo tenants that are more in tune with customer preference and provide a leisurely shopping experience.

 

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Beating Forecasts, Germany Gallops into Online Retail

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Alike other develop markets across the world, traditional retail continues to face pressure from the growing e-commerce sector in Germany. Data from the Germany Consumer & Retail Report Q4 2017 suggests that within 10 years online purchases rose from 37.3% of the population to 70.4%. The response of retailers is typically expanding into the online sales themselves,  increasing competition within the industry.

Keith Knutsson of Integrale Advisors commented, “despite Germany’s conservative market structure, past forecasts regarding online retail were underestimating the adaptivity of the German consumer,” further adding, “analysts might be wrongfully tempted to limit the horizon of technology to retail even though there is a myriad of opportunities for the market to expand.”

Within this online marketplace, Amazon Germany remains the industry leader. It established a workforce of 10,000 people and nine major logistic sites in a rapidly developing market. The opportunity for Amazon’s third party retailers outside of Germany to establish steady cash flows from sales in the market further presents dependency and growth potential on the retailer.

Another major player in the industry is the online fashion retailer Zalando, founded in Berlin in 2008. Spanning over 15 markets in Europe, it has grown to over 10,000 employees and serves as a key entry point for brands new to the German market. The company envisions an increasing demand across Europe for online retail, investigating opening additional fulfilment centers outside the country.

The growth of online sales is eating into the profitability of major department stores, but investors should be careful of completely dismissing opportunities in this sector. While Karstadt’s recent bankruptcy serves as a reminder for the difficulties in this space, M&A activity could predict a reversal in the trend.

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Prosperous European Real Estate Market Leads to Growth for Alternative Assets

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Low interest rates imposed by the European Central Bank have made the European real estate market surge in foreign investments in recent years. The artificially low rates deem stocks risky and bonds expensive, nudging people to real estate investments instead. Additionally, momentum on real estate prices has occurred amidst quelled concerns regarding a rise in European populism, pricing in political stability and success of the Eurozone’s economic recovery.

CBRE Group analyzed investor’s preference for the European market and attributed it to widespread attractive Sharpe ratios, liquidity, transparency, and strong economic fundamentals growing rental value in the area.

In these flourishing market conditions, Germany emerges as a hotbed for real estate investments, while ongoing Brexit negotiations have seized London’s long-established place at the top.

The European real estate transaction volume has been experiencing steady demand and shortage of supply. Yet it is the new market trends are hidden within the promising industry performance; investments in alternative real estate (e.g. datacenters) are benefiting due to urbanization and changing consumer habits of e-commerce. Per the Global Alternatives Survey 2017 produced by Willis Towers Watson, investments in alternative assets have hit $6.5 trillion for the first time, with real estate managers managing the largest share of assets at 35%. While the report cautions investment strategies on debt leverage, European investment are regarded as safe for “as long as prolonged deflation can be avoided.”

Keith Knutsson from Integrale Advisors commented on the growth of alternative assets, stating that “for investors to continue locking-in alpha opportunities in a capital-filled, low supply market, new forms of alternative assets are vital.”

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Principle Valued Approach outlined by Keith Knutsson

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Successful real estate investment requires an enormous amount of commitment, sometime requiring more hours than the typical 40-hour work week. But, this comes easily when you are incredibly passionate. Investment management professionals must balance on the entrepreneurial tight rope, sticking to their niche market, seeking off market deals, and leveraging the full capacity of your team. Naturally, tension arises and there is a need to change gears, which requires patience.

Some of the most successful centi-millionaire family offices steward their money effectively because the approach is concise, with efficient means of implementation, and strategic. While some deals go smoothly and others feel like roller coasters, being able to maintain composure and patience while enduring the short-term calamity is key for focusing on the end-goal.

In contrast, those who fail to occupy enough valuable land, don’t envision the long-term, don’t add value, don’t optimize their operations, and are impatient. As specified by Keith Knutsson of Integrale Advisors, “the key is to identify a niche and commit, regardless of distractions.” A niche offers credibility as well as an ease of communication with a common goal in time. Intrinsically investing in your company is important because it is ultimately the driving force that sells others and convinces others that they feel comfortable putting their money with you.

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Keith Knutsson evaluates Blockchain and the Commercial Real Estate Industry

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“Blockchain will have a significant impact on he Commercial Real Esate Industry” states Keith Knutsson of Integrale Advisors.

A blockchain is a type of decentralized database that supports and provides a constantly expanding inventory of records, termed blocks, which are fortified against alteration and adjustment. Each block possesses a timestamp and a link to a previously created block. As a blockchain runs, it effectively serves as a log for all transactions. Every user is able to link up to the network, post new transactions and authenticate transactions. Blockchain has seen tremendous growth in the past couple of years. In fact, some of the world’s largest banks, central banks, governments, universities and technology companies are working with blockchain, with implications soon to be seen in the commercial real estate market.

If the commercial real estate industry utilizes blockchain, the impact would be huge. The blockchain could provide information regarding all buyers, sellers, title work, reporting, lease comps and vendor work on any individual commercial property. Having this information at your fingertips could cut out paperwork, enhance market transparency and shorten the speed to competing a transaction from days/weeks/months to minutes or seconds.

Blockchain has the potential to:

  • Enable a commercial property to have a digital signature containing building reports, performance, and legal information. This information could be easily accessed online by authorized users.
  • Allow for commercial real estate deals to be concluded in a matter of seconds.
  • Better administer the commercial property sales or lease payment process.

Real estate transactions will start to resemble the buying and selling of commodities. With blockchain, properties in popular areas could change owners many times a year, month, or even week. The system aims to make property purchases quicker, cheaper and more secure by storing all title information digitally and enabling virtual transactions to take place. This is the future of the real estate market.

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Tight supply of homes on the market, buyer demand remains strong

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U.S. new-home sales increased in June, depicting the gradual recovery in a segment of the market that has been seriously impacted by supply constraints. Purchases of newly built single family homes rose 0.8% to a seasonally adjusted annual rate of 610,000 in June, the Commerce Department said. The average total of new home sales was up 14.1% year to date and represented the largest increase since June 2008.

Combined with a 1.8% slide in existing home sales reported by the National Association of Realtors, the latest data suggests the lack of supply kept a lid on activity in the crucial spring selling season despite steady housing demand. Longer-term trends indicate the market is continuing to recover, however in a slower manner than what was predicated. This is in part due to a shortage of new homes.

Keith Knutsson of Integrale Advisors exclaimed “one of the reasons for why new home sales aren’t recovering as fast is that builders are focusing on higher-end, more luxurious construction.”

New construction continues to lag behind the broader recovery, resulting from a lack of desirable building space and labor shortages. The size of the construction workforce in the U.S. decreased to 10.4 million in 2015 from 10.6 million in 2010, according to U.S. consensus data.

In addition, a boom in home renovation development also hit a record level of $316 billion this year, but may be hindering demand for new homes as buyers choose to stay where they are rather than pay a large premium for a brand new home.

At the current pace of sales, there was a five-month supply of new homes on the market at the end of June. There were 272,000 new homes available for sale, the highest level in eight years. The median sale price for a new home sold in June was $310,800.

 

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The Benchmark Developments on the East Coast

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All around the United States, particularly in big cities, there is rampant construction as capital flows into large urban areas. Q1 and Q2 2017 have revealed construction of 40 million square feet of office development. At this pace, new office space will, for this fiscal year, will be more than this past year’s construction of 76 million square feet and already more new space than all of 2015. Keith Knutsson of Integrale Advisors claims, “current market indicators point to commercial real estate remaining on a strong path for investors in 2017.” On the East coast, Washington D.C., New York City and Boston all have significant high-rise developments in large downtown markets.

In Washington, DC, developer Hoffman-Madison is overhauling 24 acres of waterfront land along the Potomac River. The Wharf project, once completed will bring 3.2 million square feet of new space to the area. A unique component of the development is an entertainment street named Jazz Alley, containing a concert hall, boardwalk and pier, rum distillery and one of Hilton’s popular Canopy hotels. In addition there will be two waterfront luxury condos, as well as the prior announcement from the American Psychiatric Association to occupy 63,000 square feet of office space, the first tenant for The Wharf.

New York, New York continues to find new plots to develop. Most recently, the Hudson Yards and West Manhattan are being developed. The Related Cos. $20 billion development is speculated as the most expensive development currently in the world. This investment is a composed of EB-5 investors that will fund the new mega development. EB-5 investors consist of foreign investors that reap benefits from the United States government, such as expedited citizenship for family members, while helping out with domestic jobs and capital flow into the United States. Related along with Oxford Properties Group have already raised $600 million in EB-5 funds. U.K. based Children’s Investment Fund agreed to a $1.2 billion construction loan to both developers in order to commence construction. The development is leasing up quickly with tenants, most notably Time Warner along with several of its subsidiaries.

In West Manhattan, Brookfield properties is leading the development of 1.5 acres of mixed-use space consisting of a 60,000 square foot Whole Foods, and is being viewed as a “major culinary anchor” to the area. Notable tenants are the National hockey League and the Skadden Arps law firm, who will occupy some of the 2.1 million square feet of space in the emerging 67-story One Manhattan West tower, making it one of the tallest buildings in the city.

Finally, the Seaport project by WS Development is underway in Boston. Located on the waterfront and only minutes from Logan International Airport, the aim is to convert 23 acres into one of Boston’s most vibrant mixed-use communities. The development is composed of 2.8 million square feet of office and research space and 3.2 million square feet of residential space. This will be blended into the landscape containing 8.8 acres of green space and four new hotels.

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Real Estate Investment Trusts Real in profits

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In the post-crises era, REITs (Real Estate Investment Trusts) profits are driven by low-cost debt capital and high commercial real-estate values. Within REIT segments, office and retail commercial real estate values have seen slower growth in construction compared to warehouse and residential.

“Real-estate investment trusts efforts to develop large projects have maintained a supply of commercial real estate in check, feeding into the sector’s recovery” said Keith Knutsson of Integrale Advisors.

During 2008, excessive development activity weakened REITs’ credit profiles, but have since been steady, with growth in total development activity leveling off in the recent years. Throughout the post crisis period of the business cycle, REITs have demonstrated exceptional performance, given the sector has historically low-cost debt capital and record high commercial real-estate value environment.

Development volumes from office REITs have slowed due to a lack of employment growth in businesses that take up office leases as well as the shift of traditional cubical space to shrinking desk space in an effort to promote collaboration in the workplace.

The U.S. still faces an oversupply of retail real estate, therefore the focus is set on reassessing existing buildings rather than new construction. In addition, there has been more development activity in the multifamily and industrial real-estate sectors. In the residential segment, analysts have pointed out that the overwhelmingly increasing supply will exceed demand in certain parts of the country, potentially hindering rent growth.