Category: Real Estate

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Real Estate Is The Hedge Against Inflation

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As supply disruption starts to dissipate and the denominator effect leads to an inevitable fall in the rate of annual CPI increases. It is expected that popular concern to moderate and pressure on policy rates to ease next year. Interest rates will be higher than in recent years but will remain low by historic standards.

 

Theoretically, it is reasonable to claim that real estate is a good hedge against inflation appears. All other things being equal, during periods of inflation one would expect the rent on commercial property to rise along with the price of other inputs such as raw materials, goods, or labor. Lease renewals or rent reviews allow rents to be “marked to market”. Leases may also include explicit annual indexation of rents to some specified measure of inflation, or pre-set step-ups in rents over the term of the lease. They may also allow expenses such as maintenance costs to be passed through to tenants, protecting the net income of the owner.

The strength of the link between inflation and rental income growth will be heavily influenced by other factors – particularly the balance of supply and demand in the market which determines whether landlords can, in practice, increase rents. The type of inflation also matters. If costs are being driven up by “demand pull” from strong economic growth, it is expected that real estate demand – and rents – to rise. On the other hand, landlords would find it harder to raise rents when “cost-push” inflation is driven by rising prices but without an associated increase in demand. It is also expected that the relationship to vary between countries and property types depending on the way leases are typically structured. But overall, apart from short-term distortions due to the property cycle, it is expected that income – and thus property values – to keep pace with inflation over time.

Keith Knutsson of Integrale Advisors commented that “Real estate is a good hedge against inflation and the balance of supply and demand will determine rental income growth.”

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The Emergence of “Agrihoods”

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Millennials currently represent the largest segment of American homebuyers. Furthermore, there is a shift in the type of community’s millennials are looking to live in. Agrihoods, short for “agricultural neighborhoods” are rising in the U.S., especially among younger generations of home buyers.

The Urban Land Institute defines an “agrihood” as planned housing community with working farms. These neighborhoods have grazing lands, nutrient rich soil, barns, and outdoor community kitchens. In addition, the homes are built to high environmental standards featuring composting and solar energy. Agrihoods are designed to appeal to young, active families who love to eat healthy, enjoy spending time outdoors, and see the value in environmental awareness. According to the Urban Land Institute, there are about 150 agrihoods across the country. Some of these neighborhoods are just minutes outside of large urban hubs like Atlanta, Phoenix, and Fort Collins.

“Agrihoods represent a combination of economic profit, social benefit, and sustainability” said Keith Knutsson of Integrale Advisors.

The development company that coined the term “agrihood” was Rancho Mission Viejo, based in Southern California. The emphasis is on sustainable living, aiming to draw young families as and well as retirees to the communities. All residents of the community have access to communal farms with orchards, workshop space, raised planters, in-ground crops, and fruit trees. However, newer developments in these neighborhoods are not cheap. Homes in these communities typically range from the low $400,000s to over $1 million.

The involvement of the community makes it easy for residents to participate in local programs. In addition, the act of sharing harvest benefits with neighbors brings the community together, thus allowing it and its citizens to thrive.

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Harvey Damage on Commercial Real Estate and Economic Activity

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Despite roads reopening last week, the damage hurricane Harvey has created for commercial and residential real estate could make it the costliest natural disaster in American history. Harvey generated more than 50 inches of rain over some parts of Texas, breaking records for the U.S. mainland. Texas Governor Greg Abbott estimates the damages to accumulate to a total loss of between $150 and $180 billion, and the Federal Reserve stated that the natural disaster has “created broad disruptions to economic activity along the Gulf Coast in the Dallas and Atlanta Districts.”

The focus of attention was Harvey’s effect on petroleum production capacity and rising oil prices in the US. Meanwhile roughly 27 percent, about 12,000 properties, of Houston’s commercial real estate was affected by the flooding. Those 12,000 affected properties are made up of 167,281 apartments, 73 million square feet of retail space, 60 million square feet of office space, and 11 hospitals, totaling 433 million square feet at an estimated value of $55 billion.

Keith Knutsson of Integrale Advisors commented, “the damage Harvey has done is beyond any comprehension; pictures don’t do it justice. Flooding can create a lot of invisible damage that is often dismissed until years later.”

In the short-term the housing market will appear to tighten with demand dropping relatively little compared to the drastically lower supply. Yet investors looking forward must consider the possibility of factors such as readjusted risk premiums, conjunctions of banks foreclosing on destroyed homes and a lower long-term demand in the Houston market.

With more storms brewing in the Atlantic, it is possible that incoming hurricane Irma’s damage will permanently shift interstate investments near the Gulf of Mexico downward as a result of a quick succession – a factor many investors will keep their eye on.

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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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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.