Tag: Integrale Advisors

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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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US-China Sign Phase 1 Deal

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On Wednesday, President Trump officially signed the Phase 1 Deal at the White House, taking the first major step in reducing trade tensions with China. In summary, the trade deal focused on increasing Chinese expenditure on American goods, reducing theft of American corporate technology, and eliminating currency manipulation. By signing this agreement both countries are notably making an effort to cooperate and reduce the economic strain felt by both countries and the world. Although the results of the agreement do not solve many of the important issues that the United States has with China politically, such as cyberattacks on American companies, Trump claims a Phase 2 deal will remedy these problems and strengthen our relationship with China. There is no specific date set for Phase 2 negotiations to begin, but based on activity from both governing bodies, Phase 2 discussions will not be until after elections.

Despite the low feasibility of a Phase 2 agreement being signed soon, the Phase 1 Deal already cements a good foundation for establishing fair trade between the two countries and ending the internationally damaging trade war. Chinese President Xi Jinping stated that the Phase 1 deal is “beneficial to both China, the U.S. — and the world,” showing the desire of China and the U.S. to cooperate as partners to globally release the economic strain that the trade war as caused. Although there are many critics of the Phase 1 Deal, pegging it as “underwhelming,” it positions both the US and China extremely well to resolve many long lasting problems in their political and economic ties.

Keith Knutsson of Integrale Advisors commented that, “The Phase 1
Deal represents hope for future negotiations that can not only generate greater wealth in China and the United States, but inherently help the world as well.”

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German Industrial Orders On The Rise

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The German economy is a highly developed social market economy. It is the largest national economy in the eurozone, fourth in the world by nominal GDP, and fifth by Purchasing Power Parity. According to the IMF, in 2017, the country is projected to account for 28% of the eurozone economy. In addition, Germany recently recorded the highest trade surplus in the world worth $310 billion in 2016, making it the biggest capital exporter globally.

In August, German industrial orders rose from the previous month, posting the biggest increase of 2017, showing signs of strong foreign and domestic demand. According to the German federal statistics office, new manufacturing orders climbed 3.6 % from the previous month on a seasonally and working-day adjusted basis.

Furthermore, domestic orders climbed 2.7%, exemplifying the strength of the eurozone’s powerhouse economy. International orders, outside of the eurozone are also up 7.7 %, proving a strong euro has made little impact on demand. Due to strong erratic monthly movements in the first eight months of the year, on average new orders increased by only 0.1%. The German economy is a big reason for the overall bullish performance by the eurozone economy in 2017.

Keith Knutsson of Integrale Advisors states “Combined with strong business data, showing production expectations as well as orders books close to record highs, the German industry is set to end the year at maximum speed. Thanks to the strong data provided by the German Economic Bureau, 2017 now looks as good as ever.”

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Fiscal Year Comes To An End: Political Uncertainty Ensues

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The end of September is a time where key political issues could increase volatility and shake up financial markets. With the Federal Emergency Management Agency (FEMA) running out of funds to deal with the aftermath of recent disasters, Congress went to work. A disaster relief bill was proposed. U.S. Treasury Secretary Steven Mnuchin saw the bill as an opportunity to add a provision stating a suspension of the debt ceiling until after midterm elections in 2018. Democrats, however, seeking to maintain political pressure on the U.S. budget, leaned towards a more timely solution to the problem.

In the end, a bill was passed that suspends the debt ceiling and extends government funding for three months. However, the passing of the bill does not solve the underlying issues causing political and financial uncertainty. The Republicans are eager and hoping to pass tax reform by the end of the year. Currently, the plan is to use reconciliation to prevent a filibuster and force it through the Senate by majority vote. However, a few of the president’s priorities, such as border wall funding and cutting the EPA budget, are increasing bipartisanship among leaders.

“As long as both sides of the aisle hold out hope of using the debt ceiling for political gain, it will be difficult to come to an agreement that would lead to a viable, long-term solution” said Keith Knutsson of Integrale Advisors.

Looking ahead to 2018, politicians will focus their efforts on the November election cycle, making it even harder to vote for anything controversial because of the need to preserve constituent support. As a result, a debt ceiling increase would be a tough provision to pass. On the other hand, delaying the bill could help separate the budget from the debt ceiling. Now that government funding for fiscal year 2018 was passed, Democrats could utilize their leverage on issues such as immigration reform and health care.

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U.S. Household Net Worth Rises in Q2

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The total net worth of U.S. households is currently higher than ever, helped by improving home values and stock prices. According to the Federal Reserve, the net worth of U.S. households, the total of all assets minus all liabilities, rose by $1.7 trillion in Q2 2017 to a record $96.2 trillion.

“The U.S. household balance sheet is healthy and continues to be one of the key themes of our view that the current economic expansion is far from over” said Keith Knutsson of Integrale Advisors.

Household wealth in the stock market climbed by $1.1 trillion in Q2. Despite a smaller increase than in the first quarter, the performance still reflects a steady trend in equity prices supported by business and consumer confidence around the world.

The value of real estate in the U.S. rose by $564 billion last quarter. Home prices are rising at a perfect time when there is a high demand for housing and a continuously low unemployment rate. One of the reasons for why we are seeing an increase in home values is due to a low inventory of homes for sale. Economists are estimating that a third of all homes in the U.S. have regained their pre-recession values.

During the recession, the equity and housing market both took some heavy losses. U.S. households lost around $12 trillion in wealth. However, total American net worth recovered by the second half of 2012, and has seen an increase in most quarters since.

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Interest Rates and The Federal Reserve’s Reversal of The Stimulus Program

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Federal Reserve chairwoman Janet Yellen stated Wednesday that rates are being held, but hinted of a possibility that a rate-hike is under consideration. Additionally, Yellen confirmed that through unanimous decision the Fed will reduce its balance sheet starting in October this year. The statement shows confidence that recent stagnant inflation measures are temporary. The dollar bounced back from losses earlier in the day as announcements were being made.

The balance sheet, which roughly quintupled in size to $4.5 trillion since before the financial crisis, is supposed to be reduced in October by $10 billion and $10 billion for every month after. One year later, on October 2018, the Fed is planning on approaching normalization at a rate of $50 billion per month.

Some investors are worried about the lack of precedent in reducing the balance sheet to this size. Keith Knutsson of Integrale Advisors argued, the Fed has undoubtedly been playing an increasing role in recent years in the US economy but it is to be noted that a misstep with its current size could send US markets in a frenzy.

The meeting did acknowledge recent damage attributable to natural disasters, but policymakers remain confident that long-term economic growth is not harmed by these events. The damage inflicted by recent hurricanes is solely affecting things near-term, with the New York Fed President even suggesting that rebuilding efforts could give a boost to the economy.

Despite already positive-looking economic developments, the Fed commented that consumers are continuing to spend, and business investments are picking up.  New GDP data has been adjusted and now projects a faster growth this year of 2.4 percent, an increase from the 2.1 percent previously forecasted. Unemployment projections have meanwhile been lowered to 4.1 percent, .1 percent lower than before.

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Wall Street Does the Money Dance

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A stellar performance by the major indices of the U.S. equity market serves as a sign of strong economic growth. The three major US equity indices; DJA, Nasdaq, and the S&P 500 finished the week with strong gains and new record highs.

The Dow Jones Industrial Average continued to gain traction, led by industrials. Aerospace giant Boeing, finished the day up 1.5 % and 4.3 % higher than the previous week. The Dow closed on Friday up 0.29 % to 22,268.34, the fourth consecutive day closing with a record high. This week, the Dow gained 2.16 %, marking the largest weekly gain since December 2016.

The Nasdaq Composite was up 0.3 % to 6,448.47, climbing back from a tough day on Thursday. For the week, the index gained 1.37 %, rebounding after a previous week of losses.

The S&P 500 surpassed the 2,500 mark for the first time. On Friday, the S&P 500 closed at 2,500.23, bringing its weekly gain to 1.56 %.  The industrial, telecommunications, and financial sectors all saw profits, while the healthcare industry lagged behind.

“The performance of the market is lifting the spirits of consumers, investors, and businesses, as well as raising confidence in U.S. equity” said Keith Knutsson of Integrale Advisors.

The positive performance comes despite lower than expected economic data released Friday morning, following a deadly terrorist attack in London and the recent North Korean missile launch over Japan. Wall Street investors are looking ahead to next week, when the Federal Reserve Board is set to meet. Economists are expecting the Fed to leave interest rates unchanged while proposing a new plan to unwind its massive balance sheet.

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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.