Tag: Integrale Advisors

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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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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.

 

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Eurozone Industrial Output is shining

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Output at the eurozone’s mines, factories, and utilities rose at the fastest annual pace in more than five years in May, a clear indication that the area’s economic recovery is picking up.

The eurozone economy grew at the fastest rate in over two years during the first three months of 2017, outcompeting the U.S., U.K. and Japan. The European Union’s official statistics agency released output numbers, indicating Eurozone output was up 1.3% from April, and 4% from May 2016. The annual rate of increase was the fastest since August 2011, exceeding expectations.

Industrials, accounting for one fifth of total economic activity in the eurozone, contributed to 0.2% of growth. There were signs in April and May that the second quarter has seen more normal levels of output from the utilities, with energy production up in both quarters.

The positive results in industrial output was supported by a large increase in the production of capital goods, serving as a sign of increased investment by eurozone and international businesses. Among the zone’s largest members, France led the way with a 1.9% increase on the month.

According BNP Paribas, the eurozone economy grew by 0.7% in the past three months, marking an acceleration from the 0.6% rate of quarter-to-quarter growth recorded in the past

“Such improvements will force the European Central Bank to revise some of its policies moving forward in order to adjust to growth projections” said Keith Knutsson of Integrale Advisors.

ECB’s economists have raised their growth forecasts twice in the past year, now predicting growth to continue at 2% a year. In response to the strength of the recovery in the first half of the year, the European Central Bank has indicated it may soon withdraw some aspects of it’s current stimulus package. On the other hand, there are a few indications that inflation is to rise and stay at the central bank’s target.

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Euro Funds on the Rise

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New statistics from PERE Research & Analytics revealed Europe-focused, closed-ended private real estate fundraising escalated to account for 39% of the roughly $48 billion total capital raised.  Q2 showed a huge increase in activity compared to the dormant Q1. Only 9% of the $19.57 billion raised during Q1 included European strategies. More recently, in Q2, multiple $1 billion plus fundraises in the region have accumulated to $18.71 billion.

The New York based Blackstone Real Estate Partners Europe V has played a record-breaking role in their European opportunistic offering, closing out last month with $8.87 billion. Additionally, Orion Capital Managers and Kildare Partners also held $1 billion-plus closes on European opportunistic strategies. Similarly, PGIM Real Estate’s sixth mezzanine real estate debt fund garnered $1.3 billion.

A major world player, Carlyle Group, is planning on re-entering private real estate capital markets after nearly a decade of being away. This will be the fourth opportunity fund for investments in Europe this year. The previous fund, Carlyle Europe Real Estate Partners III (CEREP III), had in Europe was in 2008, prior to the financial crisis, and raised 2.2 billion Euro in equity from institutional investors.

The group has undergone a rebranding to Carlyle Realty Europe. Additionally, significant personnel changes allow the vehicle’s identity to be more in line with its US counterparts. For their fourth fund, they will be setting their target to much lower to around 1 billion Euro. Senior Managing Director, Peter Stoll, who joined in 2015, mentioned “our dialogue with investors has now shifted to what’s next [and] what’s new.”

Nonetheless, the most popular strategy taking 49% share of the total continued to be a North-America focused fund. Cerberus Capital Management‘s latest instrument “ Cerberus Institutional Real Estate Partners IV“ has gathered $1.8 billion nearing their $2 billion target.

Global and Asia-Pacific (APAC) strategies accounted for 8 percent of the capital raised this year, compared to global funds taking 33% share, North America 32%, Europe 21%, and APAC with 13% first half (H1) year over year. Specifically, “[d]omestic demand in Europe is the driving force of recent economic growth” encouraging investors to take advantage of the profit opportunities stated Keith Knutsson of Integrale Advisors.

Compared to the 127 funds that closed H1 2016, H1 2017 saw a significant decline with only 84 closing. Although, “the average fund size trended upwards from $504.21 million in H1 2016, to $545.32 million in the first half of this year” according to PERE. Despite the increase in average fund size the overall global real estate fundraising continues to decline. The combined number funds closed in 2016 was the lowest in eight years, and the combined capital raised was at a five-year low. A modest $120.97 billion was raised for 214 funds in 2016 compared to the tally of $143.85 billion raised for 253 funds in 2015.

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Disruptions Through the Lens of Opportunity

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Amid competing to be a top performer in macro real estate markets, there are certain traits that distinguish the good from the great. Many occupiers have been forced to adjust to market demands, specifically – new technology, the battle for talent, and slower economic growth – compelling investors to adjust to meet the needs of their tenants. Huge demand across global markets is the result.

Technology continues to influences our everyday lives more and more whether we are paying attention to it or not. Technology continues to mold the way in which we conduct business. Traditional businesses are having to adapt to the new methods to stay competitive. The ‘how?’, ‘why?’, and ‘where we work’ has been completely deconstructed taking on new meaning. In a recent McKinsey Global Survey, 71% of individuals believed that enhanced digital capabilities increased profitability. On the other hand companies resistant to change may face uncertain futures due to the magnitude of the digital disruption.

The work force has also seen a large disruption due to technology. In a survey of C-suite level executives 90% report that a retention among technology talent is a priority amongst the gamut of business challenges. To expound upon this, in the U.S.A.’s Council of Advisors on Science and Technology predicted by 2020 for there to be a shortage of 1 million technical professionals. Therefore, the battle for technical talent will continue to grow, according to statistics.

Recently, the International Monetary Fund (IMF) issued a global economic forecast called ‘Too slow for too long’. Although the IMF does not seem optimistic, there is always opportunity. Disruption through corporate response combined with slow economic growth is a breeding ground for ideas. On one side, stymied growth has forced businesses to become savvy in reducing operational costs and protecting margins. However, corporate confidence is low and acts as a brake on business investment. Many commentators are referring to this established reality as a ‘new normal’.

Global Cities are seeing increased levels of occupier mobility as disruptions continue and new geography of occupancy emerges. Foreign direct investment (FDI) has been steadily increasing since 2012 and provides strong evidence to support the globalization of occupier activity. As reported by, the Organization for Economic Co-operation and Development (OECD), global FDI flows were up 25% year-on-year in 2015 at around $1.7 trillion. Both financial and corporate restructuring contributed to this being the highest volume of flows since the beginnings of the financial crisis in 2006.

The traditional spatially fixed occupier is being questioned and redesigned to accommodate a nomadic type of worker. It is noted in Knight Frank, Global Cities, that “fragmentation of business processes ha[ve] led to the rapid rise of ‘shoring’. . . [and] relocated to locations that have clear labour or cost advantages.” Cities that have benefitted greatly from this are Bucharest, Manila, Shanghai, Warsaw and Bangalore. There is also anticipated growth in Trinidad & Tobago, Kenya and Peru.

Young vagabond workers are seeking a more flexible space in densely populated cities such as Berlin, Austin, London, Seoul, Tel Aviv, and San Francisco. These cities have prospered due to the strong digital demographic. An example of corporate leadership through future foresight can be observed in General Electric’s decision to relocate from Fairfield, Connecticut to Boston, Massachusetts. Their vitality as a company is contingent upon their success in the software innovation and finding tech talent. Another example is Amazon’s decision to move from Slough, in Berkshire to the Shoreditch tech cluster of London. Also noting this shift is Integrale Advisors’ Keith Knutsson, claiming “flexibility is the driving force today for choosing a dream workplace.”

Emerging in the background, there will continue to be an onset of robotics and Artificial Intelligence (AI) that will disrupt current market conditions and create new business processes. As these altering forces take root, new property and location choices will be essential. Dr. Lee Elliott, head of Commercial Research for Knight Frank, said it best, “as many age old businesses will testify, complacency never pays in a disruptive environment.”

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Globally: Economic Challenges at Ease

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Growth in real estate transaction volume over the past eighteen months has slowed despite solid and consistent growth until recently. Over the next six months, CBRE, an American commercial real estate company, expects a modest improvement in the climate due to policy uncertainty around the world, tighter financial conditions in the United States, and Real Estate pricing.

Policy making greatly shapes the freedom investors have in the global market place. Policy uncertainty in the world, indicated by the Global Economic Policy Uncertainty Index reached record highs in early 2017. The index is based upon a blend of tax code provisions set to expire in certain countries, newspaper coverage on policy creation and divergence in economic forecasts. Most recently, Brexit has been attributed to the large spike in the indicator. Brexit is another movement thought to be part of a concurrent theme of a strong anti-globalization stance world players are taking. This anti-globalization movement can be described as the populist’s distrust in existing government. One growing concern for investors is that this movement may be attributed to a loss in confidence, which is the base of capital flows. Spectators say that the effects of Brexit will be felt slowly and that President Trump has pursued a much less aggressive agenda than he advocated for on the campaign trail. In the European realm, there has been a shift to a more centrist, pro-globalization political party, and although we are long from stable policies in place, the fewer amount of significant elections should help global investors. In general, elections are often used to determine the future of a nation’s policy making and financial conditions.

After the elections earlier this year and towards the end of last year, tighter financial conditions in the United States have been researched by the Chicago Feds Adjusted National Financial Conditions Index (ANFCI) and show that conditions were tighter than average in 2015 and 2016 following a long period without difficulty. Additionally, a strengthening currency, rising bond rates, and shrewd actions by Fed all play a part. Each of these indicators are popular indicators in forecasting the United States Economy. These financial conditions will ease their way in activity due to the lag of the impact on the real economy. This will offer investors a reason for confidence for the remainder of this fiscal year. Another indicator, the Bloomberg United States and Eurozone Financial Conditions Indexes, is yielding towards a two-year high, revealing financial conditions that support investment market. Finally, CBRE’s Ahead of the Curve, merger and acquisition activity, which is an indicator for commercial real estate proved to be stronger Q1 of 2017 compared to Q1 2016.

Real Estate pricing has also been a big factor in today’s global market. Capitalization rates in the global market are at their lowest since 1990. Capitalization rates or cap rates are a financial metric used to measure comparisons in different real estate investments by dividing the net operating income (NOI) by the listed price of the property. After Q1, average global cap rates are 4.3% for office, 3.9% for retail and 5.3% for industrial and logistics real estate. Although these rates are designated to the highest grades of real estate investment, they are suggestive of how attractive real estate is to global investors currently, with very few sellers in the market. This challenge is not expected to ease with global growth expecting to pick up.

In conclusion, CBRE is hopeful for another strong year in global real estate capital flows as challenges become stabilized but 2017 is doubtful to eclipse 2016 numbers. ‘We at Integrale Advisors appreciate the forecast by CBRE and appreciate the opportunity of working with them sourcing potential investments’ –Keith Knutsson.

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“How Today’s Generation is Turning Homebuying on its Head” examined by Keith Knutsson

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According to the National Association of Realtors, for years, the American Dream included a stable job and a comfortable suburban home close to good schools. If all went according to plan, that classic white picket fenced home was a solid investment for years to come; median home values have risen every decade since the first housing census in 1940. This model is changing with today’s generation as outlined by Keith Knutsson of Integrale Advisors.

“Today’s first-time home buyers aren’t following in the steps of their parents and grandparents. The economic and cultural environment looks quite different. Instead of moving to the suburbs, many are remaining in cities where they had been renting. Or they are opting for homes on small lots in planned communities in walking distance of conveniences like restaurants, grocery stores and shared green spaces similar to that of a large city” states Keith Knutsson

“Technology is also altering the real estate landscape” said Keith Knutsson. Today, real estate agents work with buyers who have already studied the marketplace online and expect quick answers, properties that meet a long list of requirements and help with closing transactions. Oftentimes first time home buyers are relying solely on technology to both buy and sell their home.

Shifting economic landscape

Economic changes have majorly transformed the real estate landscape for first-time homebuyers. In 1950, the median single-family home price was $7,354, or $44,600 when adjusted for inflation. Today, according to the National Association of Realtors®, the median home price has mushroomed to $233,900 in 2016, or five times more than what one paid in 1950.

Keith Knutsson stated “Homes were also more affordable for mid-century buyers, not only because they were cheaper in today’s dollars, but also because they were more reasonably priced relative to income. The median home price in 1950 was about two times median household income. Today, it’s four times.”

That’s what Anna, 30, a new home buyer experienced when she and her husband set out to buy their first home.

After renting a one-bedroom apartment in Brooklyn for seven years, the couple, planning to start a family, looked to buy in nearby South Park Slope section of Brooklyn, hoping for a three-bedroom apartment with enough space to grow.

Sticker shock quickly set in when they realized this would cost close to $2 million. While the couple had what Anna described as “healthy” savings, they still needed a loan from their parents to help make up the $800,000 down payment on the $1.8 million three-bedroom condo they bought in May 2016. That family loan took the edge off the mortgage amount and made them more appealing to sellers.

“The process was pretty long and exhausting,” Anna said. After the couple began their search in September 2015, they had two offers fall through thanks to a buyer who offered more cash down and another buyer who offered all cash. They leaned on their real estate agent to help them navigate the tricky closing process that finally got them to their more spacious home.

Demand for conveniences and the urban experience

One reason for the demand Anna experienced is a desire among many first-time homebuyers for urban living. A surge of both renters and buyers in cities across the country is constraining inventory and driving prices up, putting affordable first homes out of reach for many buyers.

What’s driving this trend? Keith Knutsson suggests “A healthy job market—the unemployment rate among those 25 and older with a bachelor’s degree or higher is 2.5 percent, significantly less than the overall rate of 4.6 percent, according to the Bureau of Labor Statistics. There is also the demand for shorter commutes to work and walkability to bars, restaurants and retail.”

“We love not having a car and being able to take the subway everywhere we need to go,” Anna said. “I was not at all interested in moving to an area where I’d have to take a commuter train to work. And South Slope is actually quiet and calm enough that it has sort of a suburban feel while still having all of the conveniences of a city neighborhood.”

That kind of urban/suburban mix is increasingly attractive to first-time homebuyers and repeat buyers alike.

“The country is becoming more urbanized, with a greater share of the population living in Census-defined metro areas,” said Lawrence Yun, chief economist at the National Association of Realtors®. “That leads to the trend of making homebuying decisions based on commuting patterns, higher land values and the likelihood of not even having a car.”

The changing face of homebuyers

“Demographic shifts are also impacting the current homebuying landscape. While married couples still make up the largest share of buyers at 66 percent, single women are entering the market in greater numbers than before, making up 17 percent of total home purchases—the highest since 2011” states Keith Knutsson.

“About one-third of my buyer clients are single women,” Harrell said. “Women are working and earning more in today’s generation and are waiting longer to marry. They do not need another income to have the means to make their first investment in a home, and they have no qualms about not waiting for marriage before they dig in roots.”

Whereas previous generations of home buyers might have given their real estate agent a short list of desired features, today’s first-time buyers have a more defined sense of what they want, and rely on their agent to help them find a home that meets their unique specifications.