Not by a long shot

Recently, The Economist published an article on The Big Long in U.S. housing, noting:

“Those feeling nostalgic for the boom before 2007 will have been heartened this week by headlines about Lehman Brothers selling a portfolio of American apartments for $6.5 billion. Lehman Brothers? No, the investment bank felled by the mortgage miasma is not rising from the dead: its administrators are merely flogging its remaining assets to repay creditors. But the sale shows that American housing, once so toxic it made the global economy choke, is once again attractive to investors. Hedge funds and private-equity firms, so often the villains, may be helping a housing revival.”

While the final sale of its investments in Archstone by the husk of Lehman Bros. says a lot of things, the sale does not show “that American housing, once so toxic it made the global economy choke, is once again attractive to investors.”

A few points:

  1. Archstone owns apartment complexes, mostly high-end ones in urban agglomerations. Multifamily is a totally different asset class than single-family houses in the Sunbelt. You’re basically comparing apples and oranges at this point.
  2. In fact, since the collapse of the single-family housing market in 2007/2008, multifamily has been one of the most attractive asset classes to institutional investors. In most cases, if you lose your house to a foreclosure, then you’ll have to rent an apartment. And if mortgage qualifications become stricter, then more people are kept in the rental market. It’s no wonder that apartment cap rates started tightening a couple years ago.
  3. Furthermore, if Lehman’s bankruptcy administrators have sold the Archstone portfolio for $6.5 billion in cash and stock (or $16 billion including the assumption of liabilities), that hardly means a resurgence. (If anything, Equity Residential and AvalonBay Communities, two big apartment REITs, have gotten a bit of a discount. Remember that Lehman acquired Archstone and took the apartment REIT private for $22 billion in 2007 at the market’s peak.)

The Economist goes on to outline three ways investors might profit from a rise in single-family homes: investments in RMBS, home builders and funds targeting single-family rental investments.

Institutions and family offices have certainly seen a lot of pitches from the single-family investment funds, and a few billion dollars have been raised to target the market. The big question remains whether single-family homes can be institutionalized — that is, whether they can become just like multifamily properties.

Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

A holiday trivia challenge to share

I spend a lot of time on the road and at conferences. Two of my favorite events are Expo Real in Munich and MIPIM in Cannes — not because of the locations or the unbeatable access to managers and investors that both afford, but because Brad Olsen of Atlantic Partners hosts one of the best dinners to be found anywhere. These dinners are one of the few events that will get me to put shoes back on after a full day of walking trade show floors and cement walkways to meeting after meeting.

Besides lots of good people, this year’s Expo dinner (co-hosted by USAA) featured a trivia contest geared to the road warriors in the room. I thought you might want to test your knowledge and see how you stack up against some of the top investment managers and investors in Europe — the winning table at Expo scored 44 (my table missed by one point). Can you do better? And no cheating: no Internet searches, Siri queries or other research.

Have fun — and have a wonderful holiday season.

Question #1: 3 points for each correct answer up to five
We all know that today Washington, D.C., is the capital of the United States, but going back to colonial days, eight other cities can lay claim to having served as the capital of the American colonies before Washington took its position in 1800. Name five of those other capitals.

Question #2: 3 points for the first correct answer, 5 points for the second, 10 points for the third
Speaking of Washington, D.C., it is one of a number of world capitals that was specifically built to be a capital. Name three more.

Question #3: 5 points
What is the southernmost world capital?

Question #4: 5 points
The northernmost world capital?

Question #5: 5 points
Which capital city of the 27 members of the European Union has the smallest population?

Question #6: 5 points for naming the right continent; an additional 10 points for naming the city.
On what continent is the highest capital city in the world, by elevation? What is that city?

Question #7: 5 points
What city generally is regarded as the oldest capital city in the world?

Question #8: 5 points for naming city; 3 points if you only name the country
What is the newest world capital?

Question #9: 5 points
Which capital cities of neighboring countries are located the farthest apart?

Question #10: 5 points
According to the U.N.’s definition of “urban agglomeration,” which includes both the city limits and the areas surrounding the city that exhibit urban density, which of these capital cities was the largest as of the 2010 U.N. report: Jakarta, Manila or Seoul?

How many member states are there in the U.N.? The closest number, either above or below the actual number, will serve as the tiebreaker in case more than one table ends up with the highest score.


1. In order: Philadelphia; Baltimore; Lancaster, Penn.; York, Penn.; Princeton, N.J.; Annapolis, Md.; Trenton, N.J.; New York City

2. Abuja, Nigeria; Ayutthaya, Thailand; Belmopan, Belize; Bridgetown, Barbados; Brasilia, Brazil; Canberra, Australia; Gaborone, Botswana; Islamabad, Pakistan; Lima, Peru; Mandalay, Myanmar; Melekeok, Palau; New Delhi, India; Nouakchott, Mauritania; Valletta, Malta; Ankara, Turkey; Beijing, China; Astana, Kazakhstan. [Ottawa was founded in 1855 and became Canada’s capital in 1857.]

3. Wellington, New Zealand

4. Reykjavik, Iceland

5. Valletta, Malta

6. South America; Quito, Ecuador [La Paz, Bolivia actually is 860 meters higher than Quito, but while it is the administrative center of Bolivia, the official capital is Sucre.]

7. Damascus, Syria [Damascus was mentioned in Genesis, the first book of the Bible, and has been continuously inhabited since around 2500 B.C.!]

8. Juba, South Sudan

9. Wellington, New Zealand and Canberra, Australia — they are separated by 2,326 kilometers.

10. Manila

Tiebreaker — 193 member states

Sheila Hopkins is managing director – Europe at Institutional Real Estate, Inc.

Higher education takes on new meaning

Higher education, indeed. Higher and higher the debt mounts at U.S. colleges and universities on the heels of a decade of massive construction projects to equip campuses with academic and recreational facilities that the best and brightest high school graduates find irresistible.

Just two problems with that classroom theorem. For starters, there is the $205 billion of outstanding debt that has piled up on university balance sheets, according to Moody’s Investors Service. Secondly, student enrollment has flattened or even declined at many institutions, right when all that spending on swanky dormitories, student unions, classrooms, labs and sports facilities was supposed to start paying off in the form of swelling student rolls.

Add to that a $1 trillion dash of student debt, spiraling tuition costs, rising demand for student financial aid and unprecedented competition from online study programs, and you’ve got a quadratic equation that adds up to some painful times ahead for academia.

The New York Times sent the academic community to the dean’s office in a cover story detailing the situation. According to Moody’s, overall debt at the 500 institutions the credit-rating agency tracks more than doubled from 2000 to 2011, and that’s after adjusting for inflation.

Thomas Powell, president of Mount St. Mary’s University, haplessly told The Times: “We borrowed a lot of money, but we had no choice. I wasn’t going to watch the buildings fall down.”

Something as fundamental as keeping the ivy from rending the buildings to rubble is one thing, but what irks many observers is the ostentation these construction projects entailed. We’re talking student unions with movie theaters and wine bars, resort-style dormitories with game rooms, swimming pools, hot tubs, tanning beds, fitness centers, clubhouses and living-space options that range from studio apartments to four-bedroom suites. Getting socked with the tab are students, parents and state taxpayers.

Meanwhile, the incremental number of dollars spent on actually educating students has paled by comparison.

So much for simple living and high thinking. It appears the nation’s prodigal intelligentsia is poised to flunk the semester.

Mike Consol is editor of The Institutional Real Estate Letter – Americas.


In October and November, several major pension plans agreed to be “founding investors” in the United Kingdom’s Pension Infrastructure Platform (PIP), including British Airways Pensions, BAE Systems Pension Funds, BT Pension Scheme, Pension Protection Fund, The Railways Pension Scheme, Strathclyde Pension Fund and West Midlands Pension Fund. The founding investors will seed the PIP with about £2 billion ($3.2 billion) in capital.

According to a report by the BBC, the PIP could act as de facto sovereign wealth fund. “My understanding, however, is that Downing Street and the Treasury are engaged on a more ambitious project, to investigate whether it might be possible to create what might be seen as a British sovereign wealth fund,” writes business editor Robert Peston.

The upside is that with a pool of capital that large, investment in infrastructure could be funded by pensions.

The project pipeline provided by the U.K. National Infrastructure Plan shows many projects the PIP will consider: “The infrastructure pipeline includes over 500 projects and programs and is valued at more than £250 billion [$400.3 billion]. Almost two-thirds of the expected investment between 2011 and 2015 will be privately funded, and the remainder will be either partially or fully publicly funded. The infrastructure investment pipeline data will be refreshed annually and was last updated November 2011.”

Drew Campbell is senior editor of Institutional Investing in Infrastructure.

The gift of spending

With Black Friday spending up, what’s in store for overall holiday spending in 2012?

Despite the recession, holiday spending was up this year, setting a new record in 2012 with $59.1 billion spent by consumers in store and online, according to Reuters.

Compared with consumer spending in 2011 during the holiday season ($52.4 billion), which was up 16 percent from 2010, consumers increased the numbers yet again this year, up 12.8 percent just over the Thanksgiving weekend.

Reuters states that consumers spent on average $423 on in-store and online sales, up from $398 in 2011 and $365 in 2010.

Bloomberg reported that on Black Friday alone, retail sales climbed 6.6 percent this year to an estimated $11 billion.

The National Retail Federation (NRF) has predicted that looming fears over the fiscal cliff and the struggling job market could take a toll on holiday spending. The firm predicts holiday sales will rise by a mere 4.1 percent, which is slower than the 5.6 percent increase in 2011.

Despite the forecast for a small rise in sales, CNN Money reports that retailers are hopeful that these strong Black Friday figures will set a tone for a solid season of spending ahead.

Denise DeChaine is special projects editor at Institutional Real Estate, Inc.

Report from Korea: Investment in overseas markets continues

In November, I attended the SAIF 2012 institutional real estate conference in Seoul. This conference, which was originally started by the European Union Chamber of Commerce in Korea (EUCCK), was in its third year and this time was organized by Samil PricewaterhouseCoopers together with EUCCK.

As in previous years, this event managed to attract a lot of institutional investors from South Korea as well as Europe and the United States. I had an opportunity to attend many interesting presentations and discussions and also moderated a panel that included Korean, U.S. and European investors. In many ways, this event serves as a barometer for the investment sentiment of Korean investors and their plans for the near and medium term, so I wanted to share some of my observations with you.

Korean investors have been active in overseas real estate markets for several years, and many observers believe that sooner or later large Chinese and Japanese institutional investors will follow suit. That is why it is quite interesting to see how this investment activity in overseas markets continues to unfold in Korea.

Asia has become a region for the formation of new capital, and many asset managers from the United States and Europe, as well as from Asia, have become more active in marketing to local investors. There is enough capital for everyone, but the question is when large Chinese and Japanese institutional investors are going to finally become more active in overseas real estate markets.

That China Investment Corp. has a clear mandate to invest overseas may not be a good indicator, but the fact that The National Council for Social Security Fund of China has made its first investment in a listed real estate securities fund looks very encouraging. The Government Pension Investment Fund of Japan, one of the largest pension funds in the world, has reportedly hired several consulting companies to help work out its investment strategies. With $1.4 trillion under management, even a small percentage allocated and invested in real estate could make a big change in the markets and keep asset managers busy looking for investment opportunities.

When this is going to happen is anyone’s guess, but things are clearly looking brighter for asset managers who are in a position to accommodate this capital when it starts moving.

Alex Eidlin is managing director – Asia Pacific at Institutional Real Estate, Inc.

Where are the secret stashes?

Property consultants, always an optimistic bunch, tell us that they expect the industrial/logistics sector to be the best performing sector in Europe over the medium term. There could be a reason for that, and it’s not just that the office and retail sectors may be blighted by the continuing economic downturn and euro zone kerfuffle.

At the recent IPD/IPF Property Investment Conference in Brighton, United Kingdom, Hamish McRae, associate editor of The Independent newspaper, remarked that he’d heard that the German government had secretly printed Deutschmarks and stored them outside the country, ready to be moved in over the weekend in the event of a calamitous euro zone disintegration or of a decision by Germany to withdraw from the euro, whichever comes first. McRae didn’t know the truth of it and hadn’t published the story. But he told us. And now I’ve told you.

Well, actually, added Pippa Malmgren, president and founder of Principalis Asset Management, McRae’s fellow presenter for the opening, stage-setting geopolitical landscape session, isn’t that just good contingency planning? Of the kind that you’d expect your government to do? To guard against eventualities? To be ready? I wouldn’t be at all surprised, said Malmgren, if other euro zone countries hadn’t also secretly printed notes and stashed them away somewhere, ready for the unthinkable. Well, you’d like to think it’s unthinkable, but if the notes really have been printed, then they’ve already thought it.

So if you’re wondering why large amounts of warehouse capacity in remote parts of Europe, but with good road and rail connections, have suddenly been taken off the market, now you know.

And IPD’s acquisition by MSCI has been finalized. We’re now supposed to say IPD | An MSCI Brand every time we mention IPD. Can’t see that lasting.

Richard Fleming is editor of The Institutional Real Estate Letter – Europe.

HO! HO! HO! Foreigners are coming to town

It is the holiday season, the holiday shopping season.

Buyers from all over the world are snapping up real estate internationally, not domestically.

Recently, many North American organizations have been announcing completed high-net acquisitions and billion-dollar future plans overseas. Bethesda, Md.–based Host Hotels & Resorts acquired five European hotels from Whitehall for $575 million. In addition, the Texas Permanent School Fund has invested $75 million to AREA European Real Estate Fund IV, an opportunistic fund managed by AREA Property Partners. The Ontario Teachers’ Pension Plan is opening a new office in Hong Kong, and the Canada Pension Plan Investment Board has acquired a 37 percent interest in two Australian shopping centers for $450 million.

Other cross-border investments are coming to the United States from across the ocean. The Second Swedish National Pension Fund (AP2) has plans to invest $324 million in U.S. properties. In addition, Norway’s oil and gas sovereign wealth fund, the Norwegian Government Pension Fund, aims to invest $11 billion in U.S. real estate. Also, a partnership led by the Government of Singapore Investment Corp. acquired a 92 percent controlling stake in 101 California St., located in San Francisco’s financial district, for $851 million. Japanese billionaire Akira Mori, owner of Mori Trust Co., has plans to invest $1.2 billion globally, particularly in New York City and London.

Many non-U.S. investors view the United States as a “safe haven.” According to the Commerce Department, foreign real estate investment in the United States was $82.5 billion for the 12-month period ending in March 2012. This is an increase of 24 percent on a year-over-year basis. And just 9 percent of residential real estate sales involve foreign buyers, indicating that the bulk of the investment has been in commercial real estate. U.S. growth was concentrated in major metros areas including Boston, New York City, San Francisco and Washington, D.C.

In the other direction, U.S. investors viewed the United Kingdom, Germany and France as the number one, two and three targets for cross-border investment during the first half of the year, according to the Real Capital Analytics’ Global Capital Trends mid-year review. The amount of money invested in commercial real estate globally inched up in second quarter 2012 from the prior three months to $157 billion, but first-half investment was 23 percent lower than a year ago.

Of the top five investment destinations by market and property type in the first half of the year, four were office markets. The London office market was the top target investment market with $9.51 billion invested in the first half of the year, down 5 percent from a year earlier. And the Tokyo office market was number two at $6.22 billion, down 19 percent.

Both the U.S. and European economies are struggling toward a recovery. What are investors seeing overseas that looks so attractive, even as others invest cross-border into their markets? Doesn’t seem to make sense — European and Asian firms coming to the States and vice versa. Why not stay home?

Andrea Waitrovich is web content editor of Institutional Real Estate, Inc.

Separating the signal from the noise

For those of us — which is all of us — who rely on forecasts, Nate Silver’s book, The Signal and the Noise, should be must reading.

Silver has made his living over his 34 short years of life as a sabermetrician (analyzing Major League Baseball statistics), as a psephologist (prognosticating the outcome of national, senatorial and congressional races from his website and, during the glory years of online poker, as a professional poker player. He’s certainly one of the world’s foremost authorities on the science of forecasting and predicting, and his book covers everything from predicting the performance of Major League Baseball prospects to why the U.S. intelligence community failed to anticipate Pearl Harbor and 9/11, to why weather forecasting has improved so much over the past 25 years (and why climatology has not), to why IBM’s Big Blue eventually defeated Kasparov, the world’s greatest chess player, to why seismologists, econometric and political forecasters so often miss the mark.

Tied in with the ideas embedded in Daniel Kahneman’s book, Thinking, Fast and Slow, it’s clear that we as human beings have a tendency to be overconfident in our ability to predict from limited sets of data.

Oddly enough, the more certain the forecaster, the more likely we are to believe them. (The less certain, the less likely we are to believe them. After all, if they’re not sure about what they’re predicting, why should we be?)

In reality, Silver points out, we should be paying more attention to the forecaster who tends to hedge his or her bets.  It’s the difference, he notes, between the hedgehog, who knows one big thing, and the fox, who knows many things. Hedgehogs tend to interpret everything they see within their narrow concept of the way in which the world works. They form their hypothesis and then work hard to fit the data they collect into their models. Foxes, on the other hand, realize we live in an uncertain world and are constantly adjusting their hypotheses to fit the real-world data that is constantly flowing back to them. The hedgehog builds a model and then falls in love with that model. The fox builds a model and constantly modifies it as the facts change.

All forecasts are based on models, notes Silver, all models are approximations of reality, and therefore, all models are wrong. (As a noted statistician once noted, “The best model of a cat is a cat.”) But, as Silver also notes, some models are useful. A corollary of this principal, as he further demonstrates, is some models are more useful than others.

Forecasters can improve the success of their models, he notes, through the iterative (scientific) process of forming hypotheses, testing those hypotheses, and then adjusting the assumptions that went into their model in the first place to better fit what they are observing in the real world. Unfortunately, it’s human nature to attempt to fit the data we are observing to conform to our models, rather than the other way around. So maintaining a mind set of healthy skepticism — even about our own processes — is essential to becoming a better forecaster.

What this ultimately suggests, among other things, is we should give greater credence to the forecasters who are less certain about their predictions than those who are more certain. Silver suggests two questions that we all should be asking whenever presented with forecasts of just about any kind are: “What are the probabilities associated with those forecasts?” and “On what basis did you assume those probabilities?”

Silver also notes that consensus forecasts often are more accurate than individual forecasts — provided the average forecast is based on independent assessments of predicted outcomes. In this sense, there may indeed be wisdom in crowds. Too often, however, so-called independent forecasts aren’t independent at all — the outcomes are integrally related to one another through shared biases and flawed data.

In some fields, like meteorology, the data at our disposal are pretty good. But because the behavior they are trying to predict are derived from such incredibly complex systems that are so dynamic and in such a constant state of flux, the more distant the prediction horizon, the less accurate will be the forecasts — at least, so far.

In other fields, such as economic or market forecasting, the data aren’t very good, and so the predictive models aren’t very good either. The same holds true when studying investment market behavior. As so many observers have noted, few have been able to beat the market consistently over long periods of time.

The exception to this rule, ostensibly, is for those who are able to act on inside information. If you are privy to information others lack and are able to act on that information, you can in fact consistently beat the markets. The problem is, making bets on inside information in publicly traded markets is illegal.

Not so, however, in the private markets. The whole thesis underlying the advantages of private market investing is the ability to identify and capitalize on the advantages created by inside information.

The question raised by Silver’s book is — are we really as good as we think we are in identifying and capitalizing on the information advantages offered by private market investments like real estate? How reliable, for example, have the market predictions by econometric forecasting firms such as CBRE Econometrics or REIS actually been, over time?

Silver and Kahneman both point out that human beings have a tendency to be overconfident in their ability to make predictions. Clearly, the number of us who missed the impending housing market meltdown and its impact on the global financial markets suggests that very few of us are really very good at teasing out the signal from the noise. And when we fail, too often we take comfort in the “fact” that no one else saw it coming. But in almost every case, we’re only self-deluding ourselves. The fact is, as Silver points out, thousands of analysts and market watchers saw the housing market meltdown coming. It wasn’t like we weren’t forewarned. We just failed to acknowledge what others were seeing and, consequently, failed to act.

This theme is repeated throughout the book and is reinforced in another interesting read, Margaret Heffernan’s Willful Blindness. (Heffernan will be a keynote speaker at our upcoming VIP conference in Dana Point at the end of January.)

The good news, Silver points out, is that while most of us are innately terrible at making reliable predictions, we can learn, and we can get better. The key, he notes, is to think in a more Bayesian way about assumptions, probabilities and outcomes. What does that mean? Read the book.

Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.