Something’s gotta give

In my most recent Publisher’s Note, I wrote about “black swan” events — possible unexpected calamities that may occur in 2014. Black swans usually occur during Minsky moments, sudden financial collapses, when people are lulled into an unwarranted sense of security by a prolonged period of prosperity and stability. The longer the period of prosperity and stability, the harsher the shock from the “unexpectedly” imploding economy.

Which economy would qualify now as having had a long and stable period of development and relative prosperity? As you may guess, the answer is China.

China has not had any serious setback in the almost 30 years of its “long march” to prosperity. Many investors have lost their shirts betting against China, but paying close attention to the most recent development there may be warranted at this time.

Economic data is notoriously unreliable in China. Even Chinese government officials have admitted this. So what is the best way to assess the situation there? What can serve as a canary in the coalmine?

One of the ways to get a better understanding of what is going in real estate markets is to see what local first-comers are doing. And no one is better for this role than Li Ka-Shing, who has earned the nickname the Warren Buffett of Asia.

In an earlier blog post, I mentioned that Li has started selling his properties in China. At that time, this could have been normal profit taking; you’ve got to take money off the table from time to time. Since then, there has been more news of Li selling even more of his holdings.

Altogether in 2013, Li sold four of his primary holdings in prime locations, including the Oriental Financial Center in Pudong, Shanghai; the Metropolitan Plaza in Guangzhou; and the Nanjing International Finance Center in Nanjing. More telling is the fact that his son Richard Li is selling his Pacific Century Place in Beijing for a reported price of $900 million. Analysts have been reporting rising rents and increasing profits at the PCP, so from a conventional point of view, selling such a gem doesn’t make much sense.

At the same time, The Blackstone Group, The Carlyle Group and other U.S. private equity heavyweights have been piling into China acquiring local developers, properties and forming joint ventures.

It is normal for investors to diversify and invest in markets other than their own turf. But if profitable opportunities abound in Chinese property markets, why do we see so much Chinese capital flowing into overseas properties? What do Li and other Chinese investors know that their counterparts from the United States don’t?

Has the Minsky moment arrived in China?

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

Is Europe getting into a RUT again?

Russia, Ukraine, Turkey. RUT. Europe’s eastern edge. I’ve switched the morning news on to hear that fears of a terrorist attack on the Sochi Winter Olympic Games in Russia are high, that a state of emergency may be declared in Ukraine, and that the Erdoğan government in Turkey continues to grapple with machinations surrounding whispers of a military coup, corruption at high levels and accusations of a tendency to autocracy and desecularization. Not bad for a Monday morning.

Europe’s eastern edge is a bit of a porous border. It’s part of the question of where does Europe stop and where does Asia start. Those three large countries have a long history of not being part of Europe or of only being part of Europe when it suits them. Or when it suits Europe. Expansion of the E.U. in recent times has largely been confined to the European mainland.

People-rich Turkey has sought to apply for E.U. membership but has been rebuffed, ostensibly on human rights grounds but the real reasons can be found in religious bigotry among Europe’s staunchly Catholic nations. Resource- and energy-rich Russia has been content, as a former superpower but still possessing nuclear weapons and still prepared to saber-rattle, to forge its own path to economic prosperity. And Ukraine — with many of the problems and issues of a classic emerging market such as political risk, rule of law and security of title for land and buildings — has been left to find its own way, knowing that Russia has a vested interest in what it does and an effective means — turning off the energy tap — of expressing its displeasure.

And so it is proving. Ukraine and the European Union had been getting closer together. Then the Russians, who seemingly still see anything east of the Oder-Neisse Line — the post–Second World War border between Poland and Germany — as their sphere of influence, put pressure on Ukraine’s government to halt the dalliance with the E.U. Ukraine’s people, apparently convinced that the road to prosperity was E.U. membership or at least closer ties with the E.U. — certainly not a tighter relationship with a Greater Russia — saw things differently. The people are expressing their views, and last week we had the first deaths in anti-government protests. As we have seen with the Arab Spring, it rarely goes well after that point.

Russia, which has put on a diplomatic charm offensive ahead of the Winter Olympic Games by releasing the Greenpeace Arctic protestors and the Pussy Riot prisoners, may revert to type once the Games are over. Turkey, which was ruled by the military as recently as the early 1980s and where the military still plays a powerful role, has to be careful. It has a young population that knows nothing of life under the generals and that has modern-living expectations that will be hard to dampen; the imposition of constraints on life to fit in with the Erdoğan government’s view of good Muslim behavior is unlikely to be tolerated for long, certainly in the major cities.

It’s 25 years this year since the Fall of the Berlin Wall and the opening of the Iron Curtain. It has been a golden period for European political, economic and social development. Is the east-west curtain closing again?

Does this matter for real estate? Of course it does. Global real estate investors have put considerable sums into development of modern office and retail assets, and the ancillary assets that go hand-in-hand. Russia and Turkey have been two of the real estate world’s success stories of the past 25 years. Investors will not want those assets put at risk.

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

Show me the money

Lloyd's Building, LondonThe numbers are in! And they’re big ones. I think by now you all are picking up on how much I like seeing BIG SUMS of money in blog posts, the IREI newsfeeds and our premium news service, IREN.

For starters, anyone notice how often a Chinese developer or a Chinese investor kept popping up throughout 2013? I remember in one week I had three headlines.

Pretty hard to miss when these firms are making billion-dollar headlines and hefty million-dollar deals. So what’s the grand total of their spending during 2013?

Chinese international investment activity has increased by 124 percent to $7.6 billion in 2013, according to research from Jones Lang LaSalle. This compares with $3.3 billion in 2012 and $2.9 billion in 2011.

Whoa! Did your guess come close?

The U.K. and the U.S. real estate markets attracted most of this capital from China in 2013; the United Kingdom received $2.3 billion (up from $1.3 billion in 2012) and the United States received $3.1 billion (up from $264 million in 2012). The office sector continues to dominate as the preferred asset class among Chinese commercial real estate investors active overseas, accounting for 85 percent of all investments they made in 2013.

New York City and London are the markets that attracted the most money from China. Chinese investors spent $2.9 billion in New York City, representing a considerable increase on 2012 when they spent $200 million in the city.  Transactions include Fosun International acquiring One Chase Manhattan Plaza for $725 million and Chinese real estate tycoon Zhang Xin becoming part owner of the GM Building in midtown Manhattan.

London attracted $2.1 billion from China. Transactions include Chinese insurance firm Ping An buying the Lloyd’s of London Building for $387 million.

In Asia Pacific, Chinese money focused on Australia and Singapore, which attracted $700 million and $1 billion, respectively. In 2012, Australia attracted $209 million from China, while Singapore did not see any investment from China.

There is also an increasing interest in retail as well as residential land development. The full story can be found in this week’s IREN.

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AndreafinalwebAndrea Waitrovich is editor of IREN and web content editor of Institutional Real Estate, Inc.

Are we there yet?

When you’re a kid, time moves slowly; an hour seems like a long time. Maybe that’s why as we headed down the long stretch of highway between Northern California and Los Angeles for our annual summer vacation to visit the grandparents and Disneyland, my sister and I would ask our dad in a whiny voice filled with despair, “Are we there yet?”

I don’t know why he would get so upset every time we asked this question. Maybe it was because we asked it every five minutes, or maybe it was because the answer was obviously “no” because the car was still moving.

Needless to say, it has been a long, slow trip for the U.S. economy as we travel the road from Recession to Recovery. There have been signs, however, that assure us we are headed in the right direction.

  • The stock market has more than recovered: Both the S&P 500 Index and the Dow Jones Industrial Average soared to record highs in 2013.
  • Corporate profits are at all-time highs, industrial production is picking up and third quarter 2013 GDP grew at a healthy rate of 4.1 percent.
  • The unemployment rate improved to 6.7 percent at year-end 2013, down from 9.7 percent at year-end 2009, but still above the 5.0 percent at year-end 2007.
  • The single-family housing market recovery kicked into high gear in 2013 with solid increases in sales of existing homes and sales prices. Construction starts are still below normal levels, but they were up almost 30 percent last year, and the sector is expected to maintain that momentum in 2014.
  • Small business owners increased employment by an average of 0.24 workers in December, the best number since February 2006, according to the National Federation of Independent Business. A very encouraging sign, considering the small-business sector represents roughly half of the private-sector economy.
  • The U.S. federal budget deficit is shrinking and presently less of a drag on the economy. For fiscal year 2013, the federal deficit was $680 billion (4 percent of GDP), much improved from 2009’s peak of $1.4 trillion (approaching 10 percent of GDP).

However, despite the spate of good economic news, many individuals and parts of the country are lagging in the recovery.

So, are we there yet? As my dad would tell my sister and me, “No. I’ll tell you when we’re there. But we are closer than the last time you asked.”

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LarryFinalwebv2Larry Gray is editorial director of Institutional Real Estate, Inc.

Secondaries: Really for real this time (it seems)

It seems like every year is declared to be the year that real estate secondary markets have their coming out party. After secondary transaction volumes rose from a yearly average of around $200 million in the early 2000s to more than $1 billion in 2008, it seemed like the table was set for the secondary market to explode, as was outlined in “For Real This Time: Transactions in the Real Estate Secondary Market Set to Grow,” a 2008 article in The Institutional Real Estate Letter. By 2009, projections for global real estate secondary transaction volumes went as high as $10 billion to $20 billion.

But, like an ill-planned surprise party, the big moment never happened — until now. Though each year from 2008 to 2012 produced a record volume of secondaries transactions, the increases never quite matched the projections, as the $1 billion from 2008 increased to only $2.6 billion by 2012. While this year’s transaction volumes didn’t hit the lofty projections we’ve seen in years past, they did have a record setting year, and one that saw transaction volumes double, as outlined by Setter Capital in its annual Volume Report:

“Secondary Market Volumes for 2013 are estimated to have hit a record $36b across Private Equity, Real Estate, Infrastructure, Timber and Hedge Fund secondaries, as reported by Toronto-based Setter Capital. Real estate secondary purchases amounted to $5.1b (~ 14.2% of total volume).”

$5.1 billion! Again, not the $10 billion to $20 billion projected in year’s past, but still a figure that doubles the transaction volume of real estate secondaries in 2012.

While the large number may be slightly skewed by the nearly $1 billion in secondaries the New Jersey Division of Investments sold to a partnership of NorthStar Realty Finance Corp. and Goldman Sachs Asset Management last June, this still accounts for less than half of the spike.

What does this all mean? Well, it seems that the pessimism surrounding the market since the crash has finally started to wane, meaning that the price points between buyers and sellers are closing in on one another.

“I think that people were generally much more optimistic last year, and so buyers reflected that in their pricing,” says Peter McGrath, managing director with Setter Capital. “Pricing was stronger last year, and I think that finally got sellers to pull the trigger and agree to sell.”

If so, real estate secondaries may have finally found their time to shine — for real this time.

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ReggieClodfelter91x119Reg Clodfelter is a reporter with Institutional Real Estate, Inc.

Lies, damn lies and statistics

“Facts are stubborn things, but statistics are pliable.”
— Mark Twain

Everyone is talking about what a great year 2013 was for infrastructure fundraising (and for real estate fundraising and for the stock market and for lots of other investment vehicles, except maybe not bonds). According to the IREI FundTracker database, 21 infrastructure funds closed in 2013, with an aggregate total of more than $29 billion raised. And this is just capital raised in closed-end funds that actually closed. Tens of billion dollars more flowed into the 206 listed and unlisted funds still marketing, including the 31 that launched in the past year, making 2013 one of the best years — if not the best year — for fundraising since IREI began tracking results.

It’s this type of news that encourages infrastructure participants to high-five each other and begin believing that infrastructure might be moving out of the “emerging” category. And it makes mayors, governors and congressmen begin to think that all of those crumbling bridges and gridlocked motorways are just one investment deal away from being fixed.

But as sportscaster Lee Corso is wont to say, “Not so fast, my friend.”

Just as the world economies are rebounding in an uneven fashion (an auto worker in Detroit and a stockbroker in New York City will have very different answers to the question, “Is the U.S. economy improving?”), infrastructure funds and sectors are not all created equal.

Of the 21 funds that closed in 2013, four raised more than $2 billion each and accounted for 54 percent of the total capital raised. One fund alone, Brookfield Infrastructure Fund II, raised $7 billion — or nearly 25 percent of the total.

Eight of the funds opened and closed in one year or less. Brookfield managed to raise that $7 billion in only seven months. Rockland Power Partners raised $425 million in two months. But others took much longer. Ten of the funds took two years or more, with one fund finally closing after four years of fundraising. And these are the funds that managed to close. Most of the funds still in the market have been there for more than 18 months. There are a lot of tired fundraisers out there.

Energy- and utilities-focused funds received the lion’s share of attention from investors. Transportation, social infrastructure and niche strategies struggled. Disappointing results from earlier high-profile deals involving toll roads and airports have dampened enthusiasm for this sector. It will undoubtedly rebound, but investors are looking for clarity on exactly what some of these projects are worth today — and how to underwrite for future demand. What kinds of returns are really realistic?

And therein lies the crux of the problem when governments and municipalities look to the private sector to fill the infrastructure gap. They approach the sector from different directions, and like the first attempt to connect the tracks for the transcontinental railroad, miss each other by “this” much.

Municipalities are looking to fill a need.

The private sector and pension funds are looking to make money. If they can make that money by doing good, so much the better. But pension funds have a fiduciary duty to provide for their pensioners. And the private sector has a duty to provide for its shareholders.

This means that if the need to be filled involves energy, that need will have a ton of capital to work with. But if it involves roadways or bridges, the municipality will be out of luck. And if that roadway or bridge is a greenfield project, the town council might as well start playing the lottery to find the capital.

This is where the federal government could help. When subsidies and tax credits are offered, investment increases. Investment in wind energy soared on the wings of subsidies. Solar energy is still shining because of tax credits. Affordable housing gets built because of tax credits and other incentives. The same could work with infrastructure — as long as the right projects are targeted. And those projects should be those that are needed but don’t provide enough of a return for the private sector to be interested.

There has been lots of talk about stimulus funds being used to build new in infrastructure — but not much building has really occurred. It would seem that simply offering tax credits to increase return would be a more efficient way to get the private sector interested in projects that need doing, and get things moving. If incentives are structured correctly, we might even find the private sector interested in taking on greenfield risk and building the infrastructure needed for the 21st century and beyond.

How would you encourage private sector investment in some of the desperately needed but out-of-favor projects?

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Sheilaflippedfinalv3stSheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.

The REIT stuff

1-8 Empire State BuildingThe past year saw a marked increase in the number of REITs around the world, despite uncertainty regarding QE tapering — the end of bond purchases by central banks as part of an effort to keep interest rates low — which could mean a rise in interest rates and could have the concomitant effect of making real estate securities a less attractive investment.

Even with those headwinds, some 19 REITs had IPOs in the United States in 2013, according to data from NAREIT. Just eight firms went public in 2012 and 2011, and nine REIT IPOs occurred in 2010.

The IPO wave included a couple highly anticipated public offerings from the firm that owns the Empire State Building and a REIT backed by The Blackstone Group, which both raised approximately $1 billion. In the previous few years, no REIT had raised more than a half billion.

Internationally, there were also new REITs in 2013. Ireland introduced the REIT structure, and a couple of firms, Green REIT and Hibernia REIT, have already taken the plunge.

The REIT IPO trend could well continue through 2014. According to Schecky Schechner, a managing director and Americas head of real estate investment banking at Barclays Capital:

“Well, we’ve had, obviously, a pullback in REIT stock prices due to the rise in interest rates and other factors. Right now, a lot of the stocks are down. In that environment, it may be somewhat more complicated for REIT investors, but good deals are getting done at decent discounts to the stock prices.”

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LorettawebfinalLoretta Clodfelter is production and copy editor at Institutional Real Estate, Inc.

Investors cozy up with developers in China

Life insurance companies in China, now able to invest up to 30 percent of their assets under management in real estate, are clearly taking advantage of some of the property investment options available to them, thus creating a win-win situation with indebted developers in the country.

For example, one such major developer, Shanghai-based Shui On Land Ltd., has been quite active with investors of late through sales, partnerships and the corporate restructuring of its business in an effort to pay down its debt and improve its cash position.

This past December, Shui On Land and its subsidiary China Xintiandi entered into a 3.32 billion yuan ($548 million) strategic partnership with China Life Insurance Co. to acquire Shui On Land’s entire stake in the company that owns the large-scale Taipingqiao mixed-use project in Shanghai’s Huangpu district expected to be completed this year.

Prior to this deal, Brookfield Property Partners agreed to invest up to $750 million in China Xintiandi, which will initially hold a portfolio of six Chinese property assets (Shanghai Xintiandi, Xintiandi Style, Corporate Avenue 1, Corporate Avenue 2, Shui On Plaza and The HUB).

Additionally, in November 2013, Sunshine Life Insurance Co. agreed to acquire Shui On Land’s office asset Chongqing Tiandi, also known as Corporate Avenue 2, in the city of Chongqing for 2.4 billion yuan ($396 million).

As more and more investors seek to capitalize on real estate’s long-term income-producing qualities and potential for asset appreciation in China’s growing cities, it won’t be surprising if such deals become even more commonplace.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Green with envy

The California State Teachers’ Retirement System published its seventh annual Green Initiative Task Force annual report in December for the year ending June 30, 2013.

The report details the retirements system’s “activities surrounding environmental risk management and opportunity capture,” notes an introduction letter by CIO Chris Ailman.

“According to Munich Re, in 2012, 905 natural catastrophes worldwide resulted in 9,600 fatalities and overall losses of $170 billion. Institutional investors cannot ignore the importance of working to minimize the frequency and impact of these environmental related events,” Ailman continues. “There are significant financial, legal and reputational risks involved and, as fiduciaries, it is an investor’s responsibility to work to mitigate these risks.”

Ailman also points out that the environmental risks present opportunities. “Efforts to reduce carbon emissions and provide relief to water-stressed regions present opportunities to investors positioned to analyze and act on them. Perhaps most notable are the investment opportunities surrounding clean energy production and transmission, and technologies that support resource efficiency.”

Since the previous task force annual report, CalSTRS has increased its green investments in large part using its “inflation sensitive” asset class. “Inflation Sensitive is largely focused on infrastructure investments, and we have taken advantage of opportunities in clean energy production and transmission investments, as well as several energy efficient facilities,” notes Ailman.

An example of CalSTRS’ green infrastructure investments is a commitment to First Reserve Energy Infrastructure Fund I, which has a total of $153 million invested in SunEdison Reserve, owner of a portfolio of contracted solar photovoltaic power generation facilities in Europe and North America. The retirement system also has invested in the Montreal University Hospital Research Centre through a commitment to Meridiam Infrastructure.

It is often said in the world of pension fund investors that the small follow the large. In other words, smaller and mid-sized pensions are often risk-averse and will not venture into new markets until the larger pensions — a CalSTRS, for example — do so. Will more pensions follow CalSTRS’ lead and use their infrastructure allocations to invest in green infrastructure such as renewable energy and resource efficiency? Investment managers looking to raise capital for infrastructure investment should at the very least take note of CalSTRS’ 2013 green infrastructure investments — it could be a sign of more to come.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.