Not just London calling

Much has been written about Asian investors’ newfound love affair with London property, as high-profile acquisitions of major assets — the Lloyd’s building, Ram Brewery — have become a dime a dozen.

But now Asian investors have begun to move out into the U.K. regional cities, according to a new report from DLA Piper. As Investing in U.K. Core Cities notes, overseas ownership in the U.K.’s other cities has been increasing steadily.

In a statement about the report, Jeremy Liebster, registered foreign lawyer at DLA Piper in Hong Kong, notes:

“With a well-publicized flood of investment money from Malaysia, China, Hong Kong and Singapore into London commercial property, the lure of the U.K. capital to Asian investors is well established and shows no signs of waning. Sovereign wealth money and pensions funds have been joined by high net worth individuals, some of whom are increasingly teaming up with local developers. But London is not the only place of interest to Asian investors, who will often be familiar with the rest of the U.K. from business, university or family ties. With rental yields in London gradually falling to match similar lows in Hong Kong, Beijing and Singapore, it was always inevitable that interest in other areas within the U.K. would begin to increase.”

The report highlights investment opportunities in Birmingham, Edinburgh, Leeds, Liverpool, Manchester and Sheffield, as well as London.

It remains to be seen if the U.K. regional cities will pull investors away from the promise of London.

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

You can’t find the solution until you define the problem

FebBlogImageAs noted in a previous post, the world needs a gazillion dollars in infrastructure development and redevelopment. To be precise (or as precise as any estimate can be), the estimated shortfall in global infrastructure debt and equity investment is at least $1 trillion per year — that’s PER YEAR, not in total.

This is a huge need, yet there is an equally huge amount of capital being raised. You read about multibillion-dollar funds closing on a monthly basis (Ardian/AXA, Blackstone, Brookfield, EIG, GIP, IFC, KKR, Macquarie, Meridiam — and I’m only up to “M” in the IREI FundTracker database of recently closed infrastructure funds closing with more than $1 billion raised). Yet despite these huge fundraises, investors are still falling short of fulfilling their target allocations.

So it appears there is no fundamental scarcity of capital. What there is a scarcity of, however, is deals that investors find competitive on a global risk-adjusted return basis. Investors don’t invest in a vacuum. Every asset class and investment is judged against a myriad of other choices. No matter how much LPs might want to invest in infrastructure, if another investment offers better returns with a lower risk profile, that’s where the capital will flow.

How do we solve this fundamental problem? How do we structure investments so investors get the risk-adjusted returns they need, and governments get the infrastructure they need? Enter the World Economic Forum and its Global Agenda Council on Long-Term Investing. This group has just published the “Infrastructure Investment Policy Blueprint,” which attempts to offer a practical set of recommendations for governments on attracting private capital for infrastructure projects.

The Blueprint report focuses on three areas that government entities need to look at to encourage additional private investment:

  1. Infrastructure strategic vision, which includes a project pipeline, a viable role for investors and communication strategy
  2. Policy and regulatory enablers, which mitigate renegotiation risk and increase the efficiency of key processes
  3. Investor value proposition at the individual project level, which focuses on maximizing value for governments and ensuring a competitive risk-adjusted return for investors

Although all three areas are important, it’s the second point that typically thwarts even the best deal. According to the report, investors frequently cite four main policy impediments that kill interest before it ever has a chance to get to the “what’s in it for me” stage:

  • Renegotiation risk. The strain on many government balance sheets, coupled with headline-grabbing regulatory decisions (think Gassled), has positioned political risk — and specifically renegotiation risk — as a critical concern for many investors in developed and emerging markets alike.
  • Procurement process. Bidding for a public-private partnership project is time-consuming and costly for investors. A lack of standardization is a major obstacle to an efficient process.
  • Permitting processes. Complex permitting processes that lack coordination and predictability will constrain investment even for the most financially attractive projects.
  • Tax policy. Taxes need to be stable over time. This risk is a kissin’ cousin to renegotiation risk — investors don’t like changes.

Investors are risk averse. When these four risks are mitigated, then they will be ready to commit capital — or at least look at the deals.

The Blueprint offers ways that government can move ahead on developing an attractive strategy, diminishing regulatory and policy risk, and increasing the value proposition. But of course, pointing out what needs to be changed is easier than implementing those changes. The report speaks for many in the industry when it concludes:

“Finally, these recommended actions are deceptively simple to outline but considerably harder to implement. They may require a substantial build-up of expertise and capabilities within government, investment of significant political capital and engagement in the lengthy process of building consensus among stakeholders. All the while, government leaders have to balance infrastructure needs against other high-priority issues. Yet, the rewards are worth the labor. Even in a situation of significantly limited resources, by prioritizing the recommendations that are most relevant and feasible, governments can do much to attract quality long-term financing and set the foundation for future prosperity.”

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

Are Asian REITs in your future?

The liquidity of Asian REITs attracts investment from investors globally, and the greater economic and urbanization growth in the region is encouraging investors’ participation in Asia’s property markets as they hunt for yield and in light of Asia’s increasing landscape of institutional-grade assets.

Just the sheer number of REITs in Asia keeps growing. In the past five years, the market capitalization of Asian REITs has more than doubled to top $148.6 billion in fourth quarter 2013, helped in large part from the now 114 total listed REITs in Japan, Singapore, Malaysia, Hong Kong, South Korea and Taiwan tracked by the recent fourth quarter 2014 release of The Asian REIT Report.

Despite ongoing legal hang-ups, draft REIT regulations in India have been completed, and while it hasn’t happened yet, finalization of REIT legislation in China, the world’s second-largest economy, is eventually bound to go through to allow more investment in the country. Additionally, there are efforts to jumpstart a REIT program in the Philippines, which never really took off before, now that more institutional-grade assets have been developed there.

Interestingly, Hong Kong’s well-established REIT market is seeking to further cement its role in an evolving marketplace: The Securities and Futures Commission is currently open to public comment as it considers amending the REIT code in Hong Kong to allow greater flexibility for HK-REITs to invest or participate in development projects as well as invest in financial instruments such as “listed securities, unlisted debt securities, government and other public securities, and local or overseas property funds.”

Add to this the growing interest — and need — by Asia-based investors to add or increase allocations to real estate in their investment portfolios to help meet their long-term liabilities: The result is a future likely filled with a greater number of Asian REITs in the market and investment opportunities offered by those REITs.

The full story can be found in this week’s IREN.

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

Guest Post: The intersection of institutional capital and home building in 2014

The run-up to the housing crash during the past decade provided many institutional investors with less than stellar results. In some cases the losses were significant.

However, recent results achieved by experienced operators have been successful and measured. As the new home market gets capitalized further, there will be more good opportunities to create value. This coming year there will be billions of dollars of debt and equity pouring into creating successful, well-planned communities.

During the past four years that I have been moderating the capital markets discussion at NAHB, there has never been more institutional interest than now. This year, at the NAHB’s National Convention, the Association allowed me to create a 4.5-hour session hearing from and interacting with about 20 institutional investors, banks, pension fund advisers and their intermediaries. Many of the dozen or so institutionally funded speakers are direct investors in land and housing nationwide producing thousands of residential lots and housing units this year with reliable and durable IRRs.

One key difference this cycle is the prevalence of disciplined investing by experienced managers of institutional funds. From buying raw land to creating value by entitlements and building rooftops, solid returns are being consistently grown with many examples of success by equity and by debt with operators who understand how to manage risk.

The audience heard from five equity funds, four banks, some private bankers and a builder with an MBA from Wharton who builds 800 houses per year. The Meet the Money Session turned out to be a live two-hour crowdfunding event buzzing with activity from the 250-plus members present. It seemed to reflect the opportunity for more disciplined institutional capital as housing starts strengthen the economy. To learn more about our agenda, see it here.

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Rick Mandell is with Aspen Portfolio Strategies Inc.

The physics of real estate investing

A number of years ago, physicists discovered something remarkable while researching the nature of reality — that the very act of observing sub-atomic particles changed their behavior.

In other words, to observe reality is to change it.

Prior to that, physicists discovered that light sometimes acts as a particle and other times as a wave. Physics experiments recently conducted in Israel showed that two photons that don’t even exist at the same time can be “entangled.”

Yes, what we call “reality” is an ever-shifting and inscrutable kaleidoscope of dynamic forces.

Now vastly scale up from the impossibly minute to the massively large, to the dimension occupied by human beings and the edifices we build and invest in. Look around. Think for a minute. Do your life experiences even begin to lead you to the conclusion that an objective “reality” exists? How often have you discussed politics, religion, culture, music — or real estate — with another person and not walked away thinking (on some level) that you just communicated with someone who is living in a completely different “reality” than you?

But then, we in the real estate business have hard data, don’t we? The kind of data — such as demographic trends and inflation rates — upon which our real estate investments are predicated. Would anybody dare argue that the population isn’t aging in Italy or Japan? Or that developing nations aren’t urbanizing? Probably not. But that doesn’t mean that when we, as real estate investors, act on that information we are not ever-so-slightly changing that very painstakingly measured “reality,” much as physicists discovered to be the case on an infinitely smaller scale.

Now multiply those data-based actions times millions of decisions and billions of dollars. Who is to say that our acting upon the trends we have measured are not actually altering those trends — perhaps to very significant degrees? Maybe that is why trends inevitably change, and sometimes with greater rapidity than we would have imagined, let alone forecasted.

If “reality” is so malleable on a sub-atomic scale, why wouldn’t it be equally or perhaps more malleable when scaled massively larger? Maybe that is why so many carefully researched thematic real estate investment paradigms go so terribly wrong.

I’m not insisting; I’m just suggesting that whatever semblance of objective “reality” might actually exist is as malleable and elusive as mercury.

But who am I to say? I obviously live in a very different reality than you.

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

Part of the solution

Many of you have probably seen the incredible satellite images of American oil and gas fields that light up the night skies as brightly as metropolitan areas. A blog post from this past September covered the issue of “flaring,” and a follow-up article in our Institutional Investing in Infrastructure publication noted investors are part of a group that is advocating to end the practice:

“A group of investors representing $500 billion in assets under management, and which are part of the Ceres Investor Network on Climate Risk, sent a letter to 21 of the oil and gas industry’s largest shale oil producers, urging them to reduce or eliminate the practice.”

Those efforts are pushing the oil and gas industry to address the problem, and the recommended solutions should interest infrastructure investors.

In October 2013, members of the North Dakota Petroleum Council created a Flaring Task Force to develop a plan to reduce the practice, and in late January — just a couple weeks ago — the task force issued a report on its findings to the North Dakota Industrial Commission.

Among the task force’s recommendations are tax incentives that encourage the development of infrastructure that can capture, store and distribute natural gas for market. This lack of infrastructure and the costs and risks to develop it were the primary hurdle to putting an end to the practice.

The flaring task force recommends governments adopt property tax credits, production tax credits and low interest rate loans to encourage pipeline and electric transmission development and to mitigate the risks.

The task force estimates it could reach 95 percent of gas capture by 2020 and reduce flaring to 5 percent (currently it is about 30 percent) if all stakeholders such as state legislators, landowners and Indian tribes were fully committed to its plan.

Oil and gas producing states have an interest in capturing this lost natural gas — tax revenues. In North Dakota, for example, it is estimated that about $1 million each month of natural gas sales tax revenue is lost. So there is incentive for them to pass the task force’s suggested tax and financing incentives.

Some institutional investors also are incented to make such investments as well, having written environmental standards into their infrastructure investment guiding policies. The California State Teacher’s Retirement System is one such investor, and it is a member of the Ceres Investor Network on Climate Risk along with several other influential investors such as the California Public Employees’ Retirement System and the Florida State Board of Investments — each with an infrastructure mandate. Many infrastructure investment managers are also members of the Ceres network, including BlackRock, Deutsche Asset & Wealth Management and KKR.

Don’t be surprised if you are reading something on this blog or in Institutional Investing in Infrastructure in a few months about investments made in North Dakota or another U.S. oil and gas state that are part of this effort to reduce natural gas flaring.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.

A key driver of future demand

At the Visions, Insights & Perspectives conference in Southern California last week, we covered a number of important topics and heard from a number of thought-provoking keynote speakers, among them Jonathan Last, an American journalist, author and senior writer at The Weekly Standard.

Last recently wrote a book, What to Expect When No One’s Expecting. He shared some keen demographic insights from his book at our event.

We’ve often heard that shrinking birth rates is a Western problem. It’s really a global issue. Last noted that 97 percent of the world faces falling fertility rates. In countries such as Mexico and Brazil, it is becoming a concern.

There is a correlation between birth rates and economic growth. When fertility rates fall below replacement rates, everything else being equal, you end up with falling GDP.

The current fertility rate in the United States is at 1.93, which is below the 2.1 replacement rate. That is currently being offset with immigration.

One memorable quote from Last: “We are 20 years away from becoming a Florida nation.”

What does all this mean for real estate? One could build the case that the aging of America and bulge of Millennials (born between 1980 and 2000) could provide a strong base for the continued trend for mixed-use urban centers that are designed around walkability.

Based on current trends, global population is expected to peak in 2050 and thereafter is expected to fall going forward, which will create a number of new opportunities and challenges for investors in the future.

These current trends are just trends. They aren’t destiny. They could change for the better or worse, as we all know the future is uncertain. However, given our current environment, it seems most likely they will continue for a number of years into the future. Demographic trends do provide us with one valuable piece of the investment puzzle for long-term planning.

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JohnHunt91x119John Hunt is conference program manager at Institutional Real Estate, Inc.

Where everyone is a VIP

Last week (January 28–30) was our annual Visions, Insights & Perspectives conference, held in Carlsbad, Calif., at the La Costa Resort and Spa. This year we celebrated the 25th anniversary of The Institutional Real Estate Letter – Americas, and let me tell you, IREI went all out.

Below, you’ll be able to take a look at a few highlights of the three-day conference.


1 (Mike C and Philip Riordan
Conference co-chairs Mike Consol, editor of The Institutional Real Estate Letter – Americas, and Philip Riordan, senior managing director and head of real estate at GE Asset Management, welcome attendees and go over the schedule for the next few days.

2 (Jim Woidat)
Jim Woidat, principal at Kingsley Associates, reviews the annual investor survey findings with attendees.

3 (Tom Morris)
Tom Morris, philosopher and author of many books, gave an informative and enjoyable keynote on the topic of The Essential Jobs at Your Office: The Success and Leadership Secrets of Steve Jobs.

4 (Mike C Tom M)
Mike Consol and Tom Morris after a short video interview

5 (JL Keynote)
Jonathan Last, senior writer at The Weekly Standard, gave an informative and eye-opening keynote on the topic of what to expect when no one’s expecting, blending demographic findings and what we should expect in the future.

6 Jonathan Last
Jonathan Last, after a short video interview (for more of IREI’s videos, click here)

7 JL and MC
Mike Consol and Jonathan Last

8 Peer to peer. Winding down
As one of many informative sessions at VIP, peer group discussions are held to discuss the main topics that are on everyone’s minds.

9 Suzanne Newsfeed
Suzanne Chaix, data associate at IREI, was helping attendees sign up for our free newsfeeds. If you aren’t yet signed up, click here and find out how!

10 Night 1
Night one welcome reception

11 Night1 (1)
Night one welcome reception

12 Day 2
The start of day two in the lovely Costa del Sol Foyer

13 Blended sessions peer group findings!
After investor-only and manager-only breakout sessions, investors and managers come together for a blended session to discuss what they have found.

14 Neil Irwin Keynote
Neil Irwin, author and columnist for the Washington Post, gives an insightful keynote on the topic of Highlights of Alchemists: Three Central Bankers and a World on Fire.

15 Neil Irwin
Neil Irwin

16 Niel and Mike C
Mike Consol and Neil Irwin

17 Attendees
After morning sessions and a quick sack lunch, attendees head out to relax or participate in one of our many activities (hiking, biking, golf or tennis).

18 Golf
One of the golf courses at the La Costa

19 Golf2
Getting ready to golf!

20 Biking
One of the biking groups (there was a choice of a coastal bike ride or mountain bike ride) getting ready to head out!

21 Biking2
Enjoying the view!

22 Tennis
A few of our tennis participants playing

23 Tennis
A few more tennis participants

24 Tennis Break
Break time!

25 Band
On the second night, the conference department went all out and did a 1980s-themed night and had everything from look-a-likes (Boy George, Tina Turner and Madonna), a photo booth, an iron-on t-shirt station, air hockey and arcade games and even an 80s cover band! Needless to say, Neon Nation kept the house jumping!

26 Night2Dancing
Attendees on night two dancing the night away!

27 Day 3 debt panel
After a final morning breakfast, attendees attend a panel on the subject of debt and equity, moderated by William Lindsey, partner at PCCP.

28 Peer Group
As a final session, peer group leaders share their group’s findings with attendees after their discuss on financing real estate.

If you’d like to attend one our events, click here for more info!

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