Leave it to Baxter

Baxter_RobotSome day I hope to retire. It could be five years, more likely 10. I’m looking forward to afternoons sitting by the pool, listening to Jimmy Buffett and enjoying a cold, refreshing beverage. But then again, if the financial markets don’t cooperate …

With the slow-growth economy and the low-yield investment environment, it won’t be easy. And, of course, there is a steady stream of gloom and doom reports predicting the demise of U.S. economic growth. Economist Robert Gordon, for example, predicts a few decades of slow growth based on four major headwinds: demography (more retirees, fewer workers); lower levels of education; increasing income inequality; and government debt. Yes, these are all major issues that will need to be addressed.

However, being an eternal optimist, I prefer the findings of Peter Diamandis and Steven Kotler, authors of Abundance — The Future Is Better Than You Think.

In the book, the authors document how progress in artificial intelligence, robotics, infinite computing, ubiquitous broadband networks, digital manufacturing, nanomaterials, synthetic biology and many other exponentially growing technologies will enable us to make greater gains in the next two decades than we have in the previous 200 years. According to the authors, we will soon have the ability to meet and exceed the basic needs of every man, woman, and child on the planet.

And I can’t help but get excited when I read about advancements in technology and new applications and products. If you’re interested in such things, I recommend you read Accenture Technology Vision 2014 Report to get an idea of the technology trends that will affect individuals, corporations and the economy. The advancement of concepts such as the Internet of Things, 3D printing and artificial intelligence will shape the future.

Being a fan of sci-fi movies, I have my reservations about robotics — in the movies the technology always seems to go awry — but am excited about the possibilities.

One such example is a robot named Baxter, a product of Rethink Robotics. Baxter is an entirely new type robot that is redefining the way robots can be used in manufacturing environments. There’s no programming required, the $25,000 robot is capable of handling a range of repetitive tasks, and line workers can train Baxter manually.

A Feb. 17 USA Today article noted how Baxter worked 2,160 consecutive hours (90 days) in a Hatfield, Pa., injection molding factory, “grabbing plastic parts off the line, placing them in a box and separating them with inserts, then counting the items to make sure each box was exactly the same” — tasks that would typically require six employees. Manufacturers that previously outsourced jobs overseas can now use affordable robots to do menial, repetitive tasks cheaper, faster and safer in their U.S. plants.

Who knows, maybe one day soon, they will produce a lower cost home version of Baxter. I’m already considering the possibilities …

“Oh, Baxter, another margarita, please.”

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

Billion-dollar headlines

Last week, 11 of the 24 headline news items published by IREN covered billion-dollar transactions and fund closings.

To view last week’s issue click here. Some key headlines include:

If you didn’t notice, The Blackstone Group was involved in not one, but three billion-dollar deals:

Money is flowing this year. Let’s do a throwback and see what 2013 was like around this time. Which headlines were catching our eyes?

In the May 24, 2013, issue of IREN, headlines were not bombarding readers with billion-dollar deals, but some high-priced headlines included:

I love billion-dollar headlines. Makes me wish I could spend that kind of money, or dream that investors would give it to me. While that may never happen, I will continue watching the newsfeeds and covering the biggest deals in IREN, praising these high-priced stories.

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

America’s infrastructure investing wave: not if, but when

For the past several years, we have all heard the compelling reasons why infrastructure investing in the United States will be the next big thing: the American Society of Civil Engineers’ report on Americas infrastructure, which gives U.S. infrastructure a D+; issues surrounding deferred maintenance and the increasing safety risks and costs; taxpayer reluctance to take on additional local, state and federal government debt and taxes; the United States’ slow recovery from the global financial crisis and the need for a catalyst to help increase GDP and employment; and the list just goes on.

With all of those and other reasons, I believe nearly everyone can agree that it is not a question of if, just of when — and where. Where are we going to get the capital to pay for it all? Catching up on the deferred maintenance in the United States alone is estimated to cost well over a trillion dollars. And that doesn’t take into account greenfield projects and updating other assets. Most experts believe traditional financing cannot do it all, which means there is clearly a place for public-private partnerships.

At this year’s Institutional Investing in Infrastructure conference, we are going to take a fresh look at this important topic, with Richard Ornitz, our keynote speaker, addressing global P3 opportunities. Some of the questions he’ll cover include: Are we at the tipping point for P3 deals, or do we still have a long way to go to make them an everyday part of the landscape? What’s new and different today, and what’s in the works to change the pace of P3 in the United States and really open up the deal flow? Which states and sectors have the most promising deal flow, and why?

Richard’s distinguished background is uniquely suited to give us insights on this and other key topics surrounding global public private partnerships.  He is on the board of the United Nations Public Private Partnership Council. He previously served as chairman of the U.S. Infrastructure Private Advisory Group and on the Private Advisory Board to the U.S. Secretary of State. Plus, he has closed in excess of $100 billion of infrastructure deals around the world.

After Richard’s address, conference co-chair Jonathan Schein, senior vice president and general manager – sales for Institutional Real Estate, Inc. will sit down with him and really dive into details and drivers of some of the key trends that Richard covered in his presentation to give more clarity and insights.

To help us and everyone attending the I3 conference, we are inviting everyone to share thoughts and possible questions to cover at Jonathan’s interview on this blog post, so we can make the most out of this session. Let us know what you’d like Richard Ornitz to be asked!

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

Follow the money

I was at the annual INREV conference in Berlin a few weeks ago. For those of you who don’t know about INREV, it is the European trade association for nonlisted real estate vehicles, i.e. pooled funds, joint ventures and club deals. This is the event for real estate managers and investors.

Yet, although the attendees were all real estate professionals, the conversations I had during breaks, at meals and on the bus were about infrastructure. The CEO of a large, global real estate investment firm sat next to me at the networking event. After catching up on each other’s families, he paused, leaned in and whispered conspiratorially, “Tell me about infrastructure.” Turns out the firm had hired someone to launch an infrastructure investment group several years ago but abandoned the effort. They are now thinking it might be time to try again.

For the past couple of years, I’ve fielded questions about infrastructure at a variety of real estate events. But those questions seemed to come from a place of bemused puzzlement: “What’s all the fuss? It’s just financing, right?”

Now, the interest seems serious — if no less puzzled. Real estate managers really do want to know about infrastructure. What’s its attraction? What does it offer investors? How do real estate investment skills translate to infrastructure investment skills? How can we get a piece of that pie?

Why the apparent change of heart from real estate professionals?

My theory is they see capital that in the past likely would have been allocated to real estate (i.e. them) now being allocated to infrastructure (i.e. someone else). Investors are leading the charge to infrastructure, and real estate managers are beginning to think they might be left behind if they don’t make an effort to get out in front of this shift.

But why now? Why is infrastructure suddenly becoming top of mind for real estate managers everywhere? I think the obvious answer is the amount of capital infrastructure is raising. According to the IREI FundTracker database, real estate funds experiencing a final closing in 2013 raised $79.7 billion. In contrast, closed-end infrastructure funds that closed in 2013 raised $55.7 billion. In other words, the new, emerging infrastructure class raised nearly 70 percent as much capital as the well-established real estate class — 41 percent of the total capital raised by both classes.

That would make anyone sit up and notice — especially the entrenched asset class that sees a newcomer nipping at its heels.

Further bolstering the contention that real estate managers and service providers have begun to take infrastructure seriously is the move by Indirex, which bills itself as “the knowledge manager for the private real estate funds market,” to begin tracking “real estate–backed” infrastructure. In explaining what this means, the data and index provider writes: “We attempt to only include in our statistics those funds which have a clear involvement with real assets and where we consider that equity could come from an investor’s real estate allocation.”

Using this limited definition for the inclusion of infrastructure funds, Indirex found that real estate–backed infrastructure took almost 10 percent of all equity raised for real estate–related vehicles in the first quarter of 2014. That’s $4.3 billion to infrastructure worldwide for those that like their numbers neat. And that’s only in funds that could be described as real estate backed.

The amount of capital flowing to infrastructure is all the more remarkable, given the lack of “infrastructure” normally needed to attract investors to an investment. There are no accepted indexes, benchmarks or best practices. If an investor is looking at infrastructure from an absolute return basis, the inability to make comparisons among and between other investments probably doesn’t matter. But if the class is being compared to other possible investments on a risk/return basis, it is going to have to provide the means to do so.

The infrastructure class is certainly working toward developing the tools needed by investors. IPD just released its Australia Unlisted Infrastructure Index covering first quarter 2014. When Anthony De Francesco spoke at IREI’s Institutional Investing in Infrastructure conference last year, he made it clear that IPD was moving toward a global unlisted infrastructure fund index and would be there sooner rather than later. Others are also working to provide the data needed for credible benchmarks and comparisons. For example, the Dow Jones Brookfield Infrastructure Indices and the Macquarie Global Infrastructure Index Series aim to measure the stock performance of companies worldwide whose primary business is the ownership, management and operation of (rather than service of) infrastructure assets. Our own FundTracker database is adding fund and transaction data daily.

We’re getting there on the data side.

The harder hurdle to overcome might be arriving at a set of best practices for the industry. No one has grown up in infrastructure. The managers come from real estate, from private equity, from fixed income — even from engineering development firms. And all bring their own best practices and biases.

Talking to a real estate placement agent in the Lufthansa lounge at Tegel Airport as everyone was heading home after the conference, the conversation again veered to infrastructure. His dismissive synopsis of the infrastructure class — it doesn’t have any good managers. The best of the infrastructure managers are inferior to the average real estate manager.

Can that be true? It doesn’t seem right to me. But if this is the view of someone who talks to investors on a daily basis, then it would behoove infrastructure managers to develop a set of best practices and change that view.

And if infrastructure managers have any questions on how to do that, it appears real estate managers would be more than happy to jump in and help — for a small fee of course.

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

Headlines may be dramatic, but Europe is getting better

It seems anyone can take a survey and put a positive or negative spin on the results.

For example, in the case of the Bloomberg Markets Global Investor Poll, although Bloomberg’s headline ran with “Europe Deflation Risk Seen by 74% in Global Investor Poll”, which was the case, the overall sentiment of the survey was positive. Here are some highlights:

  • In terms of economies measured on a scale: 34 percent see the euro zone as stable and 49 percent see it as improving, whereas only 15 percent see it as deteriorating.
  • In terms of best and worst markets for the coming year, United Kingdom and the European Union had a combined score of 50 percent for best market versus a combined score for worst market of 14 percent. Clearly the bulls are strong here.

Here at Institutional Real Estate, Inc., we are hearing and seeing investors taking a positive look at Europe. The first quarter issue of our FundTracker publication just came out with the headline: “2014 fundraising off to a great start: Europe-focused funds account for 50% of quarter’s $22 billion total.” Where is it flowing in Europe?

“… valued-oriented investments where investors are banking on improving economies to bolster property fundamentals and generate healthy returns.”

In the May issue of The Institutional Real Estate Letter – Europe, we highlighted CBRE’s 2014 European Real Estate Investor Intentions Survey. The tone of the report was that investors are moving out the risk curve. One example of increased risk appetite was Spain becoming a favorite destination of new investors; 19 percent of investors saw it attractive this year from just 6 percent in 2013.

Although we are having some mixed signals at the moment, it seems that the positive factors are outweighing the bad and momentum is building for better days ahead in Europe.

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

Life’s new certainty: pension reform

The three certainties in life have always been “birth, death and taxes,” but today’s world of pension plans with underfunded liabilities has added another item to the list of certainties: pension reform. An ample future workforce helps drive and sustain economies through producing, earning and spending more.

And slowing birth rates in developed nations in the wake of a global recession won’t spur on the kind of economic growth these nations need to see in the future to make ends meet for retirees — quite the opposite, according to a recent CBC News article, “Birth rate stalls after recession, hurting economic growth.”

But it’s not just the global financial crisis that has created a demographic drag in recent years; it’s a trend that started back in the 1960s when greater numbers of women joined the workforce and couples opted to have smaller families, notes the story. And now the these baby boomer couples are starting to retire, and there aren’t enough workers to replace them:

“Couples in the world’s five biggest developed economies — the United States, Japan, Germany, France and the United Kingdom — had 350,000 fewer babies in 2012 than in 2008, a drop of nearly 5 percent. The United Nations forecasts that women in those countries will have an average 1.7 children in their lifetimes. Demographers say the fertility rate needs to reach 2.1 just to replace people dying and keep populations constant.”

Why is population consistency and growth so important? People are living longer, and fewer workers for a growing number of retirees only makes pension funds’ ability to pay out retirement benefits that much harder. While more and more pension systems globally are moving to defined contribution plans over costlier defined benefit plans to help address the issue of underfunded liabilities (and shifting the burden of retirement planning onto beneficiaries), even that won’t be enough.

Take Australia’s superannuation system, for example, which in 2013 was 84 percent DC plans with the remainder DB plans, by far the largest DC to DB ratio in the world, according to Towers Watson’s Global Pension Assets Study 2014 report. But Australia sees the writing on the wall as its ratio of workers to retirees keeps dwindling and is now discussing pension reform efforts, such as raising the retirement age.

And, according to the CBC News article, even if retirement benefits in aging societies were fully funded, increasing numbers of retirees would still slow a nation’s economic growth through reduced output for goods and services, less spending and lower work productivity in the years leading up to retirement.

As debates on pension reform rage on worldwide, what do you think is needed to address these and other concerns?

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

Rising stars

A new report has taken a look at ultra-high-net-worth investment in residential property around the world, and highlighted 12 “cities on the rise” that are “likely to outperform the prime world cities with growth from a low base as they become more fully invested.”

The Candy GPS Report, produced by Candy & Candy with Deutsche Asset & Wealth Management, takes a look at investment opportunities in Beirut, Cape Town, Chennai, Chicago, Dublin, Istanbul, Jakarta, Lagos, Melbourne, Miami, Panama City and Tel Aviv.

The report notes:

“With many world city prime markets now looking fully valued, the question is: which cities will show growth next? Investors have already been spreading their wings away from the established safe havens and looking at alternatives, both in secondary markets and second tier cities. … We have identified 12 cities around the globe that don’t have world city status but which we see as rising second tier cities with the potential to show strong residential property price growth as global investors seek alternative locations.”

While some of the cities — Chicago or Melbourne — may be high on global investors’ shopping lists, others are a bit unexpected, especially those in fast-growing emerging economies.

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

Private investment in Chinese infrastructure

The Chinese government announced in April that it will open its infrastructure to private investment; however, it is not clear if that includes foreign capital — a Wall Street Journal report indicates there was no mention of foreign capital, while a Bloomberg report notes private capital is included in the program. The reports also point out that the Chinese government has invited private capital to invest in the past only to later not move forward with those plans.

According to Infrastructure in China — sustaining quality growth, a 2013 report by KPMG, the Chinese government is open to the idea of private investment in its infrastructure:

“We are seeing greater opportunities for both domestic and foreign players to invest private sector capital in infrastructure projects. The fiscal constraints faced by local governments on the frontline of infrastructure construction and development are creating conditions that may encourage faster development of the alternative financing and procurement methods seen in mature Western economies. Central government support and policy initiatives in this area will be areas to watch in the medium term.”

Investors are expected to be able to participate in 80 projects, including railway, ports, hydropower, wind and solar power, as well as oil and gas and chemical industries.

State-owned companies currently dominate infrastructure development and management. The Chinese government suggests investors can form joint ventures with these firms or set up their own companies to invest in infrastructure.

It will be interesting to see if institutional investors from outside China think the market is a good match for their objectives, especially in light of the recent political and regulatory decisions in Europe — Gassled and Heathrow Airport, for example — where government actions are having outsized negative impacts on investor returns. Political and regulatory risk in Europe is uncertain enough, but in a state-oriented economy such as China’s those risks could be even greater.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.