A staggering caseload of misleading research

chemist at workMost published research is false. That’s just a fact. If you don’t believe me, research it.

I know that is a disconcerting thing to say in a space read primarily by real estate operatives who annually produce or bank their investment decisions on stacks of research. But sometimes we have to look a situation squarely in the teeth.

If you need help researching my thesis and proving the accuracy of its assertion of inaccuracy (did you follow that?), I suggest Dr. John Ioannidis, an epidemiologist who has been waging war on sloppy research for years. He has helped develop a discipline called meta-research, which is the act of researching research.

You can find Dr. Ioannidis at Stanford University, where he has institutionalized his battle against errant research projects with the launch of the Meta-Research Innovation Center. METRICS is connecting people in fields such as medicine, statistics and epidemiology to delve more deeply into this problem.

This effort to tear the mask off the fecklessness of most research dates back to 2005 when Ioannidis wrote a paper titled, “Why Most Published Research Findings Are False”. It was in that paper that he pointed an accusatory hypodermic at the “over-interpretation of statistical significance” in studies with sample sizes that were too small to be valid and, thus, lead to erroneous conclusions.

Besides leading us astray, bad research is a titanic waste of money. Lancet recently wrote that in 2010 about $200 billion were squandered on medical research that was either flawed in design, redundant, never published or poorly reported. That fizzled away 85 percent of world’s total spending that year on medical research.

Ioannidis and the others running the METRICS lab have created the Journal of Irreproducible Results to monitor research projects and, presumably, publicly humiliate those who produce spurious work. But it is the kind of humiliation that serves the greater public good. Basically, shaming researchers into doing better work.

Be on guard.

Then again, we are talking primarily about medical and scientific research in METRICS’ case. But there is much to learn from flawed research of any stripe. Too-small sample sizes, lenient standards and other blemishes that afflict research are not strictly the faux pas of scientific inquiry.

There is also “publication bias” to contend with, which is said to be a pet peeve of Dr. Ioannidis. Researchers are more inclined to submit, and editors to accept, positive results rather than negative or inconclusive results. Compounding the problem is the tendency (especially in the Internet age) for research results to be republished dozens, hundreds or thousands of times. Only later do some of these research projects eventually get debunked and exposed as fallacious.

I must counter-charge, however, that the notion of conducting meta-research creates impressions that approximate an endless echo. If we are so bad at research, how good can we be at researching research?

What is our sample size? Are the standards we observe too lenient or stringent? Do we have a publication bias toward reporting egregious instances of deceptive research, while giving curt treatment to the exemplary?

Put a researcher on it.

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


Last month I introduced you to one of the latest and greatest technology updates that has been taking place at Institutional Real Estate, Inc. — videos.

I explained that these new, longer videos would include one-on-one interviews with Geoffrey Dohrmann, but in addition to that, we will have longer videos and interviews with industry professionals discussing market trends, what their company is up to in the market, forecasting, etc. Also, we will continue to have short two- to five-minute videos with industry professionals discussing current trends in the market today.

Below (and at this link) you will find Amy Price, chief operating officer at Bentall Kennedy, discussing the organization’s efforts to accelerate its expansion into the United States.

To view the entire list of videos we have to offer thus far, click here, and stay tuned!

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DenisefinalwebDenise DeChaine is special projects editor and video production specialist at Institutional Real Estate, Inc.

You heard it here first

Institutional investment in alternative assets is just another way of meeting required returns.

Who says? Towers Watson’s new global CIO, Craig Baker.

The latest survey of assets managed by alternative investment managers around the world from Towers Watson, published in conjunction with the Financial Times, shows that global alternative AUM reached $5.7 trillion last year. The survey covered seven asset classes and seven investor types.

The Global Alternatives Survey also found that, among the Top 100 alternative investment managers, real estate managers had the largest share of assets, at 31 percent and an AUM of more than $1 trillion.

Baker comments: “For almost all of the past 11 years of this research, we have seen increasing allocations to alternative assets by a wide range of investors. Not only has the appeal of alternative assets broadened to include many more insurers and sovereign wealth funds, but the range of alternative assets has also increased beyond the likes of hedge funds and infrastructure to include real assets, illiquid credit and commodities. It is, therefore, not surprising that allocations to alternative assets by pension funds, for example, now account for around 18 percent of all pension fund assets globally, up from 5 percent 15 years ago.”

“Pension funds continue to search for new investment opportunities, and alternative assets have been an area where they have made, and continue to make, very significant allocations,” Baker continues. “But they are by no means the only type of institutional investor looking for capacity with the top alternative managers. Demand from insurers, endowments and foundations and sovereign wealth funds is on the up and [is] only going to increase in the future as competition for returns remains fierce.”

Baker also makes the point that “most of the traditional alternative asset classes are no longer really viewed as alternatives, but just as different ways of accessing long-term investment themes and risk premia.” That’s a welcome reminder that the primary objective of investment for any investor is to meet required returns. “As such, allocations to alternatives will almost certainly continue to increase in the long term.”

That’s all right, then.

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

Waiting to erupt

TIREL-E July Aug 2014 coverLast week was a terrible and heartbreaking week for global news, and certainly this month has been doing its best to drive home the message of “Waiting to erupt”, the July/August cover story of The Institutional Real Estate Letter – Europe.

As contributor Jennifer Bollen notes:

“Investors would be wise to keep a close eye on geopolitics, but the potential impact of events, including conflict and civil unrest, is difficult to predict.”

With events accelerating in Ukraine and Gaza, that lesson seems even more apt now than it did when this story was written a few weeks ago.

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

Revisiting China

It has been quite some time since I have written anything on China, so I think it is a good time to revisit China. I don’t need to tell you what is going on with the economy there, as I’m sure you have been following the developments in China. It is all over the news, and it is difficult not to take notice.

I am not arguing that all the positive factors — growth, urbanization, formation of middle class, wealth formation — are not continuing. My point is that no modern economy, free-market or guided by governments (think Japan and Singapore for example), goes straight up without a major shakeout. Now, we can argue that a mild shakeout in China’s real estate markets has been taking place for some time, with sales volumes and prices going down for a number of months in China. But a bubble did not burst, along the lines of the U.S. or European experience.

What is important is that the market conditions for developers have been deteriorating; land prices are going higher, credit is becoming tighter and buyers’ sentiment is turning negative. Increasing costs and deteriorating market sentiment are not a good combination. But developers keep on borrowing at higher rates that are compressing their profit margins, and they keep on building. In addition to that, borrowing from China’s shadow banking sector, which was already a mismatch between borrowing terms and project cycles, is becoming more difficult.

Thus, to make ends meet, Chinese developers, especially smaller ones, have to rely on increasing property prices to meet profit targets that are becoming more and more doubtful under the current conditions. According to a survey by Duke University and CFO magazine, 90 percent of CFOs at U.S. firms active in China believe there is a bubble in China’s real estate markets and that this bubble is going to burst in 2014. While I would not bet my life savings on this, it is clear that the situation is difficult and some degree of caution is clearly warranted.

However, when I talk to asset managers active in China, most of them, while admitting difficulties, consider the current situation a buying opportunity. According to a report from CBRE: “The current situation presents a window of opportunity for investors to negotiate lower prices and yield-enhancing investment terms on projects in upper-tier cities where the demand-supply situation is more balanced.”

It could be a buying opportunity, but it could be a trap. Lower prices can keep on going lower, as we have seen in the U.S. and Europe. Only time will tell.

But what really bothers me is how much faith analysts, observers and asset managers are placing on the Chinese government’s ability to control the markets through “Price Reduction Restrictions” and loosening of “Home Purchase Restrictions” that were originally put in place to curb speculative buying and to control the bubble.

Douglas Elliott, a fellow with the Brookings Institution, recently noted: “The reason I am not pessimistic overall is because the Chinese central government has the financial capability and administrative skills to deal with the problems as they arise.”

How can one “restrict reduction of prices” when the buyers lose faith in the markets? How can a government official stop prices from declining when the buyers panic and withdraw from the market? The statistics may show that genuine demand exists and people are still moving from villages to cities. But it is also a known fact that most of the buying in first-tier and perhaps second-tier cities has been speculative, with wealthy families buying multiple properties. Will they continue buying when the prices continue going down? And what happens when they stop buying?

Even Byron Wien, a renowned Blackstone analyst, wrote in his recent market commentary, discussing the views of the ‘Smartest Man in Europe’: “I don’t expect a hard landing, however, because they have enough control over the economy to avoid that.” But, he continues, “Still, I presently have no investments there.”

The Chinese central government is just a group of people, and people make mistakes. Just think back to 2008 and how many mistakes our government officials, guided and supported by our experienced and knowledgeable industry leaders, made. One day, Chinese government officials will make a mistake, and because so much hope is based on their infallibility, the repercussions could be bigger than those we saw in 2008.

To demonstrate that I am not Chicken Little, here is what Zhou Xiaochuan, governor of China’s Central Bank, said in a recent interview: “We are not very experienced in dealing with the property market — we haven’t experienced too much cyclical volatility. So I think we should be more cautious in making judgment on the situation. For example, the judgment on whether supply has significantly exceeded demand. We should be prudent and need some time to watch.”

If the governor of the Central Bank of China calls for caution, should not investors heed that call?

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AlexFinalv3webAlex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

IREN getting closer to goal

Can you believe it’s halfway through the year already? And IREN is continuing its high rate of original global news coverage in the institutional real estate sector. The total number of original news stories so far this year is 465, compared with 2013’s grand total of 500 original news stories.

The IREN writing staff is on the path to surpassing 2013’s goal this month! The 2014 goal is 600 — and we will easily exceed it.

The most covered section this year is fundraising efforts. Some recent billion-dollar headlines include:

The second most covered section this year is investors’ activities, such as commitments and searches. Some recent commitment headlines include:

And the third most covered section is transactions. Some recently completed property deal headlines include:

Remember to sign up for our free newsfeeds to get daily original news and more coverage of the global real estate investment industry.

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

The ‘big’ fundraising picture

Institutional capital continues to favor large real estate funds sponsored by proven investment managers. Funds that closed during the first half of 2014 totaled approximately $40 billion, according to preliminary data from the Institutional Real Estate FundTracker database. Of that first-half total, 11 mega-funds ($1 billion plus) accounted for roughly 60 percent of the equity raised.

The largest fund to close during the first half of the year was The Blackstone Group’s Blackstone Real Estate Partners Europe IV, which topped $7 billion. Runners-up included PIMCO’s Bank Recapitalization and Value Opportunities Fund II ($5.5 billion), GI Partners’ GI Partners Fund IV ($2 billion) and Kildare Partners Kildare European Partners I ($2 billion).

The good news for smaller and medium-sized fund sponsors is that nearly 40 other funds (raising less than $1 billion each) closed during the first six months of the year. In addition, investors are now spreading more capital to funds focused on recovering European markets and higher risk/higher return value-add and opportunistic strategies in the United States.

However, it looks like the parade of mega-funds will continue in the coming months. Several of the more notable funds currently raising capital include Lone Star Funds’ Lone Star Fund IX, which is seeking to raise $7 billion; The Carlyle Group’s Carlyle Realty Partners VII, which has a goal of $4 billion; TPG Capital’s TPG Real Estate II, which is targeting $2 billion; and Shorenstein Properties’ Shorenstein Realty Investors Eleven, which is seeking $1.5 billion.

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

The risk in playing it safe

For many investors, the global financial crisis nearly flatlined much of their appetite for risk — especially when eyeing real estate. The years following saw most institutional real estate capital flood the major markets like a tsunami, leaving many secondary markets drying on the line. And even for investors who were more eager to roll the dice, the lack of CMBS in the market meant that finding financing for noncore opportunities was more challenging than it had been in previous years.

In steps 2014, Core buildings cost a fortune, and high-yield debt and CMBS are readily available to finance opportunistic plays. Cap rates for the NCREIF Property Index have fallen every year since 2009. An environment has emerged that has seen many investors turn away from the penny slots — enough for Starwood’s Global Opportunity Fund X to raise $1.3 billion in sixth months and Lone Star’s Fund IX to raise $5.3 billion in two.

Second quarter 2014 saw the Oregon Public Employees Retirement Fund commit $425 million and $300 million to noncore real estate, with Anthony Breault, senior real estate investment officer with Oregon State Treasurer’s office, who invests on behalf of OPERF, saying at the time that:

“We believe the best way to achieve above-market returns is to capture market inefficiencies often found in the private markets for a myriad of reasons, and in this post-GFC recovery market, we have found the ‘flight to quality’ investments highly competitive and often overpriced.”

In March, the Florida State Board of Administration decided to commit up to $600 million to noncore strategies in 2014, and, in June, the $15.6 billion Kentucky Retirement Systems committed $80 million to noncore real estate. David Peden, chief investment officer with KRS, explained at the time:

“We’ve had a difficult time getting comfortable with the valuations in core, so we’ve been adding value-add and a lot of real estate–backed debt in our real estate program.”

Even more recently, at a June 26 board meeting, the $24.2 billion Iowa Public Employees’ Retirement System decided to increase its target allocation to noncore strategies by 15 percent of the real estate portfolio — an increase that represents approximately $290 million of investment.

And this has just been the tip of the iceberg as we’ve seen a number of investors commit heavily to noncore strategies in 2014, enough for a value-add fund like DivcoWest Fund IV to surpass an $888 million fundraising target by nearly $100 million in just eight months.

Sometimes the money you lose out on can be worth more than the money you lose.

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

Talkin’ the talk

LanguageTwo weeks ago, I spent several days mingling with infrastructure investors, consultants and managers at our Institutional Investing in Infrastructure conference. It was truly an international crowd — Canada, the United States, the United Kingdom, Germany, Switzerland, Australia, France, Turkey, India and other countries near and far were represented. It was easy to pinpoint who was from where by listening to their accents.

It made me think about language and about how a country is united and defined by its language. We’ve all heard that there is no word for “no” in Japanese. Not sure if that particular example is true, but which words are used or not used does convey a lot about a culture.

Asset classes also have their own languages with words specific to their culture.

Stocks have their P/E ratios, exchanges and EV/EBITDA

Bonds have tranches, basis points and LTVs.

Real estate has cap rates, lease-ups and mark-to-market.

But what terms are specific to infrastructure? There don’t appear to be any, and therein lies the rub. Without its own language, is it really an asset class?

Those investing in infrastructure have all come from some other industries, and all bring their terminology with them. When pension funds first started investing in infrastructure, borrowing familiar language was an efficient way to help investment boards understand the investment possibilities being presented. But as the class has emerged, it has become apparent that several of the terms borrowed from other classes aren’t quite right for infrastructure.

For example, most of the industry talks about core, value-added and opportunistic investments to explain where the investment falls on the risk spectrum. These terms are widely used in the real estate asset class, and so have simply been adopted by infrastructure. But those coming from an investment class other than real estate might not understand the implications of a risk- or return-based nomenclature. One investor who was plucked from his pension fund’s oil and gas group to run a new infrastructure allocation asked me why those terms were used. The only real answer is that a lot of people in the industry are comfortable with them.

But now it might be time to look for terms that better fit what infrastructure is meant to do in a portfolio. Some of the infrastructure-specific terms that are beginning to gain acceptance are defensive, defensive-plus and extended to replace core, value-added and opportunistic. These terms fit the role of infrastructure more closely than the real estate terms.

Others are sure to follow. Or are they already out there? What infrastructure-specific terms does your organization use — or you wish were used? If we get enough responses, we’ll put together a directory and try to give infrastructure its own language, just as it deserves.

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