Observations regarding the current economic climate

The economic and real estate market recovery cycles have been delayed but appear to be following a predictable recovery pattern. Normally these recovery cycles stretch for five to seven years. We’re now in year five of this current recovery, but because of the slower pace, the cycle might be extended. Then again, it might not.

We’ve not really been here before.

In light of that, I think it’s important to keep an eye on where we are and where we are going. Picking up on some themes I highlighted recently, here are some key economic factors to watch:

  • The Federal Reserve’s stimulus program has not triggered much in the way of consumer demand growth, but it certainly has stimulated a new round of asset inflation. Although it doesn’t appear to be at bubble stage yet, money supply growth still continues, despite Fed tapering. (M2 is up 6.8 percent since July 15, 2013.) The fact is, the U.S. government has inflated the money supply by nearly 60 percent since 2008. Much of these newly minted dollars has found its way onto the balance sheets of financial institutions and large corporations. Many market watchers are worried that inflation could come back to haunt us with a vengeance — they’re just not sure how soon. It’s a particularly challenging time for CIOs and other asset allocators who are groping to come up with sustainable strategies
  • The CPI is in fact up 2.1 percent from June 2013. But that’s not the whole story — you really have to look back further to put things into perspective. The fact is, one dollar today buys 42 cents in goods and services when expressed in 1982 dollars. Since 1982 — how many of you were alive and economically engaged in 1982? — your money has lost more than 58 percent of its purchasing power.
  • Consumer credit is also on the rise, up 6.6 percent since May 2013. Personal savings rates are at 4.8 percent — not far off the bottom of June 2005, when it was hovering around 2 percent. We continue to be an economy driven by credit and spending.
  • Consumer spending in fact is up 3 percent since May 2013, at around $11.8 trillion. And it has been on a steady rise since it bottomed in 2009 around $9.8 trillion.
  • The good news is, the U.S. economy apparently still has room to grow. The housing sector is still in early stages of recovery. Industrial capacity utilization is still below 80 percent.
  • Along the lines of “be careful what you wish for …” — we may be facing a labor shortage threat should the economy heat up dramatically. Unemployment currently is at 6.1 percent and falling. Although the median duration of unemployment has fallen dramatically, it still has room to drop to pre-GFC levels. In other words — unemployment statistics are more favorable, but still not quite as stable as the folks at the Fed would like. On the other hand, many worry that the current unemployment stats may mask a much higher real unemployment rate, when you adjust for those frustrated job seekers who have stopped looking and those who effectively are underemployed.
  • Federal debt levels also are still a concern. The debt is up 13.2 percent since 2011. (The deficit had been shrinking as a result of the GFC, but has been on the rise again since 2009.)
  • The banking system appears to be as sound now as it appeared to be going into the GFC, if not sounder, according to the St. Louis stress index. The Fed funds rate currently is hovering around 9 basis points — meaning nearly as close to “free money” as possible for banks and their preferred prime borrowers continues. This, too, has been fueling asset price inflation.
  • Corporate profits after-tax are up 6.8 percent since first quarter 2013.
  • Despite a continuing trade deficit, the dollar remains strong against most foreign currencies. This does not bode well for correcting trade imbalances. Americans are addicted to cheaper foreign-manufactured goods, and American goods remain relatively expensive in foreign markets.
  • Advances in horizontal drilling and fracking technologies and the resultant increase in oil and natural gas reserves is leading the United States in the direction of energy independence. This has critical implications, both for economic and foreign policy in the United States. But surpluses/reserves, should they begin to accumulate, could drive prices down, which could change the economics for drillers and wildcatters.

The bottom line: The economy appears reasonably strong, which augurs positively for continued healthy space market demand growth. Development activity for new commercial space has been constrained but appears to be heating up in response. Development activity in many markets (Toronto, San Francisco) also appears to be heating up in response. But economic growth is still not robust, and some areas of vulnerability need to be watched.


What could undermine or reverse the current economy recovery? One clear area of economic vulnerability would be a dramatic and unexpected uptick in inflation and/or interest rates:

  • Treasury rates are hovering around 2.49 percent right now. Most people expect to see an eventual uptick in the 10-year rate, but no one expects a dramatic uptick, and most don’t expect an uptick of any kind any time soon. Those who fail to recognize the possibility that such an uptick could occur sooner and more dramatically than most expect could be caught flatfooted. (Do I really think that’s likely to happen? Not really. But it clearly is an area of vulnerability, precisely because so few are baking the possibility that it could occur into their forecasts and contingency plans. [Don’t forget — while some did actually predict a housing collapse going into the GFC, no one predicted housing prices would drop so fast or so dramatically. Even CS First Boston, which was one of the first to call the crash, predicted that housing prices could fall as much as 25 percent — not the 45 percent to which they actually tumbled in many markets.])
  • Today, corporate AAA bonds are yielding somewhere in the neighborhood of just shy of 4.25 percent. If rates did rise dramatically and started to approach 8 percent (close to the typical return assumption underlying the underwriting of many public pension plans), that almost certainly would reshuffle the asset allocation deck, steering capital that has been steadily drifting into higher-yielding alternatives such as real estate back into the bond market. And that would place immediate upward pressure on capitalization rates.

I’ve said it before and I’ll say it again: another area of vulnerability is the equities markets. A strong market correction would place many institutional investors who are already at or above their target real estate and infrastructure levels into a seriously overinvested position (the denominator effect). If the markets corrected severely, it could and almost certainly would put the brakes on institutional capital flows to the real estate equity and infrastructure equity markets. And that most definitely would deflate the current real estate asset bubble that’s in the process of building.

Another possible vulnerability: Political conflicts that easily could escalate and spread globally including the current conflicts between Russia and the Ukraine, Russia and the West, conflicts between various Sunni and Shiite Muslim factions in the Middle East (Iraq, Syria and ISIS; the Syrian civil war; Iran and its nuclear threat), as well as continuing tensions between Japan and China, between India and Pakistan, between North and South Korea and its western allies, and between various factions battling for control of several sectors in sub-Saharan Africa.

Other potential threats include a nuclear terrorist event, global climate change effects, bio-terrorism or an unanticipated pandemic such as a new killer flu strain or an Ebola breakout.

Then there are also several long-term threats — including the proliferation of the automation of everything, and its impact on the job markets. Many jobs will be disappearing or altering dramatically as technological innovations continue to unfold. The investment property brokerage function, for example, almost certainly eventually will change dramatically as the use of automated auction platforms eventually become standard operating procedure for marketing or bidding on real property investments. Space markets — same thing. The role of journalists like ours at IREI — same thing. Financial advisers — same thing.

We’re speeding toward a world where machine intelligence meets or exceeds the power of human intelligence, and where virtually everything is connected and governed electronically. In that kind of a brave new world, what, indeed, will be the meaning of “work”?

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GeoffFinalv5forwebGeoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.

Investing in nuts is not crazy

cute-squirrel-nutsAbout five or six years ago, I was attending one of IREI’s conferences when a representative of Dallas Police & Fire Pension System told the group, “If you want to make some money, you should invest in pistachios.” Although too polite to say so, it was obvious that most of the other attendees thought the pistachio idea was nuts (pun intended). Little did they know …

You may have heard: Nuts are a healthy snack option. A recent study published in the New England Journal of Medicine concluded that people who regularly eat nuts — the optimum is daily — live longer. The study followed close to 120,000 people over 30 years and found that the more regularly participants consumed nuts, the less likely they were to die. In fact, a handful of nuts a day cut the death rate during the study by 20 percent and was linked to maintaining cardiovascular health.

But maybe what you don’t know is that nuts are also proving to be a super food for investment portfolios. Walnuts, for example, were the top-performing permanent crop in 2013 in the portfolio of Hancock Agricultural Investment Group, which manages farmland investments on behalf of institutional clients. Walnuts produced a total return of 60.2 percent for HAIG. Other stellar nut performers included pistachios (49.9 percent) and almonds (32.4 percent).

“If you look at almonds, walnuts, pistachios, they are all enjoying growing demand globally,” notes Jeff Conrad, president and founder of AgIS Capital, who previously was the founder and longtime president of HAIG. “Consumers have responded to the recent positive research touting the health benefits of nuts. In addition, the higher incomes of growing middle classes in emerging markets have helped to boost demand. California growers, who are the dominant producers of these crops, have really profited in the past five to 10 years, as have investors.”

Post–global financial crisis, institutional investors have registered a heightened interest in real assets, including agriculture, which can produce steady income streams while providing diversification and a hedge against inflation. Offering evidence of investors’ interest in agriculture, TIAA-CREF recently raised $1.4 billion for its second farmland fund.

But, I digress. Back to the nut case. Earlier this year, the Municipal Employees’ Retirement System of Michigan went all out nuts with a big bet on almonds. The U.S. pension fund along with Danish fund Danica Pension co-invested with Swiss fund of funds Adveq to purchase 50 percent of Australia’s almond-producing farmland from commodity supplier Olam. In the transaction, 18,000 hectares of almond orchards traded hands at a price of A$211 million (US$185 million). The land will be leased back to Olam for 18 years.

Commenting on the transaction, Berry Polmann, executive director of Adveq Real Assets, told The Wall Street Journal, “The risk is very low because this is one of the premier assets in the world. … and there are stable returns.”

In addition to the income component of such investments, the value of the land often appreciates over time, fueled by growing demand for certain crops and profitable operations, as well as the limited and declining supply of farmland. From 1970 to 2009, for instance, agricultural land values, as measured by the U.S. Department of Agriculture’s Economic Research Service database, outperformed both domestic stocks and bonds on an annualized basis, returning 10.25 percent compared with 6.24 percent for the S&P 500 Index and 7.3 percent for 10-year U.S. Treasuries.

Conrad points out another consideration: “Long term, water will be a very precious commodity. There is sure to be upward price pressure on water resources. If you have a farming operation and have water rights, it could be that the water is worth more than the farmland.”

Although the fickle finger of Mother Nature can derail the best-laid plans of farmers (and investors) — such as the current drought in California — the future does look bright for almonds and other nuts, and for agriculture-related investments in general.

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

On the ground: perceptions vs. reality in Europe

An interview with VIP – Europe’s advisory board member Roger Barris, partner and chairman, Peakside Capital Advisors, Ltd.Roger Barris is a founding partner of Peakside Capital. He was formerly a managing director and head of real estate principal investments at Bank of America Merrill Lynch, which he joined in 2005. From 1997 to when he joined BofAML, he held senior-level positions at Starwood Capital (where he was the partner in charge of Europe) and Deutsche Bank AG (where he was the managing director responsible for the European activities of the real estate opportunities group). Prior to these positions, he held various positions in the mortgage securities department of the Goldman Sachs Group in New York City and London.

Save the date to join us at our fourth annual Visions, Insights & Perspectives – Europe conference, which takes place February 24–25, 2015 at the Hotel President Wilson in Geneva, Switzerland. This event is built for the European real estate investor community and is an excellent forum for international investors to attend to gain an on-the-ground perspective on what’s really happening in Europe.

With that in mind, I recently posed a few questions to Roger:

Europe is attracting a large amount of capital today. As highlighted in Institutional Real Estate, Inc.’s FundTracker publication, 2014 fundraising is off to a great start. Europe-focused funds accounted for 50 percent of first quarter’s $22 billion total. Much of this capital is flowing from Asia and the United States into Europe. What are the main drivers of those flows, and how long do you see it continuing?

I think that you have to look at this by segment. Much of the Asian capital is coming from sovereign wealth funds or from very large institutional investors, such as insurance companies and pension funds. This money is targeting primarily core investments in large, liquid markets, such as London and Paris, and now spreading to Germany and even Poland. This money is primarily seeking diversification benefits, including through “safe haven” status, and is sometimes also looking for higher yields than are available in domestic markets.

The U.S. money, conversely, is largely opportunistic. This money is being driven by both “pull” and “push” factors. The pull is the evident recovery in the European economies and the opportunity to participate in this, particularly by focusing on “distressed” opportunities. The “push” is the perception that the U.S. market, which moved earlier and more aggressively to clean up its problems, no longer offers the same type of early-cycle opportunities.

What opportunities and dislocations are these flows creating in European markets?

The demand for core assets, which is very strong from both international and domestic investors, is creating an opportunity to “manufacture” core from assets that currently suffer from poor physical condition or vacancy. We expect this demand to remain strong for a number of years, reflecting an economic environment of weak growth and very low interest rates, combined with a fear that central bank monetary initiatives might overshoot and create significant inflation. In this environment, few assets look as attractive as core real estate, which offers a yield much higher than most fixed income alternatives and also considerable inflation protection.

Are distressed opportunities available today in Europe?

There are certainly a lot of “motivated sellers” in the European markets. This comes from the banking sector, which still controls, directly or indirectly, plenty of overleveraged real estate. The previous approach with these assets was “extend and pretend” or “delay and pray,” with the tacit approval of local regulators, but this cozy practice has recently been broken by the European Central Bank and its “Asset Quality Review.” The ECB has made very clear that the AQR will be tough, and banks are finally being forced to mark assets to clearing levels, which means that they can be sold without further capital hits. It also helps that ultra-low interest rates and a strong equity market have made it possible for banks to rebuild capital.

The second group of motivated sellers is cross-border investors from the pre-Lehman bubble days, many of them operating through funds that can no longer draw capital for necessary capex or that are approaching a maturity date. These investors frequently never understood the markets into which they ventured and are now looking to dispose of these noncore investments. They were often supported by their domestic banks, which are bringing further pressure to bear since they, too, want to exit noncore markets.

So the supply side of distressed sellers is very strong. The problem is that the demand side for the large deals is even stronger. Even a motivated seller will get the better side of the bargain if he is able to generate competition among many highly motivated buyers. This is exactly what is happening in Europe for any large transaction. The reality is that, even in peripheral markets, the level of competition for large deals is enormous — we understand that, when the Spanish bad bank SAREB came to London to present its disposal program, 250 investors signed up to meet them!

What risks do you think investors should focus on when evaluating Europe and why?

The biggest risk is macroeconomic, particularly in the peripheral economies but also in some core markets, such as France. The reality is that pricing in these markets has gotten way ahead of economic and real estate fundamentals, and will only make sense if these economies recovery strongly and quickly. Although anything is possible, we continue to see huge headwinds for these economies in the form of heavy debt loads and overly rigid and uncompetitive economies. One of the reasons why we focus one Germany, Poland and the Czech Republic is that they don’t face these macroeconomic obstacles. We are confident that if we succeed in “fixing” a building in these countries, all of our good work at the “micro” level will not be swamped by negative — or even insufficiently positive — developments at the “macro” level.

What are some of the ways those risks can be managed?

Unfortunately, macro risks cannot be “managed”; they can only be avoided.

Where do you see opportunities, and why?

We think that there are very interesting opportunities to “buy, fix and sell” buildings at the micro level. We think that it is important to “buy well”, focusing on motivated sellers in situations of limited or no competition; this occurs most often with mid-market deals that are below the amount of money that the large funds need to invest. It is then important to add value through capital expenditure, repositioning and aggressive leasing. The assets that we typically buy are good quality real estate that has suffered from overleveraged, weak ownership. This is the distressed opportunity that we think is interesting in Europe, and it grows every day as more and more buildings become needy of capital and expertise.

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

Where $3 buys the thrill of the open road

OpenRoadI’m no stranger to tollroads. When I was a child, my family drove from Illinois to the Jersey shore every summer to visit relatives. To get there, we used the Indiana Tollway, Ohio Turnpike, Pennsylvania Turnpike (the first limited access highway in the nation) and the New Jersey Turnpike. I can remember flipping those AAA TripTik pages as we passed major exits and crossed state borders. A once-every-trip treat was being able to stop at one of the Howard Johnson rest areas and eat a fast-food hamburger with ice cream for dessert rather than eating the relatively healthy (but boring) meals my mother packed in the cooler and we ate at the rest area picnic tables. With four kids in the family, paying for restaurant meals was something she tried to avoid (not to mention finding a table for six).

I’ve also spent countless Saturday early mornings and late evenings on the Chicago Skyway.

So I’ve seen tollroads in action. And they always seemed to be full of traffic, mainly because they were all in congested areas with very few viable alternative routes.

But just last week, driving back home from Tybee Island, Ga., we used the 16-mile long Greenville Southern Connector to bypass Greenville rush hour traffic. And we succeeded beyond our wildest expectations. We were the only car on the road. The lonely tollbooth attendant was surprised to see us and tried to engage in small talk (not uncommon in South Carolina, which could be called “The Chat ’Em Up State”). Once we were home, I had to look up the history of this spur and see who owned it — because obviously some investor was losing its investment.

Turns out the Southern Connector was an early public-private project – owned by the public South Carolina Department of Transportation and financed with private bonds by the non-profit Connector 2000 Association, Inc. (C2A), which holds a 50-year concession to manage the road. The tollway opened in February 2001 but by 2007, things were going south because ridership was not meeting original estimates (does it ever?). The group had predicted that tolls would be generating $14 million per year by that time. Turns out those projections were a bit optimistic. By 2007, the road was only generating $5.4 million in revenues — about 38 percent of forecast.

The group struggled on, looking for a buyer to take over its concession, but the numbers obviously weren’t very attractive. On June 24, 2010, the Southern Connector filed for bankruptcy.

The road came out bankruptcy a year later and now appears to be on better footing — though its recovery is due more to the restructuring of debt and lower interest rates on the bond payments than increased ridership. Tolls are slowly being increased and ridership is also slowly increasing. But 2013 toll revenues were still only at $6.96 million.

Why didn’t this road meet expectations? Part of it has to do with culture. People in the Northeast are used to paying for roads. People in the South aren’t. I’d be willing to bet that a lot of those using the road are northern transplants. So culture plays a part. But so does the fact that the road was really built to serve as a catalyst to growth in southern Greenville County — and the recession brought the hopes of growth to a screeching halt – road or no road. Tollroads work best when they are relieving congestion in already congested areas, not when they are being used as ways to encourage as-yet-undefined development in an area. Tollroad projects in Texas have run into the same problem. There’s no reason to pay a toll if alternative routes are available.

So what’s this say to investors looking at tollroad public-private partnerships? Be careful! Look both ways. Then look again. Turning I-95 into a toll road through Virginia makes a lot of sense because of the congestion in the area and the location of the existing road. Building a new road through forests and swamps in the sparsely populated Southeast doesn’t. At least not for the investor. Greenville and South Carolina have actually profited from the road because they were able to access matching federal funds to use on other road projects. The investors and bond holders, however? This tollroad has taken a toll on them — and probably on the future of toll roads in the South.

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

The REIT time

Total Asian REIT market capitalization reached more than $166.3 billion in second quarter 2014, according to the latest edition of The Asian REIT Report. This figure comprises data from the now 117 REITs covered by the report on the REIT markets of Japan, Singapore, Malaysia, Hong Kong, South Korea and Taiwan.

The second quarter 2014 $166.3 billion market cap figure tops the $148.6 billion REIT market cap from the fourth quarter 2013 version of the report, which I discussed this past February in a blog post: “Are Asian REITs in your future?

In that post, I mentioned red tape had been holding back the passage of REIT regulations in India. But that’s no longer the case. In a journey six years in the making, the Securities and Exchange Board of India approved regulations on Aug. 10 that will allow for the public listing of REITs and infrastructure investment trusts. (Although Indian officials penned draft REIT regulations back in 2008, the plans to open up this investment space in the country were put on hold when investor interest in India waned as a result of the global financial crisis.)

Firms have already started gearing up for this big announcement: back in June, Reuters reported that The Blackstone Group, with its local partner Embassy Group, plans to set up India’s first REIT with an office portfolio totaling 20 million square feet in the country.

“We wish to increase the portfolio to 30 million square feet by looking at assets in the top five metros,” Michael Holland, CEO of Embassy Office Parks, said at an event in July, reports The Economic Times.

The opening up of a REIT space in India should breathe new life into Prime Minster Narendra Modi’s promises to lift the economy, which The New York Times suggests have been slow to come to fruition.

For institutional real estate investors, the passing of these REIT regulations in India means the country is now one step closer to allowing their pension fund and related institutions to invest in alternatives such as real estate, notes Geoffrey Dohrmann, president and CEO of Institutional Real Estate, Inc.

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

What trends are emerging?

Last month, I spoke with Steve Blank in an interview for the annual ULI-sponsored Emerging Trends report. I prepared a little cheat sheet to help focus my thoughts, and thought I’d share some of what I’m thinking about:

  • The economic and real estate market recovery cycles have been delayed, but appear to be following a predictable pattern.
  • Institutional capital flows continue to rise at a predictable pace.
  • Institutional investors’ risk appetites continue to grow: Suburban and second-tier city investing once again is on the rise.
  • Oil patches — Bakken, Permian, Eagleford Shale — are all booming. The question is the sustainability of these fields.
  • Development is beginning again in many urban markets, but funding still appears to be a bit constrained.
  • The multifamily sector continues to perform.
  • The Federal Reserve has created asset inflation. It doesn’t appear to be a bubble yet, but money supply growth still continues, despite Fed tapering. (M2 is up 6.8 percent since July 15, 2013.)
  • Consumer credit is also on the rise, up 6.6 percent since May 2013. Personal savings rates are at 4.8 percent — not far off the bottom of June 2005, when it was hovering around 2 percent.
  • Consumer spending is up 3 percent since May 2013, at around $11.8 trillion. And it has been on a steady rise since it bottomed in 2009 around $9.8 trillion.
  • CPI is up 2.1 percent from June 2013. One dollar today buys 42 cents in goods and services when expressed in 1982 dollars.
  • The U.S. economy still has room to grow. The housing sector is still in early stages of recovery. Industrial capacity utilization is still below 80 percent.
  • We are facing a labor shortage threat if the economy heats up dramatically. Unemployment is at 6.1 percent and the median duration of unemployment has fallen dramatically, but it still has room to drop to pre-GFC levels.
  • Federal debt levels are still a concern, up 13.2 percent since 2011. The deficit had been shrinking as a result of the GFC, but has been on the rise again since 2009.
  • The banking system appears as sound as it was going into the GFC, if not sounder, according to the St. Louis stress index. Fed funds rate is at 9 basis points — free money for banks continues.
  • Corporate profits after tax are up 6.8 percent since first quarter 2013.
  • An area of economic vulnerability: a dramatic uptick in inflation or interest rates.
  • One more area of vulnerability: the equities markets. A strong market correction would place some institutional investors who are already at or above their target real estate and infrastructure targets into a seriously over-invested position (the denominator effect). This could and almost certainly would put the brakes on institutional capital flows to the real estate equity and infrastructure equity markets.
  • Treasuries are around 2.49 percent right now. Most people predict an uptick, but no one expects a dramatic uptick.
  • Corporate AAA is at around 4.25 percent right now, some 375 basis points away from 8 percent. If rates rise dramatically, that will reshuffle the asset allocation deck, steering capital back to the bond market.
  • Despite a continuing trade deficit, the dollar remains strong against most foreign currencies. This does not bode well for correcting trade imbalances. Americans are addicted to cheaper foreign manufactured goods.
  • Other threats include bio-terror or an Ebola breakout, though the strength of the U.S. healthcare system helps insulate us a bit.

The bottom line: Barring a major disruption, the current real estate recovery has six to eight years or more to go.

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GeoffFinalv5forwebGeoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.

How Sharknado is not unlike an emerging fund manager

For those of you plugged into current popular culture, the cult cable movie Sharknado 2, The Second One was recently broadcast on the SyFy channel. For those of you who aren’t that connected to this particular franchise, the premise is different, even for a SyFy original movie.

Essentially, the pop culture phenomenon began last summer on a very slow entertainment and news day when along came this movie about tornadoes forming in the Pacific Ocean and picking up schools of sharks and then bringing them into Los Angeles where mayhem ensues, including much blood and gore. In fact, Sharknado became the highest tweeted event in cable television history that evening.

It was so successful that the “Second One” was soon under production.

So, how does this relate to the investment fund management business, especially in terms of emerging managers? Connecting the dots, or fins, is not as difficult as one might think. Basically, most individuals who create new funding platforms have come out of larger managers and want to set their own course. Sharknado featured such a type of actor, including Ian Ziering of Beverly Hills 90210 and Tara Reid of American Pie and The Big Lebowski. To round out the cast, a “seasoned” veteran was also brought in with John Heard of Home Alone, Big and The Sopranos. The budget for this production was in the $1 million to $1.5 million range.

Sharknado 2, The Second One brought back its original team of Ziering and Reid and brought in an even more “seasoned” veteran in the form of Judd Hirsch of such classics Taxi and Ordinary People. (John Heard was no longer available as because his character perished in the first movie.) The budget for this spectacle was obviously higher and considered to be in the $2 million range, which is nearly 25–50 percent higher than the first round.

And how does this relate to the emerging manager field? First, a group of successful individuals break off from larger investment funds to form their own management firm and need to come up with an original way of investing to attract capital. Much like Sharknado, no matter how much success you’ve had in the past, it’s what you’re doing today that counts, and it’s all about reinvention. And the hardest fund to find capital for is the first one. Now with a success under way, the emerging manager begins to raise its second fund, and this is no cakewalk either but there is some name recognition in the market. Sharknado 2, The Second One was a huge success, and now they’re off to Sharknado 3 and one can imagine how much bigger the budget will be for that movie and how much easier it will be to raise capital.

And closer to the point in terms of similarities, the Sharknado film series seems to focus on “core” markets, as the first two have been set in Los Angeles and New York City. It’s not a stretch of the imagination that the third movie will be filmed in a global location, perhaps London or Tokyo? Once again, it all comes together on a not-so-imaginary scale.

In essence, raising capital in any industry falls into the same trajectory. It starts small, but with the right mix of talent, drive and luck, in many cases it can build into a recognizable franchise. Sharknado’s rise is no fluke (pun unintended) and an interesting model to observe.

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JS_91x119Jonathan Schein is senior vice president and managing director of business development at Institutional Real Estate, Inc.

Mending, or not out of the woods yet?

Europe is attracting a large amount of capital today. As highlighted in the latest issue of Institutional Real Estate FundTracker, “both fundraising and investment activity in Europe have ramped up as economic recovery has gained traction. Funds focused on European markets have raised $23.6 billion, slightly less than the $26.9 billion raised by funds targeting properties in the United States and Canada.”

That’s good news. Let’s examine one part of southern Europe, Spain. Has it turned the corner yet? Looking at transaction volumes and number of investors pouring into the country, it seems like it has. However, a number of challenges remain, and we are still getting mixed signals. I’ll examine a few of these signals and issues to help you form your own opinion if Spain is starting to mend or if it is not out of the woods yet.

Real estate transaction volumes are up significantly. Real Capital Analytics recently reported, “There was an increase of 183 percent in property transactions in Spain during the first quarter, adding up to €1.4 billion during Q1 2014.”

What is driving those flows? Is it fundamental or technical factors? There have been a number of attractive deals where property was bought below replacement cost and naturally there’s limited to no development risk in many markets that puts a cap on supply risk in the near future as the economy improves. Currently the Spanish economy is growing at an annualized rate of 1.2 percent.

An analyst from Morgan Stanley, Daniele Antonucci, had this to say about Spain recently in a BBC report, “The Spanish economy [has] recovered further. It also looks like that it has outgrown most of its peers – from Germany to France and Italy.”

The same report noted that Spanish Minister of the Economy Luis de Guindos says Spanish GDP “would grow by close to 1.5 percent this year and close to 2 percent next year.” It looks like momentum is building for Spain.

However, there are still a number of issues and mixed signals out there. Some people point to Spanish government bond yields being lower than that of the U.S. Treasuries as being one example of the tide turning. But that signal is misleading. Rates are lower in Spain due to it having a lower inflation rate, not due to improving credit quality.

Spain’s export engine is growing faster than France. From a recent issue of The Economist, “Spain’s exports may have grown, but Jesús Terciado of Cepyme, a small- and medium-business organisation, points out that almost 90 percent still come from the largest 5,000 companies. Yet companies with more than 250 employees account for only 41 percent of Spanish jobs.”

On July 30, a Bloomberg article pointed out, “Figures today show Spanish consumer prices dropped at an annual pace of 0.3 percent this month. Inflation there has been below 1 percent for a year. If the technical definition of a recession is two consecutive quarters of shrinking gross domestic product, it seems fair to suggest that a future slowdown in Spanish prices next month would put the country in deflation.”

Thinking about Spain reminds me of this quote by Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

A number of smart managers are seeing long-term value opportunity in Spain. Among them is Deutsche Asset & Wealth Management, which stated in its March 2014 Global Real Estate Strategic Outlook: “The recovery in Southern Europe could see markets such as Spain regularly outperforming the rest of the euro zone during the second half of the decade.”

Clearly there are mixed signals regarding where Spain is headed. Is it on the mend? Or is it too early to tell if Spain has really turned and is out of the woods? Time will tell.

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

Infrastructure growth spurt

You can take it to the bank — institutional infrastructure investing is poised for a growth spurt.

Spotting trends is an important part of investment decision making, but most institutional investors — especially generally conservative pubic pension funds and insurance companies — do not want to be the first one into a new market for fear that it could turn out to be a mirage and they will be all alone, left to explain to an investment committee why they, but few of their peers, decided XYZ Fund was a great opportunity.

Many of these investors are only comfortable investing in a new market after their peers have joined them.

In infrastructure investing, institutional investors have taken their time getting in the market in large part because there is a concern that the market for deals is crowded and will only get more crowded. It will take time for the number of quality assets available for investment to increase.

Well, I think I’ve spotted a trend that should interest investors — in the past month or so, several countries have announced plans for programs and facilities to encourage infrastructure investment, and while many of these won’t exclusively be for private investor participation, they all will offer these types of opportunities for institutional investors, and that means more assets available, which should take some of the edge off increasing competition and prices for these investments.

Here are several such initiatives that have been launched in the past few weeks:

Coinciding with these new programs, two leading institutional investors this year announced their intentions to get into infrastructure investing:

And, finally, in the past three to four years, including just in the past four months, several investor-led infrastructure investing “clubs” have formed to pool pension and insurance capital to invest in infrastructure:

If that is not a trend, I don’t know what is.

These examples are in addition to the past decade or so when institutional interest in the asset class has been gaining traction. Now it seems that interest could be reaching a critical mass.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.