Falling by the wayside

It’s at this time of year that Cebr Global — the international economics consultancy that is part of the Centre for Economics and Business Research — publishes its latest World Economic League Table, an annual ranking of countries by GDP based on the IMF’s World Economic Outlook and Cebr’s estimates, projections and forecasts for various periods into the future using a mix of economic data such as growth and inflation and variables that you can never totally rely on, such as the exchange rate and the oil price. Ask Russia.

The story over recent years has been how long it would be before the longstanding frontrunner, the United States, would be overtaken by the rapidly closing Asian upstart, China. 2025, the league tables now say, mainly because China had a statistical epiphany earlier this year, decided to restate its economic numbers by measuring its service sector more accurately and in so doing added an amount equivalent to the GDP of Malaysia. Doing this brought the overtaking date forward by three years.

But this story is not about the United States and China — we all know that the 21st century is China’s, even if it has hit a bit of a rough patch. No, it’s about the European contingent in the GDP top 10 tables and their relative places. Europe’s horses are two kinds — the vibrant-growth sleek and nimble fillies and the low-growth lumbering carthorses that can’t or won’t jump fences.

Whereas the 2014 GDP table shows Germany in fourth place, the United Kingdom in fifth, France sixth and Italy eighth, by 2019 the picture starts to change. Germany is still in fourth place, the United Kingdom is sixth, and France eighth. (For the purpose of this piece, Russia is not in Europe but an outcast and almost an economic basket case — though it always hovers between eighth and 10th place in the tables.)

By 2024, Germany is fifth, the United Kingdom seventh and France eighth. Five years on, to 2029, and Germany is sixth, the United Kingdom seventh, and France ninth. European countries are losing ground steadily to the BRIC countries (ex-Russia) and to faster-growing Asian economies.

By 2030, the story goes, the United Kingdom will overtake Germany to become Europe’s largest economy once again, to sixth and seventh place in the top 10, respectively. I say “once again,” but of course not in living memory. It’s a big deal. France is in ninth place. It might not sound like much of a drop, but by 2030 France’s economy is forecast to be almost $1 trillion or nearly one-quarter smaller than that of the United Kingdom and Germany, at $3,469 billion against $4,421 billion and $4,397 billion, respectively.

It helps enormously that the United Kingdom decided in 2014 to include earnings from drugs and prostitution in its GDP formulation. Every country has drugs and prostitution in its economic makeup but few decide to put an earnings value on it — or even can. (If every country had an accurate number to put down for this dubious economic activity, perhaps the world GDP rankings would look completely different, now and in the future. Put that in your pipe and smoke it.)

Of course, plenty can happen to upset the GDP numbers and the rankings. The euro zone could break up, in which case Germany’s relative position would be strengthened. The United Kingdom could decide to leave the European Union, with unknown consequences. Scotland could decide to leave the United Kingdom, also with unknown consequences. France could abandon its dirigiste approach and embrace free-market economics. Italy could add earnings from drugs, prostitution and bunga-bunga parties to its GDP numbers and double economic output — I jest.

Cebr’s CEO Douglas McWilliams comments that “the fun of the world economic league table is that it brings things back to hard figures. The table also shows the dramatic changes now taking place in the world’s economic geography, with slow-growing European economies falling back and Asian economies, even though their growth is slowing, catching up.”

McWilliams points to Sweden as a dark horse, coming up on the inside. “The only European economy that rises consistently in this league table,” he says, “is Sweden, where the economy was revitalized by the previous government. There may be lessons here for other European economies.”

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

A holiday shopping list

In two short weeks, 2014 will end and 2015 is here. IREN will be working away, providing subscribers with all new content throughout the holidays. If you have been out this month, don’t forget to check out the IREN Fridays, which provide a wrap-up summary of the week’s news. Click here for last week’s IREN Friday.

IREN Daily will continue to publish every day but Christmas Day and New Year’s Day. But do make sure to check out the IREN Fridays on Dec. 26 and Jan. 2. In addition, all the IREN Daily stories can be viewed by IREN subscribers on our NewsCloud.

The newsfeeds will also continue every day but Dec. 25 and Jan. 1. If you haven’t yet, make sure to subscribe to our new free newsfeed that supports our Real Assets Adviser magazine. Click here to subscribe to the real assets feed, or any of our other news feeds.

IREN has had an excellent year. And will not be getting coal in our stockings. We have accomplished all our goals, publishing more than 900 global, original stories this year, exceeding the 500 we published in 2014. Thus far this month, we have published more than 60 stories.

Some headlines you may have missed during the holidays:

Also, check out the IREI FundTracker Database. You can receive daily notifications of fund openings, closings, equity raises and commitments. We mine this data trove for exclusive, original news stories in IREN — you can get right to the source and follow the news you care about most, in real time. This is a great item to have on your wish list!

Or sign up for our Institutional Real Estate FundTracker, which publishes monthly and quarterly with analysis of fundraising news and data. To view the latest issue of FundTracker, click here.

And always remember to please send any press releases, announcements or tips to the IREN email, iren@irei.com.

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

There’s nothing to fear …

Nothing to fearExcept fear itself, and a bunch of other things.

Looking out over the investment horizon, there’s a lot to feel good about as we head into 2015. While identifying winning investments in commercial real estate and the stock market in 2015 may be more challenging than it was a few years ago, it looks like both markets still have some giddy-up.

A strengthening job market and U.S. economy, lower oil prices, a rising dollar and reinvigorated consumer spending should boost investor confidence and asset values.

The consensus outlook for the U.S. economy, and the commercial real estate sector, in 2015 is based on expectations of continued economic growth; nothing too exciting, just a moderate uptick from current fundamentals. Prognosticators are using phrases such as “sustained momentum,” “broadening recovery” and “better than 2014 — but not by much.”

Stock market prognosticators are also being somewhat guarded and conservative in their pronouncements. While most are cautiously bullish, the fact remains that the stock market has climbed nearly 200 percent since it bottomed in March 2009 and reached record highs in late 2014. Six-year bull runs, however, tend to make investors a little nervous, as does the prospect of rising interest rates.

Uncertainties still to watch include the possibility of Europe falling back into recession, as well as the geopolitical ramifications of the conflict between Russia and Ukraine, and the omnipresent tensions in the Middle East. A misstep on any of these stages could destabilize world financial markets and put a damper on the feel-good economic story in the United States.

Also worth watching: It’s pretty much a given that the Federal Reserve will raise interest rates in 2015, although the timing and measure remain a mystery. Hopefully, investors will have enough confidence in the economy to take the rate increase in stride and not succumb to “the sky is falling” mentality that has been exhibited with recent Fed announcements.

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LarryFinalwebv2Larry Gray is vice president and editorial director at Institutional Real Estate, Inc.

 

Gas prices are dropping … but what’s the so what?

This I know for sure: oil prices are dropping rapidly, likely due to a glut of supply, and now the world’s two benchmarks for crude prices, West Texas and Brent Crude, have each hit five-year lows. West Texas dropped below $60 a barrel on Friday for the first time since the recession (and hey, I can fill my tank up with $30 for the first time since I was a teenager).

But where prices go from here, and what that means for investors, is an entirely different question.

I work part of the energy beat for our recently launched Real Assets Adviser, and while at times it feels like I’ve got a hold on the industry, other times it feels like trying to read Chinese in the dark.

Oil prices dropping is “interesting,” yes, but what does it mean? It means oil-producing countries are going to take a substantial hit, if you ask Moises Naim of the Carnegie Endowment for International Peace, but it could also lead to a shot in the arm for global GDP as $1.3 trillion is shifted from producers to consumers according to The Economist.

Does it mean MLPs will struggle? Well they have suffered a little of late, but I’ve seen convincing arguments that their success isn’t really tied to oil prices historically. Does it mean that OPEC will struggle? Well, maybe, but Saudi Arabia is just using it as an opportunity to strangle small competitors.

Does it mean we will see more mergers? Well, Halliburton was just in a big merger, though it isn’t clear if it had to do with falling oil prices or not. Does it mean an end to the shale revolution? Well, probably not, but that’s just an unsubstantiated opinion.

Does it mean that alternatives will struggle? Well solar did, but that was an irrational market reaction as solar fundamentals are much more tied to government policies and the price of natural gas than crude oil prices, according to MarketWatch, as alternatives don’t directly compete with oil at the pump.

The price drop may open the way for new gas taxes, such as the cap-and-trade in California that begins Jan. 1, which will likely be easier for the public to swallow with prices so low and will only increase gas prices by about 10 percent, according to Severin Borenstein, an energy economist at University of California, Berkeley, during an interview with KQED. But, despite low prices, there is still very little political will to raise gas taxes, Borenstein added in the same interview.

So falling gas prices are “interesting,” yes, but what does it actually mean?

Will prices continue to fall (as low as $43 a barrel in 2015, worst case scenario, according to Morgan Stanley) or bounce back? The oil futures marker is $10 to $20 per barrel higher than spot prices right now, indicating a future price raise in the cards, but that is still just a guess.

When a benchmark MLP index, the Alerian, has returned 23.6 percent annually over the past five years (with a 5.2 percent dividend yield, too), it seems like you just have to close your eyes and hold your wallet out to make money in the energy world. But isn’t that how it always seems right before the bubble pops? I mean, not that there is going to be an oil bubble, right?

Hey, what do I know? I’m only 25. I wasn’t even born yet the first time some of you lost money.

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

End of an era?

Last week, the London Stock Exchange announced that it had completed its acquisition of The Frank Russell Company for $2.7 billion, with a final closing scheduled for early 2015 (early as in aiming for January).

The LSE really only wanted Russell’s very profitable index business, which will give the exchange a global presence and make it the number two player in U.S.-listed exchange-traded funds. But to get the index business, LSE also had to take on the investment funds and asset management businesses as well as the consulting group. Northwestern Mutual Life Insurance Co., Russell’s former owner, wanted to sell the firm whole and not bother with piecemeal deals.

So that leaves LSE with one business line it really, really covets and fits into its business model, and a couple it has no use for. Rumor has it that as soon as the deal is finalized in January, Russell’s other business lines will be on the auction block. (Who knew that behind the façade of the venerable and staid LSE lurked the heart of a vulture capitalist?) Those rumored to be interested include private equity firms looking to get into real estate, and European-based firms looking to enter the U.S. market.

Russell has always been known as a consulting firm — at least, always known to me as a consulting firm. But its consulting group is actually a very small part of the business. According to written reports based on the sales prospectus, Russell’s index business brought in $170 million in revenues in 2013 (a nearly 50 percent profit), while the rest of the business brought in $784 million in revenues at about a 15–17 percent profit level. The consulting group was responsible for only about $40 million of that.

You begin to wonder, with all this slicing and dicing, will Russell’s consulting business survive? Will it join the list of iconic firms that no longer exist: Blockbuster, Woolworths, TWA, Arthur Anderson?

I think the first person I ever interviewed when I joined IREI years and years ago was Carol Broad. She was the perfect interview — knowledgeable, opinionated, willing to speak on the record — and very kind to a newbie in the industry whose only knowledge of real estate was knowing how to spell “collateral.” I’ve had a soft spot for Russell ever since.

But soft spots don’t drive profits, and consulting firms have been under pressure for years. To my mind, it seems unlikely that whoever eventually acquires the asset management business is going to want to also be in the consulting business. I hope I’m wrong (I have on occasion been known to be) and that when people ask me next year who the top consultants are, I’ll be able to keep Russell on that list. But I think it’s a long shot. And that is a shame.

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

Do-it-yourself pension funds, not for the faint of heart

injured fingers w hammerThere are those of us who dream of remodeling our homes, but even just finding the right people for the job can seem too daunting and nothing ever comes of it. Others are willing to take on the do-it-yourself approach, eager to save money in the long run. But DIY can be fraught with unforeseen consequences far greater than an accidental hammer hit to one’s thumb.

Now think about pension fund executives globally. They are tasked with investing the assets of current employees to pay for the needs of future retirees. As pension fund liabilities continue to increase, these CIOs and portfolio managers can’t just sit on the couch dreaming of what their asset management should look like; they have to act.

To be proactive, a growing number of defined benefit and defined contribution pension plans around the world are looking to do more in-house asset and risk management, according to Pension Funds DIY: A Hands-On Future for Asset Owners, a new report commissioned by State Street Corp. in cooperation with the Economist Intelligence Unit that surveyed more than 130 pension fund executives.

Here are some of the report’s key findings:

  • 81 percent of survey respondents are “exploring bringing more asset management responsibilities in-house over the next three years,” in part due to cost concerns, with 29 percent of participants stating it is difficult for them to justify fees for external asset managers.
  • 52 percent of the pension fund executives surveyed are not confident that their asset manager’s interests align with their own.
  • 53 percent of respondents are planning to use more “lower-cost strategies to achieve desired investment outcomes,” with 43 percent of respondents also expanding the number of technology platforms and software solutions they use.
  • 51 percent of survey participants view strengthening their governance during the next three years as a high priority.

Finding the right balance between the need for external investment management support and what is truly possible on an in-house basis is bound to create shifts in the industry in the years to come, with more than just a few sore thumbs likely along the way.

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

Every asset is individual

Sometimes, from our perch surveying property trends across regions and asset types, it is easy to forget that real estate is a brick-and-mortar business, and that each building is unique. These are not uniform securities or mass-produced widgets, each one indistinguishable from the next.

Sure, we can talk about the characteristics of the San Francisco office market or the Dallas retail market, but that top-level analysis can skim over the specific facts of individual assets.

For a nice counterpoint, “The Twilight of the Indoor Mall,” a feature on the Collin Creek Mall in Plano, Texas, a suburb of Dallas, takes a deep look at a dying mall:

“Here’s what happens when a mall like Collin Creek Mall dies. After its first major anchor pulls out, stores around it continue to close, slowly but persistently, one at a time, year after year. The remaining stores rearrange, consolidate space, move closer to the entrances. The mall becomes depressing, yes, but it’s still viable. Eventually, though, another anchor decides to pull out. Maybe it’s Macy’s. Maybe it’s JC Penney. Another cavity forms, another dead zone. Foot traffic gets lighter. Management doesn’t tell anybody anything about the future of the mall, because management won’t tell anybody anything until the day they decide to close the mall for good. Stores hear rumors from other stores. Basic upkeep starts to slip. The floors get dirty. The plants die. The mall starts to smell.”

Of course, this story doesn’t have to have an unhappy ending. Struggling properties with high vacancies and low footfall could turn out to be promising value-add opportunities. Perhaps the right asset management plan, with a focus on increasing cap-ex and re-leasing space, can turn such a property around.

Or maybe Dallas really does have too much retail space, and the highest, best use for a fading regional mall is to tear it down and replace it with something else.

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

Making the marketing message clear

Marketing is both an art and a science, and nobody really knows where the balance falls. However, when a marketing message is off, it is often quite clear. What brings this to mind is a television advertisement recently aired for the Toyota Prius. So we’re all on the same page, this blog post is neither an endorsement for this hybrid vehicle, nor a condemnation. I’ll leave the judgment about this automobile and its environmental merits to you and your friends.

My concern is with the particular promotion where an ostensibly conservation-minded family is so thrilled to see their son wash their Prius in the rain to save water. And this is great, considering parts of our country are suffering from a drought and this is a wonderful message to convey. And, without a doubt, this boy is washing the car with phosphate-free soap. It looks so nice and healthy for our planet, at least with the optics. Yet there is one major problem with this advertisement: the sun is shining all around the house and it appears that the water pouring down is coming from a well-positioned sprinkler system.

As full disclosure would have it, I do believe we have a problem with our environment — from water shortages to climate change to air quality — and there are measures we can do collectively to hopefully stem the tide. As an aside in terms of real estate investment, there are more signs indicating that there are real profits to be gained from sustainability as well.

However, this is a discussion that will be ongoing for a very long time. My point in noting this Prius commercial is that we are all in control of our message and how it’s delivered. Although one can never predict how it will be received, one should always be careful in making sure the content and the design match up. If not, it will be seen and called out.

And where do you go from there?

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