Deflate-gate, European edition

It’s Super Bowl week, the official lead-up to the unofficial holiday that is America’s biggest game. But in Europe, they play a different kind of football, and they are in the midst of a different kind of “deflate-gate,” and one that may actually be worth the time we spend talking about it.

The euro is deflating faster than Tom Brady’s footballs. According to today’s flash estimate from Eurostat, euro area annual inflation is down to –0.6 percent. In response, European Central Bank president Mario Draghi has announced a €1 trillion bond purchase program to begin in March.

The program itself will consist of €60 billion in monthly bond purchases by the ECB through at least September 2016, though the ECB expects the program to continue until euro inflation rates are near 2 percent.

And that may not happen any time soon. Even Draghi, who is quarterbacking the program, doesn’t expect inflation to turn around in the near term.

“On the basis of current information and prevailing futures prices for oil, annual HICP inflation is expected to remain very low or negative in the months ahead,” Draghi said in the Jan. 22 press conference. “Such low inflation rates are unavoidable in the short term.” Draghi added that inflation rates are expected to increase gradually in the latter half of 2015 and in 2016, though time will tell to what degree.

After Sunday, those of us in the U.S. will hopefully (and thankfully) never have to hear about our deflate-gate ever again. Hopefully the euro’s deflate-gate doesn’t last much longer.

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

A brave new world

This past fall, the BlackRock Investment Institute wrote a very insightful piece called, Interpreting Innovation: Impact on Productivity, Inflation & Investment. This short report took a look at a number of major, complex trends and issues that have an impact to various degrees to all asset classes. One of the many key points it makes is that technology is reshaping our economy and our lives. In other words, we are in a brave new world.

We all know that the saying “this time is different” is code for “take your money and run.” Generally speaking, that is true when you are discussing the fundamentals of investing. However, that metaphor does not work with regard to what is happening with today’s economy. The challenges and opportunities we face today are due to structural and not cyclical changes.

BlackRock’s report highlights a number of key points related to innovation and it’s impact on productivity, inflation and investment, below are a few points that stood out for me.

In BlackRock’s report, the firm notes:

“The correlation between U.S. productivity and jobs growth averaged more than 80 percent over the four decades leading up to 2001. … Productivity gains consistently lead to more hiring. Yet the correlation has collapsed in the past decade. …

The distinction between job categories is becoming increasingly blurry. Software algorithms are starting to replace (or complement) humans — even in professions that need cognitive skills. Think insurance claims processing, fraud detection, equity trading and legal research. Some 65 percent of U.S. workers are in jobs that can be classified as ‘information processing.’”

One key question the report asks, which we all need to reflect on, is: Are we reaching a tipping point of broader adoption due to falling robot prices and exponential increases in computer power?

What are the possible implications of these trends? One key question that could provide context is: Will the increasing level of automation in the information processing field’s productivity improvements add enough to the economy to offset the need for fewer and fewer people in information processing? As fewer people are needed, this could help keep a lid on inflation, which in turn could lead the Federal Reserve to have a shorter and lighter tightening cycle in the future than in the past.

BlackRock’s report does present a balance of the challenges and opportunities. Personally, I am in the optimist camp regarding technology’s long-term net impact to the economy, and this part really captures why:

“Growth pessimists argue the current technology boom has already run its course. What if they are wrong? There could be parallels between the recent period of sluggish growth and the Great Depression.

Financial crisis and soaring unemployment in the 1930s masked what was actually a “golden age” for technological innovation, economic historian Alexander Field argues in The Great Leap Forward. Massive investments in infrastructure and other innovations in the period laid the groundwork for rapid economic growth in the decades to come, Field concludes. The same was true during the 1870–1900 period, when innovations like steam shipping, railroads and mechanized agriculture resulted in deflation.

Similarly, the recent financial crisis could be masking breakthroughs that are not yet captured in the statistics. In addition, many recent innovations such as web search tools are freebies for consumers. They generate activity that does not show up in traditional expenditure-based economic statistics.

The productivity gains of the 1990s and early 2000s were heavily concentrated in the tech sector, Field argues. The implication? We may be on the cusp of a long-term productivity surge as technological innovations ripple through the service sector and broader economy. This would be a bullish scenario for growth — and would suggest we may be underestimating potential growth and interest rate levels.”

Take some time and read the full report; you will find yourself thinking about a number of different issues in different ways.

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

Gone too soon

AshleeI’m sure most of you have someone similar to Ashlee Emerson Lambrix in your lives. Someone who always has a positive attitude, flashes a special smile and has a knowing twinkle in their eyes; someone who is vibrant and always a joy to be around. That was Ashlee. She brightened the lives of everyone she knew, including mine.

Sadly, Ashlee passed away on Jan. 12 after a two-and-a-half year battle with a rare form of cancer — Rhabdomyosarcoma. Punctuating the sadness of this story, Ashlee was only 32. This cancer is so rare that only 120 in 1 million children will be diagnosed each year, and only a handful will be diagnosed over the age of 20. Ashlee’s case was one of those statistical anomalies. Throughout her ordeal and many treatments, she always exhibited amazing courage and inner strength. But in the end, it wasn’t enough.

Ashlee joined Institutional Real Estate, Inc. 10 years ago, fresh after graduating from Sonoma State University. She was quickly promoted to more senior responsibilities, eventually being appointed to head up our data services department. As the leader of our data services department, Ashlee prided herself not only in understanding the data, but in understanding our clients’ needs, and of being as responsive as possible to their custom data requests. Those of you who worked with our firm over the past decade more than likely had interactions with Ashlee and know that she was a special woman.

Ashlee is survived by her loving parents, Tim and Karrie Emerson, and her brother, Taylor, as well as her devoted husband Scott and four-year-old son, Hudson.

Our time with Ashlee was much too short, but it serves as a reminder that life is precious. Each day is a gift. So take a moment, today, to count your blessings and hug your loved ones.

To honor her memory, we have established the Hudson Lambrix Education Trust (aka the Ashlee Lambrix Memorial Trust for the Education of Hudson Lambrix). Donations in honor of Ashlee may be sent to the Hudson Lambrix Education Trust, c/o Institutional Real Estate, Inc., 2274 Camino Ramon, San Ramon, CA 94583.

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

Moving to core? Follow the real movers

There are many different ways to define “core” in terms of property type and location. And every investor and investment manager has his or her own acceptable measure of what “core” means and how it results in an informed investment decision.

Research then takes on a vital role in proving results, whether positive or negative, as well as predicting how well a planned strategy will ultimately turn out. And one of the hardest aspects of research is finding the right data to use in making these strategies and decisions. There are certainly the well-known and highly well-worn data providers that, when properly utilized, give a certain seal of approval that investors are seeking.

But what about the lesser known data and surveys that are often overlooked and very often are more reliable predictive indicators? For example, one of the most unscientific surveys for presidential elections is the one that predicts the outcome based on which candidate’s Halloween mask is the most purchased during the year of an election. This method has accurately predicted the correct winner since 1980, when Ronald Reagan soundly defeated Jimmy Carter.

And this brings us back to the concept of finding “core” or at least finding the next potential hot area for investment as well as finding the cold spots. Now in its 38th year, United Van Lines just released its “Annual National Movers Survey,” which essentially indicates which states in the lower 48 have the most inbound and outbound moving patterns [1]. Not surprisingly, Oregon leads this, followed by South Carolina and North Carolina with New York state, New Jersey and Connecticut at the bottom of the list. Many in the Northeast have cited retirement as a reason for leaving, and these statistics are less than scientific, but they do tell a story which is worth considering.

In essence, sometimes it is worth looking for the less than popular written narrative that can help one find information to either back up an investment strategy or, even more importantly, steer away from one that has a faulty underlying premise.

To that end, it might be worth taking a look at the United Van Lines report and see how it stacks up against your own considered strategies.

1. United Van Lines has tracked migration patterns annually on a state-by-state basis since 1977. For 2014, the study is based on household moves handled by United within the 48 contiguous states and Washington, D.C. United Van Lines classifies states as “high inbound” if 55 percent or more of the moves are going into a state, “high outbound” if 55 percent or more moves were coming out of a state, or “balanced” if the difference between inbound and outbound is negligible.

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Jonathan_Schein-NEWJonathan Schein is senior vice president and managing director of global business development at Institutional Real Estate, Inc.

China residential: bubble or not?

In the United States, the recent Great Recession had a number of different drivers, among them leverage, light regulation, residential real estate and subprime mortgages. As we move out of this challenging and complex time, memories fade and generalizations become magnified. Among them, a hot residential real estate market can help melt down an economy.

There are a wide range of potential threats and concerns regarding China’s future economic health. They include the shadow banking system, growing debt levels, rising wages that threaten China’s export economy model, corruption, etc. These and other concerns are well known and are being addressed. Time will tell how well they are managed.

Among the many challenges facing China’s future growth, one of the main ones has been real estate. Some prime examples that have been used in press coverage of the situation include the New South China Mall in Guangdong Province, which opened in 2005 and is the world’s largest shopping center, is often described as a retail ghost town or numerous high-rise residential towers that are vacant in many regional cities. Plus, you add in this statistic — the homeownership rate in China is higher than in the United States, at 89 percent versus 66 percent — and it does pose the question, how much higher can it go?

But residential real estate may not be China’s Achilles heel. A report by Andy Rothman, investment strategist with Matthews Asia, presents a compelling case for why China’s residential property market may not be in a bubble after all. One key point made by Rothman is that “China is not just Shanghai.” By which he means that the Chinese market is huge; one city cannot and does not typify the whole of the Chinese real estate market.

According to Rothman, “There are more than 150 Chinese cities with a population of at least 1 million (only nine U.S. cities and 50 metro areas are comparable in size), and these account for the vast majority of home sales” which are driven by owner-occupiers (90 percent according to his report), not speculators. Plus, keep in mind, these are low-leverage transactions that have a 30 percent down payment requirement.

He really puts the market into context with this point, “The four tier-one cities of Beijing, Shanghai, Guangzhou and Shenzhen last year [2013] accounted for only 10 percent of China’s urban population and 5 percent of total residential property sales (by floor space).”

He goes on to point out, “There are failed projects, but the ‘ghost city’ story is greatly exaggerated. For residential projects three years post completion, the vacancy rate is 15 percent, similar to the 14 percent vacancy rate for the U.S. housing units.”

To see Rothman’s report putting China’s residential real estate market into perspective, click here. It’s an engaging read and includes thoughts about one policy move that could give the property market a new boost!

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

Retail spending went up but …

In late November, I covered the matter of Black Friday sales beginning earlier and earlier and wondered if that would affect the retail market numbers after the holiday season.

A report on holiday spending by Mastercard Inc., revealed that retail spending in the United States increased 5.5 percent year-over-year from the Thanksgiving weekend through Christmas Eve.

Fox Business reports that consumers spent actively on lodging and restaurants during the holiday season, while sales of electronics were flat, reflecting an ongoing shift toward spending on “experiences” rather than goods.

As far as the U.S. economy goes for 2015, Market Wired reported that Dun & Bradstreet’s January 2015 U.S. Economic Health Tracker (which provides a monthly, multidimensional perspective on the U.S. economy, including small business health, total job growth, and overall U.S. business health) showed small business health continued to have small though steady gains, but overall U.S. business health remained stagnant in the second half of 2014.

Josh Peirez, chief operating officer at Dun & Bradstreet, told Market Wired that there are some definite bright spots in the U.S. economy, such as increased viability for businesses overall and the sustained health of Main Street. But, taken all together, business conditions appear to have stalled, and the firm estimates prolonged hesitant growth headed into the first quarter of 2015.

Let’s just hope that this is the year for consumers, retailers, businesses and job growth and that we can only build from here.

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DenisewebfinalDenise DeChaine is special projects editor of Institutional Real Estate, Inc.

What is really hot in real estate

One of the great things about real estate is that — unlike so many other investments and other things we spend money on — it has intrinsic value. You can get real, usable raw materials out of Mother Earth. We’ve built civilizations on the materials extracted from her womb.

She is clad in metals, adorned by precious and semi-precious stones, her veins flow with fresh-water aquifers, and her rich soils and vast oceans provide our entire food supply. She is also rich in coal, oil and other fossil fuel reserves we burn to create heat, to boil water, to spin turbines, to produce electricity and animate the planet. As we strip, suck and frack all of the coal, oil and natural gas out of Mother Earth’s crust, we are reminded of the need for alternatives.

One of those alternatives — rarely talked about despite its prevalence and around-the-clock availability — is geothermal energy. Yes, Mother Earth has been known to blow off a bit of steam at times, and her hot pockets are capable of producing electricity more directly than fossil fuels. Despite that, solar and wind power dominate discussions about renewable energy. Yet geothermal has significant advantages as a clean energy source compared with solar and wind. In many ways geothermal is the best and most practical of all renewable forms of energy. Consider that:

  • Geothermal energy is the most reliably available of all renewable sources. Other clean energy sources, such as solar or wind, are only available when the weather cooperates. Geothermal does not rely on uncontrollable outside forces.
  • Engineered geothermal systems are less constrained by natural topography. By contrast, to build an effective wind or solar farm the location selected must meet specific natural conditions.
  • Less land is required. A geothermal power plant needs roughly 10 percent of the amount of land required by a solar farm to produce the same amount of energy.

Since ancient times, people have used geothermal energy to bathe in hot springs and to heat their homes and prepare food. It can be used today to directly heat homes, offices and other facilities with more advanced technologies.

As fossil fuels are burned even more furiously with the economic emergence of countries such as Brazil, China and India, we would do well to remind ourselves that heat is stored within the earth and is there for the taking. Already, the United States is the number one producer of geothermal energy (though you would never know it based on its absence from the conversation), followed by the Philippines, Indonesia, Mexico and Italy.

Before you paint me overenthusiastic about geothermal, this is the stage of my disquisition where I acknowledge that, for all its attractiveness, geothermal has its disadvantages as well. To wit:

  • Because geothermal is not widely used, there is a lack of equipment, trained staff and infrastructure, all of which hinders its broader implementation.
  • The installation costs of a geothermal energy plant are high. Tapping heat trapped in the earth requires a major one-time investment.
  • Like coal, oil and natural gas reserves, geothermal sites can run out of heat over time because temperatures can drop if too much water is introduced in the production of steam, potentially resulting in a big financial loss for companies invested in those plants. For that reason, extensive research is necessary before setting up a geothermal facility.
  • Geothermal is only accessible in certain regions that contain rock formations hot enough to produce steam over a long period of time. Again, research must be conducted to ascertain the situation, running up the cost of geothermal projects.
  • Geothermal sites sometimes contain poisonous gases that can escape, meaning a geothermal plant must be outfitted to contain and neutralize the toxic vapors.
  • Finally, geothermal energy cannot be easily transported. It is best used in the area where it is tapped.

Oh well. Perhaps we will figure it out over time. Life can be complicated. In this case, Mother Earth is no exception.

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

Dim sum infrastructure debt investing

Infrastructure debt funds have made a successful entrance into global institutional investment fundraising during the past 18 months with several vehicles closing after collecting billions of dollars of commitments.

Now comes the challenge of deploying that capital.

According to a report by Bloomberg News, these funds may find Chinese municipal debt offerings a tempting item on the global menu of fixed-income investments. This is because ratings agencies are predicting many Chinese municipalities will be in dire need of financing due to changes in policies governing their options to raise funds, which could lead them to follow the example of Beijing Infrastructure Investment Co. The city’s metro transportation operator raised $1.3 billion in 2014 via a global bond offerings  — the first Chinese metro operator to do so — including a $1 billion offering in November.

Analysts predict more local government financing vehicles will come to market as “dollar bonds” similar to Beijing Infrastructure’s recent offerings because a longstanding policy that supported these financing vehicles’ local fundraising was called into question by the State Council in October. Municipal governments are increasingly coming under scrutiny regarding the amount of debt they are able take on and comfortably service.

A recent spread between onshore and offshore bond offerings was 5.06 and 3.75, respectively, or 1.31 percent, making the offshore route more affordable for these municipalities, Bloomberg notes. Investors have to consider that these municipal debt offerings often do not have a guarantee of repayment but they are backed by the Chinese government.

With their ability to raise capital locally clipped, these municipalities are expected to increasingly look for overseas investors as cheaper sources of financing that can replace the local bond buyers. China’s local government financing vehicles are estimated to be responsible for some 40 percent of local government debt, implying there should be a lot of offerings in the market.

Bloomberg notes there are 40 cities in China with approval to construct a metro system by 2020:

“By that time, the central government targets 6,000 kilometers (3,728 miles) of metro lines will be built, which S&P estimates will require as much as 2.5 trillion yuan ($401.4 billion).”

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.