Africa takes flight

Most people that make their living in the investment and finance world are familiar with the phrase “flight to safety.” It means that when markets are volatile and prices are plunging, investors look to “safe harbors” in the storm, often lower-risk, core investments, and the safest of all are generally U.S. Treasuries or cash.

But have you ever heard the phrase “flight from safety”? Or, put another way, moving out the risk curve. When everyone wants to be in the perceived safe markets, and the competition for investments in those markets grows and leads to multiple bids and rising prices, then there is a point where the price paid for that safety becomes too much, and investors leave the market. The risk of paying too much becomes greater than the risk of missing out on buying what is perceived to be a safe, core asset.

There is evidence that a rotation like this is taking place in infrastructure markets.

For example, China’s sovereign wealth fund, China Investment Corp., made news recently by announcing it is shifting away from developed countries, and has begun a major push into emerging markets, including a focus on infrastructure assets in those markets.

According to reports, the change is being made in part because CIC perceives more value in emerging markets, where fewer participants are competing for investments and, therefore, prices are not being pressured upward.

And, in the past two weeks, Alinda Capital has decided to stop fundraising for its latest core infrastructure fund and shut it down while simultaneously launching a new infrastructure value added fund — a sign that perhaps the appetite for core infrastructure is indeed waning.

In a competitive marketplace like today’s, those with the ability to do so seem to be more willing to look outside core markets for a good deal, and one of the places CIC is reportedly targeting is Africa.

Most investors probably consider Africa to be a frontier market — further out on the risk curve than an emerging market — and one they would cross off their list of appropriate choices.

But does CIC targeting Africa mean the market is developing from frontier market into emerging market? It is probably not that easy to make a blanket statement about a market as large as Africa, but parts of the continent probably have the same investment characteristics as what many investors consider to be emerging markets.

I know of at least one member of the Institutional Investing in Infrastructure Editorial Advisory Board who liked Africa as a contrarian investment. An investment in Africa may be going against the grain, but, as CIC seems to believe, the potential benefit is that an investor can find values because fewer participants are competing for assets and bidding up prices.

According to the Brookings Institute report Financing African Infrastructure, published in March, the African market for infrastructure investment has seen a surge in private external financing during the past decade, with private investment representing more than 50 percent of the increase in external financing for infrastructure. Moreover, the Brookings report notes that the composition of that external financing is changing:

“During this period, while the level of ODF [official development finance] increased — especially from the World Bank and the African Development Bank (AfDB) — the dominance of ODF in infrastructure financing declined as private investment surged to over 50 percent of external financing, and China became a major bilateral source. The most striking feature of this surge is the changing share of financing offered by traditional and non-traditional partners and private sector sources, posing great opportunities as well as challenges for sub-Saharan Africa.”

At some point, like most developing markets before it, Africa will most likely shed its frontier market status and be considered an emerging market.

Perhaps CIC’s latest move into the country signals the beginning of that point in time.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.

Billion-dollar coverage

The first quarter has seen a number of billion-dollar deals, and IREN — Institutional Real Estate, Inc.’s premium newsfeed — has published a lot of billion-dollar headlines.

New York City, always the number one market for prime office properties, had the following transactions:

The following headlines cover transactions in the retail market:

Headlines about funds closing this quarter with a billion-dollar total include:

In Europe, the following billion-dollar deals were covered:

What billion-dollar deals will next quarter bring?

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

Renters feeling the pinch

The apartment sector has produced some fat gains over the past several years, putting a smile on investors’ faces. For many tenants, however, turn that smile upside down.

In many metros across the United States, rents have shot up dramatically during the past five years, according to a recent report by the National Association of Realtors. And while this has made investors and property owners happy, renters have felt the squeeze from rising rental costs, especially considering that increases in household incomes have lagged considerably. In fact, NAR reports that during the past five years rents have increased faster than incomes in all but four of the 70 metro areas included in the study.

Metros where renters have seen the highest increases since 2009 are New York City (50.1 percent), San Jose (32.4 percent), San Francisco (25.6 percent), Denver (24.1 percent) and Seattle (22.3 percent). The growing gap between rent and income was most severe in the New York metro, where tenants realized only an 8 percent increase in income to offset the 50 percent increase in rents.

The rising rent trend and expanding rent-to-income gap is exacerbating an already dire need for additional affordable housing options in many communities. Low-income working families have seen their incomes stagnate while the available supply of affordable rental housing shrinks. Local policymakers will face some stiff challenges in the coming years as they seek to protect and expand the affordable housing stock.

According to most reports, no metro in the world has a larger affordability gap than New York City, where skyrocketing rents have produced a deepening affordability gap. Last year, Mayor Bill de Blasio announced an ambitious housing plan that promised 200,000 affordable housing units — some 120,000 will be preserved and some 80,000 will be newly constructed — during the next decade. The mayor described the plan as “literally the largest and most ambitious affordable-housing program initiated by any city in this country in the history of the United States.”

As part of the plan, the city will count on private funding sources to augment the public investment by forging a link between market-rate development and affordable housing. In expensive markets such as New York, however, that’s not an easy proposition to sell, and, as developer Jonathan Rose accurately noted, “The cost of new construction is higher than the cost of providing affordable and middle-income housing.”

An insightful and informative article on Mayor de Blasio’s plan and the New York City housing dilemma written by Henry Grabar for nonprofit organization Next City, noted:

Since its inception, rent regulation has been the enemy of property owners, real estate developers and economists who argue that their subsidy for longtime residents stunts the city’s continuing evolution, strains landlords and distorts the city’s housing market. Indeed, the programs do little for new arrivals. By keeping units off the open market, they likely drive up newcomers’ housing costs. But the state’s two rent regulation programs, with a median tenant income of $36,000, remain the most powerful single guardian of New York City’s economic diversity.

In forging a strong link between market-rate development and affordable housing, the administration walks a tightrope. Stunting the returns on residential investment may deter new projects. Not enough pressure, and affordable housing targets will be forgotten in a rush of new, expensive buildings. Who will leave New York first: real estate investors in search of higher profits, or the poor in search of lower rents?

This is New York City’s dilemma, one shared by many large cities across the United States.

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

Not just black and white

flat whiteHow do you like your coffee? Shaken but not stirred? What does your coffee say about you? What does your coffee say about the city you work in?

Everyone likes their coffee a certain way. Black, white and shades in between. Froth, no froth. Sugar, no sugar, “I’m sweet enough, already, thanks.”

The Economist famously has its Big Mac Index as a lighthearted guide to currency levels, using the differing comparative prices and purchasing power of a burger around the world. Now Savills has come up with a guide to the price in top world cities of the ubiquitous cup of coffee.

Berlin, Dublin and New York City are the top ranking cities for café culture, according to Savills. As part of the firm’s Tech Cities research program, Savills created an index to evaluate café culture by measuring the availability, quality and popularity of cafés with tech users along with the average cost of a flat white, which it says is “the coffee of choice for industry aficionados.” Well, not here. “Whatever it’s called, black with four sugars, please.”

(For those not in the know, a “flat white” is an espresso-and-steamed-milk beverage similar to a latte, with its origins in Australia and a growing global trendiness. For instance, Starbucks now offers flat whites.)

Savills’ view is that “this cultural phenomenon” has become a good barometer of a city’s tech hub credentials. Cafés offer free wi-fi, workspace, a place to hold meetings, and an opportunity to network and meet likeminded individuals. We’ve all done it.

Savills Flat White Index
(ranked by availability, quality, café visitors and cost, with flat white cost)

  1. Berlin, $3.36
  2. Dublin, $3.47
  3. New York City, $4.00
  4. Singapore, $3.72
  5. London, $4.04
  6. San Francisco, $3.75
  7. Tel Aviv, $3.00
  8. Hong Kong, $4.39
  9. Stockholm, $4.45
  10. Austin, $4.30
  11. Mumbai, $1.63
  12. Seoul, $5.54

Source: Savills World Research

Berlin’s Kreuzberg, the Zentrum of Kaffeekultur in the city, came top of the index, based on availability, quality, visitors and price. The average flat white in the German capital city costs $3.36, beaten only by Tel Aviv and Mumbai. With the euro approaching parity with the U.S. dollar, that’s €3.17. As always, the average price can be misleading — I certainly don’t pay that for a coffee anywhere in Europe. I won’t pay that. Train travelers in Germany know you can get a perfectly good cup of coffee in Yorma’s, the station food-to-go outlet, for €1.10 (it was €1, but that’s inflation for you in the deflation-hit euro zone). Not necessarily a networking and meeting venue of choice, but hey!

“A growing ‘flat white culture’ is an indication of the tech industry taking hold of a local economy,” says Yolande Barnes, director of Savills World Research. “Café culture is a good sign of human capital and suggests a vibrant and creative environment, attracting a young and talented population — the key to making a tech city.” Barnes suggests that conventional metrics no longer apply when attracting new enterprises: “People will instead be looking for the life of the city itself, its streets, its shops, its markets, its culture and cool hangouts rather than high-spec floorspace.”

Give me a black any day.

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

VIP – Europe, the State Department, Iran and the real world

Institutional Real Estate, Inc.’s most recent conference — Visions, Insights & Perspectives – Europe, held February in Geneva — was, from all accounts, a tremendous success, with a series of insight-provoking panels and our largest attendance ever.

One of the most fascinating parts of VIP – Europe was the backdrop of world events happening at the very hotel where the conference was held. At the same time as IREI’s conference, the hotel was also hosting delegations from the United States and Iran in the latest round of negotiations on the now well-publicized nuclear proliferation treaty talks. The delegations included Secretary of State John Kerry and Iranian foreign minister Mohammad Javad Zarif.

These types of political events often seem very far and don’t typically have a direct effect on your day-to-day life — although the desired outcomes certainly do.

So when you arrive at a hotel with security guards armed with heavy machine guns and protective gear without any previous information, one tends to think that this is quite a well-protected hotel. Of course, when you dig a little deeper and ask staff at the concierge and reception desks, as well as the very stern person in the elevator with a “wire” in his ear, about what exactly is going on, and nobody will say anything other than “important things are being discussed,” you begin to wonder even more.

Finally, when you get to your floor with your wheeled suitcase and think you’re heading toward your room and are then stopped by two men who you later find out were part of the Iranian delegation’s security detail, things became much clearer.

As a matter of fact, after explaining that the arrow at the elevator had pointed me toward this end of the hall for my room, the security detail very kindly asked me if I would like to be escorted to where I was supposed to be (in the opposite direction), and they did so with all due politeness.

So if you’re asking, “What on earth does this have to do with IREI’s VIP – Europe conference?” then I can honestly say, “Everything.”

Our world is incredibly complex and also incredibly interconnected. A conference about institutional investment in European real estate can find itself at center stage with some of the world’s most important negotiations regarding world peace and safety, and at that moment one gets a better understanding about how close all of these different elements work in concert with one another.

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

It’s a core world out there

At our VIP – Europe conference in February, IREI’s Jonathan Schein chatted with Martin Brühl, head of international investment management at Union Investment Real Estate, as well as the president-elect of the venerable 148-year-old RICS (he will be the 134th president; a couple of wars where the British were fighting off the Germans precluded electing presidents during some of the years — but here is Martin anyway), about the challenges he faces in taking a very German, very core-oriented, investment firm into the international investing arena.

What made this discussion particularly interesting was Brühl’s role with RICS. In this position, he promotes the benefits of an international standardized valuation process. How much easier would it be to invest outside your home market if you knew the appraisal process was consistent, transparent and comparative across markets?

Brühl believes that standardized valuations are the lifeblood of the market.

“Accurate valuations allow better decision making by governments, businesses, organizations and individuals, increasing market efficiency,” he said.

The audience, of course, couldn’t let Brühl leave the stage without at least one question about the irony of a German advocating for standardized appraisal criteria — how can you take a German appraiser seriously? But he pointed out that the German property market has an undeserved bad rep when it comes to valuations. Most properties in Germany are appraised on a standardized basis, and it is pretty much only the open-end funds that use the government-mandated process.

Even without standardized valuations, Brühl is rapidly taking Union Investment international. Right now, Union Investment’s portfolio stands at about €24 billion in assets under management, with approximately 70 percent invested in the core European countries and 24 percent in Germany. But the core markets are getting overpriced and their markets are shrinking, so during the next few years, Union Investment will be adding investments in the United Kingdom — primarily regional cities such as Glasgow, Cardiff and Birmingham; London is a seller’s market — as well as Asia Pacific and the Americas. There are about 183 countries in world. Union Investment has narrowed that universe down to 36 investable countries (investable per the firm’s low-risk criteria) and currently invests in 23 of them.

Given that Union Investment is a conservative, core investor, it comes as something of a surprise to hear that it is investing in Asia Pacific. But even Asia has some core regions. Union Investment expects to build a large portfolio in Australia (Brühl really likes Brisbane), and already has assets in Tokyo and Singapore. In the United States, the firm will be investing in gateway cities, but also fast-growing secondary markets such as Austin. When talking to Brühl after his keynote discussion, I told him I had family in Austin. He said he is looking forward to visiting his assets and taking in the live music scene. “Live music scene” seems as good a metric as any when picking a viable investment market.

With plans to put out €2 billion to €2.5 billion in international investments per year, Union Investment’s portfolio could quickly take on a new look.

But being a marathon runner, “quickly” really isn’t in Brühl’s vocabulary. Steady and methodical works better. He noted that when moving into international markets, you need to be patient.

“The best deal is the bad one you didn’t do,” he explained.

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SheilaWebSheila Hopkins is a contributor to Institutional Real Estate, Inc.

Miserable economies

Much like the object of twisted affection in Stephen King’s novel Misery, the economies of the 15 countries in Bloomberg’s so-called Misery Index for 2015 have been hobbled by unemployment and Consumer Price Index changes, the two simple components added together to yield a misery score.

The index projects Venezuela’s economy to suffer the most by far in 2015, making living and working there, well, miserable. The country is plagued by a shortage of basic goods as well as sky-high inflation.

Top 15 most miserable economies in the world

  1. Venezuela
  2. Argentina
  3. South Africa
  4. Ukraine
  5. Greece
  6. Spain
  7. Russia
  8. Croatia
  9. Turkey
  10. Portugal
  11. Italy
  12. Colombia
  13. Brazil
  14. Slovakia
  15. Indonesia

The novel Misery is filled with misfortune, rescue, false hope, even greater misfortune and, ultimately, survival against all odds.

One need only look to recent history and the present state of many of these economies to see similarities between this fictitious story arc and reality. The reality for these countries reminds us of the interconnectedness of the world’s financial markets, and the delicate balance needed to either despair or thrive.

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

Trendspotting

At this time of year, the editors of Institutional Real Estate, Inc.’s monthly magazines plan out the editorial calendar for the second half of the year. It can be a balancing act, as we try to find topics that will inspire and engage readers.

We want to provide readers with stories that don’t just repeat established trends but help them to spot trends as they develop. It isn’t enough to tell our readers what everyone is talking about. Instead, we strive to identify emerging trends before they blow up.

And it’s even more of a challenge when you realize we are attempting to forecast out six to nine months in advance. Still, IREI editors have a long history of trendspotting, and we have rich data sources and industry connections that help us as we make these plans.

The results can be very engaging. As an example, see this month’s cover story in The Institutional Real Estate Letter – Americas. “Data centers’ Latin accent” takes a look at the spread of data centers in Brazil, Mexico and the rest of Latin America. It’s a solid, well-reported story that provides a window into an asset class that most of our readers are probably not targeting — yet. The value of such a story is that it doesn’t chase overripe investment trends; instead, it is spotting them while they are still buds on the vine.

Calendars for the first six issues of the year are available here; calendars listing feature stories for the second half of the year will be posted in mid-March. We hope the second half of 2015 will be just as illuminating.

P.S. Changes are afoot in the editorial department at Institutional Real Estate, Inc. Beginning with the April issue, I have taken over as editor of The Institutional Real Estate Letter – Americas, and the former editor, Mike Consol, has moved his focus to IREI’s newly launched Real Assets Adviser.

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LorettawebfinalLoretta Clodfelter is editor of The Institutional Real Estate Letter – Americas.