Here’s what’s on tap for infrastructure

The editorial team at IREI just wrapped up the editorial calendars for the second half of 2015. Each year, the process of setting the topics for feature articles begins by reviewing the discussions at our annual Editorial Advisory Board meetings, where our publication sponsors and board members get to learn what issues and objectives drive the thinking and decision making of the investors at our meetings. These investors are public and corporate pensions, insurance companies, sovereign wealth funds, and superannuation funds, as well as the consultants who help them plan and execute infrastructure investment policy.

One of the challenges of setting the editorial content for the same group of people each year is coming up with fresh ideas. On one hand, the market is always changing, and so the thinking of our editorial board members is always changing as well and new stories ideas are always popping up. But on the other hand, the process of institutional investing also has a lot of consistency, and many of the same issues come up each year in our board meetings.

With Institutional Investing in Infrastructure, we also look for topics for the editorial calendar that are driven by events and themes taking place in the broader infrastructure market. From the effects of declining oil prices to the opening of Mexico’s infrastructure market to foreign direct investment, there are always interesting changes taking place in the market that warrant attention.

Below is the list of the editorial features of our monthly infrastructure magazine in the second half of the year, which are suggestive of the discussions that take place at our board meetings and focus on the issues most important to the investors on the I3 editorial board. We trust these timely and pertinent topics will help you get a deeper understanding of the people and trends driving the global infrastructure investment market, and please feel free to submit article ideas either for submission or as topics our staff can pursue to

The second half 2015 I3 editorial calendar

Look before you leap
The infrastructure asset class has been criticized by some investors for not producing a common benchmark that measures investment performance; however, more benchmarks are coming on line each year, and investors have more opportunities to understand how the asset class has performed.

The money talks
Get the scoop from the 2015 IREI Infrastructure Strategies conference and I3 Editorial Advisory Board meeting. Investors, consultants and managers share their perspectives on the market as well as their plans for the future.

The chase is on
A lot of capital has been raised for infrastructure investment during the past 18 months and is poised for deployment into the market. The good news for investors is they will soon be taking steps toward reaching their target allocations as capital is called and invested. What infrastructure sectors and regions are seeing capital inflows? Are prices overheating?

Regulated expectation
European regulators have issued a few surprises to investors in European infrastructure, including most recently for French toll road rates. Is this the new normal? Should investors lower expectations for rate increases on regulated infrastructure investments such as airports, water and natural gas assets?

The year of the club
Whether it is a group of like-minded investors collaborating for deals, or managers and government officials working together to make public infrastructure markets and assets more palatable to private investors, it seems a new infrastructure club is forming every other week. What is driving this trend and are more clubs coming or has the market maxed out?

Port of interest
The flow of goods and commodities through seaports can be an indicator of where we are in the economic cycle as well as the cash flows that can be expected to flow into infrastructure portfolios invested in these assets. Where are we in the cycle? Who is buying port infrastructure, and are they pleased with the results?

Mexico’s invitation to foreign investment
The first year of Mexico’s open door policy for foreign investors — including infrastructure investors — is coming to a close. What were the highlights and challenges, and what can investors expect in 2016?

Communication nations
Cell phone towers, high-speed Internet cables — some put these assets in the infrastructure bucket while others do not. Should more infrastructure investors have communications infrastructure investments? What are the investment opportunities and the characteristics of these types of investments?

Greener pastures
Greenfield infrastructure projects come with uncertainty that some investors simply do not want to take on, but does that mean all greenfield infrastructure projects should be crossed off a list of appropriate investments? Also a look at two greenfield cases studies — one that was successful and one that ran into trouble.

Recycling works
Australia has embarked on an infrastructure asset recycling program — selling government assets to private investors and recycling a portion of the proceeds into new projects. How did this program come to life and how is it progressing?

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.

Life’s just, well, uncertain

A general election will be held in the United Kingdom on May 7. The outcome is too close to call. We are in margin-of-error and the vagaries of voter registration, weather and turnout territory. Another coalition government is possible, but quite who the coalition partners would be is simply speculation. Months of negotiation could lie ahead. An outright win is also possible but is unlikely.

It has crossed a few people’s minds that this could be a good election to lose. This year’s loser could be a shoo-in in 2020.

We shouldn’t rule out a grand coalition of the two main parties, Conservative and Labour. Stranger things have happened, and they are not that far apart on the policies that matter — foreign policy, defense, health, austerity. Yes, really. In a seven-way televised debate between the leaders of the parties on April 2, Natalie Bennett of the Green Party referred to the two main parties’ policies as “austerity heavy” and “austerity light.”

On taxation, though, there is clear blue water between the two parties — Labour, with the “rich” firmly in its sights, wants to introduce a mansion tax on high-value residential properties, raise taxation on higher incomes, abolish the fiscal privileges of non-domiciled status, increase company taxes and “revisit” taxation on carried interest. Private equity real estate investors and managers — be afraid, be very afraid. The Conservatives want people to keep more of their own money, especially when they die; for the state to do less and to spend less. Labour also wants to limit rental increases on residential properties to consumer price inflation (currently 0.0 percent), which could snuff out institutional investor interest in the U.K. private-rental sector.

A German-style grand coalition solution to government would bring the merit that those pesky small parties on the left and right, and in the west and north, are not able to bring their nefarious negotiating skills to the table. Remember — the United Kingdom runs a first-past-the-post voting system; it does not have proportional representation, and there is no 5 percent vote threshold for small parties. And some of those are single-agenda or single-nation independence parties that may gain only a few seats but would be sure to exact a high price in any power-sharing or minority government–support arrangement.

The markets are not liking the uncertainty that the prospect of a hung Parliament and lengthy coalition discussions brings. The British pound has come under pressure in the foreign exchange markets, though not as much as the euro. The FTSE 100 Index may have hit a record high recently, but how much higher could it be if there weren’t this uncertainty? British government bond yields are holding steady for now, but it is unclear what may happen. U.K. property markets, with an enticing yield premium, remain attractive.

The United Kingdom, with its national debt and budget deficit at continuing high levels, could remain a thorn in the side of the European flesh. It’s a bit like the exasperated Mother Abbess in The Sound of Music: “How do you solve a problem like Maria?”

What does all this mean for Europe? Europe has problems, we know, but we don’t know whether the main problem facing Europe at present is Greece, Russia/Ukraine or the United Kingdom. We have an idea — especially in a period where Greece’s continuing reluctance to knuckle down to what its creditors want the country to do is once again rattling the world’s financial markets — but, until we know the outcome of the U.K. election, we can’t know.

We don’t know yet if an in-out referendum in the United Kingdom on continued membership of the European Union — as promised by the Conservatives — is a realistic prospect, let alone what the answer would be.

We don’t know whether Europe, inside and outside the European Union, will breathe a collective sigh of relief that the United Kingdom problem is “solved,” if the Conservatives fail to win outright, or give another gasp of anguish when the pain is prolonged, if they do.

What does all this mean for European real estate markets? We don’t know that, either.

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

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

Blackstone acquires GE Assets for $23b; so what?

By the time the GE/Blackstone transaction was announced April 10, there was such a great deal of prognostication about it you’d think “the end is nigh.”

And this raises the question, “Why?” Why is the GE deal a harbinger of the apocalypse? Are the assets overvalued, or is the underlying premise for the acquisition flawed? Is money too cheap, or is Blackstone too big?

At the moment, nobody knows for sure, and only Blackstone and its investors will ultimately know the answer when and if the returns come in. The real question is: Why are there so many questions at this point? The appearance of this type of reaction seems to be a form of post-GFC PTSD.

It seems as if almost every deal of a certain size seems to grab headlines and analysis, such as Hilton (owned by Blackstone) selling the Waldorf-Astoria Hotel for $1.95 billion to a Chinese insurance company. Uh-oh, overpaying by foreign investors and yields being compressed can only mean one thing: “It’s 2007 all over again,” and we all better get ready for the precipitous fall.

Really? Maybe GE made a good deal after getting pretty burned by the crisis and felt that this was a good time to recoup and get back to basics. (That’s what its CEO, Jeffrey Immelt, said in a statement about the sale.) Maybe Blackstone sees there is still a lot of runway left in this cycle and put its capital where its mouth is.

In reality, big deals are being done, and they seem expensive based on current history. However, terms such as “overheated” and “frothy” have yet to make their way into this cycle yet.

Remember, someone will ultimately be “right” when the market faces a real downturn because they’ll tell you so. “Remember, I told you there would be a major correction,” they will say — and yes, they would be “right.”

But how far ahead of the cycle is the question, not the answer.

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

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

Walk to me

Walking to Higher Value, a new report from Real Capital Analytics, demonstrates the importance of walkability — a property’s location to nearby amenities — in asset appreciation. Launched April 15, the RCA & Walk Score Commercial Property Price Indices quantify the price value of walkability for commercial real estate across U.S. property types through four indices: highly walkable CBD, highly walkable suburban, somewhat walkable suburban and car-dependant suburban.

According to the RCA report, highly walkable urban and suburban locations demonstrated a trend toward significantly greater commercial property price appreciation than car-dependent areas, not only in large and small markets but across the office, retail and apartment sectors:

“The findings support growing evidence that demographic changes and tenant preferences are shifting back to urban locations, but they also underscore that the trend is not solely urbanization. Even in the suburbs, dynamic live/work/play environments, which are associated with high walk scores, also have superior price trends. Thus, large mixed-use developments may become more common and sought after in the future.”

Of CBD locations, the highest walkability premiums are in the six major metros of New York City; Boston; Washington, D.C.; Chicago; San Francisco; and Los Angeles.

So investors’ quest for property value appreciation is alive and well in commercial real estate markets, putting the live, work, play phenomenon to the test in their search for the best assets to buy and sell — hopefully at a profit.

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

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

Commodities continue to struggle

We know that financial markets and sectors are cyclical by nature. Often their gyrations are tied to economic conditions, demographic trends or geopolitical forces. So you would think that after four years of declines, maybe commodities would reverse their fortunes in 2015. But, if the first three months of the year are any indication, don’t hold your breath.

During the first quarter, oversupply conditions and the continued strength of the U.S. dollar depressed prices for many raw materials. As the theory goes, since most raw materials are denominated in dollars, a strengthening U.S. currency makes commodities more expensive, resulting in lower demand.

Iron ore (–25.0 percent), lean hogs (–23.1 percent), coffee (–20.2 percent), sugar (–17.8 percent) and nickel (–17.2 percent) were among the big losers. There were few winners; gasoline (20.3 percent), silver (6.4 percent) and cotton (4.7 percent) were the quarter’s top performers.

The prices for base metals — aluminum, copper, lead, nickel, tin and zinc — all moved lower during the first quarter. Prices on the London Metal Exchange were down an average of 7.63 percent during the first three months of 2015. Earlier this year, Morgan Stanley lowered its price forecasts for nearly all base metals due to headwinds caused by the robust dollar and slowing economic growth in China, which continue to adversely affect demand.

However, maybe things aren’t so bleak.

In early April, Mark Mobius, executive chairman at Templeton Emerging Markets Group, when asked about his top conviction call, stated in a CNBC interview, “Right now, it’s commodities, believe it or not. They are so far out of favor.”

Mobius explained, “Of course, we’ve had a slump recently, but global economic growth continues. This is just temporary.”

Will commodities bounce back in the second quarter or even in the coming year? Only time will tell. But in the meantime, keep a close watch on the dollar, as it will continue to influence the fortunes of most commodities in the near term.

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

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

Investment in Europe is going up

Commercial real estate investment volume across Europe reached an estimated €45 billion ($49 billion) during first quarter 2015, according to research from DTZ. This is a 22 percent increase compared with first quarter 2014, which saw European transaction activity of €36.8 billion ($40 billion).

Nigel Almond, head of capital markets research at DTZ, said in a statement:

“The positive momentum in the market has continued into 2015. Investment continues to be driven by strong activity in the core markets of the United Kingdom, Germany and France. The positive momentum has also been maintained in the periphery, with volumes up in both Italy and Spain, [and] with positive developments in the Czech Republic and Baltic States.”

All property sectors have seen large acquisitions. In Germany, a two-property Berlin apartment portfolio totaling 5,750 units was acquired by ADo Properties, which paid €375 million ($419 million) to Deutsche Wohnen AG.

In the Baltic States, the largest single-asset transaction ever in Finland occurred. A Finnish consortium comprising Ilmarinen Mutual Pension Insurance Co., LocalTapiola and OP-Pohjola Group has purchased a 60 percent interest in a retail development in Finland from SRV. The total value of the shopping center and parking facility investment is €480 million ($524 million).

In Italy, the Abu Dhabi Investment Authority, Hines and GIC purchased the Unicredit-Piazza Cordusio office for €320 million ($358.3 million) from IDeA FIMIT sgr.

And in Spain, another growing transaction market, the Orion Capital sold the Centro Comercial Plenilunio to Klépierre for €375 million ($419.8 million).

Magali Marton, head of EMEA research at DTZ, added:

“We remain confident of the outlook for Europe’s markets during 2015. The weight of money chasing commercial real estate remains strong and supported by good relative pricing and a growing number of opportunities coming to the market. Based on first quarter performance, we expect volumes to grow by 20 percent more than the year to reach €225 billion ($tk billion) in 2015.”

Other recent IREN headlines of high-priced European transactions include:

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

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

The next step

As Institutional Real Estate, Inc., continues to grow and expand, that growth continues in all aspects of IREI life.

Back in August 2013, I presented IREI blog readers with the great news that IREI had launched a video component to its news reporting, with interviews with everyone from bestselling authors to industry professionals discussing industry trends and issues.

Jump to June 2014, when the IREI video segments continued its roll of short interviews, but added on longer, one-on-one interviews with industry professionals.

Now on to the exciting announcement that once more we are adding to our video family and adding sit-down one-on-one videos with some of the top CEOs and industry leaders in the country. These interviews will be shot in different cities around the United States and will feature these industry professionals discussing their firms and the markets in which they are involved.

We started filming in Manhattan with our senior vice president Jonathan Schein, and IREI readers should keep an eye out in the coming months for these exciting and informative videos.

Coming soon, from our studio in New York City, IREI presents:

Robert Bellinger, ASB

Robert Bellinger, president and CEO, ASB Real Estate Investments

Stuart Boesky, Pembrook

Stuart Boesky, CEO, The Pembrook Group

Steve Furnary, Clarion Partners

Steve Furnary, chairman and CEO, Clarion Partners

Tom Garbutt, TIAA-CREF Asset Management

Tom Garbutt, managing director, TIAA-CREF Asset Management

Andrew Smith, Aberdeen Asset Management

Andrew Smith, COO – Americas, Aberdeen Asset Management

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

DenisewebfinalDenise DeChaine is special projects editor and video production editor with Institutional Real Estate, Inc.

The rise of EB-5 visas

An EB-5 visa is awarded to non-U.S. residents who invest in a U.S. business in exchange for permanent residency. According to a recent Insights report from Savills Studley, investment in commercial real estate is a popular option for those looking to secure an EB-5 visa, as property investing can often meet the necessary investment and job creation criteria.

According to Savills Studley, commercial real estate projects that have received EB-5 funding include the Hudson Yards and Atlantic Yards projects in New York City and the Navy Yard redevelopment in Philadelphia.

In recent years, the number of EB-5 visas has increased dramatically, from 1,443 in 2008 to 10,692 in 2014. And investors from China have become a greater portion of those receiving EB-5 visas, increasing from 25 percent of total issuance in 2008 to 85 percent of total issuance in 2014.

And, while the program has clear benefits for foreign investors and commercial real estate developers, it is not free of political wrangling. A recent Politico report notes:

“Experts in the EB-5 program say it’s become common for former politicians, their relatives and other celebrities to trade on their names, because foreign investors — especially those from cultures like China in which business and politics are deeply intertwined — believe that such contacts are vital to getting business done.”

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

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

The lessons of Islamic financing

Admit it. Some of you are thinking: Isn’t “Islamic financing” an oxymoron? Doesn’t Islamic religious doctrine forbid debt financing?

The answers are “no” and “no.” Though the Koran does forbid charging interest, there is more than one way to make lending money a remunerative activity — so much so that Islamic finance has grown into a trillion-dollar industry. There is so much money in sukuk (a bond-like fixed-income product) that it is issued by governments in Britain, Hong Kong, Luxembourg and South Africa, in addition to governments in Muslim countries. Private sector financiers are also involved.

A good deal of light has been shed on the subject by Harris Irfan, author of a new book titled Heaven’s Bankers. Irfan headed Islamic finance teams at Barclays and Deutsche Bank, and now he runs his own Islamic finance advisory group. He points out, for example, that the prophet Muhammad and his first wife, Khadijah, were successful traders.

Not only is financing and debt permissible in Islamic culture, there is some evidence that in recent years Islamic financing has outperformed Western financing, according to Irfan.

Also interesting is that Islamic financing is required to adhere to certain principles that Western societies would do well to embrace. For example, Islam forbids the making of money from money. In other words, money must be earned from a tangible or real asset, not from the esoteric smoke-and-mirrors shell games we see Wall Street playing with such glee and reckless abandon.

“Many of these transactions are socially useless,” Irfan said during a recent radio interview.

In that regard, Islamic finance is about the real economy, about people who actually make things or provide genuine services. It is not about people who confect derivatives and other complex and useless forms of salt-water taffy that have zero nutritional value for a national economy.

Islam also requires financing result in a real economic benefit to the economy and society. And risk is supposed to be shared by all parties engaged in the transaction.

My intent is not to promote the Islamic faith, of which I am not a member, but the principle that financial institutions can do well by doing good. And, at the same time, help safeguard our economy against the kind of calamities that derivatives and other monetary shell games can instigate.

Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.

MikeCfinalwebMike Consol is editor of Real Assets Adviser.