More than just London

There is only one London, which is a premiere investor destination as one of the leading global gateway cities of the world and a financial and trade capital of Europe. It has a host of attractive attributes, such as a diverse economy, highly educated and skilled workforce, rule of law, transparency, large supply of institutional-grade buildings, liquidity, etc.

However, given London’s lofty valuations, low cap rates, and an expensive and tight housing market, is it time to consider other major cities inside the United Kingdom? A number of U.K. regional cities, such as Birmingham, could offer pockets of opportunities.

As cities go, Birmingham has a lot going for it these days. Earlier this year, ULI and PwC’s Emerging Trends in Real Estate Europe 2015 report, created a list of top 10 most attractive European cities to invest in and London placed 10th and Birmingham ending up placing ahead at number 6 which is up from 14th in ULI’s 2014 review. Click here to see the full rankings.

One of the engines of this transformation was the Paradise project. It is a part of the city formally known as Paradise Circus located in the city center between Chamberlain and Centenary Squares. The redevelopment area will comprise some 7 hectares — roughly 17 acres.

This is a major £500 million ($780 million) mixed-use redevelopment project that runs from 2015 to 2025. The funding is from a partnership led by the Argent Group, which is handling the development aspects, along with the Birmingham City Council and BT Pension Scheme, managed by Hermes Real Estate. To see how it’s developing, visit the project website here.

The momentum for the city just keeps building. As noted in the Birmingham Post: “Major deals like the new HSBC [office building] at Arena Central saw 650,000 square feet of office let in the first half of this year — the equivalent of eight and a half football pitches. … This year is set to be one where Birmingham returns to — and exceeds — pre-recession levels in terms of office lets.”

Looks like there’s more room to run in the Birmingham market, and investors have been active in the market. For example, recently, Legal & General Property bought the Birmingham headquarters of bar and restaurant operator Mitchells & Butlers and an associated hotel from LaSalle Investment Management for £69.5 million ($180 million).

If Birmingham is not on your U.K. investment radar, perhaps it is time to give it a look.

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

The funding gap

It’s no secret pension systems have been facing hefty funding gaps for many years, with more and more pension funds moving to defined contribution plans from defined benefit plans to help deal with deficits. But there is a modicum of good news to help minimize the bad.

The bad news:

Pension benefits at U.S. state-run retirement systems were underfunded by $968 billion in 2013, an increase of $54 billion from 2012, according to a new report from The Pew Charitable Trusts. The report looks at data from 238 public-sector retirement plans across the country for the most recent year full data was available, 2013.

The good news:

Examining 2013 means recent strong investment returns are not fully reflected in the report. Furthermore, because historic data from state retirement plans tends to track investment gains and losses over time, losses from 2008’s global financial crisis are still included, making the amount of unfunded liabilities appear even larger. Even better, preliminary 2014 data suggests unfunded liabilities have been reduced in the majority of states, and a number of states have benefited from reforms implemented since the global financial crisis.

The bottom line:

While pension reform and investment gains have put a needed dent in overall unfunded liability, state pension debt is likely to remain above $900 billion — and above $1 trillion when local pension system debt is added to the mix. Improved investment returns alone will not reduce the funding gap enough in the long run. Instead, funding policies are needed that will allow these retirement systems to keep abreast of pension debt and pay it down.

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

A matter of grammar

How well does your investment perform?

Recently, The Wall Street Journal and the automated proofreading company Grammarly conducted a survey of baseball fan bases and their grammar, spelling and punctuation as it appears in the signs and banners brought to their respective stadiums. It turns out that New York City, home of my beloved Mets and that other team, ranks number one and number five, respectively, as the site of the fans with the worst grammar.

In other words: one of the world’s most important financial, cultural and investment markets is inhabited by a populace that doesn’t seem to have a grasp on basic grammar. On the other hand, the city that ranks number one with the best grammar is Cleveland, home of the Indians. And Cleveland hasn’t really been on many institutional investors’ “short list” for commercial real estate investment.

Here is how some of the United States’ global gateway cities rate:

Worst to best (out of 30 cities)
New York Mets #1
New York Yankees #5
Boston Red Sox #11
Los Angeles Dodgers #16
San Francisco Giants #17
Dallas (Texas) Rangers #18
Washington Nationals #21

The real question is whether there is a correlation between a city’s overall ability to put together a readable sentence and the overall return on investment in that market. It does not seem to be the case.

New York City remains one of the hottest investment markets globally and probably will continue to do so for the foreseeable future. And so are the other first-tier cities attracting the majority of investment capital. Even Washington, D.C. — our nation’s capital and the city with the highest percentage of adults with a bachelor’s degree or higher — ranks at the bottom of the top 10, which is also a sign that literacy has absolutely nothing to do with investment performance at this point in the economic cycle. If this were the case, then Cleveland, Milwaukee and Cincinnati would be among the hottest markets.

To be fair, this is an unscientific approach to analyzing investment rationale. I doubt there are any pitch books that say, “When considering an investment, one important criteria we analyze is the market’s overall grammar. If its relative score is low, we’re all in.”

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

Real Estate 101

What is real estate? What does it entail? Who is involved? What are investing risks?

All of these questions and more can be answered in the new Institutional Real Estate, Inc. educational video series: Real Estate 101.

Presented by Glenn Mueller, real estate investment strategist at Dividend Capital and professor of the Burns School of Real Estate at the University of Denver, this six-part video series is designed for newcomers to the real estate asset class who want to gain a thorough understanding of its role in a multi-asset portfolio, as well as property fundamentals, investing, capital markets and portfolio management.

In addition, the series is an excellent refresher course for those industry veterans looking to sharpen their real estate knowledge and skills just a tad bit more.

To view this educational series, click here.

Screen Shot Real Estate 101

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

A window of opportunity to convert brown buildings into green

A recent article in The Institutional Real Estate Letter – Americas by Robert Johnson Jr., president of Johnson Independent Advisors and managing director of PACE Equity, highlights how and why green investment adds to a property owner’s bottom line and illustrates one compelling financing option in today’s market for property owners.

Green is no longer a fuzzy, feel-good value and service. Now it’s just plain, good business because it often leads to higher rents, lower tenant turnover, higher NOI and greater valuations. A study, The Economics of Green Building, found Energy Star or LEED-certified buildings command effective rental rate premiums of 8 percent (net of concessions) and sales price premiums of 13 percent. Plus, more and more institutional investors are adding ESG mandates to their investment programs, which will only help make green buildings even more liquid going forward. Clearly, green adds to the bottom line.

Now you can help the world and help yourself at the same time. How can you do this? As detailed in the article, one avenue available to building owners today is property assessed clean energy, or PACE. It is a new way to finance energy savings that works like a special assessment district bond where all the uses and benefits are for one specific property. It covers 100 percent of the project costs, the funding amortizes to term and never accelerates. The lending rates typically range from 5 percent to 7 percent.

PACE programs are accessible and growing. Currently, 31 states have passed PACE-enabling legislation, and 12 states and Washington, D.C., currently have active PACE programs. The programs are designed for property owners, which get to keep all the financing benefits of PACE: energy savings, tax credits and rebates. And the programs do not require corporate financial statements or guarantees.

Financing terms will be revised in 2017; learn more about PACE before this window of opportunity closes.

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

To boost real estate values, and economies, just add water

There are 45 landlocked countries in the world, and almost all of them are poor.

Yes, rich and largely landlocked Germany specializes in high-value manufacturing and has friendly euro zone neighbors who would never consider denying German exports unfettered access to shipping ports. And landlocked Switzerland prospers by specializing in finance, which has become an entirely digital, cloud-based business that travels the globe at speeds air, land and sea transporters could not even begin to fathom.

But these are exceptions. It is quite an irony that land is most valuable when it runs into the sea and, to a lesser extent, other water bodies. We gather on the beaches, on the coastlines, along navigable rivers and great lakes. We prosper as a result. Coastal countries of similar geography and composition with landlocked neighbors generate a GDP that is, on average, 40 percent higher, according to the Human Development Index.

The Economist has reported on the topic and had this to say: Landlocked countries’ “most obvious handicap is in moving goods to and from ports. International treaties promise access to the oceans, but responsibility for implementing them lies with the governments of the ‘transit states.’ They have little incentive to build infrastructure that would mainly help their neighbors.”

There are also the historical deficits endured by landlocked countries. Long before mass communication systems were invented, the flow of people and ideas that propelled innovation in maritime countries were slow to reach landlocked countries, if they reached them at all.

Even within U.S. borders, powerhouse state economies are found in California, Florida, New York and Texas, which have vast access to the sea, while low GSP (gross state product) states such as the Dakotas, Montana, Wyoming are basically waterless. (It should be noted, though, that some of the smallest GSPs belong to states with significant coastal access, including Alaska, Hawaii, Maine and Rhode Island.)

Also take into account the research of Peter Zeihan, author of The Accidental Superpower, which places enormous emphasis on the importance on the land/water combination. He argues that the United States is the world’s largest economy because its land mass is gushing with navigable rivers. Transporting goods by water is 12 times cheaper than by land, helping explain why human civilizations have always flourished along rivers. The United States has more miles of navigable waterways (17,600) than any other country. China and Germany each have about 2,000 miles of rivers suitable for shipping, and the entire Arab world has only 120 miles.

Clearly, dehydration tends to be bad for one’s economic health.

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MikeCfinalwebMike Consol is editor of Real Assets Adviser.

They did it

Or did they?

Greece or Iran? It doesn’t matter; they still did it. Or did they?

Tortuous multilateral negotiations between countries, regional groups and global institutions are like that. You wait for ages and then two come along at once, possibly. The week beginning Monday, July 13, 2015, could go down as the week when the world became a safer place, economically and strategically.

The agreement on July 13 between the euro zone’s 19 members on the terms of a third bailout for Greece will, if the Greek parliament can do the necessary and pass the required legislation in three days, restore stability to Europe, albeit at the cost of this latest bailout, some €85 billion ($94 billion), and of newly opened wounds in the most important European relationship — that between France and Germany.

Details are still emerging, but it seems that the overnight discussions were fractious, and not just between Greece and the other euro zone members. Time will tell what will happen, and it could all unravel if the Greek parliament cuts up rough or if other euro zone parliaments fail to approve the deal. It was close, apparently; consensus Europe nearly got a conviction — Grexit, the exit of Greece from the euro zone — that would have fundamentally changed the political and socioeconomic fabric of the continent. Grexit is still not off the table. And the lot of the Greek people is still parlous.

An agreement between Iran and the world’s leading nations on limiting Iran’s nuclear ambitions — thought to be imminent — would also have profound implications for world security, particularly in the volatile Middle East. It is another negotiation where the issue of trust has come to the fore. Given the history of Iranian denial on intentions and of subterfuge on centrifuges, can Iran be trusted to actually implement what will be agreed? Will it stick to the terms of the agreement? Will it allow international monitoring? Again, time will tell what will happen.

Winston Churchill once said that “to jaw-jaw is always better than to war-war.” That works better when you trust the people that you are jaw-jawing with.

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

Assumptions challenged

A few weeks ago, I was in Toronto for our eighth annual I3 Editorial Advisory Board meeting, where the board discussed the challenges and opportunities in global infrastructure investing for institutional investors.

As usual, the discussions were engrossing, and that is in large part thanks to the broad range of people who sit on the I3 board — geographically, the board comprises members from Europe, the United States, Canada and Australia, and whose mandates take them into all corners of the globe to invest in infrastructure. The board also has perspectives from public and corporate pension plan sponsors, insurance company investors, foundations, sovereign wealth funds, placement agents, investment managers, and investment consultants.

This range of participants makes for insightful discussions, and perhaps one of the most interesting point that I heard was about governments and their interest or disinterest in working with institutional investors to invest in infrastructure.

The point was made during a discussion about the current regulatory environment and whether it was business as usual or something different. Many in the room challenged assumptions about developed and developing markets and which carry the greatest political and regulatory risks.

With the situation in Greece providing a string of unexpected decisions, the discussion was apropos — and perhaps a foreshadowing of some of what is taking place now in global investment markets.

The point one of our board members made was that it seems that more of the governments that have traditionally been open to private investment capital in infrastructure — typically developed, OECD markets — are increasingly not concerned about making decisions that would scare off this investment. For example, these governments are restricting and/or cutting tariff increases much more than investors had expected.

On the other hand, it seemed to this board member, that developing countries — where much of the concern about political and regulatory risk is typically focused — can in some cases be much more willing to make decisions that would satisfy and encourage private investment in infrastructure.

It is interesting and contrarian viewpoints like this that make our annual Editorial Advisory Board meetings insightful and valuable. I will be writing more about the discussions at our board meeting and conference for the upcoming July/August issue of Institutional Investing in Infrastructure, which publishes Aug. 5.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.

IREN publishes 107 stories in June

We are now halfway through the year, and IREN is continuing to grow its coverage and achieve global status in the institutional real estate sector. 2015 will be a year of even more news stories and exclusive industry coverage, surpassing the number of stories posted in the past two years.

The total number of original news stories posted to the IREI NewsCloud so far this year is 506, compared with the first half of 2014’s total of 465 original news stories. In the full year, 2014 saw 937 original stories on the IREI NewsCloud.

In June, IREN published 107 stories. Some Americas headlines include:

Some Asia Pacific headlines include:

Some European headlines include:

Remember to sign up for our free newsfeeds to get daily original news and more coverage of the global real estate investment industry.

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

Life lessons

karate-kidMr. Miyagi: “Man who catch fly with chopsticks accomplish anything.”
Daniel: “Ever catch one?”
Mr. Miyagi: “Not yet.”

The Karate Kid is a classic movie, vintage 1984. Old Mr. Miyagi promises to teach karate to young Daniel-san. But during the first few days, Mr. Miyagi has Daniel busy sanding his decks, washing and waxing his cars, and painting his house and fence.

Along the way, Daniel (played by actor Ralph Macchio) does learn karate and a few life lessons as well.

Back in 1984, I was a twenty-something and well established on my chosen career path. Now, as both Ralph Macchio and I zip through our fifties, I know that I sometimes think, “Oh, to be young again!”

However, I quickly catch myself and respond, “Um, no thanks!”

Being young ain’t what it used to be. For example, do millions of twenty-somethings really want to live with their parents? Do recent college graduates really want to be working as a barista at Starbucks? Life is more complicated for today’s young adults. Unlike some previous generations, young adults today often have no “clear path”; many are “muddling through” to find their way. Unemployment, underemployment and heavy student loan debt are only a few of their challenges.

However, there is hope.

The U.S. economy appears to be picking up steam after a sluggish first quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.9 percent in May, the largest gain since August 2009, according to the Commerce Department.

“The labor market is tight, wages and incomes are rising solidly, so we should expect consumers to help lead the economy forward,” stated Joel Naroff, chief economist at Naroff Economic Advisors, in a recent Reuters article.

With the unemployment rate shrinking from 7.6 percent two years ago to 5.5 percent currently, accelerating economic growth should lead to more jobs and, eventually, much-needed wage growth, which should help currently underemployed young adults and recent college graduates. With improved financial outlooks, they will leave the nest, boosting demand for housing.

“At some point, these twenty- and thirty-somethings are going to start climbing back out of the basement,” noted Jordan Weissmann, senior business and economics correspondent at Slate magazine. “And when they do, it will be a boost to the economy. Right now, the U.S. household formation rate … is incredibly low. When it speeds up, you’ll see more demand for housing, and the things that come along with it, like appliances, furniture, televisions and so forth.”

Good news for the millennial generation? Let’s hope so. But as we know, life’s a journey, every mile counts in reaching your final destination.

Daniel: “You’re supposed to teach and I’m supposed to learn! For four days I’ve been bustin’ my ass, and I haven’t learned a goddam thing!”
Mr. Miyagi: “You learn plenty.”

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