From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for October 2012

European Real Estate Funding Gap

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Property Investor Europe sent me a report today about the shortfall in real estate funding in Europe.  The implications are a bit nerve wracking.

First, some background — European commercial real estate investors place significantly more emphasis on “traditional” bank lending than Americans. As such, the sort of private-debt network that exists in the U.S. has not grown in Europe.

According to a report by the research firm Swisslake, central bank liquidity flows gave been directed at small and diversified loans, which are in high demand.  However, commercial lending in Europe is actually facing cuts of €500 Billion or so.  In addition, banks are increasing equity requirements, leaving real estate with large financing gaps, Swisslake calculates that only about $3.8 Billion headed towards Europe in the last year from non-bank lenders.

However, this is creating a market opportunity for private debt funds.   Reportedly, 30 new funds have been launched in 2012, adding to the 20 new funds created in 2011.  These funds have increased their market share to 20%, up from 15% at the beginning of 2012.  Intriguingly, many former equity fund managers are now shifting to private debt funding.

Written by johnkilpatrick

October 19, 2012 at 11:29 am

Economic outlook — fundamentals and shocks

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I love boating, I really do.  To quote from Grahame’s famous The Wind in the Willow, “…there is NOTHING–absolute nothing–half so much worth doing as simply messing about in boats.”  However, any experienced sailor has had one of those days when the water was perfect, the wind was with you, but off on the horizon a storm cloud lurked.  “Will it head our way, or pass us by?” is the key to whether the fun cruise continues or not.

Today, and for the next few weeks, the economy is like that.  The wind is definitely at our backs, and things are generally looking up.  That having been said, the fiscal cliff continues to loom on the not-too-distant horizon.

First, the good news, and there’s plenty of it.  I’m on the Board of an investment fund (and in fact just got named chairman of the board this month, for a two-year stint).  We had a great briefing yesterday from our lead fund manager, and macroeconomic news was as good as I’ve seen it in a while.  Corporate profits are at near-record levels as a percentage of GDP, and non-financial interest expense as a percentage of profits is at a near-record low.  Lending is back up, although corporate lending isn’t quite as robust as consumer lending,  and current stock market price-earnings ratios (measured on a 12-month trailing basis) are at levels usually associated with strong intermediate-term (5-year) market returns.  Equity risk premia tell the same story.

On the real estate side, everyone’s seen the news that the S&P Case Shiller index is trending back up, and this morning’s news report puts current housing starts above an 800,000 annualized level (note that we’re hoping for a million, and at the trough of the recession we were at a record low 300,000-ish).  Manufacturing has added about a half-million jobs since the trough of the recession (early 2010), and is about 300,000 above where it stood in July, 2009.

The implications for real estate investment are clear, and as I reported earlier this week, the total return on U.S. REITs has exceeded 30% in the past year, besting the S&P 500.

With that in mind, though, the fiscal cliff continues to trouble us all.  If you’re not familiar, on January 1, the Bush Tax Cuts will expire and mandated federal spending cuts are scheduled.  Together, these two will hit the economy to the tune of about 4% of GDP (yes, driving us into a second recession).  Sadly, the solution is political, and this is all coming at a time when Congress and the White House are totally focused on the impending election.

We’ll keep you posted, and we’re preparing some private white papers on this subject for our clients as the season moves forward.

Written by johnkilpatrick

October 17, 2012 at 8:51 am

REITs — good news trumps “iffy” news

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The “headline” in Erika Morphy’s piece in GlobeSt.Com this morning was that was that REITs underperformed the S&P 500 for August and September.  Specifically, REITs were up 1.85% in the 3rd quarter this year, compared to 6.35% for the S&P 500.  You have to dig a little deeper to get to the heart of the matter, though.

First, let’s remember that investors by-and-large buy REITs as an income vehicle with equity up-side.  The current average REIT yield is 3.88% — not bad, compared to corporate bonds or preferred stocks, and more targeted income seekers can go after single tenant retail with a yield of 5.9%.  (For a great review of this, see a piece by Brad Thomas in from September 10).  Couple those sorts of dividend yields with any upside equity potential, and you have a real investment powerhouse in today’s market.  For comparison, the current yield on the S&P 500 is 1.97%.

But, the news gets better.  For the 12-months ending September 30, the NAREIT index was up 33.81%, compared to 30.2% for the S&P.  Do the math — the total return for a portfolio of REIT shares for the past year would have been (33.81% + 3.88% = ) 37.69%.  The total yield for the S&P 500 would have been (30.2% + 1.97% = ) 32.17%.  Thus, slightly more than a 500 basis point return advantage to REITs.

Of course, (and this goes without saying), past performance doesn’t translate into future returns…..

Written by johnkilpatrick

October 15, 2012 at 9:46 am

Comments to the Appraisal Foundation Strategic Plan

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Appraisal standards and licensure qualification in the U.S. are promulgated by the Appraisal Foundation in Washington, D.C., a private organization which receives oversight from the Congressionally-established, inter-agency Appraisal Subcommittee.

This summer the Foundation issued a request for comments on a sweeping update to their strategic plan.  I, along with many others, have submitted comments to the proposed updates, and my comments will soon be published on the Foundation’s website.  I’m also presenting my comments here, verbatim, for discussion and input from colleagues and friends (see below).


Comments to Appraisal Foundation Strategic Plan

Written by johnkilpatrick

October 12, 2012 at 8:54 am

Posted in Real Estate, Valuation

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Rays of sunshine

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Fall isn’t usually the time we talk about rays of sunshine, particularly not here in Seattle where we all “hunker down” this time of year for the long, dark, wet winter.  Plus, I just came back from three weeks on the road (nine hotels, 4 time zones, two rental cars with a combined 2,000 miles, and four plane flights).  One of the first things to hit my in-box was the periodic Real Estate Investment SmartBrief from the National Association of Real Estate Investment Trusts with the headline “Hopes for U.S. Rebound Fade as Global Trade Slips”.  Sigh….. not a really nice headline, eh?

Now, I have the greatest respect for NAREIT, and out of fairness, they lifted this story from the Wall Street Journal.  Nonetheless, when the market opened this morning, it actually darted into positive territory, with the S&P hovering above 1450 as I write this.  (I hope I don’t jinx it!).  Of course, the stock market has risen for the past three Octobers, and in fact the market had a significant rally in September — a rarity for a month that’s usually fairly flat — with the S&P gaining almost 3% and the Dow picking up about 2% during the month.  The “rally” this morning was triggered by two things.  First, the ISM report (Institute for Supply Management) came out in positive territory for the first time in four months, confounding analysts who thought it was continuing downward.  Second, this caused the short-sellers, who have banking on a negative October, to re-think their positions.  Hence, the really great bounce this morning was, in no small part, a lot of short-covering.

No question about it — a shrinkage in global trade is an unsettling thing, for three big reasons.  First, it signals that the net importer regions (particularly Europe) are continuing in the doldrums.  Second, healthy economies which are heavily trade based (such as the U.S.) depend on trade to stimulate GDP growth.  Finally, China is the world’s biggest manufacturing floor right now, and depends on trade to provide full-employment — nothing frightens Chinese officials more than unhappy workers with no jobs.  Thus, from both an economic perspective as well as a geopolitical perspective, a shrinkage in trade — or even a shrinkage in the growth of trade — is a bad thing.

Notably, also, while manufacturing is only 20% of the U.S. economy, it is 40% of the profits of the S&P 500.  Pundits are already noting that the ISM report is just one data point, but it’s a very important one.  In the next few days, we’ll see if the good news from ISM is sustained by other sectors of the economy.



Written by johnkilpatrick

October 1, 2012 at 9:10 am

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