June 30, 2016

Growth in income lags very far behind rises in rent

Posted in Integrale Advisors LLC, Keith Knutsson, Real Estate tagged , , at 12:15 pm by Keith Knutsson

If you haven’t heard, it’s not easy for renters these days. But the complaints are not an exaggeration.

Examining census data from 1960 to present day, a new report has illustrated the drastic — but very real — drop in housing affordability nationwide.

Though median rents have increased by 64 percent between 1960 and 2014, median household incomes grew by only 18 percent in the same time, according to an analysis by rental listing website Apartment List cited by the Wall Street Journal.

And unless something major happens, the trajectory will continue.

Renters had the worst of it between 2000 and 2010, according to the Journal — thanks in part to a recession and then a housing bust, inflation-adjusted household incomes fell by 9 percent while rents increased by 18 percent during that period.

Economic crises notwithstanding, reasons for today’s challenging housing situation include land-use restrictions, rising construction costs and disproportional migration trends, in which more people are moving to already-expensive cities like New York and San Francisco. Whereas globalization has driven down the cost of other products, housing still relies on domestic resources, according to the Journal.

Predictably, Apartment List cites the worst cities for renters as San Francisco, New York City, Boston and Washington D.C. There are, however, cost-effective options. For instance, in Austin, income growth has matched that of rent in recent years. And not all renters are flailing.

A report by property management software maker RealPage found that the trend of rising rents and diminishing housing supply has little negative impact on mid- and high-earning renters. It’s low-income households that suffer the most from the affordable housing crisis. [WSJ] — Cathaleen Chen

Source: http://therealdeal.com/2016/06/29/growth-in-income-lags-very-far-behind-rises-in-rent-report/

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June 28, 2016

How the UK’s exit benefits US REITs

Posted in Integrale Advisors LLC, Keith Knutsson, Real Estate tagged , , , , at 11:57 am by Keith Knutsson

They are considered safe, and they offer yield. No wonder the stocks of real estate investment trusts ran in the opposite direction of the Brexit-bashed U.S. stock market Friday.

Last fall, interest in REITs had begun to wane, as expectations of higher interest rates outweighed solid fundamentals in the real estate market. Now REITs, and the real estate underlying them, are the power play for the anxious investor.

“Anything that is going to drive the 10 year lower is a positive for REITs. Three-and-a-half percent dividend yield with 6 to 7 percent earnings growth is pretty darned attractive in this environment,” said Alexander Goldfarb, senior REIT analyst at Sandler O’Neill.

REITs will also benefit from rising commercial real estate values, as foreign investors continue to pour money into the U.S. office, retail and even apartment space. They had been doing that already, but Brexit will only accelerate the pace, especially of Chinese and Middle Eastern money entering the U.S. brick-and-mortar markets.

The continued flight to the safe harbor of American properties in gateway markets like New York and San Francisco reflects persistent economic and political instability in other parts of the world,” said Sam Chandan, founder and chief economist of Chandan Economics. “The U.K.’s decision to exit the European Union underscores the U.S. investment thesis and could trigger a new wave of foreign capital inflows to high-quality, well-located assets.”

New York City office space is already a favorite among foreign investors. Witness the high-profile sale of Manhattan’s former Sony Building to Saudi Arabia’s Olayan Group. The “Chippendale” tower reportedly sold for more than $1.4 billion, netting seller Joseph Chetrit a $300 million profit. New York hotels are also favored in foreign deals.

“Large institutional investors pay for New York, as they look at it more as a store of value. Growth is gravy,” said Goldfarb. “They’re looking to park capital. Foreigners, high net worth, really look to New York. If any sector is going to be the biggest beneficiary, it’s that.”

The kind of commercial real estate international buyers purchase really depends on where they’re coming from.

“The Chinese buyers tend to be very focused on office buildings in high-profile markets like New York and San Francisco,” said Rick Sharga, chief marketing officer of Ten-X, a real estate auction platform. “We do see a lot of multifamily and retail purchase activity by certain foreign buyers, and there are other parts of Asia where the buyers really specialize in hotels.”

As for U.S. REIT exposure overseas, there is not a lot. Prologis, a warehouse REIT, does have exposure in the U.K. and Europe, but, on the flip side, could benefit from a potential increase in imports into the U.S. Simon Property owns stakes in malls in Europe and outlets in Asia, but people are going to continue to go shopping, and the underlying fundamentals in most sectors appear solid.

“Broadly speaking, European logistics is in a good spot. There is a lot of demand. Office or retail, there is a very strong fundamental underlying dynamic. They are not negatively impacted by the U.K. Vacancy rates are significantly below long-term averages,” said Tom Mundy, director of research, EMEA at JLL.

REIT stocks did fall in early trading Monday, but not nearly as far as the S&P and Nasdaq. They continue to outperform broader markets.

Source: http://www.cnbc.com/2016/06/27/how-the-uks-exit-benefits-us-reits.html

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June 27, 2016

After the ‘Brexit’ vote, potential winners and loser in real estate

Posted in Integrale Advisors LLC, Keith Knutsson, Real Estate tagged , , , , at 5:13 am by Keith Knutsson

Brexit - Keith Knutsson

Even before news of a Brexit made its way around the world, high-end brokerages and developers throughout London were already getting inquiries on behalf of foreign buyers hoping to take advantage of the tumbling pound.

The significance of the British exit from the European Union was not lost on anyone. There was an immediate financial impact, as markets took a dive, and there will certainly be many more implications in the days and weeks to come.

Here is a look at some of the predicted winners and losers in the real-estate arena.

WINNERS:

Foreign buyers of London real estate will get increased value in purchasing properties as a result of a depreciating sterling. “This will now create a short-term buying opportunity for U.S. dollar- and euro- based property investors,” said Peter Wetherell, chief executive of Wetherell, a Mayfair-based broker. “For overseas buyers, this big and dramatic drop in the value of sterling will effectively offset the Stamp Duty and tax adjustments and it will make prime London property a lucrative investment for overseas investors bold enough to take a punt despite the market uncertainty.”

LOSERS:

London-based property buyers will face competition from foreign purchasers in addition to dealing with the uncertainty of their own local economy. “A fall in London house prices caused by a Brexit in the long [run] will not benefit many domestic buyers, for example, if a Brexit causes — as predicted by many — wide-ranging job losses and a general slowdown in the economy,” said Martin Bikhit, Managing Director of Marylebone estate agent Kay & Co.

An expanded version of this story was published on mansionglobal.com.

Source: http://www.marketwatch.com/story/after-the-brexit-vote-potential-winners-and-loser-in-real-estate-2016-06-26

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June 24, 2016

Kylie Jenner Is Selling Her Calabasas Mansion for $3.9M

Posted in Keith Knutsson, Real Estate at 9:10 am by Keith Knutsson

kylie-jenner

Snapchat addict and Instagram superstar Kylie Jenner is selling her Calabasas, CA, mansion only a year after she purchased it. The youngest of the Kardashian-Jenner clan, Jenner has been raking in dough from her new makeup line, the appropriately named Kylie Cosmetics. With her newfound income stream, she’s upgraded to a new place and is now ready to move on.

Did the young style icon decide that a five-bedroom mansion is too empty without Tyga? The makeup maven has bought a new home in Hidden Hills that is closer to mom Kris and sister Kim Kardashian. 

The gated estate features five bedrooms and 6.5 bathrooms, as well as two fireplaces, a movie room, and maid’s quarters. The home sits on a half-acre of land that includes a modern pool and spa within a private sanctuary.

Jenner purchased the starter home for $2.6 million in March 2015, but is now listing it for $3.9 million. We don’t know exactly what she renovated to account for a $1.3 million markup, but it must be something, right?? One thing is for sure: The skull wallpaper in one of the bathrooms is a hate-it-or-love-it addition.

That touch of Goth flair may come as no surprise to her 65 million Instagram followers, who are used to her infinite variety of black outfits, paired with black lipstick and often a black choker.

In contrast, the rest of the home is white and airy and feels quite open. Her living area is decorated by two beautiful chandeliers as well as a real fireplace. The walls are a crisp white, and the furniture makes us worry for any wine that goes near it.

Of course, we can’t forget about the kitchen, which boasts stainless-steel hardware, black wood, Viking appliances, and quartz countertops. And while most 18-year-olds have their mom cooking for them, Jenner has her chefs.

And how could a member of the Kardashian-Jenner clan survive without oversized closet space? Jenner’s home features a large walk-in-closet as well as a separate shoe and purse closet. Just imagine her Birkin and Hermès bags lining one row while her Louboutin, Brian Atwood, and Christian Dior shoes fill up the rest.

 

Young Ms. Jenner has had more experience with the California housing market than most adults, but where will she go from here? More importantly, who will buy her old home? And will they keep the wallpaper?

Source: http://www.realtor.com/news/celebrity-real-estate/kylie-jenner-selling-calabasas-home/

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June 23, 2016

Desperate Sellers Resort To Dramatic Price Cuts In Manhattan’s Luxury Real Estate Market

Posted in Keith Knutsson, Real Estate at 11:25 am by Keith Knutsson

We have been covering the bursting of the Manhattan luxury real estate bubble for quite some time now (here, here, and here). Most recently we noted that REIT Equity Residential slashed its full year guidance due to the fact that a supply glut was causing the firm to give considerable concessions in order to secure tenants in Manhattan. On the earnings call, COO David Santee even said “There’s some crazy stuff going on in New York.”

We are now seeing more evidence that the only way luxury homes are moving on the island is if the seller offers dramatic price cuts. As Mansion Global reports, according to Olshan Realty’s weekly snapshot of Manhattan’s luxury market, 35 luxury Manhattan homes changed hands last week (the highest number of contracts this year for homes $4 million and above), which was up from 19 the previous week, and up from 24 the week commencing May 30.

However, Olshan believes that the underlying reason for the number of contracts signed was the fact that desperate sellers, whose properties were on the market an average of 311 days, gave buyers significant price discounts to the tune of 11% on average. The average discount in the w/c June 13 was nearly double that of the prior two weeks, and the number of contracts signs reflects that in order to move units, prices need to come down dramatically.

“The luxury market is bloated and choking with a lot of over-priced inventory, but once sellers capitulate and adjust to realistic price levels, the market moves. Not coincidentally, the May and June weeks that showed the strongest activity of the year were also those that saw prices slashed” said Donnan Olshan, president at Olshan.

As an example of how far prices are falling on these luxury homes, the number one contract last week was a townhouse at 18 East 69th Street on the Upper East Side, sold for $22 million. Prior to selling, the five-story house with 7,831 square feet  was listed at $26 million, meaning a reduction of over 15% in price. For context, the home was purchased in March 2012 for $13.25 million and was renovated. Prices have run up, but now are working their way back down as the supply glut becomes a reality and people begin to realize (especially REITs such as EQR and developers such as the Bauhouse Group) once again that real estate doesn’t always rise in perpetuity.

Source: http://www.zerohedge.com/news/2016-06-22/desperate-sellers-resort-dramatic-price-cuts-manhattans-luxury-real-estate-market

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June 22, 2016

Einstein’s lesson on Real Estate!

Posted in Keith Knutsson, Real Estate at 5:51 am by Keith Knutsson

The debate of its veracity aside, Albert Einstein reportedly said, in some variation or another, that “the most powerful force in the universe is compound interest.” It is unimportant whether he actually said it. What is important is that we believe that the most important figure in physics and mathematics who ever lived actually believed it. It is also important because it is an obvious truth, and like gravity, we take it for granted.

Real estate developers and investors, the financiers who leverage them, or your pension fund that invests in real estate, all live by this fundamental rule. It is far better to earn a consistent 3 percent per year with no reversals against the principal than to have a volatile real estate investment return pattern gaining 10 percent in years one to three, and then losing 5 percent per year for the next three years. A single dollar invested in 2016 that returns 3 percent for six years results in a return of and on your money of $1.19. The same dollar growing 10 percent for three years and losing 4 percent for three years returns $1.17. These spreads on volatility get much wider in 20- and 30-year periods.

So when we look at the increasing purchase prices of rental apartment buildings, we see that they’re expensive — particularly because there are many that are being built. This could lead to declines in rent and higher vacancies, both affecting the net amount an investor receives in net operating income. And yet the major multifamily complexes around South Florida continue to be acquired at ever-higher prices.

The market is thinking about Einstein:

The investment market in commercial real estate assets, whether they are multifamily rental complexes, hotels, office buildings or shopping centers, are investing to generate net income after expenses. Their overall investment returns (yields) are derived from the net income they receive annually (from tenant rents) plus the price for which they ultimately sell the building.

But when the economic outlook is weakening, hotel revenues from leisure and business travel, and retail rental income, all driven by discretionary spending, become more suspect. When the investment market senses economic weakness or desires a flight to safety, investors flock to multifamily assets.

In many ways, this investment strategy is rooted in the cultural and social changes of the past 50 years. Our habits and changes in the workplace affect office utilization; our changing spending patterns and acceptance of online marketplaces are changing retail habits; and our worldwide logistics systems are changing industrial utilization patterns. What has not changed fundamentally is where and how we live — as my grandpa’s old friend Myron Cohen used to say, “Everybody has to be somewhere” — except that in the decades ahead, more people will live in urbanized areas.

In looking forward into 2017, there remains a fair degree of concern regarding the level of multifamily rental supply under construction in South Florida. The supply pipeline is a reaction to the growth in rents, coupled with a period of pent-up demand when almost no construction was present (2009-11). The federal government spurred multifamily investment and housing construction with U.S. Department of Housing and Urban Development financing programs offering longer loan terms and fixed interest rate financing. To compete, the banks have been more aggressive in multifamily lending, particularly on new construction. All of these factors are focusing cheap capital toward new multifamily construction.

But this upcoming pipeline of multifamily rental complexes is part of the key to the stability of multifamily generally. In Miami-Dade, Class A multifamily (the newest, most luxurious rental complexes) has experienced rent growth over 4 percent for three years running. Vacancies in the Class B product are below 4 percent, so Class B prices (second-tier rental products that are 10-20 years old) will continue to rise, lifting demand for new Class A product. While new supply may force Class A vacancy higher (which in fact it did in 2015 and 2016), slowing rent growth to 2 percent to 3 percent has been the success and stability of the multifamily investment class for decades. The new product tends to match better the tastes and lifestyles of the new generation of renters, and over a 10- to 20-year investment cycle, the sector outperforms with steady 2 percent to 3 percent average annual investment growth.

I’ve been through four major investment cycles in my career, including the one that saw the U.S.-owned Resolution Trust Corp. liquidate real estate assets in the early 1990s, and the only people I ever knew who ever lost money in multifamily investments were those who over-leveraged themselves with too much bank debt or who unsuccessfully tried to convert their 1970s apartment complex into condominiums only to get 30 percent sold out and lose the property to their debtors.

On the whole, multifamily investment that is not over-leveraged compounds geometrically. This applies to four- and eight-unit apartment complexes as easily as 300-unit complexes. The only difference is the amount of the initial investment that compounds.

So let’s not lament the multifamily pipeline as an evil harbinger of doom and destruction. This is not to say that every developer should take their condominium plan and convert to rentals next week. But under current economic conditions, watch the multifamily landscape in the coming 12 months. It speaks volumes about where the market sees the economy heading.

Whether he said it or not, my money is on Einstein and low-debt multifamily investments heading into 2017.

ANTHONY M. GRAZIANO IS SENIOR MANAGING DIRECTOR FOR INTEGRA REALTY RESOURCES — MIAMI/PALM BEACH, BASED IN CORAL GABLES. HE HAS BEEN INVOLVED IN THE REAL ESTATE FIELD SINCE 1986. HE CAN BE REACHED AT AMGRAZIANO@IRR.COM AND WWW.IRR.COM.

S. FLORIDA MULTIFAMILY RENT GROWTH, BY PROPERTY CLASS.

The percentages represent year-over-year average rent growth in Class A (the newest, most luxurious rental complexes) and Class B (second-tier rental products that are 10-20 years old) in Miami-Dade and Broward counties.

 Einstein’s lesson on Real Estate!

Source: http://www.miamiherald.com/news/business/real-estate-news/article84505057.html

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June 21, 2016

A storm is brewing in the real-estate market, Pimco warns

Posted in Keith Knutsson, Real Estate at 6:18 am by Keith Knutsson

MW-EP700_storm_20160620135257_ZH

Pacific Investment Management Co. is pointing to gathering clouds in the roughly $3 trillion commercial real-estate market.

“…[A] confluence of factors—volatility in public markets, tightened regulations, maturing loans and uncertain foreign capital flows—is creating a blast of volatility for U.S. commercial real estate,” said Pimco’s John Murray, in a report jointly written with Anthony Clarke.

That volatility could lead to prices falling by as much as 5% in the coming year for so-called commercial mortgage-backed securities associated with the financing of properties, including shopping malls, apartment complexes and office buildings, according to Pimco’s “U.S. Real Estate: A Storm Is Brewing.

 

Since the financial crisis, commercial mortgage-bond prices, which got whacked along with a broad swath of complex mortgage-related debt during the 2008 housing-market implosion, have recovered. Pimco attributes improvements in performance to demand for commercial bonds and warns that appetite is likely to peter out in coming months.

“Capital flows have grown unstable over the past year due to fears over interest rate hikes and, more recently, events such as political and economic uncertainty in China,” Murray wrote. “While this instability began in the public CRE markets, it has blown in to private CRE as well, particularly in non-major markets.”

Hundreds of billions of commercial bonds originated 10-years ago are set to mature over the next three years and appetite for higher-yields than CMBS offers is putting pressure on borrowers’ ability to obtain fresh financing and that’s pressuring bond prices.

Contributing to concerns about commercial real estate bonds is a shrinking base of ready buyers that has coincided with increased price volatility, Pimco cautioned.

New rules, which attempt to limit financial firms’ exposures to risky assets in the wake of the 2008 financial crisis, have caused banks to trim their dealer inventories, Pimco explained. A lack of banks serving as so-called market makers has been one of the oft-cited factors associated with a huge swing higher in the prices of Treasurys back on Oct. 15 2014.

But it isn’t all doom and gloom for commercial real estate debt.

Pimco said opportunities may arise from the shakeout, in both real estate and equities, which have shown a close relationship of late. Daily returns of real-estate investment trusts have had a 71% positive correlation to the broader S&P 500SPX, +0.58%  since the beginning of 2015, the report showed. In other words, rises in stock prices have tended to coincide with richer returns for REITs.

“For flexible capital, this storm might be a welcome one indeed,” Murray wrote.

Source: http://www.marketwatch.com/story/a-storm-is-brewing-in-the-real-estate-market-pimco-warns-2016-06-20

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June 20, 2016

Macy’s is more of a real estate company than a retailer

Posted in Keith Knutsson, Real Estate at 5:28 am by Keith Knutsson

1280px-Macys

Over the past year and a half, Macy’s financial performance has been sobering, to say the least. Like fellow department store companies Kohl’s and Dillard’s, Macy’s has reported a double-digit drop in earnings per share since the beginning of 2015. Macy’s revenue has declined by more than 5 percent in that time span, which was worse than either Kohl’s or Dillard’s.

Due to this rapid reversal in EPS, shares of all three companies have plummeted by 40 percent to 50 percent since the beginning of 2015. However, in the case of Macy’s, this huge stock decline looks like an overreaction. That’s because Macy’s owns a large portfolio of real estate, which now accounts for the vast majority of its value.

A retail turnaround could be tough to execute
Not surprisingly, executives at Macy’s, Kohl’s, and Dillard’s are promising to get earnings back on track in the next couple of years. Despite its falling margins, Macy’s has repeatedly affirmed that it will eventually return to its target EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 14 percent.

Unfortunately, it’s not clear that retailers will ever be able to sustain the margins they earned in the past. Amazon.com is making a big push into the fashion market, with considerable success. This development will pressure department stores’ profitability for the foreseeable future.

That’s not to say that department stores with solid franchises like Macy’s, Kohl’s, and Dillard’s are doomed. Nevertheless, given Jeff Bezos’ “your margin is my opportunity” philosophy, they will probably need to accept lower margins to avoid massive market-share losses.

There’s more to the story than retail
Thus, just based on Macy’s recent financial results and the future prospects for its retail business, the company’s stock price decline seems well deserved. However, analysts who examine only Macy’s current sales and profitability trends are overlooking the company’s key source of value: its real estate.

Hedge fund Starboard Value published an analysis earlier this year valuing Macy’s real estate at nearly $21 billion. That’s 20 percent above Macy’s current enterprise value (the total value of its stock and outstanding debt).

Real estate valuation is a somewhat subjective process. The value of Macy’s mall-based stores in particular could be impacted by the ongoing shift of retail sales to the Internet. Still, about 35 percent of the estimated real estate value comes from stores in A, A+, and A++ rated malls — the top-performing malls in the country.

Moreover, another 35 pecent of the estimated real estate value comes from eight “downtown” stores, mainly in major cities like New York, Chicago, Minneapolis, and San Francisco. Much of this real estate could be more valuable if it is repurposed for office or residential use. That means a retail downturn wouldn’t hurt its value.

Other department stores like Kohl’s and Dillard’s have much less valuable real estate than Macy’s. That means they must revitalize their underlying retail businesses to create value for their shareholders.

Macy’s is taking action
Of course, Macy’s valuable real estate might not be worth much to shareholders if the company’s management were adamantly opposed to monetizing it.

Yet that’s not the case. Macy’s has shown in the past year or so that it is determined to extract value from its real estate — it’s just going to take time, due to the complexity of most real estate deals.

In April, Macy’s hired real estate industry veteran Douglas Sesler to fill a new role as its executive VP for real estate. Furthermore, Macy’s has announced a handful of real estate deals in the past couple of years. It closed stores in Cupertino, California, and Pittsburgh and sold them to third parties. Meanwhile, it sold the underutilized upper floors of two downtown stores in Brooklyn and Seattle.

Just last week, Macy’s sold a downtown location in Spokane, Washington, just a few months after closing that store. This was a relatively small transaction — the Spokane building’s assessed value is $6.8 million — which may have helped Macy’s close the sale quickly. Still, it provides another example of Macy’s increased focus on monetizing its real estate.

Value will shine through soon
Thus far, Macy’s shareholders haven’t really benefited from the company’s real estate initiatives. Macy’s stock remains near a multiyear low. But it has only been seven months since Macy’s announced plans to explore real estate monetization strategies. From the beginning, Macy’s management has suggested that it would take a year or two to nail down any major real estate transactions.

As Macy’s announces larger real estate sales or joint ventures — something that will hopefully begin in the next six to 12 months — investors may finally look beyond the company’s subpar sales and earnings results and recognize the value of its real estate. That should help Macy’s stock get back on track.

Adam Levine-Weinberg owns shares of Macy’s, Inc. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Sourcehttp://therealdeal.com/2016/06/19/macys-is-more-of-a-real-estate-company-than-a-retailer/

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June 17, 2016

Real estate pros see recession by 2017, survey shows

Posted in Keith Knutsson, Real Estate at 8:58 am by Keith Knutsson

The real estate sector is getting a little more pessimistic about the economy and a majority of professionals in the industry now see a recession ahead in the next 18 months.

A survey of 400 people in the real estate business by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) showed a drop in positive sentiment to 69% from 84% six months ago. Current levels are at the lowest in two years.

“There’s a lot of weird stuff going on in the world—China, interest rates, volatility in the equity market—all of which is creating anxiety,” said Mitch Roschelle, a partner at PwC.

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And while a majority of those surveyed remain positive for now, more than half expect a recession by the end of 2017, notes Roschelle, who adds that two out of the last four recessions have been in part due to a slowdown in the real estate market.

However, he sees a silver lining to real estate pros losing their optimism.

“They’re saying, ‘Listen, maybe we need to back out. Maybe we need to not reinflate a bubble and cause another recession,’” said Roschelle. “If we don’t reinflate a bubble with housing prices and we don’t reinflate a bubble with commercial real estate prices, we may not have that bubble bursting causing another recession. So if there is a recession, real estate folks are saying, ‘It’s not going to be because of us this time.’”

Global uncertainty may also lead to some overseas investors turning to U.S. real estate. “The more volatility that goes on in foreign markets and the more uncertainty there is about geopolitical risks in foreign markets, they tend to rotate toward U.S. dollar-denominated investments and income producing asset classes like real estate,” Roschelle said.

“What’s interesting is foreign sentiment for U.S. real estate has improved while domestic sentiment has weakened.”

The real estate sector is getting a little more pessimistic about the economy and a majority of professionals in the industry now see a recession ahead in the next 18 months.

A survey of 400 people in the real estate business by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI) showed a drop in positive sentiment to 69% from 84% six months ago. Current levels are at the lowest in two years.

“There’s a lot of weird stuff going on in the world—China, interest rates, volatility in the equity market—all of which is creating anxiety,” said Mitch Roschelle, a partner at PwC.

And while a majority of those surveyed remain positive for now, more than half expect a recession by the end of 2017, notes Roschelle, who adds that two out of the last four recessions have been in part due to a slowdown in the real estate market.

However, he sees a silver lining to real estate pros losing their optimism.

“They’re saying, ‘Listen, maybe we need to back out. Maybe we need to not reinflate a bubble and cause another recession,’” said Roschelle. “If we don’t reinflate a bubble with housing prices and we don’t reinflate a bubble with commercial real estate prices, we may not have that bubble bursting causing another recession. So if there is a recession, real estate folks are saying, ‘It’s not going to be because of us this time.’”

Global uncertainty may also lead to some overseas investors turning to U.S. real estate. “The more volatility that goes on in foreign markets and the more uncertainty there is about geopolitical risks in foreign markets, they tend to rotate toward U.S. dollar-denominated investments and income producing asset classes like real estate,” Roschelle said.

“What’s interesting is foreign sentiment for U.S. real estate has improved while domestic sentiment has weakened.”

Source: http://finance.yahoo.com/news/real-estate-pros-see-recession-000000571.html

Know more about the real estate advisor – Keith Knutsson:

http://www.integraleadvisors.com/

https://keithknutsson.wordpress.com/

https://www.xing.com/profile/Keith_Knutsson

keithknutsson.tumblr.com/

www.slideshare.net/keithknutsson/keith-knutssons-affiliation

https://www.pinterest.com/keithknutsson/

June 16, 2016

Overpriced Global Real Estate: The Top Three Cities

Posted in Keith Knutsson, Real Estate at 9:26 am by Keith Knutsson

Every Wednesday we’ll be publishing some of the most extraordinary market distortions on this ball of dirt. We call it the WOW, as in “Wow, what a crazy world!” or “Wow, that’s truly insane”. We are eager for the day we struggle to find markets to bring to your attention, though that doesn’t seem like any day soon.

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to applaud insanity, laugh, poke fun at and present to you absurdity in global financial markets in all it’s insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly, we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves, we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – something we will cover more extensively soon.

In this week’s edition of the WOW we’re covering overpriced global real estate:

Contestant #1: Hong Kong

South of the motherland things have gotten a bit… ahem, hairy. HK has long been the escape hatch for frightened mainland Chinese capital flows. It stands to reason that real estate – always and everywhere – remains one of the best methods of laundering money, and so HK real estate has benefitted.

Purely by the numbers, it doesn’t make a whole lot of sense. Let’s take a peek, shall we?

Income to asset ratio: At 19 times gross annual pre-tax median income, Hong Kong real estate sure isn’t cheap.

In fact, US$1 million dollars will buy you just 20.6 square metres of property – barely enough to swing a cat in.

There are signs of stress with negative equity cases have recently jumped as foreclosures double from this time last year.

And as the South China Morning Post reports:

“Billionaire Lee Shau-kee, Hong Kong’s second-richest man, expects home prices in the city to remain under pressure, with about 10 per cent further downside to be expected before a bottoming pattern sets in.”

The positives are that Hong Kong has ever present geographical constraints. Put simply: there is very little land available for development. Then we have the fact that it’s probably not fair to judge real estate here by incomes earned within the confines of Hong Kong since – as mentioned – it’s been foreign demand (from mainland China) driving this market to a large extent.

Side note: While the focus today is on overvalued RE markets, as an investor I can’t help myself from pointing out that with a P/E ratio of just 9x, Hong Kong’s equity markets are today the cheapest in the world,with the Hang Seng Index trading at the biggest discount to global shares in 15 years.

As a reference point consider that most major stock markets typically trade at a P/E of between 15-20x, so we’re looking at an equity market some 40-50% of its highs and an overvalued real estate market at the same time.

Investors can look to going long the HSI and short Hong Kong REITs.

Contestant #2: Sydney

Welcome to the world’s largest island: the only country in the world I know of that actually eats its own emblem (the Kangaroo) and where in Sydney US$1 million will get you just 41.2 square metres of “luxury”, enough to bring your partners cat for a joint cat swinging party.

Residents of this beautiful city have to fork over an average 12.2 times their gross median income for somewhere to hang their hat.

Factors to consider:

§  A substantial slowdown in commodity sector.

§  Recent clamping down by the Chinese government on Mainland capital outflows.

§  New laws passed by the Australian government restricting foreign ownership of real estate:

Sentences may stretch to three years and fines to A$637,500 ($607,000) for illicit buyers, with penalties also on third parties knowingly complicit in violations, Prime Minister Tony Abbott said Saturday in Sydney. The steps are needed to give the public confidence that foreign-investment rules on property purchases are being enforced, he said.

§  And… increasingly fearful Australian banks are cutting back on lending to foreign purchasers.

Moving from one beautiful, albeit insanely priced, city to another our last contestant for this week is…

Contestant #3: Vancouver

Ignoring the collapse in energy prices, Vancouver’s real estate market has sailed on to ever greater highs, boosted by supply shortages, historically low interest rates, and a shedload of “boat money”.

According to the Real Estate Board of Greater Vancouver who have been tracking the average price of all properties in their region since 1977:

The average price of a single-family detached home in the Greater Vancouver area has increased as much in the past five months as it did from 1981 to 2005.

Spending 10.8 times the median gross incomes of the average Vancouverite only makes sense if you’re not basing your purchase criteria on the average Vancouverite’s income. It makes sense if you’re living in Shanghai, worth more than Gwyneth Paltrow and fearful of your government.

Vancouver is second only to Hong Kong as a place to stash mainland Chinese money.

Why for?

The perceptive among you will notice an overriding theme here. Actually two themes

One is that scared Chinese money has been fuelling all of the above markets for some time. That promises to accelerate if/when the CCP really crack down on capital flight. In such a scenario I’d rather be long Bitcoin as Chinese money flees via a different route.

The other notable theme, one which sadly pervades all markets like a plague is that the cost of capital has been so severely bloodied, beaten up and suffocated by central bankers. And so today we have actually have taken the already absurd concept of ZIRP (zero interest rate policy) one further with NIRP (negative interest rate policy).

When debt has a carrying cost untethered to any fundamentals, is it any surprise that we find such absurdities?

Source: http://www.valuewalk.com/2016/06/overpriced-global-real-estate-hk/

Know more about the real estate advisor – Keith Knutsson:

http://www.integraleadvisors.com/

https://keithknutsson.wordpress.com/

https://www.xing.com/profile/Keith_Knutsson

keithknutsson.tumblr.com/

www.slideshare.net/keithknutsson/keith-knutssons-affiliation

https://www.pinterest.com/keithknutsson/

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