Financial Times Blog | Page 77 of 99 | Real Estate & Capital Markets News

Published September 4, 2018June 13, 2019 by Roger Staiger

3 September 2018 FT — Articles to Read

3 September 2018

Question: According to MSN:News, what 10 purchases should you not put on a credit card?

Bond market big names battered by deepening Argentina turmoil – Pg. 1

– US investment group Franklin Templeton’s losses have underlined how the crisis has wrongfooted many of the market’s best-known names and left investors wary of diving back in, ….

– Franklin Templeton funds have lost $1.23bn in the past two weeks on just three of its biggest Argentine positions…

– …flagship $36.8bn Global Bond Fund lost 4.2% in August…while …$5.4bn Global Total Return Fund dropped 4.3% – the worst month for both funds in nearly four years

– Argentina, which last week increased rates by 15% to 60%, emerged as one of the hottest stories in emerging markets two years ago after the centre-right reformist Mauricio Macri came to power

Turkey braced for turmoil as inflation rises – Pg. 2

– Rising prices have fueled the devaluation of the lira, triggering a string of announcements by companies about cash flow problems and missed debt payments

– …predicted that annual inflation would top 17% in August – higher than the previous month’s figure of 15.85% and far above the central bank’s official 5% target

– The lira, which has lost around 40% of its value this year, has suffered extreme swings in recent weeks

– Turkey’s central bank stunned investors by refusing to raise rates even as the lira lost nearly a quarter of its value against the dollar in August alone

China: Xi’s other grand plan – Pg. 7

– The 36km bridge connecting Hong Kong with Macau with the city of Zhuhai in mainland China is one of the most ambitious engineering projects ever undertaken, at least 15 years in the making, and coming in at a cost of nearly $20bn

– The megaproject, scheduled to open to road traffic in the next few months, ….

– Alongside a new $11bn rail link that will plug Hong Kong into China’s vast high-speed rail network, it is a crucial element in Beijing’s plan to integrate the semi-autonomous regions of Hong Kong and Macau with nine neighbouring urban areas – including the mega-cities of Shenzhen and Guangzhou

– Beijing wants to fashion them into what it calls a “Greater Bay Area” to rival San Francisco, New York and Tokyo as a powerhouse of innovation and economic growth

– The Greater Bay project covers an area containing nearly 70m people with a $1.5tn economy, bigger than G20 countries including Australia, Indonesia and Mexico

– The idea behind the Greater Bay Area plan is to capitalize on the region’s impressive infrastructure and expertise in finance, manufacturing and technology by dropping trade barriers, promoting cross-border business and eventually creating a single market

– The cities of the Greater Bay Area were at the heart of modern China’s first economic revolution, when Hong Kong money spurred the rapid growth of the manufacturing industry in Shenzhen after Deng Xiaopiing, China’s then paramount leader, made it the nation’s first special economic zone in 1980

– The toughest challenge is how to integrate Hong Kong, a free port with its own customs system, into mainland China,…

– Beijing has said it will abolish work permit requirements for Hong Kongers in the mainland, and give them access to state healthcare and education

What employers want from MBAs – Pg. 10

– Soft skills are the most important

– Some employers are questioning the value of MBAs

– Big data matters

– Employers find it increasingly difficult to hire graduates with the right skills

– Most important skills: top five

o Ability to work in a team

o Ability to work with a wide variety of people

o Ability to solve complex problems

o Ability to build, sustain and expand network of people

o Time management and ability to prioritize

Answer: (1) Household bills; (2) Cars; (3) Student Loans; (4) Retail therapy; (5) Medical bills; (6) A night on the town; (7) Big-ticket items you can’t pay off immediately; (8) Credit card payments; (9) “Sale” items; (10) Unsecured online purchases

Published September 2, 2018June 13, 2019 by Alic Kelso

Real Estate Indexing:

Market Memo

Real Estate Indexing:

Increasingly, Real Estate indices are used as a proxy for the private and highly illiquid real estate market. They are increasingly available; provide a range of geographies and industries and show closing prices on a consistent basis within an asset that often trades within non-transparent markets. Despite this, Real Estate Indices fail to provide a comparable representation of their underlying asset in the same fashion as publicly listed debt and equity investments. Subsequently, their overreliance may lead to unaccounted for risk exposure within real estate portfolios.

The challenges associated with using benchmarks to establish current and historical market conditions comes down to an accurate understanding of an asset’s underlying demand and subsequent pricing. Indexation and their liquid derivatives fall short of tracking these changes in real time due largely to their observation and measurement of Real Estate prices. Index’s attempt to compute real estate prices and returns through (1). Appraisals, (2). Financial market prices and (3). Adjusted privately traded prices or some combination there of. Assessing the intricacies of these methodologies warrants further and more in depth discussion, however in relation to active price tracking the illiquidity of the underlying assets still pose material challenges.

For Commercial properties the NCREIF Property Index (NPI), which can be found at www.ncreif.org is the most established and widely used index in the United States. The Index, published by the National Council of Real Estate Investment Fiduciaries (NCREIF) a not for profit industry organization, is derived from appraisals of its memberships properties. Quarterly, members of NCREIF are required to submit data regarding the value of their properties from which the prices of the index and sub-indexes (bifurcated by asset and geographic location) are computed.

Every Quarter members of NCREIF report the value of their assets based upon either DCF or the Comparable Sales method, the NPI is also reported every quarter however, NPI properties are not necessarily appraised every quarter. In fact, most properties are appraised once per year or once every two to three year periods. This largely results from the time, cost and energy required to conduct valuations and the requirement for appraisers to be paid. For members of NCREIF contributing to the NPI as well as for any other property owner, there is a balance between the cost and benefits. Instead of conducting and paying for frequent valuations it is not atypical for real estate owners to adjust past valuations to account for capital expenditures, often called “desktop appraisals.”

Even when appraisals are performed accurately and frequently, their use introduces the potential for data smoothing, which significantly alters the implied risk/return spectrum of the underlying assets. Data Smoothing occurs assessing returns when the prices used in have been dampened relative to the volatility of the real asset’s unobservable but underlying price. In the case of real estate, when appraisals are used in place of the asset’s true market value and provide dampened price changes, then the resulting return series persistently underestimates an understates the volatility of the true returns as well as their correlation with other asset classes within an investors portfolio.

For example, the NCREIF is calculated on an unleveraged basis as if the properties measured were acquired entirely with equity and no debt financing in order to reduce the volatility of their returns in relation to returns of real estate acquired with leverage. Subsequently, interest charges are not deducted. Additionally, NPI returns are calculated on a before tax basis and do not include income tax effects. Lastly, the returns are calculated on a property basis and then value-weighted for the index’s calculation where more highly valued properties receive a larger weighing. Data smoothing can be necessary to filter out white noise and irrelevant information but it is important to remember that it may also alter the nature of some significant takeaways.

It remains important to remember that appraisals conducted in any time series are not real time. They are always reflecting on a perceived value at particular period in time and since there is not the benefit of observing the future that period in time is always lagging. In addition to the potentially lagged nature of both the DCF and comparable properties approach being relatively backward looking, appraisals themselves maintain a very human element to their production making them highly susceptible to heuristics, biases and failures of judgment. In the case of appraisals, anchoring or the compulsion to overly rely on initial information further compounds challenges associated with the relevance of appraisals and data smoothing for indexation. In the case of appraisals it often manifests in the appraisers recollection of historical performance of a certain asset or geographic region without as much focus paid to current market conditions resulting in distorted prices between what is reported and what a buyer may be willing to offer. This may lead to inflated prices of real estate in a period of declining performance for the asset; alternatively it may lead to a compressed value during a period of growing market strength and increased demand.

The appraisal system itself is not real time and maintains an inherent lag and divergence to market prices that is amplified by the human element of return valuations. Although this is perfectly understandable considering the illiquidity of real estate, it often goes overlooked while assessing investment risk and portfolio performance. For example, assume you have two investments providing returns over five periods.

HPR	Investment 1	Investment 2
1	-1.00%	-2.00%
2	4.00%	3.00%
3	5.00%	4.00%
4	-2.00%	-1.00%
5	2.00%	2.00%
Correlation	96.28%

Assessed side by side, these investment maintained a high degree of correlation with one another, that is to say their return distributions were comparable in both their timing and size. Now, assume that Investment 2 is a index based off of highly illiquid assets. The index has the exact same returns however; they are reported one period later due to illiquidity and appraisal lags.

HPR	Investment 1	Investment 2
1	-1.00%	3.00%
2	4.00%	4.00%
3	5.00%	-1.00%
4	-2.00%	2.00%
Correlation	-35.14%

The true correlation between the returns of the two investments may be close to 96.28%. However, the measured correlations between the assets due to their lag is -35.14%. The underestimated correlation may indicate greater opportunities for diversification however, it also provides a glimpse at hidden portfolio risk.

Assessing risk-adjusted returns within the field of investment management is art as well as a science. Despite this, the imaginative necessity is often overlooked in relation to anything that maintains the illusion of objective facts. As an investment professional across any asset class, your expected to develop, underwrite and ultimately justify what is purchased, held and sold both at the time of entry as well as upon reversion (which in real estate can often be materially different). However at no point throughout an investment’s time horizon does the investor develop the ability to predict the future. Further complicating the matter, the leading indicators of the risk and return spectrum are established using historical information i.e. variance which ultimately shows not downside risk but deviation from the mean returns over whatever historical period is being examined. Real Estate Indexing does not create these conditions, however for institutional investors their ready availability greatly increases the tendency of fund managers to improperly allocate their exposure across asset classes.

Published September 1, 2018June 13, 2019 by Roger Staiger

1 September 2018 FT — Articles to Read

1 September 2018

Question: According to MSN:Money, what are six (6) signs the next recession might be closer than we realize?

IMF haunted by past Argentine mistakes – Pg. 2

– Memories of the fund’s involvement in Argentina in the lead-up to the 2001 economic collapse run bitter and deep in the country, making the current involvement of the IMF, led by its managing director, hugely sensitive

– Yesterday, the peso found its footing but only after a 12% plunge against the US dollar on Thursday which came despite the central bank’s decision to jack up interest rates by 15% to 60%. Argentines, who have long preferred to save in dollars, have been on edge since the run on the peso began

Catholic Church – Pg. 5

– Conservatives have regrouped to fight Pope Francis’s relaxation of old doctrinal anathemas, which he sees as vital to the spiritual renewal of a two-millennia-old institution serving a notional 1.2bn Catholics around the world. Shortly after taking over from Pope Benedict XVI – who took the almost unheard of step of resigning in circumstances the Vatican has never explained – he said the Church had to find “a new balance” or it would collapse “like a house of cards”

– Conservatives in the Church, who had things pretty much their own way for half a century but especially under popes John Paul II and Benedict XVI, are desperate to discredit Francis

– Cardinals nominated by Francis, who will be 82 in December, are now thought to be close to a majority in the electoral college for the next pope

– Famously, or infamously from a traditionalist standpoint, he has called for an inclusive, non-judgmental tolerance towards homosexuality

– Francis has not changed core doctrine. But he has cast orthodoxy in a new light

– While this power battle may do immense damage to the Church, it will also prolong the anguish of abuse victims, who are already angry at Francis’s hesitant attempts to deliver them justice

– (Prof Note: I remain aghast that the Pope has not visited PA)

California to be first US state to impose female quota for boards – Pg. 8

– A bill requiring at least one woman on every public company board by next year, and two women for every board of five members and three for boards of six by 2021, passed the California legislature this week and was sent to the governor to sign into law

– Woman comprised 19.8% of board seats on Fortune 1000 companies in the US last year, …

– In California women make up 20.8% of directors of Fortune 1000 companies. The state ranks eighth overall among US states for the percentage of women on boards, although it still only has an average of 1.65 women per board, …the national average is 1.75 women per board

– Although this would be the first government-mandated quota for women on company boards in the US, there is precedent for doing so in European countries. Norway, Iceland, Finland and Sweden all have government-mandated quotas for the number of women on boards

– In the second quarter of 2018, almost 35% of new director seats went to women…

Answer: (1) The unemployment rate will struggle to push lower; (2) The yield curve is flattening; (3) Inflation has begun picking up; (4) Home sales are beginning to decline in key markets; (5) Credit card debt and late payments are on the rise; (6) The economic cycle suggests a contraction

Published August 31, 2018June 13, 2019 by Roger Staiger

31 August 2018 FT — Articles to Read

31 August 2018

Question: According to MSN.com, what are 10 things most people forget to check when viewing a home for sale?

Argentina raises rates to 60% in drastic bid to arrest peso’s slide – Pg. 1

– Argentina ratcheted up interest rates to 60% yesterday, a 15% point increase aimed at arresting a plunge in the peso that has threatened the credibility of its three-year-old reformist government

Harvard discriminates against Asian-Americans, says DoJ – Pg. 3

– Harvard University’s admissions process “significantly disadvantages” Asian-Americans, the US DOJ said yesterday…

– …Harvard’s use of a “personal rating” harmed the chances of Asian-Americans compared with other ethnic groups and alleged the “value” metric “may be infected with racial bias”

– The justice department’s civil division is separately investigating the college’s admissions policies

– In July, the justice department rescinded Obama-era guidelines that encouraged universities to promote diversity and instead reissued a document from George W Bush’s administration that called on colleges to use “race-neutral” application criteria

– Harvard has acknowledged using race as a factor in its admissions decisions in order to boost campus diversity but has denied discrimination

Director resigns over MoviePass governance – Pg. 12

– …stepped down…saying a lack of communication between management and the board, meant his “ability to effectively discharge my duties as a director has been compromised beyond repair”

– The average cost of a cinema ticket in the US was $9.38 in the second quarter of 2018, …

Spate of female hires at top Valley start-up funder – Pg. 14

– After almost a decade as an all-male preserve, the senior ranks of venture capital firm Addreessen Horowitz have been opened a bit further to admit a third woman in just over two months

– One problem has been a shortage of experienced female entrepreneurs ready to switch to VC, a traditional path taken by new start-up investors

– …40% of all investors came from just two elite university – Harvard and Stanford

Hunt for yield drives stronger demand for riskier slices of US mortgage securities – Pg. 17

– Investors are stomaching the lowest premium in over a decade for taking on more risk in the US commercial property market as a humming American economy encourages money managers to reach for higher returns

– The difference between the return on the safest slices of commercial mortage-backed securities – a pool of mortgage bundled into a bond – and the riskier slices has dropped to its lowest level since the build-up to the financial crisis,…

– CMBS bundle pools of mortgages on commercial buildings such as offices and malls into a single bond, with the interest paid by the mortgage repayments of borrowers

– The debt is sliced into tranches with higher returns offered to those prepared to absorb potential losses on the underlying mortgages first

– As the US Federal Reserve has tightened monetary policy, higher quality fixed-rate investments such as the triple-A tranches of CMBS have fallen in price, prompting investors to seek out floating rate assets like company loans, or take more credit risk to boost returns

Answer: (1) The neighbourhood; (2) Cell Signal; (3) Your commute; (4) Noise; (5) Association fees and rules; (6) Resale value; (7) Neighbours; (8) Water pressure; (9) Bedroom-to-Bathroom ratio; (10) Is there room to expand? (Prof Note: One final item, rental rate, i.e. will the home rent and will the rental rate cover the mortgage?)