Tag: Real Estate
“The child is father of the man:
And I could wish my days to be
Bound each to each by natural piety.”
– William Wordsworth
The ebbs and flows of economic fortunes of nations and companies have a direct correlation with the social and psychological ”health” of the people who inhabit those nations and corporations.
It is common knowledge that dysfunctional societies (where crime rates, divorce rates, teenage pregnancy rates, suicide rates, high-school dropout rates, illiteracy rates, etc. are high) also have low levels of productive economic growth (GDP per capita); high levels of unemployment and under-employment rates; low, flat or negative real wage growth rates, etc. It would be interesting to explore whether the psycho-social indicators precede economic indicators or vice versa.
We know, as a self-evident truth, that psycho-social maladies result in economic stagnation and even decay for a vast majority of the population whose economic fortunes are tied to the geographies or corporations under consideration. We also know that individual or family financial stress leads to many mental and psychological health conditions such as insomnia, depression, hypertension, heart disease, diabetes, low self-esteem, etc. We know that national economic malaise leads to several social problems such as increased destitution, drug use, prostitution, suicides, and so forth.
What comes first and what follows? What is the cause and what is the effect?
Perhaps, George Soros’ “Theory of Reflexivity” applies to this situation. Psycho-social turmoil leads to economic instability — which in turn — leads to more psycho-social turmoil with an ever greater pitch and velocity in a continuous downward spiral that can be stopped and reversed only by significant, firm and far-reaching policy mechanisms such as Keynesian-style deficit-spending economic stimuli to jump-start productive activity within an economy.
There is a certain ecosystem in which humans thrive, grow, and prosper. Such an ecosystem is defined by the opportunity to the entrepreneurial, the clever, the industrious, the agile, the innovative, the adaptive, the meritorious individual or company to reap the rewards of their labor in a relatively safe, fair and equitable society. Conversely, in an environment antithetical to promoting merit — innovation, entrepreneurship, value creation and the capitalist ideal are more or less suffocated and frustrated.
There are numerous examples of the above stated phenomena:
Just one such example is:
Over several years, Colombia’s decline across a wide gamut of economic indicators can largely be attributed to the descent of Colombian society into a brutal and unrelenting civil war. Or was it the other way: Did civil strife drive away investors and the profit motive for sharp, industrious, capitalist-minded individuals?
Question is: Does a strong moral fabric predict positive economic performance — both for the individual and for the society. In effect, does it pay to be good – not just in the hereafter — but also in the here and now?
More concretely, can one develop profitable trading strategies based on the psycho-social “performance” indicators of economies, and even, companies. Can we, for example, see a conclusive and positive correlation for a specific company where strong corporate social responsibility “performance” results predict strong corporate earnings and subsequent stock performance…over the long-term…factoring out any potential short-term “noise” or “bump” that comes from the PR-spawned corporate announcements about CSR initiatives?
There are numerous quantitative analyses that can be run to track asset (stocks, bonds, derivatives, currencies, real estate, etc.) performance vis-à-vis psycho-social indicators. Infact, if proprietary traders and hedge funds are not doing this already, a new school of investment philosophy could be developed where the study of psycho-social indicators across various economies and companies would inform investment and trading decisions.
…to be continued and detailed out further.
“Gateway” or “Spiky” markets are likely to lead the way out for the Real Estate asset class
Investment Context & Opportunity: Tier-1 “Gateway” Cities
Savvy, intrepid, independent-minded — particularly, contrarian — investors ought to pay close attention to real estate in global “Gateway” cities.
Gateway cities, or “Spiky” markets, can be defined as a set of global Tier-1 cities to which Prof. Richard Florida’s “Creative Class,” or even roughly, Prof. Anna Lee Saxenian’s “New Argonauts” flock.
The following metropolitan areas would constitute Tier-1 Gateway markets: New York, London, Tokyo, Bay Area (San Francisco and Palo Alto in particular), L.A./Orange County, Sydney, Miami, Toronto, Vancouver, Bombay, Rome, Munich, Paris, Moscow, Dubai, Istanbul, Sao Paulo, Shanghai, Singapore, Hong Kong.
Many of these Gateway metropolitan areas’ high-end real estate is presently under-valued by anywhere from 30 to 60 per cent vis-a-vis their historic inflation-adjusted peaks. With values of high-end real estate inventory at such dramatically low prices across many of these Gateway markets, now is the time to take some bold investment decisions.
Due to continued urbanization, these cities are on their way to transforming themselves into megapolises over the next half a decade or so. Many of these Gateway markets already enjoy megapolis status. Due to the natural limits to their expansion and the constant real estate supply-demand “cat and mouse” game, real estate prices in these markets can be expected to climb along a secular trajectory over the long-term — particularly for high-end real estate. Even in the short-to-medium term, however, these markets are likely to rebound and outperform real estate markets in smaller Tier-2 cities.
Furthermore, “network effects” or “multiplier effects” will continue to lead to a disproportionate increase in productivity in these cities compared with their Tier-2 Gateway peers (identified below). As the world comes out of the “Great Recession,” the productivity enhancements in these Tier-1 Gateway cities will get priced into the real estate asset values before (and higher than) they would in other smaller metropolitan markets. Like people, capital will be more fluid through these highly “porous” global cities. Hence, real estate assets in these Tier-1 cities will be more liquid than assets in other Tier-2 cities.
Starting now, Hedge Funds and long-only PE firms can take advantage of these opportunities by investing in landmark Grade A office space, 5-star hotels, upscale retail destinations and even marquee residential property.
Obviously, Gateway cities in certain emerging markets like Shanghai and Bombay are an exception as the real estate asset values in those markets have reached, and even exceeded, their 2008 peaks in certain instances. Infact, a credible argument can be made that high-end real estate prices are inflated in some of those emerging markets — particularly in Shanghai and other major Chinese metropolitan markets like Beijing, Guangzhou, Shenzhen, Tianjin, Hong Kong, etc.
Arguably, even “over-priced” real estate assets in emerging markets are likely to prove to be sound investments over the next half a decade and beyond. No rocket science. It is simply the crushing force of demographics that will raise price levels for virtually all forms of real estate in these centers of economic and cultural activity.
Furthermore, a small portion of this strategy could be devoted to specialized REIT’s with significant exposure to the above mentioned geographies.
A smaller amount of capital can also be devoted to higher beta, Tier-2 pool of global “Gateway” cities as well.
These would include: Chicago, Boston, Atlanta, Montreal, Rio De Janeiro, Buenos Aires, Cape Town, Melbourne, Bangalore, New Delhi, Milan, Madrid, Frankfurt, Amsterdam, Copenhagen, Stockholm, Brussels, Dublin, Vienna, Prague, Seoul, Beijing, Kuala Lumpur, Abu Dhabi, Cairo, among others.
Investment Entry Horizon:
Next 6 to 18 months would be the “sweet spot” for picking up the choicest assets without contending with bruising competition.
Investment Exit Horizon:
Next 36 to 60 months — depending on the Gateway city in question — would allow for an optimal period for healthy returns on exits.
10% to 20% annualized IRR (depending on which particular market is considered).
Roughly 5% of a diversified Hedge Fund’s total assets under management (AUM) could be a good place to start. Given the scale and scope of this investment strategy, it can absorb as much as 10% to 15% of a fund’s portfolio as the geographic diversity (North & South America, Western Europe, Russia, South Asia, Middle East, and East Asia) asset variety (Hotels, Offices, Malls, and Residential real estate) provides a natural hedge to a portfolio designed with such an exposure.
Fresh capital infusions from a fund’s limited partners would allow a fully or mostly-invested fund to expand its asset base without compromising on its investment philosophy, expected returns, risk management controls, or capital allocation/portfolio diversification principles.