Monday, 20 June 2016

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


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.
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Sunday, 19 June 2016

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


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.

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Friday, 17 June 2016

Real estate pros see recession by 2017, survey shows

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.”
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.”
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Thursday, 16 June 2016

Overpriced Global Real Estate: The Top Three Cities

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?
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Tuesday, 14 June 2016

27-story condo tower planned for West Loop



With one condominium tower under construction in the Gold Coast, Chicago developer Jim Letchinger is taking the wraps off another one he wants to build in the West Loop.
A venture including Letchinger, president of JDL Development, has proposed a 94-unit building at the southeast corner of Jefferson and Fulton streets, between the Chicago River and the Kennedy Expressway. The venture will present its plans for the site at a June 21 community meeting, according to an email to constituents from downtown Ald. Brendan Reilly, 42nd, who will host the meeting.
Letchinger is adding the project toJDL's full pipeline of residential developments in the city. In the South Loop, JDL is leasing up a 469-unit apartment tower at 1000 S. Clark St., and he has another 251-unit rental building under construction in River North, on the former site of Ed Debevic's restaurant. In the Gold Coast, he's building a 66-unit luxury condo building at Walton and State streets.
Though the downtown condo market has come back from the bust, most residential developers these days are building apartments because the rental market has been so hot. Letchinger said he initially wanted to build apartments on the West Loop site but switched to condos at the suggestion of Ald. Reilly, who is concerned about the number of rental units being built in his ward.
Given the lack of new condos in the neighborhood, Letchinger thinks that's the right move. The West Loop has also become a popular destination for companies, including McDonald's, whichconfirmed today that it is moving its headquarters to a site about 10 blocks west.
“There's still very little condo product in the city, and it's a unique location surrounded by so much office, so many jobs,” he said.
Through a spokeswoman, Ald. Reilly declined to comment.
Letchinger said he expects the condos to start at about $800,000—the smallest units will be about 1,200 to 1,300 square feet—though penthouses in the project could be priced as high as $3 million. JDL would build the 27-story tower, which is being designed by Hartshorne Plunkard Architecture, on a parking lot just north of the building at 217 N. Jefferson St. A partnership including a Nebraska real estate firm that acquired the lot and building last year will be part of the JDL development venture, Letchinger said.
The venture needs a zoning change from the city for the proposed tower, and the community meeting is a key early step in that process. If Ald. Reilly signs off on the plan, it would still need the approval of the City Council. JDL also will need to obtain a construction loan. Letchinger is not sure yet what the project will cost.
JDL is one of the few downtown residential developers building condos these days. Developers completed just 191 condos and town homes in downtown Chicago in 2015 and are expected to complete 120 this year, according to Appraisal Research Counselors, a Chicago-based consulting firm. Before the condo market crashed, developers easily added more than 2,000 units to the downtown market every year.
The residential market has flipped over since then: After completing nearly 2,600 downtown apartments last year, developers are on pace to add 4,000 this year and 4,400 in 2017, according to Appraisal Research. Before 2008, they rarely built 1,000 units a year.
If an apartment glut is on the horizon, Letchinger isn't seeing it yet. Leasing began in March at his South Loop project, and the building is almost 50 percent leased—such a fast pace “I can't believe it,” he said.
Demand also has been strong for condos in Letchinger's Gold Coast project, some of the most expensive in the city, with an average price of $1,100 per square foot, according to Appraisal Research. He said buyers have signed contracts for 54 of the 66 units in the building, which he expects to complete in late 2017. JDL also is selling 153 condos in a building next door that have been rented out for the past several years.
“I don't think there's demand for thousands of condos, but for hundreds, yes,” he said.
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