Posts Tagged ‘investors’

Financial Reform Forces Transformation on Alternative Investments

Thursday, September 16th, 2010

Wall Street reform law places new restrictions on alternative investment companies.  The alternative investment management business will undergo major changes, thanks to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Although no specific rules have yet been written, the Wall Street reform law could impact investment returns, leverage and risk-taking, innovation and transparency of private equity, real estate and hedge fund managers.

“This will change the way alternative investment businesses are run.  They will have to use more capital and less leverage and less risk-taking,” said Henry Kahn, partner in the law firm Hogan Lovells.  “This fundamentally changes what types of businesses financial services are in.”  The large financial services firms now must choose which lines of alternatives business they will keep and how they will be set up.  Smaller firms might have to deal with Securities and Exchange Commission (SEC) registration for the first time.  This will give the world – and regulators – an inside look at their investment strategies, which they do not welcome.

Investors are concerned that increased transparency and greater oversight by the SEC will make investment managers less willing to be innovative because their proprietary strategies will be open to review by regulators and their competitors.  According to Kahn, “Some large institutional clients are concerned that regulations will put additional costs on medium-size advisers and inhibit beneficial innovation in investing.”

Cheap Money to Build Skyscrapers Has Gone Bust

Thursday, March 4th, 2010

Real estate bubble ends 30-year skyscraper construction spree.  The last 30 years have seen a boom for skyscraper construction because the cost of borrowing money had declined significantly. When investors borrow money to purchase assets, they send prices higher.  The problem is that this borrowing makes the markets susceptible to busts when investors sell assets to pay their debts.  The recent financial crisis was one result of this process, with the debts larger and the price swings broader than has been seen in the past three decades.  According to central bank critics, focusing on consumers – and not on the dangers of asset-price inflation – have encouraged bubbles by keeping interest rates artificially low.

The central bank critics argue that the desire to end the credit crunch may be causing authorities to make the same mistake by maintaining short-term interest rates at less than one percent in a majority of the developed world.  Developing markets, thanks to their tendency to emulate richer nations, have the same cheap-money policies.  The irony is that many of these economies are growing faster than those in the developed world.

For the commercial real estate industry, the bubble means that it is unlikely that we will see more high-profile skyscrapers like the Burj Dubai or Petronas Towers under construction very soon.  All three projects were started during financial booms and delivered in hard economic times.

Listen to our interview with Rick Mattoon, a senior economist and economic advisor in the economic research department of the Federal Reserve Bank of Chicago, on the dangers of asset price inflation.  Click here for the podcast.

Boom Market for CRE Buyer-Users

Thursday, August 13th, 2009

In terms of commercial property investment, one positive sign is from firms buying properties to use for their own business operations.  Called user-buyers, these investors have proven they are able to get money from banks to spend on property acquisitions — a relative rarity nowadays.  Those who do not need a766981491_aa0ae36a4b loan already have earmarked their own funds for such a purchase, enabling these user-buyers to acquire a building despite the credit crunch and increasingly wary lenders.

Real Capital Analytics reports that the number of user-buyer transactions in the Philadelphia metro area, for example, rose between June 2008 and June 2009.  During that time span, 25 percent of the 40 office and industrial purchases completed in the region were by users.  Mike Margolis, president of investment sales at Professional Realty Advisors, states, “Considering users are generally 10 to 15 percent of the market, that’s a substantial increase.  “One of the most recent transactions was the acquisition of a 25,200-square-foot building in suburban Phoenixville by a Sheppard Redistribution Inc., affiliate.  The purchased property will be used by the firm for their daily operations.

Local Banks Facing Significant CRE Losses

Monday, June 15th, 2009

Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens.  According to a Wall Street Journal report – which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion.  In that worst-case scenario, 600 small and mid-sized excedrin1banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues.  These losses would exceed home loan losses, which total approximately $49 billion.

The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests.  More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.

The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31.  They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.

Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants.  As a result, these institutions must boost their capital by selling assets and making fewer loans – which could make the recession last even longer than anticipated.

Back to the Futures? Not Just Yet. Investors Still Spooked by Derivatives

Wednesday, June 3rd, 2009

It’s no surprise that investors are still wary of investing in derivatives, given the financial devastation that these vehicles’ collapse caused last year.  Proof of the fact is that the IPO of a financial instrument designed to be on American home prices failed because its auction did not generate adequate investor interest.51916680SC005_NYSE

According to its Securities and Exchange Commission filing, MacroMarkets turned down all auction bids because there was an “insufficient demand for an equal number of Down and Up shares”.  In other words, MacroMarkets was forced to abandon the auction process because the offering would work only if there was an equal number of shares in both the “up” and the “down” trusts – and if each pair of shares totaled $50.  The firm had initially set a minimum closing investment pool of $125 million, though CEO Sam Masucci did not disclose the value of the bids received before pulling the plug.

MacroMarkets sought out investment from homebuilders and banks who want to hedge their housing exposure, as well as foreign investors seeking a stake in U.S. real estate.  The problem is that investors had difficulty valuing the shares because it meant predicting the movement of the 10-city index on which the offering was based.  That’s not easy in a housing market where prices may not have bottomed out yet.

When housing trusts eventually restart, their shares will trade under the symbols UMM for “up” and DMM for “down” on the NYSE Arca, the New York Stock Exchange’s all-electronic U.S. trading platform.

Sovereign Wealth Funds Still Interested in U.S. Real Estate

Wednesday, May 13th, 2009

Sovereign wealth funds (SWFs) have been closely watching the credit crisis evolve, according to a Deloitte LLP report.  The good news is that they haven’t entirely lost their taste for American commercial real estate. water-academy-wokshop-dsc_0451

Consider that two of 2008’s highest profile transactions were the Abu Dhabi Investment Authority’s $800 million acquisition of the iconic Chrysler Building and the Kuwait Investment Authority’s $3.95 billion joint venture to acquire the General Motors Building and three additional office towers.

Deloitte notes that SWFs are breaking with their “traditionally conservative, passive investment practices” to pursue interests in partnerships and joint ventures with American real estate firms and investors.  “This shift to broader and more active investment relationships may require that SWFs pay greater attention to increased political, media and public scrutiny, as well as their need for greater operational transparency,” according to the report.

SWFs will stick to the playbook of acquiring trophy and other Class A assets.  It’s unlikely that SWFs will focus on non-performing loans since that would require extensive involvement in the American legal system of foreclosure/bankruptcy in order to protect their rights as lenders.  The relative strength of the dollar — to the extent it is an indicator of future strengthening of the U.S. economy ahead of other countries — could be considered a way to protect the risk of any further currency decline in the home currencies of the SWFs.

Rising Inflation Rates Demand Caution When Investing

Tuesday, December 2nd, 2008

Inflation has returned with a vengeance, with a 1.1 percent increase reported during June – courtesy of soaring energy and food prices.  The Federal Reserve reacted to the warning signs on June 25, when it froze the Fed funds rate at two percent – ending nine months of rate cuts that it hoped would revive the shaky economy.  Right now, the Fed believes that rising food and energy costs will negatively impact the economy for several quarters to come.  Consumers agree.  A survey conducted by the University of Michigan’s Year-Ahead Inflation Survey concluded that consumers believe inflation will reach an annual rate of 5.2 next year, the highest level since 1982.  Because they feel so pinched, people will be extremely cautious with their money.

Typically in an inflationary environment, investors look to lock their capital into assets that will protect value over the long term.  However, every time the Fed hikes its overnight fund rates, it becomes more expensive for banks to lend money.  So we have the capital markets acting as a restraint against the natural cycle of surging reinvestment in an inflationary environment.  The best advice for investors seeking a haven is to focus on quality – triple-net-leased, high-credit buildings in strong markets.  These buildings will protect the value of capital and even have good prospects for appreciation.

As consumers, we have the deflationary economy until the dwindling profits hit our businesses.  What’s the best way to ease the slide?

Fannie, Freddie and the American Taxpayer

Thursday, September 11th, 2008

As the United States government commits a bare minimum of $100 billion of taxpayer money to bail out Fannie Mae and Freddie Mac, the final reckoning depends on how effectively Washington runs the mortgage powerhouses.

According to the Christian Science Monitor, with the sheer magnitude of Fannie and Freddie – with $5 trillion in home loans on their combined books – the taxpayers’ burden is likely to add up to billions of dollars very quickly. 00037darling-let-s-get-deeply-into-debt-postersThe worst-case scenario could see the tab rise as high as the $125 billion it cost the taxpayers in the early 1990s to bail out failed savings-and-loan institutions. The rosiest scenarios hypothesize that the short-term cash infusion might be recouped with little or no net cost to the taxpayers.

Part of the reason that Fannie and Freddie are under conservatorship is that foreign central banks and investors have been divesting themselves of American mortgage debt, because they are nervous about falling prices, weak credit and the weak dollar. Since foreign ownership represents $1.4 trillion, it is a sizable piece of the puzzle.

The bottom line is that every U.S. taxpayer is now tied directly to the troubled housing market. And the stakes here are significantly higher than the government’s $30 billion bailout of Bear Stearns. The ultimate cost to taxpayers is tied directly to the depth of the housing slump. If housing prices continue to fall and foreclosures rise, the losses to Fannie and Freddie will increase. The opposite scenario would be far better news for taxpayers.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), because Congress chartered them to create a stable mortgage market. They have functioned well by guaranteeing home loans or buying them outright. Even with steep declines in the number of sales and prices, investors have continued to fund home loans with a Fannie or Freddie seal of approval; this has kept mortgages relatively available and affordable.

The Treasury Department had no alternative but to intervene, become an equity investor in Fannie and Freddie, and a buyer of their mortgage-backed bonds. Their objective is to restore consumer confidence in the credit markets, reduce the cost of mortgages, and help the housing market recover.