Situs Newswatch 5/26/2017

Berlin: From Cold War Capital to Hot CRE Market

Berlin, the one-time symbol of the Cold War between East and West, once cast adrift in the ocean of Communist East Germany, has now turned into a thriving commercial real estate market.

Thank Britain’s exit from the European Union in part as the office sector benefits from the expected relocation of banks and companies from the UK following the country’s decision to leave the EU.

Berlin, once seen as only the capital of government, is now a vibrant hub for companies. A key reason the German capital is booming is that it offers great value to businesses. A study published last February shows the total costs of renting office and living space are significantly lower in Berlin than in nearly every other leading world city, clocking in at just $28,400 per employee per year against $111,900 in New York, $105,400 in Hong Kong and $88,800 in London.

“Berlin is seen as a safe haven for investors’ capital in residential real estate, be it redevelopment of the housing blocs to refurbishment of historic buildings that are both characteristic for Berlin. Berlin residential has experienced very strong growth in capital values in recent years and experienced a massive investment in office and retail building as the population in the capital has grown. While some of this investment has been driven by mean-reversion theory, I suspect another driver is that the growth in residential investment suggests that market players are expecting Berlin is on its way to becoming one of the major European hubs for IT, advertising and retail businesses,” says Situs’ Wilhelm Hammel in Germany.

Hammel warns that some circumspection is required in looking at Berlin: “It is one of the largest European cities by size and has considerable space still available for new developments and hence additional newer space. These may be limiting factors on growth potential in the short to medium term.”

Spectacular economic growth and great political stability are combining to make Berlin increasingly attractive to global companies and real estate investors alike, but investors need advice of professionals, like those at Situs, before taking risks.

Situs Translator:

Mean reversion theory: the theory suggesting that prices and returns eventually move back toward the mean or average.

One-Fifth of Investors Plan to Cut U.K. Assets Due to Brexit
Almost one in five investors plan to cut their share of U.K. assets over the next six months as Brexit nears, a survey shows.

U.S. bank State Street published its quarterly “Brexometer” on Monday, a survey of banks, insurers and other institutional investors’ views on the UK’s plan to leave the EU.

The current issue shows that 19 percent of investors plan to reduce their holdings of U.K. assets over the next six months.

Exactly one-third of them believe that the owners of those assets will want to cut their exposure to the UK over the next three to five years. However, 28 percent believe that the opposite will happen, and say that investors will want to increase their U.K. holdings over that time frame.

State Street surveyed the participants between March 29 and April 19, the weeks following the U.K.’s triggering of Article 50, the treaty provision governing how member countries leave the EU.

The bank found that 31 percent of finance companies said their firms would cut their operations or presence in the U.K. as a direct result of its government’s decision to trigger Article 50, but one in 10 of them would increase their business there.
At the same time, 80 percent of these companies believe that Brexit will change how their businesses operate in the U.K.

Michael Metcalfe, head of strategy at State Street’s global markets division, said the long-awaited Brexit slowdown was showing only “tentative” signs of materializing.

read more: Irish Times

Foreign Banks Reduce Lending to U.K. Commercial Real Estate
North American banks cut new lending for U.K. commercial property by more than half last year as a market slowdown reduced the number of big deals being done.

Banks focused more on refinancing existing loans than extending new credit, a trend that favored domestic firms, according to a survey of 77 lenders by De Montfort University. U.K. banks and building societies were the only group to record an increase in lending in a market hurt by the vote to quit the European Union.

“North American banks active in the U.K. are generally focused on providing acquisition finance in larger transactions, of which there were far fewer last year, partly because of Brexit,” Jon Rickert, investment director at money manager GAM Holding AG, said in an interview.

The weakness of Britain’s commercial mortgage-securities market also prompted a “general rethink by several North American banks around the resources they want to commit to the U.K.,” he said.

Lenders from across the Atlantic extended 3.3 billion pounds ($4.2 billion) in new credit to British commercial property deals in 2016, down 56 percent from the previous year, according to De Montfort’s survey, published Thursday. German and other international banks cut new lending by 18 percent and 25 percent, respectively.

U.K. commercial-property investment shrank by more than a quarter last year with investment at the lowest level since 2012, researcher Costar Group Inc. said in February. The overall volume of new loans fell 17 percent to 44.5 billion pounds, with uncertainty in the run-up to the June 23 referendum on EU membership weighing on first-half activity, according to De Montfort.

read more: Bloomberg

Housing Sales Cool Down Ahead of Summer
Memorial Day Weekend is the unofficial kickoff to summer. Traditionally the housing market slows down, but it looks like the summer doldrums came early to the residential real estate market. Existing home sales have come in down 2.3 percent to 5.57 million SAAR in April. This follows sales of New Homes last month registering their biggest drop in more than two years.

“It’s all about low inventory,” The Collingwood Group Managing Director Tom Booker tells NBC News (Radio), “You just can’t sell what you don’t have. There’s a real lack of affordable homes for sale; it doesn’t matter how much demand you have — people just can’t find them. Plus, builders need to have access to risk capital to buy land, attract or train tradesmen and to build an attractive home.”

A post-election surge in mortgage rates has subsided, allowing would-be buyers a little more breathing room, but low home inventories are making it almost impossible, especially for first-time buyers and millennials.

Blackstone is Taking Over Mom-and-Pop Real-Estate Investing
Blackstone Group amassed one of the world’s largest real estate portfolios by pulling in much more capital than competitors from big institutions such as pension funds, insurers and university endowments.

Now it is taking its show to mom-and-pop investors — and again blowing away its competition.

Blackstone in January launched its first nontraded real-estate investment trust, a vehicle marketed to small investors as a way to participate in the commercial real-estate industry without the volatility of a traded REIT. Such vehicles have faced mounting criticism in recent years over high fees, poor disclosure and other problems.

Yet as of April, Blackstone Real Estate Income Trust Inc. had raised $755.4 million, about 41 percent of all the funds the entire industry raised in 2017, far more than any competitor, according to Robert A. Stanger & Co., an investment bank that specializes in nontraded REITs.

“Blackstone burst out of the gate,” said Kevin Gannon, a managing director at Stanger. “They became number one in the space in short order.”

read more: Wall Street Journal

Here’s Where Old-Fashioned Malls are Beating Amazon
Hair freshly done from the beauty parlor on a recent Friday morning, Ada Clark, 93, and her daughter Carol, 63, met in front of the J.C. Penney in the Pueblo Mall, about 100 miles south of Denver, a typical American small town. Their afternoon plan: a walk around the mall, followed by lunch at Red Lobster.

When the mall was built in 1976, Pueblo was a booming steel town. The Colorado Fuel and Iron Co. was the city’s largest employer, and a now-empty meatpacking plant also offered good wages. The mall — with its 1,100 retail jobs — has outlasted them both. It’s also the social hub for the city — and for the many small towns east to Kansas and south to New Mexico.

“Any time I get out of town to go to the mall and maybe to Sam’s Club, I guarantee that within an hour or so, I’m going to run into someone I know,” said Steve Francis, 60, of Lamar, a town of nearly 8,000 people 120 miles east of Pueblo near the Kansas border. “You take your family, your neighbors, and you make a day of it. The Pueblo Mall isn’t just the only game in town two hours away, it’s the only game in town for three counties.”

The Pueblo Mall is an outlier in the age of, when socks and laundry detergent and televisions — nearly anything you can think of — can be delivered to your front stoop within hours. The rise of online shopping has summoned a death knell for some of the old standard-bearers of retail.

Macy’s and J.C. Penney, for instance, have in recent years reported crippling losses and widespread store closures. When those big anchor stores close, suburban malls find it hard to replace them. Many ’60s- and ’70s-era enclosed malls have been abandoned, razed or reimagined.

“With department store closings, many malls will have to get creative with how they utilize space,” said Amy Raskin, who follows urbanization trends as chief investment officer at Chevy Chase Trust. She said many malls nationwide have converted space into multifamily residential units, whereas more rural malls may take on nonstandard anchor tenants, such as a Walmart.

As revenue from online shopping climbs nationally — up 14.7 percent in the first quarter, compared with a year ago — regional malls like Pueblo’s can compete by tailoring themselves to their consumers, said David Mitroff of Piedmont Avenue Consulting in Oakland, Calif.

“People are ordering online, and that changes the whole shopping dynamic,” Mitroff said. “But now the mall has barber shops, gyms, local stores and other things you can’t just buy on Amazon. Or you can go see what they have. You can touch it.”

read more: Washington Post

Key Index Shows Trouble Ahead at the Mall
Make no mistake about it, the retail apocalypse is coming. But the path to the bottom for brick-and-mortar stores may end up wandering more than one might think.

At least that’s the bet investors seem to be making. For evidence of this, look no further than an index that tracks the value of bonds backed by mortgages on malls and other commercial property.

CMBX index is serving as a real-time indicator of retail bankruptcy bets. The gauge has recovered over the last few weeks after a rough start to the year.

The price of CMBX Series 6 BB rated bonds — the most vulnerable class tracked by index provider IHS Markit — has risen about 5 percent since late February. That’s helped pare the 11 percent slide it saw over the first seven weeks of the year.

Weakness in the gauge implies that investors are wagering on closures and bankruptcies — events that would hurt holders of commercial mortgage-backed securities.

“While we may think our kids won’t be shopping at brick-and-mortar stores, it takes awhile for that to happen,” Mark Connors, global head of portfolio and risk advisory at Credit Suisse, said in a phone interview. “And in the interim, the prices will move around. It takes a long time to kill these things, and it’s usually a wild ride.”

In this instance, Connors thinks that the recovery in the CMBX index stemmed from the measure declining too far, too fast, before undergoing a mean reversion of sorts. He sees this cycle as likely to repeat multiple times as retailers try to stave off bankruptcy.

read more: Business Insider

Fed Will Stay the Course
Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s pre-crisis role on the sidelines of financial markets, analysts and central-bank watchers say.

A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed’s balance sheet and its involvement in markets. The Fed’s assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds, according to Crane Data.

Many analysts and investors worry that significantly rolling back the Fed’s expansion, a course advocated by some in conservative circles, risks disrupting markets and the economy at a time when growth remains tepid. It would also reduce the connections the institution has built with a diverse set of Wall Street firms, beyond the group of banks it dealt with before the crisis.

The Fed has become “like an octopus,” said Jeffrey Cleveland, chief economist at Payden & Rygel, a Los Angeles money manager. “Once you get the power and you are influencing all these markets, do you really want to retreat from all that?”

Investors are already assessing how stocks and bonds might react, when the central bank begins the latest stage of its yearslong retreat from stimulus — likely later this year — by ending the practice of reinvesting the proceeds of maturing bonds into new bonds. The Fed on Wednesday published the minutes of its latest policy meeting, where officials indicated it would “soon be appropriate” to raise short-term interest rates once again.

read more: Wall Street Journal

Financial Tech Is Booming In Brazil
São Paulo may become Latin America’s primary fintech hub, thanks to a fresh crop of Brazilian startups attracting international attention for innovative financial tech.

The New York Times reported Goldman Sachs recently estimated fintech companies in Brazil could generate $24 billion in revenue in the next decade. Goldman Sachs listed Brazil’s digital bank Banco Original, with its award-winning mobile app, and Nubank, a digital credit card company that attracted investments from American venture capital firms like Sequoia Capital, as two shining examples. And that’s just the beginning.

Reuters reported the number of registered fintech startups in Brazil jumped from 40 to around 250 companies in the past two years. One such high-tech startup, Creditas Soluções Financeiras Ltda, which focuses on secured consumer loans, got $19 million from investors in February, including the World Bank’s International Finance Corp. Different experts have their own tallies, but all signs point to dramatic expansion.

“The number of startups in the sector have tripled in the last two years,” Rodrigo Ubaldo, president of the Brazilian fintech association ABFintechs, said according to TechCrunch.

Just last week, the São Paulo-based financial services and brokerage firm XP Investimentos attracted a $2 billion investment from Brazilian banking giant Itaú Unibanco Holding in exchange for a minority stake in the startup. This Brazilian startup boom sets São Paulo apart from other Latin American centers like Buenos Aires and Mexico City. “Brazil has more fintech startups than any other country in Latin America, with venture capital investment reaching $161 million in 2016,” Nearshore Americas reported.

Local regulators have taken note and are now busy writing new legal frameworks to make sure the government isn’t left out of the fintech gold rush. “I believe there is room for further expansion of credit fintechs,” Brazil’s central bank director Otavio Damaso told Reuters. “New regulations would pave the way for that development within a secure judicial framework.”

read more: Business Times

There go Summer Friday Perks
Perks like Summer Fridays are popular among employees, but fewer companies are offering such season-specific benefits.

Only 20 percent of human resources managers reported that their firms allowed their staff to clock off early summer Fridays, down from 63 percent in 2012, according to the results of a survey of 300 HR managers at companies with 20 or more employees from OfficeTeam, a subsidiary of human resources consulting firm Robert Half.

The situation could be even stricter for workers, according to a 2015 survey of 15,723 Americans by Google Consumer Surveys in May 2015. That study found that only 8% of workers received additional time off in the summer, and nearly a third of those who did receive extra vacation time said that their bosses wanted them to remain connected while away from the office.

Employers are cutting back on other perks they provide workers during the summer months. Only 62 percent of companies now offer flexible schedules in the summertime, down from 75 percent five years ago. And less than a third of firms allowed a relaxed dress code in summer — in 2012, more than half of HR managers said they offered this perk.

All hope of a summer break may not be lost, though. The reduction in summer perks could point to companies becoming more accommodating throughout the year, said Cynthia Kong, a senior public relations manager for OfficeTeam. “One theory is that many companies are already offering flexible schedules, remote work options and relaxed dress codes throughout the year,” Kong said.

read more: MarketWatch

Have a prosperous Summer Friday and a great Memorial Day weekend. Our NewsWatch returns on Wednesday.

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