Here Professor of Urban & Property Economics at Henley Business School, Michael Ball gives his own thoughts on the current real estate market slowdown in the UK, and presents his expectations for the remainder of 2017.
2017 could well be the year when the UK housing market hits one of its periodic turning points after a sustained five-year run of 5 to 10% annual price rises and an up-coming ten-year anniversary since the last crash. Price averages, of course, belie much greater rises in places like London and the South East. Indications of a slowing market abound, particularly with respect to prices and time on the market. Many rightly attribute the slowdown to affordability factors following such strong price growth. Optimistically, that could lead to a less frenetic market with government homeowner initiatives sustaining the expansion in new build. Nonetheless, digging beneath the headlines suggests that many drivers of recent housing market expansion are no longer humming so positively.
Market-wise, Inner London often leads the way and news from there has been bleak for some time and not just at the top of the market. So, Rightmove’s report of a 15% price drop in Kensington and Chelsea for 2016 may indicate lost froth at the top but also raises wider concerns.
The biggest change is the falling away of overseas investment. Uncertainty over the pound plus capital and credit constraints in places like China have all contributed but home-grown factors have played a key part. Though stamp-duty rises are often blamed, some classic bubble features seem to be unwinding, especially in London, related to over-supply and mis-pricing, the super-hyping of neighbourhoods and over-estimates of the long-term demand for small ‘luxury’ accommodation. Chastened investors may take quite some time to return. This is of broader importance because experience following the financial crisis suggests that international activity has wider impacts on the market and sentiment.
Nationally, classic market drivers are turning negative. Earnings have been rising ahead of inflation but forecasts suggest this trend is coming to an end. Moderation in real earnings growth not only dampens house purchase and trading up but it also limits the potential for rent increases, depressing landlord returns.
On the mortgage front, some rise in interest rates is in the offing. Though interest rate rises are likely to be limited in the near future, they may currently have a disproportionate effect on the housing market as affordability is so stretched. Cautious lenders if they fear rising default rates may add higher risk premiums to mortgage rates and restrict lending as well.
Landlords are now major holders and purchasers of homes. They face the prospect of a rising tax burden as relief on some expenses is withdrawn and mortgage interest write-offs gradually limited. Moreover, if the Government’s stated aim of drastically reducing immigration has any effect, landlords will lose a key source of new demand. Poor prospects for rents and tenant demand combined with rising costs and taxes could create a depressing scissors effect on landlord returns, significantly discouraging investment.
Expectations matter and can suddenly switch. That Britain has a housing shortage has clearly been absorbed by home owners and investors alike. But there is a danger of thinking of demand as purely population driven and so always there, whereas it is incomes and affordability that count far more. Variations in them, combined with tight supply, make the UK’s housing market particularly prone to sharp price swings.
Counter to all this gloom is the prospect that an improving global economy may lift the UK and its housing market with it. Nevertheless, the balance of risks is shifting towards the downside. So, forecast-wise, this year may turn out fine but clouds abound and are likely to thicken as the year progresses.
This month’s Executive Insight section looks at the Indian housing finance sector and the work of Jayesh Jain – the Chief Financial Officer of PNB Housing Finance. Jayesh is a fellow member of the Institute of Chartered Accountants in India, and also holds certifications from ISACA, USA on Certified Information System Auditor (CISA) and Certified Information Systems Manager (CISM). With over 17 years of extensive experience in the Housing Finance Sector, prior to joining PNB Housing Finance Ltd, Jayesh worked with GRUH Finance Limited, subsidiary of Housing Development Finance Corporation(HDFC) Limited, in various roles and has been working as Chief Financial Officer ever since January, 2006.
He is a seasoned professional with experience in areas of Strategic Planning, Budgeting & Reporting, Resource Mobilization, Accounting & Auditing, Forensic Accounting, IT Governance, Data Mining & Analytics and Fraud Control & Regulatory Compliance. His current role encompasses a wide range of duties and responsibilities which varies from dovetailing with the business strategy, to chalk out the financial estimates of the Company and overseeing the actual performance in line with the estimates, ensuring proper and accurate Financial Records, managing tax compliances, monitoring the Company’s growth and advice peers to improve operations through analysis of various analytical reports such as Cash Flow, Unit Costing, Ratio Analysis, Yield analysis, Cost of Borrowing Report, Spread Analysis and developing & maintaining policies/process and systems of internal controls/checks. Additionally, he’s also responsible for Treasury, Capital Raise (both debt and equity), Investor Relations and Corporate Planning.
PNB Housing Finance Limited is a public listed housing finance Company headquartered at New Delhi with branches in major cities across India. The Company is the fifth largest housing finance Company by Loan Asset and the second largest by deposits in India, while also being the fastest growing HFC in India with a Hub and Spoke target operating model. PNB Housing, as of 31st December 2016, has an AUM of INR 37,745 crores and Loan Assets of INR 34,330 crores. It has one of the lowest Gross Non-performing assets and Cost of Borrowing of 0.37% and 8.81%, as of 31st December 2016 respectively. The Company also enjoys the benefit of strong parentage of Punjab National Bank, the second largest Public Sector Bank in the Country.
What differentiates PNB Housing finance from its competitors? Where does the Company stand nationally?
PNB Housing Finance is the fifth largest player amongst housing finance companies in India, with 58 branches spread across 35 cities in India.
I’d say that our main advantage, when compared to our competitors is our unique target operating model empowered with a robust technology platform. We have implemented wing-to-wing enterprise system solution, which cuts across all functions and all geographies. Our target operating model brings in efficiency of scale in the system. Further, our people with extensive experience in the mortgage industry and work towards faster and seamless execution, in compliance with the regulation.
Back in 2015, PNB Housing successfully implemented a comprehensive business transformation and reengineering exercise ‘Kshitij’, led by Mr. Sanjaya Gupta, the MD of PNB Housing Finance. The transformation included revamping of our business processes, organisational restructuring, relook at policies and most importantly, creating and implementing a strong and scalable target operating model, which I believe brings in high productivity of our people. Our branches are the primary point of sale/service, focused on origination of loans, various collection processes, sourcing deposits and enhancing customer service, while our processing hubs and zonal offices provide support functions, such as loan processing, credit appraisal and monitoring, and our Central Support Office (CSO) supervises our operations nationally. Our enterprise system solution (“ESS”) integrates all the activities and functions within our organisation under a single technology and data platform, bringing efficiencies to our back-end processes and enabling us to focus our resources on delivering quality services to our customers. Our branches, processing hubs, zonal offices and CSO are supported by our centralised operations (“COPS”) and central processing centre (“CPC”), which provides centralised and standardised backend administrative activities, payments and processing for our business, relying in turn on the ESS. These processes are to date resulting in significant improvement in PNB Housing’s competitive position and scale of operations. All backend process are ISO certified which lends a lot of productivity in our service standards and turnaround time.
Last but not least, I believe that a major strength of ours is our brand. We are promoted by Punjab National Bank –the second largest Indian public sector bank. The public reposes lot of confidence in our brand; which stands for trust, service and fair play.
What would you say are the biggest challenges facing housing finance companies in India?
I think one of the main challenges facing companies such as ours is the irrational pricing and intensified competition. There are many companies that offer products at very competitive prices. Another challenges that puts pressure on our profitability are business origination and high operating costs, coupled with balance transfers due to restriction by regulators on pre-payment charges. Under this kind of environment, it becomes quite challenging to deliver return on assets or return on equity and fulfil the expectations of the investors.
However, we remain positive, believing in the growth trajectory of the business. We continue doing our business efficiently and maintaining cost levels which shall help in our profitability.
What do you see as the biggest game changers for housing finance companies in 2017?
Back in November 2016, the Indian Government decided to ban the old INR 500 and INR 1,000 currency, which resulted in reducing the currency in circulation by more than 85%. I believe that this demonetization exercise undertaken by the Government is a positive step towards bringing transparency in the real estate sector in the long run. As a result, I foresee that valuations and transaction velocity will be more accurate and will gain pace, respectively, over time. The Mortgage to GDP ratio of our country is very low at approximately 9%, especially when compared to other countries such as China (18%), Hong Kong (45%), and the US (62%). Hence, we expect that there is a lot of growth potential to the overall housing finance/real estate industry in India.
Thrust of the Indian Government on the housing sector with the mission of Housing for All by 2022, subsidy on interest payment, under Pradhan Mantri Awas Yojna will most certainly give a boost to the housing finance industry too. Also, the Government’s smart cities mission to develop 100 cities all over the country making them citizen friendly and sustainable will help the industry growth.
What’s in store for PNB Housing Finance in the next year or so?
In the near future PNB Housing is expecting to see an expansion-led growth. As on 31st Dec 2016, we have 58 branches in 35 cities in India and we’re looking forward to increasing this number covering higher number of cities.
With majority of Investments behind us, we expect the operating leverage to play out. We expect that, over medium term, our Cost to Income ratio will be inching towards the Industry average (FY16-17.2%). At PNB Housing we continue to thrive to maintain our GNPA lower than the industry average (31st March 2016-0.87%).
As Chief Financial Officer, what motivates you most about your role?
For me, it’s about the long-term opportunity ahead of us. I’m passionate about what I do and about PNB Housing because I think we’re delivering exceptional service to our customers in respect of their requirements, and doing it in a way that puts both customers and employees first. As the CFO, I get involved in all business functions and I play an active role in developing and defining the overall strategy for the organisation. I act as the face of the Company on all issues related to overall financial performance, which motivates and excites me, while also providing me with a high level of career satisfaction.
How would you evaluate your role and its impact over the last year or so?
As a CFO, my role over the last year was very challenging and also critical from the organisation perspective. Firstly, the Company embarked on raising tier I Capital through Initial Public Offer (IPO) and I spearheaded the overall process. The IPO process involved several critical aspects, including regulatory approvals, appointment of intermediaries, Red Herring Prospectus and agreements to be in place, compliances under SEBI (Stock Exchange Board of India) regulation, Investor Roadshows etc. The IPO turned out to be the largest IPO by a HFC in India and the second largest IPO in 2016, which was oversubscribed by more than 30 times. It also met the largest QIB demand in the last 5 years, with participation from several quality long-only institutional investors, which is something that I am very proud of.
In the past twelve months, I was also, actively, involved in raising funds through securitization at a very critical time, when the gearing of the Company was very high and was close to the upper cap, as per the National Housing Bank (NHB) regulations.
We raised funds, valued at US$150 million from multilateral institution, i.e. ADB (Asian Development Bank). We also became the first HFC to raise funds under Green Bonds from IFC – valued at INR 500 Crores.
As the cost of borrowing is a key parameter for a mortgage company, over the years we also reworked the Borrowing mix, which reduced the cost of borrowing that resulted in improving the profitability of the Company during the year.
Additional assignments that I have been working towards have been improving the profitability and efficiency of our business strategy and providing insight and analysis to various functions.
Turning our attention to real estate appraisal, we interviewed Robert Nord – an expert in appraisal and mortgage loan origination of income-producing properties in Northern and Southern California, the Western United States, and in Canada and Latin America.
Prior to working for his own firm, California True Values, Robert was employed as principal with Arthur & Young in San Francisco Office and Regional Chief Appraiser for First Interstate Mortgage Company, California Federal Savings and New York life in the San Francisco Offices.
As a professional with 30 years’ experience in appraisal - looking at the work of your peers, and in your past experience, how would you say the role of a real estate appraiser has changed over the past decade?
Since 1989, the Appraisal Standards Board adopted the Uniform Standards of Professional
Appraisal Practice (USPAP). Thus, the role of the appraiser has been to standardize in the reporting of their results. But the ultimate results have been the same, to provide the client with answers in a clear and concise reconcilable manner.
Over the past 30 years, what would you say have been the three most impacting turning points for the US’ real estate market?
I think that the most significant turning points happen approximately every ten years or so. These are the supply and demand issues that are coincidental with the capital markets. That is when supply of new space grows and the demand for the space grows as well. Remember when short-term shot up to 13 percent and long-term increased to about 10 percent about 35 years ago, well, the inverse is going to happen shortly. As excess supply, has work itself off the market, interest rates will increase. Long-term government bond yields have trended downward to about 2.5 to 3 percent from over 8.5 percent the last 35 years. And overall capitalization rate will go up from 4.5 to 6.0 percent to 7.5 percent to 9.0 percent over the next 10 years. After all, I can’t imagine a negative return on bond yields, and what it would mean for real estate appraisals? Can you? So, I see rents going higher and capitalization rates both increasing with Donald J. Trump as President over the next four years or so. When were overall capitalization rates at 5 percent? 60-years ago? So, you can see how the cycles have influenced our work from the recessionary 1979-82, 1989-94 and the 2007-10 periods. During the 1980s, 95 percent of my work was for lenders. But it changed to 95 percent non-lenders in the 1990s. So, you can see that cases involving values can grow beyond lending.
Over the years, which would you say have been your most successful and rewarding projects, and why?
In the 1980s, my work included the 30-story 583-unit high rise luxury residential condominium project in Emeryville, California. In the 1990s, it was the Chevron World Headquarters in San Ramon for ad valorem taxation and the 300-acre Lockheed Skunk Works, a EPA super fund site of contaminated soil located in Burbank, California. A bit further north in Saugus was the Rye Canyon facility which had an earthquake fault running through the middle of the site. In 2000, another site included a Class 1 landfill site in Covina. Another site appraised, a gold mine, on the behalf of EPA located in Plumas County with values going back thirty years to 1980. Where do you find land sales? Fortunately, a local assessor in Auburn had a personal printout for 1980. A fortunate occurrence for sure!
More recently, I was involved with a marijuana cultivation facility where I appraised a proposed 170,000-square-foot campus on a 10-acre site in Desert Hot Springs. And to date, no construction has occurred on any such facilities. But there is a plenitude of proposed projects in the open vast desert, which will mushroom from the valley floor. The cannabis will be pampered by air-conditioning and watered in its cultivation area with 13-foot clearance, while the native vegetation sweat to survive in 115-degree plus, summertime heat. This cannabis, which will be grown for human medicinal purposes will contain five times the THC. And since there are no facilities built to date, where are the comparable sale faculties?
Colliers International is an industry-leading global real estate company with more than 16,000 skilled professionals operating in 66 countries. What sets the company apart is not what they do, but how they do it.
The firm’s enterprising culture encourages Colliers people to think differently, share great ideas and create effective solutions that help clients accelerate their success.
Kelvin Chow is Head of Landlord Representation, Office Services Department in Colliers North China. Kelvin has worked in Colliers for 15 years, assisting numerous tenants (i.e. P&G, Oracle, Schneider Electric, Cummins, 3M, Asia Development Bank etc.), as well as landlords (i.e. Poly, China Merchants Shekou Holdings, China Overseas, China MINMETALS Corporation etc.) with dealing with their office leasing related work. Here Kelvin tells us more about Colliers and shares his insights on the real estate sector in China.
How would you describe the current trends in relation to commercial projects in the Chinese real estate market?
In terms of commercial markets or commercial projects, we pay more attention to economy, because the tenants in the office buildings are from various industries. If most industries are prosperous, the economy is strong. China’s economic growth had been decelerating for several years and the current state of the economy is not as strong as it was a few years ago. In the upcoming couple of years, these trends are likely to continue, as the economy transits to service-led growth. The Chinese Government has set 6.5% as the goal of GDP Growth in 2017. Chinese economy is undergoing a period of development and model transformation. Before the new model matures, the economy can’t be prosperous - it needs time. Based on this, commercial projects face more challenges, including tenants’ cost sensitivity, more renewal and less relocation, more downsize and less expansion, trends of moving from high-cost areas and buildings to low-cost areas and buildings which results in decentralization.
One thing must be stressed - commercial markets or projects rely on Tertiary Industry much more than on Secondary Industry and Primary Industry. This is why we could see the market of Tier I cities (Beijing, Shanghai, Guangzhou and Shenzhen) being much more active than that of Tier II and Tier III cities. Simultaneously, the rental of Tier I cities is much higher than that of Tier II and Tier III cities, while Tertiary Industry in Tier I Cities is much more developed than that of Tier II and Tier III cities.
According to the National Bureau of Statistics, out of the Top 15 Cities in Mainland China, in terms of GDP, Shanghai, Beijing, Guangzhou and Shenzhen, which are all Tier I Cities, are in the Top 4 (Shanghai being number 1, followed by Beijing). However, the Tertiary Industry of Beijing contributed close to 80% of GDP, which is much higher than that of Shanghai. It explained why the rental of Beijing Grade A Office Buildings is higher than that of Shanghai and the vacancy rate of Beijing Grade A Office Buildings is also lower. The average vacancy rate of Tier I cities in Mainland China is a little lower than 10%, while the figure of Tier II cities is close to 25%. What a big gap!
We also monitor FDI (Foreign Direct Investment) - the good news is that it remains stable. There are still newly registered foreign-investment enterprises and the total number of existing foreign-investment enterprises still increases, which means that the Chinese market is still attractive to foreign enterprises.
FAI (National Fixed Asset Investment) and REI (Real Estate Investment) is continuously increasing, however the growth decelerates. In 2009, National Fixed Asset Investment increased 23.8%, but in 2016, it was 17.4%. Due to residential markets cools, Real Estate Investment only increased a little (approximately 1%).
To summarise, territorialisation remains the key driver and investment in real estate slowed down. Under such economic and market environment, more and more office buildings landlords take aggressive preference policies, such as more fitting out period, longer rent-free period, lower rental, higher brokerage fee and so on, in order to attract tenants outside the building and retain existing tenants.
In newly developing commercial projects, more landlords invite professional consultancies to get involved at a very early stage, aiming to ensure that the projects are competitive in the long run, as most of the new buildings are located far from the cities’ traditional core areas.
China has seen a boom of co-working spaces in recent years with hundreds of thousands of operators emerging. The concept came from Mainland China in 2015 and grew in 2016 when numerous office spaces were transformed into co-working spaces. There are 3 main reasons for the popularity of the concept:
-Chinese Government encourages entrepreneurship and innovation, which is an important part of China’s Economic Reform.
-As previously mentioned, traditional office space faces more challenges, due to the current state of the market. The vacancy rate is high, especially in Tier II and Tier III cities and these landlords see co-working as a new growth point.
-Co-working space operators learn a lot from WeWork – another successful business model that they have been following.
The most famous operator in Mainland China is Urwork, which was founded in Beijing in 2015. To date, Urwork has entered more than 20 cities in Mainland China. Colliers International was appointed as an Exclusive Leasing Agent by Urwork back in 2015, and has been supporting Urwork with the leasing of its growing number of co-working office spaces.
What shifts do you and the firm expect throughout 2017?
In the current Chinese market, most enterprises return back to Tier I Cities, in order to avoid risk. However, what we expect to do is to enlarge our market from Tier I Cities to Tier II, and even Tier III Cities. We plan on selecting our market cautiously and executing our strategy step by step.
The reason for many enterprises returning back to Tier I cities is that they see a market that is not so active. We see it in a different way. Every market has its own unique gene and what we do is trying to find it and then follow it. In a market that is not so active, landlords need more help and usually are willing to pay more. We convey resources such as experience, clients and talents to help the local markets. We believe that we could contribute a lot to these emerging markets.
Additionally, in Tier I Cities like Beijing, we shift our main market from brand new buildings to repositioning and remould buildings. In core city areas, there’s very limited land supply, but many old buildings need to be reconstructed to meet the market’s needs and improve rental return. New technology creates new industries, which need different types of properties.
Besides hardware upgrading, we also advise landlords to start thinking more innovatively – changing your methods could result in higher rental return.
You assist clients with commercial leasing and sales of commercial projects - what are the three top issues they require assistance with?
Our clients, the developers and the landlords of the commercial projects see tenants’ quality and reputation, rental return and leasing speed as their three main priorities.
What makes yourself and Colliers ideally equipped to help with these issues?
Aiming to exceed the landlord’s expectation, what we do is to confirm the exact client positioning at the very beginning. We know that no single office building could meet all tenants’ requirements and actually, it is not even necessary to do so. So what we need to do first is to define what kind of tenants we should specifically focus on - based on industry activity analysis, office leasing market knowledge and forecast, competitive buildings analysis and comparison with our representing buildings, market leasing transaction data etc. Then we provide clear client portrait –which could guarantee the tenant quality and reputation, as well as rental return and is valuable for the leasing speed. In addition, to make sure that the building could be leased as fast as possible, we approach the target clients directly, not only relying on general agencies, as most companies do.
Last but not least, in 2017, we would pay more attention on domestic companies. The strength of international agencies is to serve MNCs. However the current Chinese economy and market environment, present more opportunities for Chinese companies to be active in relation to office setting up, expansions and relocations.
Commercial real estate industry executives are optimistic about Q1 market conditions while taking a "wait and see" approach to new Administration policies and potential tax reform, according to The Real Estate Roundtable's Q1 2017 Economic Sentiment Index released this week.
"The Trump Administration and a new Congress are aiming to unshackle the economy by focusing on growth-oriented policies," said Roundtable CEO and President Jeffrey D. DeBoer. "As our Q1 Sentiment Index shows, leaders in commercial real estate are cautiously optimistic about what policy changes may bring, yet concerned about any potential unintended consequences that could threaten real estate's vast contributions to the US economy."
The Roundtable's Q1 2017 Sentiment Index registered at 55 — seven points up from the last quarter. [The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.] This quarter's Current-Conditions Index of 55 increased four points from the previous quarter, and rose 1 point compared to the Q1 2016 score of 54. However, this quarter's Future-Conditions Index of 55 rose nine points from the previous quarter and is up 10 points compared to the same time one year ago, when it registered at 45.
The report's Topline Findings include:
Although 36% of survey participants said asset prices increased "somewhat higher" compared to one year ago, 43% of respondents said they expect generally flat valuations a year from now — reflecting the view that many believe pricing has stabilized for certain property types. Some also noted that inflows of private capital currently favor equity to debt, dependent on the quality of the property.
DeBoer added: "The Real Estate Roundtable and its members want to advance policies that will spur job creation and economic growth, always guided first by research, data and reasoned analysis that inform policymakers' understanding of all issues, particularly when making choices that affect real estate. We hope our information will assist the policy discussion as lawmakers continue to charge forward on proposals that could have an enormous impact on our nation's growth, prosperity and national security."
Data for the Q1 survey was gathered in January by Chicago-based FPL Associates on The Roundtable's behalf.
(Source: The Real Estate Roundtable)
The Fannie Mae Home Purchase Sentiment Index® (HPSI) increased by 2% in January to 82.7, ending a five-month decline. Four of the six components that comprise the HPSI were up in January.
The net share of Americans who believe that home prices will go up in the next 12 months rose by 7%, and the net share reporting significantly higher household income in the past 12 months rose by 5%. The net percentage of those who say that it is a good time to sell a house rose by 2%, while the net share of those who say it is a good time to buy a house fell by 3%. On net, consumers demonstrated slightly greater confidence about not losing their jobs, while the net share of those who believe mortgage rates will go down remained unchanged.
"Three months after the presidential election, measures of consumer optimism regarding personal financial prospects and the economy are at or near the highest levels we've seen in the nearly seven-year history of the National Housing Survey," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "However, any significant acceleration in housing activity will depend on whether consumers' favorable expectations are realized in the form of income gains sufficient to offset constrained housing affordability. If consumers' anticipation of further increases in home prices and mortgage rates materialize over the next 12 months, then we may see housing affordability tighten even more."
Home Purchase Sentiment Index – Component Highlights:
Fannie Mae's 2017 Home Purchase Sentiment Index (HPSI) increased in January by 2% to 82.7. The HPSI is up 1.2 percentage points compared with the same time last year.
(Source: Fannie Mae)
A majority of real estate industry leaders polled plan to increase their US investments this year, as they expect continued growth in the US real estate market in 2017 and beyond, according to KPMG's 2017 Real Estate Industry Outlook Survey: Real Estate Expansion Lives On.
52% of real estate executives polled believe that improving real estate fundamentals in 2017 will be the biggest driver of their company's revenue growth. 91% of investors are bullish on access to equity capital, with 25% expecting an improvement in 2017 and 66% believing that the positive trend will remain the same. 51% of survey respondents also indicated that foreign investment in US real estate will increase in 2017.
"A growing US economy, coupled with healthy real estate fundamentals and strong access to financing and capital, make real estate leaders optimistic about a continued 'boom' in the US market," said Greg Williams, National Sector Leader, Building, Construction & Real Estate, KPMG LLP. "Although prices of Class A assets in the US are high and yields are lower, the promise of reliable returns leads to sustained interest in the sector overall, especially when compared to other global markets."
2017 Strategic Initiatives for US Real Estate Companies According to the survey, 41% of real estate company executives are planning for a significant investment in organic growth in 2017, including product development, pricing strategies and geographic expansion.
"We anticipate continued growth in the open-ended fund and debt fund spaces, as these vehicles may enable investors to obtain a stable yield, diversification, and, if they invest in an open-ended format, higher levels of liquidity," said Phil Marra, National Real Estate Funds Leader, KPMG LLP. "We also expect to see an influx of new investment in real estate, both from existing investors as well as new entrants."
58% of survey participants also indicated that they are pursuing cost-related strategies to improve bottom-line results, including the implementation of new technology to address inefficiencies and process improvements.
Three Uncertainties Real Estate Executives will face in 2017:
(Source: KPMG)
Winans Investments has created a history book, ‘Investment Atlas II’, which examines all US presidents since 1849 and how stocks, bonds and housing performed during their terms.
Their research has found compelling comparisons to past presidential elections. In the wake of Trump's victory, the media is focusing on parallels with "Give 'em Hell" Harry Truman's surprise 1948 victory over Thomas Dewey, or the "Hanging Chad" mess of 2000 that required the US Supreme Court to rule in favor of George W. Bush.
However, investors should focus on the Carter-Reagan transition of 1980-81 in which the 9% post-election stock market rally ushered in one of the greatest investment booms in US history!
While today's economic picture is not identical to the 1980's (especially when it comes to the level of interest rates and inflation), there are Reagan/Trump positive similarities that investors need to know:
Lower Business Taxes- Since 1913, US corporate income taxes have ranged between 1% - 53% with the current tax rate at 36%. The Trump plan to reduce business income taxes to 15% would be the largest tax cut for corporate America ever! Bottom-line: lower business taxes suddenly makes US stocks attractively valued versus other global investments.
Reduced Regulations - The regulatory pendulum is swinging away from post-Great Recession punishment towards deregulation in order to spur economic growth. This has caused a large shift in stock market leadership towards financial services, manufacturing and energy shares.
Lower Investor Taxes - In addition to a proposed reduction in individual top tax rates from 40% to 30%, investment related taxes (capital gains, dividends, etc.) are likely going to be substantially reduced. The Trump plan also calls for phasing out the Obamacare investment tax and lowering tax rates for short-term capital gains.
Stronger US Dollar - As economic growth expands, a country's currency should increase in value. Similar to the US dollar's historic rally in 1985, demand for foreign purchases of US stock, bond and real estate investments should boom!
There are other positive economic developments to also consider:
Gradual Interest Rate Increases - It appears that the Federal Reserve will not make the mistakes it made in the late 1930's when it mishandled exiting its Depression Era "0% interest rate" policy and triggered the Roosevelt Recession. Today, inflation pressures are relatively low, and the process of raising the Fed Fund's Rate ¼ point at a time will gradually return the US to a normalized interest rate environment while economic growth accelerates in a healthy manner.
Republican Controlled Congress - Unlike Reagan, who faced challenges from a Democrat controlled Congress through his entire presidency, Trump should have a faster & easier time enacting much of his pro-business agenda over the next two years.
Lots of Fuel For an Extended Bull Market - Since 2008, many investors have kept large amounts of cash in money market accounts and CDs. As the economy expands over the next few years, much of this money could be invested in US stocks. There could also be an investment shift from low yielding municipal and treasury bonds into US equities.
With the Trump administration's ambitious economic agenda, US common stocks should greatly outperform income investments and could achieve annual returns not seen since 1990's average annual returns of 19%!
What Should Investors do?
Investors that do not need investment income and have an average tolerance to financial risk should consider reallocating their portfolios into more US common stocks.
However, any reallocation into more stocks is not without risk. Historically, US common stocks have negative years 27% of the time and serious bear markets 8% of the time (like the 50% corrections suffered in the Dotcom Bust of 2000-02 and 2008-09's Great Recession). Simply put, any decision to increase exposure into more stocks must include a disciplined plan to exit the stock market when key market indicators turn negative in the future.
(Source: Winans Investments)
With news that average UK house prices surged by almost £4,000 in December, specialists from a leading Midlands law firm are questioning whether the so called ‘bank of Mum and Dad’ has started to have an effect on the property market.
“According to the Halifax, house prices rose by 1.7% in December, with the average cost of a property reaching a new high of just over £222,000,” says Neil Stockall, a Partner at Higgs & Sons and head of the Residential Property team.
“This represents the fastest acceleration in property values since the Brexit vote. According to the Office for National Statistics the number of 18-24 year olds living at home is around 3.3m.”
Neil added: “Perhaps the combination of being able to save more, plus some much needed input from parents, has helped some of these young people to take their first step on to the property ladder, thus resulting in this surge.”
Many parents want to help their grown up children in whatever way they can and it is increasingly common for first time buyers to turn to the 'Bank of Mum and Dad' for help in raising the required mortgage deposit. Often parents use their nest eggs to provide that support – particularly with interest rates on savings being so low at the moment. However, there are several things that parents and their children should bear in mind if they want to avoid future problems.
“A common way for parents to help is to ‘advance their inheritance’ to children. This comes with dangers as, should a parent die within seven years of making such a gift, inheritance tax will be payable if the total gifts within those seven years exceed the parents’ inheritance tax allowance.
“Further, if the child is in a relationship or marriage that later breaks down, then the ‘gift’ from the parents may become part of any financial settlement, with half required to be paid to the child's ex-partner.”
Financial gifts of this nature can, however, be protected.
“It is important that when the new home is bought, the professional advisers involved in the process are made aware that the deposit has been given by a family member. The property title will be noted to reflect this, and an appropriate Declaration of Trust can be prepared.
“An alternative approach is to make any such payment by way of a loan rather than a gift and to have a suitable loan agreement drawn up which can be secured against the property. This approach would need sanctioning by any lender, so full disclosure should be made when applying for a mortgage.
“Any such loan could be interest free and the parent may not even really expect that it would actually be repaid, but in the event of a breakdown in their child’s relationship, they will at least know that that payment will fall outside any dispute.
“When it comes to the possibility of a breakdown in a child’s relationship, nuptial agreements may be extremely helpful. These are being given ever greater weight by the courts, provided they are entered into properly. Such agreements would be subject to various qualifications and it is important that expert advice is sought from a specialist in this area of family law prior to committing.”
(Source: Higgs & Sons)
As the new US President settles in, Zillow finds the value of the White House has appreciated 15% since Barack Obama's inauguration in 2009.
The White House, valued at $397.9 million has appreciated 15% since the Obamas moved in eight years ago. The White House is the most valuable home on Zillow’s valuation list.
President-elect Donald Trump will be the 44th President to move into the 55,000 square-foot home(ii). Unlike some past presidents, luxury living is not new to Trump, who is moving from his three-story penthouse in The Trump Tower to one of the most famous homes in America.
The value of the White House, currently at its peak, is expected to appreciate 3 percent over the next year, in line with home value growth expected throughout Washington, D.C. Home values across the country have appreciated 6.5 percent over the past year and 9 percent since Barack Obama's inauguration in 2009.
"President-elect Trump is moving into one of the most famous homes in the country -- and, according to Zillow, it's also the most valuable home in the country," said Zillow Chief Marketing Officer Jeremy Wacksman. "President Obama's term coincided with a massive recovery of the US housing market, and that's reflected in the updated value of the White House. Home values across the country are growing at their fastest pace since 2006, with many markets setting new records -- one of the reasons why the White House is worth more now than it has ever been."
The White House has 132 rooms, 32 bathrooms and sits on 18 acres. Notable features include basketball and tennis courts, a sun room and a library, all of which influence the home's Zestimate. Were a potential buyer to take out a standard 30-year fixed mortgage on the White House today, the monthly payment would be about $1.6 million(iii), according to Zillow. The monthly rental payment would be just over $2 million per month.
(Source: Zillow)
In March, CPIH will become ONS’s headline measure of inflation. CPIH is more comprehensive than the current CPI measure as it includes the costs associated with owning and maintaining a home, known as owner occupiers’ housing costs (OOH).
The CPIH estimates these costs using a method known as ‘rental equivalence’. ONS has today published an article which looks at other methods for estimating OOH and what impact changing the method for estimating OOH would have on CPIH. The article finds that over the period 2006-2015, changing the method for calculating OOH would change the average annual CPIH inflation rate by a maximum of 0.2 percentage points compared with CPIH using the rental equivalence method. When looking at the period 2012-2015, which is less affected by the economic downturn, the average annual rate only varies by a maximum of 0.1 percentage points.
ONS Deputy National Statistician Jonathan Athow recently published a blog post about the challenges of measuring owner occupier housing costs and why ONS favours using the rental equivalence method for estimating these costs.
Commenting, Jonathan Athow said: “Estimating the costs associated with owning and maintaining your home is one of the most difficult issues in inflation measurement. However, we believe that the rental equivalence method best reflects these important costs.”
(Source: Office for National Statistics)
The next game changer that Finance Monthly spoke with is Pat O’Connor who has been a leader in the real estate data business since 1988. He has expanded the real estate data business from a two-page monthly newsletter on Houston apartment trends into a national database for both commercial and residential real estate.
What inspired you to start Enriched Data?
The data quality from existing national data providers simply did not have either the breadth or depth of quality required for us or other real estate professionals we met. A second factor was the existing commercial real estate data sources had either limited or inaccurate contact data for the owners. In many cases, the owner contact data was simply the name of an entity. Many real estate professionals need to be able to contact the owners of real estate to transact business. It is incredibly time consuming to start with the name of an entity and have to research to find the name of the owner. The need for accurate owner contact data is a recurring theme we have heard from real estate professionals. They do not want to spend their time researching phone numbers on the internet; they want to spend their time doing deals.
What solutions does Enriched Data provide?
Enriched Data helps companies to increase their revenue by 30 to 100% through a focused effort that includes excellent data, intelligent marketing and real estate professionals. Our efforts are currently focused on mortgage bankers and real estate investment sales professionals. We expect our clientele to expand to include real estate leasing and management professionals, as well as vendors to the real estate industry. Our core purpose is to increase our clients’ revenue.
How are you accommodating small and large companies?
We serve hundreds of clients, including seven of the ten largest real estate service providers in the USA. We also serve one man companies. Our data is accurate and vast enough to supply the big companies. For those same reasons, we help to make the smaller companies more efficient and able to compete with their larger competitors. Our customer service team is pleased to work with companies regardless of size.
What are your biggest pitfalls and how have you overcome them?
Accurate real estate data has been the greatest challenge. We have built proprietary software to facilitate the research process and built in validation criteria to identify anomalies. Training researchers has been a key step in the process. When we started, researchers were only finding email addresses for about 15% of the property owners. They are now finding email addresses, Linked-In accounts and company websites for about 70% of the real estate owners. Quality control is also a vital part of the process. We call the phone numbers to verify their accuracy.
What do you see as the most important challenges that Enriched Data faces? What specific strategies are you implementing to overcome them?
The most important challenges facing Enriched Data are understanding what specific information clients want and how they want it delivered. While it is helpful to meet with clients and prospective clients to discuss their plans and needs, the extreme pace of change in information technology and marketing generates a dilemma where many people don’t really know what they want. In many cases, real estate professionals are attempting to generate sales, whether in building sales, loans, leasing, or as vendors to buildings. The changes in digital marketing and psychographics have not been inculcated by the leadership of many real estate organizations. Having raw real estate data can move you part way to maximizing sales. However, knowing how to use the data effectively is essential. In many cases we are working with clients to help them develop a marketing and sales strategy, and then introducing them to the marketing professionals who can best use real estate data.
How can someone use your data for predictive analytics?
We have a large number of predictive analytics for clients. The simplest for commercial mortgage bankers is providing them with information on maturity dates for loans with large prepayment penalties. Slightly less direct is providing mortgage bankers with information on buildings with construction loans that are prime for long-term debt. The analytics are more complicated for single family. The first step is to understand the target market. The second step is to evaluate people who have used the product, for example, a home equity loan. If the client does not have such clients, it is possible to identify them from the public records. The next step is to use psychographics to identify the types of people who are the most likely to purchase. The next step is to identify a universe of possible borrowers. For example, if the product is home equity loans, you identify property with the requisite amount of equity. The final step is to overlay the psychographics over the universe of possible borrowers to identify those most likely to purchase. Psychographics can often identify people who are four to ten times more likely to purchase.
You have been CEO of Enriched Data since March 2015. What have been or are your priorities in your role?
There have been three priorities. The first priority has been meeting with clients to understand their needs, how they use data and their data requirements which are not being met. Second, we have been building a research team and electronic research tools to facilitate research of real estate sales and mortgages. The third priority has been acquiring tax rolls for 97% of the United States and deeds and deeds of trust to cover the same area. The raw base real estate data from tax rolls, deeds and deeds of trust is merged and then enhanced with detailed contact information on the owners, lenders, and borrowers.
What have you most enjoyed about operating within the sector over the past decade?
Working with clients to understand their needs and then working to fulfill those needs as information technology is changing, has been fascinating. Being part of the generation that has moved real estate from hard copy books to the Internet has been gratifying. It has also been a pleasure to integrate expertise in IT, real estate data and determining how to locate and integrate multiple sources of data. While the term big data is often used, we are spending more and more time seeking and integrating additional fields of data to enrich the data and provide clients with the data they need.
What are the main drivers for the development of the real estate industry in the US in the near future?
There are at least three important trends affecting real estate in the US. Retailers are seeing more and more retail spending moving to the Internet. We will continue to see entire categories of retail businesses, such as movie rentals and book stores that are largely replaced by internet sales. There are trends in office space use however they are not as clear. There are factors tending to reduce the amount of space a company needs, departments working from home. For example, many appraisal firms are sharply shrinking their office space requirements by having team members work from home. The other trend in office is for micro spaces with companies such as WeWork providing office space options from as low as $45 per month. There are a number of competing companies and is likely to be consolidation in the micro-office market. Finally, the number of households living in apartments has been increasing due to: 1) higher home prices, 2) reluctance to commit to a mortgage and a fixed location, and 3) people are waiting longer to get married and have children.
What are Enriched Data’s goals moving forward? What does 2017 hold for the company?
Enriched Data’s goal is to have the best quality residential and commercial databases available, merged with the teams and technology to allow clients to effectively use data. We have forty software engineers, which is more than any of our clients to my knowledge. Providing both the data and the information technology and marketing resources to allow clients to effectively use data is our long-term goal. During 2017 we will be working on completing our inventory of accurate contact data for all real estate owners of any commercial property worth over $2 million across the US.
