Monday, November 17, 2014

To the Telecommunications Assets with Alacrity

Investors are increasingly looking into innovative investment opportunities, such as securitizing telecommunications assets. This week while discussions about plummeting oil prices and potential interest rate increases were driving the discourse on the direction of the markets, Goldman Sachs stated that it would invest $470 million in a REIT that invests in cell towers. These telecommunications assets are becoming more and more important, as data-dependency is increasing, and investors are capitalizing on this growing demand for data.

The space is currently controlled by three substantial companies, as well as many minor participants. However, perceived potential for returns is driving investors to consider deploying significant capital into the space; this trend would theoretically result in an increase in the number of players and perhaps minimize the market share of the predominant participants.

As the amount of data demanded is rising rapidly, the current rate of consumption will result in IP traffic exceeding the 1000 Exabyte threshold, the equivalent of the memory of more than 10^20 iPhones, by 2016. Moreover, the data demanded by mobile users will account for more than fifty-percent of the total traffic by the same year. In 2018, the gross global internet traffic will be 64 times the volume of gross global internet traffic in 2005. Investors are aware of these trends, and they are reacting accordingly.

The increase in data demand will have a remarkable effect on investors in real estate. In August, the IRS announced that it would allow certain companies investing in telecommunications assets to possibly qualify for REIT status. Although these announcements do not ensure that the space will expand in the future – past announcement are not used as precedent for future decisions – they indicate an inclination to enable an expansion in the definition of real estate.

Wednesday, November 5, 2014

American Investors are Adapting to Reduced Returns

Today, the confluence of the economic environment in Europe and the uncertainty about China is causing foreign investors to acquire assets in the US and compelling American investors to adapt. The slowdown in China’s GDP growth and the stagnation in Europe are leading investors to look for secure and stable investments. Consequently, they are increasingly looking to invest in the United States, resulting in rising real estate prices in cities like New York and San Francisco. Investors are as a result seeking returns in secondary markets.
Investors from across the globe are bidding up prices in the US as they look for places to put their money. They are less likely to acquire assets in Europe, as its economies are experiencing sluggish GDP growth. There are signs that the Eurozone may be on the verge of recession.  Investors understand that there are structural issues with the Eurozone economies. They are loath to invest in the area given its economic environment, as well as Eastern Europe’s social instability. Investors are instead looking to acquire assets in the US. 
Additionally, the apprehension about the course of the Chinese economy is convincing investors to transfer their wealth to the US. There is speculation that the Chinese economy will not experience the rapid rates of GDP growth that it experienced in the 1990s and 2000s. Public policy, as well as other issues, may prevent its economy from expanding as it becomes less dependent on exports.  As a result, investors are acquiring assets in the US, in particular New York and San Francisco.
These investors are interested in acquiring assets that they perceive to be secure and stable. The assets of choice have been prize properties, such as the Waldorf Astoria that was acquired for a record amount this month.  Investors from East Asia, the Middle East, and Scandinavia are investing in these prized properties in city centers in cities like Boston and New York. As a result, the values of offices in these areas have risen to 10% over the previous price peak in 2007.
U.S. investors are consequently investing in assets in other markets with the potential for greater returns. U.S. investors are finding that they getting a better bang for their buck in cities that are considered secondary to cities, such as New York and Boston. Additionally, investors have been investing their capital increasingly in developments and redevelopments. 
Going forward, investors should consider the pressure on real property prices caused by the influx of foreign capital, and the impact that it’s having on returns. The intelligent investor will seek out returns in markets outside of those considered to be the homes of prized properties, as well as in development and redevelopment projects.