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Friday, July 29, 2011

Charge It....

by Norm Arychuk Debt Capital Markets, Toronto

There has been much said about the debt ceiling in the U.S. I have heard some good ones that are worth sharing:

“You mean that the government can approve a budget for spending and then decide later if they want to actually pay for it. Rather odd don’t you think?”

“The debt ceiling in the U.S. is akin to loading up your Visa card and then deciding later if you actually want to pay it or not.”

“Is the U.S. economy going to be the next Japan?”

As the deadline to raise the ceiling approaches, the fear is not necessarily that Congress will not allow for more borrowing, but rather that there will not be significant enough budgetary amendments to satisfy the holders of U.S. Treasuries, and of course the rating agencies. Maybe it is time that the U.S. recognizes that it is not the undisputed financial powerhouse that it once was. Many nations have been taken down a peg or two as a result of not only the financial crisis, but a long history of living on borrowings that are not sustainable. There has been incredible pain felt in the U.S., hopefully it has been enough.

Gold. From 1833 through 1919 it had a price variance of about a buck, hovering around the $18 - $19 range. From 1920 to 1971, it experienced a price doubling from $20 – to $40. 1972 and 1973 contributed sufficiently to see a price of $100. By 1979 it hit $500. In 2010, it finally broke through the $1,000 threshold and now stands near $1600, only a year later. There are predictions that it will hit $2011 by the end of 2011. This acceleration of price demonstrates the general lack of confidence in many ways, in the ability of the governments to manage fiscal policy in tune with growth. Is it too late to buy gold?

Wednesday, July 27, 2011

Weighing Commercial Real Estate

By Michael Fonda (Chicago)

Hugh Williams, my partner at Avison Young, suggested that I read the latest biography of Warren Buffett, The Snowball: Warren Buffett on the Business of Life by Alice Schroeder. In the book, Schroeder writes about a favorite adage of Buffett. "In the short run the market is a voting machine but in the long run it is a weighing machine."

Reading the Wall Street Journal's Property Report this morning, I came across the following article: Lehman Cranks Up Sales as Prices Rise. This news story aptly illustrates Buffett's adage. As I discovered by reading Money and Power: How Goldman Sachs Came to Rule the World by William Cohan, in February of 2007 Goldman marked their mortgage securities at 98; in March of 2007, those same securities were marked at 55. This drastic change in Goldman's marks destroyed the value of the real estate securities market and triggered the calamity that followed. Goldman had the cash (the votes) and their investment banking competitors, like Lehman, didn't.

Fast forward to 2011. Lehman Brothers Holdings has agreed to sell a portfolio of 10 office buildings in Rosslyn, Virginia to a real estate fund of Goldman for approximately the same price that Lehman paid for the portfolio in 2007. As Buffett might conclude, the asset weighs the same in 2011 as it did in 2007.

It's a shame. All this pain and, four years later, the value of real estate remains the same.

Thursday, July 21, 2011

Interest Remains in All Things Producing, Leasing or Developing

By Walsh Mannas (Calgary)

The Avison Young Office Report for the second quarter of 2011 (found here) points out Calgary’s office market has continued its recovery with quarter over quarter positive absorption rounding out two years of declining vacancy. As drilling rig utilization and energy investment continue to increase in Alberta we see more positive absorption possibly at a quicker pace occurring in the remainder of 2011.

The office leasing market is certainly not the only market we are witnessing robust leasing and investment activity. As the Avison Young Mid Year 2011 Retail Report (found here) points out retail leasing has also had a strong start to 2011 as retail sales increased and unemployment trended downward. Popular American retailers have also began to enter the Canadian market (Target, J. Crew) which has motivated Canadian groups to look at consolidation and diversification.

With China’s CNOOC stepping in to purchase Opti Canada Inc, a prominent oil sands producer (see CBC's coverage here), Canadian Tire announcing its purchase of the Forzani Group for $781M (see Reuters' coverage here) and Target taking over up to 220 lease hold interests for $1.8-billion from Zellers, the only certainty in the Alberta market is the liquidity and interest in most things producing, leasing or developing be they energy or real estate related.

On the investment front we have recently seen low benchmarks being set in both retail and office transactions with interest returning to all classes of real estate investment product in almost every part of the province, be it small retail in Lethbridge, distribution facilities in Calgary or core office product in Red Deer.
I am interested to see how the American Government resolves the debt ceiling issues surrounding the August 2nd deadline because it seems any measure but to increase the debt ceiling could have far reaching repercussions into every market in the world, including the ability to stunt Alberta’s robust and quickly recovering economy.

Friday, July 15, 2011

Budget Implications for Property Investors

By Amy Erixon (Toronto)

Great article in NY Times this week by David Leonhardt called “Why Taxes will Rise in the End”. Bottom line, he states, is there is no such thing as a free lunch. Americans want to protect social security and medicare, two of the three great, looming unfunded government liabilities, yet they stubbornly refuse to pay for it. Can’t have it both ways.

Developed societies around the globe are facing the same political issues: slow-growth economic consequences of financial system de-leveraging and relentless demographics of aging populations. At a time governments should be addressing coherent energy, infrastructure investment and job creation strategies to preserve standards of living in light of rapidly shifting global economic and political realities, they are instead trying to figure out any way to avoid the political heavy lifting of prioritizing spending, rationing public largess and distributing the burden to pay for it. This debate will only get harder as the preponderance of voters moves toward retirement.

In thinking about implications for real estate investors, property tax burdens are an obvious concern. In the US, where avoiding ones share of the tax burden has become the national sport this is one of the causes of job migration from downtown to suburban bedroom communities. A second area likely to be impacted are tax free rollover schemes as well as long term capital gains treatment, duration and marginal tax rates on these profits.

The federal government has already started to examine tax treaties as a way to achieve the multiple objectives of increasing revenues and steering foreign investors from equities into debt products that can help reduce the swollen Fed balance sheet. This is clearly low hanging fruit for the political crowd, since by definition foreign institutions are not voters.

As liquidity returns to the property markets it is important not to lose sight of the fact that tax policy will have a meaningful effect on returns, hold duration and composition of buyer/renter population. At the regional and intra-regional level tax policy will also have an impact on real and relative job growth which translates into rental rate growth and long term property valuations.

In the end, governments can only get the money from the people who have it. And the reality is, long-standing public sector income redistribution schemes cannot be phased out overnight.

Monday, July 11, 2011


By Michael Fonda, Chicago

After golf yesterday afternoon, one of my golfing buddies asked me what I was reading. I told him that in addition to Money & Power, How Goldman Sachs Came to Rule the World, I am also reading Alexis de Tocqueville's Democracy in America.

That evening I discovered this little gem in de Tocqueville's book (which was written in 1840).

"China appears to me to present the most perfect instance of that species of well-being which a completely central administration may furnish to the nations among which it exists. Travelers assure us that the Chinese have peace without happiness, industry without improvement, stability without strength, and public order without public morality. The condition of society is always tolerable, never excellent. I am convinced that, when China is opened to European observation, it will be found to contain the most perfect model of a central administration which exists in the universe."

Ponder that!

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