Real estate- is it time to think out of the box?

As an investor since 1995, I have had the pleasure and honor to speak on several investor panels focusing on #real estate investments since December 2016. During these panels the discussions were quite varied; from single family units, multi-family units, commercial and other assets classes in top cities to secondary and third tier cities.

From the interaction with panelists, participations from the conference and additional material I have read, there seems to be a strong consensus that even as investors realize that we are in entering the extra innings of the real estate cycle and the prospect of rising interest rates, they are still focusing predominantly on multi-family units as they are seeking current yield. As cap rates have continue to compress, the investors have moved from the larger international known U.S cities of New York, Chicago Los Angeles etc. to well-known but smaller cities such as Pittsburgh, Denver to still smaller regional cities such as Des Moines, Louisville etc. looking for yield in exchange for potential less liquidity and more risk. Yes, it is true that there are always truly good investments for those who have the local knowledge and are able to seek out the assets that have hidden value; however this becomes more and more difficult for investors.

However, as I mentioned in my last panel; today most investors would no longer doubt that their portfolio should have exposure to international equity as a means to diversify and, over a longer time horizon, reduce risk and capture the larger growth of international economies, especially the emerging markets. True,there can be short term increased volatility but a portfolio with an international component will outperform a purely domestically focused portfolio of stocks.

Thus, I would argue that the time is appropriate for this approach also to more proactively adopted with regards to real estate investments as well. As an investor, I have been asking myself do I continue to increase my exposure to a fully priced and in certain segments, over prices segments of the U.S real estate market, or is it time to seek better #risk/reward opportunities. True, one’s own experiences definitely influence one’s own profile and risk /reward tolerance to #international investments and in full transparency, I have been making international investments since 1987.

I like to give one example of what I believe in generally an out of favor dynamic #international real estate market and opportunity which I believes has a much more favor risk/reward outlook moving forward. In order to have a bit of suspense, I am going to list a few characteristics of the opportunity and then let you know where is the opportunity; ready?

-Average Class A office space rent prices have fallen from an average of $7.3/sqft/month in 2012 to $2.7/sqft/month, and are trading now near recent historic lows.

- Cash yielding, rented assets to creditworthy tenants yielding 7.5%-10% with NO LEVERAGE

- #Interest rates are falling not rising

-Low risk, real estate investment in prime location of a city of US$264 Billion GDP where prices were more expenses than NY in 2012 and now are similar to Prague

- No development or construction risk

- Position to capture asset valuation upside with rental contracts with long term tenants that are automatically adjusted for inflation.

Given these favorable characteristics, I would think that this market warrants a closer look for investment opportunities. Any guess where it is? #Sao Paulo, Brazil.

We have just secured an asset on the equivalent of Fifth Ave or Madison Ave, NY, in a top end commercial building with the characteristics similar to those that I described above. So, my question to you, is it worthwhile to think out of the box?

Russell Deakin

Managing Partner

Aceana Group