From Jason Payne, Market News Analyst …
Early January is always a busy time for institutional investors and research analysts. How do I know? I used to be one.
And even for non-institutional (aka. “retail”) investors like us, the first few days of any calendar year can be full of questions about what the next twelve months may hold for real estate markets.
“What are real estate yields going to do this year?”
“How will comparative valuations unfold during the next four quarters?”
“Where should the ‘smart money’ investors be focusing their investment efforts?”
These are only three of the obsessions adopted by institutional portfolio managers at the turn of each new year. After almost seven years of firsthand experience in their employ, I suppose I could attempt to compose a more comprehensive list of all their standard questions…
…but it would probably cause Mogul’s servers to crash.
Suffice it to say that the titans of Wall Street are especially curious during the two weeks after Christmas, and there is no shortage of demand for intelligent real estate analysis.
And to whom do these relentless interrogators direct their myriad questions about the real estate market? Why, to their favorite research analysts, of course!
Accordingly, a good institutional analyst will often find himself glued to the telephone for more than 60 hours each week during late December and early January. If he is lucky, his wealthiest clients will equip him with a team of associates who are able to compose a written commentary summarizing his expectations for the upcoming year. If he is really lucky, this commentary will not fall into the hands of competing analysts from another firm.
But some research reports always get leaked. In fact, more than a few such commentaries have already been leaked during these first few weeks of 2014.
And I have been pleased to discover that the vast majority of these commentaries implicitly support Mogul’s “bullish” outlook for this year’s real estate markets – including residential housing.
But before I share a sample of what the other guys are saying, let me first clarify some necessary terminology about “asset classes”.
Asset Classes 101
In the following analyst commentaries, you will find various references to certain debt and equity investments.
Debt and equity represent the two largest “asset classes” into which investors may place their money. For the purposes of today’s investigation, debt investing can be equated with the purchase of corporate bonds (traded in the bond market), and equity investing can be equated with the purchase of corporate stock (traded in the stock market).
But what about real estate investments? Does the direct acquisition of a land-based property does fit into either of these first two asset classes?
No, technically speaking, real estate is neither a debt instrument nor an equity instrument, and real estate investments fall into a separate asset class altogether. Specifically, this third asset class is known as “Alternative Investments”, and it includes the following investment vehicles:
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Commodities
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Foreign Exchange
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Futures
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Options
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Real Estate
However, while each of the investment vehicles listed above are technically restricted to a separate asset class for Alternative Investments, each bears a certain resemblance to at least one of its debt and/or equity counterparts. And this phenomenon is especially true for real estate investments…
…which typically bear a strong resemblance to debt investments.
(For example, the “defensive” stream of “fixed income” from a real estate asset’s monthly rent payments is strikingly similar to the “defensive” stream of “fixed income” from a corporate bond’s monthly interest payments.)
In this sense, institutional analysts and portfolio managers will often allocate a significant portion of their bond-related capital into real estate assets, even though real estate does not technically fall into the same asset class as corporate bonds.
This helpful context will be vital in order to interpret the following excerpts from a few notable Wall Street commentaries…
Spying on the Competition
According to a recent commentary from Westwood Capital LLC in New York, “equities are so highly valued that it’s very hard to assume there’s going to be much more rotation [of capital into stocks]”.
Similarly, according to a recent commentary from Huntington Asset Advisors in Cincinnati, the stock market is due for “a significant decline” in 2014. “It’s not a question of if, but how bad,” said Peter Sorrentino, who helps manage about $14.8 billion for the firm. “We are being more defensive going into this year.”
And according to a recent commentary from analysts at Greenwood Capital Associates, the firm is advising its clients to “brace” for “a decline in equities” during the next twelve months.
Reasonable Interpretation #1: Since 2014 is expected to be a relatively bad year for equity assets (due largely to last year’s 30% jump in the stock market as well as stimulus tapering from the Federal Reserve), it is reasonable to expect 2014 to be a relatively good year for real estate. This is because many institutional investors are planning to shift their capital out of stocks and into the more “defensive” asset classes – such as real estate.
Reasonable Interpretation #2: And even if some institutional investors do not make significant additions to their REI positions in 2014, they are generally loathe to reduce their REI investments in favor of any riskier asset classes.
We Reiterate Our Bullish Thesis for Real Estate Assets
Against this backdrop of well-researched analysis from our institutional peers, we here at Mogul find increased confidence in our own “bullish” thesis for fundamental real estate investing.
Specifically, as the real estate industry continues to regain its basic fundamental health, and as the broader U.S. economy is gradually weaned off its current diet of economic stimulus policies, we here at Mogul look forward to watching numerous property types reestablish themselves as premier vehicles for reliably high-yielding investment returns…
…including, but not limited to, the residential housing sector.
Jason Payne’s next Market News Update is scheduled for Wednesday, Feb. 5th.
Jason Payne
is a management consultant and founder of the Groundwar Group -- a private consulting firm providing premier corporate advisory and leadership training solutions for business leaders and investors worldwide. Mr. Payne is also the Senior Market News Analyst and a featured "Mindset" advisor for more than 15,000 entrepreneurs and investors at RealEstateMogul.com -- roles he has held since 2013 and 2014, respectively. In these capacities, Jason draws from more than a decade of successful business and investment research on Wall Street to provide insightful commentaries on a wide variety of investing- and leadership-related topics.
Mr. Payne began his career as a research analyst in the award-winning Equity Research department of Morgan Keegan & Company, where at 26 years of age, he became one of the youngest published analysts on Wall Street -- with a specialized focus on real estate investment trusts (REITs). Jason also holds a degree in Finance from New York University's prestigious Leonard N. Stern School of Business, and he is currently completing his professional residency within the Global Leadership Training program of Uruguay's multinational Geronimo Center for Innovation & Leadership.