Displaying items by tag: real estate

Tuesday, 18 June 2024 06:11

The Future of Real Estate Looks Bright

Asset managers believe the next two years might be ideal for investing in private real estate, despite recent market challenges. Clients are increasingly interested in risk-adjusted returns, prompting RIAs to explore private real estate opportunities. 

 

Core real estate, with its stable returns and lower leverage, is seen as favorable. Despite last year's focus on falling property valuations, sentiment is shifting as investors seek to time market entry. 

 

Private real estate offers attractive returns but requires patience due to slow cycles and the need for market stability. Potential buyers should be aware that the price gap between buyers and sellers remains a challenge.


 

Finsum: The old adage of buying the dip could be especially in play for this current moment in real estate.

Published in Wealth Management
Thursday, 13 June 2024 17:59

A New Trend in Private REITs

While commercial properties values have struggled mightily this year KKR is trying to instill shareholder confidence in its $1.2 billion private real estate investment trust. KREST’s struggles are not in isolation as many REITS have faced a two-year downturn due to rising interest rates and decreased investor capital. 

 

To counteract this, KKR announced a shareholder priority plan involving the potential cancellation of up to 7.7 million KREST shares if the net asset value per share drops below $27 by June 2027. This move would increase per-share value by reducing the number of outstanding shares. Additionally, KKR affiliates will inject $50 million of new capital into KREST, demonstrating their commitment to the trust and the real estate market.

 

 KKR's strategy mirrors actions taken by Blackstone last year, aiming to protect non-KKR shareholders from short-term declines while allowing them to benefit from potential real estate recoveries.


Finsum: While commercial real estate has most likely bottomed out, its still tough to say if it will ever recover or if this is the new normal. 

Published in Eq: Real Estate
Saturday, 08 June 2024 12:08

Worries of a Crisis in Commercial Real Estate

There are increasing concerns that a crisis is brewing in commercial real estate (CRE), as over the next couple of years, $2 trillion in CRE loans will need to be refinanced. Previously, there were hopes that macro conditions would soften, leading to lower rates and a more favorable lending environment. Instead, inflation has proven to be more resilient than expected, and expectations of Fed dovishness have been dialed back.

In addition to high rates, major challenges include decreasing demand for offices and rising vacancies, a stricter lending environment, and balance sheet woes at regional banks, which traditionally account for a large share of CRE lending. However, there is significant variance within the CRE market. Areas like data centers, hotels, and industrial buildings continue to show strength, while retail and multifamily exhibit more mixed performance.

If conditions worsen, there is a risk of spillover effects on the broader economy, including decreased lending activity due to losses at banks, lower tax revenue for local governments due to more vacancies and lower property values, and subsequent declines in hiring. However, the consensus continues to be that there won’t be a full-blown crisis as the sector is sufficiently diversified and continues to have strong credit performance despite adverse conditions.


Finsum: Investors should pay attention to the CRE market given the refinancing cliff and challenges posed by higher rates and a stricter lending environment. 

Published in Alternatives
Tuesday, 28 May 2024 10:12

Is the 60/40 portfolio outdated?

What is the best way to manage a portfolio in an era with less structural disinflation, and how can you improve upon the 60/40 in the current environment 

 

 The traditional 60/40 portfolio, consisting of 60% stocks and 40% bonds, has long been a benchmark, balancing growth from stocks with stability from bonds. However, the historical success of this model relies on a period of declining interest rates and favorable economic conditions in the U.S., which may not persist in the future. 

 

As interest rates stop declining and inflation potentially rises, the performance of the 60/40 portfolio is expected to be less impressive, especially during high inflation periods when energy and commodities tend to outperform. To better manage portfolios in this new environment, it’s advisable to diversify beyond the 60/40 mix by including assets like commodities, real estate, and cash equivalents to hedge against inflation and provide more stability during economic shifts.


Finsum: We have seen an increased correlation between stocks and bonds in the most recent years suggesting alternative diversification to manage volatility. 

Published in Bonds: Total Market

Entering 2024, the consensus was that the Federal Reserve would be cutting rates in the back half of the year in response to falling inflation and a slowing economy. This has major implications for private real estate, given that trillions of dollars in loans are maturing over the next couple of years. 

Yet, economic data and inflation have been more resilient than expected. Now, rate cut odds have narrowed, while there is some chatter that the Fed may have to tighten further. Currently, the Fed continues to signal that its next move is to cut rates, albeit later and to a lesser extent than previously thought. 

Still, this is likely to be uncomfortable for many borrowers, as many are holding onto properties based on the belief that rates will be lower, leading to more favorable selling or refinancing conditions. This is especially the case for those exposed to floating-rate debt. 

According to Richard Mack, the CEO and co-founder of Mack Real Estate Group, “People are paying to hold assets, but unless rents rise quickly, eventually asset prices will have to adjust to rates instead of hoping and anticipating rate decreases. In essence, you have to pay to wait and see what kind of recovery transpires, which is different from past cycles where interim cash flow paid you to wait for appreciation.” 


Finsum: Many were confident that conditions for real estate would improve as the Fed eased policy in the second half of the year. Now, many borrowers are likely to face increased stress as rate-cut expectations have been scaled back.

Published in Alternatives
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