2019 ROI First Quarter Edition 2019 - HIS Capital Group | Page 56

• Commercial real estate cycles tend to lag the general
economy, so we likely won’t feel the effect in the
commercial real estate market until much later. In addition,
the fundamentals of the commercial real estate market
are stronger now than in previous times near the end of
a cycle. Due to the pain inflicted by the Great Recession,
financial underwriting has been more diligent in general,
so the market is not overbuilt.
• We think the answer is classic core real estate in the
major cities around the world. You also have a transition
in leadership in a lot of these pension and sovereign
wealth funds increasingly the CEOs and CIOs are
coming from the real estate or alternatives sector, so
real estate is becoming more of an institutional asset
class, and these funds will be allocating more to real
estate and real assets as they understand it and need
it to help find returns.
• In this kind of environment investors should be looking
at core, core-plus and value-add real estate in major
markets. You can get a 10-year IRR of 6-7% and then if
you add conservative leverage of maybe 40-50%, you are
looking at an 8-10% return with a bit of a hedge against
inflation, and that is exactly what people want today.
• We are using more stable capital structures that will be
best able to survive any potential downturn.
• We learned from the last downturn that the groups that
were not over-leveraged or overextended survived, and
many of them even thrived. This is my same advice for
today and any future recessions don’t overextend and
don’t over-lever.
CANADIAN HOUSING MARKET?
Florida Investors be on the look-out as we expect more
money coming in from our neighbors to the North looking
for value. Our friend Jared Dillian of Mauldin Economics
shares this quick insight:
to burst. Home prices in Q4 2018 fell between 1% and 2.7%
in Edmonton, Vancouver, Calgary, and Winnipeg.
And by the way, real estate comprises about 12% of Canada’s
GDP. That number jumps to around 20% if you include
industries associated with real estate, such as construction.
A downturn in the real estate market poses a huge threat to
the economy. I still have conviction in the “short Canada” trade.
Sam’s Editorial Share:
if you look around the world, you’re going to be hard-
pressed to find evidence that capitalism is pushing more
and more people into poverty. In fact, the exact opposite
is happening:
• In 1990 just 28 years ago the global population was
5.2 billion people. And 1.85 billion lived in extreme
poverty. That’s 35% of the world’s population.
• In 2015 (the last year for which I could find stats), the
World Bank says there were 753 million people living
in extreme poverty, while the global population grew
to 7.3 billion. That would put the extreme poverty
rate at about 10%.
• In just two years (between 2013 and 2015), 26 million
people in East Asia and the Pacific, 9 million in the
Middle East and North Africa, and 50 million in South
Asia rose out of extreme poverty.
Capitalism brings economic opportunity to people. Because
capitalism is about ownership. It’s about commerce and trade.
It’s about innovation and efficiency. Once a government
decides to protect the people’s right to ownership, the good
times roll. Just look at China since Deng Xiaoping announced
that Mao’s top-down communist Cultural Revolution was
officially over in 1978:
To give a “right now” update, high prices, new mortgage
rules, and interest rates that, until January, were rising are
all hurting the housing market. And it’s starting to bite. • In 1981, 90% of Chinese people were subsistence
farmers living in extreme poverty. In 2015, it was 2%.
And the U.S. helped. We dropped trade barriers and
encouraged the flow of goods and technology, and
growth took off. Same with post-Soviet Russia.
To answer another reader’s question, it’s not just Toronto
and Vancouver that are in the bubble that may be starting America doesn’t enjoy the structural economic advantages
we once did. Technology and skill have migrated around
www.hiscaptialgroup.com 55